[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                                                   S. Hrg. 102-000 deg.

         SMALL BUSINESS ACCESS AND ALTERNATIVES TO HEALTH CARE
                                   

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, MARCH 5, 2003

                               __________

                            Serial No. 108-2

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


                                 ______

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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia             CHARLES GONZALEZ, Texas
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa                     BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan

         J. Matthew Szymanski, Chief of Staff and Chief Counsel

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)
                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Talent, The Hon. Jim, U.S. Senate................................     4
Fletcher, Hon. Ernie, U.S. House of Representatives..............     6
Chao, The Hon. Elaine, Secretary, U.S. Department of Labor.......     8
Barreto, The Hon. Hector, Administrator, Small Business 
  Administration.................................................    23
Trotter, Skip, National Federation of Independent Business.......    31
Hartnedy, John, Arkansas Department of Insurance.................    33
Hughes, Robert, National Association of the Self-Employed........    35
Appel, Steve, American Farm Bureau...............................    37
Kerrigan, Karen, Small Business Survival Committee...    38
Alford, Harry C., National Black Chamber of Commerce.............    40

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    47
    Velazquez, Hon. Nydia M......................................    50
Prepared statements:
    Talent, Hon. Jim.............................................    53
    Fletcher, Hon. Ernie.........................................    58
    Chao, Hon. Elaine............................................    60
    Baretto, Hon. Hector.........................................    75
    Trotter, Skip................................................    80
    Hartnedy, John...............................................    86
    Hughes, Robert...............................................    91
    Appel, Steve.................................................    99
    Kerrigan, Karen..............................................   103
    Alford, Harry C..............................................   111
    Women Impacting Public Policy................................   115
    National Restaurant Association..............................   120
    U.S. Chamber of Commerce.....................................   123
    Snowe, Hon. Olympia..........................................   128
    King, Hon. Steve.............................................   133
    National Small Business United...............................   135
    Small Business Association of Michigan.......................   144
    Ashmus, Keith................................................   155

 
         SMALL BUSINESS ACCESS AND ALTERNATIVES TO HEALTH CARE

                              ----------                              


                        WEDNESDAY, MARCH 5, 2003

                          House of Representatives,
                               Committee on Small Business,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 2:20 p.m., in Room 
2360, Rayburn House Office Building, Hon. Donald A. Manzullo 
[chair of the Committee] presiding. Present: Representatives 
Manzullo, Bartlett, Graves, Schrock, Akin, Capito, Franks, 
Beauprez, Chocola, Velazquez, Udall, Ballance, Faleomavaega, 
Christensen, Case and Bordallo.
    Chairman Manzullo. Good afternoon. It is my pleasure to 
welcome everyone to today's Small Business Committee hearing, 
the critical issue of small business access and alternatives to 
health care. I am pleased to have our colleague Dr. Fletcher 
discuss this bill, H.R. 660, before our committee. 
Additionally, we want to extend a very warm welcome to the 
former chairman of this Committee who now resides in the other 
place, Senator Jim Talent. It is a great privilege to have 
Secretary Chao before this committee. I always look forward to 
hearing from our SB Administrator Hector Barreto, as well as 
our other witnesses.
    Improving access and affordability to health care is one of 
the priorities for this committee. Year after year small 
business owners rate access and affordability of health care as 
the most important issue facing them. Of the 43 million 
Americans with no health insurance, 60 percent are small 
entrepreneurs, their families and their employees.
    Affordability is always the major concern for small 
employers and the self-employed. High health care costs are one 
of the biggest expenses small businesses and the self-employed 
incur as they struggle to provide coverage for their employees.
    As Congress continues to examine our Nation's health care 
problems, we need to remember that 60 percent of the estimated 
43 million uninsured are small business owners, their employees 
and families.
    Small business owners are unable to absorb spiralling 
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. My brother was nearly driven to close the doors of 
our family restaurant because of exorbitant costs of health 
care insurance.
    Our current health care system does not provide equal 
access to affordability and quality of health care for small 
businesses. One of the reasons small businesses cannot afford 
health coverage for their employees is they are unable to 
achieve the economies of scale and purchasing power of larger 
corporations and unions. Small businesses suffer from unequal 
treatment. What they want most is a level playing field when it 
comes to health care. Large corporations use the purchasing 
power of thousands of employees to offer affordable health 
insurance to their workers. Small business owners, on the other 
hand, have to find their insurance on an individual basis, 
making it very difficult and expensive to find affordable 
health coverage.
    I was heartened to see President Bush's plan for helping 
small businesses prosper in our community. The President is 
well aware of 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, AHPs, to be 
available for associations that want to provide health coverage 
for their members.
    I look forward to the testimony of the witnesses here this 
afternoon, and on cue Senator Talent walked in, but first we 
want to have an opening statement from my colleague, the 
Ranking Member Ms. Velazquez from New York.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Today we are facing a health care crisis. It is outstanding 
that in the United States, the only remaining superpower, the 
country with the largest GNP and the world's economic driver, 
there are 44 million Americans who cannot afford health care. 
That is outrageous. Nowhere is this health care gap more 
striking than in our Nation's small businesses. More than 60 
percent of the 33 million adults and 11 million children 
without health insurance are small business owners, their 
employees or their families.
    Small businesses bear the brunt of the health insurance 
crisis because of the two Cs, choice and cost. These are the 
two things that keep affordable quality health care out of 
reach for small businesses. Small employers face few options 
when it comes to health insurers and benefits. The market has 
become so skewed that in many parts of the country, small 
businesses have only one or two providers to choose from when 
trying to meet the health care needs of themselves and their 
employees. In fact, a recent report by the SBA's Office of 
Advocacy revealed insurers of small health plans have a higher 
administrative burden than those that insure large companies. 
These high administrative costs drive down the number of small 
health plan insurers, narrowing the field even more and giving 
small business less choice than they already have.
    Cost is another barrier. Many small businesses are simply 
unable to afford health insurance. Those that can, the premiums 
increased 15 percent in 2002. Year after year, we see double-
digit spikes in insurance costs, causing small firms to drop 
coverage. For example, coverage rates for firms with fewer than 
50 employees are below 50 percent, while coverage rates for 
large employers are almost 90 percent. Once again, it is big 
business that wins and small business that loses. Small 
businesses that can afford health care pay as much as 30 
percent more for policies similar to those offered by large 
corporations. While corporate giants can marshal accounts worth 
thousands of new customers and can negotiate health premiums on 
their own terms, small businesses are left with a take-it-or-
leave-it attitude from insurers.
    As the state of health care for small business reaches a 
critical stage, President Bush should be paying attention to 
it, but he isn't. The President certainly knows how to talk the 
talk. Health care was on his small business agenda released a 
year ago this month, but today we have seen no real action.
    One solution that could go a long way is allowing small 
businesses to band together through association health plans. 
AHPs will enable small businesses to harness the purchasing 
power while bringing equity to the insurance market. This is 
what we allow corporate America to do, and if it is good enough 
for corporate America, then it should be good enough for small 
businesses.
    While it is important to help small businesses, it is 
critical that the price we pay is not with diminished 
employees' health care. That is why for AHPs to work we must 
have strong solvency requirements, adequate enforcement dollars 
and a system that does not discriminate based on health care 
needs. These protections, coupled with increased access and 
cost savings, will begin to turn the tide for the small 
business uninsured.
    I want to take a moment to commend former House Small 
Business Committee Chairman, Senator Jim Talent for his 
leadership on this issue. Mr. Dooley, Mr. Fletcher and Mr. 
Johnson, working together we recently introduced AHP 
legislation, H.R. 660, the Small Business Health Fairness Act, 
which will go a long way in helping small businesses.
    Small businesses, like health plans, come in all sizes and 
span industry sectors. There are private and self-insurance 
plans, State-sponsored imperatives and now AHPs. AHPs alone 
will not solve all the health care dilemmas of small business, 
but in combination with other alternatives, they can provide 
small businesses with two things they have not had before, more 
choice and lower costs.
    Nowadays when I talk to small businesses, their top concern 
is health care. We need to stop talking about the health care 
crisis facing small businesses and start doing something about 
it. Large corporations shed jobs and wreak havoc during times 
of recession, yet they have access to quality affordable health 
care. On the other hand, small businesses are the backbone of 
our economy. They create 75 percent of all new jobs and make up 
a large percentage of individuals in the United States who do 
not have health coverage. Something is wrong with this picture. 
It is backwards, and I want to do something about it. I look 
forward to working with you all. Thank you.
    Chairman Manzullo. Thank you very much.
    You notice the bipartisan endorsement of the AHPs.
    Our first witness is--it is Senator Jim Talent. I guess 
your first name is still the same. You guys are pointing at 
each other. We are done voting in the House, so I will let the 
Senate go first. How does that sound?
    Senator Talent. Mr. Chairman, it is certainly up to you, 
and I would be more than happy to go first.
    Chairman Manzullo. Anyway. Senator Talent is the former 
Chair of this committee. He got AHPs through the House 2 years 
ago, and during the course of your testifying, Senator Talent, 
if you could discuss why BlueCross/BlueShield and other 
insurance companies have opposed AHP legislation, I would 
appreciate that.
    Senator Talent. Okay. Sure.
    Chairman Manzullo. I look forward to your testimony.

STATEMENT OF HON. JIM TALENT, A UNITED STATES SENATOR FROM THE 
                       STATE OF MISSOURI

    Senator Talent. I usually cover that point at some point, 
Mr. Chairman. I am happy to go first, and I want to recognize 
my friend and colleague Mr. Fletcher whose actions on this bill 
have been no less heroic for several years now, and certainly 
one of the best things on working on this bill now is the 
opportunity to work with him and with you, Mr. Chairman, and 
also my old friend and colleague on the committee, Ms. 
Velazquez, whose just courage and vision in fighting for small 
business continues to amaze me. And I am grateful to you, Mr. 
Chairman, and to her for giving me a few minutes just to 
testify about this idea, which a whole lot of us, including 
many on this committee, have worked on for so long, because it 
makes such common sense, and it will have such an impact on the 
people who run small businesses and the people who work for 
small businesses, and that is what this committee is about.
    You know, I said about this recently that it is not a 
revolutionary idea philosophically, but its impact is going to 
be revolutionary on small business, and the way to think of it 
is simply to allow small business people to get health 
insurance on the same terms as the big companies already can. 
So, in effect, the people that are concerned about how this is 
going to operate can just look at the models of how it is 
operating among the Fortune 500 companies. That is how this is 
going to operate. They are going to--people are going to get 
health insurance through their trade and professional 
associations, and with all the advantages, the economies of 
scale, the purchasing power, the diminished administrative 
costs, all of that, the increased competition, that will reduce 
the cost of health insurance, and so it will mean more people 
are insured.
    And you all know that--well, the estimates vary, but about 
two-thirds of the people who are uninsured in the country are 
people who work for small business or are dependents of 
somebody who work for small business, in some cases people who 
own the small business, and everybody on this committee has 
visited people in this situation. I did a tour last year of 
small businesses, and it was interesting, the number one issue 
over and over and over and over again is the rising cost of 
health care. It is hurting them. It is hurting their employees. 
It is hurting their ability to retain good employees. It is 
taking money away that they want to put into wage increases. It 
is taking money away that they want to put into expanding the 
businesses, and because it is so unpredictable, it is 
demoralizing them as well. They don't know what the costs are 
going to be a year from now or 2 years from now or whether they 
will be able to get it if somebody in the business has a health 
care episode and, heaven forbid, has to use the health 
insurance for some major problem. And association health plans 
are the answer to that.
    So the way it would work if we pass this enabling 
legislation is that big trade associations, you know, could be 
the Chamber of Commerce, it could be the Farm Bureau, whomever, 
would sponsor--would have a human--or a health benefit side, an 
employee benefit side like a big company does, and they would 
contract with big insurance companies or networks and probably 
have a self-insured side as well.
    The bill has, as you know, Mr. Chairman, very strict 
solvency requirements, reserve requirements. The Ranking Member 
mentioned this and how important it is. We have worked on this 
over the years. They will to have set aside substantial 
reserves, have specific stop loss insurance for specific claims 
and aggregate stop loss insurance for aggregate claims. The 
Department of Labor is going to be given authority to regulate 
and can increase those if they believe that it is necessary.
    And then if you join the trade association, the trade 
association has to offer you the health insurance, and on the 
same terms in which they offer any other group. They must 
offer, must carry. And you would be able to get health 
insurance like you were a little division of a big company. It 
would be just like a big company came in and bought you out.
    So my brother runs a tavern. Many of you on the committee 
know that because I always talk about it. It would be like he 
was bought out by some national chain of taverns, and he would 
be able to get health insurance, and it would cut his costs by 
10 to 20 percent. This wouldn't cost the taxpayers anything, 
which is kind of important right now when we are dealing with 
this deficit.
    So why are people opposed to it? Mr. Chairman, I like to 
give people the benefit of the doubt. I don't think, though, 
that we have to turn a blind eye to the fact that BlueCross/
BlueShield is a player in the small group market now, and in 
many cases they don't have any competition. And, of course, one 
can believe that they are here because they have some neutral 
interest in good health care policy, and it is not going to 
affect them at all one way or the other. But I think they are 
going to lose business if we pass association health plans. I 
have said for years the fact that BlueCross/BlueShield is so 
strongly opposed to this is one of the strongest signs that it 
is going to work. I mean, if they thought nobody is going to 
join these things, that it wouldn't offer lower cost health 
insurance and at better quality to people, why would they care?
    So that is I think what is at the bottom--now, other people 
have raised concerns which we have tried to address over the 
years. The reserve requirement, the solvency requirements that 
the Ranking Member mentioned are a chief one, and I for my 
part--and we have the bill sponsor--I am willing to continue to 
work with people provided that they are acting in good faith, 
as long as what they are trying not to do is make the thing so 
burdensome that no one can actually set one up. That far I 
won't go.
    So I appreciate the chance to be here. I am optimistic 
about our ability to pass this bill this year. You all have 
done yeoman's work in the House and on a bipartisan basis, and 
I am continuing to talk with Senators on both sides of the 
aisle and look forward to getting something done for small 
business. And I thank you, Mr. Chairman.
    [Senator Talent's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much.
    Maybe we could have a field hearing in your brother's 
tavern sometime. People won't remember what happened, and they 
won't care either.
    Our next witness is Doctor, Congressman Ernie Fletcher, a 
good friend of mine, a tremendous Congressman, has done a great 
job for the people that he represents, a yeoman's job for the 
Nation in spearheading the efforts in the House on AHPs, and we 
look forward to your testimony.

STATEMENT OF HON. ERNIE FLETCHER, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF KENTUCKY

    Mr. Fletcher. Well, thank you, Mr. Chairman. I want to 
thank you and the Ranking Member for holding this hearing on 
this very important piece of legislation. Certainly I want to 
thank Senator Talent, who passed this baton to me when he left 
the House as an effort that has been ongoing for a number of 
years.
    Chairman, one of the greatest assets to our American 
economy is the growth and expansion of small business. In many 
instances they are an economic engine for this Nation and the 
first to feel the effects of rising health care costs. One of 
the highest costs for any small business is providing health 
care benefits to their employees.
    It is sad in a Nation of such innovation and prosperity, so 
many small business owners and their employers are left without 
the comfort and security of affordable, accessible quality 
health care. Currently 41 million Americans lack health 
insurance; 85 percent of those are from working families. 
However, the health care crisis for small businesses and their 
employees is even more bleak. Consider that 98 percent of large 
businesses, those employing over 100 employees, offer health 
insurance, while less than half of small businesses are able to 
offer this important benefit.
    The best patient protection is access to affordable health 
care and health benefit options. However, affordable health 
care coverage is becoming a larger burden and financial strain 
for most small business owners in America.
    As a family physician and former health care executive, I 
understand the pressures small businesses face. I have 
introduced H.R. 660, the Small Business Health Fairness Act of 
2003, to ensure the basic right of health care security is 
extended to all workers, whether you work for an international 
conglomerate or the local hardware store.
    H.R. 660 can reduce the high cost of health insurance for 
small businesses and the self-employed. An essential part of 
the solution is to allow small businesses across the country to 
pull together and access health insurance through a membership 
with bona fide trade or professional associations.
    Only through AHPs operating under a uniform set of rules 
can small business workers obtain the same economies of scale, 
bargaining power and benefit design choices now available to 
workers in large corporations and labor unions. The Small 
Business Health Fairness Act will decrease the number of 
uninsured Americans, reduce health insurance costs by 15 to 30 
percent, provide new coverage options for self-employed like 
farmers and small business workers across there Nation, put 
forth tough new solvency standards to protect patients' rights 
and ensure benefits are paid, promote greater competition and 
choice in the health insurance markets.
    AHP legislation will offer employer and employees more 
options in health care benefits as well as expanding access and 
choice for working families employed in small businesses. 
Experts estimate that up to 8.5 million uninsured small 
business workers could gain health insurance if AHP legislation 
is enacted.
    Established trade and professional associations are 
uniquely structured to serve small employers and their workers 
by providing health benefits that meet their members' needs. In 
addition, AHPs will strengthen health insurance markets by 
creating greater competition, which is severely lacking in the 
current marketplace. A recent GAO report shows that the 5 
largest insurance companies combined have 75 percent or more of 
the market share in 19 of 34 States supplying information, and 
more than 90 percent in 7 of those States. Greater competition 
will benefit the consumers by bringing premiums down and 
expanding access to coverage.
    Opponents of this legislation will continue to proclaim 
that the U.S. Department of Labor is unable--or unprepared to 
handle such a program. Such statements are baseless and 
contradictory to the record of facts. The DOL currently 
administers protection covering 2.5 million private job-based 
health plans. Those programs serve 131 million workers, 
retirees and their families; 67 million individuals are in the 
self-insured plans that are monitored exclusively under DOL 
oversight. The facts clearly show that DOL has the expertise, 
the personnel and the vision to incorporate AHP legislation 
into the health insurance system immediately.
    President Bush recently commented that AHPs are a 
critically important component to guarantee retirement and 
health security for all Americans. Congress and President Bush 
have an opportunity to make health insurance affordable for 
millions of small business workers by enacting legislation to 
bring Fortune 500 health benefits to the Nation's small 
business workers on Main Street through association health 
plans this year.
    The President is ready for AHPs. The Department of Labor is 
ready. Small businesses, farmers and the self-employed are 
ready for AHPs. Uninsured Americans have already waited far too 
long for this basic right. Passing association health plan 
legislation will help to address this inequity and provide more 
Americans access to affordable, accessible quality health care 
through associations and small businesses.
    I want to thank the Small Business Committee's leadership 
in moving this important legislation through Committee and to 
the House floor in an expeditious fashion. We hope that you are 
able to do that.
     [Representative Fletcher's statement may be found in the 
appendix.]
    Chairman Manzullo. Thank you very much.
    We have been advised that Secretary Chao has arrived, and I 
hope it is okay with the Members here that we forego the 
questions to the Congressman and the Senator in order to 
accommodate her schedule. We want to thank you for your 
testimony. We will work--Jim, you got it through the House when 
you were here. So we believe we have the votes this time, and 
now we have to count on you to get it through the Senate.
    Senator Talent. Mr. Chairman, I thank you so much for that, 
but I do want to say that it was a very strong bipartisan 
effort, and I think we can all--and this committee--emanating 
largely out of this committee is what got it done, and I am 
hopeful of replicating the same thing in the Senate.
    Chairman Manzullo. That is great. Thank you for testifying.
    The next witness will be the Secretary of Labor, who 
herself can answer those questions, when people say can a 
Secretary of Labor administer AHPs. And the order we are going 
to take because of her pretty difficult schedule is the 
Secretary will testify, Members will have an opportunity to ask 
questions, and then Administrator Barreto will testify. Okay?
    Secretary, we look forward to your testimony, and thank you 
for coming today

  STATEMENT OF ELAINE L. CHAO, SECRETARY, U.S. DEPARTMENT OF 
                             LABOR

    Secretary Chao. Not at all. Thank you, Mr. Chairman, and 
Ranking Member Velazquez and members of the committee. I have a 
formal statement which I would like to submit for the record.
    Chairman Manzullo. All the statements will be admitted for 
the record. And, Madam Secretary, could you pull the mike a 
little bit closer to you? Thank you.
    Secretary Chao. Thank you very much for providing this 
opportunity to discuss the President's agenda for giving 
Americans more access to quality affordable health care, 
specifically through the association health plans. As you know, 
more than 41 million working Americans--41 million Americans 
lack health insurance, and 85 percent of the uninsured are in 
working families. The President has proposed a comprehensive 
solution to the problems of high health care costs and lack of 
access. These proposals include making medical savings accounts 
more widely available, medical malpractice reform, individual 
tax credits and association health plans, also known, as you 
all know, as AHPs.
    In my view the Small Business Committee is an ideal forum 
to discuss these issues and how to expand health care coverage. 
The sector that represents the ripest opportunities for making 
a real difference is small business, because right now those 
who work in small business with fewer than 100 employees make 
up 60 percent of the working uninsured.
    Many small employers tell us that they want to provide 
health care insurance for their employees. Cost is a major 
factor, but there are also legal barriers, market barriers and 
the threat of fraud. All these hurdles prevent many small 
employers from being able to take care of their workers the way 
they would like, and rising health care insurance costs are 
also a significant barrier for employers to hire workers and 
keep their businesses afloat.
    According to a recent Conference Board poll, health 
insurance costs were the greatest impediments to adding workers 
in the past 2 years. Soaring health insurance premiums are a 
different threat to our efforts to expand the economy. As I 
said, cost is not the only hurdle, but it is probably the most 
significant. Small company premiums are about 20 to 30 percent 
higher than those of large, self-insured companies. That is 
because small businesses have got to take on the significant 
administrative overhead costs when they decide to offer health 
coverage and bear the cost of insurance company marketing and 
also underwriting expenses.
    State benefit Band-Aids also make coverage more costly for 
the small group market, and small businesses are especially 
vulnerable to insurance fraud, which drives up the cost for 
everyone and robs the small employers of the funds that they 
could otherwise use to pay for stable, reliable coverage.
    How AHPs help small business extend health coverage is the 
subject of our hearing today, especially to uninsured workers. 
According to CBO, the average savings on health insurance 
premiums would be at least 9 percent and could be as much as 25 
percent per employer. As a result, CBO estimates that as many 
as 2 million additional American workers and their families 
could obtain health insurance through AHPs.
    Another important benefit of AHP legislation is that it 
will give Federal and State regulators much clearer lines of 
authority to regulate small employer health insurance, but it 
will also break down legal and market barriers, making it far 
more attractive for small businesses to offer health insurance 
to their employees.
    Under AHPs, small businesses would enjoy greater bargaining 
power, economies of scale, administrative efficiencies, as well 
as the benefits of a uniform Federal regulatory structure. By 
banding together, AHPs could give small employers many of the 
economic and legal advantages currently enjoyed by only the 
very largest of employers and union plants.
    In order for AHPs to cover as many small businesses and 
their workers as possible, strong rules must be in place. To 
ensure coverage of all workers regardless of health status, 
insurance will be affordable for all workers if AHPs include 
individuals with a broad range of risks.
    The AHP legislation contains numerous provisions to prevent 
cherry-picking, including a prohibition against excluding high-
risk individuals or employers from participation. The 
Department will work with the committee to make sure that this 
bill has tough and effective provisions against cherry-picking.
    To combat fraud AHPs will have to meet Federal 
certification standards and comply with the Department's 
ongoing oversight. These requirements will give small 
businesses, employers and employees confidence that we have 
carefully vetted AHP providers so that they have some assurance 
that they are not at the mercy of some fly-by-night operator. 
AHPs will also give small businesses the benefit of a uniform 
oversight system instead of having to comply with 50 different 
sets of State regulations.
    Like other health benefit plans, AHPs must abide by the 
stripped fiduciary requirements of ERISA which the Department 
of Labor administers. Further, they will have to provide the 
full range of benefits in a number of Federal health care 
statutes such as HIPAA. AHPs have got to also comply with 
COBRA, mental health parity, Women's Health and Cancer Rights 
Act, Newborns' and Mothers' Health Protection Act.
    Workers with AHP health benefits would enjoy both Federal 
and State consumer protections. For AHPs that offer fully 
insured coverage, State insurance commissioners will be 
responsible for the solvency of the insurance company issuing 
the policy, just as they are responsible for insurance policies 
issued to fully insured group plans today.
    AHPs that offer self-insured coverage will be subject to a 
single Federal oversight system in which standards of 
certification, solvency and ongoing oversight would be set and 
administered by the Department of Labor.
    Many people may be interested to know that the Department 
of Labor currently administers ERISA protections for 
approximately 2.5 million private job-based health plans, which 
cover 131 million workers, retirees and their families. Of 
these, 67 million individuals are in self-insured plans that 
are subject exclusively to the Department's oversight.
    In addition, the Department also protects exclusively an 
additional 5 million workers who are in union-sponsored 
multiemployer plans. In fact, employer-provided health 
insurance pays for more health care in America than Medicare 
and Medicaid combined.
    At the Department of Labor we are engaged in aggressive 
efforts to combat health insurance fraud. Despite 
jurisdictional uncertainty, the Department, in conjunction with 
the State insurance commissioners, has been reasonably 
effective by shutting down scam artists who offer false health 
care plans and recover money for victimized workers.
    In addition to enforcement--and I will end up soon--we 
provide a great deal of information to employers to help them 
manage their health plans. Recently we released a new Website 
containing warning signs for small businesses to watch out for 
coverage that seems too good to be true.
    Finally, the Department recently announced a new compliance 
assistance program to help employers and health plans 
successfully implement Federal health care laws.
    These are a few of the examples of the efforts that this 
Department commits to ensuring effective regulation, 
implementation and enforcement of Federal health laws.
    I will be happy to answer any of the committee's questions 
and look forward to working with you on this very important 
issue.
    [Secretary Chao's statement may be found in the appendix.]
    Chairman Manzullo. Thank you, Madam Secretary, for your 
testimony.
    Ms. Velazquez. We are going to keep the 5-minute clock.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Before I proceed, I would like to introduce our newest 
Member, the gentleman from American Samoa, Mr. Faleomavaega. 
Welcome.
    Secretary Chao, thank you for coming before this committee 
today in such an important issue for small businesses. I am 
glad to hear that the administration is supporting AHPs, and I 
am sure that you are aware the President--he ran and included 
this issue when he campaigned for President to support such 
legislation on behalf of small businesses, and he also included 
this a year ago this month in his small business agenda, but we 
haven't seen much action. A year later we have not enacted this 
legislation. I would like to know what steps the administration 
is prepared to take to help move this legislation forward.
    Secretary Chao. Congresswoman, I am delighted to hear that 
this committee is interested in this issue. I want to thank you 
for your leadership on supporting association health plans as 
well.
    We would be willing to implement this law if it were 
enacted last year, and so we are very anxious that this bill 
move forward. We agree very much in principle with what this 
bill puts forward, and as I mentioned before, I am more than 
willing, as is the rest of my Department, to work with this 
committee and others on making association health plans a 
reality.
    Ms. Velazquez. Do you think the President will meet with a 
bipartisan group of senior members from the Education and Labor 
Committee and with both Republican and Democratic Senators?
    Secretary Chao. I can promise for myself I will be more 
than willing to meet with both of----.
    Ms. Velazquez. Would you talk to him and tell him that this 
is an important issue for small businesses?
    Secretary Chao. He is very much in support of it, and I 
think it is important to point out that Congress plays a very 
large role in this, of course, and we hope that Congress will 
act quickly on this.
    Ms. Velazquez. It is important. I know that we are the one 
who vote on legislation, but if the President is totally behind 
it, and he approached and asked and sent a message here to the 
leadership, I am sure that we will bring it to the floor for a 
vote and will not include it in any type of legislation that is 
controversial, and that then it will be the end of the 
legislation.
    Secretary Chao. Well, we look forward to your leadership on 
that, too.
    Ms. Velazquez. Thank you.
    I am glad to hear you mentioned enforcement in your 
testimony, because in order for AHPs to work, it will take 
stringent oversight on the part of the Department of Labor.
    In your testimony, you state that the DOL will devote 
significant resources for enforcement. How much is in your 
fiscal year 2004 budget request for enforcement, and how does 
that compare to the last 3 years?
    Secretary Chao. Well, as I mentioned, we already administer 
ERISA, which taken by itself oversees more health care plans 
than Medicaid and Medicare combined. So ERISA is a huge 
oversight responsibility. It is a law that was passed in 1974, 
and it oversees all employer-based health plans and benefits.
    We currently, as I mentioned, have approximately oversight 
over 1.2 million plans and 67--over 125 million workers, 
including 67 private plans. We have the resources, and I am 
confident that if we do not, we will get the necessary 
resources.
    Ms. Velazquez. Well, the reason I asked is that one of the 
big factors that the last administration emphasized in 
expressing their concerns about AHPs was that the Department of 
Labor will only be able to oversee each AHP plan once every 300 
years. Now, how did we go from the last administration claiming 
they could not provide adequate oversight to your assurance 
that the Department of Labor can produce adequate oversight, 
and what has changed that would allow this oversight, or what 
was the last administration missing?
    Secretary Chao. Well, I respectfully disagree with the 
previous administration's assessment of their need. The new 
agency, the agency that used to be called Pension Welfare 
Benefits Administration, has a new name. It is called Employee 
Benefits Security Administration. Their budget has been 
increased 10 percent in the fiscal year 2004, and a great deal 
of it goes to enforcement. And as I mentioned, I do not 
anticipate that we will have any problems enforcing this added 
responsibility.
    Chairman Manzullo. Thank you, Ms. Velazquez.
    Mrs. Capito.
    Mrs. Capito. Thank you, Mr. Chairman. Thank you, Madam 
Secretary. I represent the State of West Virginia, and over 90 
percent of our business is small business. And you mentioned--
or it is mentioned in some of the statements firms of 100 and 
more and firms of 100 and lower. A lot of our firms, a lot of 
our small businesses are under the 50 threshold, into the 10- 
and 8-employee region, and time after time in visiting small 
businesses in West Virginia, their premiums are going up 30 and 
40 percent.
    You know, my question is what, in your view, is the largest 
stumbling block to seeing that this legislation goes through? 
And is there any kind of standards that have been set that 
would show what kind of association health plan insurer--what 
kind of standards would be set? Would you handle that through 
the Department of Labor, to ensure that those really small 
firms can get the accessibility that they really need?
    Secretary Chao. I think we are very close. I think in the 
past year legislation was introduced, there was a lot of 
miscommunication and misperception of what the issues are. I 
think there has been an effort on both sides to try to address 
the real health care crisis that is facing small business 
workers and employers, and so I think the issue of cherry-
picking, for example, has been taken care of in the 
legislation. I think there is agreement that we cannot allow 
healthy people--only healthy people to be included in these 
plans, and that there must not be any discrimination.
    The second point about regulations, I believe, has also 
been addressed in the reintroduced legislation as well. Right 
now a lot of small businesses are faced with a lot of very 
conflicting and difficult-to-comply standards, and so the 
Federal regulations would make it easier. As I have mentioned, 
the budget of EBSA will be increased 10 percent, and we will 
have enough resources.
    The third point was--I forgot.
    Mrs. Capito. Well, the quality assurance on the insurer.
    Secretary Chao. We want to be very sure also that the 
associations that are offering this plan are responsible, so we 
don't want to certify organizations that are set up solely for 
the purpose of offering this health care. We want 
organizations, associations to have a history, at least 3 years 
of history, and to have had some experience in providing 
services to their members that are different and separate from 
health care so there will be rigorous verification standards, 
and we do that already.
    Mrs. Capito. Well, I look forward to joining you and 
everyone in this effort.
    I would like to point out as well in this day of State 
budgets that are having difficulty meeting their bottom line, a 
lot of the problem is the problem of the uninsured. The 
hospitals there, the level of free care, charitable care is 
rising every day, and I believe it is problematic, because it 
is indicative of the inability of small business to do what 
they want to do, which is to offer their employees good, solid 
health care. So thank you very much.
    Chairman Manzullo. Thank you.
    Our next witness is Mr. Faleomavaega. You might note that I 
think the Small Business Committee is the only committee to 
have the Members from Guam, American Samoa, the Virgin Islands 
and Puerto Rico.
    Mr. Faleomavaega.
    Mr. Faleomavaega. Mr. Chairman, I offer my personal 
invitation to all the members of our committee to come to my 
district. I happen to have the largest tuna canning facility in 
the world, so I am going to make tunas out of you by the time 
we get through with you.
    Mr. Chairman, I am very happy and pleased to be selected by 
our side of the aisle to be a member of this important 
committee. I certainly want to thank you and our Ranking 
Member, my good friend from New York, as leaders of our 
committee. And I want to personally welcome also Secretary Chao 
for her fine testimony and the important position that our 
President has now provided at least in support of AHPs. And I 
am really somewhat surprised, Mr. Chairman, as the most junior 
member of the committee, I have been asked to say a few 
questions. I thought maybe the pecking order of seniority goes 
in to those who are more senior than me.
    Chairman Manzullo. We start with American Samoa.
    Mr. Faleomavaega. More and more I am beginning to like this 
committee more and more, Mr. Chairman. But I do thank you for 
this opportunity, and I do want to thank Secretary Chao for her 
presence here on our committee.
    I just have a couple of questions for obvious reasons, and 
maybe I am pleading ignorance here. Secretary Chao, what seems 
to be the most important issue of why major health insurance 
companies are not supportive of this bill? Am I getting the 
wrong drift here? It is my understanding that Blue Health and 
Blue Cross is probably the strongest----.
    Secretary Chao. Well, I think you should ask them and 
others why they don't support it, because we have a real health 
care crisis in this country, and individual health care 
coverage is extremely high. If you are a----.
    Mr. Faleomavaega. We understand that. I know my time is--
but I want to say this. You have indicated that the 
administration does support the bill. Are there any----.
    Secretary Chao. Well, we support the principles of the 
bill, and we want to work with those others.
    Mr. Faleomavaega. So in effect, you really do not support 
the bill? You support the principle, but not the provisions of 
the bill?
    Secretary Chao. I think it is going to evolve, and we want 
to make sure that we are working with the committee so that we 
can accommodate and work out some, perhaps, misunderstandings, 
some differences. I think we are so close, and paying attention 
to what the Congresswoman was saying, you know, we are so 
close, let us talk and let us work----.
    Mr. Faleomavaega. Can you cite three specific areas that 
are really serious as far as the administration is concerned 
about the AHPs?
    Secretary Chao. I think the AHP bill is a strong bill, and 
as I mentioned, we strongly support the concept, and we want to 
see it go forward. But let us wait and see what the final bill 
looks like.
    Mr. Faleomavaega. Can you share with us what exactly are 
those concerns in principle that the administration has?
    Secretary Chao. We support in principle. We support in 
principle. And as I mentioned, this is a good bill. We want to 
work with Members on it. We don't want to foreclose the 
opportunity to work with Members on it.
    Mr. Faleomavaega. Thank you, Miss Secretary.
    Thank you, Mr. Chairman.
    Chairman Manzullo. Thank you.
    Mr. Beauprez.
    Mr. Beauprez. Madam Secretary, thank you for being with us 
today. A pleasure to have you in front of this committee.
    Ninety-seven and a half percent of the businesses in my 
home State of Colorado are small businesses. It is our stock 
and trade, as it is in most States. I had not heard but was 
taken by your statistic. I believe you said 85 percent of the 
uninsured are in working families, and I am going to assume 
then that the vast majority of those are working for small 
businesses.
    Secretary Chao. Sixty-five percent, yes.
    Mr. Beauprez. And I know from personal experience what is 
happening to the cost of health care. Ours went up. At our 
business we give our employees two choices. One of those plans 
went up 72 percent last year, a dramatic increase. And not 
every business--at a time when the economy is doing what it is 
doing, business is basically getting squeezed from both 
directions, rising expense and declining revenue, and that is 
not a very nice combination. So a lot of businesses are 
struggling to either provide the benefit or have made the 
difficult decision that they have to pull it.
    So I am very supportive of this. Other than perhaps 
eliminating the estate or death tax, this is the issue that is 
consistently and most fervently brought forward by small 
businesses that approach me.
    My question is about--and I guess the concern of be careful 
what you ask for, you might get it, the concept sounds good to 
me, the principle sounds good to me. I have openly been 
supportive of this. But from your testimony, I think I heard 
you say, it does make regulation easier, more uniform. I think 
I wrote down that because it is consistent at a Federal level, 
it will make it easier to regulate and make sure that the end 
user, the worker, is getting good coverage. I would like you to 
explain exactly what you meant by that, and I am particularly 
concerned that we might actually be, God forbid, limiting 
competition and flexibility in choice in the market. Is there 
any concern in your Department about that, that we might not 
have actually more choice? I am concerned that at the front end 
we may see a more affordable health care, but if we eliminate 
competition in the marketplace, it rises on us again, and we 
are back to the same problem. Could you address that?
    Secretary Chao. Let me address your question about 
regulation, because right now the regulatory structure is very 
confusing, especially if you have a small business that perhaps 
straddles two States or is over a regional area.
    Basically self-insured association health plans would be 
solely regulated by the Department of Labor. A fully insured 
association health plan with the AHP purchases and insurance 
product from a health care health insurance company would be 
regulated by the Department of Labor and the States.
    So regulation, there will still be adequate regulation. In 
fact, adequate is not the right word. We want to ensure that 
these association health plans are doing what they are supposed 
to be doing to protect workers, and we are confident that that 
will occur.
    As for the issue about competition, I think the association 
health plan opens up competition, because right now if you are 
a single employee, employer, or if you are just a person 
opening up a shop, you have no options at this point, because 
the individual coverage--and it goes back to your question, 
Congressman, about why some people object. Individual coverage 
is prohibitively expensive. It is--you can buy it. It is 
purchasable, but it is prohibitively expensive for the majority 
of working Americans, and that is a problem.
    Mr. Beauprez. Thank you.
    Chairman Manzullo. Dr. Christian-Christensen.
    Mrs. Christensen. Thank you, Mr. Chairman, and thank you--
this is--this committee is one of the few that really is 
willing to take on some of these challenging issues. I am glad 
to be part of it.
    Let me preface my question by just saying that I am signed 
on as a cosponsor of this bill. I think because I have made no 
bones about my strong commitment to universal coverage, my 
staff assumed that I would come on, but I am really not going 
to stay on unless I can be convinced that this is a good 
approach. So I have several questions. One, again, speaks to 
the fact that I am not convinced that the experience or the 
infrastructure is in place for what the Department of Labor is 
being asked to take on, and the question is an important part 
of the Department of Labor's responsibility in monitoring AHPs 
will be taking a proactive approach. In the past one of the 
problems was that DOL did not step in before the plans--other 
kinds of plans had gone bankrupt. That was the case with the 
MEWA plans.
    Could you talk to us a bit about the auditing and the 
monitoring that the Department will be using to detect problems 
early on, and has the Department devised standards to determine 
when plans are in distress and how this will be monitored?
    Secretary Chao. We have been very concerned about MEWAs and 
the terrible plight that they leave employers and employees. 
They take advantage of the most vulnerable within our society, 
and employers and employees both suffer, because employers give 
their premium to a company they presume is legitimate, and they 
think they are buying health care coverage for their employees, 
when in actuality these organizations are total shams.
    So we have taken a very strong stand and embarked upon a 
three-prong strategy to attack this problem. One is obviously 
education and outreach. We need to let people know how best to 
look for affordable health care in the current market, and if a 
deal sounds too good, if the cost is like 90 percent below what 
the current market is, it is too good. So we have set up a 
Website. We have partnerships with the Hispanic Chamber of 
Commerce and with the African American Chamber of Commerce----.
    Mrs. Christensen. I hate to cut you off, because I know my 
Chairman is going to cut me off, but I have two questions, the 
auditing and the monitoring and any standards in place of when 
you will determine when the plan----.
    Secretary Chao. Well, MEWAs straddle States, so as they get 
bigger over a regional area, the regulatory regime is not 
adequate. And that is why, in fact, association health plans 
would actually help, in that right now we go--we recover, for 
example, $67 million. We have 181 cases pending. So we have a 
very active enforcement program going on.
    Mrs. Christensen. So some of the provisions are in place 
and just will be applied to AHPs, or there are provisions that 
will still have to be put in place? And if so, when----.
    Secretary Chao. We are pretty confident that we will be 
able to regulate the association health plans, certify it and 
conduct the audits. We already have the increased budget, but 
let me also say we currently administer the ERISA provisions, 
and that covers 2.5 million job-based health plans, covering 
131 million workers. So this is not a major new activity for 
us. It will be an incremental increase.
    Mrs. Christensen. And it may be a large incremental 
increase that----.
    Secretary Chao. I don't think so either.
    Mrs. Christensen. I am sure I am going to have some follow-
up questions that we would like to submit in the record.
    Secretary Chao. We would be more than glad to work with you 
to get them resolved.
    Mrs. Christensen. As I am speaking, you can see me looking 
through your testimony, because I saw somewhere--I couldn't 
find it in the written testimony--that coverage would be 
provided regardless of risk.
    Secretary Chao. Absolutely.
    Mrs. Christensen. Does that mean that coverage would be 
provided under these plans? I guess I should have asked----.
    Secretary Chao. What is happening now with small businesses 
is if they don't have health care coverage, they are losing out 
to big companies, and, in fact, the healthy workers are going 
to work for the big companies, and small companies can't find 
the workers that they need. That is a problem.
    Mrs. Christensen. But does that mean that preexisting--
workers with preexisting conditions would be covered under this 
plan?
    Secretary Chao. Absolutely. That is under HIPAA already, 
which we administer and we have oversight responsibilities for.
    Mrs. Christensen. Okay. Let me ask one more question, and 
let me see if I can state this properly. But as I understand 
it, part of the reason for going in the direction of the 
association health plans is looking for--is because the State-
mandated coverage is very strict, and supposedly small business 
have difficulty meeting the State standards. Now, Congress 
asked the Institute of Medicine to look at inequities in health 
care, and one of the things that they found was that there were 
different levels of coverage for different people, creating a 
two-tiered system of health care.
    So if part of the reason why we are going in this direction 
is to avoid some of the State-mandated coverage of benefits 
that are found to be too strict, how do you convince me that we 
are not compromising the kind of health care that these plans 
are going to be providing by going to association health plans? 
Do you understand what I am asking?
    Secretary Chao. I do. State benefit mandates sound 
wonderful, but many times they have the unfortunate effect of 
driving up health care costs, because many cases they are 
Cadillac plans, which not everyone needs, and so, for example, 
State-mandated benefits increase premiums by about 13 percent. 
I am not against them. I am just saying that they are putting a 
different kind of plan for employers and employees who may not 
need that.
    And so let us have a little flexibility, and quality 
affordable health care will be made available, because right 
now with the State-mandated benefits, what happens is a lot of 
employers just can't afford to pay for their employees, and 
they don't. To bring down the whole cost of health care, that 
will help, and timely health care, too.
    Mrs. Christensen. I am still not completely convinced, but 
I will keep reading and submit some questions, if I might.
    Secretary Chao. If I may offer----.
    Chairman Manzullo. You are a cosponsor of the bill, and you 
see the big picture.
    Mr. Shuster.
    Mr. Shuster. Thank you, Mr. Chairman, and thank you, 
Secretary Chao, for being here today. I don't really have a 
question, just a statement, a short one.
    Before I came to Congress, I was a small business owner, 
employed between 30 and 35 employees, and this was always a 
struggle, health care, and in central and western Pennsylvania 
where I come from, there isn't much competition. So I think 
this is an extremely important bill for small business and 
across the Nation, especially in central and western 
Pennsylvania.
    Also just an issue or point that Congresswoman Capito 
brought up, it is also going to benefit our small rural 
hospitals. One of the biggest expense lines in their budgets is 
for the uninsured, free health care, so it is important to 
small business, it is important to our small and rural 
hospitals. So anything I can do to work with you to get this 
piece of legislation passed and signed by the President, I 
certainly am committed to doing that.
    Secretary Chao. Thank you.
    Mr. Shuster. Thank you again for being here.
    Chairman Manzullo. The new Member from Guam, could you help 
me pronounce your last name?
    Ms. Bordallo. Mr. Chairman, it is Bordallo. The double L is 
a Y. Just so you don't say bordello.
    Chairman Manzullo. That is why I deferred to you to 
pronounce your own name.
    Ms. Bordallo. Thank you, Mr. Chairman, for the opportunity. 
You know, when you hear from the two Territories, American 
Samoa and Virgin Islands, and Guam has to speak up as well, but 
I am very happy to be in this committee, Mr. Chairman, and our 
Ranking Member, and also to say that this is the only committee 
where I sit in the upper level. It may not be forever, but at 
least I am enjoying it now.
    I want to say that I agree with our Ranking Member when she 
questioned the Secretary--Madam Secretary, about the support 
from the administration. You know, I see that it may be an 
exercise in futility if we go forward with this bill if there 
are provisions. You said in principle you support it, the 
administration supports it, but there are provisions?
    Secretary Chao. Well, I didn't say that.
    Ms. Bordallo. Could you repeat what you said?
    Secretary Chao. The administration is very much in support 
of association health plans, and we support with great 
enthusiasm the principles of this particular bill, but I think 
it is very unusual to come out and support any bill before it 
comes closer to final passage, because you just don't know what 
the bill would look like. So we have been spearheading this 
effort.
    Ms. Bordallo. Currently the way the bill is right now 
before us, is there anything in the provisions that you do 
not----.
    Secretary Chao. I don't think so, no.
    Ms. Bordallo. So what you are saying, then, is if it 
changes along the way, then you may not fully support----.
    Secretary Chao. No. I would view it as more of positive. I 
feel as if my concern is for those who have not signed on. We 
want to hold ourselves open to discussion and to dialogue, and 
we want to work with those, like Dr. Christensen and others, 
who may have lingering questions. I will be more than glad to 
make my staff available, myself available, to try to work to 
answer some of these concerns.
    Ms. Bordallo. So right now the way the bill is drafted, 
there is no objection? Is that what you are saying, now, 
without amendments or any changes?
    Secretary Chao. I believe so, yes.
    Ms. Bordallo. All right. One of the things that we must 
look at are the solvency requirements. Are the provisions there 
strong enough, in your mind?
    Secretary Chao. We think that it is important to have 
solvency requirements, because once again, we don't want to 
have fly-by-night operators. So we want to make sure that there 
is not too much of entrepreneurism at work here, but that 
organizations are established, that they have a financial 
history, that they are financially sturdy, and that their main 
mission is not for the purpose of being established to offer 
health care insurance. We want them to have some other mission 
of service to their members. That is all to ensure that the 
organization would be bona fide and that it is a sturdy 
organization.
    Ms. Bordallo. Would your Department, then, be willing to do 
an assessment of the solvency standards, or have you done that 
already? I am a new Member. So perhaps you have gone through 
this.
    Secretary Chao. I don't know the answer to that, but we 
will be more than glad to work with you on that.
    Ms. Bordallo. All right. Thank you, Mr. Chairman.
    Chairman Manzullo. Mr. Akin.
    Mr. Akin. Thank you, Mr. Chairman.
    I don't know if this question was asked earlier, but one of 
the things that I had heard--and I was very strongly in favor 
of AHPs and all, but I had heard from an insurance company, and 
they were kind of whining that--they probably would object to 
the term "whining," but they were saying it wasn't fair, 
because there were certain State mandates, and AHP would allow 
you to sidestep the State mandates. I am not necessarily sure 
that was good or bad, but is that true the way they are set up, 
somebody could set up a plan where you would not have to follow 
State mandates of an AHP? Would that be an advantage of an AHP? 
Am I right on that or not?
    Secretary Chao. A number of States have State benefit 
mandates, and as I mentioned, they sound wonderful, and we want 
to say that everyone should be able to have every single 
benefit available, but the reality also is that not everyone 
takes advantage--or needs the plethora of benefits that are 
being offered. But the increased number of benefits do jack up 
the cost of health care.
    Mr. Akin. I have been a legislator in the State of Missouri 
for 12 years, and we used to argue that all the time, so I am 
completely familiar with that, but the AHPs themselves, the way 
they are set up, would they require that you have to meet those 
State mandates or not, or could they be set up----.
    Secretary Chao. I don't believe so, no.
    Mr. Akin. You would not have to?
    Secretary Chao. Right.
    Mr. Akin. So from a competitive point of view, it was a 
legitimate complaint by an insurance company that it does have 
to meet those State standards?
    Secretary Chao. It would appear so, yes.
    Mr. Akin. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Manzullo. Mr. Udall.
    Mr. Udall. Thank you. Thank you, Mr. Chairman.
    Madam Secretary, I am just a little unclear on your support 
for the bill, supporting it in principle, and maybe asking this 
in a different way, are there any provisions in this bill that 
you do not support now?
    Secretary Chao. I don't think so, but let me also say, 
there is a----.
    Mr. Udall. And if we passed this bill and sent it to the 
President, you would then recommend to him that he sign this 
bill; is that correct?
    Secretary Chao. Well, the Senate has a say over this as 
well. So----.
    Mr. Udall. I am saying assuming the Senate--Mr. Talent was 
here, our former chairman, he assured us he is going to get it 
through the Senate, he is working hard. So under those 
circumstances, would you----
    Secretary Chao. We are very much in support----.
    Mr. Udall [continuing]. Support this bill in the current 
form with the provisions that are in it?
    Secretary Chao. I think I am pretty--I think I can say 
that. You will also hear from a second administration witness 
as well. There is a clearance process in the Federal Government 
in which different agencies will weigh in. So from our point of 
view, I think that is certainly----.
    Mr. Udall. Would you recommend to the President that he 
sign the bill in its current form, the bill you have testified 
about today that you have submitted this very lengthy 
testimony?
    Secretary Chao. Well, we are in support of the principles, 
as I mentioned. It will have to go through an 
administrationwide clearance process.
    Mr. Udall. I am asking for your recommendation. Would you 
support----.
    Secretary Chao. I have been a very strong supporter of 
association health plans.
    Mr. Udall. You would recommend to the President that he 
support the bill in the current form, yes or no?
    Secretary Chao. If it is in the current form and assuming 
nothing changes--and I am not trying to hedge you, but you know 
the legislative process better than I, but, again, I am very 
supportive of the principles in the current form.
    Mr. Udall. So in its current form, you could recommend that 
he support it?
    Secretary Chao. Right.
    Mr. Udall. Yes. Okay. Now, critics of the----.
    Secretary Chao. I wish I----.
    Mr. Udall. Critics of the AHP concept assert that two-
thirds of the savings under AHPs would come from adverse 
selection, also known as cherry-picking. What is your response 
to that?
    Secretary Chao. Well, the legislation provides for 
provisions which would outlaw cherry-picking. This is a big 
issue year when this bill was introduced, and there was a great 
deal of discussion, and I think coming together in agreement 
that this must not occur. And so the legislation, even when it 
died last year, had prohibitions against cherry-picking.
    Mr. Udall. You mentioned in your testimony about MEWAs and 
how many of these were suspected of fraud, and you have the 
enforcement statistics in there that you have done. Could you 
explain for the committee how these two entities are different 
and why an AHP won't be a repeat of the MEWA experience?
    Secretary Chao. Well, under the current void, there is not 
the regulatory structure that we propose. So under association 
health plans, there would, in fact, be a stronger regulatory 
structure.
    Mr. Udall. And you are prepared to set that up under this 
bill.
    Secretary Chao. We already have that ability, as I 
mentioned. It is only an incremental increase.
    Mr. Udall. Now, one of the previous witnesses here 
testified that Blue Cross/Blue Shield basically had a monopoly 
in this small group area, and that that was the reason that we 
had such high prices and the reason the costs were so much 
higher. In addition to AHPs, outside the AHP issue, have you 
given any thought as to how we could bring additional 
competition into the small group market?
    Secretary Chao. AHP is a very----.
    Mr. Udall. Aside from AHPs, in addition.
    Secretary Chao. AHP is a very effective way to do so. 
Basically it is allowing small businesses the same advantages 
that a large business would have. They are able to pool their 
risk over a larger group of people, and in so doing would bring 
the risk down. So I think it is a very effective tool.
    Mr. Udall. But have you given any thought outside of AHPs 
how to bring competition into the small group market?
    Secretary Chao. Well, I think if you--there are other ways 
to decrease health care costs. You can have--as I mentioned 
before, the administration has a comprehensive proposal that 
includes expanding medical savings accounts, that includes tax 
credits, that includes medical malpractice reform, but I think 
the association health plan has a great deal of support right 
now from both sides of the aisle, and I would like to see it 
passed.
    Mr. Udall. When you talk about the monopoly, one of the 
suggestions always is antitrust enforcement. Have you given any 
thought in that area?
    Secretary Chao. Right now it is not a competitive 
situation. So AHPs would accomplish the dual goals of being 
able to cover--being able to offer coverage through a larger 
number of people and give individuals, employers and employees, 
more options.
    Chairman Manzullo. Thank you, Mr. Udall.
    Mr. Case of Ohio.
    Mr. Case. Thank you, Mr. Chair, and as you note, the 
presence on the committee of the Members from Guam, the Virgin 
Islands and Samoa, you should know that there is an island 
conspiracy going on here. Clearly the balance of power on this 
committee belongs in the island bloc, which I am proud to be a 
part of.
    Madam Secretary, in Hawaii we have a unique law--I believe 
it is still unique--among the 50 States of the Prepaid Health 
Care Act, which requires coverage of employees under an 
employer-provided prepaid health care statutory regime, which 
is actually a couple of decades old, which is one of the 
reasons why we have very low uninsured in Hawaii.
    It is a pretty high cost. The problems you have alluded to 
in terms of statutory benefits being put in place are certainly 
true in Hawaii where the plan is beyond what many employees 
need and we operate under an ERISA exemption because of the 
scope of our law. That system has its very strong proponents 
and its very strong detractors and has led health care to be in 
Hawaii one of the top challenges facing small business. So it 
is not only a function of the cost of health care, but it is 
also a function of State law that requires fairly expensive 
coverage, universal coverage with some exemptions.
    This is not the time for that debate or that discussion. I 
hope to have it at some point in the context of the ERISA 
exemption and what changes might be made in Hawaii's law to 
retain health care in terms of availability to workers there 
under what is a pretty good system in principle and to which 
direction many States have been creeping while making it more 
affordable.
    Nonetheless, that is for another day. I guess the basic 
question I have for you today is, as you know it or understand 
it, or as I describe it to you, is there any reason why this 
bill would influence in a unique way the system we have in 
Hawaii? My impression is no. Because my impression is that you 
simply provided a Federal regime, and Hawaii can do whatever it 
wants within reason, and there is nothing inconsistent between 
what is being put forward in this bill and the Hawaii scheme. 
But I want to ask you the question to see whether there is 
anything that I am obviously missing in your mind or that you 
think I should be focusing on.
    Secretary Chao. I don't know. But I think you deserve an 
answer. Let me have my people get to work on what the impact 
would be.
    Mr. Case. Thank you, I appreciate that.
    A little bit of a follow-up. When you talk about the AHPs--
and if I missed it in your testimony, I apologize, but is there 
a projection as to those States who do not have a system like 
Hawaii's--if this bill was to be put into place roughly as 
expressed right now, what--is there any guesstimate of any kind 
as to the scope of coverage that would arise from the increased 
availability?
    Secretary Chao. Hopefully, it will give people more 
options. As we have seen in other health plans with groups of 
people, there will be an A plan, a B plan, a C plan, rather 
than just an A plan or a C plan.
    Mr. Case. Right. But are you projecting a level of coverage 
of workers as a result of this bill? Or are you aware any of 
projections as a result of this bill? We are all trying to 
increase the availability of health care to employees and their 
families. We are all trying to do it in an affordable way. Is 
there a projection anywhere, an estimate anywhere as to what 
level that would rise to?
    Secretary Chao. Health care plans are pretty complicated, 
and they vary according to different groups of people and who 
is in the plan. So I think my feeling is that it would be hard 
to come up with that, but we will look and see.
    Mr. Case. Do you believe that whatever increased coverage 
there might be arises because the health plans are picking up 
new employees that are not currently covered, or are they 
replacing the coverage of employees that are currently covered?
    Secretary Chao. Well, there are studies on that. In fact, 
the estimates are that, with the creation of the Association 
Health Plans, probably an average of increase of 2 million 
workers would be covered.
    Mr. Case. Increased?
    Secretary Chao. Yes, new workers. Those who would not have 
had access otherwise.
    Mr. Case. Thank you.
    Chairman Manzullo. Secretary, thank you for coming here. We 
promised you would be out at 3:30. We will start with Mr. 
Barreto in just a minute. But I would like to meet you in the 
hallway and thank you personally for coming here.
    Secretary Chao. Thank you very much, and I extend an 
invitation to the Committee. We want to be helpful in all of 
this, and we want to work with you. Please call upon us and our 
staff.
    Chairman Manzullo. Appreciate that very much. Thank you.
    [Recess.]
    Chairman Manzullo. Okay, I can pronounce this name. Hector 
Barreto is a great friend. He personally, I think, within the 
first month of becoming the Administrator of the SBA, visited 
Manzullo's Famous Restaurant in Rockford, Illinois, my 
brother's modest establishment, and talked to Frank and talked 
to many small businesspeople about the high cost of health 
care.
    His background is that--your father had the insurance 
agency, Mr. Barreto?
    Mr. Barreto. No, I did.
    Chairman Manzullo. You did?
    So we are just pleased to have you with us, Mr. Barreto, 
who knows the situation inside out; and thank you for your 
patience in accommodating Secretary Chao. We look forward to 
your testimony.

STATEMENT OF THE HONORABLE HECTOR BARRETO, JR., ADMINISTRATOR, 
                 SMALL BUSINESS ADMINISTRATION

    Mr. Barreto. Thank you, Mr. Chairman.
    Good afternoon Chairman Manzullo, Ranking Member Velazquez 
and honored guests and distinguished members of the Committee. 
Thank you for inviting me to discuss how to increase access to 
affordable, quality health care for small businesses. We have 
had the opportunity on several occasions recently to talk about 
this issue. I am grateful for the continued attention to this 
most pressing issue facing small businesses, and I applaud you 
for having this hearing.
    Small business owners tell me all the time that this is one 
of the most important issues they face and that the problem of 
access to affordable health insurance has grown considerably 
for them in recent years. I know you have heard the numbers--
devastating, double-digit premium increases each year for small 
businesses. This steeply rising cost, added to a long list of 
other factors, have forced many small business owners to stop 
offering insurance coverage altogether. For some, the expense 
has meant that it has never really been an option. Is it any 
wonder that most of America's uninsured citizens either work 
for a small business or are self-employed or have a head of 
household or who works for a small business?
    This impacts the ability of small businesses to compete for 
the skilled employees that they need to grow and prosper. The 
availability of quality health care benefits is often a deal 
breaker for employees when they are looking for a new job. 
Without action, this crisis will only grow. The urgency of this 
issue cannot be underestimated, nor can the opportunity to do 
something about it be ignored.
    I have been witness to this problem throughout my life. I 
grew up in a small business; then I worked for a small 
business; I became a business owner myself; and, finally, I 
served as the head of one of those small business associations 
that we talk about all the time. I have seen firsthand just how 
difficult it is for businesses to secure the health care they 
need for their employees, the coverage that their employees 
need and want.
    As SBA Administrator, I have had the chance to visit with 
small business owners all over the country. At Manzullo's 
Restaurant and all across this country, wherever I go, they 
inevitably ask me what can Washington do to make health care 
more affordable for them?
    My job as head of the SBA is to help small business owners 
and their employees. My agency is the government entity they 
look to when they are in need, and we are not able to help them 
when they ask about this, the issue that impacts their 
employees and their families so much.
    The SBA ought to be able to provide small business owners 
with information when they call and ask about health care. We 
should be able to provide a credible referral to associations 
that they can join to purchase health insurance at a lower 
cost.
    A key answer to the health insurance care question for 
small businesses is Association Health Plans. Given the 
staggering costs that are faced by all small businesses, 
President Bush has placed an increased access to affordable 
health care at the top of his comprehensive small business 
agenda.
    Besides AHPs, the administration supports Medical Savings 
Accounts, tax credits for the purchase of individual coverage, 
greater access to State-based high-risk insurance pools, and 
medical malpractice reform to curb frivolous lawsuits that 
drive up the cost of insurance.
    The President wants to make it easier for small employers 
to pull together to offer their employees the same sort of 
affordable health care coverage options that many large 
corporations and unions can currently provide. The President 
knows this can be achieved through AHPs.
    Removing the legal barriers and allowing AHPs to flourish 
would bring cost savings to small businesses by reducing the 
daunting administrative cost and introducing the discounts that 
come with high volume purchasing. Ultimately, AHPs will mean 
the expansion of access to health care benefits for millions of 
uninsured Americans and more coverage choices for small firms.
    Once Congress passes legislation enhancing AHPs, SBA will 
seek to connect small business owners with the best solution 
for providing health insurance to their employees while the 
Department of Labor will implement necessary programmatic 
structure.
    I want to thank Secretary Chao for her leadership and the 
commitment that she has provided on this issue. I know that 
small business owners that have been struggling to make ends 
meet appreciate these and your efforts. I hope that the 
Secretary and I can work closely with you this year so that 
small businesses and the 57 million Americans who work for them 
can gain access to better, more affordable health coverage. 
Until we come up with a solution that crosses State lines, I 
don't think we can solve this problem. The time for Congress to 
act is now.
    Thank you, again, for holding this hearing and for the 
support so many in this Committee for AHP legislation have 
offered. This is truly a bipartisan effort, and I am happy to 
answer any questions you may have. Thank you.
    [Mr. Barreto's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    I do not have any questions myself, neither does Ms. 
Velazquez.
    Anybody on the panel have any questions they want to ask of 
Mr. Barreto?
    Mr. Faleomavaega, you have that look your face.
    Mr. Faleomavaega. Why not?
    I do want to thank Administrator Barreto for his testimony 
this afternoon. In line with some of the concerns some of the 
members have had with the proposed bill--I assume you have not 
had the opportunity to review the newly proposed bill which my 
understanding was passed in a previous Congress.
    Mr. Barreto. No, sir, I have not.
    Mr. Faleomavaega. So I guess it is difficult for to you 
support it because you don't know what is in the provisions of 
the bill.
    Mr. Barreto. I know what the intention of the bill is to 
do. I mentioned some of that in my testimony. And I think this 
is a great start.
    As you know, Congressman, this is not a new idea. This is 
not a new concept. But probably this is one of the first times 
that this level of attention has been paid to this issue in 
both the House Small Business Committee, the Senate Small 
Business Committee, the administration, trade groups across the 
country. There is definitely a focus and a real hope and 
expectation by all of those small business owners that we will 
finally be able to take care of this problem once and for all.
    Mr. Faleomavaega. I want to thank you for your commitment 
and your offer of help on this important legislation.
    Thank you, Mr. Chairman.
    Ms. Velazquez. Mr. Barreto, for 6 years now I have been 
talking about this issue; and, like you, I have been, time and 
time again, meeting with trade associations, small businesses 
and it is the same issue: access to affordable health 
insurance.
    So, look, this is a bipartisan effort legislation; and you 
and I know that if there is a strong commitment, this 
legislation will be brought up to the floor for a vote. But we 
need also strong commitment coming from the White House. If the 
President does not talk to the leadership in the House and in 
the Senate, this is going nowhere. So we need to have a strong 
message coming from the White House.
    He included it as part of his campaign promises. He 
included it last year when he released his small business 
agenda. So the time to act is now. The President should come 
and meet with both the Senate and the House leaders.
    Mr. Barreto. You are absolutely right, Congresswoman; and I 
want to thank you very much for that history of the issue. As 
you said, you and many others have been on the front lines of 
this issue for a long time.
    I can tell you, because I have been with him, that the 
President is committed and passionate about this issue. I have 
been with him already three times this year where we have done 
Small Business Roundtables. I know the Chairman was with him 
not too long ago. This issue continuously comes up. The 
President is focused on it.
    I can also tell you that members in the Senate Small 
Business Committee and members on this Committee are speaking 
with the President and do have his consideration and support, 
and that is why I think that this is a very unique and 
important opportunity for small business. I think that together 
we will be able to create a solution that will help many, many 
small businesses.
    Chairman Manzullo. Mr. Bartlett.
    Mr. Bartlett. Thank you very much. Thank you for your 
testimony.
    It is very commendable that we and the administration are 
working to make health care coverage as available to small 
businesspeople as it is to those who work for large businesses. 
But once we have accomplished that, there still will remain 
enormous problems to be solved. Health care costs are rising at 
three and four times the rate of inflation. The only other 
large entity in our country where that is true is the Federal 
Government, and we need to curb the growth of both of these.
    Mr. Barreto. Health care is growing faster.
    Mr. Bartlett. You are right.
    There are two fundamental problems in health care. You 
mentioned one of them, and that was malpractice reform. Many 
estimate that that could account for as much as 25 percent of 
health care costs, considering the defensive medicine that is 
practiced. It is impossible to get a firm fix on that because 
you cannot get inside the doctor's head to know how much of 
what he prescribes and so much is related to defensive medicine 
but many estimate as much as 25 percent.
    The other thing that drives health care costs is third-
party payer. A reasonable analogy is that every time you go 
shopping for groceries, you know that when you go to the 
checkout counter you know that somebody else will be there with 
their credit card to pay for what you filled your basket with. 
Now, if you knew that, the average shopper would fill their 
basket with very different things than they fill it with when 
they know that they are going to have to pay for it. How are we 
going to address that problem? Until we address that problem, 
we are only nibbling at the margins of the fundamental problem 
in health care.
    Thank you very much for that question, Mr. Vice Chairman. I 
think you have articulated the issue very, very well.
    This is a first step. It is not the only step. Other things 
have been mentioned, and we need to tackle these problems one 
at a time. In fact, I don't think there is time to wait. I 
think we have to attack these all the time. I think you stated 
it very well.
    I put it this way: I say that small businesses are always 
put in the place of giving the bad news to their employees. It 
is always, we are getting a double-digit increase; we have got 
to change plans; you have to change doctors; finally, I can't 
provide health care benefits.
    It also affects the doctors. With those lawsuits going up, 
many of them, their insurance premiums go up on their medical 
malpractice, and they will maybe stop practicing in a certain 
area. There are many rural areas where they are losing their 
doctors. They do not want to practice anymore because it is too 
expensive or they are afraid of getting sued.
    So there are many problems. The problem that we are dealing 
with today, which is a very important problem, is access and 
cost; and Association Health Plans can take a big bite out of 
that problem if we finally do what we should have done a long 
time ago and give small businesses that option.
    I think a lot of issues have been brought up, and there is 
no doubt in my mind, having been in the industry, that if we 
offer Association Health Plans to small businesses not only 
will competition increase but I think that the quality of 
health care and pricing all across this country will go down, 
which will have a dramatic impact on the lives of small 
businessmen and women across this country.
    What you said is, of course, entirely true, that we have 
absolutely got to provide health care access. I was a small 
businessperson, one of 35 people in the Congress who belonged 
to NFIB, before I came here; and I know that many people in 
small business with the escalating cost of health care cannot 
provide it to their members. But once they are able to provide 
it on the same basis that it is available to large businesses, 
they still will have an enormous problem and that is that their 
cost of doing business, because of the escalating cost of 
health care, is going to threaten their survivability in a 
global marketplace.
    I just want to make sure that once we have cleared this 
hurdle--and this is an absolute must; we should have done it a 
long time ago--that we remember that there are other major 
problems that we have got to face in health care.
    Thank you very much for your testimony.
    Chairman Manzullo. Dr. Christensen.
    Mrs. Christensen. Thank you. I thank our chairman.
    Mr. Bartlett also just mentioned some of the things--
concerns that I had, because I have heard a lot about the 
rising cost of health care. But Association Health Plans are 
not going to fix all of that problem. It will not even be a big 
bite. The CBO says 2 million people perhaps, and that is if it 
works.
    Mr. Barreto. It is really not known, as the Secretary said. 
One of things we do not know is how many people will associate 
themselves with an organization, maybe for the very first time, 
simply because they will now be able to get access to 
affordable health care. There are other options as well. There 
is the self-insured options that have been discussed. So we 
really do not know.
    What we do know is that the largest part of uninsured are 
probably working for small business. What we do know is that 
these people are worried every single day that something is 
going to happen to them, and if they do not have health 
insurance they could lose their business or their valued 
employee. So it just goes to reason that if you offer a 
solution that many small businesses--they have told us this 
over and over--will take advantage of it.
    I agree, it is not the only solution or the full solution, 
but it is a big part of getting to the solution that we need to 
get to.
    Mrs. Christensen. There is apparently a report that the 
Office of Advocacy, they funded a study which reveals that 
small businesses who operate health care plans have high 
administrative costs; and there are some questions I have 
relating to that report.
    But one question I want to ask before I ask two specific 
ones about the report, if I have time. Some States have already 
set up high-risk pools for small employers to purchase 
insurance collectively. How do you see this legislation 
affecting those pools?
    Mr. Barreto. Well, I think this is a much broader 
application. I know--I practiced--my employee benefits practice 
was in California, and I know that we had some of these high-
risk pools. But they really touch very few small businesses. 
This is a much broader application. It is a nationwide 
application. So we think that it is going to help.
    Also, remember that these plans are voluntary. If a small 
business felt like, you know what, it is not in my best 
interest--small businesspeople are very smart. They will shop 
around. They will not jump at the first solution. These 
Association Health Plans will have to compete for their 
business the way the large insurance carriers have to compete 
for their business right now. So if it is not a good deal, they 
will not select it.
    Mrs. Christensen. If we could have done something 
legislatively on the Federal level to support the forming of 
high-risk pools, would that be a reasonable alternative to this 
one?
    Mr. Barreto. Again, I go back to the fact that my 
experience with high-risk pools is that it is very limited and 
a very limited application of who can go into these high-risk 
pools. Usually, it is people with very, very serious medical 
conditions who cannot get insurance anyplace else. And, 
obviously, very expensive to provide benefits to those 
individuals. So I think it depends on the details and the 
actual options that are being described. What I think we are 
talking about is a much broader, much more easily accessible 
solution for small businesses.
    Mrs. Christensen. To go back to the report a minute, 
because it kind of goes to the question that was asked of 
Secretary Chao a few times to try to ascertain whether there 
was real support for this or was it just in principle. In the 
report--apparently, in that report it says, this is a quote: 
AHPs located in the States with less stringent laws could offer 
insurance at a lower cost to groups that are now forced to 
subsidize higher cost groups in those States that require 
community rating or narrow rate bands.
    Isn't that another way of saying that AHPs would be a great 
deal for the healthy--the problem that we are trying to get 
away from with this--but cause premiums to increase for high-
cost firms that community ratings were designed to help? And 
that is coming from the SBA report.
    Mr. Barreto. I would say to you that I actually spoke to 
the Chief Counsel of Advocacy before I came. I wanted to ask 
him about his report, and he told me that he is totally 
supportive of Association Health Plans. Some of those things 
were misconstrued, and some of those things were mentioned 
before.
    I would tell you that the idea here is that when you allow 
associations to provide these kinds of benefits to their 
members, they want as many of their members as possible to 
benefit. They are not going to choose, well, we want these 
members over here because we like them better or they are 
healthier to get the benefits. Any solution is going to be made 
available to all of their members.
    As you know, there are already laws in place that prevent 
this kind of cherry-picking or adverse selection to go into 
effect. The Secretary of Labor has been very strong in her 
statement that they will not allow there to be any cherry-
picking.
    Because at the end of the day what it does is it actually--
that is one of the reasons that when Association Health Plans 
have been tried in the past they have not worked. What happens 
is that everybody gets excited about it; they join the 
Association Health Plans; and, as the rates start going up, the 
healthy people leave. Guess what happens? You only have the 
unhealthy people in there. Rates go up for everybody, and the 
plans blows up. That will not happen in this case.
    Mrs. Christensen. Thank you.
    Mr. Chairman, again, since I have several questions on the 
report, I would like to ask them to the Office of Advocacy and 
have them respond.
    Chairman Manzullo. Let's go to Mr. Schrock and then Mr. 
Ballance.
    Mr. Schrock. Let me say I agree with what Mrs. Christian-
Christensen and what Mrs. Velazquez said. Let me make two 
observations. You may or may not agree with me.
    Number one, if we are going to truly get health care costs 
under control, we have to get a cap on suing being the national 
pastime in this country. Malpractice insurance is out of 
control. My wife's family, her parents, her aunts and uncles 
are all doctors; and the premiums they pay to practice are 
outrageous. They are not going to eat them. The patient is 
going to eat them. Unless we stop these frivolous lawsuits, 
that is one area we will not make any progress.
    Number two, the cost of drugs for the American taxpayer is 
higher than any nation in the world. It is our companies that 
research, develop, and bring these drugs to market; and it is 
our population that gets stuck with the costs. And the answer I 
get is, well, we have trade agreements with other nations so 
they can get it cheaper. Baloney. It is time that we level the 
playing field so that everybody else pays the piper just like 
our people do. Why should our elderly go without drugs because 
they are expensive and somebody in Canada can get it for a 
fraction of the price? That makes no sense to me; and, unless 
that changes, it is impossible to get this under control. Agree 
or not?
    Mr. Barreto. We agree completely. Having been in that 
business and industry working with small businesses--and I also 
had doctors who were my clients. And doctors have to buy health 
insurance, too; and they complained about these things all of 
the time.
    I think the fact that there is a focus on this, I think the 
fact that there is an interest and a commitment on your part, 
the part of this Committee, is going to help us make great 
strides, maybe for the first time in history, great strides to 
start solving these problems.
    The first thing that we are tackling is the access and the 
initial cost of health insurance premiums. By providing these 
Association Health Plans we know that it is going to reduce the 
cost of health care for small businesses in the short term. 
Long term, we have to deal with some of these issues.
    Mr. Schrock. And if there are any lawyers in the room 
offended by my malpractice comment, too bad. Right?
    Chairman Manzullo. Mr. Ballance, are you an attorney?
    Mr. Ballance is an attorney.
    Mr. Ballance. I am a trial lawyer and proud of it. A former 
trial lawyer, because I can't practice anymore.
    Mr. Schrock. There is one less lawyer practicing.
    Mr. Ballance. I do not bash lawyers nor doctors. There is a 
better way to do it.
    Mr. Barreto, I want to raise one issue. This bill addresses 
access to health care. What about the question of access to 
providers? In North Carolina, we have a rule that protects that 
if there is no provider within a reasonable distance, you can 
go outside of the plan.
    Mr. Barreto. It is my understanding that what is going to 
happen once this law passes is that the association will be 
able to negotiate with carriers. I know this from my own 
experience, one of the things that they ask for is, let me see 
your provider directory. I want to make sure that there are 
doctors in the community where I need them. I also want to make 
sure that there are doctors who are culturally sensitive. I 
also want to make sure that there are doctors that speak the 
languages that I need them to speak. If not, one of the deal 
breakers oftentimes is, until the insurance company can bring a 
provider directory that really reflects the needs of that 
population, no deal.
    Insurance companies, as you know, can add those doctors 
when they need to. Oftentimes, they freeze those provider 
directories and say we have too many. We are not accepting any 
more doctors. But if they need to recruit more doctors to cover 
their clients, they definitely will.
    So I think that the Association Health Plans may be a great 
way to actually expand provider directories all across this 
country. Obviously, you will have to take it on a case-by-case 
basis, because the needs of North Carolina may be different 
than the needs of California or New York or the Virgin Islands 
or anyplace else.
    Mr. Ballance. Thank you.
    Chairman Manzullo. Thank you so much.
    You know, you always impress me, Mr. Barreto, when you get 
to health care. You just shine on that.
    Mr. Barreto. Thank you, Mr. Chairman. I appreciate it.
    Chairman Manzullo. How long did you have that firm?
    Mr. Barreto. Fifteen years. Thank you very much, sir.
    Chairman Manzullo. Thank you very much. I appreciate your 
patience in accommodating the Secretary of Labor.
    We will take a 10-minute break here and get a 
reconfiguration at the table. Thank you so much.
    Mr. Barreto. Thank you, Mr. Chairman. I look forward to 
working with you.
    [Recess.]
    Chairman Manzullo. We will reconvene the meeting.
    The first witness is Mr. Skip Trotter from Trotter Machine 
Incorporated of Rockford, Illinois, home of Trotter Machine 
Incorporated and Manzullo's famous restaurant. He is testifying 
on behalf of himself and as a guest of the NFIB. We look 
forward to your testimony.
    We have got lights up there. When it is green, it is okay. 
When it is yellow, start moving. When it is red, that is it. 
Okay?
    Thank you for your patience in coming here and waiting to 
testify. We look forward to your testimony.

   STATEMENT OF SKIP TROTTER, TROTTER MACHINE INC., NATIONAL 
               FEDERATION OF INDEPENDENT BUSINESS

    Mr. Trotter. Good afternoon, Mr. Chairman and members of 
the Committee. Thank you for inviting me from Illinois today to 
talk about the important issue of affordable, accessible health 
insurance, especially for those owning or working for small 
businesses. I am pleased to be here on behalf of the National 
Federation of Independent Business, NFIB, representing 600,000 
members who face a similar challenge.
    My name is Skip Trotter; and my father and I run Trotter 
Machine Incorporated, a manufacturing firm that produces 
hydraulic valve spools based in Rockford, Illinois. At Trotter 
Machine, my employees and I work together to produce valve 
spools which control the restriction and flow of high-pressure 
hydraulic oil in values. The unique part of our business is 
that there are only three of us in the world who manufacture 
valve spools.
    Like many entrepreneurs, I learned early that if you want 
to remain competitive, I must offer an attractive benefit 
package. Since we started the company, we have provided 
comprehensive health care insurance.
    Our company is able to offer a PPO, Preferred Provider 
Plan, to our 47 employees. My father and I want to provide a 
quality plan--medical, dental and vision coverage with a wide 
network of doctors--and every year that passes, I have to set 
our deductible higher and change our network of providers to 
keep our premiums affordable. I set an eligibility requirement 
of 90 days or, in some cases, on the first of the month after 
60 days of employment. I offer an 80/20 employer-employee 
shared contribution rate. Every year, I have changed insurance 
companies because it is difficult to find an affordable plan.
    However, the reality is that being insured is critical to 
our employees. Most them are more interested in the benefits we 
offer than in the wage they will be earning. Employees pay $80 
per month for individual coverage and $120 per month for a 
family. Trotter Machine picks up the other 80 percent of the 
cost for our employees. In addition, we pay for full coverage 
of life and disability insurance, which is roughly $1,000 a 
month.
    Annually, in February, my assistant and I go through the 
painstaking work of getting bids from other insurance carriers, 
since our average increase has been 28 percent every year over 
the last 4 years. This year, our increase was 40 percent; and 
what bothers me the most is that the coverage and service 
continues to get worse.
    A particular frustration of mine is that insurance carriers 
move at one speed--their own. In past years, we have had to go 
an additional month with the old company to stay covered at the 
higher cost, waiting for the current insurance carrier to get 
underwriting and firm pricing back to us.
    In addition to the hassle of just maintaining affordable 
coverage, my time is wasted spending countless hours on the 
health care renewal process. It takes two of us 3 days to fill 
out all the necessary forms for underwriting. This cuts into my 
employees' production time and other areas in which I would be 
producing a quality product for my customers. We are facing a 
crisis in manufacturing by losing jobs to China; Therefore, it 
is vital that I work to keep our firm competitive.
    Knowing that providing health insurance is necessary to me 
for both business and personal reasons, and knowing that I 
cannot increase prices to my customers an extra 40 percent in 
order to absorb the cost, I continue to offer health insurance 
benefits despite the growing cost to the business. Our business 
has absorbed the cost every year. We have only passed a total 
of $5 a week on to our employees over the past 4 years. I am at 
a point where I might have to increase our employees' share or 
stop paying for their disability insurance. Thus, I take the 
risk of losing good employees and dramatically increasing my 
turnover rate.
    While I continue to struggle to provide affordable 
coverage, some of the big insurance companies have announced 
record profits the last few quarters. Are they making money off 
the backs of hard-working small business owners? I support 
businesses being successful, but when I am faced with double-
digit increases every year or when my colleagues cannot provide 
insurance to their workers, I feel that the insurance industry 
is more worried about their profits than my ability to afford 
health care for my employees. I have to compete, so why 
shouldn't insurance companies? Simply put, competition is 
needed in the small group market.
    Those of us in the small business community who offer 
insurance are struggling each year to afford the cost of 
insurance premiums. It is for this reason that I support 
legislation endorsed by NFIB that would create Association 
Health Plans, AHPs. AHPs would allow small business owners to 
band together across State lines to purchase health insurance 
as part of a large group, thus ensuring greater bargaining 
power, lower administration costs, and freedom from costly 
State insurance mandates.
    Fortune 500 companies and labor unions already have this 
right. AHPs will simply level the playing field and give small 
employers the same privileges as their counterparts in labor 
and big business. In addition, AHPs will introduce into the 
marketplace much-needed competition and diversity. Without the 
ability to shop for more affordable options, we are forced to 
shift costs to our employees and drop coverage. Association 
Health Plans would end the nightmare of health care purchasing 
for small businesses.
    I also encourage----.
    Chairman Manzullo. You are out of time, Skip. It is red on 
there.
    Mr. Trotter. I can't see the light. I apologize.
    Chairman Manzullo. We appreciate that.
    [Mr. Trotter's statement may be found in the appendix.]
    Chairman Manzullo. I am going to skip to Mr. Hartnedy. You 
have a flight that leaves at 6?
    Mr. Hartnedy. Yes, Mr. Chairman.
    Chairman Manzullo. What I would suggest is this. I want you 
to testify, and then I want you to leave.
    Mr. Hartnedy. Yes, sir.
    Chairman Manzullo. So you have 5 minutes. If you go over 
that, you have a lot of traffic to get through. I look forward 
to your testimony, and then you will be excused.
    Does anybody else have any flight problems going on here? 
Okay.
    Please, Mr. Hartnedy, go ahead.

STATEMENT OF JOHN HARTNEDY, CHIEF DEPUTY COMMISSIONER, ARKANSAS 
                    DEPARTMENT OF INSURANCE

    Mr. Hartnedy. Thank you, Mr. Chairman.
    My name is John Hartnedy. I am the Deputy Insurance 
Commissioner of the State of Arkansas, a member of the American 
Academy of Actuaries and a Fellow of the Society of Actuaries. 
I have worked with a variety of health insurance committees, 
and I have over 41 years of experience. I am speaking for 
myself from Arkansas only, no other commissioners or no other 
States or no other organizations of regulators.
    The uninsured are growing, as we know. I would suggest to 
you that one of the laws passed at the Federal level, HIPAA, in 
some ways didn't help, especially with guaranteed issue. That 
is one of the reasons that we believe in Arkansas--at least we 
are seeing the small group rate increases be much more 
significant than is happening even with individuals and 
certainly with large groups. So my suggestion to you is that we 
have to be careful with H.R. 660, that we do not do more harm 
than good.
    The number one issue is cost. It is not access. We have a 
State risk pool. Anybody in the State can get insurance. The 
problem is they can't afford it.
    I do not see how this law is going to provide very much 
help, but I want it to have the best chance to work so I am 
making some suggestions that I think will improve it. I say 
that from the point of view that, 2 years ago in Arkansas, we 
passed a law that looks very much like this one and in this 
session we are tweaking it to try and make it better. So it is 
not that we are not interested in trying to do this, but I am 
not sure at this point what it is going to accomplish.
    We certainly need stability in the group. It should be an 
established group.
    Cherry-picking keeps coming up, and I will give you one 
simple example. If you had an association of health club 
workers, they are going to be very healthy. You have an 
association. You don't bar anybody. They will get extremely low 
rates. They will come out of the normal small business market, 
so the rest of the small business market, obviously, the rates 
will go up because the healthy people are not there.
    I heard the Secretary clearly speak that they have things 
in the law, and they do, to prevent cherry-picking. There is no 
way you can prevent it all, Mr. Chairman; and I just think the 
Committee needs to know that as they move ahead. There will 
definitely be cherry-picking of some limited kind.
    Solvency is my next major issue, and we had the MEWAs that 
were originally under the DOL. They have--a lot of them have 
gone bankrupt. I will just tell you, as far as the DOL 
handling, we found them good to work with. The primary work is 
being done in our department. We probably devote almost a full-
time person to doing nothing but working on the MEWAs. That is 
not being regulated entirely or very much, bluntly, by DOL.
    We have solvency requirements in the States. It is called 
risk-based capital. A simple example: If an AHP or an insurance 
company would buy treasuries, they do not have to increase 
their surplus. If they would invest in junk bonds, they are 
going to put 30 percent of the value of those bonds in surplus 
to cover their risk. The same things happen on the liability 
side.
    What I do not understand is why the DOL wants to build a 
whole new thing when we have got it in place and you could just 
tell us to take care of it. It is already there.
    State of domicile is an excellent idea. I think before 
somebody goes self-insured they ought to be in for 3 years and 
have 5,000 members. The reason for that is that I am an 
actuary. With 1,000 members, one $1 million claim puts them in 
extreme difficulty. You say they should have stop loss. You saw 
what happened on September 11th and the difficulty of getting 
reasonable reinsurance after that. If you have got a 5,000 life 
case, you can retain a whole lot more of the risk and you are 
not --excuse the expression --the victim of whatever is 
happening in the reinsurance market. I strongly recommend that 
you raise that number if you are going to do this.
    The mandates--all the States have mandates. In my opinion, 
they have an awful lot of them. Some of them are not needed. 
For example, the one I get complaints about the most in 
Arkansas is in vitro fertilization. People would love to be 
without that.
    You have included HIPAA. Great move. The cost savings, the 
providers have been squeezed about as far as they can be 
squeezed. We will not get much more out of that. Our small 
employers in our State buy into the same provider markets that 
anybody else can. The expenses, they will still have to bill 
each employer. Maybe there are some savings in commissions. The 
mandates would save, from what I have seen, 5 to 10 percent, 
less than the 13 the Secretary mentioned.
    We are going to take our premium tax. That is one of our 
next moves, to take another 2\1/2\ percent out of it. I like 
the idea of disclosure and identifier information on the Web. 
The people need to know what they are buying. We had the market 
conduct examinations. The consumer protection law is already in 
place to protect them in that area.
    If you do it, Mr. Chairman, I recommend that you throw a 
whole lot more of the burden on us. We are already equipped to 
do the job.
    Thank you, Mr. Chairman.
    [Mr. Hartnedy's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    If it is okay with you, if we could submit some questions 
in writing. Mrs. Velazquez wanted to ask those.
    Also, I would extend to you if there are any questions that 
you want answered as the Commissioner of Insurance of the State 
of Arkansas, and obviously as an affected person, if you would 
get those questions to me, preferably to me on your letterhead, 
we will shop those questions around to Dr. Fletcher, to the 
Committee on Education and Labor, and bump it over to the 
Department of Labor. Because you have some tremendous things to 
add that could possibly perfect the language on it. Okay?
    Now you can leave.
    Mr. Hartnedy. Thank you, Mr. Chairman, for letting me speak 
before you told me to leave. I appreciate it, sir.
    Chairman Manzullo. Our next witness is Mr. Hughes. We look 
forward to your testimony.

STATEMENT OF ROBERT HUGHES, PRESIDENT, NATIONAL ASSOCIATION OF 
                       THE SELF-EMPLOYED

    Mr. Hughes. Thank you, Mr. Chairman.
    My name is Robert Hughes, and I am the President of the 
National Association for the Self-Employed. I am also a self-
employed CPA in Dallas, Texas. I have been in micro-business 
since 1982.
    This is a very important issue. We realize that when we 
talk about this issue here in this Committee hearing we are 
preaching to the choir.
    The NASE currently has 250,000 member businesses around the 
country, representing about 600,000 employees, employers and 
self-employed individuals. Most of these are micro-businesses 
having fewer than 2.5 employees, including the owner and the 
owner's spouse.
    The chief impediment that micro-businesses and the self-
employed face as they try to stay afloat during this time of 
economic uncertainty is the ever-increasing cost of health 
coverage. The state of health care among the Nation's self-
employed and micro-businesses is critical.
    According to a study which we released in early 2002, 7 in 
10 micro-businesses owners report that they do not provide any 
type of health care coverage to their employees, nor do they 
have coverage themselves. Costs are cited as the chief reason 
for this trend.
    The NASE is in full support of H.R. 660, the Small Business 
Health Fairness Act introduced by Congressman Fletcher. The 
NASE believes that Association Health Plans would give the 
self-employed and micro-businesses owners access to lower rates 
through consolidated buying power as well as administrative 
efficiencies.
    According to the NASE Affordability in Health Care study, 
the participants said they would be much more likely to 
purchase health insurance if the right incentives were in 
place; and we believe AHPs can offer those kinds of incentives.
    However, my focus today is not on Association Health Plans, 
even though we support those, but my focus today is on a couple 
of other issues that we think would help the affordability of 
health coverage for micro-businesses, namely, a self-employment 
tax deduction for health insurance premiums and health care tax 
credits.
    A core issue facing self-employed individuals, all 15 
million of them in the country, is their inability to deduct 
their health insurance premiums for purposes of the self-
employment tax.
    The tax inequity faced by the self-employed when purchasing 
health insurance lies in the fact that Schedule C filers, sole 
proprietors, and schedule E filers, partners in partnerships 
with earned income, do not receive a business deduction for 
their health insurance premiums. The premiums are not deducted 
for purpose of the self-employment tax and, accordingly, these 
business owners pay self-employment tax at a rate of 15.3 
percent on their insurance premiums. The self-employed are the 
only segment of business owners in the country that pay this 
extra tax on their health insurance premiums.
    The self-employed are required to pay two types of taxes on 
their annual tax returns: the regular income tax which we all 
understand and the self-employment tax. So while 100 percent 
deductibility of health insurance was phased in this year, it 
does not solve the tax inequity. A 100 percent deductibility 
relates only to the income tax and not the self-employment tax.
    To bring this to a personal level, let me ask you: How much 
did you or your employer pay for your health insurance coverage 
last year? Make a mental assessment. Multiply that amount by 15 
percent, and then pull out your checkbook and write a check 
payable to the United States Treasury for that amount. That is 
what the self-employed and micro-businesses do every year 
because their insurance premiums are not deductible for self-
employment tax purposes.
    To achieve tax equity between all forms of business 
entities, the self-employed must receive exclusion of health 
insurance premiums from self-employment tax, regardless of the 
entity form under which they choose to operate. Health 
insurance premiums of the self-employed should be deductible on 
Schedule C or E as an ordinary and necessary business expense, 
rather than a deduction above the line on Form 1040. This issue 
is not only one of fairness but, in the current health care 
climate, the self-employed are disproportionately affected. 
Removing this extra tax on health insurance premiums would 
simply make coverage more affordable for the self-employed.
    The NASE strongly supports tax credits and deductions as a 
viable solution to begin addressing the larger issue of the 
uninsured in our Nation. Nearly 80 percent of the respondents 
in our survey indicated they would likely purchase health 
insurance for their employees if they were give tax credits.
    So, Mr. Chairman, we urge again that this Committee 
strongly consider not only Association Health Plans but 
creating some form of deductibility for health insurance 
premiums for the self-employed tax purposes.
    [Mr. Hughes' statement may be found in the appendix.]
    Chairman Manzullo. Thank you for your testimony.
    I am dubious about a farmer from Washington whose name is 
Appel. I raise beef cattle. Do you raise apples?
    Mr. Appel. No, Mr. Chairman, I do not raise apples, but you 
are not the first one to ask me that question.
    Chairman Manzullo. I bet you raise cattle and grow apples. 
Is that what it is? I am not sure what the term is. Is it apple 
or Appel?
    Mr. Appel. The correct pronunciation would be Appel. But 
most people say apple, and I answer to whatever name you want 
to call me.
    Chairman Manzullo. Steve, glad to have you here. Mr. Appel 
is testifying on behalf of the American Farm Bureau Federation, 
a member of the Washington State Farm Bureau and a farmer 
himself; and we look forward to your testimony.

STATEMENT OF STEVEN APPEL, VICE PRESIDENT, AMERICAN FARM BUREAU

    Mr. Appel. Thank you, Mr. Chairman.
    My name is Steve Appel. I am a wheat and barley grower in 
Whitman County, Washington, to answer that question. I am the 
President of the Washington State Farm Bureau and am Vice 
President of the American Farm Bureau Federation.
    Of all the small businesses in need of lower cost group 
health insurance, the American farmer is perhaps one of the 
ones that are most in need. Our members are the smallest of the 
small, for the most part themselves ineligible for small 
business group coverage.
    Group underwriting standards have traditionally excluded 
companies where direct family members consist of more than one-
half of the group's enrollment, and that is exactly the 
situation for our members. Farm and ranch businesses are also 
often excluded from the eligibility list of many insurance 
carriers.
    Additionally, most farmers and ranchers are not large 
enough to enter the arena of self-insurance which through ERISA 
preemption allows larger employers to reduce their health costs 
through exemptions for mandates and community rating.
    Today's farmers and ranchers are facing a critical need to 
provide their families and employees with affordable health 
care. A few of our State Farm Bureau organizations have offered 
insurance coverage to their members. They have for the most 
part been able to offer such coverage only on an individual 
basis. This often results in higher premiums than would be 
found in a larger group coverage plan.
    To my knowledge, only my State Farm Bureau has been able to 
offer group coverage. A favorable association law allows us to 
provide coverage that is both extensive in its benefits and 
more affordable than is the case for individual plans offered 
in the State of Washington.
    Farmers and ranchers should have options. The Washington 
Farm Bureau established its health plan 4 years ago. It has 
grown to the point where it now covers 30,000 subscribers and 
has over $50 million in annualized premiums. As a bona fide 
association, the plan offers guaranteed, issued coverage to all 
of its members, thus eliminating the cherry-picking issue.
    Each farmer and ranching member is offered a preferred or 
standard rate with a maximum premium differential spread of 30 
percent in our rates. Our health plan enjoys a 99.2 percent 
retention rate after 4 years of operation. Of those who join 
our plan, we have found that over 25 percent enter with no 
prior health insurance coverage. Even with its success, several 
State-mandated provisions which would not be required under an 
ERISA self-funded plan, have prevented additional flexibility 
and could further reduce the cost of the plan.
    Other Farm Bureau organizations would like to participate 
in the Washington Farm Bureau plan or duplicate that plan for 
themselves, but because they cannot cross State lines or State 
laws prohibit this type of a plan or do not allow the latitude 
needed to provide such a plan they are unable to establish a 
program for their own members. Each State requires separate 
approval, making it impossible for multistate plans to be 
implemented. Also, increased administrative costs could be 
directly attributed to the multi-State jurisdictions. It can 
easily cost millions of dollars to obtain a license within each 
State and thousands of dollars to gain approval for each and 
every insurance policy offered within a State jurisdiction.
    The American Farm Bureau and Federation have supported AHP 
legislation for several years as a means of enabling the 
Federation and its State organizations to be able to put 
together cooperative arrangements allowing us to make available 
to our members more affordable group health insurance coverage.
    The American Farm Bureau would encourage additional 
consideration of some provisions of AHP legislation as embodied 
in H.R. 660. For instance, we believe that the state of 
domicile provisions need to be to be clarified: Plans should 
only need to meet the form filing requirements in the State 
where the plan is domiciled, and an admitted carrier in any 
State where they operate fully-insured plans should be used. 
The language also needs to better define the operation of 
fully-insured AHPs.
    Size requirements of AHPs should be reviewed in the case of 
self-insured plans and ensure that qualified individuals will 
operate the plan. We feel there is a need to better define 
solvency requirements for self-insured plans by establishing a 
formula that take into account reasonable initial capital, 
surplus and reserves when establishing an AHP.
    These concerns, however, are minor compared to the overall 
need to enact AHP legislation this year. Health insurance 
premiums have been skyrocketing, and it is having an 
increasingly adverse impact on the ability of our members to 
provide coverage for themselves and for their employees.
    AHPs represent a major step that, if implemented correctly, 
can significantly improve the prospects of better insurance 
coverage for farmers and ranchers and millions of others across 
the Nation. We do strongly urge the adoption of AHP legislation 
and offer to help in molding the legislation.
    Chairman Manzullo. You have already helped with that 
testimony. Thank you so much.
    [Mr. Appel's statement may be found in the appendix.]
    Our next witness is Karen Kerrigan, founder and chairman of 
the Small Business Survival Committee. We look forward to your 
testimony. Thank you for your patience.

STATEMENT OF KAREN KERRIGAN, CHAIR AND FOUNDER, SMALL BUSINESS 
                       SURVIVAL COMMITTEE

    Ms. Kerrigan. Thanks go to you, Chairman Manzullo, for, 
first of all, having this very important hearing today. Your 
leadership has been extraordinary on this issue, and we 
congratulate you.
    We also thank the ranking member, Congresswoman Velazquez, 
for her support, for her passion and her tenacity on this issue 
as well.
    Again, my name is Karen Kerrigan. I am Chair of the Small 
Business Survival Committee. We are a national nonprofit small 
business advocacy organization with over 70,000 members 
Nationwide.
    The issue of affordable health care, of competitive health 
insurance, of consumer-centered health care has been an issue 
since our founding in 1994. Obviously, the issue of cost has 
reached a different level over the past several years in terms 
of being a major impediment for our members to provide health 
insurance for their employees. It has become a hindrance to the 
growth of firms, to their ability to create jobs and to invest 
in their business. But we are very optimistic that something 
will be done this year in the Congress with the support of the 
administration in moving something through that will provide 
small businesses with some relief and get more people into the 
ranks of the uninsured.
    Certainly, SBSC stands in support of Association Health 
Plans. It only makes sense that small businesses are allowed to 
purchase health insurance under the same regulatory framework 
and conditions as large businesses. It is equitable and will 
have a positive impact on the ability of all firms to afford 
health insurance, control costs and retain and attract quality 
employees.
    One of the other issues that we have been focused on in our 
organization now since our founding is how to make the system 
more consumer centered. How do you put consumers back in 
control of the system? That is why we have supported Medical 
Savings Accounts for many years.
    As you know, Chairman Manzullo, MSAs were passed as part of 
the 1996 Health Insurance Portability Act. They were a pilot 
project that were enacted as part of that law. The program has 
been extended, I believe, now three times and is scheduled to 
expire at the end of this year unless Congress takes action.
    The uncertainty in the program itself really has been a 
hindrance to MSAs reaching their full market potential in the 
marketplace. However, they are doing their job. According to 
the Internal Revenue Service, 73 percent of people who are 
buying MSAs are the previously uninsured. Over 70 percent are 
families. We think that, in order for them to have their full 
potential in the marketplace, that certain restrictions must be 
removed from Medical Savings Accounts.
    Number one, they need to be made permanent so there is 
certainty, so the industry does market them to the full extent 
that they can, they put resources into it, that they be made 
permanent, I said, they be made universal, that all people have 
access to Medical Savings Accounts, regardless of the business 
or regardless of their employment status. Right now, it is 
limited in terms of who can purchase them.
    We also believe that other restrictions like allowing both 
the employer and the employee to contribute to the Medical 
Savings Account will make it a very attractive--is another 
attractive feature that we believe will give it good standing 
as a product to compete in the marketplace.
    So these reforms were passed, along with AHPs by the House 
last year, but nothing did happen in the Senate. We are 
encouraged by the administration's support of these reforms. It 
is in the budget. And we are encouraged by the bipartisan 
support that MSA expansion and permanency has received both in 
the House and in the Senate.
    Lastly, I would like to also putting a quick pitch for one 
other reform that really does recognize the fact that, even if 
all of these reforms were to take place, not all--there will be 
small businesses, some left, that still will not be able to 
afford health care. There will be a sector in the workforce, 
very highly mobile sector that will be very hard to insure. 
That is why we also support refundable tax credits for 
individuals. We think this recognizes the highly mobile nature 
of our workforce, the entrepreneurial nature of our workforce, 
and legislation has been reintroduced again in mid-February.
    So these are the types of reforms that we hope will also be 
enacted along with AHPs to bring more people into the system to 
make it more accountable and responsive to all consumers. Thank 
you.
    [Ms. Kerrigan's statement may be found in the appendix.]
    Chairman Manzullo. Thank you very much.
    Our next witness is Harry Alford. He is the President and 
CEO of the National Black Chamber of Commerce. We got to meet 
him about a year and a half, 2 years ago; and you have been a 
witness about two or three times since then.
    Mr. Alford. Yes, sir.
    Chairman Manzullo. We should have met earlier than that. We 
like to have you testify here.
    Mr. Alford. I love to testify.
    Chairman Manzullo. The way it works out, the minority asked 
that you testify; and I said, gosh, whose witness is this? So I 
will make sure for this hearing that you are a minority and a 
majority witness, because you speak for everybody.
    Mr. Alford. The Honorable Nydia Velazquez and the National 
Black Chamber of Commerce have strong ties and go back a ways, 
so I am honored and flattered to be here.
    Ms. Velazquez. It shows, Mr. Chairman, that I do not 
discriminate.

  STATEMENT OF HARRY C. ALFORD, PRESIDENT/CEO, NATIONAL BLACK 
                   CHAMBER OF COMMERCE, INC.

    Mr. Alford. Mr. Chairman, Ranking Member Velazquez, thank 
for having the National Black Chamber of Commerce here. As 
President and CEO I am proudly representing the 1 million 
businesses in this Nation that are owned and operated by 
African Americans.
    Our businesses are the key to job creation and wealth 
building. Small business growth in the African American 
communities will lead to new jobs. The African American 
community comprises 25 percent of its total population living 
under the poverty level. The fastest and permanent way to lead 
people out of poverty, poor health care, substandard education, 
is a means for employment. Small business accounts for the vast 
majority of new employment in this Nation.
    We want our segment of the population into the mainstream 
of the economy and off the dole. It is naive to carry on as if 
we can collateralize food stamps and turn public housing 
certificates into assignable rights guaranteed to heirs. 
Employment that provides a decent living and suitable benefits 
is the key, and that is our charge via business development.
    There is one problem with the above mission. With each job 
there should be health insurance. Unfortunately, there is not 
and, in fact, the possibility of health coverage for new 
employees is becoming more and more difficult. Even retention 
of current health care coverage is become overwhelmingly 
difficult.
    Health care coverage at the NBCC national office has 
increased over 42 percent over the last 2 years. Two years ago, 
we had to cease offering health coverage to all new hires to 
our workforce. This has since become the top reason for 
attrition and has caused much difficulty in competing for the 
top echelon in the talent pool.
    This is not unique, and our constituents complain about 
this problem constantly. It has become a national challenge and 
indeed a crisis.
    The products of the civil rights movement have been many. 
The most important trend is a large mass of first generation 
college graduates who have subsequently gained valuable 
expertise training via employment with Fortune 500 companies 
and the officer ranks in the military. This group and their 
offspring are providing ready, willing and be able 
entrepreneurs.
    I am a perfect example. My great-grandparents were slaves. 
My grandparents were Louisiana sharecroppers. My father was a 
truck driver who never made more than $15,000 a year. My mother 
was a domestic.
    Through the success of the civil rights movement I was able 
to become a graduate of the University of Wisconsin, an officer 
in the U.S. Army, and a manager with three Fortune 100 
corporations. This is not an unusual standard for my 
generation, and no nation on this Earth has provided such 
rocket speed access for a downtrodden segment of its society.
    Responding to the great need for affordable health care, 
the NBCC has made many attempts to create a plan that could be 
offered to our constituents. We have failed every time, and it 
is mainly because of the decentralized oversight and regulation 
regarding insurance. We will not be able to adequately respond 
to the situation until there can be a way to provide a national 
plan.
    The President and certain Members of Congress have proposed 
the use of Association Health Plans. We see this as the answer, 
a plan that can be offered to our constituents void of 50 
different regulations, one for each State, and making coverage 
affordable.
    The bottom line is too many of our small business owners 
cannot afford health care coverage for their employees. This 
can only be overcome by the inducement of incentives and the 
removal of barriers. Demanding that businesses provide 
insurance that they cannot afford will lead to job shrinkage 
and even business closings. Our economy cannot endure such a 
bad policy. What is needed is a comprehensive national plan 
such as H.R. 660, the Small Business Health Fairness Act of 
2003, introduced by Representative Ernie Fletcher.
    The National Black Chamber of Commerce, on behalf of 1 
million black business owners who have the charge of 
economically stimulating low-income communities, will support 
such legislation. We will actively participate in advocating 
such legislation and will fiercely promote it to our members.
    Thank you, Mr. Chairman and Ranking Member Velazquez.
    [Mr. Alford's statement may be found in the appendix.]
    Chairman Manzullo. I want to thank you all for your 
patience.
    I have probably more comments than questions, but, as I sat 
here, Mr. Hughes, listening to your testimony, you could 
immediately reduce the cost of health insurance by 15 percent 
if we got rid of the FUTA tax for small business people and 
treated sole proprietors and partners in the same manner as 
corporations. Is that a correct assessment?
    Mr. Hughes. That is a correct assessment. We believe that 
it helps the health care issue substantially because it does 
provide a significant affordability benefit for all of those 
self-employed people. Greater than that, however, is the 
fairness and the equity. Our tax system simply discriminates 
against the self-employed on this issue.
    Chairman Manzullo. Mrs. Velazquez--or FICA. I am sorry. I 
get the AFL-CIO and FBI--I understand those.
    Mr. Hughes. It would do it for FUTA as well, although 
little--only $56 a year.
    Chairman Manzullo. Ms. Velazquez, we share some common 
traits. Neither of us have the gift of patience, but we both 
have the gift of persistence. I think that is one of the 
reasons--our patience has run out. If AHPs are so great, then 
why has it not been done? And her desire to move this as a solo 
bill so it gets through.
    But one of the things that I would suggest if you are going 
to attach anything to it would be the very provision to which 
you testified. Because it makes so much sense and it brings 
equity among the little guys that simply cannot afford to go 
out.
    I am just throwing that out. The folks from the SBA are 
here, and they are listening very intently. I tell you, it 
would be tremendous--just out of the box, boom, we are going to 
lower it by 15 percent and eliminate that and how easy. No new 
government. It takes one change in the tax law, and that is it. 
Automatically, it is reduced by 15 percent; right?
    You like that, Richard? Mr. Spence back there with the 
congressional liaison does a great job for the SBA.
    But these are the types of things that Members of Congress 
like because they are self-executing. It does not require the 
setting up of any new agencies or any new bureaucracy on it.
    Mr. Appel, my question to you, and comment, is it appears 
that the State of Washington enacted legislation that is making 
AHPs work on the State level. Would that be----.
    Mr. Appel. That is a correct assessment, Congressman.
    Chairman Manzullo. Has it driven down the premiums of 
insurance?
    Mr. Appel. At this point in time over--our experience over 
the past 4 years with our particular group is that we have 
experienced less than 50 percent of the rate of increase that 
the rest of the industry in the State has experienced.
    Chairman Manzullo. Okay. One of the things that I would 
suggest, and this is really critical, is that the things to 
which you testified, there has to be a way to interface, 
perhaps, the Washington program so that a national program does 
not wipe it out. Are you with me on that, and that is your 
concern?
    Mr. Appel. Actually, as we see the potential national 
program it would actually give us some other option. I would 
offer this as an example: We are a State that borders the State 
of Idaho, for example; and we have many growers--a State 
boundary is just a line on a map, and we have many growers with 
property on either side of that line. But if their residence is 
on the Idaho side of the line they cannot participate in our 
program, even though their operation is on our side of the 
line. If we have a national AHP language, we could then offer 
them coverage.
    Mr. Manzullo. So, in your opinion, can you have the two 
plans side by side?
    Mr. Appel. Yes, in my opinion, you can.
    Chairman Manzullo. That is extremely important. I think 
that should be in any legislation that even though there is a 
preemption--I am thinking out loud right now, but the question 
came up on competition; and in the drawing of this very 
delicate language, I would just stay very close. The Farm 
Bureau has always participated, but it is extremely important 
that that type of plan be able to, in my opinion, coexist with 
a Federal plan. Okay?
    Mr. Appel. We believe, actually, as we understand the 
Federal plan, that they are almost--never 100 percent--one and 
the same type of thing. It actually is a benefit to our plan, 
not a hindrance.
    Chairman Manzullo. And you have studied that 
professionally? You have come to that conclusion?
    Mr. Appel. I am not going to claim--I am a dirt farmer from 
Dusty. I always like to say that.
    Chairman Manzullo. You grow barley for the beer for Mr. 
Town's brother's tavern.
    Mr. Appel. Right. Exactly.
    Chairman Manzullo. Mr. Alford, with regard to if AHPs pass, 
do you conceive or perceive that perhaps the Black Chamber of 
Commerce could be placed in a role of administering an AHP plan 
or contracting out or being a part of this?
    Mr. Alford. That would not be wise for us to have our own 
plan, based on the medical data of the African American male 
with diabetes. That would be a high-risk baby. But we would 
merge probably with either the U.S. Chamber or NFIB.
    Chairman Manzullo. So you would see that two or more 
organizations that could qualify could piece together----
    Mr. Alford. Yes, sir.
    Chairman Manzullo [continuing]. And to contract or whatever 
it is to come up with your own plan?
    Mr. Alford. That would be the logical approach for us.
    Let me say also, time is of the essence. A solo bill makes 
a lot of sense in terms of time. And run it through the House, 
get it through the Senate, take it to the President's desk. 
Let's pull the trigger.
    Chairman Manzullo. Well, we do not have jurisdiction over 
the drafting of the legislation or putting it through, but I 
agree with that. Let's just get it moving. And I would be glad 
it work with you on that.
    Ms. Velazquez.
    Ms. Velazquez. Mr. Alford, recent studies show that there 
is a--25 percent of minorities that lack health insurance, 
while the national rate was near 15 percent. With this AHP 
legislation we hope to close this gap. Some studies estimate 
that AHPs could reduce the number of uninsured Americans 
working for small business by anywhere from 10 to 20 percent. 
Based on your membership, do you see similar reductions in the 
uninsured, or will AHPs have greater impact for minority 
businesses?
    Mr. Alford. I think it would be a greater impact increasing 
the amount insured. Looking around metro D.C., you would not 
see that great of an impact, but in Kansas City, Wichita, 
Phoenix, you would see a tremendous impact on people having the 
ability to provide health insurance for their families.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Manzullo. Mr. Appel, you stated that when your 
plan came into effect people who were not insured before became 
insured. Do you remember making that statement?
    Mr. Appel. Yes, sir.
    Chairman Manzullo. Could you quantify that for us?
    Mr. Appel. The numbers--if you look at our entire plan and 
operation 4 years down the line, the 4-year experience is that 
25 percent of those who joined our plan previously carried no 
insurance.
    Chairman Manzullo. That is astounding. Absolutely 
astounding.
    Mr. Appel. Rural America is looking for a way to cover 
themselves with health insurance. It has been a very difficult 
situation over time. My members, frankly, in my home State were 
screaming at me, saying, get us some kind of health insurance 
product. This is where we went, and it has worked out well for 
us.
    Chairman Manzullo. The final question is for my constituent 
over here. Skip, are you still with us? A little bit different 
experience than being back home and working in the shop, isn't 
it?
    Mr. Trotter. Most certainly.
    Chairman Manzullo. Are you enjoying yourself?
    Mr. Trotter. Oh, yes.
    Chairman Manzullo. Just think if the cameras were here. 
They are probably covering what happened to the animals at the 
zoo than showing up here today.
    You had a 40 percent increase?
    Mr. Trotter. That is correct.
    Chairman Manzullo. Was there somebody--no one had a cancer 
or anything serious? It was just an overall 40 percent 
increase?
    Mr. Trotter. That is correct.
    Chairman Manzullo. I presume you shopped.
    Mr. Trotter. I shopped, and the lowest bid that we had was 
roughly 27 percent.
    Chairman Manzullo. One of the things that I have seen 
happen back home is that people have gone out and gotten a 
second insurance company to insure the deductible.
    I would be glad to talk to you afterwards. There is a 
friend of ours that lives in McHenry County--we had a hearing 
in Rockford, remember that, a year ago on health insurance?
    Mr. Trotter. Yes, sir.
    Chairman Manzullo. And the gentleman from Woodstock who 
runs--Phil Bartman, who runs Cellular One, a telephone company, 
portable telephones, testified that I think he had maybe 12 or 
14 employees and that his insurance premium was going to go 
from $8,500 to $16,000. Sitting in the audience was a gentleman 
from Ringwood, Illinois, Scott Shalak, who is an insurance 
salesman. Scott went up to Phil afterwards; and he said, Phil, 
have you considered getting a second insurance company to 
insure your deductible; and Phil had never heard of that.
    He did that, and his increase went from--instead of $8,500 
to $16,000, it went from $8,500 to under $10,000. So it was a 
tremendous amount of shopping that can be done out there. This 
is not touting the constituent's name or something but just 
telling you this is what happens in the area out there when 
people get a little bit ingenious and try to use some different 
models.
    I guess my final comment is, Mr. Alford, it just dawned on 
me that African American-owned small businesses that have a 
majority of African American population as their employees are 
really hit.
    Mr. Alford. Yes, sir. It has a profound effect, and it is--
basically, entrepreneurship, capitalism is the only way out. 
And African Americans people hire their own. So African 
American businesses tend to hire African Americans, Korean 
businesses tend to hire Koreans. So the ethnicity of the 
business activity in that neighborhood means a lot to the local 
economy, whether or not the dollars are circulating in that 
economy and the people are participating or if it is siphoning 
out.
    Chairman Manzullo. In the ratings, because African 
Americans have higher incidents of diabetes, heart disease--and 
there is one another?
    Mr. Alford. High blood pressure. I have all three. Living 
testimony.
    Chairman Manzullo. Do insurance companies rate African 
Americans higher based upon those----.
    Mr. Alford. I don't know of any studies.
    Chairman Manzullo. Do you have ratings statistics on it? 
Maybe it is not a fair question.
    Mr. Alford. I would think if it was a wide pool--our 
insurance is with Aetna U.S. health care. I doubt if it is a 
wide risk. But if it is a tight pool somewhere.
    Chairman Manzullo. I imagine if it was a mom and pop 
operation, they would take a look at it.
    Mr. Alford. It would depend on the insurance; and if it was 
Detroit versus Seattle, I bet it would be a significant 
difference.
    Chairman Manzullo. You guys have been very patient. Thank 
you for coming to Washington. You come from a long distance to 
add a tremendous amount of knowledge and wisdom.
    Members of Congress rely upon your testimony, the things 
that you tell us. Even though our Committee will not write that 
health bill, there are a lot of things that you have said 
today.
    Bob Hughes, with just a very simple statement there on 
automatically reducing health insurance premiums by 15 percent 
as an issue of parity, that is something that could be chewed 
upon immediately with very little hesitation.
    And, Steve, your statement that in the AHP equivalent that 
your State passed that 25 percent of the participants had not 
had insurance before, this really gives credence to the 
guidance to where we want to go with these plans.
    So it is not a matter of theory, it is actually working in 
your State. So, again, thank you for coming.
    The complete statements of the witnesses will be included 
in the record. Anybody that wants to add to the record, you can 
do so. Keep it under 2 pages of not less than 12-point type. We 
will go with 10-point Elite single spaced. We will leave the 
record up for 7 days for any additional statements that have to 
be made.
    Chairman Manzullo. This Committee is adjourned.
    [Whereupon, at 5:00 p.m., the Committee was adjourned.]

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