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



                                                   S. Hrg. 102-000 deg.

                THE BENEFITS OF HEALTH SAVINGS ACCOUNTS

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

                                HEARING

                               before the

      SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT & GOVERNMENT PROGRAMS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                     WASHINGTON, DC, MARCH 18, 2004

                               __________

                           Serial No. 108-58

                               __________

         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           ENI FALEOMAVAEGA, American Samoa
SAM GRAVES, Missouri                 DONNA CHRISTENSEN, Virgin Islands
EDWARD SCHROCK, Virginia             DANNY DAVIS, Illinois
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               BRAD MILLER, North Carolina
STEVE KING, Iowa                     [VACANCY]
THADDEUS McCOTTER, Michigan

                  J. Matthew Szymanski, Chief of Staff

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

     SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT AND GOVERNMENT PROGRAMS

TODD AKIN, Missouri, Chairman        TOM UDALL, New Mexico
JIM DeMINT, South Carolina           DANNY DAVIS, Illinois
SHELLEY MOORE CAPITO, West Virginia  GRACE NAPOLITANO, California
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
CHRIS CHOCOLA, Indiana               MADELEINE BORDALLO, Guam
STEVE KING, Iowa                     [VACANCY]
THADDEUS McCOTTER, Michigan

                     Joe Hartz, Professional Staff

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Crane, Hon. Philip M., U.S. House of Representatives (IL-8)......     4
Braden, Ms. Victoria, Braden Benefit Strategies..................     9
Sullivan, Ms. Kate, U.S. Chamber of Commerce.....................    11
Alders, Mr. David, Carizo Creek Corp.............................    13
Perrin, Mr. Dan, HSA Coalition...................................    15
Blumberg, Ms. Linda, The Urban Institute.........................    17

                                Appendix

Opening statements:
    Akin, Hon. W. Todd...........................................    32
Prepared statements:
    Crane, Hon. Philip M., U.S. House of Representatives (IL-8)..    35
    Braden, Ms. Victoria, Braden Benefit Strategies..............    39
    Sullivan, Ms. Kate, U.S. Chamber of Commerce.................    45
    Alders, Mr. David, Carizo Creek Corp.........................    54
    Perrin, Mr. Dan, HSA Coalition...............................    59
    Blumberg, Ms. Linda, The Urban Institute.....................    75

                                 (iii)

 
                THE BENEFITS OF HEALTH SAVINGS ACCOUNTS

                              ----------                              


                       THURSDAY, MARCH 18, 2004,

                  House of Representatives,
        Subcommittee on Workforce, Empowerment and 
                                Government Programs
                                Committee on Small Business
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:39 a.m. in 
Room 311, Cannon House Office Building, Hon. Todd Akin 
[chairman of the Subcommittee] presiding.
    Present: Representatives Akin, Udall, Case
    Chairman Akin. The hearing will come to order, please. We 
have ourselves a brand new redecorated room, but we do not have 
a gavel up here so we will just have to have an unofficial 
gavel.

    As I believe most of you are aware, we are here to talk 
about medical savings accounts and I have an opening statement 
and I believe that Congressman Udall will have also an opening 
statement and then we will proceed to our witnesses.
    Good morning. I would like to extend a warm welcome to 
those of you who have taken time out of your busy schedules to 
testify before the Committee today.
    Approximately six of every ten uninsured Americans are in 
families headed by workers who are either self-employed or work 
at firms with fewer than 100 employees. It is often the case 
that the overall cost of health insurance is the greatest 
barrier to small business in providing such coverage to their 
employees.
    In fact, annual premium increases of 40 to 50 percent are 
typical of what small businesses and their employees throughout 
the nation are experiencing today.
    In January, the President noted that the best way to help 
these families is in his words, to let them save and spend 
their health care dollars as they see fit. He argued that the 
federal government must empower people to make the right 
decisions with their health care dollars.
    Give them control of a routine cost so that people see the 
doctor when they need to, spend their dollars wisely and will 
be able to have coverage for major medical bills. Health 
savings accounts or HSA's do just that.
    Last fall, with the enactment of the Medicare law HSA's 
became available to an estimated 250 million non elderly 
Americans. Martin Feldstein, a Professor of Economics at 
Harvard University and former Chairman of the Council of 
Economic Advisors under President Reagan argues that HSA's may 
well be the most important legislation of 2003.
    Under the HSA provisions, consumers can make pretax 
contributions into an HSA account, up to the amount of their 
deductibles. The HSA earns interest tax free and unused funds 
can be rolled over from year-to-year.
    As long as the account is used for qualified medical 
expenses, it can be withdrawn tax free. Pretax contributions 
can be made by the individual employer or family member.
    Individuals between 55 to 65 can make up pretax catch-up 
contributions, which they can use for non-covered Medicare 
expenses, such as their Medicare premiums.
    In addition, HSA's are portable, because the individual 
owns the account and he may take it with him to another job. 
Upon death, HSA can be transferred to a family member.
    The issue before us today is to examine the benefits HSA's 
provide to small business owners. I would like to thank the 
small business owners and health care policy experts who have 
joined us here today.
    Before we hear from you, however, our esteemed colleague, 
Congressman Phil Crane of Illinois, has been kind enough to 
speak to us about legislation he recently introduced, his Bill 
H.R. 3901, known as HSA's for The Uninsured Act would allow an 
individual to deduct 100 percent of their premiums for high 
deductible plans that are associated with HSA's. Congressman 
Crane, thank you for joining us.
    Before we proceed with the testimony though, I would like 
to give our ranking member, Congressman Tom Udall of New 
Mexico, an opportunity to say a few words. Congressman Udall.
    [Chairman Akin's statement may be found in the appendix.]
    Mr. Udall. Thank you very much, Chairman Akin. Pleasure to 
be with you and good to have you here today, Congressman Crane.
    One of the greatest concerns I think for our nation's small 
businesses is access to affordable and quality health care. The 
small business community is hit hardest by this growing 
problem.
    Many small firms have no health insurance at all. As the 
Chairman has indicated, it has been estimated that more than 60 
percent of the approximately 44 million uninsured in this 
nation are small business owners, their employees or their 
families.
    As the coverage rate for large employers approaches 90 
percent, firms with fewer than 50 employees have coverage rates 
just shy of 50 percent. The reason: Small firms pay as much as 
30 percent more for policies similar to those used in big 
corporate entities.
    While large corporations have an easy time accessing 
quality, affordable health care, small businesses, the drivers 
of our economy, are not as fortunate.
    Today we are here to discuss some possible solutions for 
this growing crisis in the small business sector. I want to 
ensure that any reforms in our health care system do more good 
than harm.
    Everyone benefits when more Americans can obtain quality 
health care coverage. President Bush as been looking at ways to 
use the tax code to encourage more people to purchase health 
insurance.
    The problem with many of his proposals, that while they may 
help a few, the adverse effects on the rest of the market will 
only exacerbate the problem. We should actually see the number 
of uninsured and underinsured in this country increase with 
some of these reforms.
    One of the proposals that we will look at today is 
expanding the tax benefits for health savings accounts or 
HSA's, as they were created as part of the Medicare bill last 
year.
    These accounts already offer a tremendous tax advantageous 
for wealthy individuals who can now put thousands of pretax 
dollars away for medical expenses. President Bush's Fiscal Year 
2005 budget calls for increasing the tax advantages of HSA's by 
allowing individuals to deduct their health insurance premiums.
    While this change may provide an additional health care 
option for a few small businesses, we must look at the bigger 
picture: The impact on the rest of the health insurance market.
    While some argue that HSA's increase the available options 
for small businesses, these health insurance reforms do not 
operate in a vacuum. The expansion of HSA's could have the 
effect of separating groups of employees into healthy and sick 
insurance pools. This could drive up costs for those in the 
traditional insurance market and could devastate some small 
businesses, particularly those with older and less healthy work 
forces.
    The resulting price hikes from this adverse selection may 
lead employers to stop offering comprehensive coverage or to 
raise the share of premiums that employees pay, only creating 
additional barriers to accessing health care.
    It is also of concern that those in the higher tax brackets 
reap the majority of benefits from these proposals and while I 
agree something needs to be done, we must target those groups 
particularly low income workers, who are most likely to lack 
health care coverage.
    I believe the tax incentives like small employer tax 
credits, if used properly, can help reduce the number of 
uninsured in this country. Many small businesses which 
currently do not offer health insurance could easily be enticed 
to start doing so with the proper fiscal tools.
    If we continue to take a piecemeal approach to this issue, 
it will not tackle the underlying problem: The inability of 
small businesses to afford health care. Congress needs to 
create a system in which small business owners, their employees 
and their families do not live in constant fear of just being 
one illness away from bankruptcy.
    After all, small businesses are this nation's main job 
creator. It is disconcerting to think they are left without 
health care options and piece of mind, even though they are the 
backbone of the American economy.
    Thank you, Mr. Chairman. I look forward to hearing the 
testimony of Congressman Crane and our other panelists today.
    Chairman Akin. Thank you, Congressman. Congressman Crane, 
thank you so much for joining us and for providing a 
prospective on your own piece of legislation, which originally 
I thought of when I heard about medical savings accounts, I 
thought that was part of it. It seems like you are adding a 
piece that maybe seemed like it was missing. Would you please 
proceed?

   STATEMENT OF THE HONORABLE PHILIP M. CRANE, U.S. HOUSE OF 
                     REPRESENTATIVES (IL-8)

    Mr. Crane. Thank you very much, Mr. Chairman. Also, Tom, I 
served with your distinguished uncle and it was a privilege. Mo 
was your uncle, right or is your uncle?
    Mr. Udall. Yes, he is my uncle.
    Mr. Crane. Yes, indeed. I had the honor of serving with 
him.
    I appreciate the opportunity to be here today to discuss my 
new legislation to help uninsured small business employees and 
owners. Just this month alone over 30 members of Congress 
joined me in introducing H.R. 3901, The HSA's for the Uninsured 
Act of 2004, which I believe will benefit millions of Americans 
who are struggling with the high cost of health insurance.
    Under current law, health savings account must be purchased 
in conjunction with a qualified high deductible health plan. 
Our new bill, The HSA's for the Uninsured Act, allows an 
individual to deduct 100 percent of the premium of his or her 
high deductible health insurance, if bought in conjunction with 
a new health savings account. It is an above-the-line deduction 
for people who do not have health coverage through their 
employer.
    H.R. 3901 will promote the use of health savings accounts 
throughout the country and is one of President Bush's top 
priorities. The premise for this bill is simple: By reducing 
the cost of health insurance for individuals, more people will 
be able to afford it.
    Before I describe to you the benefits of my new bill, I 
first want to talk a little bit about HSA's. Health savings 
accounts work like an IRA. A person can contribute to a health 
savings account on a tax free basis. The account grows tax free 
and funds in the account can be withdrawn tax free for medical 
expenses.
    Many of you are familiar with medical savings accounts, the 
predecessor of the health savings account, which began as a 
limited demonstration project in 1996. HSA's are a significant 
improvement over the old medical savings accounts, because they 
are available to absolutely everyone that wants one.
    Medical savings accounts had a number of restrictions that 
prevented their use from becoming more widespread. MSA's were 
very successful at making health insurance more affordable for 
selected individuals.
    According to the last report of the U.S. Treasury, 73 
percent of all MSA buyers were previously uninsured and at the 
end of 2003, MSA policyholders saved about $150 million in 
their accounts.
    M.S.A.'s provided the majority of its policyholders with 
health coverage they couldn't find anywhere else and savings to 
spend on future medical expenses.
    Because the medical savings account program was scheduled 
to sunset in December, 2003, Congress acted last year to create 
the next generation of MSA plans. On December 8, 2003, 
legislation creating health savings accounts was signed into 
law by President Bush and people have already begun to purchase 
health savings accounts.
    The basic idea behind these accounts is to let people put 
their own money away for their future health care needs. HSA's 
are completely portable and can be used for any health care 
expense, such as prescription drugs or doctor visits.
    Under current law, a health savings account must be 
purchased in conjunction with a qualified high deductible 
health plan. High deductible health plans are considerably less 
expensive than traditional health insurance.
    The premise behind this requirement is for individuals to 
use their health savings accounts for their small medical 
bills, like routine doctor visits. The high deductible health 
insurance is used for big medical bills, like hospital stays.
    Because people get to keep what they don't spend from their 
account, they will have an incentive to ask for the price 
before care and check their bill after care to make sure they 
haven't been overcharged.
    Let me explain to you why HSA's are so important for all 
Americans. Most insured Americans will see an estimated 13 
percent increase in their health insurance premiums. This 
increase follows several consecutive years of double digit 
increases.
    These rising costs are driving people out of the health 
insurance market. Currently there are more than 43 million 
Americans without any health insurance at all. One piece of 
legislation isn't going to solve this problem.
    There isn't a simple answer, but there is a necessity to 
take multiple steps now. One of the most important steps 
Congress can take right now to make health coverage more 
affordable is to make health savings accounts more accessible 
and that is what my legislation does.
    H.R. 3901 is the first step toward tax fairness in our 
health insurance system. All members in Congress, all of our 
staff and probably most of the people watching this hearing get 
their health insurance tax free.
    Currently, health insurance is tax free to the employer and 
tax free to the employee. Tax free benefits for health 
insurance date back to the 1940's and 1950's. In 1943, the IRS 
ruled that employer provided health insurance was tax free and 
in 1954, Congress codified that ruling. That has enabled 
hundreds of millions of families to have health coverage over 
the years.
    As we all know, the economy changes and as a result, the 
way in which people buy health insurance changes. For the most 
part, Congress has kept up with this trend.
    A few years ago, Congress gave self-employed individuals 
full deductibility of their health insurance premiums, but our 
tax policy still leaves the individual purchaser out of the 
system.
    Many of us in Congress have constituents who work for small 
employers who can't provide health insurance, because of the 
high cost. Our constituents may be waitresses in diners, 
workers in a dry cleaning store, widows who go back to work as 
temporary workers or seasonal workers in the service sector.
    None of these workers are eligible for tax breaks for 
health insurance. It is unfair that some people get tax breaks 
and some don't, all dependent on whether their employer can 
offer health insurance, yet it has been our tax policy for 60 
years.
    The HSA's for The Uninsured Act takes the first step 
towards providing fairness in our health insurance system by 
giving a tax break to individuals who purchase health insurance 
on their own.
    In a perfect world with an unending supply of revenue, I 
would like individuals who buy any type of policy to get it tax 
free, but with limited revenue, I believe we must start 
somewhere. We have to target the population who needs help the 
most, uninsured working Americans who have to buy their own 
health coverage.
    My legislation, The HSA's for The Uninsured Act, does just 
that, while also fostering savings for the future. Thank you 
and I now would be happy to try and respond to any questions 
you might have.
    [Representative Crane's statement may be found in the 
appendix.]
    Chairman Akin. I really appreciate your stopping as I said 
and talking to us about your legislation. First of all, I think 
the minority member mentioned his concern with the people who 
are on the lower end of the economic spectrum and their 
accessibility to health care. I think you are addressing his 
question to some degree, aren't you, by making it tax 
deductible for people to purchase their own?
    Mr. Crane. Right.
    Chairman Akin. It is what we used to call a major medical 
policy or something like that, is that correct?
    Mr. Crane. Yes, indeed.
    Chairman Akin. You said though that in some way it is 
limited, because we couldn't afford to do it for literally 
everybody. I don't understand.
    Mr. Crane. It is limited in that it is catastrophic 
coverage.
    Chairman Akin. Okay. Only in that?
    Mr. Crane. Right.
    Chairman Akin. Currently----
    Mr. Crane [continuing]And that is because of the premium 
cost. If you go beyond that and the administration has 
estimated the cost I think at 24.7 billion over ten years.
    Chairman Akin. One of the things that is always helpful for 
me in legislation is do sort of a before and after scenario. 
The before scenario, let us say that I am a waiter at a little 
restaurant, Joe's Truck Stop or whatever it is. It is a part-
time job and they are not offering me health insurance at that 
establishment.
    The way it is right now, the only thing that I can do is 
just go out in the private market and buy a major medical 
policy, is that right?
    Mr. Crane. Right.
    Chairman Akin. If I do that, there is no tax break on that 
at all, is that correct?
    Mr. Crane. No.
    Chairman Akin. Currently, as a member of Congress, my 
medical insurance is provided as part of my job and that is a 
pretax benefit, isn't it?
    Mr. Crane. By your employer.
    Chairman Akin. Or by the employer, right?
    Mr. Crane. Yes.
    Chairman Akin. Or if I work for General Motors, General 
Motors pays for an employee and that is all pretax dollars, 
right?
    Mr. Crane. Right.
    Chairman Akin. So basically we have set up a system where 
the people working for the big guys get a pretax or there is no 
tax on their medical, whereas the guy at Joe's Truck Stop 
doesn't have that benefit, is that right?
    Mr. Crane. Yes.
    Chairman Akin. Does your legislation create a more level 
playing field by allowing the guy at Joe's Truck Stop also to 
deduct his policy?
    Mr. Crane. To deduct his policy?
    Chairman Akin. To deduct the cost of the policy so that it 
is pretax dollars.
    Mr. Crane. Yes, right.
    Chairman Akin. Basically what you are doing is something 
that is a matter of justice, isn't it? People are being equal 
before the law in a sense.
    Mr. Crane. It is expanding the opportunity for coverage to 
many millions literally of folks out there------.
    Chairman Akin. And the people who are most likely to be 
uninsured are going to be the people who are in that type of 
category, aren't they?
    Mr. Crane. Exactly.
    Chairman Akin. What you are doing is really a very 
important building block to add to or to supplement or 
compliment the medical savings accounts that we have already 
enacted into law.
    Mr. Crane. Yes, indeed. It is something that is not 
Republican, not Democrat. It is something I think in the 
interests of all of us to try and make that outreach to help 
those who are in lower income brackets especially and have no 
coverage and are at that kind of risk to give them an incentive 
to get into a health savings account and to then take out their 
deductible insurance coverage.
    Chairman Akin. Is there any problem with insurance 
companies offering this kind of insurance? I remember before 
some of the insurance companies said, but it is hard to buy 
that kind of major medical policy anymore. Will that be 
available do you believe?
    Mr. Crane. I am sure. I think it is available right now.
    Chairman Akin. Okay. I had heard that the availability was 
a little bit spotty, but I don't know if that was more of an 
excuse or whether that was true or not. As far as you know, 
that type of coverage would still be available?
    Mr. Crane. This kind of legislation would greatly expand 
that opportunity out there.
    Chairman Akin. If I were sort of the typical 25-year-old 
working at Joe's Truck Stop, I am pretty much invulnerable. I 
haven't been to a doctor in ten years and I won't get sick and 
I won't get old and so I might not have a lot of incentive to 
get a medical policy, but if I can get one without having to 
use pretax dollars to buy it, there is at least some economic 
incentive to do that, right?
    Mr. Crane. There is also an economic incentive to take that 
health savings account out, because that money accumulates tax 
free and you can roll it over from year-to-year and build up 
that account.
    Chairman Akin. Joe's Truck Stop doesn't have a whole lot of 
extra money they are making, but it is a good guy that runs it. 
If he wanted to help a little bit, could he then partner with 
the employee and also purchase insurance or something like 
that?
    Mr. Crane. I am not sure what you mean by partner.
    Chairman Akin. Let us say that----
    Mr. Crane. He can------.
    Chairman Akin [continuing]The major medical policy is going 
to cost me $2,000 for the year and I work for Joe's Truck Stop. 
Could the boss pay 1,000 and I pay 1,000 toward that? Is that 
something that would work?
    Mr. Crane. If he gives it to you. I think he has to give it 
to you as an individual, doesn't he? To the individual.
    Chairman Akin. Okay. So they could give me 1,000 and say, 
this would be 1,000 toward buying some insurance.
    Mr. Crane. Yes, right.
    Chairman Akin. You put a 1,000 of your own in or something 
like that.
    Mr. Crane. Yes.
    Chairman Akin. It allows a lot of flexibility then?
    Mr. Crane. Yes.
    Chairman Akin. Thank you very much, Congressman.
    Mr. Crane. Thank you.
    Chairman Akin. I think you answered my questions. No 
additional questions.
    Mr. Crane. All right. Thank you very much and I trust I can 
look forward to getting you both as co-sponsors ASAP.
    Chairman Akin. I bet you I am already a co-sponsor.
    Mr. Crane. That is right. You are. Thank you. Well, I need 
you, Tom, on board.
    Chairman Akin. Thank you very much. You said that your 
schedule doesn't permit you to join us on the panel?
    Mr. Crane. No, unfortunately.
    Chairman Akin. I just wanted to extend the invitation. 
Thank you.
    I think we will now go ahead to proceed to our panel two. 
If the panel two witnesses would come forward. I think we will 
get some name tags up there for you and we will get started. 
[Whereupon, a short recess was taken.]
    Chairman Akin. Welcome to everybody here on our second 
panel. I see looking down the list that a couple of you have 
traveled from some distance so we are very thankful for your 
taking time out of your schedules.
    I know everybody has busy schedules and I think that is the 
case of Victoria Braden. It looks like you are hailing from 
Georgia, if I am not mistaken and you have your own small 
business, as I understand and also connected with women owned 
businesses.
    I think what we will do in terms of procedurally, we are 
going to let each of you make a five-minute statement. I think 
you have probably been briefed on that ahead of time.
    Then after you have made your statements, we will have a 
chance to interact and ask some questions. If you would 
proceed, Victoria, please.

    STATEMENT OF VICTORIA BRADEN, BRADEN BENEFITS STRATEGIES

    Ms. Braden. Mr. Chairman, members of the Subcommittee, I am 
Victoria Braden, President of Braden Benefit Strategies located 
in Norcross, Georgia.
    My company specializes in designing and implementing 
employee benefit plans for small businesses. I am pleased to 
appear before you as a member of Women Impacting Public Policy, 
a national bipartisan public policy organization representing 
500,000 women in business.
    The subject of today's hearing, the benefits of health 
savings accounts, is one I am passionate about. I deal with the 
issue of employee benefits health insurance all day, every day.
    As this Subcommittee knows, health benefits to employees, 
particularly in small companies, is one that is vital to the 
future of this nation's economic growth. Women Impacting Public 
Policy commissioned a bipartisan poll of women business owners 
nationwide in December.
    Only one in five businesses offer fully paid health 
insurance coverage. When asked why they do not provide 
coverage, the majority said it was too expensive to offer.
    Women business owners were asked what would cause them to 
close their businesses in the next five years. The number one 
reason, rising cost, was further defined as health insurance 
costs.
    Here is what one of my customers, David Carr, CFO of W.H. 
Bass and Company had to say about offering health insurance. 
``Every year, just after we renew our health insurance and then 
sporadically throughout the year, I find myself thinking, what 
are we going to do next year? We continue to tweak the benefits 
to keep the cost affordable, but at what point are we no longer 
going to be able to make adjustments and then find our health 
insurance unaffordable either to the company or to the 
employees or both?''
    David's remarks articulate the struggle that many small 
businesses face with regard to health insurance coverage. One 
of the bright lights in this rather dismal picture I believe is 
the establishment of health savings accounts. It builds on a 
fundamental principle that employees should share in making 
decisions about their health care, as opposed to relying on 
their employers and insurance companies to make those decisions 
for them.
    I would like to offer two examples of how health savings 
accounts will assist my clients in providing better health care 
coverage and reduced insurance rates.
    My first example is Rhodes Young Black and Duncan, a CPA 
firm with 14 employees. The firm pays 99 percent of the 
employee cost of the health insurance the employees pay 100 
percent of the dependent cost. Braden Benefits has worked with 
this business since 2000, when the cost for the employee health 
insurance was $202 and the cost to the family insurance was 
$421.
    In 2004, Rhodes Young Black and Duncan health insurance 
plan offered $30 office visit co-pays versus a $10 office visit 
co-pay in 2000 and a $1,500 deductible instead of a $500 
deductible.
    In addition, in-network and out-of-network costs have 
shifted dramatically to the employee. The cost of the current 
plan is $283 per employee and $842 per family. For the 
employer, the cost per employee has risen 40 percent and the 
cost per family has doubled.
    At the renewal, we determined that eliminating the doctor 
office co-pay all together and placing all doctor office 
charges toward the deductible would save between 12 and 24 
percent in premium.
    With these savings, the company plans to fund the health 
savings account for each employee. The employees will have less 
exposure than they currently have, because that $1,500 
deductible must be paid as an out-of-pocket expense.
    With the health savings option, the plans will be available 
to their account, which is tax free and allows them to roll 
over the money they do not spend year-to-year.
    My second example is Johnson Wholesale Floor, an Atlanta 
based company with 112 employees, 75 percent of which are blue 
collar work force.
    The company has been in business for 40 years, is a solid 
stable company, with branch offices in Florida, Tennessee and 
Alabama.
    The situation at this company is that their insurance 
carrier year-after-year pays out more in medical claims than 
they take in in premium. Every year the company receives a 
maximum amount of premium increase. Consequently, the company 
now has a $1,500 deductible.
    As benefit providers, we anxiously await the availability 
of health savings accounts for Johnson Wholesale Floor, knowing 
that a HSA will prepare the employees for the expense should he 
or she need to use the $1,500 deductible. Currently it is a 
completely out-of-packet, after tax expense to the employee.
    As costs are increasingly shifted from employer to 
employee, the availability of a health savings account will 
help employees make wise health care choices by allowing them 
to choose to spend their health care dollars.
    More importantly, HSA products protect employees that do 
not currently have availability to pay a deductible, should the 
employer participate in funding the account.
    H.S.A.'s are a wise tool for employers to use for the 
following reasons: First, the majority of employers that we 
work with are concerned when the increase costs that their 
employees bear and are looking for alternatives. The HSA 
provides one of those alternatives.
    Second, the HSA allows employees to accumulate health care 
dollars over a number of years to utilize at times when they 
need the health care dollars.
    Let me shift to some of the challenges we face in the 
commercial market at bringing HSA's to our clients. We can't 
get product. We need clarification from the Treasury Department 
on several key points that are restraining the carriers from 
creating and filing products.
    What is and is not considered preventative? Can wellness 
visits have a co-pay? Are prescriptions considered wellness? 
Can prescriptions have a co-pay and be within the confines of 
the law? Until we have clarification, carriers cannot develop 
product. Therefore, we do not have anything to offer companies, 
at least from the A carriers.
    Can flexible spending accounts be used with an HSA? If an 
employee elects an HSA for their employee health coverage, do 
they forfeit their participation in the flexible spending 
account? If the employee cannot participate in both funds, what 
effect does this have on the discrimination testing?
    Answers to these questions will expedite the offering of 
the health savings products, a very positive addition to the 
health insurance benefit offerings.
    In closing, let me just say that the responsible employers 
do not want to eliminate the doctor visit co-pays, eliminate 
prescription co-pays and leave the employee and their family 
without a means to afford health insurance.
    They want to provide health insurance to their employees. 
At the same time, they struggle to get health insurance costs 
under control.
    I believe HSA's used proactively to promote options to 
businesses and their employees gives both the employers and the 
employees new options which will have a positive effect on 
small businesses. Thank you, Mr. Chairman.
    [Ms. Braden's statement may be found in the appendix.]
    Chairman Akin. Thank you, Victoria. I appreciate your 
comments.
    Our next witness is Kate Sullivan, U.S. Chamber of Commerce 
and coming from D.C. here.
    Ms. Sullivan. Yes.
    Chairman Akin. Kate, thank you so much for joining us.

      STATEMENT OF KATE SULLIVAN, U.S. CHAMBER OF COMMERCE

    Ms. Sullivan. Thank you. We are very pleased to be here 
this morning. The Chamber is the world's largest business 
federation, representing over three million employers of all 
sizes and all sectors all around the country, around the world.
    President Bush spoke this week at the Chamber about what 
HSA's have done for small businesses and we had several small 
business owners there explaining how this has helped them save 
money and to do more for their employees.
    As an aside, he also spoke about association health plans 
and the need to get this enacted by the Senate this year.
    We have advocated for a number of years that all Americans 
have health coverage through an appropriate mix of market 
reforms, public financing and a meaningful safety net.
    Everyone in this country, whether privately covered, 
publicly subsidized or uninsured also has the right to expect 
that our health system has at its root the best possible 
quality with uncompromising standards of safety.
    An ideal health system involves many elements that must 
work together, such as private sector choices, effective us of 
the tax code and greater use of information.
    Enacting last year of health savings accounts came at a 
critical time for America's employers and working families. 
There is much they offer, not only for small business, but for 
workers at any point in their lives, particularly those times 
when they are not working.
    Healthy market competition will help lower health care 
costs and improve our health system. The insurance market, 
particularly for small businesses, has largely stagnated over 
the last five years.
    We have found that this lack of competition stems from 
state mandates on health plans, which have taken away health 
plan's ability to differentiate themselves in the marketplace 
and compete for customers by offering benefits tailored to meet 
their needs.
    Health savings accounts hold the promise of reviving the 
largely abundant, but costly small business insurance market. 
While a number of larger employers have experimented with so-
called consumer driven health plans, made possible by health 
reimbursement arrangements, non-discrimination compensation 
testing has largely prohibited the availability of this plan 
design for small businesses and partnership arrangements.
    H.S.A.'s offer a number of advantages for employees. First, 
the account is held exclusively by the taxpayer, rather than 
the employer. Employers may contribute to the HSA, to the 
account itself, as well as to the insurance premiums, which 
ease concerns for younger or less affluent workers about 
funding their deductibles.
    As with other compensation requirements, employer 
contributions must be made fairly across the employee base and 
HIPAA compliance with require that contributions not vary based 
on an employee's health status.
    Many small businesses were already forced to adopt higher 
deductible health plans as insurance costs nearly doubled over 
the last five years and insurers specializing in these kinds of 
health plans have entered stated, will now come into states 
where they have once done business, but left, because of the 
over regulation in some of those markets.
    We will also see traditional insurers also offer HSA 
products in an effort to hang on to their small business 
customers.
    This is great news for small business owners, because they 
really do desperately need that competition for their many 
substantial dollars that they are spending this way.
    They also offer a pretax mechanism for those who are paying 
for insurance when the account holder does not have work place 
coverage. This is the first time the tax code has operated in 
this way.
    Premiums must be paid from HSA balances, though annual 
contributions are still restricted to the amount of the annual 
deductible.
    Greater tax code changes must be made. President Bush and 
Congressman Crane, as we just heard, have put forth important 
proposals toward this goal and we support that legislation.
    Providing tax code parity for the millions of taxpayers who 
acquire their own coverage in the individual market has been a 
long-time priority of ours and it will continue to be a greater 
need for more Americans.
    More retirees do not have access to that coverage and we 
have people in their 20's who are not working because they are 
pursuing higher education later in life.
    We need to make this tax code parity greater across the 
board and we shouldn't restrict ourselves just to premium 
deductions for HSA's. We need to do more for low income 
individuals through vouchers or tax credits, to help those who 
do not pay taxes, but still need to pay premiums on their own.
    My full statement goes through some of the other issues in 
the tax code that can help benefit both health savings accounts 
and other forms of health coverage and that is available in the 
back of the room.
    In summary, we also recognize there is a much greater need 
for information about our health system, the best quality 
doctors and the prices that providers pay.
    Large employers have been working very hard to make that 
information available and the Medicare law enacted last year 
will provide additional incentives to hospitals to disclose 
more information about how they treat patients.
    Critics of market place health care solutions are working 
hard to convince policymakers that the widespread use of HSA's 
and health insurance tax incentives that are aimed at 
individuals will undermine the employer based health system.
    In fact, the real thing that is going to undermine the 
system is cost in this system. We need to do better, in terms 
of bringing down that cost and empowering individuals to take 
control of their health care dollar.
    No longer can employers allow the money to go into health 
insurance premiums that should go in to paychecks and we need 
to get that money returned to individuals, both for their 
health care dollars and for all the other consumer needs that 
they have. I look forward to discussing this with you more and 
questions and answers.
    [Ms. Sullivan's statement may be found in the appendix.]
    Chairman Akin. Thank you very much for your testimony, 
Kate.
    Our next witness is David Alders, coming all the way from 
Texas. I understand, David, that you are a small business owner 
yourself.
    Mr. Alders. That is correct.
    Chairman Akin. If you would proceed, thank you.

         STATEMENT OF DAVID ALDERS, CARIZO CREEK CORP.

    Mr. Alders. Thank you. Mr. Chairman and members of the 
Subcommittee, it is a distinct privilege to be with you today 
to testify on one of the critically important issues facing 
almost every American family, including my own: That of access 
to quality, affordable health care.
    My name is David Alders and I am the owner of a small 
diversified agribusiness enterprise in Nacogdoches, Texas.
    I am here today also representing the National Association 
for the Self-Employed and its 250,000 member businesses, 
representing well over a half million individuals across 
America.
    The NASE represents the smallest of America's small 
businesses, those which often are in the process of being 
bootstrapped by owners whose vision and ambition outstrip their 
capital or credit, but who enthusiastically incubate the 
American dream and who collectively are a major force for job 
creation in our economy.
    Because our businesses often are so thinly capitalized, 
ours is a sector which perhaps is most squeezed by America's 
health care cost crisis.
    Census data indicate that of the approximately 43 million 
Americans without health insurance, 62 percent are from 
families in which the household head is either self-employed or 
working for a company with fewer than 100 employees.
    The reason this group disproportionately neglects to secure 
health care coverage is easily understood. On average, workers 
in firms with fewer than ten employees pay 18 percent more for 
health coverage than those who work in larger firms and as 
Representative Udall noted earlier, perhaps that number 
actually now is significantly higher.
    We at the NASE are convinced that America is blessed with 
the finest health care system in the world and that it is so 
blessed because of and not in spite of its reliance on market 
forces.
    While we don't believe market mechanisms with eliminate 
every unfortunate human experience in the delivery of health 
care, we do believe they will produce better outcomes than 
those of centralized government mechanisms.
    Market based reforms begin with more neutral tax treatment 
of health insurance purchasing options, insurance options which 
emphasize protection against major risks and deregulation of 
health care suppliers.
    Instead of more regulation and litigation, such reform 
underscores the primacy of voluntary contracts and market 
prices.
    In short, the ultimate market based reform is to guarantee 
that the health care consumer is also the health care billing 
watchdog. Health savings accounts, coupled with high deductible 
health insurance plans, work splendidly to accomplish this 
basic measure of market accountability.
    My business has taken this approach for several years, 
maintaining adequate coverage due chiefly to ever escalating 
deductible thresholds.
    Health savings accounts now offer me the opportunity to set 
aside pretax dollars to fund care which is relatively minor or 
merely palliative and gives me the incentive to carefully 
question whether I need to access the system at all, a question 
which a meaningless $10 co-pay in a conventional plan will 
always lead a consumer to answer in the affirmative.
    To further enhance the appeal of HSA's, we strongly support 
the passage of H.R. 3901, which as Representative Crane noted, 
would allow individuals who purchase high deductible insurance 
policies and who also fund HSA's to deduct the value of those 
premiums from their income taxes.
    Of course, H.R. 3901 applies only to those taking advantage 
of HSA's and we believe this disparity in the tax code ought to 
be remedied and removed, regardless of whether a small business 
owner funds an HSA.
    H.R. 1873, the Self-Employed Health Care Affordability Act, 
would allow the self-employed to fully deduct their health 
insurance premiums and thereby achieve parity with 
corporations, which provide their employees' health care 
coverage and expense the cost thereof.
    Heretofore, the self-employed and small business owners 
have been discriminated against by having to purchase their 
health care coverage with after tax dollars and by in effect 
having to pay the self-employed payroll taxes on their health 
insurance premiums.
    Starting and expanding a competitive small business is 
difficult enough without having to pay an additional 15.3 
percent on one's insurance premiums.
    Our members would greatly appreciate your support of both 
these important pieces of legislation.
    We are not under the illusion that tax code changes and the 
creation of HSA's alone will constitute a silver bullet, which 
will solve America's health care cost crisis, but they are a 
welcome step toward consumer driven health care.
    The Galen Institute brought to Capitol Hill last month six 
of the leading vendors of health reimbursement arrangements, 
such as MSA's or now HSA's. The experience of these vendors is 
that people who utilize these vehicles tend to be older and 
slightly sicker than those who do not, but they also tend to 
make much better use of preventive services, use generic drugs 
much more, use hospital ER's much less, access supportive 
services like nurse hot lines much more and generally have been 
holding down costs significantly.
    In short, the market works when given a chance and people 
will spend their own money more wisely than they will spend 
someone else's.
    I am grateful to all of you who are working to contain 
costs, while protecting the quality of our system. Preserving 
the world's finest health care system is worth the effort and 
America's employers and employees are counting on your success. 
Thank you.
    [Mr. Alders' statement may be found in the appendix.]
    Chairman Akin. Thank you very much for your comments, David 
and we will get back with questions in just a minute.
    Our next witness is Dan Perrin. I believe you are the 
Executive Director of the HSA Coalition.

          STATEMENT OF DANIEL B. PERRIN, HSA COALITION

    Mr. Perrin. Thank you, Mr. Chairman and thank you Mr. 
Udall. On behalf of the HSA Coalition, we appreciate this 
opportunity and ask that my statement appear in the record as 
if read.
    Chairman Akin. Without objection.
    Mr. Perrin. Thank you. Mr. Chairman, the most consumer 
friendly type of health care is health care that is affordable 
and I thought it would be useful to go through an example of 
how that works with the health savings accounts.
    Essentially what you are doing is you are refinancing your 
health care. You are taking a lot of money that both the 
employer and the employee spend and you are rearranging the way 
you spend it. Part of it goes towards a major medical insurance 
policy, which costs a lot less and then what is left over goes 
into an account from which you draw down.
    What happens is that then creates a behavioral change in 
the consumer, which is a lot like the difference between going 
to a restaurant where you are on an expense account versus 
going to the same restaurant when you are paying yourself. Your 
choices on the menu vary greatly.
    If we move to Exhibit A, basically the average monthly 
premium, according to Kaiser Family Foundation, in 2003 for the 
United States was $755 a month, which is $9,068. That is both 
employer and employee money.
    Taking an example for a 40 to 49-year-old out of Florida, 
in the individual insurance market, that premium is $235 or $34 
a month now in Florida, which is a total of $2,800 in rough 
numbers a year.
    If you then take $5,150, which is the amount of that 
deductible and you put it in a bank account, you have a total 
expenditure of roughly $8,000. You started with 9,100, which is 
the average.
    Fully funding the health savings account leaves you with an 
expenditure of $8,000, to be divided up between employer and 
employee as they see fit. You save a grand, in this example 
1,100 and you have effectively given the employee first dollar 
coverage, because they spend that money to get to their 
deductible.
    The second example in terms of the bigger picture in how 
this works and what we have been through in the United States 
with double digit health insurance cost increases, especially 
over the last five years, is this chart from the Joint Economic 
Committee, which is Exhibit B of my testimony.
    Basically the story that it tells is pretty clear. It 
essentially says that since 1960, the out-of-pocket percentage 
of expenditures, in terms of what the actual consumer is 
spending, has dropped and inversely, the cost per capita of 
health care has increased. It is a pretty clear picture.
    Health savings accounts will do simply this: It will 
decrease the total cost of health care by increasing the out-
of-pocket or in this case the out of your health care savings 
accounts expenditure by consumers.
    Mr. Udall, I just wanted to note that your opening 
statement talked about the decreasing base of employer provided 
coverage. The baseline that we are working from today is that 
we are at 45 percent. We were at 63 percent ten years ago.
    At the current rate of decline, we are going to be at 36 
percent in five years and that cite from the Labor Department 
is on point three in Exhibit E.
    Finally, Mr. Chairman, I just wanted to go through quickly 
Exhibit C, which is the build-up of funds potentially under 
various expense time scenarios for a health savings account.
    The reason this is important is because people should be 
showing up at the doors of Medicare with cash, because we all 
understand that system is under increasing financial duress and 
this chart simply goes through some scenarios which may apply 
to certain people, depending on the amount of their deductible 
and how much money is deposited in their account a year, but 
the numbers are significant and it is a very important piece of 
this.
    Finally, let me just add the following: We have seen an 
explosion of insurance companies coming into this market. There 
are 30 insurers today offering. They are in every state. There 
are 12 more who have announced that in the next eight months 
they are going to be in some very large companies.
    Yesterday, for example, Blue Shield of California came into 
the market and in one case, a trustee who is a businessman who 
holds the account money for an individual who purchased the 
insurance from an insurer, who may not provide that account 
management service, said their business is doubling every month 
since January.
    When you compare it to the medical savings account start in 
1996, this is a dramatic and significant difference. Thank you, 
Mr. Chairman.
    [Mr. Perrin's statement may be found in the appendix.]
    Chairman Akin. Thank you very much for your comments, Dan.
    Our last witness is Linda Blumberg, a Ph.D. from The Urban 
Institute, Washington, D.C.. Linda.

      STATEMENT OF LINDA J. BLUMBERG, THE URBAN INSTITUTE

    Ms. Blumberg. Mr. Chairman, Mr. Udall and members of the 
Subcommittee, thank you for this opportunity to testify on 
health savings accounts and H.R. 3901, a proposal to make 
premiums for the high deductible policies associated with HSA's 
tax deductible.
    Reforms of the health insurance market have important 
implications for small businesses, which face special 
challenges in providing health insurance coverage to their 
workers.
    There are three main problems for small businesses: First, 
small firms face much larger administrative costs per worker 
than do large employers; second, insurers charge small firms 
higher risk premiums because of their greater year-to-year 
variability in medical expenses; third, the average worker in a 
small firm is paid significantly less than the average worker 
in a large firm.
    While there are mechanisms available for addressing the 
problems facing small businesses, HSA's and the policy 
contained in H.R. 3901 are not among them. Instead, they will 
tend to increase administrative loads, reduce pooling of health 
care risk for workers in small firms and subsidize high income 
individuals much more than low income, low wage workers.
    The HSA provisions and the Medicare prescription drug 
legislation provide a generous tax incentive for certain 
individuals to seek out high deductible policies. Individuals 
and families buying these policies, either through their 
employers or independently in the private non-group insurance 
market can make tax deductible contributions of up to $2,600 
per year in a HSA, $5,150 for a family. Money in the account 
and any earnings are tax free, if used to cover medical costs.
    These accounts provide the most advantage to high income 
people and those with low expected health expenses. The tax 
subsidy is of little or no value to those who do not owe income 
tax. Higher income individuals are also better able to cover 
the cost of a high deductible.
    Additionally, those who do not expect to have much in the 
way of health expenses will be attracted to HSA's by the 
opportunity to accrue funds tax free that they can use for 
health care that is not covered by insurance.
    They can also be used effectively as an additional IRA, 
whose funds can be used without penalty after age 65. Young 
healthy individuals may even choose to use employer 
contributions to their HSA's for current non-health related 
expenses, after paying a ten percent penalty and income taxes 
on the funds, a perk unavailable to those enrolled in 
traditional comprehensive insurance plans.
    H.S.A.'s will not address the high administrative costs of 
small employers. In fact, administrative loads are actually 
higher for high deductible policies since the many fixed 
administrative costs must be charged on the smaller level of 
benefits paid out and the tax subsidy under H.R. 3901 would 
also be worth more to those who need less assistance.
    More importantly, it would undermine the small employer 
market by increasing the incentive for individuals to purchase 
health insurance in the private non-group insurance market as 
opposed to acquiring it through employers.
    Low cost, high income purchasers equipped with yet another 
subsidy would be likely to find price advantages in the non-
group insurance market, since most states allow non-group 
insurers to charge lower premiums for those in good health and 
to completely exclude from coverage those with current or past 
health problems.
    But as low cost purchasers leave the group market, the 
average cost of those staying in the group market will rise, 
making group insurance more difficult to afford for higher risk 
and low income individuals.
    In addition, since employers and key employees will be able 
to get tax breaks for their high deductible health insurance, 
even if it is not provided to other employees, there will be 
even less incentive for employers to take on the hassle, 
expense and risk of offering insurance to their workers. The 
net result could be less insurance coverage among small 
businesses.
    While the risk pooling available to small firms is low, 
compared to large firms, they are still afforded a greater 
degree of pooling than is the case in most states' non-group 
markets.
    Administrative costs in the non-group market are also much 
higher than for small firm purchasers. Consequently, high cost 
and low income workers will be the big losers, as coverage 
shifts from the small group to the non-group market.
    High administrative costs, limited ability to spread health 
care risk and lower wages can be addressed in a variety of 
ways. These include providing mechanisms for small employers to 
purchase coverage in larger groups, thereby lowering 
administrative costs; broadly spreading the costs of high risk 
individuals across as large a segment of the population as 
possible, using public re-insurance mechanisms or other risk 
spreading tools; and providing subsidies to low wage, low 
income workers for the purchase of coverage.
    The Treasury Department estimates that allowing 
deductibility for individually purchased high deductible health 
insurance would reduce federal revenues by $25 billion over the 
next ten years, even though the net result could be a reduction 
in coverage.
    Funding approaches designed to address the problems faced 
by small employers would be federal money better spent. Thank 
you very much and I would be happy to answer any questions that 
you might have.
    [Ms. Blumberg's statement may be found in the appendix.]
    Chairman Akin. Thank you very much all of you for your 
testimony and we will proceed now I guess with the questions. 
Just because of the makeup that we have got, I will defer and 
let Mr. Udall, if you would like to go first with your 
questions it would be fine.
    Mr. Udall. Thank you, Mr. Chairman. Let me ask Ms. Sullivan 
with the Chamber: Would you support a proposal that allows 
small businesses to buy into the Federal Employee Health 
Benefits Program to purchase insurance for their employees, a 
small employer health benefits plan?
    Ms. Sullivan. There are proposals like that and I think the 
way it is structured is that you don't actually buy into the 
actual FEHBP but something administered by OPM that stands 
side-by-side.
    I think federal employees and retirees have some concerns 
about allowing people who are excluded basically from the 
current insurance market to get into it.
    We have reservations about the proposal that was introduced 
in the Senate, because it is being administered by OPM, which 
really does not deal right now with the private market and it 
comes along with some requirements about cost sharing, how much 
the employer must contribute to these plans.
    We really believe that because health benefits are part of 
your overall compensation, that you need to really work within 
the industry and allow them to decide how much you need to pay 
in wages versus benefits.
    Clearly those who advocate such a proposal recognize two 
fundamental problems with limiting that kind of risk pooling 
only within a state. You have more small businesses that now 
operate across state lines. They are doing now what only could 
be done by very large corporations a few years ago.
    I think turning it exclusively over or providing some kind 
of market preference like that to a federally run plan then 
really would suck up everything that does allow the private 
market to work with individual small business owners to offer 
that proper mix of benefits and compensation.
    I would be happy to provide you with more extensive 
comments about these proposals.
    Mr. Udall. Thank you. Ms. Blumberg, one of the things we 
always hear about MSA's and HSA's is that the result is adverse 
selection and separation of risk pools. Would the proposal we 
are looking at today increase the likelihood of adverse 
selection and could you describe if that is the case, how would 
that happen?
    Ms. Blumberg. I believe that would be the case with H.R. 
3901. What the legislation does is creates an additional tax 
incentive for individuals to purchase their insurance coverage 
through the individual non-group market, as opposed to the 
group market.
    What we know about insurance markets is that there is a 
much greater degree of risk pooling, of bringing together 
individuals of different types of risk for purposes of 
determining insurance premiums, in group markets, as opposed to 
the non-group market.
    In the majority of states, what we see is regulations that 
will allow insurers in the non-group market to adjust premiums 
charged as a function of what an individual's health status is.
    In fact, most states also allow insurers to actually 
exclude very high cost individuals or individuals they perceive 
as being high risk from coverage completely.
    What could happen as a consequence of this legislation, as 
we give more tax advantages to higher income people who are 
basically healthy, to move into the non-group market, what 
happens is the residual people, the higher risk people, the 
lower income people who are left in the group market will see 
their premiums on average increasing as the healthy people are 
exiting. That is a pretty classic adverse selection dynamic.
    Over time, the premiums could escalate substantially in the 
group markets and these individuals who are left would have a 
hard time getting a group policy or comprehensive policy after 
that.
    Mr. Udall. One of the things that you mention in your 
written testimony on page two is you say only 39 percent of 
establishments in firms of fewer than ten workers offer health 
insurance to any of their workers, compared to 99 percent of 
establishments in firms of 1,000 or more workers.
    It seems to me in looking at this that our problem is 
trying to get health insurance coverage to smaller firms and 
that that is where we are having this problem with insurance.
    Would you comment on that and on those figures that you 
laid out there and where you see the real problem today in 
terms of the uninsured and underinsured?
    Ms. Blumberg. Sure. What you said is true, that there is 
obviously a much lower rate of insurance coverage being offered 
among small firms and for very good reasons I would say, 
because of the high administrative loads that they face 
compared to bigger firms, because they don't have as much 
ability to spread risk as larger firms, even though they can 
spread risk better than is true in the individual market.
    Small firms' workers have lower wages on average, than do 
large firms' workers. Economists believe that individual 
workers are actually paying for the full premium, because their 
employers will pay them less cash wages in order to compensate 
for the cost that they are paying in benefits, as opposed to 
wages. When you have got a lower wage work force, there is less 
room to pass those costs back in lower wages.
    One could look at it as you did, that the problem is 
figuring out how to get more coverage in the small employer 
market and there are mechanisms I believe for doing that, but I 
think you could also ask whether structurally if the small 
group market is the place to actually rely upon to increase 
coverage.
    If we decide that the answer is no, that that is not the 
best place, then what we need to do is create a structure that 
is conducive to the workers and their dependents who are 
associated with small firms, to purchase coverage. But the 
current non-group insurance market is just not efficient, it is 
not effective, it is not as equitable in terms of the risk 
pooling that is available, for us to rely upon it for a 
widespread increase in insurance coverage.
    I would say if you are going to move away from looking at 
small employers as the base, then you need to build something 
to replace it in the current private non-group market I would 
say is not it.
    Mr. Udall. Thank you very much and I thank all of the panel 
for their testimony. Mr. Chairman.
    Chairman Akin. Thank you, Mr. Udall.
    Also, we have been joined by my good friend, Congressman Ed 
Case. Ed, did you want to offer any questions to the witnesses?
    Mr. Case. Thank you, Mr. Chairman. Mr. Alders, I was 
intrigued by your testimony, because you represent a lot of the 
businesses in my district and I suspect a lot of smaller rural 
oriented districts across the country.
    My businesses are small mom and pop operations, husband and 
wife teams, sole proprietorships running small scale 
agriculture, small scale tourism, T-shirt shops, sole 
proprietor realtors, et cetera, et cetera. I think that is what 
you represent.
    Mr. Alders. Yes, it is.
    Mr. Case. This may be a little bit of a tough question, but 
can you give me your reaction, from your real world experience, 
to Dr. Blumberg's testimony? I am asking you to do that, 
because I take her concerns seriously.
    Will in fact health savings accounts or medical savings 
accounts, more control over individual contribution and 
spending decisions by businesses, cause adverse selection? Will 
it increase administrative costs? Does it disproportionately 
impact higher income people?
    The business owners that I know that are in your category 
are not the high end of the income earners of our country. Just 
tell me what you thought as you listened to her testimony. What 
was ringing true and what was not?
    Mr. Alders. I don't consider my peers in relatively small 
agricultural operations to be high income either and I think 
they are the kinds of people who in our country have to face 
the decision of what they are going to do about health care. 
Are they going to insure at all and if so, what can they afford 
to insure against?
    I will say that my partner here on the panel, Dan, has 
probably thought through those arguments to a far greater 
degree than I have, but from my personal experience, I believe 
that the closer the health care consumer, regardless of his 
income level, the closer he is to the health care bill, the 
more he scrutinizes how much his access of a system is going to 
cost and the more he has skin in that game, so to speak, the 
wiser are going to be his choices, his decisions. I don't know. 
Even incremental steps toward that I think would be very 
healthy.
    Just to give you a personal anecdote, a week ago one of my 
eight children split his head open on a rock and so I had 
cosmetic medical work that had to be done. I called a friend in 
my community, a surgeon and met him at his office and I 
bypassed the ER system, because of the cost that I knew I would 
incur there, several hundred dollars in medical expenses versus 
maybe a hundred or $200 visiting my friend's office after hours 
and we got Sam's head stitched up appropriately.
    Because I have a high deductible policy and because those 
costs I knew were going to come out of my pocket regardless of 
what they were, if they were 2,000 they were coming out of my 
pocket, if they were 200 they were coming out of my pocket, but 
I went with a lower cost alternative that was even preferable, 
because I knew the guy who was going to be doing the stitching.
    I think if you empower consumers they are going to make 
smarter choices. We see that in every other realm of American 
business. I don't know that my employee can afford a $5,000 
family deductible policy, like I do. In fact in the past year 
he has had an extended hospital stay and he has an $11,000 
medical bill that he is paying out just a few dollars every 
month.
    I couldn't afford to purchase health care insurance for 
him. I do give him a higher salary so that he can make that 
choice. He can choose what he wants to do. He chooses not to be 
insured and his children have been covered under the Texas 
CHIPS program.
    That $11,000 bill is a bill he is going to have for many, 
many years and I would be happy to contribute. Instead of 
paying him the salary I do, take two or $3,000, a couple 
thousand dollars a year and fund an HSA. I mean he would have 
$4,000 there since his beginning of employment with me, if 
HSA's predated what they did and he would be able to meet some 
of those medical expenses through that HSA and he could afford 
that high deductible policy with an HSA.
    My personal experience is that I think if a consumer is in 
charge of paying some portion of that health care bill, he is 
going to make a much wiser choice.
    Mr. Case. Thank you. Dr. Blumberg, I don't want to leave 
you out of this. You suggest we are putting our money in the 
wrong place. I think that is essentially what you are saying. 
We shouldn't be putting it here. We should be putting it over 
on the side of the CHIPS and lower income health care coverage.
    If we were funding adequately at that level, would you have 
the same degree of reservations with the deductibility of HSA 
premium payments?
    Ms. Blumberg. Yes. Essentially when I look at the problem 
of the uninsured today, I think there are two main areas in 
which we need to subsidize further. The first is clearly the 
low income, and I think most people in the room will agree that 
we could do a better job with that, but the second key element 
is that I believe we need to subsidize high risk, as well, as a 
social decision.
    Basically all of the issues that we have when we start 
doing reforms outside of expanding a public program, such as 
CHIP or Medicaid, relate to problems of adverse selection and 
risk segmentation.
    When insurers can be much more profitable by bringing in 
low risk individuals, then we can't blame them for seeking 
those low risk individuals out. The regulations allow them to 
do that and the market forces really dictate that they do that, 
in order to compete in the insurance market.
    But what happens is that the individuals who are high risk 
or high cost or who have even some past kind of health care 
problem are really very vulnerable in this kind of dynamic. As 
we go create incentives to move individuals further into the 
private non-group insurance market, where we see even less risk 
pooling than we see in small firms and much less risk pooling 
than we see in the large firm market, then we are making those 
high risk individuals even more vulnerable than they already 
are, because they are not well served by the private non-group 
market.
    If we do anything to undermine the group market as it 
exists, high risk people, high cost people who are currently 
receiving coverage and receiving some risk pooling benefits 
from being in those group markets are basically then left out 
in the cold once they are in the existing non-group market.
    I think if we were better subsidizing the low income and 
the high risk, then I wouldn't have a problem.
    Mr. Case. Thank you. Thanks, Mr. Chairman.
    Chairman Akin. Thank you, Ed, for your comments.
    I had a number of different questions here. Let me start 
off and I think I may toss a couple of these out just to 
whoever wants to respond.
    First of all, just for my own information, do these HSA's 
in any way do they get around some of the insurance mandates 
that are dictated by individual states or does the person 
offering the insurance have to comply with the state mandates?
    Ms. Braden. Mr. Chairman, it is my understanding that they 
do have to comply with the state mandates individually and have 
to be approved by a per state basis.
    Chairman Akin. Okay. That is one thing people complain 
raise the cost of health care is the various state mandates, 
but this doesn't really deal with that part of the equation.
    Ms. Sullivan. We are waiting for clarification from the 
Treasury Department on a couple of those matters with regard to 
that preemption and what needs to be covered in these plans, 
but it comes down to fundamental plan design.
    You still have this deductible. If you are required to 
cover in vitro fertilization or some of the other things that 
do drive up the cost, it would be subject first to that 
deductible.
    The one thing that has been waived is preventive services 
and that is where we really get into some dicey concerns, 
because some states can begin determining a lot of specialty 
services and begin to consider them as preventive.
    We are waiting to see what kind of definition there is and 
this has implications across the spectrum for all employee 
benefits, because how employers determine what is within their 
own plan design and a number of very smart people who work on 
this have provided those comments to Treasury and we are 
waiting for that clarification.
    Chairman Akin. So to some degree my question isn't totally 
out in left field, but in general it is assumed that most of 
these plans will follow the state regs pretty much.
    Under the current situation with HSA's the way the law 
stands right now, the premiums are currently paid by what? Is 
it paid by the employee?
    Mr. Perrin. Sir, the premium can be paid by the employee or 
the employer. Under certain circumstances, i.e. you are 
unemployed, you are on unemployment insurance, you can take 
money out of your account to pay that premium or if you are 
on------.
    Chairman Akin. If you are unemployed, you could take pretax 
dollars out of your account to pay for your insurance?
    Mr. Perrin. Yes, sir. Let me just give you a little 
vignette on that. The------.
    Chairman Akin. I have asked this question. I keep getting 
different answers on it. It must be tricky.
    Mr. Perrin. No. This is a clear case of if you are on 
unemployment insurance, you can take out of your HSA account 
tax free and pay the premium. For example, airlines after 9-11 
thousands were let go and one of the VP's of one of the major 
airlines became convinced that HSA's were what they should be 
providing to their employees for circumstances exactly like 
this, because she had pregnant women and all kinds of stories. 
That is the current situation under the current law.
    Chairman Akin. I was kind of surprised that what 
Congressman Crane was proposing wasn't in the original bill to 
begin with, because it seemed kind of logical in a way to fit 
in. Was that just part of the politics of putting it together 
do you know?
    Mr. Perrin. That basically sums it up, sir.
    Chairman Akin. Go ahead.
    Ms. Braden. On the group health side, for a group policy, 
usually the insurance company requires that the employer pay a 
percent of the employee amount in order to make it part of the 
group policy.
    Chairman Akin. Right.
    Ms. Braden. So that is where that comes from.
    Chairman Akin. Thank you. I had a couple of other questions 
here. Mr. Perrin, I think maybe you could answer this.
    Unions represent a fairly significant part of the rank and 
file throughout the country. In the interest of unions, who 
benefits from HSA's? Is it only the business owners that 
benefit or do you union employees benefit as well?
    Mr. Perrin. That is a great question, Mr. Chairman. You may 
know that the Hotel Employees and Restaurant Employees Union, 
prior to the vote in the House in August, sent a letter up to 
select democrats supporting the passage of the health savings 
account legislation.
    There are two primary reasons they are doing this. The 
first reason is that the union wants to hold the money. They 
have a bank. They want to hold the money.
    The second reason is and most important reason is that it 
dramatically drops their cost of their health insurance and in 
some cases, I have spoken with the very senior leadership of 
some unions where you have a guy who works his whole life in 
the union and when he reaches 51 or 52, he can't do the manual 
labor.
    He can't work at what he has done. He goes out and he has 
this gap between when he stops working and gets insurance and 
when he goes on Medicare.
    The leadership of this union was very interested in seeing 
that money build up for these guys so that they have some 
cushion in that time in which they are no longer working.
    In addition, when you move to a high deductible insurance 
policy, you are not talking about $755 a month. You are talking 
about $250, something much more affordable.
    For the unions who have been trading wages for benefits for 
a decade now, this offers them the opportunity of getting a 
raise and containing their health care costs.
    Let me just explain one other example. There is a union in 
the midwest, a statewide union, they are $10 million a year in 
the hole. This is what, when they went to their actuaries, they 
were told: You triple your out-of-pocket deductible, you add 
another ten percent cash to the plan and you reduce the 80/20 
co-pay after you have met your deductible to 70/30.
    That is a real life scenario and I would be happy to 
provide you the person to call to confirm that and that was a 
year ago.
    Unions are getting killed by these costs exactly like 
everybody else and they are looking for something that is 
affordable.
    Chairman Akin. Thank you for answering that. Our time isn't 
too bad today so I am going to allow myself to run over a 
little bit and if the other gentlemen want an extra question 
that would be fine.
    Now to Linda a couple of questions that I had about what 
you were saying. I think all of us recognize that if you get 
somebody who all of a sudden develops diabetes, heart condition 
and a few other miscellaneous things, they get to the point 
where nobody wants to insure them, because they call them sort 
of uninsurable.
    It would seem to me that from some of the numbers we have 
heard, that if only one in five of the small businesses offer 
insurance to begin with and there are two questions really on 
the uninsurable thing it seems like to me, the first one is: 
The major problem that when somebody is uninsurable, who do you 
do with that?
    But aside from that question, it seems like one thing that 
you could do would be to reduce the number of people who are 
uninsurable and it would seem like to me just from a common 
sense point of view if you have Superman at 25 and you manage 
to get him from the uninsured category, where he is healthy, 
into the insured category and by the time he is 35 all of a 
sudden he is diabetic or something, then at least you have the 
benefit of having gotten people into the insured category.
    My understanding is once you are insured then if you become 
uninsurable, you at least have some ability to continue your 
policy. Does that make sense or would you respond to that?
    Ms. Blumberg. Sure. First, in the small group market there 
is technically no one who is uninsurable. The small group who 
has a very sick person in it may have to pay substantially more 
for insurance, depending upon the pool that they are in, but 
there is guaranteed issue now through HIPAA in the small group 
market.
    In the non-group, the private non-group market------.
    Chairman Akin. I don't mean to interrupt you, but does that 
also make it so that let us say you are a small business, you 
have five employees and one of them is in that category, does 
that also make it a lot more expensive to get the------.
    Ms. Blumberg. Yes. They can charge you up for that, 
depending upon how they are setting their premiums and what 
other firms are in your pool. You will likely experience an 
increase and the extent of the increase is a function of what 
state you live in, because the regulations on pricing----
    Chairman Akin. It varies from state-to-state.
    Ms. Blumberg [continuing]In the small group market vary 
from state-to-state.
    Chairman Akin. It is going to cost you more for everybody--
--
    Ms. Blumberg. That is right.
    Chairman Akin [continuing]When you have someone in your 
pool that is uninsurable.
    Ms. Blumberg. That is exactly true. In the private non-
group insurance market, there is no guaranteed issue in the 
vast majority of states and so individuals can be completely 
excluded. Many states also allow you to write out particular 
body parts or body systems that you have either had problems 
with in the past or have current problems or maybe a dependent 
does.
    There is guaranteed renewability, but again think about 
what the effective truth is when you have somebody who is very 
high cost in a narrowly priced pool in the non-group market and 
their premiums go up substantially over a course of a year or 
two.
    Then even though the law says that they are guaranteed 
renewable, they don't necessarily have effective access to that 
insurance over time.
    Even if they buy into the non-group market when they are 
young and healthy, there is no guarantee that they are going to 
be able to afford to stay in it, because of the way that the 
pricing works in most states.
    In addition, sometimes a------.
    Chairman Akin. Let me clarify that. So in other words, let 
us say I am 25 and Superman. I get the insurance.
    Ms. Blumberg. You are talking about in the non-group 
market?
    Chairman Akin. Non-group. This is just like an individual 
major medical policy. Me and my wife, a couple of kids or 
something and we run along five, ten years. We pay for the high 
deductible stuff. We are covering the other stuff out-of-pocket 
the way we have been talking about.
    Then all of a sudden either one of my children, my wife or 
myself we get something that makes us more uninsurable, I think 
of diabetes because it is one of those things that you can get 
an onset somewhere along the line, you don't know it is coming.
    The way most of the insurance works, you still can continue 
to buy insurance, can't you, in the next year after you have 
gotten the diabetes?
    Ms. Blumberg. That is right, but you may have a very 
significant increase in your premiums, to the extent that----
--.
    Chairman Akin. Wouldn't that be the case in a group market 
as well?
    Ms. Blumberg. It may be, but when you are talking about in 
a group market, there is inherently more what we call risk 
pooling. So there are more people over which the risk is 
spread.
    For example, you think of a firm of 1,000 or more workers. 
A small number of very sick people in there, those excess costs 
are spread over a very large group. The impact on everyone's 
premiums is very modest.
    The smaller the group, the more the impact of that excess 
cost on any particular individual's premiums. In the non-group 
market, because most states allow you to be rated for premium 
purposes according to your own health care risk, your own 
health care situation, the situation is even worse for someone 
who incurs an illness or a serious injury.
    Chairman Akin. So using a logical extension of what you are 
saying, it almost sounds like what you are saying is the only 
thing you would really support would be just sort of a 
universal coverage, right?
    Ms. Blumberg. No, that is not necessarily the case. I think 
you can------.
    Chairman Akin. I have heard the same argument, because we 
were talking about the AHP's and that was something that a 
number of us were pushing a couple of years ago. I heard the 
same complaint there.
    Ms. Blumberg. Well, AHPs are another mechanism that would 
affect risk pools.
    Chairman Akin. There is also going to be some cherry 
picking within. You know like you have ten small businesses. 
They want to pool and the 11th small businesses got a couple of 
uninsurable. Well, there is going to be cherry picking within 
that as well.
    Unless you go to a total universal, I mean I don't see how 
you get out of the box that you are describing.
    Ms. Blumberg. I can give you a couple of ideas if you would 
be interested in things that you could do short of going to a 
full universal system and still taking advantage of the market 
and the advantages of the marketplace that a lot of individuals 
favor.
    You could, for instance, set up a system where you let the 
government serve as a public re-insurer. In essence what would 
happen is an individual incurs a certain level of expenses. You 
pick a threshold. Maybe it is $10,000 worth of expenses. Maybe 
it is 15. Maybe it is 20.
    When an individual in a particular pool, and this is only 
one way to structure it, hits that level of expenditures, the 
government actually comes in and takes on a share of the costs 
of those particular high cost individuals.
    What that does is it takes part of the cost of the high 
risk out of what could be a relatively modest sized pool, say 
for small firms in the individual market. You can then finance 
the payment, the financing for those kinds of public re-
insurance mechanisms very broadly, across the entire 
population, for example, and then the excess costs attributable 
to each of those very high cost individuals is spread over a 
much larger group.
    You don't have the full cost resting within the insured 
group. That way the insurers then know that their exposure is 
substantially reduced, because a huge share of the expenses are 
attributable to a small number of people. They can then------.
    Chairman Akin. That is interesting. Let me just ask then: 
Aside from that then if it were found, of course we have 
already put this into law so it is operative, but if this were 
to drop the number of people who were uninsured, would you then 
change your position and think well maybe it is okay or not?
    Ms. Blumberg. You are talking about the health savings 
accounts or the tax deductibility?
    Chairman Akin. The health savings accounts and the tax 
deductibility both.
    Ms. Blumberg. I think what you are going to see is not an 
increase in the number of people who are insured. I think you 
are going to see a switching of who is insured. So you may find 
some people who------.
    Chairman Akin. You are predicting there will not be a drop 
in the number of people who are uninsured?
    Ms. Blumberg. I don't think it will decrease----
    Chairman Akin. As a result------.
    Ms. Blumberg [continuing]The number of uninsured. I think 
it has the potential to increase it. I think there is also a 
strong likelihood that what you are going to see is a 
switching.
    Chairman Akin. A switching.
    Ms. Blumberg. So people who currently have coverage lose it 
and people who didn't have it before who are healthy are taking 
it up.
    Chairman Akin. I would just take a minute now and let other 
members of the panel respond.
    Mr. Perrin. Mr. Chairman, if I may, you know sort of the 
universal attack on health savings accounts is adverse 
selection and it is something that the Coalition has heard for 
ten years.
    What we haven't heard is any proof. We have heard a lot of 
comments that this could, this might, this will. Nobody has any 
proof.
    Chairman Akin. But what you do have proof of is that the 
number of uninsured is growing tremendously, right?
    Mr. Perrin. You have proof of that and the other proof that 
you have got is that in 2001, the United States Treasury 
Department tracked the number of people who were previously 
uninsured who purchased then medical savings accounts and the 
number is astonishing.
    It is 73 percent. 73 percent of the people who purchased a 
medical savings account were previously uninsured and they were 
not just previously uninsured for two weeks.
    The definition in the law of the pilot project was that 
these people had to be uninsured for six months or more. These 
are chronically uninsured folks.
    What Mr. Crane's bill will do is give that waitress at the 
deli the opportunity to buy a low cost health insurance policy. 
The uninsured are actuarialy sicker and less healthy than those 
people who have had insurance. It makes sense and it is in fact 
true.
    How is it that you get adverse selection, but 73 percent of 
people who purchase the medical savings account are uninsured 
and in fact actuarialy sicker? Those two things cannot be both 
true. Somebody is wrong.
    When you look at what is driving people out of the market 
for insurance, the answer is clear. It is cost and at $9,000 a 
year is a very high hill to climb for most people.
    What we are promoting here today, what our Coalition is 
promoting, is a low cost alternative. If you are uninsured, you 
have a whole host of problems, not the least of which is that 
the second largest cause of bankruptcy is uninsured costs. We 
are talking about moving people from the uninsured column into 
the insured column.
    Let me just say one last thing. Assurant, who is formerly 
Fordis, announced three weeks ago that the people who are 
buying their health savings accounts, 30 percent of them are 
previously uninsured.
    Tell me, Mr. Chairman, where that figure is as high in any 
other type of a health insurance. Mr. Crane's bill will do one 
thing. It will help the uninsured and that is why it is named 
that.
    Chairman Akin. Thank you. Kate?
    Ms. Sullivan. I just wanted to also reinforce and answer 
your question directly and a little bit of what Dr. Blumberg 
was talking about.
    If you put these tax incentives into the tax code when they 
are aimed at individuals, will this mean fewer people will have 
employer based coverage?
    We maintain that fewer people are going to have that 
coverage because of cost. That is the rising cost. There is a 
lot that we can do in the system to aim there and we have more 
people who are outside the employer based system for a variety 
of reasons.
    Right now, our only health policy we have today is telling 
people if you want health insurance, get a job. That is not the 
right reason to get a job.
    We have had people going to mass retailers who offered very 
good coverage for organ transplants, because that is what their 
daughter needed and there was no other way for them to get that 
transplant covered.
    People are getting jobs in the hospitality industry, 
because they run 24/7. They get that second job. We have to do 
better. We have to do more in the individual market.
    The proposal that Dr. Blumberg is outlining, as far as re-
insurance, is something to look at as an alternative to simply 
high risk pools that could be very expensive for those 
individuals.
    Along with tax deductions, you should look at targeted tax 
credits for individuals within certain income limits so that 
they don't disrupt that employer coverage, but they reinforce 
it where it works and unfortunately, it does not work 
perfectly.
    Chairman Akin. Thank you very much. I don't mean to 
monopolize the questions. I want to let Congressman Udall also 
jump in. You can either piggyback or start on your own or 
whatever you want to do, Tom.
    Mr. Udall. Thank you, Mr. Chairman.
    Dr. Blumberg, what is the proof on adverse selection? What 
is out there that shows adverse selection in HSA's?
    Ms. Blumberg. We do have a couple of good examples of 
situations where adverse selection has changed the options 
available on the market.
    A prime example is through FEHBP, the Federal Employees 
Plan, where originally there were two Blue Cross Blue Shield 
plans. One a high option that had a very low deductible and 
another option that had a slightly higher deductible and cost 
sharing involved.
    What happened was over time the healthier individuals 
migrated into the lower option, the one with the more cost 
sharing. The higher cost individuals were left in the low 
deductible plan, and the premiums in the low deductible plan 
escalated very quickly.
    Over a number of years, we now are in a situation where we 
only have the higher deductible plan. The other one was priced 
out of existence, even though the difference in the actuarial 
value of the two plans was not nearly as different as the 
difference in the actuarial value we see between health savings 
account type high deductible plans and current comprehensive 
coverage.
    There is also an example from the Harvard Community Health 
Plan, where the split of selection was very acute and reduced 
the number of options that they had there.
    We don't have a lot of evidence from MSA's at this point, 
largely because very few employers actually took advantage of 
them. There was very little enrollment and so when you are 
talking about a modest amount of participation, you can't 
expect a big effect on the rest of the community.
    I think it remains to be seen what is going to happen, but 
I think we have enough evidence of knowing that death spirals 
do occur in insurance markets, that we need to be very wary 
about it.
    Mr. Udall. The part of this that I think is very dramatic 
and the Chairman brought this out in one of his questions I 
think, is what you say in your written testimony, the 
distribution of health expenditures is highly skewed, meaning 
that a large share of total health expenditures is attributable 
to a small fraction of the population.
    So where you have a situation where ten percent of any 
insured population typically accounts for 70 percent of all of 
the spending of that group, that argues at least to me for some 
kind of subsidization of insurance coverage for high risk 
individuals and there are a variety of ways I guess you could 
do that.
    The one that you talked about earlier was where the 
government at large becomes a re-insurer. Could you talk a 
little bit about that and why that would make a difference for 
small business people?
    Ms. Blumberg. Sure.
    Mr. Udall. You heard my concern earlier. The small business 
people, the small number of employers have a hard time getting 
insurance. Why would that help them?
    Ms. Blumberg. This is actually not much of a problem really 
for large employers. As I mentioned before, they have a large 
number of people over which they are spreading their health 
care risk. A small number of high cost people there, those 
costs are spread very broadly.
    The problem really is in the small group and the non-group 
market and what happens is because there is far less ability to 
pool the risk of high cost people for small firms. So when you 
do have even one very sick person who is employed by a small 
firm or maybe that small firm worker's dependent, then you can 
see very substantial increases in premiums year-to-year.
    Actually, there is a great persistence in those premium 
increases. If you have a bad year, someone has a bad year and 
you are a small firm, your premiums go up substantially in the 
next year and then even if the health problem is treated and 
goes away, you still see persistence of those high premiums for 
a very extended period of time.
    If you had some kind of a mechanism, either through re-
insurance or some other kind of pool where the government was 
subsidizing the costs of these high cost cases or the high risk 
cases, you end up taking away the reason why those premiums are 
spiking and being so variable year-to-year.
    You are taking a very large percentage of the costs for the 
total population out of the premium base of the small employer 
or the non-group market and financing that in a very broad way 
so the impact of it hits each of us in a much more modest way.
    Mr. Udall. It ends up making it more affordable for smaller 
business people.
    Ms. Blumberg. Yes, that is right. You should see the 
premiums for small businesses----
    Mr. Udall. Go down.
    Ms. Blumberg [continuing]And individuals' premiums going 
down substantially as a consequence.
    Mr. Udall. Thank you very much. Thank you, Mr. Chairman.
    Chairman Akin. I thank you all very much for coming out and 
providing us with really a comprehensive education on the 
subject and I really appreciate that and look forward to trying 
to work through all of these problems and solve some of the 
problems of the uninsured. Thank you.
    [Whereupon, at 12:16 p.m., the Subcommittee meeting was 
adjourned.]

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