    [Senate Hearing 108-608]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 108-608

                      HEALTH SAVINGS ACCOUNTS AND THE NEW
                MEDICARE LAW: THE FACE OF HEALTH CARE'S FUTURE?

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

                                    HEARING

                                   before the

                           SPECIAL COMMITTEE ON AGING
                              UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 WASHINGTON, DC

                                   __________

                                  MAY 19, 2004

                                   __________

                               Serial No. 108-36

             Printed for the use of the Special Committee on Aging

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                           SPECIAL COMMITTEE ON AGING

                          LARRY CRAIG, Idaho, Chairman
    RICHARD SHELBY, Alabama              JOHN B. BREAUX, Louisiana, Ranking
    SUSAN COLLINS, Maine                     Member
    MIKE ENZI, Wyoming                   HARRY REID, Nevada
    GORDON SMITH, Oregon                 HERB KOHL, Wisconsin
    JAMES M. TALENT, Missouri            JAMES M. JEFFORDS, Vermont
    PETER G. FITZGERALD, Illinois        RUSSELL D. FEINGOLD, Wisconsin
    ORRIN G. HATCH, Utah                 RON WYDEN, Oregon
    ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
    TED STEVENS, Alaska                  EVAN BAYH, Indiana
    RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
                                         DEBBIE STABENOW, Michigan
                          Lupe Wissel, Staff Director
                 Michelle Easton, Ranking Member Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page
    Opening Statement of Senator Larry Craig.........................     1
    Opening Statement of Senator John Breaux.........................     2
    Statement of Senator Elizabeth Dole..............................     3

                                    Panel I

    Hon. John W. Snow, Secretary, U.S. Department of Treasury,
      Washington, DC.................................................     4

                                    Panel II

    John C. Goodman, Ph.D., president, National Center for Policy
      Analysis, Dallas, TX...........................................    12
    Ronald A. Williams, president, Aetna, Hartford, CT...............    27
    Robert Greenstein, executive director, Center on Budget and
      Policy Priorities, Washington, DC..............................    41
    Kate Sullivan, executive director, Health Care Policy, U.S.
      Chamber of Commerce, Washington, DC............................    57
    Edward L. Langston, M.D., trustee, American Medical Association,
      Lafayette, IN..................................................    71

                                    APPENDIX

    Statement submitted by America's Health Insurance Plans..........    91
    Letter and facts submitted by The Coalition for Affordable Health
      Coverage.......................................................    98

                                     (iii)

     HEALTH SAVINGS ACCOUNTS AND THE NEW MEDICARE LAW: THE FACE OF HEALTH
                                 CARE'S FUTURE?

                                  ----------                              --

                            WEDNESDAY, MAY 19, 2004

                                           U.S. Senate,
                                    Special Committee on Aging,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 2:34 p.m., in
    room SD-628, Dirksen Senate Office Building, Hon. Larry E.
    Craig (chairman of the committee) presiding.
        Present: Senators Craig, Breaux and Dole.

         OPENING STATEMENT OF SENATOR LARRY E. CRAIG, CHAIRMAN

        The Chairman. Good afternoon, everyone. The Special
    Committee on Aging of the U.S. Senate is convened.
        Rarely do I convene one of these hearings with such
    pleasure. I say that because last fall, as part of the
    comprehensive new Medicare legislation, Congress enacted into
    law what I believe to be one of the most innovative reforms to
    American health care in at least a generation. I am speaking,
    of course, of health savings accounts. Consumer choice in
    health care is a cause I have been working on nearly all of my
    years in the U.S. Congress, and it is deeply gratifying to see
    it come to fruition in such a dramatic way.
        To a greater degree than ever before, the new health
    savings accounts will permit individuals to build significant
    tax-free health care savings for use in meeting their family's
    health care needs, including long-term care. Together with high
    deductible insurance for very high expenses, the new HSAs help
    put control of health care where it belongs, in the hands of
    the individual citizen. As we will hear this afternoon, the
    marketplace is greeting the new health savings accounts with
    substantial enthusiasm. Sales of individual and small group
    health savings accounts has been quite brisk, with some
    companies reporting sales of more than 1,000 health savings
    accounts in the first week of offering alone, and that is not
    even counting roll-out of health savings accounts in the ever
    bigger large group markets, which is expected to get under way
    this summer. Meanwhile, nearly three-quarters of the employers
    now say they are likely to offer HSAs for their employees by
    2006.
        In the midst of all of this, the Department of the
    Treasury, led by Secretary John Snow, has been moving
    aggressively to smooth the way toward full health savings
    account implementation as soon as possible. The Secretary, who
    we are honored to have with us today, deserves great credit for
    wielding his regulatory authority with such speed and
    effectiveness. Health savings accounts offer a meaningful
    opportunity to give greater control of health care to consumers
    themselves and to begin to move away from the increasingly
    bureaucratic nature of health care today.
        Putting people in charge of their own money and their own
    health care promises to realign incentives to better promote
    both cost savings and quality. The arrival of health savings
    accounts also offers needed relief to struggling small
    employers. Many such employers today face the agonizing choice
    of paying for traditional insurance they can no longer afford,
    and dropping health care coverage altogether. HSAs offer a
    promising lifeline to these companies and their workers.
        Finally, HSAs, in my opinion, hold special advantages for
    older workers and retirees, many of whom face growing health
    care coverage needs as they approach Medicare age. For example,
    the HSA law especially permits older workers above 55 to make
    supplemental catch-up contributions into their HSAs as they
    approach retirement. Health savings accounts have real promise
    as a tool to transform the way America relates to health care.
    Much work lies ahead, but I believe we are off to a very good
    start, and I look forward to the testimony of our panelists
    this afternoon.
        Before we move to their testimony and the testimony of
    Secretary Snow, let me turn to the ranking member of this
    committee, Senator John Breaux of Louisiana. John.

            STATEMENT OF SENATOR JOHN BREAUX, RANKING MEMBER

        Senator Breaux. Thank you very much, Mr. Chairman.
        I thank Secretary Snow, who I have a great deal of
    admiration for, a good personal friend of long standing, and
    always enjoy his presence before our committee, does a great
    job as our Secretary of the Treasury.
        But on the issue before the panel this afternoon, Mr.
    Chairman, health savings accounts, as they are currently
    designed, are a terrible idea, whose time has not yet come, and
    I doubt whether the time will ever come with anybody's life
    expectancy in this room that it will somehow become a good
    idea. That is a very strong statement. I opposed it when they
    did it in the Medicare bill because it does not have anything
    to do with Medicare. But I oppose it today for two principal
    reasons:
        First, it is totally unprecedented tax policy, folks. If
    you are looking at 401(k)s or Roth IRAs, we always had a
    concept in this country that if you are going to have a savings
    account you can either have it with the contribution to that
    account deductible up front, and you pay for the buildup when
    you take it out, or vice versa. This is unprecedented policy
    that says you are going to be able to deduct it when you put it
    in and you are going to be able to not have to count as income,
    the buildup, when you take it out. We have never done that
    before in any permanent tax savings policy that we have ever
    had in this country. It is unprecedented. Second, they say,
    ``Well, it is going to be important because if you use it for
    health care you should not have to pay for the buildup or you
    should be able to deduct a contribution.''
        But the type of health policy that it is being used for,
    Mr. Chairman, is not good public policy, because it is good if
    you are young, and it is good if you are not going to be sick.
    But if you are old and happen to be sick every now and then, it
    is bad policy. The reason I say that I think is quite simple,
    because the policy, the law says that you have to buy a high-
    deductible policy. What person that is old and sick and not
    wealthy is going to buy a high deductible policy? No. 1, they
    cannot afford a $2,000 deductible. That is why they are trying
    to buy insurance. No. 2, they cannot afford to pay for the cost
    if they are poor.
        So I do not want to belabor the point. Obviously, my
    position is very clear. I think it is terrible tax policy and I
    think it is even worse health policy. Other than that, I love
    John Snow. [Laughter.]
        The Chairman. John Breaux and I will not debate the issue
    here today, but I do believe the American people will prove him
    wrong.
        With that, let me turn to Senator Dole.

                  STATEMENT OF SENATOR ELIZABETH DOLE

        Senator Dole. Thank you, Mr. Chairman, for providing a
    forum where we can appropriately discuss the future of our
    Nation's health care system.
        To all of our witnesses today, thank you very much for
    coming. I realize you made a sacrifice in your busy schedules
    to be a part of this afternoon's hearing, and your efforts are
    indeed appreciated.
        I want to offer a special thanks to Secretary Snow, who is
    also my good friend and with whom I have worked on many
    transportation issues in the past in my years at the Department
    of Transportation. Thank you for giving us the benefit of your
    insight today of the most cost effective measures to apply to
    our health care system.
        Sorry, Senator Breaux, another friend of long standing, but
    I have to disagree with you. There is no question that the
    Medicare Bill passed by Congress last year created an important
    new vehicle to help consumers and businesses obtain some relief
    from soaring health insurance costs.
        Millions of Americans, including those who are not even
    considered seniors, will get help with their out-of-pocket
    medical expenses through health savings accounts. The benefits
    of such savings are far reaching indeed. Businesses and
    individuals who take advantage of these accounts will save
    substantial amounts on health insurance premiums. Additionally,
    they will have more control over health care expenditures.
    These tax-free and convenient accounts will help families pay
    their medical expenses. They also serve a proactive purpose in
    that families will have the ability to save for future health
    care needs. This opportunity to spend less on premiums and save
    money for the future will greatly aid lower-income individuals
    and families. Employees and employers can contribute to the
    HSA, and those funds may be invested in certificates of
    deposit, money market mutual funds, and other investment
    vehicles. The bottom line is that HSAs will improve health care
    access for all Americans. Americans will be able to better
    control their health care choices and protect themselves from
    devastating health care costs.
        I believe the future of health care looks much stronger
    thanks to health savings accounts and what they can mean to
    millions of Americans needing medical care.
        Thank you, Mr. Chairman.
        The Chairman. Senator, thank you very much.
        Let us turn to our first panelist, Secretary of the
    Treasury, John Snow. Secretary Snow is a former long-serving
    chairman and CEO of CSX Corporation, as well as a former
    administrator of the National Highway Traffic Safety
    Administration. He brings a wealth of experience both in and
    out of government, and the country is fortunate to have him
    serving in this post at this time.
        The Treasury Department is charged with the important task
    of implementing the new health savings account law, and by all
    accounts, it is handling that task with considerable skill and
    responsiveness.
        Mr. Secretary, we are pleased you are before the committee
    this afternoon. Please proceed.

     STATEMENT OF HON. JOHN W. SNOW, SECRETARY, U.S. DEPARTMENT OF
                      THE TREASURY, WASHINGTON, DC

        Secretary Snow. Mr. Chairman, thank you very much. Senator
    Breaux, Senator Dole, it is a great pleasure to be here with
    you to talk about this important new idea in the world of
    health care.
        It is a bold new concept and an awfully important one
    because it is one of the best single ideas I have seen to deal
    with one of the most pressing issues America faces, and that is
    rising health care costs.
        I take a particular interest in that subject as Treasury
    Secretary, because if you look at the budget of the United
    States what is driving the out-year fiscal situation that the
    United States will confront is health care costs. There are few
    things more important for our fiscal future and for the
    financial soundness of this country in the years ahead. There
    are a few things as important, maybe nothing as important, as
    getting our arms around rising health care costs. If we can
    slow the growth of health care costs from the projected levels
    of GDP plus 1 percent or GDP plus 2 percent for Medicare, and
    bring it down by 1 percentage point to GDP level or GDP plus 1,
    we have an extraordinarily much more benign fiscal future for
    this country. So we are here dealing with one of the drivers of
    the financial condition of the country, and probably nothing is
    more important than this.
        Then the question is, how do the HSAs relate to driving
    down health care costs? As you think about that, it is
    important to have in mind the American consumer. The American
    consumer shops. The American consumer knows a bargain. The
    American consumer weighs alternatives. They go on the Internet.
    They talk to their neighbors. They carefully consider quality
    and price in the tradeoffs between higher prices and whether
    you are getting your money's worth. We are good shoppers. We
    are good shoppers in virtually everything we buy in this
    country except one thing, health care.
        Why are we not good shoppers for health care? Because the
    consumer is not empowered. Somebody else is making those
    decisions for the consumer, and the consumer does not see how
    their own money is at stake in the decisions they make. It is
    no mystery, in a situation where consumers are not making
    tradeoffs, that costs rise. There is no mystery why additional
    tests are accepted without question when the consumer does not
    perceive any cost to him of those tests, and when the decisions
    about those extra tests and extra procedures are being dictated
    by somebody else.
        I think HSAs are a breakthrough idea because it will
    empower the American health care recipient to make choices, and
    to shop and search and look for better options, and will give
    them the ability to do so with those funds that accumulate in
    the HSA account.
        The HSA account is tax advantaged. That is the point of it.
    The whole point is to create in effect a super-charged IRA for
    health care, tied to a high deductible. Why do you want a high
    deductible? I think you know why you want a high deductible.
    You want a high deductible so that people get a lower premium
    for their insurance. More people can afford high deductible
    insurance than insurance that is not high deductible, so you
    encourage more people to get into the use of these beneficial
    insurance plans. But when you think about insurance, your house
    insurance does not include the coverage of, say, a washer going
    out on the sink. It covers the catastrophic expense. It covers
    the heavy cost. Your auto insurance does not cover the muffler
    going out. It covers significant incident to the automobile
    itself. It seems to me we need to be moving health care in that
    same direction so that consumers are empowered, they get lower
    cost and real insurance, and they are empowered to make
    decisions. The result of all that, I am confident, will be
    broader health care coverage and lower long-term health costs.
        I thank you very much.
        The Chairman. Mr. Secretary, thank you. There is no
    question that what we are doing is innovative. It is different,
    and obviously, my friend and colleague Senator Breaux is
    reacting to that, probably because it is new and yet to be
    determined. At the same time, it appears that the market is
    ripe for this. So let me ask a couple of questions of you in
    light of what some of the critics are saying.
        Critics of HSAs are fond of predicting that they might
    promote adverse selection, for example, by attracting
    predominantly healthier and wealthier enrollees. Yet the actual
    claims based data that is available suggests really quite the
    opposite, namely, that consumer choice approaches, like HSAs,
    actually show virtually no evidence of adverse selection. What
    is the Treasury's assessment of this issue?
        Secretary Snow. Mr. Chairman, we have looked at that
    contention that the HSAs would lead to adverse selection, and
    have found no evidence to suggest that that is the case or
    would be the case. The Federal Employees Health Benefit Program
    (FEHBP) has available to it, as you know, a high deductible
    plan. A High deductible plan option has been made available.
    This is a test case of whether or not adverse selection would
    occur, and whether just the young and the healthy would opt for
    it. That has not been the case in the FEHBP.
        I think the HSA with the high deductible is a new option
    that will be used by people in all income classes, and people
    of diverse health status.
        The Chairman. Many say that HSAs offer a real lifeline to
    employers struggling to continue providing insurance to their
    employees, as well as to the currently uninsured who are
    looking for affordable coverage. What do you believe will be
    the effect of the new HSAs on both the employer health market
    and on the number of the uninsured that many of us are
    concerned about in our States?
        Secretary Snow. I think it is going to reduce the number of
    uninsured, and I think it will help small business employers
    continue coverage or extend coverage. When the President was
    out in Minnesota a month or so again on the HSAs, he met with
    Dan Schmidt, who is owner of the Mercury office Supply Company
    in Minnesota, a company that had 12 or 13 employees. It is a
    small office supply retailer. Their premiums in 2004 were due
    to increase to $36,000. Mr. Schmidt became aware of the
    opportunities for the HSAs, and he looked into it. He was
    confronted with the possibility, the real possibility of
    dropping his health care coverage because he could not afford
    the $36,000. By opting for the HSA--and this is a real life
    story--the premiums came down to $24,000. He saved that roughly
    $12,000, and he used it to fund the employees' HSA with a no
    co-pay plan. So there is a real life story of how HSAs coupled
    with the high deductibles can help a small business person
    reduce the cost of health care and take the savings on the
    premiums and fund the HSA accounts themselves. I think that is
    a story that we are going to see told over and over and over
    again in the months ahead.
        The Chairman. I thank you.
        Let me turn to my colleague, John Breaux. John.
        Senator Breaux. Thank you, Mr. Chairman.
        Thank you, Mr. Secretary, for being with us.
        I agree with the first part of your statement that it is a
    bold and new idea. I would just add that it is a bold, new and
    bad idea. If you are healthy and you are wealthy, it is a great
    idea, but if you are low income and likely to get sick, for
    anyone to say, I am going to go out and buy a $2,000 deductible
    policy is not a good idea. It may be new, but it is not good.
        My point is, you talked about good shoppers, Mr. Secretary.
    If this is such a good deal from a shopper's perspective, why
    is it necessary for us to spend $16 billion of tax dollars,
    which is what the Treasury Department says it is going to cost
    the Government to institute HSAs? If it is such a good idea,
    why do people not just go out and buy it? Why do we have to
    subsidize it to the tune of $16 billion to make it such a good
    idea to probably get people to buy it?
        Secretary Snow. In order to encourage people to have these
    accounts, and the accounts then buildup and become the vehicle
    for people making their own health care choices, and----
        Senator Breaux. I agree with that. But why do we have to
    spend $16 billion to encourage it if it is already a good idea?
    Will it not fly on its own, that we have to spend $16 billion
    subsidizing it?
        Secretary Snow. Senator, we want to encourage----
        Senator Breaux. That is a lot of encouragement.
        Secretary Snow [continuing]. This sort of behavior. But the
    other end of that encouragement is the potential to sharply
    reduce long-term health care costs which is a multiple of
    whatever the tax cost would be I would submit.
        Senator Breaux. You pointed out that a high deductible--
    like if I am young, if I am my son, who is very healthy and
    very young, and making a very good income, more than his dad, I
    mean this is a great idea. I am going to take a high deductible
    because I have not been to the doctor, I do not get sick, and
    boy, I am going to save a lot of money and it is a great idea.
    But if I have a low income and I am a poor person who has
    chronic illnesses, this would be a very terrible idea, and it
    seems to me that given the choice, if you take young people who
    are not sick, and they all run to the HSAs, and they leave
    comprehensive regular insurance, who is left? People who are
    going to be left under the comprehensive policy are going to be
    people that are older with chronic conditions and who are low
    income, who cannot afford high deductible policies. That is
    where the adverse risk is, that is the history of insurance,
    and that is how adverse risk selection occurs.
        I just cannot--you talk about, well, the high deductible is
    normal because home policies does not cover washing machines
    and mufflers. But you can live without a muffler, and you can
    live without a washing machine, but you cannot live without
    health care, and that is what we are talking about. That is why
    it is such a bad idea. You can comment on that.
        Secretary Snow. Senator, we believe there will be more
    people covered, more people covered, not fewer, with health
    insurance as a result of the HSA being in place, and there will
    be many Dan Schmidts of the world, who are small owners and
    managers of small businesses, who will be able to sustain
    health care insurance for their employees, or expand it,
    because of the savings that are implicit here in their being
    able to move to the high deductible plans, take the savings and
    put them in to the fund the HSAs.
        Senator Breaux. It is all right if Ann Smith wants to do it
    on her own, but is it such a bad idea that we have to subsidize
    it with $16 billion to get Ann Smith to do it? I mean if it is
    that good of an idea, the Ann Smiths of the world ought to do
    it on their own. You talk about studies from Treasury. There
    are studies from the RAND Corporation, the Urban Institute, the
    American Academy of Actuaries, that found that premiums for
    comprehensive insurance could more than double, could more than
    double if the whole concept that we are talking about here
    becomes widespread and everybody flocks to these new type of
    policies. That is my concern.
        Secretary Snow. Senator, let me just conclude here where I
    started, and that is an issue you know well, better than I,
    better than most people, and that is the critical need to find
    some way to deal with this huge fiscal obligation in the years
    ahead that grow out of the unfunded promises of which the
    biggest is health care. If we are going to keep our
    commitments, and if we are going to do it in a way that is
    fiscally sound, we have to find ways to lower the growth rate
    of health care cost.
        This is a proposal that many experts feel will help achieve
    that objective.
        Senator Breaux. I would just argue that this has absolutely
    nothing to do with slowing the cost of health care. It just
    moves a lot of healthier and wealthier people into one type of
    insurance. It would not be a bad idea if we make that available
    to them, which it already is available, but that the Government
    does not have to subsidize it.
        You are doing a fine job with a bad idea.
        Thank you.
        Secretary Snow. Thank you, Senator.
        The Chairman. Obviously, the other point of view has been
    clearly heard, and John is well spoken on this issue. I would
    comment that it is interesting that we make the assumption
    that--and John used the example of his son. I have a son also
    who is struggling at this moment with his wife to have adequate
    health care coverage. One of their employers just changed their
    policy because of the cost, and costed them out of the market
    and so one of them got dropped from that policy, and they are
    in the market now searching for something they can afford.
        They are both working. They both have excellent jobs. But
    their employer tipped them upside down on insurance because the
    employer can no longer afford to offer what they had been
    offering. Whether HSAs will be an option for them or not, it
    certainly is an opportunity, and I have walked them through it
    as an example. Once these vehicles become available, they are
    going to take a look at it, see whether it fits them or not.
        Let me ask you this, John. Although it is not a focus of
    today's hearing and it is a separate issue from an HSA in
    general, I am interested in the administration's current
    proposal to go a step further to create tax deductibility for
    premiums, the premiums consumers pay on high deductible plans
    purchase in conjunction with an HSA. In what way do you believe
    this proposal will benefit health care consumers and improve
    health care access?
        Secretary Snow. Anything that encourages the use of the
    high deductible health plans is a move in the right direction.
    A larger market, an expanded market for high deductible health
    plans will bring more people under health care coverage, under
    insurance coverage, and it will create the right incentives for
    people to think hard about the choices they confront in
    purchasing health care services.
        What we really need to do I think here, Senator, Mr.
    Chairman, is to empower the American health care recipients to
    be good consumers, and the more we do that, I am confident we
    will see the health care system responding with higher quality
    and lower cost, and that is the objective. They get better
    quality and lower cost, a more efficient health care delivery
    system, and I think it is perfectly appropriate, in fact, it is
    something to be encouraged here, and that is precisely what the
    deductibility provision that the President sent to the Congress
    in this year's budget would do. It would lower the cost by
    having an above-the-line deduction on the premium for the high
    deductible health plan which is something very much to be
    encouraged.
        The Chairman. Mr. Secretary, again, we thank you very much
    for your presence here today and the work that is going on in
    Treasury right now to move this concept to the marketplace, and
    then both John and I will watch it I am sure very, very closely
    over the coming months and years to see where it takes us in
    health care, and whether it offers what some of us believe it
    can.
        Again we thank you.
        Secretary Snow. Thank you very much.
        [The prepared statement of Secretary Snow follows:]

        [GRAPHIC] [TIFF OMITTED] T4992.001

        [GRAPHIC] [TIFF OMITTED] T4992.002

        [GRAPHIC] [TIFF OMITTED] T4992.003

        The Chairman. Let me invite our second panel to the table.
    I think this group will represent a range of different
    perspectives and constituencies on health care savings
    accounts.
        Our first witness on the second panel today will be John
    Goodman, president of the National Center for Policy Analysis.
    Perhaps more than any other individual, Dr. Goodman has devoted
    much of his professional life to pursuing consumer choice in
    health care. I think it is no surprise that many have called
    him the father of medical savings accounts. We are pleased you
    are able to be with us today.
        Our second panelist is Ron Williams, the president of
    Aetna. Aetna has been a market leader in consumer-directed
    health care, both as an insurer offering consumer choice
    products and as an employer offering such products to its own
    employees.
        Next we have Kate Sullivan, executive director of Health
    Policy at the U.S. Chamber of Commerce. She is a recognized
    expert on consumer choice on health care and has been among the
    leaders guiding the Chamber's strong support for health savings
    accounts.
        Next we have Edward Langston he is a trustee of the
    American Medical Association with a longstanding service to
    that organization, and is also a practicing family physician in
    Lafayette, IN.
        Robert Greenstein is the founder and executive director of
    the Center on Budget and Policy Priorities. He has been invited
    today at the invitation of our Minority, and will bring I think
    a critical voice to the health savings account issue.
        We are pleased all of you can be with us today. Dr.
    Goodman, we will start with you.

    STATEMENT OF JOHN C. GOODMAN, PH.D., PRESIDENT, NATIONAL CENTER
                    FOR POLICY ANALYSIS, DALLAS, TX

        Mr. Goodman. Thank you, Mr. Chairman, Senator Breaux.
        Prior to this year the tax law generously subsidized
    employer payments for third-party health insurance, but it
    severely penalized any type of self insurance so that
    individuals could pay their own medical bills from a savings
    account. Every dollar of premiums that an employer paid to,
    say, Blue Cross/Blue Shield, avoided income and payroll taxes,
    and for a middle income family, that means the Government was
    effectively paying for half the cost of the insurance. Yet if
    the employer tried to take that same dollar and put it in a
    savings account so that the employee could pay his medical
    bills directly, the Government taxed the dollar before it got
    into the account. For a middle income employee, this means the
    Government was taking half the money before it went into the
    account. This is exactly what happened to us at the National
    Center for Policy Analysis.
        In effect, what the tax law was doing was encouraging us to
    give all our health care dollars to a third-party payer and let
    that third-party payer determine how the money is spent,
    instead of allowing patients and their doctors to make these
    decisions.
        The new law, and I think this is the answer to Senator
    Breaux's question, the new law creates a level playing field,
    treating third-party health insurance and self insurance in
    exactly the same way. I will say parenthetically that this is
    not the only way to do it. I have proposed other ways of doing
    it. But what is important is that however we treat third-party
    insurance we need to treat self insurance exactly the same way.
    The new law will allow individuals to manage some of their own
    health care dollars in accounts that they own and control, and
    decisions about which bills are going to be paid indirectly by
    patients and which bills would be paid by insurers will be
    determined by individual choice in the marketplace, and not by
    the tax writing committees of the Congress.
        This new opportunity will revolutionize the medical
    marketplace in my opinion. We are about to unleash a vast army
    of people who understand or will understand that when they
    spend a dollar in the medical marketplace, it is their dollar
    and not someone else's dollar. These are people who when they
    spend a dollar are going to insist on a dollar's worth of
    value. We are about to have millions of savvy consumers who
    fully understand that when they spend a dollar on health care,
    that is a dollar not available for something else, and who,
    acting in their own interest, will make their own choices
    between health care and other uses of money.
        We are about to give thousands of doctors the freedom to
    act as agents of their patients, rather than acting as agents
    for third-party payers. We are about to create opportunities
    for thousands of entrepreneurs who will discover myriad ways to
    profit by delivering health care more efficiently. We are about
    to take a very small step in the direction of a very important
    social goal, and that is making employee benefits personal and
    affordable.
        The critics of all of this have been remarkably consistent
    over the past 15 years. Many of them quote each other. They
    cite each other. They repeat each other as though they were in
    some sort of echo chamber. Many of the critics are good honest
    people who I have talked to, but nonetheless admit that they
    have never had a health savings account of their own, they have
    never seen one, they do not know anyone who has one. If you
    scan the footnotes of Mr. Greenstein's testimony today what you
    will find are a lot of references to simulation and
    speculation, but there is not one reference to a study of the
    behavior of real people. It turns out that such studies really
    do exist and more information is becoming available every day.
        We now have a decade of experience with medical savings
    accounts in South Africa, where two-thirds of the people with
    private health insurance there now have medical savings account
    plans. We have 7 years of experience with the medical savings
    account pilot program in this country, and we have 2 years of
    experience where the health reimbursement arrangements are
    HRAs. What is evident from all of this experience is that the
    evidence is strong and consistent and coming from many
    different sources.
        First, savings accounts change behavior. When it is their
    own money, people see physicians less often, they buy fewer
    drugs, they substitute generics for brand names. They save
    money. Second, they manage to do it in a way that is not
    harmful to their health. Third, the health savings accounts,
    contrary to all the claims of all the critics, do not just
    appeal to the young and the healthy and the rich. In fact, if
    anything, it tends to be slightly in the other direction--the
    health savings account population tends to be a little bit
    older, a little bit less healthy, a little bit less rich.
    Fourth, the health savings account holders do not skimp on
    preventive medicine. In fact, under some of the most popular
    plans in the United States and in South Africa, people tend to
    get a little bit more preventive medicine when they are
    managing their own money than when they are in a conventional
    plan.
        Finally, I do not know of any evidence of employers using
    the medical savings account or health savings account
    opportunity to cut back on benefits. To the contrary, these
    plans are proving to be uniformly popular with employees. When
    employers have asked employees to vote on this, they uniformly,
    by a large majority, say that they want to keep their health
    savings account plan. They do not want to go back to some
    conventional plan.
        I will conclude, Mr. Chairman. The idea is, good for the
    pocket, good for our health, and good for the country.
        [The prepared statement of Mr. Goodman follows:]

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        The Chairman. Thank you very much, Dr. Goodman.
        Let me turn to Ron Williams, who is the president of Aetna.
    Welcome to the committee, Ron.

    STATEMENT OF RONALD A. WILLIAMS, PRESIDENT, AETNA, HARTFORD, CT

        Mr. Williams. Thank you, Chairman Craig and Senator Breaux.
    I am here to discuss Aetna's experience with consumer-directed
    health plans, including health reimbursement accounts and
    health savings accounts.
        Aetna is one of the largest health insurers. We insure 13
    million members, and we serve the very largest employers in
    America, as well as some of the smallest employers in America.
    We provide fully insured coverage and self insured. We provide
    coverage one million employer sponsored retirees and
    participate in the Medicare Advantage Program, serving over
    100,000 retirees.
        There are three major points I would like to make today.
    The first is that HRAs and HSAs are getting a very positive
    response from the marketplace. The second is Aetna has been
    committed to studying the impact on the consumer, and the data
    that we are seeing suggest that we are able to lower costs
    without compromising quality. The third point I will make will
    be some recommendations on the basis of feedback we are
    receiving from the marketplace.
        This is a category that Aetna made a commitment to in July
    2001 to launch health reimbursement accounts on the basis of
    early interpretations of Treasury Department guidance. I would
    say this is a product I have had personal experience with since
    I and my family have been enrolled in this plan since January
    2002. It is something that Aetna has been deeply committed to
    and we have expanded our family of products, including stand-
    alone dental funds, pharmacy funds, and permitting consumers to
    take long term premium reimbursement as part of their health
    reimbursement account.
        A few days ago we announced a new retiree reimbursement
    accounts designed to help employers contribute to employee
    accounts for qualified health expenses. The reason that we have
    committed to this is really listening to the voice of the
    market. When we have talked to employers, the cost of health
    care is something that they are very concerned about, and also
    as we talk to consumers, they have a strong desire to exercise
    much greater control over the health decisions and benefit
    dollars. Consumers want information on quality and cost. They
    want Web-based tools, and also they are interested in better
    understanding the value that their employers are providing in
    the form of health care. We believe the consumer-directed
    health plans encourage consumerism, and the market response
    reflects this.
        Since September 2001 when we began to discuss our product,
    we have sold this product to over 190 employers, representing
    180,000 members. Aetna's own employees are in this product, and
    our enrollment grew from less than 1 percent the first year we
    introduced it to over 75 percent 2 years later. We see employer
    adoption and early quote activity for the newly approved health
    savings accounts unfolding at a very rapid pace.
        Since January 1, 2004, with the health savings account
    being approved, we have talked to more than 600 brokers and
    over 86 of our largest plan sponsor clients. So far we have
    actually sold 130 small employers into high deductible health
    plans that support HRAs, and we actually have sold four mid to
    large employers in HSAs, with one employer going so far as to
    reopen their open enrollment period to give the employees the
    option of participating in the health savings account.
        We have conducted a study of 14,000 members on the basis of
    9 months of data. This data is preliminary and we will be
    updating it shortly. We found that on the basis of looking at
    these 14,000 members in comparison to a matched cohort, who had
    been fully enrolled with Aetna for over 2 years, we saw a 1.5
    percent increase in medical claims costs compared to double
    digit increases in a comparable population.
        We had one employer who had an integrated Rx deductible and
    saw a significant decrease in Rx claim costs and increases in
    generic utilization. We also saw preventive visits increased.
    The age, the salary and the family status of people enrolled in
    the health reimbursement account was similar to the general
    population. We saw an increase in Web tools. Consumers were
    twice as likely, 9 out of 10 enrollees were satisfied or very
    satisfied with the product, and more satisfied based on the
    length of enrollment, and more than 50 percent carried balances
    forward.
        Consumerism has had a very positive impact on health status
    and quality. All of the consumer-directed plans at Aetna sales
    provide first dollar coverage for routine physicals, well-baby
    visits, annual gynecological exams, and immunizations. We also
    provide health risk assessments to help the consumer be more
    aware.
        In conclusion, Mr. Chairman, I believe there are important
    opportunities for improvement, and these would come in the
    areas of permitting consumers to make additional contributions
    for catch-up. The average retiree is likely to have to spend
    $80,000 in excess of health care costs that Medicare would
    cover, and therefore the ability for catch-up would be
    important. We believe that increasing that amount that can be
    contributed at an earlier age would help, that pre-retirees
    would also be encouraged and permitted to participate to the
    extent that they continue working in the workforce and may
    still be eligible for Medicare. We believe that encouraging the
    Medicare program to look at consumer-driven health care
    arrangements would also be something we would be very
    interested in participating in.
        Thank you for the opportunity to share our point of view.
        [The prepared statement of Mr. Williams follows:]

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        The Chairman. Mr. Williams, thank you very much.
        Now let us turn to Robert Greenstein, as I said earlier,
    founder and executive director of the Center on Budget and
    Policy Priorities. Mr. Greenstein, welcome to the committee.

     STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, CENTER ON
              BUDGET AND POLICY PRIORITIES, WASHINGTON, DC

        Mr. Greenstein. Thank you, Mr. Chairman.
        Today most employer based coverage is not high deductible
    coverage. In 2003 the average in-network deductible for
    employer based PPO plans was $275 per individual. But with the
    advent of HSAs, this is very likely to change.
        Workers in excellent health who do not expect to have high
    health care costs are likely to find HSAs very attractive, and
    this is particularly true of healthier workers who are
    affluent, since the value of the HSA tax breaks is worth the
    most to people in the highest tax brackets. Indeed, the HSA tax
    breaks have no income limit and therefore actually provide a
    way around the income limits that now apply to IRAs. Indeed,
    the tax shelter benefits are unprecedented anywhere in the tax
    code. Nowhere else in the tax code do you get a tax deduction
    for a deposit in an account, and then be able to make tax-free
    withdrawals from the same account.
        But for less healthy individuals the story is quite
    different. If you are less healthy and you have lower moderate
    income, you often would be unable to afford the greater out-of-
    pocket costs associated with the high deductible plans. You
    would get little or no benefit from the tax breaks with HSAs
    because you are in a lower tax bracket, and you often would
    lack the resources or the income to make substantial
    contributions to the HSAs in the first place.
        So the problem is one of adverse selection. The problem is
    that if healthy, affluent workers move to high deductible plans
    with HSAs and in substantial numbers, then less healthy, lower-
    income workers who want to remain in the comprehensive coverage
    are necessarily going to face rising premiums. As Senator
    Breaux rightly noted, three major studies from very
    distinguished institutions in the 1990's concluded that with
    these kinds of accounts, the risks of adverse selection were
    very high, and that if use of these accounts became widespread
    that premiums could more than double.
        Now, some, such as Mr. Goodman, say these concerns are
    unfounded and that evidence shows that, but the evidence does
    not show that at all. He cited health reimbursement accounts
    that some employers have set up in the last few years. Those
    experiences are not directly applicable to HSAs because HRAs
    are fundamentally different than HSAs. Under the HRAs there
    were no tax deductible employee contributions allowed and no
    withdrawal for non-health expenses in retirement allowed. Take
    away those features and the calculus changes.
        Similarly, the South Africa experience is wholly
    inapplicable for three reasons that I do not have time to go
    into in my 5 minutes now, but I will happy to discuss in the
    questions and answers.
        The only real significant evidence we have from the MSA
    demonstration project is a GAO survey that found some evidence
    that adverse selection was occurring.
        The concern too is that if employers begin to offer both
    comprehensive and HSA type high deductible plans and the
    healthier workers move into the high deductible plans, the
    premiums could rise so high for the more traditional
    comprehensive low deductible plans, that employers stop
    offering them. The Commonwealth Fund Study found that
    individuals aged 50 to 64 who purchased high deductible
    policies in the individual market similar to the plans required
    under HSAs were twice as likely as comparable individuals with
    low deductible employer based coverage to fail to see a doctor
    when a medical problem develops or to skip medical tests or
    follow-up treatment.
        As Linda Blumberg of the Urban Institute recently warned,
    quote, ``The practical effect of HSAs is that the most
    vulnerable populations are left bearing a greater burden of
    their health expenses.'' I would also like to comment for a
    minute on the proposal Secretary Snow talked about to add on
    top of the unprecedented tax breaks that already accompany
    HSAs, an additional deduction for the purchase of high
    deductible insurance in the individual market by people who
    have HSAs. Senator Breaux referred to a cost of $16 billion.
    That is just for the HSA provisions in the Medicare law. Both
    Joint Tax Committee and the administration say the new
    deduction would cost $25 billion over 10 years, bringing the
    total cost to $41 billion over 10 years. That is nearly six
    times the $6.4 billion official cost estimate you operated
    under for the HSA provisions of the Medicare Drug Bill at the
    time that the legislation was enacted last fall.
        Making matters worse, one of the Nation's leading health
    care economists, Jonathan Gruber of MIT, recently analyzed the
    administration's deduction proposal and concluded that it would
    likely cause the ranks of the uninsured to increase by 350,000.
    Why would it cause the ranks of the uninsured to increase?
    Because the deduction would be of greatest benefit to high
    income taxpayers in the top brackets, and most of them are
    already insured. For people who do not earn enough to pay
    income tax or are in the 10 or 15 percent brackets, the
    deduction does not provide enough of a subsidy to make
    insurance affordable. Ninety percent of the uninsured are in
    the 0, 10 percent or 15 percent brackets.
        At the same token, for an employer who is able to now say,
    look, my employees can go into the individual market, they can
    buy a high deductible plan and get a deduction for that, they
    can put money in an HSA and get a deduction for that, the
    likelihood is that some employers on the margin do not offer
    employer based coverage. Gruber's estimate is that the number
    of new people who would become insured as a result of the
    deduction, as Secretary Snow said, would be more than
    outweighed by the number who would lose coverage due to
    employer dropping. We would spend $25 billion and increase the
    ranks of the uninsured.
        The final point I would like to make is about the claim
    that HSAs would substantially lower health care costs. I think
    this claim is significantly overblown. A recent article by
    Henry Aaron of Brookings notes that most medical spending
    occurs during high cost episodes in which the total cost of
    care for patients greatly exceeds the limits of any high
    deductible, and that once you get beyond those limits, there is
    no greater constraint or incentive under these approaches.
        Linda Blumberg of Urban Institute made the same point. She
    said because the vast majority of medical spending is
    attributable to a small share of individuals with very high
    medical expenses, the vast majority of medical spending will
    still occur with the higher deductibles.
        There are two studies I am aware of here. In a RAND study,
    RAND projected--obviously it is not based on actual data
    because we do not have actual data with widespread use of HSAs
    yet, but RAND projected that under HSAs health spending would
    decline at most by 2 percent. A separate Urban Institute study
    projected that if the entire employer based system were
    switched to these kinds of accounts, there would be one-time
    savings only in the vicinity of 4 to 6 percent. To me that is
    not enough to justify $41 billion in expenditure and the
    adverse selection that would result with significant injury to
    sicker and poorer workers.
        Thank you.
        [The prepared statement of Mr. Greenstein follows:]

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        The Chairman. Thank you very much, Mr. Greenstein.
        Now let me turn to Kate Sullivan, who is the executive
    director for Health Policy at the U.S. Chamber of Commerce.
    Welcome.

      STATEMENT OF KATE SULLIVAN, EXECUTIVE DIRECTOR, HEALTH CARE
            POLICY, U.S. CHAMBER OF COMMERCE, WASHINGTON, DC

        Ms. Sullivan. Thank you, Mr. Chairman, Senator Breaux, for
    the opportunity to testify at today's hearing.
        Enactment last year of HSAs came at a very critical time
    for our Nation's employers, working families, and those who buy
    their own health coverage. They all have been facing enormous
    challenges finding those affordable plans. Along with injecting
    new and much needed competition for employers' premium dollars,
    HSA's offer a number of advantages for employees. Of primary
    benefit the account is held by the taxpayer rather than the
    employer as some of the other consumer-directed plans require.
    Employers and employees may contribute to the HSA, easing
    concerns that younger or less affluent workers may have about
    funding their deductibles. I am happy to report in a moment
    that employers overwhelmingly plan to do just this, make those
    contributions.
        As with other compensation requirements, employer
    contributions must be made fairly across the employee base, and
    HIPAA requirements for pre-existing conditions will require
    that contributions not be varied based on an employee's health
    status. HSAs have already jump started the small group
    insurance market for 2004, and small businesses desperately
    needed this market competition for their increasingly huge
    premium dollar.
        The benefits planning enrollment cycle for larger employers
    had already been completed by the times HSAs were enacted last
    December, so 2005 is the first time that these employers can
    even think about adding this option. That cycle is now just
    getting under way, and we appreciate very much the Treasury
    Department's efforts to recognize these deadlines employers
    have in getting a series of very important guidances out to the
    employee benefit planning community.
        As I have said, employers are getting ready to incorporate
    HSAs into their benefit offerings, and a recent Mercer
    Consulting survey found that 2 out of 5 employers are likely to
    offer this option next year, nearly three-quarters will at
    least offer this an option by 2006. Nineteen percent of
    employers said that they already offer such a plan. They have
    already had a deductible of that level, predominantly very
    small businesses and very large entities. Because of the
    transition rules that Treasury has put in place for 2005 and
    this year, informed and motivated employees can go ahead and
    set up these HSA savings vehicles in the absence of formal
    sponsorship by their employers.
        While some employers had already adopted high deductibles
    in recent years due to these rising costs in premiums, many
    employers in the survey reported that they intend to contribute
    at least in part to these accounts, deflating some critics'
    arguments that HSAs will simply shift more cost to employees.
    Most employers intend to adopt only the minimum $1,000
    deductible. A quarter said they would contribute $500 to the
    saving accounts, 17 percent had said they would contribute
    1,000 above and beyond what they already paid for the premiums,
    and a number are going to contribute the maximum $2,600, so
    really the employee would not even feel a deductible. The
    average contribution would be over $1,000, $1,089. Three out of
    four employers would contribute an amount lower than the
    deductible amount to make sure that there is still some kind of
    deductible consistency policy with what they are doing now,
    while another 13 percent said they would contribute fully to
    that deductible.
        We have been waiting for these guidances from Treasury, and
    the most recent guidance dealt with two important issues, how
    employees may continue to use their flexible spending accounts
    for things that are not covered by the health plan, which they
    made clear they can continue to do, along with existing health
    reimbursement arrangements so long as these do not cover the
    deductible. However, employees must budget carefully because
    any unspent money, as employees are all too familiar with, will
    prompt a quick run to the optical store to make sure you stock
    up on contact lenses for the next year. I see lots of heads
    nodding around the room. So this is something we are familiar
    with. We hope the Senate will follow the lead of the House last
    week, and allow employees to roll over at least $500 of these
    funds.
        We do have a barrier though that deals with how
    prescription drugs are treated under the deductible. The HSA
    law does not follow what is very well established practice in
    employee benefits management, which is to keep prescription
    drugs separate from overall medical spending. We are very
    concerned that after 2005, through which Treasury has provided
    transitional relief, that subjecting prescription drugs to this
    deductible will trigger medical plan spending much more
    quickly. That will drive up the health plan cost, and employers
    will be forced to raise that premium, and the deductible much
    higher.
        There are advantages in the law for older workers,
    something I know this committee is very concerned with, and
    provides an opportunity to restore retiree health benefits
    planning. In fact, more than a third of small businesses who do
    not now offer retiree benefits said they view HSAs as a way to
    help their employees with those very significant expenses for
    even after you attain Medicare age.
        Finally, I would just like to note that putting more in tax
    incentives toward individuals does not mean employers are going
    to drop coverage. There is a lot that has to happen in the
    individual market in order to make sure that employees have a
    place to go. Employers are not going to drop coverage if they
    do not think all of their employees can safely get into a plan.
        The real enemy of what is happening with these policies is
    cost. If they get too expensive and we do not bring down costs,
    we are going to have a huge problem with people having no
    coverage in this country.
        Thank you very much.
        [The prepared statement of Ms. Sullivan follows:]

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        The Chairman. Kate, thank you very much.
        Now let us turn to Dr. Ed Langston, who is a trustee of the
    American Medical Association, longstanding service to the
    organization as a practicing family physician from Lafayette,
    IN.
        Dr. Langston, welcome to the committee.

       STATEMENT OF EDWARD L. LANGSTON, M.D., TRUSTEE, AMERICAN
                   MEDICAL ASSOCIATION, LAFAYETTE, IN

        Dr. Langston. Thank you, Mr. Chairman, Senator Breaux. It
    is a pleasure to be here. I am Dr. Edward Langston, a
    practicing family physician, as noted, in Lafayette, IN. On
    behalf of the Association's members, thank you for the
    opportunity to share our views regarding the newly created
    Health Savings Accounts.
        AMA has long been a champion of this consumer-driven health
    care option because Health Savings Accounts provide, (1),
    greater patient control and choice over the use of health
    services; (2), incentives to utilize health care in a cost-
    conscious manner; (3), support for the patient-physician
    relationship; and (4), affordable protection against medical
    costs.
        The establishment of the Health Savings Accounts is just
    part of an overall trend toward consumer-directed health.
    Consumer-directed health care provides patients with greater
    control over health care decisionmaking. It also provides
    patients with a clearer understanding of health care costs.
        We anticipate that Health Savings Accounts will enhance the
    patient-physician relationship because high-deductible health
    insurance reduces outside interference with treatment decisions
    while providing patients and physicians an incentive to avoid
    wasteful spending. When patients spend money from their Health
    Savings Account, there is a strong incentive, to balance the
    costs of medical procedures and care against the potential
    favorable impact on their health. This is true both for
    patients and for physicians.
        These cost incentives reduce the need for managed care
    rules that limit availability of care. This provides
    individuals with greater flexibility in choosing the care that
    they require and desire, and we hope this will reduce managed
    care interference in treatment decisions.
        A Health Savings Account will assist the uninsured. For
    workers whose employers do not offer health insurance, a group
    that accounts for the majority of the uninsured, Health Savings
    Accounts are an attractive opportunity.
        Health Savings Accounts also have the potential to expand
    coverage by funding premium payments for the recently
    unemployed under COBRA or the individual market.
        Furthermore, due to their tax-advantaged status, Health
    Savings Accounts allow consumers to maximize their health care
    dollars, i.e., building savings for future health care needs,
    as we heard earlier.
        We know that high-deductible insurance has lower premiums
    than other insurance plans. Therefore, it makes health
    insurance affordable for some who previously were priced out of
    the market. Health Savings Accounts may be more affordable than
    conventional coverage for patients with higher expenses for two
    additional reasons. One, the out-of-pocket limit serves as a
    powerful protection against catastrophic expenses, and second,
    out-of-pocket expenses funded by a Health Savings Account are
    paid for by untaxed dollars. In fact, some patients will find a
    Health Savings Account less expensive than other health
    insurance plans regardless of their medical expenses.
        In closing, we suggest additional measures which could make
    Health Savings Accounts even more attractive. First, we urge
    Congress to explore allowing early retirees and the unemployed
    who are not receiving unemployment compensation to use their
    Health Savings Account funds to pay for health patient premiums
    without tax or penalty. We see this as a way to assist those in
    financial need to purchase the health insurance they do need.
        Second, we support tax-free rollovers for unspent Flexible
    Savings Account funds to go into the Health Savings Account,
    thus promoting more prudent health care spending by curtailing
    the ``use it or lose it'' mentality which is promoted by our
    current laws.
        Finally, we support a new option for Health Savings
    Accounts that would allow a more flexible deductible for
    families, that is, lower per-person deductibles for individual
    family members. I would be happy to elaborate on that during
    the question and answers if you so choose.
        But I want to thank you for exploring the issue of
    consumer-driven health care and in particular Health Savings
    Accounts. I especially thank the committee for holding this
    hearing and continue to focus attention on the nation's health,
    particularly the health of older and/or retired Americans.
    Thank you, Mr. Chairman.
        The Chairman. Doctor, thank you very much.
        [The prepared statement of Dr. Langston follows:]

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        The Chairman. Obviously, one of the concerns expressed by
    critics of this is the concept of adverse selection and the
    attracting of only the healthier and the wealthier. Yet, the
    actual claims-based data indicates that consumer choice options
    like HSAs actually show no evidence yet of meaningful adverse
    selection.
        What is each of your assessments of that particular
    question? Of course, we will allow you to join in on that, Mr.
    Greenstein. Mr. Goodman?
        Mr. Goodman. Well, let me just briefly describe what we did
    for our own employees. We created a $1,500 deductible and we
    put $1,000 in a Medical Savings Account for each employee and
    their families. So the person who is healthy and never has a
    single medical expense at the end of the year had $1,000 in his
    account. Since this was previously taxed, they got to take the
    money home at Christmas time. So yes, the healthy person gets
    his $1,000.
        But the person who is really sick and has lots of medical
    expenses goes through the $1,000, pays $500 out of pocket, and
    then hits the deductible and the plan pays for everything above
    that. But before we had the Medical Savings Account plan, we
    had a conventional plan with a $500 deductible and 20 percent
    copayment, and when the sick person was under that plan--it was
    a woman in this case--she was out $1,500. So the sick person
    saved $1,000 on medical expenses because the exposure was
    limited under our plan.
        There is nothing unusual about our plan. This is the way
    over the last 7 years that most Medical Savings Account plans
    were structured. They really do benefit the high-cost employee
    because they limit out-of-pocket exposure even though they
    don't buildup anything in the account.
        The Chairman. Mr. Williams.
        Mr. Williams. Yes. I would say that our experience is in
    working with very large employers who really often self-insure
    and therefore assume the insurance risks themselves, who are
    interested in having a productive and effective workforce and
    who see this as one way to get the workforce thinking about the
    cost of health care and discussing different options with their
    physicians for more cost-effective health care treatment.
        I would say our experience is that we do not see adverse
    selection. We think that consumers make choices for different
    products based on lots of considerations. Their health status
    may be one, but there are lots of others. We don't see any data
    today that would suggest an adverse selection.
        We think that there is a larger percentage of health care
    costs that is discretionary than many individuals believe. This
    is not the individual who has a cardiac event or who has a
    significant health episode. We are talking about the person who
    has a fairly minor situation and can have a choice in do they
    go to their physician and get the care they need, do they go to
    an urgent care center and get the care they need, or do they go
    to an emergency room and get the care they need. In those
    circumstances, there are very different cost structures and
    implications for the underlying increase in health care costs
    and, therefore, for the efficiency of American business.
        The Chairman. Mr. Greenstein.
        Mr. Greenstein. In fact, there really are virtually no
    claims-based data on widespread use of something like HSAs.
    There are some limited data from HRAs. But the differences are
    so significant that I don't think you can simply apply the HRA
    data.
        As I noted, because the HRAs do not allow tax-deductible
    deposits by the employee into them and do not provide a way to
    buildup retirement savings that can then be withdrawn in
    retirement for non-health care costs with tax advantages, the
    tax sheltering aspect of HRAs pale in comparison to HSAs and it
    is in significant part this very generous tax shelter and the
    incentive it provides for healthier, more affluent people to go
    into HSAs that drives the adverse selection concerns.
        Now, in 1996, Congress set up an MSA demonstration project
    and part of the purpose, a central part of the purpose was to
    determine whether there are or there are not these adverse
    selection aspects that result from these kinds of accounts.
    Unfortunately, what happened was that the use of MSAs was so
    limited under that demonstration that the GAO concluded that
    one couldn't tell.
        The only evidence--and I will readily acknowledge this is
    very limited--the only thing we have is that under a survey of
    insurers that the GAO contracted for, the insurers said that
    they expected enrollees to be healthier and wealthier and were
    targeting their promotions accordingly. But the bottom line is,
    we didn't get much out of--we didn't get anything significant.
        The Chairman. Well, we did get one thing, didn't we?
        Mr. Greenstein. Let me just quickly----
        The Chairman. Go ahead.
        Mr. Greenstein. The bottom line is, what we really should
    have done last fall, in my view, is we should have said, ``What
    are the problems with that demonstration project that led to so
    few people enrolling that we didn't get enough observations to
    determine what effect on adverse selection these accounts would
    have had, and we should have done a demonstration project that
    would have had larger enrollment and given us the answer.
    Instead, we charged ahead and went whole hog.''
        I think it is worthy of note that while we do not have
    significant claims-based data to tell us which side of this
    debate is right, that the leading studies I am aware of, the
    leading projection studies I am aware of were run by
    institutions that have no ideological ax to grind and pretty
    much come down on the side that the risks of adverse selection
    are high.
        The Chairman. I was only going to make the observation that
    is not true that in that demonstration period, the largest
    group that acquired them were the uninsured?
        Mr. Greenstein. We don't even----
        The Chairman. They were predominately the acquirers of
    Medical Savings Accounts?
        Mr. Greenstein. We don't even know that. If we look----
        The Chairman. Some insurance companies tell us that. I
    don't know whether they are accurate or not.
        Mr. Greenstein. There is IRS data on this and it is
    inconsistent. In one year, if you use those data, 28 percent of
    the enrollees were previously uninsured. In another year, 40
    percent. In another year, 73 percent. The differences were so
    substantial that those data have to be regarded as unreliable.
    We really don't know.
        The Chairman. All right. We will leave it at that and we
    will go to you, Kate, to respond to the similar question of
    adverse selection.
        Ms. Sullivan. I would just note that, I mean, already, we
    have a fifth of employers reporting that they already offer a
    plan that meets at this deductible threshold and they are not
    doing this as an HMO. It is often an HMO alternative. Perhaps
    if it is a small business, it might be the only plan they can
    find and afford.
        But those higher deductibles come with a much greater
    flexibility. You are not restricted to a particular network of
    physicians with no coverage outside, and that has a lot of
    appeal to employees who have a medical condition, perhaps a
    chronic condition. They want that flexibility without getting
    referrals, perhaps maintaining a relationship with a physician
    they have had for many years. So we know that that has a lot of
    appeal to people who are sick, as well.
        I would encourage, as we go down this road and look--here
    we are, supposing, based on one projection or another--let us
    look and see who has really been electing these plans all
    along. They tend to be high-utilizers as well as people who
    like the additional savings, like yes, I have to pay more out
    of my own pocket toward the deductible, but I don't have to pay
    as much per paycheck to be in that plan to start with.
        The Chairman. Thank you. Doctor, do you wish to comment on
    this before I turn to Senator Breaux?
        Dr. Langston. Just briefly, an observation, because I see
    patients in the office every day and my experience has been,
    frankly, that they are cost sensitive but they are also very
    health care sensitive and they make their choices based on
    their needs and the situation in which they find themselves. We
    have seen the data from the IRS and it does range from 28
    percent to a high of 70 percent, and so we would say that is a
    significant amount of the uninsured who then did purchase some
    accounts with an MSA, and with this more favorable approach, as
    you know, in public policy we have used tax incentives to
    encourage people to address issues.
        Any way from a practicing physician's perspective that we
    can engage people into our system to provide the health care
    they need and do that from a preventative perspective, we would
    certainly support. We think this is a step in the right
    direction and so we encourage that you explore this and
    consider the expansion of it, Mr. Chair.
        The Chairman. Thank you. Senator Breaux?
        Senator Breaux. I thank all the members of the panel for
    being with us. I am not sure that it is so much consumer driven
    as it is tax driven. It seems to me, and I would like to ask
    anybody to comment on this, if it was such a great idea, why do
    we have to spend $16 billion subsidizing it? Why wouldn't
    everybody just say, man, this is a great idea. I am going to
    buy a high-deductible policy. If it is that great of an idea,
    why can't it just stand on its own?
        Mr. Goodman. Well, the answer----
        Senator Breaux. Suppose you don't have a substitute for it.
    Are you telling me that it is not good enough for people to buy
    it because the government helps pay for it?
        Mr. Goodman. No. The answer is that we generously subsidize
    third-party health insurance and we penalize saving to pay
    medical bills directly. What we should have is a level playing
    field. Congress doesn't have to spend a lot of money to create
    the level playing field, it just has to treat the third-party
    insurance and self-insurance the same way and----
        Senator Breaux. Sixteen billion dollars is a lot of money.
    What do you mean, we don't have to spend a lot? We are spending
    $16 billion on this.
        Mr. Goodman. There are other things you could have done.
    You could, for example, cap the total amount of exclusion that
    employees get and not spend the $16 billion. The important
    thing is that when people choose between how much to put in
    savings and how much to give to an insurer, they should make
    that choice on a level playing field.
        Senator Breaux. OK. Well, I think it is a level playing
    field when the employers already can deduct 100 percent of the
    premiums they pay for their employees and employees don't count
    it as income. That is a huge deduction already.
        Mr. Goodman. That is right.
        Senator Breaux. Why do we have to increase it by $16
    billion to encourage people to buy a policy that I think is
    going to result in some severe adverse risk selection, not
    according to John Breaux but according to the American Academy
    of Actuaries. These are the people with the green eyeshades
    that do this for a living. They are not Democrats. They are not
    Republicans. They are actuaries, and actuaries tell us that
    this is going to cause adverse risk selection because it is
    going to be a lot more attractive to a young healthy person
    than it is to an older person who is poor and sick.
        Mr. Williams, what is the profile of the people in your
    company that have bought $2,000 deductible policies? Do you
    have that?
        Mr. Williams. Yes. I would say, Senator, that when we look
    at the profile of individuals who have enrolled in our Health
    Reimbursement Accounts, which are modeled very similar to the
    Health Savings in terms of a high deductible for preventive
    care and then an out-of-pocket maximum where the underlying
    health plan kicks in, when we look at each case, the average
    age is approximately the same for those individuals who select
    this plan in a choice-based setting to those individuals who
    don't select the plan.
        Senator Breaux. But what is the age and health?
        Mr. Williams. It depends on the--if we are talking about a
    company with an average age of, say, 35 in the workforce, the
    age might be 35 in the Health Reimbursement Account and
    approximately 35 for the profile those companies----
        Senator Breaux. Most of these are, as you have said, are
    Aetna policies sold to large employers?
        Mr. Williams. These would be typically Aetna policies sold
    to large national account clients.
        Senator Breaux. People who have pretty good jobs.
        Mr. Williams. People who have jobs where the average income
    distribution depends on the nature of the business. It may be
    service jobs, it may be manufacturing. They are employed in all
    job titles and all job families.
        Senator Breaux. Mr. Greenstein.
        Mr. Greenstein. There was a Health Affairs article a couple
    of years ago on survey results from the first employer that
    used this Aetna product and it did find that differences in
    earnings, higher earnings were a major predictor of more
    enrollment. Now, earnings tend to be higher for people who are
    older, although people who are older also tend to be in less
    good health. It could be that the earnings effect swamps the
    age effect. But there definitely was an earnings effect, at
    least in that study.
        The other point, though, I would make is Mr. Goodman said,
    ``Well, you need to have a tax treatment to equalize the
    treatment of this approach with the treatment of other
    employer-based approaches.'' I think that argument may well
    hold when applied to the Health Reimbursement Accounts that
    Aetna has established. But under those accounts, we didn't go
    one step further and provide these big tax deductions for
    employee contributions and then allow the whole thing to be
    turned into a retirement tax shelter, getting around the IRA
    income limit, where you can withdraw the money for non-health
    purposes in retirement.
        So if you want to make the argument that some equalization
    was needed with the treatment of more traditional kind of
    insurance, that argument in no way means you have to go all the
    way to HSAs. I think it stops at HRAs, not HSAs, and there is a
    big difference.
        Senator Breaux. I mean, I would like to have free health
    insurance for everybody, but obviously that is something the
    government can't afford and taxpayers can't afford. I am
    concerned that when you use the tax code in a way that
    encourages certain type of behavior that is not equal across
    the board, that that is not a fair use of the tax code, because
    I think this encourages certain types of activity among
    wealthier and healthier individuals and leaves those who cannot
    afford to pay that $1,500 or $2,000 deductible up front, and
    that is my concern.
        Mr. Greenstein. I would agree, and it is the additional
    features of HSAs that both make the adverse selection risk
    greater and that added the $16 billion in costs that you
    referred to, which I agree was $16 billion in costs we did not
    need to incur.
        Senator Breaux. Ms. Sullivan, I would like to ask you this
    question about the employers because somebody has made the
    point that, well, let us read it in the study that was before
    the committee by Mr. Gruber who said, and I would ask you to
    comment on it because I am just not sure where he was headed.
    He said that the proposed tax deduction would induce some
    currently uninsured individuals to purchase insurance,
    obviously, but would also encourage some employers to drop
    health insurance or to reduce the amount that they contribute
    toward their employees' health insurance costs. Why? He says,
    because since employers would know that their workers could get
    a tax deduction if they purchase it on their own.
        Employers across the board are limiting health insurance.
    They are dropping it for retirees or they are greatly
    restricting it for retirees and many companies are having an
    incredibly difficult time providing it to the same degree they
    used to provide it to their employees.
        If I am an employer and all of a sudden I see that, look, I
    can get out of this business and employees can get a tax
    deduction for buying it on their own, why in the heck wouldn't
    I answer to my board and do exactly that?
        Ms. Sullivan. Because it may not be available or may not be
    an option for every single employee to get it on their own. You
    would have to know the individual market and put out some very
    thoughtful proposals----
        Senator Breaux. These people aren't being thrown into the
    individual market. They can still buy it in group purchasing
    agreements.
        Ms. Sullivan. If employers are no longer sponsoring, if
    they are getting out and saying, OK, you have to go and buy
    this on your own, I mean, you are right. I guess an employer
    could say, ``I will arrange it but make zero contribution.'' I
    don't think that is something they would continue to do,
    particularly if it is a small employer. They don't have time to
    go and keep up with this arrangement.
        Senator Breaux. Are people--the point she is making--are
    they going to be thrown into an individual market, Mr.
    Williams?
        Mr. Williams. Well, I would say I am not sure----
        Senator Breaux. That is a heck of a good argument against
    HSAs if they are going to say, you are going to get a Health
    Savings Account but you are going to be at the mercy of the
    market in buying in the individual market, not in group
    purchasing arrangements?
        Mr. Williams. I think my experience, Senator, is that most
    employers are looking for ways to provide health insurance to
    maintain a healthy workforce. Whether they are a small employer
    or in the mid-size, they are looking for opportunities to try
    to make it work and----
        Senator Breaux. I understand that. Individual market or
    group purchasing? Your point was that they may be in the
    individual marketplace and be at the mercy of the marketplace.
    Is that right on HSAs?
        Ms. Sullivan. No. Actually, you were asking about the
    Gruber study, which is about the individual tax deduction
    proposal----
        Senator Breaux. The Gruber study said employers may drop it
    because employees can get a tax deduction if they buy it.
        Ms. Sullivan. If employers drop it, that means--if this is
    the proposal that Treasury made, to allow individuals who do
    buy their own insurance, who buy a high-deductible health plan
    to be able to deduct those premiums if they do not have
    employer coverage, the Gruber study says or makes an estimate
    as to how many employers would then drop their group plan. You
    would only get that tax deduction if you had an individual
    plan.
        We don't believe HSAs at all are going to throw people into
    the individual insurance market. In fact, I think HSAs will
    help maintain employer coverage, which is for some employers
    barely hanging on.
        I would disagree with the Gruber analysis about what the
    effect would be if you put more tax deductions in the tax code,
    tax incentives for individuals. Employers are not going to drop
    their coverage unless they know their employees have a place to
    go, and they know not all employees pay taxes. Some of them
    don't have enough income. That is where you start looking at
    tax credits for that income population, to help them also be
    able to afford that coverage.
        Senator Breaux. Thank you. My time has expired. I thank the
    panel.
        The Chairman. Thank you, John.
        I want to state an important fact for the record, because
    my colleague here has suggested that these kinds of tax
    deductions are extraordinary and somewhat unique.
        Senator Breaux. Unprecedented.
        The Chairman. Well, let me then suggest this. The Joint Tax
    Committee on Taxation estimates that in fiscal year 2003, the
    Federal revenue loss attributed to the exclusion for employer
    contributions to health insurance, which we have been doing
    since World War II, cost the U.S. Treasury $75 billion. So what
    we have been doing, Mr. Goodman speaks to it, we have been
    doing it for a long time. We have just been doing it one way
    instead of this way.
        Now we are doing it for everybody, the small employer, the
    large employer. I find that not unique. I find that equal. That
    is a different perspective than that reflected by John. But let
    us face the fact. There are $75 billion worth of taxes out
    there that aren't being collected right now. Why? Because we
    believe it is good for the employer to provide for employee
    health insurance, and we have done that as a norm since World
    War II.
        So different perspectives, different points of view. But
    Kate, I think the thing that concerns me, and John spoke to it
    a bit, is the commitment of the employer. My frustration in
    watching escalating health care costs over the years, and
    seeing employers agonize because of the affordability of it and
    the cutting back and the reshaping of the plan and ejecting the
    spouse out or ejecting the spouse and the family out of it. Or
    an employee, for example, suggesting that they would really
    like to move into a new opportunity and a new job but they
    can't afford to because the health care there is less than the
    one they have, and so they are locked into a health care
    environment or locked into a job because of the health care
    environment as a benefit.
        I think all of us recognize the phenomenal value of health
    care through the employer to the employee as a tremendous
    benefit and an incentive. You and others on the panel argue
    strongly that HSAs offer significant help to the employers
    struggling to continue providing insurance to their employees
    as well as to the currently uninsured. What exactly do you
    believe will be the effect of the new HSA on the employer
    health market and on the number of the uninsured as we look at
    this?
        Ms. Sullivan. In the marketplace, and we have already seen
    this this year for small businesses, is you have new carriers
    coming into States where they have not been because they are
    carriers that specialize in these types of plans. There has
    been a lot of consolidation and a lot of regulation by the
    States. So they pretty much have been down to one or two
    dominant insurance carriers in any given market.
        Now there is a new guy coming in and saying, we specialize
    in this product. Take a look at it. Then, guess what happens.
    Their long-time carrier has a more traditional PPO or HMO and
    says--such as there has been one such company--hey, we can make
    this available to you also. Then all of a sudden you have got
    some competition for dollars. We have not seen that in years.
        Those health plans also come with lower premium dollars, at
    lower cost, and some employers are finding that the savings is
    so much that they can then help fund that deductible,
    encouraging those younger employers who--employees who may not
    have the money to get into it and providing an incentive for
    older employees who have health conditions to also make this
    option because it offers more flexibility.
        I think that competition is very welcome and these larger
    employers, as they begin planning for 2005 and 2006, are
    recognizing also, let us also look at some of the data on what
    happens with consumer behavior in terms of helping make this
    more affordable long-run.
        The Chairman. Doctor, I think our frustration over time has
    been that with the third-party payment presence, that somehow
    the patient is kind of taken out of the picture in part. I am
    interested in your reaction to how doctors will look at this
    and the treatment of choices in relation to the patient, if
    that patient is there with an HSA, for example, and they are
    actually spending their dollars.
        Dr. Langston. I think one of the things that we are going
    to see is for instance, when patients are engaged in some of
    the traditional plans we have with regard to either deductibles
    or costs of their medications. They are much more knowledgeable
    and I think they ask the question, for instance, is there an
    alternative that will do as adequate a job at a certain price
    because I have a contract that would support that.
        So as a clinician on a daily basis, I certainly try to
    accommodate the patient in making those decisions, if there are
    alternatives that make sense based on their contract. I am a
    pharmacist as well as a physician and I use a lot of generic
    medication in my practice. I obviously use a lot of the pioneer
    drugs, but that is just one area where the patient, when
    informed, participates in the decisionmaking.
        The other issue is that I see patients in my office on a
    daily basis that decisions are made on are there some things
    that we can address because I am a small businessman and I have
    to have a very high deductible to make this work. I bought
    catastrophic insurance. How can I address what my needs are?
        My experience over 25 years has been that every time my
    patient, and some would call them consumers, but my patient has
    been more informed about therapies and about cost, they are
    more engaged in their care and, I think, help make those
    decisions, it puts more stress on me as a physician. But quite
    frankly, it has made me a better doctor over the years. I now
    carry a PDA in one pocket and formulas in the other pocket so
    that if a patient has a specific request based on their
    contract, I can say, all right, here is the way I can make this
    work for you and for the medication.
        I teach in the School of Pharmacy at Purdue and have pharm-
    D residents who rotate with me on a monthly basis, six to 8
    months a year, and so the young people have frankly brought me
    into that environment and I use it on a daily basis. If I leave
    my PDA at home, for instance, I am without a very efficient
    opportunity to see what I can do, because I can put costs in
    the PDA, I can put other choices in the PDA, but I also have
    the paper models in my other pocket.
        So the patients are more informed. They participate.
    Anything we can do to make that happen, frankly, I think the
    physicians of America would be supportive. It creates change,
    but frankly, we have changed in the past. We will change in the
    future.
        The Chairman. My last question, pertains long-term care. We
    know that in this proposal, the new HSA program provides that
    funds in the HSA can be used not just for regular medical
    expenses, but also for long-term care. That is something that
    we believe--I certainly believe, and I don't think my colleague
    disagrees with me--the more older Americans we can get onto
    that system, the better they are going to be, and the less
    impact they will have on their government as they age.
        To what extent do you believe this feature may help
    families ease the burden of the long-term care costs? Reaction
    by anyone here? Doctor?
        Dr. Langston. If I may speak to that briefly, engaging the
    patient in whatever model is chosen, and this is the first step
    in this direction, to be involved in health care decisions is
    terribly important. We have a mentality, I think, in the United
    States of if I can take a pill or do something like that, I can
    certainly correct whatever my problem is.
        Well, one of the interesting things when you start making
    decisions and spending some of your health care dollars, we
    might, in fact, take a hard look at some of our lifestyle
    issues. Let us take cardiovascular disease, the biggest killer
    in the United States. The five major variables there are
    weight, diabetes, hypertension, smoking, and cholesterol, all
    modifiable kinds of issues that we don't have to spend extra
    money on. If we can engage our patients into making that
    choice, and many of us believe that finding a model that has
    them involved in spending their own money will do that, in the
    long run, we are going to be better off. We think this is a
    step in that direction and are supportive of that. Those are
    big issues for us.
        Mr. Williams. Senator, in response to long-term care, I
    think it is a very important issue. Most Americans do not have
    sufficient long-term care coverage.
        Senator Breaux. Or any.
        Mr. Williams. Most Americans are uninformed about the
    nature of how their long-term needs will be met. Many are
    confused about the nature of government programs for this. I
    think it is a significant accomplishment to have long-term
    premiums included in this and we would really advocate direct
    inclusion of qualified long-term care as a permitted benefit in
    cafeteria plans.
        I think this is a huge issue and I believe that this notion
    of letting retirees catch up their contributions into the
    Health Savings Account funds would also be an important
    addition. There are some acceleration features, but if you take
    someone today who is retiring by 2009, 2010, and you think
    about the $80,000 of care that may be unfunded as a result of
    their inability to have thought about and provide for this
    earlier, there is a huge opportunity to think about giving
    retirees the opportunity to catch up.
        We also see many people who are over 65 who are actively at
    work and who no longer would be able to contribute to the
    Health Savings Account. What we are seeing in our work is that
    about 50 percent of people in these type plans are rolling over
    funds from year to year and this is the really big idea.
    Consumers don't really differentiate as much between HRAs and
    HSAs as one might do from tax policy, particularly those people
    who see that as their money and think about managing it in a
    prudent way consistent with their health care needs, but really
    thinking about their long-term needs, as well.
        The Chairman. Yes, Mr. Greenstein?
        Mr. Greenstein. Long-term care is clearly a very important
    issue and an unmet need. But if we try to do it through HSAs,
    the people who are most likely over the course of time to
    buildup large balances in their HSAs as they head toward their
    retirement years are going to be higher-income people who can
    afford to put a lot of money in the HSAs and to let it buildup
    and to not dip into it that much for other kinds of health care
    costs. But they are not the people who are most in need of help
    in affording long-term care or long-term care insurance.
        I wouldn't rule out a tax-based approach to helping people
    afford long-term care insurance, although we would also need to
    deal with the fact that most employers don't offer long-term
    care insurance and policies are basically available in the
    unregulated individual market and there is a lot of cherry-
    picking and variation based on people's health status.
        But if we wanted to do a tax-based approach, it would be
    much better to look at a refundable tax credit tied to long-
    term care than to try to do it through these kinds of accounts.
        The Chairman. Does anyone else wish to comment on that?
    John, any other questions?
        Senator Breaux. Just a couple. I want to make clear that I
    am a big believer in insurance, particularly in the health care
    area. I would like to have an individual mandate that everybody
    has to purchase health insurance and have the government help
    pay for the premium for those who can't afford it. You bring in
    a lot of healthier people into the insurance pool if you
    mandate it across the board. We could establish State
    purchasing pools so that nobody has to go into the individual
    market to buy their insurance.
        Everybody in America would have health insurance, not
    because you fit into some box like we currently have, that you
    get health care if you are old under Medicare, if you are poor
    under Medicaid, if you are a veteran under the VA benefit, and
    still have 43 million Americans with no insurance at all. So I
    am a big believer in everybody having health insurance.
        I am also a big believer in copays. I mean, I don't care if
    it is a dollar. They ought to have some connection with the
    cost of health care, whether it is buying a prescription at a
    drug store. There should be some connection with the purchase
    of health care and the fact that it costs something.
        My concern with HSAs and the high deductible is that for
    some people that are low income, $1,500 is a significant
    deductible that they are going to have a very difficult time
    coming up with. The argument that, well, there is a connection
    to the cost, there is certainly no connection after you meet
    the deductible because everything after that, if it is $100,000
    or $200,000 a year, is completely covered by health insurance
    as an incentive to go ahead and use more.
        So anyway, my concern is using the tax code in an
    unprecedented manner. Tax-free going in, tax-free coming out--
    we have never done that. To create a health care plan which I
    think is biased toward healthier and younger people is not, I
    think, a fair use of the tax code. There may be some ways to
    get this done. I don't think this is it. I also recognize that
    it is the law and we are going to watch it very carefully.
        I thank the panel for their comments.
        The Chairman. John, thank you, and we do thank the
    panelists for being with us today. It is something we will
    watch very closely. I don't dispute what my colleague has said.
    It is an unprecedented move in the market and it will be a
    significant move if it goes as many of us believe it will,
    toward changing the dynamics of health care in our country. If
    not, John, you can come back and tell me, ``I told you so.''
    How is that? [Laughter.]
        Kate, gentlemen, thank you very much for being with us
    today and adding to the record as this very important issue
    develops.
        The committee will stand adjourned.
        [Whereupon, at 4:11 p.m., the committee was adjourned.]

                                A P P E N D I X

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