[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








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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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