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




 
                     MAKING HEALTH CARE REFORM WORK
                           FOR SMALL BUSINESS

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

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                           SEPTEMBER 18, 2008

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 110-113
Available via the GPO Website: http://www.access.gpo.gov/congress/house


                     U.S. GOVERNMENT PRINTING OFFICE
44-252 PDF                 WASHINGTON DC:  2008
---------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001


                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


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

                  Michael Day, Majority 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               VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


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

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

                                  (ii)

  
?

           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


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

                                 ______

            Subcommittee on Rural and Urban 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              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLES GONZALEZ, Texas              MARY FALLIN, Oklahoma, 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

Blumberg, Dr. Linda J., Principal Research Associate, Health 
  Policy Center, The Urban Institute.............................     3
Nichols, Dr. Len M., Director, Health Policy Program, The New 
  America Foundation.............................................     5
Butler, Dr. Stuart, Vice President, Domestic and Economic Policy 
  Studies, The Heritage Foundation...............................     7
Haynes, Mr. Thomas, Executive Director, the Coca-Cola Bottlers' 
  Association....................................................     9
Eckstein, Mr. Jim, President, C.A. Eckstein Roofing, Cincinnati, 
  Ohio, on behalf of the National Roofing Contractors Association    12

                                APPENDIX


PREPARED STATEMENTS:
Velazquez, Hon. Nydia M..........................................    26
Chabot, Hon. Steve...............................................    28
Blumberg, Dr. Linda J., Principal Research Associate, Health 
  Policy Center, The Urban Institute.............................    29
Nichols, Dr. Len M., Director, Health Policy Program, The New 
  America Foundation.............................................    44
Butler, Dr. Stuart, Vice President, Domestic and Economic Policy 
  Studies, The Heritage Foundation...............................    53
Haynes, Mr. Thomas, Executive Director, the Coca-Cola Bottlers' 
  Association....................................................    63
Eckstein, Mr. Jim, President, C.A. Eckstein Roofing, Cincinnati, 
  Ohio, on behalf of the National Roofing Contractors Association    72

STATEMENTS FOR THE RECORD:
Altmire, Hon. Jason..............................................    77

                                  (v)

  


                     MAKING HEALTH CARE REFORM WORK
                           FOR SMALL BUSINESS

                              ----------                              


                      Thursday, September 18, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:37 a.m., inRoom 
1539, Longworth House Office Building, Hon. Nydia M. Velazquez 
[Chair of the Committee] Presiding.
    Present: Representatives Velazquez, Gonzalez, Cuellar, 
Ellsworth, Chabot, and Fortenberry.
    Chairwoman Velazquez. Good morning, I call this hearing of 
the House Small Business Committee to order. Last month, the 
Census Bureau came out with what appeared to be good news for 
our Nation's uninsured. In the year between 2006 and 2007, the 
number of people without health care decreased from 47 million 
to 45.7 million, but while that may have seemed to be an 
encouraging drop, the reality is that is simply not a growing 
crisis. In fact, the decline was the result of expanded 
government programs like Medicare and Medicaid, not increase 
access to affordable private insurance.
    Despite a modest update in coverage, our country's health 
care concerns are deepening. Within the entrepreneurial 
community alone, 20 million men and women are uninsured. Since 
the year 2000, small business premiums have jumped more than 80 
percent. As a result, millions of entrepreneurs and their 
employees have been forced out of the market. Clearly health 
care remains a serious problem for the small business 
community. Already this committee has held more than a dozen 
hearings on the issue.
    In July, in helping to introduce bipartisan legislation 
called the CHOICE Act, which included a number of provisions 
designed to make health care affordable for small firms. In 
this morning's hearing, we will continue to explore the various 
coverage challenges facing entrepreneurs and discuss options 
for reforming the current system. By definition small firms 
have fewer employees and less capital than their corporate 
counterparts. Accordingly, they have less clout and bargaining 
power with big insurance companies. As a result providers are 
not as compelled to offer competitive small business rates, 
leaving entrepreneurs with fewer options.
    In addition to a lack of choices, small businesses are 
forced to foot the bill for insurance companies hide 
administrative costs. Because of the unique nature, small 
business coverage tends to be more specialized, providers pour 
a great deal of money and man-hours into micro targeting 
entrepreneurs. These expenses are ultimately reflected in 
increased premiums. These steep administrative costs, unlimited 
provider options have made health care a small business 
nightmare.
    Universal coverage will be the best way to insure that 
every entrepreneur and small business employee is covered. That 
said, any overhaul of the current system will have to be 
carefully orchestrated. At present, there are a number of 
potential means for doing so, they include allowances for 
personal tax incentives, mixed private public insurance groups 
and public coverage. But in order for any of these approaches 
to be viable, they must take a number of key provisions into 
account. They must be capable of not only easing administrative 
burdens and creating more choices, but also of eliminating the 
current systems complexity.
    Any move to repair our broken health care system will have 
to strike a delicate balance. It must be cautious without being 
wavering, it must be resolute without being reckless, and most 
importantly it must be universal without being one-size-fits-
all. This is particularly true for our entrepreneurs whose 
businesses represent 50 percent of the workforce in a myriad of 
diverse industries. While small firms may be diverse in their 
unique interests they are united in their need for health care. 
A need which must be met not just for the sake of our 26 
million small businesses, but for the sake of America's 45.7 
million uninsured and the country as a whole.
    [The statement of Chairwoman Velazquez is included in the 
appendix on page 26.]
    I would like to take this opportunity to thank the 
distinguished members of the panel in advance for their 
testimony, and I yield to Ranking Member Chabot for his opening 
statement.
    Mr. Chabot. Thank you, Madam Chair, for yielding. And I 
want to thank you for holding this important hearing this 
morning and welcome the panel. I would like to thank each and 
every one of the witnesses who have taken the time to provide 
this committee or will shortly their testimony this morning. 
And I want to especially welcome a fellow Cincinnatian, Jim 
Eckstein, who I will introduce briefly later.
    The cost of health insurance in general is rising faster 
than inflation, while the percentage of individuals without 
health insurance unfortunately continues to rise. Today, more 
than 47 million Americans are without health insurance. For 
small businesses and their employees soaring health costs are a 
critical issue. The cost of health insurance continued its 20-
year reign as the number 1 issue worrying small business owners 
according to the FIB.
    Roughly 63 percent of all uninsured workers are either 
self-employed or work for firms without more than 100 
employees, in other words, fewer than 100. And that estimate is 
by the Employee Benefit Research Institute. According to the 
National Small Business Association, in 2007, only 47 percent 
of businesses with fewer than 500 employees offered health 
insurance. That was down from 58 percent about 10 years ago.
    Our current system of health insurance and health care is 
financially unsustainable and threatens the health and finance 
security of small businesses and, most importantly, their 
employees. Large employers, unlike small businesses are able to 
spread risk more broadly among their workers and enjoy 
economies of scale that keep administrative costs employer than 
is true in the small business community.
    When a large employer self insures its health benefits are 
not subject to State insurance laws and regulations because it 
is not defined as insurance. This, along with the broad risk 
spreading and low per-person administrative cost confers a 
considerable cost advantage over similar benefit plans in a 
small group or individual markets for insurance.
    Health care insurance reform should make the market for 
health insurance more competitive resulting is greater access 
to quality care. Health care policy reforms should balance the 
competing goals of access to quality, affordability, and 
predictability and consumer choice.
    Madam Chair, I look forward to working with you on this 
important issue. And I want to commend you for your hard work 
and the attention that you focused on this very important issue 
over the last 2 years. As you have indicated we have had a 
number of hearings. I know that you appreciate, as I do, the 
importance of this to the small business community, so thank 
you for holding this important hearing, and I yield back the 
balance of my time.
    [The statement of [The statement of Ranking Member Chabot 
is included in the appendix on page 28.]
    Chairwoman Velazquez. Thank you. Thank you, Ranking Member 
Chabot. I welcome our first witness, Ms. Linda J. Blumberg, 
she's a principal research associate of the Health Policy 
Center in the Urban Center. The Center analyzes trends and 
underlying causes of changes in health insurance coverage, 
access to care and the use of health care services. Prior to 
joining the Urban Institute, she served as a health policy 
advisor at the Office of Management and Budget.
    Ms. Blumberg, you have 5 minutes. When you see the green 
light to start and the red one means that your time has 
expired.

  STATEMENT OF LINDA BLUMBERG, PRINCIPAL RESEARCH ASSOCIATE, 
                     HEALTH POLICY CENTER;

    Ms. Blumberg. Thank you.
    Madam Chairwoman, Ranking Member Chabot and distinguished 
members of the committee: Thank you for inviting me to share my 
views on health insurance and strategies for health reform that 
affect small businesses and their workers. While I am an 
employee of the Urban Institute, this testimony reflects my 
views alone and does not necessarily reflect those of the Urban 
Institute, its trustees or its funders.
    In brief, my main points are as follows. Small employers 
face substantial disadvantages relative to large employers when 
providing health insurance to their workers. These problems can 
largely be summarized as higher administrative costs of 
insurance, limited ability to spread health care risk, and a 
workforce with lower than average wages. All of these problems 
must be addressed if insurance coverage is to increase 
significantly among workers in small firms.
    Fixed administrative costs make it inefficient for insurers 
to sell coverage to small employers. The per person price of 
buying insurance for a small group of individuals will always 
be higher than buying those same benefits for a large group. 
Allowing small employers and individuals to purchase coverage 
through organized purchasing pools such as the type developed 
in Massachusetts with their connector, State or Federal 
employee health benefit plans, public programs, or other such 
group purchasing entities is an approach that could provide 
small employers and individuals with an avenue for more 
efficient purchasing. Such purchasing entities should also be 
structured to guarantee workers without employer offers access 
to a source of comprehensive insurance coverage and they 
constitute 70 percent of uninsured workers .
    With regard to the second problem facing small employers, 
the limited ability to spread risk, small employers tend to 
have workforces with greater variance in year-to-year health 
care costs than large employers, a shear consequence of small 
numbers. Strategies are available to more broadly spread the 
risk associated with small group and individual purchasing. 
These include mandating that all individuals have insurance 
coverage, regulating premiums such that dollars are moved from 
healthier risk pools to sicker ones, or directly subsidizing 
health care costs of those with high medical needs. Such 
approaches could make coverage more affordable and accessible 
for workers in small firms. Strategies that would tend to 
further segment the risk of small firm workers, such as 
proposals to federally license association health plans, or to 
increase coverage in existing non group insurance markets. 
These segmenting strategies might lead to some savings for the 
healthy, but would do so at increased cost to the unhealthy, 
leading to no expected change in insurance coverage.
    The third general problem, that small employers tend to 
have lower wage workforces than large employers, means 
expansions of insurance coverage will require significant 
income-related subsidies to make coverage affordable for many 
uninsured workers. Because employers largely finance insurance 
by paying lower wages to their workers, expecting low-income 
workers to voluntarily seek out that type of trade off is not 
practical.
    Subsidies should be targeted according to workers' incomes 
in order to ensure that the bulk of government assistance goes 
to those in greatest financial need. Once one accepts that 
substantial subsidies will be required to expand coverage 
significantly, a host of design issues come into play. These 
include: defining what families at different income levels can 
afford to contribute to the cost of their medical care, 
including protecting the unhealthy from excessive out-of-pocket 
costs; mechanisms for making voluntary participation in 
insurance coverage as easy as possible; insuring that each 
individual has a guaranteed source for purchasing coverage; 
keeping the administrative costs associated with delivering 
subsidies as low as possible; and, critically, identifying 
sufficient sources of financing.
    With regard to financing, policymakers have begun to 
consider the possibility of eliminating the current tax 
exemption for employer sponsored insurance and redirecting that 
subsidy to finance reforms. The level of this tax expenditure 
is sufficient, in my opinion, to finance comprehensive health 
care reform and is already dedicated to subsidizing health 
insurance.
    The current exemption is not particularly effective in 
expanding coverage, however, since it subsidizes most those who 
are most likely to purchase coverage even in the absence of any 
subsidy. However, great caution should be taken before 
eliminating this subsidy outright, because any changes to the 
current tax treatment can be highly disruptive to the existing 
system of employer based health insurance. Eliminating this 
subsidy must be preceded with significant reforms to the 
private individual insurance market to insure that access to 
insurance coverage for those already insured not be adversely 
affected.
    Thank you for your time, and I am happy to answer any 
questions you might have.
    Chairwoman Velazquez. Thank you, Dr. Blumberg.
    [The statement of Ms. Blumberg is included in the appendix 
on page 29.]
    Chairwoman Velazquez. Our next witness is Dr. Len Nichols, 
Dr. Nichols is the director of the health policy program at the 
New American Foundation. This program aims to expand health 
insurance coverage to all Americans while reigning in costs and 
improving the efficiency of the health care system. Prior to 
joining New America, Dr. Nichols was the vice president of the 
Center For Studying Health System Change. Welcome.


STATEMENT OF LEN NICHOLS, DIRECTOR, HEALTH POLICY PROGRAM, THE 
                    NEW AMERICAN FOUNDATION

    Mr. Nichols. Madam Chairwoman Velazquez, Ranking Member 
Chabot, distinguished members of the panel, I want to thank you 
for inviting me to testify here today. My name is Len Nichols 
and I direct the health policy program at the New American 
Foundation.
    I would like to begin by congratulating, Madam Chairwoman, 
for your work on the CHOICE Act along with your cosponsors 
first and foremost because it is bipartisan. In my opinion, it 
is impossible for us to move our health care system forward 
unless we do it on a bipartisan basis. And I think probably you 
know better than most just how hard that is in this 
environment.
    So I applaud you from the outset, keep up the good work. 
And I would say I will take this moment to also congratulate 
those who worked on the SHOP Act, another thing in the same 
direction, because that along with CHOICE adds to a growing 
course that we can indeed do better as a Nation in our health 
reform conversations than we managed to in 1993, 1994, when I 
got all this gray in my beard. Linda got tired of working the 
halls of OMB, we can do better and I thank you for that.
    In a letter to testify you asked me to think about the 
question how can we structure a system to work better for small 
businesses. And I would say my primary answer is we can help 
small employers in the same way we can help all Americans, and 
there really are two big steps, some of which you have taken in 
your bill. The first is to create an insurance marketplace that 
is fair, efficient and fundamentally accessible. And the second 
is to reform the delivery system so that we can get more value 
for all our premium health care dollars. If we don't do that, 
it doesn't matter what we do about financing.
    Now the first step is to create a new market place that is 
accessible. This requires, as your bill does, that insurers be 
required to sell to all customers regardless of health status. 
There is no question that this is a problem in the individual 
market at the moment. And in the individual market, at the 
moment, of course, we have a lot OF entrepreneurs, we have 
self-employed people, sole proprietors and workers who work for 
firms who can't afford to offer right now. So I think it is 
important to think about extending that guarantee beyond the 
small group market to the individual market.
    But just accessibility is not enough, in my view. We must 
also make it fair and affordable. So you have to have rules 
about what you are going to charge people where you don't 
distinguish people's rates by their health status.
    Now I would quibble just a bit with the particulars of the 
CHOICE Act in the following way, it is designed, of course, to 
subsidize employers. I am not opposed to that, but a lot of 
analytic work has been done, some of which with myself and 
smarter colleagues to say that we can often get more efficient 
subsidy schemes if we direct them at individuals. And the main 
reason for that is that it is impossible for a firm to know the 
income of a worker, they know the wages. But if you know the 
income, you can actually tailor subsidies more precisely to low 
income families and you get more bang for your buck that way. 
So I would ask you to consider those kind of modifications 
which we can talk about off-line.
    But even more than target efficiency, one of the reasons I 
am a little nervous about moving toward subsidizing employers 
is because when I look at the 21st century economy and I see 
the needs of competing around the world, I see a health care 
system here that is more inefficient than others in the world, 
and we rely more on employer financing.
    So to move in a direction of trying to expand employer 
financing, even as we are trying to maintain middle class high 
value added jobs, competing against companies who come from far 
more efficient health systems and don't reply on employer 
financing as much, it puts a burden on us that we want to 
seriously reconsider going forward.
    Now as you know quite well, and what impresses me about 
your Act is you clearly recognize this, that in order to make 
insurance markets work better, we have to re-orient incentives, 
and re-orienting incentives really means changing what we 
reward insurers for doing. At the moment, our insurance markets 
reward risk selection, that is to say, selling to the healthy, 
including the sick any way you can.
    One important component that can reduce or change those 
incentives is an individual purchase requirement so that every 
person is required to buy whatever insurance they have access 
to. You have to subsidize them for sure, but if you do that, 
then you take away the incentive to aggressively underwrite and 
exclude the sick. Then you make an insurance market where you 
can only make money by delivering value for dollar and having 
better health services an better insurance bargains. So I think 
you want to think about adding that as well.
    As I said the CHOICE Act succeeds in creating a marketplace 
that would work better than the market does now. And I applaud 
you for that. I do think we can improve going forward.
    Let me just say a minute about delivery system reform if I 
could. No health reform proposal of any form is going to 
sustain an improvement in our health care system unless we bend 
the cost curve, unless get serious about delivery system 
reform. Just because you are a Small Business Committee doesn't 
mean you can't take this on. Indeed, you do by this Act by 
requiring employers to offer wellness programs in order to be 
eligible for the small business tax credit.
    As you clearly know, wellness and disease management 
programs have had great success and have given value to workers 
and their firms, that is, one type of innovation that can help 
transform the system. Others you might consider include 
insensitive for having enrollees sign up for help homes or 
medical homes where they have a primary care provider 
completely oriented toward helping them navigate the system. 
And you also may consider incentives for providers who adopt 
electronic records and decision support tools.
    Small employers will always hold a major role in our 
conversations about health care reform because no single group 
is more important to our economy and to our society. Small 
group insurance markets have been the focus of repeated policy 
interventions since even before Stuart and I started this a 
long time ago. And employers have suffered from high 
administrative loads, lack of competition, and I would say 
increasingly intense competition from firms from overseas.
    Thus it is clear that health reform's focus on increasing 
access to quality affordable health care for small employers 
could serve as an important and catalytic step toward the 
changes we need nationwide. As you contemplate this, I 
encourage you to think about building a marketplace that can 
eventually welcome all Americans, not just small employers, so 
that we can improve value for dollar. Thank you very much.
    [The statement of Mr. Nichols is included in the appendix 
on page 44.]
    Chairwoman Velazquez. Thank you. Our next witness is Mr. 
Stuart Butler. Dr. Butler is vice president of domestic and 
economic policy studies at the Heritage Foundation. Dr. Butler 
has been with the Foundation since 1979 and worked on an array 
of policy issues ranging from health care to welfare reform. 
The Heritage Foundation promotes public policies based on the 
principle of free enterprise, limited government and individual 
freedom. Welcome.


   STATEMENT OF STUART BUTLER, VICE PRESIDENT, DOMESTIC AND 
          ECONOMIC POLICY STUDIES, HERITAGE FOUNDATION

    Mr. Butler. Thank you very much, indeed, Madam Chairwoman. 
I also want to join with Len and Linda in applauding you and 
the committee for approaching this in a bipartisan way. And I 
think that is reflected outside of the Congress. Len and I 
don't always agree on things, and so I think there really is a 
good and spirited discussion which is very, very positive in 
this.
    I also agree with you and with Mr. Chabot that we do see in 
the small business sector structural weaknesses in the ability 
of small firms to do the kinds of things that large firms can 
do in the insurance area. The nature of the workforce and the 
change in the workforce exacerbates that issue and the 
difficulty of grouping is of course, also an inherent problem. 
So there are many inherent problems with small business trying 
to do this which we all recognize.
    So you have asked us how in this context should we move 
forward in trying to provide coverage. I would say that I am 
skeptical, and would caution you, about the idea of trying to 
model steps forward for small firms on what happens in the 
large business sector. That does go to ideas like creating 
larger groupings of smaller firms to try to operate as though 
they were large firms in the purchase of insurance.
    I think that trying to group small firms in a co-op or some 
other type of device does risk various kinds of perverse 
incentives in terms of how individual companies will view those 
co-ops, view their joining or not joining, how risk is spread, 
and so on. Trying to group firms together also will not fully 
deal with the portability problem that we see generally in our 
society, and which is particularly noticeable in the small 
business sector.
    I want to emphasize what Len said about the feature of your 
legislation that says let's try to provide a subsidy from the 
tax system through a tax credit directly to firms. We both 
agree that the evidence is that that is an extremely expensive 
way and a very imprecise way of providing subsidies when they 
are needed. You could end up with a situation where the costs 
for a newly insured employee under that arrangement could be 
more than double what we see for individual tax credits or even 
expanding public programs into those areas. So I certainly 
caution you about that.
    A better approach in my view is to start down the road of 
thinking a little differently about the role of the small 
employer in the future with regard to insurance. And the key to 
this is to separate the notion of the employers's role as what 
I would call a facilitator of insurance during the financial 
transactions from the role of sponsoring insurance, or actually 
trying to organize insurance.
    I would point out that if you look at the recent history of 
retirement programs and IRAs and so on, we have gone in that 
direction in the retirement area, saying employers have a 
certain role, but they are not there to manage your money in 
some way. There is a strong lesson there with regard to how we 
think about health insurance.
    I would suggest that approach would indicate maybe a road 
that has three elements, and I think this does echo what you 
have heard already. The first element is to say well, let us 
set up an infrastructure, often called a health insurance 
exchange, modeled on the FEHBP or the connector in 
Massachusetts, which actually carries out the function of 
organizing and sponsoring the coverage itself and offering 
different plans. It would provide a menu of options, enabling 
people to have full portability if they change employers within 
that exchange. Plans within such an exchange could be offered 
by discrete organizations or groups such as labor unions, 
consortia of churches, farm bureaus and so on. So there are 
lots of elements to bear in mind.
    In this situation, the States would function as the primary 
place in which issues of pooling and risk would take place. It 
would be within the exchange, not within groups of employers 
under that model. Again, similar to how we look at it in the 
FEHBP.
    The second element would be to explicitly make employers 
the facilitators rather than the sponsors of coverage. That 
means, in effect, that what small firms would do in this case 
is basically, specify that the exchange itself and the plans 
within it would be their plan, and they would not themselves be 
trying to organize insurance. This is much as you, as a Member 
of Congress, and other Members of Congress, don't get together 
as a co-op and try to offer insurance to your employees. You 
say the plan is the FEHBP and all those issues are carried out 
in that area.
    So the employers role would be primarily making deductions 
from payroll deductions, sending premiums, perhaps adding 
contributions and so on.
    The third element, which, again, reflects what you heard is 
that to make this more effective, and indeed to make the whole 
system more effective for employers, you must address the tax 
treatment of health care. I share Linda's cautions about the 
ways of doing that, but I think we see a health tax system 
today which is inherently inequitable, inefficient, and really 
gets in the way of creative solutions for the small business 
sector or for other sectors.
    So just in conclusion, I applaud very much what you are 
attempting to do and that you recognize and are focused on the 
special concerns of small businesses. I think those concerns do 
force us to think creatively about better ways to organize and 
to reexamine the role of employer. And I just want to end by 
absolutely agreeing with Len that this gives us an opportunity 
to look at creating a structure and infrastructure, and a way 
forward, which will not only fix the problem for small 
employers, but in my view would be the model that over time 
would extend to the working population in general. Once you see 
the small business sector as potentially the model and the 
leader in dealing with this problem rather than thinking of it 
as sort of a step sister, you can deal with their particular 
problems.
    [The statement of Mr. Butler is included in the appendix on 
page 53.]
    Chairwoman Velazquez. Thank you, Dr. Butler. Our next 
witness is Mr. Thomas Haynes, he is executive director to the 
Coca-Cola Bottlers Association. Mr. Haynes has served as 
president of the Association Health Care Coalition which aimed 
to improve health care options available to small businesses 
established in 1914, the Coca-Cola Bottlers' Association 
assists a 73-member company reducing costs by meeting their 
needs in a number of areas, including health insurance. 
Welcome.

 STATEMENT OF THOMAS HAYNES, EXECUTIVE DIRECTOR, THE COCA-COLA 
                     BOTTLERS' ASSOCIATION

    Mr. Haynes. Thank you, Chairwoman Velazquez, and Ranking 
Member Chabot for this opportunity. I would also particularly 
like to thank Chairwoman Velazquez for the leadership that you 
have shown over the years in trying to find creative solutions 
to the challenges facing the Small Business Committee. And most 
of all, frankly, for your authorship and sponsorship of the 
CHOICE Act, which I believe is a very well thought out and very 
powerful first step and a step that will probably have much 
more implications than people may see currently if Congress 
chooses to support it which I certainly hope they will. And 
really make a major dent in the problem that small businesses 
face.
    The reason I believe the CHOICE Act is so powerful, and I 
think I find myself in disagreement with Dr. Butler on a number 
of issues, is our own practical experience at serving our 
members, both in the health care and outside the health care 
environment. As I have indicated in my testimony, the 
Association has been sponsoring and providing health care 
benefits for the members of our association for about 30 years. 
We had a very effective, very comprehensive program that 
included both our large members and our small members. Our 
members range from bottlers with as fewer as 12 employees to as 
many as 50,000, so we have that entire spectrum on both sides. 
And we were providing solutions to almost ends of that 
spectrum, not the highest, but certainly the next layer down 
through 2000 when the program we had built four or smaller 
members was disbanded because we could not find a carrier 
willing to support it.
    Our program has always been based upon a fully insured 
model, although it includes significant elements of risk 
shifting both to the association and to the individual members. 
And we simply couldn't find any insurance carriers who were 
willing to support the small member part of that pool, even 
though it was working very effectively at the time and we had 
to disbanded that.
    I have been with the Association since 2001. The single 
most important task that I pursued is how to reestablish that 
program. To give you an understanding of how important it would 
be for those members, health care costs represent in the range 
of 10 percent of the cost of a case of Coca-Cola, a 12 pack of 
Coca-Cola. We believe that our smaller members have as much as 
a 20 percent disadvantage vis-a-vis their competitors, vis-a-
vis larger members.
    That represents essentially a 10 cent per case competitive 
disadvantage between small and large members. And I have 
members with less than 100 employees who compete with 
businesses with as many as 35,000, 40,000 employees. So this is 
a real world business issue for those members. And frankly, it 
is an issue for the consumers of our products, who are buying 
those products in those territories, it either affects the 
profitability or it affects the cost of the product or both.
    So this is a very important problem. The reason why I 
believe the CHOICE Act is the right solution is it basically 
models the solution that the Association has adopted outside 
the group health area. We have had a liability insurance 
program for 100 years. The single most powerful element of that 
liability insurance program is our captive. And we have had a 
captive that has operated very effectively for nearly 30 years.
    That captive has moved from taking a small part of the risk 
to taking almost the entirety of the liability at risk in our 
liability insurance program. And we are able to deliver a 25 
percent premium credit to the participants in that captive 
while still being competitive with commercial insurers in the 
real world. So I, contrary to Dr. Butler, have real world 
experience that says this solution will work, it will work, I 
will guarantee for our members. We could cover, I believe, the 
60 members who are not currently in our group health program 
very rapidly under this program and delivery lower costs than 
they face today.
    Now, I think the issue that personally as an if physical 
conservative and would be very sympathetic to Dr. Butler and 
his organization on virtually every issue would look at it and 
ask is of course the Federal tax expenditure to subsidize this 
coverage. I have no trouble with that feature of it and I think 
it is entirely supportable as expendable Federal dollars.
    In my mind what the subsidy will do is correct the uneven 
playing field that small business and large business currently 
operate on because of the disparate effect of all the state 
regulations on small businesses that are trained to pool. By 
equalizing that playing field and allowing us to create a 
cooperative, and, in fact, facilitating the cooperative, but 
including it as a requirement of the bill, it will put us in a 
position where we can put these smaller members back on an even 
playing field.
    It is, in my mind, the impact it will have on competition, 
on allowing the members themselves to manage their risk as 
opposed to paying a carrier, the profit premium that they have 
to pay to take on those risks, the reality that a carrier is 
going to be worried about adverse selection when a small 
business comes to them is going to be worried about the reality 
that the people who are seeking insurance are going to be the 
people with the greatest health risk.
    The reason why our members pay so much more for insurance 
in part, who are not in our program, is because of the premiums 
they are paying to the carriers for taking on those risks. And 
by simply pulling and retaining those risks, that profit part 
of the cost will come out of their cost and will be a real 
market-based savings. I am also very confident that with the 
subsidy for the members that have under 100 employees we could 
add double or triple the number of participants in our program 
among members with more than 100 employees, but with a lower 
cost for them. So the reality is, I think we would save more 
money internally than the Federal Government would provide us 
by a significant multiple. I think it is a dollar that would 
deliver tens or hundreds of dollars of benefits to the 
employees and our members. So I think it is an excellent 
solution. I welcome the opportunity to discuss the pros and 
cons of some of these ideas.
    [The statement of Mr. Haynes is included in the appendix at 
page 63.]
    Chairwoman Velazquez. Thank you. The Chair recognizes the 
ranking member for the purposes of introducing our next 
witness.
    Mr. Chabot. Thank you, Madam Chair. And I am pleased to 
introduce James Eckstein, who is the president of C.A. Eckstein 
Roofing, Inc. which is located in Cincinnati, Ohio, Mr. 
Eckstein has been working for the company since 1975 and has 
served as president since 2002. His business has been providing 
the greater Cincinnati area with residential and commercial 
roofing services since 1945, C.A. Eckstein Roofing is a second 
generation, family-owned company with a third generation 
actively involved in the day-to-day operations. The company 
currently employs 35 people. So the epitome of a small business 
that we are trying to encourage in this country.
    Mr. Eckstein also currently serves as Vice President of the 
National Roofing Contractors Association, one of the Nation's 
oldest trade associations which is based in Rosemont, Illinois. 
And I would note that he's come at considerable sacrifice 
because as some may know Hurricane Ike, at least the remnants 
of it, came roaring through our area, Cincinnati, Ohio and 
knocked down innumerable trees. And many, many people, in fact, 
over 90 percent of the people in the greater Cincinnati area 
were without power, some are still without power. Our home was 
out for about a day and a half.
    My wife called me and told me that she had it back on, but 
reading by candlelight and that sort of thing which was 
unusual, but what we went through clearly wasn't as severe as 
what many others went through that were seriously impacted. But 
he came back from being out of the country and came to 
Cincinnati, I understand, to see this and had some challenges 
coming up here. And I also might note there were thousands and 
thousands of homes that had shingles ripped off the roof so I 
know there is considerable work here so we appreciate his 
coming here to share testimony that might be valuable to health 
care for small businesses. And so I will quit talking and start 
listening.


STATEMENT OF JAMES ECKSTEIN, PRESIDENT, C.A. ECKSTEIN ROOFING, 
     ON BEHALF OF NATIONAL ROOFING CONTRACTORS ASSOCIATION

    Mr. Eckstein. Thank you, Madam Chairwoman, Ranking Member 
Chabot and members of the committee for the opportunity to 
discuss health care reform for small businesses. My name is Jim 
Eckstein, I am President of C.A. Eckstein Roofing Incorporated 
in Cincinnati. I also serve as a vice president of National 
Roofing Contractors Association, and I am testifying on behalf 
of NRCA.
    First, I want to commend Chairwoman Velazquez and 
Congressman Chabot for your outstanding leadership on health 
care and other issues of importance to small business. Your 
tireless efforts on behalf of working Americans are greatly 
appreciated by NRCA. NRCA welcomes the opportunity to testify 
on the problem of excessive increases and the cost of health 
insurance for small businesses which, has been a major concern 
for roofing contractors for many years.
    NRCA strongly supports the small business CHOICE Act of 
2008, because we believe it will address this critical issue. 
We commend you, Madam Chairwoman, as well as Congressman Joseph 
Pitts for recently introducing this legislation. NRCA also 
commends Congressman Chabot for introducing the Health 
Insurance Affordability Act of 2007, which would allow 
individual taxpayers to take a tax deduction for their health 
insurance costs.
    At C.A. Eckstein Roofing, we believe it is very important 
to provide our employees with high quality health care benefits 
and we have done so for many years. Moreover, it is necessary 
that we do so in order to remain competitive in attracting high 
quality employees. However, providing health coverage for our 
employees is becoming more difficult each year as we continue 
to be hit with double digit premium increases.
    Our most severe problem now is that insurance companies are 
unwilling to provide us with competitive pricing because of 
cancer and other health conditions among a few of our spouses 
and the families. As a result, we have no choice but to accept 
the double digit premium increases from our current insurer. 
The excessive premium increases charged by our insurance 
company year after year forced us to increase the amount that 
our employees pay for health care benefits which I greatly 
regret.
    In addition to jeopardizing the health of many workers, 
lack of affordable health insurance also greatly hinders 
economic growth across the Nation. Small entrepreneurs are the 
primary source of job growth in our economy and difficulties in 
providing affording health benefits to employees slow their 
ability to grow their business and create new jobs. Moreover 
the current manner in which health insurance is regulated puts 
small business at a disadvantage to large corporations in 
providing health benefits to our employees.
    It is clear from the situation at our company that some 
form of expanded pooling is necessary in order to spread risk 
across greater numbers of insured lives. Expanded risk pooling 
is essential if we are ever going to restrain the excessive 
cost of health insurance for small businesses. NRCA strongly 
supports the Small Business CHOICE Act.
    This is one method of expanding pooling opportunities for 
small businesses. The CHOICE Act is a private sector solution 
that creates new purchasing cooperatives designed it allow 
small businesses to stabilize health insurance costs by pooling 
risks. The bill also provides a tax credit to small employers 
who purchase health insurance for their employees through a 
cooperative.
    Finally the bill provides a role for trade associations 
like NRCA to be involved in the development of purchasing 
cooperatives. We believe that the establishment of new pooling 
options for small businesses, such as the cooperatives 
envisioned by the CHOICE Act will inject greater levels of 
competition into the health insurance market. The need for 
increased competition in health insurance markets is widely 
agreed upon as a key ingredient to help restrain the excessive 
cost of insurance.
    NRCA is committed to working with Congress to obtain 
enactment of the CHOICE Act, and possibly other bipartisan 
proposals that address the problem small businesses face 
obtaining access to affordable health insurance. NRCA strongly 
urges Congress to take up small business health reform early 
next year to address this urgent issue.
    Again, thank you for the opportunity to share NRCA's views 
and I would be pleased to answer any questions you may have.
    [The statement of Mr. Eckstein is included in the appendix 
at page 72.]
    Chairwoman Velazquez. Thank you, Mr. Eckstein. Dr. Nichols, 
can you please elaborate on how changing our health care 
delivery system will have a positive impact on the small 
business health insurance market?
    Mr. Nichols. Madam Chairwoman, I welcome the opportunity to 
answer that question, because it may seem disconnected, but 
basically we tend to focus a lot as the distinguished members 
who actually run businesses or talk to people who do on a daily 
basis like my brothers, I would say, but they tell us they 
focus on insurance costs because that is the price they pay. 
But as the gentleman from Cincinnati mentioned, it's the health 
care cost of the people we are covering that actually drive 
everything. And what we know, Madam Chairwoman, is that health 
care costs have been growing so much faster in economy-wide 
productivity more and more, Americans are finding it 
unaffordable. More and more small businesses are having a hard 
time. We just learned about that record.
    So the core issue is how do we reduce the rate of cost 
growth. And I would even say it is really about how do we get 
more value for dollar as opposed to cost per se. So I want to 
both encourage you to work with everybody to make the insurance 
market better, but the insurance market just reflects what the 
health care cost structure is underneath, so we have to dig 
underneath and do that. Your emphasis on wellness is a great 
place to start, but we basically have to buy smarter.
    We have tolerated far too much imprecision, not knowing, 
assuming all hospitals and doctors are the same, assuming they 
all know everything they need to know. You know, I had a dean 
of a medical school tell me a couple of years ago when he 
started practice 30 years ago he had to understand 8 drugs, 
because that is really all you needed to do to practice 
medicine in the United States then. There were 200 new ones 
last year. No one can manage that much information. We need to 
provide information tools, better incentives an get way smarter 
about buying.
    Chairwoman Velazquez. Mr. Haynes, a growing number of small 
firms are using consumer driven, high deductible health plans 
as a mean of containing premium costs, are high deductible 
plans addressing the problems being faced by your members or is 
more needed?
    Mr. Haynes. I think it is a difficult and possibly not that 
effective solution. I say that believing in theory that if you 
create the right kinds of incentives for consumers markets will 
work better. The practical real world experience that we have 
is that it is very difficult for consumers of health care 
services to understand all the choices that are available to 
them, to process all the information they need to process in 
order to make the right decisions on how much money should go 
into a pool and how to manage their own health care. I think 
they need help. That is my opinion.
    And I can't debate the academic merits issue of the 
employer provided versus individual insurance, but I do believe 
that individuals need help from a trusted source in managing 
their health care in a way that they are comfortable with and 
that will deliver the best results.
    Chairwoman Velazquez. Dr. Nichols, let me ask you, do you 
find that these plans tend to shift the responsibility of who 
is paying for health care coverage?
    Mr. Nichols. They have, but I would also say the record is 
mixed. I would say it this way, they are sort of what you might 
call consumer driven 101, which was, in some ways, more an 
attempt to just shift the responsibility and the risk, but 
increasingly there is some consumer driven 201. And let me 
hasten to agree with my colleague, Mr. Haynes, people need 
agents; they need help. It turns out if insurers and employers 
do provide that information, people can make better choices. 
What Stuart and I are thinking about instead of having a 
marketplace that brings those kind of advantages to all would 
still hinge on individual choice, but informed choice, the 
choice that actually uses the information tools we have.
    We are going to always trust our docs, but our docs need 
help. We need to trust our employers, we do in small employer 
cases, large employers I am not so sure, but in small employers 
we do, but they need help too because purchasing health care 
efficiently is a complicated thing. Web M.D. Is wonderful, it 
can't always help you decide, you need an agent you trust.
    Chairwoman Velazquez. Thank you.
    Dr. Butler, critics of individual tax credits to increase 
coverage argue that it has the potential of eroding employer 
base coverage. Is it possible to avoid this outcome while still 
offering tax credits or incentives to individuals?
    Mr. Butler. Yes, I think it is. I would agree with Len and 
Linda on the importance of structuring the insurance market in 
parallel to providing individual tax credits. I would certainly 
agree that if you merely gave somebody a tax credit and let 
them sort of go off on their own, then indeed you would get 
massive adverse selection. You would get only certain people 
leaving an employer's plan and so on, and that would be 
destabilizing. So I do think it is important to combine them.
    In my view, in terms of a health insurance exchange system, 
I do believe that the employer should actually make the basic 
decision about whether their employees have access to plans and 
to credits through the health insurance exchange. So I 
recognize that. But I think there are steps - prudent steps - 
that can be taken to make sure you are minimizing your risk of 
unraveling of existing coverage.
    And I would point out, of course, that we are all basically 
saying that there has to be some means to make sure that people 
have both adequate resources to obtain coverage and an adequate 
array of reasonable and affordable plans. I think it was Len 
who emphasized this. Trying to focus that subsidy on the 
individual is better than trying to focus it on the 
individual's employer.
    Chairwoman Velazquez. Dr. Blumberg, what are the advantages 
of a system where Americans secure health insurance through 
their employer?
    Ms. Blumberg. Well, the advantage of this system as it is 
now, while it is highly imperfect, and I think there is a lot 
of room for improvement, is that when individuals are going to 
look for a job, they are not necessarily coming together as a 
group for the purpose of buying health insurance. They are 
coming for other reasons.
    Once individuals are in and employment group, particularly 
in large employers, the employer acts as a natural risk pooling 
mechanism for buying health insurance. So that in a very large 
firm, the average healthcare cost in that pool is going to 
usually be about the average that you see in the population at 
large. And so it makes sense from a risk pooling standpoint for 
those individuals to come together and purchase health 
insurance.
    The advantage, also particularly for larger groups, is that 
there are some administrative economies of scale of buying in a 
big pool like that. And so the cost of buying health insurance 
for them is going to be lower per unit of benefit than an 
individual or a smaller group.
    Chairwoman Velazquez. Thank you. Mr. Eckstein, you 
testified that the tax credit element of the CHOICE Act is 
justified because large employers have significant benefits 
under ERISA. Can you talk about some of the advantages that 
larger firms currently have over small businesses when it comes 
to purchasing health insurance.
    Mr. Eckstein. Well, they have a larger pool of people that 
makes it a little more of an advantage for the insurance 
company to deal with that large group. For a small group, all 
we need is one or two catastrophic illnesses and we become very 
unattractive to the insurance companies. As I stated, we have 
been stuck with the same insurance carrier for 4 or 5 years now 
because no one else wants to quote us because we have had one 
spouse with cancer, one of our employees had cancer and they 
just, we are stuck with them, nobody else will quote us.
    Chairwoman Velazquez. Let me go to Mr. Chabot.
    Mr. Chabot. Thank you. Dr. Blumberg, I will begin with you 
if I can. Can you discuss again a little bit how small 
businesses can, since they have a disadvantage to larger 
corporations, larger companies with respect to scale, et 
cetera, how can the little guy compete against these larger 
companies if they are trying to provide health care for their 
employees?
    Ms. Blumberg. Truthfully, I don't believe that they can. 
And that is why I think that placing emphasis on trying to get 
more small employers to be direct providers, their own 
purchasers of health insurance coverage, is probably not going 
to be an effective way for significantly expanding health 
insurance coverage, because they will always suffer from being 
smaller scale and having the risk pooling issues and the 
administrative cost problem. They also have higher turnover 
than larger firms, which increases the administrative costs of 
the firm providing health insurance. They have got the problem 
of having lower wage workers than larger firms and medium size 
firms, on average. So the affordability issue is also a very 
prominent one.
    So from my perspective, the way to get more workers in 
small firms into health insurance coverage is through a broader 
based reform mechanism that will address the needs of really 
all uninsured individuals and particularly with these modest 
income and high health care needs.
    Mr. Chabot. Thank you. Dr. Nichols, I notice you are a big 
proponent of the CHOICE plan. Could you tell us again what are 
a couple of the major things that you think are so beneficial 
of the plan and why those of us who may not be co sponsors yet 
should consider co sponsoring the legislation?
    Mr. Nichols. Well, first of all, it is bipartisan. And in 
my opinion we need to show the country that we can work 
together. And I think that just the fact of cosponsorship and 
leadership that has already been shown reassures the country 
frankly those of us who live in Washington are trying to solve 
problems and not just posture about them.
    Secondly, it sets up a mechanism whereby people could buy 
health insurance that would be cheaper than it is for them 
today, and it targets that incentive directly at the group that 
is probably in most need of relief, and that is the small 
business sector. There is no question.
    I think Mr. Eckstein's story is the most ringing in my 
ears. Here is a family-owned company, two generations, I 
believe you told us, that is having a hard time maintaining, 
offering what they want to do because of one or two people in 
their health care family getting sick. It is that kind of, I 
will just say outrage, that we ought to fix. I don't blame the 
insurer. The insurers are in the world where they are following 
the rules they have that we have set up. The point of the 
CHOICE Act is to change the rules and to change incentives and 
to change the ways to make it available to more people. So all 
of that is good.
    My quibbles are that I think we could actually have our 
subsidy dollars go farther to cover more people if we are able 
to target them to low income workers as opposed to higher 
income workers who just happen to be in smaller firms. The 
classic example, not at the table today, would be a law firm or 
a consulting firm of a bunch of egghead economists, doing very 
well, thank you very much, why should you subsidize them? They 
don't need it.
    The second thing is I would agree with Linda in the long 
run you want to think about how are we going to help more 
workers in general. And more firms concentrate on what they do 
best, what they do best, as you all know, is create jobs. I 
want to remove the worry of health insurance from the plate of 
the CEO so he can focus on fixing roofs and making Coca-Cola 
even cheaper. I am in favor of that, I am a big Coke fan. So 
what I want to do is remove the health insurance, if you will, 
nightmare, from their plate by creating a marketplace where all 
workers can go. They can contribute to those workers purchases 
if they want to. It is America, it is part of the labor 
contract, but let's not build that as the only way to do it. 
And that is where I would quibble.
    Mr. Chabot. Thank you. Dr. Butler, the Heritage Foundation, 
and of course, Brookings are a couple of top think tanks that 
we often read your reports and listen when you all talk about 
important issues like we have here today. And obviously, we are 
way down the road on health care for the most part being 
provided through one's employer. It really didn't have to be 
this way from the beginning. I am just curious as to what your 
thinking is, because I have heard you speak at a number of 
different forums in the past. Is there a way that would have 
made better sense so that we wouldn't be here at this point in 
time? And how realistic is that at some point, maybe get back 
to what would make more sense?
    Mr. Butler. Well, I am a historian so don't get me started 
on that. I think we are facing a number of problems these days, 
if we had done things a little differently in the past, we may 
not be where we are today. But anyway, when I look at this, and 
actually when I look at it as somebody who is an immigrant to 
the United States, albeit having been here for 30 years, you 
are right.
    When you start looking at the American system, and as Len 
said, you have employers here that are trying to make 
something, yet having to worry about how sick might their 
employees be. That doesn't typically happen in other countries. 
You have employees shopping around for employers, wondering 
whether their benefits package is going to cover their problem. 
That is a problem too. And part of the root here, I think, is 
the tax treatment, which many people have pointed to that skews 
us to go down a certain road. We have all said that that needs 
to be addressed, and we need to make some steady changes in 
that to move the subsidy more to the person and away from 
another institution.
    However, I would say that given where we are and how we 
need to think about the future, I do want to just reemphasize 
the distinction I tried to make in the role of the employer 
between the role of the place of employment as a very useful 
convenient place to do a number of transactions to enroll 
people. Most Americans pay their tax via their employer. They 
are very good reasons for this, very sound reasons for doing 
this. To distinguish between that and who actually organizes 
coverage and who is at risk.
    I think the discussion we have been having to some extent 
is do we envision a future in America where the employer, 
particularly the small employer, continues to be a key part of 
organizing that coverage, and is in fact, holding the risk in 
some way, or should we try to move away from that system? That 
is what I would argue for.
    I think the analog with the way with you as Members of 
Congress provide insurance to your employees is a good analogy 
to look at. And you don't come together. You don't have to 
worry about the medical condition of any employee of yours 
because; it doesn't affect your ability to function as a Member 
of Congress; it doesn't affect the bottom line of your office 
in that sense. But you are a very important individual in terms 
of giving people who come to work for you access to a system 
based on an exchange where the risk is handled separately, and 
I think that is the way forward.
    So given the choice you can make, I would advise you, when 
you look at the CHOICE Act, to examine the opportunity for 
seeing a somewhat different role for the employer in the future 
than you are currently looking at, and to move in a slightly 
different direction than is implied by what you are doing. As 
you go down your current route, you still have the inherent 
problem of the medical risk of the employees of any individual 
company, and should they be in the co-op or should they not. 
The decision they make is going to still be one of who is going 
to carry the risk and what is the cost. I think that is 
inherent.
    I would just say finally and maybe this is a point of 
clarification for Mr. Haynes, my understanding from your 
testimony from the Bottlers' Association is that you still 
really don't provide the same kind of system of benefits to 
your smaller members and to your larger members, maybe I 
misheard that. But I thought that was the case, so you are 
still facing that situation of having a particular problem for 
the smaller members.
    Mr. Haynes. Well, if I can clarify, that is because of 
regulation, there is not a choice on our part, the system has 
State regulation. So we are going to come up with a solution 
for our small members. I am committed to doing that. And it is 
going to be based upon a captive.
    Mr. Haynes. One way or the other we are going to do it. We 
are going to struggle to be effective if we don't have some 
help financially in overcoming the competitive handicap that we 
already face because of the cost gap. But we are going to do 
it.
    And if I could just comment briefly, I think that the 
workplace is a very natural place for employees to get their 
health care insurance now. You can argue whether we might be 
better off if they didn't, but if you consider the fact that 
retirement is primarily coming through workplace-based 401K 
plans, that we provide a whole range of benefits, programs that 
we administer. I think it is both current reality and, frankly, 
fairly natural for employees to look to the workplace for help 
on their health care. After all, I think small business is 
concerned about the health and welfare of their employees 
separate and apart from the cost component.
    Mr. Chabot. Let me just ask one last quick question , and I 
will address this to both Mr. Haynes and Mr. Eckstein.
    In the scheme of challenges that those of you on the small 
business community have to deal with, where does health care in 
coming up with additional costs--I know it has been going up 
double digit in recent years. Where does that fall in the 
challenges that you face? And just a pretty quick answer, not a 
long one, Mr. Haynes and Mr. Eckstein.
    Mr. Haynes. It is very high and it is probably number one 
and I could even extend that beyond my organization because I 
have been working closely with the National Beer Wholesalers 
vis-a-vis health care and they did a member survey of the 
largest challenge that their members face and health care was 
number one in that survey; so our experience is typical.
    Mr. Chabot. Thank you.
    Mr. Eckstein.
    Mr. Eckstein. Health care has become just absolutely huge 
for us. Running a business myself, I didn't have the time to 
spend on health care every year, to shop it and try to find 
someone. I actually brought my wife to work, and now basically 
her job is she monitors our health insurance on a yearly basis. 
And we actually last year went to a health reimbursement 
account to absorb some of the increase and not pass it along to 
our employees and it actually worked out fairly well last year.
    Mr. Chabot. Thank you. And that's consistent with what I 
have been hearing. I go to small business folks in my districts 
a lot and I will tour their plant and meet with their folks, 
and I hear that if it is not the number one issue, it is very 
close to the top with just about every small business and I 
would venture to say that is probably true nationally as well.
    Thank you very much, Madam Chair. I yield back my time.
    Chairwoman Velazquez. Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Madam Chair.
    Maybe not so much a question, but I would like to thank you 
and the ranking member so much for keeping the spotlight on 
this issue. I know we have had several hearings about this. We 
have had governors in talking about State health insurance 
individuals and small business. So thank you very much.
    Obviously this is something that we look forward to getting 
something done about and I know you are committed to that, and 
I look forward to next year too. Like Dr. Nichols said, 
regardless of who is in the White House, this is going to be a 
pressing issue for the new administration as well as us.
    Sitting over here listening to the panel, I had a flashback 
to when I was interviewing--in my former life interviewing 
potential employees. And being a former law enforcement 
officer, you always ask the question why do you want to become 
a deputy sheriff? And you would think it would be to protect 
and serve and things like that. And as time went on, I had 
people saying, well, I hear the county has really good health 
benefits as their reason for wanting to become a deputy 
sheriff.
    Now, I didn't hire those people, but they were pretty 
honest. But I thought that was a telling thing that they were 
willing to come in and want that job just to get the health 
insurance benefits. I hope they are listening today and if they 
are reapplying they will think of a better answer than that.
    But as Mr. Chabot said, I spent yesterday on the phone 
anticipating this hearing talking to small business owners in 
my district with my roundtable, and just the stories that came 
from them. One gentleman who owns a trucking company and fuel 
prices are his number one, but health insurance and health care 
for him and his employees were all of their number one issue. 
And just listening to some of the stories that they had, gaming 
that deductible system. I know one of the gentlemen talked 
about that he selected a plan with a $2,500 and had asked the 
employees to pay the first $750. He would take the gamble on 
paying above the $750 anything that they didn't spend. He was 
just gambling.
    Other issues that they talked about were the insurance 
companies that are demanding that 50 or 60 percent of the 
employees get on the program, and that is not always possible. 
In a five-person job, if the spouse of somebody works and it's 
a better insurance plan, they are not there. So they are 
hampered. But again, I don't have a lot of questions because I 
think we all know where this has to go. It is letting the 
rubber meet the road and getting these things done, and I look 
forward to you and the rest of us keep pushing until this 
actually happens.
    With that, I yield back, but thank you all very much for 
your input.
    Chairwoman Velazquez. Thank you.
    Mr. Fortenberry.
    Mr. Fortenberry. Thank you, Madam Chair.
    Thank you all for joining us today.
    Dr. Blumberg, if I could summarize your testimony because 
unfortunately, it was the only one I was able to read through 
since being here fully, I think your suggestions can be 
summarized as follows: better pooling for small firms; high-
risk pools, which is a government subsidy for persons who have 
chronic health conditions; and some form of premium assistance 
for individuals of lower income; is that correct?
    Ms. Blumberg. Not necessarily. The issue of the high cost 
is a really critical one from my perspective. But whether you 
are going to address that problem by taking the people and 
separating them out into high-risk pools versus changing the 
way insurance is priced and risk is pooled in private insurance 
in general is a very big decision.
    So I think we need to be very cautious about how we go 
about that in order to make sure that coverage remains adequate 
and affordable for people regardless of their health status. 
For example, if you take the route of going with high risk 
pools for those who are high cost, they are separated out from 
the people that are lower cost. So if you are going to 
subsidize their coverage explicitly in order to make it 
affordable, the cost to the Government is going to be 
considerably higher than if their costs are averaged throughout 
the population. The total healthcare costs are the same. You 
have to pay for the costs eventually one way or the other. But 
it is a matter of how much is going to come directly from 
Government revenue versus how much is going to be spread 
through premiums. So those are big policy decisions and I 
wouldn't say that high-risk pools are necessarily the right way 
to go.
    Mr. Fortenberry. Then that would beg the question as to 
whether a form of premium assistance is the most efficient way 
and perhaps the most societally beneficial way, to continue to 
have proper access to health insurance coverage in the event 
that a person who falls out of normal risk categories and can 
not then be absorbed into smaller pools like you have.
    Ms. Blumberg. I think that buying coverage through 
employers, particularly large employers, is more efficient at 
this point than buying person by person because of 
administrative costs, but I think a lot of us have been talking 
about the notion of creating structures or building on existing 
structures that would allow coverage to be purchased outside of 
the employment context as efficiently as many employers do.
    Mr. Fortenberry. What would that look like?
    Ms. Blumberg. What that would look like is a purchasing 
entity, maybe something structured similarly to the Federal 
Employees Health Benefits Plan, which is what Stuart was 
speaking about, based on State purchasing pools, or State 
employee plans. You could do it through public programs, you 
could open up Medicaid and SCHIP for purchasing coverage for 
individuals of varying income levels. Most people in those 
plans are already enrolled in private health insurance plans, 
they are just being contracted by the State. You could set up a 
connector-like entity as they have done in Massachusetts. Where 
the State creates an entity through which they decide what the 
array of health benefits are going to look like and they 
contract with the insurers in order to provide that for 
individuals and/or small businesses that want to buy into it.
    But the key is that we have to be really careful about how 
we slice up the covered individuals in insurance coverage. The 
more choices that they have, the more options that they have 
available to them, the more we segment risk. So we have to be 
very careful about how many choices people face and how they 
are priced in order to make sure that we spread the cost as 
broadly as possibly.
    Mr. Fortenberry. Let us talk about two aspects of that, and 
others of you can chime in.
    One is the Health Savings Account initiative that tries to 
drive the consumer back into the equation when rationing 
limited dollars in ordinary costs while there is an 
extraordinary or catastrophic condition. Mr. Ellsworth is 
right, and it is an amusing story, but I think it is very true. 
And this also is a question of portability, that the dampening 
effect on economic productivity created by having a person seek 
employment merely for the benefit of health insurance, versus 
using their skill sets to find the right place to exercise 
their gifts, is a very real drain on productivity.
    So we talk about an employer-based system and you all are 
generous people, those of you who have a business. I think most 
small business people are trying to help their employees. But 
because you get a tax benefit, in effect, for doing this (plus 
the fact that it is about retaining employees) we used to call 
it in the corporate world "golden handcuffs." If these benefits 
get big enough, you are going to think twice before leaving or 
you are going to seek a position for the benefit alone versus 
the opportunity to again find the right fit for your own skill 
set. This happens a lot in rural communities where a spouse 
will leave a farm or another entity simply to go to some level 
of governmental--a level of governmental entity for the health 
insurance benefits.
    So while I agree with many of the points you are making in 
regards to the efficiency of delivering health care through the 
business platform, I think we have to think also about this 
issue of portability and this drain on productivity when a 
person ends up being basically chained to the desk that they 
are at because of their need for health insurance.
    Ms. Blumberg. That is actually one of the advantages of 
these purchasing entities, that an individual regardless of 
where they are working, can maintain their health insurance 
coverage when they move from job to job and whatever employer 
they are working with at the time, if they have decided to make 
contributions, can pay those contributions into the purchasing 
pool or the individual could hopefully go there and get income-
related support in order to be able to afford coverage there. 
So I think most of us are realizing that, particularly for 
small businesses and some medium-sized businesses as well, it 
is inefficient for them to be the location of purchasing 
coverage. But these purchasing entities are basically the 
solution to the issues that I think you are raising.
    Mr. Butler. I might add that in addition to issue of so-
called job lock, with people making decisions as to who they 
work for, there is of course the other issue which I am sure 
you are very familiar, which is how people's decision to go 
into business for themselves is affected by the insurance 
issue. There has not been so much research done on that but we 
certainly know anecdotally very much how that is affected. We 
have done a summary of the research that is out there and I 
would be more than happy to--
    Mr. Fortenberry. Madam Chair, I think that Dr. Butler is 
making an extraordinary point, one that should be impacted 
further by this committee because this drain on entrepreneurial 
productivity is very real because of this issue.
    Mr. Butler. We would like to be helpful. We see it all the 
time - people who just cannot go into business for themselves 
unless they have coverage through a spouse, for example. You 
see these patterns very, very clearly. People maybe get 
divorced and then suddenly, because they are in business, they 
cannot afford to continue because of the immediate effects of 
running out of--
    Mr. Nichols. If I could, Stuart mentioned, and I welcome to 
see it, it has been hard developing empirical models to do 
this, but I think he probably knows and I certainly know there 
are surveys of people thinking of business formation. And I 
know Todd Stottlemyer, the president of NFIB, has made very 
clear, and I think he has got a hard survey to back this up, it 
is the number one problem, the number one impediment to 
business formation is worrying about how you're going to cover 
your family and your would-be employees; so I certainly agree 
it is very important.
    Chairwoman Velazquez. We are having some votes the floor, 
but I have two more questions and then, Mr. Chabot, if you have 
any other questions.
    Dr. Nichols, despite some of the successes of the 
Massachusetts Commonwealth connector plan, it hasn't delivered 
on the promise of low-cost small business plans. Small 
businesses appear to be disproportionately funding the State's 
health care system in comparison to big business and government 
payers. Do you believe that there was a way that this could 
have been avoided?
    Mr. Nichols. Well, Madam Chairman, I think the fundamental 
cost structure in Massachusetts is driven by the unfortunate 
fact that health care costs a lot in Massachusetts, and 
unfortunately there is no magic wand you can wave when the 
providers up there get paid what they get paid, and that is the 
fundamental thing. Now, Linda actually probably knows more 
about Massachusetts specifically than I do so I will defer to 
her, but I will say when you structure a new marketplace, I 
think all of us would agree you have to have transitions that 
are smooth. You don't want to have a big jump.
    Massachusetts had a fair number of benefit mandates that 
were already in place that in some sense the market had 
adjusted to. You could get money back although not nearly as 
much as the advocates would tell you. You can get money back by 
taking mandates away, but if you do that precipitously, you end 
up uncovering cancer and so forth. So you have to be careful 
about that. What they did do, which I was very much in favor 
of, was they allowed there to be products sold to young 
workers, to young people, between, I think, 21 and 29 that had 
fewer mandates so that they could offer those people a little 
bit lower premium.
    But Linda, you may want to speak to--
    Ms. Blumberg. I think the underlying cost structure of the 
State is the major issue and they are focusing their attention 
now on strategies to contain costs. It was a very difficult 
political calculus to try to expand coverage substantially 
while at the same time containing costs, lower provider payment 
rates, et cetera. It would have been a very difficult piece of 
legislation to pass without support of the providers; so now I 
think the focus is on cost containment.
    But I would mention a survey that was done by the Urban 
Institute prior to the reform implementation and the survey was 
done again more recently. It was demonstrated that employer-
sponsored insurance coverage in Massachusetts has increased 
since the implementation of the reforms. So more employers seem 
to be offering and more workers taking up.
    Chairwoman Velazquez. Dr. Butler, you suggest giving tax 
credits to individuals as opposed to employers because it is a 
more effective means of expanding traditional coverage. Can you 
envision any circumstances in which tax credits for small 
businesses could be effectively used to expand coverage?
    Mr. Butler. Well, I do think that there is a case to be 
made for credits in the transition especially, if you are 
asking employers to set up systems. And we see this, 
incidentally, in the area of pensions as well, that legislation 
has been put forward to address the fact that there is a direct 
cost to a small business person, that might discourage them 
from setting up an alternative system. I think covering that 
with a credit can make sense, to cover those transition costs. 
What I was referring to is the idea of trying to subsidize with 
a tax subsidy directly to the employer in order to bring down 
the cost of coverage per se. So I would draw that distinction 
between the role of any kind of subsidy to the small employer.
    Chairwoman Velazquez. Yes. I am sure Mr. Haynes would want 
to comment--
    Mr. Haynes. Yes. I would say looking specifically at the 
Choice Act, there is probably dramatic evidence to the contrary 
because I think in our situation the tax subsidies would allow 
us to bring a lot more people into our existing pool. Frankly, 
I think more money would be saved by the people who wouldn't 
get--by the employers who wouldn't get the subsidies than the 
people who would get the subsidies and there would be more 
benefit to the participants in the pool that we could create 
outside of the group being subsidized than inside the group.
    Mr. Butler. Well, with respect, I mean, the actual 
econometric data that has been done--there has been a number of 
econometric studies looking at this in terms of the cost, the 
revenue loss associated with providing a subsidy to an employer 
who is already providing coverage to their employee and to try 
to level the playing field. There is a huge revenue loss 
associated with that. And I mean Econometricians do look at 
these things, and the data I think is pretty clear that it 
really is almost pushing on a string in terms of cost. It costs 
an enormous amount for those who are already covered if you go 
through the employer, and it is a much higher cost method of 
trying to cover those people. I just think the data shows that 
very clearly.
    Mr. Haynes. I think the difference is between a targeted 
subsidy and a general subsidy. This is a targeted subsidy that 
works specific on the marketplace.
    Chairwoman Velazquez. Mr. Chabot.
    Thank you.
    Mr. Chabot. Thank you, Madam Chair. I know we have votes; 
so I won't ask any more questions. But I just want to thank you 
for holding the hearing and I want to commend the panel. I 
think they have done an excellent job and have really shed a 
lot of light on this. I think this is an excellent panel, 
especially the panel member from Cincinnati.
    Chairwoman Velazquez. Thank you all.
    I ask unanimous consent that members will have 5 days to 
submit a statement and supporting materials for the record.
    Without objection, so ordered.
    This hearing is now adjourned.
    [Whereupon, at 12:00 p.m., the committee was adjourned.]

    [GRAPHIC] [TIFF OMITTED] T4252.001
    
    [GRAPHIC] [TIFF OMITTED] T4252.002
    
    [GRAPHIC] [TIFF OMITTED] T4252.003
    
    [GRAPHIC] [TIFF OMITTED] T4252.004
    
    [GRAPHIC] [TIFF OMITTED] T4252.005
    
    [GRAPHIC] [TIFF OMITTED] T4252.006
    
    [GRAPHIC] [TIFF OMITTED] T4252.007
    
    [GRAPHIC] [TIFF OMITTED] T4252.008
    
    [GRAPHIC] [TIFF OMITTED] T4252.009
    
    [GRAPHIC] [TIFF OMITTED] T4252.010
    
    [GRAPHIC] [TIFF OMITTED] T4252.011
    
    [GRAPHIC] [TIFF OMITTED] T4252.012
    
    [GRAPHIC] [TIFF OMITTED] T4252.013
    
    [GRAPHIC] [TIFF OMITTED] T4252.014
    
    [GRAPHIC] [TIFF OMITTED] T4252.015
    
    [GRAPHIC] [TIFF OMITTED] T4252.016
    
    [GRAPHIC] [TIFF OMITTED] T4252.017
    
    [GRAPHIC] [TIFF OMITTED] T4252.018
    
    [GRAPHIC] [TIFF OMITTED] T4252.019
    
    [GRAPHIC] [TIFF OMITTED] T4252.020
    
    [GRAPHIC] [TIFF OMITTED] T4252.021
    
    [GRAPHIC] [TIFF OMITTED] T4252.022
    
    [GRAPHIC] [TIFF OMITTED] T4252.023
    
    [GRAPHIC] [TIFF OMITTED] T4252.024
    
    [GRAPHIC] [TIFF OMITTED] T4252.025
    
    [GRAPHIC] [TIFF OMITTED] T4252.026
    
    [GRAPHIC] [TIFF OMITTED] T4252.027
    
    [GRAPHIC] [TIFF OMITTED] T4252.028
    
    [GRAPHIC] [TIFF OMITTED] T4252.029
    
    [GRAPHIC] [TIFF OMITTED] T4252.030
    
    [GRAPHIC] [TIFF OMITTED] T4252.031
    
    [GRAPHIC] [TIFF OMITTED] T4252.032
    
    [GRAPHIC] [TIFF OMITTED] T4252.033
    
    [GRAPHIC] [TIFF OMITTED] T4252.034
    
    [GRAPHIC] [TIFF OMITTED] T4252.035
    
    [GRAPHIC] [TIFF OMITTED] T4252.036
    
    [GRAPHIC] [TIFF OMITTED] T4252.037
    
    [GRAPHIC] [TIFF OMITTED] T4252.038
    
    [GRAPHIC] [TIFF OMITTED] T4252.039
    
    [GRAPHIC] [TIFF OMITTED] T4252.040
    
    [GRAPHIC] [TIFF OMITTED] T4252.041
    
    [GRAPHIC] [TIFF OMITTED] T4252.042
    
    [GRAPHIC] [TIFF OMITTED] T4252.043
    
    [GRAPHIC] [TIFF OMITTED] T4252.044
    
    [GRAPHIC] [TIFF OMITTED] T4252.045
    
    [GRAPHIC] [TIFF OMITTED] T4252.046
    
    [GRAPHIC] [TIFF OMITTED] T4252.047
    
    [GRAPHIC] [TIFF OMITTED] T4252.048
    
    [GRAPHIC] [TIFF OMITTED] T4252.049
    
    [GRAPHIC] [TIFF OMITTED] T4252.050
    
    [GRAPHIC] [TIFF OMITTED] T4252.051
    
    [GRAPHIC] [TIFF OMITTED] T4252.052
    
                                 
