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




 
                  FULL COMMITTEE HEARING ON EXPANDING
                SMALL BUSINESS HEALTH INSURANCE COVERAGE
                  USING THE PRIVATE REINSURANCE MARKET

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

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 24, 2007

                               __________

                          Serial Number 110-25

                               __________

         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


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


CHARLIE GONZALEZ, Texas              LOUIE GOHMERT, Texas, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)

  
?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

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

                               WITNESSES

Crouse, Dr. Leonard D., Vermont Department of Banking, Insurance, 
  Securities & Health Care Administration........................     3
Collins, Patrick L. American Academy of Actuaries................     5
Harter, Steven J., National Association of Professional Insurance 
  Agents.........................................................     7
Trautwein, Janet, National Association ofHealth Underwriters.....     9
Haislmaier, Edmund, The Heritage Foundation......................    11

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    32
Chabot, Hon. Steve...............................................    34
Altmire, Hon. Jason..............................................    35
Crouse, Dr. Leonard D., Vermont Department of Banking, Insurance, 
  Securities & Health Care Administration........................    36
Collins, Patrick L. American Academy of Actuaries................    40
Harter, Steven J., National Association of Professional Insurance 
  Agents.........................................................    47
Trautwein, Janet, National Association ofHealth Underwriters.....    50
Haislmaier, Edmund, The Heritage Foundation......................    56

                                  (v)

  


                   FULL COMITTEE HEARING ON EXPANDING
                    SMALL BUSINESS HEALTH INSURANCE
             COVERAGE USING THE PRIVATE REINSURANCE MARKET

                              ----------                              


                         THURSDAY, MAY 24, 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, Cuellar, 
Clarke, Ellsworth, Johnson, Sestak and Chabot.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    ChairwomanVelazquez. Good morning. This hearing on 
expanding small business health insurance coverage using 
reinsurance in the private market is now called to order.
    It is no secret that small employers are finding it 
difficult to purchase health insurance. However, what is less 
well known is that fewer carriers are offering coverage in the 
small group market.
    In 2006, the Government Accountability Office reported that 
in a typical state the largest insurer controlled 43 percent of 
the market, up from 33 percent in 2002. In nine states, the 
largest carrier held more than 50 percent of the market. 
Consolidation in the insurance industry has made it difficult 
for smaller insurers to compete, and a number have dropped out 
altogether.
    The lack of insurers helps explain why small employers can 
pay as much as 20 percent more than their corporate 
counterparts for the same health plan. Without competitive 
forces, insurance companies can dictate prices.
    Today's hearing is the second in a series held by the 
Committee to address the issue of providing affordable health 
insurance for small businesses. This morning we will look at 
the state of the reinsurance market and whether there are ways 
to expand the use of reinsurance to provide more health 
insurance options for small employers.
    Second, the Committee will consider whether it is feasible 
for small businesses to purchase reinsurance directly from a 
reinsurer. Typically, only insurance companies and large 
employers buy these policies to cover catastrophic claims. 
Small employers simply do not have the resources to purchase 
this type of policy on their own.
    The issue is: what changes to our laws, if any, will make 
it possible for an entrepreneur to purchase such reinsurance 
coverage? I would like for witnesses to comment on whether 
collective arrangements would allow small employers to buy 
reinsurance.
    Too often, we hear the excuse from insurance companies that 
they cannot offer small employers coverage or have to charge 
exorbitant prices due to the risk factor. If we can eliminate 
this argument, small businesses can start negotiating rather 
than simply accepting health insurance prices.
    While this may seem like a unique approach, the depth of 
the problem requires us to look at all our options. If we fail 
to do anything, costs will continue to rise, more individuals 
will find themselves uninsured, and the growth of America's 
economy and small businesses will come to a halt.
    We have with us a distinguished group of witnesses well 
equipped to help us understand the reinsurance market and 
whether it holds the key to expanding small business health 
insurance coverage. This Committee's goal is to ensure that 
health care reform does not occur without meaningful 
consideration of impact on this country's small businesses and 
the workers.
    I am pleased that witnesses are here today to share their 
insights, and I look forward to today's testimony. I now 
recognize Ranking Member Chabot for his opening remarks.

                OPENING STATEMENT OF MR. CHABOT

    Mr.Chabot. Thank you, Madam Chairwoman, and thank you for 
holding this hearing on expanding small business health 
insurance coverage.
    At the center of our examination are the issues of cost and 
access. As we all know, purchasing health insurance is one of 
small business' most costly expenses. According to the National 
Federation of Independent Business, the NFIB, health care is 
the ``most severe problem for small business owners''--greater 
than taxes, cash flow, or government regulations.
    Small groups, including small businesses, usually pay more 
for similar or less coverage than large businesses. As a 
result, small businesses are less likely to offer health 
insurance than large firms. Not surprisingly, the principal 
reason given is that the small business could not afford the 
coverage.
    Access to health insurance is also a challenge for small 
businesses. According to the Small Business Administration, 
employees with small firms are far less likely to have health 
insurance than those at larger ones. Ensuring that health care 
is affordable for small businesses is one of the most important 
issues Congress can address.
    Our nation's small businesses drive the economy, and we 
need to do all that we can to help them stay competitive and 
encourage their growth. Association health plans, pool 
purchasing, and reinsurance have been mentioned as ways to help 
reduce the costs and increase access to health insurance for 
small businesses.
    I am pleased that we will consider reinsurance during this 
hearing. Although I have reservations about the implications of 
a federal mandatory reinsurance program, I think reinsurance 
deserves further examination. I also believe that tax relief is 
not only an important way to reduce the overall tax burden, but 
to make health care more affordable for small businesses.
    In previous Congresses, I have introduced the Health Care 
Affordability Act, which would allow every American to deduct 
100 percent of the cost of their health insurance. I plan to 
introduce this bill or a 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 health care more affordable for 
small businesses and their employees, and I yield back the 
balance of my time.
    ChairwomanVelazquez. Thank you. I welcome all the 
witnesses. You will have five minutes to make your remarks.
    Our first witness is Mr. Leonard Crouse. He is the Deputy 
Commissioner of Captive Insurance at the Vermont Department of 
Banking, Insurance, Securities & Health Care Administration. He 
has worked in the insurance regulation field for 35 years. Mr. 
Crouse has been the head of the Vermont Captive Insurance area 
for 16 years.
    Welcome, sir.

 STATEMENT OF MR. LEONARD D. CROUSE, CFE, DEPUTY COMMISSIONER, 
  CAPTIVE INSURANCE DIVISION, VERMONT DEPARTMENT OF BANKING, 
       INSURANCE, SECURITIES & HEALTH CARE ADMINISTRATION

    Mr.Crouse. Thank you, Madam Chair, and members of the 
Committee. I have been in insurance regulation for 35 years, 
the last 16, as the Chairman said, in Vermont. When I came to 
Vermont, we had 200 captive insurance companies. We just 
licensed our 800th captive insurance company last week.
    It has been an industry that is referred to as the 
alternative insurance market. It has been around for a number 
of years. We passed our legislation in 1981. Many states have 
adopted regulations to form these type of insurance entities.
    There are basically three types of captives when we talk 
about captives. We have a pure captive that insures only the 
corporation that owns it or that of its affiliates. And then, 
we have association captives made up of smaller groups that get 
together, pool their risks, whatever, and form. And then, we 
have what we call the risk retention groups. Those are the 
smaller groups that get together again, usually have similar 
business, similar type of exposure. They get together to form a 
risk retention group. We have 79 of those in Vermont currently.
    If I could just refer back to the, oh, maybe four or five 
years ago, the medical malpractice crisis that was going on in 
this country and how the alternative market helped that market 
get over a major hump. Pennsylvania was a main state with major 
problems in medical malpractice. I believe we formed something 
like 39 captives that year, risk retention groups, put together 
by doctors, doctor groups, hospitals, universities with medical 
centers, and it really alleviated a serious problem. It was an 
alternative for many of these companies to go to.
    Again, the reason was that costs were becoming too high in 
the traditional markets. Insurance was, in some cases, 
unavailable. So, again, it has been a great success in that 
industry.
    Companies that do form captives, they generally realize 
lower costs, stable pricing, and the ability to receive a 
policy that meets its needs. Commercial premiums are based on 
the cost of claims, administrative costs, profit, and market 
competition. Companies forming captives feel that they can 
better estimate their own claim costs, lower administrative 
costs, and adjust the required profit to suit their needs.
    Captives should not be subject to market conditions. 
Basically, a lot of people will form a captive, and what we 
call the hard market and the soft market occurs, a soft market 
being where insurance is readily available and a hard market 
when insurance costs go up and insurance is not readily 
available.
    But when you form a captive, you stay in it for the long 
run, so you get over those humps that come and go, usually in 
the course of seven years, hard market/soft market, although 
recently those hard markets and soft markets have come a little 
bit more frequently.
    We are a regulator in Vermont. I am a regulator, number 
one. It is important to regulate these entities. And anything 
that is done by your Committee or by the Federal Government 
that would be able to assist the small markets should be done 
in a regulated environment. Insurance is a regulated industry. 
It always has been; it always will be. And what we need in the 
smaller markets, we are having problems right now with risk 
retention groups.
    It is a federal act. The Federal Risk Retention Act has 
been in effect since the early '80s when we passed our law. 
There is just not enough meat in the regulation and the 
requirements that are in that law. So if there is something 
that is passed, you have got to put a little more meat and a 
little more stiffness in there about the regulation and 
oversight of any type of program that is done.
    We are working closely now with the NAIC, trying to bring 
the states together. There is about 15 active states in the 
risk retention group business. We are trying to bring them 
together and get some uniformity. There has to be uniformity in 
the oversight and regulation of any type of alternative 
program.
    Basically, the GAO did a study, and it was completed two 
years ago. I believe it was the House Financial Services asked 
the GAO to do a report. It was a very successful report, and it 
would behoove you folks I believe to take a look at that and 
read it. It is excellent. There was a lot of good suggestions 
there on what they could do to improve the Risk Retention Act, 
and I think it would fit right into what you folks here are 
possibly thinking of doing.
    I think the alternative market properly done for the small 
businesses and health care, something could be structured. I 
think a State like Vermont would be ready and willing to work 
with you folks to set something up, and I believe we are 
positioned to do so.
    I will say this: Vermont has 28 people just in our 
alternative market division, which is the largest by far of any 
other state. We are the only state that has a dedicated 
department just for alternative markets and for risk retention 
groups, and what not.
    So I just want to let you all know that we are readily 
available to answer any questions and work with you folks.
    [The prepared statement of Mr. Crouse may be found on page 
36 of the Appendix.]

    ChairwomanVelazquez. Thank you, Mr. Crouse.
    Our next witness is Mr. Patrick Collins. He is the Vice 
President and Reinsurance Underwriter at Munich Re America 
HealthCare and is appearing on behalf of the American Academy 
of Actuaries. He is the Chairman of the Medical Reinsurance 
Workgroup and Vice Chairman of the Federal Health Committee. 
The American Academy of Actuaries represents over 15,000 
members from all practice areas.
    Welcome, sir.

STATEMENT OF MR. PATRICK L. COLLINS, MAAA, FSA, VICE PRESIDENT 
  AND REINSURANCE UNDERWRITER, MUNICH RE AMERICA HEALTHCARE, 
  PRINCETON, NEW JERSEY, ON BEHALF OF THE AMERICAN ACADEMY OF 
                           ACTUARIES

    Mr.Collins. Thank you. Good morning, Madam Chairwoman 
Velazquez, Ranking Member Chabot, and members of the Committee. 
On behalf of the Academy of Actuaries, I thank you for the 
invitation to sit down with you today and discuss private 
reinsurance in the small business context. The Academy is a 
non-partisan public policy organization representing actuaries 
of all specialties in the United States.
    We applaud your efforts to take on the difficult and 
complex health care cost problem. We are on an inevitable path 
to a collapse in the commercial medical insurance market. There 
is nothing that we can see on the horizon that will be able to 
stop it, and it is not a matter of if this will take place, but 
more of a matter of when and what form the market will look 
afterwards.
    Small employers are on the front lines, bearing the brunt 
of these high health care costs, and it hurts, not just on a 
financial level but on a personal one. As you are aware, 80 
percent of small employers have 10 or fewer employees, and the 
business owner tends to know each employee. In many cases, 
their relatives are family members.
    The choices used to be which plan of benefits to buy or 
from which carrier, and now increasingly it is whether or not 
they can afford to buy anything at all. The burden imposed by 
these health costs on small business also hurts the very 
innovation and entrepreneurial activity that has been fueling 
the economic growth of this country, and for these reasons your 
efforts to address these items are to be commended.
    The issue of how to address the high cost of health care 
benefits is indeed a complicated one, and solutions will most 
likely need multiple interlinking components that can't be 
solved with simple or quick fixes or sound bytes. And I 
understand you are considering reinsurance as part of the 
solution, and I hope that you found my written statement 
useful.
    In addition to providing some background information on 
reinsurance, the statement is intended to provide you with a 
list of items to consider when designing a program. I would 
like to emphasize and highlight just a few of these points. I 
think it is important to understand the role that reinsurance 
plays.
    In the private market, medical reinsurance reduces risk by 
providing financial protection. And by taking that risk, it 
reduces the required capital and increases the capacity by 
allowing the company to write larger programs. And it also 
provides the company with a source of intellectual capital and 
value added services.
    What reinsurance does not do, however, is it does not 
reduce overall medical costs. It simply shifts costs from one 
entity to another. Nor does it render an uninsurable risk 
insurable. By simply shifting risk around does not change its 
underlying nature. While the commercial medical reinsurance 
market today is vibrant and fills a valuable market need, it is 
relatively small. It is used by small to mid-sized health 
insurers, and it is also used by small to mid-sized employers 
who self-fund their medical benefits.
    Large health plans and large employers generally do not buy 
much reinsurance. For those who do buy reinsurance today, 
reinsurance tends to be very customized and tailored to the 
needs and goals of the organization. A standardized reinsurance 
program will tend to work well for some and not for others. And 
while it may work on average, it may not work very well for any 
one health plan or employer.
    And of the issues outlined in my statement, I think the 
ones worth highlighting the most are, first, defining the 
objectives clearly. Understanding exactly what the program is 
trying to accomplish is important. Some objectives may tend to 
work against each other. For example, providing coverage to 
sicker people with higher health costs may work against an 
objective of lowering costs and premiums.
    The second is: beware of unintended consequences. People in 
organizations, I think it will come to no surprise, will tend 
to act in their own best interest. One way that we use to flesh 
out these consequences is to look at the incentives. We first 
ask, what is the program incenting each party to do? And then, 
we ask if we are comfortable with those incentives.
    Often programs are put into place with an assumption that 
everything else will remain the same. And often everything does 
not remain the same.
    Before I close, I will leave you with one final thought. I 
was studying a condition recently called hormesis, and that is 
a condition where something in controlled doses is beneficial 
and good for you, but it is lethal in high doses. And the two 
most oft cited examples are water and oxygen.
    And I suggest thinking about reinsurance in the same way. 
Using it wisely and judiciously and it will serve you well. 
Relying on it too heavily and it may cause more problems than 
it is worth.
    Thank you for your time. I and the Academy are available to 
you as a resource to assist you in any way that we can. And I 
wish you all the best in your endeavors.
    [The prepared statement of Mr. Collins may be found on page 
40 of the Appendix.]

    ChairwomanVelazquez. Thank you. Thank you.
    Our next witness is Mr. Steven Harter, owns and operates 
Select Risk Management Inc., and is the Past President of the 
National Association of Professional Insurance Agents. The 
National Association of Professional Insurance Agents 
represents member insurance agents and their employees who sell 
and service all various insurance products.
    Welcome, sir.

STATEMENT OF MR. STEVEN J. HARTER, PAST PRESIDENT NAPIA, SELECT 
RISK MANAGEMENT INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF 
             PROFESSIONAL INSURANCE AGENTS (NAPIA)

    Mr.Harter. Thank you. Thank you, Madam Chairwoman, and 
members of the Committee. In 2002, I had the honor of serving 
as President of the National Association of Professional 
Insurance Agents. I continue to be involved with PIA and am the 
current President of the PIA trust, which is involved in health 
insurance products.
    On behalf of PIA and its members, I would like to thank you 
for this opportunity to testify before the Committee.
    PIA members are owner principals of their own independent 
agencies. We specialize in selling all sorts of insurance 
products, primarily to small and mid-sized businesses. Those 
products include automobile, home, business, including health 
insurance products. We are main street agents serving main 
street America.
    PIA's experience and perspective in this area is both as 
purchasers as well as insurance experts. We also have to buy 
health insurance for our employees.
    As I stated before, I do own and operate an insurance 
agency. In addition, until September of 2006, I owned another 
business. It was a social service agency providing supports to 
individuals with developmental disabilities. I employed 
approximately 120 people that we tried to provide health care 
for. In 2006, we merged with a large organization, largely 
because of the incredible cost of health insurance for my 
employees.
    For many years, I did provide full health insurance. I paid 
100 percent of the premium. As the costs continue to rise, I 
raised deductibles, much like other small businesses do. At 
that point, the costs became too much, and I started having my 
employees contribute toward the cost of their insurance.
    In the health care/social service industry, people are low 
paid. A lot of my people only make like $10 an hour. So an 
increase in cost to them was disastrous, and many of them 
dropped their coverage. On the last renewal, the cost for each 
employee was quoted at over $500 per month. I didn't have the 
money to do that.
    I determined the amount that I could pay, searched the 
market to find some sort of product that would be better than 
nothing--and I think a lot of small business people do this 
every day--and what I wound up with was what is called a mini-
med product that basically is a band-aid. It is not the answer 
to the problem. And I think you have other small businesses 
that are probably doing those same sorts of things. We are 
trying to work within the--in the system, but it is not being 
very successful.
    Allowing cost considerations to limit access to care in 
this manner by employees of small businesses is not a solution. 
It is another indication that there is a broader problem. I 
feel the overwhelming driver of insurance costs is the high 
demand for medical services coupled with the skyrocketing costs 
of health care, including prescriptions. I am not telling you 
anything new.
    Today, as a nation, we are healthier than we have ever been 
before. Part of the reason is the advance in medical treatment, 
which of course adds to the cost. I don't see that reinsurance 
will necessarily help curb costs. I see reinsurance as more of 
a vehicle for availability. I have always been able to find 
group insurance. I just can't afford it. I don't get the 
impression from my clients that they can't find the coverage. 
Most of the time there is a market somewhere, but people can't 
afford to pay the premium.
    I think there are only three broad answers--either have the 
government pay for part of the cost, somehow limit the cost of 
services, or pass more of the costs to individuals. And more 
than likely, it is going to be some combination of all of the 
above.
    All reinsurance does is redistribute the exposure to loss 
by the insurance company. It does not lower the total cost. 
Conceptually, the ability of insurance carriers to lower their 
overall exposure to loss through reinsurance could cause more 
carriers to compete in the marketplace. With more competition, 
costs could be lower. It is a concept that needs to be explored 
more, just as your Committee is doing.
    As Congress moves forward in developing effective 
legislation, we would like to make the following 
recommendations. First of all, we need to consider 
affordability as a key to availability. Number two, we need to 
clearly outline administration of the program, preserving state 
regulation. We strongly believe that state coverage, mandates 
must remain. Establishing financial soundness standards, 
including a structure of operative principles, is critical. It 
is not merely enough to have funding.
    We must learn from past mistakes. ERISA is an example. 
ERISA needs to be fixed before anything else is piled on top of 
it. We need to operate outside of that.
    PIA strongly advises that legislation moving through 
Committee be available for public vetting, and that before the 
concepts are implemented they are subjected to economic and 
operative modeling.
    In closing, let me emphasize that what we are really 
discussing here today is how we go about delivering more high-
quality health care to people who cannot afford to bear the 
full brunt of the cost. People who choose to work for America's 
small businesses should not be less able to have quality health 
care than people who work for large concerns.
    Aside from the issue of basic fairness, such a situation 
places small businesses at a competitive disadvantage in the 
marketplace. Reinsurance should be a part, but only one part, 
of a number of potential solutions that need to be accomplished 
to make health insurance available and affordable to small 
businesses.
    Thank you.
    [The prepared statement of Mr. Harter may be found on page 
47 of the Appendix.]

    ChairwomanVelazquez. Thank you, Mr. Harter.
    Our next witness is Ms. Janet Trautwein. She is the 
Executive Vice President and CEO of the National Association of 
Health Underwriters. The National Association of Health 
Underwriters is a trade association for health insurance agents 
and brokers, representing more than 20,000 health insurance 
producers nationally.
    Welcome.

 STATEMENT OF MS. JANET TRAUTWEIN, EXECUTIVE VICE PRESIDENT & 
        CEO, NATIONAL ASSOCIATION OF HEALTH UNDERWRITERS

    Ms.Trautwein. Thank you, Madam Chairwoman. I think I just 
want to go ahead and move right into--not talk about the things 
that others have spoken about today.
    I want to talk a little bit about reinsurance and why we 
are talking about reinsurance. You know, what is reinsurance 
for at the most basic level. One of the major cost drivers in 
health insurance today are the expenses by a few people who 
either have chronic or serious medical conditions. In fact, 20 
percent of the people who have these conditions actually 
produce 80 percent of the expense in any plan, regardless of 
the size of the case.
    And that is why reinsurance is used. Spreading the risk in 
plans, particularly small employer plans, is difficult for 
insurers to do that, and that is why many insurers do buy 
reinsurance. I find that people are surprised when insurance 
companies reinsure themselves. That seems, you know, at odds 
with what an insurance company would do. But this allows them 
to be more competitive.
    And what do we mean by ``being more competitive''? That 
means they are offering a lower cost. And if they can reinsure 
part of that risk, it helps them to offer a lower cost to more 
employers. That is what being competitive is all about.
    And I want to emphasize one thing about reinsurance. When a 
company reinsures or even an employer, large or small, 
reinsures, they don't reinsure for losses that they expect--
they price for those. They insure for losses that they don't 
expect, that would be out of the range of things that would 
normally happen.
    There are two basic types of reinsurance. There are 
actually many types, so I am going to oversimplify this 
discussion for those of my fellow panelists that would say, 
``Well, it is really more complicated than that.'' It is, but I 
am going to--for purposes of our discussion today, I want to 
break it down into two types.
    Reinsurance can be bought on individual losses, against 
losses by an individual within a group, and then it can also be 
purchased for the losses of a pool of individuals as a whole. 
And there are a lot of calculations that go into how much 
reinsurance you buy. One thing I want to point out is that the 
amount of coverage purchased is never an arbitrary amount 
today, and it never should be, because the ability to absorb 
risk is very, very different from one group to another.
    And when I talk about a group, I don't mean one small 
employer. I mean for an insurer, their group of small 
employers, or their group of a particular market, and that is 
who they reinsure. If they were to buy too much reinsurance 
because it had to be purchased at an arbitrary amount, that 
would be a huge waste of money and would cause prices to go up, 
not down. So you don't want to throw dollars away there.
    I do want to point out that there is a cost for 
reinsurance. We have mentioned this before. It is factored back 
into the premiums that people pay. There is a premium that 
insurers or employers pay for reinsurance, and it does help 
them be more competitive, but it is not free. And that is just 
an important component to keep in mind, that it is a 
rearranging of things, and it can lower costs, but sometimes it 
is just spreading it out differently.
    I want to point out that some states have tried to assist 
small employers already by developing small employer 
reinsurance pools. There are about 19 of these pools in 
existence so far today. They have been marginally successful, 
primarily for two reasons. One is that they are very small, and 
most of the large carriers do not participate.
    The reason why they don't participate is because the pools 
are set up with an arbitrarily low attachment point for the 
reinsurance, which is--they feel is silly to reinsure at that 
level and would be a waste of the dollars that could go towards 
paying claims for their customers. And so the pools have almost 
today been set up to fail. That old NAIC model needs to be 
changed, so that they could work more effectively.
    There have been some ideas circulated about federal 
subsidies for the reinsurance market, all different ways--
federal subsidies, state subsidies, any sort of assistance. The 
reason why these have been kind of popular concepts is that 
they actually--a subsidy would actually take away part of the 
cost, as opposed to rearranging it, like I was talking about a 
few minutes ago.
    So, for example, a subsidy could be constructed so that it 
would actually reduce the amount of a reinsurance cost or 
reduce the amount of a claims cost that normally would have 
been calculated into figuring how much to charge people for 
their coverage. So it should force costs down in the market, if 
it were done correctly.
    In closing, I have just a couple of key principles that I 
would say that you should adhere to on any reinsurance 
proposal, no matter what it looks like. If you were going to 
set up a subsidy, or even a program, you need to make sure that 
you set it up across a market, and that you don't segment a 
market. And so what do I mean?
    If you are going to set up a reinsurance program, then it 
is for the individual market or it is for the small employer 
market, but not a part of that market. Now, it can be broader 
than that, but you don't want it to be only for people who buy 
in this pool or only for people to do that. If it is for the 
small employer market, it is for the whole market. Otherwise, 
you are going to eliminate coverage that is already available 
to people. So no market segmentation, very important.
    The other thing, as I mentioned before, this issue about 
not using arbitrary amounts, make it flexible, so that people 
buy coverage that would be in excess of claims that they 
already expect, and then they are not insuring--being forced to 
insure too low.
    And those are my primary issues. I think there are a lot of 
creative things that could be done. It just needs to be done 
correctly, so that you are doing something good instead of 
doing something that backfires on you.
    [The prepared statement of Ms. Trautwein may be found on 
page 50 of the Appendix.]

    ChairwomanVelazquez. Thank you.
    Our last witness, but not least, is Mr. Edmund Haislmaier. 
He is a Senior Research Fellow at the Center for Health Policy 
Studies, which is part of The Heritage Foundation. Before 
coming to The Heritage Foundation, Mr. Haislmaier was the 
Director of Health Care Policy in the Corporate Strategic 
Planning and Policy Division of Pfizer.
    Welcome.

STATEMENT OF MR. EDMUND HAISLMAIER, SENIOR RESEARCH FELLOW, THE 
                      HERITAGE FOUNDATION

    Mr.Haislmaier. Thank you very much. The Committee has 
copies of my testimony. I won't go into that in great detail. I 
would like, Madam Chairman, to just echo a couple of comments 
that were made by the other witnesses, because I think they are 
very important ones, and they are comments that I made in my 
testimony.
    First off is the observation by several of my fellow 
panelists here that what we are discussing is transferring 
costs or rearranging costs or shifting who bears some of the 
costs. We are not talking about reducing the underlying costs. 
It is possible in theory in some designs to marginally reduce 
the costs through better case management. But by and large, we 
are not here to talk--this sort of mechanism does not reduce 
cost. What it does is it more equitably distributes the cost.
    Now, there is a value to more equitably distributing the 
cost, and so that is something worth pursuing. But let us make 
sure that we are not under any illusions that we are going to 
have reductions in the cost of health care as a result of this 
alone. That is a topic for another hearing, I am sure.
    The other point that I would like to make here is that 
while, as my fellow panelists have explained, there is 
reinsurance in the current market, and particularly for smaller 
carriers and employers, and those are the ones who feel the 
need to get it, because they are the ones for whom one or two 
incidences might tip the balance.
    It takes a lot for a large insurer in any line of insurance 
to have a situation where there is a sort of perfect storm of 
bad events that results in the inability to cover all the 
claims. The smaller you get, the more likely that is. And so 
the more likely they are to purchase reinsurance in any 
particular line.
    Now, that does get to a related issue, which I won't get 
into now, but I find it extremely questionable whether we 
should continue to operate on the premise that employers in the 
small business sector should be the principal organizers of 
health care. This is a model that may work, and still in some 
respects does work quite well for large employers.
    But I think it is quite clear that there are enormous 
problems when we try to pretend that a business of 10 is really 
sort of similar to General Motors or General Electric. It is 
not in this area, and I think we are putting too much of a 
burden on them, and I think we need to devise alternative 
methods for their workers to get coverage. That is, again, a 
separate subject. I would be happy to talk about it if you 
would like.
    The other point that I would like to make here is we very 
quickly get into something that is a related concept, but I 
think a more relevant concept and a slightly different concept, 
and that is whether or not government should organize risk 
transfer pools. That is not pure reinsurance, as it is commonly 
understood, and I address that in the testimony.
    Rather, it is a way of dealing with selection issues to 
ensure that the distribution of the costs associated with a 
small portion of the population that has higher than average 
expenses, that it is evenly distributed. Again, there is value 
in doing that.
    Right now, we have a situation in which it is almost hot 
potato. People are trying to avoid certain costs. Whether they 
are employers or insurers, everyone--I like to say it is--we 
see this in pharmaceutical pricing. It is sort of the reverse 
Lake Woebegone effect. As you recall, in Lake Woebegone all the 
kids were above average. Well, everybody wants to pay below 
average. The problem is that is not only economically 
impossible; it is mathematically impossible.
    So what would a fairer system look like? It would be one in 
which I think everyone would pay an average appropriate cost 
based on the general population. And if there were disparities, 
they would be evened out through a risk transfer mechanism. So, 
for example, if on average say 10 percent of the population is 
diabetic, and one insurer gets--15 percent of its business is 
diabetics, and another gets 5, there would be a redistribution 
through some sort of pooling mechanism.
    Now, states, as Ms. Trautwein pointed out, have done some 
of this in the small group market. They have done more in the 
individual market--and her organization has written extensively 
on that--in high-risk pools. Again, the cost does not go away. 
It is simply spread out evenly. It is simply transferred.
    So what that leads to is another point that Ms. Trautwein 
made, which is that if you have any kind of mechanism like 
this, you want it to be as broad as possible to encompass as 
much as possible of the market to be as fair as possible, and 
also to be as--to minimize any kind of disruption.
    Now, I happen to think that given the state's role in 
regulating insurance, in general, and some of the work that 
they have done there, that this is principally an activity that 
the states ought to pursue and experiment. Also, because 
markets are localized, both for health care services and for 
health insurance, the Federal Government may be able to help.
    When the state tries to do this, it does run up against an 
obstacle that depending on the state, you know, upwards of a 
half of its population is beyond the reach of the state, 
because they are in self-insured ERISA plans. And so it is in 
that context that states look to use mechanisms other than 
passing back to carriers the cost, such as provider taxes or 
general revenues, to, again, make sure that the costs are being 
spread not just only on half the population but on all of the 
population.
    That is an area that Congress ought to look at. Should 
ERISA be amended, for example, to allow states with a qualified 
risk spreading mechanism to require ERISA plans to participate 
in it? I am sure that will be controversial. But if you look at 
the logic of trying to spread all the costs--to spread those 
costs across all of the participants, there is reason to 
consider that.
    I will stop there. I would be happy to answer the 
Committee's questions, and thank you for the opportunity to 
testify.
    [The prepared statement of Mr. Haislmaier may be found on 
page 56 of the Appendix.]

    ChairwomanVelazquez. Thank you very much, Mr. Haislmaier.
    Mr. Crouse, I would like to address my first question to 
you. As you know, large employers' plans are sometimes 
underwritten by captive insurance companies formed, owned, and 
managed by the employer. And these arrangements allow for the 
employer to collect premiums, pay claims, while still managing 
the risk of running a plan. Can you give us a little more 
detail as to the nature of a captive insurance arrangement and 
why an employer will use such a structure?
    Mr.Crouse. Basically, we are talking about a pure now, 
something--a captive that is owned by a corporation that is 
writing business for themselves or their affiliated companies. 
The simplest answer to that would be insurance costs. You take 
worker's comp, you take general liability, some of the property 
casualty lines, a large corporation will be paying premium 
based on a national average. In other words, those rates are 
set by, you know, whomever.
    That corporation may feel that their experience in worker's 
comp, their experience for general liability, is much better 
than that of the national average. So they will form a captive 
insurance company. They will pay them to set it up. It is 
capitalized, it is the actuarial work-up, the whole--everything 
involved. And what that does, it basically lowers the cost of 
the premium that they are being charged for, because their 
experience is better than the average.
    And what they can do, then, is they get that money, they 
invest that money, you know, they collect their own premiums. 
Basically, it is their company, and they have got the 
investment income from that, the admin costs are less. There is 
just a lot of reasons why it makes sense for a large 
corporation.
    And in the health care, most of our large corporations that 
are writing their post-retirement medical benefits, these 
large, large corporations are doing that. That is mostly on the 
pure side. But those are some of the reasons why corporations 
do form captive insurance companies. It is a better way to have 
their insurance programs directly in front of them. They are 
basing their insurance experience on themselves, as opposed to 
a national average.
    ChairwomanVelazquez. So do you believe that captives or 
some alternative options or version could successfully be used 
in the small group market to achieve the success experienced by 
large corporations?
    Mr.Crouse. Well, that is a difficult--Madam Chairman, that 
is a difficult question. We have had experience with small 
groups. We have small groups in transportation. We have small 
groups--you name it. I mean, medical groups, dental groups, 
small railroads. I mean, there is a lot of small groups that 
have been successful in doing this business.
    In regards to health care, it is going to be a little bit 
more complicated. Basically, what we have seen, what we have 
done with the small groups that have done--tried to accomplish 
some of these benefits in the health care field, a lot of these 
companies, they are small companies. And the other panelists 
here are talking about the large pool and everybody in the 
country. Well, I really can't sit here and tell you that is 
what our concept does.
    Our concept would help individual small companies pool and 
get together and basically, you know, accomplish what they have 
to accomplish. But it is safety--it is a health program. A lot 
of these companies that come in, they must have a program that 
is designed to work with their employees, safety programs, 
health maintenance programs. And, basically, as you know, it is 
discriminatory to charge a certain group less than the average.
    So what they do after the experience is all over and done 
with, those insurers get money back, and that is how our 
programs work. And they have to be put together by somebody. 
They just can't say, ``I am going to do this.'' As someone 
talked about the agencies here, there has to be a large agent 
company, a large life agent or somebody, get together, get out 
there and try to bring these people together with the concept 
that this will work.
    And then, the actuaries have to come into it. The most 
important part of any program is the feasibility study done by 
the actuarial community. It has to make sense. It has to be 
sound. So, yes, it works. But the captive business would not be 
in existence today if it wasn't for reinsurance markets. There 
is not a captive out there that doesn't utilize the reinsurance 
markets.
    ChairwomanVelazquez. Thank you.
    Mr.Crouse. Whether it be pure, small groups, whatever, 
associations.
    ChairwomanVelazquez. Thank you.
    Mr. Collins, if a small business wants to reinsure its own 
catastrophic health risk, it can either purchase coverage to 
provide protection against individual claims or aggregate 
claims. Can you tell me at what point reinsurance coverage 
generally kicks in, or, rather, what is the average attachment 
point for the health reinsurance policy?
    Mr.Collins. The average attachment point for the individual 
claim level starts out at a low point, relatively speaking, if 
the employer is very small. And as the employer gets larger, 
the attachment point rises. And the decision about whether the 
level that the employer decides to purchase is generally up to 
the employer based upon their risk tolerance and how much risk 
they feel like taking.
    Generally speaking, I would say that they do not self-fund 
their plan and buy specific and aggregate stop loss, which is 
what you are referring to, if they have less than 50 employees. 
So it is generally not much of an issue for very small 
employers.
    ChairwomanVelazquez. Thank you.
    Ms. Trautwein, one way to make reinsurance more available 
to small businesses will be to encourage formation of pool 
purchasing arrangements. In order for this to work, this task 
will likely fall on established business groups, such as trade 
associations rather than individual business owners. Are there 
any dangers associated with this option? And what, if any, 
precautions should be taken?
    Ms.Trautwein. Well, I think you would have to be very 
careful about on the trade association side making sure it is 
bona fide trade associations that were not what we would call 
``shelf associations,'' that they really have been in existence 
for some other purpose for a period of time. And then, you have 
to be careful when you are putting together a pool as to how 
you do it.
    There are lots of different ways that you could use these 
ideas, and you could create a pool to do it, or you could do it 
without a pool, but you could do it with a pool, and it may not 
even be reinsurance in the way that any of us are thinking 
about it as the table.
    It might just be super catastrophic coverage with a very, 
very high deductible, and then a company perhaps could purchase 
more of a mini-med type policy, like Mr. Harter was referring 
to, and then the super catastrophic coverage would pick up 
after that. That is kind of a--that is a sort of reinsurance 
coverage, too, but certainly associations and other groups--a 
lot of different kinds of groups could facilitate that type of 
thing, but we would want to be very careful so that the public 
was not misled.
    The worst thing is for some small employer to think they 
are covered, and then when it comes time for their large claim 
it is not. So I would just say some very careful consideration 
of that language.
    ChairwomanVelazquez. Thank you.
    Mr. Chabot.

    Mr.Chabot. Thank you, Madam Chair.
    Let us see, Mr. Haislmaier, if I could begin with you. You 
mentioned I think in your comments that what we are really 
talking about here is not necessarily reducing the overall cost 
of the health insurance itself. It is sort of shifting who pays 
for it and--
    Mr.Haislmaier. Yes, as did some of the other panelists, 
yes.
    Mr.Chabot. Right, right. Now, if you are looking at 
something that really does reduce the actual cost of the health 
care itself, would an example of that be something like if you 
are looking at maybe the high cost of medical malpractice 
insurance, and proliferation of lawsuits against doctors and 
things, and the resulting practice of defensive medicine, where 
a lot of expensive tests are ordered in order to protect 
somebody from being sued, perhaps more tests than are really 
warranted. Is that an example of where you actually could bring 
the cost down itself?
    Mr.Haislmaier. In some cases, that might be. I mean, some 
states have had those problems more so than other states. Some 
states have done liability reform in that area. It is a piece 
of the issue. There are a lot of pieces that go into the cost 
of health care. There are enormous variations in practice 
patterns that are documented that have nothing to do with, 
really, you know, lawyers or anything like that.
    There are regulatory costs and the insurance--you know, 
sometimes the benefit mandates. Again, those are usually small 
pieces, but you add these things up together, there is--in a 
number of states you have very uncompetitive provider markets 
in some areas. You know, for example, in Massachusetts health 
reform, one of the things I always point out to people, you 
know, when they say, ``Well, could we do that in another 
state?'' and I say, ``Well, we don't have this--we have got 
this problem that Massachusetts doesn't have.''
    And I said, ``Yes, but you don't have their problem.'' And 
they said, ``Well, what was that?'' And I said, ``Well, they 
have got the least competitive hospital system in the 
country.'' You know, so a large part of what they were doing in 
reforming their system was to focus on trying to create 
competition at the hospital level, which is not an issue, say, 
in California or Washington State.
    So, yes, it is a piece of it. There are a number of 
different pieces. And I think, frankly, that would probably be 
another whole hearing.
    Mr.Chabot. Okay. Actually, we did have a hearing somewhat 
related to that, but let me ask a couple of the questions. And 
there are a number of people that addressed this, and I would 
like to hear you maybe elaborate a little bit on it. You talked 
about one possibility--I think you, Mr. Harter, especially 
mentioned this, and I think you did, Ms. Trautwein, as well, 
the possibility of a federal subsidy is part of the solution.
    Now, as kind of a conservative member of Congress, there is 
a lot of us that think that when the Federal Government gets 
real involved, especially if it is--I mean, the money isn't 
ours to begin with. It is being taken from your employees and 
taxpayers, etcetera. So if we would fund something like that, 
it is not free money, obviously. It is something to be 
considered, that these are tax dollars and we would have to 
take them to give them out.
    So what is your idea relative to that? And our concern that 
if we are using federal dollars, in essence we are just taking 
it from one group and then subsidizing this. And I think 
probably, Mr. Harter and Ms. Trautwein, and then Mr. 
Haislmaier, I would like to have your comment on that, too.
    Mr.Harter. My personal opinion is there is going to be--
there is a lot of pain to be passed around in the health 
insurance issue. As I have said before, there are many, many 
components that go into the issue. I think federal subsidies is 
one solution to it. I think it is a very painful solution.
    I think we have to really get down to the nuts and bolts of 
working the system. As people like at the table here, it is not 
the presidents of companies doing this. It is people who are in 
the working trenches with these products and with what can pull 
this together, I think is where the solution is going to come. 
A lot of agendas have to be set aside I think to have a 
successful outcome for this very, very complicated problem.
    Mr.Chabot. Ms. Trautwein?
    Ms.Trautwein. Yes. And I have to tell you that I share some 
of your concern about even mentioning the words ``federal 
subsidy.'' And the reason I do mention it, though, is I don't 
believe that it has to be complicated with lots of strings 
attached. We have watched the subsidies for the high-risk pools 
that came through, not huge amounts of money for the federal 
high-risk pool program.
    And you know what they have done? It is a simple grant 
program. There is one person at CMS that administers that. One 
person. And they look at these grants once per year. The grants 
go out to the state high-risk pools. They have not changed any 
of the way that they do business, other than the fact that the 
rates that they offer people are lower.
    They are dealing with the sickest of the sick, and 
reinsurance also deals with the sickest of the sick, and that 
is why I have modified my own ideas about it a little bit, 
because when we look at what is an appropriate role of 
government, you know, my personal belief is that it is for 
people that need help the most. And I believe it is--really, 
really sick people do fall into that category, and they do 
impact the costs for everyone.
    And so that is the reason why I have modified my own 
viewpoints about that more than I would have a few years ago, 
because I have seen that it actually has been beneficial in 
this other program, and I wonder if maybe it couldn't help this 
market, too.
    Mr.Chabot. Thank you.
    Mr. Haislmaier?
    Mr.Haislmaier. Yes. I come back to my comment that we are 
transferring these costs, we are not reducing them, and that is 
true if you have either a state or a federal taxpayer subsidy 
going into them. And, again, it is just a transfer to somebody.
    Now, given that, does it make sense on occasion to do that? 
Well, let us walk through the scenario. Let us say a given 
state decides to have a system that says, ``Look, we are 
going--10 percent of our state is, as Ms. Trautwein pointed 
out, the sickest group. We want to spread their excess costs 
evenly among the other 90 percent.''
    All right. At that point, you can say, ``Well, we will pass 
it all back through the insurers, in which case it gets added 
to their premium.'' But what if we can't reach all of them that 
way? Well, then, maybe a tax mechanism, a taxpayer funding 
mechanism might be a way to do it.
    At a national level, what Ms. Trautwein pointed out was 
really a demonstration project, a block grant, of a limited 
amount of money to help states set this up. At a national 
level, one could, in theory, say, ``Well, all right. That is 
fine and good for each state to do it. But what if one state 
has a population that is sicker than the national average? 
Then, we are going to sort of rebalance.''
    We do that in Medicaid, in effect, when we say, ``Well, 
some states have a much higher poor population than other 
states,'' and then so they get more money in Medicaid than 
other states. In theory, that would work.
    The caveat that I have on all of this, whether you are 
doing it at the federal or state level, is if you do put public 
money in, make it--do not make it any kind of entitlement, do 
not make it attached to any kind of revenue source, it should 
be a very clear, very specified and capped amount going into 
that, because you do not want to create a situation where you 
then have a new game, which is let us tag the Federal 
Government or the state government, if it is the state, with 
these costs and let us shift more and more and more onto the 
taxpayer.
    So you just have to be--I mean, it is possible to do it. A 
number of states fund their high-risk pools partly out of 
public money. Some states do not fund them out of public money 
at all. It is all passed back to the insurance carriers. So it 
is possible to do it, but you have to be careful that you don't 
get a game of tag going where the taxpayer gets tagged as it 
for more and more and more.
    Mr.Chabot. Okay. Thank you.
    Madam Chair, if I could just ask one quick final question.
    ChairwomanVelazquez. Sure.
    Mr.Chabot. Mr. Harter, you had mentioned when you had your 
insurance agency that the costs were getting very expensive. I 
think you said they were about $500 a month per employee at one 
point, and you got a mini-med plan. Could you just give us, 
very briefly, what sort of coverage your employees would get 
under mini-med, and about what it would cost a small business 
owner?
    Mr.Harter. We are speaking in Missouri. That is going to be 
probably less there than it might be in New Jersey or somewhere 
like that anyway. A mini-med basically provides specified 
coverage. It does pay some for doctor's visits. It will pay up 
to--I think mine is $90. There is a $30 co-pay, and then it 
will pay up to $90 for a certain number of visits per year.
    It is very, very weak in the hospital side of it. Ms. 
Trautwein was mentioning I think the mini-med might be a good 
vehicle for some of the fundamental coverage, but somewhere you 
still need that major medical. I think this program pays $1,500 
for a hospital visit. Well, a hospital--
    Mr.Chabot. But not over? There is not like a catastrophic?
    Mr.Harter. It is not.
    Mr.Chabot. Okay.
    Mr.Harter. It is not. You would have to somehow be able to 
put a catastrophic on top of one of these mini-med programs. 
The mini-med--we have a couple of versions of it that people 
can buy, but it is basically $150, $175 a month. So it is 
pretty affordable.
    Mr.Chabot. Now, that is for the--that is the total cost, 
including the employee and the employer?
    Mr.Harter. That is correct.
    Mr.Chabot. Yes. Okay. Versus, say, $500 or--
    Mr.Harter. Absolutely.
    Mr.Chabot. Okay. All right. Thank you very much, and I 
yield back, Madam Chair.
    ChairwomanVelazquez. Mr. Jefferson.
    Mr.Jefferson. Thank you, Madam Chairlady.
    I want to see if we can get back to what I think the 
Chairlady had in mind when she put this hearing together. That 
is this: that one of the reasons for high costs among small 
business--for small business employers and employees is a lack 
of competitive.
    And the notion is that if competition is introduced into 
the small business market, costs will go down for insurance. 
This is borne out by the notion that in larger enterprises 
costs are lower, because there are larger pools and there is 
more competition and more people who want the business.
    So it is not a matter of whether the cost is shifted around 
or not. It is a matter of whether the idea of reinsurance will 
mean there will be more people willing to come into a 
marketplace and compete for business.
    Now, the notion here is not so much whether--as I saw it in 
the Hurricane Katrina context, it was this. The question was: 
who, amongst insurance companies, had to pay? And that was a 
big question of risk, and not the questions underlining risk 
for the folks getting sick and all of that. It was a risk the 
insurance company had to pay, and whether somebody else would 
have to pay.
    And we saw it in the case where those who didn't--who had 
help in that--for instance, call names, State Farm had most of 
its outfit reinsured. Therefore, it paid claims quickly and 
rapidly because it wasn't paying the whole thing. Whereas, I 
feel like Allstate that is invested in the market, playing the 
stock market, and had investment insurance, found itself in 
terrible trouble having to pay everything, and ended up 
threatening to go bankrupt, and all of that.
    So the question I have is: do you think there is anything 
to the notion that reinsurance may help to introduce 
competition in the small business marketplace, and, by that 
fact, lead to some cost reductions on the part of those who 
compete? Because the notion is--and the American economy is the 
best competition, there is likely to be cost reduction. Does 
that make any sense to anybody out there?
    Mr.Crouse. Mr. Jefferson, it does make sense to me. There 
is usually a little bit of savings when you have large numbers, 
there is no question. And, again, getting back to what this 
Committee has addressed here is small business and small 
business owners as opposed to the national health problem, 
health care problem.
    I do believe that reinsurance can help. I believe also that 
it is very, very important. There is a lot of costs involved 
when you have a small business and you pay that premium to the 
health insurer. The cost that they use to administer that, the 
admin cost, it gets quite expensive.
    There are savings that small businesses can make. If they 
structure something put together with a group, a fairly large 
group, they can cut the costs of administration, they can cut 
some of these costs that are--you know, that go along with 
these normal policies with large life companies.
    And as far as reinsurance goes, what you point out, Mr. 
Jefferson, is true. I mean, most companies do retrocede some of 
their risk. In the case that you said of Katrina, they spread 
their risk as well as the first risk. The second person 
spreads, the third person spreads. I mean, retrocessions are 
done all the time, and most reinsurance companies do that.
    So I do believe that the numbers to me--if you get a pool 
big enough, and you can show that you can save some costs by 
doing something yourself--again, put together by someone that 
knows what they are doing. This takes a little bit of talent 
out there from various industries to put these together. It can 
be accomplished. It can be accomplished.
    And then, you have a bargaining chip to go to these 
reinsurers--these insurers for your health care. They may look 
at your program and say, ``That is a well-run program. There 
are some cost savings there. Maybe my rates won't be as bad.'' 
I have seen that.
    Mr.Haislmaier. Yes, sir, if I could make a couple of 
comments. First off, the example you cited with your state 
being hit by two hurricanes actually back to back is a classic 
example of why a commercial and property insurer will buy 
reinsurance. It is for exactly that unlikely eventuality. And 
as you pointed out, State Farm, you know, came out okay because 
of that.
    I want to make a couple of points here as we think about 
this. One of the big issues that folks focus on with small 
business is the size and the idea of aggregating them. I mean, 
association health plans, this is another aspect. And it is 
just very important to understand that in any risk pooling 
arrangement in health care or anything else, size is only part 
of the equation. The other two factors are randomness and 
stability.
    And when you consider saying the difference between 1,000 
small businesses of 10 employees each and one employer of 
10,000, the difference is not in the size, it is in the 
randomness and the stability of those two pools. So when we 
look at why larger employers maybe come out with better rates 
than smaller businesses, a lot of that has to do with the 
uncertainties surrounding not the size but the randomness and 
stability, which gets me back to my point of risk transfer.
    Now, to address your question, Congressman, about does 
this--is there ways to make--to increase competition, yes, 
there are. There has been limited success, as Ms. Trautwein 
pointed out--and she can speak to that--in trying to do 
precisely that in the small group reforms. A number of states--
as she pointed out, 19 of them--said, ``Well, we will set up a 
voluntary reinsurance mechanism in the small group market as 
part of our small group reforms.''
    And that was designed to encourage smaller carriers to come 
in and compete against the dominant incumbent carriers, by 
saying, well, you know, you don't have to have the same 
capitalization to go up against them, because you can offload 
some of the risk. Because of the voluntary nature of that, I 
think it has had limited success.
    Now, the next question then becomes: well, do we move to an 
all market risk transfer mechanism? That was what I was getting 
at in my testimony. Do we say that, fine, anybody coming in 
here, we are going to level the playing field in a given state 
for any insurer coming in. And as part of that leveling, we are 
also going to have a risk transfer mechanism, so that any 
insurer, big or small, can pass claims into that.
    Those claims get pooled together and then re-spread based 
on how many lives everybody is covering. And that way, if there 
is any disparities where one carrier, big or small, gets a 
larger than average share of sick people, that can be made up 
out of the carriers that don't. Those are the kinds of risk 
transfer mechanisms that we are looking at.
    But, really, for that to work you have to have as much of 
the market as you possibly can. At a minimum, as Ms. Trautwein 
said, you don't want to subdivide an existing market. Ideally, 
you want to aggregate together markets--individual, small 
group, larger group, etcetera.
    ChairwomanVelazquez. Ms. Clarke.
    Ms.Clarke. Thank you very much, Madam Chairman.
    And to our panelists, your testimony has been quite 
interesting and quite informative. You know, it is quite 
evident that fewer insurers are offering health insurance 
coverage to small businesses because of their unusually high 
health care expenses. This fact compels us to examine whether 
or not the expansion of the private insurance market may be an 
approach that will lower health insurance costs and reduce 
health care premiums for small businesses, thereby making 
medical coverage more affordable.
    I am intrigued by the notion that by developing small 
business coalitions--excuse me, small purchasing coalitions 
known as reinsurance pools--among health insurers, or small 
business employers, it will spread the insurance costs among 
everyone in the purchasing pool. More importantly, it will 
spread the risks more fairly, so that one catastrophically ill, 
sick employee out of work for an extended period of time will 
not cause a small business' health insurance rates to propel so 
high that it bankrupts them.
    My question to the panelists is that I am trying to 
understand whether, in fact, there is a way that we can 
establish fairness and stability in the health reinsurance 
market that is private for small businesses when it is very 
probable that at any given time premiums can rise due to market 
volatility.
    And, you know, whether small businesses in the long term 
greatly need--we know that small businesses in the long term 
greatly need insurance rates to be stable. What measures can be 
placed--can be put in place to ensure that these rates will be 
stable over time? If folks on the panel could sort of address 
those two issues. You know, I am trying to get to solutions 
here. We have come up with so many variables, I am just trying 
to find the common denominator. Maybe we can start with Mr. 
Crouse.
    Mr.Crouse. Well, you are answering a direct question. How 
can we reach a point where small businesses' costs are going to 
go down? Again, the only solution that I talked about, or that 
I thought, was that if small businesses get together and form 
cooperatives in a sense that there may be some more purchasing 
power. In other words, again, there may be better buying 
circumstances for these corporations--small businesses, rather.
    Other than that, ma'am, I don't--it is a tough, tough call. 
I just don't know.
    Ms.Clarke. Do you think that will ensure these rates will 
be stable over time?
    Mr.Crouse. Again, they should be stable over time. If you 
look at happened in med mal right now--and med mal is tied into 
health care in a way. To go back to what people said about, you 
know, the tort reform, it is working in some states, it has 
helped states do that, if you look at the med malpractice--I 
mean, the industry right now, the rates are down. It is 
softening up in the med mal area. That all should go back into 
the costs of health care.
    So I just feel that possibly--again, possibly, that if you 
do form cooperatives, but there has to be, you know, again, 
small businesses. We are not talking about the whole universe 
here in the country. I am talking about small businesses that 
want to get together and do it right and set it up and have the 
health program--you know, things that must be provided--that 
there can be benefits. It can be well structured within small 
businesses.
    And I say small businesses--I say possibly even in 
associations, associations that we have that have up to 5,000 
members. And they formed a small captive insurance company to 
do just that. It is put together by an insurance agency, a 
large TPA firm in the life business. It is being handled by 
them. It has worked. We have had feasibility studies. We have 
had legal opinions on it. It is structured, and it is working 
fine.
    So there is reinsurance involved at the high end. They fund 
it with trusts up to I think it is 125 percent of--you know, of 
the premium or what not. But it works. It works. There are ways 
to do this.
    Ms.Clarke. Thank you, Mr. Crouse. Let me try to get--I see 
Mr. Harter there chomping at the bit, and I am running out of 
time. But I appreciate your comments, Mr. Crouse. Thank you.
    Mr.Harter. I think we are talking about one aspect of it. I 
think the other end of it is the cost of the medical services 
is driving that. We have to respond to that, and I think that 
is a factor in that--in the unpredictability of the premium 
cost. It is all of it together. It is not just one factor.
    Ms.Clarke. Thank you.
    Thank you, Madam Chair.
    ChairwomanVelazquez. Mr. Sestak.
    Mr.Sestak. Thank you.
    Sir, may I follow up on a statement you made about ERISA?
    Mr.Haislmaier. Certainly.
    Mr.Sestak. You also made the comment that the importance of 
any approach, if you want to distribute the risk, is the larger 
the market, the better it is. My understanding is ERISA, I 
mean, probably impacts, if I am wrong--and I am not sure of 
this fact, but over 50 percent of our employers in the state. 
Is that correct? Or 65 percent?
    Mr.Haislmaier. It would depend on the state, but roughly.
    Mr.Sestak. So if you didn't want to go about this 
reinsurance and redistribution, you are not going to be able to 
do it unless you potentially change ERISA--do it as well until 
you change--
    Mr.Haislmaier. You won't be able to do it as well. That is 
true. There are some work-arounds you can do, but they are not 
perfect.
    Mr.Sestak. I guess Maryland has, you know, had its effort 
at risk of fail.
    Mr.Haislmaier. At the state, yes.
    Mr.Sestak. At the state. To pursue this reinsurance, I 
mean, you also made a statement that--to a comment about tort 
reform, something about it is a piece of it. Are we doing good 
by just focusing on the reinsurance? I mean, everybody has 
already asked a lot of questions in that area, so I won't. That 
piece--or do we really have to approach it more holistically to 
do--to really do it well?
    And I ask that because somebody, as I walked in--I think it 
was you, Mr. Collins, is, you know, you can--by doing some 
good, you may impact something else that is not as--goes beyond 
here. Must we capture ERISA this?
    Mr.Haislmaier. I don't think it is absolutely essential 
that you capture ERISA in this. I am simply pointing out that 
if you want to go beyond what states are capable of doing, this 
is an area that you would have to get into federal law. I can 
give you an example of, in states that I have worked in, where 
we have designed some of these proposals. And they haven't 
passed yet but, you know, there are various proposals on this--
setting up a state--an all carrier risk transfer pool.
    And you say, ``Well, all carriers are members. They have to 
participate. By virtue of being a participant, they have a 
right to see, and they set their own rules as to what the 
attachment points and the risk corridors are.'' Now, at that 
point you are getting about half the market. And then, you say, 
``Well, can we do anything with this ERISA piece of it?''
    Well, one of the creative things we did is we said, ``Well, 
look, we can't as a state--as state can't require those 
employers to come in and play in that system.'' But what it 
could do is it could offer--it could say, ``Look, you can 
voluntarily come in. Of course, you don't want them to come in, 
dump their risk, and leave.''
    So we set up what we call Lloyd's rules, which says that if 
you voluntarily come in, you have to stay and make payments on 
the assessments for three years after you voluntarily leave. 
That is how Lloyd's of London works with their syndicates. You 
can't just leave when the losses come.
    So that is kind of a work-around on that. I think if you 
went that far, you would make huge progress.
    Now, is there--to get to your second question, is there 
value in doing just this piece? And the answer I think is yes, 
and let me explain why. To the extent that you have some sort 
of a mechanism whereby the unpredictable disparities in where 
these high risks pop up and who gets, you know, a 
disproportionate share, to the extent that you have a mechanism 
that evens that out for everyone, what does that do? Well, it 
takes off the table that issue. Okay?
    So it says that we can now focus on other things, like the 
underlying cost of care, and we have taken away the ability for 
people to, you know, do the easy route, which is, well, I will, 
you know, bring premiums down by not having sick people. So if 
you take that off the table, then you have improved the market, 
in my view, to the point where people now have to concentrate 
more--
    Mr.Sestak. But is there a transfer, then, between those who 
are bound by ERISA and those that aren't still? Since the state 
can only impact the insurers, can't impact the employers under 
ERISA.
    Mr.Haislmaier. That is right, and that is why states have 
looked at several mechanisms--
    Mr.Sestak. In other words--
    Mr.Haislmaier. --to subsidize that pool out of--
    Mr.Sestak. If you don't mind, just to make sure I have it--
    Mr.Haislmaier. Sure.
    Mr.Sestak. --to do what you just said, which I agree with, 
you would have to have a mechanism such as you described--which 
state did you do that for?
    Mr.Haislmaier. Well, we originally drafted it for D.C., and 
this will come back and probably be considered by the Council 
again this year, as part of--
    Mr.Sestak. You would also have to have that mechanism 
taking place.
    Mr.Haislmaier. We have done that in Maryland, too.
    Mr.Sestak. You would also have to have that--a similar 
mechanism to what you described put into place in order to make 
sure that the distribution is fair throughout everyone. Is that 
correct?
    Mr.Haislmaier. It helps to do that, yes. Now--
    Mr.Sestak. So you would need to do the reinsurance and this 
mechanism.
    Mr.Haislmaier. Well, what I am saying is that this is 
different from classic reinsurance. Classic reinsurance is a 
carrier saying, ``Look, under normal circumstances, I am going 
to have losses, and I can cover them.'' What happens if there 
is an abnormal loss? What if I am writing commercial and 
property insurance in the State of Louisiana and we get hit 
with two hurricanes back to back? I am not set up to deal with 
that.
    So in classic reinsurance, that is what you are doing is 
you are buying against the very unlikely event. That is why, in 
the life and health area, you don't see a lot of it unless it 
is a small company. I mean, you know, a New York Life doesn't 
need to buy reinsurance against the unlikely event that half 
its policyholders die in a year and claim--and their life 
insurance is claimed against. That is just, you know, the--I 
mean, you never say never in insurance, but the likelihood of 
that happening is near zero.
    So that--does that help?
    Mr.Sestak. Yes, that does. Thank you.
    Thank you, Madam Chair.
    ChairwomanVelazquez. Mr. Ellsworth.
    Mr.Ellsworth. Madam Chair, if it pleases the Chairlady, I 
would like to--Mr. Jefferson brought up a point during one of 
the questions. I would like to yield to him if that is 
agreeable.
    ChairwomanVelazquez. Sure.
    Mr.Jefferson. Thank you for yielding. I thank the gentleman 
for yielding. I thank the Chair for indulging me.
    First, I didn't know whether everyone had a chance to react 
to the question that I asked earlier. And I don't know whether 
there was someone left to react to it; my time had run 
considerably. If there wasn't, I have another thing I want to 
ask, but I want to make sure that everyone responded to it 
first of all.
    [No response.]
    I guess so. Let me get to the other one. There are two 
issues here. One is the issue of cost, and which we have talked 
about. The other is the issue of access, which is basic choice 
for people in the business. And so the second question is 
whether this idea of reinsurance, which we hope would bring 
folks to the marketplace, would give a greater panoply of 
choices for small business folks as opposed to the panoply of 
choices that only folks have in larger enterprises.
    That is the second question, which I will just--and I will 
ask--the one that follows up, which I intend only for Mr. 
Haislmaier, I believe it is, the last one, which is, you talk 
about the different ways to set up the mechanisms for--that 
risk transfer mechanism set up, exclusionary, inclusionary, and 
so on.
    And you prefer, at the end of the day--I think you do--the 
inclusionary design. And you say, but you must ensure there are 
sufficient incentives in that design to make it work across the 
board and be fair to everybody. So I want you, at the end of 
the day, to comment on the examples of what you mean by these 
incentives, to make an inclusionary plan work that at the end 
of the day might lower cost.
    But the first issue is about the access issue, and the 
effect of reinsurance on that, because our notion here is that 
with reinsurance we bring more folks to the marketplace, and, 
therefore, create better access for a panoply of options for 
small business folks who may not have them now.
    Ms.Trautwein. Can I start?
    Mr.Collins. Before you do, what I was going to mention 
regarding cost and access is that those two things tend to 
compete with each other. And the one parallel that comes to 
mind is when they enacted rate reform for small business 
insurance plans throughout the states in various ways back in 
the '90s, prior to that health insurance companies could, if 
they chose to, raise rates on a particular group.
    When rate reform was installed, it limited the ability, 
depending on the state, on the level of rate increases, and, 
therefore, promoted more rate stability at an employer level, 
and it increased access through guaranteed issue and in many 
cases a maximum rate that you could give to a particular group.
    What it did, though, as the offsetting cost of putting into 
that type of benefit for the market is it raised the overall 
level of health insurance costs for the entire small employer 
market. So the ability to increase access may be a noble goal, 
but the experience is that increased access will generally 
result in higher costs. And as a policy decision, you will have 
to be able to balance those two.
    Ms.Trautwein. That is exactly the point that I was going to 
make as well, that you have to be careful in access. Even if 
you are talking about just adding additional types of policy 
choices, human nature is that people gravitate toward the one 
they are going to use the most. And you know what happens if 
your--the one thing that you are going to use the most, that 
means that it will--the cost will be abnormally higher on a 
particular type of plan.
    And we have seen this in purchasing pools across the 
country in the pools that are already there. Some certain plans 
end up dropping out because they are selected against. So I 
just wanted to--
    Mr.Jefferson. Thank you.
    Before my time goes, Mr. Haislmaier, could you--
    Mr.Haislmaier. Yes. By inclusionary and exclusionary, as I 
said in the testimony, it refers to these risk transfer 
mechanisms. Essentially, an exclusionary mechanism is one where 
we say, ``Well, we have identified somebody who is high risk. 
We are going to turn them down. We are not going to cover them. 
They can only go over there and get coverage, and we are going 
to subsidize the coverage over there.'' That is how the 
individual high-risk pool works.
    Obviously, they lack choice when you do that. The 
inclusionary mechanism says, ``Well, no, the insurers have to 
take all these folks. But if they have high claims''--
    Mr.Jefferson. Where in the standards did you--
    Mr.Haislmaier. The incentives I was referring to in the 
inclusionary model are this. In the exclusionary model, there 
is the ability of that pool, on the plus side, to manage those 
costs, because they got everybody together, and they are the 
only plan. In the inclusionary model, each of these people 
stays with their primary insurer. So the incentive--and this is 
what the carriers will be worried about--is to say, ``Well, 
those primary insurers each have to have a continuing incent to 
manage those claims costs.''
    That is why when insurers look at doing this inclusionary 
model, they want to see things like risk corridors. In other 
words, you are still paying 20 cents of every dollar, so you 
still have to--you are only ceding 80 cents of the dollars 
about X. So you still have an incentive to manage, to just not 
say, ``Well, okay, I am not paying anything anymore. I have 
given it to the pool. And the cost--you know, I don't care 
about the cost.'' That is the incentives I am referring to in 
the inclusionary model.
    ChairwomanVelazquez. Mr. Johnson.
    Mr.Johnson. Thank you. And I apologize for coming in late. 
But I am having a problem just understanding how reinsurance 
will lower the cost of insurance for small businesses, or any 
business for that matter, other than to the insurance company 
that might purchase the reinsurance. It might add to their 
bottom line to have--like State Farm, but if a business or a 
person purchases reinsurance, how does that lower their cost of 
insurance?
    Mr.Collins. If a plan is in place to, say, have a federal 
entity take all claims greater than a certain level, what will 
likely happen in a reasonably competitive market is that the 
premium rates will go down accordingly.
    Mr.Johnson. If you have a federal entity--
    Mr.Collins. That simply takes on all medical costs over a 
certain level, if there is competition of some kind in the 
market, what will happen to the premium rates is they will go 
down by roughly the same percentage. However, the point that 
was made before was--
    Mr.Johnson. In other words, that is assuming that the 
Federal Government would become the reinsurer.
    Mr.Collins. Correct. That is correct. And then, the same 
would apply if it transferred to some other entity, whether a 
private insurer or--so if somebody--the point that we were 
making earlier is the total costs aren't going down. And if 
that is what you are thinking of, I think you are exactly 
right. The responsibility for the total cost is still going to 
need to be borne by somebody, and it is simply being shifted.
    Mr.Johnson. So reinsurance is really not--is there anyone 
who disagrees with that premise that reinsurance does not lower 
the cost of insurance for small businesses?
    Ms.Trautwein. I just think I should add something there. To 
the extent that reinsurance allows more players in a market, so 
that you have the ability to spread risk more broadly, then for 
any given employer, you might--it might result in a lower cost. 
That doesn't mean that if you added all the people up together 
that you are really getting rid of the cost, but any certain 
employers might experience a lower cost if it results in an 
injection of more competition, and, thus, more ability to 
spread risk across a whole market. Then, it could help. I don't 
know if people disagree.
    Mr.Haislmaier. I mean, again, this is--I mean, Ms. 
Trautwein's point is you bring more people in, you spread it 
across-again, you are just--you are transferring. And this is a 
good thing, and it can be beneficial in the market, and it can 
create a more competitive market, induce new entrants into the 
market in terms of players, which then might later, through 
other mechanisms, bring down costs. But in and of itself, it is 
not going to bring--I would agree, it is not going to bring 
down costs of the underlying health system.
    Mr.Johnson. So, basically, you are saying if there are more 
reinsurers that could potentially make more--create more 
competition, if you will, or create more opportunities for 
various insurers to get in the business, that would then insure 
the people and cause costs to go down as far as policies.
    Mr.Haislmaier. The value--and I was trying to explain this 
to--and, unfortunately, the other Congressman has left. The 
value that I see in this is, to the extent that you 
theoretically have a system that fairly distributes the excess 
cost of the small number of people that are sick.
    Then, you have a market in which it is not a winning 
strategy to base your business on avoiding sick people and only 
insuring healthy people. To win in that market, you have to 
come up with a different strategy. What is the different 
strategy? Do a better job of making sure that people get better 
quality care at a better price. That starts to maybe lower 
cost.
    So what you have done is you have taken away something that 
might be an obstacle, but you haven't affirmatively lowered 
cost. That has to come later.
    Mr.Johnson. It seems that there might be some--it might be 
a good thing for the Federal Government to step in and 
subsidize health care for high cost, individuals with medical 
needs of a high cost in other words, to kind of bridge the gap, 
take some of the strain off of the health insurance industry. 
Is that--would any disagree with that?
    Mr.Crouse. Catastrophic losses, large losses, on the high 
end, the Federal Government come in at the high end. Those 
lines that you--you know, those losses you can't basically 
afford.
    The business I am in here, the alternative market, the 
small company, small company market, you have a company, a 
group of small businesses that get together and form a captive 
or a group. They will fund up to a certain level. They will put 
in X amount of dollars, the expected level. The actuarial will 
do a study. They will have expected losses are such, and they 
will fund to that.
    And then, they go out and they buy reinsurance on top of 
that. Now, to me, if that reinsurer looks at that company, and 
it is well run, and the expected losses in the actuarial's 
workup, you know, it looks good, then the reinsurance costs 
will be less. But, again, it has be a well run captive company, 
a small group, that keeps their costs down, all actuarially 
determined on their loss experience.
    So, you know, in that sense, I would say--and I don't know 
if the panel agrees--but wouldn't reinsurance be less at the 
higher end if you retain some risks yourselves and doing a good 
job with it? That is the alternative market that I am talking 
about, that Vermont--we are in here. And that is why, as I say, 
you get a group of companies together, similar business, 
similar exposure, and they want to form a large group. And if 
somebody can run this for them, including themselves, and make 
it work, there is savings there.
    But, again, as someone else mentioned, you have to have a 
plan where you are going to have these people health plans. I 
mean, in other words, programs where they are going to stay 
healthy, they are going to follow certain criteria. That is why 
this wouldn't work--this concept did not work for the universe 
out there, but it does work for possibly some good small 
businesses that want to lower the cost of their health care.
    Mr.Haislmaier. I would simply observe, Congressman, that 
what you are suggesting has been proposed, and, again, it is 
not reducing costs, it is simply shifting it to the federal 
taxpayer. So the cost reduction comes, as Mr. Crouse points 
out, if somebody somewhere in the system does a better job of 
providing quality care at a lower cost.
    Now, one can make the argument that pooling people together 
who are sicker than average and managing them better, you know, 
is one way to go. So, for example, you know, specializing and 
treating cancer patients and getting a better result at a 
better price. Yes, that will bring down cost. But to simply 
transfer those costs to, say, a federal program or a state 
program is not in and of itself going to do that. Again, it is 
just transferring it to somebody else's pockets to pay for. 
So--
    Mr.Johnson. Well, I am trying to find some way of 
mitigating the tension between insurers and health care 
providers. Insurers put pressure on the health care providers 
to cut as much--cut as many corners as possible to make--or to 
decrease the number of claims. In other words, you have a 
claim, so, therefore, let us make sure that the doctors do 
not--and health care providers do not embellish upon the 
claims. Let us cut those health care costs in that way, and I 
think insurance companies are in that kind of posture, a 
natural tension between the health care provider and the 
insurance company.
    But then, the sick individual or the individual who needs 
the care perhaps may not get the kind of--or the extent of care 
that they may need, particularly when they are in bad shape. So 
the Federal Government may be stepping in to take over in that 
kind of a situation. I think it is something that we should 
definitely consider, and I know that there are those who are 
opposed to Federal Government becoming more involved in paying 
for health care. And there are some valid reasons for that.
    Mr.Crouse. Representative, you are correct. You take 
doctors that are adding all these tests on. Medical malpractice 
premiums for doctors are astronomical.
    Mr.Johnson. And, certainly, there has been not one shred of 
evidence that when you go into a tort reform kind of posture 
and limit the amount of non-economic losses that can be 
recovered, that it actually translates into lowering of 
premiums for doctors.
    Mr.Crouse. Well, I guess my point was, most doctors now, 
they are going to send you for every possible test imaginable, 
just to protect themselves.
    Mr.Johnson. Well, isn't, though, it a good idea for doctors 
to--and this gets into the tension with the insurance industry. 
Isn't it a good idea for the doctor to be able to, as a--as a 
scientist or a professional to be able to test as far as he or 
she thinks is prudent for a particular individual without 
regard to whether or not they are going to be adequately 
reimbursed?
    ChairwomanVelazquez. Mr. Johnson, time has expired, but I 
will allow for the witness to answer your question.
    Mr.Johnson. Thank you.
    Mr.Crouse. There is no question what is prudent. I guess 
what I am saying is I feel, and what I have read, and what not, 
and seen, that I just think there are too many of these, you 
know, additional tests being ordered by doctors. What is 
prudent is fine, and that is what a doctor should do to a 
certain point. But I think they get a little paranoid. I mean, 
the lawsuits that are out there, Representative, in this 
country, they are astronomical.
    Mr.Johnson. I think that the more doctors could do to be 
careful about patient options, and to be careful about the kind 
of care that they give, the better off they are and the 
patients. And it is--
    Mr.Crouse. But that adds to that cost of health care, 
Representative.
    Mr.Johnson. I understand. I understand. We have got to 
trust--who do we trust, though, the doctors, the insurance 
companies? Who should be in control of that? That is the real 
question.
    Mr.Crouse. You are exactly right.
    Mr.Johnson. Thank you.
    Mr.Haislmaier. I have an answer.
    ChairwomanVelazquez. Maybe you will answer now.
    Mr.Haislmaier. Sorry. That is why I would favor a more 
consumer-driven system where instead of the business picking 
the plan, the individual is picking the plan, and the plan then 
works for the individual, because there is a lot of ways to 
raise costs and cut costs that have nothing to do, as you 
pointed out, with the quality and the benefit to the patient.
    And it is only when the insurance plan works for the 
patient that it has the right incentives to balance these 
factors when dealing with the providers. That would be a much 
bigger reform in health care, and this would just simply be an 
ancillary piece to help make it work.
    ChairwomanVelazquez. Thank you.
    Mr.Haislmaier. Thank you for indulging me.
    ChairwomanVelazquez. Mr. Collins, I would like to ask you, 
you know, sometimes lawmakers call for the Federal Government 
to intervene if an industry is encountering financial problems 
or regulatory issues. If there is any indication that the 
reinsurance industry is facing problems, or has a history of 
defaulting on its claims?
    Mr.Collins. I don't think I would be prepared to comment on 
the reinsurance industry as a whole. I would say that in the 
medical reinsurance component there is none of that history 
that I have seen or experienced. It has been a fairly vibrant 
and active reinsurance marketplace.
    ChairwomanVelazquez. Any other of the witnesses? Ms. 
Trautwein?
    Ms.Trautwein. I agree. Exactly. It is a pretty healthy 
market.
    ChairwomanVelazquez. Okay. Mr. Chabot.
    Mr.Chabot. Thank you, Madam Chair. I will be brief.
    Just in the response to the gentleman from Georgia's 
comment about the ``not a shred of evidence'' that medical 
malpractice reform has resulted in any doctors' premiums coming 
down. I think California is an example of a situation where the 
premiums on the doctors were skyrocketing, and they passed 
medical malpractice reform, pretty comprehensive out there, and 
I believe the premiums on the doctors came down substantially 
and--
    ChairwomanVelazquez. If the gentleman would yield?
    Mr.Chabot. I would be happy to yield.
    ChairwomanVelazquez. And I also know, if I am not mistaken, 
that the contrary is true in Texas where they passed liability 
reform. So in order to bring premiums down, it has to be 
coupled, liability plus insurance reform.
    Mr.Chabot. But anyway, so maybe there are shreds of 
evidence on both sides, depending on the particular state and 
how they dealt with it. But anyway, I just--I didn't want to 
let that go unresponded.
    [Laughter.]
    So I also, then, just wanted to conclude--and just--I said 
this in my opening statement and some of my questions. I have 
to say, I am very leery of federal subsidization for virtually 
anything, and not that it is never warranted, but I am always 
going to be very leery of it and hesitant to do it. And so, 
anyway, I just wanted to mention that in this case, although I 
certainly appreciate that point of view and would be willing to 
look into it.
    But, finally, I just want to, once again, comment the 
Chairwoman for meeting her--what she said she was going to do. 
You know, she said at the beginning when she took over as Chair 
of this Committee that she was going to leave no stone unturned 
when it came to doing whatever we could to reduce health care 
costs to the small business community, and this is yet one 
again hearing where I think we are looking maybe to some degree 
at the minutia, but reinsurance is probably not a term that 
every American is familiar with.
    But I believe those of us on the Committee that were here 
today are more familiar with it--you know, what it actually 
means and how it affects insurance and the ability to provide 
the health care to small businesses, and, most importantly, to 
their employees.
    So I want to, again, compliment the Chairwoman for calling 
this hearing, and I want to thank the very informative panel 
here this morning for their testimony.
    And I yield back.
    ChairwomanVelazquez. Thank you, Ranking Member.
    And the truth of the matter is that this Committee has 
played an important role in addressing the issue of health care 
crisis in this country, especially when we know that a large 
number of the people that are uninsured in this country are 
either small businesses, their employees, and their relatives, 
and to look at solutions. This is a very complex issue. We will 
continue to hold hearings, to listen to everyone, to see if we 
can come up with maybe not the solution, but look at ways where 
we can bring premium costs down.
    So I ask unanimous--I want to take the opportunity to thank 
the witnesses. This has been a very insightful hearing. I ask 
unanimous consent that members have five days to enter 
statements and supporting materials into the record. Without 
objection, so ordered.
    This hearing is adjourned.
    [Whereupon, at 11:44 a.m., the Committee was adjourned.]

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