[Senate Hearing 109-120]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-120
 
   SMALL BUSINESSES AND HEALTH INSURANCE: EASING COSTS AND EXPANDING 
                                 ACCESS

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

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

     EXAMINING EASING COSTS AND EXPANDING ACCESS RELATING TO SMALL 
 BUSINESSES AND HEALTH INSURANCE, FOCUSING ON S. 406, TO AMEND TITLE I 
 OF THE EMPLOYEE RETIREMENT SECURITY ACT OF 1974 TO IMPROVE ACCESS AND 
CHOICE FOR ENTREPRENEURS WITH SMALL BUSINESSES WITH RESPECT TO MEDICAL 
                        CARE FOR THEIR EMPLOYEES

                               __________

                             APRIL 21, 2005

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions

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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                   MICHAEL B. ENZI, Wyoming, Chairman

JUDD GREGG, New Hampshire            EDWARD M. KENNEDY, Massachusetts
BILL FRIST, Tennessee                CHRISTOPHER J. DODD, Connecticut
LAMAR ALEXANDER, Tennessee           TOM HARKIN, Iowa
RICHARD BURR, North Carolina         BARBARA A. MIKULSKI, Maryland
JOHNNY ISAKSON, Georgia              JAMES M. JEFFORDS (I), Vermont
MIKE DeWINE, Ohio                    JEFF BINGAMAN, New Mexico
JOHN ENSIGN, Nevada                  PATTY MURRAY, Washington
ORRIN G. HATCH, Utah                 JACK REED, Rhode Island
JEFF SESSIONS, Alabama               HILLARY RODHAM CLINTON, New York
PAT ROBERTS, Kansas

               Katherine Brunett McGuire, Staff Director

      J. Michael Myers, Minority Staff Director and Chief Counsel

                                  (ii)






                            C O N T E N T S

                               __________

                               STATEMENTS

                        THURSDAY, APRIL 21, 2005

                                                                   Page
Enzi, Hon. Michael B., Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Blake, Mitchell, Ward & Blake Architects, on behalf of the 
  National Federation of Independent Business; Joseph E. 
  Rossmann, Vice President of Fringe Benefits, Associated 
  Builders and Contractors, Inc. on behalf of the Association 
  Health Plan Coalition; Karen Ignagni, President and CEO, 
  America's Health Insurance Plans, Sandy Praeger, Commissioner 
  of Insurance, State of Kansas, on behalf of the National 
  Association of Insurance Commissioners.........................     3
    Prepared statements of:
        Mr. Blake................................................     6
        Mr. Rossmann.............................................     9
        Ms. Ignagni..............................................    16
        Hon. Sandy Praeger.......................................    27
Kennedy, Hon. Edward M., a U.S. Senator from the State of 
  Massachusetts, prepared statement..............................    31
Snowe, Hon. Olympia, a U.S. Senator from the State of Maine, 
  prepared statement.............................................    32
Talent, Hon. Jim, a U.S. Senator from the State of Missouri, 
  prepared statement.............................................    34

                                 (iii)

  


   SMALL BUSINESSES AND HEALTH INSURANCE: EASING COSTS AND EXPANDING 
                                 ACCESS

                              ----------                              


                        THURSDAY, APRIL 21, 2005

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:02 a.m., in 
Room 430, Dirksen Senate Office Building, Hon. Mike Enzi, 
chairman of the committee, presiding.
    Present: Senators Enzi, Burr, Isakson and Ensign.

                   Opening Statement of Senator Enzi

    The Chairman. I officially call this hearing to order. Good 
morning and welcome.
    As just about every worker and employer knows, there are 
few issues that are of greater importance to both groups than 
access to healthcare at an affordable price, and for America's 
small businesses and their workers, worries about healthcare 
are becoming acutely important. That is why we have called 
today's hearing.
    We are here to examine the ways of addressing the serious 
and growing problems facing small businesses in offering 
affordable coverage to their employees and their families. As 
we meet today we have had almost 5 full years of devastating 
double digit growth in health insurance premiums, and we have 
seen increases of more than 5 times the rate of inflation. 
Since 2000 premiums for family coverage have grown nearly 60 
percent compared to an inflation rate of 9\7/10\ percent over 
the same period. Employers want very much to keep offering 
coverage, and they are struggling to maintain current coverage 
levels. The big worry is how much longer can the system sustain 
double digit cost growth before it begins to seriously unravel.
    As chairman of this committee one of my goals will be to 
achieve serious and meaningful reform in the small business 
health insurance system. Simply put, we need to develop an 
effective yet reasonable strategy to increase the ability of 
small and low-wage businesses to offer health insurance.
    As a former small business owner I have seen this problem 
firsthand. My own State of Wyoming recently ranked 47th in the 
percentage of businesses that offer health insurance to their 
employees.
    I know there is a passionate debate on how to reform the 
small group insurance market in States where limited 
competition exists. On the one hand, advocates for association 
health plans, AHPs, make a strong and persuasive case that 
small businesses should be able to pool their purchasing power 
and thereby reap some of the advantages currently enjoyed by 
large employers. Such advantages, many argue, would include 
greater bargaining power, economies of scale and administrative 
efficiencies. You have to find a lot of merit in those ideas. 
Nevertheless, I am also mindful that critics have raised some 
very serious concerns that going this route could trigger 
dangerous adverse selection and fracture an already-fragmented 
market. Whatever we do we need to ensure that the insurance 
market is stable and that consumers are protected.
    It is my intention as chairman to work closely with both 
opponents and proponents of AHPs toward the goal of easing the 
cost and expanding the access to small business health 
insurance. As we do, my colleagues and I also will be taking a 
careful look at some of the alternative approaches that have 
been suggested, such as encouraging greater harmonization of 
what is often called a patchwork of State insurance laws and 
regulations, or easing costly benefit mandates. The one option 
I will not accept is doing nothing.
    For those who oppose AHPs now is the time to come forward 
with constructive alternatives, and for AHP supporters now is 
the time to think seriously about ways to bridge the 
differences that remain on the important issues.
    We have with us today an impressive group of witnesses, 
well-equipped to help us sort out these thorny issues, 
including one of my constituents, Mitch Blake, a small business 
owner from Jackson, Wyoming. I know that each of you has 
strongly-held views, and an airing of those views is very 
important. However, I would ask whenever possible, that you 
help us to focus on possible alternatives and practical 
solutions that may go beyond the particular perspective of the 
constituency that you represent.
    I look forward to today's discussion, and we welcome your 
contribution to it.
    When Senator Kennedy shows up we will allow an opportunity 
for his opening statement. As the tradition is with the 
committee, the chairman and the ranking member are recognized 
to deliver opening statements. I do ask unanimous consent that 
any opening statements from my colleagues be entered into the 
record. Without objection, so ordered.
    So we will now hear from our first panel of witnesses. We 
will introduce the witnesses all at once, and then I will ask 
you while I am doing that to think about summarizing your 
statement so it gives more time for questions.
    I am especially pleased to introduce Mr. Mitchell Blake as 
the first member of our panel. Mr. Blake is joining us from my 
home State of Wyoming. He operates Ward & Blake Architects, an 
8-person architectural firm in Jackson, Wyoming. Ward & Blake 
has been featured in several national publications, and has 
received awards from the Wyoming Chapter of the American 
Institute of Architects. Mr. Blake is here representing the 
millions of small businesses across the country, the vast 
majority of which are facing ever-increasing insurance costs 
for their employees. As a small business owner he will describe 
the impact that dramatic premium increases have had on his 
company and the challenges the company has faced in providing 
coverage for an employee whose child suffered from an expensive 
and serious illness.
    Joseph Rossmann is the Vice President of Fringe Benefits 
for Associated Builders and Contractors, Inc., ABC, a national 
trade association made up of commercial contractors and located 
in Arlington, Virginia. He has worked in association health and 
welfare insurance programs for the past 27 years. Mr. Rossmann 
will discuss the ongoing and frustrating efforts of his 
organization to offer health insurance to employees through its 
association. He will also represent the views of the 
Association Health Care Coalition.
    Karen Ignagni is the Chief Executive Officer of America's 
Health Insurance Plans, AHIP. She has led the organization 
since 2003 and has long been a leader in the healthcare field. 
Among other accomplishments, she is the author of more than 90 
articles regarding healthcare policy issues. She is here today 
to offer the perspective of American insurers on the coverage 
problems facing small business. We especially look forward to 
her and AHIP's thoughts regarding ways these problems can be 
effectively addressed.
    Finally, we are joined today by Sandy Praeger, the 
Insurance Commissioner of the State of Kansas. She is also here 
to speak on behalf of the National Association of Insurance 
Commissioners, NAIC. Sandy Praeger currently serves as the 
Commissioner of Insurance for the State of Kansas. She is 
responsible for overseeing nearly 1,700 insurance companies and 
65,000 agents licensed to do business in the State. She also 
serves as Secretary Treasurer of the National Association of 
Insurance Commissioners. Before being elected as an insurance 
commissioner, Commissioner Praeger served more than a decade in 
the Kansas Senate, where she assumed a leadership role on 
healthcare and insurance issues. We look forward to her 
testimony offering the perspective of our State insurance 
regulators, all of whom are serving on the front lines in 
addressing small business insurance challenges.
    I thank all of you for being here today. I look forward to 
hearing constructive suggestions about ways to address the 
serious challenges facing small business and healthcare. Your 
full statement will be a part of the record, so any 
summarization that you can do will be greatly appreciated.
    Mr. Blake?

   STATEMENTS OF MITCHELL BLAKE, WARD & BLAKE ARCHITECTS, ON 
  BEHALF OF THE NATIONAL FEDERATION OF INDEPENDENT BUSINESS; 
    JOSEPH E. ROSSMANN, VICE PRESIDENT OF FRINGE BENEFITS, 
  ASSOCIATED BUILDERS AND CONTRACTORS, INC. ON BEHALF OF THE 
ASSOCIATION HEALTH PLAN COALITION; KAREN IGNAGNI, PRESIDENT AND 
     CEO, AMERICA'S HEALTH INSURANCE PLANS; SANDY PRAEGER, 
 COMMISSIONER OF INSURANCE, STATE OF KANSAS, ON BEHALF OF THE 
        NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS

    Mr. Blake. Good morning, Mr. Chairman. Thank you for 
inviting me here to speak on the subject of affordable health 
insurance, especially as it applies to small business. I am 
pleased to represent the NFIB here----
    The Chairman. You need to move it just a little closer.
    Mr. Blake. Excuse me. I am pleased to be here on behalf of 
NFIB, representing small businessmen with similar concerns as 
myself concerning the health insurance.
    You have done a good job of introducing my firm. You may be 
familiar with some facilities that we have designed, one being 
the Nature Conservancy at Red Canyon Ranch in Lander, Wyoming, 
the other being the main facility at Spring Creek Ranch resort 
in Jackson, Wyoming.
    We have been trying to create a relaxed environment. I feel 
that providing healthcare for my employees is one way that I 
can do this, to give them some peace of mind and help them feel 
confident that their insurance needs will be met. This was not 
a troubling task when we started our firm in 1996.
    We went for a few years with Blue Cross insurance until the 
premiums started to escalate and we could no longer afford to 
stay with that company. We then switched to Life Investors 
Insurance Company of America, and we were with them for a 
couple of years until they decided to pull out of the health 
insurance in Wyoming, and so they gave us an 18-month 
withdrawal period. We thought we would renew with them but 
their premium increased from 2,800 a month to nearly 4,800 a 
month, and my company was not able to absorb that.
    We switched to John Alden Life Insurance at this point, and 
things were okay for a year, but in October of 2002 I had an 
employee find out that his 3-year-old daughter had a malignant 
brain tumor in the base of her skull. He was devastated. So we 
told him to take as much time as he needed to to deal with the 
situation. He spent 3 months at Primary Children's Hospital in 
Salt Lake City going through tests, and the whole time we 
continued to pay him full salary while he was gone. He then 
returned to the company for another 3 months on a half-time 
basis while he continued with follow-up tests, and we continued 
to pay him full salary on the half-time basis.
    When it came time for our premium renewal, John Alden 
increased our premiums by $1,200, which was a significant 
increase over the 2,000 that we were paying. In order to get 
the insurance affordable we raised our deductibles from $500 to 
1,000, and increased the out-of-pocket maximum slightly. We 
agreed to this. We sent in our premium check on December 19th, 
and then we sent in the subsequent month premium check on 
December 31st. On January 6 of 2004, which was just the 
following month, we were notified that we were terminated as a 
group. We were upset. When we received the notification we 
checked with the bank. Our check had cleared for the December 
premium. Then subsequently on January 14th our second check for 
the January premium had cleared the bank also. We were upset 
about this.
    Our insurance agent got with the Wyoming Health Insurance 
Commission. They pressured John Alden into reaccepting our 
group, however, they would only accept us as a new group, and 
they added another 40 percent to the premium that we had just 
agreed to accept, which was more than my company was able to 
bear. So we declined the offer.
    In the interim period I had to find a bridge plan to keep 
my employees covered until I could find new insurance. In 
addition, I offered them 100 percent coverage for any medical 
expenses they had during the months that we were not insured.
    We then found out about the WHIP Plan, the Wyoming Health 
Insurance Pool or Wyoming Health Insurance Plan, and we found 
that my employee's daughter qualified for that plan. So we 
moved her onto that plan, and reapplied to Starmark Insurance 
as a new group without her as part of our group. We got a more 
affordable premium at $2,350 a month for my 8 employees and 
with $1,000 deductible.
    When it came time to renew our premium again this year we 
were hit with another $800 a month increase, nearly $10,000 a 
year, which was a big hit to my company. We have experienced a 
30 percent decline in our gross annual revenue since 2001, and 
we were unsure if we could continue on with this. We again 
raised our deductible from 1,000 a month to 2,500--excuse me--
our deductible from $1,000 to $2,500, and we increased our 
prescription deductible from $200 to $400. This wasn't great 
for our employees but it brought the insurance coverage within 
a premium that we could handle. It was actually within $100 of 
where we had been. We felt comfortable with this, so we added a 
wellness benefit that my employees could go get annual checkups 
at no cost.
    However, my employees who have dependents, we pay the 
insurance for our employees and the employees pay for their 
dependents, and those of us with dependents still saw an 
increase to our cost or a reduction in our checks.
    When we started the firm we had $250 deductible and we had 
told the employees that we would keep it at that no matter 
where we changed it. But this year we were faced with such an 
increase that we could no longer feel comfortable picking up 
the slack for the increased deductible.
    We changed to an HRA plan and we cover now $1,000 of their 
$2,500 deductible. We would really like to continue offering 
health insurance to our employees. We feel it is important to 
our company. We feel it is a nice benefit that the employees 
ought to have, and I do not know what the solution is.
    I have talked to various businessmen. I have talked to my 
insurance agent. I have looked at health savings accounts. I 
have looked at PPOs. I have looked at just providing increased 
salary to my employees to see if they could get insurance 
coverage on their own cheaper than we can get it at a group 
rate. I just recently heard about the AHPs, and I am not very 
familiar with them.
    What I do know is that in my State I have limited sources 
of insurance coverage. My agent tells me that we have three 
providers in the State, and I have been with all three of them 
now. I am not sure what my alternatives are.
    What I need is affordable premiums with deductibles that 
are manageable for my employees.
    Thanks for inviting me here today, Chairman Enzi, and 
thanks for your support of small business.
    The Chairman. Thank you for your testimony.
    [The prepared statement of Mr. Blake follows:]

                  Prepared Statement of Mitchell Blake

    Good morning Mr. Chairman and members of the committee. Thank you 
for inviting me today to talk about the important issue of affordable, 
accessible health insurance, especially for those owning or working for 
small business. I am pleased to be here on behalf of the National 
Federation of Independent Business (NFIB), representing other small 
business members who face a similar challenge.
    In April 1996, Tom Ward and I formed Ward + Blake Architects in 
Jackson, Wyoming. We employ eight people at present, and our firm 
designs residential and commercial buildings. We are pleased that our 
work has been recognized in notable national building publications, and 
our firm has won several local and regional American Institute of 
Architect's awards. Chairman Enzi, you may be familiar with Spring 
Creek Ranch Resort in Jackson, Wyoming or the Nature Conservancy at Red 
Canyon Ranch in Lander, Wyoming. Our firm designed both of these 
facilities.
    One of our goals is to create a relaxed environment where the 
powers of creativity can flourish. We feel strongly that offering our 
employees good benefits is an integral part of having this environment.
    I'm here today to share with you the growing problem that my firm 
is experiencing offering health insurance to our eight employees. We 
offer health insurance to all eight, and all of them take advantage of 
it. We offer health insurance for a variety of reasons: it's the right 
thing to do, and it's a way to attract and retain employees. We feel it 
is important to remove stresses that our employees may face in their 
life, if at all possible, so that they can focus on our projects and 
perform their best work. Offering health insurance is one way that 
we're able to help relieve stress and create a positive work 
environment for our employees.
    But I have to be honest that it's not getting any easier. Our story 
is one of increasing deductibles and higher premiums. When our firm 
first started insurance costs were not so prohibitive. We started out 
with Blue Cross, when their policy cost too much, we shifted to Life 
Investors Insurance Company of America. At one point in 2000, with 
eight employees our monthly premium costs were $2,821. We ended up 
shifting to John Alden Life Insurance Company in December 2001 when 
Life Investors pulled out of the group health insurance arena in 
Wyoming, and we faced an additional $2,000 a month to stay with them 
during their withdrawal period.
    We began having trouble at the end of 2002. In October of this 
year, one of our employees who had twin daughters found that one was 
not developing well, and it turned out that she had a malignant brain 
tumor. My employee was devastated with the news. We told him to take as 
much time as he needed to deal with the medical tests and specialists 
he was involved with in determining her condition. We paid him full 
salary for three months while he was in Salt Lake City at Primary 
Children's Hospital with his daughter. We then paid him full salary for 
three additional months while he came to work on a half-time basis so 
that he could be with his daughter and continue with follow-up meetings 
with the medical specialists.
    When it came time for renewal in December 2003, John Alden 
increased their new renewal premium for nine employees from $2,075 a 
month to $3,220, or our plan would cost us an additional $13,740 on an 
annual basis. We amended the plan to increase the deductible from $500 
to $1,000 and increased the out of pocket limit from $5,000 to $6,000 
and a 50 percent copay in order to bring the premium down to $2,880 per 
month or about a $9,660 annual jump. We agreed on this working with our 
agent, Summit Insurance, who was working with John Alden, and sent a 
check on December 19, 2003. We would have paid earlier, but we were 
still working with our agent on a premium that we could afford and were 
told by our agent that if the premium was received before the end of 
the month that our policy would remain in effect.
    On December 31, 2003 we sent in our January premium not knowing 
that we would be cancelled.
    On January 6, 2004, we received notice that we had been cancelled 
even though our check had been deposited and cleared our bank.
    Our insurance agent and the Wyoming Insurance Commission pressured 
John Alden into taking us back, but only as a new group. Due to the 
cancer issues, this made the amount significantly more than the renewal 
premium we had just agreed to accept. We declined this, stating that we 
were already an approved group and should not have to pay for a new 
group premium. We felt that we were treated unfairly by John Alden and 
requested that our premiums be returned. We were especially upset by 
the fact that John Alden had cashed our January premium even after they 
had sent us the letter of cancellation.
    Because we had refused John Alden's new group renewal and requested 
our premiums back, we had to provide our employees with an insurance 
bridge plan until we could find a new carrier. In addition, we paid 100 
percent of all outstanding medical expenses that our employees had for 
the two months that they were technically uninsured.
    Based on the advice of our insurance agent we removed my employee's 
daughter from our group insurance, once we found that she qualified for 
the Wyoming Health Insurance Plan (WHIP), being that she qualified as 
uninsurable, and we obtained a new carrier. All this time John Alden 
retained both of our premium checks.
    We switched to Starmark Insurance in April 2004. Our initial 
monthly premium was $2,350 for eight employees with a $1,000 
deductible, 60 percent copay, $5,000 out of pocket. This year Starmark 
wanted to renew our policy at $3,177 or about an $823 increase in 
monthly premiums, close to $10,000 annually. So we've now switched to 
an HRA account, with a monthly premium of $2,510, a $2,500 deductible 
for singles and a $5,000 deductible for families and increased our 
prescription deductible from $200 to $400. This adjusted our monthly 
premiums to within $100 of our 2004 premiums, so we added a wellness 
benefit to the plan so that our employees could get an annual physical 
at no cost to them. It is important to know that even though the cost 
to my company was within $100 of the previous years premiums, my 
employees with dependents saw an increase in their dependents' premiums 
for which they are responsible.
    When we started this business, we only asked our employees to pay 
$250 toward the cost of their health insurance because that was the 
amount of the deductible from our first health insurance plan. We kept 
it at $250 even when the deductibles increased and as the monthly 
premiums increased, but we have had our gross annual profits reduced by 
30 percent since 2001 and just cannot afford to do that anymore and 
still offer health insurance. With our new HRA plan, we now cover 
$1,000 of the deductible and ask our employees to pay $1,500.
    As I said at the beginning, we want the best for our employees 
because it's the right thing to do and creates a positive, healthy work 
environment. But increasing health costs call into question how long 
we'll be able to offer this benefit without eliminating other benefits 
and still stay in business.
    I'm not sure what the solution is: I have discussed the issue with 
several other business owners and looked at alternative ways to provide 
health insurance for my company including Health Savings Accounts, 
PPO's, and even increasing salaries so that employees can get their own 
individual policies. I realize that the hearing today is looking at 
association health plans. I am not totally familiar with AHP 
advantages, but I do know that I am limited to three health insurance 
providers in Wyoming and therefore have limited options for my 
employees. I also know that something must be done to stop this ever-
increasing cost to small business. I want what's going to lower my 
premiums and enable me to continue offering health insurance. I want 
health insurance that makes my employees feel secure and at deductibles 
that are manageable.
    Thanks for inviting me here today, and Chairman Enzi, thanks for 
your support of small business.

    The Chairman. Mr. Rossmann?
    Mr. Rossman. Mr. Chairman, members of the Senate Health, 
Education, Labor, and Pensions Committee, thank you for holding 
this hearing to address the problems that small business face 
in providing quality health insurance for themselves and their 
employees.
    I am testifying here before you today on behalf of the 
Association Health Plan Coalition, which consists of over 150 
regional and national organizations. The AHP Coalition 
represents over 12 million employers and 80 million small 
business workers throughout the United States.
    I am excited about this AHP legislation in S. 406 because I 
know that it is a model that works for small employers. 
Association Health Plans are an important option that brings 
more competition back into the marketplace. It goes without 
saying that small employers have their backs against the wall, 
struggling to maintain a business and at the same time being 
able to provide quality health insurance coverage to their 
employees and families.
    The problem is exacerbated because they must mitigate the 
effects of the annual double-digit health insurance rate 
increases that have hit them over the past 4 to 5 years.
    At the same time we have seen major insurance companies 
consolidating for what they call increased efficiencies and 
economies of scale, telling us that bigger insurance companies 
would have more clout to negotiate lower prices from hospitals, 
doctors and drug companies. According to an article written in 
the Washington Post in January 2005 this just has not happened. 
Instead our reward seems to be the creation of local and 
national oligopolies characterized by less competition, less 
choice, higher prices and higher returns to insurance company 
stockholders.
    The Post went on to report that James Robinson, a Professor 
of Health Economics calculates that the top three health 
insurance companies control two-thirds or more of the business 
in all but 14 States, with numbers reaching as high as 92 
percent in Maryland and 98 percent in DC and Northern Virginia. 
Robinson juxtaposes those numbers with the 2000 to 2003 
financial results of the top five national firms, and he shows 
a decline in the percent of each premium dollar that goes to 
pay medical costs, along with a stronger trend toward higher 
premiums, higher profits and stock prices.
    This appears to have been accomplished on the backs of 
small employers who have borne the brunt of double-digit rate 
increases over the past 5 years.
    The bottom line to me seems to be that we need to create 
more competition in the health insurance marketplace and 
provide more options for small employers, not fewer.
    I have been involved with Associated Builders and 
Contractors Association Health Plan for over 17 years. During 
that time I have been the Vice President of Fringe Benefits for 
ABC. I have worked for trade associations exclusively in their 
health insurance programs for almost 28 years. I can tell you 
from experience that association health plans work for small 
employers.
    Associated Builders and Contractors started its health 
insurance trust back in 1957 by five contractors who were just 
too small and could not buy health insurance coverage on their 
own. Since 1957 we have enjoyed a 48-year history of providing 
health and other welfare benefits to contractor members and 
their employees throughout the United States. During the first 
43 years ABC's insurance trust had only two different insurance 
carriers for the plan. This speaks very highly of the stability 
of the program and also the confidence that the insurance 
companies placed in ABC and in our plan.
    ABC is also a perfect example of the savings that are 
available to small employers through an AHP. The total cost for 
the ABC health program varied from 13\1/2\ cents on the dollar 
to 16 percent, and that included all insurance company 
expenses. The administration, sales expense and profits of 
insurance carriers selling in the small group market by some of 
the largest providers is targeted at 35 percent. The difference 
between their number and ABC's number is 19 to 22\1/2\ percent 
in savings, which goes directly to the small employer this year 
and in future years.
    In 1999 ABC's insurance carrier came to us and told us that 
they no longer wanted to stay in the business of providing 
association group insurance plans under the master insurance 
trust concept. They did not want to because of the complexity 
and inconsistency of State laws. That statement was very 
understandable to me because in the 5 to 6 years before that we 
saw our association program being carved to pieces as our 
insurance carrier pulled out of one State after another because 
of the State small group insurance legislation activity. It 
became almost impossible for them to comply with the new State 
laws and to provide the master trust policy approach for ABC's 
trust.
    ABC had a strong viable program which was gradually 
dismantled piece by piece by well-intentioned State insurance 
reform. We talked to over 50 different insurance carriers to 
take over ABC's insurance trust, which at that point was about 
$44 million in business, and there were no takers. No insurance 
company wanted to be involved with the association master trust 
program with the State healthcare reform requirements as they 
exist today. They are just too inconsistent and piecemeal.
    In 1999 ABC even looked at the idea of going self-insured, 
but we determined that the expense involved in complying with 
each and every State's separate filing requirements would have 
cost more in the long run than we could have saved for our 
members.
    The AHP story is like a poster child for AHPs. We provided 
an affordable comprehensive set of health insurance plans, but 
were eventually eliminated because of the changes at the State 
level. We succeeded as an AHP but were legislated out of 
serving our members. We want to pass the AHP legislation in S. 
406 to bring this option back to our members because it fosters 
competition and it is a model that works, and it is also a 
model that does not have its hand out for Government subsidy.
    I am very excited about association health plans and I 
appreciate this opportunity to testify before the committee on 
an issue of vital importance to our membership and all small 
business owners across the country. We look forward to 
continuing with a constructive dialogue on how to increase 
access to affordable health insurance for small employers.
    I will be happy to answer any questions the committee may 
have. Thank you.
    The Chairman. Thank you.
    [The prepared statement of Mr. Rossmann follows:]

                Prepared Statement of Joseph E. Rossmann

Introduction

    Mr. Chairman, Ranking Member Kennedy and members of the Senate 
Health, Education, Labor, and Pensions Committee, thank you for holding 
this hearing which will address the problems that small businesses face 
in providing quality health insurance for themselves and their 
employees.
    My name is Joseph E. Rossmann, and I am Vice President of Fringe 
Benefits for Associated Builders and Contractors (ABC). ABC is a 
national trade association representing over 23,000 general 
contractors, subcontractors, material suppliers, and related firms from 
across the country and from all specialties in the construction 
industry in a network of 79 chapters. Our diverse membership is bound 
by a shared commitment to the merit shop philosophy of awarding 
construction contracts to the lowest responsible bidder, regardless of 
labor affiliation, through open and competitive bidding. With more than 
80 percent of construction today performed by merit shop contractors, 
ABC is proud to be their voice.
    I am testifying before you today on behalf of the Association 
Health Plan (AHP) Coalition (membership list attached), which consists 
of over 150 national and regional organizations that support S. 406, 
the Small Business Health Fairness Act of 2005 sponsored by Senator 
Olympia Snowe (R-ME). The AHP Coalition represents over 12 million 
employers and over 80 million small business workers throughout 
America. I also am secretary and past president of The Association 
Healthcare Coalition, which consists of bona fide trade and 
professional associations that currently operate association-sponsored 
health plans, or have done so in the past. I will be summarizing my 
comments, but I would request that my full statement be submitted for 
the official record.
    Mr. Chairman, today's hearing is extremely timely. The problem of 
small business workers not having access to affordable health benefits 
is reaching epidemic proportions across the Nation. Since over 60 
percent of all uninsured Americans are employed by a small business, or 
are dependents thereof, the current trend of skyrocketing premium 
increases threatens to greatly expand the number of uninsured 
Americans, which now stands at approximately 45 million.
    Indeed, massive premium increases of 30 percent, 40 percent and 
higher, and/or benefit reductions, are typical of what small businesses 
throughout the Nation are experiencing today. Clearly, current 
initiatives aimed at expanding access to affordable healthcare are not 
working. As such, Congress must take action to address this critical 
issue this year to prevent thousands of small business workers from 
losing their health benefits, and to expand coverage to millions of 
uninsured Americans.
    Our coalition strongly urges Congress to enact the Small Business 
Health Fairness Act of 2005 (S. 406), bipartisan legislation which 
would bring much needed competition to the small group health insurance 
market. Congress should approve the AHP bill this year to expand access 
to health benefits for small businesses and the self-employed.

The Need for Association Health Plans

    The Small Business Health Fairness Act of 2005 would help achieve 
the goal of providing Fortune 500-style health benefits to working 
families employed by small businesses. Through this legislation, AHPs 
will empower our Nation's entrepreneurs with the same tools that large 
employers and unions currently enjoy under the Employee Retirement 
Income Security Act (ERISA) making health coverage affordable for 
working families. These tools are:

     Economies of scale and increased bargaining power for 
small employers;
     Administrative savings from having one uniform set of 
rules;
     The option of self-funding health benefits;
     Health benefit design flexibility;
     Increased competition in health insurance markets.

    AHPs can reduce health insurance costs by 15-20 percent by allowing 
small businesses to join together nationwide to obtain the same 
economies of scale, bargaining clout, and administrative efficiencies 
now available to employees in large employer and union health plans. 
New coverage options will promote greater competition and more choices 
in health insurance markets. In order to make sure benefits for small 
business workers are secure, the legislation also contains tough 
solvency standards.
    The Small Business Health Fairness Act is the only proposal before 
Congress which will put small business workers on a level playing field 
with employees in large corporations or union health plans. Right now, 
small business workers are second-class citizens when it comes to 
health benefits. On average, workers in firms with less than 10 
employees pay 17 percent more for a given health benefit than workers 
employed in a large company. This is because small businesses don't 
have access to the type of economies of scale, bargaining power and 
administrative savings that corporate and union plans now have. The AHP 
legislation will help rectify this inequity by leveling the playing 
field between workers in small and large businesses.
    We estimate that AHPs, through the enactment of S. 406, can reduce 
the cost of health benefits by 15-20 percent for small business 
workers. We know this because association plans have already proven 
they can deliver savings compared with the cost of small employers 
purchasing directly from an insurance company. For example, the AHP 
sponsored by ABC for nearly 45 years, which operated nationally, had 
total administrative expenses of 13\1/2\ cents (13.5 percent) for every 
dollar of premium. These costs included all marketing, administration, 
insurance company risk, claim payment expenses and State premium taxes. 
Alternatively, small employers who purchase coverage directly from an 
insurance company can experience total expenses of 25 to 35 cents (25-
35 percent) for every dollar of premium. Moreover, any profit generated 
by an AHP in a given year does not go to the stockholders of the 
insurance company, but rather stays in the plan and inures to the 
benefit of participants by keeping costs lower in the future.
    ABC successfully operated an Association Health Plan through the 
ABC Insurance Trust. Because of the overwhelming costs in trying to 
comply with overlapping, inconsistent and often incompatible State 
laws, our health insurance carrier was forced to drop their AHP 
coverage. Today, ABC continues to provide a full array of insurance 
benefits, but has been forced to work with multiple health insurance 
providers. ABC now serves as a broker, providing our membership with 
the most competitive carriers and rates in their area. ABC is a perfect 
example of how a trade or professional association, serving as a 
purchasing pool for employers, can have a significant impact upon the 
small employer health insurance market in both price and design.
    The ABC Insurance Trust was founded in 1957 by five contractors who 
could not afford group health insurance for their employees in the open 
market due to their size. Until 1999, the ABC Insurance Trust served as 
a voluntary purchasing pool for members of the association. An 
important component of the plan's long-term success was that it was 
guided by contractor members who serve as trustees and fiduciaries 
under the plan. As participants in the program, they acted in the best 
interest of their fellow members and their employees. Participation by 
the board of trustees is a key ingredient in aggregating the voice of 
employers to negotiate price and coverage with insurance carriers and 
other providers.
    ABC's Association Health Plan program offered HMOs, PPOs, and 
traditional health insurance plans. All of ABC's plans provided 
wellness benefits with coverage for physicals and annual check ups. ABC 
continues to offer dental coverage, group life insurance, and 
disability programs to serve members of the association. A majority of 
those covered work for small construction firms with 10-20 employees.
    ABC's Insurance Trust operates in full compliance with ERISA 
reporting requirements, with the Consolidated Omnibus Reconciliation 
Act (COBRA) of 1985 and with the Health Insurance Portability and 
Accountability Act (HIPAA) of 1996. Complying with the Federal HIPAA 
legislation requires ABC and other associations to provide open access 
to all members and provide credit for prior coverage. In fact, 
Association Health Plans are specifically referenced and defined in the 
HIPAA legislation and are required to take all members under HIPAA 
guidelines.
    The inability of States to provide a regulatory environment in 
which associations can serve as a source of affordable health benefits 
for small business workers is a real tragedy. Bona fide trade 
associations have an established infrastructure that allows them to 
communicate with members more effectively because of their pre-
established relationships. This unique structure allows associations to 
add value to their members and workers that other organizations or 
purchasing pools cannot duplicate. AHPs are capable of offering 
valuable options by providing additional benefits over and above what 
many insurance companies provide today. Associations can successfully 
tailor the products and services specifically for the needs of their 
members.
    Workers in small businesses desperately need a viable mechanism to 
band together to increase their bargaining clout and create more 
competition in health insurance markets. This is true more so today 
than ever before due to the huge wave of consolidation among health 
insurance companies and hospitals. Recent mergers of health insurance 
companies have reduced competition and alternatives for small employers 
who seek access to quality and affordable health insurance. In fact, a 
survey of State insurance commissioners conducted by the General 
Accounting Office (GAO) at the request of Senator Kit Bond (R-MO) found 
disturbing levels of concentration on the small group health insurance 
markets, with market shares of nearly 90 percent among the five largest 
companies in 7 States.
    Dr. James Robinson, Professor of Health Economics at the University 
of California, Berkeley, calculates that the top three health insurance 
companies control two-thirds or more of the healthcare business in all 
but 14 States. (Robinson, James C., Consolidation and the 
Transformation of Competition in Health Insurance, Health Affairs, Vol. 
23, No. 6 (Nov. /Dec. 2004)). Robinson compares those numbers with 
2000-2003 financial results of the top five national insurance firms. 
His research shows a decline in the percent of each premium dollar that 
goes to pay medical claims, while insurance companies have enjoyed 
double digit growth in premiums, earnings and equity share prices. 
Ultimately, Robinson contends that the health insurance industry will 
only be revitalized through product innovation and further competition.
    Today, there is a great need to bring more competition back into 
the system rather than continually reducing it. By providing more 
options and choices for small employers, the AHP legislation will 
inject greater competition in health insurance markets, thus bringing 
down premiums and expanding health plan benefits and plan options to 
more small business workers and their families.

Rebuttal of Criticism of AHP Legislation

    I would like to address some of the criticisms of S. 406 that have 
been raised by large insurance companies and State insurance 
commissioners, who have a vested interested in maintaining the status 
quo. First, opponents claim that AHPs will ``cherry pick'' the market 
and only benefit healthier groups of people. But the assumptions under 
which this argument is made do not hold up to scrutiny.
    AHP legislation will not result in cherry picking for the following 
reasons:

     The Small Business Health Fairness Act of 2005 explicitly 
prohibits association health plans from AHPs from denying coverage to 
any eligible participants based on the health status of an individual 
employer or employee. Thus, it will not be possible for AHPs to 
``cherry pick'' because sick or high risk groups or individuals cannot 
be denied coverage;
     The bill contains strict requirements under which only 
bona fide professional and trade associations can sponsor an AHP. These 
organizations must be established for purposes other than providing 
health insurance for at least 3 years. Thus, an AHP cannot ``select a 
population that is healthier than those in other regulated pools.'' The 
bill strictly prohibits ``sham association plans'' set up by insurance 
companies in the past as a front group aimed at cherry picking the 
market;
     Opponents' allegations about adverse selection rest on the 
mistaken assumption that small businesses will offer only ``bare 
bones'' benefit packages through AHPs. There is broad agreement that 
``bare bones'' plans, wherever they have been tried, have failed due to 
lack of demand. This is because small business workers want Fortune-500 
style benefits like those enjoyed by workers in large companies. Also, 
small businesses must offer benefit options comparable to those offered 
by large companies if they are going to attract and retain quality 
employees;
     Adverse selection that currently exists in State markets 
will be greatly reduced when younger, healthier workers employed in 
small businesses who are now uninsured are able to obtain coverage that 
is affordable;
     The bill gives small businesses the ability to offer the 
same type of benefit packages now available to health plans established 
by large corporations and labor unions;
     Non-profit associations exist to serve their members. If 
they attempt to exclude members to avoid higher risks, or do not offer 
attractive benefit options, their mission is fundamentally compromised 
and they will not be able to compete in the marketplace;

    The other major criticism of AHP made by opponents of this 
legislation is that benefits offered by AHPs will not be secure. This 
ignores two facts: First that AHPs under this legislation are 
fundamentally different from MEWA health plans which operate under 
Federal and State laws; and second, it ignores the strong solvency 
standards required for AHPs under the bill, which will increase 
consumer protections for many small business workers. The bill requires 
the following solvency provisions for self-funded AHPs:

     Claims reserves certified by a qualified actuary;
     Minimum surplus requirements;
     Both specific and aggregate stop-loss insurance;
     Indemnification insurance to ensure that all claims are 
paid;
     AHPs must register with the State in which they are 
domiciled;
     AHPs must abide by strict disclosure and actuarial 
reporting procedures; and
     The bill provides severe criminal and civil penalties to 
combat fraud.

    Indeed, a former Inspector General at the Department of Labor has 
testified before Congress that the new enforcement tools for regulators 
contained in this legislation will help reduce health insurance fraud. 
Thus, allegations that health coverage obtained through AHPs will not 
be secure ignore these strong protections contained in the bill.

Conclusion

    In conclusion, the 12 million employers and more than 80 million 
employees represented by the AHP Coalition strongly urge Congress to 
pass, and the President to sign the Small Business Health Fairness Act 
of 2005 into law. Association Health Plans provide affordable health 
coverage to small businesses, and extend coverage to uninsured people. 
While AHPs are not the only solution to America's healthcare crisis, 
AHPs are an essential component of the solution. AHPs are important for 
many working families employed in small businesses who otherwise could 
not afford coverage. Passage of the Small Business Health Fairness Act 
of 2005 will ensure that employees of small businesses receive the 
affordable, high quality healthcare coverage they both need and 
deserve.
    I appreciate this opportunity to testify before this committee on 
an issue of vital importance to our membership and small business 
owners across the country. We look forward to continuing a constructive 
dialogue on how to increase access to affordable and competitive health 
insurance for small businesses. I would be happy to answer any of the 
questions the committee may have.
           organizations supporting association health plans
    The following organizations, representing over 12 million employers 
and 80 million workers, strongly support S. 406 and H.R. 525, the Small 
Business Health Fairness Act of 2005, bipartisan legislation to 
strengthen and expand Association Health Plans (AHPs). This legislation 
will provide workers employed in small businesses and the self-employed 
gain access to Fortune 500-style health benefits now enjoyed by workers 
in corporate and labor union health plans.
    Adhesive and Sealant Council, Air Conditioning Contractors of 
America, American Alliance of Service Providers, American Apparel & 
Footwear Association, American Association of Advertising Agencies, 
American Association of Engineering Societies, American Association of 
Franchisees and Dealers, American Association of Small Property Owners, 
ABL--America's Wine, Beer, and Spirit Retailers, American Bakers 
Association, American Concrete Pumping Association, American Council of 
Engineering Companies, American Disc Jockey Association, American 
Electronics Association, American Foundry Society, American Furniture 
Manufactures Association, American Institute of Chemical Engineers, 
American International Automobile Dealers Association, American Hotel 
and Lodging Association, American Lighting Association, American 
Nursery and Landscape Association, American Rental Association, 
American Road and Transportation Builders Association, American Small 
Businesses Association, American Society of Association Executives, 
American Society of Civil Engineers, American Society of Home 
Inspectors, American Society of Mechanical Engineers, Board on Member 
Interests & Development, American Staffing Association, American 
Textile Machinery Association, American Veterinary Medical Association, 
American Wholesale Marketers Association, Americans for Tax Reform, 
AOMALLIANCE, Archery Trade Association, Associated Builders and 
Contractors, Associated General Contractors of America, Associated 
Prevailing Wage Contractors, Inc., Association for Manufacturing 
Technology, Association of California Water Agencies, Association of 
Equipment Manufacturers, Association of Independent Maryland Schools, 
Association of Ship Brokers and Agents, Association of Suppliers to the 
Paper Industry, Automotive Aftermarket Industry Association, Automotive 
Aftermarket Association Southeast, Automotive Service Association, 
Automotive Undercar Trade Organization, Automotive Wholesalers 
Association of New England, Automotive Parts & Services Association, 
Bowling Proprietors' Association of America, California Motor Car 
Dealers Association, California Society of CPAs, California/Nevada 
Automotive Wholesalers Association, Center for New Black Leadership, 
Central Service Association, Chesapeake Automotive Business 
Association, Cleveland Automobile Dealers Association, Club Managers 
Association of America, Christian Schools International, Coca Cola 
Bottlers Association, Communicating for Agriculture, Construction 
Management Association of America, Consumer Specialty Products 
Association, Deep South Equipment Dealers Association, Electronics 
Representatives Association, Insurance Trust, Far West Equipment 
Dealers Association, Farm Equipment Manufacturers Association, 
Financial Executives International, Financial Planning Association, 
Food Marketing Institute, GrassRoots Impact, Hearth, Patio and Barbecue 
Association, Hispanic Business Roundtable, Independent Electrical 
Contractors, Independent Office Products & Furniture Dealers 
Association, Independent Stationers, Inc., Institute of Electrical and 
Electronics Engineers--United States of America, International 
Association of Professional Event Photographers, International 
Foodservice Distributors Association, International Franchise 
Association, International Housewares Association, Iowa Automobile 
Dealers Association, Iowa-Nebraska Equipment Dealers Association, The 
Latino Coalition, Mason Contractors Association, Material Handling 
Equipment Distributors Association (MHEDA), Metal Manufacturers' 
Education and Training Alliance, Midwest Automotive Industry 
Association Midwest Equipment Dealers Association, Motor & Equipment 
Manufacturers Association, NAMM, the International Music Products 
Association, National Association for the Self-Employed, National 
Association of Chemical Distributors, National Association of Community 
Health Centers, National Association of Computer Consultant Businesses, 
National Association of Convenience Stores, National Association of 
Home Builders, National Association of Manufacturers, National 
Association of Plumbing-Heating-Cooling Contractors, National 
Association of Realtors, National Association of Theatre Owners, 
National Association of Wholesaler-Distributors, National Association 
of Women Business Owners, National Automobile Dealers Association, 
National Black Chamber of Commerce, National Burglar and Fire Alarm 
Association, National Cattlemen's Beef Association, National Club 
Association, National Concrete Masonry Association, National Council of 
Agricultural Employers, National Federation of Independent Business, 
National Franchise Association, National Funeral Directors Association, 
National Lumber and Building Material Dealers Association, National 
Newspaper Association, National Office Products Alliance, National 
Paint and Coatings Association, National Portable Storage Association, 
National Precast Concrete Association, National Rental Association, 
National Retail Federation, National Restaurant Association, National 
Roofing Contractors Association, National Spa and Pool Institute, 
National Society of Accountants, National Society of Professional 
Engineers, National Sporting Goods Association, National Systems 
Contractors Association, National Tile Contractors Association, 
National Tooling & Machining Association, National Utility Contractors 
Association, Nebraska New Car and Truck Dealers Association, New Mexico 
Automotive Parts and Service Association, New York State Automotive 
Aftermarket Association, North American Die Casting Association, North 
American Equipment Dealers Association, North American Retail Dealers 
Association, North Dakota Automobile and Implement Dealers Association, 
Northeastern Retail Lumber Association, Office Furniture Dealers 
Alliance, Ohio Valley Automotive Aftermarket Association, Outdoor 
Industry Association, Piano Technicians Guild, Precision Machine 
Products Association, Precision Metalforming Association, Printing 
Industries of America, Printing Industries of Maryland, Process 
Equipment Manufacturers' Association, Professional Detailing 
Technicians Association, Professional Golfers' Association of America, 
Professional Photographers of America, Retailers Bakery Association, 
Service Station Dealers of America and Allied Trades, Self Insurance 
Institute of America, Small Business Survival Committee, Society of 
American Florists, Society of the Plastics Industry, Society of 
Professional Benefit Administrators, Southern Equipment Dealers 
Association, Southeastern Equipment Dealers Association, Southeastern 
Farm Equipment Dealers Association, Southwestern Association, Specialty 
Equipment Market Association (SEMA), Snack Food Association, Student 
Photographic Society, Textile Rental Services Association of America, 
The Association Healthcare Coalition, Timber Operators Council 
Management Services, Timber Products Manufacturers Association, Tire 
Industry Association, United States Federation of Small Businesses, 
Inc., U.S. Chamber of Commerce, U.S. Hispanic Chamber of Commerce, U.S. 
Pan Asian America Chamber of Commerce, Vermont Automobile Dealers 
Association, Virginia Bankers Association, Washington Area New 
Automobile Dealers Association, Western Growers Association, Women 
Impacting Public Policy, Wisconsin Automobile & Truck Dealers 
Association, World Wide Insurance Services, Inc.

    The Chairman. Ms. Ignagni?
    Ms. Ignagni. Thank you, Mr. Chairman, members of the 
committee. It is a pleasure to be here this morning and a 
pleasure to be part of this distinguished panel.
    The subject of this hearing is to improve access to 
healthcare, affordable access for small business. We understand 
the committee is trying to assemble a menu of strategies that 
will expand access, reduce costs, and what we have tried to do 
in our testimony today is first discuss the many dimensions of 
the cost problem. The best way to make this point is to use the 
balloon analogy. As you press down on one side the other gets 
larger. What we have tried to do is give you a menu of 
strategies that will shrink the balloon.
    Essentially there are six problems. They are distinct, but 
they are all interrelated. First we have price increases in 
healthcare. We provided very strong data that suggests that we 
did a very good job in the 1990s bringing down healthcare 
costs, bringing 5 million employees into the system that 
heretofore did not have it. We had a discussion about those 
tools and techniques under the heading of Patient Protection. 
We were asked by the Members of the Congress, individuals in 
the State legislature, to pull back on some of those tools. We 
did pull back, and not surprisingly, costs grew, making it more 
difficult for small business to come back into the system or to 
maintain access in the system.
    We have now, over the last several years, reinvented tools 
and techniques which I am going to be talking about and which 
our testimony highlights, and we are seeing some tangible 
results which we are positive about, which we think begins to 
shrink that balloon and to deal with those acute problems 
talked about by my colleagues.
    In addition to the price side, Mr. Chairman and members of 
the committee, there is also a quality issue. 50 percent 
approximately, only 50 percent of what is done today, according 
to the Rand Corporation, is classified as best practice, which 
means there is confusion and differences of opinion and lack of 
information about how best to meet patients' needs. We have 
high cost treatments. It used to be we were talking about 
hundreds of dollars. Now we are talking about thousands and 
potentially hundreds of thousands of dollars with respect to 
new devices, biologics, etc.
    We have cost shifting when we have a problem at the State 
level, particularly with Medicaid, when Government pays less. 
That means private employers pay more.
    We have a malpractice problem. $100 billion associated with 
defensive medicine, that could be reoriented toward helping 
small business.
    Transparency, consumers have information about health plans 
but almost no information about the care that is delivered by 
doctors and hospitals.
    In our testimony we have tried to give summary of where we 
are getting results in terms of pharmaceutical expenditures 
decreasing, care coordination, disease management, aligning 
payment with quality performance to improve the efficiency and 
effectiveness of the system.
    We have also provided information on SHAs. The Congress, 16 
months ago as part of the Medicare Modernization Act, 
authorized HSAs. We reported that 1 month after the regulations 
had been implemented 438,000 people were in HSAs. We are about 
to report new numbers. They will be reported in the next 2 
weeks. We are going to be showing a number of over a million, 
so we are seeing a growth in that arena.
    I would also like the committee to know that in the 
previous study in September we saw roughly a third of 
individuals purchasing HSAs had not had health insurance. That 
number is now up a little more. It is a little less than 40 
percent, and we will be reporting those data in about 2 weeks.
    We think also there are things that Government can do. We 
have talked about tax credits, particularly for low-wage 
workers and small business. We have talked about State high-
risk pools. This committee has passed important legislation, 
and we hope the Senate passes it and the Congress enacts it at 
the State level. We have talked about the importance of 
regulatory harmonization and uniformity. That the single 
fastest increase in premium cost is in the area of compliance 
cost. We have a confusing patchwork quilt all around the 
country.
    We have been working with Commissioner Praeger and her 
colleagues at the NAIC and your colleagues here in the Senate 
and the House to try to get movement going toward regulatory 
harmonization. We have talked about medical liability reform. 
We have talked about tech assistance and effectiveness 
analysis. We need to begin to think about strategies, public/
private strategies to move on that, and we have talked about 
encouraging transparency.
    Finally, we have also commented on AHPs. In our view it is 
an invitation for adverse selection. We are concerned about the 
potential, the strong evidence to suggest that--with all due 
respect to the goals of the individuals that have proposed this 
strategy and to my colleagues' observations, we understand that 
folks are desperately trying to solve the problems of small 
business and we are very sympathetic, but in our view it will 
exacerbate the problems in the name of potentially helping only 
a few. The Congressional Budget Office has indicated that we 
would see that 80 percent of individuals and small business 
would have an increase. The Academy of Actuaries has raised 
concerns about the effectiveness and the stability of those 
funds, and we are hoping that those will be issues and data 
that the committee takes into consideration.
    So, Mr. Chairman, we want to work in partnership with the 
committee. We want to provide solutions. We want to provide 
answers and we want to help you sort through these very 
difficult problems so we can shrink that balloon.
    Thank you.
    The Chairman. Thank you very much.
    [The prepared statement of Ms. Ignagni follows:]

                  Prepared Statement of Karen Ignagni

    Good morning, Mr. Chairman and members of the committee. I am Karen 
Ignagni, President and CEO of America's Health Insurance Plans (AHIP), 
which is the national trade association representing nearly 1,300 
private sector companies providing health insurance coverage to more 
than 200 million Americans. Our members offer a broad range of health 
insurance products in the commercial marketplace and also have 
demonstrated a strong commitment to participation in public programs.
    We would like to commend the committee for looking broadly at a 
wide range of options for meeting the healthcare needs of small 
employers and their employees. By widening the scope of this debate, 
you are opening the door to considering a comprehensive set of 
solutions that could improve choices for small businesses and help 
bring costs under control for all Americans. Our members are committed 
to working closely with you to identify workable strategies and to 
support your efforts.
    My testimony today will focus on four issues:

     The challenge of confronting rising healthcare costs;
     A description of what health insurance plans are doing to 
control health costs, enhance choices, and improve quality;
     Recommendations for increasing the availability of 
affordable healthcare options; and
     An analysis of the potential unintended consequences 
associated with one of the options, association health plans (AHPs), 
that has been proposed to make health coverage more affordable for 
small businesses.

         THE CHALLENGE OF CONFRONTING RISING HEALTH CARE COSTS

    The committee is starting its work in the right place--by focusing 
on rising costs and the affordability of coverage--because when 
healthcare costs outpace growth in the overall economy, businesses 
large and small find it more difficult to provide or maintain coverage. 
While we are encouraged about what we can do in the private sector to 
continue to reduce growth in healthcare spending, we believe that all 
stakeholders--including the government--have a role to play in working 
together to accomplish this objective. Evidence also strongly suggests 
that attention needs to be drawn to the efficiency and effectiveness of 
healthcare services if purchasers are to be assured that they are 
receiving maximum value for their healthcare investment.
    From 1994 through 1999, national health expenditures were in line 
with overall economic growth, because health insurance plans 
implemented a variety of tools to keep costs under control. This had a 
direct impact on the ability of employers to purchase affordable 
coverage for their employees. Indeed, the Lewin Group estimated that up 
to 5 million people \1\ who otherwise would have been uninsured were 
able to receive coverage as a result of these costs being restrained.
---------------------------------------------------------------------------
    \1\ The Lewin Group LLC, Managed Care Savings for Employers and 
Households: 1990 through 2000; 1997.
---------------------------------------------------------------------------
    As the policy debate shifted away from containing costs, 
legislative proposals at both the Federal and State levels focused on 
rolling back the mechanisms that were keeping healthcare affordable. 
This led to a new cycle of accelerating healthcare costs that has had 
an impact on all purchasers, particularly small businesses. Recognizing 
this challenge, our members have developed a new generation of cost 
containment tools that already are having a positive impact and showing 
promise for the future. For example, the rates of increase in 
pharmaceutical expenditures have significantly declined as a result of 
our members' implementation of programs to encourage greater use of 
generic drugs and other measures that encourage case management of 
chronic conditions. This progress is reflected in the most recent data 
from the Department of Health and Human Services (HHS), which projects 
that national healthcare spending increased by an estimated 7.5 percent 
in 2004--the lowest rate of increase since 2000. At the same time, 
healthcare costs still are growing faster than the overall economy.
    The Center for Studying Health System Change has noted that 
hospital prices continue to be a major factor behind increased 
spending, accounting for almost half of the annual rate of increase in 
healthcare expenditures. At the same time, innovative drugs, devices 
and other therapies--while they can provide undeniable benefits in life 
expectancy and improved quality of life--are significant cost drivers. 
Without any organized way to assess the impact of this technology or 
compare the effectiveness of various therapies, employers and their 
employees are absorbing these higher costs without information about 
what works and the conditions under which certain therapies are 
effective. As the committee begins its work on the best methods to 
ensure post-marketing surveillance, we look forward to providing 
recommendations for your consideration. In addition, we support the 
efforts of Dr. Mark McClellan, administrator of the Centers for 
Medicare & Medicaid Services (CMS), who is working with the Institute 
of Medicine (IOM) to develop the information necessary to establish 
evidence-based coverage policies for Medicare. This effort will mark an 
important and needed transition.
    As purchasers assess the impact of rising costs, they also are 
questioning whether they are getting the best value for their 
healthcare investment. Considering the Rand Corporation's finding that 
patients receive care in accordance with best practices only 55 percent 
of the time, more information about clinical effectiveness studies 
needs to be made available to physicians and other healthcare 
practitioners. As the committee reviews the work of the National 
Institutes of Health (NIH), we are prepared to offer recommendations 
for ensuring that information generated by this country's robust system 
of clinical trials is more quickly translated into everyday medical 
practice.
    Cost shifting is another issue with significant implications for 
healthcare purchasers. The costs associated with uncompensated care--
along with funding shortfalls in government health programs--are major 
causes of cost shifting. This translates into higher costs for private 
sector payers, including small employers, and underscores the 
importance of ensuring adequate funding for Medicaid and other 
government health programs.
    On the regulatory side, the existing patchwork quilt of regulations 
frequently prevents employers from designing benefit packages that they 
can afford and, as a result, sometimes forces them to make the decision 
not to provide healthcare benefits. We have been working with the 
National Association of Insurance Commissioners (NAIC), your colleagues 
in the Senate Banking, Housing and Urban Affairs Committee, and the 
House Financial Services Committee to assess the impact of the lack of 
uniformity in regulation, the administrative burdens associated with 
exploding compliance costs, and recommendations for improvement.
    Similarly, the country is not well served by the current medical 
liability system. This system creates incentives for excessive 
litigation--thereby delaying the resolution of disputes, fostering a 
culture of blame, and forcing doctors to practice ``defensive 
medicine'' that diverts up to $100 billion annually and fails to reduce 
medical mistakes. Patients deserve an improved system that promotes 
quality; resolves disputes in a fair, fast and effective manner; and 
lifts the burden of defensive medicine from healthcare providers.

  PRIVATE SECTOR COST CONTAINMENT AND QUALITY IMPROVEMENT INITIATIVES

    In response to the latest cycle of rising healthcare spending, 
health insurance plans have been working aggressively to improve 
quality and control costs, while also meeting consumer demands for 
choice, through a variety of innovative strategies and initiatives.

Pharmacy Benefit Management

    Health insurance plans use a wide range of pharmacy benefit 
management tools and techniques to reduce out-of-pocket costs for 
members and improve quality by reducing medication errors. These tools 
and techniques include:

     programs that encourage the use of generic drugs;
     step therapy programs that promote proven drug therapies 
before moving to newer, different treatments that are not necessarily 
better;
     negotiated discounts with pharmacies that participate in a 
plan's network;
     disease management techniques that include practice 
guidelines to encourage the use of the most appropriate medications; 
and
     appropriate use of mail-service pharmacies.

    The success of these strategies is clearly evidenced by new data, 
released in December 2004 by the Center for Studying Health System 
Change, showing that growth in prescription drug spending has dropped 
from almost 20 percent in the second half of 1999 to 8.8 percent in the 
first half of 2004. A number of studies have reinforced that these 
tools and techniques are controlling costs in public programs:

     A 2003 study, conducted by Associates and Wilson on behalf 
of AHIP, found that the PACE program in Pennsylvania--the largest State 
pharmacy assistance program in the Nation--could save up to 40 percent 
by adopting the full range of private sector pharmacy benefit 
management techniques.
     Another 2003 study, conducted by the Lewin Group for the 
Center for Health Care Strategies, found that Medicaid managed care 
plans reduced prescription drug costs by 15 percent below the level 
States would otherwise have experienced under Medicaid fee-for-service 
programs. Plans achieved these savings by performing drug utilization 
review, establishing pharmacy networks, and encouraging patients to 
take the most appropriate medications.
     The Government Accountability Office (GAO) reported in 
January 2003 that pharmacy benefit management techniques used by health 
plans in the Federal Employees Health Benefits Program (FEHBP) resulted 
in savings of 18 percent for brand-name drugs and 47 percent for 
generic drugs, compared to the average price customers would pay at 
retail pharmacies.

    Our members also are taking steps to improve patient safety and 
reduce the risk of medication errors. Health insurance plans have 
created pharmacy information systems which, as a matter of standard 
practice, alert pharmacists when the combination of two or more of a 
patient's medications could lead to an adverse drug reaction. Software 
that plans use in their pharmacy networks is programmed to identify 
hundreds of potentially harmful drug interactions, including those that 
could occur due to the patient's age or gender. When the system 
recognizes a dangerous combination of drugs or contraindications, an 
on-screen alert is sent to the pharmacist who can then call the 
patient's doctor to find a safer alternative.

Transitioning to Evidence-Based Medicine

    Health insurance plans are working aggressively to promote 
evidence-based medicine. This term refers to the widespread adoption in 
everyday clinical practice of treatments and therapies that are 
consistent with the latest scientific evidence on what works best and 
reduces the number of inappropriate services that have little or no 
value to patient outcomes.
    As part of this effort, our members are working with physician 
groups to increase the use of quality technology assessment and 
clinical practice guidelines that help clinicians make decisions about 
the most appropriate course of treatment for patients with a specific 
disease or symptoms. Furthermore, AHIP has collaborated with the Agency 
for Healthcare Research and Quality (AHRQ) and the American Medical 
Association to establish a National Guideline Clearinghouse--
www.guideline.gov--which is a web-based resource that gives patients 
and providers access to the latest medical evidence on effective 
treatments and technologies. The National Guideline Clearinghouse 
provides access to both summaries and the full text of clinical 
practice guidelines, an electronic forum for exchanging information on 
best practices, and a tool that allows users to generate side-by-side 
comparisons for any combination of two or more guidelines.

Disease Management

    Virtually all health insurance plans have implemented disease 
management programs to improve the coordination and quality of care for 
patients with diabetes, asthma, congestive heart failure, and other 
chronic diseases. These programs improve patient outcomes and 
satisfaction--and help control costs--by ensuring that these patients 
receive effective care on an ongoing basis so that they can avoid 
emergencies and unnecessary hospitalizations. A number of research 
studies have demonstrated that these programs are effective.
    A study published in Medical Care \2\ evaluated the impact of a 
heart disease management program on hospital service utilization, as 
well as the potential costs savings over and above the cost of 
delivering the program. This randomized controlled study included 443 
women aged 60 or older with diagnosed cardiac disease who were seen by 
a physician approximately every 6 months. The results demonstrated that 
hospital cost savings exceeded program costs by a ratio of nearly 5 to 
1. Moreover, program participants experienced 46 percent fewer 
inpatient days and 49 percent lower inpatient costs than the control 
group, while no significant differences between the two groups were 
reported in emergency room utilization.
---------------------------------------------------------------------------
    \2\ Wheeler, J. (2003). Can a disease self-management program 
reduce healthcare costs? The case of older women with heart disease. 
Medical Care. 41(6): 706-715.
---------------------------------------------------------------------------
    Another study, published in the journal Disease Management,\3\ 
examined the cost savings associated with a disease management program 
for three conditions (asthma, diabetes, and coronary artery disease). 
The preliminary results of this study show that the program produced a 
return on investment of $2.84 for each $1.00 invested.
---------------------------------------------------------------------------
    \3\ Cousins, M. & Liu, Y. (2003). Cost savings for a preferred 
provider organization population with multi-condition disease 
management: Evaluating program impact using predictive modeling with a 
control group. Disease Management. 6(4): 207-217.
---------------------------------------------------------------------------
    Yet another study, published in Managed Care,\4\ examined a large 
health management program for 120,000 individuals having, or being at 
high risk for, one or more of 17 chronic conditions or diseases. 
Findings for the first year indicate:
---------------------------------------------------------------------------
    \4\ Gold, W. & Kongstvedt, P. (2003). How broadening DM's focus 
helped shrink one plan's costs. Managed Care Magazine. (accessed on 
November 2, 2004) www.managedcaremag.com.

     a return of at least $2.90 for every dollar invested in 
the program;
     average overall savings of $41 per program member per 
month;
     14 percent fewer hospital admissions;
     18 percent fewer emergency room visits;
     significant improvement in diabetics' HbA1c levels; and
     absenteeism from work or school was reduced significantly 
(7-11 percent) among members participating in the program.

Health Information Technology

    By implementing health information technology, our members are 
helping consumers make well-informed decisions about their healthcare, 
while also achieving greater efficiencies and cost savings throughout 
the healthcare system.
    Health insurance plans have developed a wide range of health 
information technology initiatives, including secure Web sites that 
allow their members to quickly locate information about their benefits, 
check the status of claims, contact member services, or learn about 
preventive care, drug interactions, disease management, and other 
health issues. Other plans have created on-line pharmacies that allow 
enrollees to refill their prescriptions and access information about 
their medications. Another strategy implemented by a number of 
companies provides opportunities for members to receive health 
information from doctors and nurses through Web sites and e-mail.
    Our members also are implementing information technology to improve 
claims processing, offer better customer service, decrease 
administrative costs, and enhance their overall efficiency. An October 
2003 report by the GAO noted that health information technology allowed 
health insurance plans to reduce claims processing costs, improve the 
quality of claims data, improve staff productivity, and increase 
provider and customer satisfaction.\5\
---------------------------------------------------------------------------
    \5\ Information Technology Benefits Realized for Selected Health 
Care Functions.'' GAO October 2003.
---------------------------------------------------------------------------
    The GAO study also noted that plans' implementation of health 
information technology has resulted in improved clinical care for 
members. For example, one plan reported that diabetic retinal exams 
increased from 71 percent to 93 percent and the rate of adolescents 
receiving a flu vaccination increased from 29 percent to 43 percent due 
to information technology that generated reminders for health 
screenings.
    AHIP and its members are committed to developing an interconnected 
healthcare system that improves personal health and the delivery of 
care, enhances healthcare quality, and increases productivity. We are 
committed to working with all stakeholders and the Office of the 
National Coordinator for Health Information Technology to develop 
uniform interoperability standards and business rules.

Redesigning Payment Models

    Many health insurance plans are redesigning their payment models to 
reward healthcare providers for delivering high quality care. Paying 
for quality is a promising strategy for improving overall wellness and 
advancing evidence-based medicine, thereby reducing unnecessary follow 
up care and improving efficiency--which in turn will lead to better 
health outcomes and greater value. This is a significant change in a 
system that historically has paid providers the same amount, regardless 
of the quality of care they deliver.
    Under these new payment models, many health insurance plans are 
offering financial awards to physicians in the form of increased per-
member-per-month payments or non-financial rewards in the form of 
public recognition, preferential marketing or a reduction in 
administrative requirements. Additionally, some plans are beginning to 
tier provider networks and offer consumers reduced co-payments, 
deductibles, and/or premiums for using providers deemed to be of higher 
quality (based on select performance measures).
    Let me briefly highlight two examples of the innovative programs 
our members are implementing:

     One health insurance plan has developed a program that 
includes: (1) an online PPO physician report card that allows 
physicians to benchmark their performance compared to their peers; (2) 
a physician recognition program that provides rewards for superior 
performance on clinical, administrative and pharmacy indicators, and 
(3) information resources provided to the PPO physician network to 
support quality improvement.
     Another of our members has developed an initiative to 
improve enrollee health through improved access/timeliness of care, 
preventive screening, and adherence to evidence-based guidelines for 
the treatment of chronic conditions. Under this initiative, a physician 
advisory group helps to develop ``performance targets'' in key areas, 
such as patient satisfaction, emergency room utilization/access, 
access/office visits, breast and colorectal screening, immunizations, 
and treatment for diabetes and asthma. Physicians then earn an award 
based on their level of performance: high, average and below average.

New Products: Bringing HSAs to Employers and Individuals

    Besides using tools to promote quality and cost savings on an 
ongoing basis, health insurance plans are responding to the strong 
interest both employers and consumers have expressed in Health Savings 
Accounts (HSAs) as a new option for affordable health coverage.
    This option allows beneficiaries to cover their healthcare expenses 
using a tax-free account in combination with a high-deductible health 
plan. Although this is a relatively new option that was authorized only 
16 months ago by the Medicare Modernization Act of 2003 (MMA), more 
than 90 companies already offer high-deductible health plans that can 
be purchased in combination with HSAs. A wide variety of HSA products 
are available to consumers--including open access plans, preferred 
provider organizations (PPOs), and point-of-service (POS) plans. Health 
insurance plans that have contracts with providers can maximize the 
savings they deliver for employers and consumers.
    Significantly, today's HSA products are more widely available and 
more popular than previous high-deductible options that Congress 
enacted in 1996. This is true for several reasons. First, the MMA 
allows any employer or individual to establish an HSA and make 
contributions to the account. Also, the product design for HSAs is much 
more flexible, particularly with respect to deductibles and out-of-
pocket costs, and expenditures for preventive care and certain disease 
management services do not count toward an individual's deductible. 
Although HSAs were authorized by Congress at the Federal level, a 
number of States also have taken action to remove barriers to these new 
products.
    Last year, an AHIP survey found that approximately 438,000 persons 
had established HSAs as of September 2004. This survey also indicated 
that among individuals who set up HSAs, 30 percent were previously 
uninsured and nearly half were over the age of 40. A more recent 
survey, which we will release soon, indicates that more than 1 million 
HSAs had been established as of March 2005. This reflects a more than 
two-fold increase in just 6 months. Additional findings from our survey 
will shed light on this dramatic growth in HSA products and their 
potential for extending affordable coverage to more Americans.
    AHIP and the Small Business Administration (SBA) have jointly 
developed a Web site--HSADecisions.org--to serve as a clearinghouse and 
educational resource for consumer information on HSAs. This site hosts 
an online Learning Center that features a library and glossary to help 
consumers and small businesses better understand available HSA options. 
HSADecisions.org also provides a list of insurers that offer high 
deductible health plans that can be purchased in combination with HSAs. 
The site is updated on a regular basis to ensure that consumers have 
access to the most recent and most accurate information.

  RECOMMENDATIONS FOR EXPANDING THE AVAILABILITY OF AFFORDABLE HEALTH 
                              CARE OPTIONS

    As the committee looks at cost drivers, assesses what can be done 
to improve the effectiveness of the healthcare system, and reviews 
private sector strategies that are being developed to reduce costs and 
improve quality, our members would like to offer eight principles for 
your consideration.

1. Modernize and Maximize the Effectiveness of the Regulatory System

     Encourage choice with uniform rules in the small group 
market: A common set of rules would encourage competition, enhance 
consumer choice, and provide greater predictability for employers. The 
solution is not to waive all requirements for particular groups, but to 
establish an appropriate and consistent framework for all participants 
to ensure that small employers have maximum options to meet their 
needs. This means that the Federal and State Governments need to work 
together to encourage ``best practice'' regulation. This process has 
begun with the development of draft legislation--known as the State 
Modernization and Regulatory Transparency (SMART) Act--that would 
promote uniformity in plan processes, particularly internal and 
external review of coverage disputes, speed-to-market and market 
conduct standards.
     Encourage prompt product approval and consistency in 
regulatory processes. Steps should be taken to ensure that States adopt 
a mechanism by which health insurance plans can bring innovative 
products to the market in a timely manner. Ideally, the Federal 
Government should encourage States to be forthcoming regarding their 
standards for policy rate and form filing requirements and to abandon 
unwritten ``desk-drawer rules.'' This ultimately will create oversight 
mechanisms that allow companies to provide consumers with the products 
they need in a timely manner.
     Establish an independent advisory commission to evaluate 
the impact of mandates on healthcare costs and quality. Such a 
commission could advise policymakers on the safety and effectiveness of 
proposed and existing mandated health benefits, and assess whether 
proposed mandates result in improved care and value. The commission's 
findings also could inform public program coverage and decision-making 
to ensure that evidence-based standards are applied consistently in 
Medicare, Medicaid, and other public programs.
    2. Pass S. 288, the ``State High Risk Pool Funding Extension Act.'' 
AHIPs Board of Directors approved a statement in June 2004 indicating 
support for Federal funding for State high-risk pools to cover 
individuals who have unusually high healthcare costs. This legislation 
fits within the parameters of what Congress is able to accomplish from 
a budgetary standpoint at this time. We applaud the committee for 
taking action earlier this year to approve S. 288. This proposal is one 
of the next steps Congress should take as part of a long-term strategy 
for strengthening our Nation's healthcare safety net.
    3. Expand Tax Credits to Encourage the Purchase of Health Care 
Coverage. To address the needs of working Americans who are uninsured 
and ineligible for public programs, Congress can help make health 
coverage more affordable by expanding tax credits for low-income 
persons. This approach will be particularly helpful to Americans who do 
not have access to employer-sponsored coverage and to those who decline 
such coverage because of the high cost. Moreover, tax credits could 
prompt more small businesses to offer employee health benefits. The 
Employee Benefits Research Institute (EBRI) \6\ has reported that among 
small employers that do not offer employee health benefits, 71 percent 
would be more likely to seriously consider offering health benefits if 
the government provided assistance with premiums.
---------------------------------------------------------------------------
    \6\ Employee Benefit Research Institute, Small Employers and Health 
Benefits: Findings from the 2002 Small Employer Health Benefits Survey, 
January 2003.
---------------------------------------------------------------------------
    4. Develop a Framework for Evaluating Technologies for 
Effectiveness and Efficiency. To address the rapid development of new 
procedures, devices and other technologies, a public-private framework 
should be established to evaluate and compare the effectiveness and 
efficiency of these technologies. Moreover, new post-marketing 
surveillance models should be developed to assess the appropriate use 
and long-term value of certain breakthrough drugs, devices and 
biologicals.
    5. Invest in Cost Effectiveness Research. While the Federal 
Government invests heavily in clinical research, it makes only modest 
investments in research that compares the relative effectiveness of 
existing versus new therapies that are designed to treat the same 
condition. The Federal Government should assign a high priority to this 
kind of research and, furthermore, create a National Center for 
Effective Practices to ensure that the results are translated into 
usable information for providers and consumers.
    6. Overhaul the Medical Liability System to Ensure Effective 
Dispute Resolution and Promote Safety and Value. The flaws in the 
current medical liability system should be addressed with reforms that 
place reasonable limits on healthcare litigation. Additionally, patient 
safety legislation is needed to establish legal protections for medical 
error information reported by healthcare providers, and to permit the 
aggregation of data that can be used to determine the causes of medical 
errors and develop strategies for improving patient safety. Also needed 
is a uniform, national administrative process to resolve malpractice 
disputes between patients and healthcare providers in a fair and 
efficient manner, thus avoiding the need for litigation as often as 
possible.
    7. Encourage a Uniform Approach for Quality Measurement and 
Reporting. The Institute of Medicine (IOM) has made a strong case that 
patients need more information to make decisions about their healthcare 
treatment; physicians, hospitals and other healthcare professionals 
need more information to improve the quality of care they provide; and 
purchasers need more information to ensure that they are receiving 
value for their investment in healthcare benefits. Unfortunately, the 
existence of multiple and sometimes conflicting efforts to measure 
performance and report data on quality and efficiency is causing 
unintended consequences, including confusion among consumers, burdens 
on providers faced with uncoordinated data requests, and a diversion 
away from key priorities to improve quality. Leaders of the key 
healthcare stakeholder communities need to reach consensus about what 
should be measured, and how to make data aggregation and reporting 
effective and efficient. One uniform approach would be far more cost 
effective and would minimize the growing confusion associated with 
numerous measurement and data collection efforts. Critically, it also 
will help address the key issue that underlies the IOM's Crossing the 
Quality Chasm report--closing the gap between what the science 
indicates is best practice and what practitioners actually do.
    8. Encourage the Development of an Interconnected Health Care 
System and Uniform Standards. The delivery of healthcare in America is 
complex with individuals seeking care from a variety of physicians, 
hospitals, and specialists. The ultimate goal of modernizing the 
healthcare system is to improve personal health and the delivery of 
care by providing meaningful personalized information to consumers and 
providers in a usable form and in a timely manner. To achieve this aim, 
we need uniform, national standards that enable the exchange of health 
information by and between clinical electronic health record (EHR) 
systems and consumer-centric individual health records.

          UNINTENDED CONSEQUENCES OF ASSOCIATION HEALTH PLANS

    AHIP and our member companies have grave concerns about 
legislation, S. 406, that would establish special rules and exemptions 
for national and regional association health plans (AHPs). We strongly 
support the goal of developing affordable healthcare options for small 
businesses. This legislation, however, would not achieve this goal and, 
in fact, would further drive up healthcare costs and leave more 
Americans uninsured.
    I would like to preface my comments on this issue by highlighting a 
number of ``myths'' about AHP legislation and then outlining the 
``reality'' of how this legislation would harm small employers. I also 
will discuss a specific example of how the proposed AHP legislation 
would likely result in higher premiums for a typical employer.
    Myth: AHPs would reduce health premium costs for most small 
businesses.
    Reality: In fact, the Congressional Budget Office (CBO) \7\ has 
reported that AHPs would make health insurance less affordable for the 
vast majority of small businesses. According to CBO's analysis, 82 
percent of small business employees would pay higher premiums under 
AHPs. This expected outcome is closely related to the fact that the 
proposed AHPs could set up headquarters in a State without laws that 
limit how much premiums can vary for small businesses based on 
differences in employee health status. AHPs also could choose to 
operate under Federal rules that do not have these rate limits.
---------------------------------------------------------------------------
    \7\ U.S. Congressional Budget Office, Increasing Small-Firm Health 
Insurance Coverage Through Association Health Plans and HealthMarts, 
Jan. 2000.
---------------------------------------------------------------------------
                                 ______
                                 
    Myth: AHPs would cover all populations equally.
    Reality: Because AHPs could operate in the choice of environment 
most favorable to their bottom line, ``cherry picking'' of only the 
healthiest individuals would result. Although AHPs could not legally 
discriminate based upon health status, the absence of limitations on 
premium variations would ensure that quotes for small employers with a 
workforce in less than perfect health would be many times higher than 
for healthy groups. As a result, employers whose employees had incurred 
significant healthcare costs would be forced outside of the AHP. As 
soon as one or more employees of a small business experienced a serious 
illness, AHPs could drive up the group's rates and thus drive them out 
of the AHP. Ultimately, most small employers would be forced out of 
AHPs.
                                 ______
                                 
    Myth: AHPs would reduce the cost of administering health benefits.
    Reality: Each AHP would administer claims for its members. However, 
AHPs would need to recoup their administrative expenses by charging 
membership dues or by building administrative costs into the premiums. 
While some nominal savings potentially could be achieved on 
administration, in fact, small businesses most likely would end up 
paying the same or even more for administration of health benefits 
through AHPs.
                                 ______
                                 
    Myth: AHPs will operate under strong oversight.
    Reality: The legislation substitutes actuarial oversight with a 
self-policing actuarial certification and State solvency standard with 
a limited $2 million reserve. According to the GAO and the Department 
of Labor, staffing resources are completely inadequate to meet the 
challenge of the added regulatory responsibility. In addition, the 
American Academy of Actuaries concluded that the capital standards are 
inadequate for any AHP larger than 5,000 insured.
                                 ______
                                 
    Myth: AHPs would be better positioned to negotiate discounts with 
doctors and hospitals.
    Reality: Health insurance plans operating in the small group 
insurance market negotiate discounts from doctors and hospitals based 
not only on the small employer groups they cover, but rather, based on 
their entire block of business, including large employers as well as 
small groups. Because AHPs would represent small businesses only, it is 
unlikely that they could negotiate physician and hospital discounts 
that match or exceed those provided by health insurance plans covering 
both large and small employers.

Example of Premium Spike for Less Healthy Employer Groups

    In order to fully understand the implications of the pending AHP 
legislation, it is important to focus on the fact that most States have 
adopted some variation of the National Association of Insurance 
Commissioners' (NAIC) model regulating rates in the small group market. 
The NAIC model limits rate variations--to no more than 25 percent above 
or below the average rate--for similar employer groups based on claims 
experience or health status. Moreover, this model limits annual rate 
increases for any one group to 15 percent on top of the rate increase 
applied to all groups.
    The pending AHP legislation lacks this protection against wide rate 
fluctuations. That is, there is no limitation on what a group could be 
charged relative to similar groups based on health status or claims 
experience. The resulting rate swings would make small groups more 
vulnerable to catastrophic costs and make business planning less 
predictable.
    Here is a rating example based on modeling done by the Hay Group: 
Peterson's Hardware Store applies for insurance under a State law that 
has adopted the NAIC's approach of limiting rate variations based on 
health status. Peterson's is quoted an annual premium of between 
$10,000 and $16,667 (based on the maximum variation based on health 
status allowed under current law in most States). If the AHP rules were 
put in place, it would be quoted a rate between $6,000 and $28,226 
(based on no limit to the variation allowed). Only the healthiest 
groups would be quoted the lowest level of rates. The graph below shows 
this variation.
    If we assume Peterson's Hardware were eligible for the lowest rate, 
but someone became extremely ill during the year, the rates for the 
next year could change as follows. Under current law in most States, 
the rate could go from $10,000 to $11,500 (but no more), plus the 
overall trend increase--because the NAIC model limits rate increases 
based on changes in health status. Under the AHP model, the rate could 
go from $6,000 to the very top tier rate of $28,226 (plus trend), 
because there is no protection against annual increases based on health 
status.




    This example illustrates that while low rates initially may seem 
attractive to small businesses with a healthy workforce, if one of 
their workers developed a significant illness, they would face a rate 
hike from the AHP the following year. Ultimately, the result would be a 
market in which a shrinking portion of healthy businesses would be 
covered by the AHP while businesses whose workers have significant 
health needs would be driven out of the AHP. This should be a major 
concern for all committee members.
    We also urge the committee to consider the implications of allowing 
only certain entities--AHPs--to be exempted from State regulations. 
Congress should not create an unlevel playing field by granting special 
regulatory rules to specific entities that have little or no experience 
in the group and individual insurance markets. Federal legislative 
efforts should instead focus on creating consistent rules that address 
the affordability of health insurance coverage for all workers and 
their families.
    Yet another serious concern is that preemption of State law for 
AHPs could repeat the problems of the late 1980s and early 1990s when 
Multiple Employer Welfare Arrangements (MEWAs) were exempted from State 
laws. The MEWA experience exposed thousands of individuals to unpaid 
medical bills and left them with no health insurance protection. Rather 
than repeat this history, we urge Congress to consider alternatives to 
AHP legislation.
    Before closing, I want to briefly note that AHIP has launched a Web 
site--www.avoidfraud.org--which offers basic tips to help consumers 
avoid getting scammed by fraudulent, MEWA-like companies that claim to 
be health insurance plans. This site also provides consumers access to 
other relevant sources of information including the Web sites of their 
local State regulatory authorities.
    Experience demonstrates that our industry can play a significant 
role in providing purchasers with coverage alternatives that are 
affordable and effective. To the extent that State legislation 
continues to be a barrier to fulfilling that goal, we urge you to 
consider a legislative approach that solves this problem broadly, 
rather than giving preference to an untested product based on a model 
that has had such unfortunate unintended consequences in the past.

                               CONCLUSION

    AHIP and our member companies look forward to working with the 
committee to develop legislative solutions for meeting the healthcare 
needs of small employers and their workers. Our members have been 
working on creative strategies to make health coverage more affordable 
in the small-group market in a way that would avoid the many problems 
associated with AHPs. We are eager to share our ideas and contribute to 
a constructive debate on this issue.
    Thank you again for providing AHIP the opportunity to testify on 
this important legislative priority.

    The Chairman. Commissioner Praeger?
    Ms. Praeger. Thank you, Mr. Chairman. It is a pleasure to 
be here with you this morning to represent my views and the 
views of the National Association of Insurance Commissioners, 
and it is a pleasure to be here with the other committee 
members as well.
    The NAIC represents the chief insurance regulators from the 
50 States and the District of Columbia and 5 U.S. territories. 
The primary objective of insurance regulators is to protect 
consumers, and it is with this goal in mind that I comment 
today generally on the small business healthcare crisis, and in 
particular the proposal to create association health plans.
    Commissioners recognize how important it is to ensure that 
businesses have affordable and available healthcare coverage. 
Insurance is about spreading and sharing risk and not 
segmenting it. This is why the States have acted aggressively 
over the past 15 years to stabilize and to improve the small 
group market. States have required insurers to pool all of 
their small group risk by imposing rating bands to further 
spread the risk of smaller and unhealthier businesses across 
the larger population. States have created purchasing pools and 
allowed associations to provide licensed, State-regulated 
insurance products to their members.
    States continue to experiment with such initiatives as 
reinsurance, tax credits, subsidies, basic health plans for 
small businesses, and programs to promote healthier lifestyles 
and to manage diseases. As always the States are and continue 
to be laboratories for innovative ideas.
    I believe it is time to start looking at additional 
alternatives and in fact the States have been. For example, in 
Kansas this year our Governor announced a $50 million Healthy 
Kansas Initiative to expand coverage for 40,000 children and 
30,000 working parents to find ways to control cost through 
more risk sharing among small businesses and to improve the 
availability of generic drugs for low-income individuals, and 
increase the awareness of obesity and other preventable chronic 
conditions.
    As part of this initiative we in our department are working 
on a model, modeling reinsurance as part of a small group 
reinsurance feasibility study. Four alternative reinsurance 
mechanisms will be modeled with varying assumptions to quantify 
the impact of each on premium cost and small employer take-up 
rates in the Kansas market, and we actually are using actual 
claims data to do this modeling, and I think it is the first 
time something like this has been undertaken.
    One of the most recent efforts along this line is the 
Healthy New York, which utilizes a retrospective reinsurance 
mechanism, subsidized by State tax dollars, and this has 
resulted in 70,000 new insureds in the State, all low-wage 
workers and small businesses who were formerly uninsured.
    Let me just go over now some of the principles that at the 
NAIC we have agreed on when we are looking at Federal reform. 
At the Federal level the Nation's insurance regulators have 
identified 7 basic principles by which Federal health insurance 
reform legislation can be analyzed. These principles are 
intended to keep the focus on the needs of consumers and the 
true causes of the current crisis.
    1. The rights of consumers must be protected. So whatever 
we do, we have to remember that we need to make sure we are 
protecting consumers.
    2. Existing State reforms and assistance programs must be 
supported and not degraded. So reforms need to recognize the 
good things that have happened in the States and not supplant 
those.
    3. Adequate consumer education must be provided.
    4. The overarching issue of rising healthcare costs has to 
be addressed.
    5. Current cost shifting must not be exacerbated. And it is 
prevalent, it is part of the problem. We know it is existing, 
and whatever we do, we cannot create more opportunities for 
cost shifting as we try to find solutions.
    6. The position of less healthy individuals must be 
protected. We cannot price them out of the marketplace as we 
try to find solutions.
    7. Public policymakers should be aware of allowing the 
creation of insurance companies without appropriate oversight. 
There are over 10,000 insurance regulators in the States, and I 
can tell you as one of them, we have many phone calls on a 
daily basis, and over 50 percent of our phone calls daily are 
relating to insurance and availability and affordability of 
insurance. We do interact with our consumers on a very active 
and very daily basis.
    The Nation's insurance regulators oppose association health 
plan legislation because it would violate these principles that 
we have set forth. It would undermine State reform and return a 
time when companies with sick workers were rated out of the 
market. It would eliminate critical State solvency and 
licensing rules for self-insured plans, resulting in increased 
plan failures and more fraud. It would replace sound State 
oversight with unfunded and inexperienced Federal oversight 
while trusting mostly in the plans to self report any problems. 
And it would preempt important consumer protections and cut 
funding for State high-risk pools and guaranty funds.
    Studies have shown that this legislation will actually 
increase premiums for a majority of small businesses, and I 
have seen the report, the CBO report that Ms. Ignagni just 
referred to. This bill does nothing to address the rising cost 
of healthcare and it shifts the costs onto those with higher 
risks. So I do not believe, and the NAIC does not believe that 
this is a step forward.
    So in conclusion just let me say all of us recognize it is 
very important to make health insurance available to small 
employers. That is the segment that we all know in our States 
is suffering the most. However, the problem is complex, and it 
does not lend itself to easy solutions.
    The Federal Government and the States need to work with 
providers, insurers and consumers to implement true reforms 
that will curb spending and make insurance more affordable. We 
stand ready to work with our colleagues and the Members of 
Congress to draft effective reforms that will address both 
affordability and the availability issues facing small 
businesses. Together we are convinced that real solutions to 
this critical issue can be found.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    [The prepared statement of Ms. Praeger follows:]

           Prepared Statement of the Honorable Sandy Praeger

                              INTRODUCTION

    Good morning Mr. Chairman. My name is Sandy Praeger and I am 
testifying today on behalf of the National Association of Insurance 
Commissioners (NAIC). The NAIC represents the chief insurance 
regulators from the 50 States, the District of Columbia, and five U.S. 
territories. The primary objective of insurance regulators is to 
protect consumers and it is with this goal in mind that I comment today 
generally on the small business healthcare crisis, and in particular 
the proposal to create Association Health Plans (AHPs).
    To begin I will emphasize the commissioners' recognition of how 
important it is to ensure affordable, available health coverage for 
small businesses and offer the full support of the NAIC in developing 
legislation that will reach these goals. States have acted aggressively 
over the past 15 years to stabilize and improve the small group market. 
States have required insurers to pool all of their small group risk by 
imposing rating bands or limitations, to further spread the risk of 
smaller, unhealthier businesses across a larger population. Many States 
have created purchasing pools and allowed associations to provide 
licensed, state-regulated insurance products to their members.
    States continue to experiment with reinsurance, tax credits, 
subsidies, basic health plans for small businesses, and programs to 
promote healthier lifestyles and manage diseases. As always, States are 
the laboratories for innovative ideas. It is critical that the Federal 
Government and the States work closely with healthcare providers, 
insurers and consumers to implement true reforms that will curb 
spending and make insurance more affordable to small businesses. 
Rehashing strategies that have failed, such as Association Health 
Plans, is not a step forward. It's time to move on to find effective 
solutions.

NAIC's Principles for Federal Reform

    In their search for effective solutions, the Nation's insurance 
regulators have identified seven basic principles by which Federal 
health insurance reform legislation can be analyzed. These principles 
are intended to keep the focus on the needs of consumers and the true 
causes of the current crisis. These principles are:
    Principle 1: The rights of all consumers must be protected. States 
already have patient protections, solvency standards, fraud prevention 
programs, and oversight mechanisms in place to protect consumers; 
unless new Federal standards equal or exceed existing State standards 
and enforcement they should not be preempted. Any new insurance 
arrangement purporting to increase the number of people with health 
insurance will be a failure if the insurance arrangement is not solvent 
and cannot pay the claims of those who have placed their trust in it. 
Further, all new proposals must preserve access to sufficient grievance 
and appeals procedures, and also assure that benefits and provider 
networks are adequate. Consumers must always be protected from fraud 
and misinformation.
    Principle 2: Existing State reforms and assistance programs must be 
supported, not degraded. As you know, States have already enacted small 
group purchasing pools, high-risk pools, and other reforms to increase 
the availability and affordability of health insurance. Federal reforms 
must not erode these successful efforts by permitting good risk to be 
siphoned off through manipulation of benefit design or eligibility for 
benefit provisions.
    Principle 3: Adequate consumer education must be provided. Federal 
reform will be complicated, creating new insurance choices for many 
Americans. The Federal Government must coordinate with existing State 
consumer education programs to ensure consumers are able to make 
informed choices.
    Principle 4: The overarching issue of rising healthcare costs must 
be addressed. Federal efforts to increase access to insurance will not 
be successful over time unless the overriding issue of rapidly rising 
healthcare costs is also addressed. Insurance is a mechanism for paying 
for healthcare and has had only limited success in controlling costs, 
but insurance is not the cause of those skyrocketing costs. There are 
multiple drivers of healthcare costs, and they in turn are driving up 
the cost of health insurance. To bring long-term stability to the 
healthcare system efforts must include provisions to address cost 
drivers and control rising healthcare costs.
    Principle 5. Current cost shifting must not be exacerbated. 
Inadequate reimbursement payments have led to cost shifting to the 
private sector. Unfunded Federal mandates to States have shifted costs 
onto State Governments. The cost of providing care to the uninsured is 
also shifted, driving up rates for insurance consumers. These actions 
have resulted in higher overall costs and decreased access for many 
consumers. Federal health insurance reform legislation must address 
cost shifting.
    Principle 6: The position of less healthy individuals must be 
protected. Both State and the Federal Governments have begun the 
process of reforming tax structure and other financial policies to 
encourage individuals to be more responsible consumers of healthcare. 
Emerging industry trends reflect developments in benefit and plan 
designs that create incentives for responsible consumer behavior in 
healthcare purchasing decisions. Public policy decisions must assure 
that new designs do not shift costs to such an extent that insurance no 
longer offers meaningful protection to the sick or discourage 
appropriate care. Federal legislation should encourage appropriate 
usage of the healthcare system without inappropriately withholding 
needed healthcare services to the sicker patient.
    Principle 7: Public policymakers should be wary of allowing the 
creation of insurance companies without appropriate oversight. 
Remember, legislation that allows alternative risk-bearing arrangements 
must acknowledge that it is allowing the creation of new insurance 
companies. A mere change in the name of the arrangement does not 
transform its essential insurance nature and function--the acceptance 
and spreading of risk. To allow such new insurance companies to be 
formed outside the existing regulatory structure will create an unlevel 
playing field that is unfair to existing insurers and potentially 
harmful to consumers. To do so without providing adequate additional 
Federal resources to ensure sufficient oversight of new entities will 
be disastrous.

AHP Legislation Violates NAIC Principles

    The AHP legislation that has been once again introduced in the 
House and the Senate violates almost all of the principles outlined 
above and, therefore, the NAIC must remain steadfast in its objections 
to the AHP bills. Specifically, the legislation would:

1. Undermine State Reforms

    Before State small group market reforms were implemented, the small 
group market was fragmented into various pools based on risk. If a 
small employer had healthy employees in a relatively safe working 
environment the employer could easily find coverage at a good rate. 
However, if one of the employees became sick, the employer would be 
shifted to a higher risk pool and often priced out of coverage. Those 
who started with sicker or higher risk employees were often priced out 
of the market from the beginning.
    State small group market reforms forced insurers to treat all small 
employers as part of a single pool and allow only modest, and in some 
States no, variations in premiums based on risk. This spreading of risk 
has brought some fairness to the market. Although the proponents claim 
AHPs are a vehicle for allowing small businesses to pool together, they 
would actually reduce the amount of pooling in the small group market. 
In fact, it is not pooling but ``cherry picking'' that would enable 
AHPs to offer lower-cost coverage in some cases. Such savings would 
come at the expense of all others in the small group market who are not 
part of AHPs. The AHP legislation in Congress would undermine State 
reforms and once again fragment the market.
    While the AHP bill does make some effort to reduce ``cherry 
picking'' the NAIC believes the provisions will be ineffective in 
stopping risk selection. Under the current bill, AHPs can still 
``cherry-pick'' using four very basic methods:
    (a) Membership--S. 545 permits associations to offer coverage only 
to their members, allowing plans to seek memberships with better risk;
    (b) Rating--S. 545 eliminates State rating limits for most plans, 
allowing them to charge far more for higher risk persons, forcing them 
out of the pool;
    (c) Service area--S. 545 eliminates State service area and network 
requirements, allowing plans to ``redline'' and avoid more costly 
areas;
    (d) Benefit design--S. 545 eliminates all State benefit mandates, 
allowing plans to cut prices by denying consumers costlier treatments, 
driving employers whose workers need these treatments into the 
regulated market while siphoning off employers with healthier 
workforces.
    If no cherry picking were possible, AHPs would attract a risk pool 
that, on average, was the same as the current small group market--which 
would take away a major advantage of forming AHPs. Assertions by 
proponents of this measure that this issue has been addressed are 
incorrect.

2. Lead to Increased Plan Failures and Fraud Due to Inadequate 
                    Oversight

    Proponents of the AHP legislation claim that the Department of 
Labor has sufficient resources to oversee the new plans and 
insolvencies and fraud will be prevented. This simply is not the case. 
The Department of Labor has neither the resources nor the expertise to 
regulate insurance products. The States have invested more than 125 
years in regulating the insurance industry. State insurance departments 
nationwide employ over 10,000 highly skilled people. The combined 
budgets of State insurance departments total more than $700 million. 
The AHP bill provides no new resources for regulating these plans.
    While the NAIC acknowledges State regulation may cost slightly more 
initially, those costs are offset by the protections provided to our 
consumers. Insurance is a complicated business, involving billions of 
dollars, with ample opportunity for unscrupulous or financially 
unsophisticated entities to harm millions of consumers. Unless 
oversight is diligent, consumers will be harmed.
    This is not just speculation, but fact borne of years of experience 
with Multiple Employer Welfare Arrangements (MEWAs), multi-state 
association plans, out-of-state trusts, and other schemes to avoid or 
limit State regulation. Within the last year, 16 States have shut down 
48 AHP-like plans that had been operating illegally in those States, 
many through bona fide associations. Association plans in several 
States have gone bankrupt because they did not have the same regulatory 
oversight as state-regulated plans, leaving millions of dollars in 
provider bills unpaid and consumers liable for their payment.
    Each time oversight has been limited the result has been the same--
increased fraud, increased plan failures, decreased coverage for 
consumers, and piles of unpaid claims. Specifically, the NAIC believes 
the following issues must be addressed:
    a. Solvency Standards Must Be Increased--While the solvency 
standards in the AHP legislation have been increased over the years, 
they are still woefully inadequate. The capital reserve requirement for 
any and all AHPs is capped at $2 million--no matter the size of the 
plan. States require the capital surpluses to grow as the plan grows, 
with no cap or a far higher cap than that in the Federal legislation. 
If a nationwide AHP were offered to a large association, a capital 
surplus of merely $2 million would result in disaster.
    b. AHP Finances Must Receive Greater Oversight--Even if the 
solvency standards are increased, oversight is almost nonexistent in 
the bill. Under the bill the AHP would work with an actuary chosen by 
the association to set the reserve levels with little or no government 
oversight to ensure the levels are sufficient or maintained. Also, the 
AHP is required to ``self-report'' any financial problems. As we have 
seen over the past few years, relying on a company-picked accountant or 
actuary to alert the government to any problems can have dire 
consequences for consumers who expect to have protection under their 
health plan.
    State regulators comb over financial reports and continually check 
investment ratings to ensure that any potential problems are identified 
and rectified quickly. AHP plans must be held to the same standard.
    Simply limiting participation in AHPs to ``bona fide trade and 
professional associations'' and providing limited Department of Labor 
oversight of self-reported problems will not prevent fraud and 
mismanagement. Strict oversight is required and this will only occur if 
all health plans delivered through associations are licensed and 
regulated at the State level.

3. Eliminate Important Consumer Protections

    Included in the current AHP legislative proposals is the broad 
preemption of consumer protection laws. AHP proponents argue that State 
mandated benefit laws must be preempted so that AHPs do not have to 
provide coverage for expensive benefits. However, States have a multi-
faceted regulatory structure in place for insurers. Not only are 
mandated benefit laws preempted, but other laws protecting patient 
rights and ensuring the integrity of the insurers are preempted as 
well. Here is a small sample of preempted consumer protections:

     Internal and external appeals processes.
     Investment regulations to ensure that carriers only make 
solid investments instead of taking on risky investments such as junk 
bonds.
     Unfair claims settlement practices laws.
     Advertising regulation to prevent misleading or fraudulent 
claims.
     Policy form reviews to prevent unfair or misleading 
language.
     Rate reviews. Insurance departments may review rates to 
make sure the premiums charged are fair and reasonable in relation to 
the benefits received.
     Background review of officers.
     Network requirements including provider credentialing and 
network adequacy, to ensure that plans offer a provider network that is 
capable of delivering covered services.
     Utilization review requirements to ensure that plans have 
acceptable processes and standards in place to determine medical 
necessity and to make coverage determinations.

    While some of these protections may be offered by AHPs as a service 
to their association members, there would be no requirement that they 
do so, and no entity to complain to if a patient's rights are violated 
by the plan. State insurance regulators act on hundreds of thousands of 
consumer complaints every year and work hard to protect the rights of 
patients. AHP participants deserve access to the same protections and 
complaint process.

4. Cut Funds to State High-Risk Pools and Guaranty Funds

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

Alternatives for Real Reform

    If this hearing is truly about alternatives to our healthcare 
needs, then it is time to look at alternatives. As you know, States 
have been the laboratories for innovative ideas in this arena for some 
time. In Kansas, the Governor announced a $50 million HealthyKansas 
initiative to expand coverage for 40,000 children and 30,000 working 
parents; find ways to control costs through more risk sharing among 
small businesses; improve availability of generic drugs for low-income 
individuals; and increase awareness of obesity and other preventable 
chronic conditions. As part of this initiative, we are modeling 
reinsurance as part of a small group reinsurance feasibility study 
under a HRSA State Planning Grant. Four alternative reinsurance 
mechanisms will be modeled with varying assumptions to quantify the 
impact of each on premium cost and small employer take-up rates in the 
Kansas market. There are four reinsurance approaches that we will 
model, two prospective and two retrospective. The prospective 
approaches will follow NAIC small group reinsurance model and 
Connecticut designs and the retrospective will follow Healthy New York 
and a diagnosis-based design considered by Colorado. We then intend to 
select the most effective reinsurance approach that will control claim 
fluctuations and risk acceptance by carriers. Since we will be using 
our reinsurance system to process 5 years of actual Kansas claim data 
we will be able to project the amount of subsidy that actually could be 
provided in future years given different levels of subsidy.
    Other States have experimented with reinsurance, tax credits, 
subsidies, basic health plans for small businesses, public program 
expansion, and programs to promote healthier lifestyles and manage 
diseases. Many States utilize reinsurance mechanisms in the small group 
market, with various degrees of success. The most recent effort by the 
State of New York in its Healthy New York program has utilized a 
retrospective reinsurance mechanism, subsidized by State tax dollars, 
that has resulted in about 70,000 new insureds, all low wage workers in 
small businesses who were formerly uninsured.
    As another example, in Maine, the State enacted the Dirigo Health 
Plan, intended to provide coverage for 180,000 State residents. The 
plan has two components: (1) expansion of Medicaid and SCHIP to parents 
with incomes up to 200 percent of the Federal poverty line and to 
everyone earning less than 125 percent of the Federal poverty line; and 
(2) establishment of a public/private plan to cover businesses with 2-
50 employees, the self-employed, and unemployed and part-time workers. 
The plan is in its early stages of implementation, and State 
policymakers have high hopes for its success.

                               CONCLUSION

    All of us recognize that it is very important to make health 
insurance available to small employers. The States have begun to 
address this problem, and will continue to do so. However, the problem 
is complex and does not lend itself to easy solutions.
    The Federal Government and the States need to work with healthcare 
providers, insures and consumers to implement true reforms that will 
curb spending and make insurance more affordable to small businesses. 
We stand ready to work with Members of Congress to draft effective 
reforms that will address both the affordability and availability 
issues facing small businesses. Together, we are convinced, real 
solutions to this critical issue can be found.

    The Chairman. Thank you to the entire panel. I appreciate 
the condensation that you did on your remarks. I will assure 
you again that your remarks in their entirety will be a part of 
the record, and also we will keep the record open for 10 days 
after this hearing is over so that members of the panel can add 
additional questions in writing, which I hope you will respond 
to so that we can complete the record, and that will be done by 
both ones that are here and ones that may not be here.
    I would mention that Senator Kennedy had fully intended to 
be at this hearing this morning. Unfortunately, he is at the 
ongoing Executive Session in the Judiciary Committee, and those 
are taking quite a bit of time sometimes these days. He has 
asked me to thank the witnesses for their testimony, and I ask 
unanimous consent that his statement be a part of the record. 
Without objection.
    [The prepared statement of Senator Kennedy follows:]

                 Prepared Statement of Senator Kennedy

    I commend Senator Enzi for holding today's hearing on 
healthcare for employees of small businesses.
    In this century of the life sciences, it's unconscionable 
that the miracles of modern medicine are too often beyond the 
reach of all but the wealthy.
    Healthcare costs are out of control and more and more 
Americans are losing their insurance. Forty-five million 
Americans today have no health insurance. We know that persons 
without coverage receive less care, suffer more, and are more 
likely to die than those who are insured.
    The vast majority of the uninsured--more than 80 percent--
are members of working families. More than half are employees 
of small businesses or their family members. All businesses--
especially small firms--find it harder and harder to provide 
coverage for their workers. Health insurance premiums have 
risen 59 percent over the past 4 years, and the average cost of 
coverage for a family today has climbed to almost almost 
$10,000.
    Some favor association health plans, but they have many 
problems. States across the country have enacted significant 
protections for consumers in health insurance plans--but 
association health plans would sweep those protections aside. 
Gone would be requirements to cover needed benefits like 
maternity care, child immunizations and cancer screenings. 
Study after study shows that the way such plans save money is 
by avoiding State consumer laws and State rating rules, putting 
patients at risk.
    A basic principle for every responsible health insurance 
plan is adequate financial resources to meet its obligations. 
But association health plans have much weaker solvency 
requirements and are clearly inadequate to protect consumers. 
We have extensive experience with health insurance sold through 
associations and other types of ``multiple employer welfare 
arrangements,'' and they've had many problems over the years. 
Thousands of Americans have been left in financial ruin when 
their association plan has failed. In recent years, four large 
groups--two in New Jersey, one in Indiana, and one in 
California--have failed, leaving $45 million in claims unpaid 
for the 65,000 persons covered by the plans.
    The bottom line is that such proposals will do virtually 
nothing to reduce the number of the uninsured, and will 
actually cause premiums to rise for over 20 million employees 
and their families, according to the Congressional Budget 
Office. Small businesses with young and healthy workers may be 
attractive customers for such plans, but those with older 
employees or employees with serious health conditions will be 
left behind. A ``solution'' that offers no help to those most 
in need is no solution at all.
    That's why such plans are opposed by the the National 
Governors Association, the National Association of Insurance 
Commissioners, the National Conference of State Legislatures, 
the American Cancer Society, the American Diabetes Association, 
the American Academy of Pediatrics, the NAACP and more than 
1,300 other organizations that represent patients, healthcare 
professionals, consumers and workers.
    We need to make affordable healthcare a top priority for 
all families, including those working in small businesses. 
That's why I support an approach that would provide access to 
good health coverage for all Americans, regardless of where 
they work. I call it ``Medicare for All.''
    To promote competition and choice, enrollees could join 
Medicare, or have the option of choosing any of the plans 
offered to Members of Congress, the President, and Federal 
employees.
    Healthcare for all is our goal, and an important step 
toward reaching it is to help small businesses provide quality 
healthcare coverage--but association health plans have too many 
flaws to justify our support.
    I look forward to the recommendations of our witnesses and 
to working with the Chairman and our colleagues to find a 
realistic bipartisan solution to this major problem.
    The Chairman. I would mention too that he does a great deal 
of work on being informed on what goes on in these meetings and 
a great deal of preparation that he now will not be able to 
take advantage of, but I do appreciate his cooperation and 
participation on these issues.
    I also have a statement from Senator Snowe and from Senator 
Talent, and would ask unanimous consent to add them to the 
record. Without objection.
    [The prepared statement of Senator Snowe follows:]

                  Prepared Statement of Senator Snowe

    Thank you Chairman Enzi, for holding this hearing today on the 
health care crisis that faces small businesses. As you know, just 
yesterday the committee on Small Business and Entrepreneurship hosted a 
hearing on association health plans (AHPs) and other solutions for the 
health care crisis. We had a positive dialogue about AHPs, and I am 
pleased that the HELP Committee, which has jurisdiction over AHP 
legislation, has also decided to take up this issue. I believe that 
there is incredible momentum surrounding AHPs!
    I originally examined this issue 2 years ago during the very first 
hearing I conducted as chair of the Committee on Small Business and 
Entrepreneurship, and regrettably, since then the problem has only 
grown worse. Today, I hope that the HELP Committee will probe deeper 
into solving this crisis, and hopefully jump start real action by 
Congress to enact solutions this year.
    This hearing will focus on association health plans--``AHPs''--
which I strongly believe can play a major role in addressing this 
country's health care crisis. Touted by President Bush and supported by 
over 80 million Americans, AHPs will bring necessary reform to 
insurance markets that have long trapped small businesses and their 
employees in a vicious cycle of escalating premium costs and fewer 
coverage options. AHPs are crucial to solving the small business health 
care crisis because they represent a fair, fiscally sound, and already 
tested approach to reducing the ranks of the uninsured in this country 
at nominal cost to the Federal Government.
    Of the nearly 45 million uninsured Americans, 62 percent of the 
uninsured are either employed by a small business or dependent on 
someone who is. If we want to get serious about helping the uninsured, 
which I think is long overdue, we should start by focusing on small 
business.
    The USA Today recently identified health insurance costs as the 
number one issue facing small business employers across the country, a 
fact confirmed in the National Federation of Independent Business's 
Small Business Economic Trends monthly report from March. Almost 30 
percent of the small business owners surveyed responded that cost and 
availability of insurance was the single most important problem facing 
small businesses today. This was far and away their most pressing 
concern and it's one I've heard time and time again.
    Indeed, these surveys and studies mirror what we hear everyday from 
small business owners across the country. At our hearing yesterday, we 
heard from Doug Newman, a concrete company owner from Hallowell, Maine, 
who has described premium increases of close to 65 percent since 2000.
    The time has come for action, not words, to deliver small business 
owners relief from this crisis. AHPs do this, with a common sense 
approach that allows small employers to join together through bona fide 
associations to buy health coverage. AHPs will level the playing field 
of employer health coverage by giving participating small employers the 
advantages of Federal law currently enjoyed by larger employers and 
unions.
    AHP's have the strong support of President Bush, as he has said in 
his last two State of the Union addresses, and the Majority Leader, 
Senator Frist, has indicated he would like to see floor action on AHPs 
this year and I appreciate his support. AHPs are supported by a 
coalition representing over 12 million employers and 80 million 
individuals.
    Moreover, a recent snapshot poll in the USA Today asked 2,076 CEOs, 
``What changes to health care policies could be made that would have 
the greatest impact on your business?'' The number one response, at 56 
percent, was consolidated group rates--pooling, just as is recommended 
in my AHP legislation--for small businesses.
    Today, I hope the HELP Committee will examine the truths and 
realities involved with AHPs, and to finally--once and for all--drive a 
stake into the myths that opponents have put forth about AHPs over the 
years.
    AHPs allow small businesses to pool their employees together to 
receive the same bulk purchasing and administrative efficiencies 
already enjoyed by large employers and unions. It builds on the success 
of the ERISA self insurance plans used by large employers and the Taft-
Hartley plans available to union employers, which currently provide 
health benefits for 78 million people, more than half of the people who 
receive health insurance from their employer.
    Our aim is to inject competition in the marketplace and offer 
alternatives to small businesses trapped in the current system. 
Associations will be able to administer one national plan, with lower 
administrative costs.
    And reducing costs for small businesses is why we are here today. 
Studies by both the GAO and the Small Business Administration's Office 
of Advocacy concluded that small businesses currently absorb a greater 
portion of their plans' administrative costs, paying as much as 20 to 
30 percent more in total premiums than larger health plans. As a 
result, small business receive less generous benefits than larger 
employers while paying the same level of premiums. On both counts, 
small businesses and their employees lose.
    The Kaiser Family Foundation recently reported that between the 
spring of 2003 and spring of 2004, health insurance premiums increased 
11.2 percent. This marked the 4th consecutive year of double digit 
increases! Health insurance premiums saw annual increases since 2000 of 
10.9 percent, 12.9 percent, and 13.9 percent, respectively--a growth 
that far outpaced inflation and erased wage gains.
    AHP legislation will also provide a full range of benefits similar 
to what many States currently require. In many cases, large employers 
and unions, which are exempt from State benefit mandates, offer the 
most generous plans. Not surprisingly, many employees actually choose 
to stay in their jobs only to maintain that higher level of coverage. 
Like these larger plans, this bill's extensive new safeguards will 
ensure that the health care coverage is available when employees need 
it, as well as prevent fraud.
    Contrary to opponents of this bill who claim it would lead to 
``cherry picking'' of only the young and healthy, this AHP bill 
specifically require that associations plans must be open to all 
members. And each employer who participates in the plan must offer the 
plan to every eligible employee--at the risk of fines and even 
imprisonment of up to 5 years.
    Finally, critics claim that the Department of Labor could not 
handle its responsibilities under this bill. Frankly, I cannot imagine 
an agency better prepared than the Labor Department which currently 
oversees 300,000 similarly structured plans. We rarely hear complaints 
about these plans failing and leaving subscribers without coverage. 
AHPs would not add an unmanageable burden to DOL, and as the Secretary 
of Labor will testify, sufficient resources would be available to 
ensure that the Department fulfilled its obligations.
    AHP legislation is one excellent reform among myriad solutions to 
the healthcare crisis but it is one that should be available to start 
making a difference immediately--this is not radical new policy we're 
talking about here! We should also examine ways to use the tax code as 
a mechanism for increasing access to health care, and that is why I 
recently introduced a bill with Senators Bond and Bingaman to enable 
more small business owners to offer a choice of a ``cafeteria plan'' to 
allow employees to purchase health insurance with tax-free dollars. 
Currently, many small employers' hands are tied by arbitrary rules that 
restrict cafeteria plans based on the size of a business. Our bill 
would simplify those rules and give more small businesses greater 
flexibility to meet the healthcare needs of their employees--and that, 
after all, is our goal.
    I look forward to hearing from the witnesses today and working with 
the President and my colleagues to reduce the ranks of uninsured 
Americans. Let me emphasize that while I believe that passage of AHP 
legislation is an indispensable step toward resolving the small 
business health care crisis and indeed the broader crisis of the 
insured, I am eager and willing to work with colleagues to address 
concerns about this legislation and craft the best possible solution.
    Again, Chairman Enzi, thank you for holding this hearing, and for 
giving me the opportunity to submit testimony into the hearing record 
on association health plans and the health care crisis facing small 
business.

    [The prepared statement of Senator Talent follows:]

                  Prepared Statement of Senator Talent

    I would like to thank Chairman Enzi for holding this important 
hearing, and for inviting me to make a statement for the record.
    I think we can all agree that a major concern facing small business 
owners is access to quality, affordable health care. Of the 45 million 
Americans who lack health insurance, more than 80 percent are workers 
and their families and 60 percent are small business people and their 
families. I've talked personally with hundreds of people in small 
businesses, and they tell me how they are desperate for affordable, 
high-quality health insurance.
    I spoke with Janet Poppen, a small business owner from St. Louis, 
who, like many small business owners, wants to do right by her five 
employees and provide them with health insurance. Over the past 2 
years, the insurance costs for Janet's company have increased by $431 
per month, or a total increase over the 2 years of 35 percent (from 
$1,237 in 2001 to $1,668 per month in 2003). Instead of Janet denying 
her employees health insurance or making business upgrades, she has 
reduced her own salary.
    Like most small business owners, any health insurance cost 
increases affect Janet's take home pay, but she is willing to pay the 
price because she wants to do right by her employees and provide them 
with health care. Small business owners like Janet believe AHPs would 
reduce their administrative and other costs so they will no longer have 
to pay the marketing costs or profit margins of insurance companies 
and, instead, invest in their own companies.
    Perhaps it comes as no surprise that insurance companies like the 
national Blue Cross and Blue Shield Association do not like AHPs. One 
would guess that these insurers would welcome AHPs as an opportunity to 
make a lot of money by selling tens of thousands more policies. But 
that does not seem to be the case. Why not? Because insurers have a 
monopoly on health insurance through their ironclad grasp of market 
share.
    The General Accounting Office has found that the five largest 
carriers combined represent 75 percent or more of the market in 19 of 
the 34 States GAO reviewed. In Missouri the five largest carriers have 
a 51.8 percent market share. AHPs will make health insurance more 
affordable for small business through reduced premiums, to create more 
competition in the small group market--and that will bring costs down 
for the consumer.
    The Congressional Budget Office has estimated that small businesses 
obtaining insurance through AHPs should experience premium reductions 
of 13 percent on average and up to 25 percent. That's just over $1,000 
to more than $1,900 for the average family health plan offered by a 
small business. Clearly, these reductions are going to hurt the bottom 
line of insurance companies and reduce their stranglehold on small 
business purchasing options.
    On the flipside, AHPs will provide affordable, quality health 
insurance to small business owners, their employees and dependents 
across our Nation. The smallest firms stand to save the most from AHPs 
because their administrative costs, which account for a significant 
percentage of their expenses, will decrease.
    A January 2003 Small Business Administration actuarial report shows 
that administrative expenses for insurers of small health plans make up 
33 to 37 percent of claims. This compares with about 5 to 11 percent of 
claims for large companies' self-insured plans.
    Because insurance would be more affordable, more small firms could 
provide it to their employees and families. According to the CONSAD 
Research Corporation, as many as 8.5 million previously uninsured 
workers would receive coverage if this legislation were enacted into 
law. And, importantly, Association Health Plans will unburden small 
business owners from worrying about how to provide health care to their 
employees owners to doing what they do best--running their businesses.
    Now, I have heard several myths to dispute how much good 
Association Health Plans will provide small businesses. I would like to 
set the record straight right now:

Myth: Association Health Plans will allow organizations to ``cherry 
pick'' only the healthiest individuals, leaving the States' small group 
markets to care for the sickest individuals.

FACT: AHPs are prohibited by law and the language of this bill from 
being able to ``cherry pick.''

    The legislation clearly states that the bona fide association must 
provide all interested employers (regardless of age, health status, 
etc.) with information regarding all coverage options available under 
the plan. AHPs would be subject to all the preexisting condition, 
portability, nondiscrimination, special enrollment and renewability 
provisions under the Health Insurance Portability and Accountability 
Act.
    Also, the bill clearly prohibits discrimination based on health 
status by stipulating any member of an association who is eligible for 
membership benefits must be furnished with information regarding all 
coverage options available under the plan and may not be excluded from 
enrolling in the plan because of health status. Thus, it will not be 
possible for AHPs to ``cherry pick'' because sick or high risk groups 
or individuals cannot be denied coverage.

Myth: AHPs lack adequate solvency protections.

FACT: The legislation contains extensive requirements for solvency.

    Health insurance issuers that offer fully insured coverage to AHPs 
will continue to be subject to State laws regarding solvency. In 
addition, the U.S. Department of Labor would condition its class 
certification of fully insured AHPs on the issuer's satisfaction of 
State solvency and other insurance regulations.
    With respect to self-insured AHPs, the legislation sets forth 
explicit solvency requirements that are much stronger than current law 
for employers or unions who self-insure, as ERISA contains no solvency 
standards for these entities.

Myth: AHPs will destroy consumer protections by preempting all State 
benefit mandates and regulations.

FACT: The preemption of State mandates is an integral aspect of ERISA.

    The solvency standards, plan requirements, oversight, and patient 
protections included in the AHP legislation are more stringent than 
those now required by some States. AHPs would be subject to Federal 
health insurance requirements that provide consumer protections, such 
as COBRA continuation coverage; ERISA's claims procedures for benefit 
denials and appeals; HIPAA's guaranteed portability and renewability of 
health coverage for those with preexisting conditions; the Mental 
Health Parity Act; the Women's Health and Cancer Rights Act; and the 
Newborns' and Mothers' Health Protection Act. Because it operates in 
the interest of its members, AHPs will readily cover benefits 
demonstrated to be cost-effective, such as childhood immunization, 
prenatal care, and cancer screenings.
    These are just some of the pro-patient, pro-consumer protections 
contained in S. 406. For these and other reasons, AHPs are strongly 
supported by more than 170 organizations representing over 12 million 
employers and 80 million American workers.
    We need to work together now to pass a package of ideas that will 
make a real difference for people without health insurance and help 
lower the cost of health care for everybody. Again, I thank HELP 
Committee Chairman Enzi for his leadership and for his receptivity to 
common sense solutions like Association Health Plans.

    The Chairman. I want to thank all of you for the ideas that 
you put forward, and we do have a few questions, and I would 
say that this is not just a small business problem either. I 
noticed yesterday that General Motors was saying that they are 
now putting more into their insurance than they are into steel 
in the cars that they build. So it goes all the way up the 
chain, but of course, as with everything, it affects the small 
businesses considerably more than it affects the big 
businesses.
    Mr. Blake, I really appreciate your setting the stage for 
that discussion. We are very fortunate in Wyoming to have a 
special high-risk insurance pool and to have the ability to 
move some people into it. I do not know where your rates would 
have gone otherwise. We will try to come up with, through these 
discussions and others, some kind of a mechanism that will help 
companies like yours. I know that yours is not an isolated 
case, and it does create a lot of turmoil. So as you have any 
ideas, we will appreciate you sharing them with us.
    I am going to concentrate a little bit on some of the 
statements that were made here. Many of my colleagues and I 
have been asking the opponents of the AHP legislation to step 
forward with some real alternatives for addressing the small 
business insurance problem, and I am encouraged by the serious 
testimony that we have had here today. However, I would like to 
ask Ms. Ignagni and Commissioner Praeger the following.
    Of the alternatives or modifications to AHPs that you have 
looked at, what are the top two or three strategies that you 
would urge this committee to consider as we work on easing 
costs and improving access for small business? Ms. Ignagni?
    Ms. Ignagni. Thank you, Senator. I am delighted to answer 
that question. The first thing I think that is important to 
look at is the issue--I also heard the leader of GM make that 
statement, and I think that that requires all of us to look 
very closely at--are we getting value for the considerable 
healthcare investment?
    When the national data suggests that only 55 percent of 
what is done is best practice, in any other area of the economy 
if we had that situation it would be a catastrophe. And it is 
because we do not have data or transparency in the healthcare 
system to really get our hands around what is being done at the 
beside in specific care. And frankly, physicians who are very 
busy every day cannot spend every night looking through medical 
journals to determine best practices. So I think a very 
tangible set of solutions is as follows.
    No. 1: As you look at the budgets of the National 
Institutes of Health, we look at the fact that we have the best 
research capacity in the world, but we are doing next to 
nothing to diffuse that in an organized way into practice. So 
physicians simply do not have access to what is being done in 
clinical trials, to be kept abreast of the latest information, 
so when we see these data it is not surprising. But I think 
that here should be a requirement, either through the National 
Institutes of Health or the Agency for Health Care Quality and 
Research, to act as a diffusion mechanism to get that 
information, set up a center for effective best practices.
    I think that is something that all stakeholders can get 
behind, and I think you could see tangible results, just as we 
would look at a productivity or production function issue or 
deficit in a manufacturing sense. It is a similar kind of 
analogy. So that is No. 1.
    No. 2: I think it is very important--and I understand the 
passionate feelings around the issue of medical malpractice 
reform, but when we are looking at $100 billion on defensive 
medicine, that is something that even if you take 50 percent of 
that, and we had 50 billion to reorient to tax credits to help 
companies like Mr. Blake's afford affordable healthcare 
coverage, particularly oriented to small business, low-wage 
workers, etc. We know that approximately 12 million workers are 
offered coverage and cannot afford to take it. So that is a 
second strategy.
    The third is that I think that it is very important now to 
have a discussion both with the National Insurance 
Commissioners and their association and leaders on Capitol Hill 
about modernizing the regulatory structure. Looking at what 
stands in the way of offering affordable products, how we can 
begin to have more harmonization and uniformity of regulation, 
work through the challenges and come up with a strategy.
    So we would like to be part of that. We have already begun 
that process with the NAIC. We have begun it with your 
colleagues both here as well as in the House, and we want to be 
solution providers to sorting through that.
    And then there are other issues which I am pleased to tell 
you we are having an effect on. We have taken pharmaceutical 
rates of increase that just 2\1/2\ years ago were above 20 
percent. We have taken them well under 10. We have done that 
through a series of strategies, pharmaceutical care management, 
encouraging generic drug substitution when physicians say it is 
appropriate, step therapy, disease management. I have provided 
a series of things that we are doing that we are seeing results 
on, some hard, tangible data, not ours, but peer-reviewed data 
about disease management, etc. I think all of these strategies 
work together.
    I think, finally, the important legislation you passed out 
of this committee to give States a helping hand with high-risk 
pools of the sort that you have in Wyoming. Thirty-three States 
have high-risk pools. It is a very, very important piece of 
legislation.
    So I think taken together, Senator, I think that series of 
strategies could help shrink that balloon.
    The Chairman. Commissioner?
    Ms. Praeger. Thank you, Mr. Chairman. I think Karen makes a 
good point about this move toward best practices. I am often 
amused by the term ``evidence-based medicine'' because, you 
know, that we are moving toward that evidence-based medicine, 
and you have to ask, gee, what were we doing before? And the 
truth is these were practices that have just developed over 
time, and they are very regionalized. A best practice in one 
part of the country may not be considered that in another part 
of the country, so there really does need to be a 
standardization and some way of getting that information out to 
providers to assist them in adopting these best practices.
    Insurance is the messenger and the message is healthcare 
costs are going up. So we struggle to find ways to spread that 
cost over the individuals in the insured marketplace, but we 
have to address the cost of healthcare if we are going to 
decrease the cost or bring the cost of health insurance 
premiums under control.
    One of the programs that we are testing in Kansas--and I 
mentioned it in my statement--is to look at the risk bands. 
That is the way we have traditionally spread the risk in a 
small group market. We are looking at a different way of 
spreading risk, and saying, let us seat out of each individual 
group the high-risk individuals, rate the group based on its 
healthy individuals, and then look at that entire pool of high-
risk individuals and spread those costs back over each of those 
individual small groups.
    It does a couple of things. It helps spread that cost in a 
different way, and I think perhaps a fairer way, because you do 
not have, as we just heard, one group with one high-risk 
individual and their premiums really become unaffordable for 
everybody. This would create I think a broader risk-sharing 
mechanism, and it also would bring some stability because your 
healthy individuals, that risk is not going to change much from 
year to year, but if you are rating a group based on just that 
group, you can have a healthy group 1 year and a very unhealthy 
and costly group the next. And so bringing some stability to 
the way we spread risk I think is important.
    And I look forward to getting the data back. We are 
currently assessing the claims data on the top 20 carriers in 
our State to look at where the costs are and see if we can come 
up with a model that can work and be more cost effective.
    I think there is another thing, a reason--now I do not know 
how we create a solution out of this--but certainly the reason 
that we see costs going up is all of the technology and the new 
technology that is available and is out there. We have a third-
party payment system that has no discipline. If the consumer 
understands that there are certain tests or certain procedures 
or certain medications that they would like to have access to 
and they have insurance, there is no concern. I do not have to 
ask what that costs because my insurance will pay for it. Over 
time that drives the cost up for everybody. So bringing some 
discipline back into the system,
    And I think health savings accounts, one of the reasons 
Congress passed health savings accounts was to bring a little 
bit more individual responsibility into making those purchasing 
decisions. We as consumers cannot make good decisions if we do 
not have good data, and I think a very good point that Karen 
also made, the transparency of information that is really going 
to be needed if we as consumers are going to be making good 
choices.
    The Chairman. Thank you. Of course, one of my reasons for 
concern is, as the least populated State in the Nation, Wyoming 
may not even make a single pool.
    [Laughter.]
    Senator Ensign?
    Senator Ensign. Thank you, Mr. Chairman. This is a very 
important hearing that you have called for today. Healthcare 
costs are one of the most significant problems facing our 
country, individuals and our Government. Medicaid and Medicare 
together dwarf the problems that we have for Social Security as 
far as unfunded liabilities for the future. If we do not start 
getting control of this spending now, our children and 
grandchildren will be in serious, serious trouble.
    I want to talk a little bit about some of the things that 
Ms. Ignagni discussed and some issues that no one else has 
raised. Everybody talks about the problems associated with 
smoking and obesity. These are the two biggest health 
concerns--and the most preventable health problems that we have 
in the country. These two issues drive up healthcare costs more 
than anything else in the country. Nobody wants to see a little 
girl diagnosed with a brain tumor. There is nothing the girl 
did to cause the tumor. But with smoking and with obesity, 
well, for some people, obesity is not anything they can help, 
but for most of us, obesity occurs because the one exercise we 
do not do enough is this one--pushing away from the table.
    [Laughter.]
    It seems to me that we have to get a handle on preventative 
health in this country. We need to encourage people to adopt 
healthy behaviors. I do not know what role that plays in the 
ability of health insurance pools. With auto insurance, if I am 
a safe driver I should be able to have lower insurance rates. 
Similarly, if I engage in healthy activities, exercise 
regularly, and do not smoke, it seems to me that an incentive 
shoud be offered. It also seems to me that those incentives 
should be fairly large if we really want people to change their 
behaviors to pursue and maintain a healthy lifestyle.
    If you could address healthy lifestyles and incentives for 
healthy plan design as well as best practices, I would 
appreciare it. Unfortunately, I do not have a lot of time 
because I have to preside at 11 o'clock on the Senate floor. I 
have an interest in the practice of evidence-based medicine. I 
believe we need to develop and encourage the use of best 
practices so that doctors and other healthcare professionals 
have the information they need to make appropriate clinical 
decisions. What can we do to better incorporate best practices 
into private health insurance programs and large government 
programs such as Medicare and Medicaid? And, can you please 
provide me with an estimate in terms of savings that could be 
achieved as a result of the incorporation of best practices? I 
do not know if any of you have any estimates on what the 
potential savings could be from the use of best practices, but 
best practices are clearly not being done in nearly enough 
areas.
    I would also appreciate your comments concerning health 
information technology. Healthcare is one of the few areas 
where technology does not always bring the price of services 
down, it actually brings the price up. However, it seems to me 
that, if properly implemented, health information technology 
will reduce duplication, and cut down administrative costs, 
such as transcription and billing. In addition, this technology 
will reduce medical errors and potentially reduce medical 
liability insurance premiums for physicians and other 
healthcare professionals. I know the focus of the hearing today 
is on association health plans, but that proposal is a 
controversial measure. I do not know if we are going to ever 
get something like that passed. However, some of these other 
ideas may warrant consideration and actually lower the cost of 
healthcare, not only for small businesses but for the General 
Motors of the world and obviously for Medicare and Medicaid 
into the future.
    Ms. Ignagni. Thank you, Senator. You have asked a series of 
provocative questions, and I am going to give you--and in the 
interest of time try to be as quick as I can.
    First, you are right about obesity. It is a very important 
factor in virtually every major chronic illness. What our 
health insurance plans are doing now is giving individuals 
incentives for healthy lifestyles, and I would be delighted to 
provide a laundry list of things that are going on. I think you 
will be excited. It is very much in line with what you have 
suggested.
    Second, with respect to the issue of evidence-base in 
Medicare and Medicaid, Dr. McClellan has opened up an important 
new frontier in our view. He has started to begin to marry the 
concept of the clinical trials and what works evidence, and the 
scientific research with coverage policies. And he is launching 
a new effort in conjunction with the Institute of Medicine to 
collect data on the efficacy of certain devices, for example, 
so we can go back and look and adjust coverage policies. It is 
a very important new frontier, number one, and I think that 
that will reverberate throughout the whole system in a 
productive way.
    No. 2, the incentives for best practice that you questioned 
about. We are working with a group of providers to try to 
create consensus around what should be measured for quality. 
The Institute of Medicine has been very clear about quality 
guidelines. What should be measured? Dr. McClellan is also 
looking at aligning incentives with the best practices so that 
he can reward physicians, hospitals for achieving productivity 
goals. There is a lot of enthusiasm within the physician and 
hospital community about this. Individual practitioners want to 
be recognized for excellence, so I am very encouraged about 
that. Our health plans are doing that as well. Again, I would 
love to provide some information for the record.
    Finally, electronic records. We have under way a full court 
press within our industry because we have claims data, we have 
more data that can be useful to individuals in terms of 
assembling and giving people their own personal records, making 
it Internet capable, where they can bring that from physician 
to physician, hospital to hospital. We are also working with 
Dr. David Brailer while he tries to connect the entire system. 
So you are going to hear much from us on that issue, and I 
would be glad to provide more for the record.
    Senator Ensign. Thank you.
    Mr. Chairman, I apologize. Unfortunately, I do not have 
time to listen to your response. If you would like to explain 
it for the record, my staff is here and will relay the 
information to me. I appreciate your response, but I am 
required on the Senate floor. Thank you.
    The Chairman. Thank you.
    Ms. Praeger. Let me just expand on one area. In talking 
about the technology and the electronic medical records, there 
is a real opportunity there by making those medical records 
more easily transferred from treatment site to treatment site, 
avoiding unnecessary and duplicative tests. I mean how often 
has someone gone in for a sprain and an x-ray is done, and they 
go to the next place, the doctor says, ``Well, I need to do 
another x-ray.'' Time after time after time those kinds of 
duplications of the service that does not add anything to the 
quality of the care that is going to be delivered. We can go a 
long way toward eliminating some of that if we can get those 
electronic medical records standardized, because unfortunately, 
what we have now are medical records being developed 
electronically and the ability for them to work in a facility, 
but then to be able to transfer that with any reliability and 
consistency to another location, another treatment location 
site, we are not there yet.
    The Chairman. Thank you.
    Senator Isakson?
    Senator Isakson. Thank you, Mr. Chairman. I want to thank 
Mitchell Blake. I am not going to ask him a question, but I ran 
a small business that--Mr. Rossmann, I had 800 independent 
contractors, so I know exactly where you are coming from, and I 
appreciate your testimony as well.
    But these two ladies have been provocative on some of the 
negative side toward AHPs, so I want to ask them a few 
questions if I could.
    First of all, Ms. Ignagni, your testimony was magnificent, 
and if I listened well, I got out of it that the two largest 
contributors to the cost of healthcare or some of our problems 
today, not necessarily in this order, are this whole issue of 
best practices and information sharing first, and second 
defensive medicine by virtue of the tort issue or medical 
malpractice. Am I correct there?
    Ms. Ignagni. Yes, sir.
    Senator Isakson. I happen to recently have had a situation 
where they were trying to figure out if anything was wrong with 
me other than mental illness.
    [Laughter.]
    Kept wondering, that so many tests seem to be run, that I 
wondered--I mean they were checking so many things out that did 
not hurt, bother me or anything else, it occurred to me there 
is a lot of defensive practice going on by virtue of the 
medical malpractice. Do you have a--and I know this is off the 
subject of AHPs and I apologize, Mr. Chairman, but does your 
organization have a recommendation with regard to medical 
malpractice and tort reform?
    Ms. Ignagni. Yes, we do, sir.
    Senator Isakson. What is it?
    Ms. Ignagni. Three issues we think need to be priorities. 
First, we need to have caps because that has a salutary effect 
on how the whole system works. The doctors are facing just the 
Sword of Damocles every time they see a patient, and they are 
worried about being able to practice medicine, and they do not 
feel they can practice medicine today. So if we remove that 
incentive and they have some certainty in the system, that will 
go a long way, number one.
    No. 2, the safety legislation that has been working its way 
through the Senate and the House is very important as well. You 
want to give practitioners, hospitals and physicians, an 
incentive to report when things go wrong, so we can understand 
it, we can digest it, and they will not be facing the fear of 
lawsuit.
    Third, we need to do a better job in developing alternative 
dispute resolution systems. The chairman has had legislation 
from last year that lays out a number of different 
alternatives. We very much are excited about contributing to 
that. We have learned a lot in the health insurance plan 
industry with respect to the value of external review. We think 
that external review, we can learn from that and we can 
transfer that and develop administrative procedures to take 
things out of the courtroom that do not need to be there in the 
case of malpractice. So it is a three-legged stool in our view. 
It is not one, it is not two, but it is three taken together 
that could really go a long way toward addressing this and 
freeing up some very important resources.
    Senator Isakson. Second question with regard to the 
transparency issue, the information issue and best practices. 
Is HIPAA the biggest inhibitor to actually sharing information? 
And are the privacy laws we passed an inhibitor to actually 
getting best practice information out?
    Ms. Ignagni. I wish I could say because that would be an 
easy fix. It is not. HIPAA actually gives us the ability to 
share data for healthcare operations, to actually be able to 
treat patients, so physicians can do that. The biggest barrier 
is not being able to diffuse all the things that are being 
developed in the research into practice quickly, and that is 
something that individuals--I will just give you one statistic 
that I think makes the point. We are spending roughly $30 
billion in the National Institutes of Health. We are spending 
$300 million in the Agency for Health Care Quality and 
Research, $30 billion, $300. All the effectiveness analysis is 
being done in that $300 million. I think anyone could look at 
that in an objective way and say we need to do more in the area 
of effectiveness analysis so we can get that into the delivery 
system so we really deal with that variation that is going 
around in practice.
    You know, you raised another issue, if I could just add, 
Senator, with respect to the incentive to do too much. We have 
seen now a real trend in the area of entities that have sprung 
up to encourage consumers to come in for full body CAT scans, 
etc., and we know that there is some real concern on the part 
of physicians, radiologist, about the implications long-term of 
that. We in our health insurance industry, as I talk about new 
strategies that we are reintroducing, we are looking at 
radiology and we are beginning to reassess the effectiveness of 
certain radiological procedures. We are seeing a very, very 
significant trend up in MRIs, CT, that really do not match with 
what we know patients need.
    Physicians are concerned about it. We are working with the 
College of Radiology, and we are going to have some 
recommendations on that, both for the private insurance system 
as well as for the public systems.
    Senator Isakson. That is a subject I would like to have a 
discussion with you about. I know my time is up.
    Could I ask one more question, Mr. Chairman? Would you be 
offended, Senator Burr?
    Senator Burr. No.
    The Chairman. You have always been my most cognizant one of 
the time, so have another question.
    Senator Isakson. Thank you, Mr. Chairman.
    I did not want to leave Ms. Praeger out. Ms. Praeger, you 
made a very declaratory statement, which if I wrote it down 
correctly was, AHPs will probably increase premiums. Would you 
elaborate on that statement?
    Ms. Praeger. You all have focused on the real problem here, 
and you keep saying you are not talking about AHPs, but you 
really are talking about the real underlying problem, and that 
is the cost of healthcare services. I do not think an AHP can 
successfully provide over the long haul affordable premium 
coverage any more than any other group can, unless they just 
have a healthy population. So the concern with AHPs is that 
there will be a cherry picking in the marketplace and there 
will be a tendency to--for associations to form around groups 
that have a fairly low risk and leave those other entities in 
that group market to fend for themselves, and I think the CBO 
budget report that was I think in 2002, demonstrated that in 
their analysis that 20 percent may pay lower premiums, but 80 
percent in the marketplace would probably be paying higher 
premiums. So that is the concern.
    The whole concept of insurance is trying to keep as many 
people in the system without segmenting and isolating the 
healthy and thereby driving up costs for the unhealthy.
    Senator Isakson. Thank you.
    Mr. Rossman. Senator, could I respond or follow up to that 
point that Ms. Praeger made?
    Senator Isakson. Yes, sir.
    Mr. Rossman. I would just like to say I think that Ms. 
Praeger commented earlier about the creativity and the ideas 
that they are doing at the State level as far as forming 
purchasing pools and trying new and different ideas. One 
example of that is the State of Colorado, who formed a test 
association health insurance plan, which they said they were 
going to do I think 18 plans back in 2003. The concept behind 
it was you could have a fully-insured AHP program or 
association health plan at the State level, or you could have a 
self-insured program.
    Well, our Colorado chapters, of which we have two, actually 
looked into the possibility of forming a self-insured 
association health plan under the Colorado State law. We came 
to find out it was about a quarter of million dollars in start-
up capital to set up the self-insured program, and quite 
frankly, they just were not able to generate the activity, if 
you will, at the State level or the amount of revenue at the 
State level to start a self-insured pool.
    Coincident with that, they started looking at all the 
different insurance carriers under this legislation to form an 
association health plan in Colorado that was fully insured. The 
bottom line of that was that no insurance company wanted to get 
involved with an association plan because they were happy doing 
business the way that we are doing it today.
    I bring this point up because--and I have checked with the 
insurance commissioner in the State of Colorado to verify these 
facts, that there are no self-insured AHPs under this test 
program which started January of 2004, and there are no fully-
insured programs in existence today.
    I bring this up because the whole purpose of the 
association health plan legislation is to take it to a little 
higher scope, to make associations, bona fide associations, 
purchasing pools on a broader level, to cross State lines and 
give the associations and the small employers the same 
economies of scale that large employers have. We feel that we 
have got the safeguards in the bill as it stands right now, we 
have got the protections to make sure that these types of plans 
when they start will be for the benefit of all small employers 
and will stay in business and make sure that the end result of 
providing health insurance for small employers is achieved.
    But we welcome talking with the opposition or those that 
are opposed to the bill to see what things we can do 
constructively to make this a success for all small employers, 
because quite frankly, we realize it is not the end-all, be-all 
of solving the healthcare crisis. The points these ladies 
brought up today are probably very, very important, but we know 
from a functional standpoint and a practical standpoint that 
small employers are having a very difficult time now, and that 
the AHP legislation is an opportunity to provide them some 
relief as we use the programs and services and the technology 
that is being developed by the NIAC and also the health 
insurance companies.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Burr?
    Senator Burr. May I inquire of the chairman, will we be 
doing one round of questions, or will we be doing multiple 
today?
    The Chairman. We will go more than one round. I have quite 
a few questions left.
    Senator Burr. That helps me. Let me thank all of our 
witnesses. It is good to see you, some of you whom I have had 
the opportunity to work on healthcare issues with before.
    And Mr. Rossmann, thank you, you just stole exactly what I 
was going to say right from the start. This is a difficult 
thing because we are not here talking about how to solve the 
healthcare crisis. We are here trying to decide whether the 
right thing to do is to expand products that companies are 
screaming for across the country that may have affiliations 
that are desperately trying to continue to provide or to 
provide for the first time insurance for their employees.
    I take to heart, Ms. Praeger, what you said about cherry 
picking, and I truly believe that if I was an employer and I 
cut back and cut back and cut back, those employees would look 
for another place to work where the insurance product covered 
what they wanted. I think we tend to leave the employee out of 
this, they are actively involved--and Karen, I agree with you 
about the escalating cost of healthcare. I believe that we are 
the driver, the Federal Government, Medicare. The States 
replicate us. So does every insurer in the world.
    The problem is that as we ratchet down reimbursements, so 
do the insurers, and consequently, so do the big employers turn 
to the insurers and they minimize the rate that their insurance 
goes up. There is cost shift, and an unfair portion of the cost 
shift today is going to the small group market. What they are 
experiencing as a percentage of increase on an annual basis is 
not being experienced by a General Motors. There is the ability 
to get a better price based upon the size of your company, and 
unfortunately, if we can do it right--and I believe we can and 
I am supportive of our efforts to do it--then we ought to allow 
small business to become a big business and to negotiate in the 
same volume, though we have to address some of the State 
concerns. We have to address some of the issues that are raised 
about the mandates, some of the issues that are raised about 
cherry picking.
    Can we do it? Yes. We are smart enough to do it. I hope we 
can get past this and we can get back on the cost of healthcare 
and how we turn it around.
    I commend your plans for bringing down the cost of 
prescription drugs. It is amazing what you do when you raise 
the copayment for a name brand and you lower the copayment for 
a generic drug. You save money because you have empowered the 
people who are participants in the plan to make a decision. We 
are talking about a section that does not have the choice. I 
think when we talk about transparency, if we are going to go 
there, then we have to seek full transparency. It means that 
every insurer out there has to be transparent. We have to know 
the rates they are negotiating. It cannot be a secret. That 
does not exist today. We all know it does not.
    I think to some degree we are asked, Mr. Chairman, to be an 
arbitrator between people who naturally have to represent the 
constituency they have. I would ask all of you to forget that 
for a minute. Let us think about this group of individuals that 
are out there, the pool is growing every day of individuals who 
are employed and do not have healthcare, employed and cannot 
afford healthcare, employers that want to provide it and just 
cannot make the commitment financially that they always have. 
Understand, we have to find a solution to this.
    I personally believe that AHPs are not a silver bullet. If 
they are a bridge that allows us to keep more people insured so 
we can get to the point that we solve the crisis in healthcare, 
then I look at that as a benefit, regardless of the amount of 
risk that goes along.
    I want to ask some specific questions if I can. The first 
one would be, Karen, in your testimony you mentioned AHIP 
supports Federal seed money for State high-risk pools, though 
it is my understanding that some of the member companies were 
actually opposed to the creation of high-risk pools and were so 
vocal that States abandoned their efforts. Can you shed any 
light on that?
    Ms. Ignagni. Right now 33 States have high-risk pools. They 
desperately need help in terms of a Federal helping hand and 
more funding. And we would like to see these kinds of 
strategies adopted in all of the States as a backstop to what 
is going on in the market to provide opportunity----
    Senator Burr. Is that a feeling shared by all of your 
members?
    Ms. Ignagni. You know, Senator, to be honest, you can never 
say categorically that every member of a particular association 
supports that, but our board has taken an affirmative position 
last June, and we are reflecting that position. We have been 
working this at the State level to try to figure out how to 
comprehensively fund this. It exacerbates the problem if the 
answer to funding State risk pools just ends up on the backs of 
the private health insurance market, which means on the backs 
of working families.
    So we have been pushing more broad funding, and that is 
probably where there have been some differences of opinions. No 
difference of opinion on the broadness of the funding, concerns 
about funding strategies that target the insurance industry 
particularly because that means employers, small employers, 
that means employees, that means working families. So that is 
probably where the different messages have come from. We are 
very much for broad funding.
    I might say with respect to HSAs that there is some 
precedent here for the community to take advantage of in terms 
of learning and thinking about what you might do. Congress 
passed HSAs, as you know, as part of Medicare Modernization. 
There are still 10 States that have barriers actually to the 
sale of HSAs, so we have to address that. That comes down to 
the issue of regulatory harmonization and trying to figure out 
how to modernize our regulatory structure.
    I deal with the mandate situation where small employers 
would like to do something. Sometimes the perfect is the enemy 
of the good. How do we get our hands around that? We have been 
working with the NAIC, and as I said, we are working with your 
colleagues on the other committees, addressing this regulatory 
issue. But it is a very real one.
    Senator Burr. Well, representing a State where we never had 
the option to have MSAs because we never licensed a carrier 
that offered them, I understand exactly what you mean.
    When we brought up the issue of Medicare Advantage Regions, 
what was AHIP's position on that proposal?
    Ms. Ignagni. We are for the regions. We are for the local 
markets. We are for the frail elderly incentives, we are for 
the----
    Senator Burr. But the effort was for less regions versus 
more regions.
    Ms. Ignagni. Our efforts?
    Senator Burr. Yes, marked for identification.
    Ms. Ignagni. Our efforts were to try to get a political 
strategy and ultimately a regulatory strategy that would 
provide the most competition. And so we have been working with 
the Department to do that. We worked with you and your 
colleagues and the colleagues on the other side of the aisle to 
try to advance that as well.
    Senator Burr. Having less regions would be a more 
nationwide approach than you talked about though, would it not?
    Ms. Ignagni. Not necessarily. First of all, in terms of 
Medicare, what I am pleased to see is the number of contracts 
have now doubled in private sector participation since the 
enactment of the law. That is 16 months. That is an excellent 
track record. So we are seeing a very fast growth.
    Senator Burr. But fewer regions would mean more regional 
harmonization versus 50 different entities.
    Ms. Ignagni. Not necessarily. You could harmonize with 50 
States and indeed that is what, as we talk about regulatory 
reform, that a number of entities are talking about, both the 
NAIC as well as folks who are looking at insurance regulation 
broadly. The absolute number really does not drive the 
harmonization. It is the will to harmonize and modernize.
    We are being challenged in the healthcare industry to 
operate on the principle of best practice. We think regulators 
ought to be challenged to do that as well. And so if you have 
40 States can you harmonize regulation? Yes. If you have fewer 
States, regions, can you harmonize regulation? Yes. The 
question is having the political will to do it and getting it 
done and sorting through that and trying to figure out how to 
get it done as quickly as possible so we can be out there 
selling product.
    One of the issues that we have found with the AHPs, we are 
prevented in many States from selling the kinds of products 
that small business would like to buy. That is a barrier. Do we 
fix that at the State level? Do we fix it at the national 
level? We are open to talking about whatever venue, as long as 
we can fix it so we can offer product for small players.
    Senator Burr. Do you agree with my statement that more of 
the cost shift goes to small group plans today than to the 
larger companies?
    Ms. Ignagni. I think that that is probably correct, but 
probably not to the extent you think it is. All companies now 
are bearing a significant burden as States clamp down on----
    Senator Burr. But the fact is I do not know, do I, because 
there is nothing that tells me.
    Ms. Ignagni. There is nothing that really tells you 
affirmatively.
    Senator Burr. Mr. Chairman, you have been very kind. I will 
wait for the second round.
    The Chairman. That means I get two turns now, right?
    [Laughter.]
    That is fine. Those were excellent questions. I appreciate 
the interest.
    I am going to back up to a much more basic question that I 
need to have answered I guess. Do bigger companies get lower 
rates than small business? It seems pretty basic to the whole 
discussion. Do they?
    Ms. Praeger. Mr. Chairman, let me just comment. Our State 
health plan in Kansas insures about 80,000 to 90,000 lives and 
we have an older State employee population, and we have the 
same health costs that would go with having an older 
population. When health insurance premiums were increasing in 
the double digits, we were seeing those same increases in our 
State plan. So even though we were large, the larger 
purchaser----
    The Chairman. But that is talking percentages. I am talking 
actual dollars per employee. What I am hearing from small 
business is that they are paying more per employee than the big 
businesses are. Percentage of increase? Yes, everybody has got 
percentage of increase. But if you start from a smaller base 
you still wind up with a smaller base. So is there a disparity 
in the dollars per employee with the smaller one? I mean 
intuitively it would seem that there would be because you are 
not talking about as many--you have more service you have to 
provide to fewer people, but is that true?
    Ms. Ignagni. Senator, what I am particularly please--Ms. 
Praeger, were you finished? I am sorry.
    Ms. Praeger. Yes.
    Ms. Ignagni. Mr. Chairman, what I am very pleased about, we 
have just completed a study of the individual market which goes 
directly to your question, and I was very pleased to see the 
range of products now--and we can provide this for the 
committee's consideration--in terms of trying to hit this mark 
of affordability, both to the range of products in the 
individual market but then also what we see now being offered 
to small business. Now, with due regard to the fact that there 
are barriers in certain States toward offering lower option 
products, which a number of small businesses suggests that is 
the only thing that they can afford. But we are seeing products 
with premiums less than $100. We are seeing reasonable 
deductible, stop loss, catastrophic, beginning to be offered 
all over the country. And that has definitely increased from 
the last time we did this survey, which was about 4 or 5 years 
ago. So I would be delighted to provide that to the committee.
    One of the things that I think with the AHP legislation 
that has not been understood, and admittedly, you could direct 
strategies toward fixing this problem, the AHP discussion 
always proceeds as if there would be this large pool that would 
be community rated. The AHP legislation does not propose that 
there be one rate established for every member of an NFIB 
chapter or an ABC chapter or something of that sort. Each of 
the businesses would be rated themselves. So with no rating 
bands, no guidance, you could have very, very significant 
swings in rates, which is why the CBO has indicated that 80 
percent of individuals working in small business would probably 
have an increase in cost and why the actuaries--the other issue 
is the S&L problem. Basically you charter entities that have 
little experience in providing insurance, are not as 
capitalized as they need to be, according to the American 
Society of Actuaries, and then you have a real problem, which 
we have seen in the country.
    The Chairman. But my question is: do bigger companies get a 
lower rate per employee than smaller companies do? I mean we 
are going from the assumption that they do, and I think it is 
true, but I want to ask the question.
    Mr. Rossmann, did you want to comment on that?
    Mr. Rossman. Yes. Senator, I would say from my personal 
experience that they do. Larger companies get a better rate 
than smaller companies for two reasons. One is in the 
administration cost and marketing and sales cost that a 
insurance carrier will charge to a larger company versus the 
expenses factors in cost in selling to a smaller company. That 
is a savings right there.
    The other tool I guess you would say to get a lower rate 
for larger companies is the fact that they have experience 
rating. In other words, the premium dollar they pay into the 
insurance company is counted for against the administration 
charges that the insurance company makes, plus the claims 
charges of what they pay out. And generally any difference, if 
there is a margin in a given year, where they pay in more 
premium than they have paid out in claims and expenses, that 
dividend goes back to the benefit of that large employer to 
reduce their rates in the future. That is called experience 
rating. It is a standard industry item. So they get a dividend 
back from the insurance company.
    So by virtue of that, large employers also have lower cost 
or lower rates if you will for their insurance coverage. That 
is one of the big things of an association health plan. Under 
an association health plan the trust that is set up with 
trustees or fiduciaries under the program would be able to have 
an experience rated program, where any margins that are 
generated in a given year, if there are margins--and granted 
those are getting fewer and fewer because health costs keep 
going up and up--but if there are any margins those margins 
stay in the plan for the benefit of those little employers this 
year and next year.
    The Chairman. I think when people are advocating a larger 
pooling solution for the small businesses, they are looking for 
a short-term solution, and what we are talking about on some of 
the other solutions are long-term solutions. But the long-term 
solutions affect the big companies just like they do the small 
ones. The med mal is a problem for everybody in the country, it 
is not just the small companies. The risk spreading, the 
mandates, those are all problems that the big companies have as 
well. But the people advocating the AHPs are talking about a 
short-term solution, hopefully that will turn into a long-term 
solution.
    I want to talk a little bit about the mandates. States have 
mandates. One of the things that shows up in some of the 
legislation that I have looked at that I will get to referee on 
is elimination of some of the State mandates which would bring 
down some of the prices. Would there be savings if there were 
greater flexibility in designing the benefits if there was 
nationwide some kind of a change in the mandates? Mr. Rossmann?
    Mr. Rossman. I think if you have some consistency across 
State lines--and that is what you would basically achieve 
through the association health plan legislation--and it is a 
modification of--it is giving small employers the same 
advantages that large employers have today.
    One of the interesting issues is the fact that if you 
formed an AHP and you set up this plan and it was a very rich 
plan or a very bare bones plan, it would still have to go out 
to the open market and it would have to be sold, I guess you 
would say, to the small employers who were members of that 
association. And those employers have a chance to buy that 
benefit if they wanted to or not buy that benefit.
    We have seen over the years that bare bones plans with low 
or no mandates basically have not sold. I can tell you from 
personal experience and ABC members, they want quality benefits 
to offer their employees just like the large employers have for 
their employees in order to attract and retain employees. So we 
do not provide programs that have low benefits, I guess you 
would say. They have quality benefits and good comprehensive 
coverage.
    I guess the other thing I would mention on mandates and 
rating under the AHP provisions, the AHP bill, the bill is 
designed to have the experience rating of that association come 
up with one set of rates, if you will, for the association in 
general, in other words will base the rates on the experience 
of the association, take into consideration age rating, 
geographic rating, sex, family composition, all the types of 
things that States and insurance companies do today nationwide. 
And then deviate those rates upward or downward only to the 
extent allowed by State law, and that is written right into the 
bill for both insured and self-insured programs.
    So the AHP would be operating within the rating bands of 
the various States. In other words they would use their age 
rating to come up with a set of rates for the firms in this 
State, but then either raise them or lower them if allowed by 
the State, and if the State did not allow it, a State required 
community rating, then they would use those rates to develop a 
general community rate for that State and those employers.
    Ms. Ignagni. Mr. Chairman, that--and I appreciate what Mr. 
Rossmann said, and I may have a wrong understanding of the 
legislation, and I apologize if I do. One of the problems that 
Mr. Rossmann has correctly talked about is this issue of what 
does an individual employer pay, and that is Senator Burr's 
question too. And unfortunately, I think, a number of 
individuals that have sought to support AHP legislation have 
talked about it as one rate, federally-chartered AHPs, very few 
standards, preemption of mandates, etc. Unfortunately, what 
that would mean is an experience-rated premium would be asked 
of Mr. Blake. So his situation could be exacerbated under this 
particular legislation, which is why CBO gets to where it is 
with respect to its analysis of who would be the winners and 
who would be the losers.
    So with all due respect, our community wants to be a 
solution provider. We want to help you sort through this. 
Although we also at the same time wanted to be honest about 
issues that we say with respect to unintended consequences with 
legislation that could be pushed for meritorious reasons, but 
could have a serious negative consequence on small business 
such as Mr. Blake's.
    The Chairman. I understand that. What we are trying to do 
is drive toward some solutions that will solve Mr. Blake's 
problem in the short term.
    Ms. Ignagni. Well, I think you really then have to get to 
the situation of how do we sort through this patchwork quilt at 
the State level with respect to different rating requirements, 
different solvency issues, different mandates, the inability to 
bring products to market quickly. There are a whole range of 
issues that need to be honestly and legitimately sorted 
through. We would like to help the committee do that and 
provide some answers. But it is not--we believe the wrong 
strategy is to carve out a particular group with no experience 
in the insurance market with little capitalization to say let 
us develop a Federal corridor for them, because the unintended 
consequences we think are going to be quite severe, and we have 
had precedent for those unintended consequences.
    The Chairman. We will appreciate the cooperation and the 
help on that.
    Senator Burr?
    Senator Burr. Mr. Chairman, I sat here at the beginning of 
your process with the thought that if we were sitting in a 
Banking Committee meeting we would be talking about an inverted 
curve. In fact, in North Carolina today, for an employee of a 
small business it is actually cheaper to buy an individual 
health insurance policy, than it is to be a member of a small 
group. That tells you in a pretty good sense that the small 
group market is pretty messed up, and I think that experience 
cannot be limited just to North Carolina, and that to some 
degree shares with you the frustration.
    When employers cannot offer, cannot negotiate, cannot find 
an insurance product that they can provide for their employees 
that is cheaper than what the employee could go out in the open 
marketplace and get a policy for--and by the way, that 
individual who goes out in the marketplace can assemble that 
policy in all likelihood custom to them. They can decide what 
the deductibles are, they can decide what the copayments are 
going to be. They can decide so that they can match the premium 
where they personally need to be. The likelihood is that a 
small group plan does not have near the flexibility because 
they are trying to address a larger population.
    Again, I think it is a sign that something is broken. I 
think the chairman has committed to take up legislation. I am 
committed to make sure these employees have additional options. 
Where there are places that we can fix a bill, we have to do 
it, but my concern is that right now the small group market is 
the first one to feel the excesses of the cost of healthcare as 
it rises, and they are the last ones, if at all, to feel the 
benefits when we get it under control.
    The only way to let them feel the effects that big business 
does today is to in fact give them additional tools that give 
them a way to compete in a marketplace through leverage. 
Whatever that is, I think that is where we are trying to get 
to, so I encourage all of you to continue to help us as we go 
along through this process to try to put together legislation 
that I think makes sense, but also heads in the direction that 
I think all of us here today are concerned about.
    Mr. Rossmann, I wanted to give you one more opportunity, if 
you choose to, to address the cherry-picking issue and the 
rating pool issue. You did just follow up on the rating pool, 
but I think that consistently, regardless of what conversation 
you are in, when AHPs are mentioned and if there is somebody 
who is not in favor of them, the first word out of their mouth 
is, ``Well, they are just going to cherry-pick.'' The second 
phrase out is that ``This is going to have an effect on rating 
pools.'' Will you address both of them?
    Mr. Rossman. Thank you, Senator. I appreciate it. I would 
be glad to.
    As far as the cherry-picking issue, I think at this point 
that is a moot point, basically because the bill provides that 
it must be established, the AHP must be established by a bona 
fide association, it has to have trustees who are all 
fiduciaries, like you have fiduciaries under union and 
corporate plans, and they have to set up a separate trust which 
is acting in the best interest of the participants.
    Also the bill specifically requires that membership in the 
association cannot be conditioned on health issues or health 
concerns. In other words, you have to let members into your 
association like you normally would. You cannot say, ``I am 
only going to let the healthy members in the association and 
forget about the people that are unhealthy.'' So membership is 
not linked to health status.
    It also says that under the association health plan the 
trust or the program must offer the benefits to all eligible 
members. The only difference I can see in a place where you 
would not have an eligible member is quite possibly if you got 
an HMO option in some part of the country and the HMO service 
area does not expand to the entire Nation, you may not be able 
to offer an HMO to somebody in Wyoming when you only have it 
available here in the DC area. But other than that, if you have 
got PPO programs, preferred provider type organizations, that 
you have nationwide, you should be able to offer the same 
programs to all employers and all employees across the country, 
and that is the concept.
    So there will not be cherry picking because all employers 
have to get in. There will not be cherry picking because you 
cannot deny coverage for an employee. Quite frankly, I feel 
personally, and what we experience day-to-day at ABC, is the 
people that are looking for an association health plan tend to 
be the people that have medical problems, the people that are 
having a hard time with their insurance. Those are the folks we 
get a call from every day at the office, asking if we have an 
association health plan that they can get into.
    So I think the cherry picking could be almost reverse 
cherry picking and the people that are going to want this 
program when it is passed would be the folks that need it the 
most. We have to make sure that we get all of the members into 
that.
    So I hope that answers the issue on cherry picking. It does 
not exist because you cannot coincident health status on 
membership, you cannot deny coverage to the employers, and you 
cannot deny any specific employee. So those three factors 
eliminate cherry picking.
    As far as rating goes, I did not mean to--and I apologize 
if I did--I did not mean to say that there would be one rate 
nationwide as far as the rating goes. What we would do is we 
would have one large pool of plans and rates in which Mr. Blake 
would participate, for example, and those rates would vary 
according to the plan design. It would use age rating. It would 
use family composition, sex, all the things that insurance 
companies use today. And we have a set of rates for each 
medical plan, and those rates would vary according to the area 
of the country you lived in.
    And then we would say those are the rates for all the 
employers of ABC, but oh by the way, if you have some employers 
that are not quite healthy, the plan can rate you up only to 
the extent that is allowed by State law in which the employer 
is located, which is saying we are trying to put the AHP on an 
equal footing with insurance companies. We do not want the AHP 
to be in a position where the insurance companies can rate up 
and the AHP could not rate up to that level in the State, and 
then all of the business that has high medical rates would come 
to the association health plan. So we are looking for parity 
there, and that is specifically stated in the bill.
    The advantage in this experience rating of this pool is you 
bring all these claims and expenses back together and you say 
at the end of the year, our costs were X number of dollars for 
the entire group in the AHP. We need a rate increase of X 
percent for the next year, and then everybody in the country 
gets that same rate increase. We pooled them all together for 
experience. We pooled them all together for plan designs and 
the benefits of margin if it is good experience, and for rate 
increases if it is poor experience.
    So in this situation under this concept Mr. Blake would 
have the same kind of increase that everybody else in that AHP 
had in a given year. He would not be--I should not say lasered 
out--but he would not be focused on with huge rate increases 
because you are pooling them all together, and that is the 
concept behind the association health plan.
    Senator Burr. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    This has been helpful. Like I say, it has raised a lot of 
questions. The purpose of the hearing is not to go any 
particular direction, but to find some series of ideas which a 
task force that I served on last year came up with, that would 
perhaps provide some relief to small business as quickly as 
possible. Then there is a whole series of issues that we have 
been working on that would provide help to all businesses. 
Those are a bit more difficult to achieve, but we have had some 
success already. Health savings accounts is one of the things 
that we had on the list. Those are in existence.
    I have to tell you though when those first came out, my 
son's business was in the process of looking for some insurance 
and I had told him what this could do. So as he interviewed 
insurance people he asked them about health savings accounts, 
and all of them said, oh, that is a terrible idea, should never 
have been done. And he called me up the night after he did 
those, and he said, ``Dad, you must have done something 
wrong.'' I said, ``Why?'' He said, ``Well, the companies all 
tell me it is a bad idea.'' I said, ``Well, here is the key 
question to ask them. Ask them if they have a health savings 
account.'' He did. Not one of them did have. I said, ``Well, if 
they do not have the product, of course it is a bad idea.'' Six 
months later when I talked to him about his insurance, he said, 
``Yes, we have health insurance plans by almost every company 
now and they are pushing them.''
    There are some solutions out there and they have to be 
worked on very carefully and put into place, and I am hoping 
that everybody will participate in those. One of the things I 
am doing on all of health is trying to sit down with the 
different groups--health insurance companies would be one of 
them--and ask them what they can do to help.
    Of course, the first thing that always comes out is if the 
doctors did better practices, if the lawyers did not sue, and I 
say, ``No, no, no. My question is what can you do to bring down 
the cost of health?'' I have got all the finger-pointing ideas 
already and we are working on things in those areas to 
eliminate that, but even the consumer can do things that will 
help bring down the cost of health while we increase quality 
and access. That is what we are trying to do, so we will try 
and be careful with all of it, but hope that all of you will 
continue to come up with ideas, and maybe out of this whole 
thing there will be a hybrid that will work, and it will work 
with the State insurance commissioners still in the position 
where they can do the good work that they do, and I am pretty 
sure that under any scenario that we do, the insurance 
companies that are in place now will be a part of whatever 
happens. They may be administering associated health plans, but 
they will still be there.
    We will try and be careful on the whole thing.
    Again, I appreciate all of the testimony, and the record 
will remain open.
    This hearing is adjourned.
    [Whereupon, at 11:38 a.m., the committee was adjourned.]

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