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



                                                   S. Hrg. 102-000 deg.

   OVERCOMING OBSTACLES FACING THE UNINSURED: HOW THE USE OF MEDICAL 
 SAVINGS ACCOUNTS, FLEXIBLE SPENDING ACCOUNTS AND TAX CREDIT CAN HELP

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

                                HEARING

                               before the

                SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                      WASHINGTON, DC, MAY 8, 2003

                               __________

                           Serial No. 108-13

                               __________

         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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                            WASHINGTON : 2003
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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

               Subcommittee on Tax, Finance, and Exports

               PATRICK J. TOOMEY, Pennsylvania, Chairman

STEVE CHABOT, Ohio                   JUANITA MILLENDER-McDONALD, 
MARILYN MUSGRAVE, Colorado           California
JIM GERLACH, Pennsylvania            FRANK BALLANCE, North Carolina
BOB BEAUPREZ, Colorado               ENI FALEOMAVAEGA, American Samoa
TRENT FRANKS, Arizona                DANNY DAVIS, Illinois
JIM DeMINT, South Carolina           DENISE MAJETTE, Georgia
CHRIS CHOCOLA, Indiana               JIM MARSHALL, Georgia
                                     MICHAEL MICHAUD, Maine

                     Joe Hartz, Professional Staff

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Manzullo, Hon. Donald A., U.S. House of Representatives..........     3
Miller, Tom, CATO Institute......................................     6
Snyder, Kim, Lehigh Valley Chamber of Commerce...................     8
Hall, Keith, National Association for the Self-Employed..........     9
Park, Edwin, Center on Budget and Policy Priorities..............    11

                                Appendix

Opening statements:
    Toomey, Hon. Patrick J.......................................    26
Prepared statements:
    Manzullo, Hon. Donald A......................................    34
    Miller, Tom..................................................    37
    Snyder, Kim..................................................    60
    Hall, Keith..................................................    65
    Park, Edwin..................................................    69

                                 (iii)

 
   OVERCOMING OBSTACLES FACING THE UNINSURED: HOW THE USE OF MEDICAL 
  SAVINGS ACCOUNTS,FLEXIBLE SPENDING ACCOUNTS AND TAX CREDITS CAN HELP

                              ----------                              


                         THURSDAY, MAY 8, 2003

                  House of Representatives,
          Subcommittee on Tax, Finance and Exports,
                               Committee on Small Business,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 2:05 p.m., in 
Room 2360, Rayburn House Office Building, Hon. Patrick J. 
Toomey [chairman of the Subcommittee] presiding.
    Present: Representatives Toomey, Millender-McDonald, and 
Majette.
    Chairman Toomey. The hearing will come to order. Good 
afternoon. Thank you all for being here and welcome to this 
hearing today on the topic of ``Overcoming Obstacles Facing the 
Uninsured: How the Use of Medical Savings Accounts, Flexible 
Spending Accounts and Tax Credits Can Help.'' today we are 
going to take a look at various proposals, all of which are 
aimed are decreasing the distressingly high number of Americans 
who currently have no health insurance. As you are probably 
aware, total numbers approximately 43 million Americans of whom 
about 60 percent of Americans without health insurance are 
either small business owners or employees of small business 
owners. Clearly here in Congress, we ought to be looking at 
this pressing problem and looking to find solutions which will 
create an environment in which these people can find not only 
access to health insurance, but make sure it is affordable for 
them.
    The problem is certainly not limited to small businesses, 
but it does disproportionately affect small business. And part 
of it is a series of unfortunate features in the Tax Code that 
actually make it harder for individuals to obtain health 
insurance than it has to be. Our Tax Code systematically 
restricts individuals from exercising the freedom to purchase 
health care plans that would work best for themselves and their 
families if their employer doesn't happen to offer such a plan.
    Employers, for instance, are able to deduct the full cost 
of purchasing a health care plan for their workers. However 
when an individual looks to either go outside of the company 
plan or if their company does not offer a plan, the individual 
simply cannot deduct the full premium that they pay unless a 
whole number of criteria are met, and even in those cases the 
individual workers bears a cost that the employer does not 
bear. This is one of the many inequities in our Tax Code that 
makes it hard for people who do not have health insurance to 
obtain it and we ought to look at ways to address this problem. 
This inequity in the Tax Code is itself an anachronism left 
over from World War II policies, in other words, it frankly is 
an accident of history and we need to be looking for ways to 
find health care delivery systems that work not just those that 
we have always had.
    One of the reasons this is so important, as the chairman is 
going to testify soon, knows so well is that health care costs 
are simply spiraling out of control. The NFIB has reported that 
health care costs are rising about 15 percent just this year 
alone for employers with fewer than 200 employees and nearly 
that much for those with 500 or more employees. And even before 
these increases for this year small businesses were already 
struggling to keep health care costs affordable for themselves 
and their employees. We need to keep in mind small businesses 
have a particularly difficult burden because the administrative 
overhead, the insurance company underwriting expenses, adverse 
selection problems, all of these make it harder for small 
businesses to obtain the health insurance that they would like 
to be able to provide for their workers.
    Now there may not be a single simple solution to this, but 
there are probably a number of ideas that we can promote which 
will together help to alleviate this problem. I think removing 
the current restrictions on medical savings accounts, in 
flexible spending accounts and increasing tax relief focused 
specifically towards the purchase of health insurance will 
certainly be very, very helpful in all of those respects. And 
today we will be focusing specifically on the expanded use of 
MSAs and FSAs as well as increasing tax relief for health care 
in general.
    We are very fortunate to have with us today the chairman of 
this Committee, Chairman Don Manzullo. And I want to first 
thank the chairman and recognize the enormous contribution he 
has made to bringing attention in this Congress and in previous 
congresses to the problems that face the small business 
employees, employers and all of the millions and millions--tens 
of millions of Americans whose livelihoods depend on the 
success of small business.
    In particular, Chairman Manzullo is going to be sharing his 
views on his bill H.R. 1873, the Self-Employed Health Care 
Affordability Act of 2003, legislation that he recently 
introduced and that would provide for the deduction of health 
insurance costs for self-employed individuals when determining 
the self-employment tax. This, if I could add my editorial 
comment, Mr. Chairman, I think is an excellent bill. Clearly 
what this does is it eliminates an inequity in the Tax Code, a 
disadvantage that the self-employed currently unfairly suffer 
with. And I commend you for your leadership on this issue for 
introducing this bill. And at this point, I would recognize the 
gentleman from Illinois, my chairman, Mr. Manzullo for his 
testimony.
    [Mr. Toomey's statement may be found in the appendix.]

  STATEMENT OF THE HON. DONALD MANZULLO, A REPRESENTATIVE IN 
 CONGRESS FROM THE STATE OF ILLINOIS, CHAIRMAN, U.S. HOUSE OF 
            REPRESENTATIVES SMALL BUSINESS COMMITTEE

    Mr. Manzullo. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here. We held a hearing in the full Committee 
about a month ago, and Bob Hughes, who is the president of the 
National Association for the Self-Employed asked a rhetorical 
question. At that hearing, he said how would you like to lower 
the cost of health insurance for the self-employed immediately 
by 15 percent? And I said well, you know, how do you do that? 
And he said, well, a corporation does not pay FICA tax on the 
very dollars that it uses to buy health and accident insurance, 
but a self-employed person does.
    And that means that for the money that is used to purchase 
health and accident insurance by an unincorporated self-
employed person, that individual, that proprietor, sole 
proprietor pays 15.3 percent FICA tax on top of the very 
dollars that he is using to buy health and accident insurance. 
So we were--I was obviously intrigued with the idea of reducing 
health costs 15 percent across the board. My brother is a sole 
proprietor and runs a family restaurant. He is a modest man. He 
calls it Manzullo's Famous Restaurant. But he is proud of the 
fact he has 13 tables and 13 bar tools and he offers no health 
and accident benefits to his employees.
    He is only opened on weekends, which is very interesting. 
And just to buy premiums or just to pay for the premiums on the 
health and accident insurance that he has to pay for him and 
his wife, it is $1,000 a month. And he has been shopping around 
trying to get different prices, but bottom line, if he is 
paying a $1,000 a month for health and accident insurance, he 
is paying an extra $150 more for that same policy than if he 
were an employee and the corporation were buying that policy 
and it was at the same price.
    Obviously, it would be cheaper by the corporation because 
more people would be involved in the pool. And so here is a guy 
who is not incorporated, penalized because he is not 
incorporated and we try to come up with a plan. First idea was 
well, maybe there is a bill out there, a vehicle, that you 
simply eliminate the payment of the FICA tax as with 
corporations. That would have a huge dent in the Social 
Security trust fund. So what this bill does, it allows our 
nation's 16 million self-employed business owners to deduct 
their health insurance expenses when calculated on payroll 
taxes, which consists of payments to Social Security and 
Medicare.
    It is above the line as opposed to being below the line. It 
is almost revenue neutral. It comes up 1 to 2 billion short. 
And as with other legislation that involves the Social Security 
trust fund, that can be compensated for by transfers from the 
general revenue fund to the Social Security fund. And what this 
essentially does is anything that we can do to make health 
insurance more affordable for small business people, this could 
be the difference between somebody buying a policy of insurance 
or not. This could make the difference between somebody 
canceling a policy of insurance or keeping it going.
    And obviously, even if a relatively small percentage of the 
people that are uninsured now decided that they could afford 
insurance, this makes the overall insurance pool larger, less 
cost shifting and eventually brings down everybody's premium. 
This is a very, very simple bill. And it is the type of thing 
where you draw the bill and you ask yourself, you know, why did 
it take so long to come up with a bill that is this simple. And 
I think it has a lot of traction. Farmers, self-employed, 
independent contractors, anybody who pays 15.3 self employment 
payroll tax will reap considerable savings from this 
legislation. We drafted the legislation. Gave it to Nydia 
Velazquez, the ranking Democrat member of the Committee. She 
embraced it immediately. And our goal is to take this. And when 
we get towards the conference between the House and the Senate, 
throw that into the mix and say, you know, when you are talking 
about the 350 billion or 550 billion, you know, 1 to 2 billion 
a year to get rid of this disparity between the self-employed 
incorporations, it would be a pretty good investment for our 
Nation's small business people.
    [Mr. Manzullo's statement may be found in the appendix.]
    Mr. Toomey. Thank you, Mr. Chairman. I would like to follow 
up on that point because another way to look at this would be 
the cost of this bill compared to the total amount of revenue 
that the Federal Government is expected to take in annually, 
which, as you know, is well over $2 trillion.
    Mr. Manzullo. That is a lot of money, even if you are from 
Pennsylvania.
    Chairman Toomey. Yeah. Even if you work for the Federal 
Government, that is a lot of money. So if I understand you 
correctly, the total cost per year would be a maximum of $2 
billion. In the context of a budget that exceeds 2 trillion, 
what you are saying is this would cost the Treasury less than 
1/1,000th?
    Mr. Manzullo. Whatever the percentage is, but you could 
also compare that to the tax cut that is before--I mean this, 
in effect, is a stimulus.
    Chairman Toomey. Another question. The individuals who 
would benefit from this, the self-employed individuals, am I 
correct in understanding that the Tax Code currently 
acknowledges that they ought not to have to pay income tax on 
the health insurance premiums that they purchase for 
themselves? That is a deductible expense. But yet, for some 
reason that is a mystery to me, it does force them to pay the 
equivalent of the payroll tax.
    Mr. Manzullo. Depends at what point you deduct it. And 
here, it is--I guess the word often used is above the line as 
opposed to below the line on it. But it is deducted so that it 
works towards a situation where you are not really going to be 
paying tax on that. And then you have that 1 to 2 billion 
dollars a year that is in a revenue transfer that keeps the 
Social Security fund intact.
    Chairman Toomey. In other words, if your bill is enacted, 
passed and signed into law, the net effect would be that a 
self-employed individual would be finally on a level playing 
field paying the same kinds of taxes as the employer and worker 
at a corporation.
    Mr. Manzullo. That is correct.
    Chairman Toomey. So all you are trying to do, you are not 
trying to create a special advantage or a tax subsidy or any 
incentives per se, you are just trying to level the playing 
field versus a corporate situation?
    Mr. Manzullo. That is correct.
    Chairman Toomey. Could you just elaborate a little bit more 
on the issue of transferring revenues from the general fund to 
the Social Security trust fund. How would that work and what is 
the purpose of that?
    Mr. Manzullo. Let me read the answer prepared by my very 
competent staff, because I want to make sure I get this 
correct. The deduction for health insurance premiums provided 
under the bill means that some slightly lower amount will be 
paid into the Social Security trust fund. To ensure that the 
Social Security trust fund is not adversely impacted, the bill 
provides for an annual payment from general revenue, one 
government account to the Social Security trust fund, another 
government account. This is a standard provision frequently 
used in tax bills that affect the Social Security trust fund.
    Chairman Toomey. So the net effect of your bill on the 
Social Security program, the Social Security system, the 
funding thereof is zero?
    Mr. Manzullo. That is correct. That is correct.
    Chairman Toomey. I didn't have any other questions, Mr. 
Chairman. Did you have any closing statement you would like to 
make?
    Mr. Manzullo. The name of the bill, it is the Self-Employed 
Health Care Affordability Act of 2003, and it is H.R. 1873. And 
thank you for inviting me. Let me give you the names of the 
organizations that are behind this bill. National Association 
for the Self-Employed, the National Federation of Independent 
Businesses, American Farm Bureau Federation, National Small 
Business United, Small Business Legislative Council, Women 
Entrepreneurs Inc., Women Impact and Public Policy, 
Communicating for Agriculture and the Self-Employed, National 
Association of Women Business Owners, American Small Business 
Alliance and U.S. Chamber of Commerce. I think this is really 
exciting. I think it is something that has a lot of traction. 
And as I said, we will try to throw it into the mix during the 
conference. And this thing will be a real home run.
    Chairman Toomey. I am happy to be a co-sponsor of the bill. 
Thank you very much for your testimony today and for your 
leadership on this bill, and at this point, I will call up the 
second panel.
    Mr. Manzullo. Thank you.
    Chairman Toomey. We have a little challenge with the voting 
schedule. A vote was just called. My understanding is that we 
have a 15-minute vote followed by 10 minutes of debate, then 
followed by two subsequent votes, one of which will probably be 
15 minutes, the other of which will be 5. So I am afraid we are 
going to have a significant interruption during the course of 
this. What I would do is introduce the second panel. Ask the 
first witness to testify and at that point, we will have to 
break, certainly no later than that and we will come back and 
resume the testimony.
    To begin our second panel, we have Mr. Tom Miller, who is 
the Director of Health Policy Studies at CATO Institute. Mr. 
Miller has written and lectured extensively on the use of tax 
advantage mechanisms for health insurance. We are fortunate to 
have him with us here today. We have Mr. Kim Snyder, President 
of Eastern Industries, Incorporated, based in the Lehigh Valley 
of Pennsylvania. My constituent and my friend, welcome, Mr. 
Snyder. Mr. Snyder is also the Chairman of the Board of 
Governors at the Lehigh Valley Chamber of Commerce.
    Also sitting on our panel is Mr. Keith Hall. Mr. Hall is a 
self-employed CPA based in Houston Texas. That is a true micro 
business. And I am pleased to hear your testimony. And rounding 
out our panel we have Mr. Edwin Park, senior health policy 
analyst at the Center on Budget and Policy Priorities.
    At this time, I would recognize Mr. Miller for five 
minutes.

STATEMENT OF TOM MILLER, DIRECTOR, HEALTH POLICY STUDIES, CATO 
                           INSTITUTE

    Mr. Miller. Good afternoon, Mr. Chairman and members of the 
Subcommittee, I am Tom Miller, director of Health Policy 
Studies at the CATO Institute. It is a pleasure to appear 
before you today. Removing or redesigning restrictions on the 
availability of medical savings accounts, flexible spending 
accounts and tax credits for health insurance would improve 
access to affordable health insurance and health care for 
millions of uninsured Americans. Even more progress could be 
achieved by providing broader parity in the tax treatment of 
health insurance financing for all purchasers--reducing 
artificial tax and regulatory barriers to market-based value 
maximizing choices and empowering all health care consumers to 
match their own needs and preferences to a wider variety of 
affordable options.
    The relatively higher cost of small group insurance 
coverage for comparable benefits is one of the primary reasons 
why many small employers don't offer it and some of their 
employees don't demand it. Market-based public policy can't and 
shouldn't overcome all of the natural cost differentials 
between large and small employers that may be due to the 
stability, size and composition of a given employer's pool of 
insurable workers as well as any relative economies of scale 
and benefits administration.
    But tax and regulatory policy should, at a minimum, avoid 
making those cost differentials greater than they need to be. 
One of the primary factors driving health care costs higher in 
the past has been the increased share of medical bills paid by 
third-party payers, such as private health insurers, employers 
and government health program administrators. It insulates 
individual consumers from the real costs of their health care 
decisions and treatment. The centerpiece of market-oriented 
health care that can reverse this trend remains medical savings 
accounts. Less comprehensive insurance coverage under MSA plans 
would mean more affordable coverage for most Americans, 
including a larger fraction of people with low incomes.
    MSAs help control costs, improve access to health care, 
expand consumers' choice in control of their care and increase 
savings. Moreover, MSAs' improved health plan option is not 
just for affluent and healthy individuals, but for all 
Americans. However, the potential of MSAs has been hampered by 
eligibility limits and other design flaws mandated by HIPPA. 
Congress needs to allow an unlimited number of people to have 
MSAs and to expand Archer MSA eligibility to include employees 
and businesses of all sizes as well as employees without any 
employer sponsored insurance.
    Now, regarding flexible spending accounts, allowing unspent 
balances in FSAs to carry forward into the next year without 
being forfeited or subject to taxes would remove the most 
flawed incentives under their current rules, eligible workers 
who become more likely to participate in FSA options and to 
dedicate more funds to them. Enabling workers to invest their 
fund balances and providing full FSA portability as they change 
jobs also would encourage a further restructuring of private 
health insurance markets.
    FSAs could become the primary vehicle for financing medical 
procedures and health services that involve relatively 
predictable expenses and are easily foreseeable in the future. 
Regarding tax credits, more than 50 years of health policy, 
history should remind us of the costs as well as the benefits 
of the special tax treatment of employer sponsored insurance. 
The best way to remove tax policy distortions in health 
insurance markets would be to eliminate tax subsidies for 
employment-based health insurance altogether matched by 
equivalent reductions in marginal income tax rates.
    But the next best policy would be to offer a new Federal 
tax credit option, most likely amounting to 30 percent of the 
cost of qualified insurance coverage. This new option would not 
eliminate the current tax exclusion, it would provide a 
competitive alternative for workers to opt for in place of the 
tax exclusion. It would encourage a more gradual transition 
toward other forms of private insurance coverage. The tax 
credit option also would be made available to other individuals 
and families that currently don't qualify for the tax exclusion 
because they lack access to employer sponsored insurance 
coverage.
    Now if Congress feels compelled to provide refundable tax 
credits to lower income Americans for reasons that tend to blur 
universal coverage goals with income redistribution objectives, 
why not simply provide equivalent income support through more 
targeted delivery of fungible cash vouchers and then 
concentrate on implementing broader health policy reforms and 
improving the availability of more affordable health insurance 
options in private markets.
    In any case, new tax subsidies for health insurance 
purchasing should pass through directly to individual consumers 
rather than be used as initial sweeteners to induce employers 
to maintain or establish job-based coverage. Thank you.
    Chairman Toomey. Thank you, Mr. Miller, for your testimony.
    [Mr. Miller's statement may be found in the appendix.]
    Chairman Toomey. We are now down to about 5 minutes before 
our vote. At this time, the Committee will recess until the end 
of the series of votes. And then we will resume our work 
immediately following the last in the series.
    [Recess.]
    Chairman Toomey. The Committee will come to order. I would 
like to thank the witnesses for their patience. It was quite a 
long delay and interruption. But as you know, we have no 
control over the voting schedule here, so I appreciate you 
bearing with us. And at this point, I would like to recognize 
my friend and the gentleman from the Lehigh Valley of 
Pennsylvania, who has provided some great leadership on the 
Board of Governors of the Chamber of Commerce, if I might 
observe. Welcome, Mr. Snyder, and we welcome your testimony.

  STATEMENT OF KIM SNYDER, BOARD OF DIRECTORS, LEHIGH VALLEY 
     CHAMBER OF COMMERCE, PRESIDENT OF EASTERN INDUSTRIES 
                          INCORPORATED

    Mr. Snyder. Thank you, Congressman. As you have alluded to, 
my name is Kim Snyder and I am chair of the Lehigh Valley 
Chamber of Commerce. And I am here to testify on behalf of our 
4,000 members. As you know, the Lehigh Valley Chamber of 
Commerce is the second largest, fastest growing Chamber of 
Commerce in the State of Pennsylvania. We pride ourselves on 
that. And we also pride ourselves on the fact of the 4,000 
members, 3600 are actually small businesses. And as you can 
imagine, insurance is a major issue. One of the reasons why we 
are not only the largest and fastest growing, but have one of 
the highest retention rate in the Nation is because we work 
hard at serving our members, and we have been working hard with 
regards to health insurance for our members.
    As I mentioned, 3600 of our members are small businesses 
and it is a real struggle for them. We have a team of 
volunteers and staff that work year end and year out to try to 
secure a health plan which is affordable. It is a struggle. Of 
those 3600, 700 find the insurance we are able to procure for 
them affordable. We estimate that another thousand have 
insurance through other means or other carriers. But what that 
means is that there are 1900 members of our Chamber we are 
estimating that do not have health care. Now it is a growing 
problem. There has been a lot of discussion and debate not only 
nationally, but on a statewide basis, as you know, with regards 
to how do you tackle this health care cost issue, and it is a 
big problem.
    And I don't think there is any one big quick fix that can 
take place in a very short period of time. Having said that, 
there are a couple of instruments that are available now that 
would go a long way to helping small business if there were 
some small, in my opinion, small modifications made to them, 
and of course, I am talking specifically about MSAs, FSAs and 
some tax credits for small business.
    First let me talk about MSAs. They are a great vehicle. 
They could be much better. The fact of life is that a lot of 
our members do not participate. They perceive there are 
barriers to entry. One is, it is not permanent, it is 
temporary. And they want to know that there is something there 
that they can count on for years to come. And we need to take 
this program and get it out of the pilot phase and make it 
permanent. Once that is done however, there are a couple of 
things.
    First of all, what we need to do is lower the deductibles. 
The fact of life is that statistics show that a majority of the 
folks that do have MSAs never get to the point where they 
exceed their deductibles and therefore they see, you know, most 
people know that and they don't see any need to join. We would 
recommend that you reduce the deductibles for individuals down 
to $1,000 annually and for families, $2,000. Now keep in mind 
that those who have tried the MSAs, over 70 percent of those 
that are now in the program were not insured before. And of 
that 70 percent are not only individual employees but families. 
So you are talking about spouses and children also. So 
obviously, there is some real value there, but because of these 
roadblocks, not everybody is taking advantage of them. The 
other thing is there is a restriction, as you know, that either 
the employer or the employee contribute and not both. If you 
remove that restriction, it would go a long way in promoting 
this good plan.
    The flexible spending account, it needs to be flexible. As 
you know, you have to estimate how much to put in and if you 
don't spend the money by the end of the year, you quote, 
unquote, ``lose it.'' people think we are gambling with their 
money. In essence, they are. At the very worst, what happens is 
that at year end what they do is go out and try to get products 
and services to spend the money rather than--because they don't 
want to lose it and that is not smart health care purchasing 
either. What we believe should happen is allow for rollover, so 
any unused portion of FSA that is still in the account can be 
rolled over in following years. That is also important because 
health care costs have gone up and we believe will continue to 
go up and they will need more resources to take care of those 
additional costs in the future. This will help offset that.
    We also need to have a provision where they can take it 
with them. If somebody goes from one job to another, they can 
carry any unused balance with them as an individual.
    And finally tax credits. There are people on the panel that 
are much more qualified than I am to talk about those 
particular issues as far as tax credits for small business, but 
I can tell you there are members saying that they follow what 
the national trend is and studies that have been carried on 
with small business folks and a vast majority of them would be 
much more open and much more willing and would pursue actually 
buying or procuring health care benefits for their employees if 
there was a tax credit associated with getting that health 
care.
    So I think in the short-term, until the larger problem of 
the whole health care costs and issues facing us in the next 
couple of years is taken care of, I think these fixes taken 
care of right away will go a long way of not only keeping the 
uninsured ranks from growing, but actually shrinking them when 
you are talking about our small business owners.
    Chairman Toomey. Thank you very much Mr. Snyder.
    [Mr. Snyder's statement may be found in the appendix.]
    Chairman Toomey. At this time, I would be happy to welcome 
and to recognize Mr. Hall for his testimony.

  STATEMENT OF KEITH HALL, NATIONAL ASSOCIATION FOR THE SELF-
                            EMPLOYED

    Mr. Hall. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here. Again, my name is Keith Hall. I am a 
CPA and a small business owner. And I am here representing the 
National Association for the Self-Employed, an organization 
that I have been a member of for over 10 years. One of the main 
goals of the NASE is to combine the influence of the over 
250,000 self-employed and micro business owners that they 
represent with the voice of those micro business owners can be 
heard. Now this is a voice that doesn't ask for special favors 
or special tax incentives. It is a voice that only asks for the 
same opportunity for success that is afforded to big business.
    The voice of the self-employed is not always loud, but it 
is always big. There are currently over 18 million self-
employed and micro business owners. And these people create 
over one-third of all the new jobs in this country. This group 
also employs over 12 million other workers which comprise over 
$309 billion of annual payroll. This is a big voice. A major 
issue faced by these micro businesses is the ever increasing 
cost of health coverage, which is what we are here to talk 
about. The situation for the small business is critical. 
According to a June 2002 survey released by the NASE, 7 out of 
10 micro businesses don't provide health coverage for their 
employees and don't have coverage for themselves. The main 
reason for this decision is the cost of the coverage. 
Participants in the survey say the situation is getting worse 
because not only do they continue to see double digit increases 
in the premiums, but the coverages are decreasing and their 
options are decreasing.
    I am here today on behalf of the NASE to voice its strong 
support for health care tax credits and also H.R. 1873, the 
Self-Employed Health Care Affordability Act of 2003. This is a 
bill that has as its sole goal providing small business with 
the same opportunity for success as big business has in 
affording quality health care coverage. As with most of us 
here, I wear a lot of different hats. I am a father and a 
husband. I run a small business. I am the treasurer of my 
Sunday school class. I serve on two corporate boards of 
directors and I am in office of my kid's high school booster 
club. But today, I am concerned about the cost of health 
coverage for my family. I pay about $600 a month for health 
coverage, which is a little over a 7 grand a year, which is 
pretty reasonable because a lot of self-employed pay as much as 
$13,000 a year. Now it is time for me to prepare my tax return.
    Those premiums are deductible, but they are only included 
on the face of my tax return. They don't get deducted on the 
self employment tax side of my tax return. Big businesses get 
to deduct the health insurance premiums for their officers and 
employees before any tax is taken into consideration. So what 
does that really mean? The bottom line is before anything else 
is considered, my health insurance costs 15.3 percent higher 
than the guy next to me just because I am self-employed. 
Everything else may be exactly the same. He may have the same 
family size, the same medical history, the same health 
concerns, even the same weight problem that I have, but just 
because I am self-employed, I have to pay 15.3 percent higher. 
That is a little over $1,200 a year just for me and my family.
    And small business, the self-employed is the only group 
that has to pay the extra tax on the health insurance. Imagine 
going to a movie and the guy in front of you pays $14 for 2 
tickets for he and his wife. When you get to the window, the 
clerk says that will be 16 bucks just because you are self-
employed. Same person, same movie, same seat, same popcorn, 
everything is the same, but it costs you 15 percent more. It 
doesn't make sense. The cost differential is not designed to 
influence the buying habits of the consumer like a cigarette 
tax or an alcohol tax. The difference is not designed to 
provide assistance like with the earned income credit or the 
child tax credit. It is just a differential that is in the Tax 
Code that I think has been overlooked until now.
    I am certainly not a health care expert, and I am not an 
insurance expert, but it is my bias that affordable health care 
in the United States in 2003 is a tough issue. The members of 
this Committee, and on a larger scale the members of the House 
and the Senate as a whole, are asked to make tough decisions 
everyday. As an average American, I greatly appreciate the 
efforts you guys go to to make those tough decisions. I can 
only guess how refreshing it must be when an easy decision 
comes along. From where I stand H.R. 1873 is an easy decision 
that just happens to be wrapped up in a very tough issue.
    Providing the small business guy with the same benefits big 
business has is the right thing to do. And it immediately will 
provide a 15 percent cost savings to millions of small business 
owners. There is no reason why my movie ticket should cost more 
than the guy next to me and the same goes for my health 
coverage. The NASE strongly supports the bill. They know that 
there is no silver bullet that can fix everything. The NASE 
also supports health tax credits which can be the beginning to 
addressing the bigger issue of health care affordability. We 
also support SAVE, the Act sponsored by Kay Granger and Albert 
Wynn.
    And we most importantly support proactive efforts in 
finding solutions to this problem. I really appreciate the 
opportunity to be here. Thanks again for all that you guys do 
at the bigger level for working so hard to keep this country 
strong and healthy and helping people like me to afford it.
    Chairman Toomey. Thank you, Mr. Hall, for your testimony.
    [Mr. Hall's statement may be found in the appendix.]
    Chairman Toomey. At this time I would welcome and invite 
the testimony of Mr. Park.

 STATEMENT OF EDWIN PARK, SENIOR HEALTH POLICY ANALYST, CENTER 
                ON BUDGET AND POLICY PRIORITIES

    Mr. Park. Thank you, Mr. Chairman. I would like to thank 
the chairman and ranking member for the opportunity to testify 
today. My name is Edwin Park and I am a senior health policy 
analyst at the Center on Budget and Policy Priorities. The 
Center is a nonprofit policy institute here in Washington that 
specializes in fiscal policy and in programs and policies 
affecting low and moderate income families. My testimony 
focuses on two tax proposals that are the subject of today's 
hearing, medical savings accounts, MSAs, and refundable tax 
credits for the purchase of health insurance in the individual 
market.
    Both were part of the administration's fiscal year 2004 
budget. While both proposals are intended to expand coverage to 
the uninsured, any gains in coverage are likely to be 
outweighed by the adverse effects these proposals impose on the 
traditional employer-based health insurance system. Let us 
first look at proposals to make the use of MSAs more 
widespread. MSAs can make the premiums that employers pay for 
traditional health insurance plans rise substantially. People 
who are quite healthy can find MSAs attractive. If they do not 
expect to need much health care, they may prefer a high 
deductible policy.
    In addition, unlike IRAs, there are no income limits on 
MSAs that prevent wealthy people from making tax deductible 
contributions to MSAs. Healthy people with higher incomes can 
find MSAs additionally attractive because of their benefit as a 
tax shelter. If MSAs are made widely available, then young 
healthy people may choose to participate in substantial 
numbers, but older and sicker people would want to stay in 
traditional health insurance plans which generally require low 
deductibles and copays and provide comprehensive benefits. 
Because the traditional insurance pool would then have high 
risk, premiums will increase perhaps substantially making such 
coverage increasingly unaffordable.
    At the same time, it is unlikely that many more people 
would gain coverage as a result. I note that small businesses 
are already able to offer MSAs, yet, in general they provide 
traditional health insurance plans or unfortunately do not 
offer any coverage at all. Let us now look at individual tax 
credits and how they would affect the traditional employer-
based health insurance system. The availability of the tax 
credit can lead to some employers to drop coverage for their 
workers and can induce many new employers not to offer 
coverage.
    The credit is also likely to draw younger, healthier 
workers away from employer coverage into the individual market. 
This leaves older, sicker workers behind driving up the average 
cost of employer based insurance. In response, employers may 
raise employee contributions leading even more younger, healthy 
workers to opt out. An insurance death spiral could result in 
which employers can no longer afford health coverage. Because 
small business premiums rise faster than average, they would be 
especially vulnerable to these increases. Many workers with 
health insurance now, especially those who are older and 
sicker, could therefore become uninsured.
    While some young and healthy people may be able to gain 
coverage through tax credits, many of the uninsured who are 
often in poor health may still remain without health insurance, 
even with the availability of a tax credit. That is because the 
individual market is generally unregulated. Insurers can vary 
premiums based on age and medical history, so-called medical 
underwriting, and can exclude people entirely. A family 
containing old or sick members could find itself excluded from 
coverage in the individual market or charge premiums that are 
unaffordable, even with a credit.
    Alternatively, such a family could be offered a plan that 
is affordable but does not provide coverage for a variety of 
significant medical conditions. Many plans in the individual 
market do not offer comprehensive coverage. They may require 
high deductibles, impose significant cost sharing and provide 
minimal benefits. Even if an individual can't find a policy in 
the individual market, the proposed tax credit is not likely to 
make insurance more affordable. In order to obtain 
comprehensive benefits, even healthy individuals and families 
using the credit may have to pay 15 to 30 percent of their 
total income just to pay the premiums. Yet, for example, many 
of the uninsured workers and small businesses have low wages 
and are not likely to be able to afford health insurance in the 
individual market.
    If one wishes to address the problem of the uninsured 
through the Tax Code without undermining traditional employer-
based health insurance, a superior alternative would be a tax 
credit provided to small businesses directly to help them 
subsidize the cost of their health insurance premiums. 
According to the survey by the Kaiser Family Foundation of 
small businesses, 89 percent of small businesses support this 
kind of approach. An employer credit would have the benefit of 
bolstering the ability of small businesses currently providing 
traditional health insurance to continue to do so. It could 
also encourage small businesses now unable to offer coverage to 
begin to provide health insurance benefits for the first time.
    Such a credit would be most cost effective if the credit 
was targeted to the small businesses than most need financial 
assistance. These would be businesses with the fewest workers 
and a substantial number of low wage workers who are the ones 
least able to provide health insurance now. The employer credit 
could, therefore, produce gains in coverage without the adverse 
effects associated with MSAs and individual tax credits. Thank 
you very much. And I look forward to answering your questions.
    Chairman Toomey. Thank you, Mr. Park, and I appreciate your 
testimony and the diversity of opinions that we have this 
afternoon.
    [Mr. Park's statement may be found in the appendix.]
    Chairman Toomey. I would like to begin the questioning with 
a question for Mr. Miller. It seems that Mr. Park has made an 
observation about--if I could paraphrase in a way the 
importance of relying on the traditional employer-based system, 
but it seems to me that, in some respects, this is the very 
system that contributes to some of the problems, which is to 
say it is one aspect of the dominance of third party payers 
that separates the patient from the role of the consumer. And I 
am wondering if you could comment on whether--some of the 
problems that arise as a result of a dominant reliance on third 
party payers.
    Mr. Miller. Well, the larger--it is almost fourth party 
payer when you get into the employer-sponsored system because 
you have both the effect of the employer first making the 
selection of insurance and then the insurer to the extent that 
insurance is comprehensive insulating the direct consumer of 
care from the full cost of it. I think a larger context of this 
is, some employers do a good job and others don't. However, to 
strain and struggle so much to prop up the smallest employers 
to pose as would-be organizers, administrators and selectors of 
insurance has got it exactly backwards. You are trying to prop 
up a pool that doesn't really exist. It is too small.
    We certainly should treat small employers in an equivalent 
manner as we do other employers, but to create a kind of an 
artificial tax subsidy to pretend that the small employers are 
the best people to determine what the benefits are for their 
workers is kind of counterproductive. You are not going to have 
any choice of benefits in those type of small employment 
arrangements. It is going to be one choice at best. The 
bargaining power is not there. The administrative capabilities 
are not there. We may be replacing what used to be the AFDC, 
Aid to Families With Dependent Children, to a new version of 
ASBDW, Aid to Small Businesses With Dependent Workers.
    I just don't think that has much to go in that regard. Some 
of the other things that he mentioned briefly--the evidence 
actually is that this would be a death spiral of adverse 
selection doesn't show up in MSAs. Aside from the MSAs that are 
currently in the marketplace, we had the same allegations made 
about the health reimbursement accounts, yet the experience 
would say that in the plans is the workers tend to be as old or 
older than the other workers. There is no indication of some 
segmenting relative to risk. In fact, if you look at the 
lifetime experiences as opposed to year-to-year experience, 
people get sick for a while and then they get healthy.
    If you stay in an MSA for a long period of time, you would 
end up netting a benefit from it. People are not chronically 
sick on an endless basis. In addition, people who suffer from 
particular unique conditions would like to have the flexibility 
to choose the treatment and doctor that they want which is much 
more conducive with an MSA where you can spend your money as 
you wish and also have the ability of a relatively unrestricted 
catastrophic insurance plan.
    So I think it stands on its head in terms of that analysis.
    Chairman Toomey. Mr. Snyder, you represent 3,600 companies 
that are members of your organization. Two questions for you, 
one is of all the challenges that they face, and there are an 
awful lot of challenges for small businesses, especially in the 
current economic environment we are in, approximately how high 
does affordable health care rank. Is it in the top handful of 
issues that these folks are struggling with. Is it a topic that 
is on docket pretty much each and every time the Chamber board 
gets together. Is this a priority concern? And that is one 
question.
    You listed several barriers that you think are obstructions 
that would--that if we removed them, would encourage greater 
use of MSAs. What do you think is the greatest single barrier.
    Mr. Snyder. Well, the first question, the answer is yes. 
This is a constant struggle for our small business members for 
two reasons. First of all, it is cost prohibitive in many 
instances for them to afford health care, and these are 
possible alternatives, but for the reasons I stated previously, 
they are reluctant to do that. But it goes beyond the concern 
of providing health care for their employees when it comes down 
to attracting new employees. The fact is they can't afford 
insurance and that is a barrier to getting qualified people to 
come and help their business grow and thrive. Add that on to 
the ever-increasing cost of health care insurance and so on, as 
you can imagine, it is a topic every month in the Chamber and 
how we can better help our people.
    With regards to--I don't know if I can give you an answer 
as far as what the number one item is. I think it depends on 
the individuals we talk about as far as MSAs. I do know they 
also perceive it and it makes them better consumers. They 
perceive it as their money, therefore they work much closely 
with their health care providers in making sure it is the 
smartest thing to do. And we know that because it is their 
dollars, they are willing to spend more time and efforts 
considering wellness issues and preventive care issues, things 
of that nature.
    I can tell you with my company where we are not a small 
business, and we provide health care, at least we do today 
that, you know, those kinds of issues don't come into play when 
it comes to controlling the health care costs, and there is 
always a third or fourth party that is intervening and so on.
    So I think there is a lot of positive effects to these MSA 
accounts that are of value. And I can tell you with regard to 
all the folks that I know that are in business, the issue is 
not is there an alternative, like MSAs as far as providing 
health care in the future or not, the issue is can we afford 
health care insurance anymore? And more and more of us are 
saying no.
    Chairman Toomey. My time for questioning has expired. I do 
have some other questions. I will wait until the second round 
of questioning. At this time, I will recognize the gentlelady 
from California and ranking member.
    Ms. Millender-McDonald. Let me first apologize for my 
absence earlier because I had an amendment on the floor and 
then I had a markup and then the bell rang, and I had to run to 
the floor. So for all of you who have testified before my 
coming in, I apologize I did not hear you, but I have read some 
of your testimony. I want to ask all of you--you know, Mr. 
Miller, this is really not a laughing matter, it is really a 
very deep concern of the small businesses in my district. And I 
suppose we get to the bottom of what do we define as a small 
business and we go from that vantage point as to whether or not 
we can afford all of these MSAs and the flexible spending 
accounts and all of those that has been outlined here.
    It is important to address, though, the current state of 
the health care crisis, especially for small businesses, if we, 
again, talk about all small businesses and we are talking 
minority women and others and we are talking about from the mom 
and pop stores to the ones that have, I suppose, 50 or more 
employees. And I think where we have to have some dividing 
lines because really when you talk about that person who is 
trying to stay or sustain as an entrepreneur as opposed to one 
who are sustained and really have a bottom line profit, if you 
will, we are talking about two different types of small 
businesses. And we look at six out of every ten uninsured 
Americans are in families headed by workers who are self-
employed or work in a firm with less than 100 employees.
    So how can this help that minority who has this type of 
scenario, fewer than 100 employees, and is trying to stay on 
board to break even in some cases or maybe have a slight bit of 
a profit. How would these MSAs or flex savings accounts help 
them?
    Mr. Miller. Well, to take them in pieces, the medical 
savings account allows the small employers to do what the 
employers can do best, first stay in business, continue to 
offer a good job to the employees the best they can, and 
provide the best value insurance choice that they can afford. 
It ultimately is the total value of what is produced in the 
enterprise and the worker who is working there. The money is 
not coming from some independent realm. By combining the lower 
cost premium of a higher deductible insurance policy we are 
targeting the dollars for insurance to where they can do the 
most good, the greatest need which is high cost, serious 
medical conditions, which is what insurance at a minimum should 
be there to protect you against.
    In addition, it allows the opportunity to better manage 
your own compensation dollar to be able to devote it and target 
to the type of health care expenses that the individual worker 
believes delivers the best value to them. And over time, as 
they manage their health care most effectively they reap the 
rewards from that. That is what the accumulation of funds and 
the MSA or the opportunity to spend it on other types of out-
of-pocket health care would allow them to do. It doesn't allow 
the business to have more money than it was currently was 
earning. It doesn't allow the employee to have a higher wage 
than they had, but they get to find better value for that same 
amount of the compensation dollar.
    Ms. Millender-McDonald. How would you--and I am interested 
in trying to give some tax credits to small businesses. To me 
that is the first and foremost of helping them. When we talk 
about obstacles, those obstacles to me start with some type of 
tax credit. Now are you amenable to that before we get into the 
other proposals we have here today.
    Mr. Miller. I think we need to think about who is in need 
and what that need is based upon. Just because there is a small 
business I am not quite sure why they step up to the window and 
say feed me first. What is the small business supposed to be 
doing? It is running a business for a profit. Unless we wish to 
subsidize every small business in the country which doesn't 
have a positive profit picture, I am not quite sure what the 
theory in that regard entails. There may be workers in those 
companies who might need assistance, or at least be able to 
gain the same type of tax assistance that other workers do, but 
that is a different issue than saying in effect that somehow 
they move in front of the income subsidy line.
    We have people who are disabled. We have people who are 
very low income who are not adequately being served in the 
traditional public program.
    Ms. Millender-McDonald. Let us get real. We are not talking 
about subsidies per se, we are talking about tax credits that 
will enable them to go into a type of health based or a health 
insurance type of policy or proposal. But we are not talking 
about a subsidy. We don't talk about subsidies when we talk 
about the higher end of the tax credit being given to business. 
We are talking about tax credits to afford them the opportunity 
to do other things with the funding they would otherwise have 
to pay in taxes.
    Mr. Miller. The current Tax Code says if you are a 
business, ordinary and necessary business expense includes 
health care compensation as well as wage compensation. It is 
deductible. That is available to you currently under the Tax 
Code.
    Ms. Millender-McDonald. And an additional tax credit you 
would not be amenable to then?
    Mr. Miller. I think we need to consider why we would be 
steering an additional type of tax assistance to some people 
and not others. What is the basis of equity there?
    Ms. Millender-McDonald. No. I am not suggesting that. It 
would be across the board.
    Chairman Toomey. The gentlelady's time has expired and we 
will do another round. And at this time, I would like to 
recognize the gentlelady from Georgia.
    Ms. Majette. Thank you, Mr. Chairman, and good afternoon 
gentlemen. I, too, like the gentlewoman from California was not 
here for all of your testimony, but I certainly do appreciate 
you being here and your interest in sharing the information 
with us.
    From what I understand, concerning the MSAs, they have been 
in existence since 1999, and at that--with that, there really 
haven't been very many set up in the grand scheme of things. 
And I guess my question is, given the small number of those 
that have been set up, what makes you, Mr. Miller, or any of 
you think that we have a large enough sample that this should 
be something that should be expanded to a larger number of 
people if there--or a larger number of businesses if the 
750,000 MSAs that could have been set up still haven't been set 
up.
    And does that indicate at all a lack of interest or that 
this particular model is not one that is really going to be 
cost effective in terms of providing the kind of coverage that 
we--I think we want to make sure that people have in the 
system?
    And, Mr. Miller, if you could address that.
    Mr. Miller. Sure. The problem is not the numerical cap of 
750,000. It is a problem of who was allowed to be eligible to 
set up an MSA. It was deliberately--the market was artificially 
limited to be, in effect, thwarted before it could grow. It was 
limited to employers with 50 or fewer employees as opposed to 
being available to all businesses.
    That has been the fundamental reason why the MSA market has 
not grown larger; it hasn't been potentially large enough or 
attractive enough to major insurers to invest in that market, 
as well as some other rules that may be kind of complex and 
difficult to get under way.
    They were set up in 1997, and then there are different 
estimates in terms of the number of MSAs. The IRS count tends 
more to be a low-ball count around the 60,000 mark. It is 
probably about 100,000 or so Archer MSAs currently.
    What the MSA option potentially offers is simply a chance 
to kind of reconfigure the health benefits dollar. If you wish 
to kind of cut it up differently and decide to buy less 
insurance and provide more ability to handle health care on a 
first-party basis and save some money and be cost conscious, 
you have the opportunity to do so. So all we are trying to say 
is, let's have a fair and honest, level playing field 
experiment, which is to say, buyers of all types of health 
insurance and health care should be able to access this option 
along with any other one.
    Mr. Park. If I may----.
    Ms. Majette. Yes. I was going to ask you, Mr. Park, to give 
me your perspective on it.
    Mr. Park. Well, when the MSA demonstration project was 
originally established, part of the legislation included a GAO 
report that said, you know, this is--the GAO is going to 
examine to see if adverse selection actually is--which was the 
potential risk that some opponents had raised whether it would 
actually happen.
    Unfortunately, because of the sample size, there hasn't 
really been an ability of GAO to finish that report. They never 
were able to analyze the adverse selection effects. So it is a 
question of whether we are willing to expand the MSA project to 
make it universally available without a cap to all individuals, 
all businesses, without being able to verify whether or not 
adverse selection could result. And as my testimony indicated, 
adverse selection is definitely a risk.
    I think the other point I would like to raise is that one 
of the arguments in favor of MSAs is that it discourages 
unnecessary utilization of health services if you have a large 
deductible, for example, less comprehensive benefits. The RAND 
health insurance experiment which is sort of the largest 
examination of cost sharing found that cost sharing does reduce 
utilization. But for low- and moderate-income individuals, it 
discourages necessary use of health services. The value of 
comprehensive services is that people who are poorer, sicker, 
older, can get the services they need. And MSA could leave many 
of the poorer, older, and sicker workers out in the cold.
    Ms. Majette. Thank you.
    Mr. Miller. Well, that is overstating and misstating what 
the RAND--there is an evidence of kind of--some screening for 
high blood pressure, which could have been handled through 
other means, is about the only blip in the data which--that is 
a great exaggeration of some kind of unneeded care not being 
done by low-income people.
    Most of the other speculation about adverse selection is 
simply that, speculation. We don't find the evidence actually 
going out there in the marketplace.
    Ms. Majette. You are saying screening for high blood 
pressure?
    Mr. Miller. It was a tiny fraction of the entire 
population. What the RAND experiment as a whole said was, for 
all the--the average user and most of the users in that 
experiment, their health outcomes were not affected in any way, 
but they consumed a good bit less health care. Primarily, they 
were economizing on outpatient care; hospitalization was about 
the same. There wasn't a lot of shopping around for different 
dollars.
    This was done in about the mid-1970s, but these worries 
about folks suddenly having major health care needs not being 
met because of these higher deductible choices are not borne 
out in the RAND data whatsoever.
    Ms. Majette. My time has expired.
    Chairman Toomey. The gentlelady's time has expired, and we 
will begin a second round and you are more than welcome to stay 
and ask another round of questions. And I will begin with a 
question for Mr. Hall.
    As I was trying to follow your example, your personal 
example of your experience in obtaining health insurance as a 
self-employed individual, it sounds to me like you pay a total 
of about $1,000 in extra taxes, 15 percent of $7,000-odd 
roughly, more than what would be paid in taxes if you were an 
employee of a corporation providing the exact same set of 
services and receiving the exact same compensation.
    Is that about right?
    Mr. Hall. That is correct.
    Chairman Toomey. And you mentioned that, you know, we use 
tax policy often as a way to try to influence behavior. And we 
have what we famously call ``sin taxes'' where we impose really 
quite substantial taxes on items that we think it is probably 
not such a great idea for people to consume, such as tobacco 
and alcohol for instance. And the result, of course, is to try 
to discourage people from consuming those things.
    I wonder, do you think that we are having the unintended 
effect of discouraging people from going out and buying health 
insurance by imposing this artificially high or, at least I 
would argue, unfairly high tax on it?
    Mr. Hall. Well, I certainly hope that is not the intent. I 
think I had mentioned earlier that I personally believe that 
this particular inequity in the Tax Code is an inequity that 
has been overlooked until now.
    I think if you go backwards and talk about the sin tax, or 
trying to encourage consumers to respond in a particular 
different way than they are doing, to promote some action, then 
this tax would look like we are trying to encourage the self-
employed not to have insurance, which again, based on the 
testimony here today, the conversations that you have got--have 
had over months, would certainly not make sense. But it is 
certainly a situation where the self-employed pays 15.3 percent 
more for the same coverage than the guy sitting right next to 
him does, just because he is self-employed.
    Chairman Toomey. Thank you.
    Mr. Park, do you support H.R. 1873?
    Mr. Park. I haven't had a chance to fully examine that.
    Chairman Toomey. Okay. Fair enough.
    I wanted to ask you a question about employer-based health 
care, and I am not seeking to, by any means, do away with 
employer-based health care. I think there are a lot of merits 
to it. But I also think there are problems. And, you know, I 
can't help but observe that employers don't typically provide 
any other form of insurance for their workers--life insurance 
or automobile insurance or property casualty insurance. It 
doesn't strike me as pure coincidence that those forms of 
insurance which an employer could go out and buy for their 
employees wouldn't get the same kind of tax treatment as health 
care insurance does.
    My question is, do you believe there is something intrinsic 
to health care insurance that it ought to be provided by 
employers and that there isn't any other model; or do you think 
there is a better model out there?
    Mr. Park. I think the value of employer-based coverage is 
the pooling mechanism. I think that selection issues are 
certainly a phenomenon that occur when insurers look at a 
health insurance provision and the ability to pool together 
both--primarily healthy risks, low risks with older and sicker 
workers who may be higher risks allow the provision of health 
insurance at an affordable rate.
    I think that if you move in the system where people are 
individuals out on their own, then you have a medical 
underwriting situation where an individual's risk is assessed, 
where an older and sicker worker with certain--with a very long 
list of medical services in their experience history will be 
unable to access coverage in the individual market because it 
is generally unregulated.
    So I think that's the value of employer-based coverage. It 
serves as a pooling mechanism for health insurance.
    Chairman Toomey. So you--and the purpose, in your--if I 
understand you correctly, of the value of having a pooling 
mechanism is to avoid adverse selection.
    Mr. Park. Yes.
    Chairman Toomey. Mr. Miller, you don't believe that adverse 
selection is really a problem with individually-purchased 
insurance; is that correct?
    Mr. Miller. No. The actual better research in the field 
indicates there is less pooling that goes on in the employer 
group market than is commonly believed. There is actually some 
separation like with--older workers have wage offsets, so in 
effect there are some implicit take-backs of what is supposed 
to be this great pooling of health care costs.
    And in the individual market it is much more erratic. There 
is no kind of clear sign that, in effect, the highest risk is 
paying the highest cost. In fact, the problem with the 
individual market is, the administrative loads are so high that 
that kind of makes it a bad value for a lot of people until 
they can search out a better number. What we need is a more 
effective, deeper pool of parties in the individual market.
    In addition, you can protect against what are your worst 
fears by simply adequately financing high-risk pools, which 
deal with a tiny fraction of the population which might be 
subject to high health care costs. That is something where a 
State or another body needs to step up to the plate and say, we 
recognize that these folks can't afford their health care; it 
is way beyond the bounds of private insurance prices for them 
to afford.
    But that involves a small section of the market, while we 
should allow the rest of the market to do what it does.
    Chairman Toomey. So in a way you are saying, we shouldn't 
design a system around the exception, but rather let the system 
work for the vast majority and then find a solution----.
    Mr. Miller. Correct.
    Chairman Toomey.--that works for the folks that would be an 
exception?
    I will yield the time to the gentlelady from California.
    Ms. Millender-McDonald. Mr. Miller, what would be that 
solution for those who are unable to be in that larger pool of 
businesses that would then buy into the proposals that we are 
outlining here today?
    Mr. Miller. Well, I am not suggesting any kind of one 
single pool of businesses. I don't want to kind of steer you 
wrong in that regard. Each business, or the worker, should 
decide what their options are.
    The general concept of the high-risk pool tends to operate 
at the State level. Some States do it well; other States don't. 
It usually comes down to how generous they are with the funding 
for this.
    I would point to the State of Illinois as doing a 
particularly good job in terms of running a high-risk pool. 
They, in effect, find if an individual has been denied by 
several private insurers, or at least priced beyond a certain 
level; sometimes it is set at 150 percent of the standard rates 
for someone in their particular category, or 200 percent. Then, 
in effect, the cost of their comparable insurance coverage, run 
through the high-risk pool--usually through, in effect, the 
subcontracted private insurer--is subsidized by the State.
    A lot of States probably make the mistake of imposing 
premium taxes on the insurers in the State, and they just 
recollectivize the surcharge as it is. The better way is to do 
it through State general revenues. But the political impulse is 
always to try to hide the cost, and they even kind of put it 
through regulatory cross-subsidies rather than simply 
acknowledging the fact that something ought to be paid for, it 
is the right thing to do.
    Ms. Millender-McDonald. Given that the MSA is a relatively 
new concept and the GAO report has not been completed, why are 
we rushing to do this?
    Mr. Miller. There are two different things going on here. 
The high-risk pools have been around for a long time. They have 
actually been growing. I think we are at about 30 States right 
now with high-risk pools. And if you recall, the trade 
adjustment assistance provisions actually provided some 
additional Federal seed money both for more States to set up 
high-risk pools, as well as to subsidize the operating costs in 
future years of the current ones. So I think that is something 
that is growing, and there is more support for the high-risk 
pool approach.
    With regard to MSAs, again Congress set up a very bad--what 
is said to be an experimental demonstration project, which had 
a lot of flaws in it. You didn't run the--the experiment wasn't 
run, so in effect what was kind of a ``the dog chewed up my 
homework'' GAO response to that was simply because there 
weren't very many folks in it.
    But there is nothing to be afraid of in allowing people to 
make their best value--maximizing choices in a more open 
environment. We shouldn't be petrified at the idea that people 
of all walks of life should be able to go out and spend their 
health care dollars for what they think works best for them.
    Ms. Millender-McDonald. Mr. Hall, how large is your 
business?
    Mr. Hall. I have three employees and myself.
    Ms. Millender-McDonald. Okay. And so this would work well 
for you with three employees and yourself, these proposals that 
are before you today?
    Mr. Hall. Yes, I believe they would.
    Ms. Millender-McDonald. Not going into your bottom-line 
net--your net worth, or your bottom-line profit--I will skip 
over that for the moment--but would you agree that expansion of 
MSA programs would generally benefit those who are healthy, as 
opposed to--and are in the higher income tax bracket?
    Mr. Hall. I am not sure how to address that. I think Mr. 
Miller's comment on seed money, providing small business on a--
first point, back to my testimony--equal footing with big 
business so that whether it is MSAs, it is tax credits, or it 
is moving the deductibility of health insurance premiums off 
the face of their tax return over to schedule C for self-
employment tax, I think, is the critical part for small 
businesses like me.
    MSAs, in my experience, can be relatively complicated. I 
think the requirements of a specific type of health insurance 
policy, the high deductible, the fact that there has to be a 
third-party administrator involved are hurdles for small 
business people like me.
    I think Mr. Snyder had mentioned a couple of concepts of 
changing those deductibles required on the policies, changing 
things that I think would be very beneficial to people like me. 
My bias, my personal bias, is that it is not as attractive to 
the higher income people because I don't think they typically 
have as much of a concern for the $1,000 of extra costs that I 
have, that could be saved under H.R. 73 just because the 
dollars are different. I am not sure that is necessarily 
reasonable.
    Maybe that's not the way that it should be approached, but 
I think the higher volume of money that you have, whether that 
is defined as earnings or cash in the bank, some of those 
decisions become easier. I think that is a hurdle that the 
self-employed, the microbusiness may have to face, that some of 
the larger employers, the more wealthy individuals, may lose 
contact with because the volume of dollars just gets bigger and 
it is easier to make some of those decisions.
    I think there is a chance, a point-blank answer to your 
question, that those factors can help businesses like me. The 
thing I am here today to talk about personally again is moving 
my health insurance premiums that I do pay to the right place 
on my personal tax return. That seems to be the easiest 
approach to save me 15 percent.
    Ms. Millender-McDonald. Mr. Chairman, I am going to have to 
ask Mr. Park this question. I am trying to get some of that 
time I am recouping from the time I was not here. I just want 
to ask him, are there any reforms other than the refundable tax 
credit that will help individuals purchase health insurance 
when their employer does not offer coverage?
    Mr. Park. I think that, besides the credit to employers, 
one could also talk about public program expansions. I think 
that a number of small businesses, the ones who are least able 
to provide health insurance, are those with a disproportionate 
percentage of low-wage workers. The Kaiser Family Foundation, 
looking at small businesses they, were unable to offer 
coverage. Those that had an average wage of less than 2,200 per 
month were--less than half of those small businesses were able 
to offer health insurance. So these workers are in the range of 
100-135 percent of poverty, where they could be able to access 
public programs, which is not only group coverage, but 
generally is affordable and provides comprehensive benefits.
    Now, certainly right now, with the State budget crisis, 
there is a need to shore up what is currently existing for 
public programs through fiscal relief to States to help them 
maintain their current programs. But over time the State 
budgets recover. Being able to help them expand coverage to 
working parents, who are disproportionately in a lot of these 
small businesses, would be very helpful.
    Ms. Millender-McDonald. Thank you.
    Thank you, Mr. Chairman.
    Chairman Toomey. The gentlelady from Georgia.
    Ms. Majette. Thank you, Mr. Chairman. I have lots of 
questions. I guess the--from your perspective, Mr. Snyder, in 
terms of the members of the Chamber of Commerce in your area, 
do they think or do you think that this is the right approach 
to take, the adoption of the MSAs, and that that will really 
help to resolve this issue of the cost of the insurance and 
making sure employees buy coverage and how that is going to 
play out in the marketplace overall?
    Mr. Snyder. The answer is, it is one of the things that can 
be of great help. In my testimony, I pointed out that we have 
over 4,000 members, 3,600 for small business, and we classify 
it as 50 employees or less. And one of the roadblocks for them 
participating--and when you talk about pooling, we work hard at 
the Chamber to pool our members for insurance, and while that 
lowers the cost that you can buy--as far as them individually, 
it lowers the cost--it still doesn't make it affordable in 
pooling in that situation.
    The roadblocks are, you know, that people are uncomfortable 
with it being temporary. That is one reason why they haven't 
joined in the past. I mean, it is a very emotional issue. So 
the last thing you want to do is say let's go over the emotion 
of giving you this program, and then face the potential of a 
year or two down the road pulling it away again. So people have 
been reluctant to do it because of that reason.
    The other is the relatively high deductibles. It has been 
pointed out that the small business person usually is--the 
employees are on the lower income end, and a vast majority of 
them have figured out, well, what is the sense of me belonging, 
because if I look at my cost, you know, there will be very few 
years where I actually hit that deductible and be covered.
    I think they see it as a viable alternative to a much 
bigger problem that needs to be addressed now and in the 
future. I think they will use it more if they--if we do make it 
a permanent program, if we lower the deductible, if we do make 
a couple of changes that I have had in my testimony, I think 
you will find a lot more interest in that. And I don't agree, 
as somebody who is out there trying to get it done, that other 
businesses will see this as an alternative to dump--those 
businesses that are providing health care insurance, to dump 
that insurance for a less costly alternative.
    Ms. Majette. And what would--from your frame of reference, 
what would be a reasonable deductible or one that, for the most 
part, your members would feel as though they could accommodate 
and would make sense for them to have?
    Mr. Snyder. $1,000 for an individual, 2000 for a family.
    Ms. Majette. Per year?
    Mr. Snyder. Yes, ma'am.
    Ms. Majette. And that thousand deductible would have to be 
paid before there was any--would there be a copayment after 
that, once that $1,000 deductible had been met?
    Mr. Snyder. We don't get that detailed, or at least I 
don't--can't answer that question. I mean, the big hurdle was 
the deductible and how high they are. And so the incentive, or 
the feedback, was to go with $1,000, as I said, for the 
individual and 2000 for the family.
    Ms. Majette. And, Mr. Miller, I see you frowning.
    Mr. Miller. Well, we have just got another dog that is 
barking, and it isn't being heard on this issue, which is 
health reimbursement accounts.
    In effect, we are running a different experiment that is 
beginning to grow, primarily starting in the self-insured, 
larger-employer market, but it is going to move down to the 
small employers fairly rapidly. That is, from last year, if you 
recall last year's tax ruling which, in effect, said you could 
get kind of like an MSA, except it had to be employer money, 
through a health reimbursement account.
    What employers increased--they were already beginning in a 
post-managed-care world, trying to figure out how to make 
insurance affordable without the type of controls that their 
workers didn't want. So what they have gone to is increased 
cost sharing, other ways to, in effect, hollow out or carve out 
that front end of coverage.
    What they are combining that with are what are called these 
``health reimbursement accounts,'' which are tax advantaged, in 
which the employer says, we will fund some up-front benefits 
for you to deal with things like preventive care, some things 
that you want to use up front, and then there is a deductible 
after that generally. It's usually 500, $1,000, probably about 
at most $2,000, and that is not most of them. And we are seeing 
more and more employers going to this as a way to get around 
what are the barriers to having straightforward MSAs.
    And the general experience with these accounts is, the 
utilization is down, the workers are happy, the budgets are 
under better control, and more and more employers are going on 
to them. The flaw in this is that the money is exclusively the 
employer's contribution because of the way the Tax Code works.
    It is not vested in the employee; if you leave the job, 
unless you have the very benevolent employer we haven't found 
out there thus far, you don't get to take it with you; so you 
don't have that kind of long-term buildup of equity that you 
get in an MSA. But, in effect, the market is trying to do the 
best it can with the tools it has.
    Ms. Majette. Mr. Park, did you want to jump in on this?
    Mr. Park. Well, I think the issue with health reimbursement 
accounts is that most of the large employers looking at these 
accounts are looking to cut costs. So that means that the 
coverage that they are going to provide, the sort of high 
deductible policy, similar to an MSA--but as Mr. Miller said, 
without the tax advantages--and the amount of money that the 
employer contributes to that account on behalf of the employee 
for use as part of this arrangement is generally going to be 
less than the value of the premium for more comprehensive, 
traditional coverage.
    So for workers who have significant health care needs, who 
may not be able to afford that, especially those who are lower 
income and do not have the resources to meet that differential 
between the out-of-pocket costs that would be covered by 
comprehensive coverage and the lesser amount that may be in 
their spending account, plus the high deductible and other less 
comprehensive benefits of getting through high deductible 
policies.
    Ms. Majette. Thank you.
    Chairman Toomey. Well, thank you all very much.
    We will let Mr. Park, who has provided an articulate 
dissenting opinion for the most part today, and I thank him for 
his testimony, as well as everybody. And I would also like to 
thank you all for your patience during the long interruption. I 
think this was a very useful exchange and I appreciate the 
input from each and every one of you.
    And the hearing is adjourned.
    [Whereupon, at 11:45 a.m., the subcommittee was adjourned.]

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