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



 
THE SMALL BUSINESS HEALTH MARKET: BAD REFORMS, HIGHER PRICES, AND FEWER 
                                CHOICES
=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON REGULATORY REFORM
                             AND OVERSIGHT

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                     WASHINGTON, DC, JULY 11, 2002
                               __________

                           Serial No. 107-64
                               __________

         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
                                ------                                  
                                      

            Subcommittee on Regulatory Reform and Oversight

                     MIKE PENCE, Indiana, Chairman
LARRY COMBEST, Texas                 ROBERT BRADY, Pennsylvania
SUE KELLY, New York                  BILL PASCRELL, Jr., New Jersey
SAM GRAVES, Missouri                 CHARLES GONZALEZ, Texas
ROSCOE BARTLETT, Maryland            DAVID D. PHELPS, Illinois
TODD AKIN, Missouri                  JAMES P. LANGEVIN, Rhode Island
PAT TOOMEY, Pennsylvania             ANIBAL ACEVEDO-VILA, Puerto Rico
                  Rosario Palmieri, Professional Staff










                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 11, 2002....................................     1

                               WITNESSES

Keating, Ray, Chief Economist, Small Business Survival Committee.     4
Litow, Mark, Consulting Actuary, Milliman USA....................     7
Matthews, Merrill, Ph.D., Director, Council for Affordable Health 
  Insurance......................................................     8
De Posada, Robert, President, Latino Coalition...................    10
Nelson, Wayne, President, Communicating for Agriculture and the 
  Self-Employed..................................................    12

                                APPENDIX

Opening statements:
    Pence, Hon. Mike.............................................    29
    Jones, Hon. Stephanie Tubbs..................................    32
Prepared statements:
    Keating, Ray.................................................    34
    Litow, Mark..................................................    46
    Matthews, Merrill............................................    52
    Neslon, Wayne................................................    59
    De Posada, Robert............................................    63










THE SMALL BUSINESS HEALTH MARKET: BAD REFORMS, HIGHER PRICES, AND FEWER 
                                CHOICES

                              ----------                              


                        THURSDAY, JULY 11, 2002

              House of Representatives,    
                     Subcommittee on Regulatory    
                                  Reform and Oversight,    
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:13 a.m., in 
room 2360, Rayburn House Office Building, Hon. Mike Pence 
(chairman of the subcommittee) presiding.
    Chairman Pence. This hearing of the Subcommittee on 
Regulatory Reform and Oversight for the Committee on Small 
Business is called to order. And this hearing is entitled, 
``The Small Business Health Market: Bad Reforms, Higher Prices, 
and Fewer Choices.'' We are very grateful for all the witnesses 
and the members who are in attendance.
    The Chair will make a brief opening statement, then 
recognize any members that have an opening statement. Then we 
will proceed immediately to our witnesses. The procedure we 
will follow today will be to encourage our witnesses to make 
brief remarks within a five-minute time frame and then we will 
reserve all of our questions for them at the conclusion of all 
of the prepared remarks.
    Witnesses should also know that it is not necessary for you 
to hurry through your written statement, that without 
objection, your written statements will be entered into the 
full record of this hearing. And you might use your time more 
to amplify the points that you would like to make to the 
members gathered here and to the record.
    Our hearing today essentially addresses the rising cost of 
health care to Small Business America. Of the 43 million 
Americans without health insurance, 62 percent are either small 
business owners and their families or small business employees 
and their families. The problem of the uninsured is very 
clearly a problem of small business access to health care at 
reasonable prices. Well intentioned reformers in the States and 
in Congress over the last decade have managed to dramatically 
increase the cost of health care and practically destroy the 
small group market.
    Two of three reforms that sound particularly harmless are 
guaranteed issue and community rating. Guaranteed issue has 
given healthy people a reason not to purchase insurance. If you 
can get coverage at any time, then why purchase it before you 
get sick, in effect. Community rating, which was meant to keep 
prices reasonable for high risk customers, has actually led in 
many cases to prices spiraling upward and healthier people 
dropping their coverage.
    Both combined have led many companies to drop out of the 
small group market in most of the states. A few examples, 
according to one of our witnesses who represents the nation's 
largest health care actuarial company, 40 states and the 
District of Columbia have no small group market left. Insurance 
companies have just stopped offering coverage in those states.
    Additionally, a small employer in Florida trying to buy 
health insurance from e.healthinsurance.com, the nation's 
largest on-line insurance broker, cannot find any health 
insurance. Otherwise, they have a choice of two HMOs.
    Also, according to ``The State,'' which is a newspaper in 
South Carolina, small businesses in South Carolina have ``given 
up providing health insurance.'' According to the South 
Carolina Department of Insurance, eight out of ten uninsured 
individuals are members of working families. Since 1992, 73 
companies have withdrawn in whole or in part from Arkansas' 
health insurance market. Fifty-six of these withdrawals have 
taken place within the last four years.
    Obviously, in states where there is no competition for the 
small business dollar, prices will continue to rise. The 
National Association for the Self-Employed reports in a recent 
survey that seven out of ten small businesses do not provide 
health insurance to their employees and costs are almost 
uniformly cited as the chief reason for this trend.
    It is imperative that we act and act quickly in Congress to 
reverse the course of small business health insurance market, 
before we reach a point where no small business can afford 
health insurance for its employees.
    I certainly look forward to the testimony of all of our 
witnesses and, in the absence of the ranking member, the 
gentleman from Pennsylvania would recognize the gentlelady from 
the Virgin Islands.
    [Mr. Pence's statement may be found in the appendix.]
    Ms. Christian-Christensen. It is going to be very brief, 
because I do have an opening statement that I will submit for 
the record. But I just wanted to say that the issue of coverage 
is a critical one that we face in this country, being the last 
industrialized nation not to cover all of its residents and 
citizens. And I am on several bills that either express the 
sense of Congress that we should have universal coverage by 
2004 and related bills. But I realize that there are many, many 
different approaches to this very important issue and I welcome 
all of the participants in this hearing today. I thank the 
chairman for calling it. Because all of the different 
approaches ought to be on the table. We need to have a very 
open and an ongoing dialogue so that we can insure that 
everyone is covered. It is amazing that 60 percent of the 
people who make up over 40 million uninsured work for small 
businesses, small business employees or employers. We welcome 
you and we look forward to your testimony.
    Chairman Pence. With apologies to the gentlelady from the 
Virgin Islands, thank you for your opening statement and we 
will enter your formal remarks in the record without objection. 
With that, I would recognize for any opening remarks she might 
have the former chairman of this committee, the gentlelady from 
New York, Congresswoman Sue Kelly.
    Ms. Kelly. Thank you, Mr. Chairman. I have no remarks. I am 
interested in hearing what the witnesses have to say to us 
today, but thank you for holding this important hearing.
    Chairman Pence. And now the much anticipated opening 
statement of the distinguished gentlelady from Ohio, 
Congresswoman Tubbs Jones.
    Ms. Tubbs Jones. Mr. Chairman, thank you for such a kind 
introduction to my colleagues on both sides of the aisle. 
Access to health care--in addition, this is really not my 
subcommittee, but I appreciate the opportunity to be here, 
because this issue is so important to the small businesses in 
my district.
    Access to health care is the most important concern facing 
small business. Approximately 43 million people are without 
health care insurance in this country. Many of these are 
employed by small business. It is shameful that these 
businesses are at such a competitive disadvantage compared to 
big business when it comes to providing health plans. Small 
businesses drive our economy through innovation by opening 
doors for women and minorities.
    This Congress must work to remove the barriers that inhibit 
access to health care. We must doso not only for the health of 
small business workers, but also for the health of small business. 
Association health plans and tax credits represent important ideals 
that will ultimately figure into a plan to reduce the number of 
uninsured small business employees.
    However, we must recognize that there is no blanket 
solution to this problem. Allowing small business access to 
health care will require a unique combination of ideas. 
Ultimately our solution must afford small business the 
economies of scale enjoyed by big business while reducing the 
punishing effects of community rating and guaranteed issue. 
However, this solution must not make irrelevant laws that 
mandate coverage of certain benefits and must not force workers 
to purchase coverage that includes riders. Insurance policies 
that include riders do not constitute adequate coverage because 
such policies do little to make adequate health care more 
affordable.
    As we move forward with our work in this area, I encourage 
my colleagues to keep plans offered by entities like the 
Greater Cleveland Growth Association and COSE, which is the 
Council of Smaller Enterprises, in mind. These organizations 
are prominent advocates for greater access to health care for 
small business in my own congressional district, the 11th 
Congressional District of Ohio. The Growth Association has 
written many helpful articles in order to help small business 
evaluate options for providing care. With their front-line 
perspectives, both organizations will prove helpful to us as we 
attempt to expand small business access to health insurance.
    I was talking with the president of the United Food and 
Commercial Workers in Cleveland the other day. They have their 
own health care plan and they are self-insured. He said to me 
for nine years their health care coverage remained pretty 
equal, pretty steady. But in the last two years, their health 
care costs have doubled, I mean, have increased by 50 percent. 
That is like doubling, right?
    I said to him, what are you going to do about that? And he 
said, you know, we are sitting at the table, we are in 
negotiation right now, trying to figure out how do I work with 
this small business to keep my union employees with some type 
of coverage and keep it processed. I think this becomes another 
issue, particularly, as well, as we move people from welfare to 
work. Many of the small businesses are being encouraged to 
bring former welfare workers into their business for 
employment. The dilemma then becomes you have people moving 
from welfare to work at minimum wage with no health care. And 
so it is like they are moving from welfare to poverty, based on 
the amount of income that they have.
    So I am interested in this issue. I look forward to the 
witnesses' testimony on the issue and to working with them to 
try to resolve this issue. Mr. Chairman, I thank you for the 
opportunity to be heard.
    [Ms. Tubbs Jones's statement may be found in the appendix.]
    Chairman Pence. And I thank the gentlelady for her 
passionate remarks. With that, before we move to our witnesses, 
I would certainly recognize the gentleman from Illinois for any 
opening statement or opening remarks that he would care to 
make. We thank him for his attendance and all the members 
gathered. With that, we would welcome all of our witnesses. We 
appreciate very much your commitment to public service and 
taking the time to be with us in this important panel today.
    Most of you are veterans of Capitol Hill hearings and know 
the rules of the game. But for those few neophytes, the lights 
mean exactly what they do on the street coming here today. 
Green will mean go and yellow does not mean accelerate.
    This chairman does not use the gavel too harshly, but once 
you are over the five minute time, we will ask you to wrap it 
up as quickly as you can. And again I would emphasize to all 
the members that we will entertain questions of all of the 
witnesses after we have heard the statements.
    The Subcommittee will first hear from the Chief Economist 
at the Small Business Survival Committee, a prominent 
organization that has, particularly in recent years, risen to 
be a very trusted and oft quoted organization in the national 
media on issues related to small business. And their Chief 
Economist Ray Keating is with us today and is recognized for 
five minutes.

    STATEMENT OF RAYMOND J. KEATING, CHIEF ECONOMIST, SMALL 
                  BUSINESS SURVIVAL COMMITTEE

    Mr. Keating. Thank you, Mr. Chairman, and thank you for the 
kind words about SBSC. We are very pleased to be here to speak 
on behalf of small businesses regarding health care costs and 
the impact that government reforms and regulations have had on 
those costs.
    Again, my name is Ray Keating. I serve as Chief Economist 
for SBSC. We're a non-partisan, non-profit small business 
advocacy group and we have more than 70,000 members across the 
nation. We work on a wide range of public policy issues that 
impact small businesses, their employees and the economy in 
general, and obviously health care policy is of critical 
interest to us. We hear regularly from our members about the 
problems they have in the health care marketplace. And 
obviously, number one on their list is rising health care 
costs.
    Small business have been confronted with enormous increases 
in health care costs in recent years. I will offer you just a 
few examples from my written testimony.
    There was a national survey of small businesses released in 
April of this year by the Kaiser Family Foundation. And of the 
small firms not offering coverage, 72 percent cited cost as a 
very important reason for not doing so. Of all the small 
businesses executives surveyed, 67 percent said they were very 
or somewhat dissatisfied with the costs of health care.
    In Massachusetts, health insurance premiums went up by 12 
to 15 percent this year, with many small businesses reporting 
increases of more than 20 percent. A Michigan survey taken, 
again, in April of 2002, found small business health insurance 
premiums had doubled in the previous four years and were 
expected to rise by 20 to 25 percent this year. The survey also 
found, which obviously is quite worrisome, that 24 percent of 
business owners said rising health care premiums threaten the 
existence of their business.
    Another report noted that health insurance premiums in 2001 
rose 55 percent faster for small businesses than for large 
firms in 2001.
    So you get the basic idea of what the problem is right now 
and this has been a multi-year problem for small businesses. It 
has just not been the last year or two. Obviously, these rising 
costs take a heavy toll on small firms. Many did not survey. 
Some cannot afford to offer health insurance coverage in the 
first place and that places these firms at a competitive 
disadvantage in attracting good employees. Other businesses 
reduce coverage, including having employees pick up a bigger 
share of health care costs or they simply eliminate coverage 
altogether.
    The obvious question is why? Why are health care costs on 
the rise, and not only for small businesses, but for 
individuals and other firms as well? The increase in health 
care cost is due, to a significant degree, to government's 
increasing role in the health care marketplace. One major 
problem is the third party payer issue. Government's ever 
increasing role in health care funding vastly accentuates the 
problem of third party payments which push health care costs 
higher.
    Just to back track, insurance, of course, makes perfect 
economic sense. Health insurance, properly understood, protects 
individuals against large, unpredictable costs. However, 
manyemployer-provided health care plans and government programs have 
ventured far beyond the basic concept of insurance to offer first 
dollar coverage for small and predictable expenses.
    When a third party, whether an employer-provided plan or 
the government, picks up the tab for reasonable and predictable 
health care spending, demand is driven up and consumers and 
health care providers possess few, if any, incentives to be 
concerned about costs. The result is higher costs.
    Another major impetus to increased health care costs and 
rising premiums is government regulation. More regulations and 
mandates on the part of government, no matter how well 
intentioned they might be, inevitably result in higher costs. 
Higher costs, of course, mean reduced access to quality health 
care.
    As the chairman mentioned, we note the dire impact of two 
forms of regulation imposed to a significant extent in the 
States over the past decade or so, and that is guaranteed issue 
and community rating.
    Guaranteed issue, in effect, means that individuals may not 
be turned down for health insurance coverage no matter the 
condition of their health. And community rating mandates that 
an insurer charge the same price for everyone in a defined 
region, regardless of their varying health care risks.
    These regulations violate the basic tenets of the insurance 
business, namely, risk spreading. Guaranteed issue removes 
incentive for people to buy health insurance until they are 
ill. And community rating does not allow for critical risk 
factors to be considered when pricing insurance. And the 
results are completely predictable--much higher insurance costs 
and fewer insured individuals.
    In my written testimony, I offer examples in New Jersey on 
how costs have skyrocketed, how in Kentucky, insurers have fled 
the case and, of course, those are just two prominent examples.
    Unfortunately, looking ahead, it often seems that the only 
debate in policy circles today is how far new mandates and 
regulations should go. In our view, Congress and the White 
House need to dramatically shift the health care debate away 
from more government involvement and, instead, focus on 
removing governmental barriers to additional choices in the 
health care marketplace.
    I see that my time is up, but I would like to highlight 
that one dramatic change that Congress could do would be on the 
reform and deregulation front, is to lift the current 
restrictions on, for example, tax-free medical savings 
accounts. MSAs, just for people who are not aware, they combine 
a traditional high deductible, catastrophic insurance plan with 
a tax-exempt savings account. MSAs reconnect that buyer-seller 
relationship in the marketplace. Individuals and their doctors 
make health care decisions, not some distant bureaucrat.
    Again, in my written testimony, we offer various examples 
of the restrictions that are on MSAs right now, but this is a 
clear opportunity where deregulation can expand health care 
choices, expand competition, reduce the number of uninsured, 
and lower the cost for businesses of all sizes. That is the 
exact opposite of what happens with more regulations like 
guaranteed issue and community rating.
    So in the end, market and competition work. Deregulation 
and expansion of choices in the health care marketplace will 
have positive effects on both costs and quality of care. 
Minimal government intervention and regulation allow businesses 
and consumers to seek out the type of health care coverage that 
meets their needs and pocketbooks. And I look forward to any 
questions that you might have after we are done.
    [Mr. Keating's statement may be found in the appendix.]
    Chairman Pence. Thank you, Mr. Keating. Next, the 
Subcommittee will hear from Mark Litow, who is a consulting 
actuary for Milliman USA, the nation's largest health care 
actuarial firm. Mr. Litow is a fellow in the Society of 
Actuaries and a member of the American Academy of Actuaries and 
one of the most recognized experts in the country on the issues 
before this Subcommittee today and is warmly welcomed and 
recognized for five minutes. Mr. Litow?

  STATEMENT OF MARK E. LITOW, CONSULTING ACTUARY, MILLIMAN USA

    Mr. Litow. Thank you and thank you very much for putting 
this together and giving me a chance to testify. I have been in 
this business for 27 years. I have been working in exclusively 
health care for that whole time and a lot of my time is spent 
in the small group as well as individual markets.
    On Saturday, I am actually traveling to South Africa to 
deal with much the same problem. They implemented guarantee 
issue and community rating in South Africa January 1, 2000 and 
the market is totally falling apart. So this has been practiced 
in a number of countries throughout the world. This is not just 
the United States' problem. Australia did it in the 70s and has 
had dramatic problems, as well.
    Just as a caveat, since consultants always need caveats, 
the opinions I express are my personal ones. They are not of 
the firm. I did have several of my colleagues, however, in the 
firm review this and they do agree with the opinions found in 
my testimony.
    As Mr. Keating indicated, this market is in very, very bad 
shape. I think the Chairman indicated and I think that was from 
my testimony, that only ten states we see as being viable, as I 
recommended to insurance companies that I work with for 
entering those markets. There are some other states that are 
sort of on the borderline, another five. Another 15 states or 
so where the Blues or one other dominant carrier can get large, 
large discounts that other carriers cannot get and so they 
dominate the market, and 20 other states where there really is 
very little market left.
    So the question is, how did we get there and that is a long 
history. But very quickly, we implemented the premium tax 
exclusion that was referenced by the earlier witness in 1954, 
which emphasized using third parties to cover everything. That 
led to Medicare and Medicaid in 1965, which led to cost 
shifting and many other problems. And we ended up with a 
situation where virtually somebody else is always paying for 
our health care. There is very little personal responsibility. 
And that afflicts all of the health markets and the small group 
market, with its inability to get the same leverage as large 
group, is even worse.
    So we are in a real predicament. It has taken us a long 
time to get there and in the 90s we put in the rating bans and 
guarantee issue that made it significantly worse and has 
exacerbated the problem.
    So the real question is, what do we do about it, given that 
we are in this serious position? And I have a couple of 
recommendations to put forward. First would be, I would look at 
seriously repealing the premium tax exclusion, which created 
such heavy reliance on third party. That has created a serious 
problem and there are various things to do. You obviously need 
to replace it with something to help people who need the 
protection and cannot afford it. And I would suggest some form 
of tax credits as a possible solution to that.
    Secondly, I would either look at either modifying HIPAA, 
which put in guarantee issue, or simply repealing it. To modify 
it, you could offer basic and standard plans as an alternative 
to people and then you would not have to repeal it.
    The other thing are the rating bands that many of the 
states have put in. If those are too tight,generally less than 
plus or minus 25 percent, what you will see is just rate spirals 
develop very rapidly in the states. Some of the states have what they 
call pure community rating, where there is no allowance for rate 
differentiation. And so what happens in these situations is that the 
healthier people start to reduce their coverage or drop their coverage. 
The higher cost groups en masse by rich coverage, and it puts more and 
more weight--and, of course, then the insurers have to continue to 
increase the premiums and you develop rate spirals.
    And that is what is happening in these markets. The key 
thing in health care reform is focus on keeping the healthy 
people in the system. Those are the people that subsidize the 
less healthy. If they start exiting the system, you will have 
problems.
    So those are my three recommendations. We are going to need 
to show some patience in implementing this, because it has 
taken us a long time to get into this mess. It is going to take 
us awhile to get out. But we seriously need the rigorous debate 
that has just been talked about on this market and we need to 
start acting now, because if we do nothing, the situation will 
just continue to get worse. Thank you very much.
    [Mr. Litow's statement may be found in the appendix.]
    Chairman Pence. Thank you, Mr. Litow and look forward to 
questions from the members gathered about your remarks. The 
Subcommittee will now hear from Dr. Merrill Matthews, who is 
the Director of the Council for Affordable Health Insurance. He 
is a public policy analyst specializing in health care issues 
and is the author of numerous studies in health policies, past 
President of the Health Economics Roundtable for the National 
Association of Business Economics, former health policy advisor 
for ALEC and his relationship with this Chair dates back over a 
decade of misadventures and per adventures in the area of 
health care reform and is very warmly welcomed by the Chair. 
And, Dr. Matthews, you are recognized for five minutes.

 STATEMENT OF MERRILL MATTHEWS, JR., PH.D., DIRECTOR, COUNCIL 
                FOR AFFORDABLE HEALTH INSURANCE

    Mr. Matthews. Thank you, Mr. Chairman, and I would like to 
thank you and the members for putting on this hearing. I 
believe, as was stated earlier, that for small businesses, this 
is one of the most important issues they are facing--how to 
provide affordable coverage to their workers.
    As you mentioned, I am with the Council for Affordable 
Health Insurance. It has been in Alexandria for ten years. We 
are a research and advocacy association representing small 
insurers in the small and individual group market.
    I would like to start out by discussing a little bit, by 
going to an analogy and maybe making it clear what happens with 
guaranteed issue by doing that. My father-in-law is a 
homebuilder. Suppose that in his state, the state legislators 
looked out and said we have a problem with homelessness in this 
state. How are we going to get these people into homes? We 
would like to be able to fund some new homes, but we really 
cannot afford it. What are our options available?
    Well, we have some homebuilders in the state. Why do we not 
just require them that for every, say, five homes they build, 
they have to build one free and provide it for a homeless 
person? If the state legislature was to do that, my father-in-
law, of course, would have to struggle with that. He did fairly 
well being a homebuilder of middle class homes, but he did not 
make enough money off of four or five homes to build a whole 
new home.
    As a result, as he started into this process, he would find 
he would have to raise the prices of those homes for paying 
customers in order to be able to afford to build the other home 
free of charge. As those prices began to rise for the paying 
customers, they would look at that and they would say, why are 
we paying more? We have friends living in other states that 
spend a lot less for the same size house.
    And those customers would begin to look for options. They 
might not buy a new home. They might move across the state 
line. They may choose another alternative like moving into an 
apartment. They would begin to find other alternatives and as a 
result, my father-in-law would be building fewer homes. They 
would cost more, the ones that he built, and the people that 
this was set up to help, the homeless, would end up getting 
fewer homes out there, as well.
    What happens with guaranteed issue is something very 
similar to what they would be trying to do with my father-in-
law. Guaranteed issue is an attempt to try to make insurance 
companies the safety net. It is an attempt to try to make 
insurers become the provider for people who have medical 
conditions and other things and cannot get health insurance in 
a normal market.
    Now what we do in other areas of the economy, if we have 
people who are in need, we let the market work for everybody 
else and we provide assistance for those that have needs. In 
food, we have people out there who cannot afford the food they 
need, we provide food stamps or a food stamp program. For those 
who need housing, we do not tell builders you have to build an 
additional house free of charge. We provide assistance for 
those who need the housing.
    That is what we ought to look at in terms of health 
insurance. Instead of going to insurers and, in essence, saying 
you have got to take people who you would not normally take 
because they have a medical condition, which ends up, when 
those people move into the market, they have very high 
expenses. They end up bringing those expenses into the pool. 
The premiums rise for everyone, it has been discussed earlier. 
Young, healthy people begin to drop out of the pool because 
they say, my goodness, this is very high. And if I can go into 
the health insurance market any time I want to, why do I want 
to stay in here while I am healthy?
    So you get the pool smaller and sicker. And as a result, 
you get fewer people insured and the people that you were 
really trying to help initially end up paying a whole lot more 
if the product is even available at all.
    Now as mentioned by Ray, a number of states have tried to 
do this. It has never worked--never worked. At the federal 
level, we tried to do this in the small group market with the 
HIPAA legislation. If you looked at the American Academy of 
Actuaries report when this first came out, the press release 
said insurance premiums might rise between 2 and 5 percent. If 
you looked inside the report, it said, well, for some groups, 
the premiums could go up between 125 and 167 percent. That is 
exactly what we are seeing from the people you were discussing. 
The premiums are rising because people can move into the market 
and, in essence sick people can move in and the premiums will 
begin to rise.
    We think there are two or three things that can be done 
with this. Number one, you need to have a program that creates 
government as a safety net and not tries to make business the 
safety net. You can do that by repealing HIPAA. That is one 
option that Mark Litow mentioned. You can provide some options 
out there and the NAIC has got model legislation that will, if 
you are going to have guaranteed issue in some areas, you can 
let insurers offer those that are underwritten in other areas, 
so that there are some choices out there. And you can move to a 
situation in which if a state has a risk pool, the risk pool 
becomes, in essence, the safety net for those people who are 
uninsurable.
    If we are going to do this, ideally you move to a provision 
in which your high risk pool captures the uninsurable people. 
That lets the market work for everyone else. There is 
legislation in the Senate by Senators Baucus and Smith that 
would provide funds to do just that, and we think that is the 
way you need to go. And I will be available for questions 
later. Thank you, sir.
    [Mr. Matthews's statement may be found in the appendix.]
    Chairman Pence. Thank you, Dr. Matthews. Our next witness 
is Robert de Posada. Did I pronounce that correctly?
    Mr. de Posada. Yes, you did.
    Chairman Pence. Robert de Posada is President of the Latino 
Coalition. He is former president of the Hispanic Business 
Roundtable and brings a critical perspective about minority 
business enterprise and the challenges that they face in 
wrestling with the extraordinary costs of health insurance to 
this panel.
    We are grateful for your national leadership. We are 
grateful to recognize you for five minutes.

    STATEMENT OF ROBERT GARCIA DE POSADA, PRESIDENT, LATINO 
                           COALITION

    Mr. de Posada. Thank you, Mr. Chairman. As you mentioned, 
Hispanics are disproportionately affected by the uninsurance 
crisis that we have, currently. We are three times as likely as 
the rest of the population----
    Ms. Kelly. Excuse me, Mr. de Posada. Could you pull that 
microphone closer to you? Thank you.
    Mr. de Posada. Is this better?
    Ms. Kelly. Yes.
    Mr. de Posada. Hispanics are disproportionately affected by 
this crisis. The census shows that Hispanics are three times as 
likely as any other group in the country to be uninsured and 
the reason is simple. I mean, it is source of employment and 
the economics, income levels. Americans get their insurance 
from their job and the overwhelming majority of Hispanics work 
for small business and in the service industry, which as we all 
know are more likely to not offer health insurance simply 
because they cannot afford it.
    Also, according to the census, we are finding that less 
than 1 percent of all Hispanic owned businesses have 100 
employees or more. Therefore, 99 percent of Hispanic businesses 
in this country, 1.4 million, are considered small businesses. 
Fifty-five percent of the Hispanic owned businesses are also in 
the service and in the retail sector. And if we add 
construction to this, we are talking about 68 percent of them.
    After talking to many of these employers, we are convinced 
that they would love to move into a system that they could 
offer insurance to their employees. The problem is that with 
all the good intentions and all the good legislation and 
regulations at the state and federal levels that public 
officials are making, it is almost impossible for them to 
afford it. Guaranteed issues and community rating and, you 
know, modified community ratings are driving costs through the 
roof. And believe it or not, rates for small business, for 
small group market, is significantly higher than in the 
individual market, which is already very high.
    What we are seeing is that too many working families are 
being left behind. We call them the too poor, but not poor 
enough. Too poor to afford health insurance, but not poor 
enough to qualify for Medicaid.
    So what would we recommend? From a small business 
perspective, first, we strongly urge you to pass legislation to 
repeal guaranteed issue at the federal level and to continue to 
support high risk pools. Second, we would push for the 
association plan legislation again. These two proposals will 
help reduce the cost of health insurance overall.
    Also, as a more creative approach and we have been looking 
at how to implement this, we would like to allow small 
businesses to actually purchase health insurance on the 
Internet. But the key here would be the regulations that would 
apply to these businesses would be the ones in the home state 
where the insurance companies are providing. This would help 
address the whole issue of the state regulatory level.
    However, from an individual perspective, we are strongly 
recommending immediate passage of the bipartisan legislation to 
provide refundable tax credits or vouchers to workers who do 
not get health insurance from their jobs. This would help focus 
the assistance on those who need it most and would help cover 
the gap of uninsured, where it is needed most.
    And do not let opponents fool you. I mean, this has become 
too much of a partisan attack. You can get health insurance for 
working families in the market for the $3,000 being proposed. 
Currently, on a quick search on the Internet, we found that in 
Anderson, Indiana, you can get for $172 a month coverage for a 
family of four. In Chester, Pennsylvania, for $187 a month, you 
can find for a family of four. So it is affordable and it is 
doable.
    Also, once this legislation is implemented and signed into 
law, what you are going to find is all the health insurance 
companies that currently are seeing this market as something 
that is not approachable, it is not worthwhile for them, all of 
a sudden, millions of families with $3,000 vouchers, this 
becomes a significant market for them and they will design 
plans to meet this need.
    We have a serious uninsured crisis in the Hispanic 
community in our business sector and we urge you to stop the 
good intentions, new mandates and regulations that are driving 
prices through the roof. While politically popular, you are 
destroying the market and will end up leaving thousands of 
workers without coverage. We urge you to do what is right and 
to help small businesses and their employees. And we thank you 
for holding this hearing, because at least you are taking a 
first step in that direction. Thank you, Mr. Chairman.
    [Mr. de Posada's statement may be found in the appendix.]
    Chairman Pence. Thank you, Mr. de Posada, for those very 
insightful and provocative remarks.
    Our final witness this morning is Wayne Nelson, President 
of Communicating for Agriculture and the Self-Employed. And Mr. 
Nelson is a grain farmer from Winner, South Dakota, and was 
elected to his current post in 1993 and is one of the most 
recognized experts in the agricultural arena on challenges 
facing the self-employed in small business in agriculture in 
the country. And it is delightful to have you here and I am 
anxious to hear your remarks. You are recognized for five 
minutes.

    STATEMENT OF WAYNE NELSON, PRESIDENT, COMMUNICATING FOR 
                AGRICULTURE & THE SELF-EMPLOYED

    Mr. Nelson. Thank you very much, Mr. Chairman and members 
of the Committee. CA, Communicating for Agriculture & the Self-
Employed, is a national organization made up of farmers and 
small business members who are individual operators of very 
small businesses that only have one or two employees.
    As you all know, it has been stated earlier, health costs 
are rising at very alarming rates. After a few years of lesser 
increases, the last two years have seen dramatic increases. 
This really hits small businesses very, very hard. And 
unfortunately, they are forcing more of them to drop coverage 
that they have previously offered to their employees or keep 
them from offering new plans.
    Compounding the problem is that more insurance companies 
are dropping out of the small group markets in some states, 
leaving fewer choices for small businesses and a less 
competitive market. Many of the employees of these small 
businesses end up in the individual market.
    While it is important to take steps to keep a viable small 
group market working in every state, it is equally important, 
we feel, that steps be taken to maintain a viable, competitive, 
affordable individual market, not only to serve the self-
employed, but also to serve the individuals who work for small 
businesses that are not able to offer insurance under employer 
coverage.
    Many of the federal and state reforms that were enacted in 
the 1990s with the intent of helping the small group market 
have backfired and actually done harm. Also, several states 
have tried reforms in the individual market, tried to make them 
more like the employer market with disastrous results.
    Some state legislatures believe that simply legislating 
that every insurance company had to offer insurance to anyone 
at any time, regardless of their medical conditions, could 
really solve the problem. And this has led to sky high premiums 
and no competition, with many companies leaving states that 
have guaranteed issue in the individual market.
    C.A. believes that everyone deserves access to quality 
insurance and we feel that high risk pools, sometimes called 
health insurance safety nets, are the best, most workable way 
to address the problem of access for people in an individual 
market.
    Thirty states now have high risk pools that offer high risk 
pool programs that offer health insurance to individuals who 
are medically uninsurable. All risk pools by their inherent 
design need to be subsidized. Funding is an issue that is 
holding back more states from adopting them and funding poses a 
challenge for existing state programs, because they try to keep 
premiums as affordable as possible.
    C.A. believes that some partial federal funding to help 
start pools in the remaining 20 states would be helpful. 
Additionally, federal funds to help pay the premiums in the 
existing states would also be very helpful.
    The second issue that is very important is we are trying to 
do something to temper the high cost of health insurance that 
keeps many individuals and the small businesses from purchasing 
insurance. CA strongly supports refundable, advanceable tax 
credits or health credits as one way to make insurance more 
affordable.
    There are several plans introduced in both the House and 
the Senate and the President has offered his health credit plan 
and they would offer up to $1,000 per individual and up to 
$3,000 per family. These health credits are refundable, which 
means that they would be available to an individual or family 
even if they have no income tax liability.
    Department of Treasury has done review and estimates that 
the President's plan would lower the number of uninsured by six 
million people, which is very significant.
    We also feel that MSAs or medical savings accounts would 
offer another alternative to help get more people insured. 
Recent legislation extended the period of time for the current 
MSA program by one more year, but much more needs to be done. 
MSAs need to be available to all sizes of companies, not just 
very small companies. We feel that a wider range of deductibles 
would allow consumers more choice and would allow companies to 
offer products better suited to customers. It would also be 
helpful to allow contributions by both the employee and the 
employer in the same year.
    C.A. believes that our power is in our association to help 
our members have better health insurance. CA has offered an 
endorsed health plan to our individual members for the last 26 
years. Even though CA members participating in the plan are in 
the individual market, they have similar power to those in 
groups in regard to health products offered and the cost of 
premiums.
    The association can negotiate with an insurance company 
with a much louder voice in terms of tempering rate increases 
and offering quality products than the individual can alone. 
That combined voice is a power of the association.
    We will continue to work toward keeping a viable individual 
insurance market to also help the small group market. We will 
strive to have high risk pools for individual market access in 
every state, to have refundable tax credits, to help make 
insurance more affordable, to expand MSAs, to offer more choice 
and to enforce the power of the association to try to help 
individuals get better health benefits at a lower price.
    Together, we think these things can make a significant 
change in helping small business and the self-employed have 
better insurance products. Thank you very much, Mr. Chairman.
    [Mr. Nelson's statement may be found in the appendix.]
    Chairman Pence. Thank you, Mr. Nelson, for those thoughtful 
remarks. The Chair is going to pose just a couple of quick 
questions and then yield to other members before I ask the 
balance of the questions I have.
    Beginning with Mr. Keating, from your perspective as an 
economist, what are small businesses going to do if Congress 
does not--we are talking about repealing HIPAA, we are talking 
about the fair care--no one has used that term, but that is the 
legislation, the Army-Lipinski legislation. If we do not do 
something, medical savings accounts expanded beyond the pilot 
program. Give me a scenario and I am just going to run down the 
line, anybody who wants to take a whack at it, where 
agriculture, the Hispanic community, where are we going to be 
in five years if we just let this continue to go in the 
direction it is headed?
    Beginning with Mr. Keating, let us go down the line.
    Mr. Keating. Well, if you look at the rate increases that 
small businesses are facing, five years from now, you know, you 
could easily talk about doubling the cost of your health care. 
How are they going to react? They are going to react in a lot 
of ways.
    Number one, maybe some of them are going to have the 
ability to eat that, as they say. But you know what happens 
when small business owners eat those costs? That means there is 
less money for investment, there is less money for expansion. 
That means less job creation and small businesses are the 
engine of job creation and innovation in the economy.
    But most of them, our 70,000 members, most are not going to 
be able to eat costs like that, so they are going to then turn 
around to their employees, they are going to offer, perhaps, 
eliminate coverage as many of the surveys are indicating that 
small businesses will do that. They will ask for a bigger chunk 
to be picked up by employees. They will drop coverage, they 
will not offer it in the first place.
    Those costs are real. One of the things that is very 
frustrating from an economist's perspective when you look at 
the policy arena is that the things that might sound nice 
politically often are really ugly when you look at the 
economics. I mean, it sounds nice to say, okay, all you people 
have to charge the same rate for health insurance, you have to 
guarantee that no matter where a person is in terms of their 
life and their health, they have to be able to be issued health 
insurance. That all sounds very nice, but there are very real 
costs that go along with that.
    And just as sure as taxes are costs to small business 
owners and the rest of us, and we can see the cost of taxes. It 
is real easy. You know, you get your tax bill, you see how much 
money comes out of your paycheck. Regulations are very 
dangerous, because they are hidden largely from the consumer. 
But nonetheless, the costs are quite real. So you are going to 
see small businesses react in all of those ways that I 
mentioned before and that is going to have a realimpact on the 
U.S. economy without a doubt.
    Chairman Pence. Mark Litow, same question.
    Mr. Litow. I agree with that. I think two of the other 
speakers mentioned at least high risk pools. You are already 
seeing in a number of states where the small group market has 
deteriorated rapidly, that the healthiest people in those 
groups are going into individual markets and the sickest will 
go into the high risk pool. And without any changes, you will 
see that happen.
    The individual market is also deteriorating, but at a 
slower rate. Ultimately, those pressures and the pressures from 
Medicare and Medicaid will create a situation where health care 
really becomes a crisis from the whole system standpoint. And I 
think the CBO projections or 75 year projections show that 
anywhere between 2027 and 2042, that it will bring down, 
effectively, say, bring down the economy. But what is going to 
happen is, you are going to get serious ramifications from 
that.
    So I think without any change, that is clearly the 
direction. And there will have to be a change made, a very 
drastic change at some point. But it is always very difficult 
to predict how fast that will occur, whether it is in the next 
ten years or 25 years. But I think the small group market in 
the next five years without any change, you will just continue 
to see a reduction and you will see a lot of those people flow 
into the individual market and/or some into large groups and 
more into uninsured.
    Chairman Pence. Is there any question in your mind, Dr. 
Matthews, that doing nothing simply exacerbates the problem, 
will swell the ranks of the uninsured and create even a larger 
problem than we have today?
    Mr. Matthews. Doing nothing will do nothing but get more 
uninsured. It will exacerbate the problem. There is one caveat 
here which I think we are seeing coming into the market now. A 
number of the insurance companies are looking, seeing the 
prices increase, are looking for alternatives. Through most of 
the 90s, most employers moved to some type of managed care plan 
in order to be able to hold down costs. But by and large, the 
patients, the consumers, they do not want these. The doctors 
are not pleased with managed care. So there is a sense in which 
we are trying to figure out some way to get away from the more 
restrictive types of managed care like HMOs.
    But I think you may see an evolution in policies in which 
companies begin to move to something more like a high 
deductible, which is less expensive. Get you away from some of 
those costs that guaranteed issue will impose upon people who 
have a number of costs, but they are still in the low range.
    So policies at even larger companies like Humana and Aetna 
have moved to a medical savings account type of policy now that 
they are offering, for the opportunities to get a higher 
deductible, making it less expensive, and then moving more 
money into the employee's medical savings account. And I bring 
this up because it has been interesting. In '96, with the 
debate over medical savings accounts, a number of people 
opposed them because they did not want people to have to have 
high deductible policies. They did not feel like they were that 
good, they did not feel like they provided the coverage and so 
forth, especially for sick people. What we are seeing in the 
market is employers and insurers beginning to move to that as a 
result of the legislation that was trying to escape that.
    Chairman Pence. Thank you.
    Mr. de Posada. Well, you know, what you are going to see is 
a huge rise in the number of uninsured. That is a certainty. In 
addition to that, you are going to see a huge crisis in the 
hospital emergency room operations. I mean, most of these 
people currently that are uninsured are relying on emergency 
rooms to take care of their most basic needs and you are seeing 
a very serious and financial crisis in a lot of these 
hospitals.
    I think ultimately you are going to see what we are seeing 
already in the Hispanic community, which is a huge black market 
for prescription drugs that are, in many cases, counterfeits 
and ineffective.
    Finally, I think what you are going to end up seeing is a 
very strong push for us to expand the Medicaid program, which, 
I mean, we have been battling this at the state levels, where 
you are seeing that the budgets are going out of control and 
states are significantly restricting services. And it is 
becoming extremely poor services that these Medicaid 
individuals are receiving.
    On a personal level, I mean, I live and my business is in 
Washington state. We have, you know, we are hit by community 
ratings and by guaranteed issue. And probably, I mean, you are 
going to end up seeing people like me not hiring people, but 
just hiring people on a part-time basis, in order to avoid any 
potential crisis of me being forced to offer health insurance.
    I mean, there are proposals in the Senate to force people 
like me to offer health insurance to my employees. I mean, 
ultimately, that would be disastrous for my business. So I 
think what you are going to see is a lot of people going, also 
moving from a defined benefit to a defined contribution, which 
is already happening and groups like Aetna are already 
offering, you know, using other terms. But I think it would be 
a serious problem, particularly in our community, it would be 
disastrous.
    Chairman Pence. Mr. Nelson.
    Mr. Nelson. I think that the same consequences would be 
evident in rural America, with real small businesses and 
farmers, as well. There certainly would be an increase in the 
number of uninsured.
    One thing I wanted to point out was that a lot of these 
things together, MSAs and tax credits and some partial federal 
funding and risk pools can do a lot. But they are not going to 
solve 43 million uninsured in one fell swoop. And I feel that 
some people think there is a fix out there somewhere that we 
can enact one piece of legislation that will fix this whole 
problem in just a matter of a year or even less.
    And I think it is important to note that these are just 
cogs in the wheel. And why not get started and try to do some 
of these what we call re-reforms, to try to fix some of the 
reforms that have not worked in order to help lower that number 
of uninsured. Thanks.
    Chairman Pence. I have a number of other questions to 
follow up on the witnesses' remarks, but I want to yield to my 
colleagues, beginning with Mr. Phelps from Illinois for any 
questions he might have of any members of the panel.
    Mr. Phelps. I appreciate the opportunity and the testimony 
has been very enlightening. I chaired the Health Care Committee 
in the Illinois House when I was there and I have a large rural 
district, so my interest mostly has been trying to focus on 
challenges in the rural setting, although we have a combination 
of some urban areas, too.
    It may not be a question, most of mine is going to be just 
comments and maybe if anybody has a reaction, instead of all of 
you reacting, just feel free to pitch in, one or all.
    I guess one of the things in this discussion that maybe I 
have missed and I know it is just part of the overall problem 
that we take for granted and accept, but I guess I did not hear 
enough or would be interested in hearing about how we contain 
the cost of health care? Because most, if not all, the comments 
are on target, which I mostly agree with, I think we are 
looking at the effects of the system that has gone bad. What is 
the source of the problem? We know people that areuninsured 
cannot afford it, maybe because they do not have a high enough wage or 
maybe do not have a job at all, so we have different layers of 
government that has responded to these situations.
    But the cost of care, how can we involve ourselves with 
insurance reforms that might get to the source of the problem? 
Because we can have prescription drug coverage plans, you know, 
that has been offered and one that has passed at least the 
House last week or so, two weeks ago. You know, what about the 
cost? How do we get to the cost? Does there need to be 
regulation? Has regulation caused the high cost? And I think if 
you study it closely--I have my own opinions, because I have 
seen both sides from a public service, elected official, as 
well as a small businessman and someone who raised a family of 
four. My youngest is still at home and a senior at a 
university.
    But the cost keeps escalating. Does that mean there is not 
enough profit being made by the doctors and nurses, the 
hospitals, the deliverer of care? If profit does not happen, we 
all are in trouble. You know, that makes the world go round.
    The cost of equipment, do we need those sophisticated 
equipments and miracle drugs that are on the scene if everybody 
cannot afford it or if it is exacerbating the problem? Why are 
we making them to begin with? Well, because we want to save 
lives and extend the care and the age of people. But what is 
the problem with the costs going up?
    I heard back in the early 90s that it was administrative 
costs, too much paperwork. That has been reduced quite a bit, 
maybe not enough. So I guess instead of deliberating, going on 
a self-filibuster, I will just let you react to some of my 
frustrations, any of you.
    Mr. Litow. Well, first of all, you are right. The cost of 
health care from 1975 to 2000 went up at 8.3 percent per year. 
It is right out of the government statistics books. And the 
inflation rate for non-medical service was 4.3 percent and wage 
growth and assets have not kept up.
    So as long as we continue to double the rate and, of 
course, the last two years, the gap is even much wider than 
that, we are in a problem. People just cannot afford it. And 
the reason that has occurred is a lot of things we talked 
about. It goes back to we have created a system where somebody 
else is paying for it. I think everybody talked about that and 
the demand--we have set up a system where the demand for health 
care is up on the ceiling and somebody else is paying for that. 
And whether we did that for health care or for the three basic 
needs of food, shelter and clothing, we would have the same 
dilemma.
    And so we need to sit down and modify the system, not that 
people--we should have high quality care and access to that, 
but we have to find a way to bring cost into the equation with 
equal weight. And that will change the way providers are 
operating. It will change the way insurers are operating and it 
will change the way consumers are operating, for sure.
    And our models show, we ran a model a number of years ago 
called Simucare with the Council and we have updated that. And 
right now, our model is showing that health care should cost 
about 53 percent of what it costs today. So that will give you 
some idea of what we think could be done, but it is going to 
take a long time to unravel that.
    Mr. Phelps. I know I just made general statements and it is 
tough to respond without a specific question. I guess I just 
like to see the industry focus on the source of the problem, 
instead of setting up all kinds of mechanisms to respond, to 
react, and I think that is the situation we are in. Because I 
have watched it carefully over the last two decades, at least.
    When you say, and I am not necessarily taking issue, but 
just as the devil's advocate, let us say, it is shifting 
responsibility if someone else pays, even though we know over 
40 million people uninsured are too many, there are a whole lot 
more people that are paying for health care. So I do not think 
what is coming out of my check, although we have a nice 
situation, being government officials and I wish and hope that 
happens for everyone in the country, but we are paying and not 
shifting responsibility to someone else. We are paying so much 
out of our earnings for health care. But evidently, that is not 
enough to keep up with the cost that is rising each year.
    So I do not know what the justification really is for all 
the costs rising at the percentage that you just quoted, other 
than if you are saying that there are too many that are not 
contributing anything and taking too much out.
    Mr. Litow. Well, let me try to explain. Utilization of 
health care services, especially for outpatient type services, 
anything that is discretionary, changes dramatically when the 
consumer is involved in paying for that cost. So that, and we 
have seen that in all kinds of markets and all kinds of 
countries.
    And so what has happened in the country is utilization is 
very high, partly because consumers ask for all these services 
because somebody else is paying for it. Providers create all 
these things and can charge a lot of money for them, more than 
they would, because somebody else is paying for it.
    So you have created a system--and then we put in laws that 
have created certain things and we have had to, the providers, 
you know, once you have price controls on services they have 
had to operate to make a profit. So what has happened is you go 
through this whole pattern of trying to provide, providers 
having to deal with somebody else, the government, the 
insurers, everybody but the person using the services.
    And so the number of services are way up, services are 
unbundled, we have all kinds of rules which create 
administrative costs. So it is a very complicated thing. But 
the point is, we have got a lot of extra utilization, we have 
got a lot of extra charges. We have got unnecessary visits, we 
have defensive medicine, it is a long list.
    And you can get ten people to testify and people will give 
different balances, but I think people will generally--they may 
agree on, have different weights on it, but you will find most 
people agree that you have all these issues going on and it is 
not just one fix. There are a lot of problems.
    Mr. Phelps. One final comment for your consideration and 
you can take it as you like. Thank you, Mr. Chairman, for the 
time. I believe very much in being innovative and trying to 
work the system to improve it and that is why I am cosponsor of 
the Armey-Lipinski bill, as well as MSAs since I have been here 
and in Illinois legislature.
    But the bottom line is, we keep talking about competition 
and less government regulation, which I think is part of the 
answer. But I do not know of any other situation where, if the 
price of some product gets so expensive that the consumer 
cannot afford it and there truly is competition, some way or 
another the person providing that product brings down the 
price. But I think we see a very unusual dynamic here. The 
price and the cost of health care keeps going up no matter what 
we do and so we are adjusting everything to meet the cost, no 
matter how high it keeps spiraling.
    And we have all kinds of people justifying why it keeps 
going up, but everything we do does not seem to affect the 
price of care and that is frustrating.
    Mr. Keating. If I could just throw in one comment? The key 
and your support of MSAs is right on the mark. That's a big 
issue that we push and tax credits and so on. The key is--there 
was an article in ``The Washington Post'' earlier this week and 
somebody said, whatever we do, health care costs keep rising.
    Well, you have to do the right thing. And the problem is 
when you look at things like increasedregulation, whether it is 
mandated benefits, community rating, etc., etc., guaranteed issue, 
those are the wrong things. So we have to make sure our policies are 
geared in the right direction that so that we wind up with more choice 
and more competition in the end, and not just more regulation that we 
can all feel very nice and warm and fuzzy about, but it does not really 
accomplish anything and makes things worse in the marketplace.
    Mr. Matthews. Let me respond with a couple of points. 
Number one is, health care costs are probably going to continue 
to rise, even if we had a perfectly efficient system in there, 
maybe perhaps at a lower rate, because there is so much more we 
can do. The doctors, the medical schools, the hospitals, the 
pharmaceutical companies, there is just a range of new 
procedures and so forth that is coming out available that we 
are going to be able to do. So you would anticipate some kind 
of increases just in the ability to be able to do things we 
could not do ten years, 20 years ago.
    But in addition, going back to your point about the cost of 
health insurance, the interesting thing here is, in certain 
sectors of the market, prices remain fairly affordable. If you 
go to certain states that have minimal regulations, have not 
done certain things to sort of destroy the market, in many of 
those states you can find affordable policies.
    In addition, in many of these states, the companies 
themselves are looking for ways to create new products that are 
innovative in the way they are trying to address the cost. So 
if you go--increasingly, some of the Blue Crosses around the 
country and other insurers are moving to what would be a high 
deductible, say a $2,000, $2,500, $3,000 deductible for major 
medical care. But as long as you are staying within the 
network, you can get primary care, preventive care, 
prescription drugs and so forth, for $20 or $25 co-pay out of 
pocket. So they have a high deductible policy if you are going 
to have, if there is major medical accident procedure, sickness 
or something of that nature. But for standard care, it still 
remains very affordable. In other words, they try to get the 
benefits of the high deductible policy along with the provision 
in there to encourage people to get preventive and primary 
care.
    Those policies are still, in many states, quite affordable 
for a family of three or four and you referred to some of 
those. My point being is, the insurers are looking for ways to 
sort of make the market work, but there are fewer and fewer 
options out there available for them, as state legislatures and 
Congress have passed more and more regulations giving them 
fewer options.
    I think if you were to remove some of those regulations, 
give them a little more freedom out there, you would find them 
creating policies that are very affordable in a lot of areas, 
but they need to have that freedom to be able to do it.
    Mr. Nelson. I think one thing, a very simple thing that 
could be very helpful, is to have the health consumers 
recognize what it is really costing them. I would guess that 
there are a significant number of employees that do not know 
how much their health insurance is costing, because it just 
automatically comes out of their check. And they do not know 
when they go in for a procedure or go in for a check up how 
much that is really costing.
    So simply educating and empowering the consumer to learn 
more about what health care really costs and how much their 
care is costing them would be very helpful.
    Chairman Pence. I thank the gentleman from Illinois and 
would recognize the gentlelady from the Virgin Islands for any 
questions or comments she might have to the panel.
    Ms. Christian-Christensen. Thank you. Just a few brief 
questions and mine have to do more with quality, because as a 
physician and chair of the Health Trust of the Congressional 
Black Caucus, a lot of my time is spent on the elimination of 
disparities and providing for some equity in health care and 
health status for people in this country.
    So I probably will just ask two questions and I direct the 
first one at Dr. Matthews and anyone else can also answer it. 
The Associated Health Care Plans would be exempt from state-
mandated coverage of benefits. Do you see this possibly 
reducing the quality of health care available to small business 
employees and, if not, can you explain how it does not do it?
    Mr. Matthews. In my opinion, it would not reduce the 
quality. And the reason is that under ERISA, large employers 
that self-insure under ERISA are not subject to the state 
mandates. And yet, if you go by and look at the types of 
benefits that those large employers offer, in many cases they 
cover the same types of things that the states would require by 
the mandate.
    So the policies from large employers that are not required 
to do that, because they have the money and other things, 
typically have very comprehensive policies that are very good. 
So the Association Health Plans are an attempt to try to do 
something very similar. And I would expect some of the benefit 
plans to have comprehensive benefits in there. But I think it 
would also give them the opportunity to offer basic coverage 
for those employees, individuals, associations, that do not 
have the money to be able to get the comprehensive plan.
    Like you, I like to have a comprehensive plan covering me 
and managing to cover just about all the health care costs. But 
sometimes, some people cannot afford the Cadillac with all the 
options. They need to be able to get the lower cost plan that 
provides the basic care because that is all they have the money 
for, and the Association Health Plans would give them that 
option.
    Ms. Christian-Christensen. I mean, we need to try to get 
away from two-tiered levels of services. The same question 
about the risk pools. It sounds as though they foster a two-
tiered system of services. And I guess I would start by 
directing this to Mr. Litow first. Can you talk a little bit 
about the high risk pools and whether or not they also would 
provide a good, comprehensive quality level of services, equal 
to the other insurances?
    Mr. Litow. Well, high risk pool plans, very often you don't 
have the same level of choice of coverage. But as far as the 
level of services go, I am not aware--I was on the Board of the 
Wisconsin High Risk Pool for a number of years. I would not say 
that the quality of service, those people--it is private 
coverage. The coverage is subsidized. In Wisconsin, we pay 
about 60 percent of the costs and I think that is consistent 
with a number of the states. The person gets in and pays 150 
percent of the normal rate in this high average of five top 
companies in the state.
    So the intent of a high risk pool is two-fold. One is to 
encourage healthy people to buy insurance at that time, so when 
they get sick, they have the protection. If they wait until 
they get sick, then there is a penalty. But as far as the 
access to treatment----
    Ms. Christian-Christensen. And as far as the basic level of 
services?
    Mr. Litow. They would have that. They are just paying the 
penalty for having waited and getting into the system late. But 
they are not, I do not believe they are penalized in any way. 
Like I said, sometimes the coverage choices are not as 
substantial.
    I do not know, is anybody else aware of any?
    Mr. Matthews. I can say that in the Texas High Risk Pool, 
basically, in several of the states and I do not know about all 
of them, but in the high risk pools, you are basically getting 
a Blue Cross policy that is subsidized by the state, because 
you are getting people who have expensive medical conditions.
    And so I know in Nebraska, it is a Blue Cross policy. The 
insurers make very little policy if they sell that policy. I 
think the last I heard, it was like a $25 commission or 
something like that. But you get a comprehensive plan.
    In the Texas High Risk Pool, you get three or four options. 
You can have an HMO, a PPO.They give you options of 
deductibles. It looks very much like a standard insurance policy.
    And I think what Mark was saying is that the providers 
themselves, the doctors and hospitals, are largely blind to 
that aspect of it. I mean, they do not--it is not an issue of 
you are in the high risk pool so I cannot give you the coverage 
or I cannot provide this or give you this prescription.
    Mr. Nelson. In a couple of states, in Wisconsin, in fact, 
where Mark was on the board, they have another plan that offers 
some help to low income people to be able to better afford 
entrance into the high risk pool. And there is a pilot study 
now in Montana, who has a high risk pool, a federal study of a 
couple million dollars this year to help low income people be 
better able to afford getting into the high risk pool.
    In one of the proposed bills in the House right now with 
some partial federal funding for high risk pools, there are 
some dollars set aside for low income people going into the 
pool, as well. So I think that people are looking at that.
    Mr. Matthews. And--go ahead.
    Mr. de Posada. On the two-tier system that you were talking 
about, particularly in the minority communities, you are seeing 
it already.
    Ms. Christian-Christensen. Absolutely.
    Mr. de Posada. I mean, you are seeing all of our 
communities, all of our businesses not being able to offer, so 
therefore you do have a two-tier system. We are very strong 
supporters of Association Health Plans because at least that 
will reduce the cost significantly so that businesses can, 
these businesses will be able to afford it.
    However, there is no one silver bullet. And unless you 
start targeting the same kind of support that you are giving 
businesses to employees who do not get health insurance from 
their job, you are basically ignoring a huge part of the 
market. So that is why you need to focus a lot more also on the 
individual market.
    Mr. Matthews. Just if I can add this. I share your concern. 
We do not want a two-tiered system out there. In my opinion, 
the high risk pool, in fact, prohibits or prevents that two-
tiered system because it makes insurance accessible to somebody 
who can then move into the system and pay for it with their 
insurance plan just like everyone else.
    Ms. Christian-Christensen. I--go ahead.
    Mr. Nelson. Another quick point is that the high risk pool 
population of these 30 state--well, 28 operating now, and two 
states, New Hampshire and Maryland are coming on this year--it 
is a fluid population. It is not a static population. And some 
people move from the risk pool into an employer, get employed 
by someone or maybe are able to get other insurance. So people 
do not stay in there forever, so it is helpful to have them in 
there for a short period of time at some point.
    Ms. Christian-Christensen. Well, with the tens of millions 
of people who are the folks who are employed by small business 
that make up the uninsured right now, this is a critical issue 
and one that we have to address.
    I look at some of the things that we are discussing today 
as really sort of stop-gap measures. Because what we really 
need to be doing as we provide the relief to small businesses 
and help them to be able to insure their employees is do 
something about those high risk persons that are creating the 
problems we are trying to solve coming into the insurance 
system. And reaching them, providing the prevention, providing 
the improvements in the health care structures and the poor 
communities, rural as well as minority communities, and making 
sure that everyone has equal access to quality health services, 
quality prevention services, have good health care 
infrastructure in their community, so they are not coming into 
the insurance pool at high risk. That is what is really driving 
up the cost at that front end.
    But we will be working with our chairman to resolve the 
issues that are before us today. That is a longer term problem, 
but we realize that we do have to provide some relief to our 
small businesses in terms of providing insurance coverage. We 
know that those tens of millions of people do need to be 
covered, that is something that we must address. And we look 
forward to working with you on it.
    Chairman Pence. I thank the gentlelady from the Virgin 
Islands for her attendance, participation and am very much 
looking forward to working with you on addressing these issues.
    I would also recognize the gentleman from Puerto Rico for 
any comments or questions to our panel and am grateful for your 
participation in the hearing today.
    Mr. Acevedo-Vila. Thank you, Mr. Chairman. I just have one 
quick question to Mr. de Posada. I am not surprised at the 
numbers about the uninsured Hispanics. I am just a little bit 
curious. What were the numbers, let us say, five years ago? Has 
there been any improvement or are we in a worse position? I 
just want to know if there is a trend in the amount of 
uninsured Hispanics.
    Mr. de Posada. I mean, like the rest of the population, 
what you are seeing is whenever there are good economic times, 
obviously the numbers drop a little bit. But what you are 
finding is that----
    Mr. Acevedo-Vila. My point is, are we closing the gap or 
has it been like that for the last whatever years?
    Mr. de Posada. No, it has been like that for a very long 
time and it will continue to be like that simply because these 
are people that are working for small businesses that do not 
offer health insurance. So unless we figure out ways to 
encourage those employers to offer or go into the individual 
market, allowing, you know, giving them the support through tax 
credits or vouchers to be able to afford it, you are going to 
see the number continue to increase.
    Mr. Acevedo-Vila. Thank you.
    Chairman Pence. I thank the gentleman for his participation 
and know the gentleman from Puerto Rico to be probably the most 
outspoken and outstanding advocate of issues related to the 
Hispanic community in this country.
    Mr. Acevedo-Vila. I have the biggest Hispanic congressional 
district. [Laughter.]
    Chairman Pence. No argument. I have a few more questions 
for the panel, although this has been an enormously valuable 
and illuminating discussion.
    Earlier, the Chair asked about scenarios if we do not act. 
I would like to have you elaborate for the record on some of 
the proposals, some of which have been challenged here today by 
my colleagues. But it seems like in the area of reform, there 
was a consistent call for refundable or advancable tax credits.
    I know Mr. de Posada called for that and Mr. Nelson did, as 
well. Mr. Litow and Mr. Matthews, just from my notes alone. I 
am an original cosponsor of the Fair Care Armey-Lipinski bill. 
What advantages are there between one reform and another? If 
history teaches us that in legislation as well as military 
affairs that you move the line when you put mass on point, 
where would this panel, beginning with Mr. Nelson and we will 
go in the opposite direction, where would the experts on this 
panel suggest that this committee and this Congress put mass on 
point? If there are a host of good ideas from repealing HIPAA 
to medical savings accounts, the Fair Care initiative, 
refundable tax credits, what is the most promising, if there is 
one? And why would that be the most promising, both from the 
standpoint of public policy and from thestandpoint of the 
internal politics within the Congress itself? Mr. Nelson, your opinion?
    Mr. Nelson. Well, if this was, the world was free of 
budgets, my answer would be different than it is, because we 
are under constraints of budgets. And then when we start 
looking at the availability of money to try to do these 
reforms, I think that if we look at reforming MSAs, which is 
relatively low cost at some partial federal funding of high 
risk pools, which is relatively low cost, we are looking at 
several bills that may be $100 million a year and at these tax 
credits, some of the tax credit bills being proposed are fairly 
low cost. Then that is what I guess, in the reality of the next 
two years in terms of the cost, the budget that is available to 
us, that would be my three choices, I think, of trying to do 
something to really help.
    Whether one of those is more important than the others, I 
do not really have an answer for that. I just think that all 
three are very, very important. What I wish is that we could 
pass Fair Care, which has all three in them, and be done with 
it, but I am afraid that that might not be possible. I wish it 
was.
    Chairman Pence. Mr. de Posada, in your testimony you 
eventually got to the conclusion that we would see a 
significant increase in Medicaid, pressure for increase in 
Medicaid spending, which is terribly frustrating to me as a 
conservative. But it is also frustrating to me because this 
entire hearing, this entire discussion, is about working 
Americans.
    The people that are working, that are employed, and despite 
the hateful stereotypes that can attach to minority 
communities, you have been an eloquent voice in this hearing 
today for the Hispanic community and its desire, people's 
desire to build wealth and be productive parts of the economy 
and small business sector, in particular.
    Where do we focus right now that is going to make the 
biggest difference?
    Mr. de Posada. I think there are two pieces of legislation 
that you can move very quickly, and actually the House already 
passed one of them, which would be, I think, Association Health 
Plans, because that would take care of reducing costs. And in 
some essences, will allow people to by-pass some of the state 
regulatory policies that are really increasing the prices.
    The second issue would be immediate passage of Fair Care. I 
mean, when you focus the support on those individuals that are 
currently being affected by this, those that are working but do 
not get health insurance from their job, I think automatically 
you are going to be opening a huge new market of people that 
actually will not have to depend either on Medicaid, 
potentially, or having to rely on the hospitals. I mean, it is 
very sad.
    We did, last year, yes, last year we issued a report on the 
re-importation of drugs into the United States. And we were 
followed, when we were doing a press conference in California, 
we were followed by a TV crew from Chicago. When we went there, 
they did this report about the sale of illegal prescription 
drugs in Chicago, in the little 7-11 type stores, where people 
were coming in and they would sell them drugs.
    Most of these people did not know that there was a 
community health center two blocks away. So, I mean, what we 
are seeing is, these people are taking drugs or getting sick or 
getting immune to major drugs and ultimately going to emergency 
room hospitals and increasing the prices for everybody. And I 
think if we start focusing on giving that support to the 
individuals to be able to enter the private market, I think we 
are going to see a significant reduction in the dependency of 
and in the complications, which always end up to be more 
costly.
    Chairman Pence. Dr. Matthews, your remarks today were most 
helpful to the Chair, because being from south of Highway 40, 
it is hard for me to get my brain around some of these things 
and I was particularly grateful for the home building analogy. 
You made the comment, though, that we need to get insurance 
companies out of the safety net business and get the government 
in. I want to get your opinion about where we put mass on 
point, and if you could pick one, I would be grateful. But when 
you say that government should be the safety net and not 
insurance companies, are you suggesting that through reform, or 
are you suggesting that through direct subsidy?
    Mr. Matthews. I think in both. We have a model out there 
that works pretty well. I mentioned it earlier. On, for 
instance, where you are talking about housing or food, we have 
people out there that cannot afford the food they need, but we 
do not go in and regulate the grocery stores and the farmers. 
We simply provide assistance to those people who need the help 
and then we let the market work. And we let them enter the 
market with the assistance.
    Now what we are talking about is not necessarily welfare. 
But it is an attempt to say if you have people out there who 
cannot function in the market as it exists, then do not go in 
and regulate the insurance companies. Let the market work and 
provide the assistance through the Armey-Lipinski bill is one 
way to provide assistance. For those who cannot enter the 
market because they have a medical condition, you do not go 
tell the insurers you have to take them, you provide some 
additional assistance to them is one way to do it, and Mark 
Litow has done an analysis of how you might do that. But you 
have the high risk pools as the safety net. The high risk pools 
are public, private entities that provide health insurance for 
those people who cannot enter the standard market.
    My point being is that you create a system that works off a 
model like we already have that provides assistance and creates 
a safety net, but you cannot make business, whether you are 
talking about insurance or other things, you cannot make 
business a safety net. You need to create a safety net and 
government is really the only functional way of doing that.
    Chairman Pence. Thank you, Dr. Matthews. Mr. Litow, in the 
category of reforms, you said that repealing the premium tax 
exclusion would do much to stem the tide of almost the lemmings 
over the cliff drive to third-party payer that we have.
    Mr. Litow. Right.
    Chairman Pence. And I was very provoked by your comments 
about that. Is that tax credit, is tax credits where we put 
mass on point to move this issue quickly?
    Mr. Litow. Yes. I believe so. In fact, I think that is what 
Merrill was talking about. We have actually constructed a 
proposal where tax credits replace the premium tax exclusion 
step by step and actually over a long period of time, we 
believe it will be revenue neutral. So we are not even certain, 
we do not think there is a cost.
    Now I am sure people would have various assumptions about 
that. But that is where I would start, yes.
    Chairman Pence. Would you start there or do you think that 
is, in fact, the most promising to close this wound and begin 
to reverse what I think I will characterize in this hearing as 
horrendous trends for small business America?
    Mr. Litow. That is fair. I do not think there is any 
disagreement here. It is always tough to estimate the 
progression, but what I believe will happen is, as people start 
to become aware of the costs that they are paying for health 
care and what other people are paying for health care, so, for 
instance, under Medicaid, part of the issues with Medicaid are 
very few providers will take people under Medicaid. Why? 
Because the reimbursement rates are so low. And if people start 
to realize that they are paying a lot more because Medicaid 
reimbursements are so low or Medicare or they are paying for 
uncompensated care, it will open up a whole area of debate. And 
I believe that actually that will allow us to do some more 
substantial reforms in those areas, but at least to open up a 
debate.
    And that is why I believe bringing the consumer back in on 
the cost side and changing from a premium tax exclusion system, 
which relies on third party to tax credits, particularly to 
give help to people who need it, as Merrill talked about, is a 
critical first step in that.
    Chairman Pence. And lastly, is it Dr. Keating?
    Mr. Keating. No, just a Masters, sorry.
    Chairman Pence. Well, I admire your thinking, regardless of 
your title. I just simply did not want to improperly recognize 
you. I would like to get your sense. You said in your 
testimony, according to my notes, that we needed to 
dramatically shift to additional choices, drive competition 
into the equation. And it seems like your focus was less on the 
issue of subsidies and what we have heard some others place 
emphasis on with regard to Fair Care and Armey-Lipinski, but 
was to lift restrictions on tax-free medical savings accounts. 
Is that the most promising area of reform? Is that where 
Congress should go to expand the pilot programs we have?
    Mr. Keating. We certainly agree with, if not all, most of 
the proposals that have been talked about here. But we think 
the key here, Congressman Phelps had asked, you know, what is 
the core problem here? And it is the third-party payer issue. 
That is why we emphasize making medical savings accounts 
permanent, lifting the many rules and restrictions on them so 
they can flourish as a viable choice for everybody in the 
marketplace. When you think about how MSAs work, they directly 
deal with that third-party payer issuer. The consumer has money 
in that savings account. It is his or hers, he or she, they are 
concerned about the costs, how that money is spent, they are 
concerned about their health care, and they have the back up of 
what insurance is supposed to be, that catastrophic plan that 
helps you weather those large, unforeseen costs.
    So our emphasis is on dealing with that third-party payer 
issue and the true emphasis of my testimony was that and that 
is easy, or it should be easy. I know there are a lot of 
opponents in Congress that are not crazy about medical savings 
accounts for a variety of reasons, but that should be easy.
    The hard part is the other side that we talked about. It is 
deregulation. You know, the trend here, unfortunately, in 
Congress and the states has been towards more and more 
regulation, more and more government funding, expanding 
government programs. We need the emphasis to move in the 
opposite direction. That is hard, I mean, I know that is hard. 
I understand politics as well as economics, so it is very 
difficult to move to deregulate. But we need to deregulate when 
it comes to things like guaranteed issue and community rating 
and mandated benefits. Again, a lot of these things sound nice 
but the economics are ugly.
    Chairman Pence. With that, the Chair would like to thank 
all of the witnesses for outstanding and very provocative 
remarks today. Mr. Keating made the comment that he understood 
politics as well as economics, which is also true for the 
Chair. I have very little understanding of economics and my 
understanding of politics, after a year and a half in Congress, 
matches that.
    Let me thank you for your willingness to help us in this 
subcommittee draw attention to not only the reforms but to the 
deleterious and harmful effect that issues like guaranteed 
issue and essentially price fixing have affected in our system.
    You may all be assured that this subcommittee and the full 
Committee on Small Business will continue to call on you as we 
try and take your counsel to stem what I believe is a dangerous 
rising tide in small business America. That if we do not stem 
this tide, it seems evident to me and other limited government 
conservatives, that we will be faced with no choice but to grow 
public assistance through Medicaid to address this gaping hole 
in America, and take us even farther down the road of 
socialized health insurance in the United States of America.
    It is this Chair's ambition that we would reverse this 
trend, that we would build on the strength of a competitive 
free market model and we will enlist your assistance and your 
proposals and your energy as we try and drive that agenda 
before the advent of that legislative and public crisis 
arrives.
    So with that, this hearing of the Subcommittee on 
Regulatory Reform and Oversight of the Committee on Small 
Business is adjourned.
    [Whereupon, at 11:43 a.m. the Subcommittee was adjourned.]
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