[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                       FULL COMMITTEE HEARING ON
                   CHALLENGES AND SOLUTIONS TO HEALTH
                INSURANCE COVERAGE FOR SMALL BUSINESSES

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

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 14, 2007

                               __________

                          Serial Number 110-7

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


JUANITA MILLENDER-McDONALD,          STEVE CHABOT, Ohio, Ranking Member
California                           ROSCOE BARTLETT, Maryland
WILLIAM JEFFERSON, Louisiana         SAM GRAVES, Missouri
HEATH SHULER, North Carolina         TODD AKIN, Missouri
CHARLIE GONZALEZ, Texas              BILL SHUSTER, Pennsylvania
RICK LARSEN, Washington              MARILYN MUSGRAVE, Colorado
RAUL GRIJALVA, Arizona               STEVE KING, Iowa
MICHAEL MICHAUD, Maine               JEFF FORTENBERRY, Nebraska
MELISSA BEAN, Illinois               LYNN WESTMORELAND, Georgia
HENRY CUELLAR, Texas                 LOUIE GOHMERT, Texas
DAN LIPINSKI, Illinois               DEAN HELLER, Nevada
GWEN MOORE, Wisconsin                DAVID DAVIS, Tennessee
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
BRUCE BRALEY, Iowa                   VERN BUCHANAN, Florida
YVETTE CLARKE, New York              JIM JORDAN, Ohio
BRAD ELLSWORTH, Indiana
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               DEAN HELLER, Nevada, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia                VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             JIM JORDAN, Ohio

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


WILLIAM JEFFERSON, Louisiana         DAVID DAVIS, Tennessee, Ranking
HENRY CUELLAR, Texas                 ROSCOE BARTLETT, Maryland
GWEN MOORE, Wisconsin                SAM GRAVES, Missouri
YVETTE CLARKE, New York              TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  
?

           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


WILLIAM JEFFERSON, Louisiana         LYNN WESTMORELAND, Georgia, 
RICK LARSEN, Washington              Ranking
DAN LIPINSKI, Illinois               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               STEVE KING, Iowa
GWEN MOORE, Wisconsin                MARILYN MUSGRAVE, Colorado
JASON ALTMIRE, Pennsylvania          MARY FALLIN, Oklahoma
JOE SESTAK, Pennsylvania             VERN BUCHANAN, Florida
                                     JIM JORDAN, Ohio

                                 ______

            Subcommittee on Urban and Rural Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DEAN HELLER, Nevada
HANK JOHNSON, Georgia                DAVID DAVIS, Tennessee

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


JUANITA MILLENDER-McDONALD,          LOUIE GOHMERT, Texas, Ranking
California                           LYNN WESTMORELAND, Georgia
CHARLIE GONZALEZ, Texas
RAUL GRIJALVA, Arizona

                                 (iii)

  
?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES

Cockey, Jr., Adam D., National Association of Realtors...........     3
Ignagni, Karen, America's Health Insurance Plans (AHIP)..........     5
Wilensky, Dr. Gail...............................................     7
Stottlemyer, Todd, National Federation of Independent Business 
  (NFIB).........................................................     9
Cavanaugh, Michael, Queen City Electric, Inc.....................    11

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    36
Chabot, Hon. Steve...............................................    38
Altmire, Hon. Jason..............................................    39
Cockey, Jr., Adam D., National Association of Realtors...........    40
Ignagni, Karen, America's Health Insurance Plans (AHIP)..........    49
Wilensky, Dr. Gail...............................................    69
Stottlemyer, Todd, National Federation of Independent Business 
  (NFIB).........................................................    83
Cavanaugh, Michael, Queen City Electric, Inc.....................    93

Statements for the Record:
Women Impacting Public Policy....................................    96
AARP.............................................................   101
National Association for the Self-Employed.......................   107
Professional Photographers of America/Alliance of Visual Artists.   114

                                  (v)

  


                        FULL COMITTEE HEARING ON
                   CHALLENGES AND SOLUTIONS TO HEALTH
                INSURANCE COVERAGE FOR SMALL BUSINESSES

                              ----------                              


                       WEDNESDAY, MARCH 14, 2007

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[Chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Jefferson, Shuler, 
Gonzalez, Larsen, Braley, Clarke, Ellsworth, Sestak, Chabot, 
Bartlett, Graves, Akin, Musgrave, Fortenberry, Buchanan and 
Jordan.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    ChairwomanVelazquez. Good morning. This hearing on the 
challenges facing small businesses in providing health 
insurance coverage is now called to order.
    Just about every employer and employee knows there are few 
issues of greater importance than access to health care. But in 
today's market, more companies particularly small businesses 
are finding it difficult to offer health coverage to their 
employees. The challenge of providing coverage not only 
undermines the well-being of millions of Americans, it also 
threatens the growth of small business and our economy.
    If the American healthcare system is at a crossroads, small 
businesses are at its center. Entrepreneurs will tell you that 
this is the number one issue they face. And unfortunately, this 
problem is getting worse. Every year, the number of employers 
offering coverage continues to decrease. According to the Casey 
Commission on Medicaid and the Uninsured between 2001 and 2005 
the number of workers receiving coverage through their employer 
decreased nearly four percent. More than half of this decline 
was attributed to companies terminating insurance coverage.
    This Committee's goal will be to ensure that healthcare 
reform does not occur without meaningful consideration of how 
it impacts small business. Simply put, any reasonable strategy 
to expand insurance coverage must give serious thought to the 
challenges faced by small firms.
    Today's hearing is the first in a series for the Small 
Business Committee. We will be looking at ways the Congress can 
address the problems in the small business health insurance 
arena. Over the years, there have been a variety of approaches 
to reducing the number of uninsured that have been passed into 
law. We have seen the expansion of the Medicaid program, pools 
to help high risk populations as well as programs to provide 
healthcare for those laid off due to trade agreements. However, 
there have been no meaningful changes to fix the small group 
market. While states like Massachusetts and California are 
starting to take action on their own, I believe that there are 
changes at the federal level that can improve the health 
insurance market.
    A number of committees will be looking at the problem of 
healthcare coverage in the 110th Congress. My focus is to make 
sure that the small businesses are part of the debate. We 
cannot have a discussion on reducing the uninsured without 
helping the 23 million Americans without health insurance who 
work at, on or have a family member working at a small 
business. In my opinion, any solution to America's healthcare 
crisis can only take shape in light of an open dialogue with 
all interested parties.
    The panel before us will allow the Committee to do that. We 
must understand the challenges before small business and more 
importantly, we must understand how the insurance market works.
    We have with us today an impressive group of witnesses, 
well equipped to help us identify the reasons employers are 
finding it difficult to offer coverage. This is why I am so 
pleased that representatives from the small business community, 
healthcare experts as well as the insurance industry are before 
us today.And I thank all of you for taking time to have this 
great discussion this morning.
    While I know there may be differences of opinion on the 
best way to solve the problem, I think every one will agree 
that the current system is broken. I look forward to today's 
testimony on possible alternatives and practical solutions that 
may go beyond the particular perspective of the constituency 
that you represent. My hope is that we can hear about some 
common ground on the various issues that will help us move 
forward with meaningful solutions. And now I will recognize Mr. 
Chabot for his opening statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr.Chabot. Thank you, and thank you, Madam Chairwoman, for 
holding this important hearing on health insurance and 
healthcare. I want to particular welcome Mike Cavanaugh, 
President of Queen City Electric in Cincinnati for making the 
trip to testify before the Committee and I'll be introducing 
him later. I also want to mention I'm pleased to see a fellow 
William and Mary graduate, Mr. Stottlemyer from NFIB. We happen 
to both not only graduate from William and Mary, but played 
football for that fine college, second oldest in the nation. I 
happen to be 10 years older, but not 10 years wiser. So glad to 
have you here, Mr. Stottlemyer as well.
    Purchasing health insurance is one of the most costly 
expenses for small businesses. The National Federation of 
Independent Business, NFIB, cites the cost of employer-
sponsored health insurance as small business owners most 
pressing problem, greater than taxes or labor costs or even 
government red tape.
    As I visit with small business owners in my Congressional 
District back in Cincinnati, the cost of healthcare is cited 
repeatedly as the most significant challenge for those small 
businesses and the cost of healthcare is rising. Access to 
health insurance is also a challenge to small businesses. 
According to the Small Business Administration, the SBA, 
employees with small firms are far less likely to have health 
insurance than those at larger ones. Helping to make healthcare 
more affordable for small businesses is one of the most 
important issues this Committee can address and that's one of 
the reasons that I commend the Chairwoman for holding this 
hearing today.
    We all know that small business is the engine of America's 
economic growth. According to the Bureau of Labor Statistics 
from July 2005 to June 2006, small businesses created one and a 
half million new jobs, 61 percent of all the jobs created in 
America. Our nation's small businesses and entrepreneurs drive 
the economy and we need to do all that we can to help keep 
their costs down, help them stay competitive and encourage 
their growth.
    Association health plans, pool purchasing and reinsurance 
have been mentioned as ideas to help reduce the cost of health 
insurance for small businesses. Other suggestions such as 
implementing new healthcare technology, chronic disease 
management and aggressive case management have also been 
advanced as ways to reduce the cost of health insurance and 
healthcare. With a problem of this magnitude, we must examine 
all of these options, come up with new ones and work together 
to address this issue.
    I believe that tax relief is also an important way to 
reduce the overall tax burden and make healthcare more 
affordable for small businesses. In previous Congresses, I've 
introduced the Healthcare Affordability Act which would provide 
every American the ability to deduct 100 percent of the cost of 
their health insurance, something that larger companies can do, 
but unfortunately small businesses or individuals are unable to 
do it at this time. I plan to introduce this bill or similar 
bill in the near future.
    Madam Chairwoman, I appreciate your holding this hearing. I 
look forward to hearing from our witnesses and to working with 
you on finding ways to make healthcare more affordable for 
small businesses and their employees, and once again, thank you 
for holding this hearing. I yield back my time.
    ChairwomanVelazquez. Thank you, Mr. Chabot. And our first 
witness is Mr. Adam Cockey. You will have five minutes. The 
green light means you can start and then the red light means 
the time has expired.
    Mr. Cockey is the 2007 immediate past chairman of the 
Business Issues Committee of the National Association of 
Realtors Board of Directors. The National Association of 
Realtors represents more than 1.3 million members involved in 
residential and commercial real estate. Since 2003, Mr. Cockey 
has been a senior vice president of Prudential Realtors, a real 
estate firm with 25 offices located in the District of 
Columbia, Maryland and Virginia. Sir, you can start your 
presentation and thank you for being here.

  STATEMENT OF ADAM D. COCKEY, JR., SENIOR VICE PRESIDENT OF 
                 PRUDENTIAL CARRUTHERS REALTORS

    Mr.Cockey. Thank you, Madam Chairwoman Velazquez, and 
Ranking Member Chabot and Members of the Committee. I am here 
representing the 1.3 members of the National Association of 
Realtors. I thank you for holding this session and appreciate 
the opportunity to discuss the challenges that the small 
business community faces with the outlook for health insurance.
    I've been in the real estate profession for more than 32 
years. I know how hard it is to find health insurance when you 
have no employer to provide coverage. I also know how hard it 
is to provide health coverage for employees when you're the 
owner of the firm.
    The real estate sales profession experiences a perfect 
example of the challenges that the self-employed and small 
firms face today. You see, real estate agents are self-
employed, independent contractors. They are not employees of 
the offices which they are affiliated. They are independent, 
legal entities. You might say that they are the smallest of 
small businesses.
    The overwhelming majority of real estate firms are also 
small, typically having fewer than five employees and like 
other small businesses, they struggle to provide health 
insurance to their salaried employees. I'd also note that this 
struggle is not limited to just the small firms. My firm, 
Prudential Carruthers, we have 140 salaried employees. Even 
with what some would consider a less than small number of 
employees, finding health insurance coverage is a challenge and 
is expensive, so expensive that in fact, that only 70 of the 
140 employees choose to sign up for the coverage. Why do they 
not? They do not because they find that the coverage is just 
too expenses on their salary basis.
    As a result, most real estate agent employees must find 
coverage in the individual insurance market, where there is no 
negotiating and no leverage. For the most part, you basically 
take or leave whatever coverage is offered at whatever price it 
is offered. Our firm, as an example, in Year 2005 had an 8 
percent increase in insurance. This year, the increase is 21 
percent. Over the two years, we've almost had a 30 percent 
increase in insurance coverage. Consequently, today, more than 
28 percent or more than 336,000 of the nation's 1.3 million 
realtors have no health insurance. If we add family members to 
the tally, the number of uninsured individuals in realtor 
households is estimated to be as many as 886,000 men, women and 
children.
    A growing problem. Obviously, realtors are not alone in 
their struggle to obtain affordable healthcare today and 
looking at employment trends, we anticipate that we have even 
more uninsured individuals in the future. Today, as a result of 
corporate restructuring and job outsourcing, the share of the 
U.S. workforce that is self-employed, independent contractors, 
freelance workers, consultants and other nontraditional workers 
has reached a remarkable level. The General Accounting Office 
estimates that these workers comprise 30 percent of the 
American workforce in 2000. Some experts expect that by the 
Year 2010, 41 percent of the U.S. workforce will be so-called 
free agent workers.
    Without changes in the current health insurance system, we 
fear this shift in composition of workforce will be accompanied 
by increases in the number of uninsured. Finding a solution to 
the insurance problem must become a top priority.
    As discussions of a problem must also include discussions 
of solution, while our organizations and its members are not 
health insurance experts, let me quickly share some 
observations. First, any discussion of solutions must address 
the shortcoming of the national individual insurance market. 
The market is not serving the needs of the self-employed 
dependent upon it.
    Second, efforts need to be made to define what constitutes 
a set of core healthcare benefits. Such an effort would be a 
first step to define an essential set of coverage around which 
stake regulators could get together. Together, any national or 
state solution must acknowledge that the cost of providing 
individuals with total access to all desired health services is 
far beyond what most individual families and businesses can 
afford.
    And finally, we believe that there is a role for the 
community, the nonprofit organizations that have not 
traditionally been involved in facilitating access to insurance 
for the self-employed and the small businesses.
    On that note, I will close, Madam Chairwoman, and again 
thank you for inviting us. I hope that and I'm happy to answer 
any questions that you may have.
    [The prepared statement of Mr. Cockey may be found in the 
Appendix on page 40.]
    ChairwomanVelazquez. Thank you.
    Mr.Cockey. Thank you very much.
    ChairwomanVelazquez. Our next witness is Ms. Karen Ignagni. 
She is the President and CEO of America's Health Insurance 
Plans. American's Health Insurance Plans is the national trade 
association representing more than 1,3000 health insurance 
plans.
    Thank you.

STATEMENT OF KAREN IGNAGNI, PRESIDENT AND CEO, AMERICA'S HEALTH 
                        INSURANCE PLANS

    Ms.Ignagni. Thank you, Madam Chair, Mr. Chabot, Members of 
the Committee. It's a pleasure to be here today to focus on the 
problems of small business and what can be done with respect to 
the healthcare challenges in that arena.
    We have submitted testimony that focuses on four areas. 
First, the current state of the small health insurance and how 
healthcare dollars are being spent there. We have executed the 
most comprehensive survey to date on that market and we'd be 
delighted to talk more about the specifics of those results.
    Second, an overview of the strategies that our members are 
undertaking to control healthcare costs, enhance choices, and 
improve quality.
    Third, solutions, specifically targeted to small business 
to respond to some of the challenges that my colleague, Mr. 
Cockey, just talked about.
    And fourth, our perspective on various legislative 
proposals, both in Congress now, as the Chair indicated in her 
opening remarks, as well as things you might think about.
    To begin, in November 2006, just a few months, our Board of 
Directors announced a proposal for expanding access to health 
insurance coverage for all Americans. The reason I start here 
is that the problems that small businesses are facing in the 
healthcare arena are very reflective of the problems that a 
number of the individuals who are presently uninsured are 
facing, and we need to look at broad strategies as well as 
customized strategies.
    Our access proposal includes several elements that would 
help small business and indeed, Mr. Cockey referred to some of 
them a moment ago. The Chair and Mr. Chabot referred to some of 
them and I want to highlight them.
    First, our proposal would allow for a new federal 
performance grant that would allow funding to be made available 
to states if they meet specific targets to provide a helping 
hand in expanding coverage.
    Second, our proposal for healthcare tax credits would help 
subsidize the cost of individuals below 400 percent of poverty 
purchasing health insurance coverage. Many of those individuals 
from 300 to 400 percent of poverty, which is roughly $60,000 to 
$80,000 worth of income, are working in small businesses and 
need that additional helping hand. So we would do that on a 
sliding scale.
    Third, we are very, very supportive of the comments that 
have just been made about the importance of tax equity. If you 
are purchasing health insurance on your own in our country now, 
you need to spend 7.5 percent of your adjusted gross income 
before you have a dedication. Individuals who are receiving 
coverage through employers receive their coverage from 
employers and have that deduction, so we think that's a very 
important factor.
    And because we believe in this principle of tax equity, 
fourth, we have proposed a new mechanism, a Universal Health 
Account, that would not prescribe the type of coverage that an 
individual should purchase, but that it would create a tax 
vehicle to allow this tax equity to be secured and allow 
subsidies from the Federal Government, from states, from 
employers, to flow into those accounts so that individuals 
would have portability.
    Another front, we support steps to modernize the regulatory 
system. In particular, Mr. Cockey made a very important point a 
moment ago about the needs for states to create or have a 
regulatory environment that allows for the purchase of 
affordable coverage. We have set out two alternatives for 
states to consider in our access proposal. One in particular 
goes to this concept that Mr. Cockey referred to which is to 
establish a basic package of benefits. We know that there are a 
number of meritorious objectives that underpin state mandates, 
but they are acting as a barrier for small business who want to 
do the right thing and provide insurance coverage, but they 
can't afford to cover everything that is required. We believe 
in uniform regulatory structures that do provide flexibility 
for the kinds of customized benefits that we were talking 
about, but to do that in a uniform way.
    And we also believe that it's time to establish an 
independent advisory commission and a number of the states have 
been moving in this direction to assess whether or not states 
should move forward with additional mandates and to look at the 
mandates that have already been put on the books.
    We also believe and I think this has not yet been 
mentioned, the importance of federal funding for state high-
risk pools. There are a number of individuals who are medically 
uninsurable. There has been legislation, state high-risk pool 
funding, Extension Act of 2006, which has been enacted, but it 
needs to be appropriated annually, and this is also a very 
important part of the structure.
    Madam Chair, I've focused primarily in my oral remarks on 
some of the ideas that I thought the Committee would be 
particularly interested in, but in the last moment of time I do 
want to highlight for the Committee that we have provided a 
whole range of strategies that our members are undertaking to 
do disease management, to do care coordination, to make the 
healthcare system more connected, to do personal health records 
and allow individuals to have the kind of portable effective 
healthcare coverage that they are very much interested in. 
We're taking leadership and partnership with a number of 
organizations and we'd be delighted to talk about all of those 
issues. I'm sorry to be speaking fast, but I see the red light 
is on.
    Thank you very much.
    [The prepared statement of Ms. Ignagni may be found in the 
Appendix on page 49.]
    ChairwomanVelazquez. Thank you.
    Our next witness is Dr. Gail Wilensky. She's an economist 
and Senior Fellow at Project Hope, an international health 
education foundation. She has served in several roles including 
the immediate past chair of the board of directors of Academy 
Health and the administrator of the Healthcare Financing 
Administration.

  STATEMENT OF DR. GAIL WILENSKY, SENIOR FELLOW, PROJECT HOPE

    Ms.Wilensky. Thank you, Madam Chair, Mr. Chabot, and 
Members of the Committee, I am here representing my own views 
based on my training as an economist and having run Medicare 
and Medicaid programs and advised Congress through the MedPAC 
Commission.
    You've already heard a number of statements about the 
general problems in the employer-sponsored insurance market. We 
are where we are now because of tax laws that have encouraged 
the provision of health insurance through the under 65 
population, through their employers because of the differential 
treatment of wages and fringe benefits. I'd like to add my 
support to the notion that we need to make sure there is tax 
equity so that people who are not getting insurance coverage 
through their employers, are also able to use pre-tax dollars. 
There are a variety of strategies that have been proposed. I 
will support almost any of them if it goes after the major 
problem of making sure that there's tax equity.
    In addition, it's important because fewer employers are 
offering health insurance coverage and we need a way to have an 
alternative to reliance on the primary source of insurance 
through employers. It has some of its own problems, but because 
it is the way most individuals receive insurance, we have to be 
very careful as we move forward to make sure we're augmenting 
employer-sponsored insurance and not destroying it as a basis 
of insurance coverage, at least as long as we do not have a 
robust alternative in its place.
    When you look at what has been happening with regard to 
employer-sponsored insurance, it is really the smallest of the 
first that is having the most difficulty. We typically make the 
division under 200 employees as small employer, but when you 
look at who is offering health insurance coverage, it's only 
when you get to the three to nine employee firms that you see 
major difficulties. Although for the 10 to 25, only 73 percent, 
roughly three quarters of the employers actually offer 
insurance. Once you get above that number, the numbers are very 
substantial. Not that it's not a problem, but they are offering 
health insurance coverage at least, which is something the 
smallest firms are not doing.
    The decline in the variability has been greater for the 
smallest of firms. The increase in premiums, while not as 
different as one might have guessed, has again been the 
greatest for the firms that are less than 9 percent. When you 
look at averages, you do not see some of the variation that 
exists, such as Mr. Cockey described. In general, in the last 
year, insurance went up at a slightly slower rate at about 
seven percent, but it was three percentage points faster on 
average for these smallest firms. So again, it appears the 
biggest problem is for the firms that are 3 to 9, although 
there are some challenges for firms below 50 employees as well.
    The variation in risk, some characteristics about the 
insurance, about the firms themselves, makes this a more 
difficult problem to resolve. There's more variability because 
of the small numbers of employees and they tend not to have 
their own benefits staff and that means getting the expertise 
is more difficult. It also means that they pay their costs of 
getting advice directly through a loading factor and through 
their insurance broker where big firms tend to do it indirectly 
through personnel that they have on their firm as benefits 
managers or through outside consultants. Sometimes the 
differences are more apparent in terms of where they are being 
paid, rather than actual differences.
    Reinsurance has been mentioned as a strategy and it is one 
that both small firms and niche insurance companies use. Small 
firms will turn to reinsurance for stop loss. That is, in order 
to protect themselves either in the aggregate of having claims 
that are too large or if one individual has cancer or a major 
medical event, protecting itself from that kind of a claim. 
Sometimes niche firms will also use reinsurance as back-end 
insurance for their own company. This market seems to be 
functioning pretty well. It does have peaks and troughs. There 
has been some consolidated. In general, it seems to function 
pretty well.
    There's been some question about whether there's enough 
insurance offering in the small market. It's quite 
concentrated, that is, there's usually one very dominant firm, 
on average, offering about 43 percent of the insurance to small 
firms, but there are actually a lot of players, on average, 30 
to 35 players in all of the states. So it's concentrated; 
usually a Blue Cross/Blue Shield plan, but there are a lot of 
niche players as well.
    There have been a lot of attempts to try to resolve these 
issues, guaranteed issue, guaranteed renewability, 
nondiscrimination, limits on pre-existing conditions. Those 
usually go after the offerings of insurance and there have been 
a variety of ways to try to keep the cost down through rate 
regulation, premium variation limitations. But the sad fact is 
while there's been some success in terms of coverage offerings, 
there has been little success in terms of actually getting the 
costs down. And it has happened because of an inability to keep 
purchasing groups together so that they maintain a significant 
share of the market and they have a sustainable effect. There 
are a variety of ways to try to go at that. That is the reason 
that association health plans have been suggested. MEWAs which 
have somewhat of a checkered history are having a resurgence. 
The Department of Labor is putting a little more money into 
their regulations really to know whether or not this is a good 
strategy.
    Figuring out how to promote more stable groups of small 
employers is clearly the solution. The question of how to do 
that has a eluded us in the past, but we can't give up. That 
has got to be the answer for small employers, along with tax 
equity. And ultimately, you'll forgive my saying this as a 
health economist, the real solution to lowering or slowing down 
the growth in health insurance costs is slowing down the growth 
in healthcare costs. We really desperately need to do that.
    [The prepared statement of Dr. Wilensky may be found in the 
Appendix on page 69.]
    ChairwomanVelazquez. Thank you. Our next witness is Mr. 
Todd Stottlemyer. He's the president of the National Federation 
of Independent Business, the largest advocacy organization 
representing small and independent businesses in the nation. He 
became the fifth president of NFIB in 2006. Welcome.

  STATEMENT OF TODD STOTTLEMYER, PRESIDENT AND CEO, NATIONAL 
               FEDERATION OF INDEPENDENT BUSINESS

    Mr.Stottlemyer. Thank you, Chairwoman Velazquez. I thank 
you for inviting NFIB to discuss the challenges facing small 
businesses looking for access to affordable and quality health 
insurance. Throughout your service in Congress, you have 
championed issues of importance to small business and 
healthcare has always been one of your top priorities and our 
members agree. Access and affordability of health insurance 
remains their number one concern. That is why NFIB believes we 
must take action now to reach the goal of universal healthcare 
by increasing access to affordable health insurance.
    U.S. workforce is comprised of two distinct categories: big 
business and small business. When it comes to affordable and 
available health insurance, the difference between big and 
small is substantial. In today's health insurance market, the 
large employer enjoys a market that provides competition, 
economies of scale and administrative efficiencies. They're 
also able to obtain relief from the high cost of health 
mandates. All of these factors improve the affordability and 
availability of health insurance.
    However, the story is different for small business. The 
cost of their health insurance is significantly more expensive. 
That is because the small group insurance market lacks 
competition, bargaining power and administrative efficiencies. 
The cost is further exacerbated by expenses mandates and the 
result, according to a 2006 Commonwealth Fund study, on average 
small businesses pay 18 percent more in health insurance 
premiums for the same benefits as those in the largest firms.
    We strongly believe that health insurance should be 
accessible and affordable to everyone in the workforce, big or 
small. NFIB supports a comprehensive approach to help small 
businesses find affordable and quality health insurance. Our 
approach has three components: pooling, tax-base incentives, 
and cost-containment measures.
    First, Congress should take steps to develop health 
insurance purchasing pools for small businesses. Expanding the 
size of the insurance pool increases bargaining power and 
decreases administrative costs. This will increase coverage for 
small businesses. Although action on small business health 
plans was stymied in the last Congress, NFIB will continue to 
explore all pooling proposals that can increase the purchase of 
private health insurance for small businesses.
    Beyond pooling, NFIB supports tax-based incentives 
thatencourage fairness and equality for everyone purchasing 
health insurance. Rather than continue to rely on a tax system 
that primarily benefits those who obtain their healthcare in 
the employer-based system, we need a tax system that offers the 
same incentives to everyone who purchases health insurance. 
We're looking at various combinations of tax credits and 
deductions, all with the same goal in mind, greater access to 
affordable, quality health insurance.
    Sustainable solution must also include cost containment 
measures designed to make everyone a better consumer of 
healthcare. Congress needs to take steps to implement health 
information technology and transparency practices. This will 
result in consumers being more educated about the cost and 
quality in the marketplace.
    Finally, there are more than 1800 state health insurance 
mandates on the books. More mandates mean higher cost. We must 
draw a line in the sand and understand that there's a real 
difference between what we need and what we want. All mandates 
are not crated equal. There's a difference in the value of 
every woman having access to a mammogram and everyone have 
access to hair transplants or chiropractic services.
    Cost-containment measures implemented in tandem with 
pooling approaches and appropriate tax-based incentives can 
significantly improve the access and affordability of health 
insurance for small business.
    We must take action now to reach the goal of universal 
healthcare by increasing access to affordable, private health 
insurance. The 27 million working uninsured in the small 
business community can't wait any longer. They need solutions 
now. Because the longer we wait, the harder the task and the 
more uninsured population grows.
    Universal healthcare does not mean government takes over. 
It means taking necessary steps to transform the marketplace by 
injecting choice, competition and value for those services. 
This will enable more people to purchase private, quality, 
affordable health insurance that is portable over all phases of 
your career.
    I want to thank you again for holding this hearing today. 
NFIB very much appreciates your continuing support for small 
business and we pledge that we are going to do everything we 
can to increase access to affordable health insurance for 
America's small businesses, their employees and their families.
    Thank you.
    [The prepared statement of Mr. Stottlemyer may be found in 
the Appendix on page 83.]
    ChairwomanVelazquez. Thank you. Now I will recognize Mr. 
Chabot to introduce his witness. I believe he's your 
constituent?
    Mr.Chabot. Yes, he is. Thank you, Madam Chairwoman, and 
it's my pleasure to introduce Michael Cavanaugh who is the 
owner and president of Queen City Electrical, Inc. in 
Cincinnati, Ohio. After a four-year apprenticeship and three 
years as a journeyman electrician, Mr. Cavanaugh started his 
own small business. He currently employs 25 people in his 
business located in Cincinnati's west side and my Congressional 
District.
    Mr. Cavanaugh devotes considerable time and effort in 
finding a healthcare plan that he can afford to offer his 
employees and he has been successful. However, he's found this 
to be a challenging process with limited options available to 
the small business owner who wants to provide health insurance 
for his or her employees. A graduate of the University of 
Cincinnati, Mr. Cavanaugh serves on the Board of Trustees of 
the Independent Electrical Contractors of Greater Cincinnati, 
and we welcome you here this morning, Mr. Cavanaugh.

  STATEMENT OF MICHAEL CAVANAUGH, OWNER, QUEEN CITY ELECTRIC, 
                     INC., CINCINNATI, OHIO

    Mr.Cavanaugh. Thank you, Mr. Chabot. Chairwoman Velazquez, 
Ranking Member Chabot, and Members of the Committee, thank you 
for giving me the opportunity to testify today. My name is Mike 
Cavanaugh as Mr. Chabot said. I'm the president and owner/
operator of Queen City Electric in Cincinnati.
    Like any small business owner, I started my company for 
many different reasons. The most compelling thing for me was 
the prospect of doing things my own way and in a relatively 
short time after going out on my own, I started to hire other 
employees to aid in my growing business. From the beginning, I 
believe that to have a successful business, you must treat your 
employees well. It's pretty basic, I think. That includes not 
only a good work environment, but also a full range of 
benefits, including health insurance, probably one of the most 
important ones. It's a very expensive proposition, but I feel 
it's necessary.
    How could I as a small business expect to attract and 
retain the quality people that I'm going to need to grow, if I 
cannot offer health insurance? Small businesses are at a 
significant disadvantage because we cannot easily band together 
to form large pools of insured individuals similar to large 
companies. As a result, we lack bargaining power. The expense 
of providing medical coverage is one of the single most 
important items most small businesses face, in my opinion.
    Each year in my company we face the tremendous task of 
shopping for health insurance. We do this because carriers will 
not provide fixed rates for longer than one year. So it's an 
annual process. AS a result, each November, in search of the 
best overall value, we start working with a couple of local 
agencies hoping to avoid the annual 15 to 20 percent increases 
we've seen in rates, historically. We cannot start any earlier 
than 60 days prior to the expiration of our current plan, as 
carriers will not hold rates longer than 60 days. Because each 
insurance carrier has its own form, we ask each employee to 
fill out three to five different applications so that we can 
get quotes from as many different companies as possible. If you 
can imagine the headache of having all these people fill out 
these forms, it's very daunting. The process is time consuming 
and each year we spend hours and hours on the phone asking 
employees to please get their paperwork turned into the office 
so we can get our quotes back in a timely manner. This annual 
process causes a significant waste of time and resources for 
our business. We'd much rather be making money at what we do 
best instead of spending time on this.
    Once we complete the task of filing out and submitting all 
the applications, we wait for the companies to respond with 
their quotes. For some of the companies the quotes provided are 
not guaranteed rates, but only preliminary rates, because they 
require additional forms to be filled out by each insured 
person upon the selection of them as our carrier. So when we 
evaluate rates from these companies, we keep in mind that they 
are not necessarily what they may end up being when it's all 
said and done. Of course the rates cannot be evaluated until a 
full comparison of the plans can be done. I am fortunate enough 
in my company to have an office manager who has experience in 
both human resources and the field of medical administration. 
Not all small businesses are as fortunate as I am and do not 
have the luxury of this person working for them. So small 
businesses typically lack the resources to make informed, 
educated decisions when selecting health insurance. I was an 
electrician first and foremost and for me to select the right 
plan for all my people, it's kind of challenging. We don't 
always have that expertise. Most small businesses probably 
don't.
    So after a process of applications, evaluations and 
decisions about the various medical plans, we select one. Much 
time is spent educating employees on the new plan, discussing 
coverage, and helping the employees by calling the various 
providers. Small businesses spend time that they don't have 
sorting out difficulties created by a myriad of rules and 
coverage options, all in an effort to provide the best coverage 
options at the lowest cost.
    These issues are very real and time-consuming issues for 
most small businesses. Nonetheless, we continue to grow and 
create jobs year after year. The main thing that would surely 
aid in the efficiency of the entire process, I feel, would be 
more market competition. If more options were available to the 
average small business, insurance companies would be more 
competitive in rates, as well as service. And we all know they 
can improve in service, with all due respect to that industry.
    Please don't mistake these observations I'm made above as 
an appeal for more government intervention in the way business 
operates. Rather, consider it an appeal to allow for more open 
competition in the marketplace. I believe that market forces, 
in time, can bring efficiency to markets, where government 
regulations, though well intended, can have the opposite 
effect.
    Thank you again for the opportunity to testify today.
    [The prepared statement of Mr. Cavanaugh may be found in 
the Appendix on page 93.]
    ChairwomanVelazquez. Mr. Stottlemyer, most small employers 
generally receive the same tax advantages as large firms for 
sponsoring health insurance, but they often have too few 
employees to keep premiums low. Can we relieve some of the 
current tax burden experienced by small employers to make 
healthcare and other benefits affordable? And are there 
mechanisms within the current tax code that could be used to 
make insurance premiums more affordable and encourage employers 
to offer coverage?
    Mr.Stottlemyer. Well, Madam Chairwoman, as I mentioned 
earlier, we really believe in equality, looking for more 
equality in the tax system regardless of whether you're a small 
employer or large employer or you're self-employed. I think the 
comment was made earlier as it relates to the self-employed, 
the AGI is seven and a half percent, so you don't have that 
equitable tax treatment.
    We're also looking at different types of deductions or 
credits that would encourage employers to offer insurance. It 
would help give them some relief, if you will, for the smaller 
employers who offer insurance to their employees, if they paid 
a certain percentage of their premiums. So fundamentally, we're 
looking at more fairness in the tax code, whether it's large, 
small or the self-employed, and we think that's very important.
    ChairwomanVelazquez. Mr. Cavanaugh, can you talk to us 
about how tax incentives within the code impact your ability to 
offer coverage?
    Mr.Cavanaugh. The lack of the incentive or incentives? I'm 
going to be in favor of any incentive in the code, pretty much, 
any tax break I can get. It would certainly be helpful in my 
business for a tax break along those lines.
    ChairwomanVelazquez. Thank you. Dr. Wilensky, do you think 
there are other ways in which reinsurance can be expanded in 
the private sector or in the private market to lowering 
insurance costs? And can you tell the Committee more about the 
types of reinsurance and the relationship of reinsurers to 
primary insurers?
    Ms.Wilensky. I will tell you, as I mentioned, there are 
really two different ways reinsurance works and people 
sometimes confuse them. The most common and in some ways it 
would be the most directly relevant to this Committee is when a 
small firm goes to reinsure against having either in the 
aggregate large claims or for any individual a large claim. 
There is a trigger that once an individual's expenses exceed 
say $50,000, the reinsurance starts, or if in the aggregate, 
the firm exceeds $500,000 or some preset amount, the 
reinsurance comes in.
    This tends not to be nearly as expensive as the primary 
insurance because it is less likely. To the best of my 
knowledge, there is not difficulty in purchasing this 
insurance. There are a number of reinsurance companies that 
offer this type of insurance, but it is not the only kind of 
reinsurance. The other kind of reinsurance tends to go to the 
small insurance companies, to go to the point of trying to 
increase competitiveness in the market, that they will go and 
buy their own back-end insurance so that if the claims against 
them are too much, they have some protection.
    There are cyclical effects that the reinsurance companies 
report. They have peaks and troughs in their business. When 
they're in a trough and I think that is happening, has been 
happening, you get some that exit and you get some 
consolidation which means there are fewer that are around. It 
is also an area where health insurance is a relatively small 
part for some companies of the reinsurance, but it does not 
appear to be a problem of too little supply.
    I think the problem that is much more significant is the 
variation in state laws means that some of the bigger players 
that don't need or don't turn to reinsurance are less likely to 
come into states because every time they cross a state line, 
when they are dealing with companies that are not ERISA 
exempted, they have to face a different set of benefit mandates 
and different rules with regard to rate regulation and that may 
be more of the competitive problem of not having enough 
insurers than a problem in the reinsurance market, as I 
understand it.
    ChairwomanVelazquez. Mr. Cockey, a factor that complicates 
nearly all proposals to expand health insurance coverage is how 
to deal with risk segmentation in the small group and 
individual insurance markets. Risk segmentation is especially 
back for small businesses. I am interested in finding ways to 
address this problem by spreading risk. Would a small employer 
purchasing alliance or comparative help prevent risk 
segmentation?
    Mr.Cockey. Are you saying if they were part of a larger 
segment, that would--yes, I think that would certainly be some 
benefit to all because the problem with the small businesses as 
Mr. Cavanaugh mentioned, I too, have owned my own company for 
25 years. The greatest difficulty was trying to find the 
insurance because we were looked upon at a higher risk because 
we were the size we were and consequently the revenue from our 
premiums were not great enough for the insurances to feel that 
they could cover the potential expenses.
    So we went on a search every year to find another company 
that was going to cover us. So we changed every year. We were 
with new doctors and new coverage. The sad part about it is 
when I moved into a larger facility with the Prudential 
Carruthers group, thinking that would go away that we would 
have less risk in front of us and looked upon as being a 
greater opportunity for insurance companies, we are not looked 
upon any differently.
    ChairwomanVelazquez. My last question on this round is for 
Ms. Ignagni. Of the reforms being talked about, one which has 
begun to receive attention is reinsurance, and the Durbin-
Lincoln proposal on the Senate side will have the government 
act as a reinsurer for the medical expenses of high-cost 
individuals. I think reinsurance is important to the question 
of risk. But I'm concerned that a government reinsurance 
program might not be able to adequately monitor or control that 
reinsurance and risk adjustment processing.
    Do you think that having the government as the reinsurer 
would work?
    Ms.Ignagni. I think, Madam Chair, your concerns are 
warranted and well stated. Having said that, we are looking at 
a variety of proposals that would allow our members to respond 
to the challenges we've been talking about today.
    And let me give you a couple of examples that go directly 
to your point. The first job is to encourage small businesses 
to offer the insurance and then to encourage individuals to 
purchase it. And we've been looking at a range of proposals. 
First, there could be some very targeted, tax strategies to 
small employers that face disproportionate costs. That would be 
one way to go at it, number one.
    Number two, there could be targeted strategies to small 
employers that are offering wellness and disease management 
strategies, again to encourage people to get in early. That's 
the most affordable time to provide coverage.
     Three, subsidies for individuals who are under certain 
income level to allow them to be able to take it.
    Fourth, you could look at the subsidy question, not 
strictly from the employer perspective, but for individuals who 
have disproportionate healthcare expenditures. That goes 
directly to marrying the two questions, one you posed earlier, 
and the one you posed to me. So we are in the process of doing 
now having outlined a very broad access proposal for all 
Americans and the subsections that I talked about. We're also 
looking at this concept of guaranteeing access and what can be 
done through pooling mechanisms in the private sector. Our 
board meets next week and we're going to be having a great deal 
to say about that after those discussions. So I think we'll be 
able to offer even more specifics. But the final point here is 
the issue a number of our members would love to offer more 
affordable products to small businesses and to individuals. 
They are simply prevented from doing so because of the tyranny 
of state mandates. And we have offered very specific proposals 
on how to address that, not addressing it just for one 
particular group, but across the board.
    I can give you also some data that suggests that the health 
savings accounts which are new products that we've been allowed 
to offer under the tax legislation, it has shown that of the 
small businesses purchasing HSAs for their employees, 
approximately a third didn't provide healthcare coverage 
before. So we're hitting a price point. There are other ways to 
do that, but we are provided-- there are barriers because of 
state mandates.
    ChairwomanVelazquez. Thank you. I will recognize now Mr. 
Chabot.
    [Mr. Gonzalez assumes chair.)
    Mr.Chabot. Thank you, Madam Chairwoman, and Mr. Cavanaugh, 
if I could start with you. I first want to underline the way 
you concluded your statement. Please don't make these 
observations outlined above as an appeal for more government 
intervention in the way business operates. And I can't tell you 
how much I agree with you in that statement. I hope we follow 
that recommendation. And then you went on to say ``rather, 
consider it an appeal to allow more open competition in the 
marketplace. I believe that market forces in time can bring 
efficiency to markets where government regulations, though well 
intended, have the opposite effect.''
    Would the other panel members for the most part, would you 
agree with that statement in sentiment for the most part? I 
think I'm observing all nodding in the affirmative. Thank you.
    Let me follow up, Mr. Cavanaugh, with another question. You 
mentioned about your employees and their involvement and 
getting the forms back and forth and the time consuming nature 
of that. Once you got the insurance, what are some of the--are 
there any complaints that the employees have afterwards about 
things that they think should be better or things that annoy 
them, things of that nature? Have things percolated up to your 
level about that?
    Mr.Cavanaugh. Yes, frequently we--as was alluded to in 
other comments, we change plans virtually every year in search 
of more competitive coverage. We have to. So that brings up a 
whole host of potential problems with networks, doctors being 
out of network because the insured may have had a certain 
favorite doctor who is not in the network of the new one. Now 
that's improving. The networks are pretty large, but there's 
generally a suspicion of the employer sometimes that we're 
doing something to lessen their benefits or we're doing it for 
our own selfish reason, so yes, there are a host of things that 
arise when we change plans every year. I'd prefer to keep more 
consistent coverage. So we have to explain these things, 
different co-pays, all kinds of things; different medications 
that are not in certain plans and other plans, so yes, there 
are a host of things.
    Mr.Chabot. And I would assume that as a small business 
owner that your bottom line is impacted by the health insurance 
costs, especially as they increase. Would that be accurate?
    Mr.Cavanaugh. Yes, that would be fair to say. Greatly 
affected. It's one of the largest expenses that we don't have 
any control over. We don't know what it's going to be either, 
when we look at our budget for years in the future because we 
may see a 10 or 20 percent increase. We just don't know.
    Mr.Chabot. And your employees share in the premium costs?
    Mr.Cavanaugh. I pay the majority of it and I've had to 
ratchet that down. I used to pay 100 percent of the coverage, 
but it's very difficult, so yes, they do share in the cost.
    Mr.Chabot. And that's pretty common in all the industry, 
small businesses. I am again noticing the affirmative nods.
    If I could turn to you, Mr. Stottlemyer. Relative to the 
association health plans, how frustrating was it to see for in 
the last six years the House passed associated health plans 
five times and then it goes over to the Senate and 
unfortunately, action not be taken. Not too loaded a question, 
is it?
    Mr.Stottlemyer. It was very frustrating and prior to my 
coming in, I was an employer. I changed healthcare providers 
three times in the last three years. I had an 18 percent 
increase from a Blue Cross/Blue Shield. I went to Cigna and 
United Health. I was a larger small employer, but certainly our 
membership, those members who belong to NFIB, it's very 
frustrating because pooling is very important, particularly in 
states where there's not competition. And bringing them out of 
those states into a bigger pool, we fundamentally believe 
creating that competition will help reduce costs. Very 
frustrating. I'm an optimistic. Yesterday, I was on the Senate 
side and spent quite a bit of time with several Members talking 
about pooling, very importantly, and I remain optimistic with 
the leadership of this Committee and others that we can move 
the ball forward.
    Mr.Chabot. I certainly hope so. Thank you. Ms. Wilensky and 
Ms. Ignagni, if I could ask you both just a follow up on the 
association health plans. What role do you think they 
ultimately would play, especially if we're able to do some 
things legislatively up here in answering the question about 
how small businesses can deal with the increasing cost of 
health care in the country.
    Ms. Wilensky and then Ms. Ignagni.
    Ms.Wilensky. To the extent they are able to solve the 
problem that we've not solved to date which is being able to 
form large, stable grouping mechanisms, they will help small 
employers have some of the power and market share of large 
employers.
    What will be important is to monitor, if they were to get 
through the Senate, that they stay stable and some people have 
suggested that because groups tend to form and then dissolve, 
rather than stay in these pooling groups, at least in the past, 
that it might be that there would be some kind of a subsidy for 
those who remain in a pool, in addition to the natural 
advantage they gain by being part of a pool. There have been 
concerns, as you know, raised that these groups won't be 
subject to the same regulation as they would if they stayed in 
their own states, but of course, any ERISA-exempted company and 
some of them are now quite small as a way to get around some of 
the barriers they feel exist in their own states already have 
that. So it seems to me this has been an unfair burden to put 
on small employers that are attempted to gain some of the clout 
of being a bigger purchaser. If it works, if you can make it 
happen, it will go a long way to helping these small employers.
    Mr.Chabot. Thank you, Ms. Ignagni, anything you want to add 
there?
    Ms.Ignagni. Yes, Mr. Chabot. I think that--I understand 
completely why small businesses are interested in AHP 
legislation. But I think with all due respect to that concept 
there are these larger issues that if we continue to set 
specific remedies up to meet specific circumstances and not 
look at the larger picture which is we have a problem with 
mandates, we need to do a better job in the tax system. We need 
to deal with these underlying issues, that we do face some 
risks and I noted that the Congressional Budget Office had done 
a very good analysis about their concerns that short term, it 
may solve some problems; long term, we may have a real and more 
significant problem on our hands.
    So our view is to step back to say these problems are real 
that my colleagues are talking about and to propose remedies to 
deal with the situation once and for all in a uniform fashion 
and that's what we're endeavoring to do.
    Mr.Chabot. Thank you. Mr. Cockey, let me conclude with you. 
I think you had given an example of a company that had 140--
    Mr.Cockey. My company.
    Mr.Chabot. Your company had 140 employees and only 70 took 
the healthcare that was available. The one thing that came to 
mind that I was wondering, would some of the people that didn't 
take it perhaps have spouses that have coverage through their 
employment?
    Mr.Cockey. Very definitely some did, but the majority of 
them did not take it because it was not affordable for them. 
That was the unfortunate part. Those that have spousal 
coverage, their concern and our concern with that group is that 
their spouse's employers may start limiting the coverage for 
family members. So now we add to a larger number of uninsured 
individuals. And that's a real risk that we're facing.
    Mr.Chabot. Thank you very much. Thank you, everyone. I 
yield back.
    Mr.Gonzalez. Thank you very much, Mr. Chabot. The chair is 
going to make sure that I'm next in line. I'm not jumping 
ahead. I am next. I was next anyway, but the chair will 
recognize himself for five minutes. And the initial question 
will be to Ms. Ignagni and Dr. Wilensky, and we can look at the 
big picture and it's overwhelming, you know, how we bring in 
and harness and control some of the costs and so on. We can 
look at tax treatment, on and on. But if we do some of those 
things, at the end of the day though it still has to be a 
profitable endeavor for an insurance company to offer the 
policy itself.
    It seems to me that that's basically the thing that we need 
to address from the outset. How do we make it profitable? It 
seems to me insurance again is all about risk, predictability. 
And my experience has been that's the biggest drawback with 
small businesses it that you can't spread that risk as you can 
with others.
    So first and foremost, I guess, is what could we do, if 
there was one thing that we accomplish in this first part of 
the 110th Congress, what piece of legislation would it be 
addressing against spreading of risk? And is that going to be 
the association health plans or something similar?
    Ms. Ignagni?
    Ms.Ignagni. I think there's one answer to that and it has a 
part A and B and I'll be very quick about it, Mr. Chairman. The 
first is the matter of tax equity that all the witnesses talked 
about. It's fundamental and very important. Increasingly, 
people will be purchasing on their own. They're not attached to 
an employer. Realtors or groups of one is a perfect example of 
that. That's number one. And number two, as part of that, I 
think that a very doable thing is to make sure that the high 
risk pool legislation that was passed is-- the appropriations 
are there to provide this assistance to states who are trying 
to address the needs of those who are medically uninsurable 
which could definitely and significantly help small businesses 
and individuals who are in the market, who have average 
healthcare risk, but those that do not are finding it very, 
very difficult to get assistance.
    And there are three or four other things, but in the 
interest of time, I'll start there. I think that's one of the 
most important things and the other is the state mandates. We 
are ready to offer customized products to small business, basic 
packages that we know they want to purchase. They are 
affordable. They will do disease management. They will do 
prevention. They will provide catastrophic coverage and we can 
do it affordably. But we are prevented from doing so. And that 
ought to be addressed.
    Mr.Gonzalez. Thank you. Dr. Wilensky?
    Ms.Wilensky. I'd like to start with the second which is 
that one of the real barriers has been both the level and the 
variation in state regulations with regard to mandates and 
controls over rate variability and offerings, etcetera. It 
limits the number of insurance companies that will come in and 
obviously affects also the kind of products that they can 
offer. Now it's difficult because that has been traditionally a 
state function. It has become a more limited state function as 
firms opt out through ERISA exemption, but it doesn't make it 
any smaller a problem for those companies that are trying to 
offer insurance to firms that are not self insuring.
    With regard to the risk segmentation, basically the 
strategy that you can use to resolve that is to try to 
encourage pooling and to risk adjust. I mean there's not really 
a better answer than to say once you have predictably higher 
risks or spenders which will happen any time you have either 
complex chronic disease individuals or individuals who have 
predictably higher expenses because of a congenital or other 
identifiable problem, to pretend like this is not recognizable 
to the insurance company is to deny the obvious. So the 
question is can we find ways through risk adjustment by 
compensating for plans or pools that get an unusual mix in 
terms of their membership so that they will not try to find 
ways to exclude or run away from that. You can do it through 
high risk pools or other reinsurance or tax and transfer 
payments. But to pretend it's not an issue is not going to 
resolve the problem and it's something that we need to take on 
for the small firms, is to offer them a couple of different 
strategies or to do something through legislation that will 
allow this risk pooling to occur.
    I don't think, with regard to the earlier question that the 
reinsurance market per se needs to have federal intervention. 
It seems to be functioning about as well as insurance markets 
function. So this would be a solution that doesn't have a 
problem driving it.
    Mr.Gonzalez. Well, that's good to hear because we've had 
that problem regarding other areas of reinsurance and whether 
we have a federal backstop or not and I know that I'm almost 
running out of time, but Mr. Stottlemyer, there's always 
unintended consequences and whenever we consider something, the 
President proposed something in the State of the Union, right 
away regarding tax treatment to those individuals, obviously 
they're paying the premiums for coverage and treating it 
differently and then you hear, well, that's going to discourage 
employers from providing health coverage. That's one concern. 
Association or associated health plans. We hear from the 
states, oh my gosh, then you're not going to have the quality. 
You're not going to have the product. And employers let's say 
in the State of Texas will be offering products that are not as 
good as was presently considered the minimum under state 
standards and such. Could you address those two concerns when 
we attempt to find these remedies?
    Mr.Stottlemyer. Let me just for a moment put my employer 
hat back on, when I was an employer. As an employer, I had to 
offer health insurance because I had to compete in the 
marketplace for talent. So even if there were changes in the 
tax code that gave more equity, I wasn't going to walk away 
from the employer market because I needed to compete for 
talent. I was day in and day out competing for talent. So I 
don't think the idea that if we try to level the playing field, 
if you will, from a tax standpoint that that's going to blow up 
the employer market. I was an employer and I would not move 
away from employer health insurance as a former employer.
    I do think tax equity is important. The fastest growing 
part of the small business community today is something called 
SOHO businesses, single owner home office businesses. There are 
12 to 15 million of these businesses. They also happen to be 
the most diverse. I mean women, minorities. This is the fastest 
growing part of this sector of the economy. From a tax 
standpoint, they're disadvantaged. So we have to look for ways 
to give equity in the tax market.
    The comment was made about association health plans and 
unintended consequences. Whether it's small business health 
plans, association health plans, that's really not the issue 
for us. The issue is pooling. If you get bigger pools, more 
people into the pool, you can spread risk. And so when you have 
a state like North Dakota and I don't begrudge in any way, 
shape or form the Blue Cross/Blue Shield that's there that has 
90 percent of the market and they've competed for that and they 
dominate the market, but there's not competition there.
    By allowing businesses, small businesses inside that state 
to come into a larger national pool, there's going to be 
competition. So the idea whether age, small business--that's 
really not the issue. It's pooling. And I think from an 
economist's standpoint, Dr. Wilensky and others, would--I think 
it's just common sense that if you create a bigger pool and a 
stable pool, I agree with that, you need a stable pool and the 
idea of incentives to keep people in the pool, I think has a 
lot of validity.
    We're never going to be certain. We're going to have to try 
things because the issue is significant, I think, as we all 
know. And we're going to have to learn from what we try.
    Mr.Gonzalez. Thank you very much. The chair is going to 
recognize Mr. Bartlett.
    Mr.Bartlett. Thank you very much and in a former life, 
among other things, I was a small business person and a proud 
member of NFIB and I had the problem of trying to find health 
insurance for my employees.
    I always have the feeling in a hearing like that no matter 
how hard we try, what we're really doing is just nibbling at 
the margins of the problem. There are two fundamental problems 
that we seem unable to address. The first of these is that the 
employee ought to own the policy, not the employer. I have no 
idea why. I think it was because of irrational and perhaps 
stupid action on the part of the government, wage and price 
controls and employers had to compete for employees. They 
couldn't raise wages so they wanted to offer something. I have 
no idea why they didn't offer mortgage payments or car payments 
or tuition payments or maybe life insurance, but they settled 
on healthcare. So here we are. Stuck with it. It is really 
quite irrational.
    If the employee owned the policy rather than the employer a 
number of really good things happen. First of all, it's totally 
transportable. If you buy it when you're 18, you carry it with 
you until your death. And secondly, you're not worrying about 
pre-existing conditions any more because what 18-year-old has a 
pre-existing condition? Darn few. You don't need to worry about 
pooling any more because the pool now is the entire universe of 
18-year-olds out there who are buying insurance.
    We never worry about pooling in life insurance, why don't 
we worry about pooling in life insurance? It's because it's a 
competitive market and this market will not be less competitive 
if the employee owns the policy rather than the employer.
    And the second big problem is that our sick care costs are 
too high. By the way, I say sick care because we do not truly 
have a healthcare system. We have a really good sick care 
system, the best in the world. And if we had a better 
healthcare system, maybe we'd need a less big sick care system.
    There are two big problems with costs in our healthcare 
system, our sick care system. The first one is that someone 
else pays the bill. Now if my employer provided a car for me, 
rather than healthcare for me, I could easily rationalize that 
I needed an SUV. By the way, I make do with a Prius, but if he 
was providing the car, I could rationalize I needed an SUV. 
Employee-owned policies, especially if they're of the 
healthcare savings plan, would really make the employee more 
healthcare conscious. He needs to be a careful shopper. If you 
think about it, sick care costs are the only thing you shop for 
and never ask the cost. That's because someone else is paying 
the bill. This is dumb. We need to change that.
    The second thing we need to change is litigation. We really 
need to change that. It's not just a $100,000 premium, it's all 
of the defensive medicine that's practice by the doctor. And 
I'm not sure you can get inside the doctor's head to know how 
much of his medicine is defensive medicine because of enormous 
risk of insurance. I think this could be solved by when the 
patient goes to the doctor, there are two paths they can 
travel. The doctor says Susie, you have a problem. It will cost 
you $400 for me to fix it, if you will agree to what you call--
the kind of insurance you have with--when you have a board that 
decides the amount of money you get, rather than you go to 
court? Now if you want to go court, you wouldn't have come to 
me if you thought I was a quack or a fraud. You're here because 
you think I'm the best doctor you could go to today. But if you 
really want to reserve the right to sue me, then you've got to 
pay $800. I'm not going to ask my other patients to pay for my 
health insurance costs. Susie, which route would you choose to 
travel? Ninety-nine plus percent of the time say gee, Doc, I'm 
here because I trust you. Let's do it because it's cheaper and 
by the way, the extra $400 comes out of your pocket, Susie. The 
insurance company is not paying it.
    If we did these two things, if we had an employee-owned 
policy and if we reduced the costs of healthcare by these two 
rational things, most of the problems we're talking about today 
would go away. What's wrong with what I just said?
    Mr.Stottlemyer. The comment about transparency, I think 
that's exactly right. When I was an employer, one of the 
important things that I did was I actually had somebody come 
and it was with a computer and as people enrolled into 
healthcare, came up and said this is your choice, this is how 
much it costs, this is how much you pay, and this is how much 
we pay as the employer. And the first time we did it, people 
were shocked. They honestly had no idea that I, as an employer, 
was paying the most significant part of their healthcare costs. 
So transparency is important. We have to have smarter 
consumers. I mean if you smoke, the reality is if you smoke, 
you're using more of the healthcare system.
    Mr.Bartlett. You ought to pay a higher insurance premium if 
you smoke, if you're overweight or drink. It's the same thing.
    Ms.Wilensky. I don't disagree with what you've proposed, 
although I would make the choice not just in terms of whether 
you accept arbitration, but whether or not the physician or the 
institution follows a certain standard set of patient safety 
protocols as well. The only difficulty is that while this would 
be a terrific step in the direction in a lot of issues, the 
fundamental growth in healthcare spending reflects what goes on 
in the concentrated spending of the sickest five or ten percent 
of the population. And they will blow beyond any threshold in 
the health savings account or major medical account. So 
learning how to realign financial incentives so that 
institutions and clinicians are spending smarter, making sure 
that the kind of information that would help patients and 
clinicians understand what they're really going to get if they 
use a new medical technology or procedure, it's a lot more than 
what you have done because of the huge impact that the five or 
ten sickest part of the population has on the growth in 
healthcare spending. But I wouldn't detract from anything that 
you want to do. I think those are all actually very helpful 
steps. It just wouldn't solve the problem completely because of 
concentrations in healthcare spending.
    Ms.Ignagni. Mr. Bartlett, just a note that we've just ask 
PriceWaterhouseCoopers to do a study for us to look at how much 
of the healthcare dollar is going to med-mal, both direct and 
indirect expenses, 10 cents on every dollars. That's a very 
significant proportion. And physicians are afraid to practice 
medicine today. And so I think your point about changing the 
structure and having a better dispute resolution system is 
absolutely right on point.
    Mr.Gonzalez. Time is up and the chair will recognize Mr. 
Larson.
    Mr.Larson. Thank you, Mr. Chairman. And I just have a few 
questions. Certainly we're all acutely aware of the healthcare 
costs impacting small business and Mr. Cavanaugh's statements 
are especially poignant, given a visit yesterday by a high 
school friend of mine, is purchasing a flower shop his father 
started many moons ago. So he's got a state tax issues he's 
dealing with, but also the employee's ten people. In 2003, his 
health insurance premiums went up 13 percent from the year 
before. In '04, they went up 21 percent from '03. In '05, they 
went up 14 percent from '04. In '06, they went up 15 percent 
from '05; clearly putting a tremendous strain on his ability to 
provide healthcare for his employees, some of whom have been 
around for 15 years working for him, but again, his father 
started this business many moons ago. Clearly, he is impacted.
    You've given us some thoughts on pools and tax credits. I 
had a question about that, but I think you all pretty much 
clearly laid out what your thoughts are on that.
    Perhaps for Ms. Ignagni, last year there was some 
legislation introduced by a lot of folks around here, including 
a variety of provisions. Can you talk about, well, there was a 
bill introduced last year that included community rating and it 
hasn't been discussed at all. Can you discuss community rating 
and what impact it has, good, bad or indifferent?
    [Chairwoman Velazquez resumes chair.]
    Ms.Ignagni. I think community rating is something that a 
number of states have tried, for obvious reasons to try to 
equalize the payment of health insurance costs. So that it's 
the ultimate pooling mechanism.
    What we find in states that have relied on community rating 
is that the costs are the highest and our study reflects that. 
We have a very comprehensive study of both the small group and 
the individual market and it reflects that. This is not to make 
the point that they're doing the wrong thing. It's the purpose 
of trying to do the right thing to get everybody in.
    A number of states now are looking at whether or not they 
can do not that broad scale pooling, but target the individuals 
with the extraordinary healthcare costs. I suspect your high 
school friend has a couple of people in his business that have 
very high healthcare costs. Those are the individuals that we 
could either move to a risk pool or figure out another strategy 
and we're going to be recommending a series of them very soon, 
where we could subsidize those disproportionate costs so that 
it could be more affordable for the employer. Sometimes we 
don't want to put a complete average and then drive the people 
with the lowest costs out of the system because that then 
exacerbates the cost for people who are at the mid-range or the 
higher range.
    So these are the kinds of discussions that we're going 
through with the idea of recommending some very specific 
strategies. So all these strategies that have been undertaken 
have been done for the right reasons, but we want to try and 
figure out how do you make this all work for everyone and keep 
everybody in the pool.
    Mr.Larson. Washington State is one of the states with a 
high risk pool.
    Ms.Ignagni. Yes.
    Mr.Larson. In fact, we're also one of the states in '93, 
'94, moved forward on a larger plan in '95, '96, dismantled it 
all.
    Ms.Ignagni. Right.
    Mr.Larson. And now the State Legislature is back trying to 
do all that.
    Ms.Ignagni. I think this is very important because the 
lesson of Washington State demonstrates that it's very hard to 
undertake certain market changes, so-called reforms, absent the 
goal of universal coverage. If you have everyone in, it's a 
whole different proposition to figure out what kinds of market 
reform mechanisms to undertake and I know you're talking about 
that in Washington now.
    Mr.Larson. Right now, yes. You also mentioned that HSA is 
one third, in your study, showed one third of the folks who are 
in an HSA did not have coverage or an ability to purchase 
otherwise before. Did you look at substitution at all?
    Ms.Ignagni. We did not look at substitution. We asked small 
employers and individuals who are purchasing why they purchased 
it, did they have healthcare coverage prior to this. We found a 
third of small businesses didn't prior to that point offer 
health insurance coverage and a slightly higher proportion of 
individuals who are purchasing hadn't had coverage before. And 
what that says to us and I know you're struggling with this in 
Washington and our health plans are very much involved in that 
is that once you reach a particular price point for a small 
business or an individual, they are able to purchase 
affordably. So now the question is how do you design the 
structure. For some people, high deductible policies make 
sense. They'll take advantage of the early intervention. 
They'll be able to deal with the costs. For others, they want a 
more scaled down comprehensive package and we think there need 
to be two alternatives available and that's what we're working 
toward in the states as well.
    Mr.Larson. And Washington State, either the Senate or the 
House just passed legislation to allow the offering of a bare 
bones package.
    Ms.Ignagni. Exactly.
    Mr.Larson. Dr. Wilensky, in my time remaining, can you 
address this issue? Have you looked at substitution at all? 
HSAs, people moving from the current plan to an HSA, 
substituting one for the other? Or is it too early?
    Ms.Wilensky. It's early. There are two kinds of--the best 
studies that have done tend to be where the employers have 
completely switched over so that there isn't a choice between 
plans. The studies that I have seen report out where there were 
options, indicate it is a more of a mixed bag than might have 
been expected, that is, it is not just younger, healthier 
people that are choosing HSAs. It is more of a mix and that 
some people with chronic diseases are going into them. Some 
people are older going into them. But I think it's early to 
see. It will probably be another two or three years to see if 
there is a strong segmentation.
    The best way to deal with segmentation is to compensate for 
it. To me, the community rating says pretend you don't know 
that the very sick patients that are coming in from this one 
area are going to be average. Think how much better you're of 
if you are a company that's being paid on the average, but you 
actually get healthy individuals. And so it's why--I think 
they're addressing a serious problem, but there are better ways 
to address it.
    ChairwomanVelazquez. Time has expired.
    Mr.Larson. Thank you.
    ChairwomanVelazquez. There's going to be a vote at 11:45 is 
my understanding.
    Mr. Buchanan?
    Mr.Buchanan. Thank you, Madam Chair, and I thank the panel. 
I don't even know where to get started on something like this. 
I've been in business 30 years. I'm new in the House and I've 
built two good size firms, a thousand employees in my last firm 
and still have some of that in place, but basically I'm here 
full time. I chaired our local chamber. I was past last year 
chairman of the state chamber. I only say all of that because 
you know, if you put a crisis on a scale of one to ten, this is 
a ten plus. I mean it's over the top and I know we talked about 
the tax incentives and I think that's very important, but I 
remember Mr. Cavanaugh, when he was talking.
    In the mid-'80s, I provided all my employees out of 
Michigan at the time, I'm in Florida now, but in Michigan at 
the time, I provided everybody full coverage. Now I hate to 
think when I look at our insurance for a lot of our employees, 
we're paying the individual and sometimes we're paying a little 
less than that. The coverage kind of comes down. And the 
pooling of taxes, I'm all for it and I agree because I was at a 
chamber meeting and I said ``why can't we get pooling?'' 
Someone wrote down next to me on a card, I was at the U.S. 
Chamber, up there for a meeting, two words. I looked over and 
it said ``Blue Cross.'' But, and I don't know if that's all of 
it, but that's part of it. But I do want to say one thing, that 
I'm concerned about and let's say the tax incentive and I think 
that helps.
    I think the pooling helps, but when I met with a lot of 
doctors when I decided to run for office. And I met with the 
hospitals. The hospitals aren't making any money. The doctors 
aren't making any money. I look at our coverage when I go back 
and take a look at that and what's driving a lot of our costs 
today is drug coverage, mental health, emotional well being and 
so even if you put these incentives, a few of these incentives 
in place and I think they'll help to some extent and we need to 
do that minimally. When I talk to a lot of the leaders in 
Florida in terms of the President and Senate and these people 
that are involved with legislature and trying to figure out 
what we can do more effectively for small business, and by the 
way, in the Florida Chamber we had 137,000 businesses, 95 
percent were 15 employees or less. But they create most of the 
jobs.
    But when I talked to them they all say, ``Vern, nobody has 
any answers. The drivers are all going the wrong way in terms 
of the cost, the aging population, this and that.'' So when we 
talk about pooling, we talk about taxes, we talk about tort 
reform, we're the 42nd worse state in the country for frivolous 
lawsuits, the whole thing on defensive medicine is a big 
factor. But when you look at all of this, it just seems like 
what are the answers? I don't know that anybody has any 
answers. I think this is a start and I guess Mr. Stottlemyer, 
I'll just start with you. If you want to add anything to what I 
said from that standpoint, but on the pooling, what's--the 
second part of that is on the pooling, what's holding that up? 
Before you address that, can you comment on the first--I just 
kind of made a lot of general comments, but I'm concerned about 
the overall direction, the cost to healthcare, all the aspects 
of healthcare. And like I said, the doctors, the hospitals in 
our area are all complaining. They're all losing, not making 
half of what they made 10, 15 years ago, the doctors now. It's 
partly Medicare and other issues, too. But where is this all 
going?
    Mr.Stottlemyer. I think there was the comment and like you, 
I was an employer for a long time and I too, earlier on, paid 
much more then had to pay less just because of the cost of 
insurance going up. I think pooling is important. I don't think 
per se, I haven't met anybody per se that's against pooling. I 
think some of the issues last year related to community rating. 
They related to mandates in the States and those are tough 
issues. But we, as a society, I think we're going to have to 
make choices and I was joking with a Senator yesterday, in all 
seriousness, that I lost some members last year because I came 
out and said I'm not going to put a mammogram on the same level 
for every woman in America as chiropractic services or hair 
transplantation and things like that. Those are mandates in 
States. To me, it's not the same. It's more important for me to 
make sure that every woman in America has access to a mammogram 
than it is to include chiropractic services. Now I lost some 
chiropractors. They're no longer members of NFIB. But those are 
the types of choices that I think we're going to have to make 
as we go forward, whether it's on mandates, whether it's on 
community rating including things like smoking, which we all 
know has--you buy more, if you will, health insurance because 
you smoke. Those are some of the tough choices as a society 
that we're going to have to make if we're going to move the 
ball forward.
    Mr.Buchanan. I am just concerned if we don't start making 
those tough choices right now, that this thing is just going to 
get completely out of hand. Because a lot of people in our 
area, especially the small employees and employers, they either 
can't get it or they can't afford to give it.
    And I might just ask Mr. Cockey, my son is a realtor. What 
are the realtors doing? I mean I can't even imagine they can 
even get insurance or they're paying $1,000 after tax money. We 
have a lot of relatives in the State of Florida. I'm the only 
one on the Council who is from Florida, what are realtors 
doing, I mean, for insurance?
    Mr.Cockey. Some of them are just praying, praying that they 
don't get sick. Some of them have spousal coverage, again as we 
mentioned earlier. There is that concern that they'll lose that 
because the escalation of the other employees' insurance is 
going up and up. So that's a problem.
    And many of them are just not sure what they would do if 
there's ever a problem. To give you an idea, the average income 
for a realtor last year, although everyone thinks that if they 
sold a $1 million worth of real estate, they made $1 million. 
That's not true. The average income was $36,500. Of that they 
carry about $6800 to $7000 just in business expenses. So if you 
take off your taxes and then you reduce that business expense 
that they have, now you say that you're to pay $12,000 to 
$15,000 worth of insurance for insurance, they can't do it. 
They can't pay the insurance after tax. They just cannot do it.
    ChairwomanVelazquez. Time.
    Mr.Cockey. I'll give you a perfect example of a young lady 
that works for us. She makes $40,000 a year. She has two 
children. She's the sole provider for these children. Her 
current insurance today is $750 a month, plus she pays $100 a 
month for her coverage for her children, for some medical drugs 
that they need to take.
    ChairwomanVelazquez. Time has expired. Thank you.
    Mr.Cockey. So she cannot accomplish life in her present 
condition.
    Mr.Buchanan. Thank you, Madam Chair.
    ChairwomanVelazquez. Mr. Jefferson.
    Mr.Jefferson. Thank you, Madam Chair. There's been a lot of 
discussion about tax equity and high-risk pool remedies and 
issues of stabilizing pools and so on. But I want to zero in on 
this mandate question, just to ask this panel, what do you 
suggest that has to be done about that? Everybody identifies it 
as a problem. States are trying to get after these issues just 
like we are up here. They come up with different solutions. Are 
you suggest that somebody the Federal Government requires some 
customization of these packages on the state level and if so, 
how would that be accomplished?
    Ms.Ignagni. Mr. Jefferson, one of the things that we have 
proposed is in the context of our universal coverage approach 
where the Federal Government would be giving the states a 
helping hand if they achieve specific objectives. One of those 
objectives would be to set up a regulatory construct that would 
make it possible for the purchase of affordable healthcare 
coverage. And we've given two options at a minimum that should 
be looked at: an actuarial equivalency of HSA coverage or a 
basic package of benefits which would involve prevention, 
wellness, a certain number of hospital days, a certain number 
of physician visits, prescription drugs, catastrophic coverage 
on the back end. Those are the kinds of packages that 
individuals can buy affordably, want to buy and that would give 
them a broad allowance of choice.
    Mr.Jefferson. How would you limit the states in this, to 
these provisions?
    Ms.Ignagni. I would say that if you're doing a broad 
coverage strategy or in the context of the appropriations, 
here's one for example, every year you have to appropriate 
money for the risk pools, so it's sent to states from the 
Federal Government. As part of that, as a condition of that, 
you could create the requirement that states create these 
regulatory corridors. That would be one way to do it. In the 
context of additional subsidies that would be provided if you--
if we move toward a universal coverage proposal, that would be 
another. But the first would be a very quick thing that could 
be done right now.
    Mr.Stottlemyer. Can I add something? We already do that. 
For those companies that are self-insured under ERISA, they're 
exempt from state mandates. They're big businesses. The small 
business is not. State mandates apply to small business. Big 
companies that are self-insured under ERISA are exempt from 
state mandates. We're not suggesting that.
    I met with John Sefford who is the CEO of the American 
Cancer Society, the Chief Medical Officer. And one of the 
things that he talked about, which I liked, is evidenced-based 
medical mandates, evidenced-based. Things that prevent 
premature death, prevention, wellness, those types of things. 
We're going to make some choices. I mentioned earlier about 
chiropractors. There's nothing wrong with chiropractic 
services. They're good. But if you're going to get the 
invincibles, the young people into the pools, you're going to 
have to charge them less because they don't need everything 
that somebody who is in a different age or different place in 
life needs from an insurance standpoint.
    Mr.Jefferson. Dr. Wilensky, in your testimony you said that 
at least some place there that there's not much talk about the 
rise in medical costs, the costs of medical services, 
generally, as we talk about this issue of the cost of medical 
insurance. These are certainly joined issues. And that if 
you're going to actually get after the one you have to figure 
some way to get after the other at the end of the day, no 
matter what is said and done here.
    Ms.Wilensky. Right.
    Mr.Jefferson. Make the point further and tell me how we can 
get at these things at the same time in order to make sure we 
actually address them?
    Ms.Wilensky. Healthcare costs have been rising about two to 
two and a half percentage faster in real terms, that is 
adjusted for inflation on a per person basis on average for the 
last 40 to 45 years. If we don't figure out how to change that, 
we're going to overwhelm the federal budget with Medicare and 
Medicaid as major entitlements, in addition to overwhelming 
what's going on in the private sector. And the biggest driver 
for rising health insurance premiums is what's going on in the 
healthcare market.
    It's not an easy fix, the short answer is no more and pay 
for it better. Someone, I think Mr. Buchanan, commented his 
physicians are complaining that they're making as much money 
under Medicare. The fee schedules have been either frozen by 
the Congress or allowed to increase very small amounts of 1.5 
percent as opposed to the scheduled 4 percent reductions that 
were in place. But spending, under Part B Medicare, which is 
where the physicians are, grew 15 percent. It is a huge 
increase in the volume and intensity of services, some of which 
are probably needed, many of which are probably very marginal 
or questionable, some of which may be flat and inappropriate. 
It's redesigning how we pay for things so that we are rewarding 
the institutions and the clinicians who do it right, do it 
right the first time, provide good patient oriented care. It 
unfortunately requires a lot of change in both the insurance 
and in the pay structure. So it's not an easy answer, but boy, 
we better get busy on it.
    ChairwomanVelazquez. Thank you. Time has expired. Ms. 
Musgrave.
    Ms.Musgrave. Thank you, Madam Chairman, I apologize. I 
wasn't able to be here earlier and also to the panel, not able 
to hear all of your testimony. You know, I agree so much with 
what Congressman Bartlett said about how the employees should 
own the policy because human nature, we all know we act 
differently if we know what we have and how we're going to pay 
for it is a consideration. And I still think and I admire what 
you did with your employees, Mr. Stottlemyer, but a lot of 
people still don't know, nor do they care, what something 
costs. And I really watched in Colorado when I was in the State 
Legislature about the mandates that came forth every year and 
every one of them really wasn't going to cost anything. In 
fact, it was going to save money. You know, we heard that time 
after time and yet, you know, you get this product that's all 
loaded up with these mandates.
    And I don't know if there's been any discussion before, but 
Congressman John Shadegg from Arizona had legislation 
previously that would allow insurance to be purchased across 
state lines and to me that sounds so reasonable, you know, 
especially my children, can shop for insurance that was 
affordable and suited to really fit their needs at this 
particular time in their young adult life. I would like your 
response to that and anyone can respond on the panel.
    Ms.Wilensky. Makes sense to me. Again, anything that helps 
pools and that allows for a way to circumvent some of the 
barriers that now exist. I do have some sympathy with the issue 
that Karen Ignagni has raised is that this opens up a bigger 
door and not just limiting it to those who are self-insured, to 
get around some of the costly mandates and helps pooling. We do 
ultimately have to go back and fix the problem for those that 
remain for whatever reasons. You do start setting up very 
unfair playing fields and that will probably come back to have 
some unintended consequences.
    Ms.Musgrave. I also was interested in your remark, 10 cents 
on the dollar for medical malpractice, and again, I would agree 
with Mr. Bartlett in that I think that's very hard to 
calculate, because how do you get into a doctor's head and try 
to figure out how he or she practices medicine with medical 
malpractice hanging over them all the time? And you know, they 
probably don't even know sometimes why they make the decisions 
they do, but always aware of the fact that they're likely to 
get shot at when they behave in a certain way. So it's hard to 
calculate and I would say that 10 cents on the dollar is pretty 
remarkable, but it's probably higher.
    Ms.Ignagni. The Department of Health and Human Services has 
done some very excellent work about the direct costs and the 
indirect costs and the sum total leads you to approximately 10 
percent. You may be right. It may be higher. That's the only--
the number that we have is the number that 
PriceWaterhouseCoopers was able to calculate from data that we 
know that are reliable than exists. But I think this larger 
issue that Mr. Bartlett was getting at and that you're getting 
at now, what is the dispute resolution system that we need to 
have in our country? Is it through the courts or is there a 
better way? In the health plan community, we've made a 
commitment about 10 years ago to be very affirmative about the 
concept of independent review, third party review. We think 
that concept could be imported into the med-mal arena as Mr. 
Bartlett was beginning to go to, in a very productive, 
affordable, predictable way, so that patients can be protected, 
but at the same time we don't have these extraordinary costs. 
If you marry that with the kinds of strategies that Dr. 
Wilensky was talking about which we have now developed some 
path-breaking experience and track record and tools with, with 
respect to changing the way healthcare is paid for in the 
hospital arena and the physician arena and lining reimbursement 
up with performance and outcomes, all of these strategies taken 
together go to Mr. Jefferson's question about how do you get 
the cost of the system down and do it responsibly so no one 
feels they can't move into the system.
    Ms.Musgrave. Thank you, Madam Chairman, and thank you, 
panel.
    ChairwomanVelazquez. Thank you. Mr. Akin.
    Mr.Akin. Thank you, Madam Chair, for fitting me in for a 
question here. I think this is my Democrat question for the 
year, but it's a serious one. I understand the cost of medical 
liability and some percentage there. I understand there's also 
costs in healthcare that if we could knock down the number of 
McDonald's french fries that people eat that there's a wellness 
kind of piece that also a component on Americans living 
healthier lifestyles and that's actually a pretty good chunk of 
change. I've heard that some of the insurance people I've 
talked to have said they think that's even bigger than the 
liability than the trial attorney piece.
    My question, this is my liberal question, my understanding 
is as much as I'm a pro business guy, that the insurance 
companies, at least in some markets, have basically got a lock 
and a monopoly on medical insurance. They have so tied up the 
provider systems that there's no one else that can compete with 
them. And does that mean that we need to take a look at a 
monopoly kind of practice? And are there some things we should 
do? First of all, do you agree with the premise, and second of 
all, how do we do that and still preserve the free enterprise 
kind of system and approach to healthcare?
    Ms.Ignagni. Well, in the insurance community, we don't do 
exclusive contracts. We don't so-call lock up providers. And 
you see in markets all around the country that insurers move in 
and out. What's more predictive of whether or not you have a 
broad number of carriers in a market is what is the state 
regulatory structure like? How accessible is it? How easy is it 
to bring new products into the market?
    Mr.Akin. So if there's a state that's got just one 
insurance company servicing the whole state, such as I think 
it's--what is it, Iowa? Is that the one that just has one?
    Ms.Ignagni. I was just in Iowa with four insurers. We were 
visiting the Governor and the State Legislature, so I can tell 
you there is not simply one insurer in Iowa. And you find that 
in virtually every state around the country. So it is a 
question of what's the regulatory structure. Could we open up 
and allow plans to offer the range of benefits, the small 
packages that we've been talking about and have that kind of 
competition. We've been advocating for that. We have some very 
specific proposals, but thus far, we haven't been able to 
succeed in achieving it.
    Mr.Akin. So you're saying that could be solved at a state 
level?
    Ms.Ignagni. Well, no. I actually now, when responding to 
the previous question, we have some very specific suggestions 
of what the Federal Government could do to require states to 
move in that direction.
    Mr.Stottlemyer. That is one of the reasons why we're for 
pooling, because it gets you out of the state environment. As I 
said earlier, I don't begrudge Blue Cross/Blue Shield in North 
Dakota for having 92 percent of the market. They've worked hard 
to get that. But if you're in North Dakota, it's very difficult 
for somebody to come and be successful in that environment. 
That's just an economic reality. So pooling, in our view, would 
allow somebody in North Dakota, a small business owner, to get 
into a national pool. And if you get into a national pool and 
the national pool is large enough, in our view, it would create 
more competition and more--
    Mr.Akin. Which you say pooling, you mean AHPs?
    Mr.Stottlemyer. It could be AHPs, small business health 
plans, just the fundamental concept of pooling. And I think as 
Dr. Wilensky said earlier, you have to stabilize the pool. You 
can't have people come in and out. So I think the idea of some 
form of tax incentives or incentives to keep people in the pool 
and I think Karen said that as well, makes a lot of sense. But 
pooling, fundamentally, if you get a bigger pool, people are 
going to want to compete for that pool, and it's going to give 
more competition.
    Ms.Wilensky. If you see a place where there are one or two 
insurance companies, don't look to the insurance companies, go 
look to the state regulations, because there's nothing about 
the nature of the business that allows those kinds of barriers 
to be erected. And it's usually something about the 
requirements that states have put in place that have resulted 
in that.
    Mr.Akin. Anybody else? Thank you, Madam Chair. That's my 
last one for the year or so.
    ChairwomanVelazquez. Thank you, thank you. And I have two 
or maybe three more questions. I just like for them to be as 
brief as you can since they're going to call for a vote soon.
    Dr. Wilensky, you talked about few criteria that make up 
health insurance costs. Medical underwriting is used in both 
the individual and group market to set premiums. However, 
unlike the individual market, insurers do not review each 
individual's medical record in the group market, rather, the 
insurer reviews the entire group's history, taking into 
consideration it's claim history, demographics and geographic 
location. Medical underwriting appears to have a significant 
impact on cost.
    I would like to know whether a purchasing pool could 
successfully implement a community rating mechanism or some 
alternative to achieve cost savings?
    Ms.Wilensky. The problem that community rating is designed 
to address is to spread the risks. My belief is the way to 
better fix the same problem is to risk adjust the groups who 
have higher expenses coming in through a pooling mechanism or 
through some kind of subsidy like the high risk pool that Karen 
Ignagni mentioned.
    My problem with community rating per se is you ask people 
to pretend they can't see that some groups aren't going to be 
more expensive and to treat them as though they weren't. So the 
question is how do you compensate if you have somebody who is a 
complex diabetic or an HIV-AIDS or a disproportionate number of 
very sick individuals? You need to allow them to come in. You 
need to compensate either at the individual or the company 
level those kinds of groups that will experience higher costs. 
I think it is a more feasible way to keep a group going than to 
ask people to pretend as though the expenses will be average 
when they're not going to be.
    ChairwomanVelazquez. Any other comments? Ms. Ignagni?
    Ms.Ignagni. I agree with that, Madam Chair. I think that's 
well stated.
    ChairwomanVelazquez. Okay. Mr. Stottlemyer, it seems that 
based on the testimony that we received, your group, NFIB, and 
AHIP have a different perspective on what a small business 
health plan will look like in terms of whether or not as AHIP 
suggests that on groups of 50 or less, should participate in 
small business health plans. What do you think of that?
    Mr.Stottlemyer. Well, I hope we support the fundamental 
concept of pooling and I think we do. I think there's some 
differences. I think in her testimony talked about a smaller 
number of employees. I think it was 50 and we would support a 
larger number of employees, 200, if you will, coming in and the 
tax incentives could be for even smaller companies. It's not 
suggesting you'd have to do the tax incentives for a 200-person 
company. You could split, if you will, those size companies 
that come into the pool versus where you actually apply the 
targeted tax incentives. Again, I would hope we would be in 
favor fundamentally of pooling. We're talking about bringing 
people into the pool which is going to ultimately spread risk 
and hopefully allow cost to be less as well.
    ChairwomanVelazquez. Ms. Ignagni, are you suggesting that 
we should limit it to 50 employees or less?
    Ms.Ignagni. The reason that we made that observation, Madam 
Chair, is that we have a whole regulatory framework now around 
certain definitions of small employers, HIPAA, for example.
    And so the question is how do you solve this problem as 
quickly as possible and do it in a way that gets at the 
problem, but we don't then start creating particular strategies 
that we have to undo two or three years from now. We saw that 
with MEWAs and I think that having looked at that experience, 
we don't want to move down that way in the future. So that's 
why we've proposed a very specific series of strategies to 
solve the problem, but not necessarily create those unintended 
consequences.
    ChairwomanVelazquez. Thank you. Mr. Cockey, while all small 
businesses face great challenges in getting health insurance, 
the self-employed face even greater challenges. They usually 
pay higher prices and they do not even have the same tax 
treatment as many of the corporate counterparts.
    As an organization that represents many self-employed 
realtors, can you talk to us about some of the unique 
challenges that your members face?
    Mr.Cockey. Well, the unique challenge is by the design of 
our industry and how we earn our money is that we are not 
salaried employees or guaranteed salary. So the unique part 
about our business is that our income fluctuates from month to 
month, so that in good times we have money to pay the bills and 
in bad times, we have less. So that's the big challenge for us 
to have a very, very high health insurance program because we 
don't necessarily have that common income as many employers and 
employees would have provided. So that's a big challenge for 
us. Our expenses don't go away for operational side, but our 
income and revenue truly have dramatic changes. We are now, as 
an example, the wonderful market that we've been in, we are now 
in a very serious transition change where the income of many 
realtors are going to be much, much less and that's going to be 
a challenge to pay their bills.
    ChairwomanVelazquez. Thank you. Now Ms. Ignagni, in terms 
of policies sold to the self-employed, what are some of the 
reasons these policies tend to cost more than similar policies 
sold to large firms?
    Ms.Ignagni. I think the reason, one of the primary reasons, 
Madam Chairwoman, is the reason that Dr. Wilensky talked about 
very effectively which is that when you small employers, what 
you find the reason for higher, disproportionately higher 
healthcare costs is that you have one or two members of the 
group with serious catastrophic illnesses. So if we can figure 
out a way to target those individuals for additional subsidies 
or the health plan that's covering them for additional 
subsidies, you can customize that or put them in higher risk 
pools. There are a number of ways to do it. And as I say, we're 
going to have quite a number of suggestions very soon, in 
addition to this. That would be the way to make these policies 
affordable for small business, to keep people with lower 
healthcare costs, not disproportionately raise theirs and be 
allowed to expand coverage.
    I think that the question you asked Mr. Cockey is very--it 
goes hand in hand with that which is that tax treatment. It's 
unfair for people who are not attached to a particular employer 
to have to spend 7.5 percent of their adjusted gross income 
before they can get a healthcare deduction for their insurance.
    ChairwomanVelazquez. Dr. Wilensky?
    Ms.Wilensky. There are a couple more reasons that it's 
expensive. One has to do with the function finding out about 
the benefits. Mr. Cavanaugh described what he has to go 
through. If you have some kind of a grouping mechanism, that 
function can be done for the group, rather than having each 
individual have to do that. It will become more like having a 
benefits manager for a large firm. So you ought to have a 
broader number of people be able to take that fixed cost of 
figuring out what are the healthcare plans that make sense.
    The second thing is that marketing costs are more expensive 
for very small firms and that also ought to be alleviated, not 
completely eliminated, but alleviated with pooling, because 
again rather than have to go to each and every small firm of 
three or seven or nine employees, you can go to the pool and 
they will have made those. So in addition to any risk problems, 
you really will get a spreading of the administrative costs 
that's now borne in the loading factor that individuals pay 
through their brokers.
    ChairwomanVelazquez. Yes, Mr. Chabot. Thank you.
    Mr.Chabot. Thank you, Madam Chair. If it would be okay, I 
think I'll let Mr. Fortenberry go. He just came in and does 
have questions.
    ChairwomanVelazquez. You're recognized.
    Mr.Fortenberry. Thank you, Madam Chair, and I apologize for 
missing the majority of the hearing. Thank you all for coming. 
Obviously, this is a huge concern to all of us. It is a 
compelling need for us as policy makers to address the issue 
and to allow, to help overcome any deficiencies in the private 
market, particularly, so that we can help more people access 
insurance, health insurance.
    I want to give you all a specific example and maybe we can 
work back towards some of your general comments. I met with a 
person recently. She's a realtor, an independent agent. She's 
in her 50s. She was paying something like $1,000 a month for 
coverage and simply couldn't afford it any more, so she just 
drops it. Now given the tax treatment of a person in that set 
of circumstances, her income size, her inability to afford that 
level of insurance, where are we left for a person like that 
who would not have an inclination, obviously, to go into the 
emergency room if something came up and wouldn't have an 
inclination necessarily to use a community health center, wants 
to take responsibility but obviously can't deduct costs, as you 
are pointing out, until they're at 7.5 percent of income and 
you can't deduct the premium costs. There are, of course, 
health savings accounts opportunities if that can be combined 
with some type of extraordinary coverage, but again, I think 
we're going to have more and more people who are caught in this 
dilemma who simply don't make the income levels high enough 
without being able to attach to some group mechanism that they 
can leverage down their costs by spreading out the risk or some 
other form of tax treatment that makes this option more readily 
available.
    Ms.Ignagni. We have proposed setting up a universal health 
account in the tax structure which would provide the same tax 
treatment that individuals received if they are attached to an 
employer, but also provide a portable vehicle for subsidies. 
Some of these individuals may qualify as the states move 
forward in expanding coverage for state subsidies. Eventually, 
when Congress moves forward on this question, they may qualify 
for federal subsidies, but in the interim, there may be some 
monies that the employers are contributing so you can put all 
of this into an account and from there they can purchase the 
proposal that is right for them. But until we address the state 
mandate question that we've been talking about, the issue of 
affordable, available coverage for them is one that is a very, 
very high hurdle, which is why we've put so much emphasis on 
what should states be required to do by way of regulatory 
constructs. You couple all these things together and then you 
can make the programs work. And then our responsibility in the 
health insurance arena is to make sure that we are reorienting 
the payment system, we're focusing on outcomes and quality, and 
there's much very positive news to report.
    This is the fourth year where the rate of increase in 
healthcare premiums has gone down. That almost never happens. 
It doesn't hit the front pages of any of the national 
newspapers. If the opposite had occurred, it would.
    Mr.Fortenberry. But it's still what, 8 to 12 percent, 
generally in that range?
    Ms.Ignagni. No, it is seven. It's going down for next year. 
And that's on average. So if we were to look to the kinds of 
strategies that we've been talking about today, married with 
the new set of tools that we're bringing into the market, I'll 
give you an example. Three years ago, prescription drug 
expenditures were rising at an annual rate of more than 20 
percent. Now it's down to six. Because we've implemented 
strategies. We've encouraged generic drugs. We've set up tiers. 
We've done a whole range of things to expand access, but get 
the cost down. We're doing precisely the same thing now on the 
physician side and on the hospital side and we're working 
collaboratively with the healthcare practitioners to set up 
what should be the criteria for payment.
    So all of this is going to flow in a productive way, but we 
have to get that regulatory construct addressed.
    Ms.Wilensky. The tax treatment is clearly unfair. We have 
complete agreement that it is unfair to have people who don't 
get employer-sponsored insurance have to use after tax dollars. 
Everyone else uses pre-tax dollars.
    My other advice is that unless she has major pre-existing 
conditions that puts her in a very special category, she should 
go on the Internet and find out what other kind of insurance is 
available. That seems extraordinarily expensive.
    Mr.Stottlemyer. Just to add on, the 7 percent, that may be 
good news, but again, there's a big difference between larger 
employers and small employers and I'm highly confident that 7 
percent is much, much higher for small employers, even this 
year and next year.
    Mr.Fortenberry. The market is segmented, basically. Larger 
employers, the ones who might be tracked or cover the broad 
numbers of people would be on average seven versus a higher 
rate of increase and for individuals or small businesses 
without large risk pools?
    Ms.Ignagni. We have actually done--we have the most 
comprehensive survey of the small employer marker. And in the 
survey and we highlighted some of that in our testimony, you 
will see the average rates for small employers across the 
country. In certain states those rates are very, very high 
because of the issues we've been talking about in terms of the 
regulatory structure. We can look at the large numbers of 
carriers in the states. We can look at the competition, but we 
do know that there are some regulatory challenges. But I'd be 
delighted, Madam Chair, to provide a full copy of that survey 
for the Committee, if that would be helpful.
    ChairwomanVelazquez. Sure. Thank you. Mr. Cockey.
    Mr.Cockey. The thing that you mentioned about your realtor 
acquaintance, unfortunately, she's one of 336,000 people that 
are uninsured. Now either they've become uninsured because they 
can't afford it, never signed up for it to begin with, or 
they've had to cancel it because now their income has dropped 
to a point that they can't afford it. She has the ability to 
deduct that expense as an independent contractor for her 
coverage, but the unfortunate part is if I don't have the 
income, the deduction has no benefit.
    ChairwomanVelazquez. Mr. Chabot?
    Mr.Chabot. Thank you, Madam Chair. I'll be very brief 
because we have votes on the floor. I'll just conclude with a 
comment. In my question, Mr. Stottlemyer had mentioned earlier 
about kind of the frustration with having past association 
health plans. I believe five times in the past six years, 
whenever the Senate--and died over there. I've had and many of 
my colleagues have had similar frustration in trying to address 
one of the issues that increases the cost and we've talked 
about that. That's defensive medicine and frivolous lawsuits 
and medical malpractice suits. So it was frustrating to have 
passed the Health Act and other pieces of legislation which 
dealt with that issue as well that passed the House, but then 
went over and died in the Senate.
    Now my party is no longer in control of either House and 
I'm hoping that my colleagues on the other side of the aisle 
will have more success in passing such legislation in the 
Senate than we did.
    ChairwomanVelazquez. Well, we need the President on board 
too. It's nice when he says that yes, I support association 
health plan, but he needs to call--well, when the Senate was in 
control of the Republicans, he needed to have placed a phone 
call and asked them to bring that vote forward, that 
legislation to a vote.
    Mr.Chabot. Maybe we can call him together.
    ChairwomanVelazquez. I welcome that. Let me thank all of 
you. This was a great discussion and I can assure you it is an 
important issue for this Committee. We do understand that in 
order to tackle the issue of the crisis of healthcare in this 
nation, we have to address the issue of the lack of insurance 
for small businesses. This is the first hearing. We will 
continue with this dialogue and I want to take this opportunity 
to thank all of you for your participation.
    [Whereupon, at 12:05 p.m., the hearing was concluded.]
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