[Senate Hearing 108-424]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-424

          WHAT'S DRIVING HEALTH CARE COSTS AND THE UNINSURED?

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

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

     EXAMINING HEALTH ISSUES RELATING TO HEALTH CARE COSTS AND THE 
UNINSURED, FOCUSING ON INEFFICIENCIES IN AMERICA'S HEALTH CARE DELIVERY 
                                SYSTEMS

                               __________

                            JANUARY 28, 2004

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                  JUDD GREGG, New Hampshire, Chairman

BILL FRIST, Tennessee                EDWARD M. KENNEDY, Massachusetts
MICHAEL B. ENZI, Wyoming             CHRISTOPHER J. DODD, Connecticut
LAMAR ALEXANDER, Tennessee           TOM HARKIN, Iowa
CHRISTOPHER S. BOND, Missouri        BARBARA A. MIKULSKI, Maryland
MIKE DeWINE, Ohio                    JAMES M. JEFFORDS (I), Vermont
PAT ROBERTS, Kansas                  JEFF BINGAMAN, New Mexico
JEFF SESSIONS, Alabama               PATTY MURRAY, Washington
JOHN ENSIGN, Nevada                  JACK REED, Rhode Island
LINDSEY O. GRAHAM, South Carolina    JOHN EDWARDS, North Carolina
JOHN W. WARNER, Virginia             HILLARY RODHAM CLINTON, New York

                  Sharon R. Soderstrom, Staff Director

      J. Michael Myers, Minority Staff Director and Chief Counsel

                                  (ii)






                            C O N T E N T S

                               __________

                               STATEMENTS

                      WEDNESDAY, JANUARY 28, 2004

                                                                   Page
Gregg, Hon. Judd, a U.S. Senator from the State of New Hampshire.     1
Holtz-Eakin, Douglas, Director, Congressional Budget Office, 
  Washington, DC.................................................     2
Milstein, Arnold, M.D., Medical Director, Pacific Business Group 
  on Health, and Physician Consultant, Mercer Human Resource 
  Consulting, San Francisco, CA..................................     5
Davis, Karen, President, The Commonwealth Fund, New York, N.Y....     6
Conover, Christopher J., Assistant Research Professor of Public 
  Policy Studies, Director, Health Policy Certificate Program, 
  and Senior Research Fellow, Health Inequalities Program, Center 
  For Health Policy, Law, and Management, Terry Sanford Institute 
  and Public Policy, Duke University, Durham, NC.................     8
Wilensky, Gail R., Senior Fellow, Project Hope, Bethesda, MD.....    10

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Douglas Holtz-Eakin..........................................    32
    Response to questions of the HELP Committee from Arnold 
      Milstein, M.D..............................................    41
    Karen Davis..................................................    73
    Response to questions of Senator Gregg from Christopher J. 
      Conover....................................................   107
    Gail R. Wilensky.............................................   109
    Response to questions of the HELP Committee from CBO.........   114
    Associated Builders and Contractors..........................   115
    National Federation of Independent Business..................   116
    The Association Healthcare Coalition.........................   117

                                 (iii)

  

 
          WHAT'S DRIVING HEALTH CARE COSTS AND THE UNINSURED?

                              ----------                              


                      WEDNESDAY, JANUARY 28, 2004

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:24 a.m., in 
room SD-430, Dirksen Senate Office Building, Senator Gregg, 
chairman of the committee, presiding.
    Present: Senators Gregg, Enzi, Alexander, Sessions, 
Kennedy, Dodd, Harkin, Murray, and Clinton.

                  Opening Statement of Chairman Gregg

    The Chairman. We are going to get started early because we 
have got, unfortunately, three votes that have been stacked 
around 11:30. As a result, this hearing will be disrupted 
significantly. I apologize to my fellow members for proceeding 
early, but I do think we should get going here. I appreciate 
Senator Clinton's being here. I know Senator Kennedy is going 
to be participating also. I think we will also pretty much 
forego opening statements because we really want to hear from 
the panel.
    This hearing, just briefly to outline its parameters, is 
about the issue of health care and its costs, its affordability 
and the uninsured. It is part of a process that we are trying 
to go through to get some sort of hard data on what the issues 
are that drive the cost of health care and what the issues are 
that are creating our uninsured pool, which is getting larger 
and larger, unfortunately.
    I don't think there is any issue that Americans face today 
from a standpoint of cost that they have more concerns about 
than their health care bills. Certainly, this committee has a 
very deep interest in trying to address that issue.
    Let me introduce the witnesses before we start taking 
testimony. We are fortunate to be joined by the Director of the 
Congressional Budget Office, Dr. Holtz-Eakin, who obviously has 
some very hard and effective data that I know he intends to 
present to us on the issue of health care. His expertise is 
well known.
    We are also joined by Dr. Milstein, who serves as the 
Medical Director of the Pacific Business Group on Health, the 
largest health care purchasing coalition in the United States. 
Dr. Milstein also serves as a worldwide partner at Mercer Human 
Resource Consulting, and Dr. Milstein's expertise focuses on, 
but is certainly not limited to, health care purchasing 
strategies, clinical performance measurements, and the 
psychology of clinical performance movements.
    We are joined also by Karen Davis, who has served for the 
last 9 years as President of the Commonwealth Fund, the 
Nation's fourth oldest private philanthropy, engaged in 
independent research on health and social issues. Dr. Davis is 
a nationally recognized economist with a distinguished career 
in public policy and research. She has served as Deputy 
Assistant Secretary for Health Policy for the Department of 
Health and Human Services.
    We are also joined by Dr. Conover, who is currently the 
Assistant Research Professor of Health Policy Studies at the 
Terry Sanford Institute of Public Policy at Duke University, as 
well as a senior fellow at the Center for Health Policy, Law, 
and Management at Duke. He is also Director of the Health 
Policy Certificate Program at Duke. Dr. Conover's research 
focuses in the area of State health policies, estimating the 
magnitude of social burden of illness and health regulation.
    Further, we are joined by Gail Wilensky, who is well known 
to this committee, having testified many times in this 
committee. She is a senior fellow at Project HOPE, the Health 
Opportunities for People Everywhere, and the International 
Health Education Foundation. Dr. Wilensky is Co-Chair of the 
President's Task Force to Improve Health Care Delivery For Our 
Nation's Veterans, which covered health care for both veterans 
and military retirees. She also served as Deputy Assistant for 
Policy Development for President Bush, advising the President 
on health and welfare issues. Prior to that, she served as the 
Administrator of the Health Care Financing Administration. Dr. 
Wilensky's research endeavors include developing and evaluating 
policies relating to health reform and to ongoing changes in 
the medical marketplace.
    It now being 10:30, let us start the hearing. Senator 
Clinton, do you wish to make a statement or anything?
    Senator Clinton. No, Senator Gregg. I am just very grateful 
that you are holding this hearing and I want to thank all the 
witnesses. Obviously, this is a critical issue, one that we 
have to address, and I appreciate you taking the lead on doing 
it.
    The Chairman. Thank you. Thank you very much. Obviously, 
this is an issue on which your expertise is unique, also, so it 
is very appropriate to get your input on this as we move 
forward.
    Dr. Holtz-Eakin, if you could give us your thoughts, and 
then we will move down the line.

   STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
                 BUDGET OFFICE, WASHINGTON, DC.

    Mr. Holtz-Eakin. Mr. Chairman, Senator Clinton, thank you 
for the chance to be here today and talk a little bit about 
some of the work that CBO has done in this area. My written 
testimony, which I submit for the record, covers three topics. 
I will cover the same three topics briefly and we can turn to 
questions.
    Topic one is characteristics of the uninsured. We will move 
from that to some facts and features of the growth in health 
care costs in the United States and then touch briefly on the 
connection between the two, although I will spend less time on 
that.
    The first issue is just how many are there when you start 
counting the uninsured and there are really three different 
ways to measure the uninsured. One approach is to count how 
many people are uninsured over a particular period, say 1 year, 
and simply see how many remain uninsured over the entire year. 
A second approach would be to take that same period and count 
the number of people who have any spell of uninsurance during 
the year and, as a result, would count in that way. And the 
third is a mixture of the two, which is to look at any day 
during that year or week during that year and go out and count 
the number of people who happen to be uninsured at that point 
in time.
    In work that the CBO did using data from 1998, we find that 
one gets very different answers if one takes different 
measures. Using those data, there are roughly 21 to 31 million 
uninsured for an entire year, in contrast to roughly 60 million 
individuals who would be uninsured at some point during the 
year, and then lying in between is the number that is 
conventionally used to count the uninsured, which is the number 
who might be uninsured at any point in time, and that is on the 
order of 40 million individuals in the 1998 data.
    In work that has been done at the Agency for Health Quality 
and Research, those studies suggest that the same basic 
patterns prevail using more recent data, so that depending on 
the kind of measure that one uses, you can get numbers that 
differ a great deal.
    Now, the difference between 20 million and 60 million 
suggests that there is a lot of dynamics under the surface of 
counting the number of uninsured, and in the testimony, we show 
some evidence from the Survey on Income and Program 
Participation of the duration of spells of uninsurance. In 
those data, one finds that 45 percent of the uninsured have 
spells that last for less than 4 months, and so they are 
relatively short spells and they turn over.
    In contrast, there are about 26 percent of individuals who 
have spells that last between 5 months at a year. And then at 
the longer duration, 13 percent of individuals have spells of 
one to 2 years in length, and the remaining 16 percent have 
spells that exceed 2 years.
    The characteristics of these individuals are, broadly 
speaking--I will leave the details, which are described in 
Table 1 in the testimony for further discussion, but roughly, 
one finds that adults are more likely to be uninsured and have 
longer durations than younger people and children especially, 
perhaps in part due to the provision of Medicaid as targeted 
toward the children, and that the vast majority are in working 
families, that about 75 percent of those individuals are 
uninsured because employers do not offer employer-sponsored 
insurance. And finally, low education and low income are 
associated with both a greater incidence of uninsurance and 
longer durations, as well.
    One fact that has captured some attention is the rise 
recently in the number of unemployed or the fraction of 
uninsured, from 16 percent to 17 percent, roughly, over the 
past couple of years. That has been associated with a decline 
in employer-sponsored insurance from 67 percent to 64 percent. 
We simply note in the testimony that this kind of a shift in 
the coverage from employer-sponsored insurance has occurred in 
the past, and indeed, this is smaller than a comparable 
movement that occurred in the early 1990s.
    I would suggest that there is one large message in these 
data and that message is that not all the uninsured are created 
equal. In fact, there appear to be two broad groups, one of 
which suffers short spells of uninsurance, perhaps driven by 
job market changes, and another group that has long duration 
spells of uninsurance, and that policies would be more 
effective if they were tailored to recognize the different 
characteristics of the different kinds of uninsured.
    Turning to the broad trends in health care costs and health 
care spending in the United States, in 2002, U.S. expenditures 
on health-related goods and services were $1.6 trillion, a 
number that was reached by averaging real growth of over 4.5 
percent between 1970 and 2002. Despite a slowdown in the mid-
1990s, the most recent data are consistent with that long-run 
trend. We saw between 1997 and 2002 a growth that, in real 
terms, at 4.6 percent per year.
    The result is that health care spending has doubled as a 
fraction of the national economy, rising from seven percent of 
GDP in 1970 to about 15 percent in the most recent data, and 
among the categories of health care spending, pharmaceuticals 
are rising most rapidly, on the order of 14 percent in recent 
data, although they still constitute only about ten percent of 
spending.
    There are a lot of factors associated with this growth. We 
will return to them, I am sure. Some are technology, associated 
with technology and the incentives for innovation, deployment 
and utilization of those technologies, others associated with 
aging, higher incomes, and the nature of insurance. But one of 
the genuine results that we have seen is that people are 
unhappy with the current State of affairs, despite the 
increases in spending. We can come back to the sources of that.
    And finally, in the link between increasing costs and 
uninsurance, there is very little hard evidence on this topic 
and I would simply make the observation, in many ways, rising 
health care costs should make insurance more valuable and the 
desire to protect one's self against the large costs of medical 
expenditures would increase the demand for insurance, other 
things equal.
    Nevertheless, we have seen some declines in insurance and 
there is some intriguing evidence by David Cutler that, despite 
the fact that the share that employees are asked to cover has 
not gone up, the total amount that they cover is rising. As a 
result, although firms are offering, the take-up rate by 
individuals has declined and that may be part of the link 
between rising costs and uninsurance.
    I would be happy to answer any questions. That is a brief 
summary of the written testimony that we submitted and I look 
forward to the discussion.
    The Chairman. That is very good data and we appreciate it. 
We especially appreciate the written testimony.
    [The prepared statement of Mr. Holtz-Eakin may be found in 
additional material.]
    The Chairman. Senator Kennedy has joined us. I apologize 
for starting a little early, Senator, but we have got a series 
of votes stacked and it is going to disrupt this hearing 
significantly, so I thought we should get going.
    Senator Kennedy. I am in complete agreement.
    The Chairman. You are certainly here right on time, but we 
started a little early. Do you have any statement you want to 
make?
    Senator Kennedy. No.
    The Chairman. You are back from New Hampshire and you are 
happy to be----
    Senator Kennedy. To be back.
    The Chairman. Sad to have left New Hampshire----
    Senator Kennedy. Sad to leave New Hampshire-- [Laughter.]
    --but we have a good panel, Mr. Chairman, and I look 
forward to their testimony.
    The Chairman. Thank you. Thank you, Senator.
    Dr. Milstein?

 STATEMENT OF ARNOLD MILSTEIN, M.D., MEDICAL DIRECTOR, PACIFIC 
  BUSINESS GROUP ON HEALTH, AND PHYSICIAN CONSULTANT, MERCER 
      HUMAN RESOURCE CONSULTING, SAN FRANCISCO, CALIFORNIA

    Dr. Milstein. I thank the committee for the opportunity to 
share my perspective that inefficiencies in health care 
delivery comprise a substantial fraction of current health 
spending, health insurance premiums, and that much of this 
inefficiency can be eliminated by facilitating the market's 
ability to identify and reward efficient, high quality 
physicians, hospitals, and treatment options.
    There are two primary sources of inefficiency in the U.S. 
health care system. First, the provision of many health care 
services that offer no measurable gain in health or patient 
satisfaction. These services are well described in the 
Dartmouth research results, which I submitted with my 
testimony. This type of inefficiency occurs more in some 
communities than in others, but it occurs even in our most 
medically efficient communities, such as Minneapolis and 
Portland, Oregon.
    Second is detailed in the Institute of Medicine's 
``Crossing the Quality Chasm'' report, the provision of all 
health care services by antiquated clinical work methods that 
rely on faulty human memory and paper medical records. Since 
these methods of clinical work are severely mismatched to the 
challenges of delivering high-technology services to an 
American population with increasingly complex chronic 
illnesses, they offer a significant preventable waste of 
resources and preventable human suffering.
    These two types of inefficiency are invisible to health 
care providers and to consumers because we don't routinely 
measure and report how physicians, hospitals, and treatment 
options compare on the average total health care spending that 
they incur when used to treat an episode of acute illness or a 
year's worth of chronic illness and preventive care. I will 
refer to this total average level of spending per illness as 
longitudinal efficiency.
    We are also in the dark with respect to the level of 
quality achieved by particular physicians, hospitals, and 
treatment options. We do not lack methods by which to measure 
both longitudinal efficiency and quality of care, but most 
private sector health benefit plans lack a sufficiently large 
database in any one community to make valid comparisons among 
physicians or specific hospital service lines, such as cardiac 
surgery.
    The invisible hand of the market could transform the 
majority of these inefficiencies into significantly reduced 
rates of health insurance premium increase over a ten-year 
period with two catalytic ingredients from Congress. First, 
encouraging CMS to routinely and continuously share with the 
private sector the patient privacy protected CMS claims 
database so that all health plans, all health benefit plans, 
would be able to increase their precision in measuring the 
longitudinal efficiency and quality of physicians, hospitals, 
and treatment options. The patient privacy protected CMS claims 
database is a grossly underutilized national information asset 
with unnecessarily restrictive access rules for private sector 
health benefit plan sponsors.
    Second, encouraging CMS and other health plans to reward 
clinical performance improvement by either more favorable 
payment for doctors, hospitals, and treatment options that 
offer superior quality and longitudinal efficiency, and/or by 
lower cost sharing for patients who preferentially use such 
providers and treatment options. For example, Congress could 
refine its specifications for the types of health benefit plans 
to which tax-advantaged portable spending accounts would apply 
to promote both of these health benefit plan features.
    Americans have access to standardized longitudinal 
efficiency measurements for appliances and for automobiles, but 
not for the industry that consumes a much greater share of 
their income and benefits. Absence of such measurements keeps 
American hospitals, doctors, and patients in the dark with 
respect to comparative performance and unable to identify 
opportunities to make American health insurance much more 
affordable.
    When paired up with standardized publicly reported quality 
of care measurements, longitudinal efficiency measurements 
would comprise a new navigational system by which all 
stakeholders could improve America's health and slow future 
increases in health insurance premiums. It would also send a 
constructive signal to new medical technology developers. The 
market will judge their innovations based not only on their 
unit prices and their health benefit, but also on their 
contribution to reducing total health care spending.
    Thank you for the opportunity to share my perspective on 
how large, invisible, and substantially capturable 
inefficiencies in American health care delivery contribute to 
the unaffordability of health insurance.
    The Chairman. Thank you, Doctor. Those are very interesting 
ideas which we will want to follow up on here.
    [The prepared statement of Dr. Milstein may be found in 
additional material.]
    The Chairman. Dr. Davis?

STATEMENT OF KAREN DAVIS, PRESIDENT, THE COMMONWEALTH FUND, NEW 
                         YORK, NEW YORK

    Ms. Davis. Thank you, Mr. Chairman and members of the 
committee, for this invitation to join you this morning.
    Rising health care costs are a problem for all Americans, 
but they weigh especially heavily on uninsured and underinsured 
individuals, who pay much of the cost of their health care 
directly out of pocket. We can no longer afford or tolerate 
wasteful spending on care that does not benefit patients. We 
can't have duplication of expensive procedures, medical errors, 
or the high administrative costs incurred by the Nation's 
insurers and providers.
    Real solutions should directly target these sources of 
unacceptably high cost, not simply shift costs from employers 
to workers or from government to beneficiaries of public 
programs. Most fundamentally, we must act to achieve automatic 
and affordable health insurance for all, to ensure that the 
benefits of modern medicine are widely accessible and to ensure 
that investment in health care contributes to economic growth 
and a healthier, more productive society.
    Health insurance premiums are going up 14 percent a year. 
That is faster than the 8.5 percent increase in early 2003 in 
benefits per enrollee, and that divergence between premiums and 
costs bears watching.
    The U.S. has the highest health care spending of any 
country, and yet we are the only major industrialized Nation 
not to provide health insurance for all. I am particularly 
disturbed by the rapid increase in administrative costs. They 
went up 16 percent in 2002 and it made it the fastest rising 
component of national health expenditures.
    Consumer-driven health care, which is the major private 
sector cost containment strategy, is unlikely to address the 
fundamental causes of rising health care cost. In fact, it is 
likely to have adverse consequences for patients. Consumer-
driven health care contributes to excessive financial burdens 
on patients, particularly those with lower income, but also 
those who are sicker, and patient costs are already 
unacceptably high. Patient cost sharing is a blunt instrument 
for reducing utilization of services. It reduces the use of 
effective services that are already underutilized.
    There are better alternatives for achieving economies in 
health care than shifting cost to patients. Costs are higher in 
the U.S. than in other countries because we pay higher prices 
for the same services, we have higher administrative costs, and 
because physicians prescribe specialized services that are not 
clinically justified.
    If we were to adopt fundamental reforms, such as an 
integrated private-public strategy to purchase health services 
efficiently, demand quality performance, and streamline 
administrative costs, substantial savings could be achieved.
    Short of fundamental reforms, practical steps that could be 
taken in the near term include reducing medical errors and 
improving care coordination through a major public-private 
investment in health information technology. Public reporting 
of cost and quality data, as Dr. Milstein stressed, knowing 
what costs are over an episode of care in quality, and studies 
show that they vary enormously from hospital to hospital, 
physician to physician, and area to area. If we are serious 
about doing better, we really need to know where we stand.
    I also endorse Dr. Milstein's call for provider performance 
on quality and efficiency. Medicare needs to become a leader in 
paying for performance. It needs to move quickly to reward 
those providers who are both high quality and low cost over the 
course of a patient's treatment.
    We also need the development and promulgation of clinical 
guidelines and quality standards. Public programs and private 
insurers would benefit from a Federal agency charged with 
establishing the scientific basis for effectiveness not just of 
new drugs, as FDA does, but for specialty consultations, 
surgical procedures, and tests.
    Better management of high cost patients. Ten percent of 
patients account for 70 percent of costs. If public programs 
and private insurers were willing to pay for services of 
nonphysician personnel that are needed for high-cost care 
management, we could reduce the cost. We also need to 
streamline administrative efficiency and test models there.
    Finally, we need automatic and affordable health insurance 
coverage for all. Employers, Federal and State governments, and 
individuals must all share responsibility for achieving 
automatic and affordable health insurance for all. The most 
realistic strategy is a combination of group insurance options, 
including employer coverage, a new Congressional health plan, 
expansion of SCHIP to all low income below 150 percent of 
poverty, and the ability to get onto Medicare earlier for the 
disabled in a two-year waiting period and for older adults. But 
premium assistance based on income will be required to make 
premiums affordable for all enrollees.
    Together, these steps would take us a long way toward 
ensuring that this country has a high performing health system 
worthy of the 21st century. Thank you.
    The Chairman. Thank you, Dr. Davis. Thank you for those 
ideas.
    [The prepared statement of Ms. Davis may be found in 
additional material.]
    The Chairman. Dr. Conover?

    STATEMENT OF CHRISTOPHER J. CONOVER, ASSISTANT RESEARCH 
  PROFESSOR OF PUBLIC POLICY STUDIES, DIRECTOR, HEALTH POLICY 
    CERTIFICATE PROGRAM, AND SENIOR RESEARCH FELLOW, HEALTH 
   INEQUALITIES PROGRAM, CENTER FOR HEALTH POLICY, LAW, AND 
  MANAGEMENT, TERRY SANFORD INSTITUTE OF PUBLIC POLICY, DUKE 
               UNIVERSITY, DURHAM, NORTH CAROLINA

    Mr. Conover. Mr. Chairman and members of the committee, it 
is a great pleasure to be here today.
    How big a role does health services regulation play in 
explaining the extraordinarily high level of health costs in 
the U.S., and how many uninsured might be covered were we 
somehow to find a way to reduce this regulatory burden? My 
brief remarks today will provide some tentative answers to both 
questions based on the preliminary results of more than 2 years 
of research, conducted in part under contract to the Department 
of Health and Human Services.
    There are two ways to answer the first question. First, we 
looked at the costs of regulation in other industries, such as 
airlines, railroads, telecommunications, other industries that 
have been long studied by economists, and we used their best 
estimates to calculate the percent of gross economic activity 
in those industries that is attributable to regulatory costs. 
By applying these percentages to the health sector, we arrived 
at very rough, back of the envelope estimates of upper and 
lower bounds on the plausible magnitude of this regulatory 
burden.
    As you can see on Figure 1, this so-called top-down 
approach suggests that in 2002 alone, health regulation may 
have imposed an annual cost of at least $28 billion, but as you 
can see, it may have been as high as $657 billion. Clearly, a 
30-fold difference between our minimum and maximum cost 
estimates is no more gratifying to me as a researcher than it 
is to you as policy makers.
    Moreover, it is easily possible that the regulatory burden 
in health care is even higher than a simple extrapolation from 
other industries might suggest. After all, according to 
University of Rochester health economist Chuck Phelps, the U.S. 
health care system, while among the most market-oriented in the 
industrialized world, remains the most intensively regulated 
sector of the U.S. economy.
    So we also answered this question using a much more fine 
grained bottom-up approach. We looked at the literature for 
nearly 50 different kinds of Federal and State health services 
regulations, including regulation of health facilities, health 
professionals, health insurance, pharmaceuticals and medical 
devices, and the medical tort system. These various regulations 
covered the gamut from mandated health benefits to State 
Certificate of Need requirements for hospitals and nursing 
homes.
    We systematically tallied both the benefits and the costs 
associated with these regulations, finding the expected costs 
of regulation in health care amounted to $335 billion in 2002. 
As shown at the bottom of Figure 2, our estimate of benefits 
for these regulations was about $207 billion, leaving a net 
cost of $128 billion.
    Three areas account for the lion's share of this net 
burden. The medical tort system, which includes litigation 
costs, court expenses, and defensive medicine totals $81 
billion. FDA regulation adds another $42 billion, and health 
facilities regulation adds yet another $29 billion. Thus, the 
States and Federal Government both have roles to play in 
finding ways to trim regulatory excess.
    Now, how does this all relate to the uninsured? Our bottom-
up look allowed us to determine that the net cost of regulation 
borne by the health industry itself is about 6.4 percent, 
meaning that health expenditures and health insurance premiums 
are at least that much higher than they would be absent 
regulation, or excess regulation. Based on consensus estimates 
about the impact of higher premiums on how many would likely 
drop health insurance, this increased cost implies a 2.2 
percent reduction in the demand for coverage, and this 
translates into nearly five million uninsured whose plight 
might reasonably be attributed to excess regulatory costs.
    But, of course, there is a different way to look at this 
burden, as well. In light of the $35 billion in subsidized care 
that is already provided to uninsured patients every year, 
researchers have recently estimated it would only cost $34 to 
$69 billion in added health spending to cover all of the 
Nation's uninsured.
    In light of these figures, the potential opportunity costs 
of this regulatory burden become very clear. The average 
estimates from both our top-down and bottom-up look at this 
problem suggests that we could cover this cost several times 
over. Admittedly, our estimates are still preliminary, and we 
are now engaged in a process of careful review of all of them. 
But it seems unlikely that the adjustments yet to come in our 
figures would alter this central conclusion. The net burden of 
health services regulation likely exceeds the annual cost of 
covering all 44 million uninsured.
    So a legitimate policy question is whether any unmeasured 
benefits of this apparent excess regulation outweigh the 
benefits of coverage for all Americans. For example, in the 
context of the IOM finding, that 18,000 uninsured die every 
year due to lack of coverage, is maintaining the full extent of 
our current regime of health regulation worth letting that 
continue? This is not a question for me to answer, but I hope 
that you will seriously consider it as you wrestle with one of 
the most challenging health policy issues now on the national 
agenda. Thank you for your time.
    The Chairman. Thank you, Doctor. Those are obviously 
fascinating findings that will have a significant impact on 
this debate, I suspect.
    [The prepared statement of Mr. Conover may be found in 
additional material.]
    The Chairman. Dr. Wilensky?

  STATEMENT OF GAIL R. WILENSKY, SENIOR FELLOW, PROJECT HOPE, 
                       BETHESDA, MARYLAND

    Ms. Wilensky. Thank you, Mr. Chairman and members of the 
committee. I am going to try to step back and again focus on 
the larger issue of the relationship between increased health 
care spending and the decline in the number of uninsured and 
the major factors that are driving this increase and to put 
this back in the context of the strategies available to you to 
try to lower the number of uninsured. I am going to make about 
a half-a-dozen major points during my five minutes.
    The first is that it would be useful to think about the 
uninsured as a chronic problem rather than an acute one, one 
that will require explicit policy decisions to change, but 
nonetheless a chronic issue, worse during periods of economic 
decline, somewhat better during periods with robust growth, but 
one that has seen secular declines in coverage over the last 25 
years. About 25 years ago, 12.5 percent of the population was 
uninsured. That number is about 15 percent. The number that we 
have now, about 43 million, is about the same as existed in 
1997-1998, a period of very robust economic growth.
    There are two main reasons that have been cited in the 
literature about why we have seen this decline in coverage over 
time. The first has to do with the changing economic structure, 
movement more toward the service sector, part-time and 
entrepreneurial jobs, changes, frankly, that Members of 
Congress are not likely to be able to change.
    But the second has to do with increased health care 
spending relative to growth and income. What we have seen 
looking at the long haul, the last 50 years, is that, on 
average, there has been a four percent increase per year per 
person in real spending on health care compared to an increase 
of about 1.5 percent growth in real terms per person per year 
in the economy.
    There was an interesting diversion from that trend in the 
1990s, when the growth in health care spending was closer to 
two percent per year in real terms, per person per year, and 
there may be some things for us to learn about some of the 
changes that allowed us to get off that long-term growth 
spending period in the economy for health care.
    Now, in asking whether or not increased spending is really 
a problem, you tend to get different answers over time 
depending on who is being asked. At one level, you could say as 
long as people feel they are getting increased value for their 
health care spending, it may indeed be possible to continue 
spending parts or most of our increased growth in the economy 
on health care. But clearly, when it comes to matters regarding 
the uninsured, increased health care spending is a problem.
    It makes it more expensive to try to lower the numbers of 
uninsured and we know that increased health care spending is 
itself associated with increasing numbers of uninsured. So 
while in general it may not be an issue if we actually feel we 
are getting increased value for the spending, when it comes to 
reducing the number of uninsured, it will make the problem much 
more difficult to resolve.
    There are a number of issues in terms of why we have seen 
this health care spending. You have heard many of them 
mentioned already. I am just going to summarize them briefly.
    Advances in medical technology, something that we are all 
proud of that this committee in particular has helped to 
promote. In health care, technology tends not to be associated 
with lower spending the way it is in other sectors of the 
economy, where new technology usually provides services at a 
lower rate as well as higher quality, or they are not adopted 
unless the payers are willing to pay more, and the question of 
why that doesn't happen in health care is an interesting and 
important one.
    Medical liability, an issue that has been raised in 
Congress a number of times, the direct costs and practice of 
defensive medicine is an issue that drives health care 
spending. Lifestyle issues, particularly tobacco and now, as we 
know, obesity, has had a major impact in terms of increasing 
health care spending.
    Our system of reimbursement, as we have already heard, that 
doesn't pay for performance, that, in fact, pays for the 
correction of defects as well as the provision of the defect in 
the first place, is part of the driver of health care.
    And the way most of us get health care in the United 
States, employer-sponsored insurance, encouraged in large part 
by the tax exclusion, has been a driver in its own right in 
terms of health care and encouraging people to regard health 
care spending and the purchase of insurance as their employer's 
money rather than their own money as an employee.
    There are a number of steps, and you have heard many of 
them already this morning. Trying pay for performance 
initiatives, something the government is doing to a small 
extent through the Centers for Medicare and Medicaid Services; 
providing better information on the cost-effectiveness of new 
technologies and therapeutics, an issue that Dr. Davis talked 
about this morning; meshing patient safety measures with tort 
changes as a way to try to bridge what has been a very 
difficult impasse for the Congress; and exploring alternatives 
to the tax exclusion for employer-sponsored insurance.
    There are also a number of ways to try to reduce the number 
of uninsured, and again, they have been mentioned this morning, 
trying to find ways to expand access to some of the public 
programs; using the waiver process to expand Medicaid and 
expanding Medicaid itself; providing financial subsidies to 
individuals and access to group insurance, either through 
fundable tax credits or through other strategies; and providing 
mandates either on individuals or on employers. And as we have 
seen in legislation that has been raised, it is possible to mix 
and match some of these strategies.
    It is important, though, as you go forward in talking about 
these issues of reducing the number of uninsured to remember 
that any strategies that you find to reduce the rate of 
spending in health care will make it that much easier to 
provide coverage to the uninsured and will reduce the 
likelihood that you will have increases in the uninsured in the 
future solely driven by the increased health care spending. 
Thank you.
    The Chairman. Thank you, Doctor, very much for that input.
    [The prepared statement of Ms. Wilensky may be found in 
additional material.]
    The Chairman. We have a large number of members 
participating in this hearing. That reflects the interest, 
obviously, and the importance of the topic. Again, we do have 
votes that are going to hit us here. So what I going to do is 
limit time to five minutes and hope members can stick to that. 
Then we can get everybody in before we start voting.
    I will pass on my opportunity to ask questions and wait 
until the end here. If Senator Kennedy does return, he will 
obviously go to the top of the list, but the list as I have it 
by arrival would be Senator Enzi, Senator Murray, Senator 
Harkin, Senator Sessions, Senator Alexander, and Senator Dodd, 
in that order, so we will start with Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman. I appreciate Dr. 
Holtz-Eakin coming 2 days in a row to the Hill. Yesterday it 
was banking, today a completely different subject. I appreciate 
the information that you provided both times.
    In your testimony, I am a little confused between the three 
columns that are used, the uninsured at any time, the uninsured 
all year, and then the distribution of population uninsured all 
year. Are the first two columns the percentages of just the 
nonelderly people and then the last one is of the population as 
a whole, whether they are elderly or not? I wasn't sure what 
the third column represented.
    Mr. Holtz-Eakin. The first two columns are just for 
nonelderly. So, for example, for uninsured at any time during 
the year, 26.8 percent of those less than 19 were uninsured at 
any time during the year. Seven-point-three percent of those 
less than 19 were uninsured all year.
    The final column tells you of all the ages. Out of all the 
people who are uninsured all year, nearly 25 percent were less 
than 19. Fourteen percent were between 19 and 24. And so all 
the ages will add up to 100 percent of those uninsured during 
the entire year.
    Senator Enzi. The accountant in me made me wonder sometimes 
when it went over 100 percent in a category.
    I found it very interesting that 25 percent of the 
uninsured make more than 200 percent of the Federal poverty 
level. That was from page five, and then on page six, there is 
a little different way of evaluating it, which is based on 
their health and not by age. Of those who consider themselves 
in excellent health, almost 29 percent don't have insurance. 
Very good health, 33 percent don't have insurance. And good 
health, 24.5 percent have insurance. So it looks to me like 86 
percent of the people that are uninsured figure that they are 
in good enough health that they don't need insurance.
    In the Medicare bill that we passed, we had a provision for 
health savings accounts. I am of the belief that they will help 
to take care of some of these people, so they put away a little 
money while they are still in very good or excellent health. Is 
that a feeling that you have, that the change that we made 
might make that kind of a difference? I noticed that there was 
an evaluation of how much that would cost.
    Mr. Holtz-Eakin. Well, certainly part of the message in the 
testimony is that to the extent that the final consumer of 
medical services is insulated from any cost consequences, it 
feeds into the system of a set of economic incentives which can 
adopt expensive technologies which may not be worth it, in some 
sense. We may decide to spend more on health care as a Nation, 
but you don't want to spend more than is worth it. Third-party 
payers, which insulate people from the cost consequence of 
their decisions, are part of that.
    To the extent that health savings accounts put individuals 
in a position where they evaluate and have the information to 
evaluate the quality of what they are buying, so they get the 
benefits and cost tradeoff exactly right, then that is a step 
toward that direction. The flip side is you have to make sure 
that when people are young and in excellent health and they are 
in that, they are looking forward to the possibility they may 
not be and you don't just get a selection issue where only 
those people in excellent health take advantage of that for the 
tax advantages and the folks who are not in excellent health 
are in a different pool. So those are the issues in those kinds 
of accounts.
    Senator Enzi. I appreciated Dr. Conover's statistics on the 
cost of regulation and hope that we can find some data that 
also will show how much of the costs are due to new 
technologies and medical liability insurance and those sorts of 
things.
    Dr. Davis, you said that there was a major increase in the 
number of underinsured. That suggests that there might be some 
agreed upon level of insurance. Would that also mean that there 
are some that are overinsured? How is that level determined?
    Ms. Davis. There was one major study in the Journal of the 
American Medical Association that defined underinsurance as 
being at risk of spending ten percent of your income directly 
out of pocket on health care. If everyone in this country had a 
$1,000 deductible health insurance plan, about a third of 
people would pay more than ten percent of their income if 
something serious happened like they were hospitalized. So that 
is kind of the rule of thumb.
    In terms of your point about overinsurance, certainly there 
is some overuse of health care services. In our international 
surveys, we found patients reporting getting the same test more 
than once when they saw different doctors. A lot of that 
overuse is driven by physicians or the health care system that 
don't have electronic records to find the old test results and 
our compensation system that pays physicians more for doing 
more procedures. We don't really have clinical guidelines or 
standards to really indicate when insurance shouldn't pay for a 
service like an MRI because a cheaper test would have worked 
just as well.
    Senator Enzi. I feel that there is a lot more information 
there, but my time has expired. I would ask for permission to 
submit some questions in writing and also to have a full 
statement in the record.
    The Chairman. Absolutely. That, of course, is always a 
member's opportunity.
    [The prepared statement of Senator Enzi follows:]

                   Prepared Statement of Senator Enzi

    Mr. Chairman, the United States has the best healthcare 
system in the world. Our main challenge is how to extend the 
blessings of this system to as many Americans as possible.
    We need to eliminate factors that contribute to the rise in 
healthcare costs but don't contribute to improving the quality 
or availability of that healthcare. We can't make health 
insurance more affordable if we don't make healthcare services 
more affordable.
    But healthcare today is complex. Changes in law and 
regulation often have unintended consequences, and we've seen 
this effect time after time in healthcare policymaking.
    That's why I commend you for holding this hearing. We need 
to understand why healthcare costs are increasing before we 
take any major new steps aimed at reducing the number of people 
without health insurance. As a member of this committee and of 
the Senate Republican Task Force on Health Care Costs and the 
Uninsured, I am ready and willing to work with you on this 
critical issue.
    We're going to hear testimony today about a number of the 
``cost drivers'' that influence the rate of growth in 
healthcare spending. There are many factors which can be cited 
as cost drivers: patient demand, new technologies, provider 
expenses, litigation, government regulation, labor shortages, 
quality deficiencies, and cost-control incentives or the lack 
thereof, to name several.
    Take medical litigation, for instance. The continued rise 
in medical malpractice premiums contributes to the rise in 
healthcare spending as physicians and hospitals pass those 
costs along to patients and their health insurers. Our medical 
litigation system also encourages costly ``defensive 
medicine''--the ordering of unnecessary tests and procedures--
as protection against lawsuits.
    But the flaws with our current system of medical litigation 
go beyond rising premiums. Studies show that the likelihood and 
the outcomes of lawsuits and settlements bear little relation 
to whether the healthcare provider was at fault or whether the 
outcome of the procedure was avoidable--or unavoidable.
    The absence of a strong association between payouts and 
negligence means that medical litigation does not provide much 
of a deterrent effect. Without this deterrent effect, providers 
won't have a true financial incentive to get to the bottom of 
our medical-error problem. We need to revamp our medical 
litigation system to ensure that the truly injured get just and 
timely compensation, while at the same time ensuring that the 
truly negligent providers are the only ones who are punished.
    The nature of our medical litigation system is one of the 
outright problems with our system that must be fixed. The 
nature of some of the other ``cost drivers'' is not so clear-
cut, however.
    Take technology, for instance. We can all agree that the 
inappropriate or inefficient use of drugs, medical devices, and 
other new technologies contributes to some extent to the recent 
escalation in healthcare costs.
    But technology can save money as well, not to mention 
improve the quality of our lives. Today, we can repair damaged 
hearts through tiny incisions in the chest, instead of by 
cracking someone's chest open. A lower risk of infections, a 
lessened need for medications, a shorter hospital stay, and a 
quicker recovery time--all of these are benefits of the modern 
technologies that enables these new heart procedures.
    Technology is our best hope for new and cost-effective 
treatments for some of the biggest medical challenges--not just 
heart disease, but cancer, Alzheimer's, and diabetes as well. 
In our haste to ensure that money is spent wisely on 
technology, we must take care not to stifle the development of 
the next wave of medical miracles.
    The list of cost drivers I cited earlier doesn't include 
perhaps the biggest cost driver of all--us. The decisions we 
make--and don't make--about our own health play a huge role in 
the cost of healthcare today. Unfortunately, this factor 
doesn't get the attention it should.
    According to the Centers for Disease Control and 
Prevention, more than 90 million Americans live with chronic 
diseases. Roughly 75 percent of our annual $1.4 trillion in 
healthcare expenditures is attributable to chronic diseases.
    The tragedy is that most chronic diseases can be prevented 
by good eating habits, proper exercise, and other positive 
behavioral changes. Obesity, for instance, is linked to 
diabetes, heart disease, stroke, osteoarthritis, cancer and 
other chronic diseases. According to a recent study, obese 
Americans accumulated $75 billion in weight-related medical 
bills in 2003, and Medicare and Medicaid directly paid for more 
than half of those costs.
    I don't raise this issue to single out or point fingers at 
obese people. I recognize that some people have a strong 
genetic predisposition to obesity and have a difficult time 
losing weight on their own. My point is that if we all took 
greater personal responsibility for modifying our unhealthy 
behaviors, we'd collectively do more to reduce our overall 
healthcare spending than any government intervention could do.
    We also need to be more responsible for our own healthcare 
utilization. Those of us with private and public health 
insurance need to recognize that a visit to the doctor or the 
pharmacy doesn't cost us 5 or 10 or 20 dollars--that's just the 
co-payment. We pay the rest of the bill in the form of higher 
insurance premiums and higher taxes.
    Most forms of third-party insurance distort the impact of 
our lifestyle decisions and healthcare choices. We would pay 
more attention to our personal behavior if we weren't insulated 
from the ramifications of our decisions.
    That's one reason I supported a significant step we took in 
last year's Medicare bill toward reducing the number of 
uninsured in America. I'm referring to the expansion of health 
savings accounts (HSAs) from a pilot program to a full-fledged 
health insurance option for all Americans.
    HSAs combine a high-deductible insurance policy for 
catastrophic expenses with a personal spending account that 
each HSA policyholder will control for his or her routine 
healthcare costs. Unlike flexible spending accounts, people who 
own HSAs will be able to roll over to the next year any unused 
funds in their personal accounts.
    ``Consumer-directed'' insurance options like HSAs will 
encourage people to take greater ownership of their own 
healthcare decisions. A person who owns an HSA will have a 
greater incentive to invest in preventive care that will help 
him or her avoid unnecessary trips to the doctor or hospital. 
HSAs also create an incentive for people to make the types of 
lifestyle changes that will result in better health and fewer 
expenditures from their personal HSA spending account.
    HSAs have already proven to be attractive to people without 
health insurance--four of every ten people who participated in 
the pilot program of medical savings accounts (MSAs) were 
previously uninsured. HSAs should be particularly attractive to 
younger and healthier people who don't think it's a good 
financial deal to purchase traditional third-party health 
insurance. This is a good thing, by the way--if more young and 
healthy people purchase health insurance, the overall health 
insurance risk pool will improve, and there will be fewer 
unpaid medical bills because of catastrophic injuries or 
illnesses among the uninsured.
    The bottom line is that health savings accounts will allow 
people to design their own personalized insurance plans. People 
will use the money that they and their employers put in their 
own accounts to pay for the benefits they want, knowing that 
they will be protected from financial ruin in the case of a 
catastrophic illness. People deserve to be able to choose a 
lower-cost plan that gives them the freedom to balance value 
and cost, and HSAs will give them that choice.
    This brings me to the final point I'd like to make before 
we hear from our witnesses. Everyone knows by now that there 
are approximately 43 million Americans without health 
insurance. What we don't often hear is that these 43 million 
Americans are uninsured for a variety of reasons.
    Some of the 43 million Americans without health insurance 
can't afford the insurance plans that are available to them. 
Some can afford to buy a policy, but decide not to pay for it.
    Some of the 43 million Americans without health insurance 
can't afford even a low-cost plan. Some can't find a low-cost 
plan because the insurers in their state must offer a long list 
of mandated benefits, and therefore can't offer them a less-
expensive alternative.
    Some of the 43 million Americans without health insurance 
have been without it for a year or more. Some have only been 
without it for a few months.
    We can't look at uninsured Americans as one big group in 
need of one big solution. We need to identify those who really 
cannot afford to purchase health insurance, and identify some 
solutions that would make health insurance more affordable for 
them, based on their particular needs. And we need to do this 
in the context of reducing healthcare costs for everyone.
    Mr. Chairman, I again commend you for holding this hearing 
so that we can take a hard look at this issue before we leap 
into designing solutions. We need to keep in mind that 
uninsurance is a chronic problem. It didn't just suddenly 
appear. It's been a problem for decades. Eliminating the 
uninsured can't realistically be done in one bill or one 
session of Congress.
    I believe we have already taken steps toward making health 
insurance more affordable. However, that doesn't eliminate our 
responsibility to continue making progress here in 2004. We 
need to keep moving to help extend the benefits of our 
healthcare system to more Americans. I look forward to working 
with you, Mr. Chairman and the members of this Committee as we 
strive to make healthcare and health insurance affordable for 
all Americans.
    The Chairman. Senator Murray?
    Senator Murray. Mr. Chairman, thank you very much for 
having this hearing. I think this is really important that we 
explore some of the costs behind the rising health care costs 
and the growing rates of uninsured and the testimony was, I 
think, excellent from everyone who is here. I think it is 
showing all of us that this is not a one simple solution issue, 
that there are a lot of different things to look at.
    I think we have to recognize we are not just talking about 
the unemployed. We are talking about a lot of working families 
who simply don't get affordable health insurance. The jobless 
recovery that we are in is affecting a lot of people in my home 
State of Washington. We have 650,000 people who are uninsured 
today and we have one of the highest unemployment rates in the 
Nation. It goes hand in hand. So any kind of solution we find 
has to deal with a comprehensive approach and I think this is 
good to be able to explore some of this.
    But let me ask a question because it is one that I think 
many of us often get hit with, that the solution is a cap on 
noneconomic damages in medical malpractice cases. I think we 
all agree frivolous lawsuits are a problem we need to deal 
with, but I fear that if we have a narrow approach, that we 
don't really address some of the roots of the problem with 
medical safety and overuse of testing, whatever it is, 
insurance reforms that we are simply going to put a band-aid on 
and not do anything.
    Let me ask a direct question, Dr. Holtz-Eakin, because in 
your testimony, you said that medical malpractice insurance 
accounts for less than two percent of all health care related 
costs, and I heard Dr. Conover say it costs more than $81 
billion. What is the real cost of medical malpractice and will 
caps on noneconomic damages get to the real problems that we 
face with rising costs?
    Mr. Holtz-Eakin. In terms of the setting, I think it is 
important to distinguish between the level of any cost and any 
growth rates. To the extent that there is built into the level 
some impact from the tort system, there is less evidence that 
there is a rising trend that would affect the growth rate of 
national health spending.
    CBO has done some work in this area, and indeed, in some 
circumstances, you can find that tort reforms, caps on damages, 
do have impacts on malpractice premiums. However, as you noted 
in your statement and as we note in our report, even fairly 
large changes in malpractice premiums constitute a very small 
fraction of overall health insurance costs and a small fraction 
of health spending in the United States as a whole. So that is 
not a dramatic avenue to change the total spending path in the 
United States.
    Senator Murray. Would anybody else care to comment on that? 
Yes?
    Ms. Wilensky. I think you need to distinguish between two 
types of costs related to liability. The first is the cost you 
have been discussing, the cost of premiums and the total dollar 
of health care spending and I think that is relatively small.
    What may be a larger cost, but it is unfortunately very 
difficult to measure, is the cost of what has been termed as 
defensive medicine, that is practices of tests and X-rays, 
imaging, etc, that are done for fear of having a bad outcome 
and not having done all testing possible. This is potentially 
much greater. It is difficult to estimate because it is 
difficult to define and because it is confounded by the 
reimbursement system. A lot of what we see reflects pressures 
to do more when doing less might be just as well, but you put 
yourself at risk as a physician. If a bad outcome occurs, the 
reimbursement system also----
    Senator Murray. Well, is the only reason a doctor asks for 
additional medical because they fear liability or are there 
other reasons? Perhaps they profit from it. Perhaps the 
patients demand, and we see tons of advertisements on 
television, I know patients go in and demand things based on 
what they have seen. Aren't there other causes, as well for 
that?
    Ms. Wilensky. There definitely are. There is some 
indication that putting a cap in place will reduce somewhat the 
premiums. There are some proposals that have come out that 
attempt to link improvements in patient safety with ways to 
compensate for injuries that occur, avoidable injuries that 
occur, and it may provide some way to get over the impasse of 
only looking at capping malpractice awards made.
    There is some indication that capping the award will 
provide some reduction in premium and therefore in spending, 
but it is far more complicated than that, as you have 
indicated.
    Senator Murray. And if you don't deal with the fact of 
medical errors and patient safety, then we have turned the 
system on its head, as well, is that not correct?
    Ms. Wilensky. I agree.
    Mr. Conover. I would like to make clear that in my figures, 
$25 billion of the medical malpractice is the insurance 
premiums and another $70 billion is our estimate of defensive 
medicine costs. And I agree with Dr. Wilensky, it is very 
difficult to measure that.
    Senator Murray. Dr. Holtz-Eakin?
    Mr. Holtz-Eakin. I just wanted to point out that defensive 
medicine is an ongoing area of research at CBO. We have been 
able to find some evidence of links between malpractice, 
defensive medicine, in areas associated with heart ailments. 
But in using the same research methods in other areas, we find 
less evidence. The most widely cited study finds that defensive 
medicine accounts for about one percent of overall health 
spending, so the magnitudes are useful to keep in mind.
    Senator Murray. Thank you. I know my time has run out and I 
do have other questions I will submit. Thank you.
    The Chairman. Thank you, Senator Murray.
    Senator Harkin?
    Senator Harkin. Thank you, Mr. Chairman.
    Well, let me see, I think it has been about 15 years now 
that I have been on this committee, 18 years maybe now, and we 
always have these kind of hearings and this goes on year after 
year, year after year, and we keep dancing around the issue. We 
talk about different things but we don't really get to the core 
of the problem.
    What is driving health care costs and the uninsured? Well, 
the uninsured, obviously it is the fact of lack of a national 
health care system. But as Senator Murray said, this has many 
parts. But first, we have to realize we don't have a health 
care system in America. We have a sick care system. If you are 
sick, you get care, but there are absolutely no incentives, 
nothing in there to try to keep you healthy in the first place.
    Now, Dr. Wilensky was the only one that mentioned it, 
lifestyles. The fact is, if we want to focus on what is driving 
health care costs, it is the lack of preventative health care 
in America. That is what is driving it, and we never get to it. 
Just take some examples.
    Chronic diseases account for 75 percent of the Nation's 
health care costs each year and most are preventable. The 
annual costs of cardiovascular disease, $352 billion; obesity, 
$117 billion and rising; diabetes, $132 billion; smoking, more 
than $75 billion; untreated mental illness, $79 billion. In 
fact, major depression right now is the single leading cause of 
disability in the United States. So clearly, keeping people 
healthy is more cost effective than treating diseases related 
to unhealthy behaviors.
    Let us assume for a minute I bought a new car. What would 
you think if I took that car and I drove it off the lot and I 
never changed the oil, I never checked it, I never checked the 
water, I never did anything to it and I just kept driving it 
and finally the engine seized up. I took it to the garage and 
they said, put in a new engine. Well, you would probably think 
I was a little crazy, not to mention a little irresponsible.
    The same principles apply in health care policy. You either 
pay a little now or you pay a lot later. It is common sense. It 
is time our national health priorities reflected that. Our 
health system is in a downward spiral of paying a lot later. If 
we are going to bring down health care costs, what is driving 
it, we must give people access to preventative health care. 
Give them the tools to stay healthy and provide incentives.
    I will mention a company in Des Moines, Iowa, Townsend 
Engineering. Ray Townsend a few years ago decided--a small 
manufacturing plant, not a stockholding plant. He owned it 
himself. He decided he was going to change his plan. He took 
all the people and he put them on a health program. He built a 
gym right next to his facility. He gave his employees benefits, 
bonuses, free vacations, if they cut down on smoking. He hired 
a full-time physical trainer for every one of his employees.
    Guess what happened? Smoking went to zero. His sick days 
went down precipitively. His production went up. The 
productivity rate went sky high. But guess what didn't go 
down--his health insurance costs because he was in a pool with 
everybody else, but he realized that he was better off and his 
plant was better off and he was more productive and he was 
making more money because his people were healthy. But he did 
that on his own dime. There were zero incentives for Ray to do 
that.
    Well, we could take a lesson from that and start providing 
those kinds of incentives, not only just for businesses, but 
for schools and everything else. In the coming months, again, I 
will be addressing these. I am going to introduce a package of 
legislation to folks on nutrition, physical activity in 
schools--kids don't even have physical activity in schools 
anymore. Eighty percent of the elementary school kids in 
America today have less than one hour of P.E. every week. Tell 
me why they are getting fat and obese when they get older. 
Focus on mental health, tobacco cessation, prevention and 
treatment, consumer awareness, responsible marketing practices.
    I will tell you one other thing. We put $4 million in the 
last farm bill, $4 million. We took four States, 100 schools, 
elementary, middle, and high school, and we said, what would 
happen if you gave free fruits and vegetables to kids? Free 
during the day, anytime they want it. Pick up an orange. Pick 
up an apple. Pick up a banana, kiwi fruit, strawberries. Give 
them free fruits and vegetables, broccoli, cauliflower, celery, 
whatever.
    Guess what happened? Now, we have only had about a year of 
this that it has been in effect, a little over a year. You 
check those schools in Michigan. You check them in Ohio. You 
check them in Iowa. You check them in Indiana. In every single 
one of those, kids are eating healthier. Some schools have 
taken out vending machines because the kids aren't putting 
money in the vending machines any longer. These are the kind of 
incentives we have got to start putting in there.
    Food stamps--food stamps--you can still on food stamps, you 
can get Twinkies but you can't get vitamins or folic acid for 
women on food stamps. What sense does that make?
    So again, we keep dancing around this all the time, and we 
can talk about insurance, we can talk about tort reform, we can 
talk about all the new equipment and stuff. I am telling you, 
until we start focusing on preventative health care, and until 
all you doctors and all you experts start telling us that we 
have got to build in incentives, we have got to start with kids 
early in life, and we can't keep going down this road any 
longer or we are going to be here another 15 years talking 
about this.
    You are the experts out there. What is driving health care 
costs? It is the lack of preventative health care in America. 
It is chronic illnesses. Seventy-five percent, as I mentioned, 
go to chronic illnesses and these are preventable.
    My time has run out. I didn't have a question, I just had a 
statement. Thank you. [Laughter.]
    The Chairman. That was excellent testimony. [Laughter.]
    Senator Alexander? You can direct questions at the other 
panel members. [Laughter.]
    Senator Alexander. Thanks. Thanks, Mr. Chairman. I enjoyed 
Senator Harkin's statement. I have met Ray Townsend, and that 
is an impressive operation in Des Moines, Iowa.
    We are beginning to discuss the reauthorization of higher 
education, and as we talk about costs of health care, I think 
it is important to remember that we don't have unlimited 
dollars in the country and we must make choices. As Dr. 
Wilensky was talking about the 1.5 percent increase in the 
economy but the four percent increase in health care costs 
except for part of the 1990s, I was thinking about what has 
been happening in my State. One of the consequences of the 
increased cost of health care has been, I think, to damage and 
underfund higher education.
    For example, when I left the Governor's office in Tennessee 
in 1987, we were spending 50 cents out of every dollar on 
education and 15 cents on health care. Today, the State of 
Tennessee is spending 40 cents of every tax dollar on education 
and 31 cents of every tax dollar on health care. So it has gone 
from 15 cents to 31 cents on health care, and 50 cents to 40 
cents in education, so you can see where that has gone.
    The question I have--Dr. Holtz-Eakin and Dr. Wilensky, you 
may particularly have comments on this but others may as well--
is if you have been thinking about solutions to the health care 
costs. I have been intrigued by suggestions for dealing with 
the uninsured. One solution we have heard about for a long time 
is a single-payer system. Another suggestion is that we move--
that we disconnect the provision of health care from the 
employer, a practice we got into, I guess, in World War II, 
perhaps accidentally, and that we move toward a system that 
would require individuals to buy their own health care--basic 
insurance with the government perhaps helping the poor and 
providing some sort of catastrophic solution.
    The reason I bring that up is I am thinking about the 
challenge that we have as a country of keeping our jobs in 
worldwide competition over the next ten or 20 years as we 
compete with China and Southeast Asia and other countries. Our 
businesses won't be able to provide those jobs if their costs 
are so much higher than businesses that operate outside the 
United States. One of the major costs they have is health care 
and they will have enormous pressures to decrease providing 
health care. We will have less health care, and we will have 
fewer jobs if the businesses continue to provide the brunt of 
the health care costs.
    So how practical would it be to disconnect the health care 
system, health care insurance, from employers, not by shifting 
it to a single-payer government system but by shifting it to a 
system where individuals would buy an individual insurance 
policy and the private sector would still be involved? Dr. 
Holtz-Eakin, have you given any thought to that?
    Mr. Holtz-Eakin. We have not analyzed any specific 
proposals, but I think there are a couple of comments I can 
make in that area.
    The first is, let me just touch on the notion of 
international competition and costs for employment. Costs are 
best measured relative to productivity, and indeed, U.S. 
workers are highly productive. So it is not just a cost 
comparison. It is always cost relative to what you get and our 
labor provides more than do comparable laborers around that 
globe and for that reason we can afford higher labor 
compensation in all forms, including health care.
    It was interesting that in the example that the Senator 
cited his workers were more productive. I think that is part of 
a lesson there. It was not so much about health insurance but 
also about raising productivity of workers.
    But the example is typical of the centrality of employer-
sponsored insurance in our system. The data we provided 
indicate that a lot of short spells have to do with labor 
market transitions quite likely, and so for better or for 
worse, we have gotten the labor market and the health insurance 
market intertwined. There is no question about that.
    And then I think the final thing that really stands out is 
regardless of whether you do it at the individual level or the 
employer level, the notion that individuals are insulated from 
the cost of their decisions. Again, to use the same scenario, 
if one were to treat their car in the way that Senator Harkin 
described, your auto insurance would not pay off. It wouldn't 
pay for that new engine and you would be cognizant of the costs 
of mistreating the car.
    Whether it is in preventive care or in sick care, after the 
fact, an employer-sponsored insurance policy or an individual 
policy has to provide incentives for efficient utilization of 
the care and adoption of the technologies that are worth it, 
not just every technology that is invented. Those are less to 
do with being able to cover every person in the United States 
but more about what would be the impact on the efficiency of 
the system and the growth in health care costs.
    Ms. Wilensky. Let me respond more directly to the issue of 
whether moving away from employer-sponsored insurance may make 
people more sensitive. I think the answer is yes. There are a 
number of issues relating to employer-sponsored insurance. One 
of the most serious is that it tends to make people think they 
are using somebody else's money, their employer's money, as 
opposed to part of their own compensation package and that 
exacerbates the various factors we have talked about, about why 
health care spending is growing so rapidly.
    But I think at a practical level, you need to decide what 
we are going to do to augment insurance because we are seeing 
it decline in the voluntary employer-sponsored market. Either 
you can try to require employers to do this or you can try to 
provide financial assistance and access to group insurance and 
let individuals choose. I think there is a lot of reason to go 
the second route, to make sure people actually get the kind of 
insurance that they want as opposed to what their employer 
might be choosing on their behalf, and to make them clearly 
aware that this is their money that is being spent and it ought 
to be used wisely.
    You do have to be careful how you do this. The fact is, 
most of us have employer-sponsored insurance and you want to be 
careful about how you set up a system to live alongside this 
voluntary employer-sponsored insurance because it would be 
extremely disruptive if we just took away or pushed out all 
employer-sponsored insurance.
    But the fact is, there has been a secular decline in 
insurance coverage. There is going to be continuing increases 
in the number of uninsured even with robust economic growth. 
That is what the 1990s proved to us, is that even with a decade 
of robust economic growth, the number of uninsured is likely to 
increase or only decline very slightly.
    So what you do to help people without voluntary employer-
sponsored insurance, because they are not offered it or they 
are in and out of the labor market or they are part-time or 
full-time entrepreneurs, is very important and that is the 
opportunity, if you wish to use it, where you could move away 
from employer-sponsored insurance, which, as you have 
indicated, is a vagary of history of World War II and trying to 
get around wage and price controls.
    Ms. Davis. If I could make a couple of quick points. I 
think if we are really going to cover people, it is going to 
have to be a shared responsibility with both employers and 
public programs providing group insurance. Employers contribute 
$500 billion toward health insurance for workers. It covers 160 
million people. So if you do away with it, you are going to 
have to do a lot on the tax side to substitute for that.
    Our surveys show it is what people overwhelmingly prefer. 
They think employers do a good job of selecting plans. And it 
is more efficient because you pool risk, you can deduct 
premiums from paychecks, and you get lower administrative costs 
than you do in the individual market.
    So I think you have to move very carefully to move it all 
the way from employer coverage. It is what people prefer. It 
makes them happy. And even low-wage workers want what high-wage 
workers have, which is good benefits on the job.
    Senator Alexander. Thank you.
    The Chairman. Senator Dodd?
    Senator Dodd. Thank you very much, Mr. Chairman. Thank you 
for holding the hearing. Let me just make a couple of opening 
comments, if I can, and then try to get a couple of quick 
questions, if I could.
    First of all, I thank all of you for being here and thank 
you again, Mr. Chairman. Let me first of all associate myself 
with the remarks of Tom Harkin. I think the notion of doing a 
better job in the area of preventive health is something we all 
would agree on. There is less of an incentive, obviously, 
within the professions associated with health care to move in 
that direction, but clearly we all understand the benefits of 
encouraging a better lifestyle for people and reducing the 
problems.
    According to the Institute of Medicine, we lose 18,000 
people every year, they die in this country prematurely because 
they are uninsured. Let me give you some idea of the cost to 
us. If you are not impressed by the financial implications, 
clearly losing 18,000 people in the United States prematurely 
because they are uninsured ought to startle everyone. I mean, 
to State this is a crisis is like preaching to a choir here. I 
think everyone here agrees this is growing in its magnitude. We 
have had a ten percent increase in the uninsured in this 
country since the year 2000, now at 44 million people.
    I think it is important to understand who we are talking 
about here. Senator Enzi specifically talked about some aspects 
of this. Two-thirds of the uninsured are poor. They are poor. 
They are people who are living below 200 percent of poverty.
    Second, these are people who are working. The assumption 
here, I think if you ask most Americans who are the uninsured, 
they think they are a lot of unemployed people. Eighty percent 
of the uninsured in this country hold jobs, in some families 
holding two and three jobs to make ends meet.
    Third, there are 8.5 million of this number who are 
children. Twenty-one percent of the uninsured are kids in the 
United States that we are dealing with here. So that is setting 
the table in terms of the magnitude of the crisis and who, 
really, we are talking about.
    So when I see some of the suggestions being made, and I say 
this with all due respect, but the idea that the answers to 
these issues are going to be tax credits or free savings 
accounts, if you understand who are the uninsured and you begin 
to think about the suggestions that are being offered, they 
hardly touch on the problem at all.
    The idea of having sort of a tax credit approach, you are 
talking about people who don't have the disposable income here. 
The average premium for an employer-sponsored health insurance 
for a family was more than $9,000 a year. Now, does anyone 
realistically think that a tax credit approach is going to make 
much of a difference if you understand what the population is?
    The same thing is true with these health savings accounts, 
with all due respect here. Again, who is likely to go into this 
area, who are the uninsured? And if you begin to match up who 
is going to move into a health savings account and who the 
uninsured are, it doesn't line up very well.
    So the only two real suggestions we have had in this area, 
the tax credit approach and these health savings accounts, just 
don't really address the two-thirds of the uninsured being 
poor, being children, and being people who are working in 
places that just don't provide that kind of coverage.
    Now, there are some ideas out there that are being bandied 
about and we need to take some of these ideas and work on them, 
and Dr. Wilensky addressed some of them here in the brief 
comments I heard her address. Obviously, they include employer 
and individual mandates, and this is always a painful area to 
get into, but I think we are going to have to really look at 
this very carefully because otherwise it is going to be very 
difficult to get this kind of coverage, and with subsidies for 
low-income individuals.
    Expansion of existing public programs, I think is obviously 
an alternative or establishment of State purchasing pools. I 
was stunned that in this recent so-called prescription drug 
Medicare reform bill that we actually have a prohibition, a 
prohibition in that legislation of having purchasing pools when 
it comes to prescription drugs. Not only is it a disincentive, 
we are prohibited from doing it--prohibited from doing it.
    And here, we are talking about one of the major costs in 
rising health care is the cost of prescription drugs. A 
national bill on prescription drugs and Medicare reform and we 
have just banned, banned people from pooling together to try 
and reduce the cost of prescription drugs. What is this 
administration thinking about? It is incredible to me to move 
in that direction.
    So the last couple of points I would just make here is, 
obviously, there are some principles I think we ought to keep 
in mind as we try to address this issue. First and perhaps most 
importantly is any successful program should be comprehensive 
and affordable coverage for low-income working Americans, since 
they are the bulk of what we are talking about here. We should 
adopt an approach that prevents discrimination by providers 
based on preexisting conditions and current health status. We 
should expand existing public health programs, such as Medicaid 
and the SCHIP program for children.
    And finally, we need to pursue a proposal to address the 
rising cost of health care, including the use of inexpensive 
generic prescription drugs, better chronic disease management, 
preventive medicine, improving health quality and efficiencies.
    I would like to just quickly address--is that the red 
light? I had a couple of questions on the information 
technology area. I want to ask you, Dr. Milstein, you talked 
about IT being a reason for rising costs. I wanted to get at 
the question of whether or not it is also reducing costs in 
some areas. I know Dr. Davis addressed that, but I wonder if 
you might address whether or not it could also be a cost 
reducer to move into IT more effectively.
    Dr. Milstein. Thanks. I was referring to high-technology 
medicine as a cost increaser. I think information technology, 
on balance, would substantially reduce health care costs.
    Senator Dodd. And Dr. Davis, do you----
    Ms. Davis. We know that medical errors lead to longer 
hospital stays, increase charges by about $10 billion, 
contribute to 33,000 deaths. So certainly information 
technology that would reduce errors, whether it is medication 
errors, device errors, other types of medical errors, could be 
very beneficial in terms of reduced deaths, lower costs, 
improved efficiency. So yes, moving very rapidly toward the 
modern age in information technology is something I think all 
of us would agree with.
    Senator Dodd. Thank you, Mr. Chairman.
    The Chairman. Thank you. There has been an awful lot of 
good information put on the table here today and we very much 
appreciate the witnesses' testimony.
    On a couple of points, Dr. Davis, you said that, and I have 
heard this figure quoted a number of times in a number of 
different avenues, that ten percent of the population accounts 
for 70 percent of the cost of health care. Does anybody on the 
panel have a calculation that ties that ten percent as to what 
stage of life they are in? Is that in the final 3 months of 
life? Is it in the final 6 months of life that the majority of 
that ten percent of the population is in? Obviously, it is 
during an acute illness period because otherwise their health 
care wouldn't be so expensive. But is there also a tie-in into 
a stage of life that that ten percent is in?
    Ms. Davis. There is some evidence from the Medicare program 
that about six percent of beneficiaries die in a given year and 
account for 27 percent of costs. So that is a part of the 
story. But the other part of the story are high-cost people who 
are costly year after year. So it is not just end of life here. 
That is part of it, but it is broader than that. It is why, 
again, targeting disease management, high care cost management, 
better dealing with asthma--some children are in emergency 
rooms year after year, so managing asthma better, managing 
congestive heart failure better, being able to use nurses or 
even pharmacists sometimes can be monitoring people's 
compliance with medication, are effective strategies for really 
getting at who it is that is generating the high costs.
    The Chairman. It would seem logical that if we wanted to 
address the issue of savings in the delivery of health care, 
that we would address this 70 percent of the cost, ten percent 
of the folks that are generating it, which is the acute care 
issue, which brings me back to Dr. Milstein's point, which was 
that we could significantly reduce costs by making available 
the information which HHS presently has in its databank. Can 
you go into a little more depth as to how that would occur? Is 
there a legislative requirement there? Why would that generate 
savings?
    Dr. Milstein. There are, in some of the examples that I 
cited, large private sponsors and union-sponsored heath benefit 
plans. In the rare instances in which they have enough data in 
a given geography to precisely profile the longitudinal 
efficiency and quality of doctors in different hospital 
departments, they have been able to save a lot of money on 
their health insurance costs by beginning to either incentivize 
physicians who perform well on quality and efficiency or 
incentivize their enrollees to begin using physicians and 
hospitals that score better on longitudinal efficiency and 
quality.
    But most insurance carriers and most private insurance plan 
sponsors don't have big enough claims databases to precisely 
profile and compare the longitudinal efficiency and quality of 
different doctors and different hospital departments in their 
community. The only way that they would have access easily to a 
big enough database to be able to do this would be to give them 
access to the patient privacy protected version of the CMS 
claims database. That would allow every private sector health 
benefit plan sponsor to have enough data to precisely identify 
which hospital departments and which physicians were both more 
longitudinally cost effective in terms of total cost, as well 
as delivering higher quality care, and begin to either reward 
those providers with better payments and/or incentivize their 
enrollees through reduced out-of-pocket costs to preferentially 
use those providers.
    The Chairman. We don't have time right now, but if you 
could give us that in a written presentation, but also the 
ethical implications of that when we get into this patient 
protection issue and how we as a committee would be able to 
address something like that.
    Dr. Conover, you said that you got projections of saving 
$300 billion-plus, it sounds like, if we addressed regulatory 
activity and improved it. Do you have specific recommendations 
for doing that?
    Mr. Conover. Well, no. First of all, it is $128 billion is 
the excess costs of regulation.
    The Chairman. All right----
    Mr. Conover. If you eliminated all regulation, you would 
save $335.
    The Chairman. The net cost is $128, then.
    Mr. Conover. Right. The areas that seem most promising to 
look into would be malpractice reform, FDA regulation, and 
facilities regulation, but our study wasn't designed to figure 
out what would you do in those areas because we covered 50 
different areas of regulation. I don't have the expertise to 
tell you, okay, in area X, this is what you do and you could 
save so many dollars. All we can do is sort of highlight the 
areas where it looks like costs seem to be well in excess of 
benefits and those would be the targets to sort of shoot at.
    Senator Dodd. Mr. Chairman, did you find any cost savings 
as a result of regulation? Did you look at that, as well?
    Mr. Conover. Yes. When we looked at the benefits of 
regulation, that is what the $207 billion in benefits, some of 
it, it relates to cost savings. So yes, we did take that into 
account.
    Senator Dodd. You did.
    The Chairman. Which brings me to Dr. Wilensky. You were 
talking about, in the issue of tort reform, about trying to get 
over the hurdle of how we do tort reform, which has been a 
conundrum for us as a Congress. You are suggesting some sort of 
merger of patient safety with recovery activity, I guess. Can 
you give us some more definition of that concept?
    Ms. Wilensky. I do think capping awards is a component 
because I do think there is a reduction in the malpractice 
premiums, but it is more than that. There are avoidable 
injuries that occur and there needs to be compensation and 
there needs to be a tie with improving patient safety, and that 
is really the way that it may be possible to get the various 
parties together.
    We have been talking today about costs associated with 
medical errors and about deaths associated with medical errors 
and the distinction of moving away from the jury trial to 
expert decision making in terms of----
    The Chairman. You are talking about some sort of no-fault 
system, much as we have with automobiles in some States?
    Ms. Wilensky. Right. That would be a component of it, but 
it is mainly the tying together of improved patient safety with 
the changes in tort to try to provide assurance both to the 
Congress as well as to the public this is not just a question 
of protecting the providers but of actually improving and 
rewarding patient safety.
    There have been--there are some individuals around the 
country who are doing some work. I would be glad to provide you 
with names or with summaries of the work that they have been 
doing if you would like to know more about this item.
    The Chairman. What you really need to provide us with is 51 
votes or 60 votes. [Laughter.]
    Ms. Wilensky. That may be somewhat beyond my capability.
    The Chairman. Do people wish to ask a second round of 
questions? Is there anybody who has a second round?
    Senator Dodd. Just a couple. Could I follow up? You have 
obviously looked at California just on this medical malpractice 
issue, and there, they did cap awards.
    Ms. Wilensky. Right.
    Senator Dodd. They also did something else in California. 
They capped insurance premiums. Which of those two do you think 
had the larger impact?
    Ms. Wilensky. Well, the capping, I haven't looked at what 
has happened and I don't actually know the results of the 
insurance capping. One of the questions that you have to watch 
with regard to putting arbitrary caps in place is what else it 
does, and I don't know what it has done to the insurance 
system. I know that Kentucky, which had a number of active 
measures to change their insurance environment, has driven out 
most of the insurance in the State. And so what you do needs to 
be looked at in terms of not only the intended consequence, but 
the unintended consequences.
    Senator Dodd. I will just give you an idea. Just in my 
State, I hope I remember these numbers pretty well, but I think 
we have about 9,000 or 10,000 physicians, 31 hospitals, about 
12,000 nurses. We have a screening process, a board that judges 
whether or not, if proven true, the facts would result in a 
malpractice conclusion.
    As a result of that, I think we are down to around just a 
handful of malpractice suits being brought each year, and I am 
not exaggerating, just a handful. There is no premium reduction 
at all. So here, despite the fact we are screening, reducing 
the number of suits that are going as a result of the screening 
process, we see no return, no benefit yet that has occurred 
even though we brought the numbers way, way down in my State.
    The Chairman. We may want to have a hearing on that, 
because obviously that is because Connecticut is pooled with 
some other States which maybe aren't so disciplined as 
Connecticut.
    Senator Dodd. Maybe that, as well. I don't know about that.
    Let me ask one other question, just on these health savings 
accounts. I wanted to ask you, Dr. Davis. I made the point 
earlier that I thought this was going to be adverse to the poor 
because of who would qualify for health savings accounts. I 
wonder if you would address that. Am I right or wrong about 
that or do you have any other comments to make?
    Ms. Davis. No, I think you are right to be concerned about 
that. First of all, only about eight percent of Americans now 
have $1,000 high deductible health insurance plans and those 
plans really aren't good for people because it keeps them from 
getting the preventive care that you talked about earlier. We 
certainly know the uninsured don't get preventive care. If you 
have got a $1,000 deductible, people aren't going to get 
preventive care.
    So it is largely a tax break for higher-income people who 
can both afford a $1,000 deductible out of pocket and can 
afford to put away the $1,000, or even in the Medicare 
prescription drug bill as much as $2,600 every year, both 
excluding it from income, letting it grow tax free, and then 
taking it out to pay medical expenses tax free.
    The other thing it does is split the risk pool. The 
experience with employers that are starting to offer an option 
of a $1,000 deductible with a health reimbursement account is 
largely healthier people who had low expenditures to start with 
are the ones who go into it. So you pull the healthy people out 
of that and it drives up the premiums for other people who 
don't have those kinds of policies.
    So I think it is very troubling and very much a move in the 
wrong direction.
    Senator Dodd. And it doesn't address the notion of who are 
the uninsured. Do any of you want to disagree with what Dr. 
Davis just said?
    Ms. Wilensky. My understanding of who is attracted to the 
medical savings accounts, it is both the healthy and the very 
sick. It is actually both extremes and not just the very 
healthy.
    Senator Dodd. On the tax credit ideas. Let me go back. You 
argue----
    The Chairman. Can I break in here? I also have some 
questions and we are going to get a vote here, so let me ask a 
couple of questions and then we can come back to you.
    Senator Dodd. Oh, I am sorry.
    The Chairman. Dr. Holtz-Eakin, you mentioned in describing 
the parameters or the demographics of the uninsured that there 
is a large percentage of people who are young and who have 
income and who are uninsured. What percentage is that of the--
and then you broke the uninsured up into 20 million who are 
uninsured all year, 40 million who are at any point in the year 
uninsured, and so there is a group that is moving in and out of 
the uninsured pool.
    Of that 20 million who are uninsured throughout the year, 
what percentage are under age 40 and have incomes higher than, 
say, 200 percent of poverty or something in that range?
    Mr. Holtz-Eakin. I don't have the number off the top of my 
head. We have the two pieces independently but not the place 
where they intersect.
    The Chairman. Well, is it----
    Mr. Holtz-Eakin. We can certainly get that for you.
    The Chairman. Is it a significant number that we are 
talking about? Basically, what I am looking at is what 
percentage of the people who are uninsured all year are people 
who basically are healthy and are deciding they don't want to 
buy insurance with their discretionary money?
    Mr. Holtz-Eakin. We have got about 80 percent who are 44 or 
younger, so there is a large number there.
    The Chairman. Eighty percent.
    Mr. Holtz-Eakin. But those are----
    Senator Dodd. Eighty percent?
    The Chairman. Are 44 or younger.
    Mr. Holtz-Eakin. Of those who are uninsured all year, 
ballpark numbers doing the math quickly. And then for those who 
have, say, 400 percent or more of the poverty line, that is 
about five percent, so it is going to be----
    The Chairman. So 200 percent or more would be about how 
many?
    Mr. Holtz-Eakin. Four hundred percent----
    The Chairman. How about 200 percent?
    Mr. Holtz-Eakin. Two hundred percent, you would have about 
25 percent.
    Ms. Davis. Our surveys show that of the uninsured, only 
five percent are uninsured because they don't want coverage.
    The Chairman. Well, it is not a question of wanting. It is 
a question of whether they choose to do it. I think there is a 
percentage of our population that if they have a vehicle 
available to them which covers the catastrophic event of 
falling off their motorcycle or getting injured during bungee 
jumping, they might take that policy.
    Mr. Holtz-Eakin. It certainly can be a rational choice to 
be uninsured.
    The Chairman. You take that percentage out of the base. 
What?
    Mr. Holtz-Eakin. It certainly can be a rational choice to 
be uninsured, there is no question about that.
    Senator Dodd. Let me jump back to the issue. I wonder if 
any of you would just debate with me if you disagree with me. 
In the Medicare prescription drug bill, banning the pooling--
why am I wrong about that if you disagree with me?
    Mr. Holtz-Eakin. I am a bit curious. If you told me exactly 
which provision you are referring to--there is some confusion, 
at least in my mind.
    The Chairman. The position you wrote a letter on a couple 
of days ago.
    Mr. Holtz-Eakin. It is the Secretary noninterference 
language?
    The Chairman. Yes.
    Mr. Holtz-Eakin. The CBO's view on that is that if you have 
private at-risk prescription drug plans delivering this 
benefit, those entities have both the----
    Senator Dodd. What about Medicare, under Medicare?
    Mr. Holtz-Eakin. That is what I was talking about. This is 
the Part D benefit. Those firms have the incentives because 
they are at risk for their losses, and they have the tools, the 
ability to control things so that they would have tremendous 
ability to--an incentive to pursue deals with pharmaceutical 
companies and as a result don't get the best deal they can and 
it is not clear why the Secretary's intervention would produce 
a better deal. They have got all the tools and incentives that 
we can bring to bear. So we guessed it would be a negligible 
impact on the cost of the program.
    Senator Dodd. There is no ban?
    Mr. Holtz-Eakin. The language prohibits the Secretary of 
HHS. That is a ban. However, the fact is that we have the 
ability of the private drug plans to pool large amounts----
    Senator Dodd. Why wouldn't you at least try it? What is the 
point?
    Mr. Holtz-Eakin. Removing the language, the formal letter 
says removing the language would have a negligible impact on 
the cost of the program.
    Senator Dodd. Dr. Davis, do you agree with that?
    Ms. Davis. Anytime you are a small buyer, you have less 
clout than if you are a big buyer. So if Medicare were to 
negotiate on behalf of all 40 million beneficiaries drug 
prices, they would get lower drug prices. If they were to 
negotiate on behalf of all 280 million Americans, they would 
get lower prices for all services. That is the experience of 
other countries and that is why the U.S. costs are a lot higher 
than they are in other countries. We pay higher prices for 
drugs. We pay higher prices for medical services because we do 
not use the purchasing power of the government to achieve 
efficient care or good rates for services----
    The Chairman. We are about to step into a debate on 
rationing and nationalization of health care here, which really 
wasn't the purpose of this panel. [Laughter.]
    The Chairman. But we appreciate CBO's letter, which did 
clarify the point to some degree.
    I want to thank the panel for their excellent testimony. 
This is a huge issue and I very much appreciate especially the 
attendance of so many Senators and the members of the panel for 
participating. Thank you.
    The committee is adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

               Prepared Statement of Douglas Holtz-Eakin

    Mr. Chairman and Members of the Committee, I appreciate the 
opportunity to be here today to discuss the characteristics of people 
without health insurance and the factors that contribute to the growth 
of health care expenditures. While more than 240 million people in the 
U.S. have health insurance today through a variety of private and 
public sources, millions of others do not have such coverage; and the 
percentage of Americans who are uninsured has risen in each of the last 
2 years for which information is available. At the same time, health 
care spending has continued to rise.
    In my testimony today, I will discuss some important 
characteristics of the uninsured population that have received 
relatively little attention but that have important implications for 
Federal policies to expand insurance coverage. I will also discuss 
factors contributing to increases in health care spending and will 
describe the relationship between health care costs and insurance 
coverage.

Characteristics of the Uninsured Population

    In recent years, it has been frequently stated that about 40 
million Americans lack health insurance coverage. That estimate, by 
itself, presents an incomplete and potentially misleading picture of 
the uninsured population. The uninsured population is constantly 
changing as people gain coverage and lose coverage. Furthermore, people 
vary greatly in the length of time that they remain uninsured. Some 
people are uninsured for long periods of time, but more are uninsured 
for shorter periods.
    Policies aimed at increasing insurance coverage will be more 
effective if designed in light of the dynamic nature of the uninsured 
population as well as the distinction between the short-term and long-
term uninsured. For people with short spells of being uninsured, 
policies might have the goal of filling the temporary gap in coverage 
or of preventing such a gap from occurring. For people with longer 
periods without insurance, policies might seek to provide or facilitate 
an ongoing source of coverage.
    There are several alternative measures of the number of people who 
lack insurance coverage. One describes those people who do not have 
coverage for a sustained period (say, 1 year)--the long-term uninsured. 
Alternatively, another identifies how many individuals have experienced 
any episode of uninsurance during a particular period. Finally, the 
most commonly used measure (a mixture of those two others) counts the 
number of individuals without insurance on any particular day or week. 
Those different approaches yield different numbers because of the 
continual movement of people into and out of the uninsured population. 
The Congressional Budget Office's (CBO's) recent analysis \1\ found 
that in 1998:
---------------------------------------------------------------------------
    \1\ Congressional Budget Office, How Many People Lack Health 
Insurance and for How Long? (May 2003).
---------------------------------------------------------------------------
     Between 21 million and 31 million people were uninsured 
all year;
     At any point in time during the year, about 40 million 
people were uninsured; and
     Nearly 60 million people were uninsured at some point 
during the year (see Figure 1).
    CBO conducted the analysis for 1998 because that was the most 
recent year for which suitable data were available to construct all 
three measures. More recent analyses by researchers at the Agency for 
Healthcare Research and Quality indicate that those three measures of 
the uninsured remained fairly stable in the subsequent period from 1998 
to 2001.\2\
---------------------------------------------------------------------------
    \2\ Agency for Health Care Research and Quality, The Uninsured in 
America--1996-2002, Statistical Brief No. 24, available at 
www.ahrq.gov.
---------------------------------------------------------------------------
    About 30 percent of Americans under age 65 who become uninsured in 
a given year remain so for more than 12 months, while nearly half 
obtain coverage within 4 months (see Figure 2).\3\ Those estimates were 
obtained by CBO using data from the Census Bureau's Survey of Income 
and Program Participation for 1996 through 1999. They are very similar 
to the findings of previous studies that have examined earlier time 
periods.
---------------------------------------------------------------------------
    \3\ Congressional Budget Office, How Many People Lack Health 
Insurance Coverage and for How Long?
---------------------------------------------------------------------------
    People with less education, those with low income, and Hispanics 
are more likely than others to be uninsured (see Table 1). They are 
also somewhat more likely to remain uninsured for long periods. For 
example, people in families in which no one attended college account 
for 64 percent of uninsured spells of more than 12 months but only 49 
percent of uninsured spells that end within 4 months (see Table 2). 
That difference probably reflects, at least in part, the fact that 
people who did not attend college are less likely than others to have 
access to employment-based insurance.
    Adults are somewhat more likely than children to remain uninsured 
for long periods. The availability of Medicaid coverage may explain 
some of that discrepancy: coverage is available to many children in 
low-income families, but the majority of low-income adults are not 
eligible for the program. In addition, evidence suggests that single 
adults without children may be less inclined to seek insurance, on 
average, than other adults are, which may lead them to experience long 
spells without insurance.



    The vast majority of the uninsured are in working families. Some 43 
percent of the people who were uninsured all year in 1998 were in 
families in which at least one person worked full time all year, and 47 
percent were in families in which at least one person worked part time 
or for a portion of the year (see Table 1, column 3). Studies have 
found that over three-quarters of uninsured workers are not offered 
insurance by their employer. Low-wage workers are less likely to be 
offered insurance by their employer and less likely to accept it if it 
is offered.



    According to the Census Bureau's Current Population Survey, the 
number and percentage of Americans who are uninsured increased in 2001 
and 2002, after falling the previous 2 years.\4\ From 2000 to 2002, the 
number of nonelderly people who were uninsured increased from 39.4 
million to 43.3 million, or from 16.1 percent of the nonelderly 
population to 17.3 percent.\5\ That rise in uninsurance rates was 
associated with a drop in the percentage of nonelderly people covered 
by employment-based insurance (from 67.1 percent to 64.2 percent), 
which was partially offset by an increase in the percentage covered by 
Medicaid and the State Children's Health Insurance Program (from 10.4 
percent to 11.9 percent). Those changes in coverage rates, while 
significant, are smaller than those that occurred in the early 1990s, 
when the share of the nonelderly population covered by employment-based 
insurance fell by more than 5 percentage points.\6\
---------------------------------------------------------------------------
    \4\ Researchers disagree about how the CPS estimates of the 
uninsured should be interpreted. Like many health care analysts, CBO 
believes that those estimates provide a close approximation of the 
number of people who are uninsured at a specific point in time. See 
Congressional Budget Office, How Many People Lack Health Insurance and 
for How Long?
    \5\ Paul Fronstin, Sources of Health Insurance Coverage and 
Characteristics of the Uninsured: Analysis of the March 2003 Current 
Population Survey, Issue Brief No. 264 (Washington, D.C.: Employee 
Benefit Research Institute, December 2003).
    \6\ From 1989 to 1993, the share of the nonelderly population 
without health insurance rose by 1.5 percentage points, the share 
covered by employment-based insurance fell by 5.1 percentage points, 
and the share covered by Medicaid rose by 4.0 percentage points. See 
Fronstin, Sources of Health Insurance Coverage.







    Just how much of the recent increase in uninsurance rates results 
from rising costs for premiums, rising unemployment, or other factors 
is unknown. Clearly, though, losing a job may put a worker's 
employment-based health insurance at risk. In preliminary results from 
a recent analysis, CBO found that health insurance coverage rates 
declined significantly among people who received unemployment insurance 
(UI) benefits for at least 4 consecutive months in 2001 or early 2002. 
Some 82 percent of such workers had health insurance coverage (from any 
source) before they began receiving UI benefits, but only 58 percent 
had coverage by the final month of those benefits. Federal legislation 
(the Consolidated Omnibus Budget Reconciliation Act of 1985, known as 
COBRA) requires firms with 20 or more employees to continue offering 
health coverage to workers who separate from their firm. However, firms 
may charge former employees up to 102 percent of the full (group) 
premiums for that coverage. Therefore, unemployed workers may face a 
large increase in their out-of-pocket premiums under COBRA. The 
reduction in coverage estimated for recipients of unemployment 
insurance probably stems, in part, from many of those people opting not 
to purchase coverage under that law.
    Rising health insurance premiums resulting from the recent large 
increases in health care spending overall offer a plausible explanation 
for at least some of the reduction in coverage. To explore that issue, 
I will now discuss the magnitude and causes of the spending increases 
and then turn to what is known about the relationship between health 
care spending and insurance coverage.

Historical and Recent Trends in Health Care Spending

    Health care is a large and growing sector of the economy. The U.S. 
spent $1.6 trillion on health care in 2002, an amount more than five 
times as great in real (inflation-adjusted) terms as that spent in 
1970. Per capita spending increased from about $1,300 in 1970 (in 2002 
dollars) to about $5,450 in 2002, for an average rate of real growth of 
4.5 percent per year (see Table 3). The economy as a whole has grown 
over that period as well, but not as quickly, with the result that 
health spending as a percentage of gross domestic product (GDP) has 
more than doubled, from 7.0 percent in 1970 to 14.9 percent in 2002. 
The mid-1990s saw a brief slowdown in real spending growth per capita 
(the rate was 2.6 percent per year from 1992 to 1997), but higher rates 
of growth have since returned: from 1997 to 2002, real per capita 
health care spending grew at an average annual rate of 4.6 percent--
which is similar to its approximate long-term rate of increase.
    Recent growth in real spending on prescription drugs has been 
especially rapid--at more than 14 percent per year on average from 1997 
to 2002, making it the fastest growing category of health spending 
during the period. Despite the recent rapid increase in spending for 
prescription drugs, they currently account for only about 10 percent of 
all national health expenditures. That relatively small (but growing) 
share of expenditures should be kept in mind when evaluating whether 
drugs are a major driver of increasing costs.



    Federal spending on health care, principally Medicare and Medicaid, 
is subject to the same cost pressures facing the system as a whole. 
Total Federal health spending as a percentage of GDP was 1.7 in 1970 
and 4.8 in 2002. If the recent rate of growth in spending persists, 
Federal outlays on health care will continue to increase as a 
proportion of GDP. Projections of future spending on Medicare and 
Medicaid depend critically on the assumed rate of ``excess cost 
growth.'' \7\ Under an assumed rate of excess cost growth of 2.5 
percent (a rate that is slightly lower than the long-term historical 
average), Federal spending on Medicare and Medicaid would climb to 21.3 
percent of GDP in 2050 (see Figure 3).\8\ Under a more optimistic 
assumption of 1 percent excess cost growth, Federal Medicare and 
Medicaid spending would reach 11.5 percent of GDP in 2050. To put those 
estimates in perspective, the entire Federal budget currently consumes 
20 percent of GDP.
---------------------------------------------------------------------------
    \7\ Excess cost growth is the amount by which per capita growth in 
spending on health care exceeds per capita growth in GDP, after 
accounting for changes in the age and sex composition of the 
population.
    \8\ Congressional Budget Office, The Long-Term Budget Outlook 
(December 2003).



Factors Behind the Continuing Growth in Health Care Spending

    Most analysts agree that the perennial increases in health care 
spending that have occurred over recent decades are associated with the 
diffusion of new medical technologies, or as one analyst has described 
it, ``the enhanced capabilities of medicine.'' \9\ Recent advances, 
including pharmaceutical innovations, have made available to patients 
and physicians a wealth of new medical therapies, many unheard of in 
even the relatively recent past. The economic incentives for innovation 
and the development, deployment, and utilization of new technologies in 
the U.S. health care system has led generally to higher levels of 
spending. Some medical advances permit the treatment of previously 
untreatable conditions, introducing new categories of spending. Others, 
relative to older modes of treatment, improve medical outcomes at added 
cost, expanding existing spending.
---------------------------------------------------------------------------
    \9\ Joseph P. Newhouse, ``An Iconoclastic View of Health Cost 
Containment,'' Health Affairs, vol. 12, supplement (1993), pp. 152-171.
---------------------------------------------------------------------------
    It is occasionally suggested that advances in technology can lead 
to reduced spending, and that may be the case in some instances. 
Vaccinations, for example, may sometimes offer the potential for 
savings, and certain types of preventive medical care may help some 
patients avoid costly acute care hospitalizations. But, overall, 
examples of new therapies for which long-term savings have been clearly 
demonstrated are few. Improvements in medical care that decrease 
mortality by helping patients avoid or survive acute health problems 
paradoxically increase overall spending on health care, as those 
(surviving) patients live to utilize health services through old age.
    Even when a particular service becomes cheaper to provide over 
time, higher aggregate spending can still result as practice patterns 
emerge and the service is used with greater frequency. Comparing 
increased expenditures on computers and information technology with 
those on health care is instructive. As technological innovations 
permitted profitable computer processing at a fraction of the previous 
cost, total spending on computers did not decrease--it skyrocketed, as 
more consumers made more intensive use of what became available. Why do 
few people regard increasing spending on information technology as a 
problem requiring a remedy? Let me suggest that the reason is that the 
market for information technology works the way a market is intended to 
function: businesses and consumers weigh alternatives and face the full 
costs of what they use. In health care, two factors combine to produce 
a different result: payments made by third parties typically buffer 
patients from the full cost of the medical services they use, and the 
inherent complexity of medical practice forces patients to rely on the 
judgment of providers who, depending on the reimbursement system, may 
have an incentive to provide more care (under a fee-for-service 
arrangement) or less care (under capitation).
    Other factors have also contributed to increases in health 
spending. One obvious example is the aging of the population. Among 
adults, medical spending generally increases with age. As the number of 
elderly people rises with the aging of the very large baby-boom 
generation, health spending will naturally grow. However, over the past 
half century, aging has played a relatively minor role in the very 
large increases in spending that have occurred.
    Other contributing factors include the growth in personal income 
over time and the spread of health plans over recent decades. Because 
medical care is a desired service, people naturally purchase more of it 
as their income increases. And health insurance, as economists are fond 
of pointing out, effectively drives down the cost of care from the 
consumer's perspective, resulting in a higher quantity demanded than 
would otherwise be the case. But the best estimates of the effects of 
those two factors suggest that they, too, fail to explain much of the 
surge in spending in recent decades.
    Claims are often heard about unwarranted expenditures. One example 
is so-called defensive medicine, which refers to medical tests or 
procedures of little or no clinical value that are ordered by 
physicians solely in the interest of avoiding lawsuits. Another example 
is what some people term physician-induced demand, which refers to 
spending that is brought about at least in part by providers' desire to 
augment their own income. While the magnitude of spending associated 
with such practices has been the subject of considerable debate, those 
factors do not appear to explain much of the growth in spending.\10\
---------------------------------------------------------------------------
    \10\ An important distinction must be drawn between the level of 
health spending and its rate of growth. At any given moment, some 
amount of unneeded expenditure is likely, but regardless of the 
magnitude of that amount, few analysts believe that such expenditures 
can account for much of the large spending increases that have taken 
place. The elimination of unneeded expenditures, while certainly 
desirable, would offer only temporary relief from increasing 
expenditures, as the underlying source of spending growth can be 
expected to eventually reemerge.
---------------------------------------------------------------------------
    What I have presented here is a simple discussion of a complex 
issue, and I do not intend for it to represent an exhaustive or 
definitive review of the subject. The association between technological 
change and rising medical expenditures is the manifestation of a 
complex system of economic incentives that need to be examined in more 
detail. A greater understanding of the possible role of the third-party 
payment system in creating incentives for innovation and the diffusion 
of technologies, for example, could inform public policy aimed at 
addressing the continuing increases in spending. At the same time, 
policymakers could choose to spend more in light of the quality 
enhancements resulting from the remarkable medical advances that have 
been made in recent years. The point to emphasize (and about which 
there is general consensus) is that the way new medical technologies 
have been adopted and utilized has generally led to more health 
spending over time; that factor lies at the heart of increasing 
expenditures for health care. In the absence of a change in overall 
incentives, those pressures can be expected to continue.

Rising Spending and Health Insurance Premiums

    Health insurance premiums, like total spending, have undergone 
increased growth in recent years following a brief slowdown. Estimates 
from one survey of private firms show that growth in employer-based 
premiums has risen every year since 1996, exceeding 10 percent in real 
terms from 2002 to 2003.\11\ According to that survey, the average 
annual premium for an employer-based policy for an individual is now 
about $3,400, and for a family, more than $9,000. Recent declines in 
employer-based coverage may be related to increases in premiums, though 
the relationship between premiums and the prevalence of coverage is not 
necessarily a simple one. While it is natural to believe that the 
purchases of any good tend to decline when its price goes up, the case 
of health insurance is complicated by the fact that a general upward 
trend in the cost of medical services can make insurance more 
appealing, because in the absence of insurance, covering potentially 
costly medical needs is more difficult. Furthermore, changes in 
premiums can present an incomplete picture if plan characteristics 
change simultaneously (and there is evidence that average deductibles 
have recently increased in certain types of plans).
---------------------------------------------------------------------------
    \11\ Kaiser Family Foundation and Health Research Educational 
Trust, Employer Health Benefits 2003 Annual Survey (September 2003).
---------------------------------------------------------------------------
    Employee contributions for employer-based health insurance have 
remained a constant proportion of total premium costs in recent years; 
because total premiums are rising, however, the dollar value of 
employee contributions is rising as well. Perhaps related to the growth 
in employee contributions is a reported decline in the rates at which 
employees take up the offer of employer-based coverage. Three factors 
may drive changes in the number of covered workers: the number of firms 
offering health benefits, the proportion of workers eligible for health 
benefits among firms offering coverage (part-time workers generally are 
not eligible), and the rate at which workers accept coverage (if it is 
offered by their employer). Recent analysis shows that as much as 
three-fifths of the recent decrease in employer-based coverage is 
attributable to workers' declining to enroll.\12\
---------------------------------------------------------------------------
    \12\ David M. Cutler, Employee Costs and the Decline in Health 
Insurance Coverage, Working Paper No. 9036 (Cambridge, Mass.: National 
Bureau of Economic Research, July 2002).
---------------------------------------------------------------------------

Conclusions

    In sum, I have stressed that the commonly cited estimates of the 
number of people who lack health insurance present an incomplete 
picture of the uninsured population. That population is dynamic, and 
individuals vary greatly in the length of time that they remain 
uninsured. The varying characteristics of the uninsured should be kept 
in mind when developing policies to expand insurance coverage. I have 
also discussed the relationship between advancing medical technologies 
and increasing health care expenditures and noted that the correlation 
between technological change and expenditure growth needs to be better 
understood. Both Federal spending and private spending on health care 
are likely to continue to increase in the immediate future and to 
constitute a greater share of GDP.

               Prepared Statement of Arnold Milstein M.D.

    I am Dr. Arnold Milstein, Medical Director of the Pacific Business 
Group on Health and a physician consultant at Mercer Human Resource 
Consulting. I also head performance measurement activity at the 
Leapfrog Group. My comments this morning are my own and not intended to 
represent the views of these organizations.
    The problem of healthcare uninsurance has multiple root causes. I 
will focus my remarks on one of these causes, large inefficiencies in 
America's healthcare delivery systems. Eliminating these inefficiencies 
would be feasible over a 10-year period, offset projected health 
insurance cost increases by as much as 40 percentage points, and make 
healthcare insurance more affordable for private sector purchase or 
public program sponsorship.
    I will briefly outline what current science and expert clinical 
opinion tell us about the nature and magnitude of capturable healthcare 
delivery system inefficiency and link its persistence to our failure to 
collect, publicly report, and reward excellence in nationally 
standardized measures of efficiency for hospitals, physicians, and 
major treatment options. Throughout my remarks, I will use the term 
efficiency to refer to the total cost of all healthcare services used 
in treating an episode of acute illness or a year of chronic illness 
and preventive needs at a specified level of quality. This is a 
critical distinction, because some physicians, hospitals or treatment 
options may carry a higher unit price, but incur for health benefits 
plans and consumers a much lower total cost of all healthcare services 
over the duration of an illness. I will refer to this form of 
efficiency as ``longitudinal efficiency.''
    An inferable estimate of current waste in American healthcare 
spending is in excess of 40 percent. This estimate is rooted in two 
sources. First, analysis of Medicare data published by Drs. Elliott 
Fisher, David Wennberg, and other Dartmouth researchers shows that 
hospitals and physicians in the 10 percent of U.S. communities which 
spend the least per capita, (after adjusting for community differences 
in demographics, morbidity, and input price levels) achieve this result 
by providing much lower frequencies of specialist physician visits, 
tests and minor procedures, non-surgical hospitalizations, and 
admissions to ICUs. More important, they show that available indicators 
of quality of care, patient health status and patient satisfaction with 
care, are the same or higher than in the other 90 percent of 
communities that spend much more per capita. The researchers estimate 
that if hospitals and physicians in other communities adopted similarly 
efficient patterns of service use, U.S. per capita Medicare spending 
would be 30 percent lower (see Attachment A). Their unpublished work 
and estimates from other nationally respected researchers and actuaries 
suggests that similar inefficiencies exist for other American health 
benefit programs. They also show that even small degrees of improvement 
in physician efficiency could transform this waste into lower per 
capita health insurance costs (see Attachment B). This prediction has 
been confirmed by employer innovators such as Pitney Bowes and Union 
Carbide that have either incentivized physicians to improve their 
efficiency or incentivized their health insurance beneficiaries to 
utilize physicians with more efficient practice patterns, as identified 
through health insurance claims data analysis (see Attachment C).
    The Dartmouth team estimates significant additional potential 
spending reduction opportunities in all U.S. communities from (1) 
adoption of the patterns of service use by the most efficient, high-
quality providers within low-spending communities; and (2) allowing 
patients to make better informed decisions about high-cost, 
discretionary surgeries. These include surgeries such as elective 
coronary bypass graft that are on average no less frequent in low 
spending communities. Note that all of these analyses are predicated on 
preserving or improving quality of care.
    A second large source of wasted spending is in the inefficiency 
with which we produce all treatments, however valuable. The Institute 
of Medicine's (IOM) Crossing the Quality Chasm report on opportunities 
to improve the performance of U.S. healthcare delivery systems details 
the types of inefficiencies that could be eliminated if best 
operational practices were consistently assured in producing all 
current treatments. These opportunities are embedded in six ``care 
redesign imperatives,'' described in the IOM report. They include 
mainstreaming the use of interoperable electronic clinical information 
systems and other applications of operations engineering in assuring 
the reliable selection of evidence based treatments and error-free 
treatment administration.
    The IOM report and many other scientific publications describe 
hospital and physician leaders who have begun to capture these 
operational efficiencies and achieve accompanying reductions in medical 
errors (see Attachment D). These leaders have persisted in the face of 
a market environment that does not distinguish or reward providers who 
capture efficiencies for CMS and health insurers, and often penalizes 
them. America's foremost experts on operations engineering in 
healthcare, such as Dr. Brent James of Intermountain Health Care, 
estimate such operational waste at 30 percent of current healthcare 
spending.
    In essence, two largely separate 30 percent pools of waste are 
available for capture and redirection into funding wider American 
health insurance coverage. Since transforming these inefficiencies into 
reduced rates of spending will require offsetting investments such as 
improved electronic clinical information systems, I have estimated a 
net savings opportunity approaching 40 percent. Precise estimation is 
not possible for interventions in complex, adaptive systems such as 
U.S. healthcare.
    I realize that these hearings focus on the problem of uninsurance, 
rather than its solutions. Suffice it to say that America's innovators 
in healthcare efficiency capture have generated savings far in excess 
of their costs and that a few strategic public policy changes would 
enable the market to encourage many more to follow their example. The 
most important of these changes are: (1) routinizing and publicly 
releasing longitudinal efficiency and quality ratings of doctors, 
hospitals, and major treatment options; and (2) encouraging CMS to 
share with private sector health benefits plans its patient privacy-
protected claims data base, so that all health plans would be able to 
improve their precision in identifying the best performing providers 
and treatments options; (3) encouraging CMS and other health plans to 
reward clinical performance improvements either by more favorable 
payment for providers and treatment options offering superior quality 
and longitudinal efficiency, and/or by lowering out-of-pocket costs for 
patients who preferentially use them.
    Americans have standardized longitudinal efficiency measures for 
appliances and for automobiles, but not for the industry that consumes 
a much greater share of their income and benefits. Methods of 
quantifying longitudinal efficiency and quality for hospitals, 
physicians, and major treatment options are already developed and 
easily within the capability of American health services researchers to 
further refine. The National Committee for Quality Assurance (NCQA) 
plans to release standardized efficiency measures for physicians and 
hospitals during this calendar year.
    Absence of such measurements keeps American hospitals, doctors, and 
patients in the dark with respect to comparative healthcare efficiency 
and unable to identify opportunities to make their health insurance 
much more affordable. When paired with standardized, publicly reported 
quality measurements, longitudinal efficiency measurements would 
comprise a new navigational system for patients, providers, and 
insurers to improve America's health and substantially reduce future 
increases in health insurance premiums. It would also send an important 
signal to new medical technology developers that market receptivity to 
new products and services will become more sensitive to their effect on 
the affordability of health insurance, in addition to their effect on 
health.
    Thank you for the opportunity to share my thoughts on how large, 
invisible, and substantially capturable inefficiencies in American 
healthcare delivery contribute to the unaffordability of health 
insurance.



























































    Response to Questions by the Senate HELP Committee from Arnold 
                             Milstein, M.D.

    Question 1. Dr. Davis asserts that consumer-directed health care is 
just a way to shift more costs to consumers, creates more ``under-
insured,'' and harms consumers by leading them to skip necessary care. 
Can you please comment on this? Is consumer-directed health care just a 
fancy term for cost-shifting?
    Answer 1. There are several forms of consumer-directed health care. 
``Blunt'' forms that incentivize consumers to avoid health care of all 
types are likely to create the problems that Dr. Davis described. 
``Precision-tailored'' forms that incentivize consumers to use the most 
cost efficient, high quality physicians, hospitals, and/or treatment 
options are unlikely to create such problems.

    Question 2.  You mention innovative projects by Pitney Bowes and 
Union Carbide, which incentivize physicians to improve their efficiency 
and/or encourage beneficiaries to utilize physicians with more 
efficient practice patterns. Could you discuss cost reductions and 
improved patient satisfaction that result from such initiatives? If 
those benefits are realized, why has this practice not been 
incorporated into other privately sponsored insurance programs? Do you 
see any impediments in generalizing such practices?
    Answer 2. These two employers captured a reduction in total per 
capita health care costs of roughly 17 and 9 percentage points, 
respectively. Employee satisfaction was not measured, but both 
employers described the impact on employee relations as low to zero. 
This practice has not spread because very few employers or insurers 
have enough claims experience with an individual physician to quantify 
and compare his/her total longitudinal cost efficiency and quality of 
care with other physicians in the same specialty and location. Giving 
self-insured employers, unions, and insurers access to the 
beneficiary--deidentified full CMS claims data base would remove this 
barrier and allow all health plans to recognize and reward better 
performing physicians and specific hospital service lines.

    Question 3. Your mention methods for quantifying efficiency and 
quality for hospitals, physicians and major treatment options as 
``already developed'' or within capability of American health services 
researchers to further define. Is there a consensus on these measures 
within the health care community? What, if any, is the role of the 
federal government in this regard?
    Answer 3. There is not yet national consensus on how to quantify 
all of these parameters, although much progress has been made by the 
National Quality Forum (NQF) and others in quantifying hospital quality 
and hospital patient safety. The Federal Government should contract 
with (a) one or more of AHRQ's Evidence-based Practice Centers (EPCs) 
to develop standardized performance measures (cost-efficiency and 
quality) for treatment options; (b) JCAHO in partnership with one or 
more AHRQ EPCs to develop a full set of hospital quality measures; (c) 
NCQA to accelerate its effort to develop cost-efficiency and efficiency 
measures for hospital service lines, individual physicians, and 
physician groups; and (d) with the NQF to endorse current measures and 
others after they are developed via activities (a)-(c). Completion 
deadlines should not exceed 2 years for (a)-(c) and 1 subsequent year 
for (d).

    Question 4. Among the changes required to capture efficiency, you 
describe sharing of efficiency and quality ratings of physicians, 
hospitals and major treatment options among private and public health 
plans. What, if any, are the impediments in sharing of data among 
health plans? Are there privacy and patient confidentiality concerns?
    Answer 4. I recommend sharing the full Medicare claims database 
with private sector health benefit plan sponsors and letting them 
combine it with their own databases in order to compute such ratings. 
There are no patient confidentiality concerns as long as individual 
beneficiary identifiers in CMS databases are encrypted and all other 
beneficiary privacy protections provided for under HIPAA and the 
Privacy Act are strictly applied to the CMS database before CMS shares 
it with private sector health plans. Subject to these same protections, 
private sector plans could share their claims data with each other. 
However, they are understandably reluctant to do so because they fear 
that it would reveal, and thereby cause them to lose, their advantaged 
pricing with some providers. In a few communities, trusted 
intermediaries are serving the data aggregation and analysis roles.

    Question 5. You suggest that CMS should share Medicare data about 
performance of providers, i.e. efficiency and quality ratings, of 
physicians and hospitals with health plans and insurance companies. Do 
you have concerns about accuracy and validity of data based on billing 
codes and captured by personnel not trained for the purpose of quality 
related data? How sensitive and specific are such data in 
distinguishing providers of varying quality? Is there a potential for 
abuse of such data?
    Answer 5. I suggested that CMS share its claims data rather than 
rate and share provider performance. Claims data provided to CMS and 
insurers are too inaccurate and incomplete to support highly precise 
comparisons among hospitals and physicians. CMS could fix this problem 
by adopting more full and exacting billing data requirements as 
exemplified by recent recommendations of the Quality Work Group of the 
National Committee on Vital and Health Statistics. In the meantime, 
existing billing data will support less precise performance comparisons 
that are far superior to assessing doctors and hospitals based on their 
unit prices and publicly advertised quality of care assertions.

    Question 6. Dr. Milstein, should insurance companies have greater 
flexibility to offer incentives and disincentives for people to modify 
their behavior--for instance, to encourage people to take better care 
of themselves and control over their own health?
    Answer 6. Yes, I believe that insurers should be given substantial 
flexibility to incentivize enrollees' participation in behavioral 
health risk reduction programs. Based on considerations of equity, 
insurers should be encouraged to gear the size of any negative 
incentives to the enrollee's income level, as is already done by 
several large self-insured employers in order to avoid economic 
coercion of low-income enrollees.

    Question 7. One of the off-cited concerns with consumer-driven 
healthcare is that high-deductible insurance plans ``would lead to a 
major increase in the number of underinsured individuals.'' This idea 
of uunderinsurance suggests that there is some broadly agreed-upon 
level of insurance to which everyone should aspire. However, if someone 
wants to buy a high-deductible policy to protect themselves against 
catastrophic injuries or illnesses, and then save the difference 
between the cost of a high-deductible policy versus the cost of 
``Cadillac coverage,'' why shouldn't they have that choice?
    Answer 7. Like car insurance, consumers should have freedom to 
select varying levels of insurance. Since sicker consumers tend to 
select plans with better coverage, such freedom should be linked with 
rules for transferring income between insurance pools based on 
differences between pools in the health risk of their enrollees. 
Otherwise, this freedom would lead to concentrating the sickest 
consumers in insurance pools with unaffordable premiums.

                   Prepared Statement of Karen Davis

    Thank you, Mr. Chairman, for this invitation to testify today on 
what's driving up health care costs and the rising numbers of 
uninsured. The recent announcement that national health expenditures 
jumped 9.3 percent in 2002, the fastest increase in a decade, is indeed 
troubling.\1\ Even more so is the 9.5 percent jump in the number of 
uninsured Americans between 2000 and 2002, from 39.8 million to 43.6 
million.\2\
---------------------------------------------------------------------------
    \1\ Katherine Levit et al., ``Health Spending Rebound Continues in 
2002,'' Health Affairs, 23(1):147-159, January/February 2004.
    \2\ U.S. Census Bureau, Health Insurance Coverage in the United 
States: 2002, September 2003.
---------------------------------------------------------------------------
    Rising health care costs are a problem for all Americans, but they 
weigh especially heavily on uninsured and ``underinsured'' individuals, 
who pay much of the cost of health care directly out-of-pocket. Insured 
workers also feel the brunt, as employers are increasingly passing 
costs onto them in the form of higher deductibles, greater cost-
sharing, and larger shares of employee premiums. Strife over health 
insurance is once again provoking employer-employee confrontations and 
eroding business and worker productivity.
    Increased costs to patients also lead to underuse of appropriate 
care and greater financial burdens on the sickest. The direct financial 
impact on working Americans is undoubtedly one of the contributors to 
recent poll results showing that the affordability of health care is 
second among the public's concerns, after the economy and jobs.\3\ And, 
of course, since 46 percent of all health expenditures come from 
government health programs such as Medicare and Medicaid, as well as 
those run by the Veterans Administration, the Department of Defense, 
and others, rising costs also mean increased government budgetary 
outlays. State fiscal pressures that are leading to cutbacks in 
Medicaid and the State Children's Health Insurance Program (SCHIP) are 
particularly troubling.
---------------------------------------------------------------------------
    \3\ Washington HealthBeat, Affordable Care Second Behind Economy as 
Voter Concern, January 14, 2004.
---------------------------------------------------------------------------
    What we all want from our health care system is not necessarily 
cheaper care, but the efficient use of resources to provide high-
quality care to all Americans. We can no longer afford or tolerate 
wasteful spending on care that does not benefit patients, the 
duplication of expensive procedures, medical errors, or the high 
administrative costs incurred by the Nation's insurers and providers. 
Real solutions should directly target these sources of unacceptably 
high costs, not simply shift costs from employers to workers or from 
government to beneficiaries of public programs. Promising long-run 
solutions include: rewarding health care providers that achieve 
demonstrably better quality and efficiency, improving high-cost patient 
care management, reducing medical errors, improving care coordination, 
and simplifying unnecessarily complex or duplicative insurance 
practices.
    Most fundamentally, we must act as a Nation to achieve automatic 
and affordable health insurance for all, to ensure that the benefits of 
modern medicine are accessible, and to ensure that investment in health 
care contributes to economic growth and a healthier, more productive 
society.

Rising Health Insurance Premiums: Out of Reach for Many Americans

    After 3 years of double-digit increases, health insurance premiums 
for employer-sponsored coverage have reached truly staggering levels. 
In 2003, the average premium was $9,068 for a family policy and $3,383 
for an individual worker.\4\ Employees paid $2,412 directly for family 
coverage annually--more than $200 per month--and $508 annually for 
single coverage. Some economists argue, furthermore, that the employer 
share is shifted backward onto workers in the form of lower wages; even 
if this is only partially the case, the cost to workers is considerably 
greater. When employers do not sponsor coverage, insurance premiums in 
the individual market for comparable coverage is even more expensive--
when it is available at all. Half of American families make less than 
$50,000 per year; \5\ few of them could afford more than $10,000 a year 
in health insurance premiums on their own.
---------------------------------------------------------------------------
    \4\ The Kaiser Family Foundation and Health Research and 
Educational Trust, Employer Health Benefits, 2003, 2003.
    \5\ U.S. Census Bureau, Income in the United States: 2002, 
September 2003.
---------------------------------------------------------------------------
    The 13.9 percent increase in health insurance premiums in 2003 
attracted particular attention.\6\ Premiums would have been even higher 
if employee deductibles and other forms of cost-sharing had not 
increased, effectively reducing the comprehensiveness of coverage for 
the insured. At the same time, insurance spending for medical 
services--benefits--per enrollee are not increasing at double-digit 
rates. In fact, health spending per enrollee in the first half of 2003 
increased 8.5 percent.\7\
---------------------------------------------------------------------------
    \6\ Jon Gabel et al., ``Health Benefits in 2003: Premiums Reach 
Thirteen-Year High as Employers Adopt New Forms of Cost Sharing,'' 
Health Affairs, 22(5):117-126, September/October 2003.
    \7\ Bradley C. Strunk and Paul B. Ginsburg, Tracking Health Care 
Costs: Trends Slow in First Half of 2003, Data Bulletin No. 26, Center 
on Health System Change, December 2003.
---------------------------------------------------------------------------
    Although many insurance companies are reporting record profits,\8\ 
the divergence between premiums and underlying cost trends is probably 
a temporary phenomenon. In the underwriting cycle, premiums typically 
rise more slowly than costs when costs are accelerating and faster than 
costs when costs start decelerating. Market forces are likely to bring 
premiums more in line with costs in future years, but the issue 
warrants watching, especially given the consolidation within the 
insurance industry in recent years and the accompanying increase in 
insurers' market power.
---------------------------------------------------------------------------
    \8\ Dinah Wisenberg Brin, ``U.S. Health Insurers Seen Posting Solid 
Earnings as Costs Moderate, Wall Street Journal Online, January 15, 
2004 6:59 pm EST; Paula L. Stepankowsky, ``Aetna Pres Reiterates At 
Least 15% `04 Profit Growth View,'' Wall Street Journal Online, January 
14, 2004, 7:57 am. EST; Business Wire, Inc., ``HMO Profits Jump 60% in 
First Quarter 2003, According to Weiss; More than 80% of Companies 
Profitable,'' January 20, 2004; Associated Press State and Local Wire, 
``Blue Cross Profits among Country's Fastest Rising in Early 2003,'' 
January 22, 2004; Glenn Singer, ``HMO Profits Get Healthy Bounce in 
'03; Medical Costs Didn't Rise as High as Projected, Which Has Helped 
Boost Bottom Lines,'' South Florida Sun-Sentinel, December 30, 2003.
---------------------------------------------------------------------------
    Certainly, expenditures under the Medicare program, while also 
accelerating, are not matching the rise in private insurance premiums. 
Medicare outlays per enrollee for comparable benefits increased 6.2 
percent over the 1999-2002 period, compared with 8.7 percent in private 
health insurance and 10.7 percent in the Federal Employees Health 
Benefits Program (excluding benefits not covered by Medicare or private 
insurance, such as prescription drugs, home health, and skilled nursing 
facility services).\9\ It will be important, however, to monitor the 
effect of additional funds provided to Medicare managed care plans in 
recent legislation on future insurance company profits and total 
Medicare outlays.
---------------------------------------------------------------------------
    \9\ Katherine Levit et al., ``Health Spending Rebound Continues in 
2002,'' Health Affairs, 23(1):147-159, January/February 2004.
---------------------------------------------------------------------------
    The most serious consequences of rising health care premiums, 
particularly the rise in premiums paid directly by employees, is that 
some low-wage workers decline health insurance coverage even when it is 
offered by employers, while those with insurance are forced to forgo 
needed care because of high deductibles. Over one-fifth of uninsured 
workers--3.5 million people--are eligible for employer health insurance 
coverage but fail to take it up, largely because of the high cost of 
their share of the premium.\10\ Low-wage workers are particularly apt 
to decline coverage when eligible. Seventeen percent of workers making 
less than $10 an hour declined coverage, compared with 8 percent of 
those making $15 an hour or more.\11\
---------------------------------------------------------------------------
    \10\ The Commonwealth Fund 2001 Health Insurance Survey.
    \11\ Analysis of 2000 Medical Expenditure Panel Survey by Sherry 
Glied and Douglas Gould of Columbia University for The Commonwealth 
Fund.
---------------------------------------------------------------------------
    Higher deductibles also contribute to underinsurance. They cause 
the low-income insured to forgo needed medical care or create crippling 
medical bill problems. Over half of the uninsured and nearly one-third 
of low-income insured individuals reported problems paying medical 
bills in 2001.\12\ In addition, more than half of the uninsured and 
over one-fourth of low-income insured individuals reported problems 
obtaining needed care.\13\ With the marked rise in patient cost-sharing 
in the last 3 years, these problems are undoubtedly more severe today.
---------------------------------------------------------------------------
    \12\ The Commonwealth Fund 2001 Health Insurance Survey.
    \13\ The Commonwealth Fund 2001 Health Insurance Survey.
---------------------------------------------------------------------------

Trends in Health Care Costs

    The important question is why health care expenditures are rising 
at such a rapid rate. In 2002, the Nation spent $1.6 trillion for 
health care, or 14.9 percent of gross domestic product (GDP). This is a 
major jump from 13.3 percent of GDP in 2000, due to accelerating health 
care costs as well as relatively weak nominal GDP growth. By 2012, 
health spending is projected to more than double.\14\
---------------------------------------------------------------------------
    \14\ Stephen Heffler et al., ``Health Spending Projections for 
2002-2012,'' Health Affairs web exclusive, February 7, 2003.
---------------------------------------------------------------------------
    Health spending is a combination of increases in prices of 
individual services, increased numbers of services, or a shift in the 
composition of services toward more specialized, higher-cost services. 
In the mid-1990s, prices went up at a slower rate, reflecting to some 
extent moderation in economy-wide inflation but also reflecting 
discounted prices under managed care and budget cuts in Medicare and 
Medicaid. But since 1998, prices of services have been accelerating 
somewhat as providers decline to take sharply discounted managed care 
provider payment fees.
    But most importantly, since the mid-1990s the quantity of services 
consumed has been increasing. This may reflect new technology and, to 
some degree, an aging population. However, it could also reflect some 
``provider-induced'' demand--for example, as physicians attempt to 
generate additional income by providing more services, working longer 
hours, or ordering more tests. Some recent data for the Medicare 
program point to sharp increases in the provision of specialized 
services, such as pacemaker insertion.\15\ This may be an attempt by 
physicians to gain back some of the reduction in physicians' real 
income that occurred in the late 1990s.\16\
---------------------------------------------------------------------------
    \15\ Medicare Payment Advisory Commission, Report to the Congress: 
Medicare Payment Policy, March 2003.
    \16\ Marie C. Reed and Paul B. Ginsburg, Behind the Times: 
Physician Income, 1995-1998, Center for Studying Health System Change, 
Data Bulletin No. 24, March 2003.
---------------------------------------------------------------------------
    Hospital spending is now the leading source of overall health 
services expenditure growth. In 2002, hospital costs accounted for more 
than one-third of overall spending growth, physician expenditures for 
one-fifth, and prescription drugs for one-sixth. As a result of rapid 
increases, the hospital share of total national expenditures has grown. 
Again, this may be an attempt by hospitals to recover from sharply 
discounted managed care fees and Medicare hospital savings in the mid- 
to late 1990s. For example, hospital costs grew annually at 8.8 percent 
in the late 1980s and early 1990s, and slowed to 3.5 to 4 percent from 
1993 to 2000. But during 2000 to 2002, hospital costs again grew 8 to 
10 percent annually, suggesting that the slowdown in the mid-1990s was 
not sustainable given the rising wages of hospital employees and the 
costs of supplies, including prescription drugs, purchased by 
hospitals. Some of the increase is clearly attributable to 
technological advances that improve health or maintain functioning and 
are highly valued by society.
    Prescription drug spending has ``moderated'' somewhat, climbing at 
a 15.3 percent rate in 2002, down from 17.1 percent between 1997 and 
2000. Drug prices are increasing at about 5 percent a year, with the 
remainder of the spending growth reflecting either a rise in the number 
of prescriptions or a shift toward more costly medications. While 
forecasts by the Centers for Medicare and Medicaid Services (CMS) 
suggest that prescription drug spending will slow to 10 percent between 
2003 and 2011, much will depend on industry's response to the new 
prescription drug legislation. This is an area that merits close 
monitoring.
    Finally, it is shocking that administrative expenses are now the 
fastest-growing component of national health expenditures. In 2002, the 
Nation spent $105 billion on private insurance and public 
administrative expenses, up 16.2 percent from 2001.\17\ Over the last 5 
years, increases in administrative costs have consistently outpaced 
increases in total health expenditures. Private insurance 
administrative costs are particularly high--12.8 percent of total 
private insurance outlays, compared with 4.9 percent for public 
programs and only 3.0 percent for Medicare. This does not include 
administrative costs within physician offices, clinics, or hospitals, 
where administrative costs have been rising due to ever more complex 
and fragmented insurance arrangements.
---------------------------------------------------------------------------
    \17\ Katherine Levit et al., ``Health Spending Rebound Continues in 
2002,'' Health Affairs, 23(1):147159, January/February 2004.
---------------------------------------------------------------------------

Is Consumer-Driven Health Care the Answer?

    Given the public backlash against managed care, it has become 
fashionable to suggest that increasing patient cost-sharing is the 
best, or even the ``only,'' private sector strategy remaining to slow 
health care costs.\18\ But Americans spend far more out-of-pocket for 
health care than the citizens of any other industrialized nation, and 
all of these nations have lower health care spending per capita. In 
2002, Americans spent $213 billion out-of-pocket, up from $147 billion 
in 1993 and $25 billion in 1970.\19\ Despite improvements in benefits 
covered over time, rising health care costs and growing numbers of 
uninsured have kept patient out-of-pocket costs relatively constant as 
a percent of GDP, from 2.4 percent in 1970, to 2.2 percent in 1993, to 
2.0 percent in 2002.
---------------------------------------------------------------------------
    \18\ ``David E. Rosenbaum, ``The Nation: Do Some Pay Too Little for 
Health Care?'' The New York Times, October 26, 2003. ``As we've moved 
away from managed care as a cost-control device, we have no choice but 
to move to higher deductibles and co-pays,'' [quoting John F. Holahan, 
Urban Institute]; ``Jonathan Gruber [MIT] . . . argues that to limit 
overuse of health care, people should have to pay enough of the cost 
out-of-pocket that it pinches.''
    \19\ Katherine Levit et al., ``Health Spending Rebound Continues in 
2002,'' Health Affairs, 23(1):147-159, January/February 2004.
---------------------------------------------------------------------------
    Increasing patient cost-sharing has well-known adverse 
consequences. First of all, it contributes to excessive financial 
burdens, particularly on lower-income and sicker patients. A recent 
study found that a $1,000 deductible, for example, would cause one 
third of all Americans to spend more than 10 percent of their income on 
health care if they were hospitalized.\20\ A $2,500 deductible would 
cause two-thirds of all Americans to spend more than 10 percent of 
their income if hospitalized. Rates are far higher, of course, for 
those at the lowest end of the income scale. People with the potential 
for such high out-of-pocket costs in the event of serious illness are 
considered to be underinsured. No one could seriously advocate making 
one-third or two-thirds of Americans underinsured in the name of 
creating ``cost-conscious consumers.''
---------------------------------------------------------------------------
    \20\ Sally Trude, Patient Cost Sharing: How Much is Too Much? 
Center for Studying Health System Change, December 2003.
---------------------------------------------------------------------------
    Even Medicare leaves many beneficiaries facing high out-of-pocket 
costs. The elderly as a whole spent 22 percent of their income on 
health care in 2000 from a combination of Part B premiums, Medigap 
premiums, cost-sharing for covered services, and uncovered services 
(including prescription drugs).\21\ That proportion is projected to 
rise to 30 percent by 2025. While the new Medicare prescription drug 
legislation will assist many Medicare beneficiaries, there are gaps in 
benefits and beneficiary premiums that rise markedly over time.\22\ For 
low-income Medicare beneficiaries or for those with serious health 
problems, the risk of severe financial hardship remains considerable.
---------------------------------------------------------------------------
    \21\ S. Maxwell et al., Growth in Medicare and Out-of-Pocket 
Spending: Impact on Vulnerable Beneficiaries, The Commonwealth Fund, 
December 2000.
    \22\ New York Times, ``Patches for the Drug Program,'' p. 14, 
January 25, 2004.
---------------------------------------------------------------------------
    An extensive literature documents that cost-sharing is a blunt 
instrument for reducing utilization of services. It reduces both those 
effective services that are already underutilized as well as services 
that are ``supply-sensitive.'' The RAND Health Insurance Experiment, 
for example, found that low-income children facing cost-sharing had 
half the probability of receiving highly effective care for acute 
conditions that are appropriate and necessary compared with low-income 
children not facing cost-sharing. For low-income adults, these rates 
were similar. But even higher-income children and adults with cost-
sharing had a lower probability of receiving effective medical care 
than comparable children and adults not faced with no cost-sharing.\23\
---------------------------------------------------------------------------
    \23\ K. N. Lohr et al., ``Use of Medical Care in the RAND HIE,'' 
Medical Care 24, supplement 9 (1986):81-87.
---------------------------------------------------------------------------
    While the RAND study took place in the late 1970s, more recent 
studies confirm the effect of cost-sharing on receipt of essential 
care. A Canadian study found that cost-sharing for prescription drugs 
reduced use of both essential and less essential drugs, increased the 
risk of adverse events, and increased visits to the emergency 
department.\24\ A recent U.S. study found much the same effect in an 
employer plan switching from a one-tier formulary to a three-tier 
formulary with increased enrollee copayments for medications.\25\ Those 
facing increased copayments under all three tiers had a 16 percent 
decline in filling prescriptions for ACE inhibitors and a 21 percent 
decline in filling prescriptions for statins, compared with 6 percent 
and 11 percent for those experiencing no change in copayments.
---------------------------------------------------------------------------
    \24\ R. Tamblyn et al., ``Adverse Events Associated with 
Prescription Drug Cost-Sharing Among Poor and Elderly Persons,'' 
Journal of the American Medical Association 285:421-429, 2001.
    \25\ Haiden A. Huskamp et al., ``The Effect of Incentive-Based 
Formularies on Prescription-Drug Utilization and Spending,'' The New 
England Journal of Medicine 349(23):2224-2232, December 4, 2003.
---------------------------------------------------------------------------

What Alternatives Exist for Achieving Economies in Health Care?

    Looking at the experience of other countries suggests that it is 
certainly possible to spend less on health care while achieving 
comparable or better health outcomes. The major reason U.S. health care 
costs are higher is not that other countries ration care; in fact, the 
U.S. has fewer hospital days per capita than other countries and about 
the same number of physician visits.\26\ Rather, the reason is that 
costs are higher in this country because we pay higher prices for the 
same services, our administrative costs are higher, and Americans 
receive far more specialized services, such as MRls and invasive heart 
procedures.\27\
---------------------------------------------------------------------------
    \26\ Karen Davis and Barbara Cooper, American Health Care: Why So 
Costly? The Commonwealth Fund, June 2003.
    \27\ Gerard Anderson et al., ``It's the Prices, Stupid: Why the 
United States is So Different from Other Countries,'' Health Affairs, 
89-105, May/June 2003.
---------------------------------------------------------------------------
    While the U.S. health system is the most costly, it is striking how 
similar the rate of increase in real health spending has been across 
countries in the last decade. Real spending per capita in the U.S. rose 
by 3.2 percent per year in the 1990s, compared with 3.1 percent for all 
OECD industrialized countries.\28\ This finding suggests that trends 
may be more a reflection of technological change, or rising labor and 
other supply costs, than specific government policies.
---------------------------------------------------------------------------
    \28\ Anderson et al., Multinational Comparisons of Health Systems 
Data, 2002, The Commonwealth Fund, October 2002.
---------------------------------------------------------------------------
    Despite the U.S. reliance on managed care--which most view as 
successful in achieving at least ``one-time'' savings--other countries 
using alternative strategies had much the same experience. Spending 
growth per capita in New Zealand, for example, was 2.9 percent, perhaps 
owing to such policies as aggressive negotiation for lower drug prices 
and a long-standing system of no-fault medical malpractice. In response 
to general economic difficulties, Canada curbed Federal health spending 
markedly in the mid-1990s and experienced 1.8 percent annual increases 
in real health spending per capita. However, public backlash at the 
closure of hospital beds and reduced accessibility of services led to 
investment of new resources in Canadian health care in recent years. 
The United Kingdom had higher spending growth (3.7 percent annually in 
the 1990s), as a result of policy commitments to increasing the 
resources devoted to health care.
    One of the lessons from the international experience is that health 
care is highly valued by the public, and government efforts to restrain 
spending often meet with opposition from the public as well as 
providers. In each country, public dissatisfaction with the health 
system seems to be particularly sensitive to policies that increase 
patient out-of-pocket costs or visibly reduce accessibility to health 
care services.\29\ This suggests that greater success may be achieved 
over the long run by designing targeted policies that focus on 
administrative costs, duplication and waste, medical errors, or care 
that is both better for patients and lowers cost.
---------------------------------------------------------------------------
    \29\ Cathy Schoen et al., ``Health Insurance Markets and Income 
Inequality: Findings from an International Health Policy Survey,'' 
Health Policy 52(2):67-85, March 2000.
---------------------------------------------------------------------------
    If the U.S. were more willing to use the power of government to 
negotiate prices for medical services and prescription drugs, it could 
probably achieve considerably lower prices. However, we seem committed 
to a pluralistic system of many different private insurers and public 
programs, each attempting to get the best deal it can on its own, 
rather than a concerted effort to purchase services collectively or 
all-payer rate-setting. Other countries also are more willing to use 
supply constraints--for example, limiting the number of physicians of 
different types who are permitted to practice--and to use salaried 
payment systems for specialists, which eliminate incentives to provide 
unnecessary services to generate income.
    An alternative that may be feasible for the U.S. is to be more 
proactive about assessing when individual services are necessary and 
rewarding health care providers that provide the ``right care'' 
efficiently. For example, clinical criteria for the use of imaging 
tests such as MRIs and specialized procedures or specialist referrals 
could be developed and payment restricted to those instances in which 
the best available scientific evidence suggests the care will be 
effective.
    Modern information technology also shows promise, in cutting 
administrative expenses, reducing medical errors, prompting physicians 
to order tests or services only when clinically warranted, and making 
it easier to retrieve clinical information so that tests do not have to 
be repeated. Better information systems would also make it possible to 
assess provider performance in order to identify physicians, hospitals, 
and other providers that provide either superior quality care or 
greater efficiency, or preferably both. Best practices could then be 
disseminated widely, encouraging others to achieve the same levels of 
performance or tailoring financing incentives to reward best practices.

Reducing Medical Errors and Improving Care Coordination

    It has been almost 5 years since the Institute of Medicine released 
its study To Err Is Human and sounded the alarm about the seriousness 
of medical errors.\30\ Yet, our Nation is far from broadly instituting 
procedures that are known to protect patients, reduce deaths, eliminate 
complications and costly hospital stays, and, in so doing, reduce 
health care costs.
---------------------------------------------------------------------------
    \30\ L. T. Kohn, J. M. Corrigan, and M.S. Donaldson, eds., To Err 
is Human: Building a Safer Health System, Washington, DC: National 
Academies Press, 1999.
---------------------------------------------------------------------------
    A recent study of 18 patient safety indicators identified by the 
Agency for Healthcare Research and Quality (AHRQ) found that these 
medical errors account for 2.4 million extra hospital days, $9.3 
billion of excess charges, and nearly 33,000 deaths.\31\ When foreign 
objects are left in the patient after surgery, patients need repeat 
surgery, recover less quickly, and spend more time in the hospital.\32\
---------------------------------------------------------------------------
    \31\ C. Zhan and M. R. Miller, ``Excess Length of Stay, Charges, 
and Mortality Attributable to Medical Injuries During 
Hospitalization,'' Journal of the American Medical Association, October 
8, 2003:18681874.
    \32\ A. A. Gwande et al., ``Risk Factors in Retained Instruments 
and Sponges After Surgery,'' New England Journal of Medicine 348: 229-
235, 2003.
---------------------------------------------------------------------------
    Information technology (IT) shows particular promise for reducing 
medical errors. One study found that the rate of nonintercepted, 
serious medication errors at one hospital fell by 55 percent with a 
physician computer order entry system.\33\ The net savings for the 
hospital were estimated at between $5 to $10 million a year. And, of 
course, this does not measure the ``savings'' for the patients, which 
are not only desired but also yield economic benefits through increased 
productivity (e.g., fewer missed work days). Computer-based 
surveillance of adverse medical device events also shows promise.\34\
---------------------------------------------------------------------------
    \33\ David W. Bates et al., ``Effect of Computerized Physician 
Order Entry and a Team Intervention on Prevention of Serious Medication 
Errors,'' Journal of the American Medical Association 280 (15):1311-
1316, October 21, 1998.
    \34\ Matthew H. Samore, ``Surveillance of Medical Device-related 
Hazards and Adverse Events in Hospitalized Patients,'' Journal of the 
American Medical Association, 292(3):325-334, January 21, 2004.
---------------------------------------------------------------------------
    All providers should be encouraged to establish systems that reduce 
errors, whether they are computer-based or techniques such as bar 
coding. Government can facilitate these efforts through sharing in the 
costs of IT systems, promulgating IT standards, and requiring error 
reporting.
    Private-sector efforts can also assist. For example, The 
Commonwealth Fund has provided support for the development, 
dissemination, and use of tools to help hospitals self-assess whether 
safe medication practices are in place. The Institute for Healthcare 
Improvement runs a Breakthrough Series that has demonstrated success, 
through a technique known as medication reconciliation, in reducing 
adverse drug events occurring when patients are discharged from the 
hospital and resume taking prior medications along with those given to 
them at the hospital. Yet, only a limited number of U.S. institutions 
have been trained in these techniques.
    The U.S. is particularly at risk because of our more complex health 
system. U.S. patients take more medications and see more physicians, 
thus creating more opportunities for mistakes to occur. The 2002 
Commonwealth Fund International Health Policy Survey of Sicker Adults 
found that 18 percent of U.S. adults with health problems reported 
experiencing a medical error that caused serious problems in the past 2 
years, compared with 9 percent of U.K. patients and 15 percent of 
Canadians.\35\
---------------------------------------------------------------------------
    \35\ Robert Blendon et al., ``Common Concerns Amid Diverse Systems: 
Health Care Experiences in Five Countries,'' Health Affairs (May/June 
2003):106-121.
---------------------------------------------------------------------------
    The complexity of our health system not only leads to medical 
errors but leads to problems with coordinating care across health care 
providers. According to the survey, one-fifth of sick adults in the 
U.S. had a time in the past 2 years when they were sent for duplicate 
tests by different health professionals.\36\ One of four sicker adults 
reported that medical records or test results did not reach their 
doctor's office in time for appointments. When records are not 
available, patients may need to come back another time, wasting both 
patient and physician time. Information technology could improve 
efficiency by making records easily accessible when they are needed, 
reducing the need to repeat tests, and making sure that information is 
in the hands of providers at the time it is needed.
---------------------------------------------------------------------------
    \36\ Robert Blendon et al., ``Common Concerns Amid Diverse Systems: 
Health Care Experiences in Five Countries,'' Health Affairs (May/June 
2003):106-121.
---------------------------------------------------------------------------

Paying for Performance: Quality and Efficiency

    Poor quality extends beyond medical errors to include failing to 
provide patients with care that could benefit them or overuse of 
services without therapeutic benefit. A study by the RAND Corporation 
this year underscored concerns that clinicians are failing to provide 
many patients with the most clinically appropriate care.\37\ Only 55 
percent of Americans received recommended care. The results held for 
preventive care, care for acute conditions, and care for chronic 
conditions. For example, pneumonia patients received recommended care 
only 39 percent of the time, and hip fracture patients only 23 percent 
of the time.
---------------------------------------------------------------------------
    \37\ Elizabeth McGlynn et al., ``The Quality of Health Care 
Delivered to Adults in the United States,'' The New England Journal of 
Medicine (June 26, 2003):2635-2645.
---------------------------------------------------------------------------
    Overuse of services is clearly an area where quality could be 
improved and costs reduced. But rarely is a specific procedure never 
appropriate; rather, procedures are appropriate under some 
circumstances and not others. Unlike several other countries, the U.S. 
does not have a Federal agency charged with developing and approving 
clinical guidelines based on the latest scientific evidence that govern 
when a particular procedure should be used. AHRQ has a National 
Guidelines Clearinghouse with professionally developed guidelines, but 
the agency no longer develops or recommends guidelines. Without such an 
effort, progress in reducing overuse is likely to be slow.
    Just how variable current practice is has been underscored by 
several recent studies. An analysis of Medicare quality-of-care 
indicators by State shows widespread differences.\38\ A team of 
investigators at Dartmouth College has found wide variations in 
Medicare costs per beneficiary and in the use of ``supply-sensitive'' 
services across hospital service areas.\39\ But particularly 
interesting are new analyses that show wide variation in both quality 
and efficiency. For example, within the Premier network of hospitals, 
outcomes for coronary artery bypass graft vary five-fold and costs vary 
by three-fold. There is no systematic relationship between cost and 
quality.\40\ Rewarding those hospitals that achieve high quality and 
low cost would be a spur to others to emulate best practices and would 
lead to improved care for all.
---------------------------------------------------------------------------
    \38\ Stephen F. Jencks, Edwin D. Huff, and Timothy Cuerdon, 
``Change in the Quality of Care Delivered to Medicare Beneficiaries, 
1998-1999 to 2000-2001,'' Journal of the American Medical Association 
(January 2003) 289: 305-312.
    \39\ Elliott S. Fisher et al., ``The Implications of Regional 
Variations in Medicare Spending. Part 1: The Content, Quality, and 
Accessibility of Care,'' Annals of Internal Medicine (February 2003) 
138: 273-287.
    \40\ Srephen Grossbart, Ph.D., Director, Healthcare Informatics, 
Premier, Inc., ``The Business Case for Safety and Quality: What Can Our 
Databases Tell Us,'' 5th Annual NPSF Patient Safety Congress, March 15, 
2003.
---------------------------------------------------------------------------

Better Management of High-Cost Patients

    Health care costs are heavily concentrated in the sickest patients. 
Ten percent of people account for 69 percent of health care 
outlays.\41\ In recognition of this fact, private managed care plans 
are beginning to concentrate their care management efforts on either 
those patients who are most costly or those who are predicted to be 
most costly in the future. Through predictive modeling techniques, 
plans can identify which patients are most likely to be on a trajectory 
toward high costs. For example, Partners HealthCare System in Boston 
identifies patients who make increasing use of emergency rooms and uses 
call banks of nurses to find out if patients are adhering to their 
medications and to screen for such problems as depression. Kaiser-
Permanente health system goes beyond simple disease management; it 
tailors its monitoring practices differently for those patients who are 
at a stage where they can manage their condition on their own than for 
those requiring substantial assistance.
---------------------------------------------------------------------------
    \41\ A. C. Monheit, ``Persistence in Health Expenditures in the 
Short Run: Prevalence and Consequences,'' Medical Care 41, supplement 
7:1153-1164, 2003.
---------------------------------------------------------------------------
    Many of these techniques require services and personnel not 
typically reimbursed by public programs such as Medicare or private 
insurers. Researchers at the University of Pennsylvania, for example, 
have documented that using advanced practice nurses to follow patients 
with congestive heart failure home from the hospital can be effective 
in reducing re-hospitalization and in lowering annual per capita 
expenditures--in this case, from $9,600 to $6,200 per patient.\42\ The 
Commonwealth Fund is supporting an evaluation of an Aetna demonstration 
in the Philadelphia area to test this concept more broadly.
---------------------------------------------------------------------------
    \42\ M. D. Naylor, ``Making the Business Case for the APN Care 
Model,'' report to The Commonwealth Fund, October 2003; estimated 
charges by Mark Pauly.
---------------------------------------------------------------------------
    Another approach is ``telemonitoring'' patients who make intensive 
use of emergency rooms or hospital care. A pilot test of a handheld 
computer called the Asthma Buddy at New York City's Coney Island 
Hospital found that having children who are heavy users of emergency 
room services key their peak flow rate into the device and answer 
questions about their condition daily is successful in markedly 
reducing ER use and inpatient hospitalization. Again, The Commonwealth 
Fund is supporting an evaluation of a randomized controlled trial of 
this approach in five New York City public hospitals.
    These strategies show great promise in markedly reducing costs for 
the most costly patients. However, to become widespread, public 
programs such as Medicare and Medicaid, as well as private insurers, 
will need to be more willing to cover the costs of non-physician 
personnel and supplies required for these high-cost care management 
programs.

Improving Administrative Efficiency

    In addition to improving care management, using modern information 
technology to reduce the cost of administrative expenses should be a 
high priority for the future. When medical records are available 
electronically, fewer clerks are needed to file and retrieve medical 
records. Pharmacists need to make fewer calls to physicians to clarify 
prescriptions.
    The Institute of Medicine committee on which I served recommended 
an electronic insurance clearinghouse be established at the State 
level.\43\ If all insurance companies and public programs such as 
Medicare and Medicaid were to pool enrollee information in a single 
database, providers could easily verify insurance coverage through one 
system. Doing so could eliminate much of the cost incurred when people 
change insurance coverage.\44\ It could eliminate much of the 
difficulty of conducting outreach to enroll eligible people in public 
programs by making it possible, for example, to cross-check lists from 
tax records against insurance coverage. It would also be an effective 
mechanism for electronic claims submission. Other ideas that would 
eliminate wasteful duplication of effort include a single database for 
provider certification and verification of physician licenses.
---------------------------------------------------------------------------
    \43\ Institute of Medicine, Fostering Rapid Advances in Health 
Care. The National Academies Press, November 2002.
    \44\ Pamela Farley Short et al., Churn, Churn, Churn: How 
Instability of Health Insurance Shapes America's Uninsured, The 
Commonwealth Fund, November 2003.
---------------------------------------------------------------------------
    We have a very fragmented health insurance system that produces 
enormous churning in health insurance coverage. Over a 4-year period, 
85 million people are uninsured. Two million people lose or change 
coverage every month.\45\ The cost of enrolling and disenrolling and 
re-enrolling people contributes to the high administrative cost of the 
U.S. health system. Each insurer has its own approach to handling 
enrollment and claims payment. It also has its own rules for payment of 
providers, adding to the administrative costs of physician practices 
and hospitals. Reducing wasted resources on these administrative costs 
could be accomplished through statewide efforts to coordinate and pool 
administrative information.
---------------------------------------------------------------------------
    \45\ Pamela Farley Short et al., Churn, Churn, Churn: How 
Instability of Health Insurance Shapes America's Uninsured, The 
Commonwealth Fund, November 2003.
---------------------------------------------------------------------------

Conclusion

    If we have the world's costliest health system yet still fail to 
provide everyone with access to care--and fall far short of providing 
the safe, high-quality care that it is possible to provide--the 
conclusion that there is room for improvement is inescapable.\46\ Only 
by facing this fact squarely and putting into action the best ideas and 
experiences across the U.S. and around world can we achieve a vision of 
American health care that includes: automatic and affordable health 
insurance for all, accessible health care, patient-responsive care, 
information- and science-based care, and commitment to quality 
improvement.\47\
---------------------------------------------------------------------------
    \46\ Karen Davis et al., Room for Improvement: Patients Report on 
the Quality of Their Health Care. The Commonwealth Fund, April 2002, 
and Karen Davis, et al. Mirror, Mirror on the Wall: The Quality of 
American Health Care. The Commonwealth Fund, forthcoming.
    \47\ K. Davis, C. Schoen, and S. Schoenbaum, ``A 2020 Vision for 
American Health Care.'' Archives of Internal Medicine, Vol. 160, No. 
22: 3357-62.
---------------------------------------------------------------------------
    If we are to achieve a truly high-performance health system, bold 
action is required. The following steps would start us on this course:
     Public reporting of cost and quality data on physicians, 
hospitals, nursing homes, other health care providers, and health 
plans. The CMS has been a leader in posting nursing home quality data 
on its website, but this is just a modest beginning. The new Medicare 
prescription drug legislation also spurs reporting by hospitals of a 
limited set of quality-of-care indicators. If we are serious about 
doing better, we need to know where we stand, routinely collecting 
comprehensive quality measures across a broad range of providers.
     Investment in health information technology. Other 
countries are quickly surpassing the U.S. in the adoption of electronic 
medical records and electronic prescribing.\48\ They are doing so 
because the government has been willing to invest in the infrastructure 
and establish the standards required to make this potential a reality.
---------------------------------------------------------------------------
    \48\ Gautam Naik, ``England Plans Major Revamp of Health Care,'' 
The Wall Street Journal, December 3, 2003.
---------------------------------------------------------------------------
     Development and promulgation of clinical guidelines and 
quality standards. It is long past time to simply pay for services 
rendered without establishing a scientific basis for effectiveness, not 
just for new drugs but for consultations, procedures, and tests. This 
could be accomplished through establishment of a new National Institute 
on Clinical Excellence and Effectiveness.\49\
---------------------------------------------------------------------------
    \49\ Stephen C. Schoenbaum, Anne-Marie Audet, and Karen Davis, 
``Obtaining Greater Value from Health Care: The Roles of the U.S. 
Government,'' Health Affairs, November/December 2003.
---------------------------------------------------------------------------
     Paying for performance. Medicare and private insurers tend 
not to vary payment rates with quality. They pay for defects, whether 
those defects are surgeries that need to be repeated; infections that 
arise from failing to use state-of-the-art technology, such as 
catheters impregnated with antibiotics for heart valve patients; or 
medication errors. CMS has embarked on some modest initiatives to begin 
testing pay-for-performance rewards. Medicare can and should be a 
leader in promoting quality. These efforts need to be substantially 
expanded and best practices documented and disseminated. Medicare's 
leadership can be instrumental in moving private payers as well; to 
date, very few private insurers have instituted ``value-based 
purchasing'' strategies.\50\
---------------------------------------------------------------------------
    \50\ Vittorio Maio, Neil Goldfarb, Chureen Carter, and David Nash, 
Value-Based Purchasing: A Review of the Literature. The Commonwealth 
Fund, May 2003 and Neil Goldfarb, Vittorio Mario, Chureen Carter, Laura 
Pizzi and David Nash, How Does Quality Enter Into Health Care 
Purchasing Decisions? The Commonwealth Fund, May 2003.
---------------------------------------------------------------------------
     Investment in research. We urgently need to gather 
evidence on what works to improve care, eliminate waste and ineffective 
care, and promote greater efficiency, including use of modern 
information technology, team work, and improved care processes. Any 
industry that fails to invest in research to improve quality and 
efficiency is going to be a backward industry. The Federal Government 
pays $505 billion for health care but devotes only $300 million to the 
AHRQ budget to learning effective ways to improve performance of the 
U.S. health system. The report on U.S. health care quality recently 
issued by AHRQ is an important starting point. But it needs to be 
followed with an investment in research up to the task of ensuring that 
this Nation has a high-performing health system worthy of the 21st 
century.
     Statewide electronic insurance clearinghouses. It is 
important to move toward greater efficiency in the administration of 
our fragmented, complex system of health insurance coverage. 
Ultimately, solutions that would simplify eligibility for public 
programs and improve the stability of health insurance coverage are 
needed to cut the administrative cost in our system. Movement toward 
electronic administration of insurance can also achieve important 
savings. One particularly promising initiative would be testing 
statewide electronic insurance clearinghouses to pool together 
information on insurance eligibility.
     Automatic and affordable health insurance for all. 
Employers, Federal and State governments, and individuals must all 
share responsibility for achieving automatic and affordable health 
insurance for all. The most realistic strategy is a combination of 
group insurance options including: employer coverage for those who are 
working; a Congressional Health Plan, modeled on the Federal Employees 
Health Benefits Program, for small businesses and individuals; an 
expansion of SCHIP to low-income families and individuals with incomes 
below 150 percent of poverty; and an option for uninsured, older adults 
and disabled adults to obtain early Medicare coverage (e.g., by 
eliminating the 2-year waiting period for the disabled, covering 
spouses of Medicare beneficiaries, and permitting uninsured older 
adults to ``buy in'' to the program).\51\ Premium assistance based on 
income is required to make premiums affordable for all enrollees. 
Mechanisms to ensure that everyone is automatically enrolled in one of 
these four group options would help millions of Americans who currently 
fall through the cracks of coverage. Action is imperative; continued 
paralysis is exacting an unacceptable toll. The Institute of Medicine 
has estimated that 18,000 deaths of adults ages 25 to 64 occur each 
year as a direct result of being uninsured. Moreover, the Institute of 
Medicine estimates the lost economic benefit at $65 billion to $130 
billion a year.\52\
---------------------------------------------------------------------------
    \51\ Karen Davis and Cathy Schoen, ``Creating Consensus on Coverage 
Choices,'' Health Affairs (April 23, 2003); Sara Collins, Karen Davis, 
and Jeanne Lambrew, Health Care Reform Returns to the National Agenda, 
The Commonwealth Fund, January 2004.
    \52\ Institute of Medicine, Insuring America's Health: Principles 
and Recommendations, The National Academies Press, January 2004.
---------------------------------------------------------------------------
    Thank you very much for the opportunity to join this panel. I look 
forward to learning from my fellow panelists and answering any 
questions.

                           EXECUTIVE SUMMARY

    National health expenditures rose 9.3 percent in 2002, the fastest 
increase in a decade. Even more troubling was the 9.5 percent jump in 
the numbers of uninsured between 2000 and 2002, from 39.8 million to 
43.6 million. Rising health care costs are a problem for all Americans, 
but they weigh especially heavily on uninsured and ``underinsured'' 
individuals, who pay much of the cost of their health care directly 
out-of-pocket. Higher costs to patients lead to underuse of appropriate 
care and greater financial burdens on the sickest.
    We can no longer afford or tolerate wasteful spending on care that 
does not benefit patients, the duplication of expensive procedures, 
medical errors, or the high administrative costs incurred by the 
Nation's insurers and providers. Real solutions should directly target 
these sources of unacceptably high costs, not simply shift costs from 
employers to workers or from government to the beneficiaries of public 
programs. Promising long-run solutions include: rewarding health care 
providers that achieve demonstrably better quality and efficiency, 
improving high-cost patient care management, reducing medical errors, 
improving care coordination, and simplifying unnecessarily complex or 
duplicative insurance practices. Most fundamentally, we must act to 
achieve automatic and affordable health insurance for all, to ensure 
that the benefits of modern medicine are widely accessible, and to 
ensure that investment in health care contributes to economic growth 
and a healthier, more productive society.
     Health insurance premiums increased 13.9 percent in 2003, 
faster than the 8.5 percent growth in health care costs. Market forces 
are likely to bring premiums more in line with costs in future years, 
but the issue warrants watching.
     Health care expenditures in 2002 were $1.6 trillion, or 
14.9 percent of the gross domestic product. The U.S. has the highest 
health care spending of any country, yet we are the only major 
industrialized Nation not to provide health insurance coverage for all.
     Medicare outlays per enrollee continue to grow more slowly 
than private insurance, averaging 6.2 percent over the 1999-2002 
period, compared with 8.7 percent in private health insurance.
     Hospital spending is now the leading source of health care 
services expenditure growth. While some of the increase is undoubtedly 
attributable to technological advances that improve health, some is a 
catch-up from the unsustainably low rates of increase in the mid-1990s.
     Administrative expenses are now the fastest-rising 
component of national health expenditures. In 2002, the Nation spent 
$105 billion on private insurance and public administrative expenses, 
up 16.2 percent from 2001. Private insurance administrative costs are 
particularly high-12.8 percent of total private insurance outlays, 
compared with 3.0 percent for Medicare.
    Consumer-driven health care, the major private-sector strategy for 
addressing rising costs, is unlikely to address the fundamental causes 
of rising health care costs. In fact, it is likely to have adverse 
consequences for patients.
     Consumer-driven health care contributes to excessive 
financial burdens on patients, particularly lower-income and sicker 
patients. If all Americans had a $1,000 deductible plan, one-third 
would spend more than 10 percent of their income on health care if they 
were hospitalized, with even higher rates at the lowest end of the 
income scale. High deductibles would lead to a major increase in the 
number of underinsured individuals.
     Patient costs are already unacceptably high. Indeed, they 
are a major reason why public opinion polls show that the affordability 
of health care is Americans' second-leading concern.
     Patient cost-sharing is a blunt instrument for reducing 
utilization of services. It reduces use of effective services that are 
already underutilized. Studies have documented that drug-tiering and 
higher copayments are leading patients to skip filling essential 
prescriptions, increasing adverse medical events, and raising emergency 
room use.
    There are better alternatives for achieving economies in health 
care than shifting costs to patients. Costs are higher in the U.S. than 
in other countries because we pay higher prices for the same services; 
our administrative costs are higher; and physicians prescribe 
specialized services that are not clinically justified. If we as a 
Nation were to adopt fundamental reforms--such as an integrated public-
private strategy to purchase health services efficiently, demand 
quality performance, and streamline administrative costs--substantial 
savings could be achieved.
    Short of fundamental reforms, practical steps that could be taken 
in the near term include:
     Reducing medical errors and improving care coordination. A 
major investment in health information technology, with shared public-
private funding, is needed to accelerate the adoption of life-saving 
and efficiency-enhancing technology.
     Public reporting of cost and quality data. Costs incurred 
over an episode of care and quality vary enormously from hospital to 
hospital, physician to physician, and area to area. If we are serious 
about doing better, we need to know where we stand. Much more extensive 
efforts are required to achieve comprehensive public reporting of cost 
and quality data on physicians, hospitals, nursing homes, other health 
care providers, and health plans.
     Paying for provider performance on quality and efficiency. 
Medicare needs to become a leader in ``pay for performance'' payment 
methods. While the demonstrations under way are important, Medicare 
needs to move much more quickly to reward those providers who are both 
high-quality and low-cost over the course of a patient's treatment. 
Doing so would spur the development of information about best practices 
and provide guidance to private insurers looking for effective ways to 
promote high-performance care.
     Development and promulgation of clinical guidelines and 
quality standards. Public programs and private insurers would benefit 
from a Federal agency charged with establishing the scientific basis 
for effectiveness not just of new drugs but of specialty consultations, 
procedures, and tests. A national institute on clinical excellence and 
effectiveness has shown results in other countries and is a model we 
should adopt. We also need a substantial investment in research and 
demonstrations, far in excess of resources currently devoted to the 
Agency for Healthcare Research and Quality.
     Better management of high-cost patients. Public programs 
and private insurance need to be willing to pay for services of non-
physician personnel that are needed for high-cost care management, such 
as advanced practice nurses, pharmacist medication monitoring, and home 
``telemonitoring'' of conditions such as asthma and congestive heart 
failure.
     Improved administrative efficiency. The U.S. has an 
extraordinarily complex and fragmented system of health insurance. 
Ultimately, solutions that would simplify eligibility for insurance and 
improve the stability of health insurance coverage are needed to cut 
the administrative costs in our system. Testing statewide electronic 
insurance clearinghouses to pool insurance eligibility and, 
potentially, claims payment in a single place should be a priority.
     Automatic and affordable health insurance for all. 
Employers, Federal and State governments, and individuals must all 
share responsibility for achieving automatic and affordable health 
insurance for all. The most realistic strategy is a combination of 
group insurance options including: employer coverage for those who are 
working; a new Congressional Health Plan, modeled on the Federal 
Employees Health Benefits Program, for small businesses and 
individuals; an expansion of the State Children's Health Insurance 
Program to low-income families and individuals with incomes below 150 
percent of poverty; and an option for uninsured older adults and 
disabled adults to obtain early coverage under Medicare (e.g., by 
eliminating the 2-year waiting period for the disabled, covering 
spouses of Medicare beneficiaries, and permitting older adults to ``buy 
in'' to Medicare). Premium assistance based on income is required to 
make premiums affordable for all enrollees.
    Together, these steps would take us a long way toward ensuring that 
this country has a high-performing health system worthy of the 21st 
century.

































































          Prepared Statement of Christopher J. Conover, Ph.D.

    Mr. Chairman and Members of the Committee: How big a role does 
health services regulation play in explaining the extraordinarily high 
level of health costs in the U.S.? And how many uninsured might be 
covered were we to somehow find a way to reduce this regulatory burden? 
My brief remarks will provide some tentative answers to both questions 
based on the preliminary results of more than 2 years of research 
conducted in part under contract to the Department of Health and Human 
Services.
    There are two ways to answer the first question. First, we looked 
at the costs of regulation in other industries such as airlines, 
railroads, telecommunications and other sectors that have long been 
studied and calculate the percent of gross economic activity in those 
industries that is attributable to regulatory costs. By applying these 
percentages to the health sector, we arrive at very rough back-of-the-
envelope estimates of upper and lower bounds on the plausible magnitude 
of the burden. As shown in Fig. 1, this so-called ``top down'' approach 
suggests that in 2002, health regulation could have imposed an annual 
cost of at least $28 billion to as much as $657 billion. (See Figure 
1).\1\
---------------------------------------------------------------------------
    \1\ See Figure 1 Supporting Documentation for details of these 
calculations.
---------------------------------------------------------------------------
    A 30-fold difference between the minimum and maximum cost estimate 
is no more gratifying to me as a researcher than it is to you as 
policymakers. Moreover, it is easily possible that the regulatory 
burden in healthcare is even higher than a simple extrapolation from 
other industries might suggest. According to University of Rochester 
health economist Charles Phelps, ``the U.S. healthcare system, while 
among the most ``market oriented'' in the industrialized world, remains 
the most intensively regulated sector of the U.S. economy.'' \2\
---------------------------------------------------------------------------
    \2\ Charles E. Phelps. Health Economics, 2nd edition. Addison-
Wesley Publishing Co. 1997: 539.
---------------------------------------------------------------------------
    So we also answered this question using a much more fine-grained 
``bottoms up'' approach. We examined the literature for nearly 50 
different kinds of Federal and State health services regulations, 
including regulation of health facilities, health professionals, health 
insurance, pharmaceuticals and medical devices and the medical tort 
system. These various regulations covered the gamut from mandated 
health benefits to State certificate of need requirements for hospitals 
and nursing homes.\3\ We systematically tallied both the benefits and 
costs associated with such regulations \4\ and found that the expected 
costs of regulation in health care amounted to nearly $335 billion in 
2002. As shown at the bottom of Fig. 2, our estimate of benefits was 
about $207 billion, leaving a net cost of $128 billion. Three areas 
account for the lion's share of this net burden: the medical tort 
system, including litigation costs, court expenses and defensive 
medicine, totals $81 billion, FDA regulation adds another $42 billion, 
and health facilities regulation adds $29 billion. Thus, the States and 
Federal Government both have roles to play in finding ways to trim 
regulatory excess.
---------------------------------------------------------------------------
    \3\ Tables 1, 2 and 3 summarize all the topics that were included 
in our literature syntheses for health facilities, health professionals 
and health insurance respectively. An advisory panel of 20 national 
experts has provided guidance on the scope and content of this 
literature synthesis. We are confident that no major domain of health 
services regulation has been excluded. However, it might also be noted 
that our cost estimates do not include the costs imposed on health 
providers from continual changes in public payment policies.
    \4\ In many cases, the national dollar impact of a particular form 
of regulation never has been estimated per se, e.g., State certificate 
of need regulation of hospitals and nursing homes. In these cases, we 
synthesized the literature on the percent change in health costs 
associated with that form of regulated and then calculated the 
aggregate national impact by applying these estimated effects to 
aggregate health expenditure estimates for the States that still 
maintain such regulations. In some cases, our estimates also included 
mortality gains and losses reported in the literature. In these cases, 
we monetized such losses using conventional assumptions about the 
willingness-to-pay value of a human life. We used a standard value of a 
statistical life that amounted to $4.4 million for our average 
estimates, with $1.6 million and $6.6 million as lower and upper 
bounds. See Mrozek, James R. and Laura O. Taylor. ``What Determines the 
Value of Life? A Meta-Analysis.'' Journal of Policy Analysis and 
Management 21, No. 2 (Spring 2002): 253-270 for a detailed 
justification of these values.
---------------------------------------------------------------------------
    How does this relate to the uninsured? Our ``bottoms up'' look 
allowed us to determine that the net cost of regulation borne by the 
health industry itself is 6.4 percent, meaning that health expenditures 
(and health insurance premiums) are at least that much higher than they 
would be absent regulation. Based on consensus estimates about the 
impact of higher prices on how many would likely drop health insurance, 
this increased cost implies a 2.2 percent reduction in the demand for 
coverage. This translates into nearly 5 million uninsured whose plight 
might be attributed to excess regulatory costs.\5\
---------------------------------------------------------------------------
    \5\ Most recent estimates of the price elasticity of demand for 
health insurance lie in the ^.4 to ^.6 range (Sherry Glied, Dahlia K. 
Remler and Joshua Zivin, ``Inside the Sausage Factory: Improving 
Estimates of the Effects of Health Insurance Expansion Proposals.'' 
Milbank Quarterly 80, No. 4 (2002): 611). Assuming an average overhead 
cost no higher than 15 percent, a 6.4 percent increase in health 
spending attributable to health industry compliance costs would be 
associated with a 5.4 percent increase in health insurance premiums, so 
applying the lower bound elasticity estimate yields a 2.2 percent 
reduction in demand for coverage. Leaving aside the non-elderly now 
covered by Medicare, Medicaid and military benefits, there are more 
than 215 million adults and children in the private market for private 
health insurance: a 2.2 percent reduction in demand translates into 4.8 
million uninsured. Using upper bound estimates of the net impact of 
health regulation (9.8 percent) and price elasticity (^.6) would imply 
that 10.7 million could be uninsured due to health regulation.
---------------------------------------------------------------------------
    But of course, there's a different way to look at this burden as 
well. In light of the $35 billion in subsidized care already being 
provided to uninsured patients, \6\ researchers have recently estimated 
that it would cost only $34 to $69 billion in added health spending to 
cover the all of the Nation's uninsured.\7\ In light of these figures, 
the potential opportunity costs of this regulatory burden become very 
clear: the average estimates from both our ``top down'' and ``bottoms 
up'' look at this problem suggests we could cover this cost several 
times over. Admittedly, our estimates are still preliminary and we now 
are engaged in a process of careful review of them. But it seems 
unlikely that the adjustments yet to come would alter this central 
conclusion: the net burden of health services regulation likely exceeds 
the annual cost of covering all 44 million uninsured. So a legitimate 
policy question is whether the benefits of regulation outweigh the 
benefits of coverage for all Americans. For example, in the context of 
the IOM finding that 18,000 uninsured die every year due to lack of 
coverage, is maintaining our current regime of health regulation worth 
letting that continue?
---------------------------------------------------------------------------
    \6\ Jack Hadley and John Holahan. ``How Much Medical Care Do the 
Uninsured Use and Who Pays for It?'' Health Affairs Web Exclusives, 
January-June 2003. February 12, 2003: W3-66.
    \7\ Jack Hadley and John Holahan. ``Covering the Uninsured: How 
Much Would it Cost?'' Health Affairs Web Exclusives, January-June 2003. 
June 4, 2003: W3-250-265.
---------------------------------------------------------------------------
    This is not a question for me to answer, but I hope you will 
consider it seriously as you wrestle with one of the most challenging 
health policy issues now on the national agenda. Thank you for your 
time.











      Center for Health Policy, Law and Management,
                                     Durham, NC 27708-0253,
                                                     March 8, 2004.
Hon. Judd Gregg, 
Chairman,
Committee on Health, Education, Labor and Pensions,
U.S. Senate,
Washington, DC 20510-6300.

    Dear Senator Gregg: I am writing in response to your letter of 
February 10 regarding my testimony on January 28.
    Question 1. We have a recurring debate in the Senate about the cost 
impact of various legislative proposals on health care premiums, and 
the degree to which such increases drive up the number of uninsured. 
Often times, we get estimates from 1 percent (mental health parity) to 
5 percent (PBOR). Some assert that such increases are ``modest''--
adding up to the cost of only a few extra big Macs per person per 
month--and that such a cost can easily be borne by the system. However, 
you conclude that excess regulatory costs can account for nearly 5 
million uninsured. In your research, did you develop an assumption for 
how many people become uninsured for each 1 percent increase in 
premiums?
    Answer 1. We sought to explain this in footnote 5 of my testimony, 
but I would like to correct an inadvertent error regarding the number 
of non-elderly with private coverage. The corrected footnote should 
read as follows: Most recent estimates of the price elasticity of 
demand for health insurance lie in the ^.4 to ^.6 range (Sherry Glied, 
Dahlia K. Remler and Joshua Zivin, ``Inside the Sausage Factory: 
Improving Estimates of the Effects of Health Insurance Expansion 
Proposals.'' Milbank Quarterly 80, No. 4 (2002): 611). Assuming an 
average overhead cost no higher than 15 percent, a 6.4 percent increase 
in health spending attributable to health industry compliance costs 
would be associated with a 5.4 percent increase in health insurance 
premiums, so applying the lower bound elasticity estimate yields a 2.2 
percent reduction in demand for coverage. There are 185 million adults 
and children currently covered by private health insurance (Mills, 
Robert, and Shailesh Bhandari. 2003. Health Insurance Coverage in the 
United States: 2002, U.S. Census Bureau. U.S. Government Printing 
Office, Washington, DC). A 2.2 percent reduction in demand translates 
into 4.0 million uninsured. Using upper bound estimates of the net 
impact of health regulation (9.8 percent) and price elasticity (^.6) 
would imply that 9.2 million could be uninsured due to health 
regulation.
    Our figures imply that for each 1 percent increase in private 
health insurance premiums, there would be a 0.4 percent reduction in 
demand for private coverage, which at current levels of private 
coverage implies 740,000 newly uninsured.
    There are several differences between our estimates and those used 
by CBO that are worth noting:
     Our estimates affect medical expenditures (and hence 
health insurance premiums) across the board; in contrast, Federal 
mental health parity and PBOR proposals would apply only to group 
health plans (leaving out 16 million non-elderly with individual 
coverage) and in some cases exempt small employers (20 or fewer in some 
bills, 50 or fewer in others), exclusions that may leave out as much as 
30 percent of private sector employer-based coverage; see Jennifer 
Bowen, Jeanne De Sa and Stuart Hagen memorandum ``Estimate of S. 543, 
the Mental Health Equitable Treatment Act'' July 12, 2002). Moreover, 
CBO always takes into account States that may have already enacted 
similar mandates or protections as their purpose is to calculate the 
net effect of a change in Federal law. For all these reasons, the base 
of persons having coverage from which demand reductions are calculated 
is generally smaller in the CBO estimates than in ours.
     CBO assumes that 40 percent of premium increases would be 
effectively absorbed by employers and passed back to employees in the 
form of lower compensation; they assume the remaining 60 percent would 
be offset by changes in profits, by purchasers switching to less 
expensive plans, by cutting back on benefits or dropping coverage (see 
CBO, Congressional Budget Office Cost Estimate: S. 1052 Bipartisan 
Patients' Bill of Rights Act (as passed by the Senate on June 29, 
2001), July 20, 2001). For all these reasons, the net amount of each 1 
percent premium increase that is actually left over to influence demand 
for coverage is much smaller than ours (i.e., we take into account the 
full 1 percent).
    The CBO approach makes sense when analyzing mandates that provide 
some sort of benefit at an additional cost since employees (and their 
employers who are presumed to reflect their preferences) presumably are 
willing to pay something for an additional benefit even if it is not 
the full cost. However, in our case, we had already netted out any 
benefits from regulation, so the residual $128 billion in costs should 
more appropriately be viewed as the equivalent of an excise tax. As Dr. 
Holtz-Eakin has testified recently: ``Clearly, an increase in premiums 
having nothing to do with the quality of the insurance benefit (a tax 
on premiums, for example) would lead to a reduction in the number of 
people with health insurance since the price increase would lead some 
people to drop their coverage'' (Statement of Douglas Holtz-Eakin, 
Director of Congressional Budget Office, The Uninsured and Rising 
Health Insurance Premiums before the Subcommittee on Health Committee 
on Ways and Means U.S. House of Representatives March 9, 2004). In 
short, any differences between CBO estimates and ours I believe are 
more apparent than real.

    Question 2. You conclude that some regulation and litigation are 
beneficial. What proportion of regulation is beneficial and how does 
this compare to the proportion of litigation that is beneficial?
    Answer 2. This is an excellent question, but difficult to answer, 
in part because litigation permeates much of regulation of health 
facilities, health professionals and health insurance. For example, 
enforcement of fraud and abuse statutes relies in part on qui tam 
provisions that allow private parties to bring claims on behalf of the 
government. What is labeled ``Tort System'' in Fig. 2 applies only to 
the medical tort system, i.e., professional liability insurance for 
medical malpractice, associated court costs and the companion costs of 
defensive medicine. It would be very difficult to extract the 
equivalent legal costs from the other areas of health regulation shown 
on that chart.
    That said, one can observe that the ratio of benefits to costs for 
the medical tort system is 28.6 percent whereas for all other health 
regulations, this ratio is 78.7 percent, but that might be viewed as an 
unfair comparison since defensive medicine makes up roughly 60 percent 
of the overall costs of the medical tort system. So if defensive 
medicine costs were ignored, the ratios would be much more similar. 
However, in our view, the behavioral response to the medical tort 
system is just as important a consideration in accurately assessing the 
effects of regulation as the behavioral response of taxpayers to 
changes in tax rates is to accurately assessing the effects of tax 
policy. We believe it would be misleading to ignore these costs. That 
said, our figures should not be viewed as implying that only 28.6 
percent of litigation is beneficial, as some might misconstrue this to 
mean that only 1 in 4 medical malpractice cases meets some benefit-cost 
threshold. It might be that 90 percent of such cases have benefits 
exceeding their costs, but that in the remaining cases that fail a 
simple benefit-cost test, the excess of costs over benefits is so 
enormous as to produce a gross ratio (across all cases) of only $28.60 
in benefits for each $100 of costs borne by society. The way in which 
we have compiled our estimates does not allow us to answer the question 
of what fraction of malpractice cases have benefits exceeding their 
costs.

    Question 3. In your research you clearly make some judgments about 
whether regulations are beneficial or not. How did you conduct this 
analysis? What criteria did you use in making these judgments?
    This too is an excellent question that is challenging to answer. 
With the caveat that our findings are still preliminary, to date we 
have found that in the domain of health facilities regulation, of the 
16 types of regulation we studied, only 2 produced benefits that 
exceeded costs. Similarly, benefits exceeded costs for only 3 of 8 
health professional regulations we studied and 7 of 19 areas of health 
insurance regulation. This is not equivalent to saying that we believe 
31 areas of health regulation should be discarded entirely since in at 
least some cases, it is possible that regulatory reform could produce a 
better alignment of benefits with costs. The medical tort system is a 
good example of this. This system clearly produces some benefits, 
including compensation to patients and deterrence of medical errors. 
However, if there were a way to achieve the same or greater benefits 
less expensively--whether this be through caps on damages, alternative 
dispute resolution--this would be an improvement over the status quo.
    It was not the purpose of our study to make recommendations on 
specific regulatory reforms to be pursued, either in medical torts or 
any other domain of health regulation. Instead, we were trying to 
provide something that has never been achieved previously: a ``big 
picture'' view of the overall impact of health services regulation with 
the intent of identifying areas where regulation might be excessive. 
For each of the areas so identified, one would have to rely on further 
study or experts in that domain to sort through the best approach to 
reform. My guess is that only in some of these cases would experts 
judge that we should dispense entirely with regulation.
    I would like to take the opportunity of addressing two other points 
that came up in the January 28 hearing.

    Question 4. What is the cost of care at the end of life?
    Answer 4. The best estimates of this come from a 10 year old study 
by Emanuel and Emanuel implying that roughly 12.2 percent of all health 
expenditures occur in the last year of life (see Emanuel, Ezekiel., and 
Linda L. Emanuel. 1994. The economics of dying: the illusion of cost 
savings at the end of life. New England Journal of Medicine 330, no. 
540). The authors estimate that if all Americans who died executed an 
advance directive, chose hospice care, and refused aggressive, in-
hospital interventions at the end of life, their end of life 
expenditures would drop by 27 percent, producing maximum potential 
savings equal to 3.3 percent of health spending. The authors made clear 
this was a best possible case estimate and they themselves were not 
claiming it was achievable, both because it would cost something to 
educate/persuade all Americans to execute advance directives, because 
for a variety of reasons these advanced directives are not always 
followed and because not every American would opt for either hospice 
care or refuse aggressive interventions in any case. So while a 
promising area of savings, it seems unlikely this alone could be relied 
upon to finance universal coverage.

    Question 5. Does prevention save money?
    Answer 5. I enjoyed Senator Harkin's eloquent brief on the merits 
of preventive care and healthier lifestyles. There is no question that 
if Americans were healthier we could save a lot of money, but 
conversely, if they lived longer, we would spend more, so determining 
whether prevention actually saves money on balance is trickier than it 
may seem. In a superlative book written by nearly 20 years ago, a 
Brookings Institution researcher, Louise Russell showed that 
``preventive measures are not as simple as often depicted--while many 
do improve health, they are not without risk or cost, and in fact 
rarely reduce medical expenditures'' (Is Prevention Better Than Cure? 
Washington, DC: Brookings Institution 1986). She reviewed a variety of 
preventive health services, ranging from vaccinations (who often do 
save medical costs), to screening for various diseases, to changes in 
lifestyle. While nearly 2 decades old, I believe her results 
instructive and would not change appreciably were she to replicate the 
analysis today. The bottom line is that prevention generally offers the 
prospect of achieving gains in life expectancy or other improvements in 
health at a very low cost per added year of life and typically 
prevention can be justified on grounds that it represents good value 
for the money. But to expect prevention to be self-financing through 
medical cost savings may be unrealistic and I would hope that the fate 
of the uninsured does not rest on such savings having to materialize.
    I would like to thank you again for the opportunity to testify and 
the chance to provide this further information for the record. Your 
committee faces a daunting task and I look forward to seeing how things 
develop. If you have any further questions, please feel free to contact 
me (919) 684-8026 or e-mail [email protected].
            Best wishes,

                             Christopher J. Conover, Ph.D.,
             Assistant Research Professor of Public Policy Studies,
                          Terry Sanford Institute of Public Policy,
                       Director, Health Policy Certificate Program,
                        Senior Fellow, Health Inequalities Program.


                                 ______
                                 
             Prepared Statement of Gail R. Wilensky, Ph.D.

    Mr. Chairman and Members of the Committee: Thank you for inviting 
me to appear before you. My name is Gail Wilensky. I am a senior fellow 
at Project HOPE, an international health education foundation. I am 
also a former Administrator of the Health Care Financing 
Administration, now called CMS and a former chair of the Medicare 
Payment Advisory Commission, MedPAC. My testimony today reflects my 
personal views as an economist and a health policy analyst and should 
not be regarded as representing the views of Project HOPE.
    My testimony focuses on the uninsured, the relationship between 
increased healthcare spending and the decline in the number of the 
insured and the major factors that are driving increases in healthcare 
spending. These are large and complex issues and my coverage of them 
will be in the nature of an overview of what is known about them rather 
than in depth treatment of any one of them.

The Problem

    The numbers of the uninsured, the characteristics of the uninsured 
and the duration without insurance coverage has been well documented by 
the Census Bureau and the Congressional Budget Office, as well as in 
other government reports. The number of uninsured has increased in the 
Census reports of each of the last 2 years, and according to the Census 
CPS report now stands at 43 million or approximately 15 percent of the 
population. While the precise number of uninsured depends on the 
particular survey being referenced and the duration of time being 
considered, it is important to note that the number of uninsured 
reported for 2002 is very similar to the number and percent of the 
population reported uninsured in 1997, a period of robust economic 
growth. This suggests that the uninsured should be considered a chronic 
problem rather than an acute issue, one that will become somewhat worse 
in periods of slow economic growth and slightly better following 
periods of robust economic growth. What should be equally clear is that 
to substantially reduce the number of uninsured will require an 
explicit change in policy. Several of the major policy choices will be 
summarized at the end of my testimony.
    However, before considering the policy options available to reduce 
the number of uninsured, it is important to understand what has been 
behind the decline in insurance coverage. Even though, the persistence 
of a substantial uninsured population should be regarded as a chronic 
problem, it is a chronic problem that has grown somewhat worse over the 
last quarter century. In 1977, when the first of the National Medical 
Care Expenditure Surveys (now called the Medical Expenditure Panel 
Survey or MEPS) was conducted, the number of uninsured was under 13 
percent of the population and it is now slightly greater than 15 
percent of the population. Had the State Children's Health Insurance 
Program (SCHIP) not been enacted in 1997, the percentage increase would 
have been greater since it has been able to compensate for some of the 
loss in private coverage.
    This leads to the question as to why the percentage of people 
covered by private health insurance has been declining and what, if 
anything can, can be done to try and mitigate the decline. Two factors 
are cited most frequently. The first is the change in the structure of 
the economy and the move towards jobs that are part time, in small 
firms and/or are part of the service sector. These structural changes 
in the economy are all known to be associated with a lower likelihood 
of employer-sponsored insurance. The second reason is the increasing 
cost of healthcare and more specifically, the fact that healthcare 
spending has been increasing faster than personal income. While both 
reasons contribute to the decline in insurance coverage, several 
studies including those by Lewin and Associates and by Kronick and 
Gilmer, find the largest factor is the increase in healthcare spending.

Is Increased Health Care Spending A Problem?

    It has long been observed that the United States spends more on 
healthcare than any other developed country, both in absolute terms and 
as a share of our Gross Domestic Product. Over the last 50 years, 
healthcare spending in the U.S. has grown in real terms per person at a 
rate of about 4 percent per year while the GDP has grown at a real rate 
of about 1.5 percent per person. A notable exception to that trend 
occurred in the middle 1990's, when healthcare spending grew at a rate 
of about 2 percent per year, half of the historical rate. Whether there 
is more to be learned about how to sustain periods of lower growth 
without inciting the type of public backlash that occurred against the 
managed care industry in the late 1990's will be an important exercise 
for future health policy analysts.
    This country seems to have had mixed views about whether the long 
term spending growth should be regarded as a problem. During some 
periods of our history, substantial time has been spent bemoaning the 
increased rates of spending, particularly when compared to other 
countries but as of late, this attitude in at least some quarters seems 
to have changed. Some are now saying that we can afford to spend a 
significant portion of the increased growth in the economy on 
healthcare if we choose to do so. Technically this is obviously true 
but it will also mean that we will have less of our economic growth to 
spend on other things. Rather than focus on the literal sustainability 
of our healthcare spending rate, the more important question is whether 
people feel that they are getting increased value for their spending-in 
either the quantity or quality of their life--or whether more is being 
spent because of unintended cost drivers in the way healthcare is 
financed or delivered.
    Even if we conclude that we are truly getting value for the 
increase spending on healthcare, as some analysts have done and 
therefore should be less concerned about increased spending, it is 
clear that the increased spending will make it more difficult to reduce 
the number of the uninsured. It also means that if we can find ways to 
slow the rate of growth in spending, it will be less costly to cover 
the uninsured and that the rate of increase in the uninsured should 
decline.

Drivers of Increased Health Care Spending

    There are a variety of drivers of healthcare costs, each of which 
is briefly described in the section that follows plus one over-arching 
factor that exacerbates the problems associated with the other factors. 
The most important specific drivers of healthcare are advances in 
medical technology, medical liability, medical errors and patient 
safety, life styles that drive up healthcare spending and a 
reimbursement system that encourages inefficiency and fails to reward 
quality.
    The over-arching factor that exacerbates all of these specific 
factors is the dominance of employer-sponsored insurance, a dominance 
that has occurred because of the vagaries of history concerning the tax 
treatment of employer-paid premiums. As is well known by all of you, 
the rise of employer-sponsored insurance can be traced to the decisions 
of employers during WWII to provide their employees with insurance as a 
way to circumvent the then existing wage and price controls. A ruling 
by the IRS a decade later that such fringe benefits did not constitute 
taxable income has led to the present dominance of employer-sponsored 
insurance. As a result of the IRS ruling, payments of health insurance 
premiums by employers do not count as taxable income for their 
employees and are not subject to Federal or State income tax or to 
Federal payroll taxes. This treatment of income is referred to as the 
``tax exclusion'' of employer-paid health insurance and its 
implications are also discussed below.

Medical Technology

    New medical technologies and other medical advances have long been 
considered as a major driver of increased healthcare spending, 
particularly when viewed over the long-term. While some estimates have 
placed the increase due to technology as high as 50 percent, it is 
important to note that the effect of technology is frequently measured 
as a residual, after accounting for population and population aging, 
general inflation and medical specific inflation, changes in insurance 
coverage and other factors rather than measuring its effects directly. 
Nonetheless, it is clear that increasing medical capability has been a 
major factor in explaining the increase in healthcare spending.
    An important question to consider, however, is why medical 
technologies rarely decline in price over time the way they do in other 
industries and also whether the adoption of new technologies in 
healthcare is subject to the same types of economic calculus that 
occurs elsewhere in the economy. In other sectors, new technology is 
adopted if it can provide a service better and cheaper or better but 
more expensive and with the payer willing to pay for the improved 
service. In healthcare, new technologies are frequently adopted as long 
as there is any improvement in the service provided or the quality of 
life produced. Why that is the case is rather complicated but reflects 
the financial incentives of the purchaser who is frequently not the end 
payer, lack of good information about either the benefits or the costs 
of the technology, financial incentives to the provider of the service 
and the medical liability system. It is not clear that advances in 
medical technology would have quite as much an effect on healthcare 
spending if these other factors weren't also present.

Medical Liability

    Medical liability, which includes both medical malpractice and 
medical product liability, is another area that has long been thought 
to be associated with increased healthcare spending although there is a 
lot of debate about how much of an increase it causes. There are two 
types of increased spending that can occur because of medical 
liability. The first, which is easier to measure and probably the 
smaller of the two, is the increases in healthcare spending associated 
with increases in medical malpractice premiums. The second, which is 
likely to be both larger and more pervasive but very hard to measure, 
is the change in the practice of medicine driven by malpractice 
concerns. Because physicians claim they feel more at risk for errors of 
omission rather than errors of commission, assuming no adverse event 
associated with the committed act, the liability system is believed to 
exacerbate the increases in healthcare spending, particularly when 
combined with the current reimbursement system which pays more the more 
services the physician provides.
    The debate about how to limit the increased spending associated 
with rising costs of malpractice premiums as well as the practice of 
defensive medicine and yet compensate patients who have experienced 
avoidable medical errors is continuing at both the Federal and State 
level. While there is some evidence that capping non-economic awards is 
associated with smaller increases in malpractice premium increases, the 
strategy does not directly address the problems associated with the 
practice of defensive medicine. There is some thought that the 
increased focus of institutional and individual providers on patient 
safety and medical error reduction may not only provide direct benefits 
to patients in terms of improved care but also may help break the 
impasse in resolving issues of medical liability. Since the release of 
the various volumes on patient safety and medical errors by the 
Institute of Medicine, increased attention has been focused on the 
costs of medical errors and the need for system changes to improve both 
the quality of medical care and the quality of patient safety. Experts 
in this area have also looked for ways to link effective patient 
mechanisms to strategies that would provide for timely and fair 
compensation of avoidable error that results in injury. If such a way 
can be found, it would help reduce the pressure on healthcare spending 
increases associated with both malpractice concerns and with the costs 
of correcting medical errors.

Lifestyle Issues

    The lifestyle followed by many Americans is another driver of 
healthcare costs. A significant amount of attention has been devoted to 
the costs of smoking on the healthcare system as well as the costs to 
the economy from the increased absenteeism and decreased productivity 
associated with smoking. Only recently has it become clear that the 
increased costs from obesity may be even greater than those from 
smoking. This is particularly problematic because of the increased 
incidence of obesity across the entire age distribution, including the 
very young.

Reimbursement System

    Finally, the reimbursement system used by most of the public and 
private payers is a driver of healthcare costs in its own right and 
reinforces the effects of some of the other cost-drivers described 
above. The primary type of reimbursement for physicians as well as for 
many other providers in the healthcare system is fee-for-service. As 
has been well documented, fee for service reimbursement rewards 
physicians or other providers of care for providing more services, 
whether or not providing more services results in better care. Fee for 
service reimbursement coupled with concerns about potential medical 
liability can be a powerful driver for providing more services, whether 
or not better care is being provided.
    Neither fee for service reimbursement nor the bundled payments used 
by Medicare for hospitals, home care or nursing homes pay 
differentially for quality or performance. Medicare has spent most of 
the last 2 decades focused on modifying the DRG rate used for hospital 
reimbursement, the relative weights of the RBRVS system used for 
physician reimbursement, the calculations of home care episodes or on 
redesigning the RUGS classification used for nursing home payment. 
However, none of these systems reward better quality or performance, 
paying exactly the same for ``best in class'' and ``worst in class''. 
In fact, the current reimbursement system not only doesn't pay for 
quality, it pays more for defects since it pays for the initial service 
and then again for correcting any defect associated with the initial 
service.

Employer-Sponsored Health Insurance

    Considering each of these various cost drivers, it is hardly 
surprising that healthcare has been experiencing the increases in 
spending that it has. While attempting to deal with the causes or 
effects of any one of them would clearly be helpful, most of these 
problems are exacerbated by the current reliance on employer-sponsored 
health insurance, which as previously indicated is tied to the current 
tax treatment of employer paid premiums.
    There are several features associated with employer-sponsored 
insurance that cause it to exacerbate the other health cost drivers in 
the system. First, the tax exclusion increases the share of an 
employee's income that goes towards the purchase of insurance since it 
allows employees to use pretax dollars for health insurance but not for 
most other purchases including healthcare not covered by insurance. 
Second, it encourages the myth that insurance premiums paid by 
employers comes out of the employer's profits rather than being part of 
the employees compensation package, at least on average. Both of these 
features result in the purchase of more insurance than is likely to 
occur if the individual believes he is spending his own money and the 
expansion of insurance is, in turn, associated with increased spending 
on healthcare. In addition to being a cost driver, employer-sponsored 
insurance may not provide the employee with the type of insurance he 
would choose if the choice were the employee's rather than the 
employers.
    In addition, the tax exclusion is an inequitable and costly way to 
subsidize the purchase of insurance. It is inequitable way since the 
value of the exclusion is worth more the higher the employee's income 
and it is also very costly to the Federal Government. Current estimates 
are that the revenue losses for Federal tax exclusion benefits in 2002 
were almost $128 billion.
    Most economists have advocated either eliminating the tax exclusion 
and substituting a refundable credit in its place or at least limiting 
the value of the tax exclusion. This action has proven to be very 
unpopular politically, in large part because so much of the current 
insurance provided to the under-65 population is derived from tax-
subsidized employed-sponsored insurance. However, the decline that is 
occurring in voluntary, employer-sponsored insurance provides an 
opportunity to develop an alternative source of subsidized insurance 
for the under-65 population.

Next Steps

    There are a variety of actions that the Federal Government can take 
to help reduce some of the pressures on healthcare spending. Some of 
these actions may be most effective if undertaken along with similar 
actions in the private sectors. Other actions may require new 
legislation and can only be carried out by government.
    Changing reimbursement so that performance and quality are rewarded 
is an activity that needs to occur in both the public and the private 
sector. The Federal Government can be helpful in jump-starting the use 
of innovative strategies through its Research and Demonstration 
authority and ultimately will need to change its reimbursement 
strategies to reward quality and performance but the private sector is 
likely to be much more nimble in terms of trying alternative 
strategies, discarding those that don't work and experimenting with 
those that work imperfectly. Assistance in providing better information 
on clinical and cost effectiveness of new medical procedures and 
therapeutics is an important role for government but this is another 
area that might be even more effective if done as part of a public/
private partnership. State government and/or the Federal Government 
will need to take actions that change the nature of the tort system. 
Finally, any changes in the tax treatment of employer-sponsored 
insurance and any additional mechanisms that subsidize the purchase of 
insurance out of the employer setting will require governmental action.

Strategies to Reduce the Number of Uninsured

    A variety of proposals have been introduced over the past several 
years that either open up public programs to populations that have 
previously not been served by a public program or that provides 
individuals with financial subsidies, outside of the employer-sponsored 
arena.
    The SCHIP program, itself an extension of Medicaid or Medicaid-like 
programs to children above the income level covered by Medicaid, has 
been proposed for children above the current SCHIP income level and 
also for their families. Medicaid buy-in programs have been proposed 
for working populations just above the Medicaid cut-off and proposals 
have also been made to allow a Medicare buy-in for uninsured 
individuals who are less than 65.
    Refundable tax credits of various amounts and structures have been 
included in legislative proposals in both Houses and in the 
Administration's budget proposals. The most recent State of the Union 
speech also included ``above-the-line'' deductibility of catastrophic 
health plans by individuals who don't have employer-sponsored 
insurance.
    Periodically, proposals have also been made to use different types 
of mandates. Some mandates have been on individuals, with subsidies for 
the low-income, and some on employers, with subsidies for firms with 
few employees or low wage employees. A spin on the employer mandates 
has also been proposed periodically, called ``pay or play'' where 
employers who don't provide health insurance have to pay into a fund.
    Given the variety of problems associated with employer-sponsored 
insurance described earlier, particularly in a mobile society where 
most households have two workers, adding on to employer-sponsored 
insurance seems to me to be a less desirable strategy. However, even 
those who would like to move away from employer-sponsored insurance 
need to do so carefully. Most workers and dependent of workers under 65 
are insured through employer-sponsored plan, and it will be important 
how alternative policies are put in place so as to minimize the 
disruption to existing coverage.
    Some proposals are now being developed that attempt to tie together 
pieces of these various strategies. In particular, proposals are 
combining expansions in public programs with refundable tax credits and 
access to group insurance. These strategies may hold the basis for 
future political compromises. The debate will be about who qualifies 
for which program, how much subsidy should they receive and how should 
the subsidy be funded. Actions that can also help slow the cost of 
healthcare will increase the likelihood that the numbers of uninsured 
will decline or at least increase at a slower pace while these 
strategies to expand access to insurance are being put in place.

Summary of Testimony

    I. The uninsured is a chronic issue (not an acute one)
     Worse during economic decline; better with robust growth
     Secular decline in coverage over time
    II. Two main reasons for decline in coverage
     Changing economic structure
     Increased healthcare spending relative to growth in income
    III. Increased spending--a problem?
     Not for economy, as long as increased spending has value
     Problem for the uninsured
    IV. Drivers of healthcare spending
     Advances in medical technology
     Medical liability
     Lifestyle issues
     Current reimbursement system
     Employer-sponsored insurance and tax exclusion--In its own 
right and exacerbates other drivers
    V. Next steps
     Pay for performance initiatives
     Better information on C/E of new technologies and 
therapeutics
     Meshing patient safety measures with tort changes
     Exploring alternative subsidies to the tax exclusion
    VI. Strategies to reduce number of uninsured
     Expanding access to public programs
     Providing financing subsidies to individuals and access to 
group insurance
     Mandates, on individuals or employers

       CBO Responses to Questions from the Senate HELP Committee

    Question 1.You said that third-party insurance ``drives a wedge 
between what the consumer pays and the cost of what he uses'' and this 
is one of the major factors contributing to the growth in health care 
spending. Can you please elaborate on this . . . and do you have any 
ideas for reforms that would eliminate this so-called wedge? Is it 
possible to remove this wedge and still maintain a role for third-party 
insurance?
    Answer 1. Health insurance protects the individual from uncertain 
and potentially high medical costs by spreading the risk of these costs 
across a large pool of people. In offering this protection, however, 
health insurance gives rise to the possibility that the total level of 
health spending is higher than it would be if the consumers faced the 
full cost of theircare.
    In most purchasing decisions, individuals bear the full cost of 
what they consume. Enjoying more goods or higher-quality goods means 
paying more for them, and a consumer will decide not to buy an item if 
the perceived value is less than the cost. The market for medical care 
services differs in that consumers (those with health insurance, at 
least) sometimes face no added cost for additional services or more 
intensive services. From the patient's perspective--as well as the 
physician's--there may be little reason to economize, and as a result, 
resource-intensive services may be provided even if their benefits are 
very small.
    An expensive diagnostic test, for example, might be ordered even if 
there is a low probability that it will furnish useful clinical 
information. Faced with having to pay, an individual might choose to 
forego such a low-value service; facing no cost at all, he would likely 
opt for it. The cost of such services is borne collectively by all 
those who contribute premiums to the risk pool.
    Two broad approaches are used to address overuse of medical care 
services. In traditional fee-for-service plans, deductibles and 
copayments help avoid overuse by making patients responsible for a 
portion of costs, creating some incentive to limit low-value spending. 
High-deductible policies offer protection from large losses--a 
principal motivation for purchasing insurance--while maintaining the 
consumer's incentive to economize on non-catastrophic expenditures. But 
while greater cost-sharing offers stronger cost-saving incentives, it 
also reduces the risk spreading advantage to the individual. An 
alternative approach focuses on the behavior of medical care providers 
rather than consumers. ``Managed care'' combines the functions of 
insurance services with those of medical care delivery, encouraging 
providers to direct resources away from services whose value is likely 
to be low relative to cost. Approaches like disease management or case 
management, when taking into account the cost of services, can provide 
better information and compliance with appropriate treatments.

    Question 2. You stated that the relationship between premiums and 
coverage is ``not necessarily a simple one.'' Is it fair to say there 
is a relationship and that, although we may not know the magnitude, 
there is a cause and effect relationship between increased premiums and 
decreased coverage?
    Answer 2. In discussing the effect of premium increases on 
coverage, it is important to distinguish among different causes of such 
increases. While it is clear that an increase in premiums having 
nothing to do with the quality of the plan (a premium tax, for example) 
would lead to a reduction in the number of insured, the continuing 
increase in premiums over recent decades has been largely due to the 
advancing capabilities of modern medicine. Premium increases therefore 
have reflected, at least in part, changes in the product itself, 
leaving the effect of premiums on decisions to purchase coverage less 
clearcut. Other factors such as increased cost-sharing, expansions in 
public coverage, and demographic changes further complicate 
interpretation of the drop in coverage.
    CBO has not performed an analysis specifically designed to identify 
root causes of the drop in health insurance coverage. On balance, 
however, simple evidence appears to suggest that increases in premiums 
have led to reductions in insurance coverage. From 1988 to 2001, the 
proportion of insured nonelderly Americans fell by more than 2 
percentage points. A larger drop--more than 4 percentage points--was 
seen in the proportion covered by employer-based insurance. The bulk of 
the decrease occurred in the earlier years of this period, coinciding 
with a period of steep increases in real (inflation-adjusted) premiums. 
As annual growth in premiums slowed in the mid 1990s, so too did the 
drop in percentage of covered workers.

    Question 3. You stated that ``defensive medicine'' and ``physician-
induced demand'' don't explain much of the recent growth in spending. 
One can infer from this that these practices do, in fact, make up some 
proportion of national health care spending. Do you know what 
proportion of the 1.6 trillion spent on health care in 2002 can be 
attributed to defensive medicine?
    Answer 3. CBO currently has no estimate of the proportion of total 
healthcare expenditures attributable to defensive medicine. Existing 
estimates rely on conjectural surveys of medical providers, and what is 
considered defensive medicine by one may be deemed prudent medicine by 
another.
    In the absence of a reliable estimate on the level of spending 
attributable to defensive medicine, however, it may be possible to 
estimate changes in medical spending resulting from new State laws 
affecting malpractice litigation (e.g., caps on non-economic and 
punitive damages), which might be interpreted as changes in the amount 
of defensive medicine being practiced. For selected disease categories, 
analysts have estimated reductions in spending possibly attributable to 
various reforms in State malpractice laws. In these analyses, 
reductions in spending that did not measurably affect health outcomes 
are considered to represent reductions in defensive medicine. One study 
estimated that for patients hospitalized for acute myocardial 
infarction (heart attack), tort reforms reduced Medicare inpatient 
spending by 5 percent; for those hospitalized for ischemic heart 
disease, the estimated reduction was 9 percent. Another study estimated 
a spending reduction of 0.27 percent for maternity patients. These 
results are specific to these clinical areas, and do not represent 
potential reductions in overall health spending from tort reforms. CBO 
continues to explore this issue.
  Prepared Statement of the Associated Builders and Contractors (ABC)
    Associated Builders and Contractors (ABC) appreciates the 
opportunity to submit the following statement for the official record. 
We thank Chairman Judd Gregg (R-NH), Ranking Member Edward Kennedy (D-
MA) and members of the Senate Health, Education, Labor and Pensions 
Committee for addressing the crisis of the uninsured in America. ABC 
urges the committee to follow up on this important hearing with an 
additional hearing to examine possible solutions to this growing 
epidemic.
    ABC is a national trade association representing over 23,000 
general contractors, subcontractors, material suppliers, and 
construction-related firms from across the country within a network of 
81 State chapters. Our member companies represent over one million 
craft professionals and administrative employees. As the nation's 
second-largest employer, with over 6 million workers, the construction 
industry continues to create new and beneficial jobs each year. 
Construction spending has a stimulative effect on the economy. For 
every $1 million spent in construction, $3 million in economic activity 
is generated and 13 new permanent jobs are created.
    To remain at the present level of activity, the construction 
industry needs an additional quarter of a million (250,000) workers per 
year to replace an aging and retiring workforce. One of the key 
elements to attracting and retaining workers and remaining competitive 
in any industry is to provide high quality, flexible health benefit 
plans. Providing quality health care benefits is a top priority for ABC 
and its members, and maintaining cost effective health insurance plans 
is a key ingredient in achieving this objective.
    Currently, there are more than 43 million uninsured Americans, and 
60 percent of them are employed by (or family members are employed by) 
small businesses. Therefore, the problem of the uninsured does not 
solely lie with the unemployed, but also with the small businesses 
across the country who are unable to provide quality health care 
coverage due to skyrocketing costs. In fact, a new study by the Robert 
Wood Johnson Foundation found that more than one in three Americans 
under 65 was uninsured at some point over the past 2 years.
    The 2002 Census Bureau statistics show that the share of the 
population covered by employer-sponsored health care coverage declined 
from 63 to 61 percent. The rising cost of health insurance premiums is 
the biggest factor in this decline and number one problem facing small 
business in this country. Faced with 15, 20 and even 50 percent premium 
increases annually for the past several years, many small businesses 
have been forced to reduce or even drop coverage.
    Many factors have contributed to the cost increase of health 
insurance. Hospital costs, frivolous medical malpractice lawsuits, lack 
of competition and increased state regulation have all led to increased 
premiums. However, it is important to note that while health insurance 
costs have gone up at twice the rate of inflation, a vast majority of 
small businesses's productivity and profits have failed to grow at the 
same rate. One sector though, has enjoyed its greatest profit margins 
ever. The insurance industry, namely large health insurance companies, 
have experienced record-setting profits over the past few years.
    A number of state reforms have actually led to increased rates, 
thus forcing employers to reduce benefits through higher deductibles 
and co-pays or eventually to drop coverage in order to comply with the 
law. State health insurance reforms and community rating laws have 
forced some insurance carriers to completely withdraw from the small 
group market for employers with less than 50 employees. When these and 
other state reforms occur, small employers are left with fewer 
alternatives for health insurance coverage for themselves and their 
employees.
    Recent mergers of health insurance companies have also reduced 
competition and alternatives for employers who seek access to quality 
and affordable health insurance. Today, there is a great need to bring 
more competition back into the system rather than continually reducing 
it.
    While there is no single solution to the problem of the uninsured, 
ABC feels that it is vital for Congress to examine the current market 
and to consider proposals that will provide market-based reforms. We 
believe that our current health insurance system, while flawed, is 
still the best in the world. Any solutions should help provide working 
families the best opportunity to obtain the quality, affordable health 
coverage they both need and deserve. Increasing competition within the 
small group market will help lower costs to employers struggling to 
continue to offer health insurance to their employees today.
    ABC appreciates this opportunity to submit comments on such a vital 
issue. We look forward to continuing a constructive dialogue on how to 
increase access to affordable and competitive health insurance for 
small businesses and thus reducing the number of uninsured Americans.
 Prepared Statement of the National Federation of Independent Business
    On behalf of the 600,000 members of NFIB, we want to thank you for 
allowing us to submit testimony today about the worsening health care 
crisis that faces our country. The small business community is feeling 
hit the hardest. Since 1986, the members of NFIB rank the cost of 
health insurance as one their top concerns.
    America's small-business owners, whose businesses create two out of 
every three new jobs in this country, continue to struggle with high 
cost of offering health insurance to their employees. Because of the 
current structure of the health care industry, too many small business 
owners and their employees do not have access to affordable health 
insurance.
    A recent Census Bureau report shows that over 43 million Americans 
now lack health coverage. That is an increase of almost two and a half 
million people over the previous year and the largest annual increase 
in more than a decade. In 2002, over 8 in 10 uninsured came from 
working families with nearly 70 percent from families with one or more 
full-time workers. It's no coincidence that these events are taking 
place as the cost of insurance continues to skyrocket--double-digit 
increases year after year, pricing more and more small firms out of the 
market.
    Many factors contribute to the overall cost of healthcare. Lack of 
competition in the small group market, litigation, and mandates are 
just some of the many cost drivers that have led us to where we are 
today.
    Small employers are forced to purchase in the over-regulated small 
group market, and consequently workers in the smallest businesses that 
do provide health insurance pay 17 percent more on average for health 
benefits than workers at large companies. There is inadequate 
competition among insurance carriers. A GAO survey found dangerously 
high levels of market concentration among large insurance companies in 
the State small group markets. This concentration reduces competition 
and enhances insurers' underwriting gains; as competition decreases, 
prices increase.
    We must also address the growing cost of benefit mandates. The idea 
that insurance should pay for the wide range of medical treatments and 
services covered by State mandates while laudatory, is unaffordable and 
therefore unrealistic. The Council for Affordable Health Insurance says 
that since January 1970, mandates have increased 25-fold.
    Something must be done on the front of medical malpractice 
litigation. The cost of malpractice lawsuits has soared in recent 
years, pushing up insurance premiums and forcing physicians out of 
business.
    A government-run healthcare system is not the solution, however it 
is still very much on the minds of some in Congress. The devil is in 
the details, whether it comes in the form of government-run health 
care, mandates on employers to provide it in the workplace, or 
individual responsibility with subsidies for the poor.
    The problems facing small business owners, their employees, and 
families must be addressed as part of that debate. We understand that 
no one solution will help all of the 43 million uninsured. Therefore, 
we propose a multi-faceted approach that will help move countless 
numbers of Americans off the rolls of those without health care. We are 
aggressively urging enactment of legislation to permit Association 
Health Plans--AHPs--to operate nationwide. We support tax credits for 
the purchase of health insurance.
    Association Health Plans will allow small business owners to band 
together across State lines through their membership in recognized 
trade and professional associations to purchase health care for their 
families and employees. Organizations such as NFIB, the U.S. Chamber of 
Commerce, Associated Builders and Contractors, and the National 
Restaurant Association would be able to offer insurance to their 
members.
    AHPs would help rural States by giving employers who are members of 
associations or trade groups another option--particularly important in 
less populated areas where only one or two choices are available today.
    Association Health Plans will make health insurance more affordable 
for small businesses. The Congressional Budget Office has estimated 
that small firms obtaining health insurance through AHPs will realize 
premium reductions of 13 percent on average. In fact, reductions range 
from 9 percent to 25 percent. It is estimated that more than 300,000, 
up to as many as two new million employers, employees and their 
families would be able to obtain health care coverage if given access 
to Association Health Plans.
    Ours is by no means a complete solution to this most vital national 
challenge. Our goal as a nation must be to make certain that no person 
in need will ever be left unattended. We cannot afford to wait for the 
``perfect'' solution. There is none. The longer we delay, the more we 
will hear the calls for government-provided health care, and certainly, 
that is not the perfect solution.
    Thank you for holding this hearing today and we appreciate you 
allowing our testimony to be submitted on behalf of NFIB members.

       Prepared Statement of The Association Healthcare Coalition

    The Association Healthcare Coalition (TAHC) commends Chairman Judd 
Gregg (R-NH) for holding this hearing to examine rapidly rising health 
care costs and the problem of the uninsured in America. TAHC believes 
that Congress must take action to address this issue during the 108th 
Congress.
    Since TAHC represents trade and professional associations that 
exist to serve small and medium-sized employers, this statement will 
focus on examining factors in today's small group health insurance 
markets that serve to drive up health insurance premiums for small 
employers. This is directly related to the problem of the uninsured, 
since approximately 60 percent of all uninsured Americans are workers 
employed by a small business or the dependents of such workers. TAHC 
recognizes that there are many factors driving overall healthcare costs 
today, but also wishes to emphasize that the problem of extremely 
inefficient regulation in the State small group markets is a 
significant source of the dramatic, double-digit health insurance 
premium increases that continue to jeopardize coverage for millions of 
small business workers across the Nation.

The Role of Associations in Health Care

    Bona fide trade and professional associations are a vital source of 
health care coverage for millions of American workers employed in small 
businesses. Some associations have been sponsoring health plans for 
over 50 years. TAHC's membership is composed of trade and professional 
associations organized for purposes other than selling health 
insurance, a critical distinction in the debate over the proper role of 
associations in providing health care benefits to small and medium-
sized employers. Our members are not affinity groups or businesses that 
simply come together to purchase insurance. Rather, bona fide 
associations, established and run by their employer-members, exist to 
serve the needs of their members and workers. Bona fide associations 
have an outstanding track record in providing high quality health 
coverage to small businesses and their workers.
    Associations are vital to enabling small businesses to provide 
affordable health coverage to their workers. Associations are able to 
purchase affordable health coverage for pools of small employers 
because they offer health plans that are specifically designed to meet 
the health care needs of their membership. Associations offer a wide 
variety of approved health plans and managed care arrangements, both 
fully insured and self-insured. AHPs have already demonstrated that 
they can reduce health insurance premiums for small employers, compared 
with the cost of small employers purchasing coverage directly from an 
insurance company without the benefit of an AHP. For example, the AHP 
sponsored by the American Council of Engineering Companies has 
administrative costs of about 9.5 percent of premium. In contrast, a 
small employer on its own is likely to pay administrative costs of 
anywhere from 20 percent to 35 percent of premium when purchasing 
coverage in the existing small group marketplace.
    Associations are uniquely structured to be part of the employer-
based healthcare delivery system. Because they are already structured 
to represent their members in other areas, they possess the 
infrastructure, administrative mechanisms, and experience needed to 
unify employers and employees into effective consumers of health 
services. By serving this need for small employers, associations add 
value to the health care system as a whole, as well as to their members 
individually.

Inefficient Regulation in Small Group Markets Raising Premiums

    While associations have been serving small businesses and their 
workers with affordable health benefits for over 50 years, their 
ability to continue doing so is severely threatened in the current 
environment. As inconsistent government mandates and regulations 
continue to proliferate in many States, the increasing cost of 
compliance often outweighs the benefits that small employers can 
receive by joining together in an AHP to purchase health care benefits. 
The regulation of AHPs on an inefficient, state-by-state basis thus 
jeopardizes the ability of associations to continue providing 
dependable and affordable health coverage to small employers and their 
workers.
    Another critical point is that excessive benefit mandates enacted 
by many States have driven insurance carriers out of many of the State 
small group markets. This has allowed a small number of remaining 
insurance companies to develop virtual monopolies in some markets. 
Given this unhealthy level of concentration in many health insurance 
markets, in addition to the overall level of rising health care 
inflation, it is not surprising that small employers are experiencing 
dramatic premium increases year after year.
    In fact, many associations have had to close down their health 
plans, many of which have been in existence for decades, because health 
insurance companies do not wish to deal with the cost of compliance 
involved in providing coverage to AHPs in multiple States. Because of 
this, both multi-state and single-state AHPs have very few options due 
to a severe lack of competition among insurance carriers in the 
association market, and many AHPs have been hit with large premium 
increases for their small employer members. The current difficult 
regulatory environment also prevents associations that have not 
previously offered a health plan, but now wish to do so because of the 
difficulties their members face in obtaining coverage in the small 
group markets, from establishing an AHP, thus further limiting options 
for small employers. Excessive regulation and mandates in the State 
small group insurance markets has greatly hindered the ability of 
associations to serve small business members.
    Large health insurance premium increases inevitably lead to some 
small employers simply discontinuing offering health benefits to their 
employees, or reducing the employer subsidy, due to the rising cost. 
This disturbing trend will continue to increase the ranks of the 
uninsured, and will exacerbate adverse selection problems as younger, 
healthier individuals are more likely to choose to be uninsured due to 
high costs. Congress must take steps to address this problem in order 
to avoid continued growth in the uninsured population and the adverse 
health care consequences that this entails.

Association Health Plan Legislation

    In contrast to the regulation of AHPs on an inefficient state-by-
state basis, large corporate and union health plans are exempt from 
State insurance regulations and mandates. It is time that Congress 
provided workers in small businesses with the same opportunities it has 
provided to their counterparts in large corporations and labor unions--
affordable health care through economies of scale, greater bargaining 
power with large insurance companies, regulatory uniformity, and the 
freedom to design health plan options that meet working families' 
needs. This objective can be achieved by the enactment of the Small 
Business Health Fairness Act of 2003 (S. 545), introduced by Senators 
Olympia Snowe (R-ME), Jim Talent (R-MO) and Kit Bond (R-MO).
    S. 545 will put small employers on an equal basis with workers 
covered by large employer and labor union health plans by providing 
similar uniform regulatory status to health plans sponsored by bona 
fide associations. The bill will greatly improve the ability of AHPs to 
design health plan options that meet the needs of their members and 
control the escalating cost of health coverage. The AHP legislation is 
the only policy option that levels the playing field between small 
business on one hand and large companies and union firms on the other.
    If small and medium-sized employers are to compete in the 
marketplace against large corporations for high quality workers, it is 
vital that they have access to the same health benefit options as large 
corporations. As such, S. 545 is critical to the ability of small and 
medium-sized businesses across the Nation to obtain access to 
affordable health insurance.

Conclusion

    An expansion of AHPs via S. 545 is a market-oriented solution that 
will foster growth and greater competition within the small group 
health insurance marketplace. This will ultimately bring about greater 
long-term price stability and help to reverse, or at least slow, the 
trend of skyrocketing health insurance premiums for small employers. 
Thus, AHP legislation is essential to efforts to expand access to 
affordable health benefits for small employers and their workers.
    TAHC urges the Senate to expand access to affordable health 
insurance for working families by enacting S. 545. This legislation has 
already been approved by the House during the 108th Congress, and has 
the strong support of President George W. Bush, who urged Congress to 
enact the bill during his State of the Union message on January 20, 
2004.
    The time for elimination of the health insurance ``double 
standard'' for small business workers is long past due. TAHC looks 
forward to working with Chairman Gregg and members of the Senate HELP 
Committee to accomplish this goal.

    [Whereupon, at 11:50 a.m., the committee was adjourned.]

                                    

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