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



 
HEALTHCARE AND SMALL BUSINESS: PROPOSALS THAT WILL HELP LOWER COSTS AND 
                          COVER THE UNINSURED
=======================================================================

                                HEARING

                               before the

      SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT & GOVERNMENT PROGRAMS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                     WASHINGTON, DC, APRIL 27, 2006

                               __________

                           Serial No. 109-49

                               __________

         Printed for the use of the Committee on Small Business


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

                                 ______

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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

     SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT AND GOVERNMENT PROGRAMS

MARILYN MUSGRAVE, Colorado Chairman  DANIEL LIPINSKI, Illinois
ROSCOE BARTLETT, Maryland            TOM UDALL, New Mexico
BILL SHUSTER, Pennsylvania           DANNY DAVIS, Illinois
MICHAEL FITZPATRICK, Pennsylvania    RAUL GRIJALVA, Arizona
LYNN WESTMORELAND, Georgia           MELISSA BEAN, Illinois
THADDEUS McCOTTER, Michigan          GWEN MOORE, Wisconsin
JEB BRADLEY, New Hampshire

                     Joe Hartz, Professional Staff

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Shadegg, The Honorable John (AZ-3), Congressman, U.S. House of 
  Representatives................................................     5
Carroll, Mr. Robert J., Deputy Assistant Secretary for Tax 
  Analysis, U.S. Department of the Treasury......................    15
Lawler, Mr. Ed, ReMax Alliance, National Association of Realtors.    27
Wilson, Dr. Cecil B., M.D., Chair-Elect, Board of Trustees, 
  American Medical Association...................................    29
Matthews, Mr. Merrill, Ph.D., Director, The Council for 
  Affordable Health Insurance....................................    30
Hense, Mr. Paul, Hense and Associates, National Small Business 
  Association....................................................    32
Perrin, Mr. Dan, The HSA Coalition...............................    34

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    43
    Velazquez, Hon. Nydia........................................    47
    Bean, Hon. Melissa...........................................    49
Prepared statements:
    Shadegg, The Honorable John (AZ-3), Congressman, U.S. House 
      of Representatives.........................................    50
    Carroll, Mr. Robert J., Deputy Assistant Secretary for Tax 
      Analysis, U.S. Department of the Treasury..................    53
    Lawler, Mr. Ed, ReMax Alliance, National Association of 
      Realtors...................................................    68
    Wilson, Dr. Cecil B., M.D., Chair-Elect, Board of Trustees, 
      American Medical Association...............................    83
    Matthews, Mr. Merrill, Ph.D., Director, The Council for 
      Affordable Health Insurance................................    92
    Hense, Mr. Paul, Hense and Associates, National Small 
      Business Association.......................................   101
    Perrin, Mr. Dan, The HSA Coalition...........................   104

                                 (iii)
      



HEALTHCARE AND SMALL BUSINESS: PROPOSALS THAT WILL HELP LOWER COSTS AND 
                          COVER THE UNINSURED

                              ----------                              


                        THURSDAY, APRIL 27, 2006

                   House of Representatives
           Subcommittee on Workforce, Empowerment, 
                             andGovernment Programs
                                Committee on Small Business
                                                     Washington, DC
    The Subcommittee met, pursuant to call, at 10:30 a.m., in 
Room 2360 Rayburn House Office Building, Hon. Marilyn Musgrave 
[Chairman of the Subcommittee] presiding.
    Present: Representatives Musgrave, Lipinski, Udall, Davis, 
Barrow.
    Chairman Musgrave. Well, thank you for being patient this 
morning. We are waiting on our ranking member, who is very 
conscientious. I assure you he will be here just as soon as he 
can. And Mr. Shadegg, we want to be very respectful of your 
time.
    So I will call the meeting to order, and I thank you all 
for being here, and thank you especially for those who have 
traveled long distances to be with us here this morning. And we 
are going to examine health care choices for American small 
businesses, their employees, and for working families in this 
country.
    All Americans deserve and want reliable, high quality, and 
reasonably priced health care that will be there when they need 
it. One of the most stressing statistics that we see each year 
is the rising number of Americans who live without health 
insurance, currently estimated at 45 million people. Of those 
without health insurance, about 60 percent are small 
businesses--are small business owners, and they employ a number 
of people, and they are very concerned about them and their 
families.
    As health care costs continue to rise, fewer employees and 
working families will be able to afford the coverage that they 
need. Clearly, we in Congress must look at this pressing 
problem, and we must find solutions that will create an 
environment, so those that need health insurance cannot only 
find the coverage that they need but they can afford it.
    We need to be working toward a health care delivery method 
that works best, not just what we have done before. A simple 
look at the current health care landscape shows that our system 
is clearly not working.
    So the focus today in the hearing will be on four proposals 
that Congress has begun work on to help Americans get the 
coverage they need at a price they can afford. These proposals 
are the establishment of association health plans, AHPs, 
increasing the availability, use, and ease of the health 
savings accounts, or what we refer to as the HSAs. We also want 
to reform the medical liability system and examine Congressman 
John Shadegg's common sense legislation, H.R. 2355, the 
Healthcare Choice Act.
    I admire Mr. Shadegg very much, and you can always depend 
on him to come up with a common sense approach that will really 
work.
    On July 26, 2005, the House of Representatives passed H.R. 
525, the Small Business Health Fairness Act of 2005, the 
legislation that would establish federally regulated 
association health plans. And there was strong bipartisan 
support for this legislation. That was the seventh time the 
House had passed it.
    I am confident that real progress on this legislation will 
be made, I am hoping, on the other side of the Capitol this 
year, so we are looking to the Senate.
    AHPs would allow small businesses to band together across 
state lines through their membership in an association to 
purchase more affordable health insurance. Unions and large 
corporations already have this ability, and it makes sense to 
me that small businesses should have the same opportunity.
    HSAs are a new way for people to pay for medical expenses 
not covered by insurance or other reimbursements. Eligible 
individuals can establish and fund these accounts when they 
have a qualifying high deductible health plan and no other 
health insurance with just a few exceptions. The accounts have 
significant tax advantages. The contributions are deductible. 
Withdrawals can be used for medical expenses and are not taxed. 
The account earnings are tax exempt, and the unused balances 
can accumulate without any limit.
    President Bush has proposed several improvements to HSAs, 
such as allowing Americans who purchase HSA qualified insurance 
policies on their own to have the same tax advantages of people 
who obtain insurance through their employers and eliminating 
all taxes on out-of-pocket spending through HSAs.
    There is an additional area that Congress and the President 
have worked on, and that is tort reform in the medical 
community. American patients are losing access to care, because 
the nation's out-of-control legal system is forcing physicians 
in some areas of the country to retire early, stop practicing 
medicine, or they give up the performing of high-risk medical 
procedures. And it hurts people in the area that need health 
care.
    Right now there are 21 states in full-blown medical 
liability crisis, and in 2002 it was estimated that there were 
12 that were in that situation. So in crisis states patients 
continue to lose access to care, and in some states 
obstetricians and rural family physicians no longer deliver 
babies. Meanwhile, the high-risk specialists no longer provide 
trauma care or provide complicated surgical procedures.
    Excessive litigation and high medical malpractice rates 
have added to employer's health care costs and spurred some 
providers to err on the side of caution. That comes at the 
expense of both health plan dollars and patients receiving 
unnecessary service. And we know that this issue just isn't 
about the physicians. Its effects cut across the whole health 
care sector.
    Hospitals need physicians to admit patients. Companies that 
manufacture medical devices and pharmaceuticals need physicians 
to use and prescribe their products.
    Similar to the AHP legislation, the House passed H.R. 5, 
the Help Efficient, Accessible, Low-Cost, Timely Healthcare, or 
HEALTH Act, of 2005, on July 28. The Senate is continuing to 
debate this critical legislation right now, and there is 
another proposal to help Americans find and purchase affordable 
health care insurance, and that is the legislation introduced 
by Congressman John Shadegg from Arizona, H.R. 2355, the 
Healthcare Choice Act of 2005.
    Under this legislation, consumers would no longer be 
limited to purchasing policies dictated by their state's 
regulators and mandated benefits. Instead, they could decide 
among a variety of insurance policies qualified in one state 
but for sale in multiple states.
    I am very pleased to have you here today, Congressman 
Shadegg, to give us the details on this legislation.
    And as we all know, there is no one solution to this 
complicated and very serious issue when we talk about 45 
million people in the United States without health insurance. 
Small business employers and employees are in critical need of 
new ways to be able to increase health insurance coverage, and 
we will look at these proposals today as responsive solutions 
to the problem.
    I am eager to hear the testimony. Before I do that, though, 
I would like to recognize our ranking member, Mr. Lipinski, for 
an opening statement.
    [Chairman Musgrave's opening statement may be found in the 
appendix.]
    Mr. Lipinski. Thank you, Madam Chairman. I would like to 
thank you for holding this hearing on such a critical issue, 
especially critical for small businesses.
    Every small business owner I speak with, whether here or 
back home in my district, no matter what type of business they 
operate talks about one overriding issue that they face in 
running their business: how to provide affordable health care 
for their employees and for their own families.
    Over the past five years, health insurance premiums for 
employers have increased by 60 percent. Small businesses that 
have been able to offer health care simply cannot continue to 
absorb these dramatic increases. This has forced many to 
greatly increase the cost of health insurance for their 
employers--for their employees or for the employers to stop 
offering health insurance at all.
    A failure to address this crisis has created a situation 
where millions of working Americans have no health insurance. 
And while large businesses have a coverage rate approaching 90 
percent for employer-based health insurance coverage, small 
firms have a coverage rate of only about 50 percent. In fact, 6 
out of every 10 uninsured Americans are in families headed by 
self-employed workers or small business employees. This is 
simply unacceptable.
    I look forward to hearing today's witnesses discuss a 
variety of solutions they believe could help bring down the 
cost of health care and provide better access for small 
businesses.
    I supported the AHP legislation we passed last year in the 
House, and I am hopeful that the Senate will do the same this 
year. But that clearly is not enough. Because of the depth of 
this problem, I believe that all options should be considered, 
but we must make sure that in covering more Americans we do not 
significantly undermine the coverage or treatment that 
Americans currently have. Health care that is inadequate or 
risky cannot be accepted.
    One of the issues I have been particularly focused on is 
addressing the skyrocketing costs of health care at the source, 
specifically at hospitals. Most of us would never consider 
getting our car repaired at a shop without first getting an 
estimate, but this is exactly what we do when we go to a 
hospital.
    Lack of information prevents families from making well 
informed, cost effective choices. In addition, lack of 
information means that hospitals do not have to compete at all 
in their costs. When California passed a law to require 
hospitals to disclose their entire price list, it was revealed 
that there was a great disparity between hospitals in what they 
charge for common procedures and medications.
    One hospital charged $120 for a chest X-ray while another 
charged more than $1,500 for the same X-ray. And while one 
hospital did not charge for a Tylenol capsule, another hospital 
charged $7 for the same capsule.
    When California passed the law and required disclosure, 
disclosure helped to change the situation. This is why I 
introduce last year, along with Representative Bob Inglis, H.R. 
3139, the Hospital Price Reporting and Disclosure Act, a 
bipartisan effort to require every hospital to give consumers 
clear, concise information about what they charge for common 
procedures and medications. A companion bill has also been 
introduced in the Senate by Senators Durbin, DeMint, and 
Cornyn.
    Now, unfortunately, the people who are hit hardest by 
prices not being disclosed are the uninsured, including 
millions who work for small businesses. They are the ones who 
have to pay the full price for often unknown and unexpected 
charges. The Hospital Price Reporting and Disclosure Act would 
require hospitals to regularly report to the Department of 
Health and Human Services the amount they charge for the 25 
most commonly performed in-patient procedures, 25 most common 
outpatient procedures, and the 50 most frequently administered 
medications.
    More than a half a dozen states have passed some form of 
hospital price disclosure, including my home state of Illinois, 
and at least 10 states currently are considering such 
legislation. States such as Wisconsin and Oregon already have 
this kind of information available to the public on an easy-to-
access website, similar to what would be required by H.R. 3139.
    This information is essential to the 46 million uninsured 
Americans, and especially for those millions who work for small 
businesses. A recent report on 60 Minutes demonstrated the high 
impact that undisclosed hospital prices have on uninsured 
Americans. While we work to get coverage for the uninsured, we 
should give them information that will help in their health 
care choices.
    Obviously, though price is not the only factor that 
families should take into account when making their health care 
choices, this is an important point to consider not only when 
looking at H.R. 3139 but when considering all our options.
    Quality information is also critical, and I am happy that 
the Centers for Medicare and Medicaid Services is beginning to 
make some quality measures available, but more is certainly 
needed. And the advice of health care professionals will always 
be essential when making care decisions. But these are not 
reasons to oppose making price information available.
    Clearly, tackling the cost of health care is a very 
complicated issue. Protecting small businesses and the self-
employed should be a top priority, especially as health care 
costs continue to skyrocket.
    I look forward to hearing from our witnesses today about 
their ideas to provide more small business owners, their 
workers, and their families with health care coverage. This is 
clearly a problem critical to millions and millions of 
Americans, especially those who are small business owners, 
employees, and something that we need to get to work on. We 
cannot let this continue to go on, and I look forward to 
hearing today from all of our witnesses.
    Thank you.
    [Ranking Member Lipinski's opening statement may be found 
in the appendix.]
    Chairman Musgrave. Thank you, Mr. Lipinski.
    Mr. Shadegg, we will start with you on the first panel. We 
appreciate so much your testifying before the Committee today, 
and please proceed.

 STATEMENT OF THE HONORABLE JOHN SHADEGG (AZ-3), CONGRESSMAN, 
                 U.S. HOUSE OF REPRESENTATIVES

    Mr. Shadegg. Thank you, Madam Chairman, and members of the 
Committee. I greatly appreciate this opportunity to appear 
before you today and to discuss the Healthcare Choice Act. I 
have had a passion for health care reform since I joined the 
United States Congress. I believe it is incumbent upon this 
government to make health care more affordable and to assess 
the problem that many Americans have with being able to find 
and to purchase affordable health insurance coverage.
    With your permission, Madam Chairman, I will submit my 
written testimony and just direct my remarks to some of the 
highlights of this issue.
    The Healthcare Choice Act is a simple and straightforward 
proposal which I believe could have a very profound impact, but 
it requires that we set the stage first. And I think members of 
this Committee understand these points, but perhaps not all 
people listening to this hearing or perhaps reading about it 
will understand.
    I support the Committee's efforts on association health 
plans, health savings accounts, the possibility of reform of 
medical liability. I think all of those are critical. But as 
you stated, Madam Chairman, this problem--the high cost of 
health insurance, the lack of access to affordable of 
coverage--is a problem that cannot be solved in a single way 
with a single solution.
    We know, for example, that people who work for large 
employers and get their health care through those employers 
often have access to affordable health care, though listening 
to Mr. Lipinski discuss well informed, cost effective choices, 
I would argue that choice is a key factor in bringing down the 
cost of health care, and that many of those employees who work 
for large employers don't have enough choice.
    Right now many of them are offered only one plan to choose 
from. They can't pick that plan or reject it. Once they are in 
the plan, they can't pick their doctor or reject that doctor. 
And all too often, if the plan harms them under our current 
law, ERISA, they can't fire the plan or even hold them liable. 
So that is the situation that governs many who work for large 
employers.
    AHPs go directly at the problem of small businesses, and I 
enthusiastically support AHPs and the efforts of this Committee 
to make AHPs available to smaller employers and their 
employees, so that they can buy the kind of affordable coverage 
that employees of big companies get. I also strongly support 
HSAs.
    But there is a segment of our market--and I think this goes 
at the issue of the 45 million uninsured, Madam Chairman, that 
you mentioned who are not able to get insurance through an 
employer and who are buying health insurance in the individual 
market. And it is that segment of the population, which I 
submit includes many of the 45 million uninsured, who have to 
go into the individual market to buy their health insurance 
that would be helped by the Healthcare Choice Act.
    Let me explain what the Healthcare Choice Act does. Right 
now, if you are in the individual market and you are buying a 
policy for yourself, you are self-employed or your employer 
doesn't offer you health insurance, you have to buy a policy 
that has been qualified in your individual state--that is to 
say, that meets every single dot and title of the laws of that 
state, not only with regard to financial solvency of the 
company but with regard to every single mandated coverage that 
the state dictates.
    And we will talk about these benefit mandates in a moment, 
but they drive up the cost of insurance immensely. An insurance 
company wanting to sell in an individual state has to then go 
to that state, qualify to do business, and write an insurance 
policy for that state unique to that state. If it wants to go 
to the state next door, it has to do it again, qualify to do 
business in the state next door, and write a new policy that 
meets every dot and title of that state's laws. And they must 
do that on and on in all 50 states if they want to sell in all 
50 states.
    The Healthcare Choice Act says there is immense 
inefficiency in having to meet every single one of those 
requirements, including all of the benefit mandates of those 
states. And so what it says is that you would be able to, as an 
insurance company, go to one state and to meet all of the 
health insurance requirements of that state and write a policy 
that meets that state's benefit mandate laws.
    You could then go to any other state and file your health 
insurance policy with the State Insurance Commissioner and then 
sell the policy in the second or third state, and the state 
Health Insurance Commissioner of that state could enforce that 
contract, that health insurance policy, on behalf of the 
individual consumer who bought the policy.
    Let me explain why this came about. We have talked about 
mandates. The State of New York, for example, requires that 
every insurance policy sold in New York cover podiatry. 
Acupuncture, which I doubt if anybody in this room has used but 
may have, is mandated in 11 states. Massage therapy is mandated 
in four states. Hair replacement coverage is mandated in many 
states. Substance abuse treatment coverage is mandated in many 
states. Chiropractic care is mandated in 47 states.
    The Council for Affordable Health Insurance, CAHI--and I 
believe you have a witness coming this afternoon or in your 
second panel to discuss this--estimates that these individual 
state mandates can hike or increase the price of insurance by 
somewhere between 20 and 45 percent. For example, a health 
insurance policy for a single individual in Pennsylvania costs 
roughly $1,500 a year. Simply cross the Delaware River into New 
Jersey and that identical plan costs about $4,000 per year.
    And I would like to then point to this chart, if I might. 
This is a chart of a study that was done which shows the 
monthly cost of family health insurance coverage with $500 
deductible in four different states. As you can see, that 
policy for a family of four in those four different states--in 
Trenton, New Jersey, the policy costs $3,881 a month. In 
Portland, Maine, it is $1,781 a month. In Arlington, Virginia, 
it is only $548, comparable policy, same coverage, same family, 
same pre-conditions. Madison, Wisconsin, that policy costs only 
$484.
    If I could relate kind of a story of how this issue came to 
us. In point of fact, as you know, Trenton, New Jersey or New 
Jersey is just across the river from Pennsylvania. There are 
consumers in America who are literally shopping with their 
feet. They discover that they live in New Jersey, and to buy an 
insurance policy for their family it costs almost $4,000 a 
month.
    They chat with their best friend who lives right across the 
river in Pennsylvania, or their sister or their brother or 
their father or their uncle, they are at a Sunday night 
barbecue, and they are discovering that the same essential 
coverage across the river in Pennsylvania costs anywhere from 
one-sixth of as much, a few hundred dollars a month, versus 
several thousand, $4,000 a month.
    And so people are actually renting post boxes or asking a 
relative to--if they can say, ``Well, look, I often get my 
health treatment across the river in Pennsylvania. The 
insurance company doesn't really care whether I go to a 
hospital or a doctor in Pennsylvania or New Jersey. The cities 
cross the line. What I will do is, if you wouldn't mind, I will 
list my home address as your home address in Pennsylvania, 
rather than my home address as being my home address in New 
Jersey, and I can save thousands of dollars a month.'' The 
reason for that: our benefit mandates and the nature of the New 
Jersey law.
    What the Healthcare Choice Act would say is, ``We can 
produce dramatic savings for people in this individual market 
in two ways.'' One, you allow the insurance company to qualify 
the plan in one state, and then to market it in 50 states, but 
to be held accountable to the consumer in the state where the 
consumer lives. And the bill has been carefully written to 
ensure that.
    So if you buy a policy that is, say, qualified under 
Illinois law, and you buy it in my home state, Arizona, and you 
have a problem with the insurance company in living up to the 
terms of the contract, the Arizona Health Insurance 
Commissioner can represent and protect you as a consumer.
    We also have certain minimal consumer protections that 
apply across the board, including provisions that require, for 
example, an independent review of a denial of care. There is a 
minimal threshold that is placed in the law. But the big 
savings, we believe, would occur in these benefit mandates.
    I will conclude by pointing out--and I would be happy to 
answer any questions--as Mr. Lipinski noted, well informed, 
cost effective choices are critical here. And I think his point 
about being able to make a choice about a hospital with very 
high costs for the procedure you need versus a hospital with 
very low costs is a very critical power that an individual 
consumer needs.
    But if you step back from that, if a consumer can say, 
``Look, I might like to have coverage for podiatry, or I might 
like to have coverage for acupuncture, or I might like to have 
coverage for massage therapy,'' but, quite frankly, each of 
those coverages that I demand in my policy runs the cost of the 
policy up. I can barely afford it. Then, they might want at 
least the opportunity to be able to purchase a policy that has 
fewer mandated benefits.
    And just to conclude, as you mentioned, Madam Chairman, 45 
million Americans are uninsured. Statistics show or surveys 
show that two-thirds of those have incomes below 200 percent of 
the federal poverty level, and they cite unaffordability as the 
top reason why they are uninsured. As a nation, we want--we 
encourage them to become insured. It is incumbent upon us to do 
everything we can to make that health insurance affordable.
    I believe for those in the individual market, the 
Healthcare Choice Act, giving them many more choices of 
policies to pick from, ending kind of the monopoly status that 
many insurance companies have in states where they are the only 
individual policy sold, or one of only two or three that is 
sold in that state, giving them many more choices would help 
bring down the cost of insurance, and, thus, make it more 
affordable for those who can't currently afford it.
     With that, Madam Chairman, I would be happy to answer 
questions at the end of the panel.
    [Congressman Shadegg's testimony may be found in the 
appendix.]
    Chairman Musgrave. Thank you, Mr. Shadegg. And before we go 
to Mr. Carroll, I am going to ask for questions for you first, 
out of respect for your time, not that your time isn't 
valuable, but he has got other Committee things to do.
    I would just like to comment that having served in a state 
legislature I saw in Colorado mandate after mandate added. And 
there was always a very persuasive group that came in to ask 
for the mandate. There were, quite frankly, many times other 
than those individuals who had suffered enormously that wanted 
this kind of mandate put on, because they felt it was the 
appropriate public policy decision. There were also other times 
there were just turf wars going on, and certain groups that 
wanted to make sure that whatever they provided was covered.
    And, you know, we were invariably told, Mr. Shadegg, that 
we were actually going to save money in the long run. I heard 
that time after time after mandates were added. And can you 
tell us anything about the trends in state that are many 
mandates in place and states that don't have as many in regard 
to how many uninsured there are? Do you have any idea how these 
mandates have impacted individual states?
    Mr. Shadegg. Madam Chairman, they have exploded. And there 
are, according to CAHI's calculations, 1,800--and these are 
numbers that are just a little bit out of date, they are 
several years out of date, so there may be more now. Across the 
50 states, there are more than 1,800 separate types of 
mandates. And when you look at, for example, massage therapy or 
acupuncture, I don't know yet--I believe there may even be 
aromatherapy mandated in some states now subsequent to this--
there has been an explosion of these mandates.
    I certainly agree that some of the basic coverage should be 
included in any policy. No one would want to go out and buy a 
policy that didn't cover, for example, heart--cardiac issues or 
cancer treatment or emergency room treatment. But informed 
consumers, as I think Mr. Lipinski noted, can look at these and 
make those kinds of choices.
    And I think that in many instances it may be true that some 
of the mandates put in place procedures that do save costs. But 
it is hard for me to understand how, for example, mandating 
massage therapy or perhaps mandating acupuncture is going to 
produce a savings.
    One of the things that we believe this legislation would do 
would tamper down--that is, cause there to be a slowing--of the 
demand for some of the more extreme mandates. But the important 
thing to remember is that no state would be precluded, and no 
insurance company would be precluded, from continuing to offer 
policies with all of the mandated coverage. The consumer would 
have the right to pick from that.
    And another important thing to think about is survey data 
shows that people--consumers--buy the most comprehensive policy 
when given the choice that they can. So if--or that they can--
and when I say ``when they can'' it means that they can afford. 
When there are multiple policies in a market, one may cover 
very basic things, one may cover slightly more comprehensive 
things, and one may cover the most comprehensive. Consumers 
tend to buy what they can afford to buy.
    The problem with mandates--and Speaker Hastert I think 
addressed this rather well--is that with these mandates, when 
you are mandating massage therapy or acupuncture, in a way 
because every single mandate adds to the cost of the good, you 
are saying, ``Well, you may want to buy a KIA, because that can 
get you as a young person to and from work, but we are going to 
mandate that you buy a Mercedes, because we have decided a 
Mercedes is better for you and safer.''
    And that is a part of what the problem is, and this would 
just give consumers that ability to choose amongst more options 
than they have now.
    Chairman Musgrave. I think we also need to give consumers a 
little credit. And perhaps if mammography wasn't covered, I 
would, I would still have a mammogram, and I believe that 
people that are health care conscious, the gentlemen will go in 
for prostate cancer screening.
    You know, it was almost like if the mandate wasn't there, 
no one would go in for those tests or do those things. But I 
think it is, you know, a consumer choice, being able to buy the 
type of product that fits their need that they can afford.
    Mr. Shadegg. Right.
    Chairman Musgrave. And you have really emphasized that very 
well.
    Mr. Shadegg. Well, I think it is very important to look at 
the statistics about who this would appeal to. The reality is, 
sure, we wish that every single American got mammography 
screening, every single American had the most comprehensive 
coverage. The reality is we have 45 million uninsured 
Americans. The choice for them is not between a policy that 
does cover mammography and one that doesn't; it is the choice 
between no health insurance or some health insurance.
    And, clearly, the kind of basic things that most Americans 
need are going to be covered in all of the policies that we 
marked, enabling them to get at least initially, and perhaps as 
their income grows or as they go to work for a bigger employer 
that can offer them health insurance, the opportunity to get a 
more comprehensive policy. But what we need to do is get them 
into some level of coverage, and I believe this will offer that 
opportunity.
    Chairman Musgrave. Thank you. Mr. Lipinski.
    Mr. Lipinski. I just wanted to thank Mr. Shadegg for his 
testimony, and I have no questions. Thank you.
    Chairman Musgrave. Mr. Davis.
    Mr. Davis. Thank you very much, Madam Chairman, and I just 
have one question. I must admit that I don't have much 
confidence in any of these piecemeal approaches to providing 
the kind of health coverage that we need. And every time I get 
an opportunity I emphasize the fact that I believe that we need 
a national health plan that covers every citizen without regard 
to their ability to pay. And I think eventually we will get to 
that. I don't know when.
    But, Mr. Shadegg, I am intrigued a bit by the creativity 
that you have used to put together your concepts and ideas, and 
I just want to understand. You are saying that, for example, if 
I live in Illinois, I may be paying more for the same plan that 
someone in Indiana or Colorado are paying, and under your 
legislation I could then purchase that same plan in Illinois, 
and it would be governed by my state laws and health 
commissioners or whoever or plan administrators, and someone 
else would actually be governed by what takes place in 
Colorado.
    But I am able to save money as a result of your 
legislation.
    Mr. Shadegg. Yes, sir. The way it is designed is that you 
could buy that policy that had the coverage mandated by, say, 
the Colorado law, you could buy that in Illinois and it would--
and because it might not have the same--well, number one, it 
would not have gone through the same qualifying process in all 
50 states.
    And there is a parallel here to, for example, as I 
mentioned in my written testimony, the interstate banking. We 
enable people to get into interstate banking, and it has caused 
a decrease in the overall cost of banking. But the answer to 
your question is: yes. The important thing we wanted was for 
you--for the consumer, you the consumer in Illinois, to be able 
to rely on the local insurance commissioner to enforce the 
policy and protect you.
    And there are also minimal financial guarantees that are 
covered in most of the 50 states. This is not unlike--and I do 
not know, sir, if you served in the legislature. But as you 
know, there are many uniform state laws, and much of insurance 
law in the 50 states with regard to the financial solvency of 
these insurance companies is governed by uniform laws.
    This takes this one step further and says, ``We are going 
to have uniform law with regard to the basic things that cover 
an insurance policy.'' But with regard to those other variables 
we are going to, number one, allow you to get into the business 
more readily; and, number two, limit the number of mandates 
based on the policy that was chosen to be sold, and then you, 
the consumer, would get to make that choice of which policy you 
wanted to pick. That is where--it is the second way that you 
get some savings.
    Mr. Davis. Thank you very much, Madam Chairman. I 
appreciate the creativity, as I indicated. And, unfortunately, 
I did not serve in a legislature. I came out of the Chicago 
City Council, and there were times when we had to convince 
people that there was something called Illinois.
    [Laughter]
    Thank you, Mr. Davis.
    Mr. Barrow.
    Mr. Barrow. Thank you, Madam Chairman. As a former local 
government man myself, I want you to know we need more folks up 
here who have had a little experience at the local level, at 
the bottom of the food chain.
    I want to thank you, Congressman, for your initiative here. 
I want to make a couple of observations, though. First off, I 
think it can skew the discussion a great deal to take some of 
the extremes and the wacky stuff out there and treat that as if 
that is the norm. But I do want to point out that mandated 
benefits that aren't widely used cannot drive up the cost in a 
large risk pool very much to begin with, by definition, because 
they are not widely used.
    And the concern I have got is with the stampede on the part 
of folks up here to say to basically the states, ``Stop me 
before I protect the consumer again. You know, stop me from 
doing what we are doing.'' And I am a little concerned about 
that.
    I want to express some reservation about that, because it 
has been federal policy to leave regulation of this matter to 
the states. And if the Federal Government is going to say, ``We 
are going to start mandating and protecting the consumer,'' we 
need to do it in a comprehensive manner, rather--because the 
worst possible situation is for the Federal Government to say, 
``We are not going to protect the consumer, but we are not 
going to let the states protect the consumer either.'' It seems 
to me that that is a road we don't want to go down.
    The starting point that I begin with, which I think is key 
to the jurisdiction of this Committee, is it still makes no 
sense to me why 50,000 employees working for 10,000 employers 
should have to pay a higher cost per capita for the same 
insurance product that 50,000 employees can get at the same--at 
a different cost working for one employer.
    The secret, of course, is that you are pooling large 
numbers of people as much as possible, you are building the 
risk pool, so that you have the largest number of lucky people 
subsidizing the unavoidable number of unlucky people. Rather 
than approaching the statement of the problem as too many 
people getting wacky services mandated for them, the problem is 
we don't have the optimal balance of lucky people subsidizing 
the unlucky, which is what insurance is all about, certainly 
what we are doing when we insure our homes.
    And our approach as the Small Business Committee ought to 
be to try and direct policy in such a way as to build risk 
pools, not to Balkanize and break up the risk pool. What I am 
concerned about is, with the efforts we have got here, a back 
door deregulation or creating an unregulated market inside a 
regulated market competing side by side.
    That is, to me, the worst of all possible worlds, because 
you won't be able to connect the dots between the increasing 
cost in the good insurance that is out there, the more 
comprehensive insurance, as a result of people being drained 
out of that risk pool, taking their premiums and going into 
products that are--you know, have less bells and whistles on 
them.
    So it seems to me that, you know, some of these mandates, 
they may not be needed by many people very much. But if it is 
needed, it is needed badly.
    The concern I want to address, I want you to help me 
understand, the idea that I get from you is that some insurance 
is better than none. That is, at bottom, what I think you are 
saying. Something is better than nothing. The trouble is, if 
you have a whole bunch of people either exiting the current 
system, or entering the new system from the ranks of the 
uninsured who can barely afford to--who can't afford to pay in 
the present system, if you have got so many folks buying some 
kind of insurance, you are going to drive up the cost of the 
good insurance.
    Let us just say the adequate comprehensive insurance for 
the rest of us, and what is the answer to that? It seems to me 
that it is, at bottom, a policy of Balkanizing and breaking up 
the risk pool, creating so many options, you walk down the 
shelf you have got 1,000 things to choose from. That really 
cuts against what insurance does to begin with, which is taking 
those risks that can't be avoided and spread them as far and 
wide as possible.
    This seems to be going in the other direction. How do you 
answer the problem of the cost of the good insurance going up 
for the rest of us when you drain out so many folks from the 
risk pool?
    Mr. Shadegg. Excellent points, and I would like to address 
them all. But let me start with the--kind of your final 
question. There is no motivation on the part of this 
legislation to encourage anyone to exit who has never had a 
health insurance plan.
    Mr. Barrow. My point is those who want to stay in have got 
to pay more.
    Mr. Shadegg. The reality is that if you have health 
insurance through your employer, or if you can get into a group 
policy--and you weren't here when I began this discussion.
    Mr. Barrow. I know. I apologize for that.
    Mr. Shadegg. That is all right. I know what it is like to 
try to make two hearings.
    Mr. Barrow. I was in Ag dealing with gasoline this morning.
    Mr. Shadegg. I have been there, done that.
    [Laughter]
    We began with a discussion of association health plans, 
HSAs, and the issue of medical liability. And the Chairman 
said, ``Look, there is no one solution.'' I agree with you 
completely. Getting people into large pools is the best 
mechanism to give them the most affordable health insurance.
    Indeed, one of the problems that--one of the biggest 
criticisms I have, I imagine that I have a passion for health 
care reform, is that we have the notion in America that the 
only pool you can use is an employer pool. I think that is a 
false notion, and I have argued in other legislation which I 
introduced that we should be giving people more pooling 
mechanisms, so that they could get in--have the opportunity to 
get into other pools.
    For example, why not allow the Daughters of the American 
Revolution to offer a health insurance pool and create their 
own pool? Why not allow the University of--I happen to be from 
Arizona--Arizona Alumni Association offer a health insurance 
pool? I completely agree with you that the motivation is to get 
as many people out of the individual market and into a larger 
pool. They can get a better health insurance policy.
    And my passion in health care reform is to then work at 
that end of the specter. However, this bill is designed solely 
to look at those Americans who are forced to buy individual 
health care coverage. That is to say, they are either 
unemployed--
    Mr. Barrow. I recognize that.
    Mr. Shadegg. --or they work for an employer who can't get 
them in a plant, point one. Point two, I completely agree with 
you that it is outrageous to say to American consumers, ``Oh, 
you are one employee working for a large employer that''--your 
example of 10,000 and 50,000. If you happen to work for a large 
employer, you get a very good health insurance coverage, 
because the Federal Government made it possible through ERISA. 
but if you work for a small employer, but there is many of you, 
you just described AHPs very accurately, sorry, you don't get 
the same policy.
    I think that is a huge flaw, and one way of addressing that 
flaw is AHPs. And that is a much better way to address the flaw 
for people who have a job with a small employer.
    Mr. Barrow. Except to the extent that the only inducement 
would be to give the insurance industry--to get into the 
business of creating pools, large pools, out of small--out of 
large numbers of small groups--is preemption of state law.
    Mr. Shadegg. And that is the next point I wanted to go--
    Mr. Barrow. That is the only inducement. Again, you are 
going to have a regulated carrier and an unregulated carrier 
playing in the same marketplace. How is that going to help the 
cost of insurance for those who are trying to stay with a good 
product?
    Mr. Shadegg. And I guess that is kind of where I go, and 
that is I--as much as ERISA enabled large employers to offer 
low cost health insurance, it, quite frankly, leaves consumers 
without protection. I began my talk by discussing about the 
fact that for that employee of a large employer they come under 
ERISA. Now they are getting their health insurance plan--they 
didn't pick the plan, their employer picked the plan, and they 
didn't have much voice in whether the--in the plan the employer 
picked.
    Mr. Barrow. ERISA's concern is not with the definition of 
this, but protection of the solvency of the plan that you buy.
    Mr. Shadegg. Well, let us keep going, because let me finish 
my point. Number one, they didn't get to pick the plan. Number 
two, once they are in the plan, they can't pick their doctor. 
Number three, if they don't like the plan or the doctor, they 
can't fire it. And if you follow the decisions on ERISA, if the 
plan wrongfully denies them care and it kills them or harms 
them, under current law they are granted immunity. And so the 
plan--
    Mr. Barrow. I am glad you realize it. That is sort of tort 
reform that doesn't work.
    Mr. Shadegg. It is a serious problem, and granting anybody 
immunity, absolute immunity, as ERISA does for these large 
plans encourages them to abuse people and deny care that they 
need. So you and I can get on my bill that says we are going to 
end that ERISA immunity any day.
    But the point of that is, when the Federal Government 
offered large employers that option, it essentially took away 
from consumers state regulation. And when I drafted this bill, 
at least I was looking at the narrow market of those who must 
buy individual coverage. You could solve that by moving them 
into a federal pool and taking them out from under the 
protection of state health insurance regulators.
    I argue, no, that is not a good way to do it. I don't 
believe that the Federal Government is a good regulator as a 
general proposition. I don't want the citizens of Phoenix, 
Arizona, or much less Baghdad or Winslow, Arizona, to have to 
come to Washington, D.C., or for that matter to even have to 
travel down to Phoenix, to go to the Department of Labor to get 
help.
    I want them to be able to use the Arizona Commissioner of 
Insurance, whose job it is. So the way we wrote this bill was 
not to make them unregulated. It was to say, ``We are going to 
allow more insurance products into the market, but we are going 
to leave the regulation at the state level.'' So that consumers 
can keep going to the place they have been going to in the 
past.
    Mr. Barrow. I hear you, and I think I understand your point 
very well, but you are still Balkanizing the risk pool, 
creating smaller--a larger number of smaller plans, and I am 
trying to think how we can--how we can go towards trying to 
keep larger risk pools. You want to put more risk pools, some 
way to get into--
    Mr. Shadegg. I will join you in addressing moving people 
into larger risk pools. However, there will I believe always 
be, absent the passage of universal health care, a group of 
people that buy their health insurance through the individual 
market. They simply are no longer in a pool.
    The last point I want to make is that--and you make a good 
point. My testimony, for emphasis, focused on things like 
massage therapy or acupuncture, but the CAHI study said that 
these benefit mandates increase insurance prices between 20 and 
45 percent. Just a 20 percent cut in an individual health 
insurance policy would make a dramatic difference for at least 
a number of consumers.
    And I think you are right. My argument is, in fact, that 
some level of health insurance for those 45 million, at an 
affordable level so that they could get it, beats no health 
insurance, beats putting them in an emergency room asking for 
us to give them ERISA care.
    Chairman Musgrave. Mr. Barrow, I thank you.
    Mr. Barrow. Thank you, ma'am.
    Chairman Musgrave. And I happily let you gentlemen go on. I 
have never enjoyed abusing the clock so much.
    [Laughter]
    Mr. Shadegg, if you will just indulge me for one more 
question. Do you have some thoughts on what is going on in 
Massachusetts? Mitt Romney is talking about, you know, every 
citizen having coverage, and would you just indulge me and give 
us an opinion on that before you go?
    Mr. Shadegg. Well, I think the Founding Fathers intended 
the states to be laboratories, and to try different experiments 
in health care. I am not convinced that the Massachusetts 
experiment will work out to produce lower cost insurance, but I 
would not criticize any state for making the attempt.
    I personally think they would be better off, and The Wall 
Street Journal has joined me in this, in embracing a concept 
like this and making more different policies at lower costs 
available to the people in their state. But I applaud anybody 
who goes after this issue.
    As I began my testimony, I am impassioned about health care 
reform. I think we can do better, and I think we must do 
better, and I think it is intolerable that we would have 45 
million uninsured Americans.
    Chairman Musgrave. Thank you so much, and we really 
appreciate your time before this Committee today.
    Mr. Shadegg. Thank you.
    Chairman Musgrave. Mr. Carroll, you have been very patient, 
and I want to respectfully say there was a reason for all of 
that, delaying your opportunity to testify, and we look forward 
to hearing from you now.

    STATEMENT OF MR. ROBERT CARROLL, U.S. DEPARTMENT OF THE 
                            TREASURY

    Mr. Carroll. Well, thank you very much. I would like to 
submit my written testimony for the record and to highlight 
some issues in my oral statement.
    Mrs. Chairman, Ranking Member Lipinski, and distinguished 
members of the Subcommittee, I really do appreciate the 
opportunity to discuss with you today the health care proposals 
included in the President's fiscal year 2007 budget in the tax 
area. I will focus my remarks on both the problems in health 
care and how the President's proposals helped to address those 
problems, namely by making health care more accessible, 
affordable, and--
    Chairman Musgrave. Could I just ask you to move the 
microphone a little closer, so everyone can hear you? Thank 
you.
    Mr. Carroll. --thus enabling Americans to obtain health 
care and retain their health care when they change employment. 
Health care costs continue to rapidly--to rise rapidly in the 
United States. Growth in health care costs have been exceeding 
GDP growth by two percentage points annually since 1940, 
comprise 16 percent of GDP in 2004, and are projected to grow 
to nearly 20 percent of GDP by 2015.
    Higher insurance premiums pose a challenge for employers 
and burden workers. The burden of rising health care costs is 
particularly problematic for small businesses which often must 
choose not to offer any health insurance to their employees. At 
the same time health care costs are rising, the number of 
uninsured also continues to grow. As health care costs grow 
faster than incomes, an increasing number of individuals are 
unable to purchase health insurance.
    Also, those higher and ever-increasing costs mean that the 
self-employed and employees of small businesses are far less 
likely to have coverage. A significant number of the uninsured 
work for small businesses.
    A substantial portion of rising health care costs is due to 
the effects of our insurance system itself. Health insurance 
gives people valuable protection and peace of mind that they 
will have help paying their medical bills should a major 
illness arise.
    However, because third parties such as insurance companies, 
employers, and the government finance the majority of health 
care spending, most insured do not know or feel the full cost 
of health care services they consume. The direct expenditure 
for health care by an insured person may be only a small 
portion of his or her total health care costs.
    This is characteristic of low deductible and first dollar 
health insurance. The prevalence of this type of insurance is 
rooted in the tax treatment of health care generally. The Tax 
Code reduces the cost of health care when financed indirectly 
through employer-provided insurance rather than when purchased 
directly by the consumer.
    The greater reliance on first dollar coverage may lead the 
insured person to receive medical treatment that the person may 
value at less than its true cost, leading to inefficient and 
overconsumption of medical care. First dollar coverage in 
effect dulls the incentive for consumers to shop carefully for 
cost effective health care, and the tax bias that favors this 
coverage is an important piece of the puzzle explaining the 
rapid growth in health care costs.
    With the appropriate reforms, the U.S. health care system 
can become more efficient at supplying cost effective health 
care to consumers, while continuing to lead in innovation.
    The President's Health Care Initiative would address rising 
health care costs through a series of proposals designed to 
improve the functioning of the health care market. At the core 
of this initiative is a set of tax proposals that puts the 
health care consumer more in control of his or her health care 
and places health care purchased directly by individuals with 
high deductible health plans on an equal footing with employer-
provided health insurance.
    When consumers have more at stake, when they have more skin 
in the game, they can be expected to make better decisions. 
Greater reliance on competition and market forces, coupled with 
less reliance on third parties, such as insurance companies, 
employers, and the government, in making health care decisions, 
will lead to more efficient use of resources and help stem the 
excessive rise in health care costs.
    The President's Health Care Initiative builds on the early 
success of HSAs by making high deductible health plans more 
attractive and expanding HSAs. Just a couple of years after the 
enactment of HSAs, 3.2 million people are now covered by high 
deductible health plans. Moreover, there is broad use of these 
plans by important segments of the population. Early evidence 
indicates that over 40 percent of those covered by these plans 
have incomes below $50,000, and roughly 50 percent are age 40 
or over
    The President's Health Care Initiative allows those with 
high deductible health plans to deduct insurance premiums and 
out-of-pocket expenses and to claim refundable tax credits to 
recover payroll taxes paid on these premiums and out-of-pocket 
expenses. The initiative also includes a refundable tax credit 
to cover the cost of high deductible health plan insurance 
premiums that is targeted to the lowest income Americans.
    The result is a policy that provides the same tax advantage 
available to those with employer-provided insurance to health 
care purchased by all Americans with high deductible health 
plans. Providing consumers with a larger role in health care 
decisions will help bring market forces to health care. Where 
market forces are prevalent, there is evidence that health care 
costs have grown slower, or in some cases even decreased.
    The President's Initiative also helps make health care more 
portable. In today's economy, employees frequently change jobs, 
and these changes are often for the better. Each year 56 
million employees are hired, while 53 million leave their jobs. 
The average American between the ages of 18 and 38 has held 
10.2 jobs. Seeking out and testing different jobs may generally 
lead to a better matching of workers to jobs and contributes to 
skill development and wage growth.
    Americans also tend to change jobs much more frequently 
than workers in other major industrialized nations. In some 
cases, twice as often, which then allows our economy to adapt 
more quickly to changing economic circumstances.
    Our dynamic labor markets are an important contribution to 
our higher economic growth and our higher living standards. 
Tying employees' health insurance to their workplace, however, 
is a source of job lock and an impediment to fluid and flexible 
labor markets. HSAs have the distinct advantage of being owned 
by individuals regardless of their employer. When workers 
change jobs, they take their HSAs with them.
    The President's Health Care Initiative reorients HSAs, and 
in many circumstances lower income Americans would receive a 
larger tax subsidy than those with higher incomes, and is in 
stark contrast to current law, where lower income Americans 
often receive little benefit from the existing tax subsidy for 
health care.
    In summary, the lack of appropriate pricing incentives in 
the health care market has contributed to rising health care 
costs and the uninsured. At the root of this problem is the tax 
bias for first dollar coverage, and the diminished role of the 
consumer in health care decisions. The President's Health Care 
Initiative addresses these problems by putting the consumer 
more in control of their health care decisions and injecting 
market forces into the health care market.
    The Treasury Department estimates that the President's 
Initiative would increase the number of HSAs by some 50 percent 
by 2010. Building on the early success of HSAs, this initiative 
can contribute to health care that is more affordable, 
accessible, and affordable.
    Thank you for the opportunity to testify, and I look 
forward to your questions.
    [Mr. Carroll's testimony may be found in the appendix.]
    Chairman Musgrave. Thank you very much, Mr. Carroll. We 
know that the growth in health savings accounts has been 
significant. Could you give me a little more specific 
information on how many people use them now? And can you give a 
prediction for the future on the use of HSAs?
    Mr. Carroll. Sure. According to some research in the 
private sector, about 3.2 million individuals are currently 
covered by high deductible health plans. That represents a 
dramatic growth in the number of people who are covered in just 
one year. It has tripled. In 2004, the IRS released some data 
that showed that a relatively small number of people had HSAs 
or were covered by high deductible health plans, and there has 
been a dramatic growth in the number of individuals covered by 
high deductible health plans since that time.
    By 2010, as I indicated, under the President's policies we 
expect the number of individuals covered by--who have HSAs to 
increase by 50 percent. In 2010, we forecast that about 14 
million people--14 million taxpayers will have HSAs. A 50 
percent increase would increase that to 21 million.
    Chairman Musgrave. How about small businesses? What are the 
opportunities with HSAs for small businesses?
    Mr. Carroll. Well, I think that is a very important 
contribution that HSAs make to a comprehensive solution to the 
health care problem. I don't think--I agree with the 
Congressman, and the members of the Subcommittee as well, that 
one particular policy isn't going to solve this very 
complicated problem. But one of the things that we do see in 
the data is that an awful lot of the uninsured are--either are 
small business owners or work for small businesses. That is a 
fairly important source of the uninsured problem.
    HSAs are very helpful for small business owners, and to--
and the employees who work for small businesses, to provide 
them essentially the same tax advantage that large employers 
and individuals who work for large employers currently have.
    Chairman Musgrave. We always are concerned about people 
that don't have a very high income being able to afford health 
insurance. Could you specifically comment on what hope HSAs 
give for low income individuals who desperately need health 
care coverage?
    Mr. Carroll. Sure. What is particularly interesting about 
the early evidence on HSAs is that a fairly substantial 
fraction of those who have HSAs, or high deductible health 
plans that qualify for HSAs, are low income. As I mentioned, 
over 40 percent of those with HSAs, according to some recent 
preliminary evidence, have high deductible health plans. That 
is a very significant--that is a very significant finding. HSAs 
already, as they are currently constituted under current law, 
are helpful for the low income.
    In the very early data that the IRS released a month or two 
ago for tax year 2004, which is taking a very early glimpse at 
the HSA market, again, it was kind of a prelude to the industry 
data released earlier this year. A large fraction, a 
significant fraction of those with HSAs were lower income 
Americans.
    And what is interesting and what is important about the 
President's policy is it really reorients HSAs and high 
deductible plans. The series of refundable tax credits for 
payroll taxes paid for insurance premiums, payroll taxes paid 
for out-of-pocket expenses, and the tax credit for--the 
refundable tax credit targeted to the lowest income Americans 
to help make insurance more affordable for them, all make this 
system, this web of tax preferences, more progressive than they 
are actually currently constituted today.
    In my written testimony, we present--I present a chart for 
an illustrative example for a family of four, age 35, and what 
it shows is for kind of the typical level of insurance 
premiums, the typical out-of-pocket expenses for a family of 
four, age 35, that lower income people under the President's 
policies actually would get a larger tax subsidy at the low end 
of the income distribution than at the middle or at the high 
end of the income distribution.
    And it is because of this set of refundable credits for 
payroll taxes paid on the insurance premiums, the out-of-pocket 
expenses, and the refundable tax credit targeted to low income 
Americans. And what is interesting about the payroll tax 
credits is, you know, it is a credit for payroll taxes paid on 
the premiums. Of course, when individuals reach the wage cap 
for Social Security taxes, they stop paying those taxes, and 
the benefits of these credits are ratcheted down. And that is 
one of the features of the proposal that explains its 
progressivity.
    Chairman Musgrave. Thank you very much. Mr. Lipinski.
    Mr. Lipinski. Thank you, Madam Chairman. I want to in a way 
go back to what Mr. Barrow was so eloquently stating and asking 
about earlier I won't have the eloquence of Mr. Barrow, but I 
want to--I want to ask specific questions about HSAs and what 
impact they are going to have on the health insurance market in 
general, because in a way it very much appeals to me the idea 
of having the marketplace work to better provide, have a more 
efficient system of providing health care, but I have very 
serious questions about it.
    Looking at myself, I am diabetic. I know that every year I 
am going to have certain costs associated with my disease. But 
if those costs are paid if I take care of myself, I can live a 
normal healthy life. It seems to me that an HSA would never 
make sense for someone such as myself who knows they are going 
to have such costs, that it would be much better for me to be 
in the regular insurance market.
    And unless you can, you know, convince me otherwise, that 
is the way it looks to me. In that case, in the regular 
insurance market, young healthy people will go into--will have 
HSAs because it will be cheaper for them, and we are going to 
Balkanize--as Mr. Barrow was saying, we are going to Balkanize 
the market. We are going to have the sick people in one market, 
the healthy people in another market.
    Now, can you disabuse me of this belief?
    Mr. Carroll. Well, you know, I think the issue you are 
raising is the issue of adverse selection. HSAs are a new 
product. They have been around just for a few years, and it 
will be some time before we do get a complete picture of HSA 
enrollment.
    But so far I think there is little to suggest that this 
problem is going to be significant. The preliminary data that I 
referred to earlier does suggest a few important things. One, 
lower income Americans are benefitting from HSAs. That is a 
group that tends not to have insurance, that tends to perhaps 
have some of the concerns that you mentioned.
    Older Americans are much more--a significant number of 
older Americans have HSAs. Over 50 percent are over 40 years 
old, over 20 percent are over 50 years old. Those groups are 
often associated with those with a health status that might not 
be as good as the average.
    So I think when you look at the very early evidence on 
HSAs, it doesn't appear to be an issue, and the preliminary 
indications are is that some of these--some of the groups 
correlated by income and age, to the extent health status is 
correlated by income and age, it tends to be particularly 
helpful for some of these groups. So this tends not to be a 
problem.
    And another thing to kind of focus on--and perhaps this 
is--I think this is another important issue, is that when you 
look at the employer market, which broadly provides benefits, 
174 million people currently get their insurance through 
employer--the employer market, and that is an extreme--it is 
just central to our insurance system. But the employer market 
tends--is much more likely to cover middle income and upper 
income Americans as opposed to lower income Americans.
    A chart I have in my written testimony based on some data 
from the current population survey released by the Census 
indicates that for those with incomes of $75,000 or more, there 
are--81 percent of that group gets their insurance through the 
employer market. But when you look at those--the group who have 
incomes below $25,000, only 23 percent of those individuals--
    Mr. Lipinski. Okay. I just want to interrupt you, because I 
am running out of time here. It would seem to me, though, that 
in the long run you have this what you say is evidence, and it 
seems to suggest you are picking up with HSAs people who 
otherwise wouldn't have insurance, and that is great.
    But it seems in the long run, if you are looking at this 
from an economic perspective, it makes a lot more sense if 
people are making the economically wise choices that healthy 
people are going to choose HSAs, and people right now who are 
more likely to be covered, as you said, with the--with health 
insurance coverage.
    In the future, though, if HSAs become more available and 
businesses--employers are going to be offering HSAs because 
those are going to be cheaper probably for the business and for 
the individuals, you know, that situation is going to change 
with, as you said, those who are more likely to have insurance 
now are--you know, are in that category who work for the bigger 
employers.
    It would seem in the long run it only makes economic sense 
that the people are going to pull out of the--those who are 
healthy are going to pull out of the insurance. And that is 
just looking--that is just looking at the people who are 
making, as I see, wise market decisions, that is the way in the 
long run it is going to work.
    Chairman Musgrave. Just answer briefly, if you could, Mr. 
Carroll.
    Mr. Carroll. Okay. Well, you know, one of the features of 
HSAs is they have a deductible, and above that deductible they 
cover--your insurance costs are covered. What we found--you 
know, I think it is the case that HSAs have been attractive to 
the chronically ill. I think that is reflective in the data 
that we have seen to date with older Americans and lower income 
Americans.
    Chairman Musgrave. Okay. Mr. Davis.
    Mr. Lipinski. Thank you.
    Chairman Musgrave. Thank you, Mr. Lipinski.
    Mr. Davis. Thank you very much, Mr. Secretary. Can you tell 
me how an HSA actually benefits a low income person?
    Mr. Carroll. The way the President's initiative--looking at 
it in its totality--benefits low income Americans in a number 
of different ways. First, a low income American would typically 
pay payroll taxes on their first dollar of wages, and the 
individual would receive a--under the President's proposal 
would receive a tax credit through the income tax for the 
payroll taxes paid on insurance premiums.
    The individual would also receive--and that credit would be 
refundable. The individual would also receive a refundable tax 
credit for out-of-pocket expenses paid on--by that individual. 
And there is also included in the proposal another refundable 
tax credit that is targeted to the lowest income Americans. It 
is a 90 percent--it would cover up to 90 percent of the costs 
of premiums. It would be up to $1,000 for single individuals, 
up to $3,000 for families.
    And what you see in the chart I referred to--I think it is 
chart 7 in the written testimony--if you have a chance to look 
at it, what it shows is that relative to current law where 
individuals--low income individuals tend to receive a fairly 
small, actually very small benefit from the current set of tax 
preferences in the tax system relative--whereas under the 
President's proposal they receive a much richer set of tax--a 
much richer tax subsidy.
    Mr. Davis. What do we call ``low income?''
    Mr. Carroll. Well, the low income--the refundable tax 
credit I mentioned, that is targeted to the lowest income 
Americans. For singles, it is fully phased out I believe at 
$30,000 for singles, and $60,000 for families.
    Mr. Davis. Do these people need any additional tax credits? 
Do they need something else?
    Mr. Carroll. Well, I mean, the broad structure of the 
proposal is not only to provide--you know, in part it is trying 
to make insurance more affordable. It is also trying to level 
the playing field between insurance provided in the employer 
market as well as in the non-group market. And it is also, 
importantly, trying to place individuals--the health care 
consumer at the center of health care decisions, so that they 
will have more at stake.
    When individuals have more at stake in decisions, they 
typically make better ones. And by giving individuals a larger 
role in health care decisions, we expect this proposal to have 
positive effects on the--on health care costs.
    Mr. Davis. Would it not make more sense for the government 
to just pay for the health insurance for these individuals than 
to talk about a tax credit that they may not meet or can't 
benefit from?
    Mr. Carroll. Yes. The broad structure of the proposal 
increases reliance on individual choice. As was mentioned 
earlier, well informed, cost effective choices is--you know, is 
something that is extraordinarily helpful in controlling costs. 
In some elements of the health care market, where the 
procedures typically aren't covered by insurance, we have seen 
a fair amount of competition.
    We have seen a fair amount of price and quality information 
provided by the health care industry, by doctors, hospitals, 
and others. In vitro fertilization is an example. Eye laser 
surgery is another example where we have seen health care 
costs--not only the rise in health care costs diminished, but 
we have actually seen health care costs come down. So in the 
case of routine procedures, I think there are probably some 
very real benefits that can be gained by greater individual 
choice, by giving individuals more at stake in health care 
decisions.
    Mr. Davis. While I have still got a second, let me just 
ask, have we really seen anything that has--I know I have been 
engaged for about 30 years I guess in public discussions. Cost 
containment has always been a big issue in health care, since I 
have been engaged. I have never seen anything yet that has 
actually brought the cost down.
    It seems to me that the cost has simply been going up all 
the time. I have never seen anything that has brought the cost 
down.
    Mr. Carroll. Well, again, I think one area in the health 
care--in health care where you do see costs coming down is 
where market forces are more in play. Where they are more in 
play, the health care costs are either not rising as rapidly or 
falling, where individuals do not feel the kind of what 
economists would call the true marginal cost of health care, 
where they are not paying themselves directly a large fraction 
of the health care costs, you know, they tend not to be as 
involved in the decisions. Third parties are much more involved 
in the decisions. Market forces are a lot less at play.
    Mr. Davis. Thank you very much.
    Chairman Musgrave. You are very welcome. Mr. Barrow.
    Mr. Barrow. Thank you, Madam Chair. Mr. Carroll, I was 
struck by your observation that there are lots and lots of 
folks out there who are eligible to take advantage of the 
benefits of HSAs because they are already covered by 
essentially catastrophic coverage, high deductible policies to 
begin with.
    The problem is, at least the problem--one of the problems 
that I start with is one of the reasons that folks got 
catastrophic coverage is they can't afford more comprehensive 
coverage. They can't afford coverage that covers stuff at the 
front end, so all they can afford is stuff that covers things 
out of the back end. Of course that covers you. It is cheaper 
because it doesn't cover most of the stuff most of the folks 
deal with most of the time, so I can understand why they are 
eligible.
    The reason why they are eligible to take advantage of 
benefits is they ain't got the money to save. And it seems to 
me that if you do have enough money to save, and thereby 
actually get the benefit of any HSA type of legislation, it 
seems to me that you can't win for losing. If you don't have 
enough to save to begin with, you are bare. If you do have 
enough money to save, then you are either going to get lucky, 
in which case you will get the benefit of your savings account, 
you can do with that as you will, or you are going to be 
unlucky.
    And if you are unlucky and get sick and have upfront costs 
that you aren't insured for, you lose there. You might as well 
be bare. You are no better off. But if you are actually lucky 
enough to be able to pocket some of the money you would 
otherwise spend on premiums covering upfront coverage you 
didn't need, you are pulling that person out of the risk pool.
    They are not contributing to that extent to that pool of 
people who are taking their luck and mixing it with those folks 
who are unlucky, so that the lucky end up subsidizing and 
supporting the unlucky. Since we don't know who those folks are 
going to be, everything you are doing is fundamentally opposed 
to the whole notion of insurance. We are not insuring. It is 
just pushing folks to go more and more bare.
    Now, how do we get folks insured if the objective--if the 
consequence of our policy is basically to say every man, woman, 
and child for themselves? If you can afford to save, do you 
want me to use--you know, you are either going to win or you 
are going to lose. But even if you are winning, you are pulling 
out of the risk pool.
    Mr. Carroll. Right. I think this is one part of a more 
comprehensive approach to health care. It is one of the 
elements of the problem in health care is--is the reliance on 
first dollar coverage. The first dollar coverage basically 
takes the consumer out of the decisionmaking and leads to less 
and less--
    Mr. Barrow. I am going to leave the consumer in there for 
reasonable deductibles and stuff like that there. Everybody 
else who has paid in and is getting comprehensive coverage has 
got some kind of role to play in making sure you are not 
overutilizing the system.
    But, you know, the concern I have got is folks 
overutilizing the system at the other end, at the emergency 
room, because they ain't got no coverage. And I just don't see 
HSAs increasing the number of people who are pooling their risk 
and thereby trying to achieve the optical level, the largest 
number of lucky people subsidizing the unavoidable number of 
unlucky people. I just don't see that happening.
    The arithmetic just don't add up. You can say it is part of 
a comprehensive package, but this does not add to that solution 
at all. It rewards people for being lucky, but it penalizes the 
community as a whole by taking those folks out of the risk-
sharing formula.
    Mr. Carroll. I think when you look at the package in its 
entirety, its positive effects on health care costs will lower 
health care costs generally and be very helpful to the market 
generally.
    Mr. Barrow. Well, I know a guy who says the national sales 
tax is the optimal, ideal health care solution, because it is 
going to raise the tax for everybody and chase all of those 
slackers and those hypochondriacs out of the system, reduce the 
overall demand of those folks who really need it. And that is 
going to more than offset the amount of the 33 percent national 
sales tax on premiums, and the 33 percent sales tax on doctors' 
bills. I don't believe that either.
    I just don't see this part of it. I just don't see that 
part of the comprehensive package doing any good.
    Mr. Carroll. And another element of the proposal is that--
for the initiative is that it extends to individuals purchasing 
their health care directly. The same tax advantages that are 
commonly--
    Mr. Barrow. I am all for that. I am all for that. I just 
don't--I just see risk segmentation, breaking up the risk 
pool--
    Mr. Carroll. There is a large segment of the population 
that is not covered by the employer system.
    Mr. Barrow. Fair enough.
    Mr. Carroll. They tend to be lower income. They tend to 
work for small businesses.
    Mr. Barrow. I am for tax equity, as far as that is 
concerned. This just doesn't seem to get it there. Thank you.
    Chairman Musgrave. Mr. Udall.
    Mr. Udall. Following up on Mr. Barrow here, the HSAs, don't 
they really work well if you have money? And if you are living 
paycheck to paycheck, I mean, you don't have the ability to put 
the money into HSAs.
    Mr. Carroll. Well, something I mentioned earlier is the 
preliminary evidence on HSAs suggests that a lot of--a 
significant number of lower income Americans are using HSAs. 
Roughly over 40 percent, actually 42 percent, of those with 
HSAs, of the 3.2 million with HSAs have incomes below $50,000, 
suggesting that a very significant number of lower income 
Americans are finding HSAs to be useful.
    That general statistic is going to be confirmed by some 
earlier IRS data for--released for 2004 a few months ago. It 
is--so I think the early evidence is that HSAs, you know, are 
kind of consumer choice. Lower income Americans are choosing to 
take up HSAS.
    Then, an important aspect of the President's proposal is 
that it very much refocuses HSAs through the series of--as I 
mentioned earlier, the series of tax credits, refundable tax 
credits for payroll taxes paid on premiums and out-of-pocket 
expenses and refundable tax credit for lower income Americans. 
That really shifts the benefits of the tax subsidy received by 
Americans, it provides very significant tax subsidies to lower 
income Americans.
    There is a chart I have in the written testimony I 
mentioned earlier that illustrates for an individual with 
pretty much an average--the average out-of-pocket expenses and 
the average insurance premium, individuals in the $10-, $20-, 
$30,000 range actually will receive a larger tax subsidy under 
the President's proposal than higher income Americans.
    Mr. Udall. Mr. Carroll, where is the evidence that people 
earning under $50,000 are using the HSAs? You said it is 
preliminary evidence, is that correct?
    Mr. Carroll. It is--there is an IRS--the IRS released some 
statistics off of tax year 2004 returns a month or so ago. I 
can get that to you. That data, when HSAs were just starting 
out and there weren't all that many people with HSAs, that data 
nevertheless indicated a very significant fraction of those 
with HSAs were lower income Americans.
    More recently, in January of this year, AHIP released some 
data that indicated that--I believe it is the AHIP data that 
indicated that more than 40 percent of Americans with HSAs had 
incomes below $50,000.
    Mr. Udall. Well, I suspect what is going on here is people 
may have been forced to shift into these situations. Can you 
tell me how many of those switched from comprehensive plans 
through no choice of their own?
    Mr. Carroll. I don't have that information.
    Mr. Udall. Would you be able to get that for us and give us 
an indication as to what is happening there? I mean, if we made 
some policy decision and we are forcing people to do that, I 
think that would be very important to this equation, wouldn't 
it?
    Mr. Carroll. Yes, I don't believe that the data are split 
out in a way in which we could kind of directly answer that 
question. But I would simply observe that it often may be in 
the interest of consumers to move towards a high deductible 
plan, because their premiums will in fact be lower. And that 
is--so, you know, to characterize it as people are being pushed 
into high deductible plans is not something I would necessarily 
agree with.
    Mr. Udall. Thank you. Appreciate it. Thank you.
    Chairman Musgrave. Thank you, Mr. Udall. Mr. Carroll, I did 
receive a note that Mr. Perrin, the last panelist on our second 
panel, says that he can answer the last question that Mr. 
Lipinski asked. And so I would like Mr. Perrin to come up and 
join you, Mr. Carroll.
    Mr. Lipinski, could you--would you like to restate that 
question for us?
    Mr. Lipinski. Does Mr. Perrin need the question restated?
    Mr. Perrin. No.
    Chairman Musgrave. Okay. Let us just--he is eating. That is 
what the deal is. Go ahead.
    Mr. Perrin. The question about diabetes or any other 
serious illness is one we get all the time. And for you, 
Congressman, I could make a pretty clear argument that you 
would be better off with an HSA, even if you spend every dime 
in the account every year.
    There are two reasons the sick or the less healthy choose 
an HSA. The first one is financial. If you take a traditional 
family plan that now costs $11,000 a year, what you have is 
usually a $500 deductible, 20/80 co-pay up to $5,000. So you, 
as somebody who is less healthy, is going to spend that $500, 
you are going to spend the $1,000. So you are now talking about 
$12,500 that you are spending.
    If you move to an HSA and you take that $12,500 and you get 
a $3,000 deductible, and you put $3,000 in the account, your 
health insurance policy is not going to cost you $9,000. It is 
going to cost you about $6,000. So you have got $3,000 in the 
account, you have got $6,000 for the insurance, let us say, 
depending on what state you live in. That is $9,000. You 
immediately have a savings of $3,000 instantly. So there is a 
financial incentive on the part of some less healthy to choose 
an HSA.
    Now, on the non-financial side, you get complete choice, 
control, treatment options, because you are paying cash. And 
for somebody who is less healthy you have obviously a large 
amount of experience with the health care system. You know your 
condition better than most. You are perfectly happy being in 
charge of your health care. And you are probably the best 
person in the world qualified to be in charge of your health 
care, which is exactly what HSAs do.
    We have a financial incentive, we have a non-financial 
incentive. That is why the sick choose an HSA, and that is why 
there isn't going to be adverse selection.
    Now, the final point that I would add is when you move 
$3,000 into a savings account you are increasing your buying 
power by your tax rate. Right? That $500 deductible, that 
$1,000 to get to the 100 percent coverage on the co-insurance, 
really is after-tax money. We are talking about pre-tax money. 
So there is an additional financial kicker.
    Now, the problem is that if somebody says, you know, the 
sick have to pay this $3,000, therefore, they won't choose an 
HSA. It really is a pretty simplistic analysis of what is going 
on on the ground with HSAs.
    Now, you don't have to take my word for this. There are a 
number of studies, including from McKinsey and Company, that 
show that the less healthy when they have a high deductible 
plan become much more engaged in their health care. And the 
reason is really quite simple. If their condition gets worse 
because they don't take care of themselves, they are the ones 
that pay. It comes out of their pocket.
    So you have a financial--an added financial incentive for 
the less healthy to become more compliant with their treatment, 
which is exactly precisely what the McKinsey study and others 
have shown. And I would be happy to provide that to the 
Committee.
    Chairman Musgrave. Mr. Lipinski, did you want to comment?
    Mr. Lipinski. Well, I think probably right now I just want 
to leave it at that. I would very much like to see that study, 
but I think maybe we should wait. I think I have some questions 
and my colleagues have questions, but why don't we wait until 
Mr. Perrin gives his testimony.
    Chairman Musgrave. Thank you so much.
    Mr. Lipinski. Thank you.
    Chairman Musgrave. And we all would like to be eating, so 
no criticism there. Just grab when you can.
    Okay. Mr. Carroll, I thank you and thank you for your 
patience as I let Mr. Shadegg talk longer than the five 
minutes. I appreciate that, and we are glad you are with us 
today.
    And I would call up the second panel. And at this point, I 
have seen the light, so we are going to get back on the strict 
time schedule. So if the second panel would come forward, I am 
going to introduce you as you are coming.
    We have Mr. Ed Lawler, ReMax Alliance, National Association 
of Realtors from Fort Collins, Colorado; Merrill Matthews, Dr. 
Matthews is the Director of The Council for Affordable Health 
Insurance from Alexandria, Virginia; Mr. Dan Perrin that you 
just heard from is from the HSA Coalition here in D.C.; Dr. 
Cecil Wilson, he is the Chair-Elect of the Board of Trustees, 
American Medical Association, from Orlando, Florida; Mr. Paul 
Hense, Hense and Associates, National Small Business 
Association, from Grand Rapids.
    Welcome. And, Mr. Lawler, we will start with you. Happy to 
have you in the hearing today.

    STATEMENT OF ED LAWLER, NATIONAL ASSOCIATION OF REALTORS

    Mr. Lawler. Thank you. Chairman Musgrave and Ranking Member 
Lipinski, and members of the Committee, my name is Ed Lawler, 
and I am a realtor from Fort Collins, Colorado. And I am 
speaking on behalf of roughly 1.2 million members of the 
National Association of Realtors.
    NAR is the nation's largest professional trade association. 
Our members include real estate professionals engaged in every 
aspect of the real estate industry. I appreciate the 
opportunity to share our thoughts on the challenges that face 
small businesses and the smallest of the small businesses--the 
self-employed--in finding affordable health insurance coverage.
    Unlike other issues on which NAR has testified in the past, 
NAR members' interest in this topic is personal rather than 
professional. Real estate sales is a prototypical small 
business. Real estate firms typically have fewer than five 
salaried employees, and real estate agents, as independent 
contractors, are not employees of the firms with which they are 
affiliated, but are in fact the smallest of small businesses, a 
firm of one.
    As a consequence, real estate agents are typically forced 
into the individual insurance market, a market where you 
basically take or leave whatever coverage is offered. There is 
no negotiating, and there is no leverage.
    Today, 28 percent of the realtors, more than one in four, 
of the nation's 1.2 million realtors do not have any health 
insurance. In seven years, the percentage of uninsured NAR 
members more than doubled, going from roughly 13 percent of its 
membership in 1996 to 28 percent in 2004. By comparison, the 
percent of U.S. population without health insurance was 
estimated to be 15.7 percent in 2004. The percentage of 
uninsured realtors is almost double that of the nation as a 
whole.
    To further put these figures into light, 28 percent of our 
membership is 336,000 individuals. If each of those individuals 
is uninsured, it is likely that their family--spouses and 
children--are also uninsured. Therefore, we would expect that 
as many as 873,000 members and their dependents are uninsured.
    When asked why they are uninsured, 74 percent say the cost 
of the coverage is their biggest barrier rather than 
uninsurability. It is not surprising, then, that the number one 
question members who call NAR information central ask: what can 
NAR offer me in the way of affordable health insurance?
    Unfortunately, the answer to that question right now is 
very little. Not what the typical caller wants to hear from our 
association, representing them as one of the largest entities, 
as big as some of the largest corporations in America.
    Madam Chair, our members believe the powers granted to a 
trade organization should be equivalent to those granted to 
large employers or trade unions when it comes to negotiating 
for a quality, uniform national health plan for their 
constituents, regardless of where they live. As a result, NAR 
members strongly support small business health plan 
legislation, including H.R. 525, S. 406, and, more recently, S. 
1955. And we are not alone.
    A March 2006 survey of likely voters done by two nationally 
respected polling firms, public opinion surveys, and research 
partners found that the American public shares NAR's support 
for small business health plans with 89 percent of the 
participants responding favorably. Even when presented with the 
arguments against small business plans, including both 
pollsters indicated using the harshest criticism lodged against 
AHPs and SBHPs, support for the plans remained extremely high 
with 86 percent of the national voters still favoring the 
concepts.
    The result also showed that support crosses party lines 
with approval levels for voters of all parties greater than 86 
percent. Americans understand that the current insurance 
delivery system is broken and that the following firms to 
join--and that allowing firms to join together to negotiate 
will make a difference, creating another large pool.
    Last year, testifying before the Senate Small Business 
Committee on S. 406, NAR's then-president Al Mansell admitted 
that small business health plans are by no means the silver 
bullet that will solve all the nation's health insurance plans. 
But he pointed out that it was time for all parties, supporters 
and opponents, to sit down together and figure out how to 
address the issues that were contentious.
    We are heartened by the fact that this is exactly the 
approach that Senators Enzi and Nelson have taken this last 
year in developing their compromise SBHP bill, S. 1955, the 
Health Insurance Marketplace Modernization and Affordability 
Act, which passed the Senate Health, Education, Labor, and 
Pensions Committee last month. Once their bill had been 
drafted, the Senators asked the major stakeholders--insurers, 
insurance commissioners, and the small business community--to 
submit their concerns with draft language.
    Those concerns were then discussed over the course of 
several months, and acceptable alternatives were found. 
Additional changes were also made as others weighed in on the 
issue. The end result of this process is a bill that addresses 
most of the concerns that traditionally have been raised, 
including state regulatory oversight, mandates, and financial 
solvency.
    Are there still those who have objections? Yes. But it has 
been our experience that the bill's co-sponsors have been open 
to concerns and are continuing to work on addressing them. We 
believe that an acceptable compromise is possible. NAR is 
committed to working to advance what we believe can be a very 
effective insurance delivery system.
    If SBHPs are approved, we will be one of the first to be in 
discussions with our insurers to craft a quality health 
insurance package for our realtor members.
    Once again, thank you for giving NAR a place at the table, 
and for giving me the opportunity to share our thoughts and my 
thoughts. I am happy to take any questions.
    [Mr. Lawler's testimony may be found in the appendix.]
    Chairman Musgrave. Thank you. We will come back to 
questions after everyone testifies. Dr. Wilson.

  STATEMENT OF DR. CECIL WILSON, AMERICAN MEDICAL ASSOCIATION

    Dr. Wilson. Good morning, almost good morning, and thank 
you. Chairman Musgrave and Ranking Member Lipinski, we 
appreciate your holding this hearing on common-sense reforms to 
reduce health care costs and expand health care coverage. I am 
Cecil Wilson, a physician internist from Winter Park, Florida, 
and Chair-Elect of the Board of the American Medical 
Association.
    My testimony focuses on medical liability crisis, but first 
I would like to briefly comment on health savings accounts and 
association health plans.
    Like any small business, physician practices are grappling 
with the rising cost of providing health insurance to our 
employees and their families. The AMA believes that health 
savings accounts and association health plans, if properly 
crafted, could expand affordable health insurance options for 
small businesses.
    Now, the AMA also believes that Congress must address the 
high medical liability insurance costs and the burden they 
place on physician practices and patient access to care. My 
practice employs one physician--myself--and three staff. In 
fact, nearly 75 percent of practice-based physicians in this 
country either work or own small practices of less than nine 
physicians. And escalating jury awards and the high cost of 
defending against lawsuits, including meritless claims, are the 
primary drivers of increased medical liability insurance 
premiums.
    These premium costs are part of our overhead expenses, and 
when expenses increase physicians must either raise revenue by 
increasing fees or cutting other expenses to sustain their 
practices. And covering these costs is more challenging as 
Medicare, Medicaid, and managed care plans limit physician 
compensation for treating patients.
    The resulting need to cut expenses forces physicians to 
face the difficult choices of laying off staff, dropping or 
reducing health insurance benefits for their employees, 
foregoing the purchase of new medical equipment, or limiting 
certain aspects of their practice that are too expensive to 
insure.
    In addition, we are all aware of the human costs that the 
liability crisis exacts from patients any physicians alike. We 
have heard sobering stories of patients who could not find 
trauma care in time and of pregnant women who had difficulty 
finding a physician to deliver their babies.
    Viewed on a broader perspective, we all pay the price of a 
broken medical liability system. A medical liability adds $-70 
to $126 billion to the cost of health care each year, and these 
costs translate into higher health care costs for everyone. 
These are the reasons we support proven reforms to the medical 
liability system. The AMA worked hard in supporting the passage 
of H.R. 5, the HEALTH Act. And, as you know, that provides 
reforms that have proven effective at keeping medical liability 
insurance premiums stable.
    This Act allows patients to recover unlimited economic 
damages and includes a $250,000 limit on non-economic damages, 
also known as pain and suffering. As discussed in my written 
statement, a $250,000 limit on non-economic damages has worked 
in California. It will work nationwide.
    Texas enacted effective reforms in 2003. These include 
limits on non-economic damages--that is, a $250,000 cap for 
physicians--and a limit of up to $500,000 for health care 
facilities such as hospitals. That new law works. What we have 
seen already is an increase in new physicians going to Texas, 
and in 2005 Texas physicians saw an average cut in their 
premiums of 13.5 percent. This will result in a savings in 2006 
of an estimated $49 million.
    Not only do these reforms work, the public supports them. 
An April 2006 Harris poll shows that three-fourths of Americans 
support comprehensive medical liability reform. Seventy-five 
percent believe the crisis affects their access to health care, 
and a majority believe that medical liability lawsuits are the 
primary driver of increased health care costs.
    Madam Chair, federal legislation based on proven reforms 
that stabilize medical insurance premiums, and preserve patient 
access to care, is the solution to the crisis. AMA looks 
forward to working with Congress to continue to work to enact 
common-sense medical liability reforms this year.
    Thank you.
    [Dr. Wilson's testimony may be found in the appendix.]
    Chairman Musgrave. Thank you, Dr. Wilson. Dr. Matthews, we 
will hear from you at this time.

   STATEMENT OF MERRILL MATTHEWS, THE COUNCIL FOR AFFORDABLE 
                        HEALTH INSURANCE

    Mr. Matthews. Thank you, Madam Chairman, and Ranking Member 
Lipinski. I appreciate your taking the time to have this 
hearing on a very, very important subject. I am Merrill 
Matthews, Director of The Council for Affordable Health 
Insurance, which is located in Alexandria.
    CAHI is a research and advocacy organization. We have 
members, health insurers, doctors, third party administrators. 
We have been around since 1992.
    We at the Council believe that all Americans should have 
access to affordable health coverage. And by taking just a few 
steps, we think Congress can move us much closer to that goal. 
Let me identify three issues.
    People need access to affordable health insurance plans. 
State laws often impede that access, and Congress can take a 
few steps that will ensure a vibrant and competitive health 
insurance market. Let me start with creating affordable health 
insurance plans. Everyone knows that health insurance premiums 
have been going up, and that is largely responsible for the 
growing number of the uninsured.
     A recent survey by Deloitte of 152 major U.S. employers 
found that preferred provider plans, PPOs, were going up an 
average of 7.2 percent, HMOs 8 percent. That is lower than it 
has been, but it is still significantly higher than the 
consumer-driven plans that were going up by an average of 2.8 
percent annually.
    This is why the Council believes that expanding access to 
consumer-driven plans such as health savings accounts and 
health reimbursement arrangements is one of the best ways to 
keep health insurance affordable. HSAs have been operating now 
for two years. We have seen a lot of criticisms of them, but it 
is remarkable how wrong the criticisms have been.
    Even with the criticisms, the growing dynamics, we think 
that Congress can do a couple of things to make HSAs and 
consumer-driven plans even more attractive. The non-self-
employed, people who work for an employer who does not provide 
health insurance, do not get a tax break for that insurance, 
the ability to be able to put money into an HSA and to be able 
to get their health insurance premiums tax deducible, tax-free 
for those health insurance premiums would help make health 
insurance more affordable for that population.
    In addition, Americans spend a lot of money out of pocket 
on health care, allowing them to be able to pay that money out 
of their HSA for the wide range of health care costs, would 
help make health care more affordable.
    Second, not everyone has access to affordable health 
insurance plans. In large part, the affordability of health 
insurance depends upon the state that you live in. Many 
states--Congressman Shadegg talked earlier about the mandates 
that are out there. The Council, we track these on a state-by-
state basis. According to our figures, you have got about 1,843 
mandates out there.
    If you had the ability to be able to bypass some of those 
mandates, you would be able to have access to more affordable 
policies. For instance, Minnesota has 62 mandates, Maryland 60, 
Virginia 54. Washington, D.C. has only 17. Alabama has 18, and 
Idaho 13. There are no stories in the press about people 
falling dead in Idaho because they only have 13 mandates. You 
can get affordable policies out there with fewer mandates and 
still have quality coverage.
    In addition, one of the biggest problems we have is 
guaranteed issue in community rating. Eight states passed those 
laws. Kentucky backed off from them. All the states that have 
done that have ended up destroying their health insurance 
markets by making health insurance virtually unaffordable. 
Congressman Shadegg talked about New Jersey. That is our sort 
of prime example of how not to reform the health insurance 
system.
    Ensuring a competitive market for health insurance--we 
think Congressman Shadegg's bill would allow people to be able 
to buy health insurance across state lines. He talked at length 
about it. Let me just mention one thing about it. There is some 
discussion about, doesn't this allow people living in one state 
to be able to have health insurance in another state? And isn't 
that a problem?
    Council for Affordable Health Insurance based in Virginia 
provides insurance. I live in Texas. I could have the Council's 
plan. I choose not to do that. I have a plan in Texas. If I did 
choose the Council's plan, I would be a person living in Texas 
with a Virginia regulated health insurance policy. I can do 
that right now.
    My daughter, who is from Texas. goes to school in New 
Jersey. She is a graduate student at Rutgers. She is under my 
Texas plan. She could choose to go under New Jersey, but we 
can't afford that. She is a Texas resident living in New Jersey 
with a Texas-based plan.
    You already have that going on now, and it seems to work 
just fine. Incidentally, if you live in Pennsylvania, and you 
decide to move to New Jersey, you live in Pennsylvania, you 
have the individual policy there, you move to New Jersey, you 
can keep that individual policy living in New Jersey. You will 
pay lower premiums than somebody who actually goes through the 
insurance department there in New Jersey. But under current 
law, you can carry your insurance policy with you to another 
state.
    Chairman Musgrave. Could you just wrap up, please?
    Mr. Matthews. Yes, ma'am. In summary, let me say that just 
with a few steps Congress could dramatically improve Americans' 
access to affordable health insurance, especially for those 
living in states that have virtually destroyed their health 
insurance market.
    I encourage you to look at some of those provisions, and we 
will be--we look forward to answering your questions. Thank 
you.
    [Mr. Matthews's testimony may be found in the appendix.]
    Chairman Musgrave. Thank you, Dr. Matthews. Mr. Hense, we 
would hear from you at this time, please.

  STATEMENT OF PAUL HENSE, NATIONAL SMALL BUSINESS ASSOCIATION

    Mr. Hense. Yes. I am pleased to be here. I want to thank 
Todd McCracken and the National Small Business Association for 
having me here. I am a humble CPA from Grand Rapids, Michigan, 
so this stuff to me isn't statistics and numbers; it is people, 
because this is what I do. I don't study these bills as much as 
maybe some people who live in Washington, but I do see the 
results.
    I am a University of Detroit graduate, not a Harvard or Ivy 
League school graduate, inner city school. This is real to me, 
not theoretical or statistical.
    There is a term called a BFO, blinding flash of the 
obvious, that I think applies to what I want to present to you, 
because I just don't understand. And I use the example of 
Michigan is imploding. We are kind of looking forward to having 
Ford and General Motors join the National Small Business 
Association or Small Business Association of Michigan, because 
we are going through, you know, a real meltdown.
    And, of course, most of you know, if you do follow Michigan 
issues, that it is health care that is driving what used to be 
the Big 3 down, not just the Medium 2.
    But the situation that I look at is people--we are almost 
exclusively a small business CPA firm. It is what we do. It is 
what we are--our total involvement is. So if somebody comes to 
me and says, ``I want to start a business. I have just been 
downsized by one of these giant corporations,'' or because we 
have a reputation for helping people with startups, we get 
people who don't have a business background, their family 
doesn't have a business background, and they say, ``Well, what 
do we do?''
    So we go into this, we are going to hire somebody. So you 
take two people, say you have one person that says, ``I want to 
start a business, I am going to hire somebody.'' so you--tell 
me how I explain to this person who is going, ``I can do it, I 
want the American dream, I want to own a business. How do I do 
this?'' And I say, ``Look, you hire this person, you get health 
care on both of you.''
    By the way, the employee gets 100 percent scot-free, tax 
deductible health care. You don't. Well, why don't I? Because 
you are the owner. You have just become a capitalist. And here 
is what we do. I am going to--say $10,000 a year you pay in 
health care, you are going to pay a 15 percent premium that the 
employee doesn't have to pay. Well, why? Because you own the 
business.
    You had the initiative. You went out and started this 
business, you had the guts to do it, and, by God, the 
government is behind you 100 percent. They want your down 
payment right up front, how much they are going to get out of 
you over the years. Hardly understandable.
    The same thing applies to pension Section 125 plans. You 
want employers to set up a 125 plan, have health care for the 
employees, set up a pension plan. Who do you exclude? The 
employer. From the Section 125 plan and from the health care 
100 percent deductible. Hard to understand.
    There is, by the way, a good side to this. There is all 
this negative talk. In order to avoid self-employment tax on 
small businesses and their health care plans, we have to 
usually set them up in an entity. And what do you suppose that 
does, an S Corp or a C Corp? That drives up accounting costs. 
So there is a bright side to everything.
    The other point is, I had just--again, people, not numbers, 
nor statistics, real people--I have a young woman working for 
me, wonderful young woman, 15 years with me, raised three kids, 
just got through a bout of bone cancer with a son, finished 
college while her son was being treated for bone cancer, got 
her degree, passed the CPA exam, and we are talking about 
bringing her on as an owner.
    And what is our hurdle? Well, she loses her--the health 
care becomes a problem, because she has to pay self-employment 
tax on the health care. But she loses her Section 125 plan. I 
mean, what is the message? So when I look at this, like I say, 
I would like to somehow someday have somebody explain to me why 
you would differentiate between the person who says, ``I will 
not be on welfare, I will not be a statistic, my job went away 
with General Motors' downsizing, I am going to own a business, 
and I am going to hire somebody.'' Well, you can do that. This 
is America. That is what we want you to do.
    But when you start that business, your friend or your 
neighbor or the person you hire, you don't pay self-employment 
tax on their health care insurance but you do on your own. And 
I have never had an explanation of that that satisfied any 
rational bone in my body. So basically, I think that if it is 
good for General Motors it is good for Ford. Obviously, it 
hasn't been, but if it is good for big business it is good for 
small business.
    If it is good for government employees, let us level the 
playing field. If you own a business, you should have the same 
health care, you should have the same availability of health 
care with the same tax, same pension plan, same Section 125. 
There is no reason to prejudice the owner in these programs. We 
should actually be thrilled that they are doing it, because 
they are helping solve our employment problem.
    Thank you very much for having me. And I just want to throw 
one thank-you out, Representative Musgrave, for your extending 
the Section 179 deduction. That is a big issue for small 
business, extend that a few years. And, Representative 
Lipinski, your bringing things out into the light with the 
hospitals--I don't remember the numbers on the bills. I know 
the concepts. Anything that brings the cost out in light gets--
allows people to say, ``This is what the problem is.''
    I ask continuously, why does this keep going up? Nobody 
ever answers. The problem we are talking here about who is 
going to pay. Well, that is a problem. The bigger problem is: 
why is it so much? And thank you very much for shining a bright 
light in that dark little corner of the world.
    Thank you.
    [Mr. Hense's testimony may be found in the appendix.]
    Chairman Musgrave. Appreciate your comments. Mr. Perrin.

           STATEMENT OF DAN PERRIN, THE HSA COALITION

    Mr. Perrin. Thank you, Madam Chairman, and members of the 
Committee, Mr. Lipinski. I want to echo my colleagues' comments 
on your hospital bill. Trying to explain consumerism in health 
care when there are no prices is a kind of rough road. And it 
is a real problem; we salute you for your leadership in that 
regard.
    Let me just go back to basics a little bit on HSAs. You 
know, people have a lot of ideas about what they are, and one 
Congresswoman was asking me, you know, how are you supposed to 
explain an HSA to people? I said, ``Congresswoman, let us say I 
give you $2,500, and once you have spent that money your 
insurance kicks in.'' That is an HSA. She said, ``Where does 
the $2,500 come from?'' Which is the obvious question.
    It comes from reducing your premium. And that is why 
Congress mandated that an HSA-qualified plan have the 
characteristics it does, to create that money available to 
people to fund their account.
    And I have a little vignette to share with the Committee. I 
took my kids to one of these amusement parks where you pay the 
fee, the rides are free once you get in the park, except for 
the souvenirs and the games and the arcades and the food. And I 
have five kids, and my older kids wanted to go off on their 
own, so I said, ``Okay. Here is your money.'' I gave them $40 
each, because I, frankly, didn't expect to see them until 
sundown, but they sought me out about two, three hours later, 
and, ``Dad, we don't have any money.''
    So they are standing there, they have no large stuffed 
animals or hats or T-shirts, any noticeable thing that they 
have spent the money on. And I said, ``What happened to the 
money?'' and they proceeded to list this long list of things 
including telescopes that take quarters that were on top of a 
tower. They basically just wasted the money instantly, almost 
instantaneously. So I said, ``No, I don't have any money.'' So 
we went to the waterpark and spent the rest of the day there.
    Now, my wife then tells me our cousins are visiting, and I 
have been elected to take the kids again to the amusement park. 
This time there are three more, and they are teenagers. So when 
I handed out the money this time, I said, ``Look, what you 
don't spend you get to keep.'' Okay? So some of the kids were 
literally jumping up and down they were so excited. They 
thought they hit the jackpot.
    And the behavior changes were substantial. My son said, 
``Well, Dad, you know, the arcade is too expensive, and so is 
the souvenir shop.'' My daughter skipped lunch and had an ice 
cream cone. They actually argued with the clerk about the 
change; something I have never seen them do.
    There was a huge discussion about the fact that I had 
brought 20 SPF sunscreen, but the teenage girls wanted 40. But 
it was $15 at the park, so they spent 15 minutes trying to 
decide how to divvy up that cost. And what that really 
illustrates is that when an employee, either the employee gives 
them the money or they finance it when they are in individual 
insurance, when they are spending their own money they spend it 
a lot differently.
    And that is at the core of why HSAs--as my colleague Mr. 
Matthews pointed out, the Deloitte study showed only a 2.8 
percent increase year or year. We have another study from 
United Benefit Advisors, largest private sector study ever 
done, 3.4 percent year-over-year premium increase. And this is 
what is killing business. These price increases are 
unsustainable. Unsustainability means you can't afford it.
    When you can't afford it, it means you don't have any. And 
for the first time, ehealthinsurance, who has about 60 insurers 
on their website, sells exclusively to the individual market, 
showed a 15 percent premium decrease, a double-digit premium 
increase between 2004 and 2005. I don't know about you, but it 
has been a long time since health care costs have gone down, 
insurance costs have gone down.
    So there are a lot of dynamics that HSAs bring to the 
table, but really it starts with reducing the premium cost and 
using those savings to fund the account, which then changes 
behavior.
    So, Ms. Musgrave, I appreciate your allowing the Coalition 
to be represented here today, and thank you.
    [Mr. Perrin's testimony may be found in the appendix.]
    Chairman Musgrave. Well, thank you, and maybe you could 
have a second job with parenting classes. I like the analogy 
with the amusement park.
    The testimony has been especially good. I really appreciate 
it, and I would just like to start out with a question for Mr. 
Lawler. I think a lot of people when they hear ReMax or Century 
21, you know, they see this big company. You know, we have seen 
the signs all over the country and everything, but would I be 
correct in stating that you are more like an independent 
contractor? And tell me if that is true, and, if so, what kind 
of challenges do you face with--
    Mr. Lawler. Absolutely. I am glad you brought that up. In 
my testimony here, so often that is a confused assumption, 
large companies we hear have market share across the whole 
United States. But the vast majority of these agents are 
independent contractors, and, as such, they are a sole person, 
one-person entity. They are not employed by ReMax in this case. 
I am not employed by ReMax. I work as an independent contractor 
and have to provide my own health insurance as an individual.
    Of those agents that do have health insurance, 
approximately 30 percent get their own health insurance as 
individuals, and it is very limited and it is costly.
    Chairman Musgrave. You know, you see those ubiquitous 
signs, and you really do have this concept that this is a big 
company, and I think it is very easily overlooked, what kind of 
challenges you face as an independent contractor.
    Dr. Wilson, I was elected my freshman class with some 
doctors, and they have very eloquently spoken about the 
challenges that much of my district faces being a remote rural 
area. And you talked about the challenges that in some areas 
you can't even get docs to deliver babies.
    Could you dwell on the tort reform issue a little bit for 
me? And put a picture on what that does to someone who lives 75 
miles from a major city, and they live in a farming community 
of 10,000 people, and help us out with that a little bit.
    Dr. Wilson. Thank you, Madam Chair. And maybe I can 
approach that from my personal experience, which is actually in 
the greater Orlando area, which is urban. And let me just say 
the bottom line is that what happens in urban areas is 
magnified by the challenges you just described of geography. I 
mean, if you only have one physician in a community, and that 
physician decides because of the challenges related to 
viability to retire earlier, or to move to another state, then 
all of a sudden you go from one physician to zero physicians.
    Let me just say that my experience--and I have been in 
practice for a fair number of years now--and a surgery group 
that I have used for some 25 years in one of the hospitals at 
which I have privileges two years ago lost their liability 
insurance because in Florida at that time companies were 
fleeing the State. Two members of that group left the State, 
one member retired, and the remaining members of that group 
decided not to provide coverage at that community hospital.
    So the group I had used for my patients in Winter Park 
Hospital was no longer at that hospital, and since they were 
the only general surgery group for nine months that hospital 
had no general surgeon. So if one of my patients or any patient 
in Winter Park came to that hospital with an acute abdomen, 
with appendicitis, or a gall bladder problem, they had to be 
transferred. And that's the reality of the liability crisis, 
which is--does not solve the problems in terms of 
recompensating people who are injured, but results in these 
effects.
    So as I said to begin with, those kinds of things are 
multiplied many fold, not only in rural settings but also in 
the urban high density population settings as well.
    Chairman Musgrave. I believe you mentioned 21 states in 
crisis. Are there states where docs are literally fleeing? They 
just don't want to practice there anymore? How bad is that 
crisis that you are referring to in your testimony?
    Dr. Wilson. The 21 states--and that is an American Medical 
Association designation--and we designate states based on our 
understanding of the challenges to access to care for patients 
in that state relating to the liability crisis, the value of 
awards, the excess awards, the difficulty of getting insurance, 
and that is how we categorize those states.
    I will just give you the example from my State of Florida. 
It is very difficult to recruit physicians to come to Florida. 
One of the other groups that I use is an orthopedic group who 
has for the past three years tried to recruit a physician to 
come to their practice. One of my brothers who is a general 
surgeon in the panhandle, a group of five general surgeons, 
took them three years to recruit two general surgeons to come 
to the panhandle, and it was because of the liability crisis.
    My brother, who was hoping to retire, kept saying, ``I am 
hoping to retire.'' And I said, ``Well, you know, Ted, you keep 
promising that,'' but it was the challenge. So that is the 
personal experience.
    The other final observation which I alluded to is Texas. 
And prior to Texas reform in 2003, you could pick any 
particular high risk specialty and find that the numbers--
actually the numbers were decreasing in the State. And just in 
the three years since passage of that legislation, that climate 
has changed such that physicians are now coming and we are 
seeing increased numbers coming to Texas.
    Chairman Musgrave. Thank you. Mr. Lipinski.
    Mr. Lipinski. Thank you, Madam Chairman. We have been here 
for more than two hours already, but I could probably go on for 
at least two hours myself here. I will try not to do that.
    I would like to first thank Mr. Hense and Mr. Perrin for 
their comments on my bill, H.R. 3139, Hospital Price Disclosure 
Act, and hopefully maybe I can get the Chairman of the 
Committee to sign on to that bill.
    But I want to move on to a couple of questions that I have. 
First I want to talk a little bit--Dr. Matthews had talked 
about mandates and the problems with mandates, and it is 
certainly easy to pull out ones that--most of us would say, 
``Well, that is kind of ridiculous, that that needs to be 
covered.''
    I just wanted to make a statement about my concerns. Right 
now, it is not a problem if you live in one state and for some 
reason or another you could have insurance through--from 
another state. My concern is that, though, if you can have an 
insurance company just following the--whatever the requirements 
are in one state, what it is going to lead to with every 
insurance company is going to be going to one state. What state 
is that?
    The state that has the fewest regulations, the fewest 
mandates, and is going to be in the interest of the states to 
fight against each other to get to the bottom, so that they 
have insurance companies there, so they are getting in the 
money from these insurance companies. I mean, that is my 
concern about that.
    One thing, this is going to violate probably all kinds of 
norms in etiquette, but let me pull something out from my shoe.
    [Laughter]
    This is an orthotic. I have had orthotics now for four or 
five years. I was having knee pain. I was a runner, and I 
didn't have--hadn't had any problems for many years, and, you 
know, first I was told, well, you are just getting older, you 
have got to accept that. Then, I went and was told, ``Well, you 
get these orthotics. It will make a difference. It can help to 
get rid of your knee pain.''
    Now, they were covered--the insurance I had at the time, 
they were covered. Moved to a different insurance, they weren't 
covered. I actually waited a little while until I was elected 
to Congress--until I started my coverage, I should say. I had 
been elected, but I checked the insurance I had before I 
started and got the insurance, it didn't cover it. So I 
thought, well, I could wait a little while. I waited, and, sure 
enough, now I have coverage, which is fantastic.
    I would have bought it no matter what. But I can certainly 
see this isn't the best example, but it is an example. What 
difference does it make? On a good week, I run 20 to 25 miles 
in a week. It certainly helps my health. I am in much better 
shape because of that, and I would want to do that. However, I 
would be concerned that there are people who certainly simply 
for one reason or another didn't want to do it or couldn't 
afford it--to go out and spend the few hundred dollars that it 
costs to buy one of these.
    That is my concern, getting back to Mr. Perrin on HSAs. Do 
we have--what evidence do we have about people's long--their 
decisionmaking in terms of long-term impacts? It is easy to 
look at all of these different things you might buy at an 
amusement park and say, ``Well, the kid doesn't really need 
that or didn't really need to do that.'' I mean, that is one 
thing. But it is another thing if someone is not going to get a 
test or someone is not going to get something done.
    Do we have any evidence that people do make good decisions 
for themselves in the long run? And it gets down to not whether 
people, you know, are smarter or not, as much as, what 
information do people have? Do people have enough information 
to be making those types of decisions?
    Mr. Matthews. Let me address a couple of points there. 
Number one, we had a group of actuaries oversee this mandate 
chart, and you will find in there that we did an actuarial 
estimate on each of the mandates. The vast majority of them are 
less than one percent, would affect the cost of a premium less 
than one percent.
    Some of them have very little impact. It is when you begin 
to add 20, 30, 40, 50 mandates together that you begin to start 
having a real significance.
    Another question that came up in the discussion of this is: 
wouldn't we think that some of these--some of the things that 
are in there that we look at as mandates are things that you 
would expect a good health insurance policy to cover anyway. 
But because some state or another state--for instance, 
prescription drugs--we mention that as a mandate, because a 
couple of states have a law about that.
    We would think that a good prescription--a good health 
insurance policy would include prescription drug coverage 
anyway. So some of the things that we call mandates are going 
to be part of what we think a comprehensive policy should have. 
But there is no evidence that I am aware of that when 
deductibles rise our mandates decrease, that you have any 
adverse effect on health outcomes. We are not aware of that.
    What most happens is that most of the mandates that you 
could begin to extract are things that people could pay for out 
of their own pocket, but because insurance covers they go ahead 
and do--they cover it under the insurance. And that gets to an 
issue of, you mentioned--the term overinsured or underinsured 
was mentioned here earlier.
    In many cases, people have comprehensive coverage for 
things that they could pay for easily out of pocket. And ideal 
insurance would not necessarily cover everything that somebody 
could reasonably spend on health care. It would actually cover 
large unforeseen costs, things that insurance, when you talk 
about insurance, should actually be covering, not standard, 
routine, daily, or lower cost.
    But there is no evidence that I am aware of that by moving 
people to higher deductibles or removing some of the mandates 
that it adversely affects their health in any shape, form, or 
fashion.
    Mr. Lipinski. I know Mr. Perrin is going to address this 
next, but let me also throw in this other part of this 
question. Why do insurance companies--insurance companies--
health insurance companies are not out there for people's--to 
look after--just to look after people's welfare. They are out 
there to make a profit. Why don't insurance companies encourage 
people to not overspend? Because the money doesn't come out of 
nowhere.
    They money comes from the insurance company. How can 
insurance companies aren't themselves--they are in the 
business. This is their business. And if they don't want people 
to spend too much, if they think the way their insurance is 
structured that people are going to spend too much, why don't 
insurance companies do something about it?
    Mr. Matthews. That is one of the reasons why deductibles 
have been rising over the past decade or two. It used to be--
several years ago it would be a $50 or a $100 deductible. Now 
it is--$500 or $1,000 is common. Also, a change in the co-pays. 
But as Dan pointed out, that sort of increases your cost up 
front. And if you have a $1,000 deductible, without an HSA or a 
health reimbursement arrangement, you may discourage or put off 
certain care that you might otherwise get if you had coverage 
for it.
    That is why what the consumer-driven plans with the HRA or 
HSA are meant to do is to say there is money in an account for 
you if you need preventive care, if you need to get routine 
care, but there is an incentive for you to ask the question: 
where do I get value for my money? And that is what they are 
trying to do is to get that element back in.
    Now, in the '90s, many of the insurers, especially large 
insurers, were moving to managed care as a way to try to 
control utilization. But that was just never going to work. 
People and physicians do not want somebody looking over their 
shoulder telling them what they can and can't have.
    The only alternative we really have now is to give that 
power to patients and let them make the decisions in 
consultation with their physicians.
    Mr. Perrin. Mr. Lipinski, let me give you a couple of quick 
bullet point answers. I thought about the amusement park 
analogy, and if one of my kids was in pain in some way, you 
know, and I kept true to the--you have got $40, they would 
likely go and spend money to make themselves feel better. If 
they felt nauseous, they would buy some Pepto-Bismol. If they 
twisted their knee, they would get a bandage, or whatever. And 
I expect that they would be incented by the fact that they 
don't feel well to spend the money.
    The HSA provides you the ability to have the cash by 
reducing your premium to spend the money. I have got, you know, 
a couple of quick vignettes personally. I used to smoke. I 
would get bronchitis. I go in. I had Kaiser. They would give me 
this, you know, 10-day, three times a day pill, which I could 
never take, because I can't even take my vitamin every day. And 
so I would get bronchitis again, and then a buddy told me about 
Zithromax.
    So I went in and I asked for Zithromax, and they said, ``It 
is not on our formulary.'' I said, ``Just write me the script, 
and I will pay out of pocket.'' And so they gave me so codeine 
syrup as well, which for five bucks I could get at the Kaiser 
pharmacy. So I went down, I gave them the prescriptions, and 
they filled it with Z-Pak. And I said, ``I thought you guys 
didn't have Z-Pak, you know, for patients.'' And she said, 
``Well, we don't, but the doctors take it when they get sick.''
    So the point I am trying to make is that with a little bit 
of knowledge a consumer can make decisions which benefit them, 
provided they have the funds to pay for it. An HSA, by lowering 
your premium, will give you access.
    With regard to the insurance companies, you know, if you 
look at this chart, which is Exhibit C in my testimony, you 
will see that as the out-of-pocket costs for individuals has 
dropped, the cost of health care has increased--premiums 
mostly. Insurers don't insure anymore. I mean, most of these 
insurers are, you know, administrative services organizations 
that take $50 or $80 claims, plus 15 percent, and charge you 
for being a clerk. Okay?
    And as insurance has come more to that sort of model where 
the deductibles get so low that everybody blows past them, they 
essentially become these huge, you know, electronic claims 
processing companies, and there is an enormous amount of waste.
    Let me just tell you what happened in South Africa.
    Chairman Musgrave. Very quickly. We are going to have to 
wrap it up, please.
    Mr. Perrin. All right. You know, in 10 years in South 
Africa we saw 65 percent of the insured population get an MSA, 
almost exactly like an HSA. You know, there are some insurers 
who really don't want to see an HSA succeed, because their top-
line profit goes from $927 a month down to $400 or $500 a month 
in premium.
    So, you know, those companies are in this MSA market and 
that are pricing their plans properly, they are making money 
because the insurance works, the insurance science of the less 
healthy and the healthy combined to, you know, give them 
appropriate and practical coverage.
    And, you know, if you look at the McKinsey study, if you 
look at other incentives that are in place with an HSA, the 
less healthy are simply not adversely affected by not getting 
care. And one of the reasons for that is that an HSA allows for 
preventative care to be a covered benefit. And that is the only 
covered benefit that is allowed below the deductible.
    Now, notwithstanding that, Assurant, which was in the MSA 
pilot, found that 30--more than 30 percent of the people in an 
HSA got preventative care, more preventative care, when 
compared to their normal fee-for-service, you know, or HMO 
population. And the reason is really simple. It is like that 
noise in your car when you first get a car and you ignore it 
and you end up paying 10 times more than if you had just fixed 
the damn valve in the first place. Right?
    And you learn the lesson where if you let things go, they 
are going to get more expensive, and you have to pay to get 
your car out. This is the exact same lesson that people with an 
HSA know intuitively, and that is why they spend more on 
preventative care.
    Chairman Musgrave. Mr. Lipinski, did you have any thing 
else?
    Mr. Lipinski. I will--well, I will pass right now. I don't 
know if you have any more questions or you have--
    Chairman Musgrave. I am going to just ask one more thing, 
and this is a subject that we can certainly pursue more. I just 
have to ask my constituent, Mr. Lawler, when you talked about 
those realtors, those members calling and saying, ``Well, what 
can you do about the high cost of health insurance?'' do you 
think that we have offered some solutions today, and could you 
just comment on that? I would just like to hear what you think 
Congress could do that is really going to address this problem.
    Mr. Lawler. Well, I have to commend the House side, because 
you have worked diligently on association health plans, and I 
think that is probably the best answer or route for realtors. 
We need to get the Senate to come along, and at least the 
Senate bill--
    Chairman Musgrave. We agree with that.
    Mr. Lawler. --1955--Senate bill 1955 at least I think is 
marching down that direction. But I think, you know, we are the 
largest group of our type, and it is difficult for our agents 
to get health insurance. Roughly a third don't have insurance. 
Roughly a third are buying it as individuals. They have no way 
to be in a pool. And the other third are basically getting 
their insurance through their spouse or somebody else.
    So I think it would be terrific if all the House members 
would work with their Senate compatriots to get an association 
health plan as soon as possible. I think the--when we asked our 
realtors recently what was one of their biggest concerns, 
within less than a week we had over 400 responses regarding 
associated health plans or health plans. And this is just the 
State of Colorado. This isn't the National Association of 
Realtors, just in our local area.
    Chairman Musgrave. Thank you very much. Some of the 
legislation--the legislation that Mr. Hense mentioned is 
Melissa Hart's Self-Employed Health Care Affordability Act. And 
I am a co-sponsor of that, and I certainly think that the 
disclosure for prices--that is going to get us in the direction 
that we need to go. I mean, it is incredible that we think of 
going into it blind so to speak and not have any idea what the 
prices are.
    I just commend you for your testimony. This has probably 
been the hearing where we have gone over the most, but I feel 
that we got some very good information today, and I appreciate 
all of you for being here. Appreciate the fact that you all 
made the effort to get here and share your expertise with us 
today.
    And thank you, Mr. Lipinski.
    This hearing is adjourned.
    [Whereupon, at 12:54 p.m., the Subcommittee was adjourned.]


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