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



 
           THE RISING COST OF HEALTH CARE FOR SMALL BUSINESS

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

                             FIELD HEARING

                               before the

      SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT & GOVERNMENT PROGRAMS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                    CHARLESTON, SC, AUGUST 25, 2003

                               __________

                           Serial No. 108-31

                               __________

         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
Csiszar, Ernst N., Director of Insurance, State of Carolina......     3
Marchant, Larry, South Carolina Managed Care Alliance............     5
Perry, Evelyn Reis, National Federation of Independent Business 
  (NFIB).........................................................     7
Degenhart, Vincent J., M.D.......................................    10
Moreland, Doug, Benefitfocus.com, Inc............................    11
Kulze, John, M.D.................................................    13

                                Appendix

Opening statements:
    Akin, Hon. W. Todd...........................................    24
Prepared statements:
    Csiszar, Ernst N.............................................    26
    Perry, Evelyn Reis...........................................    41
    Degenhart, Vincent J., M.D...................................    50
    Moreland, Doug...............................................    51

                                 (iii)




        THE RISING COST OF HEALTH CARE FOR SMALL BUSINESS OWNERS

                              ----------                              


                        MONDAY, AUGUST 25, 2003

                  House of Representatives,
        Subcommittee on Workforce, Empowerment,and 
                               Government Programs,
                               Committee on Small Business,
                                                     Charleston, SC
    The Subcommittee met, pursuant to call, at 1:45 p.m., in 
the Magnolia Room, Charleston Place Hotel, 205 Meeting Street, 
Charleston, South Carolina, Hon. Todd Akin [Chairman of the 
Subcommittee] presiding.
    Chairman Akin. Good afternoon. If I could please have your 
attention. The Committee on Small Business and Workforce will 
come to order. Those of you in the back of the room, if you 
would like to grab a snack or a beverage or whatever, if you 
could do that please, and make yourselves comfortable.
    One of the things that I have tried to do as Subcommittee 
Chair is to try to run our meetings, get them going on time and 
try and get them out in a reasonable period of time. I think 
some of you are probably pleased to hear that. So we are going 
to go ahead and proceed.
    The general format is going to be I will make an opening 
statement. I do believe Congressman DeMint may have an opening 
statement as well, then we will hear from our different members 
of the panel, five minute statements from each, and then we 
will proceed to some questions at that point.
    I would first of all like to say to all of you, thank you 
so much for coming today. I was pleased to be able to come here 
and to be able to come here with Jim DeMint. It might be a 
surprise to you, but the Congress has these different Committee 
hearings, and most of the time they are held in Washington, 
D.C., but we have the authority to hold Committee hearings 
anywhere in the country that we want to, wherever it makes 
sense logically. This seemed to be a very appropriate place for 
our topic today. Our topic is going to be, from a small 
business point of view, the rising cost of health care and 
people who are uninsured. Now that is important to us because 
of the fact that of the people in America who are uninsured, 
about sixty some percent of them are, in one way or the other, 
connected with small business. So that is very much down the 
lines of things of interest to our Committee.
    So why would we choose to come here particularly for an 
official meeting of the House? Well, the reason is that to 
really find out what is going on, it is necessary to get into 
various states and to see what is going on and be able to have 
witnesses such as yourselves. So we are very thankful to have 
you coming and joining with us.
    I was looking around at different opportunities and talking 
to Congressman DeMint, who is very, very well respected, first 
of all on the subject of health care, but just generally 
speaking in the house. It was really an opportune time for us 
to be able to come and join you here, even though I am new to 
this city and wish I had a little longer to stay and visit.
    Jim has been on the front lines of the small business world 
with his own market research company and he has not forgotten 
some of what it is like to be a small business owner. So he 
combines that interest in small business but also he has been 
involved with legislation that connects to the health care 
business. And in fact, that is to some degree his hallmark, is 
being involved with health care kinds of issues. He 
particularly caught my attention this year when he got through 
the idea that you could provide employees with a $500 rolling 
over option, so in other words at the end of the year, you did 
not have to spend all the money that was in your particular 
account, but you could roll that money over in your health 
savings account or these different flexible spending accounts 
for the end of the year. This is a significant step. It does 
not sound like a lot perhaps to us, but in Washington, D.C. 
where things tend to move slowly, that was quite a significant 
advance and Jim made that break-through. We are thankful to 
have him here.
    So first of all, thank you all for coming but before we 
proceed and take the five minute statements, I would like to 
turn over the microphone if Congressman DeMint would like to 
make a statement or say a few words. Certainly, as I emphasized 
before, he has the qualifications that we need for this hearing 
today and we are very thankful to the people of this state for 
sending him to Washington, D.C. and for his expertise.
    [Mr. Akin's statement may be found in the appendix.]
    Chairman Akin. Jim.
    Mr. DeMint. Mr. Chairman, thank you for coming to South 
Carolina, welcome to Charleston. We very much appreciate your 
work on the Committee. The Chairman is very involved with small 
business, particularly oversight of SBA and other government 
programs related to small business, so he is very instrumental 
in things that affect a lot of us.
    As he has mentioned, this is an official meeting of the 
Committee, it's not just the two of us listening. The lady here 
who appears to be on a respirator is actually taking down 
everything we say, it will be part of the official Committee 
record and we use that and Committee staff uses that as we put 
together the case for changes, reform, for legislation. So our 
intent is to use this to develop solutions.
    The Committee's work, while not official with jurisdiction 
over tax code and some other areas, it does have a lot to do 
with regulations that affect small business. we find ourselves 
very much as advocates for development government contractual 
arrangements with small business, whatever we can do to grow 
small businesses in this country, which make up about 99 
percent of all the employers. So it is a big part of the 
American economy. Most of the new jobs are coming, or at least 
a whole lot of them, from small business. So I think what we do 
is pretty important.
    This issue of health insurance today is huge. It is a hard 
issue for major employers, it is an even harder issue for small 
businesses.
    I have been traveling the state like wildfire over the last 
three weeks and I have not talked to one employer who has not 
mentioned this as a major issue. It is an issue that even makes 
them consider locating subsidiaries offshore. It is another 
reason that American businesses are having difficulty being 
competitive, and then as increasingly as we on the government 
side reduce reimbursement for Medicare/Medicaid, that cost is 
being shifted on the private insurers. The rates are being 
forced up. We have got to do something to change our health 
care system or to save our private insurance market and to make 
sure that we do more to help people get insurance rather than 
what we are doing now and we are making it harder for them to 
have insurance.
    My hope today is that our witnesses will not only make us 
aware of the problems, which a lot of us are aware of, but to 
help us identify examples of things that might be working or 
ideas they have on how we can fix things to save the private 
insurance market, which is where we need to go.
    So Mr. Chairman, again, thank you and I look forward to the 
testimony and the questions that you and I both have later on.
    [Mr. DeMint's statement may be found in the appendix.]
    Chairman Akin. Thank you very much, Congressman.
    I think now that what we will do is we will just proceed 
right down the line up of our witnesses, go for five minute 
statements from each of you and then we will have some 
questions we would like to ask afterwards, if that will work.
    Do we have a timer specifically?
    Mr. Bezas. Yes, I have it.
    Chairman Akin. Okay, he will make some kind of a signal 
when you are starting to get close to the end of your five 
minutes.
    So our first witness, and I am very thankful to have Ernst 
Csiszar, who is the Director of Insurance for the State of 
South Carolina. We had a chance to have lunch together and 
Ernst has shared a couple of thoughts with me. I am just 
fascinated by what your comments are going to be Ernst, and 
thank you so much for taking time to join us here.

STATEMENT OF ERNST N. CSISZAR, DIRECTOR OF INSURANCE, STATE OF 
                         SOUTH CAROLINA

    Mr. Csiszar. Thank you, Congressman and again, I extend my 
welcome to the State of South Carolina, what may be the first 
time, I hope will not be the last time. We can use to tourist 
dollars, by the way. And Congressman DeMint, welcome to your 
home.
    I am delighted to be here today and what I would like to 
start with is just sort of a view, at least from a regulators 
standpoint, of what some of the basic problems are with our 
health care system, and perhaps suggest maybe not entire 
solutions because this is a complex, very, very complex field, 
but perhaps some of the answers that are worth considering. I 
have heard some of those directly from Congressman DeMint at 
lunch time. I think those were great ideas.
    To begin with, I would describe the problem to start with 
as what I would describe or call a flawed business model. And 
the flaw starts with the very basic proposition that we have a 
third party payer system in which the end customer is in 
essence entirely desensitized from the price. Doctors and 
patients incur the cost and employers and insurance companies 
pay for that cost. So there is not much incentive, shall we 
say, to have any degree of exercise by those who are actually 
consuming the health care.
    I would add that that fundamental flaw in the business 
model is compounded by other flaws that I would attribute to 
that same business model. I would say there is weak corporate 
governance that we face in the sector. I will give you an 
example. Most public hospitals, as you know, are run by a board 
of trustees. Private ones also board of trustees or board of 
directors. They tend to be staffed with political or business 
cronies and oftentimes they do not do the job they are designed 
to do. So corporate governance is weak.
    I would also say that weak management teams quite 
frequently are associated with the health care field, not least 
because the skills of a doctor are not oftentimes the skills 
that are required for management. No offense to the doctors, 
they are wonderful, they are great in terms of their own skills 
in practicing medicine, but I would suggest that management 
skills sometimes are of a different nature and do not often 
coincide with the profession that doctors engage in.
    I would add another component, weak capitalization of the 
business model. We heard this morning, for instance, that in at 
least one state of the union--and I do not think this is 
untypical necessarily--you can form an HMO with $1.00. So there 
is overall, generally speaking, a weak capitalization.
    Interestingly enough, it is also a business model that 
turns the laws of economics upside down. In most other places, 
demand drives supply. In the case of the health care system, 
supply I think sometimes drives demand. If you build a 
hospital, they will fill it for you, sooner or later it will be 
filled.
    I would add one other component to this business model 
because it is a highly--and I would describe it as an over-
regulated business model in fact, it has high administrative 
costs. The businesses incur, from what we estimate--I saw one 
estimate quite recently--about 25 percent in overhead costs, 
essentially paper shuffling kinds of costs, and that is 
exceedingly high for an industry that has to live on very thin 
margins, if there are any margins at all.
    So fundamentally, I think the problem starts with the 
problems with the very nature of the business. You add to that 
the fact that this model, because of this removal of the 
pricing decision if you will, from the end user, from the 
patient, really brings about utilization issues. I sort of 
shrink when I hear things coming out of Washington that suggest 
we put cost controls on this, for instance. Cost controls do 
not work when your price is not an inflationary kind of price. 
If we are talking about spending, then the only way to control 
the spending is through rationing, for instance. And that is an 
unpalatable kind of solution I think politically or 
economically for most Americans, but it is indeed spending. The 
inflationary costs, if anything, have gone down. The costs of 
actual medical procedures I think has gone down. The cost of 
pills tends to go down as well, even though over time we have 
seen increases in that.
    The other problem we have of course is that over 40 
percent, close to 50 percent, is already paid for by government 
and it is really unaffordable from a governmental standpoint 
and ultimately I can say that you add all these problems 
together, together with the cost shifting out of Medicare and 
Medicaid, and we have got what is certainly a bit of a mess.
    In terms of solution, I would say address the fundamental 
problem and the fundamental problem I think you have already 
identified. It has to hurt the purchaser's pocketbook in some 
shape or form, whether it be through a medical savings account, 
whether it be through a voucher system, whether it be through 
some other means, the fact of the matter is that unless you 
bring a significant portion of the cost out of the purchaser's 
pocket, you are not going to be able to control consumption.
    Thank you.
    [Mr. Csiszar's statement may be found in the appendix.]
    Chairman Akin. Thank you very much, Ernst, that was very 
much on target with what we are looking for--specific in terms 
of where the problems were and then you give us a number one 
solution for what you do about it. Thank you.
    And we will take our next witness is Larry Marchant and I 
believe that Larry is the Executive Director of the South 
Carolina Managed Care Alliance, but also with experience in the 
medical insurance business as well; is that correct, Larry?
    Mr. Marchant. Yes, sir, thank you.
    Chairman Akin. Good. Thank you very much for coming and 
joining us.

STATEMENT OF LARRY MARCHANT, EXECUTIVE DIRECTOR, SOUTH CAROLINA 
                     MANAGED CARE ALLIANCE

    Mr. Marchant. Thank you for letting me be here, Mr. 
Chairman, Congressman DeMint, it is a pleasure to represent the 
third party payers today at our Congressional hearing. I also 
have a little bit on the Alliance I would like to leave with 
you, I have got an annual report I would like to share as part 
of the record as well.
    Chairman Akin. Without objection.
    Mr. Marchant. From the insurer's standpoint, I think the 
one thing that we would like for you to help us do as we form 
partnerships to address this situation--I was happy to hear 
Congressman DeMint's remarks at lunch about getting everyone to 
the table because we want to make sure we are part of the 
solution and we have some ideas.
    If you will help re-empower us from the private sector 
standpoint to help solve this affordability issue as well, I 
think that as unpopular as managed care has been in the public 
with some of our politicians and with the media, the fact of 
the matter is, there was a time when managed care did help 
control cost in the health delivery system. Honestly, there are 
really only two ways we can control costs in the delivery 
system. One is you lower the reimbursement level or you lower 
the commodity which you are purchasing, that price, that unit 
price, or you control the utilization of how much you are going 
to purchase. And in health care, that is what we attempted to 
do, and honestly, we thought we were successful in managed care 
on trying to control those costs and still deliver a quality 
product.
    What concerns us, however, is regardless of what model we 
end up doing--and we are supportive of a lot of different 
options for employers and individuals. We, Congressmen, agree 
that MSAs or those type of plans have a place. I think what we 
fear is we do not want them necessarily to take the place of 
another. We would like to have a lot of choices for individuals 
and employers to choose from, whichever best fits their ability 
to purchase that insurance. But when you boil it down to the 
lowest common denominator, and the Director hit on it a little 
bit on the inverse economics, and that is the health care 
equation is very simple. You take the total number of dollars 
that we spend in health care delivery, and let us say here in 
South Carolina, put it all in the pot--doctor's salaries, 
hospital costs, hospital administrators, insurance executives, 
premiums, everything--put it all in the pot, divide it by the 
population of South Carolina. And if the top line is higher 
than the bottom line, you have medical inflation.
    In my hometown of Columbia, 100 miles up I-26, we have a 
quarter of a billion dollars in new hospital construction going 
on just in my hometown. Somebody is paying for that 
construction. I am not saying it is good or bad, it is needed, 
I suspect you could probably line up the folks clear out to 
King Street to give you all the reasons why we need every--all 
four hospitals in Columbia need all this technology. But the 
fact of the matter is those are the dollars that are added to 
the top line and the industry is concerned that regardless of 
how you are paying for it, whether it is a third party payer or 
individual, some entity has to stand over someone's shoulder 
and control excess capacity because we will still pay for that 
no matter what model that we use.
    Of course, my doctor friends will agree with me on this 
statement, I think the only other construction project going on 
in Columbia right now is a high rise for a new law firm.
    [Laughter.]
    Mr. Marchant. And that may tie in to his remarks on medical 
malpractice.
    But you know, we laugh and we are joking, but if you sit 
back and think about it, somebody is paying for those costs. 
And again, we have to make sure we have a system that is 
looking at those costs and making sure when you go in to 
purchase, that you are not over-paying or that you are not 
accidently being over-utilized.
    I do want to brag about one particular thing that the 
Alliance for Managed Care worked with hand-in-hand with the 
NFIB, Chairman Dan Tripp, I think who is in the audience, and 
Chairman Thomas from the Senate, and the DOI, as a matter of 
fact, and that is a mandate moratorium bill that we passed in 
South Carolina last year. We were the first state to do this. I 
think our General Assembly was wise enough to understand that 
until we decide what the final answer is going to be on health 
care delivery and how we are going to pay for this, at least we 
can say okay, that is it, we are going to put a lid on 
government mandates, we are going to put a lid on forcing 
employers to pay for this and that. And while this is 
definitely not the solution, we can do that until we can get to 
those answers, Congressman DeMint, down the road and I would 
ask the Chairman and the Committee to seriously look and see if 
there are ways that we can kind of at least just put a stop to 
any government intervention until we can come up with a plan 
for the future, because you know there is a mile long of 
mandates and HIPAA and privacy and reform that we did back in 
the 1990s that we feel like maybe have hurt more than it has 
helped.
    I'm looking forward to questions from the Committee, and I 
will do my best to supply the answers. And thank you for 
allowing me to be here.
    Chairman Akin. Thank you very much, Mr. Marchant, for your 
perspective, and we will look forward to getting back with some 
questions too.
    Our next witness is Ms. Evelyn Perry and I believe that you 
are a small business owner I am told, but also are you 
connected with NFIB as well?
    Ms. Perry. I am a member.
    Chairman Akin. Member of the NFIB and also a small business 
owner.
    Ms. Perry. Correct.
    Chairman Akin. And what was the nature of that business 
again?
    Ms. Perry. I will be glad to tell you about it.
    Chairman Akin. You are going to sell me something.

  STATEMENT OF EVELYN REIS PERRY, PRESIDENT OF CAROLINA SOUND 
 COMMUNICATIONS, INC., AND NATIONAL FEDERATION OF INDEPENDENT 
                        BUSINESS (NFIB)

    Ms. Perry. I wish you good afternoon, Mr. Chairman and Mr. 
DeMint. Thank you for inviting me today to talk about the 
important issue of affordable, accessible health insurance for 
small business. I am pleased to be here on behalf of the 
National Federation of Independent Business, representing 
600,000 members who face a similar challenge.
    My name is Evelyn Reis Perry and I am President of Carolina 
Sound Communications and Georgia Sound Communications, family-
owned firms that provide a wide range of communication products 
and services to over 2000 clients.
    We are based right here in beautiful Charleston, South 
Carolina and we also have offices in Myrtle Beach and recently 
Savannah, Georgia.
    At Carolina Sound, we are both low voltage contractors and 
the MUZAK franchise in over 30 counties in South Carolina and 
Georgia.
    We design, install and service sound and video systems for 
industry, schools, health care, the hospitality industry, 
military installations and other businesses. Recently, we have 
begun to work with the medical profession to help them comply 
with the HIPAA Act.
    The MUZAK business has been in Charleston since the early 
1950s and has continued to grow appreciably. It is established 
as a premier sound and video contractor in South Carolina and 
now Georgia.
    As President, I manage the day-to-day operations which 
includes administering our employees' benefit package. At 
Carolina Sound and Georgia, we have 17 employees.
    Like many entrepreneurs, I learned early that if I want to 
remain competitive in hiring, I must offer an attractive 
benefit package. Since we started the company, we have provided 
comprehensive health care to all employees.
    I spent 20 years in the private non-profit world including 
government before I became a business owner, and social 
responsibility is important to me. However, recently, two 
experiences forced me to stop and rethink health insurance and 
what role an employer should play.
    In January of this year, we acquired the MUZAK franchise in 
Savannah, Georgia, which consists of 13 counties in Georgia 
plus Hilton Head and Beaufort in South Carolina. The five 
employees there were covered by health insurance provided by a 
larger corporation which previously owned this property. The 
company provided 50 percent of the premium cost to the 
employee.
    In investigating what this group would cost our company to 
cover, we found that the premiums in Savannah were almost 
triple the premiums in Charleston. This penalty was for no 
other reason than the zip code of the Savannah office. It would 
be impossible for us to cover these new employees at 100 
percent, as we have done for years in Charleston. We have them 
presently covered under a temporary policy while we investigate 
what other options are available. Additionally, one of our 
principals is now a diabetic, making it a risk to change 
insurance companies in Charleston, even though we might wish to 
look at competitive bids.
    The government has provided that insurance companies must 
cover all employees, but no one has guaranteed that it will be 
at a rate which is affordable.
    Our company offers a quality plan--medical, dental, 
pharmaceutical coverage--with a wide network of doctors. Every 
year that passes, to remain affordable, I have to either raise 
the deductible or raise to copay. In past years, we have taken 
competitive bids just to remain even. However, the reality is 
that being insured is critical to our employees. We have in the 
past paid 100 percent of the premium cost for them.
    In addition to being a socially responsible company, it is 
to our benefit to have healthy employees and we know that if we 
did not supply this benefit, some would never visit the doctor 
even for preventive care.
    As you know, affordable health care is a problem that 
stretches from coast to coast. A colleague of mine in Wisconsin 
just went through the renewal process for her employees. She 
shared with me her employees will be paying a larger share of 
the premiums and they may delay coverage for new hires. One 
agent told her, ``Small businesses can expect double digit 
increases every year in the foreseeable future no matter what 
their group's medical history is and no matter who the provider 
is.'' Every year I hold my breath when that renewal notice 
arrives. Our average increase has been almost 20 percent every 
year for the past four years.
    Knowing that providing health insurance is necessary to me 
for both business and social reasons and knowing that I cannot 
increase prices to my customers an extra 20 percent in order to 
absorb the cost, I continue to offer health insurance benefits 
despite the growing cost to our business. We have absorbed the 
cost every year and have not passed it on to our employees. 
Sadly, we now have had to rethink that policy and thus, I take 
the risk of losing good employees and dramatically increasing 
my turnover rate.
    We have a 30-year old male employee, happens to be a family 
member, for whom our premium is about $200 a month. When he got 
married and had one child, he had to shoulder over $550 a month 
for two dependents, even after we paid his personal premium.
    Those of us in the small business community are struggling 
each year to afford the cost of increasing premiums. It is for 
this reason that I support legislation endorsed by NFIB and 
others that would create association health plans. AHPs would 
allow small business owners to band together across state lines 
to purchase health insurance as part of a larger group, thus 
ensuring greater bargaining power and lower administrative 
costs.
    Fortune 500 companies and labor unions already have this 
right. AHPs will simply level the playing field and give small 
employers the same privilege as their counterparts in labor and 
big business. It will also spread the risk for the insurance 
companies. In the end, they win as well.
    We all know that small businesses employ the vast majority 
of employees in this country and create the lion's share of all 
net new jobs. Yet this economic engine that drives our economy, 
small business, is the very group hurt by the inability to form 
AHPs. This needs to change.
    I know that the AHP legislation has already passed the 
House of Representatives and I thank you for your leadership on 
this issue. I would urge our Senate to follow the House's lead.
    There are several other things that Congress can do. I 
support and encourage the expansion of Medical Savings Accounts 
and Flexible Spending Accounts.
    Currently, there is no rollover provision. NFIB supports 
legislation before Congress to allow $500 in unspent balances 
in FSAs to be rolled over.
    Further, MSAs without the current restrictions would give 
employees more control over their own health care decisions. I 
also support the concept of having a tax credit for the 
purchase of individual health insurance.
    I am a business owner, not a health policy expert, but I do 
know that there is a lot of debate about how to insure more 
Americans and how to help those currently insured continue to 
afford their coverage. We need common sense solutions to 
controlling the cost of quality health insurance.
    Mr. Chairman, thank you for allowing me to share my 
experience with you and the members of the Committee. And I am 
happy to answer any questions that you might have.
    [Ms. Perry's statement may be found in the appendix.]
    Chairman Akin. Thank you, Ms. Perry. We are going to go 
ahead to the questions afterwards, after we have heard from the 
other witnesses, but thank you very much for sharing with us.
    Our next guest is Dr. Vince Degenhart. I believe you are an 
anesthesiologist and we really appreciate you coming in. Please 
proceed.

            STATEMENT OF VINCENT J. DEGENHART, M.D.

    Dr. Degenhart. Thank you, Congressman Akin and Congressman 
DeMint and staff for enabling me to be here to speak with your 
Committee.
    I have been practicing anesthesiology in Columbia, South 
Carolina for over 20 years. In those 20 years, I have seen an 
escalation in the number of malpractice cases and the amount of 
jury awards against physicians and hospitals. These rises in 
number of cases and jury awards have added greatly to the 
health care bill of America. Last year, of the 10 awards of 
over a million dollars in the state of South Carolina, six were 
against physicians, according to South Carolina Lawyers Weekly.
    Ironically, this comes at a time when health care, 
technology, medical education are all improving. Health care in 
the United States is at a pinnacle and we try to get better and 
better and better. Life expectancy in the United States today, 
if you are born today, is 75 years. By the year 2010, it is 
expected to be 80 years. This is not because Americans are 
taking better care of themselves, as obesity and sedentary 
lifestyles have only increased the problems we see in medicine. 
But medical care is getting better, in spite of what our trial 
lawyer friends want to make America think. In other states, 
such as Pennsylvania, Nevada, West Virginia, they have had 
terrible crises in medical malpractice with doctors leaving the 
state, doctors quitting neurosurgery, physicians stopping 
delivering babies at ever increasing cost of malpractice 
insurance and the constant threat of being sued.
    Not every decision we make in medicine is going to be the 
right decision, but even with the best education, the best 
drugs, the best surgeons, things will go wrong. The human body 
is a living marvel, yet we are all going to die. But that does 
not mean that someone made a mistake or that there was 
malpractice involved. But somehow in America, we have gotten to 
expect that perfect results are the only way.
    The typical wage earner in America earns $25,000 a year, in 
South Carolina it is closer to $20,000 a year. As previous 
speakers have said, the premiums monthly are about $200 to $220 
per month. That is over 10 percent of the salary. Each year, 
premiums go up by 15 or 20 percent, so now you pay more than 20 
percent of your salary in premiums, so pretty soon, you cannot 
afford health insurance; therefore, we have 41 million 
Americans who are uninsured. These increases are incredibly 
high, yet if we look at malpractice insurance increases, they 
are staggering.
    In Florida, the average OB/GYN premium is $143,000 to 
$203,000 per year. It is no wonder they are leaving Florida. 
Why when millions of Americans are without health insurance are 
we spending more and more on malpractice insurance and legal 
costs? $10 billion a year in the United States.
    The average jury award in the last five years has gone from 
$500,000 to $1 million in medical malpractice cases. Insurance 
companies are stopping selling malpractice insurance. The 
biggest one in the country, St. Paul Fire & Marine, stopped 
selling malpractice insurance in South Carolina and nationally 
last year, as their loss ratio--for every premium dollar they 
collected, they lost a $1.50. Well you cannot make money doing 
that. So they got out of the malpractice business, and they 
were the second largest insurer in our state. In this state, we 
are insured now primarily by the JUA and PCF, which are quasi-
state agencies, non-profit with all volunteer boards. Yet, we 
have even seen dramatic increases in our insurance costs. This 
year in 2003, our increase is 24 percent on average. For my 
practice, it was 34 percent. We are paying this year $104,000 
more than we were a year ago in malpractice insurance costs. We 
have gone from $301,000 to $405,000 in one year. Now you just 
cannot sustain those kind of increases in any type of small 
business.
    So many people look on malpractice and physicians and 
hospitals as a pot of gold or their chance at the lottery, when 
it is not. That money comes from somewhere, it comes from each 
of you, all of us pay for it. That money comes out of the 
system. So now you have raised the bar, somebody gets a $20 
million award, now somebody else cannot afford health 
insurance. It is estimated now that physicians, hospitals due 
to the cost of malpractice and runaway jury awards along with 
defensive medicine costs $50 to $100 billion a year in health 
care dollars.
    What can we do to solve this problem? We need drastic 
solutions. Now H.R. 5 is a great start, we need to limit non-
economic damages to $250,000; we need to do something with the 
contingency fee system. We are patterned after the English 
system of law and yet there is no contingency fee system in 
England. The loser pays and the judge is the judge and jury. So 
I think that we are on the right track with H.R. 5, 
unfortunately the Senate has voted against it and our own 
Senators, Hollings and Lindsey Graham, have voted against tort 
reform. A lot of money has gone into financial contributions, 
but I think that if we keep pushing, keep pushing, keep 
pushing, we can do something to solve this problem and get that 
hundred billion back into the health care system and out of 
these runaway jury awards.
    Thank you.
    [Dr. Degenhart's statement may be found in the appendix.]
    Chairman Akin. Thank you very much, Doctor.
    Our next witness is Mr. Doug Moreland and I believe Doug, 
you are in the software business?
    Mr. Moreland. That is correct.
    Chairman Akin. Thank you very much for joining us. You can 
proceed.

     STATEMENT OF DOUG MORELAND, CHIEF TECHNOLOGY OFFICER, 
                     BENEFITFOCUS.COM, INC.

    Mr. Moreland. Good afternoon, thank you.
    There are a number of factors that are contributing to the 
high cost of health insurance. One of them that is significant 
I believe is the cost of the administration of health-related 
services. The cost of administering membership, determining 
eligibility, adjudicating claims is a significant contributor 
to the cost of insurance and this is a burden that the health 
insurers and life insurers are all very familiar with.
    About three and a half years ago, I and two other gentlemen 
co-founded a business here in the Charleston area, originally 
targeting a need that large and small employer groups had. 
Those groups were suffering under the burden of paperwork, 
paperwork associated with enrolling all of their employees in 
health-related services as well as other benefits such as 
401(k) dental and vision insurances. Our intent was to capture 
that information, to unify it, on line so that it would be 
quick and easy for employees to enroll and transfer that 
information electronically to the health insurance carriers and 
the other related benefit providers.
    Well, we learned very quickly that there was a substantial 
need in the insurance industry for these services and that led 
very quickly to partnerships with a number of large health 
insurers including Blue Cross-Blue Shield of South Carolina. 
From there, we began to learn what their exact needs were, how 
we could capture benefit enrollment for them, how we could 
transfer that data to them electronically and how we could 
reduce errors that were produced through latency in billing 
systems and in claims, a substantial number of claims that were 
being rejected because of miskeyed data.
    From there, we began to work further and we became involved 
with the small group business, and we learned that the cost of 
administering small groups was substantially higher than the 
cost of administering large groups. Small groups turn over 
insurance quicker and the cost of selling and underwriting 
small groups is substantially greater.
    Further, from there, we began to learn that consumer-driven 
health plans could be a significant contribution to the 
administrative costs because health insurers' cost was very 
high, but in addition to that, the employer groups' cost is 
very high. They are experiencing, you know, 15, 20, 25 percent 
rate increases every year and they are looking for some relief. 
The small group consumer-driven health plans would allow 
potentially for the configuration of health insurance on a 
family-by-family basis, in particular, co-payments, 
deductibles, co-insurance. Those types of features, if 
configured, would allow a family to purchase health insurance 
that would be substantially tailored for their needs, combined 
with a medical spending account, it could be a great advantage, 
because this would allow the employer to provide a fixed amount 
of funding to a family's insurance and thus allow families to 
spend their money more wisely. It also would introduce 
responsibility to the consumer.
    Currently we have an environment where consumers have a 
tendency to use insurance if they have it and if they had more 
responsibility in purchasing the insurance, then we would 
probably see reduced costs--I would expect to see reduced costs 
from that.
    So in summary, what Benefitfocus has been able to provide 
is administrative simplification, which of course is one of the 
chief tenets of the HIPAA Act and I am here less to tell you my 
opinions or what I think should be changed in the health 
industry, but more to inform you what our experiences have been 
these past years. And I give all of the credit to the health 
insurers for educating us and inviting us into their business 
to add administrative simplification.
    Thank you.
    Chairman Akin. Thank you very much for your perspective.
    Dr. John Kulze, you are providing laser kinds of eye 
operations, if I understand that.
    Dr. Kulze. Exactly. Thank you.
    Chairman Akin. Thank you.
    [The statement of Mr. Moreland follows:]

                 STATEMENT OF JOHN KULZE, M.D.

    Dr. Kulze. I am a Charleston physician in a small group 
practice with one other doctor and 10 employees. We provide 
comprehensive eye care including Lasik surgery and other eye 
surgery.
    As a small business, we have experienced first-hand the 
difficulties of providing health insurance as an employer with 
skyrocketing costs also. We treat patients in need of health 
care without health insurance coverage also.
    Lasik is one segment of eye care that has emerged in the 
last decade and is generally not covered by insurance. 
Subsequently, we have seen the cost of this procedure drop 
substantially over the last several years due to competitive 
pricing. Pricing varies greatly from high volume, low priced 
laser centers to more moderate costs from individual providers 
with personalized treatment. Medical offices, laser centers, 
banks, financing companies have all emerged that have created 
financing opportunities for almost any individual desiring the 
treatment. So it has opened the doors to almost everyone.
    As a small business owner and physician, we recently 
changed our health insurance to a high deductible plan where 
the employee/employer contribute to the deductible cost. This 
returns the majority of the patient's outpatient care to a 
health care and financial transaction between doctor and 
patient. The third party does not stand in the middle and the 
doctor and patient are forced to weigh the cost of the 
treatment. This also allows the patient to control more of 
their health care costs and direct costs toward preventive care 
if they choose. Hopefully, changes such as these will continue 
to help relieve this insurance cost burden.
    Thank you.
    Chairman Akin. Thank you very much for your testimony, 
Doctor.
    My understanding is that you have business here that you 
have got to attend to fairly quickly, so perhaps I might start 
with a question or two for you.
    Dr. Kulze. Okay.
    Chairman Akin. I will just start with first of all, how are 
the third party payment plans affecting your practice and how 
do you feel this practice can be improved?
    Dr. Kulze. Well, quite often, the third party payment plan 
is, as I said in my testimony, in the middle. So a patient 
comes to see me and the patient and the doctor are together, 
yet they cannot maybe continue treatment or provide treatment 
until it is okayed by a third party payer and then possibly the 
treatment, depending on what it is, may not be covered by the 
third party payer. So it adds a whole other layer between 
doctor and patient, where, you know, treatment and payment is 
done.
    Chairman Akin. Thank you very much. Congressman, did you 
have a question you wanted to------.
    Mr. DeMint. Yeah, Dr. Kulze--Kulze is right?
    Dr. Kulze. That is correct.
    Mr. DeMint. I often use the example when I am speaking of 
laser eye surgery, so I am glad you are here. Because after 
years of working in health care myself and dealing with process 
improvement in many other business categories, I have found 
that because of the payer system on the medical side of health 
care, that it was very difficult for them--physicians, 
hospitals--to constantly change the way they deliver, to look 
for more efficient ways to do things, to look for new 
technology, to cut out steps, because of the coding system and 
really because of third party fixed payer systems. Not 
necessarily insurance in general, I want to make a distinction 
there.
    But it looks to me that Lasik eye surgery is kind of an 
example of what could happen if not only the consumer was 
involved, but the physician was not tied down to the code 
system that is a part of all other medicine. You can deliver 
the service in the way that you think is best and you can pull 
out as many steps as you want and it is competitive, like you 
said, but it is my understanding that Lasik eye surgeons do 
just fine as far as what they are making, the price is getting 
lower and lower, the quality appears to go up, consumers making 
the decision.
    Sometimes people will say well consumers really are not 
smart enough to buy health care. I would like you to maybe just 
comment on the code system, the consumers, how you do business 
directly with them. Do you think the American consumer can buy 
health care?
    Dr. Kulze. Well, first, the code system is quite 
complicated and it seems to constantly change. So in a small 
practice like myself, I mean I even have to have someone 
designated or hired to keep up with correct coding. It would be 
completely impossible for me to code everything myself and know 
correct codes and file subsequently. I would not have the time.
    Mr. DeMint. But you do not have to do that for Lasik.
    Dr. Kulze. Yes, Lasik, you do not. Lasik is--there is not a 
third party issue there to file. It is a transaction between 
patient and doctor simply, like most any other thing purchased 
in the world. So doctor and patient are going to sit down and 
discuss the procedure and decide the best route to go. There 
are varying price levels emerging with advancements in Lasik. 
Prices may very according to the patient's desires. If you want 
to take the Cadillac version, then you can have the Cadillac 
version and pay for it too. But there is some pricing in that 
manner. But competitive pricing between physician and physician 
has really brought the price down I think.
    Certainly it is not going to go lower than the physician 
can stand. So it is at a level that is accepted I think to 
physician and patient.
    Mr. DeMint. Do you find the patient able to make--I mean 
there is a concern that if patients ever do business directly 
with you, that you are going to take advantage of them. How 
would we make sure that did not happen if we tried to allow a 
lot of other medical services to be delivered in the same way? 
How do we know doctors would not take advantage of us?
    Dr. Kulze. That is a good question and obviously like any 
business person--physician, lawyer, whatever--it comes down to 
when you are making the purchase, the transaction, the 
treatment, there has to be some trust obviously. I think 
physicians work hard to train themselves, to keep 
certification, to know what goes on from one physician to the 
other. I think patients see the quality of their care. I think 
what you see in the majority of private medicine is that 
doctors gain their business from referral from other patients. 
So patients that have received appropriate care and quality 
care, they tell their family members and friends who they think 
they should go to. So that system alone promotes quality care.
    Mr. DeMint. Okay. I yield back, Mr. Chairman.
    Chairman Akin. Thank you. I very much appreciate your 
coming in.
    Let me see if I can summarize what I think I was hearing 
you say, to make sure I understand.
    First of all, you are saying that at least in the Lasik 
side of your business, it is basically a free market in the 
sense that there is a product that is available and customers 
can come in and purchase it and they can negotiate what price 
they want, depending on which doctor they want to talk to or 
what procedure they need. And what you are saying is that that 
free enterprise is working well. It is producing--maybe I am 
putting words in your mouth, but tell me if I am. We are 
producing a good quality product, the costs are continuing to 
come down and yet the doctors and everybody is content with the 
result of the transactions, nobody is starving to death and 
people are getting good service. Is that the bottom line of 
what you are saying?
    Dr. Kulze. That is generally so, I agree.
    Chairman Akin. But your practice also includes a much 
broader spectrum of work other than just Lasik, and so in those 
other categories, those are where you have the government set 
up and essentially it is a de facto price control type of thing 
and you also do not have the consumer that involved or 
immediately involved in the cost of what they are purchasing.
    Dr. Kulze. True. I do probably the majority of my practice 
not Lasik and I strongly agree with the first gentleman that 
talked that I think the answer in my view, from the doctor's 
standpoint, is bringing this transaction back between patient 
and doctor, so that at the same time that you are discussing 
treatment, you are discussing the cost of the treatment. I 
think that is very, very important.
    Chairman Akin. Thank you very much for joining us, we 
appreciate you coming in, especially with I know that you have 
got other business waiting. So if you would like to be excused 
and want to slip out, that is fine. We have got some questions 
for the other gentlemen here as well.
    Dr. Kulze. Thank you.
    Chairman Akin. I think maybe what I am going to do is to 
kind of go back around, Ernst, to you to start off and a 
question which pretty much really occurred to me as I heard a 
number of your other testimonies. Different ones of you, 
depending on your perspectives, identified things that are 
driving health care costs. You know, the problem of malpractice 
in some areas, the problem of the cost of administration and a 
number of different things.
    Let me ask, and anybody who wants to jump in on this 
question, please do. If you take a look at what these different 
cost drivers are and you had to rate them, which one is really 
driving cost of medicine the most. The first question would be 
what do you think that would be, if you can compare 
administrative costs to malpractice to other things. So that 
would be my first question.
    Mr. Csiszar Actually, Congressman, there is an interesting 
study out by Price Waterhouse in 2002 that sort of identifies 
some of the drivers and I think they are pretty much on target, 
because I would agree with the fact that the number one driver 
is demand. The number one driver is the fact for the first time 
since the Egyptian pyramids, doctors are providing of value to 
the patients, they are not telling them to go home and take a 
couple of aspirins. You know, there are procedures--artificial 
knees, MRIs, CAT scans, so on and so forth. So there is 
something that the customer is valuing in this. So I think 
demand supplemented by demographics, we know that our aged 
population is roughly about 13 percent of the population, but 
consumes roughly 33 percent of overall medical costs. So 
combine demographics into this demand equation and I do not 
think there is any doubt in my mind whatsoever that demand is 
the number one driver.
    Add to that then things like malpractice and I would agree 
entirely with the doctor here that malpractice is a 
contributor. I would only caution you, I keep hearing about 
caps on awards and that is a good start, but that is not the 
whole solution. I entirely agree with the comments made with 
respect to loser pays, with respect to choice of venue, for 
instance, which is significant, with respect to trial by judge 
alone without juries for instance. So I think a comprehensive 
tort reform package would make eminent sense because it is a 
clear, clear driver.
    I would add to that------.
    Chairman Akin. Could I interrupt you just a second? Could I 
assume that the things that you are mentioning are in sort of 
economic order?
    Mr. Csiszar Yes.
    Chairman Akin. So you would say first of all demand, 
obviously people want health care and that is really what is 
driving it.
    Mr. Csiszar Yes.
    Chairman Akin. Second thing would be malpractice.
    Mr. Csiszar Malpractice.
    Chairman Akin. You pick that over, for instance, 
administrative costs or whatever.
    Mr. Csiszar I would pick that over the regulatory cost, for 
instance, because the regulatory cost I would pick as number 
three, just the amount of paperwork required by things like the 
privacy legislation. Never mind paperwork, actually changes to 
computer systems, for instance, at an enormous cost. So I would 
add regulation as number three.
    Certainly fraud is in there, I would put that probably in 
as sort of a number four.
    But by far, outstripping all of this is just the demand 
factor I think. And that again is supplemented by a third party 
payer system, by demographics, et cetera.
    Chairman Akin. Thank you very much. Did anybody want to 
piggyback on that one way or the other?
    Mr. DeMint. A lot of the things you have mentioned--
paperwork, administration, fraud--a lot of these are a result 
of again the third party fixed fee system, even the fraud 
trying to game the system. Liability is somewhat of an issue in 
that the patient is somewhat helpless in the process, all the 
decisions have to be made for them, so they cannot share in the 
responsibility the way it is set up.
    So what I look for is, is there a common root cause. I mean 
certainly not any one thing is going to change it, but a lot of 
the system of bureaucracy and liability is built around the 
fact that the patient is not a decision-maker, not a 
responsible participant in the process and you have certainly 
spoken of that.
    Let me switch to Mr. Marchant. Mr Marchant, you have heard 
the mention of these patient-directed plans, defined 
contributions. And in your testimony you mentioned that someone 
is going to--in other words, is going to have to ration 
utilization. It is either going to have to be a third party or 
it is going to have to be the patients themselves. I think we 
have heard here and many other occasions, if we make it free 
for the patient, then a third party is going to have to 
restrict access, because getting back again to the idea of 
demand.
    But my question to you and I know that a number of the 
companies that you represent have been involved with some of 
these new products, but it does not appear that the insurance 
industry is as active as I might think they would be at a 
crisis stage of the industry developing defined contribution 
plans, trying to work out how to make them work better for 
patients, for employers, and maybe there is a lot going on that 
I do not know. But just from an industry perspective, is the 
development of defined contribution, health savings accounts, 
HRAs, is that a priority of the health insurance industry?
    Mr. Marchant. Congressman, the industry reacts to the 
market. That is the reason why we had managed care to begin 
with and that is why you are seeing more and more companies 
coming up with these defined plans, MSAs. I know of at least 
one, probably several health insurance companies here in South 
Carolina that do offer these type products to employers. The 
information that I have received back is that people are not 
jumping to buy them. They appear to be complicated and for 
whatever reason, I do not know if the marketing folks are not 
pushing them, but we are not seeing people beat down the doors 
to buy them. But we surely--we are at a position in the market 
where we want to offer an employer anything. I mean we are at 
the point where they are making decision to drop everything 
that they have, so the industry is trying to retool and put 
products on the market which people feel comfortable they can 
buy. From what I understand so far is that the marketplace has 
not matured yet or maybe the crisis is not large enough, I am 
not sure. But they are not buying them like we thought they 
would. But they are being offered in this state.
    I want to get back though to a question about controlling 
the cost and utilization, you talked a little bit about that in 
the laser surgery that was talked about earlier. That is an 
elective procedure. The industry is concerned that most health 
care is an involuntary purchase, so whatever--I mean the laser 
surgery, there is probably a lot of thought put into that, that 
is elective and you can shop around. But whatever plan that we 
decide to do, we still hope that there is an ability for 
someone to go in and have some prearranged discounts or some 
look after the fact to make sure that utilization does not 
continue on the rate that it is right now and that costs stay 
level.
    Mr. DeMint. I appreciate those points. But I think most 
health care is elective, 70 or 80 percent of what we go to the 
doctor for goes away by itself within a few days. And what 
concerns me is the way our system is set up, it encourages 
people to actually over-elect. Certainly the more serious 
procedures are not elective, the problems that people have, and 
my concern is that we are over-utilizing at the primary care 
level and we are not getting enough money up to the chronic, 
more tertiary services.
    But again my question goes back to you. I know following 
the market is one thing, but it is my opinion that we need a 
lot of help figuring out how to make consumer-directed products 
work and we need a lot of participation from the health care 
industry. This is not exclusive of other health care products, 
I believe the cash accounts can work in conjunction with an HMO 
insurance product, with a PPO insurance product, with all kind 
of alternatives. What we are trying to do though is get some of 
the health care decision-making made with the individual having 
a vested interest in what it costs, pushing the health care 
industry to publish prices, to get more quality information and 
I guess my challenge to you and the industry is to help us on 
that, because it is a complex product to develop and I have had 
a number of employers say they have talked to their insurance 
companies about it, the products are not developed very well, 
there is not marketing material and folks are really just 
learning about it. But we did have 10,000 federal employees 
this year take a health reimbursement account product without 
very much promotion at all. So my hope is that it is growing.
    But I appreciate yours answers and response and 
consideration there.
    Mr. Chairman.
    Chairman Akin. Thank you very much for the back and forth 
on that. It raised one of the questions that came up to me, 
Larry, in your comments. I think you said something to the 
effect ``someone must control the excess capacity,'' and I 
guess you could say which came first, the chicken or the egg. 
But that does raise a question and that is if you are going to 
control costs, and maybe that is making the assumption that 
they will be controlled one way or the other, you know, who is 
to do that? I think that certainly the health care industry has 
done a job doing that, they have dropped a lot of costs in the 
process of trying to cut out duplicate procedures, which we had 
a lot of problems with in other ways.
    On the other hand, at a fundamental level, I think Ernst 
has raised the question of who is the ultimate person that is 
going to be controlling that, and do we believe, as the doctor 
just suggested, that that is more of a consumer base or is that 
something that is going to be controlled by someone else. Do 
you have a personal opinion as to where that should go or do 
you generally support the concept that it should be more of a 
consumer driven model that is going to help us?
    Mr. Marchant. Well, surely we would support more cost 
sharing for employees. I mean we understand and we believe that 
the more people feel the give and take, the better off we 
probably are on controlling utilization, and that of course 
will be right back to the patient. I mean they will make that 
decision. You know, insurance used to operate that way and we 
have moved toward copays and we have moved toward the 
prescription cards because that was the consumer demand, that 
is what employers were asking for. We got into the preventive 
medicine is good, we need to encourage people to get physicals 
that may have cost $400 but it is better to let them have it on 
a $25 copay and maybe catch that disease.
    So all of these things were market forces and the industry 
is supportive of going back towards more pay as you go, but we 
have been under a tremendous political pressure from the 
Congress and from our state legislators to try to put products 
in the market the cover all these things, make it easy for the 
employees to access this care. So I think the industry is 
prepared to go either way, Mr. Chairman, on that issue. We want 
to be involved in presenting options for the market.
    Chairman Akin. Thank you very much, I think you answered my 
question.
    A follow up then, Ms. Perry, you had mentioned several 
different kinds of ways to move more towards a market-driven 
system. At least I got that impression of some of your 
conclusions.
    And I guess maybe I would just ask if you could elaborate, 
what are the advantages or limitations of either, whether it is 
a Medical Savings Account or the FSAs. I have trouble keeping 
them all straight, but essentially------.
    Ms. Perry. I do too.
    Chairman Akin. --essentially variations on the theme where 
you create more flexibility on the part of the consumer to 
control how they want to get insured and how they want to cover 
their medical liabilities. Could you comment on that?
    Ms. Perry. Sure.
    On the MSAs, from my understanding and again, I am not an 
insurance expert by any means, individual families and 
individuals can pay medical expenses from an MSA and they can 
contribute to this tax free and it can be rolled over from one 
year to the next. So if they bank the pretax money to pay for 
copays or to pay for the deductibles and they do not use them 
all this year, they will roll over and this is true of the FSAs 
as well, the following year. Right now, I believe it's the 
FSAs, if they are not used by the employee, who has been the 
one to put their money into it, it goes to the employer, a 
wonderful boon to me, but not to my employee. And they are not 
going to be overly excited about putting their money into a 
fund that disappears at the end of the year. And right now, 
MSAs are scheduled to end December 31 of this year. They were a 
demo, it was strictly an experiment and it is not going to 
continue into the next year unless something happens. And there 
has been a limitation of 750,000 individuals who are able to 
participate in this product and then it cuts off.
    Chairman Akin. So it is very limited what is available 
right now.
    Ms. Perry. Extremely limited--extremely limited.
    Chairman Akin. Okay.
    Ms. Perry. And I guess the one that is of most interest to 
me right now is the AHP, the Association Health Plan, and 
mainly for some of the reasons that I had mentioned. I see an 
economy of scale, I see a spreading the risk. Instead of just 
in-state, across the states, across the country, using the 
population of the country or the population of an association 
to spread the risk factor for the insurance company and for us. 
So that when I buy a company in Georgia, I do not have to worry 
about paying three times what I pay in Charleston, South 
Carolina. If I only have 17 employees, I am competing with a 
General Electric, I am competing with a large company that has 
a very large population to spread that risk.
    Chairman Akin. Thank you. Congressman DeMint, did you have 
any follow up questions along those lines?
    Mr. DeMint. Well, it is more of a suggestion. While MSAs 
are very limited, health reimbursement accounts are now 
available and can be rolled over. I would hope whatever carrier 
you use would make you aware of those. This is where an 
employer can put money into an account for an employee, they 
can provide a reinsurance product above that and the money can 
roll over if they do not spend it. Now we are trying to improve 
that so it will be portable, so that the employee can put money 
in it that rolls over, that is what health savings accounts are 
ultimately envisioned to be. But right now, you can create an 
HRA style of product.
    But let me move from you to Mr. Moreland for a quick 
question.
    When you were talking about defined contribution plans, it 
sounded like while you were positive about it, you were--did I 
hear you say that the administrative costs of those were high?
    Mr. Moreland. Well, to be more clear, I would say that the 
delivery mechanism is a little more complex. It is difficult 
for an employee to configure their benefits and determine their 
cost on a piece of paper, which is why our organization has 
gotten so involved in defined contribution plans, because it is 
easy via computer software to provide an environment where a 
subscriber, contract holder can configure their benefits 
different ways and see the immediate impact on the bottom line, 
their medical spending account and their overall costs.
    Mr. DeMint. But your general conclusion is that this is a 
potential solution to at least some of the problems we have 
talked about. Is that fair to say?
    Mr. Moreland. It is.
    Mr. DeMint. And it can be administered efficiently if given 
the right software and if your company does it, right?
    Mr. Moreland. And we might. But further I would say too, 
just referring to what we were speaking about earlier are 
defined contribution system really prevalent in our industry 
yet, and the answer I think is no, but I think there are a 
number of reasons for that. One is that there is somewhat a 
wait-and-see environment in the industry, but also because 
there needs to be a fair amount of infrastructure in the 
administration systems to support defined contribution plans; 
in particular, paying claims out of medical spending accounts. 
None of those systems, software systems or even processes have 
really been established yet. So I think we will see that in 
time.
    Mr. DeMint. Good, good. I yield back.
    Chairman Akin. Thank you, Congressman.
    I know that Congressman DeMint has done a lot to challenge 
the thinking of many of us in Congress along the lines of 
these, particularly the MSAs, FSAs and it is helpful to hear 
what you are saying, it just takes time. I remember when the 
HMO first came along. Boy, it took a long time to drag me 
along, I was one of those died in the wool, get my major 
medical policy on the street corner and do not bother me with 
telling me who my doctor was going to be. It takes time to try 
to have a public understanding, and I am sure the medical 
community to understand, how these systems are going to work. 
So I appreciate your perspective on that.
    I appreciate, Jim, that you are challenging all of us to 
take a look at the way to try to develop that flexibility for 
our consumers across the board.
    Mr. DeMint. Thank you, Mr. Chairman.
    Chairman Akin. I think maybe just in a general sense, I 
will go back to the starting point I think that you, Ernst, put 
pretty clearly and that was from a systems point of view, we 
have got some fundamental problems in what we have got going. 
And I think that is has been my sense, and part of the reason I 
even ran for a government office was that we do have a systemic 
kind of thing. And the problem is that we have separated the 
consumer from the product that he is using, and that just by 
definition is going to drive costs. And I appreciate your sort 
of standing off and taking a look at it at a distance and 
saying, you know, we kind of have to challenge some of those 
assumptions at the front end.
    My background was big business, I used to work for IBM and 
other places like that, and I understand--you know, businesses, 
I do not think of them as being evil, they are pretty much, you 
show me the rules, I will play the game. And I think the 
insurance companies have responded to the rules to some degree 
the way politics and people in public office have defined them.
    Maybe we need to get back to the drawing board and get back 
to the basics that built America, which is allowing the 
consumer to be one that defines the demand, and maybe that 
answers that question that you mentioned, in terms of excess 
capacity. You know, if people will not pay for it, that is a 
quick way to stop it, and to try to develop those products.
    Unless you have a follow on questions, Mr. Congressman, I 
am------.
    Mr. DeMint. I think we need to reassure Vince that we have 
heard the malpractice argument and that is almost a no-brainer, 
we need to do something about that. Medicine is not a perfect 
science and to hold doctors to a standard of perfection is only 
going to make it harder and harder for people to get health 
care and to afford insurance.
    But did you have any additional comments to make?
    Dr. Degenhart. Well, I appreciate what the House has done 
in that regard, and hopefully the Senate can somehow come 
around, it has become a very partisan issue.
    But since I spoke about the malpractice issue, I think I 
would be remiss if I did not speak about the quality issue. 
Because in medicine, we have got to improve quality. I think it 
is good and we like to pat ourselves on the back that we all do 
a great job and do not want to get sued. Yet the Institute of 
Medicine says we make 44,000 errors a year that cause death in 
the United States in American hospitals. That may be high, it 
may be low, I do not know for sure. But in any event, we are 
doing things. Our new committees on quality assurance, the new 
leap frog group out of Washington that is instituting a 
partnership with hospitals to have software programs such that 
medical errors in medications basically cannot be made. You 
cannot make a medication error that you write too much for a 
patient or not enough, or that you write the wrong drug or 
something they are allergic to. Also they will have treatment 
protocols for different disease processes--did you think of 
this, did you want to do this, did you want to do that. These 
are some systems things.
    A lot of times, I think what has been known with this with 
the Institute of Medicine, what they showed was that most of 
the errors are not errors that the physician or the nurse or 
somebody makes personally, it is a system error. And we can fix 
a lot of these systems. And yes, that takes money and it is 
going to take time, but I think in the next two or three years, 
you are going to see dramatic changes in that regard in 
hospitals and health care facilities in their systems that are 
going to be so much better. And I think that will deliver a 
better product and hopefully ultimately a more cost-effective 
product as Lasik has shown.
    Chairman Akin. I may have glossed over. As a member of the 
House, we passed some different malpractice legislation, I do 
not know how many times in the last couple of years and so I 
kind of took that as we have already done that, and I would 
just wish that we had a tape recording to pass on to some of my 
Senate colleagues so perhaps we could move something along in 
that regard as well.
    Perhaps some of you can do something about that. Who knows.
    Larry.
    Mr. Marchant. Going back to the answer that I gave to you 
about the utilization, I cannot leave without stressing this 
for the Committee to remember--patients do not control 
utilization in the hospital setting. The providers control 
utilization. So again, as we go back and rethink, yes, on the 
voluntary procedures when you are of a sound mind and you can 
think about what procedures you want to have done, remember 
that most of cost that we incur in the health care delivery 
system are 25 percent of the sickest people in the United 
States. Most of those decisions are involuntary, the person 
that is paying the way does not make those decisions on how 
many tests to run, what procedure is done. Those are done by 
the provider. So again, as we go through this process of 
putting people in control of their health care, we have to take 
into account that many of these decisions are not made by the 
folks who actually pay the bill.
    Mr. DeMint. And that is an excellent point, if I can jump 
in, Mr. Chairman. As I envision defined contribution, patient 
driven, I see primary and secondary health care and as we get 
to the tertiary level which is more involuntary, obviously 
third parties need to be involved. But we do need, to what 
degree we can, keep--make sure folks have insurance, they are 
covered, but keep the patient, their family at least involved 
with the financial aspect of it. Because at whatever point 
health care becomes free, the demand goes through the roof. And 
we just need to question all aspects of it and I appreciate all 
of you today helping us question it and come up with a few 
ideas.
    We want to move from talking about the problem to figuring 
out what the solution is. And I know some of that is on our 
side, some of it is on your side, and so hopefully we have 
challenged each other today to come up with some new ways of 
doing things and we will see how the health care market 
evolves.
    Mr. Chairman, I know we need to close right now but if 
anyone has 30 seconds of something that has not been said that 
needs to be said, you have done us all a great honor to be here 
and I want to make sure we do not leave it unsaid. So any 
additional comments?
    (No response.)
    Chairman Akin. Well, I appreciate that. So far I have a 
perfect record of bringing meetings in on time and we have got 
four minutes that has been redeemed for everybody.
    Thank you all very much. We will be standing by for a few 
minutes afterwards if you have any questions or answers or 
thoughts. Thank you all very much, the meeting is adjourned.
    [Whereupon, at 3:00 p.m., the hearing was concluded.]

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