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

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

                                    HEARING

                                   BEFORE THE

                          COMMITTEE ON SMALL BUSINESS
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                       CRYSTAL LAKE, IL, AUGUST 14, 2002

                                   __________

                               Serial No. 107-67

                                   __________

             Printed for the use of the Committee on Small Business

                               U.S. GOVERNMENT PRINTING OFFICE
    82-203                          WASHINGTON : 2002
    ____________________________________________________________________________
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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
    MIKE PENCE, Indiana                  STEPHANIE TUBBS JONES, Ohio
    MICHAEL FERGUSON, New Jersey         CHARLES A. GONZALEZ, Texas
    DARRELL E. ISSA, California          DAVID D. PHELPS, Illinois
    SAM GRAVES, Missouri                 GRACE F. NAPOLITANO, California
    EDWARD L. SCHROCK, Virginia          BRIAN BAIRD, Washington
    FELIX J. GRUCCI, Jr., New York       MARK UDALL, Colorado
    TODD W. AKIN, Missouri               JAMES R. LANGEVIN, Rhode Island
    SHELLEY MOORE CAPITO, West Virginia  MIKE ROSS, Arkansas
    BILL SHUSTER, Pennsylvania           BRAD CARSON, Oklahoma
                                         ANIBAL ACEVEDO-VILA, Puerto Rico
                          Doug Thomas, Staff Director
                      Phil Eskeland, Deputy Staff Director
                      Michael Day, Minority Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on August 14, 2002..................................     1

                                   WITNESSES

    Blankenbaker, Mary, Co-Owner, Benjamin's Restaurant..............     5
    Brauns, Ryan, Senior Vice President, Rockford Consulting and
      Brokerage......................................................     6
    Shalek, Scott, RHU, Shalek Financial Services....................     8
    Close, Brad, National Federation of Independent Businesses.......    11
    Koehler, Ken, Flowerwood, Inc....................................    13
    Buxton, Brad, Vice President of Networks & Medical Management,
      Blue Cross & Blue Shield of Illinois...........................    14
    Wilson, Isabella, Chief Financial Officer, Illinois Blower, Inc..    17
    Milam, James, MD, Illinois State Medical Society.................    19

                                    APPENDIX

    Opening statements:
        Manzullo, Hon. Donald........................................    36
        Crane, Hon. Philip...........................................    39
    Prepared statements:
        Blankenbaker, Mary...........................................    41
        Brauns, Ryan.................................................    44
        Shalek, Scott................................................    53
        Close, Brad..................................................    59
        Koehler, Ken.................................................    69
        Buxton, Brad.................................................    72
        Wilson, Isabella.............................................    75
        Milam, James.................................................    78

                      SMALL BUSINESS ACCESS TO HEALTH CARE

                                  ----------

                           WEDNESDAY, AUGUST 14, 2002

                              House of Representatives,
                                   Committee on Small Business,
                                                        Washington, DC.
        The Committee met, pursuant to call, at 11 a.m., in Room B-
    171, College Conference Center, McHenry County College, Hon.
    Donald A. Manzullo (chair of the Committee) presiding.
        Chairman Manzullo. Well, good morning. Can you hear my
    voice clear enough? Okay. It is my pleasure to welcome
    everybody to today's Small Business Committee Field Hearing on
    the critical issues of small business access to health care. As
    soon as this hearing ends, we will be going to Libertyville and
    have a hearing there on how the cost of medical malpractice
    insurance is affecting the cost of insurance premiums
    themselves.
        Fighting health care costs is one of the biggest expenses
    small businesses and the self-employed incur as they struggle
    to provide coverage for their employees. As Congress continues
    to examine our nation's health care problems, we need to
    remember that 60 percent of the estimated 43 million uninsured
    are small business owners, their employees, and families.
        Small business owners are unable to absorb spiraling health
    care costs and find themselves priced out of the health
    insurance market. Many owners are faced with the choice of
    staying in business or providing their employees with
    insurance.
        I personally know of a small business owner who pays $700 a
    month and has a $5,000 deductible to insure both himself and
    his wife. He and his wife are considering selling their
    business and taking jobs that would pay considerably less in
    order to receive health care benefits.
        Our current health care system does not provide equal
    access to affordable and quality health care for small
    businesses. One of the reasons small businesses cannot afford
    health coverage is that they are unable to achieve the
    economics of scale and purchasing power of larger corporations
    and unions. Small businesses suffer from unequal treatment.
    What they want most is a level playing field when it comes to
    purchasing their health care products.
        Large corporations use their purchasing power of thousands
    of employees to offer affordable health care insurance to
    workers. Small business owners have to find their insurance on
    an individual basis, making it very difficult and expensive to
    find affordable health coverage.
        I can't help but wonder why insurance companies cannot
    offer affordable health care to small businesses. Why must
    insurance companies charge the most to those least able to pay
    these high prices?
        I was very heartened to see President Bush's issue, his
    plan for helping small businesses prosper in our economy. The
    President is aware of the health care access and affordability
    problems facing small businesses, and his plan includes
    concrete steps to increase health security for employees of
    small businesses. His agenda calls for association health plans
    to be available for associations that want to provide health
    coverage for their members. It calls for permanent extension of
    Medical Savings Accounts, including a significant reduction in
    the required deductible for these health accounts.
        Congress needs to ensure that there are many different
    health insurance options for small business owners to utilize.
    We need to help our businesses attract, and keep employees; and
    nothing helps more than the ability to provide health coverage.
        I look forward to the testimony of the witnesses. Now, they
    are not all going to agree. Some are in favor of associated
    health plans, and some are opposed. And the purpose here is to
    get a fluent discussion going to see what ideas are bouncing
    around Congress and tell us for your perusal. I am joined by my
    excellent mentor. I met Phil a long--well, I know you got more
    years than I do. I am not as graceful and distinguished as you
    are. Before I was elected to Congress, Phil Crane represented
    all of McHenry County, and then because of the redistricting in
    1992, I became the blessed beneficiary of McHenry County, and
    had the privilege to represent you in the past 10 years. As you
    know, redistricting occurs every 10 years, and we came to a
    situation where we went from 20 members of Congress, down to
    19, and so the areas had to get bigger.
        The Congressional District that I represent, we,
    unfortunately, lost the northeast corner of McHenry County,
    which is cities of Richmond, Hebron, Johnsburg; and the city of
    McHenry itself, and Scott, also Rinkley. I've been thinking
    about the cities that we lost in there. So, I lost that
    northeast corner, and the redistricting map, I picked up the
    western half of Global County, all of Carol County, the top
    halves of DeKalb and Whiteside County. So the new branch of the
    district I represent runs from Fulton on the Mississippi, all
    the way over until Algonquin on the Fox, and then all the way
    to the Iowa and Wisconsin borders to the northeast corner.
        Phil Crane, in redistricting, we had to figure, he had to
    expand his area, he couldn't go into Lake Michigan, and he
    couldn't go into Wisconsin, and so, he had to come into McHenry
    County. And as we looked at the map, we tried to make it as
    square as possible. One of the townships got split,
    unfortunately, but at least he kept the cities intact. So,
    Phil, is again, reclaiming that northeast corner, and when we
    sat down and talked about redistricting, Phil and I had to
    agree that we are going to treat this county as a whole. So you
    now have two members of Congress that are looking after the
    interest of McHenry County, and I can't think of a finer
    partner, and a friend, and a mentor, of so many years, and with
    that, I'll go to you. Thank you.
        Mr. Crane. Thank you, Don. I deeply appreciate that. It is
    a pleasure to have the opportunity to be back in McHenry, and I
    maintained a lot of friends over here, even after the loss of
    our district. But my district in geographic area is roughly the
    same. I lost a big chunk down in Cook County to guarantee that
    our colleagues over there stay in their districts, and they
    moved into mine, and I've been here eight years.
        Chairman Manzullo. Okay.
        Mr. Crane. At least we didn't send you down to Kentucky.
        Chairman Manzullo. That's correct.
        Mr. Crane. Well, I want to congratulate you for holding
    this important hearing, and inviting me to have the opportunity
    to participate. And I would like to commend your leadership
    efforts on access to affordable health care for small
    businesses. You've been a great ally in our fight to expand and
    remake, or make permanent medical savings accounts, and your
    work on establishing association health plans is to be
    commended as well.
        Let me just say that I believe all Americans should have
    access to quality health care, and that is the best health care
    system in the world. According to the U.S. Census Data two
    years ago, there were around 39 million uninsured. Of that 39
    million, 60 percent, I believe are owners or employees of small
    businesses.
        One of the main reasons that individuals go without health
    insurance is the cost of the premium. Since 2000, insurance
    premiums have continued to increase. This year, premiums rose
    an average of 19.3 percent, and it said that for every one
    percent increase in health insurance premiums, 100,000
    individuals will lose their health insurance coverage. That's
    1.9 million more individuals on the uninsured rolls this year
    alone. And, Mr. Chairman, if I could just point out that I
    recently read that insurance companies across the country are
    seeking rate increases of 22.5 percent for next year. If that
    is correct, that would be the highest annual percentage
    increase in the last four years, and it would result in 2.3
    million more uninsured next year.
        There are also other reasons that Americans find themselves
    uninsured. Some are unemployed workers who have the option to
    continue coverage under their former employer's plan, as long
    as they pay the premiums, but do not have the money to do so.
    Other unemployed workers and some working families are
    uninsured because their employers do not offer any coverage.
    Still others, generally low-income workers, may be offered
    employer-based insurance for themselves or their families, but
    cannot afford the premiums.
        All responsible lawmakers want some form of action to help
    the uninsured. The argument is how best to do that. And,
    although most members of Congress believe that the employer-
    sponsored insurance system should continue as the basis of
    coverage for most working families, there has been a gradual
    recognition that, in today's economy, the traditional employer-
    based system cannot serve all families effectively. In
    particular, that system does not assure stable, continuous
    coverage for all. Two factors demonstrate this problem.
        There are very high rates of uninsurance among employees of
    small firms. According to a Kaiser Family Foundation Survey,
    while 99 percent of large firms offer health insurance, only 55
    percent of firms, with fewer than 10 employees do. Among low-
    wage workers, those who earned less than $7 an hour in 1996, 45
    percent are not even offered insurance.
        This is probably due to the fact that employers who try to
    offer coverage to very small groups tend to face high
    administrative costs. According to data collected by the
    Congressional Budget Office, overhead costs for providing
    insurance can exceed 30 percent of the premium costs for firms
    with fewer than 10 employees, compared to about 12 percent
    firms with more than 500 employees. Also, small employers may
    lack access to resources to assemble good and affordable
    options for their workers. Consequently, many small businesses
    adopt a competitive compensation package that emphasizes cash
    income rather than health benefits.
        Because I am the vice chairman of the Committee on Ways and
    Means, as so indicated, I'd like to focus for just a brief
    moment on a role of taxes. The Federal Tax Code blocks
    employees from obtaining coverage from anyone other than an
    employer or former employer; The current tax system excludes
    from taxable income, federal and state income taxes, and
    payroll taxes, all compensation provided to a worker in the
    form of employer-sponsored insurance. But workers who do
    purchase insurance for themselves rarely can claim any tax
    relief or receive any other assistance toward the cost of
    coverage.
        There is one section in the tax code that provides for some
    tax relief medical expenses. Since 1942 taxpayers who itemize,
    have been able to deduct health care costs that are in excess
    of a statutory percentage of their adjusted gross income. The
    current threshold where deductions of medical expenses are
    allowed is after 7.5 percent of the adjusted gross income.
    However, few taxpayers who itemize can reduce their taxable
    income through the existing deduction, because their
    unreimbursed medical expenses are unlikely to exceed 7.5
    percent of the AGI. That is why I have introduced legislation
    to help make health care more affordable by allowing taxpayers
    to deduct most of their medical expenditures to exceed two
    percent of their adjusted gross income.
        Let me give you an example of how this legislation would
    help. Under current law, a family with an income of $30,000
    would only be allowed to deduct medical expenses in excess of
    $2,250. Under my proposal, that same family would be allowed to
    deduct all health care costs exceeding $600.
        Let me just end by saying that providing access to
    affordable, quality health care is an issue that will be with
    us for some time. But the longer we wait to pass legislation to
    help improve access to health insurance, means that millions of
    Americans will continue to lack affordable protection against
    the potentially catastrophic costs of an illness or accident.
    And I look forward to hearing some of our local small business
    owners, as we work towards a solution for this issue. Thank you
    again.
        Chairman Manzullo. Thank you, Phil. Most of you have never
    testified before a Congressional Committee, and the first thing
    I want to tell you is to relax, don't be nervous, this is not
    the stuff that you see on C-SPAN and nobody is going to ask
    that you get up and swear under oath. We conduct our small
    business hearings formal enough to comply with the House of
    Representatives Rules, but informal enough so that we are goal
    orientated. We have a time clock of 5 minutes, and when we get
    to 4 minutes, does a bird come out of the wall? What is going
    to be our signal on that?
        Mr. Thomas. I'll wave my hand.
        Chairman Manzullo. You will wave your hands? What if I
    don't see you?
        Mr. Thomas. I'll make sure.
        Chairman Manzullo. You will make sure you see me? Okay. So,
    when we are at 4 minutes, I will let you know, or maybe I will
    go like this, okay. And if you run over a little bit, that's
    fine. But I do want to--after testimony, we have plenty of time
    for questions by Congressman Crane and myself, and also you
    might question each other, that is also permissible. And Mary,
    you look the most nervous up there. I'm going to start with
    you. Either you are first, or you are going to be last. So I'm
    going to start with you. You are going to be first. And then,
    go ahead, before any testimony, I just want to state that your
    written statements will all be made part of the record. And if
    you want to do the preliminaries, that's fine.
        Mr. Crane. I understand, ladies first, but you mean
    Isabella is next to last.
        Chairman Manzullo. Oh.
        Ms. Wilson. That's okay.
        Chairman Manzullo. That's all right? You are okay Isabella,
    all right. Thank you for reminding of that. Make sure you tell
    us a little bit about your business, if you're self-employed,
    and employ employees, et cetera.
        With that, Mary Blankenbaker, you can go now.

        STATEMENT OF MARY BLANKENBAKER, CO-OWNER OF BENJAMIN'S
                               RESTAURANT

        Ms. Blankenbaker. Thank you. Good morning. My name is Mary
    Blankenbaker. I am co-owner of a family owned and operated
    restaurant in Galena, Illinois. I have about 12 full-time
    employees and about 22 part time.
        On behalf of the restaurant industry, I would like to thank
    you for this opportunity to speak to the Committee on Small
    Business about the important health care problems that are
    facing small businesses today.
        Small business owners can tell you that any changes to the
    Patient's Bill of Rights must include explicit limits on
    employer liability and provision for association health plans.
        Of the approximate 43 million uninsured Americans, 60
    percent live in a family, employed by a small business. Many
    restaurants cannot afford to provide health benefits because of
    costly state mandates and lack of purchasing power.
        For each of the last two years, health insurance premiums
    have gone up an average of 23 percent for table service
    restaurants. Benjamin's has the best rating an insurance
    company can provide. As of August 1st, our renewal date, our
    premium increased 28 percent.
        Many more small businesses in a variety of industries are
    seeing this as well. Over 172 million people in the United
    States receive health coverage through their workplace. Yet, it
    is becoming increasingly difficult to offer health coverage
    incentives to employees as a result of higher premiums.
        Prior to August 1st, we were already under great financial
    burden to provide health insurance to our employees, while
    paying $745 a month for just four people.
        I continue to hear from my fellow restaurateurs that some
    premiums have risen even higher than ours. From 30 to 40, and
    even up to 50 percent, association health plans would provide
    employees greater access to better and more affordable health
    coverage by allowing small businesses to group together to
    purchase health insurance.
        This would reduce the premiums and greatly expand the
    benefits we could offer our employees at Benjamin's, and the
    thousands of small businesses could offer their employees.
        The insured deserves better than more mandates. Adding new
    laws and expanding liability will only serve to increase
    insurance costs and undermine employer's ability to voluntarily
    offer this valuable benefit.
        Help us to achieve proper legislation that will make it
    possible for associations to pool their members and resources
    so they can afford suitable coverage.
        Association health plans are a win-win-win-win situation.
    The insured's companies win because they lower sales costs and
    write more policies. The employer wins because they can afford
    the health insurance and they can add another benefit for their
    employees. The employees now benefit because they are insured
    and the government benefits because many more citizens are
    insured without costing the government a penny. Thank you.
        Chairman Manzullo. Thank you, Mary.
        [Ms. Blankenbaker's statement may be found in the
    appendix.]
        Chairman Manzullo. Our next witness is Ryan Brauns. Ryan is
    a senior vice president from Rockford Consulting and Brokerage.
    And we look forward to your testimony, Ryan.
        Are you doing okay, Mary?
        Ms. Blankenbaker. I'm fine.
        Chairman Manzullo. Well, you did just fine.

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

        Mr. Brauns. Thank you, Congressman Manzullo, and good
    morning to you and Representative Crane. My name is Ryan Brauns
    and I am the senior vice president at the firm called Rockford
    Consulting and Brokerage, home office in Rockford, Illinois.
        I would like to thank Chairman Manzullo for all of his good
    work and efforts in the area of small business needs.
    Particularly that of medical savings account expansion and
    increasing access to insurance for uninsured working Americans.
    Thank you, Congressman Manzullo. There is much work to do, and
    with your leadership and free market vision of you and
    Representative Crane, I'm sure efficient solutions will be
    found.
        When starting this, thinking about the testimony today, a
    call from--let me paraphrase, Francis Bacon came to mind. ``For
    the want of understanding causes, operations fail.''
        1776, man, what a good year for the United States. What a
    great year for the world, not only did we have Jefferson in the
    beginning of this country creating an ethical framework for
    political freedom, but a cost upon being as Smith, creating an
    ethical framework for economic freedom, it is to be used of all
    the nations. The outline in there, what a free market, is how
    it could work? What it means to the surviving, and fried, and
    what its loss of power is.
        And the point of my testimony today is that there is
    something going on in health care today. A revolution so-to-
    speak, something that gives us great cause, great cause I
    should say to be optimistic about what is going on in health
    care. And I had college days that would constantly remind us
    that the plan for the long run is that we die in the short run.
    So clearly, a lot of things that you are discussing today, tort
    reform, association plans of Patient's Bills of Rights, and
    things of this nature, certainly have a role, they are
    important issues. But I assert today, that they are not
    necessarily long-run solutions, that certainly would help
    people like we just heard from, now in the short run, but what
    accountable solutions are systemic? And that is where the role
    of consumers comes into play. Our health care system is the
    greatest in the world. It reflects our values and that's why
    it's different than any other system in the world. We use a fee
    for service system. Everybody else matches to allocate these
    scarce resources, except in the country of Singapore and South
    Africa, the only free countries that have any type of fee-for-
    service in free market health care.
        But the system that we have developed, really since the
    twenties, the day when Blue Cross came around, they
    institutionalized the third-party payer system has taken the
    consumer out of the equation by large. Taken all the power that
    the free market group consumerism can break, and removed it
    from the equation. I can give you two quick anecdotes, as to
    how this power, we might save our daily lives. I see people
    wear glasses, as do I and some of the panel. How often have you
    heard a radio commercial advertising laser eye surgery? I think
    about it. The next thing you hear one of those commercials, you
    know the commercial, when the surgeon talks about the quality,
    because we are certainly interested in that in health care, but
    he also talks about the price. I will do it for eight hundred
    an eye, I take Visa, MasterCard. The RAM study, that anecdote,
    shows us that people make health care decisions engross by
    price.
        Let's take a look at the pharmaceutical industry for a
    moment. In 1991, they spent $55 million marketing to you and
    me. When you go home tonight and turn on the television, you
    are going to see a lot of ads for drugs. It is not a
    coincidence that over this last 10-year span, direct-to-
    consumer drug advertising has gone from $55 million to $2
    billion, and a large component of the rate increases that we
    are seeing are driven by rising pharmaceutical costs. I don't
    begrudge the pharmaceutical industry, it's a free market, but
    it does prove to us the power of consumerism, consumers making
    choices, making decisions based on their own wants and desire,
    and price is certainly a part of that. Now, bring us to, I
    guess the IRS ruling that came out on June 26, greatly
    expanding the role of medical savings accounts, and what that
    can do. I am going to assert today that just didn't go quite
    far enough. That if we could see in your redirect, if we can
    see if Congressional discussion, and so forth, an expansion
    consumer types of model, the primary reason, it empowers their
    employees, it bolsters the doctor-patient relationship, which,
    by the way, would have great effects. In that situation, but
    also the downward shift, the trend curve, we move up and down
    the trend curve, meaning increases year-by-year, but we haven't
    ever come up with anything to shift it. And that's the
    excitement that consumers brings to the market, the average
    rate of increases than you have seen in consumer driven
    products, it has been half or less than what we are currently
    seeing, and I could go on, but I welcome your questions.
        Mr. Crane. Thank you.
        Chairman Manzullo. Thank you.
        [Mr. Brauns' statement may be found in the appendix.]
        Chairman Manzullo. Our next witness is Scott Shalek, Mr.
    Crane's new constituent in Brainwood.
        Mr. Crane. He used to be yours.
        Chairman Manzullo. Yes, that's correct. I guess technically
    until January 4th, whatever it is, the--well, I have gotten to
    know Scott over the last several years, and Scott is an
    insurance broker. And we had some very, very interesting
    discussions on the products that are offered, and uniqueness of
    products that are out there, and Scott, we welcome you to the
    Small Business Committee to share with us your background, your
    experience, and your thoughts.

       STATEMENT OF SCOTT SHALEK, RHU, SHALEK FINANCIAL SERVICES

        Mr. Shalek. Thank you, Congressman Manzullo and
    Congressman----
        Chairman Manzullo. Scott, can you please move the mike
    closer to you? Thanks.
        Mr. Shalek. Congressman Manzullo and Congressman Crane, I
    want to thank you for the invitation and opportunity to testify
    before the Committee on the issue of affordable health care for
    small businesses.
        My name is Scott Shalek; I am with Shalek Financial
    Services in Ringwood, Illinois, and I am Regional Vice
    President for the National Association of Health Underwriters.
    Shalek Financial Services specializes in employee benefit,
    consulting and financial planning for individuals in businesses
    ranging in size from one to five hundred.
        Our mission is to provide comprehensive solutions to help
    individuals and businesses set and achieve financial security
    and success, while providing a level of service above
    expectations.
        The National Association of Health Underwriters is an
    association of highly qualified health insurance professionals
    with over 18,000 members throughout the United States and
    Canada. The mission of NAHU is to serve the public by promoting
    the activities and ethical conduct of insurance professionals
    through communication, education and legislative
    representation. Members are trained and experienced in guiding
    individuals and employers through the complexities of choosing
    appropriate and affordable health plans.
        Many members hold advanced designations from the American
    College such as Registered Health Underwriter. We are the
    agents and the brokers on the front line of health care every
    day helping millions of individuals and businesses get the most
    from their health dollars. To demonstrate the value of the
    agent and broker, in my written testimony, I have said three
    bases for my files.
        Last meeting in Rockford you had, there was much discussion
    given to using association health plans as a way for small
    groups to receive lower rates, similar to those of union plans
    or large groups. I realize that concept, that volume discount
    to purchasing quotas as endorsed by business groups such as the
    NFIV and the IMA to be sound as an innovative solution to
    reducing health care costs to small employers. In other words,
    these have been tried in several states with disastrous
    results.
        Last month a big MEWA called Indiana Construction Industry
    Trust, became insolvent and left 21,000 members with
    approximately $8 million in unpaid claims. As you can see,
    there are major problems when considering using AHPs. First,
    healthy groups tend to drop out after a year or two to find
    coverage elsewhere at more affordable rates. Second, AHPs do
    not have sufficient state regulatory oversight, which limits
    important consumer protection. Both of these factors can cause
    premium rates to rise and lead to more uninsured Americans.
        Indeed, a vehicle has long been available to create group
    purchasing opportunity for small businesses. These are called
    Multiple Employer Trusts (METs). The difference between METs
    and AHPs is significant, and METs generally comport to state
    laws.
        Another suggestion that was discussed is union plans get
    better rates over small groups. I have studied major union
    programs in Lake and McHenry County, and this is not true--
    proved to be true. Union plan groups vary from a low of $631 a
    month to a high of $832 per month, with an average cost around
    $756 per month. We compared these groups to the groups that I
    have studied previously, there is going to be substantially
    higher rates, almost double to some cases.
        In 1965, there were only eight mandated health insurance
    benefit laws in the United States. Today, there are over 11
    hundred and the number is escalating. These range from the
    trivial, to the serious. In fact, in Minnesota, hairpieces are
    coming; Georgia, heart transplants. In Illinois, we have in
    vitro fertilization, which is a multibillion dollar cost to the
    insurance industry, and passed on to the consumers with more in
    premiums.
        Mandated benefits drive up costs and increase the number of
    uninsured. It is estimated that mandated benefits account for
    between 20 to 25 percent of all uninsured Americans. In
    Illinois alone, mandates have increased costs over 20 percent.
        One idea in reducing health care costs is the elimination
    of exemption of mandated benefits for small businesses. The
    states and federal governments allow insurers to sell no-frills
    policies, which would compete in regulated insurance. Small
    employers and consumers of health care would have the freedom
    to choose the coverage that best meets their needs.
        The health insurance industry has always been in the
    forefront in reducing health care costs. Programs such as PPOs
    and HMOs were designed to curb rising health care costs.
    Administration costs in private sector insurance is
    substantially less than government-run programs. Compared to
    Medicare and Medicaid, administration costs and private sectors
    is about 66 percent less than what the government spends per
    dollar of benefits paid.
        Electronic claims processing with health care debit card or
    Internet processing administration, would also help to reduce
    costs by around five times the amount required over paper
    claims. Expansion of medical savings accounts and elimination
    of burdensome regulations can substantially assist individuals
    and businesses to reduce cost and make coverage more
    affordable. Countries such as Singapore and South Africa have
    had great success with MSAs. Since their introduction in 1994,
    MSA plans in South Africa have captured about half of the
    private insurance market.
        One plan might be ideal for making health care insurance
    more affordable, which the federal government has begun to
    seriously consider is a refundable health tax credit. The
    refundable health tax credit for low to medium income Americans
    would substantially reduce the number of uninsured, while
    reducing costs, and allow more small businesses the ability to
    offer health insurance programs to their employees at
    affordable rates. Properly designed health tax credits will
    provide a real solution to the problem of the uninsured America
    by addressing affordability, than most basic component of
    access to health care.
        In conclusion, there is no doubt that we have the finest
    health care system in the world. Yet, we are our own worst
    enemies when it comes to the issue of affordability. Government
    regulations and mandates continue to be a driving force in
    rising health care and insurance costs, forcing many
    individuals and small businesses out of the market. As an
    advocate of the health insurance plan consumer, the role of the
    agent or broker is key to the individual and business health
    care solutions. But they can't do it alone. We need to work
    together as a team in educating the consumer and exploring
    sensible reforms to make health care more affordable,
    predictable and manageable. We need to consider responsible
    mandate laws, adverse selection, tort reform, and removal of
    political agendas. We need to work to find ways to encourage
    more consumers to purchase private sector health insurance.
    This would expand markets and increase the number of carriers.
    We need more choice for the consumers. Working together for a
    common goal, we can make a difference.
        Mr. Chairman and Congressman Crane, I want to thank you for
    allowing me to testify today and share some common sense
    solutions for reducing the cost of the quality of health care.
    I look forward to working with you in the future, and look
    forward to the good work that Congress will do to make health
    care more affordable for all Americans.
        Chairman Manzullo. Thank you, Scott.
        [Mr. Shalek's statement may be found in the appendix.]
        Chairman Manzullo. Our next witness is Brad Close,
    representing the National Federation of any kind of Businesses.
    Brad is the manager of Federal Public Policy and he went on to
    newly greater pastures because--for whom did you work before
    NFIB? And who set up the hearing in Rockford, that was you, uh?
        Mr. Close. Yes, sir.
        Chairman Manzullo. The NIFB's great gain and our great
    loss, but I guess we trained you right.
        Mr. Close. Yes sir, you did.
        Chairman Manzullo. We sure did. And prior to working for my
    office, Brad worked with Congressman Ewing, and your home is
    there.
        Mr. Close. Yes.
        Chairman Manzullo. At least. So with all of those ties and
    connections and great credentials, we look forward to your
    testimony.

      STATEMENT OF BRAD CLOSE, NATIONAL FEDERATION OF INDEPENDENT
                           BUSINESSES (NFIB)

        Mr. Close. Thank you, Mr. Chairman. Nothing is more
    important for NFIB members than solving our current health care
    problems in small businesses. We firmly believe that
    association health plans and removing the restrictions on
    medical savings accounts, are necessary steps to create more
    affordable health care options for small businesses across the
    country.
        As Mary stated earlier, over 60 percent of our uninsured
    population consists of small business owners, to families and
    their employees. The high rate of the uninsured in the small
    business community is due to the lack of available options for
    small businesses, and an increasingly shrinking small group
    insurance market.
        We know that the smaller the business, the less likely it
    is to provide health insurance. Our members are the smallest of
    the small. We have 6,000 members across the country and over 50
    percent of them have less than five employees. Sixty percent of
    businesses that have three to nine employees offer health care
    benefits. While most large firms are able to offer coverage.
    Even the best of times, the small business health care plan
    covers only about 57 percent of the employees in small
    businesses. Many even go without coverage due to the cost.
        In fact, a recent business journal of Jacksonville, Florida
    article stated that skyrocketing health premiums are leading
    young professionals to opt out of employer-sponsored health
    plans, mainly because the monthly premium is no longer
    affordable to them.
        We at NFIB can substantiate that the high cost of health
    care is the number one problem of small business owners today.
    NFIB survey shows that the past decade, small business owners
    have ranked the cost of health insurance as their number one
    problem. Higher than taxes, regulations, and every other
    problem. Our members have also told us that they believe
    providing health insurance is the right thing to do for their
    employees. Right for their employees and right for their
    business. However, the high cost of health insurance often
    prevents them from doing this.
        Many of our members have experienced double-digit increases
    over the past few years. Elaine Smith from Granite City,
    Illinois, experienced a 26 percent increase this year. Ron
    Hatch of Yankton, South Dakota, experienced a 50 percent
    increase, and Phil Bartmann, in McKenna County experienced
    nearly a 100 percent increase. On average, a worker in a firm
    with less than 10 employees pay 17 percent more for health
    insurance than a worker in a firm with 200 or more employees.
        In today's society, when it comes to purchasing health
    care, the rules of the game are definitely stacked against
    small business owners. Small businesses with the least income
    actually pay the most, while Fortune 500 companies are able to
    offer exceptional benefits, have more modest annual cost
    increases, and more health plan choices for their employees.
    The companies have benefited from the economies of scale that
    come from being able to purchase health care in a large group,
    across state lines, under one set of rules.
        Small businesses under today's laws cannot have any of
    these advantages. Association Health Plan legislation like H.R.
    1774, in the House of Representatives, the Small Business
    Health Fairness Act, levels the playing field by enabling small
    businesses to purchase their health care like big businesses
    and union plans through association health plans under ERISA.
    Association health plans are a private market solution to our
    nation's health care coverage and cost problems. It builds upon
    what has been proven to work. If small businesses purchase
    health care in the same manner and under the same rules as big
    businesses, premiums would decrease and coverage would
    increase.
        Allowing small business owners to purchase their health
    care through association health plans will allow them to save
    on administration costs and bring to the market a great amount
    of bargaining power with sufficient numbers to absorb risk
    without substantially increasing premiums.
        Small businesses currently must pay the highest marketing
    billing and claim processing costs. Some pay from 20 to 25
    percent of their premiums towards such expenses compared to
    about 10 percent of the larger employers. The H.R. 1774 would
    become law, administrative costs would be spread over thousands
    of members in association health plans instead of just a few
    workers in a small businesses resulting in significant cost
    savings. The bill would also allow association health plan to
    operate without having to comply with the 50 individual state
    laws on benefits, premiums, and solvency, and the 50 individual
    state mandates. This would best expand opportunities for small
    businesses which cannot afford coverage right now. Association
    Health Plan Bill also requires that the plans put up and
    maintain capital surpluses before they can be certified and
    maintain sufficient claim preserves, stop loss insurance, and
    indemnification insurance to guarantee the claims will be paid
    even in the event the financial difficulty for plan
    termination.
        The bill also gives clear and strong regulatory authority
    to ensure that the Department of Labor and partnership of state
    regulators are able to ensure that Association Health Plans
    will meet the very strong certification reserve departments
    that the legislation provides for them.
        We strongly believe that if Association Health Plans become
    law, our health care system will be fair and more choices will
    be available to small business owners, which is what we think
    is the ultimate solution. More choices for small business
    owners, free market choices, and we urge the committee to
    assist in moving the Association Health Plan legislation to the
    President's desk issue. Thank you, Mr. Chairman.
        Chairman Manzullo. Thank you, Brad.
        [Mr. Close's statement may be found in the appendix.]
        Chairman Manzullo. Our next witness is Ken Koehler. Ken is
    the, I guess the CEO, President, probably both, Chairman of the
    Board, of Flowerwood, Incorporated. And a very popular nursery,
    flower store, all kinds of equipment for gardens and lawns. We
    used to have those trains, LGD trains. You don't sell those
    anymore, but I like your type of trains.
        Mr. Koehler. I still love trains.
        Chairman Manzullo. You still love trains. I look forward to
    your testimony.

           STATEMENT OF KEN KOEHLER, FLOWERWOOD, INCORPORATED

        Mr. Koehler. Thank you, Chairman Manzullo, and also
    Representative Crane, for giving me the opportunity to address
    you today with a subject that I really feel needs serious
    attention, and that being, affordable health care.
        My name, as you stated, is Ken Koehler. I am president and
    co-owner of Flowerwood, here in Crystal Lake. Flowerwood is a
    family owned and operated florist, nursery, garden center,
    wholesale greenhouse, that has served McHenry County and its
    surrounding communities since 1948. Since our beginning with
    four employees, Flowerwood has grown to its present staff which
    is--ranges in size from 75 to 100 full- and part-time
    employees, as well as many seasonal employees.
        We have many ethnic--different ethnic groups that are
    represented by the employees that we have and very many
    different educational backgrounds. Our employees range from
    ages of 16 years old starting out on their first job, to many
    retirees that are supplementing their income with part-time
    employment, and we have wages ranging from about $5,000 a year
    up to $75,000 a year.
        Our work force includes retail clerks, floral designers,
    landscape designers, installers, horticultural growers,
    mechanics, delivery drivers and office personnel. And most of
    our management team we are proud to say has been with us from
    over 10 to 35 years, and are proud to be in service with our
    company.
        We value these employees, and we have tried to offer
    comprehensive benefit packages, which include health coverage,
    life insurance, 401(k) plans, Cafeteria Section 125 plan. The
    benefits are offered to all full-time employees and currently
    we have 20 that have elected to be part of our health benefits
    package.
        Flowerwood has felt health insurance coverage for its
    employees to be very important, it is a safeguard to their
    every day lives and their families' security. In the early
    years, Flowerwood was able to fund most of the cost of the
    insurance, thus minimally impacting the employees out-of-pocket
    exposure. Today, that has changed dramatically with the company
    covering 40 to 45 percent of the cost and the employees bearing
    with 55 to 60 percent cost.
        For most of the years prior to 1998 and '99, the cost
    increases that we experienced were less than 10 percent, in
    many cases around five to six percent. For the most part
    manageable and the impact of both Flowerwood and the employees
    was moderate. But since then, increases have become double
    digit, and now have put our health insurance program in a
    crisis. In the years 1999 to 2000, we were faced with a whole
    20 percent increase. At that time, we made a major change in
    the plan, and began to offer choices between HMO and PPO, and
    at this time greatly changed the deductibles.
        This change and increases in the deductibles kept the
    increase to about 13 percent, rather than 20 percent increase.
    In the year 2000 to 2001, we experienced a 17 percent increase,
    and in the years 2001 to 2002, was a 18 percent increase. And
    then just this July, for the years 2002 to 2003, we had the
    pleasure of experiencing in the 43 percent increase.
        Since 1999, our per employee health care coverage has
    increased between 85 to a hundred percent, and I provided a
    table to show you the differences in the single and family
    coverage on the PPO and HMO. We are still trying to evaluate
    other options, but the bottom line is these cost increases
    significantly impacted both Flowerwood and our employees.
        The pay increase that we were able to give our employees in
    May has been completely eroded by the increased rates in weekly
    insurance. And in many cases, the increases and costs double
    what they made in increased wages. We are concerned that these
    huge increases will lead to our--to help fund some of the
    employees' health cost, as well as total lack of ability for
    any of them to find their own affordable health insurance.
        We realize that there are many small businesses, such as
    ourselves, facing the same crisis. We have heard some of that
    here today. I hope that some affordable options become
    available soon. I have heard some good suggestions here. We are
    at the breaking point with our margins and our business is
    shrinking every day, like every other retailer and restaurant,
    entrepreneurs facing. And then when we have these unpredictable
    and controllable costs putting us against the wall, I don't
    know where it is going to end up. Mr. Chairman, thank you for
    the opportunity to share our company's experience with you and
    address the members of your committee. I hope that there are
    some good solid solutions to employee-based health care on the
    horizon. There is no easy--this is no easy task, and I commend
    you and the committee for your diligent work on this very
    important issue. And I thank you again for the opportunity.
        Chairman Manzullo. Thank you very much, Ken.
        [Mr. Koehler's statement may be found in the appendix.]
        Chairman Manzullo. Our next witness is Brad Buxton. Brad is
    the vice president of Networks and Management of Blue Cross and
    Blue Shield of Illinois, and Brad, tough job. We all have tough
    jobs, it is very difficult, I mean to use the word Medical
    Management, okay. Just like calling the House of
    Representatives, but we look forward to your testimony.

       STATEMENT OF BRAD BUXTON, VICE PRESIDENT OF NETWORKS AND
       MEDICAL MANAGEMENT, BLUE CROSS AND BLUE SHIELD OF ILLINOIS

        Mr. Buxton. Thank you very much. I'm not even popular at
    that home. My name is Brad Buxton, and I am vice president of
    Health Care Management for Blue Cross and Blue Shield of
    Chicago. And thank you, Congressman Crane and Congressman
    Manzullo, for inviting us today.
        Blue Cross and Blue Shield of Illinois's mission is to try
    to provide its members with quality and affordable accessible
    health care in Illinois. And we do insure about one in four
    Illinoisans, and we worked very hard over the years to try to
    put together programs where we actually pooled for as many
    small businesses as we can. Both are HMO and PPO, to try to
    keep the cost down, as low as two members per group.
        It is a very challenging and daunting task, as you know,
    because mandated benefits, as it has been mentioned here before
    today, have grown from eight, back 10 or 12 years ago, to now
    over a thousand mandated benefits. So, it is very hard, even
    when you are dealing with small groups in any pool, to try to
    do things to drain the cost down to the small group employer,
    that you have to add the mandates.
        So, in our programs, in our HMO and PPO, we've added high--
    low-cost, high-deductible alternative plans. Our small groups
    get the same deals that our large groups get, so we try to keep
    them on the same playing field, and at the same time, we worked
    very hard in the last six years, we have actually lowered our
    administrative costs, that passed on from the mid-20 percent,
    to under 10 percent. So, we are working very hard.
        But in any business, there are many things that are going
    to challenge you. When you look at health care, and when you
    look at, let's say the ideology, what we try to do, is we
    always try to get to the, where the problems really come from.
    What is really driving the cost. Why are we sitting here today
    talking about what legislation we need to pass for small
    employers? And when it comes down to it, we really get down to
    the cost issue. And the cost issue is great. Just a few years
    ago, and the law we passed, the Patient Protection Act, and
    while the meaning of it was very, very good, one of the things
    it said was, ``Insurers will pay all emergency room charges, no
    matter what.'' And that means no matter whether they were
    emergency or not. That cost our HMO $57 million a year. Those
    costs had to be then passed on. And I will tell you that
    increase in 57 million, were not all emergency room procedures.
        We do have one of the best health care systems in the
    world. But there are problems with it and there are issues with
    it. And what we have to do is figure out how we balance what we
    fixed in controlling the cost, to ensure that the accessibility
    is still there. And the quality is there. Today, it is a part
    of our economy. If you look at where our health care system is
    today, and what it has, to the local economies, it's
    incredible. So, if we don't do the right things, and we end up
    hurting the employers of people that, whether it would be
    health insurance, hospitals, physicians groups, et cetera, they
    are going to hurt multiple economies. So what do we do? We have
    to be very careful, and we have to get the costs that are
    affordable, yet, at the same time, not cut down on advances
    that are going to make people live longer and be healthier, and
    more productive in their life.
        So, what we know today, is that when the medical costs are
    going up, they are going at a higher rate than a CPI. And they
    are going up on higher rate premiums, and actually the medical
    index is going up. Why is that? What is happening and what is
    one of the reasons for that? Well, one of the main reasons, and
    we talked about it today, is drugs. I brought a list, a little
    bit of information here, which isn't in my presentation, that
    is written down, but our drug costs, in all lines of business
    went up from $463 million in 1999 to $701 million in 2001. And
    the average cost of a brand drug was $77 to $78 and the average
    cost of a generic similar was $15. That's an incredible
    difference, yet we don't have--we don't have a lot of
    businesses adapting plans that will force, or at least in
    generics.
        But we go into three-tier types of programs to drive
    formally, there are a lot of things that stand in the way of
    having businesses go to that, and that's problematic. Three
    comparisons, you take Prilosec, the brand drug, versus a
    generic, Zantac, $153 versus $21. I can go down a long list of
    that. You talk about drugs are now turning at over 20 percent
    per year, whereas, regular hospital cost inflation is somewhere
    probably around four to five, but lower.
        If you go back in time, and you look at health care costs
    back in the 1980s, we had an average length of stay of eight
    days. Average days per thousand are close to 900. Out-patient
    visits per thousand are somewhere in the mid-300s. Doctor's
    visits thousands were around 850.
        Today, average length of stay is less than four days, and
    admissions per thousand are down to about 220; doctor visits
    are still around about 850 to 900; and out-patient is now
    somewhere close to 800 visits per thousand. So, when you start
    to look at where the costs are growing, you look at that as one
    of the issues, and cost continues to escalate there and most
    insurance companies don't have contracts which control the unit
    cost inflation here.
        You look at--now, you go to and you look at what's
    happening with malpractice reform, nothing. Today, it's not
    only doctors, some doctors are leaving communities. And,
    actually, I know a doctor who is traveling from New York City
    to West Virginia to practice, because he is getting a better
    health insurance rate. He can't afford malpractice in New York.
    You can't afford it sometimes in Chicago. They are moving to
    other places, there is good and bad in that, by the way. But,
    that's a real problem. We have no protection for that. Health
    insurance companies today will offer managed care products
    which are now being told by their carriers that they may not
    carry them anymore.
        We are not talking about a cost issue here, we are talking
    about the fact that the liability of insurers who has a HMO or
    point of service program may not be allowed to have coverage
    anymore. That's a huge problem, that's a cost problem that
    won't go away, we need some reform there.
        Other types of things that we have seen that have come out,
    last year the Illinois legislature, a bill which was called the
    Fairness and Contracting Bill came out. That bill would have
    added, by the state's calculations, to the state program
    itself, the State of Illinois employees, almost $500 million.
    Blue Cross and Shield by our own calculations, by our
    actuaries, there are no actuaries, you know, it was very
    precise, thought it would cost us over $1 billion that we would
    have to pass on to our members, and this bill, I won't go
    through all of the particulars of it, is not just a bill, it is
    inherently a problem in Illinois. Just go look at other state
    legislatures, and what they are doing in anti-management care
    legislation. In 1999, stated in the last person's presentation
    is when things went haywire. That's when anti-managed care
    legislation started to come in. You look at the biggest bumps
    in health care over time, and that care was one of them, and
    then when we went to payments in Medicare, and there were bumps
    that actually leveled out the cost of care for some time.
    Managed care, when it came in, to the eighties, to the late
    nineties, actually was leveling out the cost of care, anti-
    managed care legislation came in, and it went by the border.
        So, we need to do a few things to take care of that, we
    need to look at reimbursement, we need to reimburse for health
    outcomes, not just generally reimburse based on what you paid
    in the past, we really need to figure out how we reimburse in a
    way that pays for care, that's quality, just like we do in our
    products. Thank you very much, and I appreciate your time.
        Chairman Manzullo. Thank you very much.
        [Mr. Buxton's statement may be found in the appendix.]
        Chairman Manzullo. You know, that's a story. Brad, the
    scenario that you painted, that society of the insurance
    company, that story is where we are really at now. The cost of
    health--the cost of liability insurance for health insurance
    providers, it is very interesting. Uhm, the next witness is
    Isabelle--Isabella; is that right, Isabella?
        Ms. Wilson. Correct.
        Chairman Manzullo. Isabella Wilson, chief financial officer
    of Illinois Blower, Incorporated and out of Cary. In fact, I
    think that I visited your facility.
        Ms. Wilson. On Industrial Drive?
        Chairman Manzullo. Yes. In Cary, with a group of other
    companies, and, is that correct?
        Ms. Wilson. In our building we have one.
        Chairman Manzullo. Okay. Were there other shops that are
    nearby in that area?
        Ms. Wilson. Yeah, it is an industrial area.
        Chairman Manzullo. Right. And, I think we visited that part
    two years ago, and now that you are here, we look forward to
    your testimony.

       STATEMENT OF ISABELLA WILSON, CHIEF FINANCIAL OFFICER OF
                     ILLINOIS BLOWER, INCORPORATED

        Ms. Wilson. Thank you. Chairman Manzullo, Congressman
    Crane, I appreciate the opportunity to testify before you and
    this committee on such an important matter. And as you stated,
    my name is Isabella Wilson, and I am the chief financial
    officer of Illinois Blower. Which is a small, privately held
    manufacturer of industrial fans located in Cary. Right now, we
    are at about 56 employees. The rising cost of health care has
    several implications for a company the size of Illinois Blower
    and its employees.
        Chairman Manzullo. Isabella, can you pull that mike a
    little bit closer to you? Thank you.
        Ms. Wilson. Direct and monetary costs are only part of the
    story. Overall, our cost for employees has increased by 56
    percent from 1999 to 2000; 30 percent from 2000 to 2001 and we
    did manage to contain it to 13 percent to 2001 to 2002. To
    contain last year's increase to only 13 percent, our employees
    did have to make some sacrifices. Out-of-pocket prescription
    drug costs increased 750 percent for our employees.
        Many, in fact, had to switch doctors. In the last four out
    of five years, we had to switch carriers to contain our costs.
    Which has an impact on the quality of care, and greatly
    increases the company's administrative burdens and costs. Our
    new HMO plan is extremely limited to participation in McHenry
    County, forcing employees to either travel 30-plus miles to a
    participating hospital and doctor, or to absorb the increased
    cost of PPO coverage, which many just can't afford.
        Financially, the impact of the company is extensive.
    Average gross margins in our industry are only 30 percent.
    Which means that for every dollar increase in health care
    costs, we have to increase sales by $3.31 to cover the
    additional costs. Over the past several years we have been very
    lucky. Our business is tied to the power generation industry,
    and we have enjoyed the boom in the creation of electrical
    power generation capacity since 1998.
        Unfortunately, that industry has taken a severe hit since
    September 11th, and the collapse of Enron. As the company faces
    more difficult times, managing health care costs is both
    imperative and increasingly difficult. If the economic downturn
    continues, and we are forced to reduce our work force, the
    options available to us from the number of insurance companies
    who write policies for groups our size, and the number of plan
    designs available decrease.
        Unfortunately, we are also seeing dramatic increases in all
    areas of our business insurance. With this year, renewal
    increased in our cost by seven percent, these dramatic
    increases and non-productive costs will have a direct impact on
    Illinois Blower's ability to compete in today's global
    marketplace.
        These rising costs directly impact our ability to afford,
    implement capital projects, which would allow us to improve and
    speed up our production process. This directly affects our
    ability to compete with companies located in less developed
    countries where labor costs are significantly lower.
        In summation, rising health care costs not only directly
    impact the company's bottom line, it can also negatively affect
    employee morale and less productivity; reduce employee's
    quality of life and medical care, and lead to a decrease, and
    employee's consumer spending as they have a shift in income, to
    cover the ever increasing out-of-pocket costs, also impacting
    the overall economy.
        Finally, I really want to reiterate the plans that impact
    rising health care costs, have a major impact on our ability to
    compete in today's global marketplace. As an example, we are
    currently faced with our largest customer moving 37 percent of
    what was historically a product we produced for them to Chinese
    manufacturing companies in 2003. Our customers are looking for
    greater cost savings than we are able to provide, as our cost
    structure is continually being hit by the rising costs of such
    non-productive expenses as health insurance premiums.
        Again, thank you for the opportunity for me to testify
    before this committee on this important matter. Thank you.
        Chairman Manzullo. Thank you, Isabella.
        [Ms. Wilson's statement may be found in the appendix.]
        Chairman Manzullo. Our last witness is with the Illinois
    State Medical Society, I'm sorry, is representing the Illinois
    State Medical Society and, Dr. Jim, is it Milam? Milam is an
    OB/GYN from Libertyville. But you won't be testifying about
    what we were hearing a minute ago.
        Dr. Milam. No. Sometimes clinical care has to take
    precedent over----
        Chairman Manzullo. Is that right, you take care of
    patients.
        Dr. Milam. I'm in the office this afternoon.
        Chairman Manzullo. So, we only need you for one half, and
    I'm sure you know something about the way the cost increased in
    medical malpractice insurance, Doctor, and we look forward to
    your testimony.

       STATEMENT OF JAMES L. MILAM, M.D., ILLINOIS STATE MEDICAL
                                SOCIETY

        Dr. Milam. Thank you, Mr. Chairman. It is exactly five
    minutes after 12, so good afternoon Mr. Chairman, and Mr.
    Crane. As stated, my name is James L. Milam, M.D.; I am an OB/
    GYN in solo practice in Libertyville. I currently serve as the
    First District Trustee to the Illinois State Medical Society. I
    represent the Lake County, McHenry County and Kane County. On
    behalf of our 14,000 physicians, medical student members, I
    appreciate having the opportunity to testify.
        I am pleased to present a medical perspective on the rising
    cost of health care. This is an extremely complex problem, but
    I hope I can provide some insight into the problems we face.
        National health spending shot up 6.9 percent to $1.3
    trillion in 2000. Health care now accounts for 13.2 percent of
    the nation's total economic output, up to 12 percent a decade
    ago. Clearly, many factors are contributing to this
    unprecedented rise. One of the most pressing, is medical
    malpractice insurance rates. Insurance premiums are soaring in
    the highest rates since the mid-1980s. Also, alarming is the
    high number of insures that have left the medical liability
    market. Many physicians are forced to limit service, retire
    early, or move to other states where premiums are more stable.
    It is not unrealistic to ask the question, ``Will my doctor be
    there?''
        Many states have been categorized as seriously threatened.
    And, I am sure you have seen the list in the newspaper. In
    Illinois, the crisis is looming. The primary cause is the
    unrestrained escalation in jury awards that are part of a legal
    system that, in many states, is simply out of control. The
    average jury award goes to $3.49 million in 1999, up from 1.95
    million in 1993.
        The soaring cost of malpractice premiums drive up the cost
    of health care which encompasses everyone, especially small
    business owners. The other cost is a loss of service to
    patients. Emergency departments are losing staff and scaling
    back on many services including trauma units. Many OB/GYNs and
    family physicians have stopped delivering babies, and
    neurosurgery is being postponed, because surgeons cannot find
    or afford insurance.
        The critical rise in malpractice premiums, medical costs
    are rising in another way. Physicians are practicing more
    defensive medicine, where ordering extra tests and choosing
    procedures that limit their risks.
        There has been an explosion in the cost of prescription
    drugs. Medicare, managed care, and many private insurers have
    cut drug benefits in the last several years. The average senior
    now spends $500 annually for medications. In addition,
    government regulation from CMS, one of the HCFA and EMTALA and
    COBRA, just to name a few, are burying physicians in paperwork
    and documentation. It tends to follow this regulation and are
    often at the risk of prosecution, fines and imprisonment. Soon
    we will have to face the daunting HIPAA statutes.
        There is a shortage of well-trained nurses, as you know,
    and many medical students, to say many applicants are not
    applying to medical school, because there is a huge debt,
    declining income and loss of respect. Without a doubt, it is
    clear that legislative action is taken immediately to address
    the soaring costs that limit services and that passed on to
    many, including our small business owners.
        In order to effectively stabilize medical liability
    insurance rates, while continuing to ensure that patients who
    have been injured are fairly compensated, I believe Congress
    must pass fair and reasonable reforms to our medical liability
    litigation system, that such as the ones that have been proven
    effective in other states.
        Currently H.R. 4600, the Health Act of 2002, as well as
    with benefit patients, by awarding injured patients unlimited
    economic damages yet cap non-economic damages up to $250,000.
    This would also address a fair share rule that allocates damage
    awards fairly and in proportion to a party's degree of fault.
    These reforms are necessary and urgently needed.
        Earlier this summer, the House passed a Medicare bill which
    the Senate, however, did not pass. To me this is very
    disheartening. Speaking as a physician, I can tell you that we
    all just want to treat our patients and deliver the highest of
    care. However, in the current environment, this is becoming
    difficult, and in some cases impossible. Many physician
    practices, including my own, are counted among the ranks for
    small businesses. If we work together keeping the patient as
    the focus, I am confident we can find a solution to the
    problem. Thank you for your time and attention.
        [Dr. Milam's statement may be found in the appendix.]
        Chairman Manzullo. Thank you very much, Doctor, for the
    really quality testimony. What a range of opinions and
    backgrounds. I've got a--I've got many questions, I'm just
    going to take one at a time and we will rotate between the two
    of us, Mr. Buxton, you talked about a couple of things, and one
    is reimportation of drugs, and I think Blue Cross/Blue Shield
    is in favor of Congressman Emerson's bill; is that correct?
        Mr. Buxton. That's correct.
        Chairman Manzullo. Could you explain to the folks exactly--
    I'm an original co-sponsor on that bill. And could you explain
    to the folks how that works?
        Mr. Buxton. Not exactly. No, I can't. Uhm, actually, I am
    not as familiar with the bill. I know we are in favor of it,
    and unfortunately what I can tell you about the whole situation
    is the fact that, you know, the grand situation has gotten to a
    point, where because of the patent abuses, that we are seeing--
    where the drug goes off patent, and then they put it back on
    under a new name, has become to be unbearable in terms of the
    cost. Uhm, we have seen the--actually, the pharmaceutical
    companies are now beginning to control the generics. And when
    you talk about the reimportation, the ideas that you can get
    these drugs for less in another country, because they don't
    have the same patent cost on them, and they sell them actually
    cheaper out there. And the idea with the legislation, is that
    we would be able to get those drugs at the same rate. I am not
    sure exactly how that works. But to be quite frank, if we could
    increase the use of generics, and the incentive to use
    generics, we really wouldn't need the whole reimportation
    issue. And so, if we were able to actually put some regulations
    on the use of generics and incentives, I think we would
    actually be able to bring down cost. As you can see, there is a
    $60 difference between brand and similar generic.
        Chairman Manzullo. So, you are talking about the--let's
    see, Waxman----
        Mr. Buxton. I'm looking at Mr. Keye for a little help.
        Chairman Manzullo. Hatch. Hatch-Waxman, that was the past
    20 years ago, the law was passed 20 years ago, and its purpose
    was to speed up of the issuance of generic drugs, but something
    has gone haywire with that bill.
        Mr. Buxton. Right. Like, for instance, Prilosec is getting
    ready to go off brand. When Prilosec goes off brand, it would
    become a generic. Generic would take it over, or maybe multiple
    generics, and sell it as a generic at probably $60 less. What
    happened is that the pharmaceutical company made--Gateway came
    out with Nexium. Nexium is the same thing as Prilosec. They are
    selling it more than Prilosec, and what they are doing is they
    are gaining market share, very fast, and what they will do then
    is they will control the generic Prilosec by ideally, maybe the
    company that will do the generic. So, they are officially
    keeping the rate high, and you still continue to pay for a
    patent which, as part of the cost has been taken care of years
    passed. So the whole patent, I think--we think the whole patent
    law should be looked at in terms of, when a drug really needs
    to go off patent, in terms of have they recovered the cost of
    inventing that drug. That is something that is very important
    and really has never been looked at.
        Chairman Manzullo. Well, once it was when the prescription
    drug bill came before the House, there were three provisions in
    there, one being the reimportation, the other being, and making
    sure that everybody that provided an area that show drugs can
    really get at the same original discount. And the third one
    dealt with generic reform. And none of those were a volume plan
    bill. So, that's why any bill that comes through the House,
    really gets to address those issues. But what is it that's
    causing this spike in the cost of drugs? In the last two
    years--I really can't----
        Mr. Buxton. I think the doctor--I couldn't be able to
    answer that, but I really believe over-the-counter advertising,
    you know, has some direct consumer, and that's how they do it.
        Dr. Milam. That's exactly correct. This schizophrenia
    economy, if you will, because we all know drug companies stock
    on 401(k)s and we want them to make a profit. But, yet, we want
    the drug costs down. So when a company brings a drug to market,
    it may cost $20 million as an average to bring the drug to
    market, because there may be three or four drugs of Zantac, so
    the company is trying to reduce the cost, and then obviously
    doing a patent, so another company who didn't sell it might be
    able to sell that drug for cheaper, and manufacture it more
    cheaply. Also, you might have colors, there might be a
    difference between a white pill and an orange pill. But the
    theory is that we also--they have liability. The companies have
    lawyers that have to look at all their liability for adverse
    outcomes and side effects and things like that. So the notion
    is that it can be sold in Canada cheaper, because there isn't
    the same liability laws up there, and so many patients can go
    across the boarder, and liability isn't the same.
        Chairman Manzullo. Like prices on the Internet?
        Dr. Milam. Yes. And then bring them back over here, and I'm
    not certain in the drug industry, so I don't understand
    totally, but it--as far as how much it costs to bring the drug
    to market and other significant research----
        Chairman Manzullo. It's about $100 million now. Mr.
    Buxton----
        Dr. Milam. One more thing, another thing that is
    problematic is rebates. And we have PPMs that basically are----
        Chairman Manzullo. Explain what distribution is today.
        Mr. Buxton. As if an insurance company has a covenant, or a
    PBM, a Pharmaceutical Benefits Management Company, manages a
    drug coverage for you. Okay, they have a formula, and on that
    formula there are brand and generic drugs. Every time one of
    those brand drugs are sold, the PPM has a deal with the
    pharmaceutical company, to get in a sense, a payment for that.
    Some people might call it a kickback, but it is called a
    rebate. That rebate then, the higher--the more people that use
    that drug, the more the rebate is. Now what insurance companies
    do, who use PPM to do their own, some of them may do their own
    rebate, they take that and pass it back, all of or some, to the
    customer. When it goes through a PPM, the PPM will take back a
    piece of that rebate and give it to the insurance company, who
    will give back some of it to the customer, or none of it, and
    put it back into the price, and there are different ways to do
    that. The problem is, rebates are inflationary. If I am paying
    you a dollar for every time you sell Nexium, let's say. Well,
    you want to sell a lot of Nexium. Okay. And it may not net out
    to the bottom line to the customer in the long run because some
    of those rebates are withheld. So, quite frankly, I think there
    needs to be rebate reform, if we are going to get to the bottom
    line, cost of the drug, to get it back to the individual.
        Chairman Manzullo. In the State of Illinois under the
    Circuit Breaker Plan that is provided for seniors, that rebate
    goes to the State of Illinois and the PBM acts in the purist
    capacity, maybe that's not correct--well, it is, the purist
    capacity to negotiate the lowest price and the savings are
    passed on ultimately to the consumer.
        Mr. Buxton. Right, that is the whole rebate, and there are
    other things like information that is sold on, what doctors
    prescribe what drugs, and do they get a rebate for that. So,
    there are a number of hidden rebates that don't come back to
    the state or anybody else. And rebates still, even though the
    state gets the net amount, it is still inflationary practice,
    because you are sending people to more popular brands and not
    move to generics.
        Chairman Manzullo. Congressman Crane.
        Mr. Crane. Thank you, Don. And thank you all for your
    testimony and being here today. You know, this is a very
    important subject, and it's one that--we had a town meeting
    yesterday, and the day before, and many of these issues came up
    at our town meeting. I pointed out that to the folks last night
    that one of the ways you get around this is to make sure that
    you have one of your kids get a medical degree. With all
    kidding aside. My dad got a medical degree, and we never
    thought about health care, that's what your father was for. And
    before he got his medical degree, though, my mother went into
    labor and the OB was out of town that weekend, and so we put
    papers on the bed and boiled water, and the dog came in and sat
    on the floor watching, and I said to my father afterwards,
    ``Weren't you a little unnerved about delivering me?'' He said,
    ``No, I delivered pigs and cows at the farm, it was no big
    deal.'' And--but, the fact is that he had his medical degree
    then, and he purposely delivered my sister and my two kid
    brothers at home. And we always relied on him for everything,
    and he produced--well, one of my brothers is a physician, and I
    had a nephew who is a neurosurgeon down in Downers Grove. And
    having members of the family that went down that path gives you
    comfort, as well as an emergency you get a hold of a dentist,
    no big deal.
        But it is something that is a big deal, and you folks have
    all touched upon component parts of it that is a big deal
    facing our country today, and potentially impacting in a
    negative way, if we don't take some action here. So many
    millions of Americans--Mr. Brauns, in your testimony you
    dedicated a significant portion of your discussion to the power
    of consumerism in the free market. Given the employer-provided
    health care structure that the majority of these people seem to
    rely on, how do you propose that we begin to change the current
    practice, and move toward a health care market geared toward
    individual consumer?
        Mr. Brauns. Thank you for the question. Uhm, I think first
    of all, it starts with understanding. I think we have to
    understand that all of us in the industry, the employers, the
    brokers, the physicians, the government. In fact, there is
    tremendous power in consumerism to begin with. Once we can get
    people to understand that we can take the patient, inject that
    patient back into the process so that when he confers--that he
    or she confers with their doctor, there is only a 800 number
    that has to be called. There is no supervising authority that
    has to say, ``Yes, Doctor, please go ahead and do that, or
    don't go ahead and do that.'' And the way you do that is by
    allowing people to generate some fund of funding that they call
    their own.
        In this country we've evolved into this medical savings
    account, and what I am talking about is the next evolution. And
    the IRS ruling that came out on the 26th, has had the ruling,
    has had tremendous impact in the industry already. And as I
    have said since then, our last--we had 50 employers that have
    already gone to implement something like this. So communication
    has to be part of it. Things like this, but we also do call on
    government to? To include this in your letter, to include this
    in your potential solutions, and I certainly do not diminish
    any of the solutions that have been talked about here today,
    like tort reform, or association health plans, and so forth.
    They are controversial, I think we would have been back. But if
    we could find a solution that would move those or at least make
    them as compared to what consumers can do. We can be interested
    in pursuing it, and in the consumer's philosophy has that
    potential power. For decades, we--I shouldn't say decades. But
    in the late eighties, we saw what 401(k) did to the retirement
    market. When people got their own that they control, it vastly
    changed the way we used to reflect its tool, saving pension,
    and government. That same concept could happen here. So the IRS
    read the ruling now and it also makes it still very
    complicated. But what would be great is that government would
    include this in its revenue and say to perhaps House Ways and
    Means of the way of this, in the respect that let the money
    that accumulate in those funds be used by the consumer for his
    or her own purpose. If he wants to take that money at the end
    of the year and buy a fishing pole with it, then he could do
    it. Currently it is restricted to just health care type
    expenses, as we see outlined in previous bills like 125 and
    105, and so forth.
        But financial engagement, and by the way, consumers want
    this. They are clamored for it. We have not seen an employer
    yet that hasn't said send us more information on this. Large
    employers for a long time have been talking about the--defining
    contribution health. How can we do it? It is kind of a Holy
    Grail, but we haven't really been able to--the system isn't
    quite there yet. That's probably the last step on the journey.
    But we are moving in that particular direction. So, directly to
    answer your questions, getting information out, letting
    government say, Hey, we have recognized the power of this, and
    we want to get that information out, crafting rulings like the
    recent medical ruling, and expanding upon that, so that
    consumers can use that money as they see fit. That's what--to
    answer some of the things that came up here at the end of the
    table. You know, most consumers have no idea what drugs costs.
    They get their EOB, their special Benefits, say, $10, $50. They
    have no idea that it was a $80 or $100 bill. But if all of a
    sudden that 80 or 100 bucks comes out of their fund of money,
    they are very interested in whether they are going to take
    Claritin or Clarinex. One way or another, one is off brand,
    whether its generic or whether it's not. Because if they can
    take that money and go to dinner with it, or buy a fishing
    pole, or whether it's for the tires, or the living room. Really
    engaged, the last time I will ask you this, if I gave you
    $1,000, Congressman, handed it to you today, and said, ``It's
    yours, do with it what you will.'' You would love me, you would
    be very happy with that. But if I gave you $1,000 and said,
    ``Congressman, you can only use this for automobile repair.''
    Okay, you're happy, but it doesn't have the same effect. So the
    revenue ruling is going in the right direction, but it's not
    quite there yet to really empower this thing.
        Chairman Manzullo. You haven't seen my car; a 1994 Buick
    Estate Wagon. A hundred thousand miles. But if you had two
    teenage boys driving, you wouldn't want five thousand pounds of
    steel wrapped around them. So they have to drive that tank. And
    you made your point, but a lot of safety on that. Uhm, Ken, you
    mentioned in your previous, about 46 percent last year?
        Mr. Koehler. An increase in 43 percent.
        Chairman Manzullo. Forty-three percent. Can you put the
    mike a little closer?
        Mr. Koehler. Oh, sorry.
        Chairman Manzullo. Was there a reason for that? Was there
    an illness of one of the employees?
        Mr. Koehler. We have had some illness within the group, so
    it did increase. But we experienced the same thing at the
    county this year, and, you know, I am a county board member,
    and our rates were going to increase to 37 percent, and we were
    able to negotiate them down to 31 percent. So, I mean, there
    are dramatic increases that have taken place throughout the
    entire industry.
        Dr. Milam. I also had the privilege, for over several years
    as serving on one of the boards for one of the major hospital
    groups in the northwestern part of this area in the State of
    Illinois. And some of the things that we found there, obviously
    tort reforms make it. This is critical. If there isn't
    something done about that. There is no control as far as the
    cost of hospitals and commissions are going to be great. And
    see, we are going to lose people, just good people that don't
    want to practice anymore because they just can't afford it. I
    think that is important. The other thing that we found from a
    hospital perspective is the fact that there are a lot of costs
    that are never paid back in the form of Medicaid and Medicare.
    And the hospitals have to absorb those costs, but of course who
    ends up paying for it, it's every other patient, certainly the
    patients that are covered by insurance, are impacted with that
    and it is passed on to insurance companies, but is also passed
    on major to the people that just don't have any insurance at
    all, but the people who take full bulk. And then in the past,
    probably three years, one of the more interesting dilemmas that
    have come into the health care really just begins to scratch
    the surface as far as health care costs, and that's called
    agency providers for nursing. And we've seen the cost go up, I
    mean incrementally, it's astounding, and it has taken a
    hospital to run efficiently, and in one year turn around
    running in the red, and putting them in jeopardy of being able
    to deliver good health care. And I don't know what the answer
    to that one is, because I mean it is a fact of life, that over
    the years, nurses were not paid very well for the type of work
    and the hours that they put in, and they realize that and then
    somebody that was very cute came up with the idea that, well,
    come and work for us as an agency nurse, and we will get you
    the better money, and the price went up from--and to use an
    example, maybe $20 an hour to $60 an hour overnight, because
    these people could get better jobs, better pay, uhm, by just
    working through an agency, and this is epidemic. And you talk
    about major cost is incredible.
        Chairman Manzullo. Doctor. Thank you, Mr. Chairman----
        Mr. Buxton. And I have a couple of comments, I want to be
    clear, I would like my testimony to reflect the fact that I am
    not interested, we are not interested in reforming the tort
    concept. If someone is injured, they should be made whole
    again. It is just affecting the liability issue, and the cost
    involved, and frankly what has happened with nurses, in nursing
    schools, in the old days if you were a female you went to
    nursing school. Now if you are a female you can go to medical
    school. So why should you necessarily become a nurse, when you
    can become a doctor. That being said, we have also gone to the
    extreme of consumerism, if you will, we now have free agent
    nurses. Baseball players can be free agents and go to team to
    team, nurses are either finding that there is not necessarily
    they are instituted----
        Chairman Manzullo. That is a serious problem.
        Mr. Buxton. Yeah, there is a 120,000 right now, and
    projected to be about a quarter of a million by 2024. Most of
    it is the lack of respect, long hours, and the work force is
    not here, because the people who go into medicine or health
    care do it because they have an inner drive. They want to do
    it. Now, they can become a business, then they are getting paid
    just as any other business, so why should they work nights and
    weekends, and be exposed to bodily fluids and potentially come
    down with hepatitis or HIV when they can make the same amount
    of money in the business world, unless they really want to do
    it, in which case----
        Chairman Manzullo. But that is the consumerism.
        Mr. Buxton. Yes. Also, the fact that----
        Chairman Manzullo. And I might add, please, we are all in
    this together, so what I want to know--well, no, what I mean
    is, we have to have the nurses or the doctors are affected.
        Mr. Buxton. But we have shifting cost for so many years
    from one person to another person, as a society that's what
    insurance is. Shifting the cost. If I don't have a claim, I'm
    paying for the person who is sick, and, frankly, most people
    cannot afford out-of-pocket medical care. I could not go pay
    for a gallbladder surgery in the next week or long-term
    institutional care for my folks, next month or something. So I
    suppose part of what I think we should come to grips with is
    the fact that, as a society, we need to decide how much we are
    going to spend on our health care. We know how much a burger is
    worth, we know how much a gallon of gas is worth, and we know
    how much we are ready to go pay for a Cubs ticket, but how much
    do we want to pay for our health care. And we have to come to
    grips with that notion.
        Chairman Manzullo. Well, you threw in the Cubs analogy, but
    I won't touch that. Scott, on tort reform we might want to look
    at structures. So much in the state of Nebraska, which has
    probably the lowest malpractice and medical insurance rates in
    the nation. In Nebraska, they sent punitive damages to the
    state educational system instead of a plan. Now, after all, no
    plaintiff has the real right to penalty judgments--they have a
    real right that penalty judgments, actual damages--in fact, no
    plaintiff has a right to penalty judgments, but they do have a
    right to actual damages, pain and suffering and legal costs.
    But punitive judgments really don't serve the purpose, except
    for enriching the plaintiff's pocket. And why do we need to
    give the plaintiffs a motive to sue insurance companies, or
    doctors or hospitals? You know, it's a big thing. We can make
    $93 million if we sue the doctor, who, on a 77-year-old man who
    had eye surgery and they did it wrong.
        Mr. Shalek. In the state of Illinois, are punitives a
    consideration of medical malpractice?
        Mr. Buxton. I think so.
        Dr. Milam. What's the question?
        Chairman Manzullo. Are punitive damages----
        Mr. Buxton. A consideration of malpractice?
        Chairman Manzullo. I don't think they are in the State of
    Illinois, are they? Do you know of any awards of punitive
    damages in Illinois?
        Mr. Buxton. There was a 77-year-old man that received $90-
    some million----
        Chairman Manzullo. Was that in Illinois, the judgments?
        Mr. Buxton. I know it was a loss.
        Chairman Manzullo. Okay.
        Mr. Buxton. It was finalized, it was reduced down, but
    still those kind of settlements, all it does, $93 million, who
    is going to pay for it? Punitive, excuse me. Punitive, we are
    going out and punishing Exxon for adding this bill in Alaska,
    but punitive in the sense that the jury is instructed to use
    their best judgment of what they think.
        Chairman Manzullo. All right, it is covered under pain and
    suffering.
        Mr. Buxton. Yes.
        Chairman Manzullo. Congressman Crane.
        Mr. Crane. Uh, yes. Mr. Shalek, you have discussed a number
    of solutions for more affordable health insurance, and I would
    like to ask you if we were able to help control over
    utilization of health care services by making consumers more
    aware of health care costs, do you think that would result in
    lower utilization and lower costs?
        Mr. Shalek. Education of the consumer is a big factor. Now,
    if we can see it by what the drug companies are doing on TV,
    they are educating the consumers to buy brand name drugs. They
    go to the doctor, they have the symptoms, they see everything
    else on TV. We need this drug, doctor; the doctor gives them
    the prescription for it, and lays the cost. The biggest thing
    is education of consumers, and we need everybody to get
    involved, agents have tried, doctors tried, but insurance
    companies direct, what we need is a greater effort, maybe on
    behalf of the government to get involved in educating the
    consumer on health care and what the actual costs are and how
    to do so affordably.
        Mr. Crane. You mentioned that there should be more emphasis
    on individually purchased health insurance, and, frankly, I am
    amazed at how many people I have talked to that has stated it
    is just too complicated to process the work through and they
    would rather not bother. Can you tell me how we can work to
    educate consumers to make that less intimidating from their
    prospective?
        Mr. Shalek. That is probably a role of the agent. But
    medical savings accounts work, the health tax credit could be a
    great success story, with the government, people don't
    understand their health care coverage in a big--in a lot of
    ways. You talk to most employees, they have no idea they have
    this benefit. They go to the doctor, they know they got a $10
    co-pay, that's it, that's all they care about. They don't
    understand what everything else costs. How to access a doctor,
    how to ask for discounts from the doctor. An example: My
    chiropractor does not charge me the deductible on insurance.
    Because he knows after the deductible they are going to pay,
    that's all he settles for, he is basically paid on assignment
    from my insurance companies. There are doctors out there that
    will do that. But people are, like doctors I guess, they don't
    know how to ask for discounts, like the insurance companies are
    asking for discounts, they don't understand their benefits.
    They get this book that is this thick (indicating) and they are
    not going to read it. So, if we don't go with MSAs and a health
    tax credit, a refundable health tax credit for all lower income
    to middle income Americans, we will increase the number of
    uninsured, people will start understanding their insurance
    better, because the government is involved with the education
    process.
        Mr. Crane. When I listen to this, I keep reflecting back on
    the experience of when I grew up as a kid. I had a great
    grandmother who was in her 90s and she had cataracts, and so my
    dad laid her out on the dining room table, and he made us
    little kids go into the other room, and he had glass doors that
    had little shades on them, and my older brother and I would
    climb up on the backs of the chairs and look over and watch,
    whatnot. And my mother was in there, and an aunt of ours was
    assisting, as they did surgery on one of her eyes and restored
    her vision to that one eye.
        I mean, it was that whole attitude about any of the needs
    that you might have in drawing that out, makes the climate we
    live in today something that is bewildering. Because I still
    have tendency to think that, you know, I'm going to call all
    the medical experts in the family if I have a problem and
    that's no big deal. But it is a big deal. It is a big deal in
    educating people in understanding what their options are and
    things to do with and likely important in educating us as to
    what we can do to help with this. Don.
        Chairman Manzullo. Thank you. You don't operate like that,
    do you?
        Dr. Milam. Oh, no. Uhm, with regards to what the
    gentleman's chiropractor does, let me just say that, most of
    the PPOs and contracts that I belong to and HMO contracts,
    require that I collect the deductible from the patient. If I
    don't collect the deductible, they can kick me out of the plan.
    That being said, in addition with Medicare, we are obligated,
    because the Medicare fee is already set. That I have to collect
    a deductible in a co-pay for Medicare patient, or else then I
    have just changed my rates, so there are contractual, and, in
    fact, government restrictions to being kind, it's almost like
    we are in a double bind. We want to be nice to our patients and
    forget the co-pay, but, in fact, if you forget the co-pay,
    there are some jurisdictions, where doctors have not charged
    their friends or there other associates for medical care, and
    that's been considered kickbacks in some jurisdictions as well.
    So this is all about the contracts, and we are talking about
    businesses. It's difficult, and it is still burdensome.
        Mr. Buxton. Just a moment, Representative Crane, one quick
    fact. Last year, we run our data all the time and look at where
    our costs are generated from. Twenty percent of our members
    last year did not generate a claim, twenty percent. Seven
    percent drove 72 percent of the cost. And most of those were
    chronic care conditions. So, when you begin to look at what's
    driving the cost, chronic care really shows through, especially
    when you get down to asthma, diabetes and complications of
    heart and hypertension. Those are the major things. And obesity
    and smoking are the two greatest causes of health care
    problems. And if we could solve those two issues, we could cut
    our health care problem. And that's true. That's not something
    that is made up. And everybody agrees with that. It is just
    that it is so hard to make that change and this is why disease
    management--disease management is going to save money per se.
    Disease management help people manage their disease better and
    might save somebody that cost, like an emergency room here and
    there. But over the course of the disease like diabetes, it is
    going to be very expensive, and then the most expensive is the
    last two or three months of life. And that is where we spend
    the most money. So, when you put things in perspective, your
    grandfather, your father was right. A lot of people who don't
    need care, they get care, and the most terrifying thing you can
    do is get care, and be in a hospital too long, because of
    hidden infection. And we know for a fact that a lot of people
    who are coded as dying of pneumonia, aren't dying of pneumonia,
    they are dying of salmonella, and other bacteria. And that's
    not even reported to the CDC, because the CDC doesn't require
    it. So when you talk about medical errors, you got to start to
    talk about what's going on in terms of how we are going to
    control these rates with people who are severely ill and in
    hospitals, and what are we going to do about that. And that's a
    huge issue. So, anyway, I just thought I would bring this up.
        Mr. Crane. You know, in that context, my dad used to write
    in a syndicated newspaper company called the ``Great Medic''
    and he was arguing 70 years ago that smoking caused lung
    cancer, and I never ever smoked in his presence, but I was the
    only one of his kids that took up that bad habit, and I did it
    for 50 years. I quit five years ago, cold turkey.
        Chairman Manzullo. Good for you.
        Mr. Crane. But, I have a grandfather who lived to be 98 and
    grew his own tobacco, and his wife never thought it was--it was
    that serious. And he made his own beer, and he grew his own
    tobacco, and he lived to 98 in his peaceful business. But,
    which is part of the reason why, again, you know our family
    environment there. You've got emergency Dr. Pop, you know, it's
    a broken bone, he'll fix it. But at any rate, these are
    legitimate concerns that I was brought up to be more aware of
    than I obviously was, or I wouldn't have taken that path of 50
    years of Camel cigarettes. Uhm, let me ask a question of you
    Mr. Buxton, can you comment on whether Blue Cross and Blue
    Shield are trying to incorporate more emphasis on prevention in
    order to keep health care costs down?
        Mr. Buxton. Yes, we are actually--most of the products now,
    are standard benefits, include preventive care, and we feel
    very strongly that preventive care administered correctly will
    actually create a healthy new population. So, we have done
    things most recently in our HMO product where we actually
    reward physicians to do things in preventive care, whether it
    be immunizations. But one of the most recent ones was in
    preventive care for doing mammograms. We found that our
    physicians and our HMO weren't doing mammograms at the level we
    felt they should be, or that healthy 2000 dictated they should.
    So what we did was, we said anytime we find it in the record,
    we will give you an extra $1,000. And we have done that with
    mammograms, pap smears, we've done it with diabetic and asthma
    programs, so when we find that the program, the five-point
    program to the individuals documented in the medical record,
    that way we know the individuals know what they are supposed to
    do to take care of themselves. We give the physician an extra
    thousand dollars. So the idea is that so the beginning of us
    getting into the payments for outcomes, because that is a good
    outcome, you can actually measure it, you see it, it's there in
    the record and then you pay for it.
        The idea is you can tie cost effective care to quality
    care, but you are paying more for that. And the rationale in
    looking at doing that within hospitals in terms of beginning to
    look at as you lower infraction rates, as you lower mortality
    rates, and those types of things, we are going to actually
    increase payments to hospitals who do that, because we feel
    then we get a healthier population, and in a sense they
    practice better. So I didn't get to that in my little deal
    today, but we feel that outcome-based reimbursement is one of
    the keys here. You wouldn't pay to have your car fixed twice
    for the same thing.
        Chairman Manzullo. I have. You haven't seen my car.
        Mr. Buxton. At the same time, and we think that those types
    of business principles, we need to begin to get into health
    care. So, that's a great question, and, yes, we do reimburse
    extra for good preventive care.
        Chairman Manzullo. There is a bill that was introduced
    several months ago, there are ten thousand bills a year, to
    allow an employer, an employer to have a gym on-site with the
    ability of the employees who come in there, for weight loss,
    for continuity, for almost anything. But if there is a gym next
    door, that is a separate business and the employer can't
    contract with them to provide those services without the
    benefit being considered to be included as income to the
    employee. And so that is it in the whole wellness-thinking
    based upon prevention. That is some of the things that we are
    trying to do. But, Scott, I want to ask you a question and that
    is, in terms of innovation, you come up with some pretty
    interesting scenarios and one of those is on page three of your
    testimony, you talk about the Injection Molding Company in
    Woodstock. One of the things that I want the folks here to
    hear, and maybe you can help Ken in his application, how did
    you go about saving that company that tremendous amount of
    money?
        Mr. Shalek. We reviewed their current programs and looked
    at their costs and I worked for almost every single insurance
    company selling insurance through the State of Illinois, and
    make recommendations on looking at an alternative plan that
    they had most of their people on HMO, some of them PPO; I said,
    ``Look, they were complaining because the HMO was not that well
    available to people out here,'' like Illinois Blower has the
    same problem. I said, ``Why don't you go all PPO with a
    completely different design?'' Go with a $1,000 or $2,000
    deductible and then the company offers $1,000, the insurance
    company gets $1,000 to $2,000 or $5,000 deductible, with a 100
    percent coverage, thereafter. Including prescriptions, and you
    also get a prescription discount card up-front. And when you
    start comparing the cost, I said, ``give your employees all a
    two-hundred and fifty to $500 deductible, let them understand
    the cost. What their benefits are. But once they hit this cap
    of $1,000 to $2,000, everything is paid 100 percent. Lower the
    costs by about 50 percent.'' I lowered their costs from
    $23,000--$24,000 basically, to----
        Chairman Manzullo. Per month?
        Mr. Shalek. Per month. To $14,000 per month. Big, big,
    difference in cost deductions. And, you know, as was said,
    seven percent of all claims or 90 percent of all claims come
    from 70 percent of the people. Well, you get $1,000 or $2,000,
    after that you are covered 100 percent. We are getting rid of
    the small claims, let the employer pay the first $500
    themselves on the little stuff, let the company self-insured
    from $500 to a thousand at 70 percent or 90 percent, or
    whatever percent they want, but the employer's self-insure
    that. It is going to cost them not that much more money, but
    the savings they are saving is dramatic.
        Chairman Manzullo. So you were able, through global
    innovation, to actually lower their health care costs----
        Mr. Shalek. Their costs reduced $112,586.52 a year.
        Chairman Manzullo. And that's for 40----
        Mr. Shalek. Forty-five employees.
        Chairman Manzullo. Ryan, we are going to wind up here
    pretty soon? You have had similar experiences in your book,
    isn't that correct?
        Mr. Brauns. Yeah, definitely. Especially recently, with the
    consumer concept. And the concept is very similar in a lot of
    ways to what we have been talking about. Although some of the
    things, kind of nibbling on the edges. And one of the insurance
    companies we use is one of the South African companies, and----
        Chairman Manzullo. Is that a South African company?
        Mr. Brauns. Yeah. And by the way, I think all of the major
    insurance companies in this country are working on developing
    consumer-type products. This just has to be one of the first
    companies that is out of the box with a quality product. And
    what is interesting about that particular product is that it
    couples with it a health--a preventive healthy behavior-type of
    program. The difference is, though, that the compensation for
    the healthy behavior isn't going to the doctor or the hospital,
    which is really a good idea, however, the conversation here
    goes directly back to the person, if the person engages in
    health behavior, smoking cessation, weight loss, jogging,
    working in a gym, and the whole list of things, and then they
    get something for it, they get money or they get airline miles,
    or they get dinners at a restaurant, and things like that. It
    sounds a bit hokey, I understand, but if you think about it,
    that is what we all do. If you say we got a gym on the
    premises, build a gym on the premises of this business for the
    concept of lowering health plans, nobody wins. Except for the
    people who go to the gym anyway, nobody wins. But as soon as
    they say, ``Tell you what, if you don't go, I'm going to take
    $25 out of your paycheck.'' That's financial engagement.
        Well, I did have a demonstrable and impartial effect on his
    claims in general. So, many of our cases started to go down to
    the consumers that we have. We already have seen a reduction,
    and we are anticipating a reduction in renewals as well because
    the shift curves a little bit lower, and the magic of this, if
    I could use that word, it is kind of expenditure, as that we
    just heard, many people don't have claims. Many people have
    small claims. These people will roll money over in their funds,
    year after year, after year, their funds will grow, because it
    is much easier for the employer to have them say, I will have a
    $5,000 deductible plan, I'll have a $10,000 deductible plan,
    when the bulk of their employees are generating those funds
    underneath, or it is for the employer to say, ``You know what,
    ladies and gentlemen, with my company, XYZ here, we are
    eliminating the company dental plan.'' Under today's scenario
    they would be wailing a national fee. But if you are able to
    say, ``Look, most of you have a few thousand dollars in your
    fund, we are going to let you have a voluntary dental plan, and
    we will even put a little towards that.'' All the employees are
    going to be happy as clams that the company has off-loaded some
    of the liability and made it affixed in that respect. These are
    the type of solutions that are starting to come out of the free
    market, primarily driven by this consumerism concept. And it
    is----
        Chairman Manzullo. So the issue is in Illinois health care.
    People who buy insurance need to shop more. They need to go
    to----
        Mr. Shalek. I think it's not shopping, I think they need to
    become educated more and find out what benefits are available
    to----
        Chairman Manzullo. What products are out?
        Mr. Shalek. And with destiny, they can even have a week at
    the Ritz Carlton if they wanted to.
        Mr. Brauns. There are solutions out there. We all know that
    there is a price in this, in the employer's respect, we've got
    lots of clients who are getting 30 to 40 percent increases. You
    know, you just can't sustain your business in that respect, so
    short-run stuff is solutions here, and actually are certainly
    called for. But something systemic, something long run. And
    there was a study done in California, and I can't recall the
    name of it, I will put it in my written testimony later, uhm,
    where a great way was put toward to developing Web-site and so
    forth, so employers can go to that and find out what tax rates
    they had coming to them. How does the IRS treat expenses and
    even a lot of employers, small employers in particularly,
    rent--they don't know that under 162 of the Code, you can
    deduct health care expenses of the business expenses. A lot of
    them aren't aware of that. You would be surprised. So what this
    study found is that when you made a course of the range of
    options that are out there, yeah, they lowered their premiums,
    it increased substantially from what they were, now that
    doesn't mean that those of us who are taking advantage of that
    aren't getting much of the same problems, but there are many
    that could use additional information.
        Last point, PPOs, we talked about the rise in cost of
    health insurance going all the way back to July 1, 1966,
    Medicare, by the way the Medicare cost shift is killing us, if
    Congress can do something about that right away in that
    respect. Costs have continued to rise. We saw an inflection in
    that curve, an abatement in around the '80s when we started to
    get managed care come into the picture in earnest. But now we
    see that the trends, obviously this focus really increased.
    When everybody has a discount, nobody gets a discount. PPOs are
    fundamentally consumers. If you go to doctor A, it costs you
    less; if you go to doctor B, it costs you more, your choice.
    But all of a sudden, you cannot find an employer that does not
    have a PPO arrangement. You can find many employers have two or
    three PPOs. In Rockford we have three hospitals. All have
    emergency care centers, all level one trauma centers and so
    forth, and we have many employers that have all three hospitals
    in their PPO in that respect. So the PPO concept proved the
    consumerism will work, but all of a sudden as a potential
    solution now that the savings have been brought out of that.
        Chairman Manzullo. Doctor.
        Dr. Milam. Thank you. And, Mr. Chairman, that is the last
    comment that I was going to agree with it. Everything that was
    just said is accurately said, and it doesn't do anything to
    control the cost, it just shifts from one party to another
    party. So shopping around doesn't necessarily lower the rates
    to the clients, it may lower individual rates or a group rate
    like the Injection Molding Company, but it still costs X to
    deliver the care. And we have addressed that so far, and that's
    what we have to get across or it will--or else we will have to
    accept the fact that if we don't control this, it is going to
    go up, so we either have to accept rising costs or accept
    controlled costs.
        Chairman Manzullo. I appreciate that so much. I want to
    thank everybody for their testimony. Our Small Business
    Committee actually had more hearings on health care than I
    think any other committee has in Congress. We held five
    hearings on HCFA horror stories of how physicians and medical
    providers, and are being abused by HCFA's 4,800 employees and
    49 different Medicare contractors. We may not be in that
    situation where there are two Medicare contractors such as in
    Los Angeles and they have geographical divisions and the MRI
    indication for a particular virulent ailment, differs depending
    on which side of the street you lived on. There was a
    difference in reimbursement rate even though the providers were
    across the street. After there was a merger with the two
    providers, so that there was now one provider--reimbursement
    rates still varied depending on where you lived. This is
    totally one of the most inefficient systems that has ever been
    developed by Health Care Finance Administration. Physicians and
    other health care providers are hammered by provisions that do
    not make sense.
        Let me give you an example on closing on that. We were
    approached by the portable x-ray providers. My mother was at an
    assisted living center, when she needed an x-ray, her doctor--
    she talked to the doctor on the phone, and he would call the
    portable x-ray people, they would go to the nursing home, in
    the privacy of her room, they would take the picture, send it
    over to the radiologist, who is part of that team, and usually
    within two hours of the phone call that my mom would make to
    her primary care physician, would know the condition of her
    lungs. Most seniors, the biggest fear, of course, is pneumonia.
    But Medicare got reimbursement--reimbursement rates go down so
    low, that that portable
    x-ray provider went out of business, and the next time she had
    to have an x-ray, guess what happens, one of those pair of
    ambulance units shows up at the nursing home, it is wintertime,
    she is pushed out there in the wheelchair, lifted up, taken to
    the emergency room at the hospital, sits there in a room with
    people of all types of ailments and diseases, and gets her x-
    ray taken; four hours later she is transported back to the
    nursing home. And the amount of reimbursement is that Medicare
    has to pay for that, that obviously is much higher. Brad, you
    know what I am talking about.
        So we held a hearing, and this was the hearing where we
    actually had to subpoena in the head of the Health Care
    Financing Administration and he blew off the subpoena. We were
    getting ready to have him held in Congressional Contempt of
    Congress. Finally he showed up, we got the parties, sat down
    together and said this stupid arbitrary rule not only is a
    disservice to seniors, that my mother was a victim of that, but
    also cost a lot more money. No one is leaving the room, bring
    your toothbrushes and your sleeping bags until we come to a
    resolution. Well, no one stayed overnight, but the hearing did
    last three hours, and now there has been a favorable resolution
    where HCFA has now decided to increase the reimbursement.
        But that is the type of stuff we have to deal with on a
    continuing basis. There is a lady that was here in the audience
    had a device called the Mary Walker. What this is, it is a
    device, that is the regular walker as we know it. There is a
    little seat on it, and the purpose of it, is to encourage
    seniors to become mobile and they would walk for a period of
    time, then just get a little bit of a rest, and get back up on
    that again. Well, because it had an arm that came across and
    latched across, and actually much more ergonomically correct,
    because the seat here now places his or her hands in front,
    with the legs back here, and it spreads out and redistributes
    the weight much better. But because it had a latch on there,
    HCFA continues to call it a restraint. Therefore, it is not in
    the nursing homes, if it is used. We have been working with
    those people now for several months. And, Doug, I sent you an
    e-mail, what is it called, the therapy, this is round six now
    with HCFA. It is everything that we have been working with for
    the past two years and the Chairman of the Small Business
    Committee is, going to bring in the decision makers from HCFA
    and say, now is the time you bring your toothbrush and your
    sleeping bag, because no one is leaving this room. We are going
    to lock up until you come to an amicable decision. So we need
    to talk about HCFA again.
        Mr. Buxton. We are doing the same thing with dialysis right
    now. Kidney dialysis will become a really bad problem, if it
    isn't now, in many metropolitan areas, where hospitals have cut
    down because of the reimbursement, and now the private vendors
    are charging so much that nobody can afford it.
        Chairman Manzullo. Would you talk to them about that
    because they don't like me?
        Mr. Buxton. And I heard your reputation, and I'm proud of
    it.
        Chairman Manzullo. Phil, did you have any closing remarks?
        Mr. Crane. Well, the only concluding remarks that I would
    like to make is title of the Small Business Access to Health
    Care field hearing. The importance is small businesses in this
    country. I am Chairman of the McHenry Subcommittee and we had a
    hearing out here about five years ago and we got Charlie Rangel
    who is the Democratic Ranking Member on Ways and Means, to come
    with me, and Charlie is basically a free trader, and I knew
    that we had giants, we in our district, like Motorola and
    Sears, and Allstate, Baxter Avenue, to name a few, and so I
    anticipated getting input from all these giants in the world
    market. What was revealing about that hearing is better than 90
    percent of our exports in the State of Illinois, and at that
    time we were the fifth largest export state in the union, over
    90 percent of our exports came from companies employing 500 or
    less. And a fellow came in to see me that was doing business in
    the Persian Gulf and he had a folder, and he said,
    ``Congressman, do you know how many businesses in your district
    that are doing business in the Persian Gulf?'' I said, ``I
    haven't the vaguest idea.'' He handed it to me; it was over a
    hundred fifty businesses in our district doing business in the
    Persian Gulf and I--and these were employers of 150 or fewer.
    And I looked at the names and there wasn't a single one of them
    that I had seen before, and I thought he was conning me and I
    checked and they were businesses from our district, and,
    indeed, they were doing business over there. So, I think
    getting the message out so people understand that the
    importance of small businesses, I mean, that is the real
    strength of our nation.
        Chairman Manzullo. But, Phil, you can yield on that, the
    trade imbalance, in our country the inability of paper
    manufacturers to export is because of the higher cost of doing
    business and it's a natural sector going into--that will be the
    next hearing--but in terms of the higher cost of health care,
    makes that less competitive.
        Mr. Crane. Well, that is an important ingredient, but the
    other thing, Don, is that we didn't have trade negotiating.
        Chairman Manzullo. All right.
        Mr. Crane. It is eliminating in other countries very good
    products.
        Chairman Manzullo. Great.
        Mr. Crane. And now we have addressed that.
        Chairman Manzullo. It makes it better for the farmers.
    Well, we want to thank you all for coming. You have been very
    gracious in your testimony. I'm going to leave the record open
    for 14 days. I think Ryan wanted to add something to your
    testimony; is that correct?
        Mr. Brauns. Uh-huh.
        Chairman Manzullo. If you can give that to Doug. Doug, why
    don't you give us the fax number. Uhm, it's 202----
        Mr. Thomas. In Washington?
        Chairman Manzullo. Yeah.
        Mr. Thomas. Yeah, you can send your written testimony down
    there, it is 202-225-3587. I'm trying to think, I never faxed
    to myself, 3587.
        Chairman Manzullo. Okay.
        Mr. Thomas. You can put it to my attention or Piper's.
        Chairman Manzullo. This hearing is adjourned.
        [Whereupon, the Committee was adjourned.]

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