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



                                                        S. Hrg. 108-691



      THE PERFORMANCE AND POTENTIAL OF CONSUMER-DRIVEN HEALTH CARE

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

                                HEARING

                               BEFORE THE

                        JOINT ECONOMIC COMMITTEE

                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 25, 2004

                               __________

          Printed for the use of the Joint Economic Committee



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                        JOINT ECONOMIC COMMITTEE


    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]


SENATE                               HOUSE OF REPRESENTATIVES
Robert F. Bennett, Utah, Chairman    Jim Saxton, New Jersey, Vice 
Sam Brownback, Kansas                    Chairman
Jeff Sessions, Alabama               Paul Ryan, Wisconsin
John Sununu, New Hampshire           Jennifer Dunn, Washington
Lamar Alexander, Tennessee           Phil English, Pennsylvania
Susan Collins, Maine                 Adam H. Putnam, Florida
Jack Reed, Rhode Island              Ron Paul, Texas
Edward M. Kennedy, Massachusetts     Pete Stark, California
Paul S. Sarbanes, Maryland           Carolyn B. Maloney, New York
Jeff Bingaman, New Mexico            Melvin L. Watt, North Carolina
                                     Baron P. Hill, Indiana



        Donald B. Marron, Executive Director and Chief Economist
                Wendell Primus, Minority Staff Director


                            C O N T E N T S

                              ----------                              


                      Opening Statement of Members


Senator Robert F. Bennett, Chairman..............................     1
Representative Pete Stark, Ranking Minority Member...............     4

                               Witnesses

Statement of Dr. Arnold Milstein, M.D., MPH, Physician 
  Consultant, Mercer Human Resources Consulting, San Francisco, 
  CA.............................................................     6
Statement of John M. Bertko, F.S.A., MAAA, Vice President and 
  Chief 
  Actuary, Humana, Inc., Louisville, KY..........................     8
Statement of Howard Leach, Human Resources Manager, Logan 
  Aluminum, Inc., Russellville, KY...............................    10
Statement of Gail Shearer, Director, Health Policy Analysis, 
  Consumers Union, Washington, DC................................    12

                       Submissions for the Record

Prepared statement of Senator Robert F. Bennett, Chairman........    35
    Chart entitled ``Out-of-Pocket Spending Falls as Per-Capita 
      Spending Climbs''..........................................    36
Prepared statement of Representative Pete Stark, Ranking Minority 
  Member.........................................................    37
Prepared statement of Dr. Arnold Milstein, M.D., MPH, Physician 
  Consultant, Mercer Human Resources Consulting, San Francisco, 
  CA.............................................................    37
    Article entitled: ``The Effect of Incentive-Based Formularies 
      on 
      Prescription-Drug Utilization and Spending''...............    43
Prepared statement of John M. Bertko, F.S.A., MAAA, Vice 
  President and Chief Actuary, Humana, Inc., Louisville, KY......    52
Prepared statement of Howard Leach, Human Resources Manager, 
  Logan Aluminum, Inc., Russellville, KY.........................    58
Prepared statement of Gail Shearer, Director, Health Policy 
  Analysis, 
  Consumers Union, Washington, DC................................    61
    Consumers Union Testimony on ``Consumer-Driven'' Health Care.    61

 
                   THE PERFORMANCE AND POTENTIAL OF 
                      CONSUMER-DRIVEN HEALTH CARE

                              ----------                              


                      WEDNESDAY, FEBRUARY 25, 2004

                     Congress of the United States,
                                  Joint Economic Committee,
                                                     Washington, DC
    The Committee met at 10:02 a.m., in room SD-628 of the 
Dirksen Senate Office Building, the Honorable Robert F. 
Bennett, 
Chairman of the Committee, presiding.
    Senators present: Senator Bennett.
    Representatives present: Representatives Ryan, English and 
Stark.
    Staff present: Tom Miller, Leah Uhlmann, Donald Marron, 
Colleen J. Healy, Mike Ashton, John McInerney, Wendell Primus, 
and Frank Sammartino.

        OPENING STATEMENT OF SENATOR ROBERT F. BENNETT, 
                            CHAIRMAN

    Chairman Bennett. The hearing will come to order.
    Mr. Stark is on his way, I understand, and other members of 
the Committee will come and go as their schedules permit.
    We'll get started because we potentially have a Senate vote 
that may interrupt us.
    But we're grateful to the witnesses who are here to examine 
this issue, which is a very important issue.
    We're facing a significant challenge in this country to 
keep health care affordable. For many years, our health care 
spending has grown at a significantly faster rate than the 
economy, and all projections are that this will only continue.
    And I believe it was Herb Stein, the economist, who said 
``When something can't go on''--as people are saying about 
increasing health care costs--``it won't.'' Something that 
can't go on will, of its own weight, fall. And I would rather 
that we do something about health care spending to bring it 
under control than to just let it go forward until it does fall 
of its own weight with catastrophic results.
    Now in recent years, we've enjoyed amazing advances in 
medical technology that have extended and greatly improved our 
lives. And medical procedures, as we've experienced this 
technological revolution, have become less expensive and less 
invasive.
    But as we discovered at our last hearing on this subject 
last summer, we found an interesting paradox. And it seems 
counter-intuitive, but the data are clear--as costs for medical 
procedures go down, and the delivery of health care 
correspondingly becomes more efficient, overall costs go up.
    Now much of this disconnect can be attributed to the 
difference between the amount consumers pay and the actual cost 
of the technology, because we found as we got into that, that 
as the cost of individual procedures go down, the number of 
procedures go up more dramatically than the cost comes down, 
which means more people choose it, which means overall costs 
rise.
    Now some people might not choose expensive procedures if 
there was an economic incentive that entered into their choice. 
And because of comprehensive insurance and other programs, 
we've created the notion in people's minds that, ``someone 
else,'' is paying for our health care.
    And we therefore have an economic incentive to use more and 
more health services.
    In other words, insured people are buying greater amounts 
of medical services, which contributes to the higher insurance 
premiums and the overall health care costs. And, paradoxically 
again, as this happens, we're buying more and more insurance, 
more and more people can't afford it, or their employers feel 
that they can't afford it, and so the number of uninsured goes 
up.
    Now we have a chart here that illustrates, I think, the two 
trends. The dark blue line is a figure in dollars that shows 
the amount of per capita health care costs overall, starting 
with the 1960s, the decade in which we went to Medicare.
    [The chart entitled ``Out-of-Pocket Spending Falls as Per-
Capita Spending Climbs,'' appears in the Submissions for the 
Record on page 36.]
    And the overall costs have been going up very dramatically, 
higher than the economy is growing, higher than our incomes 
have grown, higher just about than anything else.
    And we are now at the point where everybody says our 
number-one cost problem is increasing health care.
    The orange line is in percentages, not dollars. So at first 
glance, this might be a little misleading. The orange line 
shows the percentage of the at-point-of-service, out-of-pocket 
costs that people pay.
    In 1960, it was about 50 percent. When you went to the 
doctor or you went to the hospital or you went somewhere, you 
paid about 50 percent of the cost yourself and the other 50 
percent was covered by your health care plan.
    And as we can see the orange line coming down, that number 
is about 15 percent today.
    So if there was an economic incentive back in 1960 either 
to stay healthy in the first place, or to make wise choices as 
to what costs you would incur in the second place, that 
incentive has gone down very dramatically.
    I'm not sure we can make a direct cause-and-effect 
relationship between these two lines. It's always dangerous to 
put two lines on a chart and say one is causing the other.
    But, nonetheless, it's something that we should consider 
and pay some attention to.
    Given the rapid rise of the line on the bottom, the dark 
blue line that every employer talks about as his biggest 
economic challenge today, including the Federal Government, we 
have to look for ways of limiting costs that are not Draconian.
    We want to limit costs while improving access and the 
quality of health care.
    Now, as we've seen in other areas, cutting costs by 
government fiat causes all kinds of market distortions. The 
government can't keep up with the marketplace and cost 
controls, regardless of the area, have never worked over time.
    If prices are set too low, there's a shortage of providers 
who say that they can't make a living at those low prices. If 
prices are set too high, insurance companies are forced to 
raise premiums and ration services to the patients.
    So there are those who believe, and I am one of them, that 
a better approach is consumer-driven health care.
    We've had 2 years of experience now to look at the initial 
attempts at getting consumer-driven health care off the ground. 
And the purpose of this hearing is to look at that evidence, 
look at that experience and see what it can tell us.
    A consumer-driven approach to health care does restore to 
consumers a degree of direct control over their health care 
dollars which has been missing.
    It provides them with better value and greater choice, 
improved health and recognition of the true cost of the 
services they demand.
    So you can see, if the cost at purchase goes from 50 
percent down to 15 percent, the true cost of what they're 
getting gets lost in the minds of the consumer.
    Consumer-driven health care offers a broad range of options 
that encourages employees to take a greater role as informed 
health care consumers in choosing their health plans and 
benefit packages to health care providers and medical treatment 
alternatives.
    Another promise of consumer-driven health care is that it 
can reverse a long-term trend that has combined more third-
party payment of health care bills with substantial hikes in 
health care spending.
    Now, in last December's Medicare Prescription Drug 
Improvement and Modernization Act, health savings account 
options that were severely limited before the passage of that 
act have been expanded. And they give consumers even greater 
ownership and control of their health spending dollars, which 
might very well reshape the health care market.
    So today's hearing will examine the performance of the 
consumer-driven health care market over the last 2 years to see 
how this new approach is developing in terms of levels of 
enrollment, plan options, consumer satisfaction, and projected 
growth.
    And I'm very grateful to the witnesses that will be here to 
help us understand what experience we've had and give us their 
opinions as to what might happen in the future.
    Our panel will include a number of perspectives on this: 
Dr. Arnold Milstein, who is a physician; Mr. John Bertko, who 
is an actuary; the benefits manager at a firm that has adopted 
the consumer-driven health approach, Mr. Howard Leach; and a 
health policy analyst for Consumers Union, looking at it from 
the outside to see what the insiders may have missed, Ms. Gail 
Shearer.
    And we're grateful to all of you and look forward to what 
you have to share with us today.
    [The prepared statement of Senator Robert F. Bennett 
appears in the Submissions for the Record on page 35.]
    Chairman Bennett. Mr. Stark.

        OPENING STATEMENT OF REPRESENTATIVE PETE STARK, 
                    RANKING MINORITY MEMBER

    Representative Stark. Thank you, Mr. Chairman, for delving 
into this area.
    I'm troubled by the title ``The Performance and Potential 
of Consumer-Driven Health Care,'' because, having spent some 
time in the health care policy area, I have yet to observe any, 
``consumer-driven health care'' that's performed well.
    Basically, the policies that the Administration is 
suggesting we use are--what they really are are tax shelters 
that require people to pay more for their health care so that 
insurance companies' stockholders can get rich.
    The high deductible defined contribution plans are not 
consumer-driven, nor do they offer very much choice.
    They simply shift costs to the consumers and force the 
consumers to pay more out-of-pocket, often in many cases making 
it difficult for the patients to actually get the care they 
need.
    I know the Chairman knows a great deal about the market, 
free markets and the open markets that we have in this country. 
But I know that he also knows, I think as an academic as I once 
was in the field of marketing, that the consumers need reliable 
information.
    And I'm going to challenge the Chair, which I rarely would 
do, and all of our witnesses, including Dr. Milstein, who might 
have reason more than any others, and anybody else in the room, 
to take the Stark Test, as I call it, and get a 95 percent 
score, those of us who are somewhat experts in the area of 
delivery of health care, to see if you could define for me what 
your own health plan provides.
    Tell me, first of all, how much it costs each month. You 
may know your share of the payment, if any, but I doubt if 
anybody in this room knows the cost--you and I don't--of our 
own health plan. And then, what are the benefits?
    We may know vaguely, Mr. Chairman, that it provides 80 
percent or 90 percent of medical costs. Maybe 100 percent if we 
go to an approved doctor. Roughly that it provides some 
hospitalization.
    I think, unless you or I or our family members, or the 
panel's family members have been ill recently, you wouldn't 
know. I could sure stump you on mental health benefits--how 
many days do you get? Or unless you have a child who has 
handwriting problems like mine, occupational therapy.
    Most people don't know. They just don't know.
    And I just approved it. I've arranged at Georgetown 
Hospital--and I have a sign-up sheet here for all of the 
panelists and for you and me, Mr. Chairman, and any of the 
people here in the room today, as a courtesy of Georgetown 
Hospital Medical Center, to get a half-price colonoscopy or pap 
smear.
    Do you want to sign up?
    [Laughter.]
    We don't do this.
    Chairman Bennett. I got mine at Bethesda Naval Hospital.
    [Laughter.]
    Representative Stark. And you didn't pay anything. But we 
don't want to buy this stuff. We want to buy a new car or a new 
suit or a tie with elephants on it. I want to get one with 
donkeys on it.
    [Laughter.]
    But if a doctor tells us to take a test, we'll take it and 
hope we pass. But we don't know what the test is.
    And I'll bet you in many cases--I don't know what specialty 
Dr. Milstein has--but I'll bet you outside of his specialty, he 
doesn't know what tests cost. And we patients don't.
    What I'm suggesting is that, yes, the Internet is informing 
us more and we're learning more. And with the all the 
advertising that the pharmaceutical companies are presenting 
us, we're asking our physicians to improve our life so that we 
can leap through the tulips or get up there with the football 
players or whatever.
    But I suspect that it's annoying the doctors as much as 
perhaps it annoys me for giving us that little bit of knowledge 
which could be dangerous.
    So while I believe in the free market, had some success in 
it, I just do not feel that it is possible for us to learn 
quickly or to take the information that is now available and 
make reasonable choices.
    The high deductible plans, in fact, will attract, because 
of their tax features, those of us who are younger or who are 
not very sick. But it may shift the responsibility and cause 
additional illness and increase costs, because if people are 
deterred from getting the care they need, they may end up being 
sicker which will be more expensive in the long run.
    So you can do better, Mr. Chairman. The problem that we 
ought to look at, for instance, in pharmaceuticals, which is 
driving most of the increased health costs for the past year or 
two. And we ought not to refuse to allow the Secretary of 
Health and Human Services to bargain and use his market clout 
to buy pharmaceuticals for us at a lower cost.
    He showed that he could do that in one drug not so long ago 
and got a 50-percent discount. I want the Secretary's discount. 
I don't want one of these cockamamie Buck Rogers Rocket Rangers 
discount cards.
    I want Secretary Thompson out there getting me discounts at 
50 percent when I walk into Giant or Rite Aid.
    I want him on my side. That's how we'll save some money.
    But I look forward to what the witnesses have to say, and 
this is an area which is very interesting to me and I look 
forward to a stimulating hearing.
    Thank you, Mr. Chairman.
    [The prepared statement of Representative Pete Stark 
appears in the Submissions for the Record on page 37.]
    Chairman Bennett. Thank you very much.
    I normally don't comment on Mr. Stark's comments, but I 
must make this personal observation when he says we don't know 
what things cost and we don't know what we ought to do.
    Since Bill Frist has become the Majority Leader of the 
United States Senate, every Senator, regardless of party, 
philosophical orientation, state, what have you, gets a letter 
from the Majority Leader telling him what tests he ought to 
have, what screening he ought to go through, what he needs to 
do to keep himself healthy.
    And my only defense is that I keep telling Senator Frist 
that he drinks too much coffee.
    [Laughter.]
    With that, we go to our witnesses. Let's go in this 
direction, start with Dr. Milstein, and just go down all four. 
And when we've heard from all four, then the question period 
and discussion period will start.
    Dr. Milstein, your resume is on the record. I won't take 
the time to go through the credentials of each of you, because 
we will stipulate that every one of you is brilliant and 
properly prepared.
    We appreciate your willingness to come here and share with 
us your experience.

     OPENING STATEMENT OF DR. ARNOLD MILSTEIN, M.D., MPH, 
          PHYSICIAN CONSULTANT, MERCER HUMAN RESOURCE 
                 CONSULTING, SAN FRANCISCO, CA

    Dr. Milstein. Thank you for the opportunity to summarize 
early results from a study of consumer-directed plans that I 
lead with researchers from the Harvard School of Public Health 
and staff from Mercer.
    We surveyed and received responses from more than 600 U.S. 
health benefit plans and have been conducting in-depth 
interviews with 15 consumer-directed plans that had preliminary 
results.
    We studied plans that incentivized consumers to select more 
affordable and/or higher quality physicians, hospitals or 
treatment options, including more self-management of health 
problems, and that provided consumers with comparative 
information on cost or quality.
    We examined both portable account plans, such as health 
reimbursement accounts, as well as tiered benefit plans in 
which consumers pay either a lower premium or a lower cost at 
the point of service if they select a more favorably-rated 
provider or treatment option.
    A summary of our more detailed findings and other related 
published research is as follows.
    Our first general finding is that the potential gain from 
consumer-directed plans is large. If consumers were first well 
informed about which physicians, hospital service lines, and 
treatment options offered superior affordability and quality, 
and second, were incentivized to select superior options, they 
could both improve their quality of care and offset 
biotechnology-driven increases in insurance premiums.
    Additional gains from a more performance-sensitive consumer 
market would be ongoing, as safer, more affordable health care 
became a market imperative for physicians, hospitals and 
treatment innovators.
    Ongoing gains would include acceleration of the complete 
process re-engineering of in-patient and ambulatory care as 
described in the Institute of Medicine's ``Crossing the Quality 
Chasm'' report.
    In my testimony last month at the Senate HELP Committee, I 
document why I estimate these potential sources of efficiency 
capture equal 40 percentage points of current spending.
    Our second general finding is that early attempts to 
implement consumer-driven plans are indeed slowing health 
insurance premium increases, but are falling short of this 
potential.
    Early returns suggest that consumers are accessing 
available performance information, reducing their use of 
services, and substituting less costly services for more costly 
services.
    Annual savings based on comparisons with concurrent 
increases in other health benefit plans in the same geographies 
center around 10 percentage points, net of reductions in 
benefits coverage.
    Lack of independent scientific scrutiny of the data 
underlying these reported results and information voids about 
important questions, such as the impact on quality of care, 
indicate that there is more to learn before projecting the 
results likely to occur for the entire U.S. population.
    We estimate that enrollment in consumer-driven plans will 
double in 2004 to something approaching 4 million individuals.
    Of these, about one-quarter will be enrolled in HRA or 
spending account type plans.
    We also found that consumer-directed features such as 
performance comparisons of doctors and of treatment options 
were beginning to penetrate mainstream health plans.
    Two structural limitations explain why early results are 
not approaching their full potential.
    First, many plans are making cost savings a lower priority 
than the simpler goal of increasing consumers' use of 
performance comparisons and consumer self-confidence in using 
those comparisons to select better options.
    Second, very few health plans have enough claims experience 
with most individual physicians or individual hospital service 
lines to quantify validly for consumers the comparative quality 
of care or cost efficiency when treating a longitudinal period 
of illness.
    Imagine trying to select baseball players for an important 
game if performance information was limited to one-quarter of 
your players and for those players you had fielding averages, 
but not batting averages.
    Let me close by pointing out that there is an important 
budget-neutral opportunity for Congress to reduce the 
significant informational barrier to capturing the full 
potential of consumer-directed plans.
    Congress could clarify to CMS that nothing in the current 
Privacy or HIPAA statutes was intended to block routine access 
by private-sector health plans, whether sponsored by self-
insured employers, labor unions or health insurers, to the full 
Medicare claims database as long as such access assures all 
statutory beneficiary privacy protections provided for under 
HIPAA and the Privacy Act, such as encrypted beneficiary 
identifiers.
    Such information access would enable all American health 
plans to compare for consumers the quality and longitudinal 
cost efficiency of physicians, hospitals by particular service 
lines, and treatment options.
    Precision in performance comparisons could be further 
enhanced if CMS were to require modest expansion of hospital 
and physician billing data as recommended by the Quality Work 
Group of the National Committee on Vital and Health Statistics.
    Thank you for the opportunity to summarize my more detailed 
written testimony.
    [The prepared statement of Dr. Arnold Milstein, M.D. 
appears in the Submissions for the Record on page 37.]
    Chairman Bennett. Thank you very much. And your testimony, 
as submitted, will appear in the record.
    Mr. Bertko.

    OPENING STATEMENT OF JOHN M. BERTKO, F.S.A., MAAA, VICE 
          PRESIDENT AND CHIEF ACTUARY, HUMANA, INC., 
                      LOUISVILLE, KENTUCKY

    Mr. Bertko. Good morning and thank you for the invitation 
to present early experience with our consumer-centric health 
insurance products.
    I'm the Chief Actuary of Humana, which is one of the 
country's largest regional insurers. We have about 6 million 
total members and 3 million commercial members in about 15 
major states.
    Today, Humana has over 200,000 under-65 members enrolled in 
our consumer-centric products, which is roughly 7 percent of 
that business. The number has grown dramatically in the last 
year from roughly 40,000 a year ago.
    We believe that Humana ranks second in membership in these 
true consumer-centric products. And we agree with Dr. Milstein 
that there are about a million Americans today enrolled in 
these consumer products that have a spending account.
    Chairman Bennett. Let me interrupt you to be sure I have 
the numbers right.
    A year ago, you had 40,000 enrolled. And now you have----
    Mr. Bertko. 200,000.
    Chairman Bennett. 200,000. Okay.
    Mr. Bertko. So the growth rate----
    Chairman Bennett. I heard million in there and I didn't 
know quite what--all right. So it's gone from 40,000 to 200,000 
in a year.
    Mr. Bertko. Yes, sir.
    Chairman Bennett. Good. Thank you.
    Mr. Bertko. We expect that in the next year, that these 
numbers will again double and that by January 1st, 2005, Humana 
is likely to have between 400,000 and 500,000 members in these 
products.
    Our product is called SmartSuite and we believe in the 
social contract of insurance, that the healthy must subsidize 
the sick and it's critical that all employees, both healthy and 
high users, remain in the same risk pool for insurance 
coverage. And that to maintain the integrity of this risk pool, 
the employer must provide a subsidy for high-use employees and 
blend these funds with contributions from employees that have 
either average, high, or low utilization.
    So we market what we call a total replacement solution, 
where the employer chooses a bundle of products and then each 
employee chooses one option from the bundle.
    In employee choice, we have found in early experience that 
employees make meaningful choices if given the good information 
and tools, like the kind that Dr. Milstein described.
    Our employees and members use a wizard to help them learn 
about their plan choices and estimate the cost of services they 
might use in the coming year based on the previous year's claim 
experience.
    Then the employer or family makes a decision as to whether 
they wish to pay for their coverage through lower payroll 
deductions and higher costs at the point of service or vice-
versa, choose higher payroll deductions today, but have lower 
costs from cost-sharing.
    Our initial and ongoing educational communications are 
critical to the success of the consumer-centric approach. 
Employees and dependents are provided with web-accessible 
decision support tools that show how much they've spent, 
different costs for services, and to the extent available, 
quality information about providers.
    With Humana employees as the pilot group, and now with our 
customers and their employees, we've learned many lessons. But 
I'd like to stress that it's still early and these should be 
viewed as indicators rather than fully credible proof.
    Currently, we have 125 employer customers with these 
200,000 members and by the end of 2003, 28 percent of them have 
chosen the consumer-centric option. The remaining 72 percent 
remain in traditional products.
    Cost trends have been significantly reduced by enrollment 
in these products.
    In our Humana employee pilot, we reduced cost trends in the 
first year for Louisville employees to 4.9 percent. And in year 
two, when we extended it to the 14,000 non-Louisville employees 
and their dependents, we achieved a trend of 1.4 percent.
    And these are well under the mid-double-digit trends that 
are exhibited in the rest of the market.
    When we extended these to our customer block of business, 
as of January, 2004, we have credible claims experience on 43 
employers covering roughly 50,000 insured members. And the 
average trend for those groups today is about 6 percent.
    Again, well under the double digits.
    All of Humana's detailed cost and utilization evidence that 
I'm going to provide now is only on our Humana employees. It's 
a bit too early to give detailed experience on our customers. 
We'll have that later this year.
    An important question is: Why did claim trends decrease to 
these single-digit levels?
    Our early experience indicates that there are several types 
of behavioral changes that accounted for most of the trend 
reduction.
    First, employees themselves chose among the options to 
migrate to lower cost options, thus reducing their payroll 
deductions.
    Another significant factor appears to be a change in the 
site of care for receiving services. Visits to emergency rooms 
and use of other hospital out-patient services decreased while 
use of physician office visits and preventive care increased 
somewhat.
    We believe that Humana's employees chose to make greater 
use of the physicians and office settings where the doctor's 
knowledge of his or her patient likely leads to better quality 
care, while eliminating unnecessary and costly emergency room 
visits or other hospital out-patient services.
    And Exhibits 2 and 3 of my written testimony provide a 
summary of this.
    We also strongly stress the need for employers to embrace 
and communicate the message of employer participation.
    For employers, we provide a package of communications. For 
employees, we make use of on-line enrollment applications, a 
wizard to assist employees in making their health care option 
decisions, and a PlanProfessor to provide those kinds of 
background information needed to know what your details of your 
plan are.
    To date, we've had 102 of our employer customers make use 
of the wizard with nearly 100,000 unique users--that is, the 
employees and members--sign on to this.
    So, in my opinion, the health insurance industry has 
embraced consumer-centric options. Health Savings Accounts will 
have enormous appeal in the individual health insurance market 
where most of the products sold today do have high deductibles 
to qualify.
    In addition, Health Savings Accounts are likely to replace 
the medical savings accounts for small employers--those under 
50 lives.
    In the larger end of the market, it appears to me that 
health reimbursement accounts may continue to have somewhat 
greater appeal due to their greater flexibility and plan design 
and the ability of employers to use them to increase employee 
retention.
    Thank you, and I'd be glad to answer questions later.
    [The prepared statement of John Bertko appears in the 
Submissions for the Record on page 52.]
    Chairman Bennett. Thank you very much.
    Mr. Leach.

           OPENING STATEMENT OF HOWARD LEACH, HUMAN 
RESOURCES MANAGER, LOGAN ALUMINUM, INC., RUSSELLVILLE, KENTUCKY

    Mr. Leach. Good morning, Mr. Chairman, and members of the 
Committee. I'm Howard Leach, head of human resources for Logan 
Aluminum, a world-class manufacturer of aluminum sheet products 
located in Logan County, Kentucky, with a workforce totaling 
one thousand employees.
    Thank you for the opportunity to testify before you today.
    I'm delighted to share with you the practical side of 
consumer-directed experience at Logan Aluminum.
    Like many employers, in recent years, our business 
experienced annual health-care cost increases of 20-plus 
percent, which, simply put, is not sustainable and not in the 
best interest of our business or our employees.
    Traditional approaches to the management of health care 
costs have been limited primarily to employers absorbing costs, 
shifting cost to employees, or reducing benefits.
    Logan realized these solutions would not be effective long 
term, and it was just a matter of time until neither employers 
nor employees could afford the cost of health care.
    As a business facing intense competition and cost 
pressures, we chose consumer-directed health because we saw its 
potential to help hold the line on a disturbing cost trend.
    But we also made this decision for the benefit of our 
employees.
    To fully appreciate our enthusiasm for the consumer-
directed approach, it helps to understand our company's 
culture. While employing roughly one thousand people in our 
Russellville, Kentucky plant, we have established a team-based 
culture that emphasizes employee involvement in nearly every 
facet of the operation.
    We look at our employees as partners. With the help of a 
20-member employee committee, we engage our people in 
thoughtful discussions several times a year about health care 
costs.
    These employees, in turn, disseminate information about 
these issues with other smaller groups of employees in the 
workforce. This helps keep every employee aware of the health 
care issues affecting our business.
    We are proud of the fact that we have historically offered 
employees an excellent, competitive benefits package, including 
comprehensive medical coverage.
    We have been very fortunate in not having to ask employees 
to pay a percentage of premium, and under the new consumer-
directed health care plan, we still don't.
    When health care costs became more of a concern in the 
early 1990s, we decided the best way to tackle rising costs was 
to get at the root causes through a strong focus on prevention.
    We implemented a wellness program--managed by an on-site 
wellness director--that emphasizes regular health care 
screenings and critical lifestyle changes.
    We have an on-site medical department that includes a part-
time doctor and two nurses.
    Employees are encouraged to routinely take advantage of 
health care screenings, including an annual physical, on-site 
and at no cost. The program also supplies our employees with a 
variety of information designed to help them better understand 
how they can improve their health outlook through a healthy 
lifestyle.
    Because we want our employees to be actively involved in 
managing their health, we follow up these educational efforts 
with health risk appraisals that are evaluated by an outside 
vendor.
    The individual results are confidential--only the employees 
see their individual assessments. High-risk employees are 
identified and then contacted by the vendor and encouraged to 
participate in an intervention program.
    Through follow-up health risk appraisals, we know we have 
had an impact. Results show improvements in body mass index, 
tobacco use, seatbelt use and exercise activity across our 
employee population.
    Consumer-directed health care, in fact, reinforces the 
importance of healthy lifestyle choices and becoming a wise 
consumer of health care. Employees are also encouraged to set 
individual wellness and team wellness goals, which are rewarded 
with additional company incentives.
    Throughout the implementation process of the consumer-
directed model, we emphasized that Logan Aluminum's philosophy 
remains unchanged. We want our employees to be healthy, wise 
consumers, and we are providing the tools needed to help make 
that happen.
    We continue to provide access to free, on-site physicals. 
We also provide incentives to employees who participate in the 
health risk appraisal program and in wellness programs--up to 
$250 in cash per employee per year if certain aggregate goals 
are met.
    Our results from 2003 show the average employee out-of-
pocket costs did go up in the consumer-directed health plan 
from $240 to $665. However, the net effect after wellness 
incentives was an increase of only about $200 per employee.
    While expanding our efforts to promote wellness and 
informed decision-making, we saw a reduction of 18.7 percent in 
our total medical costs in 2003. This represents an improvement 
of $925,000 to the company's bottom line.
    We're also encouraged by utilization data that shows 
employees continue to enjoy access to the care they need. One 
of the best indicators of that could be hospital days of care, 
which increased 4.4 percent for one thousand members in 2003.
    In-patient surgeries were up 4.2 percent, an additional 
indication that employees are getting appropriate treatment for 
serious health events.
    Logan Aluminum is committed to providing its employees with 
quality health care benefits in a cost-effective manner, and we 
remain committed to the active involvement of our own employees 
in helping to manage these costs through better management of 
their own health. Consumer-directed health care is helping us 
do that.
    Logan Aluminum very much appreciates the opportunity to 
testify before the Committee today. I hope the perspective of a 
company on the front lines of today's fast-evolving health care 
landscape has been informative and useful.
    Thank you.
    [The prepared statement of Howard Leach appears in the 
Submissions for the Record on page 58.]
    Chairman Bennett. Thank you very much.
    Ms. Shearer.

  OPENING STATEMENT OF GAIL SHEARER, DIRECTOR, HEALTH POLICY 
           ANALYSIS, CONSUMERS UNION, WASHINGTON, DC

    Ms. Shearer. Thank you very much, Chairman Bennett, for 
providing me an opportunity to present a consumer perspective 
on this important topic.
    So-called ``consumer-driven'' health care plans, which have 
defining features of high-deductible coverage and possibly tax-
advantaged employer contributions to health reimbursements or 
savings accounts, may create serious problems for the U.S. 
health care system.
    Consumers Union believes that this type of coverage is 
misnamed, misguided from a policy perspective, and a dangerous 
distraction from the need to solve the health insurance crisis 
that faces 43.6 million uninsured consumers and tens of 
millions of underinsured consumers.
    Our testimony also addresses issues raised by health 
savings accounts, as included in the recently enacted Medicare 
bill, and the President's new proposals. These proposals are 
likely to accelerate the erosion of current coverage by adding 
tax benefits for high-deductible coverage.
    First, I need to point out that we take issue with the term 
``consumer-driven,'' to refer to the transformation of the 
health care system to one characterized by high deductibles.
    ``Defined-contribution'' health care, in our view, would be 
a more accurate shorthand way to refer to a health care 
approach that essentially increases deductibles and shifts 
costs to sicker employees.
    Many employees with chronically ill or seriously ill family 
members will not view this transformation as consumer-friendly, 
despite the name.
    The recent expansion and renaming of medical savings 
accounts and the President's proposal for a new tax deduction 
are more likely than previous efforts to transform the health 
insurance marketplace to one characterized by high deductibles.
    The Economic Report of the President makes it clear that 
this is the intention, the Administration frames the problem in 
the health insurance marketplace as too much rather than too 
little insurance.
    The Report establishes the ideal health insurance 
marketplace as one in which high-risk consumers face health 
insurance premiums consistent with their risks, explicitly 
rejecting the current goal of health insurance markets of 
spreading risks broadly across the community.
    At the same time, the Report ignores the reality that the 
uninsured and the underinsured face severe health consequences, 
even bankruptcy or death, because of the lack of adequate 
insurance.
    The Administration's proposals, which boost consumer-driven 
health care, will shift more of the costs to those who are 
sick.
    While the Administration proposals will undermine employer-
based health insurance and shift more to the individual health 
insurance market, that market underwrites risks carefully and 
does not make affordable, comprehensive coverage available to 
individuals who have pre-existing conditions.
    The underlying nature of the population's health status--in 
which risks vary widely--makes the health insurance market 
different from other markets such as the market for cars or 
toasters.
    Individuals with underlying health risks benefit from 
employer coverage or other large pooling arrangements such as 
public programs, since this spreads risks broadly.
    For those covered by employer health plans now, the average 
cost in 2000 was about $2,600. But those in the top tenth of 
spending had average costs of over $16,700.
    Because of the combination of variation in risks--which 
lead to different health insurance selections--and higher tax 
brackets and ability to meet high deductibles, HSAs will appeal 
disproportionately to the healthy and to the wealthy. Many 
economic analyses, including that of the American Academy of 
Actuaries, have reached the conclusion that this type of high-
deductible health insurance will fragment the risk pool, shift 
costs to the sick, and ultimately drive low-deductible coverage 
out of the market since it cannot exist side-by-side in the 
marketplace with high-deductible coverage because of the 
underlying nature of the health insurance market.
    ``Consumer-driven'' health care is likely to aggravate the 
problem of the underinsured since individuals with moderate 
income are likely to face out-of-pocket health care costs and 
premiums that exceed 10 percent of their income.
    The focus on transforming our health care marketplace to 
one characterized by high-deductible policies is a dangerous 
distraction from the urgent national goal of extending 
affordable, quality health coverage to all.
    And in closing, I just would like to make two points of 
agreement with earlier witnesses.
    First, I would agree that the research that exists to date 
is of a very preliminary nature when it comes to this type of 
health insurance.
    And second, I would agree that we urgently need more 
studies, more research that compares the clinical effectiveness 
of different approaches. And if we did more of this, we would 
be able to get more value for our health care dollars.
    One specific area that was part of the Medicare bill was an 
authorization for the Agency for Healthcare Research and 
Quality authorized to spend $50 million comparing the 
effectiveness, the clinical effectiveness, of different 
prescription drugs in various therapeutic categories.
    This type of research would help us get much more bang for 
the prescription drug buck. And I would urge you to support 
appropriating that money quickly.
    Thank you.
    [The prepared statement of Ms. Shearer appears in the 
Submissions for the Record on page 61.]
    Chairman Bennett. Thank you very much.
    We are well into a Senate vote. So I'm going to have to 
leave and do that.
    Normally, I would say, I will turn the gavel over to Mr. 
Ryan and let him go forward. But if I may be so selfish, I am 
so interested in the clash that will now occur, that I want to 
be here.
    [Laughter.]
    So if everybody could take a short pause, I will go save 
the Republic from whatever it is we're doing on the floor and 
return as quickly as I can.
    [Laughter.]
    The hearing will stand in recess until that time.
    [Recess.]
    Chairman Bennett. The hearing will come to order.
    My apologies. I thank you all for your indulgence. The 
Senate does have a habit of getting in the way of our schedules 
by requiring us to vote from time to time.
    As I hear this panel of witnesses, I think there are a few 
things that we can stipulate right up front so that we don't 
have to argue over them.
    And that is that the information presented is preliminary. 
There is no hard evidence that can justify a significant 
extrapolation into the future with firm numbers.
    At the same time, the early indications from people who 
have tried this kind of health care activity is that it has two 
features. It does bring costs down. And so far, it increases 
employee satisfaction and employee health.
    Is it fair to say that?
    The gentlemen are nodding. I haven't gotten a reaction from 
the young lady yet.
    Ms. Shearer. I thank you, Senator. I believe that it is 
really premature to make that kind of conclusion at this point.
    Chairman Bennett. Well, that's why I made the stipulation.
    But so far, on the anecdotal evidence that we have, costs 
are coming down and employees are satisfied and appear to be 
healthier.
    Ms. Shearer. And I just think it's important to keep in 
mind that when you're measuring employer costs, you have to 
also be sure to keep in mind, have the costs been shifted and 
what are the employee costs as well?
    So it's not clear to me from the research that's been 
presented today that we have all the data we need about the 
whole picture.
    Chairman Bennett. Well, again, with the understanding that 
this is just an indication and not something on which we're 
going to make long-term extrapolation, the early indication is 
that it's bringing total costs down.
    Mr. Bertko. Mr. Chairman, may I add something there?
    Chairman Bennett. Sure. Please.
    Mr. Bertko. I think Ms. Shearer has brought up several 
valid issues. We have looked in our first group at what we call 
the distribution analysis, how people's choices affected their 
out-of-pocket spending. Across the board, the costs do go up 
some.
    Now it turns out that folks in the low end of the bracket, 
myself, for example, might end up paying out-of-pocket costs, 
not payroll deduction, perhaps $10 to $100 more a year.
    We found out, though, that the people with the highest 
costs, those with $10,000 or more, in our program where we 
have, they can choose between a traditional HMO and PPO and 
consumer-centric, they made excellent choices. And looking at a 
last-year to this-year basis, their cost-sharing actually 
dropped because they chose the right kind of plans to be in.
    And so, I would say, again, preliminary evidence is that 
folks make good choices. They have an ability to predict what 
their next-year's costs are going to be, and they choose the 
right kinds of plans to be in.
    Chairman Bennett. Now, Mr. Leach, you have the only 
experience--well, no, I guess that's not true. But you have a 
direct experience within a company.
    I want to focus on this question of health.
    In all of the debate we have about health care in the 
Congress, we almost never talk about health. We talk about 
coverage. We talk about insurance premiums. We talk about 
costs. We talk about negotiations. We talk about everything 
other than the fact that we want people to be healthy.
    If I heard your presentation correctly, you are saying that 
the introduction of this program in your company has not only 
had an impact on costs, but it has had an impact on behavior 
that leads people to be healthier.
    Not only is that your perception, but if you can, speak for 
your employees. Do they have the perception that this plan 
serves their needs better than the previous one and that there 
are healthier choices being made?
    Mr. Leach. Yes, Mr. Chairman. I would say that, in our 
opinion, it does meet both the needs of employees and the needs 
of the company.
    What we've seen and what we try to do is to measure health. 
And I know that's a difficult thing to do. But we, through 
health risk appraisals, where it's employee information, look 
at aggregate data from one year to the next--in this case, we 
look at aggregate data from 2002 and compared that with 
aggregate data from 2003.
    And employees did say their health is better over the 
course of one year than it was the previous year.
    Now I agree that one year is not a trend, but our data 
shows that employees like the plan. There's more involvement. 
Employees are interested.
    I think all of us want to have good health. And what we 
have attempted to do is give employees a set of tools to help 
them measure, monitor, and take control of their health. And we 
believe that we have good preliminary results.
    Chairman Bennett. All right. I have a lot more. But what I 
would like to do, as my yellow light is on, just turned red, is 
stay within the 5-minute requirement for members for this first 
round. I'd ask Mr. Stark and Mr. Ryan to do the same thing. And 
then perhaps go into more of a roundtable sort of discussion 
since we do not have a large number of members and have a 
little back and forth with all seven of us on some of these 
issues.
    So if the members are agreeable to that, Mr. Stark, I'd 
recognize you for 5 minutes and then Mr. Ryan for 5 minutes, 
and then we can go into that mode, unless there is objection.
    Representative Stark. Mr. Chairman, I'd just like to get a 
definitional issue out of the way here, because--and I think I 
learned this a long time ago from somebody far wiser than me. 
What we're talking about this morning is medical care.
    If you get up in the morning, on a sunny spring day in 
Wisconsin or in California, and you get out of bed and you're 
excited about going to work and your spouse looks about as good 
as he or she did to you 10 years ago. And your sex life is all 
right and you're healthy.
    Chairman Bennett. I'm not touching that one.
    [Laughter.]
    Representative Stark. All right. But if you get up out of 
bed and try to put your underwear on and you fall over and 
sprain your ankle, you need medical care.
    And I guess what I'm seeing is that health, as we define 
it, can include the environment and our economic well-being and 
the state of our communities, and it goes somewhat beyond the 
medical care that excellent providers, physicians and hospitals 
provide.
    And I think it's important that particularly when we're 
talking about costs, some of Mr. Leach's programs, which I 
think are amazing, may go to the overall good feeling and well-
being of their employees, but it would be hard to define the 
costs.
    And I'd just bring that out as something that could get 
confusing.
    I did want to talk to Dr. Milstein, because he brings up a 
couple of issues in his written testimony and in an article 
which I've looked at which he also wrote, I guess in the New 
England Journal of Medicine.
    [The article entitled ``The Effect of Incentive-Based 
Formularies on Prescription-Drug Utilization and Spending,'' 
appears in the Submissions for the Record on page 43.]
    But I think you do suggest, Doctor, in your written 
testimony, that there is a good bit of risk selection, but we 
don't know quite how much.
    Is that fair?
    I mean, risk selection is a result of people selecting 
these plans. And you're unable to quantify it at this point.
    Is that a fair analysis of your testimony?
    Dr. Milstein. Yes. We examined multiple plans as part of 
our study.
    For some of them, such as one of the plans that Mr. Bertko 
described, there are no questions about risk selection, because 
they pertain to an entire employee population. For some of the 
other plans that we examined, there were issues of risk 
selection.
    Representative Stark. And often, in employees, one of the 
troubling things, companies that employ lower income 
individuals, because I want to then lead to your article where 
you conclude where you're dealing with prescription plans, that 
by--if I can paraphrase you, if you'll allow me a little bit--
by changing the formulary or administration, which could 
include co-pays and the rest, that in some instances, you could 
lead enrollees to discontinue therapy, which is something that 
I would think would also take place in other kinds of medical 
care.
    It's like titration. I know Dr. Milstein's done this. You 
drop that stuff in there and all of a sudden, it all turns blue 
and we're never quite sure how many drops you have to put back 
before it gets clear again.
    And there is the risk, and I think we'll talk about it 
later, that we could deter people from getting necessary care, 
which is what I mentioned in my opening comments.
    And I don't know as we know yet. Kaiser, in northern 
California has done some studies about, if they go from 5 to 10 
bucks as a co-pay, whether it deters or just stops over-
utilization.
    I worry about that in some of these plans, because it could 
be an easy way to save money. Just bump that co-pay up and 
particularly among lower-paid employees, you're going to have 
far less utilization.
    But I wanted to say, that is a concern, besides the fact 
that I don't think the plans are going to work. But I just 
wanted to talk about some of the more gentle problems here.
    I yield back, Mr. Chairman.
    Chairman Bennett. Mr. Ryan.
    Mr. Ryan. I wanted to get into--I think my questions are 
probably for Mr. Bertko and Mr. Milstein.
    I wanted to ask the two of you about the differences 
between HRAs and HSAs and the market perceptions.
    HSAs are so new, so it's difficult to make any kind of 
conclusions. But what is your impression as to what large 
employers are saying and doing and thinking with respect to 
HRAs versus HSAs?
    And are there some deficiencies with the regulations 
surrounding HSAs that need to be addressed so that it is an 
easier decision for large employers to make the decision to go 
with HSAs versus HRAs, because, for me, the most attractive 
difference is that HSAs are portable. It's part of the 
employee's property that they can take with them, but they 
can't do that with HRAs.
    Could you go into that issue as to--and if anybody else 
would have a comment, that would be great.
    Mr. Bertko. Sure, Mr. Ryan. Let me start and Dr. Milstein 
can add.
    HRAs have been around a little bit longer. We got 
clarification from Treasury a little over 2 years ago. And the 
reimbursement accounts are fairly flexible.
    There really are fewer limits in terms of the size of the 
deductible and how the accounts roll over and the plan design 
itself.
    So many larger employers might choose HRAs. They also can 
use notional dollars, like airline credits.
    Mr. Ryan. Yes.
    Mr. Bertko. As opposed to filling with real cash.
    HSAs, Health Savings Accounts, need actual cash 
contributions. I think to the point of employees, they would 
find those more attractive. They clearly are portable.
    It's my understanding from listening to things from 
Treasury, for example, that there are some constraints on our 
ability to define the deductible, and particularly the family 
deductible.
    That might make them slightly less attractive.
    Plus, we're big believers, I think like the rest of the 
panel, in preventive care. And to some degree, we think that, 
for example, prescription drugs might need to be folded into 
the way that preventive care is described so that we can make 
those easier to be obtained.
    I think HSAs will be very, very attractive to individuals 
and to purchasers and to the small group end of the market. 
That's the 2-to-50-market. HRAs may continue to be somewhat 
more attractive to the companies of a thousand or more.
    Mr. Ryan. Is that pretty much because it's more mature of a 
product and the employer which has the resources in a big 
company can control it more so?
    Mr. Bertko. That would be my guess, in my opinion.
    Dr. Milstein. There was a single paragraph in my testimony 
that addressed this and indicated that there were some areas in 
which clarification for employers would help them feel more 
comfortable.
    Mr. Ryan. I didn't actually get that. Could you just relay 
it real quickly?
    Dr. Milstein. Some of those were, for example, the 
possibility, if any, of rolling over balances in HRAs into 
HSAs.
    Mr. Ryan. Yes.
    Dr. Milstein. And in particular, the relationship between 
HSAs and some of the carve-out benefit programs that some 
employers offer, such as carve-out pharmacy or mental health 
programs.
    Mr. Ryan. Okay. Ms. Shearer, I just want to ask you a quick 
question.
    Are you an advocate of a single-payer system, a single-
payer plan? Is that kind of ideally, if you were king or queen 
for a day, you would do that?
    Ms. Shearer. We are a strong advocate of universal health 
care. We have supported a lot of different approaches to 
getting there.
    We're pretty open-minded about how to do it as long as you 
cover everybody and you finance it in a fair way.
    We have supported single-payer many times because it's the 
most efficient way to do this. But we are very open-minded.
    We think that the most important thing for this Committee 
and other committees in Congress to do is to chart a course to 
get us to universal coverage.
    Mr. Ryan. Let me ask you this question, then, because I 
read your testimony and listened to your testimony on the 
criticisms you point towards HSAs and the consumer-based 
system.
    How do you propose to keep down costs in a single-payer 
universal care system other than establishing a global budget 
and rationing care?
    Ms. Shearer. Well, that's a huge question. Let me just talk 
about one specific way.
    I think that if we had more information about comparative 
effectiveness of drugs and then allowed, for example, the 
Federal Government to do what it does for the Department of 
Veterans Affairs, to negotiate deep discounts for prescription 
drugs, that would be one way.
    That's part of our health care spending where there is an 
obvious----
    Mr. Ryan. That sounds like a form of rationing as well.
    Ms. Shearer. Well, if I may say.
    Mr. Ryan. Sure.
    Ms. Shearer. Other countries do this. What they do is they 
look at a therapeutic category.
    For example, they might pick statins, cholesterol reducers, 
and realize that there are several drugs that have a similar 
impact.
    If they then go and negotiate with--pick a benchmark drug--
negotiate a good price, everybody's getting quality health care 
at a lower price.
    This is what the Department of Veterans Affairs does for 
its members and it's a way to use our health care dollars much 
more effectively.
    Mr. Ryan. Okay. But at the end of the day, because we're 
seeing in single-payer systems throughout the world that 
they're running up against their global budgets and then they 
have to end up rationing care.
    And those ace inhibitors and those statins aren't actually 
being delivered to those people.
    I see that I'm out of time. I had a quality question, but 
I'll ask it when we go around the next round.
    Ms. Shearer. And if I could just say, the key is what kind 
of budget is the government allocating.
    If you look at Canada, for example, they're spending a much 
lower share of their GNP on health care.
    If they put in the funds, it would be much lower than the 
share that we're spending, but then people would get the health 
care and it would be delivered more efficiently and 
effectively.
    Mr. Ryan. And they're rationing. Thank you.
    Chairman Bennett. Well, let's not get into a debate over 
Canada, because that might get the blood pressure up to a point 
where we avoid the purpose of this hearing.
    Mr. Bertko, you're an actuary. And Ms. Shearer referred to 
a study by actuaries. I wondered if you had an opinion on her 
comments about the study.
    Did you participate in that study? Are you aware of it?
    Mr. Bertko. I'm aware of it, Mr. Bennett, and in fact, I 
was one of the peer reviewers of the study.
    Chairman Bennett. Good. Then let's get into it.
    Mr. Bertko. Ms. Shearer quotes some of the things that 
were, I believe, worded in the study. I didn't review that this 
morning before coming over.
    I would suggest, though, that that study was describing 
things that were on a theoretical basis, and that what's 
emerging right now is what Mr. Leach and Dr. Milstein and I are 
suggesting, which are actual empirical data are now emerging.
    And so, there clearly is a worry.
    I mean, I would agree with the issues raised by Ms. 
Shearer. But at the same point, our solution in terms of 
keeping the risk pool intact is a way around this.
    Large employers, in fact, in their own ways, whether self-
insured or insured, can keep those risk pools together in much 
the same way.
    So as long as the employer remains the basis for the risk 
pool, I think that that could be managed and somewhat minimize 
the worries of the selection issues that Ms. Shearer raised.
    Chairman Bennett. That's true, apparently, as long as the 
employee stays with the employer.
    One of the biggest problems that we have with the uninsured 
is that Americans no longer stay for significant periods of 
time with the same employer.
    COBRA is an attempt to deal with that problem as you move 
from one employer to the other. But as one who has moved from 
one employer to the other, dealt with COBRA, it's very 
expensive.
    And then, as one who has ended up in the uninsured pool--
fortunately, I stayed healthy, so that I didn't have need for 
medical care. And I think staying healthy is an important part 
of the cost equation--I finally got another employer where I 
did get covered.
    But how does this consumer-based health care plan deal with 
the tremendous shifting that is going on in America and will 
only accelerate. We're only going to see more of people moving 
every 2 or 3 years from employer to self-employed to a 
different kind of employer to their own business to working for 
the government and so on.
    By my own case, the 11 years I've spent as a Senator is the 
longest period of time in my entire employment history that 
I've drawn a paycheck from the same place.
    I've changed jobs over 20 times since I turned 20.
    So I'm personally very concerned about this. Those of you 
who are saying, the empirical evidence says this is--yes, I 
can't keep a job. That's my problem.
    [Laughter.]
    But I've got this one and I'm trying to get a 6-year 
extension on the contract come November.
    [Laughter.]
    Address that from the experience that you've had. And Ms. 
Shearer, we'd like your comments, too, because this is a very 
major problem for an employer-based system.
    Anybody--and then my colleagues, jump in with your 
questions and your comments.
    Mr. Bertko. Mr. Bennett, if I can start, perhaps, I think 
that consumer-centric health plans can address it in two ways.
    The first one is perhaps the more obvious one. If we can 
actually maintain lower trend rates, something in the 
neighborhood of 5-, 6-, 7-percent, versus the high ones, it 
keeps the total premium more affordable.
    The second part of this is, and perhaps to address Mr. 
Stark's question earlier, COBRA represents the actual 102 
percent of the full rate.
    And so that's what things actually cost employers like Mr. 
Leach's company.
    If there's an HRA or an HSA, I'm at least aware of many 
employers who are willing to provide the roll-over account and 
is able to pay for either COBRA coverage or retiree medical 
coverage.
    And to the extent that people can accumulate those, that 
then is some pot of money for a while. It won't be a complete 
solution, but say in between jobs, if you have a 6-month gap, 
it could be used to pay for COBRA coverage.
    Chairman Bennett. Anybody else want to comment?
    Yes, Ms. Shearer.
    Ms. Shearer. If I could just say--I think that this issue 
of an employer-based health care system is key here.
    Now people are beginning to understand that if they get a 
pink slip, they lose their health insurance because, in most 
cases, if you lose your source of income, you cannot afford to 
pay a premium that is 102 percent of the premium level.
    Another concern that we have in talking about transitions 
is that, especially with the President's new proposal for a tax 
deduction for premiums paid in the individual market for a 
high-deductible policy, that many employers may find that this 
means that their employees have a choice, have an alternative 
outside of the employer-based market. And they may actually 
stop their employer coverage.
    And if they have employees who are not very healthy, 
they're going to really have a struggle in the individual 
market.
    So there are a lot of transition issues that are relevant 
now, I think.
    Chairman Bennett. Mr. Leach.
    Mr. Leach. Mr. Chairman, I would say on behalf of the 
employer's side, I don't have experience with a person leaving 
our organization to go to another organization and work.
    But what we do have experience on is retirees, those people 
who elect to take early retirement.
    I think the fact that employees can take those accounts and 
use them into retirement is a very positive feature. And the 
early retirees at our company have found that particularly 
attractive.
    So that if I have a good year this year, I can roll over 
dollars to next year. And if I have a good year next year----
    Chairman Bennett. By good year, you mean a healthy year.
    Mr. Leach. Yes, healthy year.
    Chairman Bennett. Yes, right. So that's another incentive 
to stay as healthy as you can.
    Mr. Leach. I think that's the key, people staying healthy 
and not spending all their dollars in their account. Then they 
can take that account with them to the point in the future, if 
they have a year where there are serious health issues, they 
have dollars to cover that.
    Chairman Bennett. And could they take the account with them 
if they left you to go to work for General Motors?
    Mr. Leach. The retirees would.
    Chairman Bennett. But somebody who just leaves you to go to 
work for somebody else would not.
    Mr. Leach. That's correct.
    Chairman Bennett. Okay. We're joined by Mr. English. We are 
in a roundtable kind of thing. So far I have dominated it.
    [Laughter.]
    But I will step back from that.
    Representative Stark. Mr. Chairman.
    Chairman Bennett. Yes, sir.
    Representative Stark. I just wanted to cover a couple of 
issues here.
    My distinguished friend and colleague from Wisconsin was 
talking about rationing. And he's correct. There is rationing 
in our system. As there is in every system in the world.
    The only question that I think comes up is on what basis do 
we ration?
    Mr. Ryan. Or who does the rationing?
    Representative Stark. Yes. Do we do it clinically, as they 
do in Canada, let the physician decide who goes to the head of 
the queue, or do we do it financially, which says that the rich 
people can get care more quickly, or get a fuller platter of 
benefits?
    Because reducing benefits, as some managed care plans may 
choose to do, or limiting a selection of pharmaceutical 
products, saves money, but is a form of rationing.
    I would make the case that Medicare rations, but it is the 
most efficient program that we have so far in the United 
States. It has had the least average increase in costs over the 
years and has, for seniors, a pretty broad selection of choice 
and benefits, particularly now that managed care plans are 
available under Medicare, as they were not some years ago.
    The issue I think will come into play is that employers 
like Mr. Leach and/or our automobile companies are going to 
join with me and Ms. Shearer--I have a plant that makes most of 
the Corollas in my district. And my Toyota/General Motors 
partner people tell me it's about a thousand bucks a Corolla 
for--I think that's health benefits. It may include some 
retirement benefits.
    I know that General Motors said that it costs them--they 
saved $800 on every Chevy Impala they made in Canada because 
they didn't have to load in the health care costs.
    It could very well become--and then we have experts like 
Wal-Mart who have made a science out of not paying their 
employees benefits.
    At some point, we may have to even that out and demand--our 
former colleague in California, John Burton, has a pay-or-play 
plan that says that every employer has to provide medical 
benefits.
    I think we're going to get there in time, because I don't 
think we can sit and watch 45 million people basically go 
without health care, because they don't have insurance.
    I would hope that you'd stipulate to that.
    How we get there will be a question of some debate. I would 
say that I'd just make it--that would be my constitutional 
amendment. Let's say that everybody has the right to medical 
care and then it won't only be prisoners under Article 8. It 
will be all of us.
    Mr. Ryan. Bring an amendment to the floor.
    Representative Stark. I've always said, ``what's good 
enough for Rostenkowski and the Watergate burglars is good 
enough for me.'' If I have to go to jail to get my health care, 
that's where I get it under the Constitution.
    Maybe that's where we should go. Thank you, Mr. Chairman.
    Mr. Ryan. Can I chip in?
    Chairman Bennett. Let's let Mr. English, because he didn't 
have his 5 minutes.
    So let's do that and then Mr. Ryan.
    Representative English. Thank you, Mr. Chairman. But rather 
than interrupt the inexorable forward movement of this 
discussion, I will pass.
    Chairman Bennett. All right.
    Mr. Ryan.
    Mr. Ryan. I wanted to get into some of the quality stuff. 
But I just can't let the opportunity pass to comment on what my 
friend, Mr. Stark, said.
    You're right. Rationing is occurring in every model that we 
have. And the question comes down to who does it?
    Is it the individual with the freedom of choice, with the 
consent of the physician? Or is it some third party like an HMO 
bureaucrat or a government bureaucrat?
    And I think if you actually look at the Canadian system, 
look at the studies that they've had, the rationing and the 
decision-making on who gets ahead of the queue isn't really 
based on need.
    The well-connected, the wealthy, the politically-connected 
are the people that are getting ahead of the queue.
    So even in those seemingly perfect systems, you're having 
rationing that isn't, quote, unquote, fair. More importantly, 
you are seriously seeing people being denied care, especially 
when they need it.
    In Ontario, a couple of years ago they took 121 coronary 
bypass patients off the list waiting for care because they got 
too sick while waiting for care.
    Twenty percent of the patients looking for dialysis--in 
England I think it is, I think it's dialysis--get too sick 
while they're waiting on the list.
    So the question is, we all want to get to full insuring of 
everybody. We all want to get our hands around this issue of 
under-insured and uninsured. And do we want to have an 
arbitrary third-party system, whether it's government or HMOs 
denying care to people, especially when they need it.
    So we've got to figure this.
    And in figuring this out----
    Chairman Bennett. If I could exercise the Chairman's 
prerogative.
    Having now had the statement on both sides of Canada, can 
we focus again----
    Mr. Ryan. I'm sorry. I'm from Wisconsin. We actually look 
at this thing.
    Chairman Bennett. Mr. Stark did it. You did it. And it's 
perfectly appropriate for both of you.
    But I can see if I don't step in, we're all going to get 
into it, including me, and I don't want to do that.
    Mr. Ryan. Okay. The quality stuff. That's important.
    If a person is going to be a good consumer in health care, 
they've got to get access to quality data.
    If they're going to shop around, they need to know on an 
apples-to-apples comparison what things cost, who's good, who's 
bad, where's the best deal, where's the best quality.
    Mr. Milstein, you had excellent recommendations in your 
testimony on things that Congress can do that are budget-
neutral, either through the regulatory side of things or 
through the statutory side of things on how we can help wrestle 
that quality data out that we collect into the public.
    Does anybody else have any comments on how we could do 
that? And if you could quickly summarize for everyone else's 
benefit, what are the things that we could do just this year to 
help get that quality and price data out to the public?
    Dr. Milstein. Sure. I think, first and foremost, would be 
to liberate the Medicare claims database, in a way that fully 
protects the privacy of Medicare beneficiaries.
    As I mentioned in my testimony, most health benefit plans, 
whether they're operated by unions or large companies, don't 
have enough at-bats per doctor, to use the metaphor, or at-bats 
per hospital for narrow service lines such as surgery A versus 
surgery B, to run a stable calculation of whether the hospital 
or the physician is more efficient or less efficient, higher 
quality or lower quality.
    And the Medicare claims database would, except for 
pediatrics and OB, obstetrics, would allow all health benefit 
plans in the private sector to be able to more reliably and 
more precisely compare doctor and hospital performance.
    The second thing I mentioned, which would be hugely 
important, would just be at the margin to consider the 
recommendations of the Quality Work Group of the National 
Committee on Vital and Health Statistics to slightly increase 
the information that's submitted on hospital bills and 
physician bills so that we'd have a little bit better ability 
to not blame doctors and hospitals for what looks like bad 
performance when it actually relates to differences in the 
severity of the illness of the patients that they're treating.
    Representative Stark. Would you yield there?
    Mr. Ryan. Sure.
    Representative Stark. You're talking about what I would 
call outcomes research, that we have the data to be able to.
    Dr. Milstein. Yes. But I'm saying we didn't foresee a mess 
due to the outcomes research. If we could free up the database, 
then the private sector and CMS could do the research.
    Mr. Ryan. Am I correct in assuming that to liberate, as you 
say, the CMS claims database, that doesn't require a statute 
change. They can do it regulatorily over at CMS.
    Correct?
    Dr. Milstein. Yes. I believe it requires a letter of 
clarification from the Congress that neither HIPAA nor the 
Privacy Act was intended to prevent such release.
    Mr. Ryan. Okay. Thank you. If anybody else wants to comment 
on that issue, please do.
    Mr. Bertko. Yes. I'd like to second what Dr. Milstein has 
said.
    When I was a consultant, we had access under very limited 
abilities to what's called a 5-percent sample of the database. 
And there's a data use agreement with a great deal of 
protection.
    But to be able to look in certain areas, particularly rural 
areas where, using a metaphor again, the at-bats for either a 
hospital or an individual or group of physicians, that would be 
extremely useful.
    We also support transparency, whether in quality or cost 
data. There's a few states--I think Wisconsin, in fact, is one 
of the leaders in that. And if that were to be present in more 
states, it would be very valuable.
    Representative Stark. If I could ask my colleague to yield 
again.
    Mr. Ryan. Yes, sure.
    Representative Stark. I think this is an area where we 
would find a great deal of agreement.
    Now I'm not sure that we would find it among all insurers 
or all providers. There is no question that when you begin to 
both, say, standardized medical records. Or I remember the 
scream when we said, ``Well, every doctor will have to have a 
computer.'' And they said, ``Oh, we can't afford that.'' I find 
that somewhat disingenuous.
    But, in other words, there will have to be some standards 
set, whether it's government or the medical educators or 
however, before we can go ahead and make determinations of what 
would be useful treatment and how much it would cost and the 
outcomes.
    And I for one feel that that is an area in which we're 
going to have to step in as government setting some standards, 
protecting some privacy, but deciding where it's more important 
for us to have information than for some of us to keep it 
secret.
    And I would hope--as I say, we've had a variety of 
opposition. Sometimes it's the insurance companies. Sometimes 
it's the hospitals. Sometimes it's the physician.
    Chairman Bennett. Sometimes it's the privacy advocates.
    Representative Stark. Absolutely. But I would love to join 
with my colleague from Wisconsin to walk down that road with 
the people who are concerned about having this.
    Mr. Ryan. Yes.
    Representative Stark. I think it would take 5 or 10 years 
for the information, the real outcomes to be available to be 
used, but I think we could say that we've done a great service 
to providing medical care in this country.
    Mr. Ryan. Would you yield, Pete?
    Representative Stark. Yes. I'm done. Thanks.
    Mr. Ryan. That's really encouraging. I'm very encouraged to 
hear you say that.
    I hope, given the technology today, we could do it a lot 
faster than that.
    But are you open to the idea of doing just what Mr. 
Milstein said? There's three of us here on the authorizing 
committee over in the House, getting the CMS to release this 
data, providing that privacy and all those considerations are 
dealt with?
    Representative Stark. I think that the more data that's 
available, the better off we'll be.
    As I say, other than what I've always said is, look, 
release the data. The heck with privacy. Go after the person 
who uses it to harm you.
    Chairman Bennett. Can I quote you?
    [Laughter.]
    Representative Stark. No, seriously. I mean, it's so 
important in this world today--is it important to know who has 
AIDS or who has a heart condition and what they've done to get 
there?
    I don't know if it's important to know who the individual 
is.
    Mr. Ryan. Right.
    Representative Stark. But I do think if somebody discovers 
that and uses it to embarrass or hurt you or keep you from 
getting a job, the courts could take care of that.
    I would err on the side of getting the data uniform and 
collectible in a database that's available to researchers.
    Mr. Ryan. And shoppers and consumers. Great.
    Chairman Bennett. Doesn't that go back, Mr. Bertko and Mr. 
Leach, to your experience, that the more data that are 
available to your employees, the better choices that they make?
    And Ms. Shearer, you're in the business of getting data 
into the hands of consumers. I would think that you would 
endorse this idea.
    I'm a little puzzled as to why you don't like the idea that 
consumers get to make more and more choices under these kinds 
of plans. And you're supporting that either the government or 
an employer continues to make these choices.
    When I came to the Senate, of course, HillaryCare was on 
the floor and this was the major issue that dominated the first 
session. And people would stand up and say--remember the unions 
would be chanting at us wherever we went--``we want the same 
plan that you've got. We want the same plan Senators have.''
    And my reaction was, I want the plan I had before I came to 
the Senate.
    [Laughter.]
    Which was better. And the reason it was better was because 
I was the CEO of the company and I got to pick. And now I'm a 
government employee and all I get is what the government 
employees group--and I don't know who they are.
    I would fail the Stark Test here. I don't know who they are 
that determines what my plan is. I'm a government employee. I 
get whatever a government employee gets.
    But when I was the CEO, I got to pick the plan for the 
whole company and it was great. I picked a plan that fit my 
needs and then hoped that it would fit my employees' needs.
    Now that's a little bit of an overstatement for the 
dramatic impact of it, but that's where we are.
    The people who are making the choices are not the people 
who are consuming the services.
    That's a fundamental fact of our present system and would 
be a fundamental fact under a single-payer system, and that is, 
in my view, where the problem is.
    The people who are using the services, the consumers, are 
locked out of any impact on the decision.
    And I like the idea that we're getting, at least anecdotal 
evidence that when you put the consumer into the decision-
making stream, the results get better. Not only the cost 
results, but more important for, Mr. Leach, your employees are 
healthier.
    They begin to understand now that they are in the game, now 
that it's their money on the line--it's all their money. The 
premium is their money. The idea that the employer pays for 
this is nonsense.
    It's the employee's money because he earned it for you. If 
you can't get enough value out of an employee to cover the 
whole cost of his benefits, you can't afford him. And just 
because it doesn't show up on his W-2 doesn't mean that it's 
not his money and it doesn't mean he hasn't earned it with his 
work for you.
    But when you get the employee, you get the consumer in the 
game where he or she begins to see, this is what it costs me if 
I don't have the annual physical because I'm going to pay for 
it later on. This is what it costs me if I don't do the 
screening.
    All right, I'll pay for the screening because it's going to 
save me money down the way, and also, I'm going to get 
healthier. We get a healthier population.
    That will have as much of an impact on bringing down the 
medical care costs as anything we can do.
    So, in the spirit of seeing Mr. Ryan and Mr. Stark get 
together, which is something that you don't happen to see every 
day, Ms. Shearer, can you and Mr. Leach get together and say, 
let's find a way to get the consumer of medical care into the 
business of making some of the decisions regarding the cost of 
medical care?
    Ms. Shearer. Well, where to begin?
    First of all, let me say that I certainly can agree that 
more quality information in the marketplace can only be a good 
thing for consumers. But it's also important to keep in mind 
that it's not a be-all and end-all.
    When you're having a heart attack, you don't have a lot of 
time to do research into the quality of the doctor that may be 
treating you.
    So you can only take it so far. But also, I do need to come 
back to this question about consumer choice.
    This is not a marketplace for toasters. When I go buy a 
toaster, whoever is selling it to me doesn't care anything 
about who I am.
    Someone selling me health insurance cares what my 
underlying health status is. And the thing that concerns me, 
it's great if we can encourage people to stay healthy and to be 
healthy and preventive measures.
    Those are great things. I think everybody would agree on 
that.
    But people get sick, often through no fault of their own. 
And we have to make sure that we have a health care system that 
doesn't over-punish people who get sick and throw them into 
tremendous financial burdens, including bankruptcy, or possibly 
even deter them from getting the care they need because they 
face huge financial barriers.
    So I think the key thing, because of this variation in 
risk, we have to be thinking about a system that includes 
everybody and that subsidizes--I was pleased to hear that 
Humana adjusts the payment based on the employee's risk. That 
make a huge difference. I think that that would probably be 
unusual in this particular type of marketplace. But that's 
something to try to replicate.
    Thank you.
    Chairman Bennett. Well, I'm a little surprised that 
Consumers Union takes that posture because your whole history 
has been to empower the consumer in areas where the consumer is 
ignorant.
    You're saying that, gee, when you have a heart attack, you 
don't want to make a cost decision, and that's true.
    But I can tell you, if I had a heart attack in Utah, I know 
what I would say to the 911 people who show up. I'd say, 
``Don't take me to that hospital. Take me to this one.'' 
Because maybe it's just reputation. Even in the pain of a heart 
attack, I know that there are some certain places I don't want 
to be taken, I don't want to go.
    Health care is not a commodity. It is not exactly the same 
everywhere.
    And the more customers know, the more they're going to want 
to exercise that knowledge. And Consumers Union ought to be in 
the foreground of saying, these are the hospitals that are 
good. These are the ones that are unacceptable.
    I don't know anything about cars except how to turn them on 
and how to push the brake and how to push the accelerator.
    And I go to your magazine to tell me, ``This one is going 
to turn over.'' There's no way I know it's going to turn over. 
It's a life-threatening kind of thing. ``This one is going to 
turn over. This one has got a high repair rate,'' all the rest 
of it.
    I'm dependent on you to help me make a choice.
    The same thing with car repairs. I go to the consumer 
advocates who say, ``These people will take you to the cleaners 
and these people will give you''--or I go to another repair man 
and say, ``Where do you take your car?'' Somebody whom I trust.
    Consumers are not doctors, but they're not stupid, either, 
and they need to be informed. And as they get informed, I think 
the experience is that they begin to make intelligent choices.
    And I would think, yes, you don't like the uninsured 
problem, and neither do we, and we ought to work together on 
that.
    But on this issue, I would think that you'd be in the 
trenches with the others trying to get as much data as possible 
to see if this really works instead of just saying, 
theoretically, ``Well, we're afraid that there's going to be 
adverse selection here and therefore, let's not try it.''
    Ms. Shearer. I am agreeing on the issue of quality data, of 
quality of hospitals. I think that that can be very helpful.
    I think, really, the other witnesses have acknowledged that 
there is a potential for tremendous risk selection. And I don't 
think that you can ignore all of economic theory based on some 
very preliminary findings.
    And I would predict that there would be more findings that 
would come out over the next few months that may tell a 
different story.
    Chairman Bennett. But are you opposed to getting those 
findings in case you're wrong? Are you opposed for us pursuing 
this, to find out whether or not these first indications really 
are not an anomaly? They are, in fact, indications of something 
very solid.
    Ms. Shearer. Of course not. More research, more findings 
are good.
    What I opposed was the expansion of medical savings 
accounts, the draining of $41 billion out of the Federal 
Treasury to encourage a kind of health insurance that all 
economic theory indicates will separate the healthy from the 
sick.
    Chairman Bennett. Yes. But such initial evidence as we have 
says it's working.
    Ms. Shearer. Senator, with all due respect, I find that 
evidence extremely preliminary and I don't believe the results 
will hold up over time.
    Chairman Bennett. All right. But let's see over time 
whether you're right or not.
    The world is filled with people who say, ``Well, this isn't 
going to work.'' And somebody says, ``Let's try it.'' And the 
first indications come in and say, ``Well, it is working.'' And 
others say, ``Well, that's still not conclusive enough,'' and 
they try to kill it.
    If it turns out that it's clearly not going to work, I will 
abandon it. I want to solve the problem. But the early 
indications are--you talk about economic theory. The economic 
theory that I subscribe to--and then I'll shut up and let my 
colleagues talk--the economic theory that I subscribe to says, 
``markets make better decisions than governments do.''
    And here is an opportunity to get some market forces into 
this, get consumers empowered to impact the market in ways that 
they have never been able to before.
    And I think that's an economic theory worth testing. I'll 
get off my soapbox.
    Mr. English, you've been very quiet here and I don't want 
you to feel----
    Representative English. Well, I thank you, Mr. Chairman.
    Ms. Shearer, listening to your points, I guess one of the 
problems I have is that the line of argument that the Chairman 
has made I think is unassailable.
    And quite apart from the ideological claim that by allowing 
people to pay for their own out-of-pocket on a tax-advantage 
basis is somehow a spectacular drain on the Federal Treasury.
    And you and I may just simply have a different view on how 
that works philosophically. I think it's their money. And I 
think in the long run, providing tax advantages for health care 
expenditures or savings directed towards health care 
expenditures is probably actually a great dynamic to have in 
the economy.
    Is your greatest concern with consumer-driven health care 
systems the shift of risk potentially allowing individuals to 
avoid having to pay--I suppose what some might consider to be 
their share as part of a group?
    Or is it a lack of adequate consumer information? And are 
not both of those solvable problems in the long term?
    Ms. Shearer. Well, the lack of information is relatively 
solvable, I believe. And I think there's quite a bit of 
agreement on that issue today.
    What isn't really solvable is the underlying nature of risk 
in the health insurance marketplace and the fact that someone 
in the top 10 percent will have expenditures of $16,000 in any 
one year and someone in the bottom 10 percent, about $30 on 
average.
    As we move towards a system, if people have choices in an 
employer market between a high deductible and a low deductible 
plan, economic analysis shows us that the low deductible plan 
will be crowded out over time.
    And so, while many proponents sell this in terms of 
choice--``let's give people a choice''--the reality is that 
over time, unless there's careful risk adjustment, the low 
deductible plan will disappear.
    So that's really my concern. Transforming the marketplace 
to a high deductible system is thereby shifting costs to many 
employees who have chronic health conditions, who run through 
that health reimbursement account.
    Representative English. I understand that. And may I 
intervene, because you've made a couple of good points?
    Are there not also opportunities, though, to identify those 
risks that you're concerned about that may create a crowding 
out, and actually direct our research and our medical solutions 
dealing specifically with some of those problems?
    Aren't many of those high-risk cases--it's very easy to 
deal with these in very broad categories. But are they not 
individuals who may have conditions that are ultimately 
solvable with a combination of public research and also an 
active private marketplace?
    Ms. Shearer. Well, I think the situation varies. The high-
risk person might be someone who needs a bypass surgery or it 
could be someone who needs chronic care.
    More research is certainly a good thing and can help lower 
those costs. I'm not sure if I'm answering your question 
exactly, but more research on diseases and more focus on 
specific diseases can certainly be a good thing.
    That's not the part of consumer-driven health care that I 
take issue with.
    Representative English. Dr. Milstein, you've heard my 
exchange with Ms. Shearer. Would you like to comment?
    Dr. Milstein. Yes. I think one of the reasons that this 
discussion is tough is there are two different visions of 
consumer-directed health care that are floating out there and 
that carry different implications for some of the concerns 
expressed.
    One vision would simply increase cost-sharing for 
everybody. And that obviously falls disproportionately on 
sicker people and tends to create some of the cost-shifting 
challenges towards sicker people that most people don't want.
    I think your point is right that, as Mr. Bertko said, there 
are ways of solving that problem by making more generous 
allowances or contributions towards the plans that attract 
people who are sicker.
    That's vision one. And I consider that a ``blunt 
solution.'' You're just increasing deductibles and now you have 
skin in the game, and we'd like you to be more careful.
    There's a second vision. And if you look at the enrollment 
numbers that I mentioned, it's the majority vision of current 
consumer-driven health care plans. The second vision is more 
precise in raising consumer cost-sharing.
    It doesn't necessarily involve increasing the deductible or 
coinsurance; instead it varies how much people pay at the point 
of care depending on the efficiency and quality ratings of the 
selections made.
    The article that I attached from The New England Journal of 
Medicine illustrates these two different approaches. They 
achieved two very different results.
    One solution simply increased drug cost-sharing. It 
resulted in a total cost savings, but some sick people stopped 
using medications that were helping them.
    That's vision one for consumer-directed health care.
    They also evaluated the second vision, the other vision for 
consumer-directed health care, in which there was no increase 
in what people had to pay for the drugs that offered more 
favorable quality and cost-effectiveness ratings. But there was 
an increased consumer cost share for alternative drugs that had 
a less favorable quality and cost-effectiveness rating.
    The second approach did not discourage people from taking 
helpful drugs and it reduced total costs both for the consumers 
and for the employers.
    The second vision of consumer-directed health care allows 
the most common ground among the points of view expressed this 
morning.
    Representative English. I yield.
    Representative Stark. Thanks.
    Doesn't that presuppose that you will have a completely 
objective selection of how the formula is determined? And if 
market-based forces get involved and one pharmaceutical company 
wants a bigger market share and drops the price, the market--
when you say one drug is more efficacious or better, somebody 
has to make that decision on--not on a market-driven basis, but 
on a professional knowledge.
    And that's where it----
    Dr. Milstein. Absolutely. It very much pivots on having a 
reasonable scientific determination as to which physician, or 
which drug offers----
    Representative Stark. I guess I would say scientific rather 
than market-based.
    Dr. Milstein. Yes.
    Representative Stark. Okay.
    Mr. Ryan. Can I ask a quick question?
    Mr. Bertko, you say that in your testimony, Humana has over 
200,000 under-65 members enrolled in your consumer-centric 
product. And that's up from 40,000 from just a year ago?
    Mr. Bertko. Yes. There is a great uptake in this.
    Mr. Ryan. Wow. I just met with one of your counterparts at 
another company who was involved in rolling out HSAs as of 
January 1, and they had a phenomenal increase in application. 
And 30 percent of their applications for HSAs were people who 
were uninsured.
    Do you have any data to that effect as to the jump from 
40,000 to 200,000? How many of those people were people who 
were uninsured?
    Mr. Bertko. Well, let me say that this is a different 
market from what I believe you were talking about, the 
individual health insurance markets.
    So ours are primarily employers who----
    Mr. Ryan. Employers converting over to a consumer-based 
thing?
    Mr. Bertko. Yes, exactly.
    Mr. Ryan. Okay. Thank you.
    Chairman Bennett. Okay. We're reaching the witching hour.
    I found this very stimulating and very helpful and I'm 
grateful to all the members of the panel. I want to make one 
final point.
    When we talk about statistics, which we always do in the 
Congress, we forget that people move. I've already talked about 
people moving from employers. People also move from one 
quintile to the other, to use the economist's term.
    Once again, to be personal about it, in my lifetime, on the 
income range, I have been in the bottom quintile and I have 
been in the top quintile, and in the process, moved back and 
forth.
    Since I got to the Senate, I dropped out of the top 
quintile and come back into other areas.
    But the reason I make that point is that much of the 
rhetoric around taxes are, well, it only benefits the people at 
the top, as if the people at the top have always been there and 
always will be.
    And the benefit of people who are moving up and down--I use 
myself as having moved both up and down. Donald Trump moved 
down very dramatically at one point. Now he's back.
    That principle, the understanding of that, makes the tax 
system look different than if you assume that everybody at the 
top has always been there. We are the most fluid society in the 
world economically as people move up and down.
    I make that point because the same is true in health care. 
If we leave the older seniors out and the Medicare problem--80 
percent of Medicare costs go for the last 60 days as people are 
dying--and so on. If we leave that out of the equation and talk 
about the people under 65 who are employed, with some obvious 
exceptions, the general rule is that somebody who has a serious 
health problem that requires high cost in one year, recovers 
and goes back to the low costs in the next year.
    In other words, you don't have a pile of people, to use 
your figures, Ms. Shearer, who are $16,000 and a pile of people 
that are $30, and they stay that way.
    Somebody in the $30 a year can have an incident that takes 
him up into the $16,000 a year area, get well and go back.
    That means if there is an incentive--I keep coming back to 
this--is there an incentive for smart purchasing and for 
improving one's habits, and therefore, one's health.
    Over a lifetime, you can fund the years where you have the 
high health problem and still get the benefit at the end of 
your life of the money you have accumulated by making wise 
choices.
    And I think we ought to keep that in mind as we look at the 
equation of what happens when we're trying to incentivize and 
inform customers and allow the consumer of the service to make 
some choice as to what happens to the service.
    We come back, Dr. Milstein, to your second vision, which is 
the vision that I embrace, that an informed consumer can have 
an impact on the whole system.
    And my big problem with the present system is, as I say, 
the consumer is frozen out of any decision-making. The decision 
as to which plan he's going to be in is made for him by his 
employer.
    And increasingly, the decision of which doctor he can go to 
is made by the plan, and so on. And he ends up with whatever he 
gets.
    And then the other comment I will make just for the record, 
for all of these discussions, there's a woman in Utah who 
listened to me speak very authoritatively on this subject.
    After the luncheon, she came up and said, ``You're a very 
nice man, and you don't understand anything at all about the 
problems of the poor.''
    And she is an advocate to the poor, works among them 
immensely, and she made this point as she brought me down to 
earth.
    She said, ``The problem with the poor in health care has 
relatively little to do with money. The system is so 
impenetrable that the poor cannot navigate through it.'' She 
said, ``You've got to pay more attention to community health 
centers, because the main function of a community health center 
is when somebody walks through the door, they can find their 
way to what they need.''
    She said, ``You want to create this system and then just 
give the poor enough money to survive in it, and they won't 
know how to use that money. They just can't navigate the 
system.''
    And she appropriately humbled me, and I've spent some time 
looking at that. And the community health centers, at least in 
Utah, do a fabulous job. And somebody who is homeless, somebody 
who is on Medicaid, walks into one of those, the most important 
service they provide is navigate through the bureaucratic 
shoals and get them what they need.
    And the flip side of that, if I may--Mr. Stark has left. 
I'm not taking advantage of that. He would get upset about 
this. But he'll be back.
    The flip side of that, I have another woman in Utah who 
said to me, ``You know how I deal with Medicare?'' She said, 
``I take care of my mother's affairs. I have an 85-year-old 
mother. I am a professional woman. I am a college graduate. I 
think I'm pretty smart. The Medicare forms absolutely baffle 
me. And any thought that my 85-year-old mother would be able to 
handle this----''
    So she said, ``I have figured out how to deal with 
Medicare. I throw away everything unopened and once a month I 
call the Salt Lake Clinic and say, `what do I owe you?'
    ``I write the check, send it in. They may be over-charging 
me. They may not. But the peace of mind not having to deal with 
the system is worth whatever financial problems I might have 
had.
    ``I don't even open it. I just throw it away. And once a 
month I call the Salt Lake Clinic where she goes for her 
treatment and say, `what do I owe you?' ''
    That is part of the problem and that is what a system 
designed to get the consumer informed and empowered will, I 
think, begin to impact not only the federal bureaucracy, but 
for most of these people the private bureaucracy.
    Let me again thank you all for coming. It's been a most 
stimulating morning. And we hope that those of our colleagues 
who are on the tax-writing committees will benefit from the 
record that we are building here in this Committee.
    The hearing is adjourned.
    [Whereupon, at 12:05 p.m., the hearing was adjourned.]


                       Submissions for the Record

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

       Prepared Statement of Senator Robert F. Bennett, Chairman
    Good morning and welcome to today's hearing on consumer driven 
health care.
    The United States faces a significant challenge to keep health care 
affordable. For many years, our health care spending has grown at a 
significantly faster rate than the economy, and all projections 
indicate that this will only continue.
    In recent years, we have enjoyed amazing advances in medical 
technology that have extended and greatly improved our lives. Medical 
procedures have become less expensive and less invasive. However, as we 
discussed at our hearing last summer on technology and innovation in 
health care, we have found an interesting paradox. It seems 
counterintuitive, but the fact is that as the cost for a medical 
procedure goes down--as the delivery of health care services becomes 
more efficient--overall costs actually go up.
    Much of this disconnect can be attributed to the difference between 
the amount consumers pay and the actual cost of the technology--and 
health care as a whole. Because of comprehensive insurance and other 
public programs, we have created the notion that ``someone else'' is 
paying for our health care and so we use more and more health services. 
In other words, insured people are buying greater amounts of medical 
services which contributes to higher insurance premiums and overall 
health care costs.
    So today we are looking for ways for market forces to limit costs 
while improving access and quality of health care. As can be seen in 
other areas, cutting costs by government fiat creates market 
distortions. The government can't keep up with the marketplace, so cost 
controls have never worked. If prices are set too low, there will be a 
shortage of providers, and if they are set too high, insurance 
companies are forced to raise premiums and ration services to patients.
    I believe a better approach is consumer driven health care. We have 
two years of experience to look at and see that this approach is 
gaining some traction.
    A consumer driven approach to health care restores to consumers 
direct control over their health care dollars. It provides them with 
better value, greater choice, improved health, and recognition of the 
true cost of the services they demand. It offers a broad range of 
options that encourage employees to take a greater role as informed 
health care consumers in choosing health plans, benefit packages, 
health care providers, and medical treatment alternatives. Another 
promise of consumer driven health care is that it can reverse a long-
term trend that has combined more third-party payment of health care 
bills with substantial hikes in health care spending.
    New health savings account options, included in last December's 
Medicare Prescription Drug, Improvement, and Modernization Act, give 
consumers even greater ownership and control of their health spending 
dollars, which could reshape the health care market.
    Today's hearing will examine the performance of the consumer driven 
health care market over the last two years. We can see how this new 
approach is developing in terms of levels of enrollment, plan options, 
consumer satisfaction, and projected growth. I believe the Congress 
should learn more about what works, and what can be improved upon.
    With that, we welcome our panel that will provide a number of 
perspectives on consumer driven health care, including a physician, Dr. 
Arnold Milstein; an actuary, Mr. John Bertko; a benefits manager at a 
firm that has adopted a consumer driven health care approach, Mr. 
Howard Leach; and a health policy analyst for Consumers Union, Ms. Gail 
Shearer. We look forward to your reports on the performance--to date--
of consumer driven health care.

[GRAPHIC] [TIFF OMITTED] T3563.013

           Prepared Statement of Representative Pete Stark, 
                        Ranking Minority Member

    Thank you, Chairman Bennett. I have to say I'm extremely skeptical 
about the title of today's hearing--``The Performance and Potential of 
Consumer Driven Health Care.'' Having spent much of my Congressional 
career in health care policy, I have never known so-called ``consumer 
driven'' health care to perform well or to have much potential. Rather 
than hide behind euphemisms, we should just call these policies what 
they really are: tax shelters that require people to pay more for their 
health care, so that insurance company stock holders can reap the 
benefits.
    These high deductible, defined contribution plans are not consumer-
driven, nor do they offer much choice. Instead, they simply shift costs 
to so-called ``consumers'' and force patients to pay more and more out-
of-pocket, making it difficult for patients to get the care they need.
    These so-called ``consumer driven'' health plans rely on consumers 
obtaining reliable information on treatment choices, quality and 
charges of providers. Yet, this information doesn't even exist in our 
system today. I am very pleased that Gail Shearer is here today from 
Consumers Union--the preeminent source for consumer information--to 
talk about this fact.
    The concept of ``empowering'' consumers to make more responsible 
choices about their health care decisions is misleading rhetoric. 
Purchasing health care is not like buying a car or a toaster. This is 
true not only because the information is not available, but also 
because health care needs are often unanticipated and patients rely on 
their doctors' expertise--not their own--to guide medical decision-
making.
    Having a heart attack is not like having your car break down. If 
your mechanic makes the wrong decision about your engine repairs, it is 
not life or death. People cannot generally predict when they need 
health care. And even if they could, there is nowhere to seek out 
credible information on where to go for care or what to ask for and 
what to expect to pay.
    The President has now proposed to spend $41 billion on high 
deductible plans, which will at best extend coverage to a minute 
fraction of the 44 million who don't have coverage today.
    In fact, the Administration has finally admitted that these 
policies are not about insuring the uninsured, but an attempt to insert 
more ``cost consciousness'' into the system to reduce consumption. 
However, I would argue that these policies fail to meet even that 
objective.
    While it may shift responsibility of costs under the deductible, 
most of our national spending is on behalf of people who are very sick. 
High-deductible plans are unlikely to alter the overall level of 
spending, but instead shift more costs to people who can barely afford 
their current obligations. Who knows? These plans could have the 
perverse effect of increasing overall spending as people delay care 
until their treatment is even more costly than it would have been if 
treated early.
    Given that this is the first hearing on health care in the JEC this 
session, and that this was what my colleague Ways and Means Chairman 
Bill Thomas shared as his vision for the U.S. health system, it is 
clear that Republicans view high deductible plans as a sort of magic 
bullet for our health system.
    We have a lot of issues that can and should be addressed. 
Certainly, the rising cost of health care is a growing problem that is 
forcing more and more people to become uninsured. Of course, a 
significant part of the rising cost of health care is due to 
prescription drug spending. If Republicans were really interested in 
controlling costs, they would have given the Secretary authority to 
negotiate for discounts in the Medicare program, but that's another 
story.
    These health plans being discussed today force individuals to 
negotiate prices on their own. This dilutes purchasing power. These 
plans don't reduce cost, they discourage people from using health care 
services.

                               __________
           Prepared Statement of Arnold Milstein, M.D., MPH 
         Physician Consultant, Mercer Human Resource Consulting

CONSUMER DIRECTED HEALTH BENEFIT PLANS COULD GREATLY IMPROVE QUALITY OF 
   CARE AND HEALTH INSURANCE AFFORDABILITY; EARLY ATTEMPTS WILL FALL 
    CONSIDERABLY SHORT OF THEIR POTENTIAL; THERE ARE BUDGET-NEUTRAL 
                   OPPORTUNITIES FOR CONGRESS TO HELP

    I am Arnold Milstein, a physician consultant at Mercer Human 
Resource Consulting, and the Medical Director of the Pacific Business 
Group on Health, which serves 44 large and over 2000 small California 
employers. My testimony summarizes the initial findings of a Robert 
Wood Johnson Foundation funded study that I lead in partnership with 
Professor Meredith Rosenthal at the Harvard School of Public Health; it 
does not represent the positions of these organizations. A more 
detailed summary of the findings of the Mercer/Harvard Study will be 
released in the second quarter. Professor Rosenthal will publish 
additional findings in scientific journals over the next 12 months.
    We studied consumer-directed health benefit plans by surveying in 
the first quarter of 2003 over 600 for-profit and not-for-profit 
regional health plans of all types, serving employers of various sizes. 
They included regional components of national insurers as well as 
regional insurers; they included diverse plan types such as HMOs, PPOs, 
and indemnity plans, offered on both insured and self-insured bases. 
Over the past several months, we also have been conducting 15 in-depth 
case studies of consumer-directed health benefit plans of diverse 
types, serving multiple U.S. regions and populations. These case 
studies include interviews with health plan executives and purchasers, 
with follow-up review of print and electronic documentation. We defined 
consumer-directed health plans as health benefit plans that 
incentivized insureds to select more affordable and/or higher quality 
health care options and provided cost and/or quality information with 
which consumers could compare available options. Case study interviews 
are ongoing and will add detail; but the broad shape of our findings is 
not likely to change.

  A. INCREASED CONSUMERISM COULD GREATLY IMPROVE QUALITY OF CARE AND 
                     HEALTH INSURANCE AFFORDABILITY

    This conclusion is drawn from evidence internal and external to our 
research. The external evidence is that (1) as summarized in my January 
25, 2004 testimony to the Senate HELP Committee, up to 40% of what we 
are currently spending on American health care could be eliminated over 
a 10-year period, and thereby slow the rate of biotechnology-driven 
health insurance cost increases without impinging on quality of care, 
clinical outcomes, or patient satisfaction; (2) as documented in the 
Institute of Medicine's 1998-2001 reports on quality of care, quality 
reliability is seriously flawed, even among our best providers; and (3) 
as described in both of these sources, inter- and intra-community 
variations in quality and cost-efficiency are wide among hospitals, 
among physicians, and among different treatment options for the same 
condition. Such wide performance variation offers substantial 
opportunity for informed and incentivized consumers to preferentially 
select better performing physician, hospital and treatment options, 
including better self-management of health risk and avoidance of 
services offering no health value. In addition to capturing immediate 
gains in quality and cost-efficiency, this expression of the market's 
invisible hand would generate ongoing gains by more strongly motivating 
all providers and treatment innovators to discover ``better, safer, 
leaner'' methods of transforming health benefit plan dollars into 
improved health.
    The internal evidence that we uncovered in our research is that, if 
carefully explained and encouraged, many enrollees, including sicker 
individuals, are willing to enroll in consumer-directed health benefit 
plans, seek performance information and select more affordable health 
care options. The 600+ plans that we surveyed had enrolled over 2 
million enrollees in consumer-directed health benefit plans for 2003 
and more than 4 million for 2004. These overall consumer-directed plan 
numbers included approximately 500,000 enrollees of account-based (also 
known as Health Reimbursement Accounts or HRA) models in 2003 and 1 
million account-based model enrollees in 2004. While these absolute 
numbers are small, the consumer-directed health benefit movement is 
early in its adoption curve, the growth rate is high (we anticipate 
another doubling of enrollment by 2005), and many mainstream health 
plans are beginning to integrate consumer-directed features, such as 
hospital or physician quality and/or affordability comparisons, into 
their other offerings.

 B. EARLY ATTEMPTS TO IMPLEMENT CONSUMER-DIRECTED HEALTH BENEFIT PLANS 
            WILL FALL CONSIDERABLY SHORT OF THEIR POTENTIAL

1. Structural Limitations

    My prediction of substantial shortfall is partly based on insurers' 
near-term goals. The stated motivation for insurers and purchasers that 
offer consumer-directed models are varied. The majority of health plans 
we interviewed indicated that their main objective was to increase 
consumer engagement in health care decision making, rather than wholly 
rely on physicians and hospitals. These plans believed that improved 
cost-efficiency and quality of care would eventually follow, but argued 
that these goals were secondary in the near-term. In contrast, most 
employers prioritized immediate slowing of increases in health benefit 
costs.
    Shortfall in results will also arise from two primary informational 
gaps that severely handicap consumer-directed health benefit plan 
innovators: (1) valid, easily understood performance comparisons among 
physicians (e.g., a surgeon's complication rate), among hospitals by 
specific service lines (e.g. a hospital's average total lung cancer 
treatment cost), and among treatment options (e.g., patient 
satisfaction ratings from open vs. closed biopsy of a suspected breast 
tumor) are generally lacking; and (2) we lack research evidence on the 
form and size of incentives minimally required to motivate consumers, 
especially the 20% sickest consumers who spend 80% of health benefits 
dollars, to switch from an MD, hospital, or treatment with which he or 
she (or someone whom they trust) is familiar to a less familiar 
alternative, when the alternative offers better quality and cost-
efficiency.
    Of the 15 plans we studied in depth, only one offered consumers 
clinical quality of care comparisons for physicians (medical groups in 
this case) across a variety of measures using audited data. Six others 
provided information only on patient satisfaction or patient-reported 
quality of care. Twelve plans offered comparative quality information 
on hospitals across a large number of service lines either through a 
vendor or, in one case, by creating a unique hospital report card. 
Information on the quality implications of major treatment options was 
provided by seven plans. Only one plan offered consumers detailed cost 
comparisons (in this case, based on the negotiated fee or unit price) 
for physicians and hospitals by service line. Three other plans made 
available qualitative performance ratings on physician or medical group 
cost (e.g., an indication of above or below a threshold using stars or 
dollar signs); to rate economic performance, these three plans used a 
measure of cost-efficiency rather than unit prices.
    With respect to hospital quality of care comparisons, we found 
plans were primarily relying on hospital billing data or unaudited 
hospital reported survey responses. The consensus of the scientific 
community and a recent measures endorsement process by the National 
Quality Forum is that hospital billing data is generally an inadequate 
basis on which to compare hospital quality.
    We found a different but equally severe handicap with respect to 
most cost comparisons. The most commonly offered cost comparisons, 
which are limited to drug options and procedures, were based typically 
on the unit price(s) charged by the physician, hospital, or pharmacy, 
rather than on their longitudinal cost-efficiency. Longitudinal cost-
efficiency in this context refers to the effect of a doctor, hospital, 
or treatment option on the total cost of treating an episode of acute 
illness or a year of chronic illness. In the case of a physician, it 
reflects not only the cost of his/her services but also, for example, 
the cost of differences in the average frequency with which their 
patients with the same chronic illness are scheduled for return office 
visits or are admitted to the hospital. Use of unit price as an index 
of cost-efficiency is problematic because researchers such as Elliott 
Fisher at Dartmouth and teams at Premera Blue Cross have independently 
documented that unit prices are misleading signals of relative cost-
efficiency. Indeed, researchers such as Tom Rice at UCLA have 
documented that lower unit prices typically induce physicians to 
provide a greater volume of services, either services billed by them or 
by others, such as laboratories, radiologists, or hospitals.
    This substantial informational barrier to consumer identification 
of the most affordable providers is not caused by a lack of analytic 
methods with which to compare the longitudinal cost-efficiency of 
doctors or hospitals. Rather, most health plans lack enough claims 
experience with individual doctors or individual hospital service lines 
to allow statistically valid comparisons.
    This barrier is especially problematic because most plans are 
hesitant to pool their claims data with competing plans, out of fear 
that negotiated unit price advantages they may hold with some 
physicians or hospitals would be revealed and then replicated by a 
competing insurer. To address this problem, many plans rate large 
physician groups or all of a hospital's service lines in a bundle. Such 
bundling obscures important performance differences and depresses the 
gains from better engaged consumer. Other plans are responding to this 
barrier by limiting their ratings to the minority of providers with 
whom they have adequate claims experience.
    The main obstacle to comparisons of cost-efficiency and quality for 
treatment options is our insufficient federal investment in AHRQ, on 
which most stakeholders rely to quantify the comparative performance of 
treatment options. Many large purchasers support much better funding of 
AHRQ to generate these comparisons.
    Even if consumer-directed health benefit plans had reasonably 
accurate performance comparisons for consumers, we currently know 
little about the economic and non-economic incentives that are 
minimally required to induce selection of better performing, but 
unfamiliar, physicians, hospitals, and treatment options. In the 
absence of these planning inputs, consumer-directed health benefit plan 
designers have often relied on blunt incentives such as higher 
deductibles, higher co-insurance, and portable spending accounts that 
generally discourage use of all services, including services that are 
essential to maintaining patient health (e.g., betablocker use by 
patients recovering from a heart attack). That blunt, overall 
reductions in benefit coverage can discourage use of clinically 
valuable services was most recently documented in attached research 
findings. A promising exception to this general picture is that four 
accountbased plans exempted recommended preventive care from the 
relatively strong incentives to control spending from the first dollar 
and one plan reduced the out-of-pocket cost for chronic medications for 
individuals who participate in a chronic illness registry, a clinical 
innovation shown to improve patient health outcomes.
    Consumer incentives to select cost-efficient options are 
concentrated at the low end of the distribution of annual per capita 
health care costs. The majority of the plans provide the strongest 
incentives to choose low-cost hospitals, physicians, and treatment 
options only up to $2,000 to $3,000 for a person with single coverage. 
Beyond that point, coverage mimics typical PPO coverage and is almost 
always accompanied by an out-of-pocket maximum. For large self-insured 
employers, who make up the majority of current consumer-directed plan 
enrollment, out-of-pocket maximums are as low as $1,500 (for small 
employers, we encountered some as high as $5,000.) Thus, a typical 
enrollee of an account-based plan that anticipated minor surgery or a 
maternity stay would have no incentive to control other spending during 
the year. Finally, even for the one of 15 plans that calibrated out-of-
pocket costs at the point of service to the comparative cost-efficiency 
of the health care provider selected by the consumer, this incentive 
did not extend beyond the plan's out-of-pocket limits, even for 
affluent enrollees. Only the three ``narrow provider network'' plans 
created incentives to select more efficient or higher quality providers 
at all levels of spending, because they offer no coverage for services 
delivered by providers excluded from the network based on poor 
performance.
    Failure to encourage even affluent individuals to select more cost-
efficient options at higher levels of annual personal health care 
spending will severely limit the savings from most early consumer-
directed health benefit plans; this is because roughly 55% of total 
commercial health insurance spending is by enrollees who exceed their 
annual out-of-pocket limits.
    Finally, we found only one plan that specifically aims to assure 
that they do not shift a greater share of out-of-pocket cost onto 
sicker enrollees. This account-based plan provides first-dollar 
coverage with low coinsurance for all cancer care and hospital 
admissions. As a result of this design, the aforementioned plan has 
demonstrated that sicker individuals disproportionately benefited 
economically from the consumer-directed plan relative to a typical PPO 
plan. If widely adopted, this approach could offset the quality loss 
described in the Epstein study or the concern that the consumer-
directed plans approach will impoverish the sick. Failure to attract 
sicker individuals whose selection decisions offer the largest 
opportunity for health benefit plan savings threatens realization of 
the full potential of consumer-directed health plans.

2. Early Evidence on Risk Selection and Impact

    Because consumer-directed plans are relatively new to the market, 
there have been limited opportunities to study their effects. Most of 
the available evidence on savings, recently summarized at a briefing by 
the Galen Institute, has come from the plans themselves and should be 
regarded as preliminary until independently confirmed by health service 
research.

Risk Selection
    Consumer-directed plans are offered to employers both as a total 
replacement for all prior options (often, but not always in the fully-
insured segment of the market) and as an additional option alongside 
prior options. In the latter case, plans have indicated mixed results 
in terms of risk selection. One major HRA plan found evidence that 
individuals selecting their plan were much healthier than those 
choosing competing HMO and PPO options. Another similarly designed plan 
found that enrollees who chose their plan were slightly sicker than 
average. Many plans have also reported that the type of employer that 
chooses to offer a consumer-directed plan is highly varied and includes 
many employers with predominantly low-wage employees. More data will be 
needed to address this question and selection patterns will likely 
change as more information about the new model is disseminated.

Impact on Spending and Service Utilization
    Reports of the impact of consumer-directed plans on spending are 
similarly sparse because only a few plans and employers have enough 
claims experience to assess the impact of these new models. It is also 
important to note the difficulty of assessing the impact on spending of 
consumer-directed plans because of issues such as risk selection. 
Moreover, none of these findings have been validated by independent 
researchers. Three of the studied consumer-directed plans reported 
reduced spending growth compared to ambient health insurance trend. The 
reported savings net of reductions in benefits coverage were on the 
order of ten percentage points. Consumer out-of-pocket spending was 
reported to have grown more slowly than comparison plans as well. Most 
of this effect is attributed by the plans to behavioral changes such as 
substitution of generic for brand name drugs and substitution of office 
visits for emergency room visits. Two of the account-based plans we 
examined also report that preventive care use increased relative to 
comparison groups. Because these findings relate to specific 
populations and plan designs (both the consumer-directed plan and the 
plan with which it was compared) it is not yet possible project early 
results to the insured population at large.

Other Effects
    Several account-based plans have reported high retention rates for 
both employers and employees with a choice of plan. This suggests 
relatively high satisfaction with the plans. The impact of account-
based and other consumer-directed models on important outcomes such as 
clinical quality and longer run cost-efficiency is not yet known.
    In summary, significant structural limitations in the early forms 
of consumer-directed health plans have not blocked directionally 
favorable early results. Most pioneers report decreased rates of per 
capita health spending and increased consumer information seeking. 
However, (1) none of these early self-assessments have examined impact 
on health outcomes or robust measures of quality; and (2) reported 
savings, ranging up to a 15 percentage point offset of concurrent 
insurance premium trends, have not yet fully accounted for more 
favorable enrollee health status, leaner covered benefits, cost 
transfers to sicker beneficiaries or to the employer-purchaser, and the 
economic value of health or quality losses that consumers did not 
intend.

3. How Will HSAs Alter This Picture?

    Through our interview with plans and other interactions with Mercer 
clients and contacts, we assessed the market's early reaction to the 
Health Savings Account (HSA) provisions of the recent Medicare reform 
legislation. All but one of the account-based plans are developing or 
had developed a product that would meet the more restrictive definition 
of an HSA. Large employers, however, appear to be cautious about HSAs, 
waiting for clarification on a number of fronts. One plan reported that 
the main question from its employer clients was whether HRAs could be 
converted into HSAs. This plan indicated that its clients and potential 
clients wanted to experiment with an HRA before offering an HSA, which 
cedes to employees more control of benefit dollars. Other employers had 
unresolved questions about the relationship between HSAs and both FSAs 
and pharmacy benefit carve-outs.

     C. THERE ARE BUDGET-NEUTRAL OPPORTUNITIES FOR CONGRESS TO HELP

    There is a short list of budget-neutral interventions available to 
Congress to address some of the structural barriers facing consumer-
directed health benefit plans and allow realization of their full 
potential for improving the quality and affordability of American 
health benefit plans.
    1. Give employer-, union- and insurer-sponsored health plans real-
time access to the full CMS claims database, holding back data only to 
the extent necessary to protect the privacy of individual Medicare 
beneficiaries. The Medicare claims databases are a severely 
underexploited national information asset that would allow all private-
sector health benefit plan sponsors to compare more validly the 
longitudinal cost-efficiency and quality of physicians, hospitals by 
service line, and treatment options. Current CMS rules restrict access 
to research that will benefit CMS. However, wider access is, in the 
view of most external legal experts, not restricted by the statutory 
language of HIPAA or the Privacy Act, if beneficiary privacy is fully 
protected. Congress could clarify this and encourage CMS to revise its 
regulations to allow real time access, subject to full protection of 
beneficiary privacy via encryption and other methods specified in 
existing law.
    2. Encourage CMS to support rapid expansions of minimally required 
hospital and professional billing data, as recommended by the Quality 
Work Group of the National Committee on Vital and Health Statistics. 
This would enable much better performance comparisons of providers and 
treatment options by CMS and private-sector health plans, especially in 
reducing the confounding effect of differences in patient severity of 
illness on provider performance comparisons.
    3. Encourage the Secretary of HHS to speed up adoption of the 
National Provider Identification program. This will allow all benefit 
plans to better identify individual providers and more accurately 
compare their performance via analysis of CMS and private sector claims 
data.
    No health care professional, government official, or well intended 
health benefit plan manager can better determine the most personally 
satisfying tradeoff for consumers between health care spending and 
anticipated health improvement than well informed consumers can for 
themselves. Especially when paired with robust pay-for-performance 
programs for physicians and hospitals, consumer-directed health benefit 
plans can be a vehicle for great improvement in both the affordability 
and quality of American health care. Expect initial shortfalls in the 
results from early consumer-directed health benefit plans; and 
encourage CMS to help all American health benefit plans gain access to 
information that they need to deliver maximum potential consumer gain.

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          Prepared Statement of John M. Bertko, F.S.A., MAAA 
                   VP and Chief Actuary, Humana, Inc.

    Thank you for your invitation to present early experience with 
consumer-centric health insurance products from Humana, Inc. and 
additional observations relating to the experience of the health 
insurance industry. My name is John Bertko and I am the Vice President 
and Chief Actuary for Humana, Inc. Humana is one of the country's 
largest regional health insurers and is a leader in design and 
implementation of consumer-centric health products. With over 6 million 
total members and 3 million commercial members in 15 major states, 
Humana has a cross-section of the country's insured consumers in its 
variety of traditional and consumer-centric products.
    Today, Humana has over 200,000 under-65 members enrolled in our 
consumer-centric products, roughly 7% of our total non-governmental 
business. This number has grown dramatically in one year from the 
roughly 40,000 enrolled as of January 1, 2003. From our market 
research, we believe that Humana ranks second in membership in true 
consumer-centric products, if defined as products with a spending 
account. Overall, we estimate that there are roughly 1 million 
Americans enrolled in some form of consumercentric product with a 
spending account. (This number at least doubles if various choice 
products with multiple options but no spending accounts are included in 
the total.)
    We expect that this number will at least double again during 2004, 
perhaps growing even faster as more employers and consumers become 
interested in consumer-centric products and more insurers enter the 
market. At this point, we believe that most employers that offer these 
products are the ``early adopters.'' By January 1, 2005, we expect 
Humana will have from 400,000 to 500,000 members enrolled in its 
consumer-centric products.
    The good news, at least from Humana, is that the consumer-centric 
concept succeeds by giving individuals incentives to choose health care 
services and options that are right for them in a total replacement 
solution by providing the information and tools to make their choices 
easier. Before providing a summary of our early experience, let me give 
a very brief description of the Humana consumer-centric solution.

           HUMANA'S CONSUMER-CENTRIC SOLUTION--SMARTSUITE SM

    First, Humana believes in the social contract of insurance--that 
the healthy must subsidize the sick. It is critical that all employees, 
those who use few or no services (the healthy) and those who use many 
services (the high users) remain in the same risk pool for insurance 
coverage. In order to maintain the integrity of this risk pool, the 
employer must provide a subsidy for the high use employees and blend 
these funds with contributions from employees with average, high or low 
utilization of services.
    Based on this premise, Humana, unlike its competitors, markets a 
``total replacement'' solution. Employers choose from a variety of 
bundles of products containing traditional products (i.e., HMOs and 
PPOs) and high deductible or ``consumer-centric'' products for which we 
create rates to maintain affordable coverage for all products. Each 
employee then chooses his or her own option from the products offered 
in the bundle.
    Humana's consumer-centric options typically have an allowance or 
spending account of between $500 and $1000 for the employee to ``choose 
and use'' health care services. Each employee has control over those 
dollars, to spend on preventive care, office visits, imaging or lab 
tests or other services. After this allowance is exceeded, the employee 
must meet a deductible, generally in the range of $1500 to $3000. 
Expenses above this deductible are then covered by true catastrophic 
insurance with low cost-sharing (generally 10% or less).

                            EMPLOYEE CHOICE

    Experience shows that today most employees do not make an active 
choice of health insurance coverage each year. Most employees default 
to the coverage they had the previous year. Humana experience reveals 
that when employees have to make an active choice each year, they make 
more meaningful choices if given good information and tools. In the 
Humana scenario, each employer is strongly encouraged to have a 
``positive open enrollment'' for its employees during which time 
employees examine all options. Employees use a ``wizard'' to help them 
learn about their plan choices and estimate cost of services they or 
their family might use in the coming year based on previous year's 
claims' experience. Then, based on this information, the employee or 
family makes a decision as to whether they would prefer to pay for 
their coverage through lower payroll deductions and higher costs at the 
point when they need services or choose higher payroll deductions and 
lower costs at the time they seek services.

                      IMPORTANCE OF COMMUNICATIONS

    Initial and ongoing educational communications are critical to the 
success of the consumer-centric approach. In our approach, employees 
and dependents are provided with Web-accessible decision-support tools 
that show how much they have spent, different cost levels and, to the 
extent available, quality information about providers. We want our 
members to think about what services they obtain, at which site of care 
they want to seek services and the quality and efficiency of their 
providers.
    Also critical in the educational process is the public availability 
of comparative cost and performance data. States like Pennsylvania, New 
York and Wisconsin have taken the lead in publishing this kind of 
consumer information on their Web sites. The Centers for Medicare and 
Medicaid Services (CMS) has begun to publish some data for health 
plans, nursing homes and home health agencies. Just as they do in all 
other areas of their lives, consumers make better choices when they can 
compare cost and quality information. We encourage you to advocate for 
faster disclosure of this kind of information at the federal level.

                       EARLY EVIDENCE OF SUCCESS

    Through our experience, first with Humana employees as a pilot 
group, and now with customers and their employees, we've learned many 
lessons. We have provided a significant amount of this information to 
health services researchers as part of outside independent assessments 
of our data. However, I need to point out that it is still ``early'' 
and the data should be viewed as good indicators rather than fully 
credible proof that the concept works.
    From Humana's perspective, we view our results as representing the 
effects on ``health systems in miniature''--using an employer as a risk 
pool and measuring what happened from year to year. The following 
evidence represents a summary of the last 2\1/2\ years of experience, 
for both Humana's pilot initiative for its own employees and then for 
Humana's ``early adopter'' customers.

          ADOPTION AND ENROLLMENT IN CONSUMER-CENTRIC OPTIONS

    As of mid-February 2004, Humana has 125 employer customers, with 
over 200,000 members in consumer-centric solutions and products of all 
kinds. These customers are evenly distributed across our major states 
and in a variety of industries, from financial companies to hospitals 
to school districts to restaurant industry companies.
    As I previously mentioned, in Humana's solution, individual 
consumers choose between traditional products and consumer-centric 
options. While early enrollment in the consumer-centric option was a 
low percentage at both Humana and its competitors in 2001, by 2003 
nearly 28% of members were enrolled in consumer-centric options, with 
other employees remaining in traditional options. Humana believes that 
most employers will want to continue offering both traditional and 
consumer-centric options, while encouraging efficient behavior.

                         COST TREND EXPERIENCE

    Cost trends have been significantly reduced by enrollment in these 
products. And, because Humana views these trends across the whole 
``employee health system,'' we've seen a significant impact on 
traditional as well as consumer-centric options. In our Humana employee 
pilot, we started with 10,000 Humana Louisville employees and their 
dependents on July 1, 2001. As measured a bit more than a year later in 
late 2002, our average health care trend was 4.9% (the year-over-year 
total increase) versus an average trend in the Louisville market of 
around 15% (after benefit buydowns). In Year 2, we extended this 
solution to our 14,000 non-Louisville employees and dependents and 
achieved a trend of 1.4%, attributable in part to ``word of mouth'' and 
a greater 20% enrollment in the consumer-centric option. The same year, 
Humana offered its Louisville employees a next generation solution with 
even more customizable features, including Health Reimbursement 
Accounts. This solution's trend was 2.7%. All of these trends compare 
to mid-double digit trends in the rest of the traditional marketplace 
in 2001 through mid-2003.
    Similar cost trends are now emerging in our customer block of 
business. As of January 2004, we have credible claims trend experience 
on 43 of the 125 employers (many just enrolled as of January 1, 2004), 
covering 48,000 insured members. The early evidence for these groups 
points to an average trend in a range between 5% and 8%. We update this 
experience monthly and the results have been consistent through 2003.

          EARLY EVIDENCE OF UTILIZATION AND BEHAVIORAL CHANGE

    All of Humana's detailed cost and utilization evidence is derived 
from analysis of the experience of our 24,000 employees and dependents. 
It is too early to look at the results of covered customer members 
since analysis of actuarially credible data requires 12 full months of 
data, plus a minimum of three months of ``run-out'' claims to allow for 
processing of utilization ``in the system.''
    Based on the Humana experience, we first find that there is 
significant favorable selection by the ``early movers'' into consumer-
centric options. In Year 1, these ``early movers'' (6% of employees and 
dependents) of Humana members had prior claims that averaged only 53% 
of the average cohort. In Year 2, with now 20% of members in the 
consumercentric option, these healthy individuals averaged around 50% 
of the average cost. They are clearly healthier, although were 
approximately the same age, on average.
    The next question is ``Why did claim trends decrease to single 
digit levels?'' Our early experience indicates that several types of 
behavioral change accounted for most of the trend reduction. First, 
employees chose themselves to migrate to lower cost options, thus 
reducing their payroll deductions, in some cases from approximately $20 
per pay period for a single employee to $5 per pay period.
    Another significant factor appears to be a change in site of care 
for receiving services. Visits to emergency rooms and use of other 
outpatient services decreased relative to Humana's market averages, 
while use of physician office visits increased somewhat. In addition, 
more prescription drugs were used, generally consistent with more 
office visits. We believe that many of Humana's employees chose to make 
greater use of their physicians in office settings, where the doctor's 
knowledge of his or her patient likely leads to better quality care, 
while eliminating unnecessary costs associated with emergency room 
visits or other outpatient services. Exhibits 2 and 3 provide a summary 
of the behavioral changes that shows the consumer-centric solution 
(SmartSuite SM) vs. Humana's market averages.
    In addition, about 200 employees chose to waive coverage. We 
checked with all of them and all but one had coverage elsewhere 
(generally through spousal coverage). Reduction of duplicative coverage 
frequently means that use of unnecessary services is diminished.
    Last, there was some element of buydown of coverage in this pilot, 
since Humana added a hospital copay to all of the traditional benefit 
options.
   use of communications and shared-decisionmaking tools by consumers
    Humana strongly stresses the need for employers to embrace and 
communicate the message of employee participation in their health care 
decisions. For the employer, we provide a package of communications 
materials tailored to explaining the consumercentric solutions, from 
messages from senior management to payroll inserts to newsletters to 
posters.
    For employees, Humana makes use of on-line enrollment applications, 
a wizard to assist employees in making health care option decisions, 
and a ``PlanProfessor SM'' to provide background information on how to 
maximize their benefits and options. To date, we have had 102 of our 
employer customers make use of the wizard and had nearly 100,000 unique 
users log in. The wizard leads consumers through a series of questions 
about their prior utilization of services, their preferences for 
physicians and hospitals and the tradeoffs between lower payroll 
deductions and lower point-of-service cost-sharing. This tool provides 
options to:

     ``Narrow My Choices''
     ``Tailor My Benefits''
     ``Balance My Cost''
     ``Tell Me How Much Will I Spend?"

    The wizard and the on-line application allow specific information 
to be provided to consumers without overwhelming them with data. Access 
to the applications can be provided through work desktop computers, 
home computers, kiosks at work locations or through the Internet at 
libraries or other public facilities.

  THE HEALTH INSURANCE INDUSTRY HAS EMBRACED CONSUMER-CENTRIC PRODUCTS

    In my opinion, the health insurance industry has generally embraced 
consumer-centric products. Humana and nearly all of our major 
competitors offer some version of a product with health spending 
accounts or multi-option choice product. These products come in many 
variations but all make the point of increasing consumer involvement in 
the ``choose and use'' health services process.
    Since the Department of Treasury issued a statement clarifying the 
position of Health Reimbursement Accounts (HRAs) in June 2001, most 
large insurers have included these accounts in their products. HRAs 
have considerable flexibility in plan design and generally use 
``notional'' dollars in accounts that are available to employees but 
allow balances at the end of a year to roll-over to be used in future 
years. ``Notional'' dollars are accounting credits, like airline 
frequent flyer miles, that can be used later but are not cash 
contributions. Between 30% and 50% of employees have some of their HRA 
amounts remaining to be rolled over. Use of the rollover amounts 
depends on the employer's plan provisions, but they may be used for 
paying down deductibles or coinsurance in future years, for COBRA 
coverage or for retiree benefits. Generally, I don't believe most 
employers allow the accounts to be portable.
    As you know, Health Savings Accounts (HSAs) were included in the 
Medicare Modernization Act (MMA) signed into law in December 2003. Many 
health insurers either already have HSA products on the markets or are 
in the process of developing and filing these products today. HSAs use 
actual cash contributions into an account (in contrast to the notional 
dollars used with HRAs) and are truly portable for consumers. There 
are, however, certain legislated constraints on plan design that may 
reduce the appeal to some consumer segments.
    In my opinion, HSAs will have enormous appeal in the individual 
health insurance market where most products sold today have deductibles 
large enough to qualify as high deductible health plans to meet the HSA 
requirements. In addition, HSAs are likely to replace the Medical 
Savings Accounts available to small employers. In the larger employer 
market, it appears to me that Health Reimbursement Accounts (HRAs) may 
continue to have somewhat greater appeal, due to their greater 
flexibility of plan design and the ability of employers to use them to 
increase employee retention.

                                SUMMARY

    Consumer-centric products will be the focus of attention in 
employer-sponsored and individual health insurance over the next few 
years. Getting consumers involved in the ``choose and use'' decisions 
about their health care coverage is essential to reducing the health 
care cost burden. HRAs and HSAs are likely to emerge as common product 
features available to most American workers and their families and will 
be a necessary component of a strategy of communication, shared 
decision-making and choice.

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[GRAPHIC] [TIFF OMITTED] T3563.011

     Prepared Statement of Howard Leach, Head of Human Resources, 
                          Logan Aluminum, Inc.

    Good morning, Mr. Chairman and members of the Committee. I am 
Howard Leach, head of human resources for Logan Aluminum, a world class 
manufacturer of aluminum sheet products located in Logan County, 
Kentucky, with a workforce totaling 1,000 employees. Thank you for the 
opportunity to testify before you today.
    I am delighted to share with you the practical side of the 
consumer-directed experience at Logan Aluminum. Like many employers, in 
recent years our business experienced annual health-care cost increases 
of 20+ percent, which, simply put, is not sustainable and not in the 
best interest of our business or our employees. Traditional approaches 
to the management of health care costs have been limited primarily to 
employers absorbing costs, shifting costs to employees or reducing 
benefits. Logan realized these solutions would not be effective long 
term, and it was just a matter of time until neither employers nor 
employees could afford the cost of health care.
    As a business facing intense competition and cost pressures, we 
chose consumer-directed health because we saw its potential to help 
hold the line on a disturbing cost trend. But we also made this 
decision for the benefit of our employees. Now, with more than a year's 
experience in a consumer-directed plan, I am here to testify to the 
fact that we made the right call and, just as important, I believe our 
employees feel we made the right call. Looking back at our experience 
in 2003, we have determined that this approach has more than met our 
expectations in several important regards, specifically:

     Consumer-directed health care is a perfect match for any 
company, such as ours, that is motivated by a desire to control long-
term health care costs through a healthier, responsible workforce. We 
provide incentives for our employees to complete an annual health risk 
appraisal, and we now have a 99.7 percent completion rate.
     By encouraging employees to be wise consumers of health 
care services, consumer-directed health care can help reverse 
unsustainable health care cost trends. As a self-funded benefits plan, 
we were able to realize an 18.7 percent reduction in our total medical 
costs in 2003 over 2002.
     And, most importantly, consumer-directed health care did 
not negatively impact our employees' use of preventive health services 
and the care needed for serious medical issues. In fact, hospital days 
of care were up 4.4 percent in 2003.

                          A TEAM-BASED CULTURE

    To fully appreciate our enthusiasm for the consumer-directed 
approach, it helps to understand our company's culture. While employing 
roughly 1,000 people in our Russellville, Kentucky plant, we have 
established a team-based culture that emphasizes employee involvement 
in nearly every facet of the operation.
    We look at our employees as partners. With the help of a 20-member 
employee committee, we engage our people in thoughtful discussions 
several times a year about health care costs. These employees, in turn, 
disseminate information about these issues with other smaller groups of 
employees in the workplace. This helps keep every employee aware of 
health care issues affecting our business.
    We are proud of the fact that we have historically offered 
employees an excellent, competitive benefits package including 
comprehensive medical coverage. We have been very fortunate in not 
having to ask employees to pay a percentage of premium, and under the 
new consumer-directed health care plan, we still don't. In the past, 
the only out-of-pocket costs employees were liable for was a $15 co-pay 
for in-network doctor visits.
    When health care costs became more of a concern in the early 1990s, 
we decided that the best way to tackle rising costs was to get at the 
root causes through a strong focus on prevention. We implemented a 
wellness program--managed by an onsite wellness director--that 
emphasizes regular health care screenings and critical lifestyle 
changes. We have an onsite medical department that includes a part-time 
doctor and two nurses.
    Employees are encouraged to routinely take advantage of health care 
screenings, including an annual physical, onsite and at no charge. The 
program also supplies our employees with a variety of information 
designed to help them better understand how they can improve their 
health outlook through a healthy lifestyle. Because we want our 
employees to be actively involved in managing their own health, we 
follow up these educational efforts with health risk appraisals that 
are evaluated by an outside vendor.
    The individual results are confidential--only the employees see 
their individual assessments. High-risk employees are identified and 
then contacted by the vendor and encouraged to participate in an 
intervention program. About 250 employees have been identified as at-
risk, and 90 percent of them are now participating in health management 
activities. Logan Aluminum sees aggregate results only, helping us to 
identify health-related issues across our employee population as a 
whole. This allows us to concentrate our educational efforts and 
incentives on developing health issues.
    Through follow-up health risk assessments, we know we have had an 
impact. Results show improvements in body mass index, tobacco use, 
seatbelt use and exercise activity across our employee population. 
Right now 25 percent of our employees are using the company fitness 
center, and 10 percent are in weight reduction programs. Anecdotally, 
we have all been extremely gratified to hear that health screenings 
have caught cancers early while still treatable. However, despite these 
significant trends in the `90s, we did not get all the behavior changes 
we had hoped for. And, when costs began to rise dramatically several 
years ago, we knew we had to respond aggressively.
    Late in 2001, we assembled a task force made up of seven 
individuals with the expertise needed to examine the problem 
effectively. After extensive research and analysis, the group reported 
back to senior management the following spring that it was recommending 
a consumer-directed health care model. The task force reasoned that 
consumerism offered not only a solid chance of helping to slow costs 
but of fitting well with our focus on wellness and behavior 
modification. Consumer-directed health care, in fact, reinforces the 
importance of healthy lifestyle choices and becoming a wise consumer of 
health care. Employees also are encouraged to set individual wellness 
and team wellness goals, which are rewarded with additional company 
incentives.

                     CONTINUOUS INFORMATION IS KEY

    We very quickly communicated with our employees about the need to 
make a change in health care benefits. Initially, there were many 
questions and a few concerns about adopting a consumer-directed 
approach, but we responded as best we could with the promise of more 
information to come. When management approved the health benefits 
change, we returned to employees with more information about how the 
plan would work. A couple of months later, we went back again with more 
detailed information and reading materials to help familiarize our 
employees, their dependents and retirees with the specifics of the 
plan.
    We selected Aetna HealthFund as our consumer-directed health care 
plan. Having enjoyed a long relationship with Aetna, we determined that 
this would minimize disruption to employees and allow us to continue to 
utilize Aetna's extensive PPO network in our area.
    Throughout the implementation process, we emphasized that Logan 
Aluminum's philosophy remains unchanged. We want our employees to be 
healthy, wise consumers, and we are providing the tools needed to help 
make that happen. We continue to provide access to free, onsite 
physicals. We also provide incentives to employees who participate in 
the health risk appraisal program and in wellness programs--up to $250 
in cash per year, per employee, if certain aggregate goals are met.
    Consumer-directed health care complements these efforts by 
encouraging employees to assess the value and quality of health care 
services available to them. Preventive care is included as is treatment 
for more serious medical conditions, after the deductible has been met. 
In fact, with employees in the health plan now having access to a 
health reimbursement account, we implemented an additional $200 
incentive to be applied to the employee's account if he or she 
completes the health risk appraisal. As a result, 99.7 percent of our 
people now complete the health risk appraisal, and we are paying out 
$418.75 in total incentives to each employee for 2003.
    With the help of online tools provided by Aetna, employees now are 
getting a better understanding of the true costs of health care. This 
information is helping them make informed choices among the options 
recommended by their physicians. Our employees generated more than 
15,000 hits to the online Aetna site in 2003.
    The end result is that, over the course of 2003, employee concerns 
and questions virtually dried up. Our annual employee survey at the end 
of 2003 showed virtually none of the health care concerns expressed in 
2002, before the plan was implemented.
    While the deductible in the plan does have the potential to 
increase out-of-pocket costs, employees still do not pay monthly 
premiums. And, employees know that if they maintain good health they 
can save some portion or all of their health reimbursement accounts and 
roll them over to another year--decreasing the potential out-of-pocket 
exposure in the following year. Again, they also know that full 
coverage kicks in once the Aetna HealthFund reimbursement account is 
exhausted and the deductible is met.
    Our results from 2003 show that average employee out-of-pocket 
costs did go up in the consumer-directed health plan from $240 to $665. 
However, the net effect after wellness incentives was an increase of 
only about $200 per employee. And, the results compare favorably with 
national averages. Hewitt Associates (October 2003) projected that the 
average employee contribution toward health care expenses would reach 
$1,565 in 2004, up from $1,276 in 2003.

                      SIGNIFICANT IMPACT ON COSTS

    As I alluded to earlier, we are seeing truly impressive results 
after just one year in Aetna HealthFund. While expanding on our efforts 
to promote wellness and informed decisionmaking, we saw a reduction of 
18.7 percent in our total medical costs in 2003. This represents an 
improvement of $925,000 to the company's bottom line. It's all the more 
remarkable when you consider that 13 and 14 percent increases are 
currently routine for alternative health care plans.
    Similarly, we implemented a new, three-tiered pharmacy plan in 2002 
that charges employees a co-pay for generic prescription drugs, a 
higher co-pay for preferred brand-name drugs and a higher-yet co-pay 
for non-preferred, brand-name drugs. After five years of near-20 
percent increases in our pharmacy costs, we saw a 5 percent reduction 
in the first year under the new plan and an additional 3 percent 
reduction in 2003.
    We recognize that these results represent only a short period of 
time, but we are very encouraged that we are moving in the right 
direction.

                       EMPLOYEES GET NEEDED CARE

    We also are encouraged by utilization data that shows employees 
continue to enjoy access to the care they need. One of the best 
indicators of that could be hospital days of care, which increased 4.4 
percent per 1,000 members in 2003. Inpatient surgeries were up 4.2 
percent, an additional indication that employees are getting 
appropriate treatment for serious health events.
    Use of health care services in some other settings, however, did 
drop off. For example, office visits per 1,000 members fell 6.3 
percent. Emergency room visits dropped 2.1 percent. Since emergency 
rooms are a high-cost environment in which to receive care and should 
be used for true emergencies only, we think these results actually 
demonstrate that employees are giving serious consideration to their 
health care options and are making appropriate choices.

                               CONCLUSION

    Logan Aluminum is committed to providing its employees with quality 
health care benefits in a cost-effective manner, and we remain 
committed to the active involvement of our own employees in helping to 
manage these costs through better management of their own health. 
Consumer-directed health care is helping us do that.

    It's hard to overemphasize how big a threat rising health care 
costs have become to the competitiveness of American businesses today. 
Consequently, quality, affordable health care is extremely important to 
us from a business standpoint. But our passion and excitement for 
consumer-directed health care comes not just from a business objective 
met, it comes from a truly innovative solution that allows us to 
continue being the kind of company in which we have always taken pride.

    In consumer-directed health care we have found an approach that 
provides employees with the health care services they need, helps make 
our employees wiser, more educated consumers, and holds the line on 
costs. I call that a win-win by any measure.

    We will continue to watch the results of our new health plan. We 
will continue to talk to our employees to make sure the plan continues 
to meet our collective needs and that employees have the information 
they need. But if I'm certain about one thing it's that consumerism 
needs to move forward so that its potential for helping all of us to 
become better, more intelligent consumers of health care is realized.

    Logan Aluminum very much appreciates the opportunity to testify 
before the Committee today. I hope the perspective of a company on the 
front lines of today's fast-evolving health care landscape has been 
informative and useful. We know how promising the consumer-directed 
health care movement has become to us. We would very much encourage 
Congress to do what it can to ensure that this important new approach 
to health care is given every chance to demonstrate what it can do. We 
all need to be participants in a health care benefits solution. 
Consumer-directed health care readies us better than anything I can 
think of for this new era.
    Thank you.
                               __________
Prepared Statement of Gail Shearer, Director of Health Policy Analysis, 

                   Washington Office, Consumers Union

    So-called ``consumer driven'' health care plans, which have 
defining features of high-deductible coverage and (possibly) tax-
advantaged employer contributions to health reimbursement or savings 
accounts, may create serious problems for the U.S. health care system. 
Consumers Union believes that this coverage is misnamed, misguided from 
a policy perspective, and a dangerous distraction from the need to 
solve the health insurance crisis that faces 43.6 million uninsured 
consumers and tens of millions of underinsured consumers. Our testimony 
also addresses issues raised by health savings accounts, as included in 
the recently enacted Medicare bill and the President's new proposals. 
These proposals are likely to accelerate the erosion of current 
coverage by adding tax benefits for high-deductible coverage.
    We take issue with the growing use of the term ``consumer-driven'' 
to refer to the transformation of the health care system to one 
characterized by high-deductibles. ``Defined contribution'' health care 
would be a more accurate shorthand way to refer to a health care 
approach that essentially increases deductibles and shifts costs to 
sicker employees. Many employees with chronically ill or seriously ill 
family members will not view this transformation as consumer-friendly, 
despite the name.
    The recent expansion and renaming of medical savings accounts and 
the President's proposal for a new tax deduction are more likely than 
previous efforts to transform the health insurance marketplace to one 
characterized by high deductibles. The Economic Report of the President 
makes it clear that this is the intention; the Administration frames 
the problems in the health insurance marketplace as too much rather 
than too little insurance. The Report establishes the ideal health 
insurance marketplace as one in which high-risk consumers face health 
insurance premiums consistent with their risks, explicitly rejecting 
the current goal of health insurance markets of spreading risks broadly 
across the community. At the same time, the Report ignores the reality 
that the uninsured and underinsured face severe health consequences, 
even bankruptcy or death, because of the lack of adequate insurance. 
The Administration's proposals, which boost ``consumer-driven'' health 
care, will shift more costs to those who are sick.
    While the Administration proposals will undermine employer-based 
health insurance and shift more to the individual insurance market, 
that market underwrites risks carefully and does not make affordable, 
comprehensive coverage available to individuals who have pre-existing 
conditions. The underlying nature of the population's health status--in 
which risks vary widely--makes the health insurance market different 
from other markets such as the market for cars or toasters. Individuals 
with underlying health risks benefit from employer coverage or other 
large pooling arrangements (e.g., public programs), since this spreads 
risks broadly. For those covered by employer health plans now, the 
average cost (in 2000) was about $2,600, but those in the top tenth of 
spending had average costs of about $16,700.
    Because of the combination of variation in risks (which lead to 
different health insurance selections), and higher tax brackets and 
ability to meet high deductibles, HSAs will appeal disproportionately 
to the healthy and wealthy. Many economic analyses, including the 
American Academy of Actuaries, have reached the conclusion that this 
type of high deductible health insurance will fragment the risk pool, 
shift costs to the sick, and ultimately drive low-deductible coverage 
out of the market since it can not exist side-by-side in the 
marketplace with high-deductible coverage because of the underlying 
nature of the health insurance market.
    ``Consumer-driven'' health care is likely to aggravate the problem 
of the underinsured since individuals with moderate income are likely 
to face out-of-pocket health care costs (and premiums) that exceed ten 
percent of their income.
    The focus on transforming our health care marketplace to one 
characterized by high-deductible policies is a dangerous distraction 
from the urgent national goal of extending affordable, quality health 
coverage to all.

                                 ______
                                 
      Consumers Union Testimony on ``Consumer-Driven'' Health Care

                              INTRODUCTION

    Employers, who provide health insurance for about 60 percent of the 
U.S. population, are increasingly under pressure to constrain their 
spending on health insurance premiums, which have been growing in 
recent years at an annual rate of 5 to 8 percent. This pressure is 
aggravated by the recent weakness in the economy. One way to reduce the 
employer premiums for health insurance, and to make payments more 
predictable, is to switch to a ``defined contribution'' approach to 
health insurance, similar to the shift in recent decades from defined 
benefit pensions to defined contribution pensions. In the employer 
health insurance market, a key distinguishing feature of its effort to 
move toward a defined contribution model is high-deductible coverage. 
As indicated by the title of the Joint Economic Committee hearing, the 
term that insurers and employers have coined to name this new trend in 
the marketplace is ``consumer-driven health care.'' Consumers Union, 
\1\ which appreciates the opportunity to present our views to the 
committee, is troubled by this trend in the marketplace. In our 
testimony, we plan to explain why we believe this type of coverage is 
misnamed, misguided from a policy perspective, and a dangerous 
distraction from the health insurance crisis that faces 43.6 million 
uninsured consumers and tens of millions of underinsured consumers.
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    \1\ Consumers Union is a nonprofit membership organization 
chartered in 1936 under the laws of the state of New York to provide 
consumers with information, education and counsel about good, services, 
health and personal finance, and to initiate and cooperate with 
individual and group efforts to maintain and enhance the quality of 
life for consumers. Consumers Union's income is solely derived from the 
sale of Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees. In addition to reports on Consumers 
Union's own product testing, Consumer Reports with more than 4 million 
paid circulation, regularly, carries articles on health, product 
safety, marketplace economics and legislative, judicial and regulatory 
actions which affect consumer welfare. Consumers Union's publications 
carry no advertising and receive no commercial support
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 MISNOMER: ``CONSUMER-DRIVEN'' HEALTH CARE IS BETTER CALLED ``DEFINED 
                       CONTRIBUTION'' HEALTH CARE

    Defining features of so-called ``consumer-driven health care'' 
plans tend to be high deductible policies (e.g., $5,000), combined with 
a contribution by the employer to a health care savings account, at a 
level that leaves the consumer exposed to some out-of pocket costs 
before the high-deductible is met. For example, the employer might 
provide $2,000 toward a family's health reimbursement account, and 
offer a deductible of $5,000. (Often, the employer provides additional 
access to information about health care choices, such as information 
about managing certain diseases.) ``Consumer-driven'' implies that 
consumers have a full range of choices, and are in the driver's seat 
calling the shots. The problem with this is that too many consumers are 
not in control of their health care out-of-pocket costs or health 
coverage. An employee with a seriously, chronically ill child, for 
example, will not be able to accumulate a nest egg in a health 
reimbursement account, and will face high out-of-pocket costs each 
year. A consumer with an income in the range of $25,000 to $30,000 will 
suffer financial hardship if they face out-of-pocket costs as high as 
$3,000 a year. An employee with existing health conditions such as high 
blood pressure or diabetes will face very limited choices in the 
individual marketplace if his employer decides to ``cash out'' its 
health insurance plan and send employees into the individual market for 
coverage. This type of policy appears to be driven largely by the 
employer's desire to curb its health care expenditures. The term 
``consumer-driven'' may well mislead employees and the public about the 
true impact of this type of coverage.

     THE MEDICARE BILL AND ADMINISTRATION PROPOSALS ACCELERATE THE 
    TRANSFORMATION OF THE MARKETPLACE TO ONE CHARACTERIZED BY HIGH 
                          DEDUCTIBLE COVERAGE

    The year 2003 may well go down in health care history as the year 
that the health care system began to rapidly evolve toward a system 
characterized by health insurance deductibles in the range of $1,500 to 
$2,000 for individuals and $2,500 to $5,000 for families, instead of 
deductibles that are around $250 for individuals and $500 for families. 
``Consumer-driven health care'' plans in the employer benefit system 
are one mechanism for movement toward high deductibles. The expansion 
of medical savings accounts (renamed as Health Savings Accounts or 
HSAs) in the Medicare Modernization Act is another major step toward 
high deductible coverage as the norm. Because employer and employee 
contributions to HSAs (when accompanied by a high deductible policy) 
will be shielded from taxes, it is likely that this financial incentive 
will stimulate substantial rapid expansion.
    The Administration's additional proposal for making premiums paid 
for high deductible policies tax deductible is likely to boost the 
popularity in the marketplace substantially and dramatically exacerbate 
market segmentation. While supporters of MSAs, HSAs and ``consumer 
driven health care'' initially argued that consumers should have a 
choice of this type of high-deductible coverage, recently they have 
spoken more openly (to their credit) about their intention to transform 
the health care system to one in which high-deductible policies are the 
norm. This is a more honest approach to pretending that high-deductible 
and low-deductible policies can exist side-by-side in the marketplace, 
when the nature of varying risks in the marketplace, and adverse 
selection, make this impossible. This year's Economic Report of the 
President \2\ clearly indicates the Administration's opposition to 
health insurance coverage for relatively routine health care needs; a 
key policy recommendation (for tax deductions for premiums for high 
deductible policies) clearly indicates the Administration's preference 
for a high-deductible health insurance system. Similarly, former House 
Speaker Newt Gingrich has spoken about his goal of transforming 
America's health care system into one characterized by high deductible 
coverage.
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    \2\ P. 200, Economic Report of the President, February 2004.
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    Despite the theory (as expressed in the Economic Report of the 
President) that health insurance with higher deductibles will lead to 
consumers shopping around for health services (based on price and 
quality), the reality of health care needs (often requiring timely 
care, often requiring decisions by doctors, not patients) and 
inadequate information in the marketplace about health care quality and 
prices, precludes the workability of a ``consumer-choice'' type of 
model. Even if perfect information about price and quality were 
available on an instant basis, it is the doctor who ultimately makes 
judgments about needed care. Another problem with the theory is that 
most health care expenditures are incurred in the course of very 
serious illness, after the deductible (and probably the stop-loss) have 
been met, thereby negating any curbing of expenditures that would be 
based on patients' financial incentives. Instead of reducing aggregate 
expenditures, such policies are more likely to shift even more costs to 
consumers.

 THE PRESIDENT'S ECONOMIC REPORT FAILS TO RECOGNIZE THE COSTS INCURRED 
             WHEN CONSUMERS ARE UNINSURED AND UNDERINSURED

    The focus of the President's Economic Report chapter on health 
insurance is more on the alleged problems of over-insurance rather than 
the problems associated with the lack of insurance and underinsurance. 
The chapter could be a primer for a Health Economics 101 course on the 
virtues of an unfettered free market for health insurance: the reader 
learns about different consumption choices that consumers make when 
they have insurance. It posits that patients might over-consume 
services if they face too little cost-sharing. Insurers might be 
disadvantaged because applicants know more about their health status 
than the company does. The lack of insurance is a matter of choice for 
the uninsured who opt out of employer coverage or fail to enroll in 
public coverage.
    The report suggests that in an ideal world, the insurer would have 
complete information about the applicant's health status, and this 
would enable the insurer to more easily discriminate in pricing between 
the healthy and the potentially sick: ``If insurers could distinguish 
among different types of consumers, policies could be tailored to 
specific types and priced accordingly.'' As Paul Krugman pointed out in 
The New York Times recently, this approach would lead to insurance 
companies denying coverage for dialysis if new insurance company tests 
indicate that they are likely to experience kidney problems later in 
life. \3\
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    \3\ Paul Krugman, ``The Health of Nations,'' New York Times, 
February 17, 2004.
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    Nowhere in this chapter is there recognition of the reality that 
faces millions of Americans every year: For the most part, people are 
not uninsured out of choice, but because they can not afford to pay 
health insurance premiums. Every day, uninsured and underinsured 
Americans are dying because of the lack of insurance. An Institute of 
Medicine study reported that an uninsured woman diagnosed with breast 
cancer is 30 to 50 percent more likely to die than a woman with private 
health insurance. The record is clear: uninsured people get inadequate 
care. Cancer patients die sooner when diagnosis is delayed; uninsured 
people with diabetes are at greater risk of uncontrolled blood sugar 
levels and hence are at risk of additional chronic disease and 
disability; and adults with mental illness who lack mental health 
coverage are less likely to receive mental health services consistent 
with clinical practice guidelines.\4\ When the marketplace shifts to 
one characterized by pricing to risk, as suggested by the President's 
Economic Report, this leads to escalating premiums for the very people 
who can least afford them--people who face serious health challenges. 
In addition, unreimbursed health care costs are a leading cause of 
bankruptcy, and contribute to half of all bankruptcies.\5\
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    \4\ Care Without Coverage: Too Little, Too Late, Institute of 
Medicine, 2002, pages 3-11.
    \5\ Consumer Bankruptcy: Issues Summary. Leo Gottlieb, Professor of 
Law; Elizabeth Warren, Harvard Law School, January 7, 2003.
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    The United States is the only industrialized country in the world 
that would consider ``pricing to risk'' instead of spreading health 
care costs broadly across the population. A World Health Organization 
report found that the U.S. had the highest per capita health care 
spending, but rated 54th (of all the countries in the world) when it 
comes to fairness of financial contribution.
    I would like to share a personal story that is a stark reminder of 
the irony that a country as rich as ours fails to provide health 
coverage to all. A cab driver, who came from Egypt over 20 years ago, 
had experienced health care in Egypt (with a per capita income about 
one tenth the level of the United States) with health care in America. 
He reported to me how a U.S. doctor marveled over his high-quality scar 
from stitches received in a major abdominal operation, all at no cost 
to him. In contrast, his wife, recently diagnosed with breast cancer, 
is receiving court notices for her failure to pay bills for a 
mastectomy, even though there had been assurances that her treatment 
would be covered by subsidies. He posed the question to me: how can a 
country this rich put such a financial burden on people who are 
seriously ill?
    The Administration's proposals, which boost ``consumer-driven'' 
health care, by design, shift more costs to those who are sick. The 
result will ultimately be a health care system that distributes costs 
of health care even less fairly than it does today.

                      HEALTH INSURANCE RISKS VARY

    There is tremendous variation in health care costs incurred by 
those covered by employer health insurance, as shown in the Figure 
below. Based on survey data from the Medical Expenditure Panel Survey 
(MEPS) and adjusted to 2000 levels (by the Lewin microsimulation 
model), the average health care costs of those with employer based 
coverage was $2,628 in 2000. However, the average masks a large degree 
of variation: those in the lowest fifth of spending incurred on average 
$30 of health care expenditures, while those in the top tenth of 
spending incurred costs of $16,710.\6\ This variation of risk goes to 
the heart of the need to find a way to spread costs broadly in order to 
keep costs affordable to those at the highest risk level.
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    \6\ Gail Shearer, Consumers Union, The Health Care Divide: Unfair 
Financial Burdens, August 10, 2002, Table 10. 
[GRAPHIC] [TIFF OMITTED] T3563.012


     A 62-year-old overweight smoker with high blood pressure 
was rejected 55 percent of the time, and was offered coverage with 
benefit limits or premium surcharges 42 percent of the time, at average 
premiums of $9,936/year.\7\
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    \7\ How Accessible is Individual Health Insurance for Consumers in 
less-than-perfect health? The Henry J. Kaiser Family Foundation, June 
2001, www.kff.org.
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     A 48-year old breast cancer survivor was rejected 44 
percent of the time, and was offered coverage with benefit limits or 
premium surcharges 38 percent of the time.
     Even a 24-year old with hay fever faced rejection 8 
percent of the time, and benefit limits or premium surcharges 87 
percent of the time.

    Yet the Economic Report of the President suggests that instead of 
spreading risks broadly so that health coverage will be affordable to 
those with existing conditions, ``pricing to risk'' is a primary goal 
of the health insurance marketplace. This approach sacrifices any 
notion of community and sharing of our neighbor's burden, in favor of 
marketplace efficiency. Clearly, a shift of the insurance market away 
from employers and toward the individual insurance market, as 
encouraged by the President's proposal, will add financial burdens and 
challenges to all those that have any existing health conditions.

 HEALTH SAVINGS ACCOUNTS (HSAS) DISPROPORTIONATELY BENEFIT THE HEALTHY 
                 AND WEALTHY AND FRAGMENT THE RISK POOL

    Expansion of medical savings accounts (MSAs) under the new name of 
Health Savings Accounts (HSAs) add a new wrinkle to ``consumer-driven 
health care'' plans by making the contributions to the health 
reimbursement account tax deductible. This new tax policy, combined 
with high deductible health coverage, is likely to appeal 
disproportionately to the healthy and wealthy.\8\
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    \8\ Edwin Park and Robert Greenstein, Center on Budget and Policy 
Priorities, President Proposes to Make Tax Benefits of Health Savings 
Accounts More Lucrative for Higher-Income Individuals, February 9, 
2004.
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     The healthy benefit because they have the new prospect of 
a tax-sheltered investment in which money is not taxed when put in or 
when withdrawn.
     The wealthy, with higher tax brackets, benefit 
disproportionately because the tax savings are larger at higher tax 
brackets than lower tax brackets.
    Because of the divisive impact of high-deductible health insurance, 
it is also likely to aggravate already serious health marketplace 
disparities that result in inferior health care for blacks and Latinos, 
another troubling possibility at a time when the nation is finally 
beginning to address these problems. Because of the variation of risks, 
and different selections made by people of different health status, 
high deductible plans can not exist in the long-term in a marketplace 
that offers low-deductible plans as well. Ultimately, low-deductible 
plans will be driven out of the market, with ``premium spirals'' 
driving out comprehensive coverage.\9\
---------------------------------------------------------------------------
    \9\ Daniel Zabinski, Thomas M. Selden, John F. Moeller, Jessica S. 
Banthin, Center for Cost and Financing Studies, Agency for Health Care 
Policy and Research, ``Medical Savings Accounts: Microsimulation 
Results from a Model with Adverse Selection, Journal of Health 
Economics, 18 (1999) 195-218.
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    At the same time that this type of policy drives low-deductible 
coverage out of the marketplace, it is expected to do so with 
considerable federal expenditures. While the 10-year estimate of the 
HSA provision in the Medicare bill is $16 billion, adding the cost of 
the President's proposal to make premiums deductible brings the 10-year 
cost to $41 billion.\10\ Beyond draining the federal treasury (and 
these cost estimates may well be low), it is important to keep in mind 
what other experts have said about the impact of such high deductible 
coverage:
---------------------------------------------------------------------------
    \10\ The $25 billion estimate is from: ``General Explanations of 
the Administration's FY2005 Revenue Proposals,'' Department of 
Treasury, February 2004, p. 26. The HSA provision of the Medicare 
Modernization Act was initially estimated (by the Joint Committee on 
Taxation) to cost $6.4 billion over 10 years. The Administration budget 
estimated this cost to be $16 billion. OMB, Analytical Perspective: 
Fiscal Year 2005, p. 292, cited in Edwin Park and Robert Greenstein, 
Center on Budget and Policy Priorities, President Proposes to Make Tax 
Benefits of Health Savings Accounts More Lucrative for Higher-Income 
Individuals, February 9, 2004, p. 3.
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    ``Fundamentally, those who would likely win from shifting to MSA/
catastrophic arrangements are the healthy who will `take back' some of 
their `excess' contributions that effectively help to subsidize 
others.'' \11\
---------------------------------------------------------------------------
    \11\ Len M. Nichols, Marilyn Moon & Susan Wall, ``Tax-Preferred 
Medical Savings Accounts and Catastrophic Health Insurance Plans: A 
numerical Analysis of Winners and Losers,'' The Urban Institute, 
Washington DC, April 1996, p. 12.
---------------------------------------------------------------------------
    ``The great savings will be for the employees who have little or no 
health care expenditures. The reatest losses will be for employees with 
substantial health care expenditures.'' \12\
---------------------------------------------------------------------------
    \12\ American Academy of Actuaries, ``Medical Savings Accounts: 
Cost Implications and Design Issues,'' May 1995.
---------------------------------------------------------------------------
    ``Insurers view high deductible plan enrollees as presenting a 
lower claims risk than enrollees in traditional low deductible plans . 
. . Insurers expect relatively better health status and lower service 
utilization by enrollees selecting high deductible plans and price 
their products accordingly.'' \13\
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    \13\ ``Medical Savings Accounts: Results from Surveys of 
Insurers,'' U.S. General Accounting Office, December 31, 1998, GAO/
HEHS-999-34, Appendix, p 14.
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    ``If MSAs become widely popular among consumers with relatively 
better health, an adverse selection cycle could be triggered that would 
drive up the cost of conventional, more comprehensive insurance. The 
resulting premium increases are likely to be large enough to make such 
insurance unaffordable and unavailable for substantial numbers of 
Americans.'' \14\
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    \14\ Iris J. Lav, Center of Budget and Policy Priorities, ``MSA 
Expansions in Patients' Bill of Rights Could Drive up Health Insurance 
Premiums and Create New Tax Shelter,'' February 23, 2000.
---------------------------------------------------------------------------
    A recent study of ``consumer-directed health benefits'' concluded 
that the young and healthy are potential winners, and that older people 
are less likely to choose high-deductible plans.\15\
---------------------------------------------------------------------------
    \15\ Dwight McNeill, ``Do Consumer-Directed Health Benefits Favor 
the Young and Healthy?'' Health Affairs, January/February 2004, p. 186-
196.
---------------------------------------------------------------------------
    Another concern about the President's proposal to make premiums for 
high-deductible health insurance policies tax deductible is the likely 
erosion of employer-based health coverage. When employers realize that 
employees have alternatives to employee coverage (i.e., through tax 
credits or deductions on the individual market), they may decide to 
discontinue offering their employees health insurance. Economists have 
estimated (in the case of tax credits) that for every 100 individuals 
who become newly insured through tax credits, 42 individuals would 
become uninsured because their employer dropped coverage.\16\
---------------------------------------------------------------------------
    \16\ Estimate calculated based on Jonathan Gruber's testimony 
before the Subcommittee on Health, House Ways and Means Committee, 
February 13, 2002. See also: Edwin Park, Center on Budget and Policy 
Priorities, Administration's Proposed Tax Credit for the Purchase of 
Health Insurance Could Weaken Employer-Based Health Insurance, February 
18, 2004. www.cbpp.org.
---------------------------------------------------------------------------
    In sum, high deductible coverage, combined with the new tax 
shelter, drive up premiums for those wanting low deductible coverage, 
are likely to lead to elimination of low-deductible coverage, strain 
the federal treasury, and will lead to shifting of costs to those who 
are sick while benefiting the healthy and those in high tax brackets.

   ``CONSUMER DRIVEN HEALTH CARE'' WILL NOT SOLVE THE PROBLEM OF THE 
      UNINSURED WHILE AGGRAVATING THE PROBLEM OF THE UNDERINSURED

    Approximately one in six (16 percent) families (with head of 
household under 65) incurred out-of-pocket health care costs (including 
premiums they pay directly) that exceed 10 percent of their income.\17\ 
Economists have used a risk-based definition of the underinsured--in 
which individuals are ``underinsured'' if they have private insurance 
and yet, because it is not comprehensive, run the risk of having out-
of-pocket costs exceeding 10 percent of their income if they face a 
catastrophic illness.\18\ As the President's Economic Report clearly 
points out, high-deductible (and ``consumer-driven'') health care plans 
are designed to increase out-of-pocket costs for those who have health 
care expenditures. The gap between money in a health savings account 
and the high-deductible (this gap could be very high, in a range of 
$2,000 to $5,000 for families) is likely to cause a large number of 
families with relatively modest income to fall into the category of 
being ``underinsured'': they are at increased risk (especially when 
including premiums and health care expenses not even covered by their 
policy) of having out-ofpocket costs exceeding 10 percent of their 
income. This concern is aggravated by the fact that many costs (e.g., 
charges that exceed allowed rate levels, charges for non-covered 
services) will not count toward meeting the deductible or toward any 
stop-loss in the policy. In our view, shifting this kind of financial 
burden to families with moderate incomes is undesirable. This segment 
of the population is also at risk of facing loss of employer coverage 
(if employers drop out of the health care market) and higher premiums 
for low-deductible coverage (if high-deductible policies are 
available).
---------------------------------------------------------------------------
    \17\ Gail Shearer, Consumers Union, The Health Care Divide: Unfair 
Financial Burdens, August 10, 2002, p. 14.
    \18\ Pamela Farley Short and Jessica S. Banthin, New Estimates of 
the Underinsured Younger Than 65, JAMA, 274: 1302-1306.
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    Focusing on transforming our health care marketplace into a high-
deductible marketplace is a dangerous distraction from the urgent 
national goal of extending affordable, quality health coverage to all.
  

                                  
