[Senate Hearing 108-718]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 108-718

     MEDICARE PRESCRIPTION DRUG CARDS AND ASSOCIATION HEALTH PLANS

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                            SPECIAL HEARING

                     APRIL 2, 2004--NORRISTOWN, PA

                               __________

         Printed for the use of the Committee on Appropriations


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

                               __________



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                      COMMITTEE ON APPROPRIATIONS

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

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

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

                         Administrative Support
                             Carole Geagley




                            C O N T E N T S

                              ----------                              
                                                                   Page

Opening statement of Senator Arlen Specter.......................     1
Statement of Hon. Stewart Greenleaf, State Senator from 
  Pennsylvania...................................................     1
Statement of Hon. John Fichter, State Representative from 
  Pennsylvania...................................................     2
Statement of Hon. Michael McMullan, Deputy Director, Center for 
  Beneficiary Choices, Centers for Medicare and Medicaid 
  Services, Department of Health and Human Services..............     3
    Prepared statement...........................................     5
Statement of Donna Uhler, Coordinator, Apprise Program, 
  Pennsylvania Department of Aging...............................    10
Statement of Bradford P. Campbell, Deputy Assistant Secretary, 
  Employee Benefits Security Administration, Department of Labor.    14
    Prepared statement...........................................    16
Statement of Alexis L. Barbieri, Executive Deputy Attorney 
  General, Commonwealth of Pennsylvania..........................    19
    Prepared statement...........................................    21
Statement of Paul Zieger, on behalf of the National Federation of 
  Independent Business...........................................    22
    Prepared statement...........................................    24
Statement of Ray Carroll, on behalf of the Pennsylvania 
  Restaurant Association.........................................    25
    Prepared statement...........................................    27
Statement of Mary Beth Senkewicz, Senior Counsel for Health 
  Policy, National Association of Insurance Commissioners........    28
    Prepared statement...........................................    30

 
     MEDICARE PRESCRIPTION DRUG CARDS AND ASSOCIATION HEALTH PLANS

                              ----------                              


                         FRIDAY, APRIL 2, 2004

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Norristown, PA.
    The subcommittee met at 12:15 p.m., in Courtroom ``C'' of 
the Montgomery County Courthouse, Norristown, PA, Hon. Arlen 
Specter (chairman) presiding.
    Present: Senator Specter.

               OPENING STATEMENT OF SENATOR ARLEN SPECTER

    Senator Specter. Good afternoon, ladies and gentlemen. The 
field hearing of the Appropriations Subcommittee on Labor, 
Health and Human Services, and Education will now proceed.
    I am joined today by State Senator Stewart Greenleaf and 
State Representative John Fichter. This hearing was suggested 
by Senator Greenleaf, who contacted me a few weeks ago and said 
that there was a lot of interest in the Medicare prescription-
drug bill, a lot of information needed to be conveyed to the 
people in Pennsylvania in his State Senate District. And I 
compliment Senator Greenleaf for taking the initiative to 
undertake the hearing.
    When we decided to schedule the hearing, it was decided to 
expand the hearing to include association health plans, as 
well, because small-businessmen and -women are facing 
tremendous problems on having adequate healthcare. It's very, 
very costly for small-businessmen and small-businesswomen to 
insure employees, and there has been a legislative proposal 
which would authorize the formation of association health 
plans, which would enable small-business people or individual 
employers to band together and get lower rates, and we thought 
that would be a good adjunct to this hearing.
    It's not often that you have a hearing on the multi levels, 
but there's no reason why we couldn't do that. And so here we 
are.
    Let me yield, at this point, to Senator Greenleaf.
STATEMENT OF HON. STEWART GREENLEAF, STATE SENATOR FROM 
            PENNSYLVANIA
    Senator Greenleaf. Thank you very much, Senator Specter, 
for being here. And you've always been concerned--I know you 
almost live in Montgomery County, and you're from our area.
    Senator Specter. Right across City Line Avenue is 
Montgomery County. A lot of advantages. You don't get to pay 
the city wage taxes.
    Senator Greenleaf. But, anyway, we're happy you're here in 
our courthouse and in the center of our town. I know you're 
concerned about both healthcare for small-business people, and 
also for prescription drugs, drugs for the elderly. And we know 
you're very busy and have a lot of things, and the ranking 
members of many, many committees, and we appreciate you taking 
the time to be here, and being here in this county and talk 
about an issue that not only affects us, but the rest of the 
State, as well.
    We, in Pennsylvania, passed a program recently to increase 
the benefits for elderly citizens in Pennsylvania, increasing 
the PACENET by, I think, over $31,000 a year for married 
couples. And with Representative Fichter, in the House, and 
myself, in the Senate, both parties and both bodies worked very 
hard to have that passed. We have one of the best prescription 
plans in the Nation. But now the Congress, with Senator 
Specter's leadership, is able to have a drug-discount program 
passed, and it's now pending, and it will start in the very 
near future, for about a year and a half, and then go into a 
permanent program. So we're hopeful we can combine the two, 
combine the Pennsylvania program, which is funded by our 
lottery funds, and then the Federal program. And I think we 
will be very, very encouraged by that, the savings that 
Pennsylvania will have in regard to the Federal program. We can 
then take those monies and put them into additional benefits 
and raise the income levels even higher.
    In the suburbs, it's hard for people to qualify on their 
income levels for the PACENET program. The program that the 
Senator and others in Washington have been instrumental in 
getting passed will add millions of dollars to our program, so 
we can then increase the income limits for our constituents so 
even more can qualify under the PACENET program. About 125,000 
additional people will qualify for the new program. And we 
hope, with additional monies, both in the indirect aid to 
Pennsylvania and the additional people who qualify for the 
Federal program, we should have the best program in the Nation.
    So thank you for inviting me to be here today. Thank you 
very much.
    Senator Specter. Thank you very much, Senator Greenleaf.
    I would turn now to distinguished State Representative, Mr. 
John Fichter.
STATEMENT OF HON. JOHN FICHTER, STATE REPRESENTATIVE 
            FROM PENNSYLVANIA
    Rep. Fichter. Thank you, Senator Specter, Senator 
Greenleaf. Obviously being junior to both of these gentlemen in 
seniority, and specifically being a member of the House of 
Representatives, and not the Senate--anyway, following Senator 
Greenleaf--he just about said it all, but I do want to thank 
Senator Specter for coming to Norristown to highlight Medicare.
    We've come a long way from July 1, 1965, when the President 
signed the Medicare law. I remember that Part A was free, and 
Part B was $3 a month. So now Part A, I think, is still free, 
but Part B is $44 a month. But there's been a lot of 
improvements to the program over the years, and basically for 
the good of our senior citizens. And Arlen Specter has always 
had a soft spot in his heart for the senior citizens. And, 
Senator, just keep up the good work down there.
    Thank you very much.
    Senator Specter. Thank you very much, Representative 
Fichter.
    One note before we begin. I want to thank the Montgomery 
County Court of Common Pleas and the Montgomery County 
commissioners for permitting us to have the hearing in this 
elegant courtroom. I am tempted to move across the street into 
the county and run for judge with surroundings like these.
    I note a little definition here of ``bodily injury'' and 
``deadly weapon,'' the ingredients of a crime which apparently 
had to be charged to the jury. It reminds me of the good old 
days, when I used to be an assistant district attorney and I 
handled these matters.
STATEMENT OF HON. MICHAEL McMULLAN, DEPUTY DIRECTOR, 
            CENTER FOR BENEFICIARY CHOICES, CENTERS FOR 
            MEDICARE AND MEDICAID SERVICES, DEPARTMENT 
            OF HEALTH AND HUMAN SERVICES
    Senator Specter. Let us turn now to our first witness. With 
the first facet of our hearing today being on the Medicare 
prescription drug plans, our first witness is Ms. McMullan, Ms. 
Michael McMullan, Deputy Director for Beneficiary Education at 
the Centers for Medicare and Medicaid Services. She led the 
formation of the Center for Beneficiary Services, and helped 
design the national Medicare program, Medicare & You. She 
received her B.A. in economics from Washington College, and a 
master's in business administration from Loyola.
    Thank you, Ms. McMullan, for coming from Washington, and we 
look forward to your testimony. We will introduce Ms. Uhler in 
just a moment.
    We have set the time at 4 minutes for opening statements 
from members of the panel, and 4 minutes for the witnesses. 
That is set to allow the maximum amount of time for questions 
and answers.
    We had a memorial service for Ambassador Walter Annenberg 
at the Academy of Music. And among the guest speakers were 
former President Gerald Ford, Secretary of State Colin Powell, 
and Governor Rendell, and I was one of the guest speakers, and 
we were allowed 3 minutes. So I want you to know what a 
generous allocation 4 minutes is.
    Ms. McMullan, the floor is yours.
    Ms. McMullan. Senator Specter, thank you for inviting me 
here today to discuss the Medicare Drug Discount Program. This 
is a voluntary program that will provide immediate relief.
    Senator Specter. Would you pull the microphone right under 
you. Senator Thurmond, when he chaired, said, ``Bring the 
machine closer.''
    Ms. McMullan. Many seniors will reduce the cost of 
prescription drugs today. Today, people with Medicare who do 
not have coverage for prescription drugs pay, on average, 20 
percent more for their prescription drugs. The Medicare-
approved drug discount card is meant for this population; to 
help them reduce their out-of-pocket costs for outpatient 
prescription drugs. Very importantly, those people with the 
greatest need, the low-income portion of the population, will 
also qualify for a $600 credit. Enrollment in these programs 
will begin as early as May 2004, and discounts will begin as 
early as June 2004. These discount cards are administered by 
private-sector organizations, and there will be at least two 
choices in every State. There are more than that number of 
choices in Pennsylvania.
    Enrollment fees cannot exceed $30, and that's an annual 
enrollment fee. The transitional assistance that we've talked 
about, the $600 credit, is available in both 2004 and 2005 to 
people who are at 135 percent of poverty. For an individual, 
that is $12,569 and for a couple, that is $16,862. And if they 
qualify for the transitional assistance, the enrollment fee is 
waived.
    They can enroll at any time. But once they are enrolled, 
they are locked into the drug card that they select. There is 
an open-enrollment period, November 15 through December 31. And 
the reason for the lock-in is that the way the drug discount 
card works is to collect as many covered lives as possible to 
negotiate the best price possible from the pharmaceutical 
manufacturer, as well as the pharmacy. This way the individuals 
with the card get the best price at the pharmacy.
    To help people with Medicare understand what their options 
are, we have created on our web site, medicare.gov, an 
interactive database that will include information about all of 
the drug cards that are available, that an individual will 
enter his or her eligibility information, information about 
themselves, their income, and other information and their zip 
code. If they have a favorite pharmacy, they can enter the name 
of the pharmacy. If they just want to know how many pharmacies 
are within 5 miles of their location, they can also enter that, 
and we will narrow down their options and present that 
information to them.
    People who aren't able to use the Internet themselves can 
call 1-800-MEDICARE, and a customer-service representative will 
walk them through this process, and we will mail them the 
information that has been tailored to them.
    Additionally, at the end of April, we will mail to every 
Medicare beneficiary household a short, two-page description of 
the drug cards, so everyone will get this in their hands. And 
the Social Security Administration will also be mailing, to 
people who will potentially qualify for the $600 credit, a 
letter explaining the importance of taking advantage of the 
$600 credit.
    I also want to note that we have a guide to choosing a 
Medicare-approved drug-discount card that will be available 
either by calling 1-800-MEDICARE or by going on the web site 
and downloading it. This goes into extensive information about 
the opportunity for the drug-discount card, how to enroll, the 
types of questions people need to be prepared to answer. And 
we'll be sharing this information, as well as additional aids 
like tip sheets, and a CD-ROM explaining the web site, with 
community-based organizations, including the State Health-
Insurance Assistance Programs and other community-based 
organizations.
    Our regional offices will be working with community-based 
organizations to reach out to individuals in the greatest need, 
those who have access barriers to information such as language, 
location, literacy, and culture so that that population will 
also get an additional amount of information and attention to 
make sure that they know the opportunity exists both with the 
drug-discount card for those that do not already have 
outpatient prescription drug coverage and the $600 credit.

                           PREPARED STATEMENT

    Just one last note. The card is not available to people who 
have Medicaid coverage for outpatient prescription drugs, but 
it is available to all other people with Medicare that are 
enrolled in either Part A or B.
    [The statement follows:]
                 Prepared Statement of Michael McMullan
    Chairman Specter, Senator Harkin, distinguished Committee members, 
thank you for inviting me here to Norristown, Pennsylvania, to discuss 
the Medicare Prescription Drug Discount Card and the Transitional 
Assistance Program, which were enacted into law on December 8, 2003, as 
part of the Medicare Prescription Drug, Improvement, and Modernization 
Act of 2003 (MMA). In May 2004, as an important first step towards 
comprehensive Medicare prescription drug coverage, Medicare 
beneficiaries will be able to enroll in a Medicare-approved drug card 
program that will offer discounts on their prescription drugs. This 
voluntary drug card program will give immediate relief to seniors and 
persons with disabilities covered under Medicare to reduce their costs 
for prescription drugs. In addition to the expected savings from the 
drug discount card, certain low-income beneficiaries will qualify for 
additional assistance in the form of a $600 annual credit. CMS is very 
proud to have a significant role in this important first step towards a 
comprehensive Medicare prescription drug benefit, which is slated to 
begin on January 1, 2006. CMS is working diligently to meet the 
aggressive deadline to implement the drug card and transitional 
assistance program. To this end, the Secretary last week announced the 
approval of 28 general and special cards, and 43 exclusive cards. We 
are confident drug card sponsors will begin marketing and enrollment 
efforts on May 3, 2004, with beneficiaries beginning to see discounts 
beginning June 1, as scheduled. We are also launching aggressive 
education campaigns to help beneficiaries choose the best card to fit 
their needs, and are planning strict monitoring efforts to ensure that 
card sponsors are not changing prices for unwarranted reasons.

                               BACKGROUND
    Currently, Medicare beneficiaries who lack outpatient drug coverage 
pay among the highest prices for prescription drugs, as much as 20 
percent higher than people with drug coverage according to a study of 
drug pricing prepared by the Department of Health and Human Services' 
Office of the Assistant Secretary for Planning and Evaluation. Under 
the Medicare Prescription Drug Discount Card Program, we expect 
beneficiaries to save an estimated 10 to 15 percent off the retail 
price on their overall prescription drug costs, and up to 25 percent on 
some drugs. The drug card will pass savings on to beneficiaries in the 
form of price concessions. While not a drug benefit, the voluntary drug 
card program is an important first step in providing Medicare 
beneficiaries with the tools they need to better afford the cost of 
prescription drugs.

                          SPONSOR SOLICITATION
    CMS has already begun implementation of the drug card program. We 
received 106 applications by the January 30, 2004, deadline. Five 
applications were withdrawn or merged by the applicants, leaving a 
total of 101. To be considered for the program, organizations were 
required to complete a detailed application concerning their 
qualifications and the design of their proposed drug discount card 
program. Applicants that did not receive our approval have a right to 
request a reconsideration within 15 days from the notice of initial 
determination. Any reconsideration determination will be final and 
binding on the parties and not subject to judicial review.
    CMS solicited applications by potential drug discount card 
sponsoring organizations on December 15, 2003, and applicants were due 
back on January 30. We evaluated each application against the 
requirements to operate a drug card program, and the sufficiently 
complete and correct applications were approved. A number of the 
applications were disapproved if, for example, they did not fulfill 
entirely a key requirement, such as providing a contract or letter of 
agreement (signed by both parties) when the sponsor indicated a plan to 
contract out a key function such as administering the $600 credit. 
Because of the short timeframe to implementation, we are providing such 
applicants with a two-week window to correct such deficiencies, and we 
will review this information on a rolling basis to determine if these 
applications can be approved.
    We have approved 28 general card applications (of the 55 general 
applications considered). As approved sponsors can offer more than one 
card program, this results in 28 national approved programs and 19 
regional approved programs. Twenty-seven potential sponsors were 
rejected based on failing to completely satisfy fundamental 
requirements of the solicitations, including liabilities exceeding 
assets and the failure to demonstrate the capacity to manage 
transitional assistance. CMS also approved 43 (of 44) exclusive card 
applications, associated with 84 Medicare managed care organizations, 
to provide the drug card as an integrated part of the Medicare 
Advantage benefit package available to beneficiaries enrolled in those 
plans. The recommended approvals allow for a manageable number of cards 
from which people with Medicare will select, and reflects the high 
standards attributed to the use of the Medicare name. The 28 general 
card applicants represent card programs that would be administered by 
insurers, pharmacy chains, and pharmacy benefit managers. We expect 
that beneficiaries can begin to enroll in these card plans in May and 
begin using their drug cards in June 2004.
    We also awarded a ``special approval'' to: three applicants to 
provide access to the $600 credit through long-term care pharmacies; 
two applicants to provide discounts to residents of the territories; 
and one applicant to service Federally recognized Indian tribe and 
tribal organization pharmacies. The MMA requires CMS to have one 
additional contractor for the tribal pharmacies. We have re-issued a 
solicitation to receive additional applications to meet this 
requirement, and several organizations have responded with a notice of 
intent to submit a proposal.
    All applications of contractors that currently administer State 
pharmacy assistance programs will receive a Medicare approval, 
covering: IA, IL, KS, MA, MD, MI, NH, NY, OH, OR, PA, RI, SC, VT, and 
WV. States have the ability to exclusively contract with a Medicare 
approved card program. If a State's current contractor did not apply 
for an approval, the State may work with another (approved) card 
sponsor.
    To ensure that beneficiaries have convenient access to their 
neighborhood pharmacies, card sponsors will not be permitted to limit 
their services to mail-order programs. Instead, all approved cards must 
include an extensive national or regional network of retail pharmacies, 
which must meet minimum requirements. For example, in urban areas, at 
least 90 percent of Medicare beneficiaries must live within two miles 
of a participating pharmacy. In suburban areas, 90 percent of Medicare 
beneficiaries must live within five miles, and in rural areas, 70 
percent of beneficiaries must live within 15 miles of a participating 
pharmacy.
    Drug card sponsors will be required to provide information to 
beneficiaries on the program's enrollment fee, which cannot exceed $30 
per year, and to publish discounted prices available through their 
cards. In addition, Medicare will ensure that beneficiaries have at 
least two choices of approved general cards in each State, with the 
State being the smallest service area permitted under this program. If 
a card sponsor's service area includes additional States, the entire 
additional State must be included. Medicare will also provide reliable, 
easy-to-compare information that will show beneficiaries which programs 
are in their area, and allow beneficiaries to choose the discount card 
program that best meets their needs. Medicare will also inform 
enrollees that prescription drug card sponsors must protect personal 
and medical information consistent with the privacy requirements of the 
Health Insurance Portability and Accountability Act.

                        BENEFICIARY ELIGIBILITY
    To qualify for the drug discount card, Medicare beneficiaries must 
be entitled to or enrolled under Part A and/or enrolled under Part B, 
but may not be receiving outpatient drug benefits through Medicaid, 
including 1,115 waivers. In addition to receiving discounts through the 
drug card, beneficiaries with incomes that do not exceed 135 percent of 
the federal poverty level ($12,569 for individuals, $16,862 for couples 
for 2004) will get a Federal credit of up to $600 per year to purchase 
their prescription drugs. The Federal government will also pay the full 
annual enrollment fee, which is not to exceed $30, for these 
cardholders with low incomes.
    To enroll, beneficiaries will submit basic information to the 
selected approved discount card sponsor of their choosing about their 
Medicare and Medicaid status. Those beneficiaries requesting the $600 
credit also must submit income and other information about retirement 
and other health benefits to the card sponsor, and attest to 
truthfulness of the information. CMS will verify this information and 
notify the approved discount card program of the beneficiary's 
eligibility and enrollment outcome. If a beneficiary is found to be 
ineligible for a drug card, the card sponsor will send written notice 
to the beneficiary explaining why he or she was found to be ineligible. 
For beneficiaries who are eligible, sponsors will send a welcome 
package, including their new drug card, so that they can begin 
obtaining discounts and, if receiving the $600 credit, using these 
funds to purchase prescription drugs, upon receiving their cards. 
Individuals found to be ineligible for either the discount card or the 
$600 credit may request reconsideration if they still believe they 
qualify.
    An eligible beneficiary can enroll in an approved discount card 
program at any time. After the initial election in 2004, beneficiaries 
will have the option, for 2005, of choosing a different card program 
during the second election period between November 15 and December 31, 
2004. In addition, a beneficiary may change cards under certain 
circumstances if, for example, the beneficiary enters a long-term care 
facility, moves outside of the area served by the beneficiary's 
approved program, or enrolls in or drops a Medicare managed care plan 
that is also providing an exclusive drug discount card program in which 
the beneficiary was enrolled.

                    TRANSITIONAL ASSISTANCE PROGRAM
    In addition to providing a discount off the price of prescription 
drugs, MMA creates the Transitional Assistance program, which provides 
up to $600 in an annual credit for Medicare beneficiaries whose incomes 
do not exceed 135 percent of the federal poverty level ($12,569 for 
individuals, $16,862 for couples for 2004). When applying the $600 
toward prescription drug purchases, beneficiaries at or below 100 
percent of poverty will pay 5 percent coinsurance, and beneficiaries 
between 100 and 135 percent of poverty will pay a 10 percent 
coinsurance. The credit, in conjunction with the discount card, will 
give these most vulnerable beneficiaries immediate assistance in 
purchasing prescription drugs they otherwise may not be able to afford. 
For example, Medicare beneficiaries without prescription drug insurance 
on average would pay about $1,300 for prescription drugs in 2004. The 
expected savings of approximately 10 to 15 percent translates to $140 
to $210. This savings added to the $600 credit will be of substantial 
help to those who need it most.

                               EDUCATION
    To help explain the drug discount card to beneficiaries and help 
them navigate among cards to choose the card that best fits their 
needs, CMS has a number of education and outreach efforts underway. 
Print, radio, and television advertisements will highlight the upcoming 
changes to the Medicare program, including the addition of the drug 
discount card. The advertising campaign--presented in both English and 
Spanish--also includes Internet-banner ads and a 10-minute pre-recorded 
informational radio interview to educate beneficiaries about the 
upcoming drug discount cards.
    These advertisements will direct beneficiaries to 1-800-MEDICARE 
and Medicare's website, www.medicare.gov, for more information. CMS is 
working to ensure that customer service representatives at 1-800-
MEDICARE have up-to-date information on the drug card, as well as other 
CMS programs. Based on our analysis, we estimate 1-800-MEDICARE will 
receive 12.8 million calls in fiscal year 2004. This compares to an 
fiscal year 2003 call volume of approximately 5.6 million calls. The 
12.8 million calls include an estimated increase of 5.5 million calls 
as a result of the new Medicare law and 7.3 million calls for routine 
1-800-MEDICARE call topics. We plan to increase our CSR level at 1-800-
MEDICARE in May 2004 to handle the expected increase in call volume.
    An additional feature of the website will be a new price comparison 
tool, Medicare Price Comparison. Under the drug card program, card 
sponsors will negotiate drug discounts with both pharmacies and drug 
manufacturers. The new comparison tool will give beneficiaries, or 
their representatives, the capacity to find the sponsor-negotiated 
price for each drug or all their drugs at pharmacies in their area. 
Pricing information will be available for brand name, generic, and 
mail-order prescriptions offered through each card sponsor's program. 
Drug card sponsors will be able to update the drug pricing information 
on a weekly basis. Starting in late April, beneficiaries will be able 
to use the comparison tool by going to www.medicare.gov or by calling 
1-800-MEDICARE. Customer service representatives at 1-800-MEDICARE also 
will be able to answer questions about the program, help them compare 
drug cards on price and network pharmacies, and refer callers to other 
appropriate resources. They will also mail the results of the 
comparison to seniors.
    CMS also has a number of beneficiary publications planned for 2004 
to explain changes in the Medicare program. For example, HHS has 
prepared a detailed ``Guide to Choosing a Medicare-Approved Drug 
Discount Card'' for beneficiaries that explains the program, including 
eligibility and enrollment information, and provides step-by-step 
guidance for comparing discount cards and choosing one. The booklet 
currently is posted at www.medicare.gov, and printed copies will be 
available for free through 1-800-MEDICARE. CMS also will publish a 
small pamphlet with an overview of the drug card program and an 
introduction to the discount cards and the $600 low-income credit. In 
addition, a brief document that introduces beneficiaries to the 
discount cards and the Medicare-approved seal will be mailed directly 
to beneficiary households. This mailing, which will correspond with the 
television information campaign, is scheduled for late April 2004. 
Also, as required by MMA, CMS will work with its partners at the Social 
Security Administration to facilitate a mailing targeted toward low-
income Medicare beneficiaries detailing the drug card and transitional 
assistance program.
    To assist in beneficiary education and outreach, CMS increased 
funding to State Health Insurance Assistance Programs' (SHIPs) grants 
and REACH from $12.5 million last year to about $21.1 million for 
fiscal year 2004--a 69 percent increase above the fiscal year 2003 
total. In addition, HHS' budget plan for fiscal year 2005 allocates 
$31.7 million to SHIPs--more than double the amount awarded in fiscal 
year 2003. With the new funding, SHIPs will be able to expand their 
efforts to work with and reach even more Medicare beneficiaries and 
increase and enhance their volunteer staff through additional training 
and resources.
    To educate providers and pharmacists, as well as the States and 
other stakeholders, CMS will sponsor conferences and conduct a number 
of teleconferences to make the information available nationwide. For 
example, in-person training will take place at the CMS-sponsored drug 
card conference, which is scheduled for April 7-8. CMS staff will be 
available to provide technical assistance and support as the program 
begins.

                                COVERAGE
    The discount card and $600 in transitional assistance can be used 
to purchase nearly all prescription drugs available at retail 
pharmacies. Syringes and medical supplies associated with the injection 
of insulin, such as needles, alcohol, and gauze, are also included. It 
is anticipated that many approved programs will use formularies to 
obtain deeper discounts on prescription drugs. If an approved discount 
card program uses a formulary then the drugs most commonly needed by 
Medicare beneficiaries must be included. At a minimum, each program 
must offer a discount on at least one drug in each of the 209 
therapeutic categories of prescription drugs. However, even if a 
prescription drug is not on the sponsor's formulary, the $600 must 
still be applied to all the covered prescription drugs available at the 
pharmacy if the beneficiary uses the discount card toward the purchase. 
Drug card sponsors also may choose to offer discounts on over-the-
counter (OTC) drugs, but the $600 cannot be used toward the purchase of 
OTC drugs. CMS made public on April 1, 2004 the enrollment fee for each 
drug card on the PDAP website, and the discounted prices will be posted 
at the end of April.
    Medicare approved drug discount card sponsors will negotiate with 
manufacturers and pharmacies for rebates and discounts off the average 
wholesale price (AWP) for drugs covered under the drug card program. In 
order to get the most competitive savings to beneficiaries, some cards 
will use formularies, which can improve the negotiating leverage 
sponsors have with pharmaceutical manufacturers.
    Beneficiaries will be guaranteed a percentage savings (or discount) 
on each purchase they make with their card. Individual prices may 
change, as AWP moves up and down, but the discount rate to which the 
card entitles them will not move, unless the sponsoring organization 
can satisfactorily report to CMS a good cause for such a move. The 
attached chart outlines how this process works. CMS expects to receive 
detailed information from program sponsors concerning specific 
discounts in the near future.
    It is true that drug prices under the drug card may change. But 
this is not different from the way drug pricing works in the market 
place today. In typical industry practice, a pharmacy benefits manager 
guarantees, by contract, a certain discount off of the average 
wholesale price (AWP) to its payers. Within the universe of the 
thousands of prescription drugs on the market, there are changes in AWP 
in response to price shifts in labor and raw ingredients, as well as to 
supply and demand. However, taken individually, the AWP for the vast 
majority of drugs either does not change or changes several times a 
year by a modest amount.
    Once a card is selected, beneficiaries are committed to their card 
for the calendar year (with a few exceptions). This is a key program 
design feature to improve the discounts to beneficiaries under a drug 
discount card. Historically, drug discount cards have not included 
discounts from manufacturers because sponsors could not guarantee 
market share. By having committed beneficiaries, Medicare approved 
sponsors are able to guarantee a certain patient population. This 
guarantee increases their negotiating leverage with manufacturers and 
improves their ability to secure discounts and rebates, which are 
passed on to the beneficiaries. Because approved programs will be 
competing for Medicare beneficiaries to be able to increase their 
negotiating power, the programs will have an incentive to pass 
negotiated savings along to the beneficiaries in the form of the lowest 
possible drug prices.
    While approved discount card programs may update their prices and 
lists of offered drugs on a weekly basis, CMS will monitor drug price 
changes to ensure that prices do not deviate from expected market 
changes, such as those in average wholesale price. While we do not 
anticipate that sponsors will be changing prices for unwarranted 
reasons, CMS will nonetheless closely monitor changes in prices over 
time for each drug that a card sponsor offers:
  --If a card sponsor's drug prices change in an amount that is not 
        consistent with the expected change due to AWP, then the 
        sponsor must report it and provide a rationale.
  --Also, CMS will routinely check for price changes from week to week 
        compared to what is expected, based on changes in AWP. Price 
        changes that are not expected will be flagged and evaluated.
  --If the price change is not due to legitimate changes in their 
        operating environment, such as losing a manufacturer contract, 
        or unexpected costs of operating the call center, then a card 
        sponsor could be sanctioned by CMS.
  --Sanctions could include prohibiting further marketing and 
        enrollment, monetary penalties, and terminating the card 
        program.

                                 FRAUD
    Although the drug discount card program has not yet been 
implemented, some Medicare beneficiaries have already received calls as 
well as in-person solicitations from individuals/companies posing as 
Medicare officials attempting to gain personal information from 
beneficiaries for identify theft.
    A beneficiary should NEVER share personal information such as their 
bank account number, social security number or health insurance card 
number (or Medicare number) with any individual who calls or comes to 
the door claiming to sell ANY Medicare related product.
    Beneficiaries who are contacted by these false card companies 
should remember that Medicare-approved cards will not be available 
until May. The names of approved card sponsors have been made public 
and the companies will begin to market their cards through commercial 
advertising and direct mail beginning this month. Medicare-approved 
card sponsors will not market their cards door-to-door or over the 
phone.
    In response to these complaints, CMS is coordinating information 
with customer service representatives at 1-800-MEDICARE, the call 
centers at the Medicare contractors and the State Health Insurance 
Assistance Programs (SHIPs). CMS has already informed the public 
through a press release about how to protect themselves from fraud. OIG 
referrals have been made for two complaints where we had specific 
enough information to make a fraud referral.
    CMS is continuing to explore methods to limit the scope of these 
scams and develop a process to work with the appropriate law 
enforcement agencies to avoid further spread of this type of activity. 
CMS' office of Program Integrity is hosting a law enforcement fraud and 
abuse meeting this month. The primary participants will include the 
Department of Justice, Federal Bureau of Investigation, and the DHHS' 
Office of the Inspector General. Participants from other agencies that 
have dealt with issues of Prescription Drug fraud will also be invited. 
The primary topic of this meeting will be the discussion of the drug 
discount card program and how to prevent and deter fraud, waste and 
abuse in this area.

                               CONCLUSION
    Thank you again for the opportunity to testify today about this new 
important transition toward a prescription drug benefit for Medicare 
beneficiaries. This voluntary drug discount card program will provide 
immediate assistance in lowering prescription drug costs for Medicare 
beneficiaries until the new Medicare drug benefit takes effect on 
January 1, 2006. We recognize the importance of the discount cards and 
the low-income credit to Medicare beneficiaries, who, for too long, 
have gone without outpatient prescription drug coverage. We at CMS are 
dedicated to meeting the deadlines set out in the historic Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 and are 
working expeditiously to satisfy the May 3 and June 1, 2004, effective 
dates for enrollment and implementation, respectively. Thank you again 
for this opportunity, and I look forward to answering any questions you 
might have.

    Senator Specter. Well, thank you very much, Ms. McMullan.
STATEMENT OF DONNA UHLER, COORDINATOR, APPRISE PROGRAM, 
            PENNSYLVANIA DEPARTMENT OF AGING
    Senator Specter. We will defer questions until after we've 
heard from Ms. Uhler.
    We now turn to Ms. Donna Uhler, the Apprise Coordinator in 
Montgomery County. Through their Montgomery County Agency on 
Aging, the Apprise Program provides seniors and their families 
in the country with information about Medicare and healthcare 
options. She has an MBA from St. Joseph's University in 
Philadelphia, a bachelor's degree from Millersville University.
    We thank you for joining us, Ms. Uhler, and we look forward 
to your testimony.
    Ms. Uhler. Thank you for inviting me today.
    The Apprise Program is the State health-insurance 
assistance program, and subcontractor to the Retired Senior 
Volunteer Program here in Montgomery County. We have 12 
counselors who are specifically trained, receiving update 
training twice a year by the State, 15 sites throughout the 
county. We, as stated by Senator Greenleaf, are very lucky to 
have the PACENET program here, which handles a good number of 
the folks needing prescription assistance.
    The drug-discount cards names the approved companies that 
has been announced in the city papers, but I've not 
particularly seen it in the local papers. We've had limited 
individual calls at this time. We have received a number of 
requests for presentations. Many times, they're asking for the 
explanation of the whole modernization act. We've given at 
least six so far, and have five scheduled in just the next 2 
weeks, and I'm sure more to come. Most of the individual calls 
come from two groups, those first turning 65 and those needing 
prescription assistance. We handle about 1,200 calls a year, 
plus those present at our presentations. The majority are of 
the middle-income bracket, around the $25,000 limit, with drug 
costs someplace in the $1,500 a year to $2,000 range.
    We have one HMO here in Montgomery County, and that same 
company provides a PPO. Those folks will get their card through 
that company, and the company handling PACE has approved--has 
been approved as a card sponsor, and they will automatically 
assist members who are eligible for the $600 credit if they 
decide to go with that drug-discount card company. The 
government PPO type is provided by a company that has also been 
approved as a card sponsor.
    Questions are coming from the long-term care facilities, 
which Senator Greenleaf is very familiar with since we were 
requested to do a presentation, and their confusion is as to 
how their long-term pharmacy groups are dealing with the 
discount card; not the long-term care residents, but the 
assisted-livings that are more independent, or the independent 
residents living the long-term care setup, with one of the 
issues being that part of their agreement, when they go into 
these long-term cares, is some of their drug costs may be 
covered by the admission agreement.
    Most of the seniors we talk to have heard about the change, 
but, quite honestly, they're not terribly trustworthy of the 
change. You often hear, ``I know it's going to cost me more 
money,'' and we don't get the money to cover the cost. We will 
be providing presentations, doing health-fair participation, 
news articles, news letter articles, and, most important, 
handling the phone calls or meeting with the individuals. 
People always appreciate the human voice and feel more 
confident if someone looks at their choices.
    The counselors we have are very dedicated and experienced, 
and they're even doing some of their counseling in the evening. 
We will be recruiting more counselors before the modernization 
act in 2005 and 2006.
    Thank you.
    Senator Specter. Well, thank you very much, Ms. Uhler.
    This is, I think, a very important step in acquainting the 
seniors with the availability of this program. The statistics 
are that some 2,100,000 Medicare beneficiaries in Pennsylvania 
will have access to their prescription-drug benefit under the 
new Medicare law. And it was a matter of familiarizing the 
potential--the Medicare recipients with it. It is important to 
note that the beneficiaries can keep the current plan if they 
want to. It doesn't begin until the year 2006. Is that correct?
    Ms. Uhler. Yes.
    Senator Specter. But they have the option of going to the 
HMOs, where the thought is, with competition, that there may be 
a lowering of the cost of Medicare by giving physical 
examinations to having significant emphasis on preventive 
medicine, and making the availability of prescription drugs 
where we will have the opportunity to keep seniors healthier 
longer before it gets there, that we will be able to hold down 
the costs.
    There's been a lot of controversy, as we all know, about 
what the program will cost. Congress has budgeted $400 billion 
over 10 years. There have been some comments that the real 
costs were concealed, that it would cost $150 billion more. 
Nobody knows precisely what it will cost. We are investigating 
to see if there was any material withheld, but the real 
determination of the costs will depend upon how it works with 
respect to the examinations, with respect to preventative care 
and competition.
    Let me ask you this, Mr. Uhler and Ms. McMullan, what is 
the best way to get information to the seniors now about these 
drug cards? Are those brochures that you held up, Ms. McMullan, 
going to be mailed out to seniors?
    Ms. McMullan. There are several things happening in late 
April. We will mail, to every beneficiary household, a short 
description of the drug card, and refer them to 1-800-MEDICARE 
and to the web site for those people who use that, or whose 
children or other caregivers use it on their behalf. In 
addition, there's the Social Security mailing. We will be 
having ads on television, advertising both the $600 
transitional system and the drug card, and leading people to 1-
800-MEDICARE. We will be doing other outreach events through 
pharmacies, physicians, and healthcare providers.
    Senator Specter. Is there a number which the senior citizen 
can call to get the information?
    Ms. McMullan. 1-800-MEDICARE.
    Senator Specter. What's the number?
    Ms. McMullan. It's 1-800-633-4227.
    Senator Greenleaf. 1-800-MEDICARE.
    Ms. McMullan. 1-800-MEDICARE.
    Senator Specter. It's very hard to spell ``Medicare'' on my 
phone. Translate the number for the media who are here. To list 
the number in any publication which goes out will be very, very 
helpful.
    Ms. McMullan. 1-800-633-4227.
    Senator Specter. Ms. Uhler, how much will the reductions be 
by using these Medicare cards?
    Ms. Uhler. The anticipated reduction is total overall of 
someplace between 10 to 15 percent, I believe, but there maybe 
an individual drug that, itself, may be 25 percent off.
    Senator Specter. Well, my red light went on, and I like to 
observe the red light, so I'd yield now to Senator Greenleaf.
    Senator Greenleaf. Thank you, Senator.
    On the State level, in regard to the Federal program--and 
you're going to be, obviously, involved in this very closely--
it would be very important if you could let us know, as you get 
involved in these--in the two programs, to see how we can best 
interface the two and to supplement each other, and to help to 
increase the benefits that they now have to the maximum. And so 
it would be really important, with your practical experience of 
how to run it, and the practical changes we might be able to 
make in Pennsylvania that could help to include additional 
seniors in receiving the benefits; rather than have two 
separate programs, having a little more working together.
    I've heard some proposals where that $600 could be 
reimbursed to the State, and then we would use that $600 to 
increase our benefits. That is what I was referring to, things 
like that might be helpful in helping Pennsylvania's seniors.
    Ms. McMullan. There are discussions going on with the State 
pharmacy assistance programs in order to figure out how best to 
integrate the transitional assistance into the State pharmacy 
assistance programs. We are dealing with each State 
individually, and working through the issues on how best to do 
that. But, indeed, those benefits and programs can be 
coordinated. There's lots of opportunity to integrate the drug 
card transition assistance into the State pharmacy assistance 
programs.
    Ms. Uhler. The people in the Montgomery County can call the 
Montgomery County Apprise number, which is 610-834-1040, 
extension 20. A counselor checks that line daily, and we will 
get back to whoever calls.
    Senator Greenleaf. Thank you.
    Senator Specter. Thank you very much, Senator Greenleaf.
    We turn now to Rep. John Fichter.
    Rep. Fichter. Thank you, Senator.
    Ms. McMullan, you talked about the enrollment period. Is 
there any penalty if I missed signing up during the stated 
enrollment period?
    Ms. McMullan. An individual can sign up at any time. Once 
they sign up, they are in for the year, and then they can sign 
up during the November 15 to December 31 enrollment period for 
another card in 2005. But you can sign up at any time, and 
there is no penalty for late enrollment.
    Rep. Fichter. It seems that every time the State starts a 
program or gets involved in a State-run program, we always have 
a problem finding everybody who's eligible for it. And I heard 
your testimony, where you're sending things out, you're going 
to do ads on TV, and various and sundry other things. How about 
the lady or gentleman up in Tioga County, where there is no TV, 
or the individual down on the Ozark Mountains, down in 
Kentucky? In case they miss, is there any followup to contact 
those people?
    Ms. McMullan. What we're doing, in addition to the mailing, 
which should go out to all of those individuals, because the 
mail service reaches into rural communities, is ask our 
regional office staff to make sure that they target those 
individuals in the outreach, particularly low-income 
individuals and people who have access barriers, to make sure 
that we get the information out. We're also partnering with as 
many organizations as possible in community-based 
organizations, as well as pharmacies. And as an example of one 
of those partnerships, Wal-Mart is going to have information 
available to tell people about the prescription drug--Medicare-
approved prescription-drugs cards, and where to call to get 
information. So in places like local pharmacies and other local 
organizations, additional information will be out there. We are 
trying to find every mechanism possible to get the information 
into the community, into the grassroots, to the people in the 
low-income groups that are most benefitted by the prescription-
drug card.
    Rep. Fichter. Thanks very much.
    Thank you, Senator.
    Senator Specter. Thank you very much, Rep. Fichter.
    Well, thank you very much, Ms. McMullan and Ms. Uhler. I 
think that the presentation you have made here today is a very 
important one.
    This program will go into effect so that people can start 
getting the discounts, estimated between 10 and 25 percent, as 
of May of this year. And the cards cost no more than $30 for 
the low-income brackets, and they may be obtained free. 
Depending on the income level, the individuals may have a $600 
credit for the first $600 of prescription drugs which are 
purchased. And then in the year 2006, the major plans will come 
into effect, where seniors can either stay with traditional 
Medicare or exercise the option and go into an HMO.
    There's been a lot of misinformation about the plan. 
There's been a great deal of politicization of it with people 
arguing whether it is good or bad--I think, fairly stated, in 
an effort to gain political points.
    What we want to do is to acquaint the seniors with what the 
plan is, let the seniors be informed so they know what their 
rights and opportunities are. Then they can make their choices. 
They can take it if they wish to. They're not obligated to take 
it. And then we will see how the plan works, emphasizing, 
again, that seniors can retain the current coverage they have. 
They don't have to go into the new plan, but they can do it if 
they want to. And there are very substantial sums being 
budgeted by the Congress to provide this prescription-drug help 
at a time when prescription drugs are enormously expensive.
    So we thank you very much for coming, and we expect your 
telephones to be ringing more frequently now that there will be 
greater awareness by the seniors on what the programs are.
    We now turn to our second panel on the issue of association 
health plans, and we would ask, at this time, that you to come 
forward--Ms. Alexis Barbieri, Mr. Paul Zieger, Mr. Ray Carroll, 
Ms. Mary Beth Senkewicz.
    The issue on association health plans has been the subject 
of legislation which has been produced in both the House and 
the Senate. On March 6 of last year, Senator Snowe introduced 
S. 545, the Small Business Health Fairness Act of 2003, which 
would establish a regulatory framework and certification 
process for associated health plans. Associated health plans 
will allow small employers and self-employed to band together 
to voluntarily form multiple-employer groups to enable small 
business to offer health insurance to their employees.
    We have Mr. Campbell, who has also joined us. Mr. Campbell, 
you're on the top of the page.
STATEMENT OF BRADFORD P. CAMPBELL, DEPUTY ASSISTANT 
            SECRETARY, EMPLOYEE BENEFITS SECURITY 
            ADMINISTRATION, DEPARTMENT OF LABOR
    Senator Specter. Our first witness will be Mr. Bradford 
Campbell, who is the Deputy Assistant Secretary for Employee 
Benefits Security Administration in the U.S. Department of 
Labor.
    Thank you very much for joining us, Secretary Campbell, and 
we look forward to your testimony.
    Mr. Campbell. Thank you very much, Mr. Chairman.
    Good afternoon. My name is Bradford Campbell. I'm the 
Deputy Assistant Secretary of the Employee Benefits Security 
Administration.
    I would like to ask that my full statement be submitted for 
the record.
    Senator Specter. Without objection, your full statement 
will be made a part of the record.
    Mr. Campbell. I would like to thank you for inviting me to 
Norristown today to discuss the Administration's support for 
the bill you referenced, S. 545, the Small Business Health 
Fairness Act. On behalf of the administration, I would like to 
thank you for your co-sponsorship of this legislation, which 
will offer working Pennsylvanians and their families improved 
access to affordable quality health benefits by establishing 
association health plans, or AHPs.
    This bill is a central element of the President's plan to 
give workers better options in purchasing or securing 
affordable health benefits through their employers. In his 
State of the Union Address in January, President Bush called on 
Congress to pass this legislation, and we, at EBSA, are 
committed to working with you to enact this much-needed 
legislation.
    Despite being growth engines for the economy, creating two 
out of every three new jobs, small businesses face significant 
hurdles in providing health benefits to their employees. The 
reality is that 85 percent of Americans without health 
insurance are in working families. And of that, 60 percent are 
affiliated with small business. While 98 percent of large 
businesses offer health benefits, less than half of small 
employers can afford to do so. These facts illustrate the 
problem, but they also suggest a solution. If we can level the 
playing field for small businesses, we will have gone a long 
way toward solving un-insurance in America.
    AHPs are squarely targeted to the health-coverage needs of 
small businesses, and they address the two main threats they 
face, cost and fraud.
    First, cost. The fact of the matter is, small business pay 
20 to 30 percent more than large businesses for similar 
benefits. The reason is because Federal law allows large 
employers and unions to pool their employees and members 
together across State lines, something small businesses are 
generally unable to do. The result is that small businesses are 
denied the benefits of administrative efficiencies, economies 
of scale, and greater bargaining power. By contrast, small 
businesses are effectively isolated, trying to buy coverage for 
5 or 10 employees at a time, instead of 5 or 10 thousand.
    Moreover, in many States the marketplace is consolidated, 
with one or two insurers coming to dominate the market. With 
less competition comes less choice and higher costs. This 
problem is exacerbated by the fact that each State has 
different requirements for plan design. The complexity of 
trying to craft an insurance policy that meets these different 
requirements adds considerably to the cost, making it very 
difficult to design an affordable insurance policy that can 
operate in multiple States.
    AHP legislation remedies this disparity in Federal law, 
allowing small businesses to join together through their trade 
associations to purchase health benefits in a way similar to 
large employers and unions.
    Second, fraud. In part because small businesses have fewer 
healthcare options, they're more vulnerable to scam artists, 
who try to prey on their need to have health coverage. This is 
a significant area of enforcement at the Department of Labor. 
And one of the key portions of our enforcement effort in 
preventing fraud is association health plans. Before an AHP can 
offer a benefit to a single employee, it will have to be 
certified in advance by the Department of Labor as meeting the 
requirements of the legislation that prevents this sort of 
fraudulent behavior from occurring.
    To the critics who claim that EBSA will be unable to 
regulate these plans and protect consumers, I would like to 
point out, Mr. Chairman, that we have 30 years of experience in 
administering the Employee Retirement Income Security Act, or 
ERISA, which provides us regulatory authority over 131 million 
Americans in employer-provided health plans, of which 67 
million Americans are in self-insured plans solely regulated by 
the Department of Labor. And you'll generally find, I think, 
both anecdotally and looking at the actual facts, that these 
are widely regarded as some of the best health benefits 
available in these plans that are regulated by the Department.

                           PREPARED STATEMENT

    I would just like to conclude by saying that if you look at 
the report from the Congressional Budget Office, AHPs are 
estimated by them to provide new benefits to as many as two 
million workers, and reduce premiums by as much as 25 percent 
for small businesses.
    With that, I would like to thank you for inviting me to 
testify today, and I look forward to answering any questions 
you may have.
    [The statement follows:]
            Prepared Statement of Hon. Bradford P. Campbell

                          INTRODUCTORY REMARKS
    Good afternoon, Chairman Specter. My name is Bradford Campbell, and 
I am the Deputy Assistant Secretary for Policy of the Employee Benefits 
Security Administration. Thank you for inviting me to Norristown today 
to discuss the Administration's staunch support for Association Health 
Plans (AHPs), a key element of the President's plan to increase access 
to quality, affordable health benefits for working Americans.
    Mr. Chairman, I would like to thank you, on behalf of the 
Administration, for your cosponsorship of S. 545, the Small Business 
Health Fairness Act. S. 545 is the Senate version of the AHP 
legislation passed by the House of Representatives on a strong 
bipartisan basis. The President called on Congress to pass AHP 
legislation in his State of the Union Address, and we appreciate your 
support of the bill, which will give working Pennsylvanians more health 
insurance options in what is becoming an increasingly concentrated 
insurance marketplace.
    I am testifying before you today on behalf of the Employee Benefits 
Security Administration, or EBSA. EBSA is the federal agency that will 
oversee AHPs. Our job is to protect the employer-provided health and 
retirement benefits of millions of Americans, and I can assure you, Mr. 
Chairman, that we are committed to working with the Congress to make 
sure that AHPs are a secure and well-regulated option for employers 
seeking to offer high quality and affordable health benefits. EBSA has 
firsthand experience dealing with group health plan regulation as well 
as combating insurance fraud. We administer the Employee Retirement 
Income Security Act (ERISA), protecting approximately 2.5 million 
private, job-based health plans and 131 million workers, retirees and 
dependents. Of these, 275,000 plans covering 67 million individuals are 
self-insured, and therefore are subject exclusively to EBSA oversight. 
These include large, self-insured multiemployer plans (established and 
operated jointly by a union and two or more employers), which cover 
more than 5 million participants, not counting their covered 
dependents.

                   SMALL BUSINESSES AND THE UNINSURED
    Despite being the driving engine of our economy, small businesses 
face many obstacles, and finding affordable health insurance is one of 
the most significant. Secretary Chao has met with small business men 
and women around the country, including here in Pennsylvania, and they 
have consistently expressed to her their concerns about finding good 
health insurance at a reasonable price. The numbers behind the 
uninsured statistics highlight the need for AHPs--85 percent of 
Americans without health insurance are in working families, and 
approximately 60 percent of them work for small businesses with less 
than 100 employees.\1\ That's why AHPs will be especially effective in 
getting more Americans insured--they are targeted squarely at small 
businesses who are trying to provide affordable health benefits.
---------------------------------------------------------------------------
    \1\ Department of Labor estimates of working families' health 
insurance status, based on the Census Bureau's annual March Current 
Population Survey.
---------------------------------------------------------------------------
    Although most working Americans receive health insurance from their 
employers, firms with fewer than 100 employees find it particularly 
difficult to offer benefits. Just 49 percent of these small businesses 
offer insurance, compared with 98 percent of larger firms with 100 or 
more employees.
    Many small employers want to offer health insurance, but 
circumstances make it difficult for them. Let me spend just a minute to 
discuss the barriers small employers face when it comes to health 
insurance. I will then describe how AHPs will help.
    First, Cost.--For a variety of reasons, insurers typically charge 
small firms more per employee than large firms for comparable coverage. 
According to the General Accounting Office,\2\ insurers incur higher 
marketing, underwriting and administrative costs when providing health 
care coverage to small employers than to large employers--and they pass 
those costs on to small firms. Small company premiums are 20 percent to 
30 percent higher than those of large self-insured companies with 
similar claims experience.\3\ And the cost of these policies continues 
to rise--small businesses recently have faced double digit premium 
increases from year to year.
---------------------------------------------------------------------------
    \2\ U.S. General Accounting Office, Private Health Insurance: Small 
Employers Continue to Face Challenges in Providing Coverage, GAO-02-8; 
and Private Health Insurance: Number and Market Share of Carriers in 
the Small Group Health Insurance Market, GAO-02-536R. Insurers must 
market and distribute their policies to a very large number of 
unconnected employers. Insurers also must compensate agents for each 
small policy sold or renewed. Some costs, such as the cost of 
collecting detailed medical histories for purposes of medical 
underwriting, are layered on each time an employer changes insurers.
    \3\ Actuarial Research Corporation. Cost drivers include small 
businesses' administrative overhead, insurance company marketing and 
underwriting expenses, adverse selection, and State regulatory burdens.
---------------------------------------------------------------------------
    Second, Overhead.--When a small firm decides to offer health 
insurance, it must take on administrative tasks, including identifying 
available insurance policies; comparing their prices, benefit packages 
and other features; assembling plan descriptions, enrollment materials 
and other forms; and educating and enrolling its workforce. This takes 
staff time and money.
    Third, State Regulatory Burdens.--The States have been very 
aggressive in regulating small-group insurance markets, overseeing 
rates and imposing benefit mandates that leave employers without 
affordable options, and a very limited ability to design benefits that 
best suit their needs. Indeed, benefit mandates are responsible for one 
of every five small employer decisions not to offer coverage.\4\ As a 
result of different benefit mandates and policy approval processes 
across the 50 States, small businesses generally are not able to join 
together across State lines. It is expensive and difficult to develop 
an insurance policy that meets the requirements of more than one State, 
and the resulting costs from this complexity tend to make such policies 
unaffordable.
---------------------------------------------------------------------------
    \4\ Gail A. Jensen and Jon Gabel, ``State Mandated Benefits and the 
Small Firm's Decision to Offer Insurance,'' Journal of Regulatory 
Economics; 4:379-404 (1992).
---------------------------------------------------------------------------
    Taken together, these factors put small employers at a big 
disadvantage in the insurance marketplace. And because the cost and 
complexity of offering coverage makes small employers eager to shop for 
bargains, there is one more factor that hits them hard--health 
insurance fraud.

                          HOW AHPS WOULD WORK
    In an AHP, small businesses could join together across State lines 
through their trade and professional associations to purchase health 
benefits, reducing the market and financial barriers that they face. 
Small businesses would enjoy greater bargaining power, economies of 
scale, administrative efficiencies, and more uniform regulation, giving 
them more access to affordable coverage.
    To ensure that unscrupulous promoters cannot operate AHPs, only 
bona fide trade or industry associations that have been in operation 
for at least three years for purposes other than providing health 
benefits will be allowed to sponsor these arrangements. Before an AHP 
can begin operating, EBSA will examine the plan sponsor and certify 
that they meet rigorous statutory eligibility standards, as well as the 
applicable tough solvency and membership requirements.
    Bargaining Power and Economies Of Scale.--By grouping small 
employers together to purchase coverage, AHPs will be able to act more 
like large employers and offer lower cost coverage to employers, 
employees and their families. If the AHP chooses to purchase insurance, 
it will be in a better position to negotiate with insurers regarding 
the terms and costs of coverage than a small employer acting 
individually. AHPs will also enjoy economies of scale in the 
administration of plans. They will give insurers a vehicle to market 
and distribute policies to many small employers at once. By offering a 
well-selected and stable choice of policies to members, AHPs can help 
slow small employers' otherwise costly movements from one insurer to 
another.
    Streamlined Regulation.--AHPs will allow small businesses to enjoy 
a more uniform regulatory system. Just as large employers and unions 
are able to offer the same health plan to their workers and members 
regardless of which State they live in, AHPs will allow small 
businesses to join together across State lines to purchase uniform 
health benefits. It is important to note, however, that the pending AHP 
legislation leaves in place major elements of State insurance 
regulation. Much as in the current group health marketplace, insurers 
selling policies to AHPs are regulated by the States. The AHP 
legislation passed by the House preserves important State consumer 
protections for these insurers, including solvency standards and prompt 
pay laws. AHPs that offer self-insured coverage will be subject to a 
single, effective, national certification and oversight process 
administered by EBSA. The legislation provides strict new solvency 
standards for these plans to protect consumers.
    Pooling Risk.--AHPs will help ensure that small employers will not 
be denied insurance coverage or be priced out of the market due to the 
health of their employees. An employer with high claims experience 
would be offered the same coverage options as other employers within 
the sponsoring association. In fact, AHPs would generally be prohibited 
from setting premium rates based on health status, severely restricting 
AHPs' ability to engage in favorable risk selection, or so-called 
``cherry-picking.''
    Broader Choice of Coverage.--Associations will be able to fashion 
coverage options that best meet their members' needs. By offering 
broader choices, AHPs will encourage small business workers who are 
currently uninsured to purchase coverage and pay into the premium pool. 
Expanding health insurance coverage to include more of the uninsured 
not only improves their lives, but it reduces costs across the system 
by broadening the risk pool.
    Cost Savings and Increased Coverage.--Small businesses obtaining 
insurance through AHPs could enjoy significant premium reductions. 
According to the Congressional Budget Office (CBO),\5\ the average 
savings would be 13 percent and could be as much as 25 percent per 
employer. CBO further estimated that, because insurance will be more 
affordable, as many as 2 million Americans whose employers do not offer 
insurance today will be brought into the employment-based health 
insurance system.
---------------------------------------------------------------------------
    \5\ Congressional Budget Office, ``Increasing Small-Firm Health 
Insurance Coverage through Association Health Plans and Healthmarts,'' 
January 2000.
---------------------------------------------------------------------------
    Wide Availability and Greater Access.--Dozens of well-known small 
business groups are eager to offer coverage to their members, and 
support enactment of AHP legislation, including organizations such as 
the National Federation of Independent Business, the United States 
Black Chamber of Commerce, the United States Hispanic Chamber of 
Commerce, Women Impacting Public Policy, the American Farm Bureau, the 
Associated Builders and Contractors, and the National Restaurant 
Association, to name just a few.

             PROTECTING WORKERS BY OFFERING BETTER OPTIONS
    Because of the obstacles small businesses face in obtaining 
affordable health insurance, they are especially vulnerable to scams 
that promise low-cost health coverage but fail to deliver. Many of 
these arrangements turn out to be multiple employer welfare 
arrangements (MEWAs), although they are usually not marketed under that 
name. MEWA is the legal acronym for arrangements that provide health 
benefits to employees of two or more unrelated employers who are not 
parties to a collective bargaining agreement.
    MEWAs are subject to a mix of State and Federal laws and 
regulations. While some MEWAs operate successfully and provide reliable 
benefits to participating employers and their workers, unscrupulous 
promoters have exploited complexities in their regulatory and oversight 
structure to operate Ponzi schemes that collect premiums but 
intentionally default on their obligations to pay claims.
    Health insurance fraud artists take advantage of small employers by 
marketing generous coverage using slick brochures and promising cheap 
premiums. The scam artists delay State and Federal law enforcement 
authorities by raising jurisdictional issues while they collect 
premiums and sign up new customers. Sometimes these promoters present 
themselves not as MEWAs, but as other ``ERISA plans,'' not subject to 
State oversight. Fraud increases the cost for everyone, and the fear of 
being taken in deters many small employers from offering coverage at 
all.
    EBSA employs a three-pronged approach to fighting insurance fraud. 
First, we work hard to educate small employers about how to spot fraud 
in the marketplace to prevent people from falling victim to scams in 
the first instance. Second, we have a vigorous civil and criminal 
enforcement program, conducting active investigations and cooperating 
closely with State insurance regulators to find scam artists, shut them 
down, recover monies to pay benefits, and send criminal perpetrators to 
jail. Third, we support the enactment of Association Health Plan 
legislation, which will provide a secure, well-regulated, and 
affordable health coverage option for small businesses.
    Let me be clear that we regard health coverage scams as a top 
enforcement priority, and will continue to do so until these 
unscrupulous operators are stamped out. The President's proposed budget 
for fiscal year 2005 includes a request for 30 additional 
investigators, 10 of who will be criminal coordinators in our regional 
offices--their job will be to work with State and Federal prosecutors 
and law enforcement entities to make it harder for criminals like these 
to slip through the cracks.
    In the end, however, the best way to protect the public from these 
scam artists is to change the environment in which they operate. Small 
employers are more vulnerable to fraud because they have few options 
for health insurance in most States. High cost and limited choice make 
employers more receptive to deals that are too good to be true. AHPs 
will change this environment by providing an attractive, cost-effective 
alternative to fraudulent health plans that is certified, regulated, 
and closely monitored by the Department of Labor. There will be no 
confusion over jurisdiction, and no question as to the Department's 
authority to shut down bad actors. And, for small employers, the 
Department's certification will serve as a ``stamp of approval'' 
signifying that an AHP will provide reliable, affordable health 
insurance coverage. By making these real choices possible, AHPs make it 
harder for scam artists to find people desperate enough to try anything 
to get the coverage they and their workers need.

                               CONCLUSION
   Thank you, Senator Specter, for the opportunity to testify today. 
The Administration strongly supports AHPs, and stands ready to work 
with you to help pass and effectively implement legislation that 
expands access to affordable quality health insurance coverage for 
working Americans and their families.

    Senator Specter. Thank you very much, Secretary Campbell.
STATEMENT OF ALEXIS L. BARBIERI, EXECUTIVE DEPUTY 
            ATTORNEY GENERAL, COMMONWEALTH OF 
            PENNSYLVANIA
    Senator Specter. Our next witness is the executive deputy 
attorney general for the Commonwealth of Pennsylvania, Alexis 
Barbieri.
    If I may add just a personal note, which I do on rare 
occasions when I see Ms. Barbieri, I note my longstanding 
friendship with her father, Judge Alex Barbieri. He and I were 
elected to the Committee of Censors of the Philadelphia Bar 
Association together in 1964, and Judge Barbieri then became a 
member of the Court of Common Pleas, Number 8, a very 
distinguished court, with Judge McDevitt and Judge Spaeth. And 
then Judge Barbieri became a Commonwealth Court judge and a 
Supreme Court justice.
    I tried a murder case, when I was district attorney, before 
him, Frank Joseph Campbell--this is probably more than you want 
to know--and without telling you about the case, the defendant, 
Frank Joseph Mitchell, was victimized in a sheriff's van. And 
Judge Barbieri then asked me, as district attorney, to lend him 
a young assistant named Alan Davis, who was the special master, 
and conducted a very intensive investigation into abuses and 
prisons attacks on one prisoner against another. That was 1968, 
and that was the first such investigation ever conducted.
    Since that time--this was a long time ago, 36 years ago--
there have been many investigations, but that was a landmark 
investigation. And ``60 Minutes'' was in its first year in 
1968. They came to the sheriff's cell block to interview those 
of us who were involved in that investigation.
    So, Ms. Barbieri, you come from a very distinguished 
lineage. And having used up all your time, Ms. Barbieri we will 
now move on to the next witness.
    Ms. Barbieri. Thank you, Senator. I think I will paraphrase 
my testimony since my time is much more limited than I 
anticipated.
    Senator Specter. You have your full time, Ms. Barbieri.
    Ms. Barbieri. Senator, in my capacity in the Attorney 
General's Office, I was in the Public Protection Division. And 
within that division is the healthcare section. The attorney 
general is the chief enforcer in the Commonwealth of the 
consumer-protection laws. And in the areas of consumer 
protection that implicate healthcare, the healthcare section 
investigates, mediates, and brings legal action against 
entities that engage in unfair or deceptive practices in the 
delivery of healthcare.
    The pending legislation provides special exceptions for 
health-insurance coverage sponsored by professional business 
associations, known as association health plans. Health 
insurance sold through or sponsored by these associations is a 
coverage option available to the self-employed and small 
business and others. Currently, these association health plans 
must comply with all the applicable State insurance and 
consumer-protection laws. The proposed Federal legislation 
would allow them to escape State regulation and oversight, 
which protects consumers by ensuring that these plans are 
marketed in conformance with the consumer-protection laws.
    State oversight and regulation is critical to protect 
consumers from unscrupulous operators that sell phony health 
insurance to unsuspecting businesses and individuals. The AHP 
legislation, which promotes affordability and access to 
coverage for small businesses and their employees, would exempt 
them, unfortunately, from that comprehensive State oversight 
and regulation that consumers have come to expect from their 
health-insurance coverage. And eliminating the consumer 
protection laws and State oversight will only harm the 
consumers. And for that reason, 42 attorneys general across the 
country have sent a letter in opposition to this legislation 
because they were concerned about their continuing ability to 
enforce State law. They know from past experience that 
exempting these plans from State law harms consumers.
    In the 1970s, Congress experimented with providing 
exemptions for similar entities, multiple-employer benefit 
arrangement, and the result was widespread fraud and abuse, 
resulting in $123 million in unpaid medical claims and many 
uninsured. Congress restored the States' authority to fully 
regulate these entities in the 1980s, and the States have made 
tremendous strides in combating healthcare fraud.
    These States have been aggressive to take action against 
unscrupulous operators, issuing 108 cease and desist orders 
against 41 unauthorized entrants, and imposing civil and 
criminal penalties. This legislation would not permit them to 
continue in this enforcement pursuit.
    Reemption of State laws would also leave the States 
powerless to protect the plans that fail to deliver promised 
benefits or engage in deceptive practices. Under the Federal 
AHP legislation, protections that are taken for granted would 
be eliminated.

                           PREPARED STATEMENT

    While the attorneys general strongly support efforts to 
increase access to affordable coverage for small businesses and 
their employees, we believe that this legislation would make 
the problem worse. Indeed, the U.S. Congressional Budget Office 
found that AHPs would actually increase health insurance 
premiums for the vast majority of small firms at a time when 
businesses are experiencing double-digit increases in the 
health insurance.
    [The statement follows:]
                Prepared Statement of Alexis L. Barbieri
    Good Afternoon. First, I want to thank Senator Arlen Specter--the 
senior Senator from Pennsylvania--for holding this field hearing on the 
important issue of health care reform. Senator Specter, you have long 
been a leader of efforts to improve our nation's health care system 
through increasing funding for medical research (including doubling 
funding for the National Institutes of Health); ensuring adequate 
funding for prevention and public health programs; and, improving 
access to high-quality, affordable health care.
    My name is Alexis Barbieri, and I am an Executive Deputy Attorney 
General and the Director of the Public Protection Division in the 
Office of Attorney General for the Commonwealth of Pennsylvania. Within 
my Division is the Health Care Section. The Pennsylvania Attorney 
General serves as the principal enforcer of consumer protection laws 
throughout the Commonwealth of Pennsylvania. In matters pertaining to 
health care, the Health Care Section of the Attorney General's Office 
is responsible for protecting consumers through vigorous enforcement of 
patient protection laws including, but not limited to, the right to 
independent external review of denied medical claims. The Attorney 
General's Health Care Section investigates, mediates, and brings legal 
actions against entities that engage in unfair or deceptive practices 
in the delivery of health care. It also investigates and mediates 
consumer complaints of coverage denials and fraudulent practices.
    My testimony will focus on the pending legislation before the U.S. 
Congress (H.R. 660/S. 545), Association Health Plan (AHP) legislation. 
This legislation provides special exemptions for health insurance 
coverage sponsored by professional and business associations, known as 
association health plans (AHPs). Health insurance coverage sold through 
or sponsored by associations is a coverage option currently available 
to the self-employed, small businesses, their employees and others. 
Currently, association health plans--which are engaged in the business 
of providing health insurance--must comply with all applicable State 
insurance and consumer protection laws. The proposed federal AHP 
legislation would allow AHPs to escape State regulation and oversight, 
which protects consumers by ensuring that these plans are financially 
sound, fairly priced and cover important health benefits.
    State oversight and regulation is critical to protect consumers 
from unscrupulous operators that sell phony health insurance to 
unsuspecting businesses and individuals. Regrettably, the AHP 
legislation, under the guise of improving affordability and access to 
coverage for small firms and their employees, would exempt AHPs from 
the comprehensive State oversight and regulation that consumers have 
come to expect from their health insurance coverage. Eliminating 
consumer protection laws and State oversight will only harm consumers 
and, for that reason, 42 Attorneys General across the country, strongly 
oppose federal AHP legislation.
    State oversight and regulation is the best way to ensure that 
health insurance plans remain financially solvent and that consumers 
are protected against fraud and abuse. We know from past experience 
that exempting these plans from State laws harms consumers. In the 
1970s, Congress experimented with providing exemptions for similar 
entities--multiple employer welfare arrangements (MEWAs)--and the 
result was widespread fraud and abuse, resulting in millions of dollars 
in unpaid medical claims and more uninsured. Congress restored the 
States' authority to fully regulate MEWAs in the 1980s, and the States 
have made tremendous strides in combating health care fraud.
    I am especially concerned about the prospect of federal preemption 
in light of a new wave of health insurance scams that have left over 
200,000 individuals and families uninsured and saddled with over $252 
million in unpaid medical claims. The States have been aggressive in 
taking action against unscrupulous operators--issuing 108 cease and 
desist orders against 41 unauthorized arrangements, as well as, 
imposing criminal and civil penalties. Regrettably, this legislation 
would prohibit States from helping consumers by usurping their 
authority and putting the U.S. Department of Labor (DOL) in charge of 
regulating these entities. DOL has neither the resources nor the 
expertise necessary to adequately protect consumers from health 
insurance scams. According to the U.S. General Accounting Office (GAO), 
DOL was only able to shut down 3 fraudulent entities out of 144 
unauthorized entities identified by GAO over a three year period.
    The AHP legislation would also put consumers at risk for unpaid 
medical claims because of the bill's inadequate solvency standards. 
Self-funded AHPs would be exempt from State solvency requirements and 
instead, would have to meet minimal federal standards (capped at $2 
million). This standard is far less stringent than State solvency 
requirements and, thus, far less protective of consumers. Plan failures 
are a major problem for these types of entities, which have a long and 
troubled history of financial insolvency and even fraud. Indeed, the 
assets of the association sponsoring an AHP would not be at risk in the 
event of insolvency. Therefore, it is critical that the States be able 
to apply and enforce their stronger solvency standards. Otherwise, 
consumers would be victims of unpaid medical claims in the event of a 
plan failure or insolvency.
    Also, preemption of State laws would leave States powerless to 
protect consumers from plans that failed to deliver promised benefits 
or engaged in deceptive practices. Under federal AHP legislation, 
protections that are taken for granted would be eliminated including; 
limits on how much and how often premiums can increase; the right to 
independent review of claim denials; coverage for important health 
services (e.g. maternity care, preventive care, child immunizations, 
cancer screenings, mental health services and treatment) and, consumer 
marketing protections. Preemption from State laws and oversight will 
ultimately do great harm to consumers by eliminating many of the 
consumer protections that Pennsylvanians have come to rely on.
    While the Attorney General's Office strongly supports efforts to 
increase access to affordable coverage for small businesses and their 
employees, we believe this legislation would actually make the problem 
worse. Indeed, the U.S. Congressional Budget Office found that AHPs 
would actually increase health insurance premiums for the vast majority 
of small firms at a time when businesses are experiencing double digit 
increases in their health insurance premiums.

    Senator Specter. Thank you very much, Ms. Barbieri.
    For the record, it should be noted that Ms. Barbieri has a 
bachelor's degree from the University of Pennsylvania, a law 
degree from Widener University School of Law, and a career as a 
clerk to Superior Court Judge Vincent Cirillo, who used to be a 
Montgomery County Court judge.
    Senator Greenleaf. That was in this courtroom.
    Senator Specter. I had a big case involving--with Frank 
Perdue, the chicken man, who drove onto the Pennsylvania 
Turnpike one night when it was under construction, and didn't 
know that it was one-way, and pulled out to pass and had a 
head-on collision with an oncoming car, and killed the other 
driver. And Frank Perdue came to me--I had finished my tour as 
district attorney and was a defense lawyer at that time--and 
rather than take the 20 minutes to tell you how I got him off, 
he was not guilty. It's not necessarily relevant to him getting 
off.
STATEMENT OF PAUL ZIEGER, ON BEHALF OF THE NATIONAL 
            FEDERATION OF INDEPENDENT BUSINESS
    Senator Specter. Back to the hearing. Our next witness is 
Mr. Paul Zieger, whose family has been in the florist industry 
for almost a century, 80 employees, and had his health 
insurance premiums increase by more than 15 percent over the 
last 4 years. Mr. Zieger has a bachelor's degree in physics 
from Muhlenberg, and a certificate in business administration 
from the Wharton School.
    Thank you for joining us, Mr. Zieger. We look forward to 
your testimony.
    Mr. Zieger. My pleasure.
    Good afternoon, Senator, members of the committee. Thank 
you for inviting me to talk this afternoon about the important 
issue of affordable and accessible health insurance, especially 
for those of us who are working and owning small businesses.
    I'm here on behalf of the National Federation of 
Independent Business, the NFIB, which represents 600,000 
members of small business people, like I, who face similar 
challenges. I've been a member of that organization for 30 
years.
    My name is Paul Zieger, and I own and run a company, Zieger 
& Sons, which is a wholesale florist. At Zieger & Sons, my 
employees and I work together to sell and distribute flowers--
cut flowers, that is--to retail merchants over a five-State 
area.
    My grandfather started Zieger's in 1910, when he purchased 
a greenhouse business in the Germantown section of 
Philadelphia. He restored the greenhouses and developed the 
business by growing a multitude of flowers and wholesaling them 
to the local trade. His sons, Herman and Wilbur, took over his 
dream, and the company grew from there.
    As the company moved into the 21st century, the family 
members decided that it would be best for the success of both 
the growing and wholesaling divisions if they separated into 
two companies. Thus, in August 2002, the descendants of Herman 
Zieger opened Zieger Floral, Inc., for the growing division, 
leaving the descendants of Wilbur Zieger to operate Zieger & 
Sons as only wholesale. For those of you who are Montgomery 
County residents, Zieger owns the warehouse.
    At Zieger & Sons, we now have 80 employees. I, along with 
most of the management team, have college degrees, while most 
of my employees have high-school diplomas. Our employees range 
anywhere from high-school graduates to late-50s. We have part-
time and full-time workers, and our payroll is divided among 
hourly workers, commissioned salesmen, and management. Our 
company has a family atmosphere, with low turnover, which is 
why it is so important to me to be able to give my employees 
the benefits they deserve. We are just as dedicated to our 
employees as they are to us.
    Like many entrepreneurs, I learned very early that if I 
want to remain competitive, I must offer an attractive benefits 
package. Since the early 1950s, our company has provided 
comprehensive health insurance for our employees. We have seen 
steady premium increases of at least 15 percent per year for 
the last 3 years, and these premiums now rose by more than 19 
percent this year. We have been lucky not to have had excessive 
claims, which could have raised those premiums even more.
    It has been an employee--I have an employee in Delaware who 
now has to be covered under a policy of just one, because I 
have no group coverage, since he is in another State. I have a 
similar problem for anyone I might hire from the State of New 
Jersey, because the insurance coverage is prohibitive. I will 
keep this employee, even though it is expensive to me, because 
he is important to me, and I certainly wouldn't want to 
discharge anybody just because he was difficult to insure.
    We changed our plan in 1994 from a PPO to an HMO because of 
continually rising costs. We want to offer one plan to our 
employees. And if they want dependent coverage, we charge them. 
We used to pay 100 percent, but now the employees share 2 
percent of that cost of the premium, and we're raising that to 
3 percent as we move to try to control our continually rising 
cost.
    Every year, of course, we had to get together and decide 
what plan we were going to offer to keep our cost under 
control. We've already heard that our increases have been more 
than 15 percent per year, and so we need association health 
plans to help us do that. And we have always absorbed those 
costs and looked to the future for Congress to help us to help 
keep those benefits available to us. The bottom line is, I take 
the risk of losing employees and dramatically increasing my 
turnover costs as I struggle to deal with this.
    I support businesses being successful, but when I'm faced 
with double-digit increases every year, or when other small 
businesses cannot provide health insurance to their workers, I 
feel that the insurance industry is more worried about their 
profits than our ability to afford healthcare. I have to 
compete, so why shouldn't insurance companies? Simply put, 
competition is needed in the small market.
    It is for this reason I support the legislation endorsed by 
the NFIB for the association health plans. And we've already 
heard the testimony about how they would allow us the same 
benefits that big companies and labor unions have.
    Mr. Chairman, thank you for supporting this legislation and 
for allowing me to share my experiences.
    [The statement follows:]
                   Prepared Statement of Paul Zieger
    Good afternoon Mr. Chairman and Members of the Committee. Thank you 
for inviting me to talk about the important issue of affordable, 
accessible health insurance, especially for those owning or working for 
small businesses. I am pleased to be here on behalf of the National 
Federation of Independent Business (NFIB), representing 600,000 members 
who face a similar challenge. I have been a member of NFIB for 30 
years.
    My name is Paul Zieger, and I own and run Zieger & Sons, Inc., a 
wholesale florist. At Zieger & Sons, Inc., my employees and I work 
together to sell and distribute flowers to retail merchants over a 
five-State area.
    Ernst Zieger started Zieger & Sons, Inc. in 1910 when he purchased 
a greenhouse business in the Germantown section of Philadelphia. He 
restored the greenhouses and developed his business by growing a 
multitude of flower varieties and wholesaling them to the local retail 
trade. His sons Herman and Wilbur took over his dream, and Zieger & 
Sons prospered. As the company moved into the 21st century, the family 
members decided that it would be best for the success of both the 
growing and wholesaling divisions if they separated into two separate 
companies. Thus in August 2002, the descendants of Herman Zieger opened 
Zieger Floral Inc., for the growing division, leaving the descendants 
of Wilbur Zieger to operate Zieger & Sons as only wholesale.
    At Zieger & Sons Inc., we now have 80 employees. I, along with most 
of the management team, have college degrees, while most of my 
employees have high school diplomas. The ages of our employees range 
anywhere from just out of high school to late fifties. We have part-
time and full-time workers, and payroll is divided among hourly 
workers, commission sales, and management. It is a family atmosphere 
with low turnover, which is why it is so important to me to be able to 
give my employees the benefits they deserve. We are just as dedicated 
to our employees as they are to us.
    Like many entrepreneurs, I learned early that, if I want to remain 
competitive I must offer an attractive benefits package. Since the 
early 1950's, we have provided comprehensive health care insurance to 
our employees. We have seen steady premium increases of at least 15 
percent per year for the last 3 years, and this year premiums rose by 
19 percent. We have been lucky not to have had any catastrophic claims 
or I am sure they would be much higher.
    One of my employees lives in Delaware. He has been an employee for 
six years and a very valuable one at that. Unfortunately, I pay quite a 
bit more for his health benefits since he resides in another State. 
Currently, there is no way to offer insurance across State lines; 
therefore I have to pay for an individual policy. I will continue to do 
that because he is an excellent employee, and it is worth it to me to 
have him on staff. With 80 total employees, we are able to spread our 
health risks a little, but they need to be spread over a larger group 
to keep the costs down. I would like my employee from Delaware to be 
included in the same pool, as well as any other employees I might hire 
in the future from surrounding States.
    We currently offer a Health Maintenance Organization Plan (HMO) to 
our employees. We changed plans in 1994 from a Preferred Provider Plan 
(PPO) to an HMO since many of the physicians were dropping out of the 
PPO network and costs were continually going up. We offer one plan to 
our employees and if they want dependent coverage they must pay for it 
themselves. We used to pay 100 percent of their premium, but each year 
we have had to ask the employees to pay more to allow us to continue to 
offer health care coverage. New employees must wait 90 days before 
becoming eligible, but after that period, the plan is offered to all 
workers including part-time workers who work over 30 hours per week.
    Every year I, along with our human resources person, research 
different options for affordable health care for our workers. In 
February each year, my benefits consultant and I go through the 
painstaking work of getting bids from other insurance carriers or 
researching different options to bring down the cost. For the past 
three years, our health care costs have increased by 15 percent, and 
this year they rose by 19.4 percent. Currently, we pay 98 percent of 
the premium with the employee paying 2 percent. This year we will 
increase the employee pay share to 3 percent and raise our co-pays to 
bring our premium increase down to 14 percent. Seems to me that 
insurance companies continue to subsidize their costs by raising our 
rates. How is it that these companies have such high paid executives 
yet claiming they must raise rates to survive?
    Knowing that providing health insurance is necessary to me for both 
business and personal reasons, and knowing that I cannot increase 
prices to my customers an extra 20 percent in order to absorb the cost, 
I continue to offer health insurance benefits, despite the growing cost 
to the business. Our business has absorbed the added cost every year. 
This company has run like a family operation for years, and I cannot 
imagine denying my employees health coverage, but unfortunately we are 
extremely worried about how the increases will look next year. The 
bottom line is I take the risk of losing good employees and 
dramatically increasing my turnover rate if we are forced to lower 
coverage and increase employee contribution.
    While I continue to struggle to provide affordable coverage, some 
of the big insurance companies have announced record profits the last 
few quarters. Are they making money off the backs of hard-working small 
business owners? I support businesses being successful but when I'm 
faced with double-digit increases every year or when other small 
businesses cannot provide health insurance to their workers, I feel 
that the insurance industry is more worried about their profits than my 
ability to afford health care for my employees, which tells me the 
system is broken. I have to compete so why shouldn't insurance 
companies? Simply put, competition is needed in the small group market.
    It is for this reason that I support legislation endorsed by NFIB 
that would create Association Health Plans (AHPs). AHPs would allow 
small business owners to band together across State lines to purchase 
health insurance as part of a large group, thus ensuring greater 
bargaining power, lowering administrative costs and easing the burden 
of having to comply with 50 different sets of costly State insurance 
mandates. Fortune 500 companies and labor unions already have this 
right. AHPs will simply level the playing field and give small 
employers the same privileges as their counterparts in labor and big 
business.
    Mr. Chairman, thank you for your support of the legislation and for 
allowing me to share my experience with you and the Members of the 
Committee. I look forward to the relief that will come from Congress by 
enacting AHPs and I am happy to answer any questions that the Committee 
may have.

    Senator Specter. Thank you, Mr. Zieger. I compliment you on 
your statement. I compliment you on handling all of those 
papers. I've seen a lot of witnesses at a lot of hearings, and 
I compliment you on doing an outstanding job. That's very 
effective.
STATEMENT OF RAY CARROLL, ON BEHALF OF THE PENNSYLVANIA 
            RESTAURANT ASSOCIATION
    Senator Specter. Our next witness is Mr. Ray Carroll, owner 
of Ray's Restaurant & Malt Shop, located in East Norriton, 
Pennsylvania. Mr. Carroll is a graduate of Florida 
International University, with a bachelor of science and hotel/
restaurant management.
    Thank you for joining us today, Mr. Carroll, and we look 
forward to your testimony.
    Mr. Carroll. Thank you for having me today, Senator Specter 
and other members of the Committee.
    One of the greatest challenges facing restaurants and other 
small businesses today is the accessibility to affordable, 
quality healthcare.
    My name is Ray Carroll, and I am representing the 
Pennsylvania Restaurant Association as a member of the board of 
directors of the Philadelphia/Delaware Valley Chapter. I'm 
involved in our community through my restaurant, which touches 
over 100 nonprofit organizations in Montgomery County and the 
Philadelphia area. As you know, I own Ray's Restaurant & Malt 
Shop, since 1986, and employ 40 individuals.
    There are over 870,000 restaurant locations in the United 
States. The vast majority of these restaurants are small, 
single-unit operations. And 7 out of 10 have less than 20 
employees. The restaurant industry is also one of the largest 
employers in the country, employing an estimated 11.7 million 
people, making it the largest employer outside of government.
    One of our primary obstacles to providing improved coverage 
to more people is cost. Restauranteurs from around the country 
are reporting that same staggering increases facing other small 
employers. For each of the last 2 years, the average premium 
increase for a table-service restaurant was 23 percent. 
Unfortunately, analysts project similar increases for the 
foreseeable future.
    Employees of smaller companies also pay more to offer 
healthcare than those of large employers. On average, a worker 
in a firm with less than 10 employees pays 18 percent more for 
health insurance than a worker in a firm with 200 or more 
employees. Obviously, small businesses cannot pass on their 
retail costs or menu prices of 18 to 20 percent every year, or 
else we would be all out of business.
    The cost encountered in today's small group health-
insurance market not only makes it difficult for employers to 
find affordable coverage, it is forcing those who wish to 
continue offering coverage to make difficult decisions. Many 
employers are either having to reduce coverage, pass on a 
higher percentage of their cost to their employees, or have to 
discontinue offering coverage altogether.
    Another challenge facing employers is the lack of choices 
when shopping for a health plan. In many States, the small 
group healthcare market only offers employers a small handful 
of choices. It is clear to us that additional competition is 
necessary.
    If enacted, association health plans would decrease costs 
and provided needed competition. But allowing employers to 
consider the health plan of a bona fide trade association of 
their choice, whether that be the Pennsylvania Restaurant 
Association plan or a Chamber of Commerce plan, employers would 
have more health plan options from which to choose. AHPs would 
allow small businesses to take advantage of the same uniform 
regulatory status, economies of scale, purchasing clout, and 
administrative efficiencies that corporate and labor unions 
current enjoy.
    In addition, association health plans would provide quality 
and reliable health coverage. Like corporate and labor unions, 
AHPs would be fully regulated by the Department of Labor.
    In September 2002, Secretary Elaine Chao issued a 
comprehensive report detailing the Department of Labor's 
readiness for assuming oversight of AHPs. Also in this report, 
Secretary Chao emphasized the numerous safeguards in the AHP 
legislation that are designed to protect consumers.

                           PREPARED STATEMENT

    The Pennsylvania Restaurant Association and I, as a small 
business owner, believe association health plans provide a 
great way to increase access to the uninsured. By removing some 
of the cost barriers and by instilling additional competition 
into the small-group market, AHP legislation provides 
employers, particularly small employers, the tools they need to 
provide quality healthcare to more people.
    Thank you for inviting me today to give my testimony.
    [The statement follows:]
                   Prepared Statement of Ray Carroll
    One of the greatest challenges facing restaurants and other small 
businesses today is accessibility to affordable, quality health care. 
Senator Specter and members of the committee, thank you for the 
opportunity to present testimony today on the Association Health Plan 
legislation which will provide quality health care coverage to more 
individuals.
    My name is Ray Carroll, and I am representing the Pennsylvania 
Restaurant Association as a member of the board of directors of the 
Philadelphia Delaware Valley Chapter. I am involved in my community 
through my restaurant which touches over 100 non-profit organizations 
in Montgomery County and the Philadelphia area. As you know, I have 
owned Ray's Restaurant and Malt Shop since 1986 and employ 40 
individuals.
    There are over 870,000 restaurant locations in the United States. 
The vast majority of these restaurants are small, single-unit 
operations, and 7 out of 10 have less than 20 employees. The restaurant 
industry is also one of the largest employers in the country--employing 
an estimated 11.7 million people--making it the largest employer 
outside of government.
    One of the primary obstacles to providing improved coverage to more 
people is cost. Restaurateurs from around the country are reporting the 
same staggering premium increases facing other small employers. For 
each of the last two years, the average premium increase for a table 
service restaurant was 23 percent. Unfortunately, analysts project 
similar increases for the foreseeable future.
    Employees of smaller companies also pay more to offer health care 
than those of large employers. On average, a worker in a firm with less 
than 10 employees pays 18 percent more for health insurance than a 
worker in a firm with 200 or more employees.
    The cost encountered in today's small group health insurance market 
not only makes it difficult for employers to find affordable coverage, 
it is forcing those who wish to continue offering coverage to make 
difficult decisions. Many employers are either having to reduce 
coverage, pass on a higher percentage of the cost to their employees, 
or have to discontinue offering coverage altogether.
    Another challenge facing employers is a lack of choices when 
shopping for a health plan. In many States, the small group health care 
market only offers employers a small handful of choices. It is clear to 
us that additional competition is necessary.
    If enacted, Association Health Plans would decrease costs and 
provide needed competition. By allowing employers to consider the 
health plan of a bona-fide trade association of their choice--whether 
that be the Pennsylvania Restaurant Association plan or a Chamber of 
Commerce plan--employers would have more health plan options from which 
to choose. AHPs would allow small businesses to take advantage of the 
same uniform regulatory status, economies of scale, purchasing clout, 
and administrative efficiencies that corporate and labor unions 
currently enjoy.
    In addition, Association Health Plans would provide quality and 
reliable health coverage. Like corporate and labor union plans, AHPs 
would be fully regulated by the Department of Labor. In September 2002, 
Secretary Elaine Chao issued a comprehensive report detailing the 
Department of Labor's readiness for assuming oversight of AHPs. Also in 
this report, Secretary Chao emphasized the numerous safeguards in the 
AHP legislation that are designed to protect consumers.
    The Pennsylvania Restaurant Association and I as a small business 
owner believe Association Health Plans provide a great way to increase 
access to the uninsured. By removing some of the cost barriers and by 
instilling additional competition into the small group market, AHP 
legislation provides employers--particularly small employers--the tools 
they need to provide quality health care to more people.

    Senator Specter. Thank you, Mr. Carroll.
STATEMENT OF MARY BETH SENKEWICZ, SENIOR COUNSEL FOR 
            HEALTH POLICY, NATIONAL ASSOCIATION OF 
            INSURANCE COMMISSIONERS
    Senator Specter. Our final witness on this panel is Ms. 
Mary Beth Senkewicz, senior counsel for Health Policy of the 
National Association of Insurance Commissioners. Prior to 
joining the association, she supervised the Consumer Affairs 
Division of the Wyoming Insurance Department. A JD from St. 
John's University, and a bachelor's degree in English and 
philosophy from Cabrini College, right around the corner--are 
you a native of this area, Ms. Senkewicz?
    Ms. Senkewicz. I'm not, Senator. I was born in New York 
City, but I went to Mother Cabrini High School and then to 
Cabrini College.
    Senator Specter. That makes you an adopted native.
    Ms. Senkewicz. Thank you. And I'm on the board now. Thank 
you.
    Senator Specter. Thank you for joining us. We welcome your 
testimony.
    Ms. Senkewicz. Thank you, Senator.
    I'm testifying this afternoon on behalf of the NAIC, which 
represents insurance regulators in all 50 States, the District 
of Columbia, and four U.S. territories, the National 
Association of Insurance Commissioners. The primary objective 
of insurance regulators is to protect consumers. And it is with 
this role in mind that I comment today on the AHP legislation.
    At the start, I would like to emphasize that the States 
recognize the importance of insuring that health coverage is 
affordable and available for small businesses. And we offer the 
full support of the NAIC in developing legislation that will 
reach those goals.
    States have acted aggressively over the past 15 years to 
stabilize and improve the same-group market. More must be done, 
we agree. But unless the most basic underlying issue, the cost 
of healthcare, is directly addressed, all efforts will have 
limited results.
    We would like to work with the Chair to develop legislation 
that would make insurance more affordable and provide small 
businesses with greater choices, but any legislation must meet 
the following criteria.
    First, higher-risk employees must not be forced out of the 
market. Before State small-group market reforms were 
implemented, if an employee became sick, the employer was 
shifted to a higher-risk pool and often priced out of the 
market. State small-group market reforms forced insurers to 
treat all small employers as part of a single pool, and allow 
only modest variations in premiums based on risk. This 
spreading of risk has brought fairness to the market, and must 
be preserved for the sake of higher-risk employers and their 
employees.
    The AHP bill would dismantle the small-market reforms, 
allowing plans to cherry-pick risk, leaving higher-risk 
consumers with little or no coverage. The bill's proponents 
claim to have addressed this issue, but that is not the truth. 
AHPs would be encouraged to cherry-pick using four very basic 
methods: benefit package design, service area, membership, and 
rating. And the more underhanded plans could think of many more 
ways to improve their risk pool.
    Second, consumers must be protected from plan failures and 
fraud. Over 10,000 State employees nationwide oversee the 
business of insurance to ensure that plans are able to pay 
claims. Through reporting requirements, States receive the 
information they need to identify problems and force corrective 
action. Yes, State regulation has a cost, but it has a cost 
because it provides real protections for consumers. Adequate 
Federal regulation would also have a cost.
    Insurance is a complicated business involving billions of 
dollars, with ample opportunity for unscrupulous or financially 
unsophisticated entities to harm millions of consumers. The 
fact is, each time oversight has been limited in the past, the 
result has been the same: increased fraud, increased plan 
failures, decreased coverage for consumers, and piles of unpaid 
claims.
    Crucial to the long-term viability of insurance plans is 
the maintenance of sufficient capital and reserves. In 
particular, the capital-reserve requirement in the bill for any 
and all AHPs is capped at no more than $2 million, no matter 
the size of the plan. States require the capital surpluses to 
grow as the plan grows.
    More troubling, even if the solvency standards increased, 
oversight is nonexistent. State regulators comb over financial 
supports and continually check investment ratings to ensure 
that any potential problems are identified and rectified 
quickly. The AHP legislation would rely on self-reporting and 
an under-funded Department of Labor to identify and correct 
problems. The Department of Labor does not have the personnel, 
the funding, or the expertise to provide adequate oversight of 
the AHPs. The regulation of the self-funded ERISA plan is very 
different from regulating an insurance company, which is 
exactly what a self-funded AHP is. It is the creation of a 
Federal insurance company. This should be of particular concern 
to the committee.

                           PREPARED STATEMENT

    Finally, patient rights must be preserved. The AHP bill 
will broadly preempt State consumer protections, since the AHP 
is self-insured, such as external appeals processes, policy and 
advertising reviews to prevent unfair or misleading language, 
networks, and utilization review standards, just to say a few. 
Furthermore, there would be no entity to complain to if the 
patient's rights are violated. States insurance regulators act 
on thousands of complaints every year and work hard to protect 
the rights of patients.
    Mr. Chairman, thank you for inviting the NAIC to testify 
today. I ask that my full statement be made a part of the 
record.
    [The statement follows:]
               Prepared Statement of Mary Beth Senkewicz

                              INTRODUCTION
    Good morning Mr. Chairman. My name is Mary Beth Senkewicz and I am 
Senior Counsel for Health Policy for the National Association of 
Insurance Commissioners (NAIC). The NAIC represents the chief insurance 
regulators from the 50 States, the District of Columbia, and four U.S. 
territories. The primary objective of insurance regulators is to 
protect consumers and it is with this goal in mind that I comment today 
generally on the small business healthcare crisis, and in particular 
the proposal to create Association Health Plans (AHPs).
    At the start, I would like to emphasize that the commissioners 
recognize the importance of ensuring that health coverage is affordable 
and available for small businesses and offer the full support of the 
NAIC in developing legislation that will reach these goals. States have 
acted aggressively over the past ten years to stabilize and improve the 
small group market. Many States have even implemented laws that allow 
associations to provide insurance to their members. However, the 
members of the NAIC remain strongly opposed to the AHP legislation that 
has been offered in Congress. More can and must be done to make health 
insurance more affordable for small business employees, but the AHP 
legislation, as currently drafted, would do more harm than good.
   what states and the naic have already done to address the problem
    Throughout the 1990's, the States and the NAIC have devoted 
significant attention to the problem of making health insurance 
available to small employers. We have taken a variety of approaches in 
this effort.
Small Group Reform
    One approach the States have taken is small group reform. Before 
the enactment of the Health Insurance Portability and Accountability 
Act of 1996 (HIPAA), 46 States had enacted some kind of small group 
reform based in varying degrees on NAIC models.
    In 1992, the members of the NAIC adopted the Small Employer and 
Individual Health Insurance Availability Model Act. It required the 
guaranteed issue of a basic and standard health benefit plan by all 
health carriers doing business in a State's small group market. It also 
required guaranteed renewability, subject to certain exceptions, and 
established rating bands to assure consumers are not priced out of the 
market and risk is spread over a larger pool. In essence, the block of 
small group business is treated much like large groups for rating 
purposes.
    In 1995, the NAIC refined this model. The 1995 version required 
guaranteed issue and guaranteed renewability of all products offered by 
a carrier in a State's small group market. It also required adjusted 
community rating with adjustments permitted only for geographic area, 
age, and family composition.
    Today, our members are examining the impact of HIPAA and 
determining what further efforts are needed by States to assist small 
businesses in the provision of coverage.
Purchasing Pools
    Allowing small businesses to form purchasing pools, sometimes 
called purchasing alliances, is another approach that States have taken 
to make health insurance more available to small groups. By joining 
together, small groups can somewhat reduce their administrative costs, 
provide their employees with more choice, and command better prices.
    The NAIC has devoted considerable attention to health insurance 
purchasing pools. In 1995 the NAIC adopted three model acts allowing 
for the creation of purchasing alliances. These models represent the 
NAIC's complete agreement with the concept that small employers should 
have the opportunity to join together to purchase health insurance.
    At least twenty-two States have either adopted legislation that 
creates some kind of purchasing pool or have allowed purchasing pools 
to operate without legislation. In 2000, Kansas passed legislation 
creating the Kansas Business Health Partnership, which allows for small 
groups to pool and establish their own set of benefits. It is not 
comprehensive insurance but it is a low cost alternative for businesses 
especially those with low wage workers.
    Again, the NAIC agrees that more needs to be done to expand 
coverage to small businesses. Reforms should be broad, addressing both 
the affordability of insurance (bringing down the cost of coverage to 
small businesses, possibly through financial incentives) and the 
availability of insurance (expanding choice and promoting competition). 
However, the AHP legislation is not the answer and would have the 
effect of reversing many of the gains that have been made over the last 
10 years.

            SPECIFIC CONCERNS ABOUT CURRENT AHP LEGISLATION
The AHP Legislation Would Undermine State Reforms
    Before State small group market reforms were implemented, the small 
group market was fragmented into various pools based on risk. If a 
small employer had healthy employees in a relatively safe working 
environment the employer could easily find coverage at a good rate. 
However, if one of the employees became sick, the employer would be 
shifted to a higher risk pool and often priced out of coverage. Those 
who started with sicker or higher risk employees were often priced out 
of the market from the beginning.
    State small group market reforms forced insurers to treat all small 
employers as part of a single pool and allow only modest, and in some 
States no, variations in premiums based on risk. This spreading of risk 
has brought some fairness to the market. The AHP legislation in 
Congress would undermine State reforms and once again fragment the 
market. AHPs would be encouraged to ``cherry-pick'' using four very 
basic methods:
    (a) Benefit design.--S. 545 eliminates all State benefit mandates, 
allowing plans to deny consumers costlier treatments;
    (b) Service area.--S. 545 eliminates State service area and network 
requirements, allowing plans to ``redline'' and avoid more costly 
areas;
    (c) Membership.--S. 545 permits associations to offer coverage only 
to their members, allowing plans to seek memberships with better risk;
    (d) Rating.--S. 545 eliminates State rating limits for most plans, 
allowing them to charge far more for higher risk persons, forcing them 
out of the pool.
    While the AHP bill does make some effort to reduce ``cherry 
picking'' the NAIC believes the provisions would be woefully 
inadequate.
The AHP Legislation Would Lead to Increased Plan Failures and Fraud
    Proponents of the AHP legislation claim that the Department of 
Labor already has sufficient resources to oversee the new plans and 
will be able to prevent any insolvencies or instances of fraud. This 
simply is not the case. The Department of Labor has neither the 
resources nor the expertise to regulate insurance products. The States 
have invested more than 125 years in regulating the insurance industry. 
State insurance departments nationwide employ over 10,000 highly 
skilled people, and the combined budgets of State insurance departments 
total more than $700 million. The AHP bill provides no new resources 
for regulating these plans.
    While we acknowledge State regulation does increase costs, it 
exists to protect consumers. Insurance is a complicated business, 
involving billions of dollars, with ample opportunity for unscrupulous 
or financially unsophisticated entities to harm millions of consumers. 
Unless oversight is diligent, consumers will be harmed.
    This is not just speculation, but fact borne of years of experience 
with Multiple Employer Welfare Arrangements (MEWAs), multi-State 
association plans, out-of-State trusts, and other schemes to avoid or 
limit State regulation. Within the last year, 16 States have shut down 
48 AHP-like plans that had been operating illegally in the State, many 
through bona fide associations. Association plans in several States 
have gone bankrupt because they did not have the same regulatory 
oversight as State-regulated plans, leaving millions of dollars in 
provider bills unpaid.
    Each time oversight has been limited the result has been the same--
increased fraud, increased plan failures, decreased coverage for 
consumers, and piles of unpaid claims. Specifically, the NAIC believes 
the following issues must be addressed:

            SOLVENCY STANDARDS MUST BE INCREASED
    While the solvency standards in the AHP legislation have been 
increased over the years, they are still woefully inadequate. In 
particular, the capital reserve requirement for any and all AHPs is 
capped at $2 million--no matter the size of the plan. Almost all States 
require the capital surpluses to grow as the plan grows, with no cap or 
a far higher cap than that in the federal legislation. If a nationwide 
AHP were offered to a large association, a capital surplus of only $2 
million would result in disaster.

            AHP FINANCES MUST RECEIVE GREATER OVERSIGHT
    Even if the solvency standards were increased, oversight is almost 
nonexistent in the bill. Under the bill the AHP would work with an 
actuary chosen by the association to set the reserve levels with little 
or no government oversight to ensure the levels are sufficient or 
maintained. Also, the AHP would be required to ``self-report'' any 
financial problems. As we have seen over the past year, relying on a 
company-picked accountant or actuary to alert the government of any 
problems can have dire consequences for consumers who expect to have 
protection under their health plan.
    State regulators comb over financial reports and continually check 
investment ratings to ensure that any potential problems are identified 
and rectified quickly. AHP plans must be held to the same standard.
    Simply limiting participation in AHPs to ``bona fide trade and 
professional associations'' and providing limited Department of Labor 
oversight of self-reported problems will not prevent fraud and 
mismanagement. Strict oversight is required and this will only occur if 
all health plans delivered through associations are licensed and 
regulated at the State level.

THE AHP LEGISLATION WOULD ELIMINATE IMPORTANT PATIENT PROTECTIONS
    Included in the current AHP legislative proposals is the broad 
preemption of consumer protection laws. Proponents of AHPs will argue 
that State mandated benefit laws must be preempted so that AHPs do not 
have to provide coverage for expensive benefits. However, States have a 
complex regulatory structure in place for insurers. Not only will 
mandated benefit laws be preempted, but other laws protecting patient 
rights and ensuring the integrity of the insurers would be preempted as 
well. A small sample of these laws and actions follows:
  --Internal and external appeals processes.
  --Investment regulations to ensure that carriers only make solid 
        investments instead of taking on risky investments such as junk 
        bonds.
  --Unfair claims settlement practices laws.
  --Advertising regulation to prevent misleading or fraudulent claims.
  --Policy form reviews to prevent unfair or misleading language.
  --Rate reviews. Insurance departments may review rates to make sure 
        the premiums charged are fair and reasonable in relation to the 
        benefits received.
  --Background review of officers.
  --Network requirements including provider credentialing and network 
        adequacy, to ensure that plans offer a provider network that is 
        capable of delivering covered services.
  --Utilization review requirements to ensure that plans have 
        acceptable processes and standards in place to determine 
        medical necessity and to make coverage determinations.
    While some of these protections may be offered by AHPs as a service 
to their association members, there would be no requirement that they 
do so, and no entity to complain to if a patients' rights are violated 
by the plan. State insurance regulators act on millions of consumer 
complaints every year and work hard to protect the rights of patients. 
AHP participants should have access to the same protections and 
complaint process.

THE AHP LEGISLATION WOULD CUT FUNDS TO HIGH RISK POOLS AND GUARANTY 
        FUNDS
    While the latest version of the AHP legislation would allow States 
to impose premium taxes on AHP plans--to the extent they are imposed on 
other insurance plans--it preempts other State assessments. States 
often use health insurance assessments to fund such important entities 
as high risk pools (which provide coverage to the uninsurable) and 
guaranty funds (which help cover claims if a plan is insolvent.) Such 
programs are vital to the stability of the small group and individual 
markets and to the protection of consumers--they must not be undercut 
by federal preemption.

                               CONCLUSION
    All of us recognize that it is very important to make health 
insurance available to small employers. The States have addressed this 
problem, and will continue to do so. However, the problem is complex 
and does not lend itself to easy solutions.
    The AHP legislation proposed in Congress would put consumers at 
significant risk and disrupt the health insurance market. The illusion 
of federal regulation based on company self-reporting of problems will 
lead to extensive failures. The fragmentation of the small group market 
will leave many small businesses with higher premiums, or no coverage 
options at all.
    The NAIC opposes AHP legislation as currently drafted and urges 
Congress not to adopt it. History has demonstrated that AHP-type 
entities have done more to harm rather than to help small businesses. 
The federal government and the States need to work with healthcare 
providers, insurers and consumers to implement true reforms that will 
curb spending and make insurance more affordable to small businesses. 
We stand ready to work with members of Congress to draft effective 
reforms that will address both the affordability and availability 
issues facing small businesses. Together, we are convinced, real 
solutions to this critical issue can be found.

    Senator Specter. Thank you, Ms. Senkewicz, for your 
comprehensive testimony. Your full statement will be made a 
part of the record.
    Mr. Carroll, when you commented that small companies have 
to pay 18 percent more than the larger companies, if the 
smaller companies and restauranteurs, who you are speaking for, 
could have that 18 percent reduction, would that bring those 
policies within affordability for your restaurants?
    Mr. Carroll. Much more affordability. And that trickles 
down not only to offering employees that really enjoy the 
restaurant profession and industry, that really care, it 
trickles down to keeping those employees, retaining them, and 
being able to offer new employees that are out there an 
opportunity to work with you and to be a part of the community. 
So absolutely it would.
    I mean, it's staggering what the insurance rates have gone 
up in our area. I would say sometimes it's been higher than 18 
percent every year, so it's very difficult to manage.
    Senator Specter. Mr. Zieger, you commented that, as I 
understood your testimony, you've raised the employees' share 
from 2 percent to 3 percent.
    Mr. Zieger. Yes, we're just doing that, starting May 1.
    Senator Specter. And that has been a considerable help to 
your company, enabling you to pay for the increasing cost?
    Mr. Zieger. Oh, yes. We changed our deductibles, we 
increased our emergency-care co-pay from $50 to $100. We 
increased our specialist co-pay from $30 to $40.
    Senator Specter. So you made those modifications of 
coverage, and you also increased the employees' share from 2 
percent to 3 percent. Were your employees satisfied to see 
those modifications?
    Mr. Zieger. Yes, they are, because they read the newspapers 
and see worse things out among their colleagues.
    Senator Specter. It's interesting that they have been met 
receptively in your program.
    Ms. Senkewicz and Ms. Barbieri, you both have raised a 
point about the issue of oversight. Ms. Barbieri, if the bill 
was modified to permit the State attorneys general to have 
oversight, would that solve a significant part of your 
objection to the bill?
    Ms. Barbieri. Yes, sir, definitely.
    Senator Specter. Ms. Senkewicz, when you testified about 
sufficient capital reserves, capped at $3 million, what would 
you think the bill ought to provide to meet that very important 
objection that you have raised?
    Ms. Senkewicz. In the State--Senator, at the State level, 
we use a concept that is called risk-based capital, which 
assesses the risk of the entire company. And there are 
different types of risk--insurance risk, business risk, 
investment risk, and some others that I'm forgetting. But in 
using the formula, then, you come up with an amount of money 
that the company needs to have in reserve, which is going to 
vary, then, according to the size of the plan.
    Senator Specter. So you really think the Federal program 
ought to be modified to take those actuarial items into 
account. If we were able to do that, and exclude the higher-
risk--eliminate the cherry-picking, as you characterize it--
well, you raise good objections to deal with the fraud issues 
and the patients' rights. Do you think the bill could be 
restructured to meet the objections which you and General 
Barbieri have raised, and allow small businesses to pool to get 
the benefits of larger purchaser participation?
    Ms. Senkewicz. Senator, we definitely would like to work 
with the committee to look at restructuring of the bill. In 
fact, Senator Durbin and Senator Lincoln recently dropped a 
bill called the Small Employer Health Benefits bill that we are 
presently studying. That structure, which is different from an 
AHP structure because it uses insured plans only. Obviously 
greater pooling risk is something that the States are aware of 
and are working towards. States allow pooling now, but it is 
only usually within State lines. We'd be happy to work with 
you.
    Senator Specter. Well, thank you for the invitation and the 
suggestions. And you raise important objections, and we need to 
deal with them.
    Secretary Campbell, if this bill were enacted, two 
questions for you. How many people do you think could be 
covered among the now 40-million-plus Americans who are not 
covered by health insurance? And how much would cost be 
reduced?
    Mr. Campbell. There are several different studies that 
looked at that question. As I indicated, the Congressional 
Budget Office found that there would be up to 2 million 
Americans who previously had not had employer-provided 
insurance who would get it, and that the average premium 
savings would be up to 25 percent. There have been other 
studies, including by CONSAD, that estimate more on the order 
of 8 to 8\1/2\ million people with proportionately higher 
savings, as well.
    I would like to point out one thing. I think the Senator 
has a very good point, which is, we can resolve the questions 
that folks are raising, the concerns they have with this 
legislation, through the legislative process. The question is 
not whether this is a good or a bad idea; the question is: How 
do we take this good idea and implement it to make it work even 
better? And that is something we're committed to working with 
you and the committee on, as well.
    I would want to point out one important factor in this 
debate that's been a little bit blurred. Most AHPs would be 
purchasing insurance products from the State, and that 
insurance product would be regulated by the State, with a 
fairly narrow exception.
    Senator Specter. So you're not going to cut out Ms. 
Barbieri?
    Mr. Campbell. No, sir. In fact, most of the consumer 
protections that we're talking about would continue to apply to 
insured products that an AHP is offering. But the narrow 
exception is to the benefit design, and the purpose of that is 
to allow uniformity so that benefits can be offered across 
State lines, much as they are for large employers and union 
plans. Our reading of the bill, and the reading of the bill by 
the House Education and Workforce Committee in their committee 
report, which I would certainly commend to the committee's 
attention, points out that external reviews, solvency 
standards, prompt pay laws, and a variety of other consumer 
protections not affiliated with benefit design are, in fact, 
preserved, and the States do still have the regulatory 
authority under the legislation.
    Senator Specter. Senator Greenleaf.
    Senator Greenleaf. Thank you.
    Mr. Zieger, you grow roses, don't you?
    Well, that was part of Zieger & Sons, prior to August 2002, 
but my cousin, David, under Zieger Florals company, does that.
    Well, you've been an institution in the Willow Grove area. 
And there must be a lot of pressure on you, with all that land 
there, with the housing and commercial development there. It 
must be difficult to continue as a small business there, and I 
congratulate you on being able to do that. We all know that 
small businesses hire and create more jobs than any other type 
of business, and they hire more people than any other type of 
business, and it is important for us to make sure that you have 
a viable workforce, as well.
    What are your costs in comparison to--and I guess this goes 
to Secretary Campbell, as well--what are your actual costs, as 
compared to other larger businesses? And what do they pay, as 
far as actual premiums for health insurance? Obviously, it's 
across the board, because it depends on what the benefits are, 
what deductibles are. Maybe you could give us some idea of what 
we're talking about as a comparison between those that are 
allowed to join together and those that are not.
    Mr. Campbell. The statistics that the Department of Labor 
has indicate that small employers pay roughly 20 to 30 percent 
more for similar benefits, and a large portion of that cost is 
due to the administrative overhead, the lack of negotiating 
ability. And all that's related to the inability to pool across 
State lines to get like-minded groups. When you're bidding for 
insurance for 5 or 10 people, and an insurer has to market that 
product to each of you separately, that increases cost and 
makes it much more difficult to provide the same benefits in a 
cost-effective manner.
    Senator Greenleaf. What about providing for oversight? Is 
the small business able to, unlike a larger one that maybe has 
thousands of employees, have a better oversight on what's being 
used? I mean, obviously, we've become so distant from our 
insurance that, you know, it's covered, it's paid; we don't 
really look at the bill very closely, we don't challenge it if 
it's wrong. Are there any things we could do to help that 
situation, to maybe give the employee, as well as the employer, 
a stake in the savings? Is that a factor in the cost of health 
insurance? And is a small employer capable of implementing this 
a little bit better than a larger one?
    Mr. Campbell. Well, to the question of other proposals that 
help get the actual consumer of the service, the employee, more 
involved in the decisions that are made, the administration has 
supported--in fact, the Congress has passed, in the Medicare 
legislation, health savings accounts, which are a way to allow 
persons to make those healthcare decisions with pre-tax 
dollars, and then use that in conjunction with a sort of major-
medical insurance policy that has a lower premium. The result 
being a consumer making the choices up front and having money 
they can transfer from year to year and actually have ownership 
of while still having a lower cost, but important health 
benefits.
    Senator Greenleaf. The health savings account is where 
basically employers put up the savings account, and the 
employee gets the benefits. If they under-use it, they have the 
benefit of what's left over. What about just reversing that a 
little bit and getting employees even more involved in it by 
giving them the monies to take out to buy their insurance? 
There's a set amount, and then it's their responsibility, not 
the employer's, to go out and buy that insurance. Would that 
add more cost savings?
    Mr. Campbell. Two things. First of all, HSAs can be used by 
individuals as well as employers. It's really an individual tax 
benefit, so it goes in that direction that you're speaking of.
    But as for the second point, employment provides a stable 
pooling device that generally offers better rates and better 
benefits than is available in the individual insurance market. 
Generally speaking, employer-provided coverage is cheaper and 
more comprehensive, which is one of the reasons that most 
Americans get their health coverage through their employer, as 
opposed to buying it on the insurance market for individuals.
    Mr. Zieger. We were told by our consultant that the HSAs 
are possibly the wave of the future. And I suppose it would 
take the insurance factor out in many cases. That way, I would 
have a health savings account and use the funds in that account 
to just go pay a doctor for a visit or for my annual physical, 
and get rid of the insurance cost. You would only be insured 
for catastrophic illness, $2 or $5 thousand, whatever 
catastrophic kind of thing, and you'd just pay for service on a 
fee-for-service basis.
    Senator Greenleaf. It just seems to me the more we get the 
employee involved in the decisions, I think there will be cost 
savings there, as well. There's a little--there's now little 
involvement involving the employees. They're not the 
gatekeepers; they're not the ones looking at what the costs 
are. Then how we could save--whether there's double-billing or 
mistakes in the bill.
    Thank you.
    Senator Specter. Thank you very much, Senator Greenleaf.
    Rep. Fichter.
    Rep. Fichter. Thank you, Senator.
    Senator, before I ask questions, I just want to let you 
know that Ray's Diner has the best eggs benedict in Montgomery 
County.
    Senator Specter. What time do you finish serving?
    Mr. Carroll. There's always an open invitation. We serve 
eggs benedict all day.
    Rep. Fichter. Thank you.
    Mr. Campbell, you have me confused. Basically, when you say 
that when you have a large group or big corporations are going 
to pay one cost, and then the small firms, with the same level 
of benefits, are going to pay a higher cost than large 
corporations, I'm having a problem trying to figure out how 
that happens. Are you indicating that the small firms are 
subsidizing the large firms? Is that what you're saying?
    Mr. Campbell. No, sir. It goes to the nature of trying to 
offer products to them. First of all, the small firm is only, 
as I said before, 5 or 10 people. Clearly, when you have 5 or 
10 people negotiating for any product, compared to 5 or 10 
thousand, you're not going to get an economy of scale, you're 
not going to get some cost savings associated with that. There 
are several reasons for that. One is, an insurer has to go out 
and find the small businesses, so there are marketing costs. 
There are administrative costs going through the rating 
processes for each of those businesses, which compound 
themselves, so that the cost for an insurance policy for that 
small business has a lot more overhead and those kinds of costs 
built into it. When you have a larger plan, say a union plan, 
and you're pooling them across these broad areas, you're able 
to more competitively bid that out. You have one contact point, 
which reduces your marketing cost, for example, and a variety 
of savings in those ways.
    Rep. Fichter. Well, taking it just one step further, if you 
have a group--let's say U.S. Steel, back in the 1970s, when 
they had thousands and thousands of employees, and they put a 
level of benefits in the benefit program, negotiated or not, 
and that having a group that large would spread the risk over 
that entire group. In other words, x number of people have 
heart attacks, x number of people have appendectomies in a 
given year, so that's going to generate an experience, and 
you're going to be experience rated on an annual basis.
    Now, conversely, if you take the small firm, they don't 
have the number of employees to spread the risk that the large 
ones do, so that's basically why I'm having a problem with the 
statistics that you're saying, that they're going to pay a 
higher rate.
    Mr. Campbell. I think the example you used, if you had a 
firm, let's say, of five employees, versus U.S. Steel, if one 
of those five employees gets cancer, the proportionate effect 
on the rate for that group, depending on the State that they're 
in and to the extent the laws allow it, would much higher than 
it would be for U.S. Steel, as a whole. General speaking, the 
principle of insurance is the larger the group size, the more 
they're able to bear those kinds of risk and the less chance of 
statistical anomalies having such a disproportionate effect on 
the market. So that's another reason why small businesses have 
more difficulty; being rated as individual units when they have 
those sorts of events can dramatically affect their cost.
    Rep. Fichter. You see, that's the beauty of this 
legislation. It allows the small businesses to go from 10 to 20 
to 30, across State lines. They can turn into thousands, also. 
So the bottom line is, they could spread their risk over many, 
many individual benefit programs.
    Mr. Campbell. Indeed, sir, that's one of the primary 
benefits.
    Rep. Fichter. Thank you very much.
    Thanks, Senator.
    Senator Specter. Thank you very much, Rep. Fichter.
    I just have one additional question. Ms. Senkewicz, there 
was a famous football player from Georgia, Frank Senkewicz----
    Ms. Senkewicz. No relation, unfortunately. I would have 
loved to have been his niece.
    Senator Specter. I think he spelled his name differently.
    Ms. Senkewicz. He had an extra ``i'' in his name.
    Senator Specter. My father and my uncle spelled their names 
differently. My uncle spells his--my father spelled his name S-
p-e-c-t-e-r, and my uncle spelled it S-p-e-c-t-o-r. They 
obviously spelled it incorrectly. But when people spell my name 
with an ``or,'' I can tell--I went to law school, I was 
followed by a fellow who spelled his name ``or,'' and I'm 
certainly pleased that they misspell his name and started to 
spell his name like my name.
    Well, that concludes the hearing. And I think it has been a 
very, very useful hearing. I think, on the Medicare program, 
there's been a good bit of information disseminated about 
prescription drugs and ways for seniors to find out how to 
utilize the program. And this panel, I think, has produced a 
lot of insight with small-businessmen here articulating the 
issue and identifying ways to cut costs through larger 
purchasing power. And the concerns raised by the attorneys 
general and by Ms. Senkewicz and Ms. Barbieri point the way to 
answering those issues.
    We thank you for coming from Washington, Secretary 
Campbell, with an overview as to the administration's support 
for the bill and the way it can cut costs and increase the 
coverage.
    My instinct is that we're a lot close to the 8-million 
mark, the small businesses, than the 2-million mark, among the 
40-million-plus employees who are not covered. But healthcare 
is a major capital investment, and the Congress will be looking 
very, very closely at these issues as we proceed.
    I, again, want to thank Senator Greenleaf for making the 
suggestion, and Representative Fichter for joining us. And I 
want to thank my staff for running another good hearing. We 
have a high level of professionals who keep the Senate in 
motion.

                         CONCLUSION OF HEARING

    Thank you all very much for being here. That concludes our 
hearing.
    [Whereupon, at 1:37 p.m., Friday, April 2, the hearing was 
concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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