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




                    THE HEALTH OF THE PRIVATE HEALTH
                            INSURANCE MARKET

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 23, 2008

                               __________

                           Serial No. 110-99

                               __________

         Printed for the use of the Committee on Ways and Means








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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
MIKE THOMPSON, California            THOMAS M. REYNOLDS, New York
JOHN B. LARSON, Connecticut          PAUL RYAN, Wisconsin
RAHM EMANUEL, Illinois               ERIC CANTOR, Virginia
EARL BLUMENAUER, Oregon              JOHN LINDER, Georgia
RON KIND, Wisconsin                  DEVIN NUNES, California
BILL PASCRELL, JR., New Jersey       PAT TIBERI, Ohio
SHELLEY BERKLEY, Nevada              JON PORTER, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

                                 ______

                         SUBCOMMITTEE ON HEALTH

                FORTNEY PETE STARK, California, Chairman

LLOYD DOGGETT, Texas                 DAVE CAMP, Michigan
MIKE THOMPSON, California            SAM JOHNSON, Texas
RAHM EMANUEL, Illinois               JIM RAMSTAD, Minnesota
XAVIER BECERRA, California           PHIL ENGLISH, Pennsylvania
EARL POMEROY, North Dakota           KENNY HULSHOF, Missouri
RON KIND, Wisconsin

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.












                            C O N T E N T S

                               __________

                                                                   Page

Advisory of September 23, 2008, announcing the hearing...........     2

                               WITNESSES

Karen Davis, Ph.D., President, The Commonwealth Fund, New York, 
  New York.......................................................     5
Bruce Bodaken, Chairman & Chief Executive Officer, Blue Shield of 
  California, San Francisco, California..........................    15
Roger Feldman, Ph.D., Blue Cross Professor of Health Insurance, 
  University of Minnesota, Minneapolis, Minnesota................    18
Mila Kofman, Superintendent of Insurance, Maine Bureau of 
  Insurance, Augusta, Maine......................................    24

                       SUBMISSIONS FOR THE RECORD

American Academy of Actuaries, Statement.........................    46
American College of Obstetricians and Gynecologists, Statement...    52
National Small Business Association, Letter......................    54
The National Association of Health Underwriters, Statement.......    58
The National Association of Insurance Commissioners, Statement...    61

 
                    THE HEALTH OF THE PRIVATE HEALTH
                            INSURANCE MARKET

                              ----------                              


                      TUESDAY, SEPTEMBER 23, 2008

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:16 a.m. in 
room 1100, Longworth House Office Building; Hon. Fortney Pete 
Stark, (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
September 16, 2008
HL-30

      Hearing on The Health of the Private Health Insurance Market

    House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) 
announced today that the Subcommittee on Health will hold a hearing on 
problems in the private health insurance market, with a focus on the 
need for reforms in the non-group or individual market. The hearing 
will take place at 10:00 a.m. on Tuesday, September 23, 2008, in the 
main committee hearing room, 1100 Longworth House Office Building. In 
view of the limited time available to hear witnesses, oral testimony at 
this hearing will be from invited witnesses only. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Over 46 million Americans are uninsured, and many cannot purchase 
coverage in the market today because it is too costly or unavailable at 
any cost because of pre-existing conditions. While most insured 
Americans under age 65 obtain health care through private insurance 
plans, too many face eroding coverage and high and increasing costs.
      
    About 170 million people purchase insurance coverage through an 
employer and 16 million through the individual market.\1\ Eight million 
Federal employees, dependents and retirees also get their coverage 
through publicly-subsidized private plans in the Federal employee 
health benefits program (FEHBP); the average Federal employee chooses 
coverage from among 5 to 15 available plans (depending on the 
region).\2\
---------------------------------------------------------------------------
    \1\ Census data.
    \2\ CRS Report for Congress Federal Employees Health Benefits 
Program: Available Health Insurance Options, November 26, 2007.
---------------------------------------------------------------------------
      
    In general, private plans attempt to control costs by minimizing 
risks and spending. Plans try to balance the financial and health care 
risks of very sick individuals with healthy individuals. Once people 
are covered, most plans control costs through cost-sharing strategies 
and by limiting coverage of services and providers. Some plans have 
used innovative cost control tools such as deployment of health 
information technology, focusing on more effective disease management 
treatment for people with chronic illnesses, and creating integrated 
health care delivery systems.
      
    Rising health care premiums and rising numbers of employers 
dropping insurance coverage are a growing concern even for those with 
adequate coverage today. Furthermore, many small employers and those 
who try and purchase health care on their own are experiencing 
significant problems as they try to obtain coverage. To avoid adverse 
selection, individual and small group market insurance products use a 
patient's medical history to screen out those whose pre-existing 
medical conditions pose a risk for the risk pool. By refusing to cover 
people with pre-existing conditions or excluding all care for any 
related health problem, most insurers avoid risk at the onset. In 
practice, this means that people with even minor illnesses may find 
their coverage unaffordable, inadequate, or completely non-existent at 
any price. For example, removal of a small skin lesion could negate any 
coverage for cancer treatment. Simply being a woman of ``child bearing 
age'' often results in an insurer excluding maternity coverage in the 
small group and individual markets.
      
    In announcing the hearing Chairman Stark said, ``As we seek to 
reform our health care system, we need to be sure our solutions meet 
the needs of the millions of Americans who have coverage today as well 
as the millions who are uninsured. While I expect private health 
insurance will remain part of any reformed system, the purpose of this 
hearing is to highlight that major changes will be necessary to ensure 
affordable, comprehensive coverage for everyone.''
      

FOCUS OF THE HEARING:

      
    This hearing is focused on challenges of the private health 
insurance market.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``110th Congress'' from the menu entitled, ``Committee Hearings'' 
(http://waysandmeans.house.gov/Hearings.asp?congress=18). Select the 
hearing for which you would like to submit, and click on the link 
entitled, ``Click here to provide a submission for the record.'' Follow 
the online instructions, completing all informational forms and 
clicking ``submit''. Attach your submission as a Word or WordPerfect 
document, in compliance with the formatting requirements listed below, 
by close of business Tuesday, October 7, 2008. Finally, please note 
that due to the change in House mail policy, the U.S. Capitol Police 
will refuse sealed-package deliveries to all House Office Buildings. 
For questions, or if you encounter technical problems, please call 
(202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
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printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman STARK. I apologize for the delay. We have just 
solved the Wall Street crisis here before we started on the 
second crisis for the day.
    Thank you for being here, and we are going to talk about 
healthcare payment system through the private insurance 
companies, whether group or independent policies. And this is a 
segment of the payment industry through which most Members of 
Congress and our staffs receive their care. As we are trying to 
lay the groundwork for possible healthcare reform or healthcare 
payment reforms in the years ahead, it's important that we 
examine this very large sector of our payment system. As we do 
see from the events of this past week, the case for reasonable 
regulation, not relying totally on self-regulation or letting 
people just fend for themselves in a complex market, doesn't 
seem to be a very good solution to follow.
    Right now, the payment market is failing some 40-odd-
million uninsured for a variety of reasons. The people who are 
uninsured are not necessarily there because they don't want 
insurance. Many of them can't afford it. Many of them can't 
find it because of pre-existing conditions. And we'll hear from 
witnesses this morning about how to deal with that problem.
    Even those of us who enjoy a payment plan through large 
employers face problems. Premiums are increasing faster than 
wages. The employers are shifting some of those costs onto the 
beneficiaries who hire deductibles and copayments. And we'll 
hear today about issues in dealing with those problems. So I 
want to welcome the witnesses and I look forward to the 
witnesses informing us as both their definition of the problems 
we face and how they suggest that we deal with it.
    Mr. Camp.
    Mr. CAMP. Well, thank you, Mr. Chairman, and thank you for 
convening this hearing on the private health insurance market. 
And regardless of what happens in November, comprehensive 
healthcare reform should be near the top of our to-do list in 
2009.
    And I strongly believe that any plan for reforming our 
Nation's healthcare system must include conversations about how 
to reform the Tax Code so that every American, not just those 
who have employer sponsored health insurance, can benefit. And 
we must also look for ways to better utilize the private health 
insurance market to expand coverage to the millions of 
uninsured Americans. In doing so, we need to ensure that 
millions of Americans who are eligible for Medicaid and SCHIP, 
but are not yet enrolled, get the coverage to which they are 
entitled.
    Every uninsured person in this country shares one common 
characteristic, and that is they receive no assistance under 
the Federal Tax Code to help them purchase health insurance in 
the individual market. We should use the part of the Tax Code 
to create personal healthcare just as the Tax Code created 
employer-sponsored healthcare. By equalizing the tax treatment, 
we can give the millions of Americans in the individual market 
the ability to purchase quality health insurance.
    And I hope that my support for equalizing the Tax Code will 
not be misconstrued as a desire to move everyone into the 
private market. That is certainly not my intention. If you're 
lucky enough to have employer-sponsored insurance, then you 
should be able to keep it. And, certainly, there are benefits 
of employer-sponsored insurance, such as effective risk pooling 
and administrative savings, which I know we'll hear about from 
our witnesses today.
    However, employer-sponsored insurance also tends to shield 
consumers from the full cost of the care, which encourages 
over-consumption of health/sick care services. This in turn 
contributes to rapid spending growth and higher healthcare 
costs for everyone. For those people who have no other choice 
but to purchase insurance in the individual market, we ought to 
do something that will allow them to choose the health 
insurance that best meets their needs while receiving financial 
assistance through the Tax Code.
    The generosity of the American taxpayer should not go to 
employers alone. It should apply to individuals, small 
businesses, and large corporations alike. But in order to make 
this work we must study the shortcomings of the private health 
insurance market, and I trust we'll hear about some of those 
today.
    I welcome the opportunity to discuss what reforms might be 
needed to make private health insurance more affordable and 
more accessible to the uninsured, even if we're not comfortable 
with every suggestion that is put forward. We owe it to our 
constituents to have an open discussion about reforming the 
system, so that everyone has equal, affordable access to the 
best healthcare in the world.
    Thank you, Mr. Chairman. I yield back.
    Chairman STARK. This morning we will hear from a 
distinguished panel. Dr. Karen Davis, who is President of The 
Commonwealth Fund, whose work in the research, funding research 
in the delivery of medical care, is well known.
    From my part of the world, Mr. Bruce Bodaken, who is 
Chairman and CEO of Blue Shield of California, and has been a 
proponent for many years for universal coverage for all 
Americans.
    Dr. Roger Feldman, who is the Blue Cross Professor of 
Health Insurance at the University of Minnesota in Minneapolis.
    And Ms. Mila Kofman, who is the Superintendent of Insurance 
from the state of Maine, the Maine Bureau of Insurance from 
Augusta.
    We welcome you and look forward to you enlightening us in 
the order I mentioned your names and ask you to try to heed the 
5-minute warning and that will give Members of the Committee an 
opportunity to let you expand on your testimony and your ideas 
during the periods of inquiry.
    Karen, would you like to proceed?

 STATEMENT OF KAREN DAVIS, PH.D., PRESIDENT, THE COMMONWEALTH 
                    FUND, NEW YORK, NEW YORK

    Ms. DAVIS. Thank you, Mr. Chairman, Mr. Camp, and Members 
of the Committee.
    Historically, the U.S. healthcare financing system has been 
based on shared, financial responsibility among employers, 
government and households. Unfortunately, the rise in 
healthcare costs this decade has coincided with an erosion in 
health insurance coverage and with rising economic insecurity 
for American families, caused in part by the shifting of 
greater financial responsibility for coverage and healthcare 
directly to families.
    Americans' mixed system of private and public health 
coverage has its strengths and it's worth preserving. However, 
the trend toward increasing the individual's responsibility for 
insurance and healthcare is shifting an unacceptable risk onto 
families. As a consequence, the number of Americans without 
adequate protection from healthcare expenses has been on the 
rise.
    As the Chairman noted, the number of uninsured has 
increased 20 percent this decade, now at 26 million. The number 
of underinsured people has jumped 60 percent over the last 5 
years, an estimated 25 million today. Low income adults are 
hardest hit. Private markets are simply not working for low 
income adults. The numbers of Americans who faced difficulty 
paying medical bills and have accumulated medical debt have 
also risen substantially.
    A recent Commonwealth Fund study found that there are 79 
million Americans who have difficulty paying medical bills or 
accumulated medical debt and many of those were insured at the 
time those expenses were incurred. Managed care plans have 
increased patient cost-sharing or limited benefits. There are 
no minimum standards on benefits to prevent people from being 
under-insured.
    Nearly all private insurance in the group market is now 
some form of managed care; and, while non-profit integrated 
delivery systems often have superior performance on quality and 
have been among the leaders in adopting electronic information 
systems, many other managed care plans do little more than 
provide discounted fee-for-service plans.
    Coverage for employees of small business is particularly 
troubling. It's eroding in terms of the proportion of firms 
that are offering any health benefits. It's eroding in the 
quality of those benefits. The rise in deductibles, especially 
in small firms shifts risks to patients and those higher 
deductibles are particularly a burden for the sickest 
Americans.
    Individual health plans represent the weakest part of the 
health insurance market. Such plans are characterized by high 
administrative costs, poor benefits, and in most states they 
exclude poor health risk. Fortunately, the public programs, 
Medicare, Medicaid, and the State Children's Health Insurance 
Program, buffer some of the risk to families by covering the 
elderly, many of the disabled, low income children, and some 
very low income adults.
    Ensuring stable, affordable health insurance coverage for 
all Americans will require significant increase in the role of 
government to set the rules for the operation of private 
markets and reverse the trend toward shifting greater financial 
risk to families who are unable to bear that risk. Steps should 
include providing health insurance premium assistance to low 
income and moderate income families, strengthening, not 
weakening employer coverage, setting national rules for the 
operation of individual health insurance markets or creating a 
national insurance connector such as the one implemented by 
Massachusetts.
    I would also suggest offering a public plan modeled on 
Medicare to small businesses and individuals, which our studies 
estimate would lower premiums by 30 percent and increase the 
stability of insurance coverage. Building on Medicare, 
Medicaid, and SCHIP to cover older adults, the disabled who are 
in the 2-year waiting period for Medicare, and low income 
adults, as well as children. Private insurance markets do not 
serve these populations well.
    Finally, insurance reforms need to be part of a 
comprehensive strategy to bring about a high performance 
healthcare system that achieves better access, improve quality 
and greater efficiency.
    Thank you.
    [The prepared statement of Ms. Davis follows:]
Statement of Karen Davis, Ph.D., President, The Commonwealth Fund, New 
                             York, New York
    The U.S. health care financing system is based on shared financial 
risk. Employers, federal and state government, and households all share 
in paying premiums for health insurance coverage. Such coverage is 
essential to protect individuals from potentially devastating medical 
bills and to ensure financial access to care. With rising health care 
costs, insurance is all the more important to prevent families' savings 
from being wiped out and to make sure that everyone can get the care 
they need.
    Unfortunately, the rise in health care costs this decade has 
coincided with an erosion in health insurance coverage and with rising 
economic insecurity for American families caused by the shifting of a 
greater share of financial responsibility for coverage and health care 
directly to families. American's mixed system of private and public 
health coverage has its strengths and is worth preserving; however, the 
trend toward increasing the individual's responsibility for insurance 
and health care expenses is shifting an unacceptable level of risk onto 
families. As a consequence, the number of Americans without adequate 
protection from health care expenses has been on the rise:

      The number of uninsured Americans has jumped almost 20 
percent between 1999 and 2007; today there are 45.6 million uninsured.
      The number of underinsured--people with inadequate 
coverage that ensures neither access to care nor financial protection--
has jumped 60 percent between 2003 and 2007, from 16 million to 25 
million.
      Low-income adults have been hardest hit. Nearly three-
fourths (72%) of adults with incomes below twice the poverty level are 
uninsured or underinsured. Private markets are simply not working for 
low-income adults.
      The numbers of Americans who face difficulty paying 
medical bills and have accumulated medical debt have also risen 
substantially, with middle-income families earning less than $60,000 a 
year being particularly squeezed. In a recent Commonwealth Fund survey, 
79 million Americans reported difficulties paying medical bills or 
accumulated medical debt. About 60 percent of those experiencing 
medical bill problems were insured at the time they incurred their 
expenses.
      Managed care plans have increasingly used tiered 
prescription drug copayments that limit access to more expensive 
medications. In addition, most managed care plans place limits on 
mental health outpatient visits and inpatient days.
      It should be noted that private managed care plans come 
in many shapes and sizes. Nonprofit managed care plans that are part of 
nonprofit integrated delivery systems--the best-known include Kaiser 
Permanente, Geisigner Health System, Henry Ford Health System, and 
Intermountain Health Care--have been found in Commonwealth Fund--
supported case studies to have superior performance on quality and have 
been among the leaders in adopting electronic information systems and 
quality improvement care processes to deliver better results for 
patients.
      Coverage for employees of small firms is eroding--both in 
terms of the proportion of firms offering any health benefits and the 
quality of those benefits. The rise in deductibles shifts risk to 
patients; premiums are shared between employers and workers and spread 
equally among all enrollees but patients are fully responsible for 
deductible amounts and uncovered services. Higher deductibles are 
particularly a burden for the sickest Americans, who have the highest 
medical expenses; they also undermine their ability to get needed care.
      Individual health plans represent the weakest part of the 
health insurance market. Such plans are characterized by high 
administrative costs and poor benefits, and, in most states, they 
exclude poor health risks. Because health expenditures are so skewed--
with 10 percent of people accounting for 64 percent of health care 
outlays--health insurers have a strong incentive to avoid covering 
those with health problems, to charge much higher premiums, or to 
provide policies with very restrictive benefits.
      Fortunately, Medicare, Medicaid, and the State Children's 
Health Insurance Program buffer some of the risk to families by 
covering the elderly, many of the disabled, low-income children, and 
some very-low-income adults. In 1965, Medicare and Medicaid were 
enacted to cover those who were often left uncovered by private 
insurance: the elderly and low-income people. Medicare and Medicaid 
have low administrative costs. Medicaid expenditures per person are 
lower than costs for privately insured children and adults. Moreover, 
growth in Medicare spending has been somewhat lower than growth in 
spending by private insurers over time. Yet Medicare beneficiaries 
continue to report good access to health care services.

    Ensuring stable, affordable health insurance coverage for all 
Americans will require a significant increase in the role of government 
to set the rules for the operation of private markets and reverse the 
trend toward shifting greater financial risk to families who are unable 
to bear that risk. Action is needed to guarantee affordable coverage 
that provides adequate financial protection and ensures that 
individuals can obtain needed care--the two essential functions of 
health insurance. Steps should include:

      Providing health insurance premium assistance to low-
income and modest-income families who cannot afford family premiums, 
which now average over $12,000 even under employer plans.
      Strengthening, not weakening, employer coverage.
      Setting national rules for the operation of individual 
health insurance markets or creating a national insurance connector, 
such as the one implemented by Massachusetts, that makes affordable 
health insurance policies available to those without access to employer 
coverage. Structuring insurance choices through rules governing the 
operation of private markets, or through a health insurance exchange or 
connector, could ensure the availability of quality, affordable 
coverage to a larger number of individuals who are either uninsured or 
have inadequate or unstable coverage, or for whom premiums create major 
financial burdens.
      Offering a public plan modeled on Medicare to small 
businesses and individuals would lower premiums by 30 percent and 
increase the stability of insurance coverage.
      Building on Medicare, Medicaid, and SCHIP to cover older 
adults, the disabled who are in the two-year waiting period for 
Medicare, and low-income adults, as well as children. Private insurance 
markets do not serve these populations well.

    Finally, insurance reforms need to be part of a comprehensive 
strategy to bring about a high performance health care system that 
achieves better access, improved quality, and greater efficiency. This 
will require fundamental changes in the way health care providers are 
paid--changes that help align financial incentives with these goals and 
create a more organized health system that takes full advantage of 
modern information technology and evidence-based medicine and spreads 
best practices. Rather than shifting more financial risk to families, 
public programs and private insurers alike need to do more, both 
independently and in collaboration, to slow the growth in health care 
costs and transform the delivery of health care services to improve 
quality and enhance value for the money spent on health care.
SHIFTING HEALTH CARE FINANCIAL RISK TO FAMILIES IS NOT A SOUND 
        STRATEGY: THE CHANGES NEEDED TO ENSURE AMERICANS' HEALTH 
        SECURITY
    Thank you, Mr. Chairman, for this invitation to testify on private 
health insurance markets and how they are currently functioning within 
our nation's mixed system of private and public coverage; the major 
strengths and weaknesses of this system; and how private markets might 
be strengthened through the establishment of uniform rules governing 
the operation of insurance markets, including the benefit of an 
insurance connector to structure coverage choices for working families.
    Unfortunately, the rise in health care costs this decade has 
coincided with an erosion of health insurance coverage and with rising 
economic insecurity for American families caused by the shifting of a 
greater share of financial responsibility for insurance and health care 
directly to families. The U.S. private--public insurance system has 
strengths and is worth preserving, but the trend toward increased 
individual responsibility for insurance and health care expenses is 
shifting an unacceptable level of risk to American families--with 
potentially serious consequences. Action is needed to guarantee 
affordable coverage that provides adequate financial protection and 
ensures that individuals can obtain needed care--the two essential 
function of health insurance.
    Since most of the difficulties in the private market are 
experienced by employees of small businesses and by individuals without 
access to employer coverage, structuring insurance choices through 
rules governing the operation of private markets, or through a health 
insurance exchange or connector, could ensure the availability of 
quality affordable coverage to a larger number of individuals who are 
either uninsured or have inadequate or unstable coverage, or for whom 
premiums create major financial burdens.
    Rather than shifting more financial risk to families, public 
programs and private insurers alike need to do more, both independently 
and in collaboration, to slow the growth in health care costs and to 
transform the delivery of health care services to improve quality and 
enhance value for the money spent on health care.
A Broken System: Growing Numbers of Uninsured Americans
    Last month, the U.S. Census Bureau released the latest data on the 
number of Americans without health insurance. The number of uninsured 
individuals fell to 45.7 million in 2007, from 47.0 million in 2006.\1\ 
While the new figure represents the first decline since 1999, there are 
still 7 million more uninsured people now than at the beginning of the 
decade. Moreover, the decline of 1.3 million uninsured people between 
2006 and 2007 was entirely attributable to an equal growth in coverage 
under Medicaid, a shift that highlights the importance of the nation's 
safety-net insurance system. In contrast, employment-based coverage 
declined slightly, from 59.7 percent of the population to 59.3 percent.
---------------------------------------------------------------------------
    \1\ C. DeNavas-Walt, B. Proctor, and J. Smith, Income, Poverty, and 
Health Insurance Coverage in the United States: 2007 (U.S. Census 
Bureau, Aug. 2008).
---------------------------------------------------------------------------
    The major bright spot in the last eight years has been the improved 
rate of coverage for children, with the proportion of uninsured 
children declining from 12.5 percent in 1999 to 11.0 percent in 2007. 
This improvement was a reflection of increased coverage for children 
under the State Children's Health Insurance Program (SCHIP). However, 
more than 8 million children remain uninsured, a figure that 
underscores the need to permanently reauthorize SCHIP and provide 
adequate funding to cover all low-income children.
    By contrast, the proportion of uninsured adults ages 18 to 64 has 
increased markedly since 1999, from 17.2 percent to 19.6 percent. The 
gap between coverage rates for working-age adults and children has 
widened in the last eight years--in contrast with the 1990s, when rates 
for both rose in concert. The differential experience for adults, who 
are not covered by SCHIP, attests to the success of offering states 
fiscal incentives to cover low-income children. Extending federal 
financial assistance to states to cover low-income adults could have a 
similar impact in alleviating some of the most serious health care 
access problems created by gaps in coverage.
    Some states have stepped up to the plate to find ways to cover both 
children and adults who are uninsured. Massachusetts, which enacted 
health reform in April 2006 with the help of a Medicaid waiver, has 
moved into first place, with the lowest uninsured rate in the nation in 
2007. In that state, 7.9 percent of the population was uninsured in 
2006--2007, compared with 24.8 percent in Texas, the state with the 
highest uninsured rate. A recent report from the Massachusetts 
Commonwealth Connector indicates that 439,000 residents have obtained 
coverage under the Massachusetts health insurance reforms.\2\
---------------------------------------------------------------------------
    \2\ J. M. Kingsdale, Executive Director's Monthly Message, The 
Massachusetts Commonwealth Connector, Aug. 25, 2008.
---------------------------------------------------------------------------
Inadequate Coverage: The Rise of the Underinsured
    While numerous indicators point to the continued erosion of our 
employer-based system of health insurance coverage, these statistics 
fail to count the millions more who experience lapses in their coverage 
during the year, or the millions of ``underinsured'' people whose 
inadequate coverage ensures neither access nor financial protection.\3\ 
Deterioration in insurance coverage and access to care is not limited 
to the uninsured. Even individuals with insurance coverage are 
increasingly at risk of being underinsured, defined as deductibles 
exceeding 5 percent of income, or out-of-pocket expenses exceeding 5 
percent of income for low-income families (10 percent of income for 
higher-income families).\4\
---------------------------------------------------------------------------
    \3\ C. Schoen, S. Collins, J. Kriss and M. M. Doty, ``How Many Are 
Underinsured? Trends Among U.S. Adults, 2003 and 2007,'' Health Affairs 
Web Exclusive, June 10, 2008, 27(4).
    \4\ C. Schoen, S. R. Collins, J. L. Kriss, M. M. Doty, How Many Are 
Underinsured? Trends Among U.S. Adults, 2003 and 2007, Health Affairs 
Web Exclusive, June 10, 2008.
---------------------------------------------------------------------------
    As of 2007, there were an estimated 25 million underinsured adults 
in the United States, up 60 percent from 2003. Low-income adults are 
hardest hit. Nearly three-fourths (72%) of adults with incomes below 
twice the poverty level are uninsured or underinsured. Private markets 
are simply not working for low-income adults.
    Only about one-third of working age adults have quality, affordable 
coverage. Others are uninsured at some point during the year, are 
underinsured, or report problems obtaining access to needed care or 
paying medical bills. Together, an estimated 116 million adults fall 
into one or more of these groups.
    Underinsured people--even though they have coverage all year--
report access to care and bill problem experiences similar to the 
uninsured. Both those who are uninsured at some point during the year 
and those who are underinsured report major difficulties obtaining 
needed care. Sixty percent of those who are underinsured reported one 
of four access problems: did not see a doctor when needed medical care, 
did not fill a prescription, did not see a specialist when needed, or 
skipped a medical test, treatment, or follow-up service. Seventy 
percent of those uninsured at some point during the year reported one 
of these four access problems, contrasted with 29 percent of those who 
were insured all year and not underinsured.
    The economic consequences of being uninsured or underinsured are 
now well documented. A recent study by The Commonwealth Fund found that 
79 million Americans have problems paying medical bills or are paying 
off accumulated medical debt.\5\ About 60 percent of those experiencing 
medical bill problems were insured at the time the expenses were 
incurred. Adults who experienced medical bill problems face dire 
financial problems: 29 percent are unable to pay for basic necessities 
like food, heat, or rent because of their bills; 39 percent use their 
savings to pay bills; and 30 percent take on credit card debt.
---------------------------------------------------------------------------
    \5\ M. M. Doty, S. R. Collins, S. D. Rustgi, and J. L. Kriss, 
Seeing Red: The Growing Burden of Medical Bills and Debt Faced by U.S. 
Families (New York: The Commonwealth Fund, Aug. 2008).
---------------------------------------------------------------------------
    These problems are widely reported by those who are uninsured or 
underinsured. Sixty percent of adults who are underinsured or uninsured 
report being unable to pay medical bills, being contacted by collection 
agencies for unpaid bills, changing their way of life to pay medical 
bills, or having accumulated medical debt.\6\ In contrast, only one-
fourth of insured adults reported financial stress related to medical 
bills. Medical bill problems and accumulated medical debt were greater 
when plans did not include prescription drug or dental coverage and 
when the deductible exceeded 5 percent of income.
---------------------------------------------------------------------------
    \6\ S. R. Collins, J. L. Kriss, M. M. Doty, and S. D. Rustgi, 
Losing Ground: How the Loss of Adequate Health Insurance is Burdening 
Working Families: Findings from the Commonwealth Fund Biennial Health 
Insurance Surveys, 2001--2007 (New York: The Commonwealth Fund, Aug. 
2008).
---------------------------------------------------------------------------
    Managed care plans have increasingly used tiered prescription drug 
copayments that limit access to more expensive medications. In 
addition, most managed care plans place limits on mental health 
outpatient visits and inpatient days. These restrictions on benefits 
may not be known by enrollees at the time they choose a plan, 
especially those enrollees who have a new health condition, such as 
cancer, that requires costly drugs.
    Underinsured adults also report more problems dealing with their 
insurance plans. Nearly two-thirds of underinsured adults report they 
had expensive medical bills for services not covered by insurance, the 
doctor charged more than insurance would pay and they had to pay the 
difference, or they had to contact the insurance company because they 
did not pay a bill promptly or were denied payment.
    Inadequate coverage can also lead to more costly use of emergency 
rooms, as well as to hospitalizations that could have been avoided with 
better primary care. Uninsured and underinsured people with chronic 
conditions, for example, are less likely to report managing their 
chronic conditions, more likely to report not filling prescriptions or 
skipping doses of drugs, and more likely to use emergency rooms and be 
hospitalized.\7\
---------------------------------------------------------------------------
    \7\ S. R. Collins, K. Davis, M. M. Doty, J. L. Kriss, A. L. 
Holmgren, Gaps in Health Insurance: an All-American Problem, Findings 
from the Commonwealth Fund Biennial Health Insurance Survey (New York: 
The Commonwealth Fund, Apr. 2006).
---------------------------------------------------------------------------
    It should be noted that private managed care plans come in many 
shapes and sizes. Nonprofit managed care plans that are part of 
nonprofit integrated delivery systems--the best-known include Kaiser 
Permanente, Geisinger Health System, Henry Ford Health System, and 
Intermountain Health Care--have been found in Commonwealth Fund--
supported case studies to have superior performance on quality and have 
been among the leaders in adopting electronic information systems and 
quality improvement care processes to deliver better results for 
patients.\8\
---------------------------------------------------------------------------
    \8\ R. A. Paulus, K. Davis, and G. D. Steele, ``Continuous 
Innovation in Health Care: Implications of the Geisinger Experience,'' 
Health Affairs, Sept./Oct. 2008 27(5):1235--45; A. Shih, K. Davis, S. 
Schoenbaum, A. Gauthier, R. Nuzum, and D. McCarthy, Organizing the U.S. 
Health Care Delivery System for High Performance (New York: The 
Commonwealth Fund, Aug. 2008).
---------------------------------------------------------------------------
Coverage Eroding in Small Firms
    Any American is at risk of losing health insurance coverage, with 
employees of small businesses being particularly vulnerable. While 99 
percent of firms with 200 or more employees continue to offer health 
insurance coverage, the corresponding rate for the smallest firms 
(those with fewer than 10 employees) is, at 45 percent, far lower.\9\ 
Coverage in such very small firms is down from 57 percent in 2000. 
Three of five workers who are uninsured are self-employed or working 
for a firm with fewer than 100 employees.
---------------------------------------------------------------------------
    \9\ S. R. Collins, C. White, and J. L. Kriss, Whither Employer-
Based Health Insurance? The Current and Future Role of U.S. Companies 
in the Provision and Financing of Health Insurance (New York: The 
Commonwealth Fund, Sept. 2007).
---------------------------------------------------------------------------
    Smaller businesses face many disadvantages because they do not 
enjoy the economies of covering large groups with natural pooling of 
risks. Employees of smaller businesses, moreover, receive fewer 
benefits and often face higher premiums. For the same benefits, a firm 
with more than 1,000 employees paid an estimated premium of $3,134 for 
single employee coverage, compared with $3,579 for employers with fewer 
than 10 employees.\10\ Small firms also pick up a lower share of the 
premium, further increasing costs to workers of small firms relative to 
those employed in larger firms.
---------------------------------------------------------------------------
    \10\ J. Gabel, R. McDevitt, L. Gandolfo et al., Generosity and 
Adjusted Premiums in Job-Based Insurance: Hawaii Is Up, Wyoming Is 
Down, Health Affairs, May/June 2006 25(3):832--43.
---------------------------------------------------------------------------
    Driven in part by a philosophy that individual responsibility for 
insurance and higher deductibles will slow the growth in health care 
costs, employer coverage and policies available in the private 
individual insurance market have shifted more of the cost of health 
care directly to households. Deductibles have risen particularly 
sharply in small firms with three to 199 employees--with the mean 
deductible for single coverage rising from $210 in 2000 to $667 in 
2007. By contrast, for larger firms, deductibles increased from $157 to 
$382 over this period. Deductibles vary by type of plan, with high-
deductible health plans having particularly large deductibles; health 
maintenance organization (HMO) plans which are more typically offered 
by larger firms, generally have lower deductibles than preferred 
provider organization (PPO) plans.
    Not surprisingly, therefore, employees of larger firms are more 
likely to say that employers do a good job of selecting quality 
insurance plans. Of employees in firms with 500 or more employees, 76 
percent give employers high marks for selecting quality plans, compared 
with 69 percent of workers in firms with fewer than 20 employees.\11\
---------------------------------------------------------------------------
    \11\ S. R. Collins, J. L. Kriss, K. Davis, M. M Doty, and A. L. 
Holmgren, Squeezed: Why Rising Exposure to Health Care Costs Threatens 
the Health and Well-Being of American Families (New York: The 
Commonwealth Fund, Sept. 2006).
---------------------------------------------------------------------------
Individual Insurance Market Works Less Well than Employer Coverage
    Faced with declining rates of coverage driven by the erosion of 
employer-sponsored coverage, the only recourse for many people is to 
turn to the individual health insurance market. However, this is the 
weakest link in the U.S. health insurance system. The Commonwealth Fund 
Biennial Health Insurance Survey found that of 58 million adults under 
age 65 who sought coverage in the individual insurance market over a 
three year period, nine of 10 did not purchase coverage, either because 
they were rejected, they were unable to find a plan that met their 
needs, or they found the coverage too expensive.\12\ Serious health 
problems are also a significant barrier to gaining coverage in the non-
group market. More than 70 percent of people with health problems or 
incomes under 200 percent of the poverty level surveyed by The 
Commonwealth Fund said that it was very difficult or impossible to find 
a plan they could afford.
---------------------------------------------------------------------------
    \12\ S. R. Collins, J. L. Kriss, K. Davis, M. M Doty, and A. L. 
Holmgren, Squeezed: Why Rising Exposure to Health Care Costs Threatens 
the Health and Well-Being of American Families (New York: The 
Commonwealth Fund, Sept. 2006).
---------------------------------------------------------------------------
    Although increasing numbers of adults lost access to employer-based 
coverage from 2000 to 2006, there has been virtually no change in the 
number of people covered by individual-market insurance. Loss of 
employer coverage has led to higher levels of uninsured individuals, 
not to higher levels of individual coverage.\13\ Those who are covered 
by individual health insurance plans are much less satisfied with their 
coverage than those covered by employer plans, and they are likely to 
drop such coverage if and when more desirable coverage becomes 
available from employers or public programs. Only a third of those with 
individual coverage rate their coverage as excellent or very good.\14\
---------------------------------------------------------------------------
    \13\ C. DeNavas-Walt, B. D. Proctor, and J. Smith, Income, Poverty, 
and Health Insurance Coverage in the United States: 2006 (Washington, 
D.C.: U.S. Census Bureau, Aug. 2007).
    \14\ S. R. Collins, J. L. Kriss, K. Davis, M. M. Doty, and A. L. 
Holmgren, Squeezed: Why Rising Exposure to Health Care Costs Threatens 
the Health and Financial Well-Being of American Families (New York: The 
Commonwealth Fund, Sept. 2006).
---------------------------------------------------------------------------
    The fundamental problem with the individual insurance market is 
that insurers are concerned that only those expecting to have high 
medical expenses will seek out coverage. Health expenditures are highly 
skewed: 10 percent of individuals account for 64 percent of health care 
outlays.\15\ Avoiding those who are sickest results in substantially 
greater profits for insurers.
---------------------------------------------------------------------------
    \15\ S. H. Zuvekas and J. W. Cohen, ``Prescription Drugs and the 
Changing Concentration of Health Care Expenditures,'' Health Affairs, 
Jan/Feb 2007 26(1): 249--257.
---------------------------------------------------------------------------
    Except in a few states that require insurers to have open 
enrollment and community-rated premiums, insurers typically screen 
applicants for health risks and exclude high-risk individuals from 
coverage or charge higher premiums.\16\ By design, underwriting 
practices discriminate against the sick and disabled, making coverage 
often unavailable at any price, or only at a substantially higher cost 
than incurred by healthier individuals. Non-group premiums are 20 
percent to 50 percent higher than employer plan premiums, and more than 
40 percent of total premiums are estimated to go toward administration, 
marketing, sales commissions, underwriting, and profits.\17\ Premiums 
typically climb steeply with age.\18\ Benefits are often inadequate, 
and premiums and risk selection practices are difficult for states to 
regulate.\19\
---------------------------------------------------------------------------
    \16\ N. C Turnbull and N. M. Kane, Insuring the Healthy or Insuring 
the Sick? The Dilemma or Regulating the Individual Health Insurance 
Market (New York: The Commonwealth Fund, Feb. 2005).
    \17\ D. Bernard and J. Banthin, Premiums in the Individual 
Insurance Market for Policyholders under age 65: 2002 and 2005, Medical 
Expenditure Panel Survey Statistical Brief #202, Agency for Health Care 
Research and Quality, April 2008; M.A. Hall, ``The Geography of Health 
Insurance Regulation,'' Health Affairs, March/April 2000:173--184; M. 
V. Pauly and A. M. Percy, ``Cost and Performance: A Comparison of the 
Individual and Group Health Insurance Markets,'' Journal of Health 
Policy, Politics and Law, Feb. 2000 25(1):9--26.
    \18\ D. Bernard and J. Banthin, 2008.
    \19\ K. Swartz, Reinsuring Health: Why More Middle Class People Are 
Uninsured and What Government Can Do (New York: Russell Sage 
Foundation, 2006).
---------------------------------------------------------------------------
    Those fortunate enough to have employer coverage are much better 
protected financially than those buying in the individual market--both 
because the employer pays a share of the premium and because the risks 
are pooled across the workforce. Only 18 percent of those with employer 
coverage pay premiums of $3,000 or more, compared with 54 percent of 
those who buy on the individual insurance market.
Public Programs Work
    As this Committee knows well, public programs today cover more than 
one of four Americans--83 million people--including elderly and 
disabled adults under Medicare; low-income families, the elderly, and 
the disabled under Medicaid; and low-income children under the State 
Children's Health Insurance Program (SCHIP). Covering many of the 
sickest and poorest Americans, these programs have improved access to 
health care for people who typically do not fare well in a private 
insurance market.
    Medicare and Medicaid have much lower administrative costs than 
private insurance--averaging around 2 percent, compared with 5 to 15 
percent for larger employers, 15 to 25 percent for small employers, and 
25 to 40 percent in the individual market. Medicare and Medicaid 
expenditures are also comparable or lower than expenditures by private 
insurance. Medicaid spending on health services for those without 
health limitations is lower than for those covered by private 
insurance. Medicare expenditures are high because they cover the 
elderly and disabled--but the rate of increase over the period 1969 to 
2003 has been one percentage point lower than under private plans for 
comparable benefits (annual increases of 9.0% vs. 10.1% for private 
insurance).
    Extending a Medicare-like plan to small businesses and individuals 
without access to employer-sponsored coverage would provide them with a 
much more affordable option.\20\ Estimated premiums for family coverage 
under a Medicare-like public plan (with benefits comparable to the 
standard Blue Cross Blue Shield option in the Federal Employees Health 
Benefits Program) would be $8,424 annually in 2008, compared with 
$12,106 in a typical employer private plan. This 30 percent reduction 
in premiums would go a long way toward making coverage much more 
affordable for small businesses and individuals than available either 
in the small business insurance market or in the individual insurance 
market.
---------------------------------------------------------------------------
    \20\ C. Schoen, K. Davis, and S.R. Collins, ``Building Blocks for 
Reform: Achieving Universal Coverage With Private and Public Group 
Health Insurance,'' Health Affairs, May/June 2008 27(3):646--57; G. 
Claxton, ``Health Benefits in 2007: Premium Increases Fall to an Eight-
Year Low, While Offer Rates and Enrollment Remain Stable,'' Health 
Affairs, Sept./Oct. 2007 26(5):1407--16.
---------------------------------------------------------------------------
    This premium differential occurs in part because Medicare buys 
physician and hospital services at a discount to rates paid by private 
insurers. Yet, a Medicare Payment Advisory Commission survey finds 
that, if anything, Medicare beneficiaries have a better experience than 
the privately insured in finding a physician and in getting an 
appointment promptly.\21\
---------------------------------------------------------------------------
    \21\ MedPAC Report to the Congress: Medicare Payment Policy, March 
2006, p.85.
---------------------------------------------------------------------------
The Way Forward: Rules Governing Private Markets and Role of Public 
        Programs
    We can no longer afford to ignore the fact that the U.S. is the 
only industrialized nation that fails to ensure access to essential 
health care for all its population. Yet, the U.S. spends twice per 
capita what other industrialized nations spend on health care. Since 
2000, the most rapidly rising component of health care outlays has been 
the net cost of private health insurance administration.\22\ The U.S. 
leads the world in the proportion of national health expenditures spent 
on insurance administration, and the nation could save $102 billion 
annually if it did as well as the best countries.\23\
---------------------------------------------------------------------------
    \22\ K. Davis, C. Schoen, S. Guterman, T. Shih, S. C. Schoenbaum, 
and I. Weinbaum, Slowing the Growth of U.S. Health Care Expenditures: 
What Are the Options? (New York: The Commonwealth Fund, Jan. 2007).
    \23\ The Commonwealth Fund Commission on a High Performance Health 
System, Why Not the Best? Results from the National Scorecard on U.S. 
Health System Performance, 2008, The Commonwealth Fund, July 2008.
---------------------------------------------------------------------------
    That expenditure does not buy us satisfaction. Americans are more 
likely to report hassles paying medical bills than those of other 
countries.\24\ A survey of U.S. adults found that 28 percent said that 
spending time on paperwork or disputes related to medical bills and 
health insurance in the past two years was a serious problem.\25\
---------------------------------------------------------------------------
    \24\ C. Schoen, R. Osborn, M. M. Doty, M. Bishop, J. Peugh, and N. 
Murukutla, Toward Higher-Performance Health Systems: Adults' Health 
Care Experiences in Seven Countries, 2007, Health Affairs Web Exclusive 
October 31, 2007 26(6):w717--w734
    \25\ S. R. Collins, J. L. Kriss, K. Davis, M. M. Doty, and A. L. 
Holmgren, Squeezed: Why Rising Exposure to Health Care Costs Threatens 
the Health and Financial Well-Being of American Families (New York: The 
Commonwealth Fund, Sept. 2006).
---------------------------------------------------------------------------
    The growth in insurance administrative cost in the U.S. has 
coincided with a major consolidation of the insurance industry. Two-
thirds of all managed care enrollees are now enrolled in the nation's 
10 largest managed care plans. The largest three health plans control 
over 50 percent of the market in all but four states.\26\ Operating 
earning margins for major insurers have also increased during this 
period, as increases in premiums have substantially outstripped 
increases in medical outlays.
---------------------------------------------------------------------------
    \26\ J. C. Robinson, ``Consolidation and the Transformation of 
Competition in Health Insurance,'' Health Affairs, Nov./Dec. 2004 
23(6):11--24.
---------------------------------------------------------------------------
    Massachusetts has shown how organizing an insurance connector, 
offering choices of plans, and reviewing premiums for reasonableness as 
a condition of being included in the connector can improve benefits and 
lower premiums. For example, a typical uninsured 37-year-old male faced 
a monthly premium of $335 pre-reform, compared with $184 post-reform, 
with a $2,000 deductible instead of a $5,000 deductible pre-reform.\27\ 
To provide choices but simplify decision-making, Massachusetts has 
offered three tiers of benefits--labeled gold, silver, and bronze--with 
actuarially equivalent policies within each tier.
---------------------------------------------------------------------------
    \27\ Jon Kingsdale, Executive Director, Commonwealth Health 
Connector, ``Design of Connector as an Element of NHI,'' July 23, 2008
---------------------------------------------------------------------------
    Insurance market reforms--including minimum requirements on 
insurers to cover everyone, the sick and healthy alike, at the same 
premium--could ensure the availability of coverage in all states. By 
organizing a national insurance connector that builds on the experience 
of Massachusetts, we could expand insurance choices to small businesses 
and individuals.
    The Federal Employees Health Benefits Program is another example of 
offering multiple plans. The most popular option is the Blue Cross Blue 
Shield standard option plan, which covers 58 percent of all 
enrollees.\28\ However, FEHBP does not establish minimum benefits for 
all plan offerings. It has offered high-deductible plans that qualify 
for health savings accounts; only 30,000 individuals out of the 8 
million covered have elected these plan options.
---------------------------------------------------------------------------
    \28\ Mark Merlis, Personal Communication, September 16, 2008.
---------------------------------------------------------------------------
    Offering small businesses and individuals without access to 
employer-sponsored coverage choice of insurance plans through an 
insurance connector has advantages as well as serious pitfalls. 
Attention needs to be given to how to design a framework for choice 
among plans that best achieves the goals of insurance--ensuring access 
to essential care and providing financial protection against burdensome 
medical bills--in a manner that is equitable and efficient. Structuring 
choices within such an insurance connector works best when:

    1.  A standard benefit adequate is defined and available to all. 
The benefits should be adequate to meet the two basic functions of 
insurance--ensuring access to essential care and providing financial 
protection from burdensome medical bills. A small number of choices of 
benefit packages can let enrollees pick plans closer to their needs, 
but a profusion of benefit packages undermines effective comparisons 
and choices. The Massachusetts system of three levels of benefits--
gold, silver, and bronze--has much to commend it.
    2.  Premiums to the enrollee for a standard plan are affordable, 
regardless of income. Income-related premium assistance--whether 
sliding-scale premiums or tax credits set to ensure that no one pays a 
standard plan premium in excess of a given threshold of income--is 
essential to guarantee affordability.
    3.  Enrollees have and use comparable information on benefits, 
expected out-of-pocket costs, adequacy of physician and other provider 
networks, and premiums across plans to make informed decisions.
    4.  Marketing practices which mislead or discriminate against the 
sick are prohibited and strictly enforced.
    5.  Market rules set the framework for efficiency and equity, 
including that insurers cover everyone (guaranteed issue and guaranteed 
renewal) and charge the same premium regardless of health status of 
enrollee (community rating or age bands), and that all individuals 
obtain health insurance (individual mandate).
    6.  Premiums are risk-adjusted to ensure that insurers do not have 
a financial incentive to enroll healthier people and enrollees do not 
have an incentive to avoid plans with sicker enrollees.
    7.  Insurers compete on the basis of the added value they bring in 
fostering quality and efficiency in the delivery of health care 
services and administration of claims.
    8.  Premiums are reasonable and have low administrative overhead; 
this can be ensured through negotiation or review of premiums or offer 
of a competitive public plan alternative

    To ensure stable, affordable health insurance coverage for all 
Americans will require a significant increase in the role of government 
to set the rules for the operation of private markets and reverse the 
trend toward shifting greater financial risk to families who are unable 
to bear that risk. Action is needed to guarantee affordable coverage 
that provides adequate financial protection and ensures that 
individuals can obtain needed care--the two essential functions of 
health insurance. This should include:

      Health insurance premium assistance to low-income and 
modest-income families who cannot afford family premiums, which now 
average more than $12,000 even under employer plans.
      Strengthening, not weakening, employer coverage.
      Setting national rules for the operation of individual 
health insurance markets or creating a national insurance connector, 
such as the one in Massachusetts, that makes affordable health 
insurance policies available to those without access to employer 
coverage. Structuring insurance choices through rules governing the 
operation of private markets, or through a health insurance exchange or 
connector, could ensure the availability of quality, affordable 
coverage to a larger number of individuals who are either uninsured or 
have inadequate or unstable coverage, or for whom premiums create major 
financial burdens.
      Offering a public plan, modeled on Medicare, to small 
businesses and individuals would lower premiums by 30 percent and 
increase the stability of insurance coverage.
      Building on Medicare, Medicaid, and SCHIP to cover older 
adults, the disabled who are in the two-year waiting period for 
Medicare, and low-income adults, as well as children. Private insurance 
markets do not serve these populations well.

    Finally, insurance reforms need to be part of a comprehensive 
strategy to bring about a high performance system that achieves better 
access, improved quality, and greater efficiency. This will require 
fundamental changes in the way health care providers are paid, so that 
financial incentives for providers are aligned with these goals, as 
well as a more organized health care system that takes full advantage 
of modern information technology and evidence-based medicine and 
spreads best practices. Rather than shifting more financial risk to 
families, both public programs and private insurers need to do more, 
both independently and in collaboration, to slow the growth in health 
care costs and transform the delivery of health care services to 
improve quality and enhance value for the money spent on health care.

                                 

    Chairman STARK. Thank you.
    Mr. Bodaken.

 STATEMENT OF BRUCE BODAKEN, CHAIRMAN AND CEO, BLUE SHIELD OF 
             CALIFORNIA, SAN FRANCISCO, CALIFORNIA

    Mr. BODAKEN. Thank you, Mr. Chairman and Members of the 
Subcommittee. Thank you for this opportunity to testify about 
the health insurance market.
    I am Bruce Bodaken, Chairman and CEO of Blue Shield of 
California, a not-for-profit health plan serving 3.4 million 
Californians.
    While more than 200 million Americans have insurance 
coverage that gives them access to some of the best medical 
care in the world, our system has gaping holes: nearly 47 
million uninsured, rapidly rising costs, and uneven quality. In 
my view the vast numbers of uninsured are root cause of the 
major problems afflicting the private, health insurance market. 
Only by extending coverage to all Americans can we solve those 
problems.
    Let's start with an overview of what is and what is not 
working in today's market, which is actually three markets, and 
it's already been mentioned: large group small group, and 
individual. The large group market works pretty well. The 
sizeable number of members in each group assures a balanced 
risk of both healthy and less healthy enrollees. In this 
market, health insurance works as it is supposed to. The heavy 
medical expenses of a few are spread across a broad population 
that also includes lots of healthy people with minimal expense. 
The result is a reasonable, per enrollee health insurance cost.
    The small group market works quite differently and not as 
well. Under Federal law insurers are prohibited from turning 
down any small business that applies for coverage based on the 
health status of their employees. For obvious reasons, employer 
coverage is more valuable for older and sicker employees, who 
may not be able to obtain coverage in the individual market.
    Since employers are not required to offer coverage and 
employees are not required to buy it, those who need it most 
are disproportionately represented in the small group insurance 
pool. As a result, premiums are much higher than in the large 
group market and if every small business provided coverage of 
course, that very same overall risk would improve and costs 
would thereby improve as well.
    Balanced risk is an even bigger concern for the individual 
market. Since there is no mandate to purchase insurance which 
would guarantee a broad risk pool, California and more than 40 
other states, which allow insurers to deny coverage or impose 
limits on the coverage offered to people with pre-existing 
health conditions.
    I can assure you that rejecting an applicant for coverage 
is not something I or any of my colleagues are comfortable 
with, but in a voluntary market in which people can go in when 
they're sick and go out when they're not, medical underwriting 
is the only way to ensure a balanced risk pool. Without it, 
premiums would even be higher, spiraling upward, depriving even 
more people of coverage.
    The only way to put the small group and individual markets 
on solid footing is through a universal coverage plan, covering 
all Americans, certainly covering all Californians. Since 2002, 
Blue Shield has supported a universal coverage plan with these 
basic elements. First, require every individual to have 
coverage and every business to contribute to their employee's 
coverage; provide subsidies to low income purchases, enroll 
everyone eligible for Medicare and SCHIP programs; and require 
insurers to accept all applicants, regardless of health status.
    The benefits of this approach, which is often referred to 
as shared responsibility are it builds off what works. It 
doesn't interfere with the current large group market, which 
functions well, and it would allow the vast majority of insured 
Americans to keep what they have today. It spreads the cost of 
achieving universal coverage broadly; and, last but most 
important, it gets everyone covered. This will enable the small 
group and individual markets to function the way we expect 
insurance markets to function by spreading risk across a broad 
population.
    While we don't have time today to explore the other 
benefits of universal coverage, I also believe that having 
everyone in the system is essential to reducing costs and 
improving the quality of care in the long term. For Blue 
Shield, it's an imperative based on the mission of our company, 
but it's also the right and economic thing to do to solve the 
issue of the uninsured.
    Again, thank you for inviting me to testify today. Blue 
Shield of California is eager to work with you on solutions to 
the serious problems facing our current health insurance 
system.
    [The prepared statement of Mr. Bodaken follows:]
 Statement of Bruce Bodaken, Chairman & Chief Executive Officer, Blue 
            Shield of California, San Francisco, California
    Mr. Chairman and members of the subcommittee, thank you for this 
opportunity to testify about how the health insurance market functions. 
My company, Blue Shield of California, is a not-for-profit health plan 
serving 3.4 million Californians. Expanding access to health coverage 
for every Californians is Blue Shield's mission. And it is my personal 
mission as well.
    While more than 200 million Americans have insurance coverage that 
gives them access to some of the best medical care in the world, our 
system has gaping holes.

      Nearly 46 million are without coverage, and tens of 
millions more have inadequate coverage.
      The cost of medical care is rising beyond the capacity of 
many Americans to afford coverage or to pay their share of the costs 
even when they have coverage. The federal government exacerbates this 
problem by underpaying hospitals and doctors for care provided through 
public programs, which results in cost shifting onto insured patients.
      Too often, Americans receive care that does not follow 
the best medical evidence, and prevention and wellness are not 
sufficiently valued.

    In my view, any discussion of market reform needs to start with the 
uninsured. In addition to being the most glaring failure of our health 
insurance system, the vast numbers of uninsured are also a root cause 
of the major problems afflicting the private health insurance market. 
Only by extending coverage to all Americans can we solve those 
problems.
The State of the Market
    Let's start with an overview of what is and is not working in 
today's market, which is actually three separate markets--large group, 
small group, and individual.
    The large group market works pretty well. Groups are rated based on 
the medical expenses incurred by their members, but the sizeable number 
of members in each group, combined with insurer requirements that a 
minimum percentage of employees take up coverage, assures a balanced 
mix of both healthy and less healthy enrollees. In this market, health 
insurance works as it is supposed to: the heavy medical expenses of a 
few are spread across a broad population that also includes lots of 
healthy people with minimal expenses. The result is reasonable per-
enrollee health insurance costs.
    The fact that a very high percentage of large employers continues 
to offer health coverage is a testament to the success of this market. 
Since 1999, offer rates among employers with more than 200 workers have 
consistently remained over 98%.\1\
---------------------------------------------------------------------------
    \1\ Kaiser Family Foundation and Health Research Educational Trust, 
Survey of Employer-Sponsored Health Benefits, 1999-2007.
---------------------------------------------------------------------------
    I do not mean to suggest that costs for large group coverage aren't 
high. At nearly $4,500 per year for a single worker and over $12,000 
per year for a family, they most certainly are.\2\ But in a country 
with average per-capita health expenditures of over $7,000, that's a 
comparatively good deal.\3\ The affordability problems that large 
employers increasingly face are not a function of market problems, but 
rather of surging medical care costs.
---------------------------------------------------------------------------
    \2\ KFF/HRET, Survey of Employer Sponsored Health Benefits, 2007
    \3\ CMS, National Health Expenditure Data for 2006
---------------------------------------------------------------------------
    The small group market works quite differently and not as well. 
Under federal law, insurers are prohibited from turning down any small 
business that applies for coverage based on the health status of their 
employees. Forty-six states also impose strict limits on health status 
rating in the small group market. In California, for example, the rate 
charged any small employer can't be more than 10% lower or higher than 
the average rate. Nonetheless, nearly half of all small businesses do 
not offer coverage to their workers, usually because they can't afford 
it.
    For a small employer with a very sick employee--a three-employee 
print shop with a cancer-stricken worker, for example--the rules assure 
that coverage can be purchased and that the employee's medical 
condition will have little impact on the premium charged to that 
particular business. However, the average premium charged in this 
market must reflect the average medical costs incurred by the employees 
of the small businesses that choose to buy coverage.
    For obvious reasons, employer coverage is more valuable for older 
and sicker employees who may not be able to obtain coverage in the 
individual market. Since employers are not required to offer coverage 
and employees are not required to buy it, those who need it most are 
disproportionately represented in the small group insurance pool. As a 
result, premiums are much higher than in the large group market. If 
every small business provided coverage, of course, the overall risk 
would improve, thereby moderating costs.
    Not surprisingly, virtually all the decline in employer-sponsored 
coverage occurred in the small-group market. Between 1999 and 2007, the 
percentage of businesses with three to eight employees that offered 
coverage declined from 56% to 45%.
    Unbalanced risk is an even bigger concern for the individual 
market. Since there is no mandate to purchase insurance, which would 
guarantee a broad risk pool, California and more than 40 other states 
allow insurers to deny coverage or impose limits on the coverage 
offered to people with pre-existing health conditions.
    I can assure you that rejecting an applicant for coverage is not 
something I or any of my colleagues are comfortable doing. But in a 
voluntary market, medical underwriting is the only way to ensure a 
balanced risk pool. Without it, premiums would spiral upward, depriving 
many more people of coverage.
    The high-risk pools that exist in California and many other states 
help to some extent to address the fallout from medical underwriting. 
But segregating the sickest people into a separate pool and then 
subsidizing their coverage with tax revenue or assessments on private 
insurance is neither efficient nor desirable. In California, chronic 
under-funding of the high-risk pool has resulted in high premiums, low 
benefit maximums, and frequent enrollment waiting lists.
    In sum, the large group market works well because each group 
represents a balanced pool of risks that allows insurance to spread 
risk across a broad population. But in the small group and individual 
markets, individual purchasers don't by themselves constitute balanced 
risk pools, and only through broad participation in the market can 
insurance spread the risk as it's designed to do. Unfortunately, in the 
current voluntary markets, we don't get sufficiently broad 
participation--and the dynamics currently in place assure that the 
problem will only get worse.
Fixing the Current Market
    The only way to put the small group and individual markets on solid 
footing is by covering everyone. It is good economics and frankly, it 
is the right thing to do. Blue Shield has been committed to universal 
coverage for a long time: In 2002, we proposed a plan we called 
``universal coverage, universal responsibility'' that we continue to 
advocate. It consists of these basic elements:

      Require every individual to have coverage.
      Require employers to provide coverage or make a minimum 
contribution towards the cost of coverage--``play-or-pay.''
      Provide subsidies to low-income purchasers.
      Establish regional purchasing pools or insurance 
exchanges to provide coverage options to individuals and employees of 
``pay'' employers.
      Make greater efforts to enroll all who are eligible for 
Medicaid and SCHIP.
      Require insurers to accept all applicants regardless of 
health status and to eliminate health as a rating factor.

    Our proposal closely resembles the coverage expansion legislation 
enacted in Massachusetts and the California plan sponsored last year by 
Governor Arnold Schwarzenegger and Assembly Speaker Fabian Nunez, which 
we strongly supported.
    The benefits of this approach, often referred to as ``shared 
responsibility'' are:

      It builds on what works. It doesn't interfere with the 
current large group market, which functions well. And it would allow 
the vast majority of insured Americans to keep the coverage they have 
today.
      It spreads the cost of achieving universal coverage 
broadly. We believe that is the fairest and most practical way to 
finance coverage expansion.
      Last but most important, it gets everyone covered. And it 
will enable the small group and individual markets to function the way 
we expect insurance markets to work--by spreading risk across a broad 
population.

    While we do not have time today to explore the other benefits of 
universal coverage, I believe having everyone in the system is 
essential to reducing costs and improving the quality of care over the 
long term. I look forward to other opportunities to discuss those 
issues.
    Blue Shield of California is eager to work with Congress and the 
new Administration on solutions to the serious problems facing our 
current health insurance system.

                                 

    Chairman STARK. Thank you.
    Dr. Feldman.

  STATEMENT OF ROGER FELDMAN, PH.D., BLUE CROSS PROFESSOR OF 
    HEALTH INSURANCE, UNIVERSITY OF MINNESOTA, MINNEAPOLIS, 
                           MINNESOTA

    Mr. FELDMAN. Mr. Chairman and Members of the Subcommittee, 
it is my pleasure to appear before you today to discuss the 
private health insurance market in the United States.
    As you noted in the advisory for this hearing, most people 
under 65 obtain their health insurance through the employment 
of a family member. Employer sponsored insurance or ESI has 
many advantages, but it also enjoys the tax subsidiary that 
costs over $200 bill per year.
    Today, I'll review the tax treatment of health insurance 
premiums and the history of the tax exemption for ESI, explain 
what's good about ESI and bad about the tax subsidy, and 
conclude that ESI can and should stand on its own without 
special tax assistance.
    The tax system touches health insurance premiums in four 
ways. Premiums paid by employers are exempt from taxation. In 
addition some employees can pay their share of the premium with 
pre-tax dollars. Self-employed workers enjoy a partial tax 
exemption. They can deduct premiums from income taxes, but not 
from their self-employment tax. And, finally, individuals who 
itemize Federal income taxes can deduct premiums and medical 
expenses that exceed seven and a half percent of their adjusted 
gross income.
    The tax subsidy for ESI arose almost by accident. During 
the second world war, employers needed more workers, but wages 
were controlled. Offering ESI was a way to attract workers. In 
1943 a tax court ruled that employers could provide health 
insurance without violating the wage controls and in 1954 the 
IRS code made the tax exemption permanent. The percentage of 
Americans covered by ESI jumped dramatically, but some of that 
occurred by buying out or crowding out existing individual 
insurance coverage.
    ESI has many advantages. It's available to everyone who 
qualifies, usually by working more than a minimum number of 
hours. No one is turned-down for coverage, yet protects people 
from premium increases due to changes in their own health risk, 
and it has low administrative cost compared with individual 
insurance.
    [Chart. Insert not included. Waiting for a response from 
the committee.]
    Mr. FELDMAN. This graph shows dramatically that the 
administrative cost of health insurance decreases as the size 
of the covered group increases. Large employers with more than 
10,000 workers have by far the lowest administrative cost. 
While ESI has many advantages, the tax subsidy that supports it 
is expensive. It distorts the choice of where people work. It 
encourages people to purchase insurance policies that are too 
generous, which subsidizes the purchase of too much medical 
care, and the subsidy is grossly unfair.
    In 2006 the tax subsidy cost over $200 billion. The largest 
part of the subsidy came from the Federal income tax exemption, 
but the exemption from Social Security and Medicare taxes was 
also significant. The tax subsidy was worth $1753 for one 
person and $3825 for a family. This will affect where people 
work. Once people take a job with ESI they can be locked into 
it. The subsidy reduces the number of people who go into 
business for themselves, and unequal tax treatment for the 
self-employed reduces entrepreneurial survival.
    The tax subsidy encourages people to buy more generous 
coverage which leads to more medical spending. Free care has 
some benefits, but the Rand Health Insurance experiment found 
that it had little or no measurable effect on health status for 
the average adult.
    The last issue here is tax fairness. Families earning more 
than $100,000 per year who comprise 14 percent of families in 
the United States have 26.7 percent of the benefit of the tax 
exemption. On the other hand, families earning less than 
$50,000 who comprise the majority of all families in the United 
States have only 28.4 percent of the tax advantage. In summary, 
any discussion of healthcare reform should include a close look 
at the current tax treatment of health insurance premiums.
    ESI has many advantages, but these advantages are supported 
by an inefficient and unfair tax subsidy. Health economists 
agree, virtually unanimously, with these conclusions. I believe 
that ESI can and should stand on its own without special tax 
assistance; and, if a tax subsidy is offered to ESI, it should 
be extended equally to the self-employed and to people who buy 
insurance that is not related to work.
    Thank you for letting me share these comments with you.
    [The prepared statement of Mr. Feldman follows:]
   Statement of Roger Feldman, Ph.D., Blue Cross Professor of Health 
       Insurance, University of Minnesota, Minneapolis, Minnesota
    It is my pleasure to appear before you today to discuss the private 
health insurance market in the United States. As you noted in the 
Advisory for this hearing, most people under age 65 in the United 
States purchase health insurance through the employment of a family 
member. This system of ?employer-sponsored insurance' or ESI provides 
many advantages to those who are covered. But it is also the 
beneficiary of a tax subsidy that cost the federal and state 
governments over $200 billion in 2006.
    In these prepared remarks I will briefly review the tax treatment 
of health insurance premiums and history of the tax exemption for ESI. 
This is followed by an explanation of what is good about ESI: no one is 
turned down for coverage; ESI protects people from premium increases 
due to changes in their own health risk; and it has low administrative 
costs compared with non-ESI or ?individual' insurance. Despite these 
advantages of ESI, the tax subsidy for ESI is seriously flawed: it is 
expensive; it distorts the choices of where people work; it encourages 
them to purchase insurance policies that are too generous, thereby 
subsidizing the purchase of too much medical care; and it is grossly 
unfair. I conclude that ESI can and should stand on its own without 
special tax assistance. If tax assistance is offered to ESI, it should 
be offered equally to the self-employed and to people who buy insurance 
that is not related to work. These tax policy changes would contribute 
to our shared goal of a fair and efficient tax system.
Tax Treatment of Health Insurance
    The most significant feature of the tax treatment of health 
insurance premiums is that premiums paid by employers are exempt from 
the federal income tax, state incomes taxes in 43 states, and Social 
Security and Medicare taxes.\1\ To picture the exemption, you might 
think of a worker who earns $50,000 per year before taxes and who does 
not have ESI. That worker's combined tax bill would be $10,810 if he or 
she were representative of other workers at that income level. Now 
suppose the worker's employer offers to contribute 100% of the cost of 
an ESI policy with a $10,000 premium and it reduces the worker's wages 
to $40,000 to offset its contribution. The worker's tax bill would fall 
to $7,780, for a tax saving of $3,030. In other words, the tax subsidy 
reduces the cost of insurance for that worker by roughly 30%. On 
average, the tax exemption reduced the cost of ESI for all covered 
workers by 35% in 2006.\2\
---------------------------------------------------------------------------
    \1\ For detailed information on the tax treatment of health 
insurance, see the Henry J. Kaiser Family Foundation, ``Tax Subsidies 
for Health Insurance: An Issue Brief,'' July 28, 2008, available at 
http://www.kff.org/Insurance/7779.cfm, and Leonard E. Burman, 
``Statement before the House Committee on the Budget,'' October 18, 
2007, available at http://www.taxpolicycenter.org/publications/
url.cfm?id=901121. My example of the worker who earns $50,000 is taken 
from the first source.
    \2\ Thomas M. Selden and Bradley M. Gray, ``Tax Subsidies for 
Employment-Related Health Insurance: Estimates for 2006,'' Health 
Affairs, 25:6 (November, 2006), pp. 1568-1579.
---------------------------------------------------------------------------
    In addition to the tax exemption for employer-paid premiums, many 
employees can pay their share of the ESI premium with pre-tax dollars 
through ?Section 125' plans (named for that section of the Internal 
Revenue Code). There is no national data on the number of employees who 
have Section 125 plans, but I think almost all self-insured firms that 
bear medical risk without relying on an insurance company are capable 
of offering them. Furthermore, some states have required or are 
considering a requirement that all employers above a minimum size must 
offer Section 125 plans.
    People who are self-employed are subject to the federal income tax 
as well as a self-employment tax that is equivalent to Social Security 
and Medicare taxes. These people may deduct health insurance premiums 
for themselves and their families from their federal income tax (up to 
the net profit of their business) but not from their self-employment 
tax. Thus, they have a partial tax subsidy compared with those who have 
ESI.
    Any taxpayer who itemizes federal income tax deductions can deduct 
premiums and medical expenses that exceed 7.5% of their adjusted gross 
income. This is the only premium tax deduction available to those who 
do not have ESI or are not self-employed, and of course it is limited 
to taxpayers who itemize deductions, have large bills, and have federal 
tax liabilities.
History of the ESI Tax Exemption
    The linkage of health insurance to employment in the United States 
arose almost by accident. During the Second World War there were 
critical domestic labor shortages, but wage controls prevented 
employers from offering higher wages to attract employees. Employers 
found they could circumvent these controls by offering unregulated 
fringe benefits, including health insurance. In 1943, a tax court gave 
its blessing to this arrangement. Following the War, the tax code was 
interpreted as continuing to favor employer-paid health benefits, but 
their legal status remained in limbo until 1954, when the Internal 
Revenue Code made the tax exemption permanent.
    The permanent tax exemption for ESI transformed the private health 
insurance market in the U.S. An economist recently rediscovered two 
surveys from 1953 and 1958, before and after the permanent tax 
exemption was granted.\3\ Respondents to each survey reported on their 
health insurance coverage during the prior year. The percentage of 
households in the U.S. with ESI jumped from 47% in 1952 to 66% in 1957, 
but overall health insurance coverage rose by a smaller amount, from 
63% to 76% of households. Thus, the ESI tax exemption ?crowded out' 6 
percentage points of the market for individual coverage, which shrank 
from 16% of households in 1952 to 10% in 1957. The individual market 
remains small today, with only about 13.6 million covered lives in 2006 
among people under age 65, compared with 157.6 million covered lives in 
ESI.\4\
---------------------------------------------------------------------------
    \3\ Melissa A. Thomasson, ``The Importance of Group Coverage: How 
Tax Policy Shaped U.S. Health Insurance,'' American Economic Review, 
93:4 (September, 2003), pp. 1373-1384.
    \4\ National Center for Health Statistics, Health, United States, 
2007 With Chartbook on Trends in the Health of Americans, Hyattsville, 
MD, 2007, Tables 136 and 137, available at http://www.cdc.gov/nchs/
data/hus/hus07.pdf
---------------------------------------------------------------------------
What Is Good About ESI?
    As the economic study cited above showed, many people in the United 
States had ESI even before it had a tax exemption. The reason is that 
ESI has many advantages for those who are eligible. The first of these 
advantages is that no one is denied coverage. Everyone who qualifies 
for coverage, which is usually based on working a minimum number of 
hours and may involve a minimum duration of employment, will be offered 
coverage.
    In contrast, people who apply for individual coverage may be turned 
down. We don't know how many applicants for individual coverage are 
turned down nationally, but several small-scale estimates have been 
made. In one of these, researchers posed as hypothetical applicants, 
asking insurers to consider them for coverage as if they were real 
consumers.\5\ Of 420 applications for coverage, 154 were rejected. 
`Bob,' a 36-year old consultant who injured his knee in college and had 
it surgically repaired 10 years ago, was turned down 12% of the time. 
?Greg,' a 36-year old writer who is HIV-positive, was rejected 100% of 
the time. The number of truly uninsurable individuals such as Greg is 
probably about 1 percent of the population, but Bob should be able to 
obtain insurance, and the failure of the individual market to offer it 
is a serious problem. Another study using data from a large insurer in 
the individual market in one state found that 14% of the applications 
were rejected--also a much higher rate than the 1 percent who are 
likely to be truly uninsurable.\6\
---------------------------------------------------------------------------
    \5\ Karen Pollitz, Richard Sorian, and Kathy Thomas, ``How 
Accessible Is Individual Health Insurance for Consumers in Less-than-
Perfect Health?'' Kaiser Family Foundation, June, 2001, available at 
http://www.kff.org/insurance/3136-index.cfm
    \6\ Mark V. Pauly and Len M. Nichols, ``The Nongroup Health 
Insurance Market: Short on Facts, Long on Opinions and Policy 
Disputes,'' Health Affairs, web exclusive, October 23, 2002, pp. W325-
W344, available at http://www.healthaffairs.org. Other applicants in 
this study were offered insurance, but at premiums higher than the 
standard rate for low risks. It is impossible to determine whether 
these premiums quotes were actuarially fair.
---------------------------------------------------------------------------
    Finally, the state high-risk pool known as the Minnesota 
Comprehensive Health Association (MCHA) offers an opportunity to view 
the actual health care costs for people who were turned down by private 
insurers. On average, over the years from 1994 through 2004, MCHA 
claims costs were about twice the normal premium rates for those who 
held coverage, adjusted by age, sex, and the number of covered 
dependents.\7\ Thus, while those turned down for coverage had higher-
than-normal costs, their costs were not so wildly high that they were 
uninsurable.
---------------------------------------------------------------------------
    \7\ Minnesota Department of Health, ``Minnesota Health Care Markets 
Chartbook, Section 5: Public Health Insurance Programs,2004,'' 
available at http://www.health.state.mn.us/divs/hpsc/hep/chartbook/
section5.ppt
---------------------------------------------------------------------------
    The second advantage of ESI is that premiums are based on the 
experience of the group, not the individual policy-holder. This means 
that ESI protects people, except those in very small groups, from 
premium increases due to changes in their own health risk. Economists 
refer to this protection as `guaranteed renewability',\8\ and in my 
opinion it is extremely important. Imagine a patient who is diagnosed 
with pancreatic cancer. In 1999-2000, the cost per month of this 
disease was $7,616.\9\ ESI policy-holders are protected against 
increases in their premiums due to the onset of pancreatic cancer and 
other costly diseases.
---------------------------------------------------------------------------
    \8\ Mark V. Pauly, Howard Kunreuther, and Richard Hirth, 
``Guaranteed Renewability in Insurance,'' Journal of Risk and 
Uncertainty, 10:2 (March, 1995), pp. 143-156.
    \9\ Stella Chang, Stacey R. Long, Lucie Kutikova, Denise Finley, 
William H. Crown, and Charles L. Bennett, ``Estimating the Cost of 
Cancer: Results on the Basis of Claims Data Analysis for Cancer 
Patients Diagnosed with Seven Types of Cancer During 1999 to 2000,'' 
Journal of Clinical Oncology, 22:17 (September 1, 2004), pp. 3524-3530.
---------------------------------------------------------------------------
    Individual insurance can offer some of this protection, but not as 
effectively as ESI. The reason is that people who do not develop cancer 
can drop out of the individual-market pool and find lower premiums on 
their own. This prevents insurance policies in the pool from covering 
as much of the cost of cancer as patients would want. It is also worth 
mentioning that ESI provides guaranteed renewability only as long as 
the policy-holder remains employed, and that states may impose 
guaranteed renewability on the individual market through state 
insurance laws.
    The third advantage of ESI is lower administrative costs compared 
with individual insurance. There is a strong, negative relationship 
between the number of employees covered by ESI and the administrative 
cost as a percentage of benefit costs. Interestingly, the most widely-
cited source for this relationship is a study by a private consulting 
company that is over 20 years old.\10\ It would be worth replicating 
this study to determine if the internet has reduced the administrative 
costs of individual insurance.
---------------------------------------------------------------------------
    \10\ Hay Huggins Co. estimate, 1987, reprinted in U.S. House 
Committee on Ways and Means, Health Care Resource Book, Washington, DC: 
U.S. Government Printing Office, April 16, 1991, p. 107.
---------------------------------------------------------------------------
What's Bad about the Tax Subsidy?
    Despite the advantages of ESI, the tax subsidy that supports it has 
several serious disadvantages.
    It is expensive: The tax subsidy for ESI premiums is the largest 
federal income tax expenditure, exceeding the cost of the deductibility 
of mortgage interest on owner-occupied homes by 80% in fiscal year 
2008.\11\ The total cost of the ESI premium subsidy in 2006, including 
foregone Social Security and Medicare taxes and state income taxes, was 
$208.6 billion.\12\ This does not include the tax subsidy for 'Section 
125' plans used by some employees to pay their share of the ESI premium 
with pre-tax income.
---------------------------------------------------------------------------
    \11\ Office of Management and Budget (OMB), Analytical 
Perspectives: Budget of the United States Government, Fiscal Year 2008, 
Washington, DC: OMB, 2007, available at http://www.whitehouse.gov/omb/
budget/fy2008/apers.html
    \12\ See reference #2.
---------------------------------------------------------------------------
    It distorts the choices of where people work: In 2006, the average 
tax subsidy for each person with single-coverage ESI was $1,573 and the 
subsidy for family-coverage ESI was $3,825.\13\ No one knows exactly 
how much the subsidy affects the choices of where people work, but the 
effect could be substantial. Suppose the average person is an auto 
repair worker who could earn $57,000 at a repair shop that offered ESI 
and $60,000 at one that did not offer ESI. By ?earn,' I mean the total 
value of his repair work before paying the health insurance premium 
would be $60,000 or $57,000. His potential earnings at the shop that 
didn't offer ESI are higher because that shop has more clients who need 
his special skills in auto body painting. If the worker was otherwise 
indifferent between the two jobs (e.g. they had the same hours, were 
equally distant from his home, etc.) and he valued family-coverage 
health insurance at its cost, he would take the job with health 
insurance because the tax subsidy made it more attractive. In doing so, 
he would lose $3,000 of earnings. The total loss of earnings throughout 
the economy could be very large.
---------------------------------------------------------------------------
    \13\ See reference #2.
---------------------------------------------------------------------------
    While estimates of the effect of the tax subsidy on job choice are 
lacking, we do have evidence that it reduces mobility between jobs. Not 
all studies find this effect, but those that do indicate that people 
with ESI switch jobs about 25% less frequently than those without 
ESI.\14\
---------------------------------------------------------------------------
    \14\ Jonathan Gruber and Brigitte C. Madrian, ``Health Insurance, 
Labor Supply, and Job Mobility: A Critical Review of the Literature,'' 
National Bureau of Economic Research, NBER Working Paper No. W8817, 
March, 2002, available at http://www.nber.org/papers/w8817
---------------------------------------------------------------------------
    The ESI subsidy also reduces the number of people who go into 
business for themselves. One interesting study recently compared 
changes in self-employment among residents of New Jersey, after that 
state facilitated access to health insurance that was not linked to 
employment, with Pennsylvania where there was no change in access.\15\ 
There was a substantial increase in self-employment in New Jersey, 
especially for unmarried, older, and less-healthy individuals.
---------------------------------------------------------------------------
    \15\ Philip Decicca, ``Health Insurance Availability and 
Entrepreneurship: Evidence from New Jersey,'' McMaster University, 
Department of Economics, September, 2007, available at http://ssrn.com
---------------------------------------------------------------------------
    Finally, the deductibility of health insurance premiums for the 
self-employed has a positive effect on entrepreneurial survival.\16\ 
The effect of the deduction on married filers (who are often older and 
have dependent family members) is greatest. This research suggests that 
extending the same tax subsidy to the self-employed as to those with 
ESI would increase entrepreneurial activity in the U.S. economy.
---------------------------------------------------------------------------
    \16\ Tami Gurley-Calvez, ``Health Insurance Deductibility and 
Entrepreneurial Survival,'' report prepared for the Small Business 
Administration under Contract No. SBAHQ-04-M-0536, April, 2006, 
available at http://www.sba.gov/advo/research
---------------------------------------------------------------------------
    It Encourages More Coverage and More Medical Spending: As I 
mentioned above, on average, the tax exemption reduced the cost of ESI 
for all covered workers by 35% in 2006. By reducing the cost of ESI, 
the tax subsidy encourages workers to buy more coverage, such as 
policies with free medical care at the point-of-purchase. One study 
suggests that the tax subsidy increases coverage (measured by total 
insurance spending) by 29%\17\
---------------------------------------------------------------------------
    \17\ Jonathan Gruber and Michael Lettau, ``How Elastic Is the 
Firm's Demand for Insurance?'' Journal of Public Economics, 88 (2004), 
pp. 1273-1293.
---------------------------------------------------------------------------
    Other research shows that more insurance coverage leads to more 
medical spending. The classic RAND Health Insurance Experiment found 
that people with free care spent 40% more than those with a deductible 
of about $4,000 in today's prices.\18\ In general, the benefits of the 
additional care were not worth the extra cost or they could be achieved 
at lower cost. The RAND researchers found that the additional care had 
beneficial effects on blood pressure levels for poor people with high 
blood pressure, but a one-time screening examination achieved most of 
the reduction that free care achieved. For the average adult, free care 
``had little or no measurable effect on health status.'' \19\
---------------------------------------------------------------------------
    \18\ Joseph P. Newhouse, et al., Free for All? Lessons from the 
RAND Health Insurance Experiment, Cambridge, MA: Harvard University 
Press, 1993.
    \19\ See reference #18, p. 243.
---------------------------------------------------------------------------
    It is Grossly Unfair: Because upper-income families demand more 
generous insurance coverage and in most cases have higher tax 
liabilities than lower-income families, they get most of the benefits 
of the ESI tax exemption. In 2004, families earning more than $100,000 
got 26.7% of the tax benefits, although they comprised only 14% of 
families in the U.S.\20\ Families earning less than $50,000 got only 
28.4% of the tax benefits although they comprised more than half 
(57.5%) of U.S. families. This is grossly unfair.
---------------------------------------------------------------------------
    \20\ John Sheils and Randall Haught, ``The Cost of Tax-Exempt 
Health Benefits in 2004,'' Health Affairs, web exclusive, February 25, 
2004, available at http://www.healthaffairs.org
---------------------------------------------------------------------------
    For another snapshot of the distributional effects of the ESI tax 
subsidy, we can look at the average subsidy by selected establishment 
characteristics. In establishments where more than half of workers 
earned less than $10.43 per hour in 2006, the average subsidy per 
employee was $637 and the average subsidy per covered employee was 
$2,268.\21\ The difference is due to the fact that many low-wage 
establishments do not offer health insurance, or their workers do not 
take up an offer if they have one. In establishments where more than 
half of workers earned more than $23.07 per hour, the average subsidies 
were much larger: $2,525 per worker and $3,283 per covered worker. This 
also is grossly unfair.
---------------------------------------------------------------------------
    \21\ See reference #2.
---------------------------------------------------------------------------
Summary Comments
    Any discussion of health care reform should include a close look at 
the current tax treatment of health insurance premiums. Currently, ESI 
premiums are exempt from income and payroll taxes, while insurance 
purchased by individuals and self-employed workers lacks some or all of 
these tax privileges. ESI has many advantages including guaranteed 
issue, guaranteed renewability, and low administrative costs, but these 
advantages are supported by an inefficient and unfair tax subsidy.
    These conclusions are not controversial among health economists, 
who agree, virtually unanimously, that excluding ESI premiums from 
taxable compensation causes workers to demand more insurance than they 
would in the absence of that exclusion.\22\ There is also general 
agreement that this higher level of coverage leads to inefficiently 
high levels of health care spending, and finally, that the tax subsidy 
is ?upside-down' with the largest subsidies going to high-income 
taxpayers.\23\
---------------------------------------------------------------------------
    \22\ Mark Pauly, ``The Tax Subsidy to Employment-based Health 
Insurance and the Distribution of Well-being,'' Law and Contemporary 
Problems, 69:83, (Autumn, 2006), pp. 83-101.
    \23\ See reference #1, Burman testimony.
---------------------------------------------------------------------------
    I believe there is also general agreement that the tax subsidy 
should be reformed so that it does not encourage consumption of more 
insurance on the margin, and so it should not disproportionately 
benefit high-income taxpayers.
    There is less unanimity that the subsidy should be extended equally 
to individual insurance as to ESI. The hesitancy to subsidize 
individual insurance is based on two premises: ESI has advantages 
compared with individual insurance; and ESI could not stand on its own 
without the subsidy. In my opinion these premises are self-
contradictory: ESI can and should be allowed to stand on its own 
because of the advantages it offers.
    I conclude that tax assistance should be offered equally to the 
self-employed and to people who buy insurance that is not related to 
work. On the whole, this would be a good thing. It would improve the 
efficiency of labor markets by promoting better matches between 
workers' skills and the jobs they seek. It would increase workers' 
productivity and the supply of entrepreneurs, both of which are needed 
at this critical time for our economy. Finally, it would make the tax 
system more fair and even-handed.
    Thank you for allowing me to share these comments with you today.

                                 

    Chairman STARK. Thank you, Dr. Feldman.
    Ms. Kofman.

 STATEMENT OF MILA KOFMAN, J.D., SUPERINTENDENT OF INSURANCE, 
           MAINE BUREAU OF INSURANCE, AUGUSTA, MAINE

    Ms. KOFMAN. Good morning.
    Chairman STARK. Good morning.
    Ms. KOFMAN. I am the superintendent of insurance in Maine. 
My agency serves and protects the public through regulation and 
oversight of the insurance industry. It is my job to ensure 
that insurance companies keep their promises.
    We do that through vigil and financial oversight and 
licensing, examinations of insurers activities, and our review 
and approval of premiums and insurance products. Prior to my 
appointment I was an associate research professor at Georgetown 
University where I studied health insurance markets across the 
nation.
    Mr. Chairman, I thank you and the Committee for your 
leadership and willingness to examine the private, individual 
health insurance market and its problems. It is both an honor 
and a privilege to be here today.
    I believe it would be optimal for us to address the 
healthcare crisis in America in its entirety, and for the 
Federal government to ensure that all Americans have access to 
affordable, adequate, and secure health coverage.
    Maine has been at the forefront of reforms, developing 
innovative initiatives to help finance medical care. Governor 
Baldacci has been a leader in establishing meaningful new 
health coverage options for individuals, coverage that actually 
works for people who are sick.
    Today I will focus on the individual health insurance 
market. In most states it is inaccessible, unaffordable and 
inadequate. It is not a free market where purchasers have 
meaningful options. A free market assumes that anyone and 
everyone who wants to buy a product can choose among sellers 
competing for their business. Insurance companies do not, I 
repeat, they do not compete to insure sick people.
    An insurance company's success depends on its ability to 
minimize its risk. This provides incentives to cherry-pick 
healthy people and limit the number of unhealthy people 
covered. It creates an individual market, which many Americans 
cannot access, because they have or had a medical condition. 
Even minor conditions like an allergy could be the basis for 
not selling you a policy. In most states, insurers are allowed 
to charge higher rates for people with medical conditions. 
Assuming your are not rejected and can afford the high rate, 
the insurer may decide not to cover your existing condition, 
ever.
    The individual market is not truly a free market. A free 
market assumes that the consumer has the information needed to 
make an informed decision and what you bargain and pay for you 
actually get. In reality, full contracts are not available 
prior to enrollment. Summaries may be misleading and 
conflicting and vague contract language makes it difficult to 
determine how medical care is covered.
    Furthermore, insurers can change benefits after you enroll. 
Your drug benefit can be reduced and you're still paying the 
same premium. In addition, there are adequacy problems. For 
example, Mary, paying more than $500 a month in 2005 believed 
she was protected. Mary was diagnosed with cancer. Each 
chemotherapy injection was nearly $5500. Her policy had a 
maximum daily benefit of $1500 for both chemo and radiation.
    Affordability is a problem also. Some argue that coverage 
would be cheaper without guaranteed issue and adjusted 
community rating requirements; however, states without these 
have much higher rates of uninsured. Texas, New Mexico, 
Oklahoma, for example, states without these consumer 
protections, one in five people are uninsured compared to one 
and ten in Maine.
    For the last 20 some years, some have looked at high risk 
pools to address the cost. In reality, many have had 
significant funding problems: high premiums, waiting lists, 
inadequate benefits, exclusions for existing medical needs, and 
high out-of-pocket obligations. Although 34 states have these 
pools, less than 200,000 nationwide are enrolled.
    Many factors contribute to the price of insurance: the cost 
of medical care, administrative costs and profits. In recent 
years, all three have increased. Profits have been very 
healthy. Nationally major health insurers reported combined 
profits of $12.6 billion last year. While American families 
struggled and made sacrifices to stay insured paying double-
digit premium increases, it was reported that the former CEO of 
a large insurance company received a bonus of $1.6 billion 
worth of stock options in addition to salary.
    In conclusion, all aspects of the individual market should 
fully be examined and better understood before significant 
coverage expansion efforts of this market are undertaken.
    I thank you for your time.
    [The prepared statement of Ms. Kofman follows:]
Statement of Mila Kofman, Superintendent of Insurance, Maine Bureau of 
                       Insurance, Augusta, Maine


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman STARK. Thank you.
    I want to thank all the witnesses. I think I'll just make a 
couple of comments and perhaps the witnesses would care to 
comment on my comments.
    Bruce, I agree with you. You and I have talked often that 
if we allow medical underwriting, we can't have an individual 
market that will serve individuals very well, so that if you 
followed Dr. Feldman's advice and gave all of us a voucher or a 
tax deduction that we could go shopping, unless we really 
change the way that individuals receive their medical insurance 
they'd have problems.
    I am concerned that this idea of doing away with the 
present tax structure it would do nothing to change what 
employers do. I think a survey recently showed less than 4 
percent of employers said they would change their plans if the 
plans were not deductible by the employee. The employer gets to 
deduct it anyway.
    One of the unintended consequences in the initial 
President's plan is that for very low income people their 
Social Security benefits would be reduced by about a third, 
because the new deduction given to them in a sense reduces the 
amount of salary in which they pay Social Security taxes; and, 
if it's a $12,000 deduction, you're making 30,000 bucks a year, 
it cuts into your Social Security benefits pretty severely. I 
guess that could be corrected with a tax deduction, but there 
are serious problems there.
    The other issue is that we do get $200 billion in payments 
now out of this system for better or for worse; and, if we're 
going to spend $700 billion to bail out Wall Street, I don't 
know where we could get that 200 billion out of the employers 
without somebody up here on this Committee saying tax. And 
that's a very unpopular word on this Committee. So I see some 
structural problems on getting there.
    Further, I think that programs that rely on consumer-driven 
plans tend to impact most heavily on low income. Those of us 
with generously taxpayer-paid salaries can afford to shop, can 
afford several thousands of dollars of co-pays under our 
generous benefits that we get, but people closer to a couple 
times the poverty level don't have that option. And, I think 
most studies, even Rand study back in the eighties, showed that 
when faced with higher deductibles or co-pays, people forego 
needed medical care and needed prescriptions. And I don't think 
we want to endorse plans that would drive people away.
    Secondly, just to comment on the consumer driven plans, 
people have suggested more transparency in pricing. Many 
physicians have suggested that this puts the purchaser in the 
business of becoming a primary care doctor. It isn't a question 
of deciding how much a tests costs. It's what tests should you 
buy. And as Mr. Bodaken and I have discussed in the past, we 
want to expand the number of codes and the number of types of 
tests have expanded dramatically. And it would be beyond most 
of us without medical training.
    It would be beyond our comprehension to decide what kind of 
a test we ought to buy. And then you get into the question, for 
example, if somebody decides they want to go to the low-cost 
hospital, but the low-cost surgeon, they find, can't practice 
at the low-cost hospital; so we have an inter-relation between 
the providers of medical care.
    And just starting to price this on the Internet could cause 
some problems that I don't think we're ready to deal with yet 
and could drive down the quality of our care, which is driven 
pretty much by our primary care doctor or whomever leads the 
direction of our medical care. So, while I am a great believe 
in shopping for the best price, I do find that in some of those 
areas we would have some problems, and I guess I would 
summarize it by suggesting that all the witnesses have brought 
forth some good suggestions in how we can improve what we are 
doing.
    If the underlying goal is to first take care of the 46, 50 
or 80 million people who are under-insured, my instinct is to 
leave the major plans in place, recognizing that over the 
longer run, and by that I would suggest 10 years, they will 
change. But I just could end these observations by suggesting 
that if anybody in this room could imagine a worse political 
situation than to have the Secretary of Health and Human 
Services announce that their health insurance plan--all 200 
million Americans who have health insurance--would end next 
January 1st and that Pete Stark was writing a plan which they 
would receive in the mail, I can conceive of no one item that 
would be more apt to cause a revolution in this country against 
people who would just be afraid of what Washington would be 
doing.
    So I think that states like Maine, Massachusetts--I wish 
California had been able to join them--Hawaii, who are moving 
toward plans to ensure coverage, are moving us gradually there. 
And I think anything we can do here to help it is important, 
and I appreciate all of your contributions in terms of 
suggestions of how we can facilitate that plan.
    Unless there's anybody who has a burning desire to comment 
on that, I would recognize Mr. Camp for his inquiries.
    Mr. CAMP. Thank you. Thank you all for being here.
    And Dr. Feldman, you state that employer-sponsored 
insurance can and should stand on its own without special tax 
assistance. And what effect would eliminating the employer 
exclusion from employees' income of health benefits have on the 
number of employers offering health benefits?
    Mr. FELDMAN. Some small firms would drop their health 
insurance coverage. A study by John Gruger and Michael Lettow 
at the Massachusetts Institute of Technology suggests that the 
percentage of small firms offering health insurance would fall 
from about 73 percent to 60 percent.
    Gene Abraham from the Council of Economic Advisors and I 
predict that about 8.4 million workers and their dependents 
would lose their ESI coverage. Depending on how a subsidy for 
individual coverage was structured, however, we predict that 
about 90 percent of the workers who are dropped would take up 
individual coverage.
    Mr. CAMP. And do employers have any incentives to offer 
health benefits, such as retaining quality workers or obviously 
having healthy workers?
    Mr. FELDMAN. Yes, they do, Mr. Congressman.
    The list of advantages of ESI that I presented is only a 
partial list due to time constraints. One of the strong 
advantages that employers have from offering ESI is that it 
improves the productivity of their workforce. Some studies have 
estimated that every dollar invested in employee wellness 
programs through health insurance can yield between two and 
three dollars of productivity savings. Fewer workers are absent 
and those who come to work are in better health and are more 
productive.
    Mr. CAMP. This Committee has heard estimates of the number 
of under-insured in America. Are there any Americans who are 
over-insured because of incentives the Tax Code provides to 
over-purchase health insurance or over insure?
    Mr. FELDMAN. I'll make a controversial statement, but one 
that I believe in. I think almost all workers who have ESI are 
over-insured, and that represents about 157 million 
individuals. The reason that they're over-insured is because 
the tax subsidy encourages them to buy policies that are more 
generous than they otherwise would buy.
    One authoritative study suggested that the increase in 
insurance purchase raises costs by about 30 percent.
    Mr. CAMP. A recent analysis of Senator John Edwards' 
healthcare plan by the Lewin Group found that imposing a 
mandate on employers to offer healthcare benefits or pay a tax 
would result in 52 million Americans losing their employer-
sponsored health coverage.
    Do you believe a play-or-pay mandate is a good idea?
    Mr. FELDMAN. Well, I'm not going to respond directly to the 
Lewin results, because I don't know how much credibility a 
particular estimate has. But, I believe three things about a 
play-or-pay mandate. Number one, it's a tax on labor, and not a 
very particularly transparent tax either.
    Number two, some employers would drop ESI coverage. They 
would find it would be more advantageous to pay the tax rather 
than continuing to offer ESI. And, number three, some low 
income workers would lose their jobs.
    Mr. CAMP. All right.
    Ms. Kofman, when Maine's health program went into effect it 
was to cover all 128,000 uninsured in Maine, but we're finding 
that fewer than 4,000 have been enrolled in the new program; 
and, in fact, the program has closed, I understand.
    What would you attribute to this inability to be more 
successful in reaching the uninsured?
    Ms. KOFMAN. Thank you for your question.
    Dirigo Choice, which is a bridge program that helps people 
who don't qualify for public insurance like Medicaid and can't 
afford private coverage because it's too expensive, through 
Dirigo Choice, small businesses and self-employed people and 
others can access private coverage that is negotiated for by 
the state for them. There have been over 23,000 people who've 
been served by the program. The challenge, of course, is money, 
is financial. It's how to pay for the program.
    You are absolutely correct that currently new enrollment is 
limited, and it's mostly because of the financial challenges 
that the program faces. And I welcome an opportunity to work 
with you to figure out a way to help us and other states to 
infuse more dollars into these innovative programs.
    Mr. CAMP. Thank you.
    I see my time has expired. Thank you, Mr. Chairman.
    Chairman STARK. Mr. Doggett, would you like to inquire?
    Mr. DOGGETT. Thank you for your testimony.
    Dr. Davis, you may be familiar with a report the National 
Women's Law Center is releasing today that shows that the 
overwhelming majority of these private health plans don't 
include maternity coverage. Or, if they do, it is in the form 
of a supplemental rider that has a long waiting period and is 
prohibitively expensive.
    I recently received a communication from a realtor in 
Austin who said: "I'm considering not having a baby because I'm 
concerned that as a self-employed person, I will have out-of-
pocket expenses exceeding $10,000. I have health insurance, but 
it doesn't cover maternity. I'm a college-educated person, but 
I am afraid of the healthcare cost in this country.''
    How can insurers in the individual insurance market claim 
to meet the needs of women if maternity coverage is so 
difficult to get and is so inadequate?
    Ms. DAVIS. I think you've just pointed to one of the major 
differences between employer coverage and coverage in the 
individual market. When people get employer coverage, they get 
it by virtue of getting a job or being the spouse of a worker. 
And it would cover maternity care on the same basis as other 
services, perhaps even lower cost-sharing for pre-natal care.
    But, as you point out, if you are buying coverage in the 
individual market, and as Mr. Bodaken stressed, the insurers 
are concerned that you're only buying coverage because you 
expect to be pregnant, expect to use the services. So, as a 
result, as you stress they either don't cover maternity 
benefits at all or they charge very high rates for that 
coverage.
    I think we all know that investment in pre-natal care has 
high pay-off in terms of fewer low, birth-weight babies, fewer 
premature babies. A number of years ago, the Institute of 
Medicine estimated that every dollar spent on prenatal care 
saved three dollars because of having healthier babies. So I 
think this is exactly the kind of benefit that one would be 
very concerned that one would lose if one were to shift more 
people into the individual market.
    Mr. DOGGETT. Let me ask you another question. Ms. Kofman 
may have some observations on this too.
    There are actually people that sit on this side of the dais 
on this Committee who advocate a point of view that boils down 
to the fact that if you just charge high enough premiums on 
these high-cost policies with big deductibles to individuals, 
they'll make more rational healthcare choices.
    I received another communication from a woman in Austin who 
consults with individuals and with corporations on how to cut 
their energy costs by being more energy efficient. And she 
says:
    "I've been self-employed for 27 years. For 10 of those 
years I've had no health insurance due to the cost. Thankfully, 
I'm healthy and fit at 50 plus. I now have a catastrophic 
health insurance policy. It covers nothing unless I am hit by a 
train. There's a $5,000 deductible and so much mumbo-jumbo and 
who pays for what it would take a team of lawyers to figure 
out. So I avoid doctors, check-ups, testing, and take the best 
care of myself as possible and pray that nothing unforeseen 
happens.''
    Do you find that with these high cost, private policies, 
like Brenda Cross has, the woman who wrote me there in Austin, 
that the nature of those policies affect the healthcare 
decisions that consumers are making?
    Ms. DAVIS. You are absolutely right that those who are in a 
high deductible health plans are very dissatisfied with 
coverage. Only about a third are satisfied with their coverage. 
Most would not recommend the plan to a family Member or friend. 
Most would get out of those plans if they had any other 
alternatives available to them.
    Those that are in the high deductible plans, whether 
they're with a savings account or without a savings account 
more likely to report not getting needed care. They are much 
more likely to report difficulty with medical bills, with 
medical debt. It's all part of this shifting more and more 
financial risk to families.
    When it's covered by the plan, it's covered by the premium. 
It's shared between the employer and the worker. When it's in 
the deductible, only the worker pays for those deductible 
expenses. Some are fortunate enough to have employers making a 
contribution to a health savings account, but over a third have 
no contribution from their employers, and others have very 
modest amounts of money in their account. They are simply not 
able to handle the financial risk that this push toward 
skimpier and skimpier policies has created.
    Mr. DOGGETT. Ms. Kofman, do you have experience with that?
    Ms. KOFMAN. A couple of thoughts.
    First of all, I think the higher cost, both for premiums 
and out-of-pocket costs, whether it's co-insurance or co-pays, 
or other out-of-pocket, it's like a silent disease that's 
killing off the middle class.
    Mr. DOGGETT. Right.
    Ms. KOFMAN. And we need help to stabilize, to keep families 
healthy, to keep workers at work. We need to help people 
financially and not take away what they have now. Many families 
are struggling. We know that the leading cause of personal 
bankruptcy in America is an illness, and we know that the 
majority of those filers had health insurance. It just wasn't 
enough to cover them.
    While we are engaged in all this talk about, perhaps, some 
being over-insured and buying too much, we live in the 
wealthiest nation in the world, and arguably we provide the 
least for people who need it the most. We let 18,000 people die 
each year preventable deaths because they have no coverage; 
and, more and more people are struggling to pay their bills to 
maintain their health coverage.
    I would argue that we need more financial resources, more 
real solutions to address the cost drivers to make sure 
everyone gets coverage and it's fair and just.
    Mr. DOGGETT. Thank you for helping us lay the ground work 
for real reform next year with a new president.
    Chairman STARK. Mr. Johnson, would you like to inquire?
    Mr. JOHNSON. Thank you, Mr. Chairman.
    Mr. Bodaken, as part of your health reform plan, you 
advocated expanding Medicare and Medicaid, and in an interview 
you gave to the San Francisco Gate you talked about how 
Medicare and Medicaid are significantly under funding hospitals 
and physicians.
    You know, Medicare is slated to take another cut in 
physician payments by about 40 percent over the next decade. In 
your state, 50 percent of the doctors won't participate in 
Medicaid, according to our information, because of low 
reimbursement.
    I think and I would like to hear what you think about 
fixing the problems in Medicare and Medicaid, which are both 
under funded and running out of money before we talk about 
expanding eligibility. Could you comment on that?
    Mr. BODAKEN. What I was talking about, the expansion of 
Medicare and Medicaid, it was less about the expansion of 
eligibility and much more about getting the underlying 
reimbursement to physicians in hospitals to a level that is 
adequate so that they don't leave the system. What's happening 
with all of the public programs, including SCHIP, is that 
because of the levels of reimbursement, Medicaid is the lowest, 
and California in particular is one of the lowest states in 
terms of MediCal payments to physicians, and for that matter 
hospitals, but Medicare as well.
    They in fact, because they are under funded, actually to 
make their bottom lines have to charge the private sector 
essentially the same contracts with companies like mine at a 
much higher level, which means that all of the private coverage 
is that much more expensive. We think it's about 15 percent 
more expensive because of what we call the cost shift from the 
under funding of Medicare and Medicaid to the private sector.
    Mr. JOHNSON. Yeah, but where would you suggest we get the 
funds from?
    Mr. BODAKEN. Well, it seems to me and one of the things 
we've said from the day we launched the proposal for universal 
coverage is that frankly we really do believe that it's not a 
matter of whether tax is a dirty word or not, it's not a matter 
of simply taking the current revenues and redistributing them, 
and somehow covering 48 million more people. It's going to cost 
more money, and we had thoughts about that at time.
    We still have those thoughts, but the reality is we've got 
48 million people uninsured nationally, 7 million in California 
uninsured, to get to levels of reasonable coverage and 
reasonable reimbursement to providers. I think it's going to 
take more money, and whether we call it fees or whether we call 
it participation to a greater extent on the part of the 
enrollee. There's lots of ways to do it, but frankly I think 
it's naive to think that we can meet the unmet needs of that 
many people and have it all come out as a zero sum game.
    Mr. JOHNSON. Well, we may have to start charging people 
more. I think we can agree that making individual health 
insurance market more viable for more Americans will help 
decrease the number of uninsured in the country.
    Mr. Bodaken, you said that an individual mandate would be 
one way to achieve that. What about equalizing the tax 
treatment for health benefits? For example, if the Tax Code 
treated health benefits that individuals purchased on their own 
the same way as those benefits purchased through the employer-
sponsored system, wouldn't that affect the individual insurance 
market? And I'd appreciate both of you answering that.
    Mr. BODAKEN. Yeah, I think actually there is an inherent 
unfairness in the individual market versus the group market in 
terms of the tax treatment. And changing that unfairness I 
think is an appropriate thing to do. The only thing I would 
caution is that the adjustment of the underlying tax 
treatments, particular in the employer system, I think getting 
it equal in the individual system is fine.
    To remove it from the employer system and the individual 
system I think has much more severe consequences in terms of 
actually increasing the problems of uninsurance and 
underinsurance. So I don't personally think in the near term 
that doing that is really a solution. But insofar as we have a 
Tax Code that says if I have a job and my employer gets a 
deduction and I get a deduction, If I'm individually employed, 
it seems to me that same deduction should apply.
    Mr. JOHNSON. Dr. Feldman, would you care to respond?
    Mr. FELDMAN. I think extending the tax subsidy to 
individual insurance would be the most significant tax reform 
that you could consider at this point. That would allow you to 
consider more significant, longer term reforms that Members of 
this panel and of your Committee all support.
    You could require that insurers who accept the tax credit 
offered guaranteed renewability and guaranteed issue for all 
comers for their policies. You could also require that they 
offer several standardized packages, some of them including 
maternity benefits.
    I would recommend that you allow insurers to designate 
between one and 2 percent of their applicants as uninsurable, 
because some folks, truly, can't be insured by a private 
market. Those people would go into a high risk pool subsidized 
by premiums levied on all the normal policies. But all of these 
things are contingent upon reforming the tax treatment of 
health insurance so as to create a level playingfield.
    Mr. JOHNSON. Thank you very much for your testimony.
    Mr. Speaker, my time has expired.
    Chairman STARK. That's all right. I will accept the 
promotion.
    Mr. Becerra, would you like to inquire?
    Mr. BECERRA. Thank you, Mr. Chairman, and thank you to our 
panelists for their testimony.
    Superintendent Kofman, Congressman Doggett asked some 
questions about the treatment of women when it comes to 
healthcare and I would like to expand on that a bit. We know 
that some plans are making some substantial profits these days, 
while at the same time we have a number of consumers who can't 
afford to purchase health insurance, and many are being denied 
health insurance or being removed from their plan because they 
have allergies.
    We know that in many cases there has been an effort in the 
past years of this Congress to remove oversight and regulatory 
responsibilities to oversee some of the insurance industries 
activities in healthcare, and now we are beginning to see in 
the banking industry the results of some of the deregulation 
that occurred, the bail-out of AIG, the default of companies 
like Lehman Brothers, and now we're being told by the President 
that we must provide $700 billion to bail out Wall Street.
    What is your sense of the need to provide some responsible 
oversight and regulatory authority over the health insurance 
industry to make sure that consumers indeed are receiving what 
they believe they are paying for?
    Ms. KOFMAN. I don't think that the insurance industry can 
regulate itself; and, I think there is an important role for 
state insurance regulators. And I ask that you do not take my 
authority away to protect the consumers living in my state, 
whether it's through health insurance or other congressional 
interventions.
    It is my job to make sure that companies stay solvent and 
claims get paid, and that there's a fair and predictable 
marketplace for companies to do business. Going back to your 
first point on discrimination against women, I just want to 
clarify that the problems identified in my testimony are 
problems in the individual market.
    Many of those problems do not exist in the group market and 
the job-based market because Congress and the states have 
passed laws to protect women against discrimination. So I just 
wanted to clarify that. In many cases, you can't even buy, for 
instance, a maternity rider. In Maine, we don't require 
individual health insurance coverage to cover maternity.
    We have two carriers. One of the carriers voluntarily 
offers that coverage; the other one does not. Even if you 
wanted to pay a million dollars for that rider, you couldn't 
buy it as a consumer. In the job-based market, especially for 
employers with more than 15 employees, that's not allowed. You 
have to cover maternity, and that's as a result of the Federal 
laws that we have.
    Mr. BECERRA. And is it the case, especially in the 
individual marketplace, that you do find some stark disparities 
between the cost of insuring a woman, all else being equal, and 
the cost of insuring the man, to healthy 40-year-old 
individuals, one male, one female, in the same geographic area, 
trying to shop for an insurance policy as an individual could 
result in vast disparities in cost, usually a much higher cost 
for a woman than a man.
    Ms. KOFMAN. That's correct. Maine is one of five states 
where we do not allow disparities based on gender. You cannot 
be discriminated against because you are a woman. Our rates are 
allowed to be varied based on age and tobacco use and 
geographic location and occupation. But insurance companies are 
not allowed to base their rates on one's health needs or 
perceived needs or gender. But we are in the minority.
    Mr. BECERRA. And it seems that when you talk about 
healthcare and you talk about a system where there has to be 
some coverage for the need to recoup some of the cost and make 
some profit, there will always be a desire on the part of the 
entity, whether insurance company or a physician, to be able to 
make ends meet. So you have to have a little bit of a buffer at 
the end of the day, call it a profit, whatever you wish, to be 
able to offer services the next day.
    That differs, of course, from the Federal government or any 
government-provided healthcare where at the end of the day that 
governmental entity, Federal, state, is not looking to make a 
profit, and, as a result, will cover the ill as well as the 
healthy at the same time. So a woman who is about to become 
pregnant or who is pregnant is not going to find herself facing 
some discriminatory policy from the Federal government when it 
comes to receiving health insurance.
    Usually, it's unfortunate that we are talking about a woman 
who is low income who receives that non-discriminatory 
treatment by the government. But it seems to me that there's a 
problem we have here in that the reason the government can be 
non-discriminatory is because it's not looking to make a profit 
on the private sector side, if you want to make a profit. And I 
can understand the need to make a profit.
    You want to get the least ill, or in other words, the 
healthiest person, to become a Member of your plan. So a woman 
who is 30 years of age and still childbearing age wishes to be 
insured versus a man who is 30 years of age and obviously can't 
bear children. That insurance company probably looks at the two 
and says, the likelihood that the 30-year-old man is going to 
cost me less over the next 10 years than that childbearing age 
woman of 30 years of age as well.
    Ms. KOFMAN. Yeah, if men could only have kids.
    Mr. BECERRA. We might have had universal coverage quite 
some time ago, I suspect.
    Ms. KOFMAN. I think to your point of different incentives 
that exist when the private market provides coverage, it's 
certainly true in a for-profit world, and it's not a value 
judgment. It's just the reality.
    Mr. BECERRA. Right.
    Ms. KOFMAN. Companies need to make profits, especially if 
they're publicly traded. They have responsibilities to the 
stockholders on Wall Street.
    Mr. BECERRA. That's right.
    Ms. KOFMAN. And it's a different type of incentive, then, 
for government. Certainly when employers provide coverage to 
their workers there is a built-in incentive to make sure the 
worker gets healthy as quickly as possible so he or she can 
return to work quickly. Well, I'm not sure that same incentive 
exists in the individual market. It's a different type of 
incentive. So, that's another reason we should be very careful 
if we decide to walk away from the job-based coverage system we 
have currently.
    Mr. BECERRA. I am glad you distinguished it. We are not 
making value judgments here. It's a fact of life. If you are in 
the private sector, you have to survive, and that means you 
have to be able to make some profit at the end of the day.
    So it's not that these industries are trying to short-
change Americans. It's that they have to exist for the next 
day. And, so, that's difficult we have the four courses that we 
are talking about, the healthcare or the life of someone in the 
future. And maybe that's not the best way to make value 
judgments.
    But, Mr. Chairman, I know my time has expired, and I 
appreciate it.
    Chairman STARK. Thank you. We are going to have a vote in a 
few minutes and I would like to give as many people here.
    Mr. Pomeroy, would you like to inquire?
    Mr. POMEROY. Yeah, I would, Mr. Chairman.
    Thank you for this excellent hearing. The panel has been 
superb.
    I am trying to put this in the context of what we might see 
next year by way of a proposal from a new administration 
relative to healthcare.
    Dr. Feldman, have you had an opportunity to compare your 
view on how this ought to go with the positions of the 
respective candidates?
    Mr. FELDMAN. Yes, I have. I have not made these statements 
publicly before. In my comparison of the candidates' proposals, 
I think they would both be quite effective in reducing 
uninsurance and they would both be quite expensive.
    Mr. POMEROY. The proposals are quite different. It seems to 
me as I hear you saying is the first thing we need to do is 
essentially dramatically change the tax support for employer-
sponsored health insurance. Now, to me, is that more like the 
approach of Senator McCain as opposed to Senator Obama?
    Mr. FELDMAN. Yes, it is.
    Mr. POMEROY. Now, you offered some statistics that I am 
wrestling with. You think that those workers covered by 
employer-based health insurance are over-insured, and this 
rises the cost of health care?
    Mr. FELDMAN. Yes, I do, Mr. Congressman.
    Mr. POMEROY. So in your view if people were paying a lot 
more from their own pocketbook, then the prices would come down 
because people would be unable to afford those prices.
    Mr. FELDMAN. I would like first of all to say that when we 
talk about the cost of employer-sponsored health insurance, 
ultimately all of it, whether it is paid by the employer on my 
behalf or whether I pay for it out of pocket, comes out of my 
productivity and out of my paycheck. This is a prediction from 
both economic theory and,
    Mr. POMEROY. With time so short, we can't get into the 
theory part. But, basically, you think over-insurance means 
someone else pays the bill and that means you can charge more 
because the user of the service isn't paying the bill 
personally?
    Mr. FELDMAN. Yes, sir.
    Mr. POMEROY. And so we get at cost by having people pay 
more out of their own pocket.
    Mr. FELDMAN. Yes, that's correct.
    Mr. POMEROY. You would tax employees for the value of the 
health insurance they received, right?
    Mr. FELDMAN. Yes, I would.
    Mr. POMEROY. And is that similar to the McCain proposal?
    Mr. FELDMAN. It is.
    Mr. POMEROY. I am glad you clarified that, because I am 
looking at something I pulled off the web page: McCain-Palin. 
It says "Straight talk on health system reform.'' And there's 
not a word about the new taxation on employees for the value of 
their health insurance benefit received.
    Indeed, what is the value of health insurance commonly 
provided? Do you know, Dr. Feldman?
    Mr. FELDMAN. In the testimony that I presented earlier I 
mentioned that the value of the taxes for a single person was 
$1753 and the value for a family was, I think $3800.
    Mr. POMEROY. No. That's not the question. How much more tax 
would they have to pay? And I'm just looking, for example, at 
the Blue Cross testimony and you are estimating that the cost 
of coverage in a large group, which would be the most cost-
effective insurance delivered, is $4500 per year for a single 
worker, $12,000 for a family. So a worker in the marketplace 
with family coverage can expect to pay taxes on $12,000 more 
income. Is that correct?
    Mr. FELDMAN. It all depends on your position in the 
distribution of income.
    Mr. POMEROY. No, actually. Again, theory versus just how 
this thing works. In terms of how it works part if you're 
paying income taxes on the value of your coverage and the 
average value of coverage is $12,000 a family, it looks like I 
just got $12,000 income figured into what I got to pay taxes 
on.
    Dr. Davis?
    Ms. DAVIS. Congressman, if I could just comment.
    The Urban Institute, Brookings Institution, Tax Policy 
Center, estimates that Senator McCain's proposal would increase 
taxes by 1.3 trillion over 10 years, and that's not covering 
the cost of the high risk pools.
    Mr. POMEROY. No. I'm saying in fairness to the McCain plan, 
it looks like he gets a tax credit, but the tax credit is $2500 
for individuals and $5,000 for families. Now, someone that is 
going to have to go shop for coverage, how far is that going to 
go to covering the coverage you are going to have to shop for.
    We might ask the expert, the guy that sells the insurance, 
Mr. Bodaken?
    Mr. BODAKEN. Yeah, we think it would be about 50 percent 
inadequate in terms of covering what they have to buy on the 
open market.
    Mr. POMEROY. I am going to cite here from a survey, and 
then I see that my time has elapsed, Dr. Feldman. By all means 
submit in writing further elaboration.
    A survey conducted by the American Benefits Council sites 
74 percent of employers responding that this changed tax 
treatment would have a strong, negative impact on their 
workforce and that some considerable portion of their workforce 
would actually find that coverage would then transition from 
the place of employment to the individual, and so people can be 
expecting to pay substantially more out-of-pocket dollars one 
way or the other under the McCain plan. It's not reflected in 
the straight talk.
    Peace would seem like straight talk on these matters. We 
want to make note of that fact.
    I yield back, Mr. Chairman.
    Chairman STARK. Thank you.
    Mr. Kind, would you like to inquire?
    Mr. KIND. Thank you, Mr. Chairman.
    Just to follow along the line of questioning of Mr. 
Pomeroy, the statistics that I am looking at, if we are focused 
on the ranks of the uninsured in this country, there is a large 
percentage of people working in small businesses or family 
farms and having a hard time getting coverage, because it is 
too expensive.
    About 30 percent of the employees working in small 
businesses have to go without any type of health coverage, 
because of the expense involved. And, yet, getting back to what 
Mr. Pomeroy was alluding to, the average monthly premium for an 
employee in a small firm was roughly $379. That's roughly 
$4,553 in annual premiums. And then for family coverage it 
comes to $11,835.
    Is that pretty close, Mr. Bodaken, the statistics that you 
are seeing? So the $2500 and the $5,000 tax credit would be 
about half of really what we are seeing nationwide, average 
premiums for individuals and family coverage today. It is quite 
a gap in order to make up.
    I have been focused. You know, if you look at the 48 
million uninsured in a given year, a lot of them working in 
small businesses or on family farms that can't afford coverage, 
how do we close that gap? Earlier this legislative session, I 
and Phil English and others introduced legislation called the 
Shop Act. It would establish a national purchasing pool to give 
small businesses and family farmers a chance to join that.
    There are some tax incentives in order to offer coverage to 
it and also some of the other barriers. But one of the other 
aspects involved in the legislation is seeing what we can do to 
try to begin harmonizing rules across state boundaries. We've 
got 50 different states with 50 different sets of regs, 50 
different sets of mandates out there.
    How important would that be as far as establishing a pool 
for small businesses or family farmers to join in if we focus 
on just what's going on from state to state and then trying to 
harmonize those rules at some point?
    Does anyone have an opinion or thought?
    Mr. BODAKEN. I guess our thought is and perhaps similar to 
what was said earlier about state regulation, if we look at the 
overall regulation of the insurance market, the problems we 
have in the insurance market, at least in my opinion, are not 
primarily the result of inadequate state regulation. In fact, 
state regulators do a pretty good job on the whole. The 
problems are in the way the market has functioned, or should 
say, allowed to function, and there's lots that can be done at 
the state level to fix that.
    And, so, for example, we talked about maternity early. We 
actually proposed, along with another health insurer, that we 
require maternity in our individual policies. It's the right 
thing that maternity not be part of an individual policy, ended 
up passing and vetoed by the Governor.
    That said, there are even insurers that believe that 
coverage is too skinny, we ought to fix it. I don't think by 
putting it at the Federal level that we necessarily solve those 
problems.
    Mr. KIND. I am not talking about Federal preemption here, 
but I am talking about seeing what we can do to try to 
harmonize across state boundaries.
    Mr. Feldman?
    Mr. BODAKEN. Yeah, and I guess the other suggestion that 
has been made is that we sell across state lines and our 
concern there would be just to make sure that there isn't a 
cherry-picking of states with the least regulation, and they 
aren't sufficiently solvent for a state like California.
    Mr. KIND. Right. Our proposal is to have the Institute of 
Medicine take a look at this and see if we can come up with a 
basic benefit plan that would make sense.
    Mr. Feldman?
    Mr. FELDMAN. Mr. Congressman, number one, the tax exemption 
for self-employed people should be extended so that you can 
deduct as much of the tax as a person who gets ESI. Currently 
that exemption is limited to the extent of your taxable income, 
and you can't apply it against your self employment tax.
    Mr. KIND. Yes, and I have legislation that would get rid of 
that self-employed tax that would voluntarily deduct their 
health insurance premiums. It's an anomaly in the Code and we 
should fix that.
    Mr. FELDMAN. It's just an anomaly.
    Number two, your pooling idea I think would have support 
from Members of this panel. The state of Minnesota operates two 
insurance pools; one for high risks and one for people who are 
getting a state subsidy. And both of those pools run at 
administrative costs of around five to 6 percent per year. So 
that's a very good idea. Number three, I would support allowing 
individuals to buy insurance across state lines.
    Mr. KIND. Yes, just let me make a quick observation, and if 
anyone wants to comment, you can. But I have noticed when you 
look at the comparative rate of the uninsured from state-to-
state, and I am not sure if there is a correlation. Maybe you 
do see one, but those states with the relatively lower 
uninsured rate for their citizens also happen to be states that 
have less utilization, yet higher quality of outcome.
    I am talking about Minnesota, my state of Wisconsin, Iowa. 
Is there a correlation here where you are getting less 
utilization, higher quality of outcome? It just so happens in 
these states that one of the lowest in Federal reimbursement 
rates, too, and yet they have some of the lowest uninsured 
rates in the entire nation compared to the rest of the states.
    Ms. DAVIS. Absolutely. The Commonwealth Fund issued a state 
scorecard on health system performance, and there is a very 
high correlation between the extent to which the people were 
covered by insurance and the quality of care, whether people 
got preventive care, whether they had their chronic conditions 
controlled. So definitely there is a high payoff for states 
that have high rates of insurance coverage in terms of better 
health outcomes, better quality of care.
    Mr. KIND. Thank you.
    Chairman STARK. Dr. McDermott, would you like to inquire?
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    I appreciate you having this hearing and letting me ask a 
question.
    The Veterans Administration negotiates prices; and, I am 
really talking to Mr. Bodaken, because I think it was your 
testimony that talked about the woman who thought she had 
health insurance coverage and wound up finding that her 
insurance only covered $1500.
    Was it yours? Excuse me. Then I got the wrong person. But 
the issue here that strikes me is that the Veterans 
Administration negotiates down to 40 percent on 
pharmaceuticals. Only when the government steps in and 
regulates can you get savings. It seems to me that buying in 
the private insurance market is hopeless, because the average 
person, this woman with her cancer treatments, has no way to 
negotiate or shop. She isn't going to go down to the pharmacy 
and say, I would like the cheap drug to stick into me for my 
cancer. She can't do that, and she has no way to drive down the 
price, because she is by herself.
    And the insurance companies are never going to drive down 
the price. They're not going to buy. So explain to me how you 
control cost in the private market or do you not care as long 
as you can shift it onto the individual?
    Mr. BODAKEN. Well, with respect to whether we control 
costs, costs are certainly going up at a higher rate as a 
result of hospitals, physicians, pharmaceuticals, all kinds of 
things, some of which is legitimate, some of which isn't. The 
reality is we probably pay on behalf of our subscribers, about 
50 percent of what a private individual would pay without the 
discounts that we're able to negotiate, so it is pretty 
significant what we are able to negotiate on behalf of 
individuals.
    But I don't discount the fact that certainly Medicare has 
got clout that no individual insurer has in terms of 
negotiating drug prices, and perhaps in other areas, we ought 
to take advantage of that. But in fact we do a very good job 
and I would say the Blues nationally do a very good job of 
getting more cost-effective rates than any other health plan 
across the nation in terms of the negotiations we have with 
hospitals and physicians.
    Mr. MCDERMOTT. Mr. Kofman, what is your experience with 
this? You are running this insurance program in Maine. What is 
happening to people?
    Ms. KOFMAN. Well, I don't run the insurance program in 
Maine. I lead the insurance department, and we have oversight 
over insurance companies.
    I am not convinced that insurance companies could 
effectively negotiate on behalf of the policyholders. I think 
it depends on the providers, if in Maine for example many of 
the hospital systems have gotten quite large and they purchased 
physician groups. So about half of the physician groups are 
owned by a hospital system.
    Mr. MCDERMOTT. So doctors are working for salaries rather 
than on a fee-for-service or performance production basis?
    Ms. KOFMAN. There are different arrangements, but 
essentially the hospital system negotiates on behalf of the 
doctors that are in the system. And the salary structures vary.
    Mr. MCDERMOTT. How big, how big does the system have to be? 
I mean we prohibited Medicare with 45 million people from 
negotiating, but how big does the hospital have to be to be 
able to drive the prices down by that kind of negotiation.
    Ms. KOFMAN. Well, the carriers negotiate with the 
hospitals, and if the hospital system is quite large and 
there's only one hospital system in the area, then it's kind of 
hard to negotiate because you only have one player you're 
negotiating with. So I think it's a challenge for the private 
carriers to negotiate a huge savings when there is only one 
party to negotiate with.
    I think looking at the whole system, system-wide, there are 
opportunities to save money, whether it's looking at the fee 
structure, looking at how we spend new technologies, new MRI 
machines. Why do you need five of those in a particular setting 
when the community is small.
    For example, looking at the drug prices, why they had been 
going up, looking at how we use medical care, when do we access 
medical care. Is it in a timely fashion where we can get to the 
problem early before it costs a whole lot of money? There are 
lots of opportunities to do that and I certainly would agree 
that the government has been quite successful at looking at 
some of those opportunities and achieving cost savings, like 
what the VA does.
    Mr. MCDERMOTT. Absolute global budget; it seems like it's 
an open-ended thing that's going on today. Being a physician, I 
know about the California relative value scale, and I lived 
with it for 20 years when I practiced medicine, so I know how 
physicians ratchet prices up. And the pharmaceutical companies 
seem to be doing the same thing and the device companies are 
doing the same thing at much higher than the actual rate of 
inflation to the rest of the economy.
    So I find it very difficult to see how the private market 
could ever do for the individual what a government regulated 
system--and I know government regulation is the in-talk these 
days--since we've been watching the banks, but there does need 
to be some way it seems to me to put that on top.
    I yield back the balance of my time.
    Chairman STARK. Thank you.
    And I want to thank our witnesses. I would like to have you 
be comfortable if Members, and I'm sure we all will think of 
something we wish we had asked this morning, if we could write 
to you sometime for your input on questions that will occur to 
us or that our staffs will remind us that we forgot to ask. It 
would be appreciated. You will make us look a lot smarter if we 
can impose on you.
    Thank you for your testimony this morning and the hearing 
is adjourned.
    [Whereupon, at 11:36 a.m., the hearing was adjourned.]
    [Submissions for the Record to follow:]
                American Academy of Actuaries, Statement
    The American Academy of Actuaries is a professional association 
with over 16,000 members, whose mission is to assist public 
policymakers by providing leadership, objective expertise, and 
actuarial advice on risk and financial security issues. The Academy 
also sets qualification, practice, and professionalism standards for 
actuaries in the United States.
INDIVIDUAL MEDICAL INSURANCE MARKET
    Many recent proposals designed to reduce the number of uninsured 
would increase the reliance on the individual medical insurance market 
to provide coverage. As such, the American Academy of Actuaries' \1\ 
Individual Medical Market Task Force has developed this statement to 
provide policymakers with a clear understanding of how the current 
individual market works, the relative ease or difficulty a person may 
have acquiring coverage in this market, and the cost implications once 
he or she is covered.Policymakers aiming to ensure that any 
``reformed'' market is viable and sustainable over time should consider 
the information provided in this statement. A key to sustainability is 
managing the adverse selection in a voluntary market, which may require 
trade-offs between accessibility and affordability.
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    \1\ The American Academy of Actuaries is a professional association 
with over 16,000 members, whose mission is to assist public 
policymakers by providing leadership, objective expertise, and 
actuarial advice on risk and financial security issues. The Academy 
also sets qualification, practice, and professionalism standards for 
actuaries in the United States.
---------------------------------------------------------------------------
BACKGROUND
    Insurance purchased in the individual market was the primary source 
of health coverage for about 5.4 percent of the nonelderly population, 
or 14 million people, in 2006.\2\ The individual market is an important 
segment of the health insurance market. People who purchase coverage in 
the individual market include those who are self-employed, between 
jobs, or don't have access to either employer coverage or public 
coverage.
---------------------------------------------------------------------------
    \2\ ``Health Insurance Coverage in America: 2006 Data Update,'' 
Kaiser Family Foundation, October 2007.
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    The individual market today is a mix of regional carriers and large 
national carriers plus independent or consolidated Blue Cross Blue 
Shield organizations. Within the past few decades, the number of 
insurance carriers has declined, due to carrier consolidations as well 
as some carriers leaving particular states due to changes in the 
regulatory climate. In recent years, some large carriers have been 
selectively entering the individual market; their considerable market 
share allows them advantages in provider-payment negotiations and 
economies of scale.
REGULATION
    Like other forms of insurance, the individual market is regulated 
primarily by the states. Indeed, the individual market is considered to 
be the most heavily regulated health insurance market. States can 
regulate benefit-coverage requirements, underwriting and rating 
practices, and market conduct. While many benefit-coverage and 
insurance policy-administrative provisions can be relatively consistent 
across the country due to standardized contractual language in all 
states, regulations of other aspects of individual market products, 
including specific mandated benefits, can vary significantly from state 
to state. As a result, multi-state insurance carriers must comply with 
multiple sets of regulations, which can increase compliance costs.
    Some insurance companies use associations or discretionary trusts 
to offer what is essentially individual insurance. These vehicles are 
regulated as ``group'' or ``franchise'' insurance, as they insure 
multiple unrelated individuals under a single master contract. This may 
allow insurance companies to avoid the rate approval processes (and 
sometimes other regulatory oversight functions) required of traditional 
individual policies. Many states have clarified the regulatory 
oversight for these types of arrangements. For those that haven't, the 
lack of clear rating and regulatory oversight can lead to situations in 
which consumers have no place to turn for redress.
    In addition to state regulations, certain federal regulations also 
apply to the individual market, in particular, the Health Insurance 
Portability and Accountability Act (HIPAA). This law provides security 
that had not previously existed in the individual market. Previously, 
insurers could cancel blocks of policies without penalty. Under HIPAA, 
insurers may not cancel or non-renew policies, except for non-payment 
of premium as long as the insurer remains in the individual market. 
HIPAA also contains provisions requiring that qualified individuals 
leaving employer coverage have access to coverage in the individual 
market on a guaranteed issue basis. HIPAA does not specifically 
regulate the premiums for such coverage. This means that individuals 
who cannot satisfy underwriting criteria are still offered coverage, 
but at premiums that may be twice or more the rates for individuals who 
do satisfy underwriting criteria. Most states, however, have means to 
control these rates, such as offering HIPAA-eligible people coverage 
through a high-risk pool or some other state-regulated mechanism.
ISSUE AND RATING CONSIDERATIONS
    States use insurance issue and rating regulations in an attempt to 
strike the appropriate balance between access to insurance and premium 
affordability.
Underwriting Rules and Guaranteed Issue
    Insurance in the individual market is issued on either a 
guaranteed-issue basis or through medical underwriting. In most states, 
insurers require applicants to qualify for coverage through a medical 
underwriting process. This enables insurers to classify similar risks 
together and assign an appropriate premium. The underwriting process 
removes from a risk pool those individuals for whom large claims may be 
expected in the near future. Underwriting decisions are made on a 
person-by-person basis, even within families applying for coverage 
together. Some individuals will be denied coverage and others may be 
able to obtain coverage but at a higher premium or with exclusions for 
certain pre-existing conditions.\3\ Still, about three-quarters of 
underwritten applicants are accepted as standard risks.\4\
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    \3\ Certain individuals who are denied coverage at the time of 
application may have access to state high-risk pools. According to the 
National Association of State Comprehensive Health Insurance Plans, 35 
states operated high-risk pools in 2007, covering about 200,000 
individuals (available at www.naschip.com, accessed on July 23, 2008).
    \4\ America's Health Insurance Plans. 2007. ``Individual Health 
Insurance 2006-2007: A Comprehensive Survey of Premiums, Availability, 
and Benefits'' (available at http://www.ahipresearch.org/pdfs/
Individual_Market_Survey_December_2007.pdf).
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    Importantly, the underwriting event is a one time process at the 
time of application. Individuals who pass underwriting and are issued a 
policy will not need to undergo any further underwriting in order to 
retain that policy, regardless of health status changes, as long as 
premiums are paid on time.
    A handful of states prohibit insurers from medical underwriting and 
instead require guaranteed issue for all applicants, not just those 
eligible under HIPAA. In those states, all applicants must be issued 
coverage regardless of their health status or likelihood of large 
medical expenses. Compared to insurance pools comprised of individuals 
who pass medical underwriting, guaranteed issue provisions result in 
insurance pools with higher average expected claims and a higher share 
of insureds who are expected to have claims. Higher average premiums 
result. This arises not only because individuals at risk of high health 
spending cannot be denied coverage, but also because guaranteed issue 
provisions can reduce the incentives for individuals to purchase 
coverage when their expected medical spending is low. This is 
especially true when guaranteed-issue provisions are accompanied by 
community rating provisions, which is frequently the case. As will be 
discussed in more detail below, under community rating all insureds (or 
all in a certain demographic class under adjusted community rating) pay 
the same premium. Individuals who anticipate low medical needs may find 
it less costly to delay purchasing coverage until their medical needs 
rise.
Premium Setting
    Similar to other types of insurance coverage, premiums for 
individual market business are set to provide for claims, 
administrative expenses, margins for adverse contingencies, profit/
contribution to surplus, premium taxes and other applicable state fees, 
and federal taxes on earnings. How these components are included in 
setting premiums can vary by carrier, and competition can influence 
where premiums are set.
    Typically, factors that are used to set premiums for an individual 
include the benefits selected, the selected provider network, age, 
gender, geographic location, and perhaps policy duration. Health status 
may also affect premiums, as can tobacco use.
Rating Structures and Restrictions
    The most common state premium rating approach for the individual 
market is to permit premiums to vary not only by characteristics such 
as age and gender but also by the individual's health status at the 
time of issue. Even with this approach, however, there may be some 
limitations on premium variations. For instance, several states impose 
rating bands that limit the amount that premiums can vary according to 
health status.Certain states have implemented more restrictive rating 
requirements, which generally limit the extent to which premiums are 
allowed to vary among all or certain risk characteristics. General 
approaches that states use to restrict rating variations include:

      Pure community rating. Under pure community rating 
regulations, every participant in a particular insurance plan pays the 
same premium. Premiums cannot vary by factors such as age, gender, and 
health status. However, premiums can vary by family size and usually by 
geographic region within the state. With pure community rating, the 
low-risk individuals subsidize the costs of the high-risk individuals, 
essentially lowering the premiums for high-risk enrollees and raising 
the premiums for the lower-risk enrollees. New York and Vermont are two 
states that require pure community rating in the individual market.
      Adjusted community rating. Under adjusted community 
regulations, premium rates are allowed to vary, often within limits, by 
certain characteristics, such as age and gender. However, premiums are 
not allowed to vary by health status. Maine and New Jersey are two 
states that require adjusted community rating in the individual market.

    A goal of imposing rating restrictions is to reduce the premiums 
for those at risk for high health costs, thereby increasing the 
affordability of their coverage. The compression of risk-based rates 
between ages, in which the rates for older individuals (e.g., over age 
50) are set lower than their risk level would imply while the rates for 
younger individuals (e.g., below age 35) are set higher than their risk 
level would imply, is an example. This needs to be done carefully, 
however, or the rates for younger individuals will be so high compared 
to the perceived value of the policy that they will be disinclined to 
purchase coverage. This can result in an age distribution skewed more 
heavily toward older higher-risk ages, resulting in higher premiums for 
all insured individuals. As premiums increase, more of the low-risk 
individuals (of all ages) leave the market, causing premiums to 
increase even further and threatening the market's sustainability.
Yearly Premium Increases
    Premiums for plans in the individual medical insurance market 
typically increase every year (and sometimes more frequently), 
primarily due to increases in claims costs. Numerous factors affect how 
average claims costs for a particular plan and insurer can change from 
year to year, and how those changes in claims costs that are factored 
into a plan's premiums can vary from insurer to insurer. The result is 
a wide variation in claims costs and in the resulting premiums between 
plans within an insurer and between insurers.

      External factors driving medical-cost increases: These 
factors reflect increases in the per-unit costs of health services 
(e.g., the price for a given physician visit, hospital visit, or 
prescription drug) as well as increases in the utilization and 
intensity of medical services received. These external factors, which 
recently have been in the 8 to 10 percent range, are common to all 
health insurance markets.
      Cost-containment factors mitigating cost increases: 
Insurers use various techniques, such as utilization management and 
provider-payment negotiations, both of which may become more stringent 
as insurers try to offset the claim cost increases that arise due to 
external factors. Conversely, any reduction in the stringency of these 
capabilities will increase the growth in claims costs.
      Policy duration (for medically underwritten business): As 
discussed above, where allowed, medical underwriting is used in the 
individual market to assess an individual's relative risk for incurring 
near-term health costs and to assign a premium commensurate with that 
risk. Coverage for undisclosed pre-existing conditions is also limited 
for a specified period. The result is a pattern of increasing claims 
costs by year since issue, commonly referred to as policy duration. In 
the first two policy durations, claims costs are typically low. In 
later durations, individuals develop health conditions and incur more 
claims. The extent to which these expected increases in claims costs 
translate to yearly premium increases depends in part on the insurer's 
pricing strategy. Some insurers will evenly spread these expected 
annual increases over all the premiums for the length of time an 
average policy will be in force, including the initial premium. This 
produces higher initial premiums, but lower premium increases over 
time. Other insurers will set lower initial premiums, but have higher 
premium increases to reflect more closely the pattern of these expected 
increases in each year. The degree to which carriers reflect the 
expected durational increases within each year's premiums varies 
considerably, and can depend on the state. Some states limit the 
durational effect on premiums by requiring that a larger portion of the 
later-year expected claims costs be included in initial and early-year 
premiums. Other states do not have such limits, and allow the balance 
between initial and renewal premiums to be adjusted by market forces.
      Policyholder lapses: In developing the initial premiums, 
as well as annual premium increases, insurers assume a certain 
percentage of policyholders will lapse, that is drop coverage. Some may 
secure employer-based coverage. Others, especially those at low risk 
for claims, may not be willing to pay the annual premium increases. 
They will either go without coverage or seek other coverage costing 
less. Lapse and re-purchase is more common if premiums increase 
substantially with duration. Individuals who are at lower risk for 
health claims may be able to purchase a new policy at a lower premium 
either from the current insurer or a different insurer. As a result, 
the average claims costs, and premiums, of those individuals retaining 
coverage will increase over time.
      Plan design effects: A plan's deductible levels can 
affect how its claims costs change over time. When total health 
spending increases but the deductible level is held constant, the 
deductible each year represents a smaller share of the services used by 
the insured. Therefore, the plan's claims costs will increase more on a 
percentage basis than the increase in total spending. In addition, more 
individuals will have spending that exceeds the deductible amount. This 
increase in claims costs, and the associated increase in premiums, is 
referred to as deductible leveraging and the higher the deductible, the 
greater the leveraging effect will be, all other things being equal. To 
offset this increase, insureds who do not expect immediate health care 
needs may elect to increase their deductible levels in order to match 
their premium increase to, say, their wage increase. This practice is 
often referred to as a benefit buy-down.

    It is important, however, to consider the effects of deductible 
changes in conjunction with policyholder choice and adverse selection. 
Individuals usually have knowledge about their expected health care 
expenses in the near term. They will use this knowledge to time a 
change in their deductible to maximize the benefits they receive. 
Because lower deductible plans pay a higher share of medical expenses, 
they tend to attract individuals who expect to incur claims in the near 
future. And higher deductible plans will tend to attract individuals 
who expect fewer claims in the near future. Some policyholders with 
low-deductible plans who expect low future health care needs will 
decide to increase their deductibles. This selection results in higher 
average claims costs for those remaining in the low-deductible plan. 
Moreover, the addition of the policyholders who are increasing their 
deductibles to the pool of individuals with higher deductibles could 
reduce the average cost of that pool. As a result, it is not uncommon 
for many insurers to increase premiums for low-deductible plans at or 
above the overall average premium increase rate while instituting the 
same or slightly lower premium increases for higher deductible plans. 
In other words, the impact of selection can offset the increases 
resulting from deductible leveraging of higher deductible plans.
    In setting annual premiums, insurers consider the above factors. 
Since several of the factors operate together, the effects of a single 
factor on the overall trend in claims costs may be difficult to 
estimate. The goal is to develop the best estimate of the claims costs 
for the next year. Part of the process involves the correction of prior 
estimates; these corrections may increase or decrease the current 
estimate of the claims and the resulting rate increase. These help 
account for why premium increases can fluctuate over time and differ 
not only between insurers but also between plans within an insurer.
BENEFIT PACKAGES/COVERAGE
    In the early days of the individual market, medical coverage 
offered only a limited benefit package, to keep premiums and rate 
increases low and to manage adverse selection. Coverage for 
hospitalization was limited to a fixed daily benefit payment, sometimes 
with a limit on the number of days per admission or per year and also a 
list of set-dollar fee payments for surgical procedures, with only 
those procedures on the list being covered. Many benefit packages did 
not cover office visits or prescription drugs. Over time, the benefit 
packages became more comprehensive in the amount and type of medical 
expenses covered, approximating those in the group market. 
Nevertheless, coverage in the individual market generally has higher 
out-of-pocket expense amounts than in the group market. Although lower-
deductible policies are available, individuals typically choose 
policies with deductibles in the range of $1,000 to $1,500, with some 
choosing deductibles as high as $5,000 or $10,000.\5\ Once the 
deductible is met, coverage is typically very comprehensive, unlike 
earlier limited benefit packages. For instance, a typical plan may 
require 20 percent coinsurance, but eliminates cost sharing altogether 
once an annual out-of-pocket threshold is reached.
---------------------------------------------------------------------------
    \5\ America's Health Insurance Plans. 2007. ``Individual Health 
Insurance 2006-2007: A Comprehensive Survey of Premiums, Availability, 
and Benefits'' (available at http://www.ahipresearch.org/pdfs/
Individual_Market_Survey_December_2007.pdf).
---------------------------------------------------------------------------
    In addition to higher deductible levels, medical coverage in the 
individual market commonly differs from typical group coverage in some 
areas, including:

      Normal maternity coverage (except for complications) is 
often excluded from benefit packages in the individual market, or 
offered with dollar limits and waiting periods of more than nine months 
before benefits are paid.
      Where allowed by a state, treatment for substance abuse, 
alcoholism, and mental conditions typically have annual and lifetime 
coverage caps.
      Pre-existing conditions for impairments unknown to the 
insurer at the time of application are excluded for the first one or 
two years following issue, as allowed by state. (Impairments known to 
the insurer are either covered, if minor, excluded permanently, or 
covered but with a premium surcharge.)

    Because they pay the full premium, without any subsidies from 
employers, consumers in the individual market are more sensitive to 
premiums. As premiums have continued to climb, the individual market 
has reacted to this price sensitivity by reintroducing limited benefit 
plans. These plans, which are purchased as either the primary source of 
coverage or as supplemental coverage, are a small but growing share of 
the market. These products are modeled on some of the earlier benefit 
packages and do not provide comprehensive coverage or catastrophic 
protection. The underlying philosophy is that some coverage is better 
than no coverage. Some of these products provide limited outpatient 
benefits only, whereas others provide inpatient benefits that are 
limited to a fixed-dollar amount per day and/or are capped at a 
specific number of days per year. The desire for lower premiums is 
driving the demand for these types of benefits. Some states prohibit 
these types of policies and some require that policies with limited 
benefits properly disclose that to consumers.
ADMINISTRATIVE COSTS AND OTHER CHARGES
    Administrative costs and other charges include those used to cover 
the costs of marketing and selling the insurance and the managing of 
the policy after it is sold. Because administrative costs, risk/profit 
charges, and state fees are higher in the individual market, a lower 
share of premiums goes to pay benefits in the individual market 
compared to that in employer-sponsored group insurance.
    Loss ratios, which are the measure of premiums that go to health 
claims, provide information on the share of premiums that go to 
administrative costs and other expenses. Typical loss ratios in the 
individual market, which is the share of premiums that go toward paying 
claims, average about 65 to 70 percent. That means on average 30 to 35 
percent of the premium is used toward administrative expenses, risk 
charges, premium taxes, and profit/contribution to surplus. In 
comparison, loss ratios average about 75 to 85 percent for employer-
sponsored group coverage and can be as high as 95 percent for very 
large self-funded plans.
    Comparing the loss ratios for employer-sponsored group insurance to 
those in the individual market can be misleading, however. Large 
employers have human resource departments that support employees and 
dependents with benefit questions. In the individual market, these are 
handled by the agent/insurance company. The costs of the human resource 
departments are not reflected in the administrative costs for the large 
employers, but the analogous costs for individual contracts are 
reflected in the premium.
    Distribution costs, which cover the costs of advertising, member 
acquisition, and commissions to agents and brokers, can make up a large 
share of administrative costs, particularly in the individual market. 
Individual health coverage has traditionally been sold through salaried 
employees of the carrier, or more typically, through independent 
commissioned agents. Commissions can either be level over the life of 
the policy, say 5 to 10 percent of the premium, or can be tiered with 
higher commissions in the first year, as high as 20 to 30 percent in 
the first year, 5 to 10 percent for the next few years, and then as low 
as 0 to 2 percent thereafter. Even with the advent of insurance sales 
over the Internet, insurers need to provide licensed agents on staff in 
their administrative offices to respond to applicant questions relating 
to benefit options on the application.
    In addition to distribution costs, insurers also incur 
administrative costs for billing and enrollment, underwriting, claims 
adjudication, customer service, information technology support, and 
regulatory compliance.
PUBLIC POLICY IMPLICATIONS
    In an attempt to reduce the number of uninsured, many recent 
federal health reform proposals would expand or restructure the 
individual market. For instance, some proposals would extend the 
favorable income tax treatment of health insurance to the individual 
market, or otherwise make the tax incentives for health insurance more 
consistent between the individual and group markets. Other proposals 
would allow for the purchase of insurance across state lines or allow 
for cross-state insurance pooling. And others would merge the 
individual and small group markets.
    Whether such attempts would succeed depends, in part, on how 
changes to the rules and regulations governing the individual market 
are structured. It is important to strike the appropriate balance 
between access to coverage and premium affordability. This is 
especially important in a voluntary market, where a key to 
sustainability is managing adverse selection.
    Currently, states have chosen varying regulatory strategies with 
respect to the individual market, with disparate effects on access and 
affordability. To increase access to health insurance for higher risk 
individuals, some states have imposed guaranteed issue and community 
rating requirements. Because these provisions can exacerbate adverse 
selection, however, higher average premiums result. Other states allow 
insurers to underwrite and to incorporate health status factors into 
the premium rates charged to individuals. These provisions can help 
keep average premiums lower by managing adverse selection risk. On the 
other hand, they can also decrease access to insurance for higher-risk 
individuals.
    Increasing overall participation in health insurance plans, in 
particular among those with average or lower-than-average claims costs 
for their risk class, would be one of the most effective ways to 
minimize adverse selection. In that way, there would be enough healthy 
participants over which to spread the costs of those with high health 
costs. Aside from mandating coverage--which wouldn't necessarily 
guarantee 100 percent participation--potential options to help minimize 
adverse selection include providing premium subsidies or penalizing 
delayed insurance purchase through higher premiums (as it is with 
Medicare Parts B and D) and/or lower benefits. Implementing risk-
adjustment mechanisms could also be used to mitigate the impact of 
adverse selection on a particular insurer.
    Nevertheless, efforts to reduce the number of uninsured through any 
insurance reforms may be in vain if the growth in health care costs is 
not addressed. Doing more to control the growth in health spending is 
essential to a more sustainable health insurance system.

                                 

    Statement of American College of Obstetricians and Gynecologists
    On behalf of the American College of Obstetricians and 
Gynecologists (ACOG), representing nearly 52,000 physicians and 
partners in women's health, thank you for holding this hearing on the 
private health insurance market. As the health care decision-makers of 
their families, women are uniquely impacted by our broken health care 
system, as purchasers, providers and patients. We look forward to 
working with the Committee in the next Congress to reform the health 
care system to ensure comprehensive and affordable coverage for all 
that meets the goals of H. Con. Res. 400 and S. Res. 638, a resolution 
by Representative Jan Schakowsky and Senator Debbie Stabenow.
    As women's health care physicians, we experience the problems of 
the private health insurance market in many ways. We struggle together 
with our patients to understand their complicated insurance coverage 
limitations, and we fight with insurers to ensure that our patients are 
covered for necessary and appropriate care. We treat women without 
coverage and know that too many women with serious medical problems 
only receive needed care when they face a medical crisis. We experience 
the problems, too, that many employers do, in coping with the rising 
cost of purchasing health insurance for ourselves, our employees, and 
our families.
Women and Health Care Use & Outcomes
    Women have distinct health care needs and use more health care than 
men throughout their lives, including regular visits for reproductive 
health care. Women are more likely to seek preventive and routine care, 
are more likely to have a chronic illness that necessitates continuous 
health care, and are more likely to take a prescription drug on a daily 
basis than men.
    Without insurance, health outcomes for women suffer. Uninsured 
women are three times less likely to have had a Pap test in the last 
three years and have a 60% greater risk of late-stage cervical cancer. 
Uninsured women with breast cancer are 30-50% more likely to die from 
the disease. And 13% of all pregnant women are uninsured, making them 
less likely to seek timely prenatal care and 31% more likely to have an 
adverse health outcome. In general, the uninsured receive less 
preventive care, are diagnosed at more advanced disease stages, receive 
less therapeutic care, have higher mortality rates, and are less likely 
to have a regular source of care.
Women and Health Care Costs
    Affordability of health insurance and services is a key issue for 
women because they have greater annual health expenditures, but also 
have, on average, lower incomes than men. In 2007, the median income 
earnings for women was $35,100--$10,000 less than the median income for 
men. Insured or not, women have greater out-of-pocket costs, are more 
likely to avoid or delay needed services due to cost, and face greater 
medical debt than men. As a result, women are disproportionately 
affected by higher medical costs that eat up more of their wages. And, 
since women already pay 68 percent more than men for out-of-pocket 
health care costs, higher cost-sharing adds to an already serious 
financial burden.
    Women also are financially vulnerable because they are more likely 
to obtain coverage through their spouse--putting them at risk in the 
case of divorce or death of a husband or their husband's employer 
cutting dependent coverage. Also, when a husband moves from job-based 
coverage to Medicare, his wife, if not Medicare-eligible herself, may 
lose her coverage at the same time.
    Women are more likely to find that the services they need are not 
covered by their insurers. High-deductible plans are often marketed to 
young women but fail to cover pregnancy-related care, the leading cause 
for hospital stays and the most expensive health event most young 
families face.
Affordability and Availability of Insurance in the Non-Group Market
    Women without group insurance face enormous problems in obtaining 
and affording coverage in the individual insurance market. Underwriting 
laws in most states allow women seeking insurance coverage in the 
individual market to be subject to higher costs because of their gender 
or health status or face pre-existing condition exclusions that limit 
their coverage for the services they most need. Exempted from the 
requirements of the federal Pregnancy Discrimination Act, small groups 
and individuals may be denied coverage for maternity care, or require 
the purchase of expensive riders for this coverage, often more than a 
year in advance. Women who are already pregnant or are in less-than-
perfect health may be denied coverage altogether.
    As health care costs have risen, so have denials of coverage and 
insurance industry gaming. For instance, some insurers recently started 
denying pregnancy coverage--or any policy at all--to women who have had 
a previous cesarean section. And recently, California's largest health 
insurer was forced to pay a number of fines and penalties to nearly 
1,000 former members whose policies were canceled only after they filed 
claims.
High-Deductible Plans Leave Out Maternity Care
    High-deductible health plans, or so-called ``consumer-directed 
health plans'' (CDHPs), offer lower premiums than traditional insurance 
but with higher cost-sharing requirements. These plans are often an 
attractive option for young, healthy individuals who are enticed by low 
monthly premiums, but maternity care is rarely covered. While many 
CDHPs advertise first-dollar coverage for preventive services, a recent 
study found that prenatal care was usually not considered a preventive 
service, requiring considerable out-of-pocket expense. In addition, 
because pregnancy usually spans 2 plan years, women often must satisfy 
two annual deductibles before any costs are covered.
Elements of Reform
    ACOG supports reforms that guarantee a core package of essential 
services available nationwide, under all coverage options, to give all 
women access to meaningful and affordable coverage.

     Guarantee Essential Benefits for All Women: An insurance 
card does not guarantee access to needed services. Without coverage for 
the services they most use, underinsured women could face the same cost 
burdens as those without any insurance, with predictable results: 
delayed or missed care leading to worse health outcomes. Defining a 
core set of benefits will guarantee that no woman with insurance is 
denied basic care or burdened with the unaffordable out-of-pocket or 
catastrophic health care expenses that drive millions of Americans into 
bankruptcy every year. A core benefit package will cover preventable 
and primary care services to keep women healthy and keep health care 
affordable.
     Essential Coverage Should Be Uniform and Affordable under 
All Insurance Nationwide: Most women who get their insurance from large 
employers or public plans already have comprehensive benefits. Women 
who get their insurance in the small group and individual markets are 
vulnerable to wide fluctuations in benefits and affordability, 
depending on employment status, where they live, age, gender, and 
health status. Health care reform that guarantees a core package of 
essential services available nationwide under all coverage options will 
give all women access to meaningful coverage. Out-of-pocket expenses 
should be minimized and women should not be charged higher premiums 
than men for equivalent services.
     Invest in Primary and Preventive Care: ACOG supports 
benefits that emphasize and promote prevention--especially prenatal 
care and contraception--continuity of care, and a medical home for 
women. Prenatal care and risk-assessment are critical preventive 
services for all pregnant women and contraception is a medical 
necessity for women during three decades of their life span and should 
be covered to the same extent as other prescription drugs and services. 
Continuity of care--seeing the same health care provider over time--
enhances quality of care and patient satisfaction. Costly and 
burdensome ``gatekeeper'' rules that deny or delay women's direct 
access to obstetric, gynecologic, primary care services must not be 
permitted.
     Eliminate Health Disparities: Health system reform should 
recognize and eliminate disparities in health care coverage, treatment 
and outcomes related to a patient's culture, race, ethnicity, 
socioeconomic status, disability and sexual orientation.
     Protect Existing Access and Coverage: ACOG believes that 
existing access and coverage guarantees--such as state benefit mandates 
and Pregnancy Discrimination Act protections--should be maintained and 
strengthened until comprehensive health reform and universal coverage 
are achieved. Health reforms should not compromise or reduce existing 
benefits for women.

                                 

              National Small Business Association, Letter
Dear Chairman Stark:

    On behalf of the National Small Business Association (NSBA), the 
nation's oldest nonpartisan small-business advocacy group reaching more 
than 150,000 small businesses nation-wide, I would like to provide 
comments to a recent hearing held by the House Ways and Means 
Committee, Subcommittee on Health titled, ``The Health of the Private 
Health Insurance Market.'' The hearing examined problems in the private 
health insurance market, with a focus on the need for reforms in the 
non-group or individual market.
    Attached is a document, Small Business Health Care Reform: A Long-
Term Solution for All, that NSBA has worked on for several years with 
small-business owners and health care experts to address problems with 
the U.S. health care system. The principles outlined in this document 
would benefit the group and non-group market by making the necessary 
and appropriate reforms to the entire U.S. health care system. We trust 
that you will take them into consideration as the Committee continues 
to engage in the health care reform discussion.
    Mercer, a leading human resource consulting firm, recently released 
preliminary data from their National Survey of Employer-Sponsored 
Health Plans 2008 that indicates health insurance costs for all 
employers will rise about 5.7 percent in 2009--the lowest annual rise 
in the past decade. However, for small employers--those with between 10 
and 499 employees--costs are expected to rise 10 percent. The Small 
Business Administration's Office of Advocacy report, ``Structural 
Factors Affecting the Health Insurance Coverage of Workers at Small 
Firms'' cites the two most important factors associated with being 
uninsured are wages and firm size. According to the 2008 Employer 
Health Benefit Survey by the Kaiser Family Foundation and Health 
Research and Educational Trust, workers at small businesses paid 27 
percent more on premiums annually for family coverage than workers at 
large firms. The disproportionate burden small businesses face in 
providing health insurance must be a priority in the health care reform 
debate.
    As 99 percent of all employers, small-business owners are a very 
important piece to the overall health insurance puzzle. Of the 
approximate 47 million uninsured people in the US, roughly 20 million 
are small-business owners or employees. The trend of spiraling health 
care cost, and the current financial markets crisis makes this hearing 
all that much more important to health care consumers in the non-group 
and group health insurance market.
    The small-business owners that make up NSBA repeatedly rank health 
care among their top concerns. According to the recent NSBA Survey of 
Small and Mid-Sized Business, only 38 percent of respondents--nearly 90 
percent of whom employ less than 19 workers--offer their employees 
health insurance. That is down 3 percent from one year ago, down 11 
percent from 2000, and down 29 percent from 1995. Despite the low-rate 
of offering health insurance, 69 percent of respondents rated health 
insurance as the top benefit they want to offer.
    If the goal of Congress and the next administration is to achieve 
systemic reform to the U.S. health care system, then we must not 
isolate one segment of the health insurance marketplace from the rest 
of the system. The challenges that face individuals in the group and 
non-group market must be addressed through comprehensive reforms to the 
insurance and deliver systems.
    It has become clear to NSBA that, to bring meaningful 
affordability, access, and equity in health care to small business and 
their employees, a complete reform of the health care and health 
insurance systems is called for. The small business community needs 
substantial relief from escalating health insurance premiums. This 
level of relief can only be achieved through a broad reform of the 
health care system with a goal of universal coverage, focus on 
individual responsibility and empowerment, the creation of the right 
market-based incentives, and a relentless focus on improving quality 
while driving out unnecessary, wasteful, and harmful care.
    Finding a fix to the failing health care system is not an easy 
task, but I welcome the opportunity to be at the table representing the 
needs of small business as the Committee works to find solutions to 
American's health care needs.

            Sincerely,
                                       Todd O. McCracken, President

Small Business Health Care Reform
A Long-Term Solution for All
    In attempting to create positive health care reform for small 
businesses, one quickly bumps up against the reality that the small 
business problems cannot be solved in isolation from the rest of the 
system. Since small businesses purchase insurance as part of the 
overall small group (2 to 50 employees), the decisions of others 
directly affect what a small business must pay and the terms on which 
insurance is available to them. It has become clear to NSBA that, to 
bring meaningful affordability, access, and equity in health care to 
small businesses and their employees, a broad reform of the health care 
and health insurance systems is called for. This reform must reduce 
health care costs while improving quality, bring about a fair sharing 
of health care costs, and focus on the empowerment and responsibility 
of individual health care consumers.
The Realities of the Insurance Market
    Small employers who purchase insurance face significantly higher 
premiums from at least two sources that have nothing to do with the 
underlying cost of health care. The first is the cost of 
``uncompensated care.'' These are the expenses health care providers 
incur for providing care to individuals without coverage; these costs 
get divided-up and passed on as increased costs to those who have 
insurance. It is estimated that this practice, known as ``cost-
shifting'', adds another 8.5 percent to the cost of health care for 
those who purchase insurance. Second is the fact that millions of 
relatively healthy Americans choose not to purchase insurance (at least 
until they get older or sicker) due to cost. Almost four million 
individuals aged 18-34 making more than $50,000 per year are uninsured. 
The absence of these individuals from the insurance pool means that 
premiums are higher for the rest of the pool than they would be 
otherwise. Moving these two groups of individuals onto the insurance 
rolls would bring consequential reductions to current small business 
premiums.
    Implicit in the concept of insurance is that those who use it are 
subsidized by those who do not. In most arenas, voluntary insurance is 
most efficient since the actions of those outside the insurance pool do 
not directly affect those within. If the home of someone without fire 
insurance burns down, those who are insured are not expected to finance 
a new house. Not so in the health arena. Any individual with injuries 
or illnesses will receive care from an emergency room, regardless of 
whether or not the individual is insured. It is simply sound business 
sense that the hospital will then look to other avenues to ensure the 
cost for that uninsured injury or illness is recouped. Moreover, 
individuals' ability to assess their own risk is somewhat unique 
regarding health insurance. People have a good sense of their own 
health, and healthier individuals are less likely to purchase insurance 
until they perceive they need it. As insurance becomes more expensive, 
this proclivity is further increased, which, of course, further 
decreases the likelihood of the healthy purchasing insurance.
Individual Responsibility
    There is no hope of correcting these inequities until we have 
something close to universal participation of all individuals in some 
form of health care coverage. NSBA's plan for ensuring that all 
Americans have health coverage can be simply summarized: 1) require 
everyone to have a basic level of coverage; 2) reform the insurance 
system so no one can be denied coverage and so costs are fairly spread; 
and 3) institute a system of subsidies, based upon family income, so 
that everyone can afford coverage.
Required Coverage
    Of course, the decision to require coverage would mean that there 
must be some definition of the insurance package that would satisfy 
this requirement, as well as a system of penalties for those who chose 
not to comply. Such a package must be truly basic to ensure both 
affordability and choice are inherent in the overall system. The 
required basic package would include only evidence-based, 
scientifically sound benefits that would be determined on a federal 
level. The process for defining the basic package must be nonpolitical 
and incorporate an appropriate array of stakeholder involvement 
including state insurance commissioners, state legislative 
representatives (governors or legislators), insurers, actuaries, small 
and large businesses, consumer groups, providers, and those insured. 
This group shall be responsible for not only defining the initial 
package offering, but also for evaluating, on an ongoing basis, a broad 
cost-benefit analysis of benefits offered, as well as evaluating such 
analysis of any proposed additional benefits.
Fair Sharing of Costs/Market Reforms
    Incumbent on any requirement to obtain coverage is the need to 
ensure that coverage is available and affordable to all. In 
coordination with the requirement that all individuals have coverage, 
insurance companies would operate on a guaranteed issue basis--the 
requirement to provide coverage to all seekers. A coverage requirement 
on individuals would make insurers less risk averse by broadening the 
make-up of their covered individuals, thus bringing to fruition the 
goal of health insurance being paid for through fair-sharing rather 
than through cost-shifting. The importance of a penalty for individuals 
who seek not to purchase health insurance is imperative in preventing 
individuals who only purchase health insurance when they get sick. The 
guaranteed issue requirement on insurers must be accompanied by 
safeguards in the form of an individual mandate and penalty systems 
that prevent such behavior.
    It follows, then, that the methods by which insurance companies 
price or ``rate'' their product could reasonably withstand more 
rigorous standards. The rating for the basic package would be based on 
a modified community rating system with defined rate bands and only 
limited allowable actuarially-sound rating characteristics, including 
defined geographic regions. In addition, insurance companies would be 
allowed to provide certain, limited discounts or benefit enhancements 
to individuals or companies, or both (depending on who pays for the 
cost of the plan) who implement a certified, evidence-based and 
actuarially-sound wellness programs. Insurance companies would operate 
within narrow rate-bands and no additional charges or discounts could 
be given outside that band.
    Modified community rating would apply only to the federally-defined 
basic package, any additional services purchased above the federal 
package would be subject to market-based rating rules and would not be 
eligible for preferred tax treatment. Although not subject to the 
modified community rating rules, those additional services should not 
be used as a means to game the system.
    While the onus should no longer reside with employers to provide 
health insurance, the option ought to remain open to those employers 
who chose to carry out the administrative work for individuals in 
securing health insurance. All market rules and regulations would apply 
equally to the insurance plan regardless of who does the administrative 
work.
    As another method to balance the market and infuse a greater level 
of choice, higher deductibles for those able to afford them would be 
implemented. The shape of the package would help return a greater share 
of health insurance to its role as a financial backstop, rather than a 
reimbursement mechanism for all expenses. More robust consumer behavior 
will surely follow
Subsidies
    Due to the requirement that individuals purchase health insurance, 
without exemption for low-income individuals, there would be available 
federal financial assistance for individuals and families based upon 
income.
    Finally, it should be clear that coverage could come from any 
source. Employer-based insurance, individual insurance, or an existing 
public program would all be acceptable means of demonstrating coverage.
Reshaping Incentives
    There currently is an open-ended tax exclusion for employer-
provided health coverage for both the employer and employee. This tax 
status has made health insurance preferable to other forms of 
compensation, leading many Americans to be ``over-insured.'' This over-
insurance leads to a lack of consumer behavior, increased utilization 
of the system, and significant increases in the aggregate cost of 
health care. Insurance now frequently covers (on a tax-free basis) non-
medically necessary services, which would otherwise be highly 
responsive to market forces.
    The health insurance tax exclusion also creates equity concerns for 
small employers and their employees. Since larger firms experience less 
volatile rate increases, and have greater bargaining power than a small 
firm, their health insurance packages are typically richer than what a 
small business can afford. Therefore, a large firm can build very rich 
benefit packages which are tax exempt for the business and are 
considered a piece of the employees' compensation package. This gives 
large employers a significant competitive edge over small businesses 
with regards to both their tax treatment as well as their ability to 
recruit employees. Furthermore, many small business employees are 
currently in the individual insurance market, where only those premiums 
that exceed 7.5% of income are deductible.
    For these reasons, the individual tax exclusion for health 
insurance coverage should be limited to the value of the basic benefits 
package. But this exclusion (deduction) should also be extended to 
individuals purchasing insurance on their own. Moreover, the tax 
treatment of both health insurance premiums and actual health care 
expenses should be the same. These changes would bring equity to small 
employers and their employees, eliminate the federal subsidy for over-
insurance, induce much greater consumer behavior, and reduce overall 
health care expenses.
Reducing Costs by Increasing Quality and Accountability
    While the above steps alone would create a much more rational 
health insurance system, a more fair financing structure, and clear 
incentives for consumer-based accountability, much more must be done to 
rein-in the greatest drivers of unnecessary health care costs: waste 
and inefficiency. More accountable consumer behavior can help reduce 
utilization at the front end, but most health care costs are consumed 
in hospitals and by chronic conditions whose individual costs far 
exceed what any normal deductible level is likely to be.
    Health care quality is enormously important, not only for its own 
sake, but because medical mistakes, waste and inefficiency add billions 
to our annual health care costs. Medical errors, hospital-acquired 
infections, and other forms of waste and inefficiency cause additional 
hospital re-admissions, longer recovery times, missed work and 
compensation, increased strain on family budgets and, in the most 
severe cases, death. In fact, medical errors are the eighth leading 
cause of death in the United States. The medical costs alone probably 
total into the hundreds of billions of dollars.
    What financial pressures are we bringing to bear on the provider 
community to improve quality and reduce waste? Almost none. In fact, we 
may be doing the opposite, since providers make yet more money from re-
admissions and longer-term treatments. It is imperative to reduce costs 
through improved health care quality. Rather than continuing to pay 
billions for care that actually hurts people and leads to more costs, 
we should pay more for quality care and less (or nothing) when 
egregious mistakes occur.
    Insurers should reimburse providers based upon actual health 
outcomes and standards, rather than procedures. Evidence-based 
indicators and protocols should be developed to help insurers, 
employers, and individuals hold providers accountable. These 
protocols--if followed--could also provide a level of provider defense 
against malpractice claims.
    Through digital prescription writing, individual electronic medical 
records, and universal physician IDs, technology can reduce unnecessary 
procedures, reduce medical errors, increase efficiency, and improve the 
quality of care. This data also can form the basis for publicly-
available health information about each health care provider, helping 
patients make informed choices. The implementation of electronic 
patient records played a significant role in the seismic shift in the 
Veterans Health Administration from being a highly criticized system to 
being one of the best around today--receiving a 67 percent rating for 
overall quality as compared with the 51 percent ranking for a sampling 
of non-government health care providers in a recent report from the 
Annals of Internal Medicine.
    The U.S. medical system can also benefit from thinking outside the 
box. While traditional doctors' offices and hospitals remain the 
primary mechanism of health care delivery, creative and effective 
alternatives should also be taken into consideration. There are myriad 
programs in existence today, such as Volunteers in Medicine, community 
and retail clinics, urgent-care and 24-hour clinics, that can offer 
near-term relief to many individuals in underserved communities, and to 
uninsured individuals.
Availability of Information
    Small businesses are particularly disadvantaged when it comes to 
being able to access information. While large businesses that self-
insure conduct quality studies and compile provider information, small 
businesses are at the mercy of their insurance carrier to provide them 
with such data. As a result, little to no provider information with 
regards to cost or quality is made widely available. This disadvantage 
will be a heavy burden on individuals as well, if they are not armed 
the information needed to make important health care decisions.
    Insurance companies and health care providers should take the lead 
of the Centers for Medicare & Medicaid Services (CMS) in compiling 
provider information and quality rankings, and making them publicly 
available, easily accessed and understandable. Also included in these 
rankings should be common-sense pricing lists. Increased information 
flow to consumers will ensure better decision making and improve the 
long-term health status of Americans by empowering them as a partner, 
with their primary care provider, in their own health. Engaging 
consumers in their own care requires accurate and abundant information 
that will help individuals evaluate the options and make their own best 
decision.
    With the increased attention many health providers are paying to 
prevention and wellness programs, quality measurements must be a key 
part to ensure their success and scientifically-proven benefit. 
Prevention and wellness programs ought to be held to the same high 
standards regarding the tracking and reporting of outcomes. 
Additionally, health care providers should carefully track chronic 
disease management and report on the risk-adjusted outcomes of such 
programs. Tracking this data should enable doctors nation-wide to share 
best-practices and adjust treatments for optimum outcomes in their 
patients.
    NSBA calls on hospitals and doctor's offices to make publicly 
available, a plain-language list of the top 20 in-patient and out-
patient procedures' costs and risk-adjusted outcomes. This information 
should be updated at least annually and the number of procedures 
included incrementally over time until all procedures' cost and 
outcomes are publicly listed. Under the lead of CMS, all health care 
providers will compile the data in universal forms enabling the 
consumer to easily compare providers against each other.
Reform Medical Liability
    There is an enormous array of financial pressures and incentives 
that act upon the health-care provider community. Too often, the 
incentive for keeping patients healthy is not one of them. Our medical 
malpractice system is at least partly to blame. While some believe 
these laws improve health care quality by severely punishing those who 
make mistakes that harm patients, the reality is that they simply lead 
to those mistakes--and much more--being hidden.
    In addition to instituting reasonable limits on medical liability 
awards, NSBA supports the creation of so-called ``health courts.'' 
Health courts would serve as administrative courts to handle medical 
injury disputes. Judges would be health-care trained professionals 
assisted by independent experts to settle malpractice disputes between 
patients and health care providers.
    Plaintiffs would receive full economic damages, as well as non-
economic damages based on a compensation schedule. This new process for 
medical liability would also provide the injured party with an avenue 
to appeal with further review in the traditional court system. In 
addition to easing the medical liability burden, health courts would 
establish a mechanism that clear and consistent standards be developed 
based on cases and the opinions of the judges.
Conclusion
    The small business community needs substantial relief from 
escalating health insurance premiums. This level of relief can only be 
achieved through a broad reform of the health care system with a goal 
of universal coverage, focus on individual responsibility and 
empowerment, the creation of the right market-based incentives, and a 
relentless focus on improving quality while driving out unnecessary, 
wasteful, and harmful care.

                                 

      Statement of The National Association of Health Underwriters
    The National Association of Health Underwriters (NAHU) is a 
professional trade association representing more than 20,000 health 
insurance agents, brokers and employee benefit specialists all across 
America. Our members work on a daily basis to help individuals and 
employers of all sizes purchase health insurance coverage. They also 
help their clients use their coverage effectively and make sure they 
get the right coverage at the most affordable price.
    All of this experience gives our membership a unique perspective on 
the health insurance market place. Our members are intimately familiar 
with the needs and challenges of health insurance consumers, and they 
also have a clear understanding of the economic realities of the health 
insurance market. They have had the chance to observe the health 
insurance market reform experiments that have been tried by the states 
and private enterprise, and are in a unique position to report on which 
of these efforts have worked the best.
    NAHU access and cost issues in the individual health insurance 
market are certainly a problem with our current private health 
insurance marketplace, and we currently have a group of individual 
market health insurance benefit specialists working on detailed reform 
recommendations. Once these reform ideas are finalized in early 2009, 
we look forward to sharing them with both the Committee and the entire 
Congress. However, in the interim, NAHU would like to share with you 
some of our long-standing policy ideas relative to the individual 
health insurance market.
    The members of NAHU believe all Americans deserve a health care 
system that delivers both world-class medical care and financial 
security. Americans deserve a system that is responsible, accessible 
and affordable. This system should boost the health of our people and 
our country's economy. That being said, the system must also be 
realistic.
    We believe the time is right for a solution that controls medical 
spending and guarantees access to affordable coverage for all 
Americans. We believe this can be accomplished without limiting 
individuals' ability to choose the health plan that best fits their 
needs and ensures them continued access to the services of independent 
state-licensed counselors and advocates. We also believe that the 
federal government could adopt several key reform measures that would 
go a long way toward making individual health insurance coverage more 
affordable and more accessible to millions of Americans.
    The vast majority of privately insured Americans receive their 
health insurance coverage through their employer or the employer of 
their spouse or parent. The employer-based system currently provides 
more than 160 million Americans with reliable and efficient access to 
high-quality health coverage, and as we look to improve our nation's 
private market health care delivery system, we should build upon its 
many strengths. NAHU strongly supports employers making voluntary 
contributions toward the cost of their employees' health insurance 
coverage, and we believe the preservation of the current federal 
employer deduction and employee exclusion is critical in ensuring a 
healthy insurance market. We would oppose any attempt to alter the 
current tax treatment of employer-sponsored health insurance, including 
proposals to cap the exclusion or replace it with either an individual 
income tax credit or deduction.
    But as important as employer-sponsored health insurance is to our 
national coverage system, NAHU realizes it does not work for everyone. 
As such, federal tax laws should be updated to provide the same tax 
deductions to individuals and the self-employed that corporations have 
for providing health insurance coverage for their employees, although 
not at the expense of the existing employer coverage income tax 
exclusion. Congress should remove the 7.5 percent of adjusted gross 
limit of medical expenses on tax filers' itemized deduction Schedule A 
form, allow the deduction of individual insurance premiums as a medical 
expense, and equalize the self-employed health insurance deduction to 
the level corporations deduct by changing it from a deduction to 
adjusted gross income to a full deductible business expense on Schedule 
C.
    Additionally, the federal requirements regarding individual 
policies sold on a list-bill basis--whereby the employer agrees to 
payroll-withhold individual health insurance premiums on behalf of its 
employees and send the premium payments to the insurance carrier but 
does not contribute to the cost of the premiums--need to be clarified 
regarding the establishment of Section 125 plans, HIPAA group insurance 
protections, and the applicability of state-based individual health 
insurance laws and regulations.
    Another issue Congress should address with regard to individual 
health insurance coverage is making sure that people with serious 
medical conditions no access to employer-sponsored health insurance can 
buy a private health insurance product. Right now, in a number of 
states there are people who cannot buy individual health insurance at 
any price. Most states, but not all, have independently established at 
least one mandatory guaranteed purchasing option, the most common and 
effective of which is a high-risk health insurance pool. The federal 
government should require that all states have at least one private 
guaranteed purchasing option for all individual health insurance market 
consumers.
    In addition, to support state high-risk pools, who serve this 
population in 34 states, the federal government should continue to 
provide financial support to keep risk-pool premiums stable and allow 
states to provide risk-pool premium subsidies to low-income citizens 
and older beneficiaries (who tend to be charged the highest rates) to 
help ensure continued coverage for early retirees.
    Much of the national variations in individual market costs and 
access are caused by differences in state laws and regulations relative 
to individual market coverage. Therefore, Congress should actively 
encourage the states to create regulatory climates that ensure the 
availability of many affordable coverage options, and should offer 
premium subsidies to targeted populations in need of such support. One 
way that Congress could do this would be to make federal block grant 
funds available to states that encourage and reward health insurance 
innovations that utilize the strengths of the existing private 
marketplace. Examples of positive actions states can take to positively 
reform their individual health insurance markets include:

      Create broadly funded high-risk pools to serve 
individuals with serious medical conditions purchasing coverage in the 
individual health insurance marketplace.
      Allow for the assessment of insurable risk in the 
individual market for effective risk-management.
      Limit the cost-impact of unnecessary health insurance 
mandated benefit requirements through the creation of effective 
independent state mandated benefit review commissions and/or allowing 
the availability of limited mandates health benefit plan options.
      Create state-level subsidies of private health insurance 
premiums. Subsidies could target individual purchasers or employers 
offering coverage to employees, or both. Subsidies could also be 
indirect through a private and voluntary reinsurance mechanism.
      Modify their state Medicaid and/or State Children's 
Health Insurance Programs to allow for the subsidization of private 
health insurance coverage for eligible beneficiaries. Such subsidies 
could be created for use in either the employer-sponsored health 
insurance market (if such coverage was available to the beneficiary) or 
through the individual health insurance market. For individual market 
purchasers, Medicaid dollars could be used to fund individually 
controlled health care accounts, which could be used to purchase health 
care coverage in the private market, as well as to pay any health care 
related expenses that might not be covered by the private market plan 
due to deductibles or other cost-sharing arrangements.
      Provide state-level income and payroll tax incentives for 
the purchase of health insurance coverage. This could include 
refundable tax credits for the purchase of private market health 
insurance coverage, allowing for the deduction of health insurance 
premiums for individual and group health insurance purchasers, 
exclusion of Health Savings Account contributions from state income tax 
liability and/or other means determined by the states.

    Finally, NAHU must stress that by far, the greatest access barrier 
to health insurance coverage in America today, particularly in the 
individual health insurance market, is cost. NAHU believes that any 
successful comprehensive health reform plan will need to address the 
true underlying problem with our existing system--the cost of medical 
care. Constraining skyrocketing medical costs is the most critical and 
vexing aspect of health care reform. The cost of health care delivery 
is the key driver in rising health insurance premiums and it is putting 
the cost of health insurance coverage beyond the reach of many 
Americans.
    As such, NAHU urges the Committee to consider cost with every 
single health insurance market reform proposal you entertain. Not just 
whether or not the market reform idea includes cost containment 
elements, but also whether or not the market reform idea itself would 
cause health insurance premiums to increase. Great care needs to be 
taken when implementing market reforms on a national level to not 
inadvertently induce cost increases in the existing private market 
system. No matter how ``fair'' a market reform idea might seem on its 
surface, it's not at all ``fair'' if it also prices people out of the 
marketplace.
    A greater focus on medical cost containment will help lower health 
insurance premiums nationwide, since premium costs are directly related 
to medical care expenditures. But we also need to make sure that all 
Americans have access to affordable health care coverage. As important 
as affordability, is choice. There needs to be choice of providers, 
choice of payers and choice of benefits, with many price and coverage 
options. The reality is that we are a diverse nation with diverse 
needs. One size does not fit all when it comes to health care.
    NAHU believes that if serious steps are taken both to reduce 
overall medical care costs and increase consumer access to private 
insurance, the result will be will be greater degrees of health plan 
competition, more consumer plan choices, lower health insurance rates 
and a lower number of uninsured Americans. NAHU urges Congress to 
carefully consider the cost and market impact of all potential reforms 
to America's health insurance marketplace. Our private health insurance 
plans are innovative, flexible and efficient, and our marketplace is up 
to the task of responding to well-structured reforms. We look forward 
to working with you to both fill the gaps in our nation's coverage 
system and also to make private health insurance more affordable and 
accessible for all Americans.

                                 

    Statement of The National Association of Insurance Commissioners
    The NAIC represents the chief insurance regulators from the 50 
states, the District of Columbia, and five U.S. territories. The 
primary objective of insurance regulators is to protect consumers and 
it is with this goal in mind that the members of the NAIC submit these 
comments today on the health of the private insurance market.
    To begin, we recognize the failures in the current market, they are 
well documented. Over 15 percent of Americans, almost 46 million 
people, go without coverage. For most, coverage is simply too 
expensive, a result of medical spending that has run out of control and 
consumes 16 percent of our economy. For others, those without coverage 
through an employer and with health problems, coverage is not available 
at any price. For Americans lucky enough to have insurance, premiums 
take ever larger bites out of the monthly paycheck, even as rising 
deductibles and co-payments shift more of the financial burden of 
sickness to the patient. Insurance Commissioners see this every day, 
and we welcome Congress' interest in helping the states tackle this 
challenge.
    State insurance commissioners believe it is important to ensure 
that affordable, sufficient health coverage is available to small 
business owners, their employees, and individuals. The NAIC offers its 
full support in developing federal legislation that will reach this 
goal--a goal that can only be attained through federal-state 
coordination. We offer the experience and expertise of the states to 
Congress as it attempts to improve the health insurance marketplace.
STATE EXPERIENCE
    States led the way in requiring insurers to offer insurance to all 
small businesses in the early 1990s, and the federal government made 
guaranteed issue the law of the land in 1996 \1\ for all businesses 
with 2-50 employees. Federal law does not limit rating practices, but 
forty eight states have supplemented the guaranteed issue requirement 
with laws that limit rate variations between groups, cap rate 
increases, or impose other limitations on insurer rating practices. 
These rating laws vary significantly in response to local market 
conditions, but their common objective is to pool and spread small 
group risk across larger populations so that rates are more stable and 
no small group is vulnerable to a rate spike based on one or two 
expensive claims.
    In addition to requiring insurers to pool their small group risk, 
many states have established various types of purchasing pools and have 
licensed associations to provide state-approved insurance products to 
their members.
    States continue to experiment with reinsurance, tax credits and 
subsidies, and programs to promote healthier lifestyles and manage 
diseases as they pursue the twin goals of controlling costs and 
expanding access. These state-based reforms are, of necessity, very 
distinct--based on both the specific needs in the marketplace and the 
strengths and weaknesses of the marketplace. For example, the State of 
New York implemented the very successful ``Health NY'' program, a 
reinsurance-based program that addresses many of the problems 
identified in New York's individual and small group markets, but 
utilizing its strong HMO networks. Likewise, the Commonwealth of 
Massachusetts has implemented broad reforms built on past reforms and 
the unique insurer, provider and business environment.
    As always, states are the laboratories for innovative ideas. We 
encourage federal policymakers to work closely with their state 
partners, as well as with health care providers, insurers and 
consumers, to identify and implement reforms that will make insurance 
more affordable to small businesses. And remember, all significant 
reforms will have significant consequences--both positive and negative.
KEYS TO REFORM
    Based on the experience and expertise of the states, we encourage 
Congress to consider these four keys for successful health insurance 
marketplace reform:
    Address Health Care Spending. Any effort to increase access to 
insurance will not be successful over time unless the overriding issue 
of rapidly rising health care costs is also addressed. While the health 
care challenge in this country is generally expressed in terms of the 
number of Americans without health insurance coverage, the root of the 
problem lies in the high cost of providing health care services in this 
country. According to the most recent National Health Expenditures 
data, health care spending reached $2.1 trillion in 2006, 16 percent of 
GDP and $7,026 for every man, woman and child in the United States.\2\ 
This level is twice the average for other industrialized nations.
    This level of health care spending has badly stressed our health 
care financing system. Health insurance reform will not solve this 
problem, since insurance is primarily a method of financing health care 
costs. Nevertheless, insurers do have a vital role to play in reforms 
such as disease management, enhanced use of information technology, 
improved quality of care, wellness programs and prevention, and 
evidence-based medicine--all of which have shown promise in limiting 
the growth of health care spending. Whatever is done in insurance 
reform should be done in a manner that is consistent with sound cost 
control practices.
    Protect the Rights of Consumers. States already have the patient 
protections, solvency standards, fraud prevention programs, and 
oversight mechanisms in place to protect consumers; these should not be 
preempted by the federal government. As the members of this committee 
know all too well, the preemption of state oversight of private 
Medicare plans has led to unethical and fraudulent marketing practices 
and considerable harm to thousands of seniors. In similar fashion, the 
Employee Retirement Income Security Act of 1974 (ERISA) severely 
restricts the rights of employees covered by a self-insured plan. We 
urge federal policymakers to preserve state oversight of health 
insurance and avoid preempting or superseding state consumer 
protections.
    Avoid Adverse Selection. Any program that grants consumers the 
choice between two pools with different rating, benefit, or access 
requirements will result in adverse selection for one of the pools. For 
example, if a national pool does not allow rating based on age or 
health status, while the state pool does allow rating based on those 
factors, then the national pool will attract an older, sicker 
population. Such a situation would be unworkable. While subsidies or 
incentives could ameliorate some of the selection issues, as costs 
continue to rise and premiums increase the effectiveness of such 
inducements could erode.
    Promote State Innovation. The NAIC urges Congress to review current 
federal laws and regulations that hinder State efforts to reform the 
health care system. As mentioned earlier, laws such as ERISA curtail 
consumer protections and supersede State laws, limiting the reform 
options available to states. In addition, inadequate reimbursement 
payments in federal health programs have led to shifting of costs to 
the private sector. This has resulted in higher overall costs and 
decreased access for many consumers, and limits the ability of states 
to implement reforms.
    To promote innovations and eliminate these barriers, the NAIC 
supports legislation like H.R. 506, the Health Partnership Through 
Creative Federalism Act, that provides funding for state initiatives 
and establishes procedures for waiving federal requirements, such as 
certain ERISA provisions, that impede state innovation.
    Just as important, Congress must carefully consider the impact of 
any new federal reforms on the states' ability to be effective partners 
in solving our health care crisis.
CONCLUSION
    Years have been spent talking about broad health care reforms that 
will ensure that all Americans have access to affordable health 
insurance coverage and the peace of mind that goes with it. Action is 
long overdue.
    The NAIC encourages Congress and the Members of this Committee to 
work with states and learn from past reforms. Together, we can 
implement successful initiatives that will truly protect and assist all 
consumers.

                                 
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