[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
        PRESCRIPTIONS FOR HEALTH CARE: SOLUTIONS TO THE PROBLEM

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, MARCH 2, 2005

                               __________

                            Serial No. 109-3

                               __________

         Printed for the use of the Committee on Small Business


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Deputy Chief of Staff/Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
King, Hon. Steve (IA-05), Congressman, U.S. House of 
  Representatives................................................     3
O'Grady, Hon. Mike, Assistant Secretary for Planning and 
  Evaluation, U.S. Department of Health and Human Services.......     6
Haynes, Mr. W. Thomas, Executive Director, The Coca-Cola 
  Bottlers' Association..........................................    11
Roberts, Ms. Holly Stephen, HSA Coalition........................    13
Hughes, Mr. Robert, President, National Association of the Self-
  Employed, Hall & Hughes, LLC...................................    14
Kerrigan, Ms. Karen, Chairwoman, Small Business Entrepreneurship 
  Council........................................................    15
Shalek, Mr. Scott, Shalek Financial Services.....................    17

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    36
    Velazquez, Hon. Nydia........................................    38
    Lipinski, Hon. Daniel........................................    40
Prepared statements:
    King, Hon. Steve (IA-05), Congressman, U.S. House of 
      Representatives............................................    42
    O'Grady, Hon. Mike, Assistant Secretary for Planning and 
      Evaluation, U.S. Department of Health and Human Services...    45
    Haynes, Mr. W. Thomas, Executive Director, The Coca-Cola 
      Bottlers' Association......................................    58
    Roberts, Ms. Holly Stephen, HSA Coalition....................    63
    Hughes, Mr. Robert, President, National Association of the 
      Self-Employed, Hall & Hughes, LLC..........................    65
    Kerrigan, Ms. Karen, Chairwoman, Small Business 
      Entrepreneurship Council...................................    70
    Shalek, Mr. Scott, Shalek Financial Services.................    77
Additional material:
    Welch, Ms. Maria, Respira Medical, Inc.......................    87

                                 (iii)


        PRESCRIPTIONS FOR HEALTH CARE: SOLUTIONS TO THE PROBLEM

                              ----------                              


                        WEDNESDAY, MARCH 2, 2005

                   House of Representatives
                                Committee on Small Business
                                                     Washington, DC
    The Committee met, pursuant to call, at 2:10 p.m. in Room 
311, Cannon House Office Building, Hon. Donald Manzullo 
[Chairman of the Committee] presiding.
    Present: Representatives Manzullo, Musgrave, King, 
Fitzpatrick, Westmoreland, Gohmert, Velazquez, Lipinski, 
Christensen, Bordallo, Barrow, Bean and Moore. 

    Chairman Manzullo. Good afternoon. It is my pleasure to 
welcome everyone to today's Small Business Committee hearing on 
the critical issue of small business access and alternatives to 
health care.
    The hearing will serve as a forum to discuss and promote 
innovative solutions to help small businesses meet their health 
care needs. Exorbitant health care costs are one of the biggest 
expenses small businesses and the self-employed incur as they 
struggle to provide coverage for employees.
    We have assembled here today a panel of what I like to look 
at as innovators, as people that have specific plans. People in 
the field like Scott Shalek, who on a day-to-day basis are 
challenged, people in positions of public policy that have to 
come up with very difficult decisions and people representing 
various groups around the country who are expressing their 
tremendous concern over the cost of health care.
    Self-employed workers pay their full 15.3 percent payroll 
tax for social security and Medicare on top of individual 
income tax. In recent years, Congress passed legislation 
allowing them to deduct their health care expenses from their 
individual income taxes. However, they do not receive a 
deduction from their payroll tax.
    Last year, along with Congresswoman Velazquez, we 
introduced the Self-Employed Health Care Affordability Act that 
would allow those small business owners to deduct their health 
insurance costs from their payroll taxes. There are other tax 
credits and additional ideas we will hear more about.
    In terms of the order of proceeding, Congresswoman 
Velazquez will have her opening statement, and then I am going 
to recognize Congressman King and Congressman Lipinski for an 
unusual round of opening statements, but each of them has 
introduced very specific legislation dealing with this. Then we 
will proceed immediately to Assistant Secretary Michael 
O'Grady. We are anticipating votes at 2:45.
    [Chairman Manzullo's opening statement may be found in the 
appendix.]
    Congresswoman Velazquez?

    Ms. Velazquez. Thank you, Mr. Chairman.
    The number one challenge facing our nation's small 
businesses today is their ability to access affordable health 
care. All one needs to do is look at the numbers to see the 
effect that rising health care costs are having on small 
businesses. These costs have consistently worsened by double 
digits--11 percent in 2002, 13 percent in 2003 and 12 percent 
in 2004, adding up to an increase of 60 percent over the past 
five years.
    Clearly we have a health care crisis that needs to be 
addressed. There is no question that there is a growing 
insurance gap between corporate America and small business. 
Large businesses have a coverage rate approaching a healthy 90 
percent for employer based health insurance, while small firms 
have a coverage rate of only 50 percent.
    In addition, small firms can expect to pay up to 30 percent 
more for similar policies offered for their larger 
counterparts. The truth is that six out of every 10 uninsured 
Americans are in families headed by self-employed workers or 
small business employees. This is simply unacceptable.
    While it seems that when you recognize the problem and 
acknowledge that small businesses need access to health care, 
they have been long on talk and short on action when it comes 
to providing the solutions to affordable health care.
    Since 2001, President Bush repeatedly talks about allowing 
small businesses to band together to purchase health care for 
association health plans. This is a common sense solution that 
has been around long before President Bush took office. In 
fact, association health plans passed three times in the past 
four years--three times--with overwhelming bipartisan support.
    My question is will AHPs actually pass into law in the 
109th Congress, or will this be another Congress that goes down 
promising a lot and delivering little?
    Despite the constant touting of the importance of AHPs, no 
efforts have been made to move it forward or to offer any 
pressure. We have seen in the past when President Bush really 
wants to move something forward he can, as he showed us two 
years ago with his prescription drug plan.
    The reality is that the Republican party controls the White 
House and both the Senate and the House, and if they want to 
get this done it can get done. The logical first step will be 
for the President to pick up the telephone and call Senator 
Frist to get a commitment from the Majority Leader that this 
legislation will be brought to the Floor no later than 
midsummer. That is the least that can be done.
    Second, the health care reforms that have passed have 
fallen vastly short of closing the national gap on insurance. 
The most significant change has been the health savings 
accounts, which claim to help small firms. However, with health 
care costs on the rise HSAs have not addressed this crisis.
    A recent study by the Kaiser Foundation found that only 
five percent of small firms are seriously looking into offering 
HSAs next year versus 30 percent of large firms. Despite the 
fact that HSAs are friendlier options for large businesses, 
they are being sold as a solution for small firms. The reality 
is that small businesses see little benefit from HSAs.
    Protecting small businesses and the self-employed should be 
a top priority, but unfortunately health care costs are only 
continuing to skyrocket. Promises have been made on how they 
plan to attack this crisis, but at some point this talk needs 
to stop and some action needs to be taken.
    This question has been going on for too long now. We need 
to end the back and forth and start taking steps forward to 
implement a solution that will actually help small business 
owners. As the economic engines of this country, small 
businesses deserve to be confident in their ability to provide 
health care for themselves and their families.
    Thank you, Mr. Chairman.
    [Ranking Member Velazquez's opening statement may be found 
in the appendix.]

    Chairman Manzullo. Thank you.
    Congressman King, you are recognized for five minutes.

    Mr. King. Thank you, Mr. Chairman, for the opportunity to 
testify before the Small Business Committee regarding the 
worsening health care crisis that faces our country.
    The small business community is among the hardest hit, and 
I commend you, Mr. Chairman and Ranking Member, for your 
outstanding leadership in holding these hearings for the 
opportunity to discuss the worsening access to health care for 
small businesses, midsize businesses and their employees.
    Mr. Chairman, health care costs are escalating, and there 
are few options for small business owners to choose from when 
selecting insurance coverage for their employees. In order to 
keep and attract talented workers, sourcing affordable quality 
health insurance is a top concern.
    As an owner/operator of a small construction business for 
over 28 years, I am well aware that the largest challenges here 
are access and cost. Even though small business is the backbone 
of our American economy, over 60 percent of the estimated 43 
million people without health insurance are small business 
owners, employees and--

    Chairman Manzullo. Would the gentleman yield? Could you get 
right to the legislation that you have proposed? We have a 
tight clock here, Steve.

    Mr. King. I will be happy to do that, Mr. Chairman. If I 
could also ask unanimous consent to introduce this testimony 
into the record.

    Chairman Manzullo. Without objection.

    Mr. King. Thank you, Mr. Chairman.
    My legislation is H.R. 37, and what it does is it provides 
for a full deductibility for employees to purchase a health 
care plan if it is a high deductible plan--$1,000 deductible 
for individuals, $2,000 deductibles for couples and families--
if it is in conjunction with a health savings account.
    It arises from frustration that I have had as an employer 
for 28 years, and that is not being able to in those years 
deduct my own health insurance premiums and allow for my own 
individual employees.
    This is a way that we can supplement the current HSAs and 
help out individual employees, waitresses and ditch diggers. 
People that are working on the lower end of this economy have 
the largest obstacles. As the Chairman said, they are paying 
15.4 percent of their wages in payroll taxes, and on top of 
that when they purchase health insurance they are having to do 
that with taxable income instead of the after tax dollars like 
the corporations that hire their competitors.
    That is the key and the core to H.R. 37, and I have always 
believed that anything that was deductible for a corporation 
for health care or health insurance should also be deductible 
for individuals in this country.
    That would conclude my testimony, Mr. Chairman.
    [Congressman King's statement may be found in the 
appendix.]

    Chairman Manzullo. Thank you, Congressman King.
    Congressman Lipinski has some legislation. Go ahead.

    Mr. Lipinski. Thank you, Mr. Chairman. In 2003, 45 million 
Americans had no health insurance, an increase of 1.4 million 
over 2002. Of these 45 million, more than 80 percent hold jobs 
and work year-round, mostly in small businesses. The problem is 
they are not poor enough to qualify for Medicaid, but too poor 
to buy health insurance on their own if their employer does not 
provide it.
    Congressman Mark Kennedy and I have introduced H.R. 756, 
the Fair Care for the Uninsured Act, which would provide 
greater equity, access, portability and choice for those who 
are left behind by today's system. It will also create a 
marketplace where individuals and families can choose a plan 
that best fits their need. It is not limited to the type of 
plan that would apply to.
    The Fair Care for the Uninsured Act of 2005 would create a 
new tax credit for the purchase of private health insurance 
specifically for uninsured workers who do not have access to an 
employer-based health plan. This way insurance will become more 
affordable, more people will become insured, and consumers will 
have more control. The tax credit would be $1,000 for an 
individual and up to $3,000 for a family of four.
    Giving more individuals an opportunity to purchase health 
insurance will not only benefit them, but it will help insured 
Americans as well. Families who cannot afford health insurance 
often have no other health care option than to go to the 
emergency room. The cost of an emergency room visit is three to 
four times more expensive than the cost of a regular office 
visit, and when the uninsured turn up in the emergency room 
they usually cannot pay for the cost that they incur.
    As a diabetic, I know how important it is to utilize 
preventive services and get proper treatment for even minor 
problems. Unfortunately, most uninsured people do not have the 
opportunity to do this. In fact, uninsured diabetics are 11 
times more likely to end up in the emergency room than 
diabetics who do have insurance.
    Ultimately these costs are paid by taxpayers in the form of 
higher taxes and paid by the insured in the form of higher 
premiums. By making health care more affordable for uninsured 
Americans we are making it more affordable for everybody.
    Additionally, a lack of access to affordable health care/
health insurance disproportionately affects America's large and 
growing Hispanic community. According to the U.S. Census 
Bureau, over one-third of Hispanics are uninsured compared to 
12 percent of non-Hispanic whites. Only 38 percent of Hispanics 
working in small to medium sized companies have health 
insurance compared to 63 percent for white, non-Hispanic 
workers.
    This is because most Hispanic workers are heavily 
concentrated in the service industry and in small businesses, 
working for firms that do not or cannot afford them health 
insurance coverage. Therefore, they are disproportionately 
found outside the normal channels of health insurance in this 
country. For these hardworking Americans, Fair Care will make 
insurance more affordable and help alleviate their fears of a 
medical crisis.
    Some might argue that this legislation interferes with 
employer-based health care, but under Fair Care only persons 
who do not have access to workplace health coverage qualify for 
the tax credits.
    H.R. 765 also recognizes the importance of health insurance 
safety nets that exist in 32 states for those who are not 
otherwise insurable, and it builds upon the success of these 
programs and helps expand these safety nets to all 50 states.
    I thank you very much, Mr. Chairman, for the opportunity to 
speak on this legislation, and I look forward to hearing the 
testimony by witnesses regarding their ideas for addressing the 
health care crisis.
    [Congressman Lipinski's statement may be found in the 
appendix.]

    Chairman Manzullo. Put me on your bill, Steve, put me on 
your bill.

    Ms. Velazquez. Yes, Mr. Chairman. I would like to take this 
opportunity to welcome our newest addition to the Small 
Business Committee from the Democratic side, Gwendolyn Moore 
from Wisconsin. Welcome.

    Ms. Moore. Well, thank you so much, Ranking Member 
Velazquez, and thank you, Mr. Chairman. I am so pleased to be 
here. I am so excited to be able to talk about health care 
because it is certainly the most burgeoning problem that has an 
impact on businesses to be able to operate.
    I am very curious. I am in a listening mode today. I am 
very curious as to how some of these plans will serve my 
constituents. Again, I am from Milwaukee, Wisconsin, and we in 
Milwaukee, Wisconsin, have the largest gap in growing 
businesses that offer health care insurance.

    Chairman Manzullo. I am going to have to cut you off here 
so we can get started.

    Ms. Moore. I am sorry.

    Chairman Manzullo. You will get an opportunity. You and I 
talked. I am a Marquette Law School graduate.

    Ms. Moore. Yes.

    Chairman Manzullo. You will notice the definite Jesuit 
influence in my life.

    Ms. Moore. Okay.

    Chairman Manzullo. Our first guest this afternoon is Dr. 
Michael J. O'Grady, whose claim to fame is that he is a former 
Senate staffer on the Joint Economic Committee. I was on that 
Committee, but I think it was before your tenure.
    What I want to do is let you go first, and then I am going 
to do something a little extraordinary, which is to give Mrs. 
Velazquez five minutes to ask you questions. I will do that 
because I would like to at least conclude your testimony.
    The other Members of the panel may not have an opportunity 
to ask you questions before the bells go off, if that is okay 
with you. If you could stick around as long as possible, I 
would appreciate it, okay?
    We look forward to your testimony.

STATEMENT OF MICHAEL J. O'GRADY, U.S. DEPARTMENT OF HEALTH AND 
                         HUMAN SERVICES


    Mr. O'Grady. Thank you very much. Good afternoon, Mr. 
Chairman, Members of the Committee. I am Michael O'Grady, and I 
am the Assistant Secretary for Planning and Evaluation at HHS. 
I am honored to be here today to discuss the President's 
proposals for making health care more affordable and to 
highlight how small business and their employees can benefit 
from these proposals.
    As you know, small business is the engine that drives our 
nation's economy. Small firms with fewer than 500 workers 
employ 50 percent of all private sector employees and generate 
60 to 80 percent of the new jobs over the last decade. 
Unfortunately, the strength of small business is being hindered 
by escalating health care costs. Small business and their 
employees need help.
    Health care insurance premiums continue to increase faster 
than both inflation and wages and are higher and more volatile 
for small firms compared to larger firms. Last year, premiums 
increased 11.2 percent for all firms, but 13.6 percent for 
firms between three and 24 workers.
    The President is committed to driving down the cost of 
health insurance for small business owners and their employees. 
The Congress and the President have already taken a first step 
in making coverage more affordable by creating health savings 
accounts.
    Health savings accounts were created under the Medicare 
Prescription Drug Improvement and Modernization Act or MMA. 
They are used in conjunction with high deductible health plans, 
and contributions and withdrawals used to pay for eligible 
medical expenses are tax advantaged.
    Since individuals own their own HSAs, the accounts are 
portable from one employer to another, and unused funds can be 
carried over from one year to another to help pay for future 
medical expenses. HSAs provide individuals with more choice, 
greater individual control, individual ownership and lower 
health insurance premiums.
    The President's 2006 budget includes a comprehensive set of 
measures to make coverage more affordable and available for 
small business and the uninsured. It invests $125.7 billion 
over 10 years to expand insurance coverage to millions of 
Americans through tax credits, state purchasing pools, tax 
deductions and rebates to small employers who contribute to the 
health savings accounts owned by their employees.
    In addition, the President's plan includes association 
health plans, medical liability reform and the Cover the Kids 
campaign. In total we estimate that eight to 10 million people 
will gain health insurance coverage under the President's 
comprehensive plan. This is significant for small businesses 
since nearly half of the uninsured are either small business 
employees or their dependents.
    To give you more specifics, the President's budget provides 
$19.2 billion over 10 years in credits to small business owners 
who offer HSAs and contribute to their employees' accounts. 
This proposal targets small business and relies on private 
market forces making consumer choice more available, more cost 
conscious and spending in a more prudent way.
    In addition, the President's budget includes $28.5 billion 
in tax incentives over 10 years to make high deductible health 
plans that are used in conjunction with the HSAs more 
affordable. Currently individuals who purchase their own health 
insurance do not receive the same tax favored treatment as to 
health insurance premiums as do employees who receive insurance 
through their employer.
    To level the playing field and encourage the purchase of 
high deductible plans, the President proposes that both the 
contributions made to an HSA and the premiums paid to purchase 
the high deductible health plan be fully deductible.
    The President's plan also includes a refundable tax credit 
for the purchase of health insurance targeted to low income 
individuals and families, many of whom work for small 
businesses. Over half of the uninsured have incomes below 200 
percent of poverty, and many of these people are not eligible 
for either employer coverage or for public insurance programs.
    The President proposes to invest $74 billion over the next 
10 years in tax credits to help these individuals purchase 
health insurance. The tax credit would pay for 90 percent of 
the cost of standard coverage. The credit would be up to $1,000 
per adult and $500 per child, up to two children, so eligible 
families with two or more children could receive up to a 
maximum of $3,000. Eligible individuals could receive up to 
$1,000.
    To facilitate the use of tax credits, the President 
proposes $4 billion over the next 10 years in grants to 
encourage states to create insurance pools. To insure that low 
income Americans get the most out of the tax credits, states 
could provide a powerful group purchasing mechanism through 
these state sponsored purchasing pools, allowing individuals to 
directly reduce their monthly premium payments.
    In addition to different tax credit proposals, the 
President also supports association health plans. Association 
health plans enable small employers to provide better and more 
affordable health care coverage options to their employees like 
those offered by larger employers.
    Other proposals in the President's budget call for 
expanding community health centers to provide quality, 
compassionate care to patients who need help the most 
regardless of their ability to pay and the Cover the Kids 
campaign, which combines an outreach effort from the federal 
government, states and community organizations to enroll more 
SCHIP and Medicaid eligible children.
    Also, the creation of a national marketplace for individual 
insurance products allowing individuals to get the best buy 
they can find anywhere in the country that best meets their 
individual needs for health insurance coverage and to reform 
the medical liability system to limit frivolous lawsuits and 
excessive jury awards and make health care more affordable and 
accessible to all Americans.
    As I have just outlined, the President has an ambitious 
agenda to drive down health care costs and make insurance 
coverage more affordable for small businesses and their 
employees. As a member of the Administration, I look forward to 
working with you to achieve these goals, and I am happy to 
answer any questions.
    Thank you.
    [The Honorable Mike O'Grady's statement may be found in the 
appendix.]

    Chairman Manzullo. Thank you, Dr. O'Grady.
    Mrs. Velazquez, you are recognized for five minutes.

    Ms. Velazquez. Thank you, Mr. O'Grady. In your testimony 
you discuss health care reforms proposed by the Administration. 
I noticed that the last proposal included in your prepared 
remarks was association health plans.
    It seems that the $100 billion expansion of health savings 
accounts has become the centerpiece of the Presidents' small 
business health care agenda. We know that these HSAs conform to 
the President's ownership society agenda just like his social 
security private accounts, but these HSAs provide little actual 
benefit to small businesses.
    How much of an impact has the fact that association health 
plans do not correlate with the President's ownership society 
agenda link to the drop of association health plans as one of 
the Administration's top priorities?

    Mr. O'Grady. I do not think you should assume that somehow 
there has been a change in priority here. This is an area that 
in terms of the proposal, it is mostly with the Department of 
Labor rather than my department, but it certainly is part of 
the President's agenda.

    Ms. Velazquez. But it is about health insurance.

    Mr. O'Grady. It is certainly about health insurance, and 
when you think about the advantages of association health plans 
and the way they would interact with some of these other 
proposals we only view those as sort of dovetailing in terms of 
being able to both--both sets of proposals, a number of these 
different proposals, are all pushing in the same direction.
    Certainly the Administration is strongly behind association 
health plans. I heard your concerns, and I certainly will take 
those back.

    Ms. Velazquez. I am impressed by association health plans 
being one of the top priorities of the Administration given the 
fact that in your prepared remarks the association health plans 
discussion comes on page 8, almost at the end of your 
testimony.
    Why is it that President Bush has not used his political 
capital to get the Senate to move the association health plans? 
After all, when he was campaigning he was talking about 
association health plans and how much he supports it.
    How can we get Senator Frist to bring it to the Floor for a 
vote?

    Mr. O'Grady. I certainly hear what you are saying. I 
certainly understand. In terms of the notion of Senator Frist, 
he does not work for the President, and those dialogues are 
ongoing.
    Certainly in term of the notion of you should not take 
anything about a position that this holds in the written or 
oral testimony as indicating somehow this is a rank ordering of 
the priorities of the Administration. These are all in the 
budget. These are all things that are being moved forward 
simultaneously.
    One of the things that we hit with the uninsured, and that 
is a little different than the last Administration, is an idea 
of just thinking that there are these really key subpopulations 
and how we get the right policy tool to that population. AHPs 
are on that list. There is no doubt about it.

    Ms. Velazquez. I can see that. We have voted three times 
for it, and year after year we promise small businesses in this 
country that we are going to get it done.
    Do you know what? With the prescription drug plan the 
President wanted that bill passed. A lot of the Members here, 
conservative members, did not support it. He called Hastert and 
Tom DeLay and everybody else. He can do the same with this.
    As Ranking Member of the Small Business Committee, I know 
firsthand how the President's latest budget hits small 
businesses hard in its attempt to get a handle on the $427 
billion deficit. The Administration's slashed or cut 50 small 
business programs in the fiscal year 2006 budget because it 
said it has to keep the deficit in check.
    If we need to cut these programs to save money, why is the 
Administration proposing spending over $100 billion to expand 
the health savings accounts? It seems it is completely cynical 
to talk about the deficit and then spend billions on programs 
that have little success to reducing health care costs for 
entrepreneurs.

    Mr. O'Grady. Certainly what you are seeing here is a 
balance between an attempt to control the deficit, reduce the 
deficit and how to help as many people as you possibly can with 
the funds that you have available.
    In terms of the way these proposals are going forward, 
there are two policy goals that are being simultaneously dealt 
with here; affordability question, no doubt about it, but also 
how do we go about reducing the number of uninsured.

    Ms. Velazquez. Mr. O'Grady, the Kaiser Foundation did a 
study that demonstrates that only five percent of small 
businesses will say that they will use the health savings 
accounts.
    So we are going to spend all this money. We are going to 
cut by 42 percent the budget for the Small Business 
Administration, and yet we are doing something that will 
provide little benefit to small businesses when it comes to 
health care.

    Mr. O'Grady. I do not think you should assume it is little 
benefit. What we see in any tax credit proposal that have come 
forward, whether it is the way 401(k)s were first introduced, 
IRAs, any of those things where you are talking about getting 
people to set up accounts that can roll over, that will take a 
little bit of time for that information to get out.
    I know that the people at Treasury are trying and through 
the IRS to make it quite clear to small business, as well as to 
all businesses, what is available.
    In your opening statement when you were talking about that 
notion of larger businesses, I would assume that that is sort 
of what we have seen in pensions and other areas. They move 
first. That is because they are already offering three or four, 
so to add an HSA as a fourth option to employees is an easier 
link for them than a smaller employer who might only have one 
option and they have to think about it.
    Part of this idea is how you get that information out 
there. How do you make this doable? That is the logic behind 
the health purchasing pool, the $4 billion to help the states 
to be able to set up a pool so they can facilitate.
    You could have great insurance premiums, very low, and due 
to a number of different things. If people do not know about 
it, it is sort of like having the lowest prices around and you 
have no real parking lot in front of your store. You can do a 
great deal on these things, but we have to help people to be 
able to get in there and get access to this insurance, and that 
is part of the idea.
    When you see what is going on with different proposals 
where there is a tax credit maybe for the parent, for the 
child, how you do that sort of stuff? These state purchasing 
pools are part of building that infrastructure to make this 
work.

    Chairman Manzullo. Thank you, Mrs. Velazquez.
    I think the fact that Senator Frist needs 60 votes to get 
AHPs through has a little bit to do with the fact that it did 
not pass this past year.
    We will continue with our testimony with Mr. Haynes.
    Dr. O'Grady, if you could stick with us as long as you can 
we would appreciate it.

    Mr. O'Grady. Certainly.

    Chairman Manzullo. Thank you so much.
    Our next witness is Tom Haynes, Executive Director of The 
Coca-Cola Bottlers' Association.
    Dan, you better hide that can of pop that you have in front 
of you there.

    Mr. Haynes. I saw that.

    Chairman Manzullo. Speaking on behalf of the Association of 
Healthcare Coalition, and make sure you bring the mike close to 
you, Mr. Haynes. You are recognized for five minutes. Thank 
you.

    STATEMENT OF W. THOMAS HAYNES, THE COCA-COLA BOTTLERS' 
                          ASSOCIATION


    Mr. Haynes. Thank you, Chairman Manzullo, for inviting me 
here today. It is an honor and a privilege. I also want to 
thank you and Congresswoman Velazquez for your leadership not 
only on these issues, but more specifically on the issue I am 
here to talk about, which is the Small Business Health Fairness 
Act, the AHP legislation.
    I am here on behalf of The Coca-Cola Bottlers' Association 
and the Association Healthcare Coalition, which I serve as 
president, to urge the Committee and the Congress to move 
promptly in 2005 to pass AHP legislation.
    I have to say that, Congresswoman Velazquez, your remarks 
hit very close to home because we believe that this, along with 
a lot of other tools that we are talking about, but primarily 
in our situation, this legislation is the key to solving some 
of the health care issues that the small businesses that are 
part of my membership--

    Chairman Manzullo. Could you get directly into your 
testimony as to the AHP that your organization runs?

    Mr. Haynes. Sure. Sure.

    Chairman Manzullo. Thank you.

    Mr. Haynes. I would love to, Chairman Manzullo.
    We have had a health care program for a number of years. 
Our association has existed for 90 years. We include every 
Coca-Cola bottler in America, large and small. Approximately 60 
of our 77 members would probably qualify as small businesses. 
There are 100 or so or fewer employees, the majority by number 
but certainly not the majority by employment or population.
    Our job is to make it possible for those small businesses 
to remain competitive, to remain economically viable and, to 
the extent I can, to make them comparable to the big businesses 
that run Coca-Cola Bottlers all over the country in terms of 
their ability to survive and thrive.
    We had an AHP that covered both large and small bottlers 
that we had to disband in 2000. We had our smaller bottlers in 
a pool. That program worked very well. The ultimate cost to our 
smaller members was very comparable to the cost for our larger 
members.
    Because of state regulations, state mandates, the 
complexity associated with dealing with all those state 
requirements, the insurer that we were working with on that 
program disbanded it and essentially said that they simply 
cannot put together a program that covers bottlers with fewer 
than 100 employees.
    Essentially we have had to cut off the small businesses 
that we were supporting and focus our AHP program on the larger 
businesses. We have maintained that program for the larger 
businesses. It has been very successful. We have members that 
have 150 to 250 employees who we believe have health care costs 
comparable to our largest bottler, which has about 70,000 
employees. We believe that for a bottler with 200 employees, 
they have a very comparable cost as to the largest bottlers.
    I came from the Coca-Cola Company. The programs that we 
offer to bottlers are very comparable in benefits to the 
program I had as an employee of the Coca-Cola Company, so in 
the real world our association can close this gap that the 
small members that I serve are facing.
    We cannot do it without AHP legislation. I have tried very, 
very hard to find every solution I can come up with to provide 
the same kind of programs for our smaller bottlers as we do for 
our larger bottlers. I simply have not been able to do it, and 
we spent a couple years trying.
    There are huge numbers of benefits that we could bring not 
only to those smaller bottlers, but even to some of the people 
that are sort of in between, the bottlers that are 200 to 500 
employees. We could put together a pool program that involves 
them, and some of our larger bottlers in that size were in our 
smaller bottler pool before we had to disband it in 2000.
    I have looked at the arguments against AHP legislation. I 
think our association is an example of how they simply do not 
apply to most association programs. There are a number of other 
associations that are a part of our coalition. I think that 
their situations, their stories, would be very similar to ours.
    I would simply say, Congresswoman Velazquez, this is a very 
straightforward, very simple, but very powerful tool to begin 
to solve and to make a significant dent in the health care 
issues that are being faced by small employers.
    [Mr. Haynes' statement may be found in the appendix.]

    Chairman Manzullo. Thank you.
    Our next witness is Holly Stephen Roberts, an independent 
insurance agent from Madison, Indiana. Is that correct?

    Mr. Roberts. Yes, sir.

    Chairman Manzullo. Did you play basketball in Madison, 
Indiana?

    Mr. Roberts. That would not be pretty, sir.

    Chairman Manzullo. All right.

       STATEMENT OF HOLLY STEPHEN ROBERTS, HSA COALITION


    Mr. Roberts. Thank you, Mr. Chairman, for allowing me to 
share with this Committee.
    When our family moved to Indiana just about a year and a 
half ago, I did decide to become self-employed as an insurance 
agent, and I went to work for a local insurance agency, the 
Madison Insurance Agency, primarily as their life and health 
agent.
    In doing so, I researched and learned about HSAs and how 
they can benefit people. I knew that high deductible health 
plans, along with an HSA, was right for my wife and me, so the 
first one that I wrote was on us.
    We chose it because the premiums are lower and we had 
already decided that we would basically self-insure ourselves 
for $5,000 from our own savings should we need to and use the 
actual health insurance coverage for something major or 
catastrophic.
    Actually, we were willing to do this even before knowing 
about HSAs. Once we discovered HSAs, it was an extra blessing. 
This plan became even better because now we get a tax break on 
something that we were planning to do anyway.
    Three months ago, I became a permanent full-time employee 
at U.S. Filter in Madison, Indiana, and I was given the 
opportunity to participate in their group health insurance 
plan. The annual premium for just my wife and me is $7,604. The 
premium is the same for each employee regardless of their age, 
their sex and their lifestyle.
    The company does pay a large portion for us and for each 
employee in the amount of $5,666, but that leaves us paying our 
share of $1,938 a year. Even though this amount is basically 
the same as the premium on our personal high deductible health 
plan, we have decided to keep our personal plan and take 
advantage of our HSA.
    This decision is for three reasons. First, we like to be 
self-sufficient and in control of our finances and decisions 
concerning things like insurance, et cetera. If I become 
unemployed or laid off, I would then have to pay the full 
$7,600 plus two percent under COBRA.
    Second, our contribution to the HSA helps lower the amount 
of our income, thus lowering our taxes and increasing our 
savings. Third, it benefits U.S. Filter in that they do not 
have to pay $5,666 towards my insurance.
    As you know, the biggest problem with group health 
insurance is that everyone is accepted, the unhealthy as well 
as the healthy. That is why the premiums are so high. This can 
lead to adverse selection because the younger, healthier people 
bail out, leaving the older or the less healthy people to make 
up the group. This naturally leads to more claim activity and 
payouts, which leads to higher premiums, and the cycle just 
continues. Eventually employers and employees alike are not 
going to be able to afford it.
    I am still a self-employed independent contractor working 
for the insurance agency, but only on a part-time basis now. 
However, I have been able to talk to quite a few people about 
high deductible health plans and HSAs. It seems that the self-
employed are especially interested since they get a double tax 
break. They get to write off the actual insurance premiums they 
pay, as well as their HSA contribution.
    I realize that the U.S. Government seems to be and should 
be encouraging its citizens to be more self-sufficient and take 
more control over their lives by taking advantage of IRAs, both 
traditional and Roth, college savings plans, et cetera. We are 
just thankful that HSAs are another tool that has been given to 
us to do just that.
    Thank you, Mr. Chairman.
    [Mr. Roberts' statement may be found in the appendix.]

    Chairman Manzullo. Thank you.
    Our next witness is Robert Hughes, president of the 
National Association of the Self-Employed. We look forward to 
your testimony.

 STATEMENT OF ROBERT HUGHES, NATIONAL ASSOCIATION OF THE SELF-
                            EMPLOYED


    Mr. Hughes. Thank you, Mr. Chairman. On behalf of the 
NASE's 250,000 members nationwide representing about 600,000 
people, we thank you for the opportunity to talk today with the 
Small Business Committee.
    Our typical member is a very small business. We refer to 
them as micro business. They employ fewer than 10 employees. 
There is no doubt that the single largest issue for micro 
business is the cost of health care and related health care 
coverage.
    NASE member Marcos Spizanti, owner of Silicon Construction 
in St. Charles, Missouri, had to give up his health insurance 
because of the high cost of premiums. ``I could no longer 
afford to pay the premium, and therefore my wife, child and 
myself are not insured. I feel it is wrong, and I am angry 
about it,'' says Marcos. ``If people cannot afford insurance, 
what makes anyone thing they can afford taxes on top of that? 
Big business gets too many breaks. How about us little guys?''
    Marcos, of course, is referring to the fact that he and 16 
million other sole proprietors and partnerships with earned 
income have to pay the equivalent of payroll taxes on their 
health insurance premiums.
    This huge tax inequity lies in the fact that health 
insurance premiums are a business deduction for all businesses 
except sole proprietors and partnerships. Therefore, the sole 
proprietor pays an extra tax on health insurance premiums 
amounting to 15.3 percent of those premiums.
    According to the most recent Kaiser Family Foundation 
study, the self-employed pay on average $9,950 in insurance 
premiums for family health coverage. Because they cannot deduct 
these premiums as ordinary business expenses like other 
businesses, they are required to pay $1,522 in additional taxes 
that no other business entity must pay.
    This is money that our members tell us they would use to 
reinvest in their business, hire part-time assistance or 
utilize the offset to reduce premium costs they face every 
year.
    The NASE would like to thank Chairman Manzullo and 
Representative Velazquez, who, in the 108th Congress, 
introduced the Self-Employed Health Care Affordability Act, 
which would have removed this inequity in the Tax Code faced by 
our nation's self-employed.
    We believe the enactment of legislation such as this is 
about fairness for all business owners, not just corporations. 
We believe enactment will reduce the ranks of the uninsured. We 
believe the enactment would reduce the net cost of health 
insurance for the micro business owner.
    The NASE strongly supports legislative proposals such as 
association health plans and health care tax credits. We 
applaud the implementation of health savings accounts, yet let 
me restate with emphasis the self-employed are the only segment 
of the business population that have to pay this extra tax on 
health insurance premiums. This inequity needs to be corrected.
    The NASE and our members appreciate the current efforts of 
Congress to mitigate the cost burden and access difficulties 
with health coverages. However, the NASE believes that current 
legislative solutions are band-aids from larger wounds in the 
delivery of health care in this country.
    We applaud the legislation we hear from Mr. King and Mr. 
Lipinski in terms of reducing health care costs, health care 
insurance costs and creating greater access to those health 
insurance premiums.
    Thank you, Mr. Chairman, for the opportunity to talk today.
    [Mr. Hughes' statement may be found in the appendix.]

    Chairman Manzullo. It was the result I believe of you 
testifying last year that we introduced that bill.

    Mr. Hughes. Yes, I think that is correct.

    Chairman Manzullo. Thank you.
    Our next witness is Karen Kerrigan of the Small Business & 
Entrepreneurship Council. We look forward to your testimony.

STATEMENT OF KAREN KERRIGAN, SMALL BUSINESS & ENTREPRENEURSHIP 
                            COUNCIL


    Ms. Kerrigan. Thank you. Thank you, Chairman Manzullo, for 
inviting the SBE Council to be a part of this hearing today. We 
certainly appreciate your leadership on this most critical 
issue that continues to truly torment small business owners, 
their workforce and, of course, the millions of Americans who 
lack insurance.
    Thank you, Congresswoman Velazquez, for your leadership 
with respect to your effective advocacy on the issue, as well 
as your sponsorship and leadership on key legislation like 
association health plans and the FICA deduction, which would 
make a meaningful difference for small employers and the self-
employed.
    Affordability, access and rising premium costs do remain a 
persistent challenge for the small business sector. While some 
significant progress has been made through the enactment of 
HSAs, certainly more needs to be done to promote more 
affordable access, increase choices and equity in the system.
    HSAs have been the breakthrough for small firms and 
individuals. They are saving significant dollars on healthcare 
costs through this product, and most significantly, the 
previously uninsured and small business owners not previously 
offering health insurance are responding to HSAs.
    A recent survey by America's Health Insurance Plan shows 
that most of the HSA products being purchased are by 
individuals and small firms, where approximately 30 percent of 
these buyers were previously uninsured and 16 percent of the 
new small business purchasers previously did not offer health 
insurance.
    Certainly giving small business owners a tax credit on HSA 
contributions for the first $500 per employee with family 
coverage, on the first $200 per worker with individual 
coverage, as has been proposed in the Congress, will help to 
further promote the accounts and insure more Americans.
    However, no matter what is done on the policy and 
legislative front to help stabilize premium cost and help small 
employers access more affordable coverage for themselves and 
their employees, there will still remain a fairly large segment 
of the working population that for one reason or another will 
not be able to access health insurance through his or her 
employer.
    That is where the need for individual tax credits come into 
play. There is growing recognition that treating individuals 
equitably on the tax front with respect to health coverage 
costs not only makes sense from a fairness issue, but is a more 
appropriate solution given the high mobility and nature of 
today's workforce.
    The Fair Care for the Uninsured Act introduced in the 109th 
Congress by Congressman Mark Kennedy and Dan Lipinski is one 
approach that is supported by our organization that will 
provide this desirable tax fairness for individuals.
    This advanceable and refundable tax credit, $1,000 for 
individuals, $2,000 for couples, $500 for dependents and up to 
$3,000 for a family, can be used to buy health insurance in the 
private market and give individuals the freedom to choose their 
own benefits and cost sharing features.
    A complementary proposal supported by the SBE Council that 
will provide individuals with more choice and access to 
affordable coverage would allow individuals to buy insurance 
from any state in the union. This nationwide marketplace is 
especially important for individuals and states where excessive 
mandates and regulation have driven up the cost of insurance 
and depleted the number of carriers in the state, thereby 
limiting choices.
    Giving individuals tax equity with employers with respect 
to the purchasing of coverage and allowing individuals to shop 
nationwide for the plan that best meets their personal and 
financial needs would give consumers more power and choice in 
the marketplace.
    Let me add that the SBE Council is fully supportive of 
association health plans and the FICA deduction for the self-
employed, as well as Mr. King's proposal. These proposals, 
along with tax credits, bring fairness to the system and will 
drive competition, which in the long run will make health 
coverage more affordable for all.
    Thank you again, Chairman Manzullo, and I look forward to 
our dialogue and your questions.
    [Ms. Kerrigan's statement may be found in the appendix.]

    Chairman Manzullo. Thank you for your leadership.
    Our last witness is Scott Shalek, a near constituent of 
mine right over the border. Scott has become a good friend. We 
have called him on numerous occasions when we get stuck on how 
these plans work.
    In fact, we had a hearing in Rockford, Illinois, about 
three or four years ago, and Scott was sitting in the audience. 
Phil Burke from Woodstock was talking about the almost nearly 
100 percent increase he had in premiums. With a little counsel 
from you, he ended up with two insurance policies, one for the 
main and one for the deductible.
    Scott, we look forward to your testimony. I know you have a 
lot to say, but if you could tell us the impact that you have 
had on being creative, especially with the HSAs? We look 
forward to all of your testimony.

      STATEMENT OF SCOTT SHALEK, SHALEK FINANCIAL SERVICES


    Mr. Shalek. Chairman Manzullo, Ranking Member Velazquez and 
distinguished Members of Congress, I thank you for the 
invitation and the opportunity to testify before this Committee 
today.
    My name is Scott Shalek, and I am a former board member of 
the National Association of Health Underwriters and own an 
independent insurance agency in Ringwood, Illinois, which 
specializes in benefits consulting and retirement planning for 
individuals and businesses ranging in size from one to 500 
employees solving many complex problems and diversified 
situations.
    NAHU is an association of insurance professionals involved 
in the sale and service of health insurance, long-term care 
insurance and related products serving the insurance needs of 
over 100 million Americans. We have over 20,000 members around 
the country. We have been an active participant in solutions 
for rising costs and the uninsured, and we are pleased to have 
this opportunity to talk about possible solutions with the 
Members of the Committee today.
    Increasing health care costs across the nation have caused 
health insurance premiums to rise significantly. This increase 
has been due to a variety of factors, including technological 
advances, pharmaceuticals, overutilization, medical liability 
expenses and aging population. These cost drivers are often 
magnified by state regulation that decreases competition or 
stifles creativity and innovation.
    If this trend continues, employer based coverage and the 
financial participation of employers will be eroded. We believe 
that there is no one magical answer to the problem of the 
uninsured or for making health insurance more affordable. A 
multifaceted approach will be required since no one solution 
will fit the needs of all our citizens.
    Any attempt to provide Americans with universal access to 
health coverage should preserve--

    Chairman Manzullo. Scott, before time runs out I really 
would like you to get into the AHPs.

    Mr. Shalek. Okay.

    Chairman Manzullo. That is a great story, I mean, with all 
respect, you know.

    Mr. Shalek. All right.

    Chairman Manzullo. Tell us your story. That is why you are 
here. Tell us your story.

    Mr. Shalek. Well, with the advent of the Medical 
Prescription Drug Act--

    Chairman Manzullo. I am sorry. HSAs.

    Mr. Shalek. Yes.

    Chairman Manzullo. I am sorry. Go ahead.

    Mr. Shalek. Well, with the Medical Prescription Drug 
Improvement Modernization Act of 2003, it created health 
savings accounts effective January 1, 2004, which basically 
replaced MSA accounts and fixed many of the flaws contained in 
the old MSA legislation.
    These plans, along with health reimbursement arrangements, 
have already made a huge impact on health insurance markets of 
all sizes. The biggest impact has been in the individual market 
and among small employers. In the first nine months, over 
400,000 people enrolled in the HSAs, and current statistics 
show that about 3,000,000 people now have consumer driven 
health plans.
    On Monday of this week, I worked with a small furniture 
business with 14 employees that received two rate increases 
over the last year totaling 24 percent. After reviewing their 
claim history, we increased their deductible from $750 to 
$2,000 and reduced their premium cost by 15 percent, a savings 
to the company of over $1,000 per month.
    In addition, with the new plan design their co-insurance 
improved by 10 percent, and the single employee maximum out-of-
pocket cost decreased by $250 per year. With the savings, the 
company is starting an HRA this year and planning to contribute 
to HSA accounts for the employees next year.
    In my own situation, my stepson, who is a single parent 
with two children, could not afford dependent coverage through 
his employer. His cost through his employer to cover his 
children was over $600 per month. We moved him to a $2,000 
deductible HSA plan, and the cost for both children dropped to 
$136 a month.
    A few important trends that are occurring with the use of 
HSAs. Premiums are remaining unchanged or only showing slight 
increases. Consumers are becoming better educated when they are 
spending their own money and utilization is decreasing. More 
people are switching to generic drugs. There is a substantial 
decrease in consumers running to emergency rooms unless it is a 
true emergency.
    Consumers are asking their physicians more questions about 
conditions, tests and cost. There is an increase in the 
purchase of long-term care insurance and other benefits such as 
vision and dental. Employers are now able to do more long-range 
planning with regards to their benefits program, and they are 
soliciting input from their employees.
    With the current increasing number of employers converting 
to consumer driven, high deductible health plans, several 
insurance carriers are now offering supplemental gap plans to 
cover out-of-pocket expenses. These low-cost plans help fill 
the gap based on the employer's current medical plan.
    Benefits under these plans vary widely between carriers. 
Some just have a daily hospital cash benefit while others cover 
hospital expense, outpatient benefits and physician visits. 
Most have caps on their maximum benefits, but these limits can 
be up to $5,000 or more.
    Premiums can be paid by the employer, the employee on a 
voluntary basis, through HSAs under certain criteria or both. 
Gap plans are an excellent way to help reduce health care costs 
for many small businesses.
    For the people that work in small businesses who are not 
able to offer health insurance coverage, it is important that 
their premiums for HSA compatible health insurance are 
deductible. Many small employers will be looking at these 
options in the near future, and a tax credit for part of the 
contribution to employee HSAs would be a great incentive for 
them to offer coverage.

    Chairman Manzullo. Scott, you are over by a minute and 12 
seconds.

    Mr. Shalek. Sorry. Okay.
    [Mr. Shalek's statement may be found in the appendix.]

    Chairman Manzullo. Thank you.

    Mr. Shalek. Thank you.

    Chairman Manzullo. We are still trying to figure out when 
these votes are coming. They are not coming until 3:15? Is that 
it? All right.
    Dr. O'Grady, Mr. Shalek has talked about the fact that I 
think there were 400,000 people with HSAs--

    Mr. Shalek. Within the first nine months.

    Chairman Manzullo. --within the first nine months. Do you 
have any idea on the figure and how that is growing?

    Mr. O'Grady. The figure is, we are hearing different things 
from different sources. That is sort of the ballpark we are 
hearing.
    We are hearing different things from industry sources. We 
are hearing different things from sort of the large consulting 
firms that go out and interview different--you know, do surveys 
of employers, the sort of stuff that was being referred to 
before, those sorts of things.
    The bottom line is we really will not know for sure until 
the IRS tells us who actually, you know, was filing and was 
going forward with the HSA, but, like I said, in terms of this 
what we have seen before and other things that are using the 
Tax Code through either credit or deductibility, you do not 
want to judge too quickly. There is a learning curve there. 
There is a start up time.
    As to the discussion of IRAs and Roth IRAs, those sorts of 
things can really take off, but I am going to bet that both 
those you did not see much in the first year.

    Chairman Manzullo. That is my second question. As I stated 
when I introduced Mr. Shalek, we pass the laws, and then I call 
him to ask what the laws mean and how they are working.
    There appears to be a lot of confusion as to what options 
are open for what individuals, especially with the HSAs. I 
would like some discussion as to how we can overcome that, what 
is the best way to do that.
    Mr. Shalek?

    Mr. Shalek. Well, one of the things is a lot of the banks, 
especially where I live, there is not a bank in the area that 
is offering HSA accounts right now. My own bank that I own 
stock in, I am meeting with them next week to explain what an 
HSA is and how they can participate.
    There are some great programs, but people are not getting 
the word out. It is a big problem. People do not understand 
them yet. It is new. It is going to take a little time.

    Chairman Manzullo. Ms. Kerrigan, do you have a comment 
here?

    Ms. Kerrigan. I agree. I mean, there is lag time on this 
issue. The legislation was only signed into law last year. You 
know, the regulatory agencies and the IRS had to develop their 
regulations, which took another few months. Certainly there is 
this lag time.
    You see the early adopters right now who are out there who 
are getting this product. Then of course you have enrollment 
periods and all those other things. Certainly you are going to 
have the larger companies that may respond more affirmatively 
in terms of looking at this because they have HR departments 
whose job it is to go look for this type of stuff where small 
business owners do not.
    I find in talking with my members and doing interviews 
there is tremendous interest on this issue. I also run the HSA 
Coalition. Our website is hsainsider.com. I know we have had to 
upgrade our server and our technology several times because we 
are getting close to 5,000,000 to 8,000,000 visits per month on 
that website.
    There is a lot of interest out there. You know, as I said, 
I just think it takes time for this to penetrate into the 
marketplace, you know, whether it is the people selling them, 
the insurance companies developing products, the banks, et 
cetera, all the players. The structure is still coming 
together.

    Chairman Manzullo. Mr. Shalek, you had mentioned it. Are 
most of your small business people now are in HSAs?

    Mr. Shalek. Some of them are looking at it for the first 
time. A lot of them have gone to health reimbursement accounts, 
and I am planning in the future to switch over to HSAs because 
they did not understand it, and at that time there was not 
enough institutions offering an HSA account.

    Chairman Manzullo. Okay.

    Mr. Shalek. They are going to high deductible plans and 
doing a health reimbursement right now, but I would say in the 
next year or two I would say probably 70 to 80 percent of our 
businesses will be switching over to HSAs.

    Chairman Manzullo. Are any people in HSAs now who before 
that could not afford insurance?

    Mr. Shalek. Yes, quite a few. Well, my own son. He could 
not afford the insurance for his kids.

    Chairman Manzullo. Your testimony. Okay.

    Ms. Kerrigan. Yes. Chairman Manzullo, as I mentioned in my 
testimony, 30 percent of the buyers are the previously 
uninsured, and 16 percent of the new small business purchasers 
are those who previously did not offer insurance.
    I think clearly this is having an impact on the target 
group who we want to hit, which is uninsured people.

    Chairman Manzullo. Okay. Thank you.
    Mrs. Velazquez?

    Ms. Velazquez. Thank you. Mr. Chairman, I would allow the 
other Members to make questions now. When they finish, I will 
come back and make more.

    Chairman Manzullo. Congressman Lipinski, do you have any 
questions?

    Mr. Lipinski. Thank you, Mr. Chairman. I have a couple 
different questions.
    I want to be in favor of HSAs. My concern is this. I 
mentioned before I am a diabetic. I know that I am going to 
have health care costs. There is no question about that.
    Mr. Roberts had talked about there being an adverse 
selection problem right now in that only those people who do 
have problems or know they are going to have problems are 
purchasing health insurance.
    It seems to me that what HSAs are doing is making it even 
worse in terms of being an adverse selection problem. I see 
that if HSAs--you know, it is a great idea if it is going to 
help those who do not have any insurance. It is better than 
having no insurance, but I am looking at say HSAs becoming very 
popular 10 or 20 years down the line.
    I know that I need to have regular health insurance. An HSA 
is not going to help me a whole lot. I am going to be left with 
an insurance pool talking about regular insurance, insurance we 
normally think of today. I am going to be in that pool with 
other people who are just like me who have some kind of chronic 
condition that they know they are going to need this coverage 
for. My insurance premiums are just going to be incredibly high 
because those are the people in that pool.
    Now, I am just wondering what any of you would argue or put 
forward to allay that concern, or is that just where this is 
going to go?

    Mr. O'Grady. In the spirit of full disclosure, I am a 
diabetic too. To allay your fears, I would point to research, 
not a theory.
    What we have seen, the precursor to this, was what we 
referred to a little before, what I kind of think of as 
consumer directed health care. So it was, but the difference 
here is now the individual holds the account, and he can roll 
it over from employer to employer.
    It used to be there were a number of employers who did it 
in a situation where the employer held the account. If you 
left, you could not take it with you. Now, what they found, and 
there are a number of them that are in the Midwest. A number of 
them have tried this, some of the larger employers, but it was 
in Minnesota.
    Part of what they found there is there is a couple things 
they did. They in effect carved out certain preventive benefits 
just like you are talking about. You need your testing. You 
need these sorts of things. These are things that made good 
health care sense and also make bottom line sense.
    You do not want your diabetes getting out of control. They 
will cost you 10 times as much as if you keep them in tight 
control. There is no doubt about that. That evidence is in.
    They would carve out certain benefits so that you did not 
face the full deductible for preventive benefits. We certainly 
are pushing very heavily at HHS on smoking and any number of 
different things to try and get preventive benefits out there 
to make sure people do it.
    Now, the other thing, in terms of the data that they found. 
First year data coming in showed very much the pattern you were 
talking about. Who are the folks who signed up? There were 
folks who did not expect much health care that their premiums 
were the vast majority of the health care spending in any 
particular year, and it went that way.
    In year two and three what they found, and to stay on this 
coincidence, it happened to be the diabetics, is that folks who 
knew that they were going to have even under very comprehensive 
care going to have a fair amount of out-of-pocket expenses--
they were going to be paying deductibles, they were going to be 
paying co-insurance--they could use the account, in this case 
because it was Minnesota, to go to the Mayo Clinic.
    So you started to see the mix of people who were interested 
in this new design move away from sort of what I think 
everybody's least concern was, that it would be dividing up the 
current pool and that all of a sudden you are talking about, 
you know, when you talk about what would people really like to 
do with their insurance and how would they like to mix this 
somewhat more traditional coverage with the availability of an 
account. What you found is people with chronic illness started 
to see some real advantages to this.
    Now, did that mean that the premiums in the group that 
chose the kind of pre-HSA version, did it go up some? Yes, 
because those folks had higher average spending than, you know, 
the 22-year-olds who never cleared their deductible.
    In terms of when you think about these things and when you 
think about the options, I do not think we can assume a kind of 
default assumption that this is going to just bifurcate in 
terms of sick high cost people versus low cost people.

    Mr. Lipinski.I would like to get a hold of what you are 
talking about and take a look at that.
    One quick question for Ms. Kerrigan. Do you have any 
concern if we allow people to buy health plans in any state 
that essentially it is a race to the bottom of the state with 
the lowest regulations is going to be where everyone then is 
going to go to? Any concerns about that?

    Ms. Kerrigan. Well, I do not. I think right now when you 
look at various states there already is a race to the bottom, 
unfortunately. I mean, you do have probably the individuals in 
most need and those in the middle to low income bracket who 
cannot afford insurance.
    I think the states will respond in terms of, from a 
competitive perspective in terms of looking at, you know, the 
types of mandates that they are requiring and seeing if what 
they are doing in terms of driving up the cost of insurance and 
whether those are really needed.
    People need different types of insurance coverage, and I 
think the market will respond in that way as well, so I really 
do not have a concern that it will be a race to the bottom.
    I look at it more as the opportunity of people who do not 
have insurance in some states, who cannot afford it, you know, 
to actually escape and go to another state and buy something 
that best meets their personal and their financial needs.

    Chairman Manzullo. Thank you.
    Mr. King?

    Mr. Lipinski. Thank you.

    Mr. King. Thank you, Mr. Chairman.
    First I would like to thank Mr. Roberts for bringing this 
home to a family perspective. That helps everything else make 
sense here in the testimony.
    I would then direct my question to Mr. O'Grady. The thought 
occurs to me that if we could pass Mr. Lipinski's bill and my 
bill we would end up with a deductible situation for employees 
purchasing their own health care plans.
    Under those circumstances we still, by my estimation of 
this federal policy, do not allow necessarily for a small 
employer who has two or three or a small number of employees 
with a tiny, little budget struggling against big corporations 
to enter into an agreement with an employee to purchase an 
individual health care policy, as opposed to a group.
    Is that correct? If so, do you have a recommendation by 
which we might address that situation? I happen to know that 
small employers searching to purchase group plans on the market 
are at a real disadvantage regardless of association health 
care plans.

    Mr. O'Grady. I think there still is a rub there--there is 
no doubt about it--in terms of because it would be treated as 
income to the employee.
    You know, it would not be an in-kind benefit and therefore 
deductible. It would be treated as a cash benefit and therefore 
taxable. It would still be deductible to the employer, but not 
to the employee. It would be an after tax sort of a situation.
    Now, part of what in terms of the Administration's thinking 
in terms of how we do this and how do we make these different 
parts fit together, that is to return to this notion to allow 
states who want to be able to set up state pooling 
arrangements.
    Could you have something where you have various funds? We 
have these different disparate programs. We have some kids 
being covered by Medicaid. We have some kids covered by SCHIP. 
We have parents who have certain tax advantages either through 
their employer or on their own.
    Some of the things that our experience has been over the 
last few years with allowing states to be fairly innovative in 
the waivers that they have had for these different programs, is 
there some way you can basically take and pool that money 
coming from employers, coming from the state through either 
SCHIP or Medicaid or whatever and be able to fairly 
significantly subsidize the purchase of family coverage, and so 
you also do not have this sort of ridiculous situation where we 
have four members of a family and this kid is covered by one 
program and this kid is covered by another and mom is uninsured 
and dad gets it as a single coverage through his employer 
maybe.
    You know, we have all this sort of hodgepodge, and so part 
of the thought there is how do you stay flexible enough that 
you can pool this money and really have something that is going 
to be able to offset 50, 60, 70 percent of the price of a 
premium?
    Now, that at this point is the best I can think of to start 
to dovetail with your concerns. Could you set up a structure so 
that the employer could make some sort of a contribution, but 
it would be viewed in the traditional way that employers are 
currently contributing towards the purchase of health care.

    Mr. King. And that might be a way to address the rub 
because, as I understand it currently, if an employer seeks to 
purchase health insurance for an individual employee they must 
seek that same level of policy for all employees whatsoever. Is 
that correct?

    Mr. O'Grady. I believe so, but I would like to double 
check. If I find out it is not, I will get back to you.

    Mr. King. Mr. Shalek?

    Mr. Shalek. A lot of groups now are offering multiple plans 
within the group or the employer. A lot of groups now are 
offering multiple plans within the employer's group lease for 
the employees.
    They have a choice of buying up to a higher benefit plan or 
spending less money for a higher deductible, but they are all 
group plans. Yes.

    Mr. King. Thank you.
    Thank you, Mr. Chairman.

    Chairman Manzullo. Thank you.
    Congresswoman Moore?

    Ms. Moore. Thank you so much, Mr. Chairman.
    If I ask a question that has already been addressed, please 
forgive me. I had another meeting out in the hall.
    I guess my questions are directed to the panel, but most 
particularly the Honorable Michael O'Grady. Just really 
listening to your testimony, there were a couple of things that 
caught my interest and I am hoping that you will be able to 
respond.
    First as it relates to the association health plans, I was 
really very, very happy to see that this Administration has 
gone on to address a lot of the concerns and complaints that 
have been made about the coverage to take out some of the 
biases and some of the concerns that we had to address solvency 
issues, state regulation, consumer protections, national 
oversight, because I do think that there could be a tremendous 
benefit from the association health plans.
    However, what I am concerned about is this not meeting 
state mandates. As a person with a background from the state 
legislature, I can tell you that I have had to fight insurers 
about including in their plans things like mammograms, 
contraception, tubal ligations.
    I guess what I am thinking is that the economy of scale--
say, for example, restaurant workers, many of whom would be 
women. The economies of scale would enable us to insure this 
association of employees, so what really could be the harm in 
meeting the state standards?
    As Mr. Lipinski suggested, you know, what you guys see, it 
would be fitting to have some sort of standard as opposed to a 
race to the bottom. You know, women need mammograms. It is 
amazing that we had to fight to get that in.
    You know, we had to fight for that as a covered benefit, 
and that is the one reservation and concern that I have about 
those health plans.

    Mr. O'Grady. I think that in terms of when we look at the 
kind of situation we have with both the uninsured, the 
underinsured and how different generosity of different plans 
go, certainly what we have seen in different states, and 
different states have handled mandated benefits in different 
ways. You certainly can see there are some examples that have 
gone to an extreme in terms of various things that they have 
asked to go on there.
    To a certain degree, when you think about where you mandate 
are you right that in terms of if you take some benefit and you 
spread it over 100,000 people or whatever you are going to 
bring down the unit cost of that. There is no doubt about it.
    Will you get it at 60 percent of what it would cost you if 
you tried to purchase it for one individual? Sure. All those 
different benefits are definitely adding up and so it has in 
effect a zero sum gain that there is a certain amount there.
    Some of the states have. Some of the states have done it, 
and certainly we have seen it with some of the larger employers 
who are self-insured. Would you rather offer something not as 
generous, but offer it to more people?
    That is certainly a kind of state for the most part that is 
decided certainly in terms of Medicaid and SCHIP waivers and 
some of that.

    Ms. Moore. Can I ask another question because my time is 
expiring?

    Mr. O'Grady. Sure.

    Ms. Moore. I am very concerned. I saw that you had a 
refundable tax credit for individuals up to $3,000. Is that 
just for their premiums, or is that for their health care?
    I am having a hard time understanding how very, very low 
income people with incomes under $25,000 are going to benefit 
from tax credits even with the refundable proposal.

    Mr. O'Grady. Well, it certainly is in terms of--they are 
going to get the credit even if they pay no taxes whatsoever, 
so it will be like the earned income tax credit in that sense.

    Ms. Moore. Right.

    Mr. O'Grady. The fact that they may be a $10,000 a year 
worker or something like that; they will still get the credit.
    Let me double check on that in terms of premium versus 
because there are other options there that have to do with 
could you put part of it in. Certainly we have that part of 
this could go into your health savings account. Would you be 
able to cash it out directly? I do not believe so if you had 
just straight out-of-pocket.
    Could you do it through a health savings account so some of 
your money is going towards the premium and the rest of it can 
go towards the account so you can use that to pay deductibles 
and co-sharing? Yes, but there are some limits there.

    Chairman Manzullo. We are going to have to recess here.
    You two ladies wanted to have questions?

    Ms. Bordallo. Real quick questions.

    Chairman Manzullo. That is right. You do not have to vote. 
They took away your vote.

    Ms. Bordallo. That is right.

    Chairman Manzullo. All right. Both of you do not have to 
vote here.

    Ms. Bordallo. Mr. Chairman, I just want a clarification 
very quickly if I could.

    Chairman Manzullo. If you want, we can come back. How are 
you on time?
    Dr. O'Grady, you could be excused because of your schedule.
    Absolutely I am willing to come back. I just want to know 
because you are a physician, and you have lots of questions.

    Ms. Bordallo. I do not have a lot of questions.

    Chairman Manzullo. We will be back in about 25 minutes. Is 
that okay with the rest of the panelists? Okay. All right. We 
will recess until then. Is that okay?

    Ms. Bordallo. How long will that be? When should we be 
back?

    Chairman Manzullo. About 25 minutes. Thank you.

    Ms. Bordallo. Very good.
    [Whereupon, a short recess was taken.]

    Chairman Manzullo. Okay. We will resume.
    Mr. Haynes, you had a response to Congresswoman Moore's 
question on mammograms and state mandates, I believe.

    Mr. Haynes. Yes, I did. I am sorry Congresswoman Moore is 
not here.

    Chairman Manzullo. That is okay.

    Mr. Haynes. The question she asked is one that I have 
asked, because as I understood her question it was essentially 
once you facilitate association health plans why can 
association health plans not go ahead and comply with the state 
mandates?
    I have a plan, and I am trying to get it expanded to cover 
the smaller bottlers. The carriers are saying the mandates are 
the obstacle. I think the problem is, you know, I have about 
10,000 employees, somewhere between 5,000 and 10,000 employees 
that I think could benefit from me restoring a small group 
plan. I may have 25 employees in Illinois and 400 in Iowa and 
200 in Minnesota and 15 in New York. I mean, among those I am 
probably in about 40 some odd states.
    The carriers have said in essence, you know, if you had 
5,000 employees in each state it would make sense, but to do it 
for 30 or 40 or 20 or some small number of people in 40 
different states, the complexity and the administration is just 
too much for us to be interested in doing.
    I keep testing that answer, but that is the answer I keep 
getting.

    Chairman Manzullo. Congresswoman Bordallo?

    Ms. Bordallo. Thank you very much, Mr. Chairman, and I want 
to thank the principals who testified here. Thank you very much 
for your time.
    I also want to commend the Chairman, Mr. Manzullo, and our 
Ranking Member Velazquez for their leadership in reaching 
across the aisle to look for bipartisan solutions to these 
concerns.
    Mr. Chairman, Assistant Secretary O'Grady left. Is that 
correct? I do not know if anybody can answer this question, but 
I want to go on record to ask it.
    There has been a great deal of discussion this afternoon 
about the state high risk pools, and I think it is a move in 
the right direction. However, the original state high risk 
authorization did not include my district of Guam, nor did it 
include any other territories, and seated right next to me is 
the congresswoman from the Virgin Islands.
    In putting political capital behind us, can I assume that 
the Administration would support authorizing grant funding to 
the U.S. territories? It is very important, and it has been 
mentioned several times here this afternoon, just mentions of 
states, never territories.
    Now, the Senate--I understand in the 107th, Mr. Chairman, 
this was authorized, but we were not included.

    Chairman Manzullo. If you would like to reduce that 
question to writing, we will attach a cover letter to it, 
Congresswoman Velazquez and I--

    Ms. Bordallo. All right.

    Chairman Manzullo. --and get that over to the Department of 
Health and Human Services.
    Is that okay with you, Congresswoman Velazquez, to certify 
her question?

    Ms. Velazquez. Yes.

    Ms. Bordallo. I would also like to ask the two of you. I 
think the Senate, it has gone through their reauthorization. I 
do not know whether we are included in that.

    Chairman Manzullo. Okay.

    Ms. Bordallo. That will be another question I will place in 
the letter.

    Chairman Manzullo. Okay. We would be glad to do that.

    Ms. Bordallo. All right. That is my big question. I am just 
very concerned because many times the territories are 
forgotten. Thank you very much.

    Chairman Manzullo. Dr. Christensen?

    Ms. Christensen. Thank you, and I thank you, Mr. Chairman 
and Ranking Member, for allowing the hearing to continue. It is 
a very important hearing, and I always welcome the opportunity 
because this is sometimes the only opportunity I have to talk 
about healthcare issues.
    I come from the perspective of the chair of the Health 
Braintrust of the Congressional Black Caucus, that is 
interested in insuring that everyone has access to health care 
and access to health care coverage, so I just want to set that 
as a background.
    One of the main reasons and perhaps the only reason that 
AHPs have not passed in three tries is the fact that all of the 
proposals eliminate state regulation. If the main aim is to 
cover small business employees without undermining benefits and 
coverage or even risk doing so, why can we not look at other 
ways? Why does it have to be association health plans?
    We have tried on three occasions. It has passed the House, 
but I do not think it is going to pass even in this Congress 
with the majority that we have. Why do we not instead look at 
the states, pooling with the state insurance coverage or other 
ways of pooling so we accomplish the same thing and probably 
accomplish more because it does not appear that the association 
health plans are going to be successful in passing through 
Congress.
    You seem puzzled, so let me just go to the quote from one 
of the agencies, the Center for Studying Health Care System 
Change. The option of allowing small firms to join existing 
state employee pools may offer the best choice because it 
offers stability, simplicity and affordability, and I am 
quoting across. I am not quoting the entire statement. It 
offers a choice of plans, competitive low load rates that are 
rarely possible for small firms, and it allows them to stay 
under state regulations.
    Now, what is wrong with doing it by allowing the small 
businesses to join existing state employee pools instead of 
fighting the AHP battle year after year, Congress after 
Congress?

    Chairman Manzullo. Anybody want to? Scott?

    Mr. Shalek. One of the things I have seen in Illinois is 
that, and we have bills proposed to do that, but the problem in 
Illinois is the state cannot manage its own health insurance 
program adequately enough to save small businesses money.
    I think the only advantage to an AHP is the exemption from 
the state mandates, which will then erode the private market 
sector on health insurance. About the only thing that could be 
done to make everything on an even playing field is for 
Congress to preempt employers from state mandates.

    Ms. Christensen. Well, what if we were able to provide some 
assistance? Some on the opponent side of AHPs say labor really 
is not able to regulate either, but if some assistance could be 
provided from the federal level to the states, because this is 
such an important issue, to better manage their state employee 
pools we would get over a hurdle that seems to be impeding 
passage of anything to help small businesses.

    Ms. Kerrigan. If I could just address this? I could think 
about it a little further and maybe provide a more thoughtful 
response in writing, but I do know if you are talking about 
AHPs from a national perspective what you are bringing to the 
table is a larger pool of employees that you would be able to 
better leverage in negotiating more affordable health care 
costs.
    I think the power of numbers in terms of being able to 
negotiate these costs through the national model where you have 
organizations that have national memberships is, you know, one 
of the driving forces; that you have larger numbers of people 
that you can then use in the marketplace and negotiate for 
better plans and more affordable health insurance options for 
your members.
    I mean, that is just something that comes to my mind. I 
know there are pooling arrangements at the state level. Some 
have worked. Some have not for reasons described by my fellow 
witness, but the power of numbers do help in this regard.

    Mr. Haynes. Could I respond a little bit further too? On 
the mandate issue, I think it is important, and I know the 
Committee realizes this, but this is not a question of whether 
to preempt mandates or not because that has already been done 
with respect to large employers and unions. The question is 
whether you should put small business on the same footing 
through bona fide associations as large employers.
    I think the second thing that is important is just to 
reiterate her point. The administrative cost piece of this; 
really the size and scale, makes a very significant difference. 
Our program that we have, which is not as big as we want it to 
be because we would like to include the small bottlers, already 
has administrative costs in the six to seven percent range.
    It is my understanding that on a nationwide basis small 
groups that rely on commercial markets pay administrative costs 
that run between 17 and 30 percent. That additional cost, that 
administrative cost, to me is one of the real key leverage 
points of AHP legislation.
    I think in our situation there is dramatic evidence that it 
does work. I know there are a number of other AHPs that have 
shown that they likewise can drive those administrative costs 
down, which drives down the cost not only to the employers, but 
the employees, and frankly help solve in many cases an 
uninsured problem. In our case, as our bottlers dropped out of 
the small group, in many cases the ultimate result has been 
uninsured; not just higher costs, but a significant increase in 
the number of people who were uninsured.

    Chairman Manzullo. I have a question. Mr. Haynes, when you 
said that the smaller guys had to drop out of the AHPs, my 
understanding is that with the pending legislation which passed 
the House, I think three times that if you had 1,000 people in 
one shop and two in the other shop that you would end up with a 
group rating so that everybody is considered to be essentially 
working for the same employer.
    Is that a correct assessment of it?

    Mr. Haynes. Yes. That is my understanding of how it works, 
and that is how our program worked before.

    Chairman Manzullo. But what happened with the little guys? 
How could they be rated individually and still be part of an 
AHP?

    Mr. Haynes. Well, in our small group program we had them 
rated as a pool, okay, and when they dropped out they ended up 
having to go out to the commercial market and buy based upon 
whatever rating was--

    Chairman Manzullo. So the pool was not big enough?

    Mr. Haynes. Correct.

    Chairman Manzullo. Okay. Okay.
    Congresswoman Velazquez?

    Ms. Velazquez. Thank you.
    Mr. Haynes, we keep hearing that if association health 
plans are passed, businesses will drop benefits, and it will be 
a race to the bottom with only bare-bones plans.
    What would you say to those people who claim that you only 
want association health plans so that you can cut benefits?

    Mr. Haynes. Well, the plan we have involves, you know, a 
set of benefits that I would stack up against any large 
employer plan.
    The reality is that anything we do with our bottlers has to 
be competitive. Our bottlers themselves have to be competitive 
in the marketplace, and to some extent they have to be 
competitive with big bottlers because there is a market where 
they compete for employees, and they also compete to continue 
to exist because a lot of the larger bottlers have bought out 
the smaller bottlers. If they cannot operate as efficiently, 
their best option is to sell out.
    I think a bare-bones plan, A, if we offered it would not be 
competitive, and, B, if it was the option that our members 
chose it likewise would not be competitive. What has happened 
is they have gone into the commercial market and the costs have 
gone up. They have resorted to more bare-bones plans to manage 
those costs.
    The reality is that as we explored what some of these 
people who dropped out of our plan have done, many of them have 
increased deductibles, cut coverages and made the program 
sufficiently unattractive to the employees, particularly 
younger employees that a large percentage of them are now going 
uninsured.

    Ms. Velazquez. If it is good for big business, it should be 
good for small businesses, or if it is good for unions, it 
should be good for small businesses.
    Mr. Haynes, I know that you talk about how through your 
association health plans that you were able to keep health care 
costs down for your businesses, reducing the administrative 
cost and increasing your bargaining power.
    I would also like to know, what do you think about 
association health plans? What would be the effect of the 
association health plan in terms of insurance markets in the 
states?

    Mr. Haynes. It is simply more competition. Frankly, I think 
that is a good thing for everybody.

    Ms. Velazquez. Do you think it will force insurance 
companies, many of them states where they have a monopoly on 
the market, to start negotiating rates with small businesses?

    Mr. Haynes. Absolutely. We have real world experience with 
that in other insurance markets where we write commercial 
liability insurance. As we have gotten into additional lines, 
it has created a lot of additional competition for commercial 
insurance. It has driven those costs down very quickly and very 
dramatically.
    There is every reason to believe that is exactly what would 
happen in AHPs, both in our case and with other AHPs.

    Ms. Velazquez. What would you say to the fact that a month 
before the Presidential election, the White House announced 
that they wanted to add more groups into the association health 
plan legislation, but not small businesses?
    Do you think adding civic groups and other groups into the 
association health plans will help, or how difficult would it 
make it to pass?

    Mr. Haynes. That is maybe not a question I am most 
qualified to answer because it deals with Washington, and that 
is not what I do day-to-day.

    Ms. Velazquez. But have you been consulted as a person who 
is an advocate for association health plans?

    Mr. Haynes. Not personally, but it could well be that other 
members of our coalition have been part of that discussion. I 
certainly will follow up on it myself.

    Ms. Velazquez. But do you see the logic? The association 
health plan's main focus is to help small businesses, so I do 
not know what kind of benefit small businesses will have by 
adding civic groups and other groups into the association 
health plans.

    Mr. Haynes. It is not entirely clear to me either, but I 
would have to say I cannot offer an opinion on that without 
studying it a little bit further.

    Ms. Velazquez. Thank you, Mr. Chairman.

    Chairman Manzullo. Did you have a concluding question, Dr. 
Christensen?

    Ms. Christensen. A concluding question? Oh, my goodness. 
Okay.
    I just wanted to point out before I asked the question that 
several respected research organizations, nonpartisan ones--
Urban Institute, Mercer Consulting, Lewin Group--and the 
Congressional Budget Office have concluded that AHPs will cause 
premiums to increase for most small firms while doing nothing 
to help the uninsured. As a matter of fact, our own 
Congressional Budget Office found that 75 percent of small 
employers would see their premiums increase under AHPs.
    I have a couple of questions. Let me see which one I want 
to ask. Let me ask a question about the HSAs. As I read about 
HSAs, to me they give just a semblance of coverage. I do not 
see where they really improve coverage because the process sets 
aside funding because of the high deductibles. People would 
naturally reduce utilization of health services because of the 
high deductible and what they have to pay.
    What appears that would happen under health savings 
accounts is that people would reduce the utilization of needed 
services and end up having to go to services sicker, thus 
continuing to increase the cost of health care.
    As I look at what has been developing, if I am reading this 
correctly, with HSAs, now realizing that those high deductibles 
make it very difficult for persons to access health care, and I 
hope, Mr. Shalek, that your son and children stay healthy. I do 
not know what their deductible is, but the high deductibles are 
unaffordable to many people and so now there are gap coverages 
that cover the deductible.
    HSAs were so great that the premiums were lowered, but now 
we have to come up with a second insurance to cover the high 
deductibles; the gap coverage. Does that not just put us back 
in the same place?

    Mr. Shalek. Not necessarily. What we are finding is 
consumers are becoming more educated in the actual cost and 
benefits of health care. People that have run to the doctors 
because they saw ads on TV for these prescription drugs that 
cost $150 are now, if they need it, looking at alternatives 
such as generics that might only cost them $10.
    They are becoming more informed and educated on their own 
health care. They are asking questions of doctors. Why do I 
need this MRI? Would an x-ray not cover it? So it is educating 
the public right now, number one, and if you compute the cost 
of a traditional health care plan to the cost of an HSA and put 
the money away into a savings account, even if you had claims, 
your cost comes out less.

    Ms. Christensen. Beyond that the way it is set up. Older, 
poorer, sicker individuals who either do not make enough to 
benefit from the tax incentives or cannot afford the high out-
of-pocket costs will remain in a traditional low deductible 
insurance plans, and both AHPs and HSAs as I see it will appear 
to me to be proposals that drive up the cost of health care.
    For those sicker people, the people that, I as Chair of the 
Health Braintrust, advocate on behalf of, in the final 
analysis, unless everyone has access to quality health care, 
the solutions that may seem like quick solutions that are 
before us today will probably just make the situation worse in 
the long run for everyone.

    Chairman Manzullo. Will the gentlelady yield for a 
question?

    Ms. Christensen. Sure.

    Chairman Manzullo. Dr. Christensen, is it your concern that 
when people set up the HSAs if their income is modest that they 
will not have enough money to put into the plan in the first 
place and to use those dollars to take them up to the 
deductible?

    Ms. Christensen. Some. You know, the fact is you have low 
premiums, but if you get sick some will find themselves unable 
to meet the deductible. Others, because it is their health 
savings account, they will try to save money by not going to 
the doctor.
    To me that is just human behavior. They will get to the 
doctor. Some will not be able to benefit from the tax 
deductibles either.

    Chairman Manzullo. Okay. Were you done with your questions?

    Ms. Christensen. Pretty much, I guess.

    Chairman Manzullo. Go ahead.

    Ms. Christensen. Well, I have one other question about the 
barriers that the states put up, and I guess I would go to Mr. 
Haynes?

    Mr. Haynes. Yes.

    Ms. Christensen. Yes, but anyone could answer. Several of 
the testimonies, and I know I was not here for most of them, 
but I really tried to read them last night and this morning. 
State protections impede the ability to offer coverage to the 
members.
    What are some of the state protections that you think are 
problematic besides the benefit mandates? I do not think we 
should lower the quality of services that people are eligible 
for.
    Do you support allowing AHPs to be exempt from state rating 
laws that limit how much insurers can raise rates when an 
employee gets sick or that they be exempt from state external 
review laws? What are some of the areas where you feel that the 
state protections impede the ability to offer coverage to 
members?

    Mr. Haynes. If I could respond to that, I do not know if it 
is specific forms of state regulations. It is the complexity 
associated with all the variations that I think are the core of 
the problem. One state wants you to do it one way. Another 
state wants you to do it another way. It is the complexity that 
it has caused.
    I think what the AHP legislation tries to do is let us have 
a uniform set of regulations administered by the Department of 
Labor that deals with some of the issues that you mentioned, 
Dr. Christensen, but does it in a way that makes it 
administratively feasible and possible for an AHP to exist 
across a number of different states.
    As I see it, that is what the legislation is seeking to do, 
not specifically to, you know, eliminate specific regulations 
that might exist at the state or specific mandates.
    The point that I would make relative to mandates is, as I 
said, the complexity of dealing with all the different state 
mandates is what I am told is the barrier to us doing a multi-
state pool program the way we used to. I think there are some 
state regulations that eliminate the possibilities of doing 
self-funded programs, self-insured programs, which I think are 
a very important asset that association plans need in order to 
create more competition.
    The reality is that what is happening, as I said, is some 
of these small bottlers and their employees simply have no 
coverage, so as opposed to the system that we are proposing 
where there would be more people with coverage, that there 
might be some specific coverage mandates that would not be 
applicable and some specific coverages, we at least have people 
insured who are not currently insured. I think that is a 
benefit.
    Beyond that, our particular program that we have with the 
larger employers does comply with all mandates, so everybody in 
our existing program, you know, all those mandates are being 
complied with.

    Chairman Manzullo. We appreciate your coming here. I want 
to go out and get a can of Coke. There you are.
    Thank you so much for your patience and coming back after 
our vote and continuing to research, continuing to try to find 
a way, as Congresswoman Velazquez says, to get both houses to 
agree on some major reforms. Thank you for your participation.
    The hearing is adjourned.
    [Whereupon, at 4:33 p.m. the Committee was adjourned.]

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