[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE HEALTH OF THE PRIVATE HEALTH
INSURANCE MARKET
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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
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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
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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\
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\1\ Census data.
\2\ CRS Report for Congress Federal Employees Health Benefits
Program: Available Health Insurance Options, November 26, 2007.
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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.
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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.
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\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).
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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\
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\2\ J. M. Kingsdale, Executive Director's Monthly Message, The
Massachusetts Commonwealth Connector, Aug. 25, 2008.
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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\
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\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).
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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\
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\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.
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\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.
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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\
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\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).
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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.
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\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.
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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\
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\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).
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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.
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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\
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\21\ MedPAC Report to the Congress: Medicare Payment Policy, March
2006, p.85.
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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.
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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\
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\1\ Kaiser Family Foundation and Health Research Educational Trust,
Survey of Employer-Sponsored Health Benefits, 1999-2007.
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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.
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\2\ KFF/HRET, Survey of Employer Sponsored Health Benefits, 2007
\3\ CMS, National Health Expenditure Data for 2006
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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\
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\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.
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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\
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\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
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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\
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\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
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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.
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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.
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\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.
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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.
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\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.
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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.
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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\
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\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.
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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\
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\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.
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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.
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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.
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\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.
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\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).
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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.