[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:]

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    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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