[Senate Hearing 108-143]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-143
 
                            HEALTH INSURANCE
=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                      MAY 14, 2003--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
SAM BROWNBACK, Kansas                MARY L. LANDRIEU, Louisiana
                    James W. Morhard, Staff Director
                 Lisa Sutherland, Deputy Staff Director
              Terrence E. Sauvain, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
JUDD GREGG, New Hampshire            ERNEST F. HOLLINGS, South Carolina
LARRY CRAIG, Idaho                   DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          HARRY REID, Nevada
TED STEVENS, Alaska                  HERB KOHL, Wisconsin
MIKE DeWINE, Ohio                    PATTY MURRAY, Washington
RICHARD C. SHELBY, Alabama           MARY L. LANDRIEU, Louisiana
                           Professional Staff
                            Bettilou Taylor
                              Jim Sourwine
                              Mark Laisch
                         Sudip Shrikant Parikh
                             Candice Rogers
                        Ellen Murray (Minority)
                         Erik Fatemi (Minority)
                      Adrienne Hallett (Minority)

                         Administrative Support
                             Carole Geagley













                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening statement of Senator Arlen Specter.......................     1
Opening statement of Senator Tom Harkin..........................     2
Opening statement of Senator Larry Craig.........................     3
Statement of Ken Weinstein, owner, Cresheim Cottage Cafe and 
  Trolley Car Diner, Philadelphia, PA............................     4
    Prepared statement...........................................     6
Statement of Paul Burrow, Teacher, Oskaloosa, IA.................     7
    Prepared statement...........................................     9
Statement of Leo W. Gerard, international president, United 
  Steelworkers of America........................................    10
    Prepared statement...........................................    13
Statement of Charles Kurilko, LTV worker.........................    12
Statement of John F. Diedrich, vice president, Employee Health 
  and Benefits, Exelon Corporation...............................    16
    Prepared statement...........................................    17
Statement of Jack Hadley, Ph.D., principal research associate, 
  Urban Institute................................................    19
    Prepared statement...........................................    21
  


















                            HEALTH INSURANCE

                              ----------                              


                        WEDNESDAY, MAY 14, 2003

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 9:33 a.m., in room SD-124, Dirksen 
Senate Office Building, Hon. Arlen Specter (chairman) 
presiding.
    Present: Senators Specter, Craig, and Harkin.


               opening statement of senator arlen specter


    Senator Specter. Good morning, ladies and gentlemen. The 
Appropriations Subcommittee on Labor, Health and Human Services 
and Education will now proceed.
    We have a hearing today which will focus on health care 
access and affordability and its impact on the economy. This 
hearing has been suggested by Senator Tom Harkin, and I credit 
my distinguished colleague for his leadership in this important 
field. As I have said so often, when Senator Harkin and I are 
chairman and ranking, and we have passed the gavel back and 
forth on a number of occasions, it is a seamless exchange. We 
have put into practice a principle which I think needs more 
application in Washington, and that is, if you want to get 
something done in Washington, you have to be willing to cross 
party lines. Health care knows no party line, nor does 
education, nor does worker safety. So we have made a point of 
that.
    I have other commitments this morning. We have Secretary 
Rumsfeld coming into the Defense Appropriations Subcommittee, 
and I am going to excuse myself in a few moments, but I did 
want to open the hearing and welcome our distinguished panel: 
Mr. Leo W. Gerard, the International President of the United 
Steelworkers of America; Mr. John F. Diedrich, the Vice 
President of Employees' Health and Benefits for Exelon; Dr. 
Jack Hadley, Principal Research Associate in the Urban 
Institute; and Mr. Paul Burrow, a teacher at Oskaloosa Senior 
High School in Iowa. It is amazing how so many Iowans turn up 
on our witness list, and Pennsylvanians.
    Mr. Ken Weinstein, a small business owner in Philadelphia, 
Pennsylvania, just maintaining some balance here between Iowa 
and Pennsylvania.
    Now I yield to my distinguished colleague, Senator Harkin, 
who will conduct the hearing.


                opening statement of senator tom harkin


    Senator Harkin [presiding]. Thank you very much, Mr. 
Chairman, for having this hearing. We had one earlier and this 
one. I think we have one more in this series on health care 
affordability and access to health care.
    I just want to echo the chairman's remarks that we have 
passed this gavel back and forth now going back almost 13 
years, and it has been, as he has said so many times, a 
seamless transfer. We may be of different parties, but we both 
have worked diligently and hard to address the health care 
needs of this country. And I am very appreciative of the 
leadership that Senator Specter has given to this committee 
over all these years, both as ranking member sometimes and now 
as chairman.
    Again, I want to thank you, Mr. Chairman, for calling this 
hearing and for letting us get these witnesses here to again 
look at this issue that is bedeviling so many people in this 
country. As I see it, it has just gotten so much worse over the 
last couple of years.
    In the hearing today, we are going to focus on our 
businesses, school districts, our workers, labor, the overall 
economy. I have held roundtable discussions on this around the 
State of Iowa and heard from families, businesses. It just 
tears your heart out when you talk to some of these people. I 
do not know Mr. Weinstein's business, but we had a small 
business in Iowa. I remember the last roundtable discussion--I 
had a guy employed 55 people, and 10 years ago he covered 
everyone with health care for the workers and their families. 
The cost kept going up, so he had to cut back. Then he just 
covered the workers. He could not cover the families, and then 
the deductibles kept going up all the time. Now he is to the 
point where he cannot even afford to cover the workers even 
with high deductibles. He told me, he said, remember, I employ 
55 people and these are the same people my kids go to school 
with, the people I go to church with, the people I sit on the 
school board with. They are not just my workers. They are sort 
of my neighbors. And he said, I have had to tell them I cannot 
do this anymore.
    We have had premiums going up. I have seen some businesses 
have a 30 percent increase in annual payments. Let me show one 
chart here on the school districts in Iowa. This is one that 
popped up that I had not even thought about. We have school 
districts in Iowa with premium increases of over 50 percent. We 
had one, Eddyville/Blakesburg. I just happen to know that area. 
It is a small school district. 61.5 percent increase in 1 year. 
There is Mediapolis, 58 percent in 1 year. Van Buren, 57.4 
percent. Twin Cedars, 61.5 percent. Heck, I think the least is 
around 33.7 percent. That is just in 1 year, an increase for a 
school district.
    As the superintendent who gave me these figures from his 
district said to me, when we have to do that, most of our money 
goes for salaries, teachers. So if we have to pay this on 
health care, we have to keep the teachers' salaries down. Now, 
if we keep the teachers' salaries down, the teachers go 
someplace else. So if we want to keep the salaries up, we do 
not give them health care. Then the teachers go someplace else. 
He said, either way, we are just losing on this.
    It is not just in Iowa. I know it is happening in other 
States too.
    The health care system right now. We spent $1.4 trillion in 
2001, 14 percent of GDP. That is a big enough problem, but by 
2012, we are supposed to go up to 17 percent of GDP. That is 
the projected track we are on right now. We spend nearly double 
per person in other countries, but many of them have higher 
life expectancies and healthier populations than we do.
    I have talked to my friends in labor, and I am proud that 
Mr. Gerard is here, a good friend, and President of the United 
Steelworkers of America. My friends in labor said this is their 
biggest single issue now in terms of the negotiations and what 
they are going to do about health care. And what about the 
retirees who have been promised, because of contracts long ago, 
that they were going to get health care, but now companies are 
finding it necessary to renege on that. I cannot blame the 
companies. They have got a bottom line too, but the health care 
thing has gone out of sight. So what happens when a retired 
person who has been promised health care benefits all of a 
sudden wakes up one morning and they do not have them? They 
cannot go out and buy insurance. They are 70 years old, 72. 
They cannot get any insurance that they can afford.
    So it is just hitting all parts of our economy, small 
businesses, bigger businesses. It is just pervasive. It is 
hitting everyone. And that is why we are having these hearings 
as a subcommittee that is involved with funding of health care 
in America. Both Senator Specter and I felt it was important to 
have these hearings to draw this out more and to get more data 
and more information.
    I see my esteemed colleague from Idaho is here, and I would 
be glad to recognize Larry for any opening comment or statement 
he might have. Senator Craig.


                opening statement of senator larry craig


    Senator Craig. Tom, thank you very much. I will be brief. 
We have the gentlemen with the testimony and knowledge before 
us, and that is our purpose here.
    I wear another hat, besides serving on this subcommittee of 
appropriations, and that is I am chairman of the Special 
Committee on Aging. And we have spent a good deal of time 
looking at accessibility of health care and how we deal with it 
in our country.
    It is obvious to me there is no single silver bullet that 
solves our problem, that we are now experiencing an 
accumulation of successes in a dynamic economy known as health 
care and failures on the part of the political system to 
respond to some of the problems. As a result of that, we are at 
or near crisis when it comes to access and affordability of 
something that most Americans have come to expect is their 
right to have. As a result of that, we have got some 
substantial problems, Mr. Chairman.
    I do call him my chairman because off and on he is.
    Senator Harkin. He is my chairman too.
    Senator Craig. But I find it fascinating that we are unable 
to respond. Now States are having to respond to the issue of 
tort reform. It cannot go unspoken in this forum. My State of 
Idaho this year finally said enough is enough, and they capped 
punitive damages. And that will begin to slow the cost of 
insurance to providers.
    I am told that in the State of Nevada, for an OB-GYN it is 
$250,000 in premium, and just across the line in California it 
is $50,000. Now, somebody has to pay for that if that 
practitioner is going to expose himself or herself to the 
market, and the consumer pays ultimately in the end, or fails 
to have access. That is one and only one issue.
    I should not just pick on the trial lawyers, but this 
Congress refuses to respond to that issue. We struggle with it. 
Why? Because of the politics of it.
    We refuse to respond to the issue of the dynamics of a 
pharmaceutical industry that is really providing lifesaving, 
life-enhancing drugs to the American consumer, and at the same 
time, we have assumed that they can advertise and drive a 
market beyond its normalness. Tom Harkin and I have spent a lot 
of time on the issue of generics and other kinds of things that 
have application.
    There are a lot of things to be looked at that are an 
accumulation of the current health care system in our country 
and its costs and the issue of access. So I look forward to 
comments today.
    My great fear--I just did a hearing on Medicare versus the 
Federal health care system. Anywhere from 15 to 20 dynamic 
insurance companies providing programs and adjusting and 
competing for the Federal employees' paycheck, and on the other 
side of it, a system with a monstrous bureaucracy that Congress 
has set limits in and tried to micromanage. So we take a whole 
Federal health care system with 8 million people in it and run 
it with 120 people versus Medicare that now has a bureaucracy 
of 5,000 employees and thousands of pages of regulation.
    Is there a lesson to be learned here? I would hope. The 
problem is we have not learned it. Your information today and 
your testimony may assist us in this process. Thank you.
    Senator Harkin. Thank you, Senator Craig.
STATEMENT OF KEN WEINSTEIN, OWNER, CRESHEIM COTTAGE 
            CAFE AND TROLLEY CAR DINER, PHILADELPHIA, 
            PA
    Senator Harkin. Again, I thank all the witnesses for being 
here today. We will start. I will just go from Mr. Weinstein, 
left to right. We will just go across. I will introduce Mr. Ken 
Weinstein who is a small business owner in Philadelphia, 
Pennsylvania, where he runs the Cresheim?
    Mr. Weinstein. Yes, Cresheim.
    Senator Harkin. Cresheim Cottage Cafe and the Trolley Car 
Diner. He received his bachelor's degree from the University of 
Delaware and his master's degree from the University of 
Pennsylvania.
    All of your statements will be made a part of the record in 
their entirety. Mr. Weinstein and others, if you could look at 
that clock here and try to keep it to 5-7 minutes or so, 
something like that, and then we can get into a discussion 
afterwards, I would appreciate it. Mr. Weinstein, welcome.
    Mr. Weinstein. Thank you, Senator Harkin. Good morning, 
Senators, ladies and gentlemen, thank you for the opportunity 
to present you with information about health care costs and 
accessibility and how it impacts my small businesses and 
employees.
    My name is Ken Weinstein. As Senator Harkin said, I own two 
restaurants in Philadelphia, Cresheim Cottage Cafe and Trolley 
Car Diner in the Mt. Airy section, not far from where Senator 
Specter and his wife live in East Falls.
    I am proud to be able to provide jobs to more than 80 
people in my community. Like many small business owners, I live 
near my businesses. I am very involved in my community and I 
have strong personal connections to many of my staff, as you 
mentioned in the example of another small business owner 
before.
    I consider myself a fairly typical small business owner 
with simple beliefs. On a daily basis, I balance the priorities 
of making a reasonable profit with treating my employees right. 
Lately this has been less than easy. The economy is down. Our 
revenues are down, and our costs, led by high insurance rates, 
are up.
    When I first opened Cresheim Cottage Cafe 8 years ago, we 
did not think twice about covering all of our managers and 
chefs. We were able to buy top of the line Blue Cross/Blue 
Shield coverage for single people for less than $150 per month. 
And what great coverage. They had $2 co-pays for doctor's 
visits, no network, and a full prescription plan. And we were 
able to enroll our cooks, dishwashers, servers and bussers in a 
basic health plan for just $60 a month, coverage that just no 
longer exists today.
    Now I am able to only cover half of my managers at more 
than $280 per month for single coverage, and worse, to control 
costs, we had to drop Blue Cross/Blue Shield to go with a lower 
quality health insurance company that pushes us into a network. 
Co-pays for doctor visits have increased from $2 to $10 per 
visit and prescriptions from $5 to $35. And all these added 
expenses came with an 87 percent increase in enrollment costs 
over an 8-year period.
    At the Cottage, health care coverage for managers used to 
be automatic. Now it is negotiated as part of the compensation 
package. At the Cottage, we used to automatically be able to 
renew our policies each year. Now I am forced to price out our 
policies each year, creating a lot of employee fear that the 
new policy is not going to cover a specific doctor or situation 
that they have. At the Cottage, this is the last year that we 
will be able to provide 100 percent coverage for our managers. 
Next year managers will be asked to pay into their health care 
costs.
    When the Trolley Car Diner opened just 3 years ago, we 
covered our managers for $584 per month for family health care. 
Each year since, we have lessened our coverage, offering our 
employees higher deductibles, higher co-pays, and less 
flexibility. On January 1 of this year, we paid more than $800 
per month for lesser family coverage.
    I think this is one of the most telling things. On February 
1 of this year, the Diner's health insurance rates were 
increased by 61 percent. When I called the company to ask why, 
because I assumed there was a mistake, they told me that one of 
my managers had a back problem and charged $3,900 for doctor's 
care for the year. I would understand their response except 
that we paid in well over $10,000 for the year. When I called a 
second time and said there must be, again, some kind of 
mistake, he said, no mistake. He said their company just saw 
Trolley Car Diner as a future health care risk and the rates 
would stand.

                           prepared statement

    I do not know the solution to our current health care 
crisis. Some of the solutions were mentioned here before, and 
obviously there is more than one. But I do recognize the 
problem. We are paying more and more for less and less 
coverage. I am frustrated. My employees are frustrated, and my 
employees' families are frustrated. The current crisis is 
hurting my employees and hurting my businesses. We do not need 
tax cuts. We need a better quality of life for our cities and 
the working people who live there.
    [The statement follows:]
                  Prepared Statement of Ken Weinstein
    Good morning, Mr. Chairman, Senators, Ladies and Gentlemen: Thank 
you for the opportunity to present you with information about health 
care costs and accessibility and how it impacts on my small businesses 
and employees.
    My name is Ken Weinstein and I own two restaurants, Cresheim 
Cottage Cafe and Trolley Car Diner in the Mt. Airy section of 
Philadelphia, not far from where Senator Specter and his wife live. I 
am proud to be able to provide jobs to more than 80 people in my 
community.
    Like many small business owners, I live near my businesses. I am 
very involved in my community and I have strong personal connections to 
many of my staff.
    I consider myself a fairly typical small business owner with simple 
beliefs. On a daily basis, I balance the priorities of making a 
reasonable profit with treating my employees right. Lately, this has 
become less than easy. The economy is down. Our revenues are down. And 
our costs, led by health insurance rates, are up!
    When I first opened Cresheim Cottage Cafe 8 years ago, we didn't 
think twice about covering all of our managers and chefs. We were able 
to buy ``top of the line'' Blue Cross/Blue Shield single coverage for 
less than $150 per month. And what great coverage: $2 co-pays for 
doctor's visits, no network and with a full prescription plan!
    And we were able to enroll our cooks, dishwashers, servers and 
bussers in a basic health plan for just $60 per month--coverage that no 
longer exists today.
    Now, I am able to only cover half of our managers at more than $280 
per month for single coverage. And worse, to control costs, we had to 
drop Blue Cross/Blue Shield to go with a lower quality health insurance 
company that pushes us into a network. Co-pays for doctor's visits has 
increased from $2 to $10 per visit and prescriptions from $5 to $35. 
And all these added expenses came with an 87 percent increase in 
enrollment cost.
    At the Cottage, health care coverage for managers used to be 
automatic. Now it is negotiated as part of the compensation package.
    At the Cottage, I used to automatically renew our policy each year. 
Now, I am forced to price out health insurance each year creating 
uncertainty and employee fear that the new policy will not cover their 
specialized doctor or situation.
    At the Cottage, this is the last year that we will provide full 100 
percent coverage for our managers. Next year, managers will be asked to 
pay in for their health coverage.
    When Trolley Car Diner opened just three years ago, we covered our 
managers for $584 per month for family health care. Each year since, we 
have lessened our coverage, offering our employees higher deductibles, 
higher co-pays and less flexibility. On January 1 of this year, we 
payed more than $800 per month for inferior family coverage.
    On February 1 of this year, the Diner's health insurance rates were 
increased by 61 percent. When I called the company to ask why, I was 
told that one of my managers who had a back problem, spent $3,900 for 
doctor's care. The company's response is understandable except that we 
paid more than $10,500 to the health insurance company during the year. 
I was assured by a different person at the company that it was not a 
mistake. They just saw us as a future health care risk.
    I don't know the solution to our current health care crisis. But I 
do recognize the problem. We are paying more and more for less and less 
coverage. I am frustrated, my employees are frustrated and my 
employees' families are frustrated.
    The current crisis is hurting my employees and hurting my 
businesses. We don't need tax cuts. We need a better quality of life 
for our cities and the working people who live there!

    Senator Harkin. Mr. Weinstein, thank you very much for a 
very powerful statement.
    It would be my intention to go through, Larry, all of them. 
Then we will come back with questions.
STATEMENT OF PAUL BURROW, TEACHER, OSKALOOSA, IA
    Senator Harkin. Next we go to Paul Burrow, teacher at 
Oskaloosa Senior High School in Oskaloosa, Iowa. Did I have 
that on that chart? Yes, I did.
    Mr. Burrow. On the top.
    Senator Harkin. Oskaloosa, 35.9 percent.
    He helped to establish the Iowa State Employee Benefits 
Association and has served on the board of directors for 3 
years and the past 2 as its chair. Mr. Burrow received his 
bachelor's and master's degrees from Drake University. Mr. 
Burrow, welcome and please proceed.
    Mr. Burrow. Thank you. I appreciate this opportunity to 
appear before you. Senators and ladies and gentlemen, my name 
is Paul Burrow. I have been a Spanish and social studies 
teacher at Oskaloosa Senior High School for the past 25 years, 
and I also serve as the Chair of the board of directors for the 
Iowa State Employees Benefits Association. I will refer to it 
as ISEBA, which is a joint effort between the Iowa Association 
of School Boards and the Iowa State Education Association to 
provide the best health insurance and other benefits at the 
lowest possible price for Iowa's public school employees.
    The message that I want to bring to you today is that 
health insurance costs have risen to a level where they are 
seriously impacting school resources and are detrimentally 
affecting the quality of the education our children are 
receiving.
    To understand this, I invite you to go back to the mid-
1980s. I was a young negotiator at the time and while we dealt 
with any number of issues, health insurance never came up. In 
fact, during my first years of negotiating, we never even 
included health insurance costs in our discussions.
    That is ancient history. In the past 7 to 8 years, we never 
begin seriously to negotiate until we know what the increase in 
health insurance premiums will be. In other words, the cost of 
health insurance is now controlling our negotiations. And it is 
not hard to understand why.
    Last year the teachers in Oskaloosa effectively took no 
increase in salary so they could pay for a 19 percent increase 
in insurance premiums. This year the rate of increase was 35.5 
percent. Just 2 years ago, family health insurance cost my 
district just over $5,000 per year per teacher. Next year that 
same insurance will cost my district over $10,000. If health 
insurance premiums continue to increase at the rate they have 
been in recent years, by 2008, the family health insurance 
benefit will cost the district more than a beginning teacher's 
salary. Health insurance benefits now account for over 14 
percent of Oskaloosa's school budget. Just 3 years ago, those 
benefits accounted for only 9.5 percent of our budget. By 
having to allocate more and more funds to health insurance, 
this has significantly impacted the ability of our school 
district to recruit and retain quality teachers and maintain 
quality programs for our students.
    Oskaloosa is not alone in its struggle to deal with rising 
health insurance costs. In the Twin Cedars and Nashua School 
Districts, the cost of family health insurance already equals 
the salary of a beginning teacher. Across the State of Iowa, 
teachers have for years taken home less pay each year in order 
to pay for increasing health insurance premiums.
    We have attempted to deal with the situation. This is the 
reason why ISEBA was formed. ISEBA pays 91.5 cents of every 
premium dollar for health care claims. It is lean and 
efficient. But in an economy that saw less than 4 percent 
inflation last year, when we met to set our rates, we started 
with a 15 percent increase because that is the conservative 
estimate of what inflation will be in the health care field. 
When we settled on increases that would be passed on to our 
school districts, I made the observation that negotiations were 
going to be extraordinarily difficult this year.
    Bill Thompson, the superintendent of the Williamsburg 
District, who also serves on ISEBA's board of directors agreed 
with me. But he also observed that what this really meant was 
our school boards would be forced to lay off teachers and 
teacher associates, class sizes would increase, the purchase of 
much-needed school supplies would once again be postponed to 
another year, and ultimately the quality of our children's 
education would be short-changed. He is exactly right. Last 
year Iowa lost 492 full-time teaching positions. And the result 
is fewer opportunities for our students.
    Health insurance is a necessity in our society. Many of the 
people with whom I work are working in the public schools 
simply because they need health insurance. And yet, the very 
thing for which they are working is being priced beyond their 
reach. Oskaloosa has been forced to shift more cost to 
employees and to place a cap on lifetime health insurance 
benefits. This was done in the hope of somehow putting the 
brakes on runaway health insurance costs.
    This scenario has been repeated across the State of Iowa 
and across this Nation. In order to maintain any sort of health 
insurance, teachers and other school employees are shouldering 
more and more of the risk, taking home less and less in their 
paychecks. School districts across the State and across the 
Nation have had to reduce the numbers of teachers, nurses, 
counselors, support staff in order to pay for the health 
insurance premiums of their employees. And because of this, the 
employees are not the only ones who are short-changed. The 
students throughout the United States are the ultimate losers 
in a contest in which there seem to be few, if any, winners.

                           prepared statement

    Rising health care costs is the single most important 
factor jeopardizing the ability of school districts to maintain 
quality educational programs. This situation is not unique to 
Iowa. During a time of fiscal crises in the States and 
additional expectations of the schools imposed by the new 
Federal education legislation, the Federal Government must seek 
solutions for this problem. Only then will our schools be able 
to concentrate on the mission of helping all students learn.
    Thank you.
    [The statement follows:]
                   Prepared Statement of Paul Burrow
    Mr. Chairman and Honorable Senators: Thank you for the opportunity 
to appear before you. My name is Paul Burrow. I have been a Spanish and 
Social Studies teacher at Oskaloosa Senior High School for the past 25 
years. I also serve as the chair of the Board of Directors of the Iowa 
State Employee's Benefits Association (ISEBA), which is a joint effort 
between the Iowa Association of School Boards and the Iowa State 
Education Association to provide the best health insurance and other 
benefits at the lowest possible price for Iowa's public school 
employees.
    The message I want to bring to you today is that health insurance 
costs have risen to a level where they are seriously impacting school 
resources--and are detrimentally affecting the quality of the education 
our children are receiving.
    To understand this, I invite you to go back to the mid-1980's. I 
was a young negotiator at the time. And, while we dealt with any number 
of issues, health insurance never came up. In fact, during my first 
years of negotiating we never even included the cost of health 
insurance in our discussions.
    That is ancient history. In the past 7 to 8 years we never begin 
seriously to negotiate until we know what the increase in health 
insurance premiums will be. In other words, the cost of health 
insurance is now controlling negotiations. It's not hard to understand 
why. Last year the teachers in Oskaloosa effectively took no increase 
in salary so they could pay for a 19 percent increase in insurance 
premiums. This year the rate increase was 35.5 percent. Just two years 
ago, family health insurance cost my district just over $5,000 per year 
per teacher. Next year, that insurance will cost my district over 
$10,000. If health insurance premiums continue to increase at the rate 
they have been in recent years, by 2008 the family health insurance 
benefit will cost the district more than a beginning teacher's salary. 
Health insurance benefits now account for over 14 percent of 
Oskaloosa's school budget. Just three years, those benefits accounted 
for only 9.5 percent of our budget. By having to allocate more and more 
funds to health insurance, this has significantly impacted the ability 
of our school district to recruit and retain quality teachers and 
maintain quality programs for our students.
    And, Oskaloosa is not alone in its struggle to deal with rising 
health insurance costs. In the Twin Cedars and Nashua School Districts 
the cost of their family insurance already equals the salary of a 
beginning teacher. Across the state of Iowa, teachers have for years 
taken home less pay each year in order to pay for increasing health 
insurance premiums.
    We have attempted to deal with the situation. This is the reason 
why ISEBA was formed. ISEBA pays 91 cents of every premium dollar for 
health care claims. It is lean and efficient. But, in an economy that 
saw less than 4 percent inflation last year, when we met to set our 
rates we started with a 15 percent increase because that is the 
conservative estimate of what inflation will be in the health care 
field. When we settled on the increases that would be passed on to our 
school districts, I made the observation that negotiations were going 
to be extraordinarily difficult this year. Bill Thompson, the 
Superintendent of the Williamsburg District, who also serves on ISEBA's 
Board of Directors, agreed with me, but also observed that what this 
really meant was our School Boards would be forced to lay off teachers, 
and teacher associates; class sizes would increase; the purchase of 
much needed school supplies would once again be postponed to another 
year; and ultimately the quality of our children's education would be 
shortchanged. He is exactly right. Last year Iowa lost 492 full time 
teaching positions. The result is fewer opportunities for our students.
    Health insurance is a necessity in our society. Many of the people 
with whom I work are working in the public schools simply because they 
need health insurance. And, yet, the very thing for which they are 
working is being priced beyond their reach. Oskaloosa has been forced 
to shift more cost to employees, and to place a cap on lifetime health 
insurance benefits. This was done in the hope of somehow putting the 
brakes on runaway health insurance costs. This scenario was repeated 
across the state of Iowa--and across this nation. In order to maintain 
any sort of health insurance, teachers and other school employees are 
shouldering more and more of the risk and taking home less and less in 
their paychecks. School Districts across the state and across the 
nation have had to reduce the number of teachers, nurses, counselors, 
and support staff in order to pay for the health insurance premiums of 
their employees. And, because of this, the employees are not the only 
ones who are shortchanged. The students throughout the United States 
are the ultimate losers--in a contest in which there seem to be few, if 
any, winners.
    Rising health care costs is the single most important factor 
jeopardizing the ability of school districts to maintain quality 
educational programs. This situation is not unique to Iowa. During a 
time of fiscal crises in the states and additional expectations on the 
schools imposed by the new federal education legislation, the federal 
government must seek solutions for this problem. Only then will our 
schools be able to concentrate on the mission of helping all students 
learn.

    Senator Harkin. Thank you very much, Mr. Burrow. I had not 
read your testimony before, but it corresponds with what I had 
heard from the superintendent of schools down in Ottumwa I 
think it was that gave me that information.
STATEMENT OF LEO W. GERARD, INTERNATIONAL PRESIDENT, 
            UNITED STEELWORKERS OF AMERICA
ACCOMPANIED BY CHARLES KURILKO

    Senator Harkin. Next we go to Mr. Leo Gerard, a good 
friend, president of the United Steelworkers of America. Mr. 
Gerard has worked hard in the last couple of years since 
assuming his position to implement new health and safety 
programs to eliminate unsafe working conditions. Mr. Gerard, I 
am told, was recently awarded an honorary Doctorate of Laws 
degree from Laurentian University. As I note, you are 
originally from Canada.
    Mr. Gerard. Yes, sir.
    Senator Harkin. Well, now this could be interesting.
    Mr. Gerard. It should be fun.
    Senator Harkin. Welcome, Leo, and please proceed.
    Mr. Gerard. Thank you. I want to try to use my time, and 
with the permission of the Chair and Senator Craig, I would 
like to ask a colleague to take at least a minute of my time.
    Senator Harkin. Absolutely.
    Mr. Gerard. I want to try to put this in two chunks. One 
is, first of all, that the crisis in health care is really a 
human crisis, and second, it is a competitive crisis for 
American manufacturing and I am not sure enough attention has 
been paid to both of those individually or together.
    Let me just regurgitate a few facts. In the period from the 
year 2000 to the end of 2002, 400 firms in the United States 
with capitalization of $100 million or more went into Chapter 
11 bankruptcy. Thirty-seven of those were steel companies. Of 
those steel companies, 250,000 retirees have lost their health 
care and/or, in addition to that, have had their pension 
benefits substantially reduced by the PBGC who seized their 
pensions.
    We have had 13 years of growing trade deficits in this 
country with each year setting a record over the last year 
which has resulted in close to 2.7 million jobs being lost in 
the last 27 months, of which over 2 million of those are 
manufacturing jobs. I only raise that to put it in the context 
that health care is a driving factor in a so-called global 
economy where the playing field is already unlevel. And because 
of our employer-based health care system, Wilbur Ross, a now 
high-profile Wall Street financier, in his business 
acquisitions--and he has been doing them in steel and other 
industries--has said that the average American manufacturing 
firm in the global economy, because of our employer-based 
health care system, starts off with an average 10 percent 
disadvantage against the rest of the industrialized world. That 
is almost incomprehensible that we would tolerate that as a 
Nation.
    On top of that, when we talked, as Senator Craig, about 
administrative costs, with my experience in Canada, let me tell 
you that the Canadian health care system is in a crisis as 
well. The Canadian Government is really concerned that it has 
now reached 10 percent of GDP, and they are really, really 
upset that we are spending close to 4 percent of that on 
administrative costs in Canada.
    To put it in perspective, nobody argues anymore that 14 
percent of GDP is the cost in America. Some of us think it is 
closer to 14.5 percent. And no one argues very much with saying 
that somewhere between 20 and 25 percent of the cost of 
administering the system is administrative costs in America. So 
not only are we hamstrung with a system that disadvantages 
corporations, we in fact have more waste.
    Senator Harkin. Can I interrupt you there, Leo? You said 
that in Canada it is 4 percent?
    Mr. Gerard. 3 to 4 percent of the health care system is 
administration.
    Senator Harkin. 4 percent of the cost.
    Mr. Gerard. Yes.
    Senator Harkin. And here it is how much?
    Mr. Gerard. Between 25 and 30 percent we are told.
    Senator Harkin. That is in administration?
    Mr. Gerard. Yes.
    Senator Harkin. I had not heard those figures.
    Mr. Gerard. I can tell you that I belong to a plan. In 
fact, I put us all in it. We are now in a PPO like everyone 
else, and I get at least five mailings from my health care 
provider and I have to go through about three doors before I 
can get to see a doctor. That costs money. They send me bills 
to tell me this is not a bill. It is just they want to inform 
me. I do not want to waste my time on my little stories.
    Let me just say again America is the only industrialized 
nation on earth that has an employer-based health care system, 
and you are going to hear in a minute from one of my friends 
about how an employer-based health care system puts your life 
at risk when your employer goes bankrupt. And when that 
employer goes bankrupt as a result of years of illegal trade 
activity or it goes bankrupt as a result of becoming more 
productive--and this is the catch-22. I could argue this with a 
lot of folks who do not understand the steel industry.
    During the 15 years prior to the steel crisis, our union 
and the steel industry bargained $60 billion of modernization 
in those mills. The trap that they are in is as the mill gets 
more modern, you make the same amount of steel with less 
people, so people leave the mill, which ends up that you have a 
ratio of, in some cases, eight or nine retirees to every active 
worker, which drives up your cost.
    At Bethlehem Steel, prior to Bethlehem's bankruptcy, 
Bethlehem was spending $225 million to $250 million a year for 
retiree health care. U.S. Steel is spending almost that same 
amount. In fact, if we look at some of the statistics that we 
have seen recently, you will find that the more productive a 
manufacturing firm becomes, on top of the factors that are 
already on your chart, Senator, they get the additional burden 
of having more retirees.
    For General Motors, they are believing that their cost for 
their retiree health care this coming round will be somewhere 
between $3.5 billion to $5 billion a year.
    This system is paralyzing American manufacturing, and on 
top of that, the system now has identified that close to 79 
million Americans went without health care sometime in the last 
18 months--45 million to 49 million--you never know exactly 
what the statistics are. Other statisticians will be more 
capable than me at this--are permanently without health care.
    I will be more than happy to provide you with an analysis 
of the health care system that we did, but what strikes out at 
you is that close to 35 percent of Hispanics have no health 
care. Close to 26 percent of African Americans have no health 
care. Close to 70 percent of people making under $20,000 have 
no health care. I would not want to use the terms that would be 
used to say what kind of system that looks like, but it is very 
clear that the system is broken.
    I would like to relinquish a minute to my colleague, Chuck 
Kurilko. Chuck worked in the steel mill for 37 years and his 
story is a gut-wrenching story that I think needs to be heard 
by this subcommittee and hopefully you will get to pass it on 
to your colleagues. Chuck, why don't you take a minute?
    Senator Harkin. Chuck, just identify yourself here for the 
recorder.

                STATEMENT OF CHARLES KURILKO, LTV WORKER

    Mr. Kurilko. I am Charles Kurilko. I worked 37 years at 
LTV, and I want to thank everybody that let me tell you my 
situation.
    I worked 37\1/2\ years, and changing shifts for 30 of them 
and working days maybe 7. And my doctor is telling me doing all 
that over them years caused some of my health problems. So I 
retired in November with the health cost of $184 a month and my 
pension was $2,400 and some change a month.
    In January my insurance went up from $114 to $185. It was 
how everybody's insurance is going up. January and February 
that was my rate. In March--and I think we have a world-class 
steel mill I was working at--it went completely bankrupt, put 
my pension into Government guarantee, dropped my pension from 
almost $2,500 down to about $1,500, and my insurance went up to 
$1,305 a month. It is traumatic. I had a hard time, but over 
the months I was okay. $1,305, over half my pension going to my 
insurance.
    Then come January, and I was informed my insurance was 
going to be $2,864 a month, which if I paid that for a year, my 
whole life savings would have been gone. So I could not afford 
to pay that, so I went without insurance for the last 4 months, 
finding a sub-insurance of paying out $640 a month with no 
prescriptions. And unfortunately or fortunately, I buy most of 
my prescriptions now from Canada, which is sad, but there is a 
savings.
    So that is my story. It was like a death sentence. When 
they told me $2,864, I could not believe it. I did search and 
finally found insurance, but it has been traumatic for me and 
my wife. She wanted insurance because if something happens, we 
lose everything I have ever worked for. So that is my story and 
how insurance has affected my life.
    I want to thank everybody for letting me tell you my 
situation.
    Senator Harkin. Well, Mr. Kurilko, thank you very much. I 
did not see this, but I see your story was also put in the Wall 
Street Journal.
    Mr. Kurilko. Yes.
    Senator Harkin. Just today. No 2 days ago.
    Mr. Kurilko. Monday.
    Senator Harkin. I may have some more questions for Mr. 
Kurilko later on.
    Mr. Kurilko. Yes. If anybody wants anything later, I would 
be more than glad to answer some questions.

                           prepared statement

    Mr. Gerard. Let me just close by saying Chuck was 
highlighted, but Chuck's story--I can bring you 20,000 of them. 
The system is broken. People that have given their lives and 
played by the rules should not have this happen to them in 
their retirement years. It is just wrong.
    So I will leave it for questions.
    [The statement follows:]
                    Prepared Statement of Leo Gerard
    Thank you Chairman Specter and Ranking Member Harkin for inviting 
me to testify today on the issue of health care and the crisis in 
manufacturing. Since becoming President of the United Steelworkers of 
America in 2001, I have made health care a top priority for the union, 
because the rising cost of health care has contributed to the 
precipitous decline in the American manufacturing sector.
    Since January 2001, the American economy has lost 2.7 million 
private sector jobs, including more than 2 million manufacturing jobs. 
Just last month, April 2003, the U.S. economy shed 95,000 manufacturing 
jobs, causing the national unemployment rate to rise from 5.8 percent 
to 6.0 percent. The United States now employs fewer manufacturing 
workers that it did in 1961, falling to 16.25 million workers in April 
2003 from a high of 21 million in 1979.
    While unfair and illegal trade has had the most detrimental impact 
on American manufacturing, one cannot discount the negative impact of 
rising health care costs on American manufacturing. The United States 
is the only industrialized nation in the world that does not have some 
form of state-subsidized or national health care. To put it another 
way, America is the only industrialized nation on earth that places the 
overwhelming burden of health care costs squarely on firms and their 
workers. By embracing a different social and economic paradigm than the 
rest of the industrialized world, the United States has created an 
artificial comparative advantage for foreign corporations that sell 
goods in the U.S. market. Additionally, thousands of American firms 
with significant numbers of retirees have a double burden of providing 
health care coverage for both their active and retired employees, 
whereas their industrialized competitors do not carry the financial 
burden of their retired workers.
    The recent trends in the American health care system are disturbing 
and are wrecking havoc on American manufacturers and their workers. 
Average health premiums rose by 12.7 percent in 2002, 11.0 percent in 
2001 and 8.3 percent in 2000, dramatically increasing the cost of 
providing health care for employees. In 2002, the average annual 
premium for a family was $7,954, a major burden for firms contributing 
significantly to their employees' health care and competing in global 
markets. The greatest contributing factor to rising health premiums for 
workers and retirees is the skyrocketing cost of prescription drugs, 
increasing around 15 percent annually. The astronomical prices for 
prescription drugs in America.
    Over the past 15 years, while the percentage employees contributed 
for their health care stayed relatively steady, the actual dollar 
amount paid by workers in employer-sponsored plans rose dramatically 
because firms passed along rising costs to their employees. According 
to the Kaiser Family Foundation, in 1988 the average worker's 
contribution for an employer-sponsored family health plan was $52 per 
month. The average monthly contribution level rose to $122 in 1996, 
$138 in 2000 and $174 in 2002. Despite paying more for their own health 
care, working families today receive less choice than they did 15 years 
ago, with almost 95 percent of Americans in 2002 participating in 
employer-sponsored HMO, PPO, and POS plans instead of conventional 
health plans.
    Recent information indicates that this trend of increasing health 
contributions for American workers will continue in 2003 and beyond. A 
Kaiser Family Foundation study found that in 2002, 53 percent of all 
firms ranked health care as their ``greatest cost concern,'' and 65 
percent of all large firms cited health care as the ``greatest cost 
concern.'' 78 percent of firms in the KFF survey said that they would 
be ``very likely'' or ``somewhat likely'' to increase the amount their 
employees pay for health care in 2003.
    In just about every contract negotiation today, the rising cost of 
health care is a central issue, if not the most pressing or contentious 
issue. Workers at General Electric (GE) nationwide held a 2-day strike 
in 2002 to oppose the company's call for major increased worker 
contributions for health care. In my union's current negotiations with 
the Goodyear Rubber and Tire Company, health care is a major issue 
making it more difficult for both sides to come to an agreement. From 
the smallest to largest bargaining units, unions and employers are 
seeing increased health care costs erode away the wages of the workers 
and the profits of companies. Both sides are losing out in a system 
where the total necessary contribution for health care rises annually 
by 10 percent, and those who lose out the most are workers who become 
uninsured because of rising costs.
    A disappointing aspect of the American health care system is the 
growing number of uninsured Americans. While Americans spend the most 
per capita and in aggregate on health care--more than 14 percent of 
Gross Domestic Product--a recent Families USA study showed that more 
than 74.7 million Americans under the age of 65 had no health care 
insurance at some point during 2001 or 2002. Nearly four in five or 
77.9 percent of the 74.7 million uninsured Americans were connected to 
the workforce. 20.2 million or 27.1 percent of all uninsured Americans 
were under the age of 18. The study also found that the likelihood of 
being uninsured decreases with higher income, but still 15.95 million 
or 16.5 percent of people with incomes four times the poverty line or 
greater were uninsured.
    For decades the United Steelworkers of America has recognized the 
right to health care as a core right of every citizen in a democratic 
nation. The staggering number of uninsured Americans is a national 
tragedy. But USWA also concurs with other health care advocates that 
allowing more than 40 million Americans to be uninsured at any one time 
is an inefficient and illogical public policy.
    Exorbitant health care premiums and rising numbers of uninsured 
Americans are symptoms of a larger problem--that our employer-based 
health care system is broken. This is particularly the case for firms 
that are disadvantaged by the health care burden in a global economy. 
The United States must either repair its employer-based health care 
system and relieve a considerable disadvantage for American 
manufacturing firms, or the nation must abandon our current system for 
a health system similar to Canada's or other industrialized nations. 
For fairness, efficiency and the future viability of American 
manufacturing, the United States cannot continue to deny millions of 
Americans adequate health care and at the same time disadvantage 
American manufacturing firms with an increasing cost for lesser health 
services.
    In recent years, the USWA has teamed up with the steel industry in 
urging the U.S. Congress to reduce the retiree health care costs of 
American steel companies. For several reasons, including reduced 
capacity and rising productivity, there are around 600,000 steel 
industry retirees and fewer than 200,000 active steel industry 
employees. The three to one ratio of retired to active workers added 
major operating costs for older steel companies. For many of the 35 
bankrupt American steel companies with significant retiree health care 
costs, the cost of retiree health care alone can add $10 to $25 per ton 
of steel or around five to 10 percent of the market price of a ton of 
steel. Bethlehem Steel, a company that no longer exists today, spent 
$224 million or 6 percent of its overall revenue on retiree health care 
in 2002. An inadequate Medicare system that does not subsidize 
prescription drugs for America's seniors exacerbates the problem of 
rising health care costs for manufacturing firms that supplement 
Medicare for their retirees.
    Although the steel industry and the USWA offered numerous proposals 
to protect the health care of steelworker retirees and the financial 
stability of America's steel producers, more than 200,000 steel 
retirees have lost their health care benefits due to company 
liquidations and asset sales. Thousands of families have gone uninsured 
for months and even years, as a result of these health care 
terminations. Even when COBRA has been available, families lack 
insurance since COBRA coverage can cost thousands of dollars a month. 
More than 50,000 of these retirees are not yet eligible for Medicare, 
although some of them may qualify for a 65 percent advanceable, 
refundable Health Coverage Tax Credit (HCTC), created by the Trade 
Adjustment Assistance Reform Act of 2002. More than 150,000 Medicare-
eligible steelworker retirees are now in a similar position as millions 
of other seniors who must choose between basic necessities and filling 
their prescriptions.
    The rising cost of active and retiree health care for American 
manufacturers is not just a problem for steel companies. Health care is 
problem for the aluminum and tire companies where USWA members work 
hard throughout America. It is a problem in the auto and airline 
industries. It is a problem and a concern for every firm that produces 
a good and must compete in the global economy. Furthermore, it is a 
bankrupt idea to tie a worker's retiree health care to the financial 
health of his or her company, especially when our government has 
created incentives for offshore production that weaken American 
manufacturers.
    On May 12 the Wall Street Journal reported the following health 
care liabilities for major American companies, which demonstrates the 
major burden of health care:
  --General Motors--150,000 current employees and 460,000 retirees. $5 
        billion health care costs in 2002
  --Ford Motor--95,000 current employees and 107,000 retirees. $1.9 
        billion health care costs in 2002
  --United Airlines--2,000 current employees. Number of retirees 
        unavailable. $151 million health care costs in 2002.
  --US Airways--28,840 current employees and 9,867 retirees. $55 
        million health care costs in 2002.
  --U.S. Steel--20,351 current employees and 88,000 retirees. $212 
        million health care costs estimated for 2003.
  --A.K. Steel--10,300 current employees and 32,000 retirees. $149 
        million health care costs in 2002.
    Last year, I worked with my fellow industrial union presidents of 
the AFL-CIO to create an Industrial Union Council (IUC) to 
cooperatively address issues like health care, trade, and labor law 
reform. Together we are promoting a health care agenda that will reduce 
the cost of health care for retirees and working Americans. We are 
promoting an agenda that rewards corporations for providing active and 
retiree health care, and levels the playing field for American 
companies competing in global marketplace. Our health care agenda 
includes the following:
  --A Medicare prescription drug program that provides a generous 
        benefit to all seniors. The drug program must be within the 
        Medicare system and provide a subsidy to firms that already 
        provide a prescription drug benefit to retired employees.
  --Increased subsidies for employers who offer comprehensive health 
        care coverage to their employees, especially companies that 
        cover older pre-Medicare-eligible individuals.
  --Expanded and improved tax credit for trade-affected laid-off 
        workers and pre-Medicare-eligible Pension Benefit Guaranty 
        Corporation recipients.
    Chuck Kurilko, who lost his health care when LTV liquidated in 
2002, takes 18 prescription medicines to treat his diabetes, heart 
condition and other health problems. His wife Carolyn takes 8 
prescription drugs, and overall the couple spends around $800 to $900 
out of pocket every month. Kurilko's pension was reduced from $2,500 a 
month to $1,500 a month, and he could not purchase COBRA because it 
would have cost him $2,864 per month. Kurilko and his wife skip 
prescriptions and recently have turned to a Canadian service to 
purchase their prescription drugs.
    Kurilko said the following in the AFL-CIO's America @ Work: ``Every 
other major country in the world has some kind of universal health care 
plan and helps people buy their medicines. Why this country doesn't is 
beyond me.''
    I couldn't agree more with Mr. Kurilko about the need for health 
care reform in this country and the necessity of protecting the health 
of hard-working citizens like him.
    Thank you again Senators Specter and Harkin for allowing me to 
share the views of the United Steelworkers of America on the need for 
health care reform.

    Senator Harkin. Thank you, Mr. Gerard.
STATEMENT OF JOHN F. DIEDRICH, VICE PRESIDENT, EMPLOYEE 
            HEALTH AND BENEFITS, EXELON CORPORATION
ACCOMPANIED BY MARK GOLDBERG, SENIOR VICE PRESIDENT, NATIONAL COALITION 
            ON HEALTH CARE

    Senator Harkin. John Diedrich, Vice President of Employee 
Health and Benefits for Exelon Corporation. Prior to his 
employment at Exelon, Mr. Diedrich worked at the USG 
Corporation in several benefits and compensation assignments. 
Mr. Diedrich is a graduate of Lafayette College. Mr. Diedrich, 
welcome.
    Mr. Diedrich. Thank you. Mr. Chairman, members of the 
committee, thank you very much for this opportunity to testify 
today. I want to begin by applauding the comments that each of 
you opened with, that Senator Specter also opened with. I could 
not have said it better. From where I sit, it is the same 
message that we deliver to our employees at Exelon where health 
benefits are concerned.
    I am John F. Diedrich, Vice President of Employee Health 
and Benefits for Exelon Corporation. Exelon is a registered 
utility holding company, and our two utilities, Commonwealth 
Edison, ComEd, of Chicago and PECO Energy of Philadelphia, 
serve over 5 million electric customers. We have the largest 
customer base in the United States for electrical service. In 
addition, we have more than 40,000 megawatts of generating 
capacity. That is the second largest portfolio in the country. 
We market the power that we generate in 48 States, as well as 
in Canada.
    I am here today representing Exelon and the National 
Coalition on Health Care. Accompanying me to this hearing today 
is Mr. Mark Goldberg. Mark is Senior Vice President with the 
Coalition. The coalition is a nonpartisan alliance of more than 
100 organizations working together for public policy changes to 
assure affordable, high-quality health care for all Americans. 
The coalition's members include major businesses, national 
unions, pension funds, State health benefit plans, associations 
of health care providers, organizations representing the major 
religious faiths, and consumer groups. We have attached a list 
of the coalition's members to the testimony. All told, the 
organizations that are members of the coalition represent or 
employ more than 100 million Americans.
    Exelon and the coalition believe that the current rate of 
health care cost increase in this country is not financially 
sustainable. And I do appreciate again this opportunity to 
comment on the business impact of health care cost increases at 
Exelon.
    The medical benefit programs at Exelon cover approximately 
91,000 people, 18,000 active employees, 18,000 retirees, and 
55,000 family members. In 2001, total medical benefit expenses 
at Exelon were nearly $180 million. One short year later, 2002, 
for the calendar year just ended, the equivalent figure was 
$215 million, a $35 million increase year over year, 19.4 
percent.
    I have been working on benefit strategy and design for 11 
years. Working for a large employer like Exelon, we are able to 
use our scale and leverage our size in the marketplace to 
secure substantial discounts through the insurance programs 
that we contract with. We are able to take advantage of, quite 
honestly, leading-edge developments in the design of medical 
programs. Four years ago, we instituted a very comprehensive 
disease state management program. It is working very well. 
Participants in that program are seeing anywhere from 8 to 10 
percent reduction in claims costs year over year. We have a 
carved-out prescription benefit program, multitiered formulary, 
again close to the cutting edge. And yet, we are still burdened 
by significant cost increase from one year to the next.
    Last July we predicted, in planning our budgets for this 
year, that health care would increase by 20 percent. So far 
through the first quarter of 2003, it is trending upward at 
19.6 percent. Sad to say, but our prediction was all too 
accurate.
    As a business, we look at our costs in terms of what that 
means in earnings per share. At Exelon, every $5 million of 
pre-tax cost savings or additional cost to the corporation is 
worth approximately a penny per share. In 2002, that $215 
million cost was approximately 43 cents per share, 43 cents per 
share not going back to the shareholders of the corporation. 
The 20 percent predicted cost increase this year translates to 
8 cents per share, and we have to find offsetting savings to 
neutralize the impact of that cost increase to the shareholders 
of the corporation.
    Companies have historically used several methods to try and 
contain costs. First and foremost, cost shifting, moving more 
of the cost to employees. Unfortunately, in the present 
environment, where national health care inflation is expected 
to approach 15 to 16 percent for 2003, an employer shifting 
additional cost burdens to the employees will expect to maybe 
buy themselves, at most, 1 or 2 years of savings before the 
inflation rate catches up with their cost-shifting methods.

                           prepared statement

    Health care cost inflation is a national problem, beyond 
the capacity of any single company, even a large firm with 
substantial purchasing power, to overcome. We need a 
comprehensive public policy solution to this crisis. This will 
require a significant bipartisan effort by all stakeholders 
involved. Exelon and the other members of the coalition are 
ready to do our part to support that effort.
    I thank you again for the opportunity to testify and 
welcome whatever questions come later. Thank you.
    [The statement follows:]
                 Prepared Statement of John F. Diedrich
    Mr. Chairman and Members of the Committee: Thank you for the 
opportunity to testify today. It is a privilege to be before this 
Subcommittee. I am John F. Diedrich, Vice President, Employee Health 
and Benefits for Exelon Corporation. Exelon is a registered utility 
holding company. Our two utilities, Commonwealth Edison (ComEd) of 
Chicago, and PECO Energy of Philadelphia, serve over 5 million electric 
customers, the largest electric customer base in the United States. We 
have more than 40,000 megawatts of generating capacity, the second 
largest portfolio in the United States. Our wholesale power marketing 
division markets the output of our generation portfolio throughout 48 
states and Canada.
    I am here today representing Exelon and the National Coalition on 
Health Care. The Coalition is a non-partisan alliance of more than 100 
organizations working together for public policy changes to assure 
affordable, high-quality health care for all Americans. The Coalition's 
members include major businesses, national unions, pension funds, state 
health benefit plans, associations of health care providers, 
organizations representing the major religious faiths, and consumer 
groups. I am attaching to my testimony a list of the Coalition's 
members. Together, these organizations employ or represent more than 
100 million Americans.
    Exelon and the Coalition believe that the current rate of health 
care cost increase in this country is not financially sustainable. I 
appreciate this opportunity to comment on the business impact of health 
care cost increases at Exelon.
                 medical benefits at exelon corporation
    Exelon sponsors medical benefits programs that cover approximately 
91,000 people, including 18,000 active employees, 18,000 retirees, and 
55,000 dependents. The programs offered by Exelon include preferred 
provider organization, health maintenance organization, indemnity, and 
point-of-service plans. Exelon, like most large employers, self-insures 
the majority of its medical benefits, the exception being the purchase 
of fully insured HMO coverage. Exelon also shares the cost of providing 
medical benefits with employees, asking that employees contribute 20 
percent of the cost through premiums, co-payments, and other out-of-
pocket expenses.
                        cost of medical benefits
    The total cost of medical benefits sponsored by Exelon in 2001 was 
nearly $180 million. The equivalent figure for 2002 was $215 million, 
an increase of $35 million or 19.4 percent in just one year. Although 
the active employee population was undergoing reductions as a result of 
the merger that formed Exelon, the total covered population did not 
change appreciably during that time, and enrollment in the various 
plans remained relatively constant. In fact, the rate of cost increase 
from 2001 to 2002 would have been greater if Exelon had not initiated 
design changes to its medical benefits plans that went into effect at 
the beginning of 2002. Those changes included more aggressive 
management of prescription drug benefits and expansion of a successful 
coordinated care program for participants with chronic conditions such 
as asthma and diabetes. Our latest cost information, for the first 
quarter of 2003, shows Exelon's medical expenses are continuing to 
trend upward at 19.6 percent year over year. In late July 2002 we 
predicted that Exelon's medical costs for 2003 would be 20 percent 
higher than in 2002. So far, it appears that that prediction was all 
too accurate.
    One of the performance benchmarks at Exelon, as it is at many 
publicly held companies, is earnings per share. Every additional $5 
million of pre-tax savings or cost at Exelon is worth approximately one 
penny per share. The $215 million total cost of medical benefits for 
2002 translates to $0.43 per share. The predicted 20 percent medical 
cost increase at Exelon this year is equivalent to about $0.08 per 
share. In last year's budget planning process for 2003, offsetting 
savings had to be found to neutralize the impact of increasing medical 
costs on Exelon's return to shareholders. We were successful in finding 
those savings, but the continuing high trend of health care inflation 
means we will need to find another $0.10 per share in offsetting 
savings to remain cost neutral for 2004.
                     the implications for business
    In recent years, employers have pursued two principal strategies 
for managing medical benefits costs: cost shifting and reductions or 
modifications in benefits. In the present environment, with national 
health care inflation expected to approach 16 percent for 2003, cost 
shifting might buy an employer only one or two years of savings. After 
that, unless an employer continues to shift an increasingly higher 
percentage of the cost to employees, the health care inflation rate 
will quickly make up the difference. The most pronounced impact of 
increased cost shifting to employees is realized when employees who 
have access to employer sponsored medical benefits decline the coverage 
because they deem it too expensive. Unless those employees have access 
to other group coverage or are able to secure individual health 
insurance coverage, the number of people lacking health insurance 
increases. As the number of uninsured individuals in this country 
grows, the cost of health care will continue to increase at a rapid 
pace. Individuals without health insurance tend to seek medical 
attention only after the effects of illness or injury outweigh the 
costs of not seeking care. By that time, a person's health has declined 
to the point that urgent care becomes a necessity and the most frequent 
point of delivery for that care becomes the hospital emergency room, 
one of the most expensive places to receive care. The costs for that 
care will eventually be reflected in increased costs for government and 
employer-sponsored health plans.
    The other commonly used means of controlling the cost of medical 
plans is reducing or modifying the level of benefits provided. This 
frequently also involves some level of cost shifting through increases 
in office visit co-payments, annual deductibles, and out-of-pocket 
maximums. It might also include the use of specialized service 
providers for such things as prescription drug benefits. Exelon 
incorporates many advanced design features in its existing medical 
benefits plans. We constantly seek new programs to control the costs of 
medical benefits and to improve participant health. After eleven years 
of working in the field of benefits strategy and design, I can tell you 
that new ideas are few and far between.
    Health care cost inflation is a national problem, beyond the 
capacity of any single company--even a large firm with substantial 
purchasing power--to overcome. We need a comprehensive public policy 
solution to this crisis. This will require a significant bipartisan 
effort by all stakeholders. Exelon and the other members of the 
Coalition are ready to do our part to support that effort. Thank you 
again for the opportunity to testify.

    Senator Harkin. Thank you very much, Mr. Diedrich.
STATEMENT OF JACK HADLEY, Ph.D., PRINCIPAL RESEARCH 
            ASSOCIATE, URBAN INSTITUTE
    Senator Harkin. Now we turn to Mr. Jack Hadley, a principal 
research associate at the Urban Institute in Washington, D.C. 
and a senior fellow at the Center for Studying Health System 
Change, a nonpartisan health care policy research organization. 
Dr. Hadley is a past president of the Association for Health 
Services Research. He graduated from Yale University with his 
Ph.D. in economics. Mr. Hadley, welcome to the committee. 
Please proceed.
    Dr. Hadley. Thank you, Senator, and I very much appreciate 
the opportunity to speak, to the committee this morning. I have 
three major points.
    Let me say, by way of background, most of my research over 
the last 2 years has concentrated on economic analyses of the 
costs and consequences of being uninsured. As the cost of 
insurance increases, more people will become uninsured, which 
will impose costs on our economy.
    I have three major points I would like to make.
    First, as a Nation we already spend a substantial amount of 
money to pay for care received by uninsured people.
    Second, much of this money is spent inefficiently, going to 
hospitals for emergency room and inpatient care for people who 
would have been treated earlier, more cheaply, and more 
effectively if they had insurance.
    Third, lack of insurance reduces the health of the Nation 
and, as a result, also reduces the wealth of the Nation.
    In a study published earlier this year, we estimated that 
in 2001 the Nation spent about $35 billion on uncompensated 
care received by the uninsured. About two-thirds of 
uncompensated care, almost $24 billion, was provided by 
hospitals. We also estimated that a substantial portion of the 
uncompensated care, perhaps as much as $30 billion, is already 
being financed by taxpayers through various add-on payments to 
the Medicare and Medicaid programs, through State and local tax 
appropriations, Government grants to community health centers, 
and direct care from the Veterans Administration and the Indian 
Health Service.
    For people who are uninsured all year, uncompensated care 
represents about 60 percent of the care they receive. However, 
in spite of what appears to be a substantial subsidy, 
uncompensated care is not a substitute for insurance. On 
average, the uninsured receive about half as much care as 
people insured all year.
    Much of this money we currently spend on uncompensated care 
was spent inefficiently. Studies have shown that the uninsured 
are more likely to be hospitalized for preventable conditions, 
that is, medical conditions that can be adequately treated on 
an outpatient basis. One study estimated that about 12 percent 
of the uninsureds' hospital stays were for preventable 
conditions. Another study conducted in nine States estimated 
that the extra costs associated with preventable stays added 
over $100 million to the cost of hospital care in those States.
    In general, a large body of research, which I summarized in 
a recent study, provides convincing evidence that the uninsured 
receive less preventive and diagnostic care, receive less 
therapeutic care, even after being diagnosed, and as a result, 
die earlier and experience greater limitations than otherwise 
similar people with insurance coverage.
    Having insurance would increase the efficiency of medical 
spending by getting people into care earlier. In a current 
study, we estimate that if all low-income people had insurance, 
the percentage who delay in seeking care would fall from 21 
percent to 9 percent, and the percentage with an unmet health 
need would fall from 10 percent to 4 percent.
    My last point is that poor health as a consequence of being 
uninsured has adverse effects on adults' work and earnings. 
Evidence also suggests that poor health in children affects 
their educational attainment. While it is difficult to put 
precise numbers on these effects, the research suggests that a 
person in fair or poor health might earn from 15 to 20 percent 
less on an annual basis than an otherwise similar person in 
very good or excellent health. Poor health of a family member 
also affects the ability to work.
    Although more research is needed to develop precise 
quantitative estimates, I can provide more detail about a piece 
of the puzzle from recent studies of health insurance, health, 
and medical care use by older, middle-aged adults. These 
studies show that lack of insurance increases the probability 
of disability or major health deterioration in older, middle-
aged people, roughly those between the ages of 50 and 65. 
Disability at this age leads to early coverage by the Medicare 
program and transfer payments made through the DI and SSI 
programs.
    If this age group had complete insurance coverage, would it 
lead to better health at age 65? And if it does, what are the 
implications for Medicare and Medicaid spending on these people 
after they turn 65?
    In another ongoing study, we estimate that more people 
would survive to age 65 and those who survive would be in 
significantly better health. As a result of the health 
improvement and in spite of the fact that more people survive, 
our simulation suggests that Medicare and Medicaid would save 
about $10 billion a year on care to 66-to 68-year-olds. Our 
calculations also suggest that these savings would cover about 
half of the cost of expanding insurance coverage to this cohort 
of older, middle-aged people.

                           prepared statement

    The debate on whether to expand health insurance coverage 
to all Americans will inevitably emphasize the cost of 
providing insurance. It must also include the benefits of 
having insurance. While more work needs to be done to develop 
precise quantitative estimates of the magnitude of these 
benefits, I believe the research is quite clear in 
demonstrating that lack of insurance leads to poorer health and 
that poorer health is associated with less educational 
attainment, lower labor force participation, and lower 
earnings. These consequences undoubtedly lead to lost tax 
revenues and higher public program payments, both for medical 
care and income support payments.
    Thank you.
    [The statement follows:]
                   Prepared Statement of Jack Hadley
    Thank you for inviting me to appear before the Committee this 
morning. I am a Principal Research Associate at The Urban Institute, 
and a Senior Fellow with the Center for Studying Health System Change, 
which are independent, nonprofit, research institutions here in 
Washington. Most of my research over the last two years has 
concentrated on economic analyses of the costs and consequences of 
being uninsured.\1\ Based on this research and reviews of other studies 
done over the last 25 years, my presentation focuses on some of the 
broad economic costs associated with a large uninsured population.
---------------------------------------------------------------------------
    \1\ The following three studies were supported by a grant from the 
Kaiser Commission on Medicaid and the Uninsured's Cost of Not Covering 
the Uninsured Project made to the Urban Institute: Hadley J., ``Sicker 
and Poorer: The Consequences of Being Uninsured,'' (available at 
www.kff.org/content/2002/20020510) and Medical Care Research and Review 
(Supplement to Vol. 60, No. 2, June 2003); Hadley J. and J. Holahan, 
``How Much Medical Care Do the Uninsured Use and Who Pays for It?'' 
Health Affairs web exclusive, February 12, 2003; Hadley J. and T. 
Waidmann, ``Health Insurance and Health at Age 65: Implications for 
Medicare and Medicaid,'' The Urban Institute, April 2003. The Robert 
Wood Johnson Foundation supported the following work through a grant to 
The Center for Studying Health System Change: Cunningham P. and J. 
Hadley, ``Expanding Care vs. Expanding Coverage: Alternative or 
Complementary Approaches for Improved Access for Low-income Persons?'' 
Center for Studying Health System Change, May 2003.
---------------------------------------------------------------------------
    I have three major points.
  --First, as a nation we already spend a substantial amount of money 
        to pay for care received by uninsured people.
  --Second, much of this money is spent inefficiently, going to 
        hospitals for emergency room and inpatient care to treat people 
        who probably would have been treated earlier, more cheaply, and 
        more effectively if they had insurance.
  --Third, lack of insurance reduces the health of the nation, and as a 
        result, also reduces the wealth of the nation.
We already spend a substantial amount of money on care to the uninsured
    In a study published earlier this year, we estimated that in 2001 
the nation spent about $35 billion on uncompensated care received by 
the uninsured, both those who are uninsured for a full year and those 
who lack coverage for part of a year.\2\ (Figure 1) About two-thirds of 
uncompensated care, almost $24 billion, was provided by hospitals 
caring for uninsured people in emergency rooms, outpatient departments, 
and as inpatients. (Figure 2) We also estimated that a substantial 
portion of uncompensated care, perhaps as much as $30 billion, is 
already being financed by taxpayers (Figure 3) through programs such 
as: Medicare and Medicaid Disproportionate Share Payments; Medicaid 
Upper Payment Limit payments; state and local tax appropriations, 
primarily to public hospitals and clinics; Federal grants to community 
health centers; and Federal direct care provided by the Department of 
Veterans Affairs and the Indian Health Service. For people who are 
uninsured all year, uncompensated care covers about 60 percent of the 
care they receive.\3\ However, in spite of what appears to be a 
substantial subsidy, uncompensated care is not a substitute for 
insurance, nor are the uninsured free riders who are taking advantage 
of everyone else. On average, the uninsured receive about half as much 
care as people insured all year, roughly $1,250 compared to about 
$2,500 per person for someone covered by private insurance. (Figure 4) 
Moreover, in spite of receiving about half as much care as the 
privately insured, the uninsured actually pay about the same amount 
out-of-pocket for the care they receive, and what they do pay out-of-
pocket represents a bigger burden on their family incomes. Being 
uninsured represents triple jeopardy: you receive less medical care 
than the insured, you pay about as much out-of-pocket, and what you pay 
represents a bigger burden on your family's resources.\4\ (Figures 5 
and 6)
---------------------------------------------------------------------------
    \2\ Hadley and Holahan 2003, op cit.
    \3\ Ibid.
    \4\ Merlis M. 2002. ``Family Out-of-Pocket Spending for Health 
Services,'' Commonwealth Fund Pub. 509 (www.cmwf.org).
---------------------------------------------------------------------------
Much of the money we currently spend on uncompensated care is spent 
        inefficiently
    Being uninsured is like playing Russian roulette with your health. 
Research clearly shows that compared to the insured, the uninsured are 
more likely to delay seeking care and to have unmet health needs.\5\ If 
they're lucky, they'll get better without any care. But if they're not, 
the uncompensated care they eventually receive from the safety net can 
wind up costing much more than if they had been treated when symptoms 
first appeared or if their illness were diagnosed before symptoms 
become apparent.
---------------------------------------------------------------------------
    \5\ Center for Studying Health System Change, www.hschange.org/
CONTENT/421/?supp=1 and www.hschange.org/CONTENT/421/?supp=4
---------------------------------------------------------------------------
    Studies have shown that the uninsured are more likely to be 
hospitalized for preventable conditions, i.e., medical conditions that 
can be adequately treated on an outpatient basis and should not require 
hospitalization. One study estimated that about 12 percent of the 
uninsureds' hospital stays were for preventable conditions, compared to 
about 8 percent for the privately insured.\6\ (Figure 7) Another study 
of avoidable hospitalization estimated that the extra cost associated 
with preventable stays was $105 million in only nine states.\7\ (Figure 
8) Studies also suggest that the expansions of insurance coverage for 
children through Medicaid and SCHIP have led to reduced rates of 
avoidable hospitalizations for children, by as much as 22 percent.\8\
---------------------------------------------------------------------------
    \6\ Kozak LJ, Hall MJ, Owings MF. Trends in Avoidable 
Hospitalizations. Health Affairs 2001 March/April; 20(2): 225-32.
    \7\ Hoffman C, Gaskin DJ. The Costs of Preventable Hospitalizations 
among Uninsured and Medicaid Adults. Washington DC: Kaiser Family 
Foundation, 2001.
    \8\ Dafny L, Gruber J. Does Public Insurance Improve the Efficiency 
of Medical Care? Medicaid Expansions and Child Hospitalizations. NBER 
Working Paper Series, Working Paper 7555, February 2000: 1-43.
---------------------------------------------------------------------------
    Other studies show that uninsured people with cancer are more 
likely to be diagnosed at an advanced disease stage, which is strongly 
related to reduced survival.\9\ (Figures 9 and 10) Numerous other 
studies have found that the uninsured are less likely to receive 
screening and diagnostic tests known to lead to early detection of 
cancer, heart disease, and diabetes--diseases with high mortality rates 
and high levels of disability and diminished activity status.\10\ 
(Figure 11) Even among people who know they have hypertension or 
diabetes, use of appropriate medications and routine follow-up care is 
lower for the uninsured compared to the insured.\11\ In sum, a large 
body of research provides convincing evidence that the uninsured 
receive less preventive and diagnostic care, receive less therapeutic 
care even after being diagnosed, and, as a result, die earlier and 
experience greater limitations than otherwise similar people with 
insurance coverage.
---------------------------------------------------------------------------
    \9\ Ayanian JZ, Kohler BA, Abe T, Epstein AM. The Relationship 
Between Health Insurance Coverage and Clinical Outcomes Among Women 
with Breast Cancer. The New England Journal of Medicine 1993 July 29; 
329:326-31; Roetzheim RG, Gonzalez EC, Ferrante JM, Pal N, Van Durme 
DJ, Krischner JP. Effects of Health Insurance and Race on Breast 
Carcinoma Treatments and Outcomes. Cancer 2000 December 1; 89(11): 
2202-13; Roetzheim RG, Pal N, Gonzalez EC, Ferrante JM, Van Durme DJ, 
Krischer JP. Effects of Health Insurance and Race on Colorectal Cancer 
Treatments and Outcomes. American Journal of Public Health 2000 
November; 90(11): 1746-54; Roetzheim RG, Pal N, Tennant C, et al. 
Effects of Health Insurance and Race on Early Detection of Cancer. 
Journal of the National Cancer Institute 1999 August 19; 91(16): 1409-
15.
    \10\ Ayanian JZ, Weissman JS, Schneider EC, Ginsburg JA, Zaslavsky 
AM. Unmet Health Needs of Uninsured Adults in the United States. JAMA 
2000 October 25; 284(16): 2061-9.
    \11\ Families USA Foundation. Getting Less Care: The Uninsured with 
Chronic Health Conditions. Families USA Foundation. Washington DC, 
2001. 1-49; Huttin C, Moeller JF, Stafford RS. Patterns and Costs for 
Hypertension Treatment in the United States: Clinical, Lifestyle and 
Socioeconomic Predictors from the 1987 National Medical Expenditures 
Survey. Clinical Pharmacoeconomics 2000 September 20; 20(3): 181-95; 
Beckles GL, Engelgau MM, Narayan KV, Herman WH, Aubert RE, Williamson 
DE. Population-Based Assessment of the Level of Care Among Adults with 
Diabetes in the U.S. Diabetes Care 1998 September; 21(9): 1432-8.
---------------------------------------------------------------------------
    Moreover, as I noted earlier, access to the safety net is not a 
substitute for insurance. In an ongoing study, we compared the effects 
of expanding insurance coverage versus expanding the safety net on low-
income people's access to care.\12\ Simulations suggest that a 10 
percent increase in insurance coverage, would reduce the proportions 
reporting an unmet medical need or putting off care by 25-30 percent. 
Spending a comparable amount of money on expanding the safety net would 
reduce unmet need and putting off care by one-third to half as much. If 
insurance coverage were universal, the percentages with an unmet need 
or delaying in seeking care would fall to 4-9 percent, roughly the same 
levels we observe among people with full-year coverage through their 
employers.
---------------------------------------------------------------------------
    \12\ Cunningham and Hadley 2003, op. cit.
---------------------------------------------------------------------------
Reduced health is associated with lower earnings and educational 
        attainment, and probably with higher payments from public 
        programs
    Lack of insurance reduces health, which has adverse effects on 
adults' work and earnings. Evidence also suggests that poor health in 
children affects their educational attainment. Unfortunately, social 
science studies of the relationships between health and work, earnings, 
and educational attainment are all hampered by the difficulty of 
sorting out what is causation and what is association. We don't have 
the ability to randomly assign people to excellent, good, or poor 
health and then see how it affects their education, work, and earnings. 
Nevertheless, there is enough presumptive evidence, I believe, that 
suggests that poor health among adults leads to lower labor force 
participation, lower work effort if in the labor force, and lower 
earnings. While it is difficult to put precise numbers on these 
effects, it appears that a person in fair or poor health might earn 
from 15-20 percent less on an annual basis than an otherwise similar 
person in very good or excellent health.\13\ (Figures 12 and 13.) Poor 
health of a family member also affects the ability to work. Studies 
have shown that family caregivers, parents caring for sick children or 
a spouse caring for a sick partner, work less and earn less.\14\ This 
lost work time and lost earnings represent foregone productive activity 
that would contribute to our national economy, and to tax revenues 
collected. Studies of children's health and educational achievement 
suggest that children in poor health have poorer school attendance and 
lower school achievement and cognitive development.\15\ However, a 
number of these studies focus on comparisons of children who were born 
at low birthweight. The research is more ambiguous in showing that 
insurance coverage improves birthweight, although it is much more clear 
that insurance leads to higher infant survival. While there is still 
much that needs to be done to develop more precise estimates of exactly 
how much health would improve and what the quantitative impact would be 
on earnings and public program payments, I can provide more detail 
about a piece of the puzzle from recent studies of health insurance, 
health, and medical use by older middle-aged adults. These studies show 
that lack of insurance increases the probability of disability or major 
health deterioration in older middle-aged people, roughly between the 
ages of 50 and 65.\16\ Disability at this age leads to early coverage 
by the Medicare program and transfer payments made through the DI and 
SSI programs. A highly relevant question to this Committee's 
deliberations is whether complete insurance coverage in late middle age 
would improve people's health at age 65 and, if it does, what are the 
implications for Medicare and Medicaid spending on people after they 
turn 65. Another ongoing study suggests that lack of insurance during 
late middle age does in fact lead to significantly poorer health at age 
65--fewer people survive and those who do have an increased incidence 
of being in fair or poor health with a disability.\17\ Our analysis 
simulates how much health would improve if this cohort had complete 
insurance coverage and whether Medicare and Medicaid spending would 
increase or decrease after age 65. We find that more people survive to 
age 65, and those who survive are in significantly better health. As a 
result of the health improvement, and in spite of the fact that more 
people survive, our simulation suggests that Medicare and Medicaid 
would save about $10 billion a year on care to 66-68 year olds. Our 
calculations also suggest that these savings would cover about 50 
percent of the cost of expanding coverage to this cohort of older 
middle-age people.
---------------------------------------------------------------------------
    \13\ Chirikos TN, Nestel G. Further Evidence on the Economic 
Effects of Poor Health. The Review of Economics and Statistics 1985; 
67:61-9; Fronstin P, Holtmann AG. Productivity Gains from Employment-
Based Health Insurance. In: Fronstin P, editor. The Economic Costs of 
the Uninsured: Implications for Business and Government. Washington 
D.C.: Employee Benefit Research Institute, 2000: 25-39.
    \14\ Boaz R, Muller C. Paid Work and Unpaid Help by Caregivers of 
the Disabled and Frail Elders. Medical Care 1992; 30:149-58; Ettner S. 
The Impact of `Parent Care' on Female Labor Supply Decisions. 
Demography 1995(32): 63-80; 36:76-87; Wolfe BL, Hill SC. The Effect of 
Health on the Work Effort of Single Mothers. The Journal of Human 
Resources 1995; 1(42-62).
    \15\ Currie J, Madrian BC. Health, Health Insurance and the Labor 
Market, Chapter 50. In: Ashenfelter O and D Card, editor. Handbook of 
Labor Economics, Volume 3, 2000: 3309-415; Grossman M. The Correlation 
Between Health and Schooling. In: N.E. Terleckyj, editor. Household 
Production and Consumption. Columbia University Press, 1975: 147-211; 
Grossman M. and R. Kaestner, Effects of Education on Health. In Behrman 
J. and N. Stacey, eds., The Social Benefits of Education (Ann Arbor: U. 
of Michigan Press, 1997): 69-122; Perri T. Health Status and Schooling 
Decisions of Young Men. Economics of Education Review 1984; 3:207-13; 
Wadsworth M. Serious Illness in Childhood and its Association with 
Later-Life Achievement. In: Wilkinson R, editor. Class and Health. 
London: Tavistock, 1986; Wolfe BL. The Influence of Health on School 
Outcomes: A Multivariate Approach. Medical Care 1985 October; 23(10): 
1127-38.
    \16\ Baker DW, Sudano JJ, Albert JM, Borawski EA, Dor A. Lack of 
Health Insurance and Decline in Overall Health in Late Middle Age. The 
New England Journal of Medicine 2001 October 11; 345(15): 1106-12; 
Baker, D.W., J.J. Sudano, J.M. Albert, E.A. Borawski, and A. Dor. 2002. 
Loss of Health Insurance and the Risk for a Decline in Self-Reported 
Health and Physical Functioning Medical Care 40(11): 1126-31.
    \17\ Hadley and Waidmann 2003, op. cit.
---------------------------------------------------------------------------
                                summary
    The debate on whether to expand health insurance coverage to all 
Americans will inevitably emphasize the cost of providing insurance. It 
must also include the benefits of having insurance. While more work 
needs to be done to develop precise quantitative estimates of the 
magnitude of these benefits, I believe that the research is quite clear 
in demonstrating that lack of insurance leads to poorer health, and 
that poorer health is associated with less educational attainment, 
lower labor force participation, and lower earnings. These consequences 
undoubtedly lead to lost tax revenues and higher public program 
payments for both medical care and income support payments. Finally, 
I've focused only on the dollar and cents issues around the question of 
the consequences of being uninsured. However, poor health and premature 
death obviously have significant subjective effects on one's own and on 
family members' sense of well-being. The total value of good health 
goes beyond, possibly well beyond, a narrow accounting of financial 
consequences. 



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Senator Harkin. Thank you very much, Mr. Hadley. I 
appreciate your being here and your testimony and research. We 
will start a round of questioning. I will start with about 5 
minutes, and then I will turn to Senator Craig.
    As we look at this, what I have heard from all of you is 
that the health care problem that we are facing now is beyond 
the ability of you in your individual capacities, either as a 
small business owner, school district, president of an 
international labor union, a larger business that is a stock-
owned business, to deal with. Is that correct?
    Mr. Diedrich. Yes.
    Senator Harkin. That is what I am hearing. There is no way 
that individual entities can deal with this anymore.
    Mr. Gerard. I can speak for us. This is of such crisis that 
every negotiation that we are involved in, the ability to 
maintain health care is the central issue. Every bankruptcy 
that we are involved in or every major company that we are 
involved in is facing an economic crisis as a result of health 
care and--I cannot be dishonest--the deterioration of their 
investments in their pension funding as a result of the Wall 
Street scams that have gone on. In most cases, as Mr. Diedrich 
says, we have squeezed everything out of the system that we can 
squeeze. Ninety-five percent of Americans now get their health 
care through a PPO, POS, PMS, whatever all the PMs that you can 
find, and you have squeezed it all out of the system. Yet, we 
have this huge inefficiency that is taking down American 
manufacturing.
    I was looking earlier, when I was talking, and I could not 
find it. I have now found it. General Motors, $5 billion; Ford, 
$2 billion; United Airlines, $150 million; U.S. Steel, $212 
million; A.K. Steel, $149 million. This is just the cost of 
providing retiree health care, again, I remind you that no 
other nation on earth puts on the backs of its employees and 
employers. So we have a huge disadvantage which leads to the 
kind of human tragedies of Chuck and tens of thousands of 
people like Chuck. It is beyond our ability to manage.
    Senator Harkin. Evidently at one time in our country we had 
a system of employer-based health care insurance, and yet the 
dynamics of what is happening and the increased costs of health 
care and the administrative costs--are you saying and others 
saying that whatever the system we had in the past cannot 
operate now?
    Mr. Gerard. Let me use your chart, Senator Harkin. I 
apologize because I do not know how many trillions of dollars 1 
percent of GDP is or how many hundreds of billions of dollars 1 
percent of GDP is.
    Senator Harkin. We have got another chart that shows that. 
I did not put that up. This is the other chart.
    We did not visit before the hearing. I just happen to have 
it.
    Mr. Gerard. If you take what Mr. Burrow said and my off-
handed, snide remark about my former home country, if you look 
at a difference between 14 percent of gross domestic product 
for health care that leaves 79 million with no health insurance 
at some point in the last 18 months, and Canada and France or 
Germany, any other industrialized nation, next to America I 
think the highest per capita expenditure on health care is in 
fact Switzerland. And Switzerland spends about $1,500 U.S. less 
per person, but you are covered from womb to tomb for 
everything. If you take that difference in gross domestic 
product of 10 percent versus 14, and you apply that to 
education, you apply that to infrastructure, you apply that to 
other stuff, you can rebuild the American economy.
    Now, if that goes to 17 percent, let the record show I 
think that the country is going to be in turmoil like people 
have never seen. You will not be able to sustain schools. You 
will not be able to sustain infrastructure. You will not be 
able to sustain police forces. I mean, the whole system will 
collapse. And that is where it is going unless we do something.
    Senator Harkin. Mr. Weinstein, when I was having my 
roundtable discussions in Iowa, I expected that I would get a 
lot of elderly, that I would get workers, people like that. I 
never expected the number of small business owners that showed 
up at my health care forums, people just like you that owned 
small businesses and that had coverage before and now just 
cannot do it any longer. This made a great impression on me 
because I had not expected that. I do not know what small 
businesses do now. How much further can you go?
    Mr. Weinstein. The answer to your last question directly 
is, no, we cannot afford to have an employer-based system as 
long as the costs are where they are or as long as the 
Government does not provide some sort of tax credit or 
subsidize in some way. If I have a $7-an-hour dishwasher who 
works 30 hours a week, I would have to more than double his 
salary to provide him health care coverage at this point. And I 
cannot ask my customers to pay $10 more for a steak. They are 
not going to come to my place. So there is not a whole lot we 
can do in the current system to provide more.
    Why I think it is impacting small business owners so much 
right now is we look at our employees every day and we hear 
their stories and we hear that they had to take yesterday off 
of work because they had to go sit in a clinic all day to try 
to get free or reduced care coverage. And that is the impact on 
us and them.
    Senator Harkin. Thank you both. My time is up. I will come 
back again, but I will yield to my friend from Idaho, Senator 
Craig.
    Senator Craig. Well, thank you very much, Mr. Chairman, and 
to all of you. I appreciate your testimony. It clearly is part 
of a critical and growing national debate in our country that 
we have got to deal with.
    I understand why employees feel frustrated and obligated. 
Since World War II, we have expected you, through benefit 
arrangements and therefore tax incentives, to be able to 
provide health care. I understand that frustration because you 
sense it is your obligation. It was in the old system. It is 
less the case in the new system and in the new economy. And 
that is a transition that this country is going to have to go 
through.
    The responsibility of health care is with the individual, 
not with the employer. But if the individual cannot deal with 
it, then it becomes the responsibility of the whole, and that 
is, I think, where we are rapidly going to.
    I pointed a few fingers earlier. I suspect if I had 20 
fingers, I would have to use them all to point at different 
pieces of the system that are not functioning very well or that 
are extremely dysfunctional, whether it is pension systems and 
insurance systems provided through unions and those cost 
obligations today.
    We have heard dramatic testimony here. And I cannot imagine 
the impact emotionally on someone like the gentleman we have 
just heard who all of a sudden is faced with a system that will 
break him because he simply cannot afford access to it and at a 
time when he and his wife grow toward increased health care 
requirements. And to you, the small business owner, I 
appreciate your frustration.
    At the same time, our problem, Tom, is that we have had a 
system in which it was, in essence, by the benefits we offered 
through the tax system, the responsibility of the employer to 
provide. And they are still trying to do that in a system that 
probably is not going to much longer allow that.
    At the same time, I am a bit frustrated. I live on a border 
State, and so I see the flow going both ways. I see Canadians 
coming into the United States to gain quick access to a higher-
quality health care system because they do not want to stand in 
line as long, depending on the particular need. If it is in 
north Idaho, we have got a high-quality cancer clinic in Coeur 
d'Alene, Idaho or in Spokane, Washington. So we get Albertans 
and Saskatchewans and folks coming down because they cannot 
gain access. Or they can, but they have to wait too long and 
their health is impaired.
    So I have spent a good deal of time studying the Canadian 
system, and we can argue that it may consume less of the GDP of 
Canada, but it also is a rationed system to some extent. It is 
rationed by time, sir. Everybody has access to it if you can 
afford to wait. And I have visited. I have gone into the 
clinics of Idaho and Washington and sat down with the Canadians 
waiting and said, why are you here? And their explanation is 
quite obvious: quality and time. And they can afford to pay. If 
not, they wait in line and their health is impaired while they 
wait.
    Now, I am not here to attack the Canadian health care 
system. I am going to suggest that it is not a panacea. It is a 
way of supplying health care in a rationed, direct form for 
all, and the argument is quality. So is it perfect? No, it is 
not. Is our system perfect? No, it is not and it is rapidly 
becoming broken in many ways.
    I do not have solutions to the problem. That is why I am 
here today to listen to all of you, and we are going to try to 
sort out a piece of it this year. Tom and I and others are 
going to try to fix Medicare a little bit, and we are going to 
try to add a component to it that will address a certain 
segment of our economy that is stressed out because of fixed 
incomes and their senior status. But that is not going to solve 
the overall problem of a major company like yours, Mr. 
Diedrich, and the impact that it is going to have. So I have 
sorted out for years and really am struggling with the reality 
of where do we go.
    I found it very fascinating, Mr. Chairman. I just held a 
hearing on the dynamics of the Federal employees' health care 
system versus Medicare, and the micromanaging we have done in 
Medicare to get cost savings. Ironically the dynamics of the 
marketplace on the other side in the Federal health care system 
have created about the same savings, maybe not in the immediate 
sense, but in the total sense, averaged out, they have. So the 
marketplace works too if you can create those incentives.
    But we know the frustration that we have gone through here 
deciding what kinds of health care the provider who makes his 
or herself available through Medicaid can provide. And we say 
you can provide this service, but you cannot provide that 
service. I no longer want to say to the senior citizens of this 
country, you can only have a limited form of health care. Why 
can you not have as much access to the system as I do? Because 
my guess is if we give it and we give it in a timely way, in 
the end it will probably cost no more because we will have 
created some dynamics that play it out appropriately. So I am 
as frustrated as all of you are in that system.
    I have always thought, yes, compare it with all the other 
systems of the world. We are at about a $12 trillion-plus 
economy. You are right, sir. We spend about 13.2 percent of the 
GDP I think or 14 percent, depending on who is figuring, and 
other nations spend a little more or a little less. And then 
you have to measure what the system provides.
    So I have no specific questions for you other than to say I 
am one of those who is as anxious, as is Tom, in searching out 
how we solve this problem.
    Now that I have effectively skewed the Canadian system--or 
maybe not effectively. Now that I have skewed it, I see that 
there is a response coming from a former Canadian.
    Mr. Gerard. I want to take minor issue.
    Senator Craig. Please do because I am only an observer of 
the system.
    Mr. Gerard. And now I am an observer myself, but I have 
been in it and my daughter is there and she is in it. With all 
due respect to the folks who are coming down from Alberta, 
Alberta has been, under the current political leadership, in a 
rush to attempt to dismantle the Canadian universal health care 
system and has, in many ways, starved their system so that it 
is the lowest funded per capita in Canada.
    On the other hand, you probably very seldom see anybody 
heading to the New England States or upstate New York from 
Atlantic Canada or the Province of Quebec because they have 
seen their health care--and again, people do not understand the 
Canadian system. It is not a single payer as people say. It is 
a transfer payment arrangement with a minimum floor, and you 
can go as high as you want. So in the Province of Quebec, they 
have seen health care as a competitiveness issue to attract 
business. So they provide a very high level of health care and 
a much higher level of funding than any of the other provinces. 
So there are differences about how efficient the system is.
    The only comment I would make is that if the Canadians were 
to increase their funding from 10 to 11 percent, you would not 
have people who are coming down. The thing that really drives 
people out--and I do not mean this to be class warfare--but 
those that have the ability to pay and do not want to wait 2 
weeks for their heart surgery will come down and pay because it 
is an egalitarian system and you get into the system based on 
the need. So if I end up having a little bit of stress on my 
heart and the doctors say, listen, we are going to schedule you 
for a month from now, that is fine. But if I am on the verge of 
dying, they operate immediately, so that the system, when it is 
well fed, works.
    Let me just make this last observation. I think in the 
political reality that we currently exist in, as much as I 
think we ought to be looking at a universal health care system 
for America and trying to get everybody, I think you've got to 
look at some basic principles. And the basic principle is--what 
is the term? Pay or play or play or pay? I think everybody has 
got to put something into the system. Mr. Weinstein is getting 
hammered because he wants to do the honorable thing, while we, 
in fact, know there are some large, major corporations that in 
fact teach their people how to use the public system rather 
than pay anything. And that puts a tremendous burden on those 
that are trying to do something.
    I want to suggest a couple of things that the newly formed 
Industrial Council of the AFL-CIO are looking at, some options. 
And the first one is you could take a lot of pressure off the 
system incrementally if there was a Medicare prescription drug 
benefit that provided real Medicare coverage for seniors on 
prescription drugs. Drug costs are the fastest, as we see those 
numbers, how quickly they are climbing. Drug costs are almost 
double what the rest of the health care price escalation is.
    What I find really fascinating is that while drug companies 
are talking about how they need that, I think the numbers are 
that close to 40 percent--I saw a figure just a moment ago. 
Some substantial portion of--here it is. Thirty-five percent of 
every dollar of revenue is spent on marketing. Twenty-four 
percent is now profits. And I will tell you what. If you can 
get 24 percent return anywhere else, we ought to get to it. And 
that is driving the system to the breaking point.
    Last but not least, let me talk about what you said, 
Senator Craig. My mind jumped very quickly when you said health 
care should be the individual's responsibility. The problem 
with that is in a private delivery system, it is the insurance 
equivalent of being a drunken driver when you hurt your back. 
The process of adverse selection comes in and part of the 
reason that Chuck's rates have gone to $2,800 per month is 
because Chuck has got a heart problem. So when Chuck left the 
workplace, he had company-provided health care that was 
providing him $100 and some per month into the pot. When the 
company went bankrupt, Chuck got put into the COBRA system, and 
I think you all know that probably far better than me. So his 
first year in COBRA went to $1,300, but the process of adverse 
selection, the people who are healthy, opted out and left the 
people that had a need for health care coverage, whether it was 
drugs or whether it was seeing the doctor or whether it was a 
heart attack. So when the people that needed health care were 
the final ones left in the pool, his health care premiums went 
from $1,300 to $2,800. So what you have actually done is add an 
extra burden on people for being ill.
    Senator Craig. Let me add to that, Tom, if I can, very 
briefly because when I made that statement, I made it in the 
context of a new economy and a new dynamic. What we are 
suffering from is the current situation. That is what stresses 
out a small employer or a large employer who feels it their 
obligation and responsibility based on an old system that is 
not working very well right now.
    If you create optimum dynamics in the marketplace and you 
put within that individual's paycheck the salary to go out and 
select a health care system, and there are multiples, and once 
they have selected it, they're in it, and they can take it with 
them, and they cannot be jettisoned from it, and they begin to 
invest in it at an early age or insurance company, then adverse 
selection goes by the wayside. And we can write that into law, 
but we do not now. Why do we not? Because of the dynamics and 
the reality of a past health care system, not the current 
situation.
    It is my job and responsibility. I should not ask for 
somebody else to provide it for me, but I want to make sure 
that there is a system out there that I can select from that 
has a variety of diversities in it, that has a variety of 
applications. When I am young, I may think I need less. If I am 
married and my wife and I decide we are going to have children, 
I may need more. There are all kinds of dynamics that a 
marketplace ought to offer is what I am suggesting to you.
    We can debate this all day.
    Mr. Gerard. We probably should.
    Senator Craig. But we are not going to.
    What we are going to do is fix Medicare this year and 
prescription drugs, and then the pressures will grow in other 
areas. And those who do not have, who are still not of that age 
group, and cannot provide will stress out Medicaid in the State 
and the Federal system, and that will push us a little further. 
And your coalition that has been formed here will push us a 
little further, and ultimately we will get to a reformed 
system. But this year all we are going to be able to fix and 
afford in the dynamics of the current argument and debate is 
probably Medicare and prescription drugs, and I am prepared to 
do as much as I can to get that fixed. And it does burden the 
system less.
    I hope we can get to tort reform this year and handle 
another side of health care. We ought to be able to try to 
leverage that down a little bit and do some other dynamics.
    But no, when I made that statement what I am saying is the 
individual does have a responsibility, but we have got to 
provide a system that they can access and access reasonably 
with the best kind of information and education available to 
them because if not, they fall victim to the current system and 
the current system is something that you are about as upset as 
I am.
    Thank you, I want to say ``Mr. Chairman,'' Tom.
    Senator Harkin. Thank you, Senator.
    Senator Craig. You bet.
    Senator Harkin. I come from a State where we have a lot of 
insurance. Des Moines is known as the Hartford of the West. We 
are the second largest domiciliary of insurance companies in 
America. So I have, I think, studied the insurance business for 
a lot of my adult life because it is so important to our State.
    There is a principle that cannot be refuted in insurance, 
and the principle is that the more that is in the pool, the 
cheaper it is for all. The more in the pool, the cheaper it is 
for all. It is just a principle of insurance, and it is, I 
think, mostly apparent to anyone who just thinks about it for a 
second.
    The problem that I see with an approach which would permit 
individuals to decide from a cafeteria menu of different health 
care plans of what is best for them at one point in time--now, 
obviously, if I am young and I am very healthy, I want minimum 
coverage. So I am in a separate little pool by myself. If I am 
middle-aged and I am married, I might get another one. If I am 
older and now I may have a heart problem and stuff like that, 
then I am in another pool. So each one of these little pools, 
the expenses become more and more to the individual because you 
have so many separate pools out there.
    If you have a young person who says, well, I am young and 
healthy, I do not need insurance, okay, fine. So I take a 
little bit, and then something happens, the unforeseen happens, 
an accident happens. I didn't think I had cancer, and all of a 
sudden I do, but I didn't have the health care coverage for it. 
What do we do? Throw them out in the street? Sorry, you didn't 
anticipate that. You cannot get health care coverage now. You 
are just not going to throw people out in the street. So they 
are going to go right back to the emergency room one more time 
and get that kind of help there or through some other kind of 
system.
    Second, on the administrative costs, it is a fact that the 
Medicare system right now--the total cost of the Medicare 
system--the administrative costs are 2 percent. Mr. Hadley, is 
that----
    Dr. Hadley. Absolutely.
    Senator Harkin. 2 percent.
    Mr. Gerard. Better than Canada.
    Senator Harkin. I did not know that. What is Canada?
    Mr. Gerard. 3 to 4 percent.
    Senator Harkin. In the private sector, though, Mr. Hadley, 
the administrative costs, as we have heard, range from 25 to 30 
percent. Is that about right or not?
    Dr. Hadley. I do not know if it is exactly that high, but 
certainly it is somewhere in the neighborhood of 20 percent, I 
would say conservatively.
    Senator Harkin. Someone said that earlier. I just picked it 
up here. I do not know who said that.
    Mr. Diedrich. Mr. Chairman, in the case of Exelon, our 
administrative costs are on the order of 15 percent.
    Senator Harkin. 15 percent. So somewhere up in that range.
    So Medicare is 2 percent. So it would seem to me that 
intuitively that we ought to say what is it about this kind of 
system that keeps the administrative costs low, and is this 
adaptable. Can we do this on a broader basis, Mr. Hadley? Is 
there some way that this kind of a thing can be adopted on a 
broader basis?
    Dr. Hadley. Well, a big part of the administrative costs in 
the private sector are the advertising, the competing for 
business, the risk selection that goes on. Medicare does not 
have any of those. Medicare is an automatic system, and its 
administrative costs are narrowly focused on the process of 
paying bills. That is why you see that big difference. That 
would clearly be a savings of a single system, a national 
system.
    On the other hand, I think as Senator Craig said, there is 
virtue and value in having choices, and the Federal system 
which has a limited number of choices might be a good 
alternative to look at as something that is in between a 
completely unregulated private insurance system and one that 
has more constraints on it.
    Senator Harkin. You are talking about the Federal 
employees' health benefit system.
    Dr. Hadley. Right.
    Senator Harkin. Which is actually a pretty good system, I 
mean, for those of us who are in it.
    Dr. Hadley. If I could add, Senator.
    Senator Harkin. Yes.
    Dr. Hadley. Thinking about Senator Craig's comment on the 
issue of individual responsibility, I think the principle that 
we really need to talk about is really mandatory coverage 
perhaps at the individual level, not necessarily at the 
employer level, but at the individual level, in much the same 
way that in most States, if you want to drive a car, you have 
to have automobile insurance. And I think we could think as a 
Nation that if a condition of being here, of living here, is 
that you have to have health insurance coverage----
    Senator Harkin. I have heard that argument made, but I 
wonder if that passes constitutional muster. I have some real 
questions about whether that would pass constitutional muster. 
Now, obviously, when you drive a car, I do not have to take out 
auto insurance unless I voluntarily want to buy a car. And the 
Supreme Court has upheld that as a legitimate State interest. 
But to say that simply because I live here, I have got to buy 
health insurance, I do not know if that passes constitutional 
muster.
    Senator Craig. Let me add at this point that is a valid 
debate and I agree. I think maybe you phrased what I am after 
in a different kind of way that goes at the same point here. 
Individualize the system.
    But when we study the Federal system and the efficiencies 
built within that versus the Medicare system, I think there are 
some very fascinating dynamics there, that 8 million are 
managed by 120 individuals. It does not advertise per se. We 
see what we get and we have a selection book and a few other 
things out there. There is some advertisement in the costs of 
that versus obviously a Medicare system. And it would not be 
fair to say that those costs in Medicare are just for health 
care alone. They also manage other things within their system, 
and their efficiencies are substantial. But they are also 
highly regulated and very selective, and we have micromanaged 
them to a point of absolute frustration, as far as I am 
concerned.
    Mr. Gerard. I just wanted to make a comment. I was going to 
make the three points. I got sidetracked for a little too long 
with Senator Craig on one point.
    I again am thinking of Mr. Weinstein and folks who are 
trying to do the honorable thing and have their employees 
covered versus those who just say, go take care of yourself. We 
ought to reward those employers through the tax code who are 
providing levels of health care. If Mr. Weinstein wants to 
provide it at his restaurant or U.S. Steel wants to provide it 
at the steel plant, they ought not to be disadvantaged by those 
who are not providing it.
    Let me tell you that that is a huge problem in the 
manufacturing sector, that employers who are the old-line 
employers, as they say, who have built a strong manufacturing 
economy, whether it is General Motors or Exelon or U.S. Steel 
who are trying to do that, are disadvantaged in the global 
economy by about 10 percent. They are also disadvantaged by 
having to absorb the cost into the system of those who are not 
putting anything into the system. And we ought to be rewarding 
those folks through the tax system with some kind of increased 
tax incentive if they are providing a minimum level of 
coverage. We ought to reward them if they are providing a drug 
benefit to Medicare-eligible retirees, and that system ought to 
reward those as opposed to punishing them. Currently the system 
punishes them because they do not get the kinds of breaks that 
someone who is not providing gets.
    Last but not least, let me just say that this may be a bit 
parochial on my part, but I am actually getting sick and tired 
of having to look over our shoulder at rear guard actions that 
are being rumored to be proposed by the House Ways and Means 
Committee to undermine the trade adjustment allowance that is 
providing the 65 percent tax credit to workers who have lost 
their pensions through a PBGC closure. This benefit was passed 
by the Senate roughly a year ago. It is a very, very, very 
difficult benefit to access because you have got to get it 
through a State-approved program, and right now after 1 year, 
we only have, I think, nine States that have approved a 
program. Yet, we hear regularly that the House Ways and Means 
Committee on one or more tax measures that are coming are going 
to try to erode, undermine, or evaporate this TAA benefit. This 
is all that Mr. Kurilko can possibly rely on to give him some 
possible help if we could get the State of Ohio to give a 
program.
    So I think that the Senate ought to look at expanding that 
program, not limiting it. It was a 65 percent tax credit for 
people between the age of 55 and 65. It ought to be expanded so 
that it could give people who need access or were getting 
access to drug benefits from their employer, give them credit 
for that so Mr. Kurilko who needs eight different prescription 
medicines for he and his wife does not have to figure out do I 
have to cut the pill in half this week.
    So there are some meaningful, simple things that the Senate 
could do that certainly would not take the system to the kind 
that Mr. Craig and I are debating, but would take some of the 
pressure off the small employers and the large employers and 
restore some balance in the competitive workplace.
    We are killing the American manufacturing industries with 
this employer-based system that is not working and is squeezing 
and squeezing and squeezing to the point where you cannot do 
any more transfers to workers. It is robbing Peter to pay Paul. 
Our employers are facing crisis. Bargaining is absolutely 
unbelievably difficult. We have squeezed people into limited 
choices, PPOs and POSs, and people have to look at a book 
before they know who they call. And we have got accountants 
sitting in rooms telling people, no, you cannot go to that 
doctor. You were there once already. Talk about choice. The 
choices have been squeezed out of the system.
    So if I am sounding a bit frustrated, it is because I am. 
This is all I do now. When I ran for president, I did not think 
I was going to be the person that would have to spend the rest 
of his life trying to figure out how to give our membership 
health care.
    Senator Harkin. Well, we could go on. You have been 
generous with your time.
    It is becoming more and more clear, at least to this 
Senator, that people like Mr. Kurilko--I mean, we say we are 
going to debate this and maybe we will get to this sometime, 
but his time is right now not next year or the year after. His 
time is right now. Mr. Weinstein's time is right now. His small 
business is at the brink. Our school districts. Mr. Burrow, we 
have not had much interchange here, but when the cost of health 
care is the same as the starting salary of a beginning teacher, 
what do you do? What happens to those teachers? What happens to 
the kids in our schools? This whole thing just seems to have 
come to sort of like a critical mass.
    Mr. Gerard. It is the perfect storm.
    Senator Harkin. Yes, the perfect storm. Everything has come 
together all at once here. It is the trade. It is our imbalance 
in trade. It is older workers. It is modernization, as you have 
said, the downsizing. It is people living longer in our 
country. It is the advertising of the drug companies. I have 
been as supportive in drug research as anyone, but when their 
advertising now exceeds the amount they put into research, 
something is wrong. And especially when they are advertising 
things that I cannot buy.
    When they advertise a drug that is a prescription drug, I 
cannot buy it. I have got to get a doctor's prescription before 
I buy it.
    I cannot tell you how many doctors I have had come to me 
and say, Senator, you have got to go back to the system we had 
before where they did not advertise drugs because I get people 
coming in asking me to write a prescription for this drug, and 
I say to them, well, but there is a cheaper generic drug. No, 
no, I want this drug. As one doctor said, I am not their 
parents. If they want it, it is not going to hurt them, it is 
going to make them better. There is a cheaper alternative, but 
because of the advertising, I am almost forced to write a 
prescription for them for that drug.
    Mr. Diedrich. Absolutely correct. We know that all too 
well. We hear that from our employees all the time.
    To put oneself in the shoes of the physician, they too are 
interested in providing good quality customer service, which 
means when that patient coming in carrying that ad, beautiful, 
full-color, just as you said, Senator, asks, will this work for 
my condition, the doctor will say, yes.
    Senator Craig. Well, let me add to that because that is 
exactly what is happening, Tom. That is also a form of 
defensive medicine. The doctor does not deny the choice of the 
consumer, that the consumer has been led to the door of that 
particular drug, because he may find his own self at risk, 
failure to prescribe, even though you and I have spent a lot of 
time with generics and alternatives and we know that many of 
them are 95, 97 percent as good.
    I am very frustrated by the amount of advertising--I agree 
with the Senator--as a part of the total cost of business. At 
the same time, if I am a provider, if I am a physician, and my 
patient says that is what I want, and somebody else is going to 
pay for it, I probably am going to prescribe it because I do 
not want any sense of risk here or that patient coming back to 
me a month later and saying, you did not do what I wanted you 
to do and my health has deteriorated, and therefore you are at 
risk or you are liable, because we know what that system will 
do to them. So that is another factor involved in this whole 
debate that we have got to deal with.
    Thank you.
    Mr. Gerard. I am not a lawyer. I am proud of that. But let 
me just try and defend them for a moment.
    Senator Harkin. Wait a minute.
    Senator Craig. Neither am I and I am proud of that too. So 
you and I have that in common. Tom, we put you at risk here.
    Senator Harkin. Did you meet my used-to-be friend here?
    Mr. Gerard. One of the things that I think we need to put 
in perspective, Senator Craig, is the whole issue about tort 
reform. Let us not mislead ourselves. That is not going to fix 
the health care system. It is 1 or 2 percent of the problem.
    Senator Harkin. I am sorry. Less than 1 percent.
    Mr. Gerard. Less than 1 percent of the problem. It may be 
good politics, but it is not going to fix the health care 
system. I do not want to try and defend them.
    But let me tell you I had to become 55 years of age before 
I found out that heartburn is really acid reflux disease and I 
needed a $3 pill every time I got heartburn. Rolaids will do 
the same trick.
    Senator Craig. The reality is for this Senator and others--
excuse me--I am not going to fix one part of it without fixing 
the other. Tort reform will have to go hand-in-glove. We are 
not going to pick on one segment of an industry and let the 
other one sit alone. The reality is the whole, not the pieces.
    Senator Harkin. Well, I agree that the whole has to be 
addressed, but we have to address it proportionately. If it is 
less than 1 percent of the increased costs, but drug costs are 
the major portion and it is in advertising and they are 
advertising prescription drugs, it seems to me that therein 
lies some savings, big savings.
    Senator Craig. And you and I agree on that, Tom.
    Senator Harkin. Let's get together on that one.
    Mr. Burrow. I am going to have to close this hearing down, 
but Mr. Burrow wanted to say something.
    Mr. Burrow. Senator, you started with the question of what 
are we going to do, how are we going to fix this. Obviously, we 
have been presented with a number of options. The bottom line, 
though, is whether it is individual, whether it is a modified 
system of what we have, it has got to be affordable. When the 
individual consumer does not take home more in the paycheck 
because of the fact that it is going to health insurance, when 
I sit down and have to create premiums that I know are going to 
cause my colleagues to be laid off, that is where the rubber 
hits the road. We can talk about the philosophy, but the 
reality is it is affecting the economy and it is affecting the 
ability of this Nation to survive economically.
    Senator Harkin. No doubt about it.
    Well, thank you. You have all been generous with your time. 
If there are any last little things that anybody wanted to add?
    Mr. Gerard. I just want to thank you and Senator Specter. I 
had not met Senator Craig until today, but I want to thank you 
for taking the time to hear from folks. I really appreciate 
that you are struggling with a difficult problem. We have done 
some analysis of our system versus the systems globally and 
with your permission, I will forward that on to you and you can 
pass it around to your colleagues.
    Senator Harkin. I would like to have that, Leo. Thank you 
very much.
    I really feel that what we ought to do here as a Congress 
is we ought to have some self-imposed deadline or something 
whereby we address these issues before we go home at the end of 
the year. We ought to come out with some comprehensive approach 
to getting a handle on these increased costs of health care and 
what we are going to do about small businesses and what we are 
going to do about labor retirees. This ought to be the number 
one thing that we in Congress debate. We all have different 
views on it. Of course, we do. No one has, I think, the right 
answer, but I think by working together and debating and voting 
and hammering these things out over a short period of time, I 
think we might come up with something that at least would be 
better than what we have got right now.
    But if we just limp along from 1 year to the next and 
nothing ever happens, people are not only going to get 
frustrated, but more and more people are going to fall behind 
in terms of their health care, and we are in kind of a death 
spiral economically in this country unless we do something to 
stop it. So I would hope that Congress could this year just 
say, before we go home at the end of the year, we are going to 
address this and have some votes and pass something that will 
address this.
    Now, Mr. Craig said we are going to try to get to 
prescription drugs and Medicare reform this year, and that 
might be a good part of it. I hope we at least get to that 
anyway before we get out of here this year.
    So again, I thank you all very much, and if you will 
forward any other information you have that you think would 
help us in our debates and our deliberations, please do.
    Mr. Kurilko, thank you very much for being here. I wish we 
could do something now to address your problem because you 
cannot wait.

                         CONCLUSION OF HEARING

    Thank you all very much for being here. That concludes our 
hearing.
    [Whereupon, at 11:04 a.m., Wednesday, May 14, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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