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




 
                       STATE COVERAGE INITIATIVES

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

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

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 15, 2008

                               __________

                           Serial No. 110-91

                               __________

         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
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL, JR., New Jersey       JON PORTER, Nevada
SHELLEY BERKLEY, 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
STEPHANIE TUBBS JONES, Ohio
RON KIND, Wisconsin

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


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of July 15, 2008, announcing the hearing................     2

                               WITNESSES

Alan Weil, Executive Director, National Academy for State Health 
  Policy.........................................................     6
The Honorable JudyAnn Bigby, M.D., Massachusetts Secretary of 
  Health and Human Services, Boston, Massachusetts...............    12
Jack Lewin, M.D., Chief Executive Officer, American College of 
  Cardiology.....................................................    15
Trish Riley, Director, Maine Governor's Office of Health Policy 
  and Finance, Augusta, Maine....................................    23
Edmund F. Haislmaier, Senior Research Fellow, The Heritage 
  Foundation.....................................................    28

                       SUBMISSIONS FOR THE RECORD

AARP, Statement..................................................    70
 Cleveland Jobs with Justice, Letter.............................    72
James Donbavand, Letter..........................................    73
Jill Levine and Ray DiCarlo, Letter..............................    74
The Milliman Medical Index, Letter...............................    76


                       STATE COVERAGE INITIATIVES

                              ----------                              


                         TUESDAY, JULY 15, 2008

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:04 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
July 08, 2008
HL-27

    Chairman Stark Announces a Hearing on State Coverage Initiatives

    House Ways and Means Health Subcommittee Chairman Pete stark (D-CA) 
announced today that the Subcommittee on Health will hold a hearing on 
State Coverage Initiatives. The hearing will take place at 10:00 a.m. 
on Tuesday, July 15, 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:

      
    With a growing number of uninsured individuals and limited action 
on the federal level, states are tackling health care reform. Several 
states have attempted to initiate health care reform to cover 
significant portions of the uninsured residents in their states. In the 
1970s, Hawaii was the first state to try and achieve universal health 
care coverage. More recently, 3 states, Massachusetts, Vermont and 
Maine, have enacted universal coverage initiatives.\1\ An additional 14 
state Governors and legislatures have proposed universal coverage. 
Early results from Massachusetts have been encouraging, although key 
challenges remain. Massachusetts has expanded affordable coverage to 
355,000 people by establishing new coverage programs, setting 
individual affordability standards and penalties to implement an 
individual mandate, and launching new requirements for employers. 
Massachusetts is offering valuable lessons to other states and the 
nation.
---------------------------------------------------------------------------
    \1\ http://www.kff.org/uninsured/kcmu_statehealthreform.cfm
---------------------------------------------------------------------------
      
    However, even though a few states are finding the funding and 
pursuing bold coverage initiatives, the vast majority of states have 
either been unable to implement major initiatives or have not even 
attempted to do so. In fact, many of the states that have attempted 
health reform have done so leveraging federal Medicaid and State 
Children's Health Insurance Program (SCHIP) funding and still must 
consider long-term financing for their programs. Annual balanced 
budgeting, differences in the percent of uninsured and variation in 
states' average incomes are just a few reasons why some states have a 
much higher burden to implement health care reform. A state-by-state 
approach to health care reform would result in vast variation in 
coverage across the nation, as some states decide to implement 
universal coverage and others do not.
      
    In announcing the hearing Chairman Stark said: ``Comprehensive 
health reform must be a priority for the next President and Congress. I 
welcome the opportunity to learn from state efforts as Congress 
considers health solutions in the coming year. It is important we 
understand the successes and difficulties of the states as we prepare 
to embark on national health care reform.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the health care reform lessons learned at 
the state level as well the need for a national solution on health care 
reform.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
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of business Tuesday, July 29, 2008. Finally, please note that due to 
the change in House mail policy, the U.S. Capitol Police will refuse 
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or if you encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman STARK. Welcome. We will begin our hearing on state 
health initiatives. And we have often felt that one of the ways 
to achieve affordable health care is to have several of our 
major states lead the way. And Federal Government would then be 
called in to see that comprehensive reform would combine the 
state's efforts and the federal efforts to get us to a national 
plan. The U.S. would then finally join the rest of the 
industrialized world in ensuring that everyone has access to 
affordable health care.
    Now, unfortunately, the--given the experience to date, it 
seems unlikely that any one state will set the basis for the 
nation.
    Today's witnesses include experts and officials who have 
been at the forefront of state reform efforts. And I believe we 
will hear that it's very difficult for them to move forward, 
one at a time, and achieve complete uniform affordable coverage 
for every resident.
    However, a few states have been able to make remarkable 
gains in reducing the number of uninsured, and many are 
hampered by numerous issues: state balanced budget 
requirements, volatile financing, the need for Federal waivers 
from ERISA and other Federal laws. All of those are challenging 
states' programs.
    Canada achieved universal health care, just as I described, 
one province at a time. But that was four years ago, and we 
face a different situation. We have a larger and more diverse 
population. Health care costs have risen tremendously, and 
special interests have grown ever more entrenched and committed 
to maintaining the status quo.
    So, while we have made progress here, states have been 
trying health care reforms for the last four decades, and we 
have relatively few successes in those that have tried, and 
many states haven't even attempted. It seems there will always 
be states that are unable to implement these reforms on their 
own, for one reason or another.
    But today we will hear from a panel of experts that include 
state officials who study and aid state policy makers. I look 
forward to hearing their testimony, and we hope we can learn 
from their experience, both the successes and failures, as we 
begin to consider health care reform for our Nation.
    My premise may still hold true, that the states will lead 
the way and bring the Federal Government kicking and screaming 
to the table, but there is an important caveat. Instead of 
needing several states to achieve universal health care, we 
simply need several key states who are trying to meet that 
goal, and can show us the way that we can, through a state and 
Federal partnership, achieve that goal.
    I think today we will hear that there is no lack of 
commitment at the state level, but states hit road blocks in 
every way. So I look forward to the testimony of our witnesses, 
and I would like to ask Mr. Camp if he has any opening remarks.
    Mr. CAMP. Well, thank you, Mr. Chairman. And thank you for 
convening this hearing on state health care reforms.
    In recent months, this subcommittee has heard testimony on 
the many challenges facing our health care system. Each of 
those hearings has broadened the debate on health care reform, 
and, I believe, highlighted the need to address this issue 
sooner, rather than later.
    Today, we will hear directly from the states which are on 
the frontlines of this battle. Many states, including those 
testifying today, have taken steps to ensure their citizens 
have adequate access to the health care system. And, Mr. 
Chairman, I believe this could be one of the most important 
hearings we have this year, because, at the end of the day, to 
make significant reforms in our health care system, we will 
need to work hand in hand with state governments.
    In fact, much of the work being done at the state--by the 
states on health care reminds me of welfare reform in the early 
nineties. And many on this Committee will remember that before 
we enacted the 1996 welfare reform law, states like Wisconsin 
and Michigan had already begun to make changes to their welfare 
programs.
    Instead of enacting overly broad national mandates, we gave 
great--the states greater resources and flexibility to craft 
programs that fit their own populations. And I think the 
lessons we learned from that reform a decade ago can be applied 
to health care. It is my opinion that states are the most 
appropriately situated to design health care plans that meet 
the needs of their citizens. And Congress should be looking at 
what works and what does not work in the states.
    Even more importantly, we should be breaking down the 
barriers that are preventing states from trying to address 
their own difficulties. And we will hear today that many of the 
successes in the states were only possible through waivers of 
existing law by CMS and HHS. So, who would have thought that 
the answer lied with eliminating unnecessary, burdensome, and 
unworkable Federal mandates?
    As we look at what the states are doing, we must not 
overlook the single largest obstacle for providing health 
insurance: the discriminatory tax treatment for individuals who 
purchase health insurance on their own. To spur the expansion 
of health coverage after World War II, Congress gave employers 
a huge tax benefit to offset the costs of providing health care 
to their employees.
    This led to our current model today, where you either get 
care through the government or an employer. Eighty-5 percent of 
all Americans receive health care through their employer, and 
this has left upward, depending on how you count it, 40 million 
Americans uninsured or under-insured. I firmly believe we must 
address this inequity in the tax treatment with other reforms 
to adequately address the issue of health coverage.
    Mr. Chairman, this is an important issue. I don't think is 
necessarily a Republican issue or a Democrat issue. And when we 
talk about health care, it shouldn't matter which party you're 
in. We really must talk about an American solution. And I 
believe we can work together to support the states and their 
efforts to craft innovative solutions. But we must also be 
forward-thinking and develop new solutions for the millions of 
Americans that are demanding health care choices.
    Again, thank you, Mr. Chairman, for calling this hearing. 
And, with that, I yield back.
    Chairman STARK. Thank you. We're going to have one panel 
this morning. Alan Weil, who is the executive director of the 
National Academy [sic] for State Health Policy--a peek at his 
testimony suggests that he is going to give us an overview of 
the progress that states have made. In the late nineties, Mr. 
Weil was the state Medicaid commissioner for the Democratic 
Governor of Colorado.
    We will hear from Dr. JudyAnn Bigby, who is Secretary of 
Health and Human AServices for the Commonwealth of 
Massachusetts. Secretary Bigby will provide, we believe, an 
overview of the implementation of their coverage initiative and 
its progress to date, and perhaps discuss the challenges ahead.
    Dr. Jack Lewin is familiar to many of us. He made a 
terrible, terrible mistake in his career path years ago when he 
left the great state of Hawaii, because we could have had the 
hearing there if he was still there. He moved from Hawaii--I 
must say moved up to the great state of California--and now is 
chief executive officer of the American College of Cardiology. 
I don't know just what Jack is going to tell us about, but I am 
sure he will discuss Hawaii's--I think first state to mandate 
coverage for all residents. And back in 1986, whenever that 
started, and what's happened to that since, and I think we will 
find that interesting.
    Mr. Haislmaier, with the Heritage Foundation, and he has 
worked with several states in designing their health reform 
initiatives. I think he will talk to us about the themes that 
states have raised during his work, and the challenges they 
face. He is a strong proponent of consumer-driven health care, 
and is going to give us some alternatives to the plans that are 
on the books.
    Ms. Trish Riley is the director of Maine Governor's Office 
of Health Policy and Finance. She will talk about Governor 
Baldacci's successful passage of a comprehensive health reform 
act, the Dirigo Heath Reform Act of 2003, and advise us to how 
that is doing, and whether or not our former colleague can run 
for reelection on the success of that plan, or whether he 
should look to his cousin success in writing mystery novels, 
and perhaps move that way.
    So, we will just start down with the panel. Mr. Weil, if 
you would like to lead off, if you each want to take about 5 
minutes to summarize, I am sure that the Members will want to 
inquire in more depth as you complete your testimony. Please 
proceed.

STATEMENT OF ALAN R. WEIL, EXECUTIVE DIRECTOR, NATIONAL ACADEMY 
                    FOR STATE HEALTH POLICY

    Mr. WEIL. Thank you, Chairman Stark, Ranking Member Camp, 
distinguished Members of the Committee. My name is Alan Weil, I 
am the executive director of the National Academy for State 
Health Policy. NASHP is a non-profit, non-partisan organization 
that works with leaders in state health policy to identify 
emerging issues and address challenges in state health policy 
and practice.
    This is an exciting time for states in our Nation, as the 
call for significant health care reforms grows louder. States 
are considering and implementing innovative and promising 
strategies to reverse the trend of an increasing number of 
Americans without health insurance.
    Yet, given the barriers states face, my overarching message 
to you today is that states cannot do this alone. Federal 
leadership is required. In the absence of Federal action, a 
broad array of states in all regions of the country 
representing quite varied ideological perspectives is pursuing 
health reforms. You will hear about some of these efforts from 
other witnesses.
    But despite successes, the states' ability to address our 
health care challenges is limited. States are constrained for 
many reasons. They lack authority to affect many of the health 
care activities within their borders. About half of a typical 
state's residents are completely outside the reach of state 
authority, because they are enrolled in Medicare, have coverage 
through an employer that self-insures, or obtains services 
through various Federal programs.States face budgetary 
constraints, due to balanced budget requirements, and due to 
Federal policy that requires that Medicaid waivers be budget-
neutral with respect to Federal costs. Expecting states to 
address the many vexing health policy issues on their own is 
unrealistic, and constrains the number of states that can even 
make such an effort.
    Given these challenges, it is not surprising that only 
three states in the last decade--Maine, Vermont, and 
Massachusetts--have adopted comprehensive reforms, and efforts 
in larger states, such as California, Illinois, and 
Pennsylvania, remain stalled.
    Now, while state efforts make a real contribution, Federal 
leadership is needed to make substantial sustained progress in 
health reform. Federal leadership could take several forms, 
including one that provides a substantial role for states to 
operate within a national framework. Indeed, approaches that 
combine the resources, stability, and uniformity of Federal 
involvement, with the dynamism of local involvement and 
creativity of states, can foster excellent results.
    The Federal Government can bring its clout, as the largest 
purchaser, and stable funding to weather economic ups and 
downs, and standards that ensure that all Americans have 
meaningful access to needed services. States can design the 
details of a plan to conform to local market and medical 
practice conditions, develop models that enable us to learn 
what does and does not work, and ensure that program operations 
reflect local values. Federal waivers, though helpful in some 
instances, are no substitute for a clear, Federal commitment.
    Federal leadership is required, if we are to bring down 
unwarranted variation across the country in health care 
practice and costs. A recent Commonwealth Fund report describes 
interstate variation in the use of antibiotics to reduce the 
risk of infection during surgery. Variation across states in 
the share of the adult population without health insurance has 
existed for decades. And in recent studies, they have ranged 
from a high of 35 percent in Texas to a low of 11 percent in 
Minnesota. National requirements, resources, and benchmarks can 
all serve to close some of these gaps.
    The importance of Federal leadership is clearly 
demonstrated in the contrast between our recent experience 
covering adults and children. For adults, we have no national 
coverage strategy. Medicaid, which is the nation's primary 
commitment to health care to the poor, explicitly excludes non-
elderly adults, unless they have a disability or dependent 
children.
    For children, we have a national strategy. Despite some 
limitations, Medicaid and SCHIP extend coverage to nearly all 
children in families with incomes up to twice the poverty 
level. And the contrast, then, is stark. Between 1996--1999 and 
2006, the percentage of uninsured adults increased in 43 
states, while the percentage of uninsured children decreased in 
32 states. The combination of a national priority with the 
resources to support it and state flexibility and the methods 
for achieving it can yield tremendous results.
    In my job, I have the opportunity to speak to many state 
officials. Their message is surprisingly consistent, regardless 
of job title, political affiliation, or state. They are doing 
what they can to address issues and problems that are bigger 
than the resources available to them. They are eager for 
Federal leadership, they feel its absence, but they are also 
nervous about a heavy-handed or one-size-fits-all approach.
    A true Federal solution to our health care problems 
requires something like a joint venture: cooperation between 
the Federal Government and the states that states have not seen 
lately. Delays in SCHIP reauthorization, CMS's August 17th 
letter, the new Medicaid citizenship and identity documentation 
burdens have all impeded state efforts to cover more folks.
    Ultimately, in the absence of federal action, states will 
lead and states will accomplish as much as they can, given the 
constraints they face. But piecemeal state action will never 
add up to what the nation needs. A national response that 
honors the history of American Federalism would include a 
series of national commitments to universal coverage, improved 
access and quality, and tempering cost growth that frame and 
support what states can do.
    I thank you for the opportunity to appear before the 
Committee today.
    [The prepared statement of Mr. Weil follows:]

Statement of Alan Weil, Executive Director, National Academy for State 
                             Health Policy

    Chairman Stark, Ranking Member Camp and other distinguished Members 
of the Ways and Means Health Subcommittee, my name is Alan Weil and I 
am the Executive Director of the National Academy for State Health 
Policy (NASHP). NASHP is a non-profit, nonpartisan organization that 
has worked with state leaders for more than two decades helping them to 
identify emerging issues and address challenges in state health policy 
and practice. NASHP seeks to amplify the voice of state health 
officials and support interstate learning--roles that we believe will 
be particularly important as health care rises on the national agenda.
    This is an exciting time for states and our nation as the call for 
significant health care reforms grows louder. States are considering 
and implementing innovative and promising strategies to reverse our 
nation's trend of an increasing number of Americans without health 
insurance. Yet, states face substantial limitations in what they can 
accomplish in the absence of further support at the national level. 
States have demonstrated critical leadership and hold great promise for 
the success of any major coverage reforms, but states cannot do this 
alone. States need a national framework in order to achieve the promise 
of health reform--a framework of federal support, assistance, and 
guidance. I will discuss each of these points in my testimony \1\
---------------------------------------------------------------------------
    \1\ Much of this testimony draws from my article ``How Far Can 
States Take Health Reform?'' which appeared in the May/June 2008 issue 
of Health Affairs at pages 736-747.
---------------------------------------------------------------------------
1.  States are leading the way addressing major health system 
        challenges.
    In the absence of federal action, states are leading the way in 
addressing many of the major challenges facing the American health care 
system. States are responding to the concerns raised by families, 
businesses, and health care providers and have made progress in 
improving access to health coverage, containing health costs, and 
improving quality.
    A broad array of states in all regions of the country representing 
quite varied ideological perspectives is pursuing health reforms. Some 
state efforts are comprehensive in scope; others focus on particular 
problems facing the health care system. Although Massachusetts has 
received the most attention recently for its groundbreaking reforms 
that have already cut the number of people without health insurance in 
their state by half, many other states are also making real progress 
toward this goal. Iowa recently passed legislation to improve 
enrollment and retention for children in public programs and strengthen 
consumer protections in the private market. Wisconsin has taken 
advantage of options available under the Deficit Reduction Act to 
expand coverage to parents and children and simplify and modernize its 
Medicaid and SCHIP programs. Louisiana is a leader in providing 
coverage for low- and moderate-income children.
    States long ago learned that they cannot afford major coverage 
expansions if they do not also improve the quality of health care and 
contain the growth in health care costs. Efforts to address quality, 
cost, and the demand for health care services are too many to count. 
Minnesota recently passed landmark legislation to establish a unified, 
statewide system of quality-based incentive payments and to help 
consumers and other purchasers compare providers on overall cost and 
quality of care. Pennsylvania has taken a comprehensive and innovative 
approach to reducing medical errors. North Carolina is a recognized 
leader in improving care for Medicaid enrollees with chronically 
illnesses. Arkansas is celebrated for its innovative approach to 
reducing childhood obesity. South Dakota has focused on ensuring that 
the elderly receive oral health care. Vermont's health reform efforts 
include a state-wide system of care to address chronic conditions.
    While ideological differences exist around the country, states have 
demonstrated that it is possible to find middle ground on health care. 
They have overcome partisan and stakeholder differences to adopt 
reforms designed to address the real challenges and problems their 
residents face. The middle ground generally includes some combination 
of expanding public programs, subsidizing families and businesses to 
make insurance coverage more affordable, and demonstrating a real 
commitment to controlling program and overall system costs. States have 
eschewed policies at either extreme: avoiding approaches that rely on a 
single payer approach or that expect unregulated markets to solve the 
problems of the health care system.
    State political leadership and successes have ignited hope across 
the nation that solutions can be found to problems in our health care 
system. While many of these problems continue to get worse, it is state 
experience that allows us to have optimism about the future.

2.  States' ability to address major health care system challenges is 
        limited.
    Despite some successes, the states' ability to address the health 
care challenges our nation faces is limited. States are constrained for 
many reasons. They face statutory, market, financial, and structural 
constraints that will always prevent them from achieving the broad-
based, system-wide reforms we need.
    States lack the authority to affect many of the health care 
activities within their borders. About half of a typical state's 
residents are completely outside the reach of state authority because 
they are enrolled in Medicare, have coverage through an employer that 
self-insures, or obtain services through the Department of Veterans 
Affairs, Indian Health Service, or other programs. Medicare acts 
independently of state policy in exercising its dominant role as a 
purchaser of health care services. The Employee Retirement Income 
Security Act of 1974 (ERISA) preempts state laws that relate to private 
employer-based health plans. National and multinational insurers, 
hospital systems, pharmaceutical companies and medical supply companies 
operate beyond the reach of state legal authority but have a 
significant effect on health care costs within a state. Although it is 
possible for states to design reforms that fit within their current 
authority, these boundaries foreclose a series of options that might be 
more effective.
    States also face important budgetary constraints. Current federal 
policy is that state reforms must be budget neutral with respect to 
federal Medicaid and State Children's Health Insurance Program (SCHIP) 
costs. Expecting states to address the many vexing issues in health 
policy on their own is unrealistic and severely limits the number of 
states that can even make such an effort. In addition, unlike the 
Federal Government, all but one state operates under a balanced budget 
requirement. Any successful health coverage plan must be able to 
operate through all phases of the economic cycle--a particular 
challenge for state-based reforms. This fiscal year, as many as 28 
states are reporting budget shortfalls, creating pressure for states to 
cut services and government spending even as they are seeking 
opportunities to expand coverage.

3.  Federal Leadership is Needed.
    Given the challenges noted above, we should not be surprised that 
only three states--Maine, Vermont, and Massachusetts--have adopted 
comprehensive approaches to health care reform within the last decade. 
Meanwhile, reform efforts remain stalled in larger states such as 
California, Illinois, and Pennsylvania. While state efforts make a real 
contribution, federal leadership is needed to make substantial, 
sustained progress in health reform efforts.
    Federal leadership could take several forms including one that 
provides a substantial role for states to operate within a national 
framework. Indeed, approaches that combine the resources, stability and 
uniformity of federal involvement with the dynamism, local involvement, 
and creativity of states can foster excellent results. The Federal 
Government can bring its clout as the largest purchaser, stable funding 
that can weather economic ups and downs, and standards that can assure 
all Americans they will have meaningful access to needed health care 
services. States can design the details of any plan to conform to local 
market and medical practice conditions, develop various models that 
enable us to learn what works and what does not, and assure that 
program operations reflect local values.
    A ``joint venture'' approach between the Federal Government and 
states would enable states to continue to serve as the laboratories of 
democracy. But if states are to serve as laboratories, they need to be 
afforded the resources necessary to achieve the high hopes we have for 
them. All credible national proposals for health reform come with a 
price. States cannot pursue comprehensive health reform without 
substantial and reliable financial participation by the Federal 
Government. Medicaid provides a solid platform on which states can 
build, but coverage expansions are generally dependent on waiver 
negotiations, which are time-limited and subject to much discretion on 
the part of the Federal Government. Some grand redistributive scheme 
might theoretically allow for the provision of insurance coverage to 
everyone for the amount of money already in the health care system; 
however this is not a realistic approach when limited to a single 
state.
    A serious endeavor to support state efforts would have to build in 
a long-term financial commitment proportionate to the share of the 
problem states are expected to address. In addition, a serious state-
based effort would need to anticipate the challenge of providing quite 
variable amounts of money to different states, given the tremendous 
disparity in the scale of the problem each state faces.
    A genuine commitment to having the states function as laboratories 
would require revitalizing the research and demonstration component of 
Section 1115 waivers, expanding the commitment to evaluation in all 
program waivers, and moving away from budget neutrality as the guiding 
principle of waiver approval. Despite the fact that Medicaid Section 
1115 waivers provide states with flexibility for ``research and 
demonstration,'' these waivers are often granted primarily to enable 
states to make budget neutral program changes with a very small 
research component. A commitment to experimentation would include a 
willingness to spend money on ideas that might yield improvements along 
a number of dimensions other than short-term program spending, 
including improving the quality of care patients receive and lessening 
the likelihood of more expensive interventions.
    Federal waivers, while helpful in some instances, are no substitute 
for a clear federal commitment. Some have suggested that federal reform 
proposals include ``ERISA waivers'' that would allow a federal agency 
or group of federal officials to waive provisions of ERISA on a short-
term basis. These waivers are just another form of uncertainty--for 
businesses and for states--and they grant excessive authority to 
federal program administrators. By contrast, carefully crafted federal 
safe harbors--policies that states can adopt that would be defined as 
permitted under federal law--would provide clear guidance and could be 
designed to avoid undue burden on multi-state employers while also 
enabling true state experimentation. For example, states should have 
the authority to adopt uniform ``pay-or-play'' strategies to finance 
broad-based coverage initiatives. States should be able to require 
self-funded employers to participate in premium assistance programs. 
And states should be able to mandate participation from all public and 
private payers in state-wide data collection and system performance 
improvement projects.
    Finally, federal leadership is important as a means to bring down 
unwarranted variation across the country in health care practice and 
costs. A recent Commonwealth Fund report describes interstate variation 
across dimensions such as appropriate use of antibiotics to reduce the 
risk of infection during surgery and the incidence of deaths amenable 
to health care.\2\ Variations across states in the share of the adult 
population without health insurance has existed for decades; in 2004-
05, these ranged from a high of 35 percent of adults uninsured in Texas 
to a low of 11 percent of adults uninsured in Minnesota. National 
requirements, resources, and benchmarks can all serve to close some of 
these gaps.
---------------------------------------------------------------------------
    \2\ J. Cantor et al., Aiming Higher: Results from a State Scorecard 
on Health System Performance (New York: The Commonwealth Fund, 2007).
---------------------------------------------------------------------------
    By contrast, when states operate entirely on their own, they are 
likely to yield increased variation in health coverage, access and 
quality across states. States tend to build on their own successes, 
pushing the leaders farther ahead and leaving others behind. Diffusion 
of policy innovations both among states and from states to the Federal 
Government is slow and sometimes does not occur at all. A desirable 
reaction to high levels of variation in health care is to set national 
goals based on best practices. State and national policy efforts can 
then be focused on raising the bar for everyone and reducing the degree 
of variation through strategies that bring those farthest behind closer 
to the front of the pack.
    Ultimately, federal leadership matters. Consider the example of 
adults' and children's health insurance coverage. Compare the change in 
health coverage status of adults and children in the United States over 
the past decade. For adults, there is no national strategy. Medicaid, 
which represents the nation's primary commitment to meeting the health 
needs of the poor, explicitly excludes non-elderly adults from coverage 
unless they have a disability or have children living with them. For 
children, there is a national strategy. Despite some important 
exceptions and limitations, the combination of Medicaid and SCHIP 
extends coverage to almost all children living in families with incomes 
up to twice the federal poverty level. The contrast is stark: between 
1999-2000 and 2005-2006, the overall percentage of uninsured adults 
increased in 43 states while the percentage of uninsured children 
decreased in 32 states. The combination of a national priority with the 
resources to support it and state flexibility in the methods for 
achieving national goals can yield tremendous results.

4.  States Can Be Effective Partners in Meeting Health Care Needs.
    In my job I have the opportunity to speak to a broad array of state 
health officials. Their message to me is surprisingly consistent 
regardless of their job title, political affiliation, or state. They 
are doing what they can to address issues and problems that are bigger 
than the resources they have to respond. They are eager for federal 
leadership and they feel its absence. But they are also nervous about a 
heavy-handed or one-size-fits-all approach.
    Recent experience, particularly related to state coverage efforts 
in Medicaid and SCHIP, has been dispiriting for states. A number of 
developments at the federal level have disappointed state expectations 
of funding or frustrated state efforts to move forward with coverage 
initiatives funded in part with federal funds. The inability of 
Congress and the President to agree on SCHIP reauthorization presents 
states with tremendous uncertainty regarding how to finance coverage. 
The Centers for Medicare and Medicaid Services (CMS) issued a letter on 
August 17, 2007, without any prior consultation with states, the terms 
of which undermined a variety of state plans to cover children.\3\ New 
citizenship and identity documentation burdens in Medicaid have 
increased administrative costs and resulted in the disenrollment of 
eligible citizens. Additional limitations on available Medicaid funds 
through regulations and sub-regulatory initiatives have undermined 
federal support for the most vulnerable populations and shifted burdens 
to states even as state budgets are tightening.\4\ All of these events 
have served to limit state progress and squelched enthusiasm for 
federal-state partnerships.
---------------------------------------------------------------------------
    \3\ See J. McInerney, M. Hensley-Quinn and C. Hess, The CMS August 
2007 Directive: Implementation Issues and Implications for State SCHIP 
Programs (Washington, DC: National Academy for State Health Policy, 
April 2008). http://www.nashp.org/Files/shpbriefing_cmsdirective.pdf
    \4\ See S. Schwartz and J. McInerney, Examining a Major Policy 
Shift: New Federal Limits on Medicaid Coverage for Children 
(Washington, DC: National Academy for State Health Policy, April 2008) 
http://www.nashp.org/_docdisp_page.cfm?LID=C7DE48DC-68F8-46B2-
A56741E6A8F6EFEE
---------------------------------------------------------------------------
    A true, federal solution to our health care problems requires a 
more cooperative approach between the Federal Government and states--
one that respects state investment and provides the tools and resources 
states need to be an effective partner in achieving health reform 
goals.
Conclusion
    I conclude with the same words I used in the article I wrote on 
this subject:
    ``In the absence of federal action, states will lead, and states 
will accomplish as much as they can, given the constraints they face. 
But piecemeal state action will not add up to what the nation needs. A 
national response that honors the history of American federalism would 
include a series of national commitments that frame and support what 
states can do--indeed, what they are eager to do.''

                                 

    Chairman STARK. Thank you very much.
    Ms. Bigby.
    Dr. BIGBY. Good morning.
    Chairman STARK. Good morning.

 STATEMENT OF JUDYANN BIGBY, M.D., MASSACHUSETTS SECRETARY OF 
        HEALTH AND HUMAN SERVICES, BOSTON, MASSACHUSETTS

    Dr. BIGBY. I want to thank you, Chairman Stark and Ranking 
Member Camp, for inviting me to testify before this hearing 
today on state health care reform. I am JudyAnn Bigby, I am the 
secretary of health and human services for the Commonwealth of 
Massachusetts, and I am honored to be here today to represent 
Massachusetts and Governor Deval Patrick, to tell you about the 
efforts to reform health care in Massachusetts.
    I want to start by telling a very brief story. I have lived 
in the community that I currently live in for over a decade. I 
have taken my clothes to the same dry cleaners for that period 
of time. A few months ago, the woman who is the co-owner, with 
her husband, of this family business said, ``Oh, Dr. Bigby, I 
saw you on TV doing a PSA on health insurance. And I want to 
tell you, health reform in Massachusetts is the best thing that 
could have happened to us.''
    ``We never thought, as a small business, that we could 
afford to buy insurance for ourselves, but we did. I had my 
first check-up in 19 years, because of this. And I discovered 
that my blurred vision was due to cataracts, which I have had 
fixed, and I can now see again. And thank you for helping to 
implement this program.''
    That is the story of one person, but we know that we have 
hundreds of thousands of people in Massachusetts who are now 
covered because of heath care reform.
    From the beginning, the strength of this effort in 
Massachusetts was marked by a coalition of people that 
represent representatives from the executive and legislative 
branches of government, providers, insurers, employers, 
consumers, advocates, and community leaders. In April of 2006, 
you all know that Massachusetts enacted a health care reform 
bill that was designed to move the state to near universal 
coverage.
    The components of this bill allowed us to do several things 
that are key to the success that we are seeing: number one, 
expansion of Medicaid, so that we could cover more people; 
number two, the creation of the Commonwealth Connector, to 
develop Commonwealth Care, which is a state-subsidized program 
for low-income individuals who are not eligible for Medicaid; 
and also, the Connector developed affordable health insurance 
products for those with incomes over 300 percent of Federal 
poverty level who did not have access to employer-sponsored 
insurance.
    We also transformed the uncompensated care pool, which is a 
pool the state had developed more than 20 years ago to pay 
hospitals and health centers for care for those who were 
uninsured. We also reformed the insurance market to combine the 
non-group and small group market, and created the individual 
mandate, which went into effect in July of 2007, and was 
enforced as of December 31, 2007. And we also defined what 
employer responsibility was, through the fair share.
    A Medicaid waiver from the Centers for Medicare and 
Medicaid Services is a critical component of Massachusetts's 
health care reform. This partnership with the Federal 
Government allowed for expanded Medicaid coverage, including 
children with families of incomes up to 300 percent of the 
Federal poverty level. It also eliminated enrollment caps for 
other individuals so that they could be covered by Medicaid, 
including disabled working adults and individuals with HIV/
AIDS.
    We currently are operating under a short-term waiver 
extension, while we finalize negotiations with CMS for renewal 
of our waiver. And we look forward to being able to continue 
this historic effort.
    Enhanced employer responsibility requires that all of 
employers with 10 employees or more contribute a fair share 
toward covering their employees. We have learned from this 
experience that defining what a fair share is, is difficult to 
do. As I said, we have over 340,000 individuals who are now 
covered who were not covered in June of 2006. More than 170,000 
people are enrolled in the subsidized state program at a growth 
and number that was higher than we expected, due to our 
underestimate of the number of uninsured in Massachusetts.
    But we do know that, since enactment of heath care reform, 
we have decreased the number of uninsured in Massachusetts by 
more than half, and we have not seen a decrease in employer-
sponsored insurance.
    We also know that people are getting access to care, they 
are going for preventative care, they are reporting that they 
have regular providers. They also report that their out-of-
pocket medical expenses have gone down. We have also seen that 
the reform of the non-group market has created products with 
lower premiums and better coverage.
    So, we are in a good position to continue this experiment, 
going forward. What we need is the ability to continue to learn 
from this experiment, and refine our products, and to engage in 
our partnership with the Federal Government with as much 
flexibility as possible. Thank you.
    [The prepared statement of Dr. Bigby follows:]

Statement of The Honorable JudyAnn Bigby, M.D., Massachusetts Secretary 
          of Health and Human Services, Boston, Massachusetts

    My name is Dr. JudyAnn Bigby, and I serve as Secretary of Health 
and Human Services for the Commonwealth of Massachusetts. I am honored 
to be here with you today to represent Massachusetts and Governor Deval 
Patrick in offering testimony before the House Ways and Means 
Subcommittee on Health about Massachusetts' historic health care reform 
initiative.
    I particularly want to thank Chairman Pete Stark of California for 
inviting me to testify today and for holding a hearing on states' 
health care reform efforts. I also want to thank the other 
distinguished committee members for their interest in and commitment to 
this important topic. I look forward to sharing Massachusetts' health 
care reform experiences with you, and I also look forward to hearing 
your insights and perspectives.
    Massachusetts is proud to be leading the way toward near-universal 
coverage and working to ensure that everyone has access to high-
quality, affordable health care.
    From the very beginning, the strength of health care reform in 
Massachusetts was the support of a broad and diverse coalition, 
including representatives from across sectors and across the political 
aisle. Coalition members included representatives from the executive 
and legislative branches of both federal and state government; 
providers; insurers; employers; consumer advocates; and community 
leaders.
    In April 2006, Massachusetts enacted a health care reform bill 
designed to move the state to near-universal coverage. At the heart of 
this initiative was the principle of shared responsibility among 
individuals, employers and government. The coalition took steps to 
achieve near-universal coverage through:

      Medicaid expansions
      The creation of the Commonwealth Connector to develop:
      Commonwealth Care, a subsidized insurance product for 
low-income individuals not eligible for Medicaid; and
      Affordable health insurance products for those without 
access to employer-sponsored insurance and incomes over 300% FPL
      Transformation of the Uncompensated Care Pool, a fund 
developed in Massachusetts more than 20 years ago to pay for 
uncompensated care in hospitals and health centers
      Insurance reform
      An individual mandate
      Employer responsibility through a fair share and free 
rider assessment.

    A Medicaid waiver from the Centers for Medicare and Medicaid 
Services is a critical component of Massachusetts' health care reform 
initiative. Our partnership with the Federal Government allowed for 
expanded Medicaid coverage, including to children with family incomes 
up to 300% of the Federal Poverty Line (FPL). The elimination of 
enrollment caps for Medicaid coverage for several populations--
including long-term unemployed adults; disabled working adults; and 
individuals with HIV/AIDS--also expanded coverage.
    We are currently operating under a short-term waiver extension, 
while we finalize negotiations with CMS for a new waiver. Extending 
this state and federal partnership is critical to our historic effort 
to reach near universal health insurance coverage. We are working 
closely with CMS to come to an agreement that will facilitate the long-
term success of health care reform in Massachusetts.
    Enhanced employer responsibility requires that all employers with 
more than 10 employees offer access to pre-tax health plans. Health 
care reform requires these employers to make ``fair share'' 
contributions toward their employees' insurance or be subject to an 
assessment fee that is used to help cover the uninsured.
    In addition, health care reform mandates that adults have insurance 
unless they do not have access to affordable insurance. The 
Commonwealth Connector developed subsidized and non-subsidized health 
insurance products, but also defines minimal creditable coverage and 
affordability standards.
    Health insurance market reforms also merged the small and non-group 
markets in an effort to reduce the cost of non-group premiums.
    We are seeing the positive results of Massachusetts' comprehensive 
health care reform efforts. Since June 2006, approximately 340,000 
individuals now have enrolled in health insurance programs. Enrollment 
in the state's Medicaid program has expanded by more than 60,000. More 
than 170,000 have enrolled in Commonwealth Care, the state's subsidized 
plan for low-income residents. More than 120,000 of them have enrolled 
in private insurance plans, and the percentage of employers offering 
health insurance has increased from 68% to 72%, while the percentage 
has been dropping nationally.
    We are seeing the impact.
    A recent Urban Institute survey of Massachusetts residents showed 
that the adult uninsured rate has decreased by 50% in just one year. 
Low-income adults, men and young people have seen the biggest drops in 
rates of uninsurance.
    In addition, more people report having access to a regular health 
care provider and have made visits for preventative care. The 
percentage of adults who reported that they did not access care due to 
costs have decreased, and individuals report lower out-of-pocket 
medical costs.
    The percentage of adults who have employer sponsored insurance has 
increased slightly.
    Premiums for non-group insurance have decreased while the benefit 
package has improved.
    Between FY06 and FY07, visits billed to the Uncompensated Care Pool 
(now the Health Safety Net) decreased by 15%. The cost of care funded 
declined by 9% during the same period. We are projecting it will fall 
significantly more in the current fiscal year.
    We know, however, that providing health insurance is not enough. We 
are also focusing on controlling health care costs to ensure that the 
gains we have made in expanding access are sustainable. We will be most 
successful if we can achieve the most value for the dollars we are 
spending and do a better job of decreasing costs among the 10% of 
patients who consume 60 to 70% of the health care dollars.
    We need to focus more on prevention, ensuring that individuals have 
a medical home, and coordinate the care that those with chronic illness 
receive across the system. The issue of whether we have the primary 
care capacity to meet the increasing demand of the insured is an 
important question--not just because we do not want people to be 
frustrated by not being able to get an appointment with a primary care 
provider once they are newly insured, but also because we know that 
communities and populations are healthier when they have access to 
primary care. In addition, care is less expensive when the ratio of 
primary care to specialists is higher than what we currently have in 
Massachusetts.
    To build on the 2006 health care reform efforts in Massachusetts, 
the Patrick Administration launched the ``Healthy Mass'' initiative in 
December. Nine diverse agencies from across state government--in their 
roles as employers, purchasers, providers, regulators, insurers, 
administrators, stewards of public health, and potential sources of 
health care financing--committed to working closely together to ensure 
access to care; contain health care costs; advance health care quality; 
promote individual wellness; develop healthy communities.
    In these early stages, we are working together to decrease 
administrative burdens on providers; adopt strategies to improve 
quality of care; focus on decreasing the impacts of chronic disease; 
and align payments tosupport primary care and community hospitals.
    As part of this initiative, the state announced last month that 
state agencies, including Medicaid, will no longer pay for costs 
associated with the 28 serious adverse health care events identified by 
the National Quality Forum. The state will also no longer permit their 
providers to bill members for these services. This new policy makes 
Massachusetts the first state in the nation to establish a uniform non-
payment policy across state government. This policy will not only save 
taxpayer dollars, it focuses attention on strengthening health care 
quality.
    Massachusetts has come an impressive distance in a very short 
period of time, and we are committed to ensuring not only that people 
are insured, but that theyalso have access to quality, affordable care 
and the tools to lead healthier lives. Moving forward, we must share in 
making thoughtful choices to ensure its continued success.
    Thank you.

                                 

    Chairman STARK. Thank you.
    Dr. Lewin.

  STATEMENT OF JOHN C. LEWIN, M.D., CHIEF EXECUTIVE OFFICER, 
                 AMERICAN COLLEGE OF CARDIOLOGY

    Dr. LEWIN. Thank you. It is an honor to be here, Chairman 
Stark, and Ranking Member Camp. I am pleased to see the rest of 
you here: Mr. Johnson, Ms. Schwartz, Mr. McDermott, and good 
friend, Mike Thompson. Thank you all for having this hearing 
today.
    I have been the CEO of the American College of Cardiology 
for the past 2 years. Before that, I was in California, as the 
CEO of the California Medical Association. Prior to that, I had 
been a practicing physician for a long time in Hawaii, and I 
was the commissioner of health in Hawaii for 8 years at a 
critical time, when Hawaii was developing and implementing its 
employer-based access. I wanted to talk a little bit about 
that.
    Hawaii actually passed a law requiring every employed 
person to have coverage and strongly incentivizing their 
dependants to be covered, as well, along the Richard Nixon 
proposal 1974. They thought it was going to become national 
law. It went through all sorts of court challenges raised by 
employers, and made it to the Supreme Court, where the law was 
repealed, actually, on the basis of a violation of ERISA. It 
took almost 10 years.
    Hawaii came, then, to Congress and got an exemption from 
ERISA to allow the law to proceed. And I had the privilege of 
implementing much of that coverage. Every employed person in 
Hawaii, even today, has coverage. All the dependants don't, 
because the cost split between the employer and employee wasn't 
really fixed in the law. And as the costs have gone up, 
employees haven't been able to afford to pay their percentage 
of the dependant coverage. So there has been some erosion 
there.
    But Hawaii has done something that is very elegant, 
basically, in the private sector. It is private coverage. There 
is a great deal of portability. It was really just requiring 
that there be a cost split between the employer and the 
employee.
    Now, that--in the waiver that Congress gave to Hawaii--the 
waiver froze the cost split at the percentage that, at the 
time, was the average cost of health insurance for employees. 
And in the early eighties, it was about 3 percent of wages, or 
salary, across the whole population, that constituted the cost 
of health insurance for the employee. So, in the waiver that 
you granted, the employer can't tax the employee more than one-
and-a-half percentage of wage.
    Now, obviously, that doesn't work today. Hawaii would be 
afraid to come back and ask for a, you know, a revision of that 
waiver, for fear that the whole law would be repealed. So the 
cost shift to the employer, over time, has been fairly 
significant. But the basic idea was to be a 50/50 split, with 
some subsidy for low-income workers.
    The state also developed a special program of state 
subsidies for people who were unemployed, self-employed, part-
time employed. That program kind of ran out of steam when the 
state's budget issues came up later.
    At one time, Hawaii had 96 percent of its public covered, 
almost 97 percent. It is now back to 90 percent. It was 96 to 
97 percent. Now it is down to 90, yes.
    And then, in California, I worked on a variety of efforts, 
but Governor Gray Davis signed into law SB-2, which was a 
Hawaii model for employers, but it exempted businesses with 
under 50 employees. But it was a step, a big step, in 
California that was passed. It was through the CMA and AFL-CIO, 
a partnership.
    Governor Schwarzenegger, coming into office, led a campaign 
to repeal that law, successfully, although it was only a 50.5 
percent vote. Very, very close. And then he attempted to try to 
create another system, which I worked with him on. And, as you 
know, that did not make it through the legislature.
    I guess what I would like to share with you is that state 
reforms are important, they are worthy of respect. They do 
teach us what works and what doesn't work. But we need national 
reform, or we will see erosion of even the best state efforts, 
over time. We need national minimum requirements and policies.
    Second thing I would like to share is that an employer 
mandate has really been kind of disparaged a lot lately as 
something that we're probably not going to use any more, there 
has been an erosion of coverage. But employer coverage, if we 
fix some of the problems of employer coverage, it still is the 
main source of coverage for most Americans. I don't think we 
ought to throw it out.
    If we made employer coverage more portable, if we fixed 
some of the fair insurance practice issues that would make it 
better, if we expanded choice of coverage with employer 
coverage, maybe through regional or state purchasing 
cooperatives like the FEHBP, then employer coverage, for those 
who have it now, would be stabilized in the future, as we try 
to expand coverage for people in agriculture and food services 
and retail and small businesses that don't have coverage today.
    I think the other points I would make is that the reforms 
in California, the reforms in Hawaii that I was privileged to 
participate in, really didn't focus on quality of care 
improvement, and on systematically improving quality and 
patient safety. Any kind of Federal action would need to 
incorporate that, as well as electronic, you know, EMRs, 
personal health records, inter-operability standards that would 
great facilitate improvement in quality and reduce 
administrative costs.
    And, finally, we have very perverse payments, even, 
obviously, through Medicare that don't really reward quality or 
patient safety. And we would love to work with you, here in 
Congress, to actually change those payment processes so that 
they do, in fact, incentivize quality and improvement.
    The current system, unchanged, is going to be a financial 
train wreck. It is going to be both an economic and ethical 
imperative to change it. States will continue to serve as 
critical laboratories. But we need Federal action, and we need 
Federal commitment and national policy to guarantee that 
everyone will have coverage in the future. And we look forward 
to working with you to achieve that. Thank you.
    [The prepared statement of Dr. Lewin follows:]

   Statement of Jack Lewin, M.D., Chief Executive Officer, American 
                         College of Cardiology

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    Chairman STARK. Thank you very much. And, Ms. Riley, how 
are things in the great state of Maine?
    Ms. RILEY. They are fine, Chairman Stark, and I am pleased 
to report that Governor Baldacci was reelected.

STATEMENT OF TRISH RILEY, DIRECTOR, MAINE GOVERNOR'S OFFICE OF 
           HEALTH POLICY AND FINANCE, AUGUSTA, MAINE

    Ms. RILEY. Thank you very much for the opportunity to be 
here, Chairman Stark, Ranking Member Camp, and Members of the 
Committee.
    You asked us to speak a little bit about the lessons 
learned in the past 5 years. And maybe the most important 
lesson, following Jack Lewin, is that states have been at this 
work since 1970. And each decade saw new kinds of reforms. We, 
in Maine, were pleased to start the fourth wave of state health 
reform in 2003, with the establishment of our Dirigo health 
reform.
    Absent any sustainable new sources of revenue, Governor 
Baldacci sought to achieve health reform by improving the 
efficiency of the health care system to achieve savings and 
reinvest them in health care access.
    We learned early that clear goals are important. Covering 
the uninsured implies that we will find adequate financing to 
bring those now without coverage into the insured tent. Such an 
approach generally accepts the status quo in how care is 
delivered and coverage provided. The goal which was ours, to 
assure every man, woman, and child has access to affordable, 
quality care, is different. It seeks health security for all, 
those without coverage, those with inadequate coverage, and 
those who fear rising costs will jeopardize their coverage.
    Numerous studies that you well know have documented that 
we, in the United States, pay for redundancy, inefficiency, 
variation, and over-supply. A recent McKinsey Global Institute 
study concludes that we spend $477 billion more on health care 
than peer nations, yet, as you well, know, we don't cover 
everyone, and we don't get better outcomes or health or quality 
for that investment.
    When Dirigo began in 2003, Maine had the highest rate of 
uninsured in New England. By 2006, every state in New England 
saw their uninsured rates rise. Only Maine saw that rate drop, 
and drop to the lowest in the region. But our progress has been 
stalled, lacking adequate finances. And I think this will be 
the last time I say this, given Secretary Bigby's response, 
because I am certain Massachusetts has now outpaced us, and I 
congratulate them for that.
    To guide Maine's reform, we convened stakeholders in a 
health action team. We found earlier that process may be as 
important as policy in this effort of health reform. The 
legislature created a special joint commission on health 
reform, with members from the health, insurance, and 
appropriations Committee convened together. The reform debate 
played out largely between two camps: those who wanted 
deregulation and market-based solutions, and those who wanted 
more investment to sustain comprehensive coverage to cover all 
the uninsured.
    Long negotiations resulted in significant amendments to the 
original bill, and found a middle ground that won strong 
bipartisan support. Both the health action team and the Joint 
Committee were dissolved, once the bill was enacted.
    In hindsight, with oversight of the reform split among 
different legislative Committees, and no one single stakeholder 
group to provide guidance to the overall reform, a vacuum was 
created that allowed the parties to return to their corners 
when the inevitable implementation challenges occurred. 
Enacting health reform, we have found, is tough. Few states 
have done it. But implementing reform is tougher. And I think 
whenever we think about how to frame a Federal response, we 
have to think about the long-term implementation.
    To achieve progress, all parties with strong leadership 
need to stick to it, and work together to make mid-course 
corrections, rather than see each bump in the road as an 
opportunity to defeat reform.
    As Alan Weil pointed out, Medicaid is a critical component 
of any kind of reform, and we based our reform on it, as well. 
Since delinking welfare and Medicaid eligibility, and imposing 
work requirements, more low-wage and part-time workers receive 
Medicaid because they can't receive or can't afford workplace 
coverage. The premium assistant provisions within the Medicaid 
program need serious reform. They are difficult to administer, 
pay only for the employee's share of the premium, and require a 
state match.
    The Dirigo health reform sought to pool all revenues, 
including employer contributions from our small businesses who 
are covered, and used those pooled state resources to match 
Medicaid for eligible employees and their dependants. CMS 
rejected our approach, which will soon be tested in the courts.
    There are several other ways that the Federal Government 
could take action. Complexity and redundancy are costs in the 
system. Streamlining and creating a single system--and that 
does not necessarily mean a single payer--would help. The 
Federal Government should examine its considerable purchasing 
power to its standardizing reporting, payment policy, benefits, 
eligibility, and quality metrics.
    Secondly, if states are to play a role in health care 
reform, they need the capacity to work in a level playing 
field, and ERISA now prohibits that. It prohibits much creative 
work, and even the collection of key data from self-insured 
businesses, and needs to be amended.
    I think it is particularly important that we have Jack 
Lewin here, from Hawaii, because it reminds us that states have 
been at this work for over 30 years. For 30 years, states have 
been the laboratories of democracy, adopting insurance reforms 
before HIPAA, starting children's health programs before SCHIP.
    While states have done extraordinary work to lay the 
foundation for reform, each state is operating relatively 
independently, based on very different health systems, 
coverage, and costs, and reflecting different state priorities. 
That state-to-state variation results in fragmentation and 
complexity across the country, which drives costs.
    Over three decades of state health reform, and the reams of 
studies and evaluations analyzing them, suggests to me that it 
is time to get out of the laboratory and learn from the decades 
of state experimentation. We cannot reform our health system 
piecemeal, or even by further state-to-state innovation. In the 
spirit of Federalism, the national government must commit to a 
national policy and a clear road map that achieves affordable, 
quality health care for all, and finally answers the question: 
Who pays?
    Thank you very much.
    [The prepared statement of Ms. Riley follows:]

 Statement of Trish Riley, Director, Maine Governor's Office of Health 
                   Policy and Finance, Augusta, Maine

    Thank you for this opportunity to talk with you about lessons 
learned at the state level about health care reform. Perhaps the most 
important lesson about state health reform is that it comes in waves, 
each building on the lessons of the past and learning from the 
challenges states find in building sustainable health reform over time. 
But each wave ultimately collides with the critical question--who pays?
    I have been fortunate to have been directly involved in many of 
these efforts as a former Medicaid director and to have worked closely 
with the reforming states in my service over the past several decades 
with the National Academy for State Health Policy. Enactment of 
Medicaid in the 1960s was arguably the beginning of state health 
reform, although the initial wave of state initiated reform began in 
the 1970s when Hawaii enacted the first mandate requiring most 
employers to offer health coverage, advanced soon after President 
Nixon's health reform--that included a similar provision--had failed. 
In the decade of the 1970s the first high risk pools were created. In 
the 1980s Washington State established the subsidized Basic Health 
Plan, Massachusetts enacted the Health Security Act and Oregon created 
the Oregon Health Plan. Children's health plans began in Minnesota and 
Vermont.
    By the early 1990's 46 states had adopted insurance reforms, 
children's health programs grew in other states and Medicaid waivers 
yielded Arizona Access, TennCare and RiteCare, Medicaid managed care 
based programs to expand coverage. Each of these initiatives had their 
advocates and detractors, some failed, some changed, most held on in 
some form but following the failure of the Clinton health plan in the 
early 1990's state action again stalled and states were in the ebb of a 
third wave of reform.
    In 2003, Maine led the fourth wave with the establishment of our 
Dirigo Health Reform. Our approach was comprehensive health system 
reform, focusing on affordability and driven by Maine's per capita 
health spending, which ranks the second highest in the U.S.,by then the 
highest rates of uninsured in New England, decline in employer 
sponsored plans and by limits in state budget capacity. In 2002 state 
and local revenues in the United States had the slowest growth since 
records were kept. Absent any sustainable, new sources of revenue, 
Governor Baldacci sought to achieve health reform by improving the 
efficiency and effectiveness of the health care system. By improving 
the system's efficiency, savings would be created and reinvested in 
health care access.
Clear goals are important: ``Covering the Uninsured'' is not the same 
        goal as ``making sure every man, woman, and child has access to 
        affordable, quality care''.
    Covering the uninsured generally implies that we will find adequate 
financing to bring those now without coverage into the insured tent--
covered through one or more of the myriad of coverage options available 
today or by creating special plans for the uninsured. Such an approach 
generally accepts the status quo in how care is delivered and coverage 
provided. But with growing pressure on the affordability of our 
employer based system, more costs are shifted to employees andcoverage 
can become less comprehensive. As a growing number ofpeople use more of 
their incomes for sometimes less coverage, more people are under 
insured--forestalling needed care for fear of incurring out of pocket 
costs they cannot afford. And the literature is filled with data 
documenting concerns with quality of care. Our goal of assuring every 
man woman and child has access to affordable; quality care seeks to 
provide health security for all--those without coverage; those with 
inadequate coverage and those who fear rising costs will jeopardize 
their coverage.
    Numerous studies have documented that the U.S. spends far more than 
other developed nations yet we leave 47 million uninsured and do not 
achieve better health outcomes or quality for that additional 
investment. In fact, we pay for redundancy, inefficiency, variation and 
oversupply. Recently, McKinsey Global Institute published ``Accounting 
for the Cost of Health Care in the United States'' that concludes that 
even after adjusting for its higher per capita income levels, the 
United States spends some $477 billion more on health care than peer 
countries.
    McKinsey notes that higher health spending in the U.S. is not 
explained by higher disease burden but by these factors:

    1.  Higher input costs--salaries, drugs, devices and profits, 
(e.g.: we use 20% fewer drugs yet pay 50-70% more for them and we are 
the largest consumers of medical devices in the world).
    2.  Inefficiencies and complexity in the system's operational 
processes (eg: we have 3-6 more scanners than Germany, UK, France and 
Canada).
    3.  Costs of administration, regulation and intermediation of the 
system.

    McKinsey's study reinforces Maine's approach to comprehensive, 
system reform, stating ``most components of the U.S. health care system 
are economically distorted and no single factor is either the cause or 
the silver bullet for reform''.\1\ While it is unlikely that Americans, 
who value choice, will adopt all the provisions that make other 
countries' health care more affordable, unless Americans are ready to 
embrace higher costs and a greater investment of our GDP in health, 
then the cost issues must be addressed head on.
---------------------------------------------------------------------------
    \1\ McKinsey & Company, Accounting for the Cost of Health Care in 
the United States, January 2007; p. 19.
---------------------------------------------------------------------------
    In crafting the Dirigo Health Reform, Maine's strategy was to 
affect cost, quality and access together, reflecting our conclusion 
that we had an inefficient health care system which led to 
unaffordability of health insurance and a growing number of people who 
were under- and uninsured.
    We built the program by expanding Medicaid for the poorest of our 
citizens, establishing a subsidy program for those just beyond Medicaid 
eligibility; launching comprehensive activities to improve health and 
reduce the costly burden of chronic disease; creating the Maine Quality 
Forum to remediate costly variation in the system; initiating a variety 
of cost containment mechanisms; requiring medical loss ratios in the 
small and non-group markets; increasing transparency through price 
posting and standardized reporting by insurers and hospitals; 
supporting electronic medical record diffusion; strengthening 
certificate of need; establishing a capital investment fund as an 
annual budget for new capital investment and facilitating collaboration 
among providers.
    Our cost containment goal is to assure coverage remains affordable 
for those who buy it privately but subsidizing health coverage remains 
a tool to meet the affordability gap for those with lower incomes. The 
foundation of Maine's coverage expansion was Medicaid. From that base 
we built a sliding scale subsidized insurance plan, DirigoChoice, 
targeted to those 3 times the poverty level who were employed in small 
businesses with fewer than 50 emplyees,were sole proprietors or 
individuals--categories that include the majority of uninsured--and 
built the reform on the employer based system. Specifically, the plan 
pooled small businesses to achieve economies of scale and purchasing 
power and adopted medical loss ratios in the small group and individual 
market to help make those markets more affordable. DirigoChoice is a 
voluntary program, recognizing that unless and until insurance became 
more affordable, mandates would not be tolerated. The program is 
financed through an assessment on insurers and those who administer 
self--insured plans that can only be levied if Dirigo's comprehensive 
reforms result in documented savings
    When the Dirigo Health Reform began in 2003, Maine had the highest 
rate of uninsured in New England. In the years following, as Medicaid 
expansions took hold and DirigoChoice became the fastest growing 
product in the marketplace, every New England state saw its rate of 
uninsured increase; only Maine saw its rate fall to the lowest in the 
region by 2006.
    But our progress has stalled, lacking adequate financing. While 
$110 million in savings has been independently documented since the 
program began, those savings have been contentious, subject to court 
challenge and highlight the complexity of cost containment in health 
care. Payers of the surcharge assert that reducing the rate of growth 
of health care costs is not the same as cost savings. The Legislature 
enacted alternative financing this session, including taxes on beer, 
wine and sugared beverages, but this alternative is also being 
challenged.
Politics Trumps Policy_The process of enacting and implementing reform 
        is as important as the reform.
    To launch Maine's reform, stakeholders were convened in a Health 
Action Team that met often and in public to guide the Governor's office 
in developing the original proposal. The Legislature created a Special 
Joint Committee on Health Reform with bipartisan members from the 
health, insurance and appropriation committees.
    The reform debate played out largely between two camps--those who 
wanted de-regulation and market based solutions like high risk pools, 
arguing that lower costs would assure more coverage and others who 
wanted more investment to sustain comprehensive coverage to cover all 
the uninsured. Long negotiations resulted in significant amendments to 
the original bill and found a middle ground that won a unanimous 
committee report and strong bi-partisan support in both chambers.
    Both the Health Action Team and the Joint Committee were dissolved 
once the bill was enacted. Numerous commissions, workgroups and an 
independent Board of Trustees for the Dirigo Health Agency assured 
citizen input throughout the implementation of the reform, but each 
group was responsible for a part of the reform only. In hindsight, with 
oversight of the reform split among different legislative committees 
and no one single stakeholder group to provide guidance for the overall 
reform, a vacuum was created that allowed the parties to ``return to 
their corners'' when the inevitable implementation challenges occurred. 
Amendments to the original bill, that eliminated a planned global 
budget and a fixed assessment that could not be passed on to premium 
payers, reduced the ability to generate stable, predictable funding and 
attain the amount of cost savings initially envisioned. As the program 
was launched, additional revisions were required that further 
challenged the ability to meet enrollment target timetables developed 
with the original legislation and never revised. Rather than recognize 
that these unexpected factors would slow but not deter program 
enrollment, proponents of alternative strategies quickly declared 
Dirigo a failure and revived advocacy for their favored market based 
reforms, which created a challenging environment for program 
modification and mid-course improvements.
    As Maine's experience clearly shows, enacting health reform is 
tough enough--few states have done so--but implementing reform is even 
tougher. The devil is indeed in the details and health reform is a work 
in progress. But to achieve that progress, all parties, with strong 
leadership, need to commit to it and to work together to make mid 
course corrections rather than to see each bump in the road as an 
opportunity to defeat reform.
Medicaid is a critical component for state-based reform but needs 
        reliable, counter cyclical financing and clarity in its 
        coverage for eligible, employed beneficiaries.
    Should national health reform maintain the current employer based 
system, Medicaid's role will remain critical. Medicaid is the essential 
building block in state health reform and is of paramount concern to 
the states and to Congress. As states face recessions and budget 
challenges, Medicaid's funding formula needs to keep pace with rising 
costs and demand.
    Since de-linking welfare and Medicaid eligibility and imposing work 
requirements, an increasing number of low wage and particularly part-
time workers, work each day in firms large and small, and qualify for 
Medicaid--often ineligible for or unable to afford workplace coverage. 
The premium assistance provisions within the Medicaid program are 
difficult to administer, pay only for employee share of premium and 
require state match. Additional policy debate needs to address where 
the role of the Medicaid program ends and the role of the private 
employer begins. As costs escalate, private employers are increasingly 
reluctant to offer coverage to part-time workers and to make Medicaid 
eligible employees part of their workplace health plan. On the one 
hand, employers face difficult trade offs as the costs of health care 
grows. Increasingly employer--based coverage has passed more and more 
cost on to employees. As lower wage employees pay a larger part of 
their incomes for health care, we are witnessing a new and growing 
problem of underinsurance. But employers must balance the costs of 
health care against the ability to create jobs or increase wages and 
states need to be cautious in what demands they place on the very 
employers who assist in ``welfare to work'' programs or who, subject to 
state regulations they find intolerable, self insure, and abandon the 
consumer protections of the fully insured marketplace.
    A design feature of the original Dirigo Health Reform sought to 
pool all revenues to the Dirigo Health Agency( employer contributions, 
employee contributions and others), and use those pooled state 
resources to match Medicaid for eligible employees and their 
dependents. CMS has rejected our approach, which will soon be reviewed 
by the courts.
    The states that followed us in this fourth wave of state health 
reform relied heavily on Medicaid, unlike Maine which coupled system 
savings with program financing. Vermont accepted federal flexibility in 
exchange for a block grant--like approach to Medicaid. Massachusetts 
built its program with $400M in Medicaid funds that had been supporting 
their uncompensated care. We appreciate the strength of Vermont's 
initiative but find the block grant approach, which abandons a long 
established health care entitlement program, to be counter--intuitive 
to efforts to expand access and, like most states, we did not have 
access to the Medicaid funds now supporting Massachusetts' landmark 
reform.
Its time for a national policy to achieve affordable, quality health 
        coverage for all.
    States serving as laboratories of innovation have gained public 
attention and achieved much, filling a void in the absence of national 
reform. The laboratories of democracy were at work testing reforms 
reflected in later Congressional action. Many states had adopted 
insurance regulations before HIPAA was enacted; had well running 
children's health programs before SCHIP was born and developed 
Patients' Bills of Rights before Congress took them up.
    The many and varied state experiments have been operational since 
at least the early 1970's. While states have done extraordinary work to 
lay the foundation for reform, each state is operating relatively 
independently based on very different health systems, coverage and 
costs and reflecting different state priorities. While experimentation 
has generated significant reforms, it has also created state--to-state 
variation that may also account for fragmentation and complexity across 
the country which drives costs. Over three decades of state health 
reform, and the reams of studies and evaluations analyzing them, 
suggest to me that it is time to get out of the laboratory and learn 
from decades of state experimentation. This is certainly not to say 
that there will not be a role for the states in any emerging national 
health reform but that a national solution-and national financing--is 
essential. We cannot reform our health system piecemeal or even by 
further state by state imitative. In the spirit of federalism, the 
national government must commit to a national policy that achieves 
affordable, quality health care for all of us.
    We need a national policy that makes the roadmap clear that will 
achieve the reforms needed to address cost and quality and to cover all 
of so that the U.S. can take our place as health leaders--not as the 
country that spends twice as much, doesn't get any better health or 
quality and leaves 47 million without any coverage.
    There are several obvious first steps that the Federal Government 
can take.
    Complexity and redundancy are costs in the system. Streamlining and 
creating a single system--that does not necessarily require a single 
payer--would help. The Federal Government should examine its 
considerable purchasing power across Medicare, Medicaid, FEHBP, Champus 
and others toward standardizing reporting, payment policy, benefits, 
eligibility and quality metrics. If states are to play a role in health 
care reform, they need the capacity to work in a level playing field. 
ERISA prohibits much creative work and even the collection of key data 
from self insured businesses.
    In the end, then, the ultimate question remains--who pays? For 
those of us who believe we are already paying more than we need to 
through cost shifting of the uninsured and the inefficiency in our 
health care system, cost containment needs to be a part of any reform. 
But ultimately, the nation's uninsured, a growing number of under-
insured and all of us who have coverage now and fear for its future, 
need a reliable and sustainable source of financing to affordable, 
quality care-that does not sacrifice the access expansions in place 
now--that only a strong and consistent national policy can assure.

                                 

    Chairman STARK. Mr. Haislmaier.

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

    Mr. HAISLMAIER. Thank you, Mr. Chairman, Ranking Member 
Camp, and Members of the Committee, for inviting me to testify 
today. My name is Edmund Haislmaier, I am a senior research 
fellow at the Center for Health Policy Studies at the Heritage 
Foundation, and I have to give you the caveat that my testimony 
is my own, and the Foundation does not take any institutional 
positions on these or other matters.
    I come here, having spent the last 3 years--or more, 
actually--working with over 18 different states throughout the 
country, with very diverse situations. And I would like to 
share in my 5 minutes some observations and conclusions that I 
have reached over the past 3 years. And I say, literally, 
diverse. I can recall a week last September when, on Monday, I 
was in Anchorage and the following Monday I was in Tallahassee.
    First of all, to follow up on what some of the other 
panelists have said, I am impressed by the diversity of states. 
And that is in a number of areas: their demographics, their 
economies, and importantly, their health delivery systems. 
Because, remember health care delivery is always local. Also, 
in the financing arrangements, the way the insurance markets 
are regulated, and the way they design and operate their public 
programs.
    Now, in looking at this from the federal and state 
perspectives, my key observation is that the Federal Government 
controls a significant portion of the financing of health care 
in this country. The tax treatment of health care is a key 
determinant of employer-provided health insurance--that is, the 
favorable tax treatment. Of course, the Federal Government sets 
the rules for Medicaid and SCHIP spending. And Medicare, while 
it is a Federal program, has a significant impact at the local 
level, because it is the disproportionate payer for hospital 
services.
    So, that is what the Federal Government controls. The 
downside for the Federal Government control is they have 
virtually no regulation and no experience in the area of 
private insurance markets, nor do they directly regulate the 
providers: the doctors, the hospitals, et cetera. Thus, if you 
were to try to construct a national solution of some kind, you 
would inevitably have to tackle those issues.
    Just think for a minute: What agency should be tasked with 
regulating health insurance? It is a very interesting question. 
We have never really come up with a satisfactory solution at 
the federal level.
    Now, on the state side, the reverse is the case. They have 
to work within Federal constraints, particularly on the 
financing side of things. But they do have considerable powers 
to alter their private insurance markets, and to regulate 
providers.
    So, I see, as the path forward, states working creatively--
and I would emphasize creatively--within existing parameters of 
Federal law. And that is what I have been working with a number 
of states, as I said, on doing.
    The more I do this, the more convinced I become that the 
path forward will be an evolutionary one, not a revolutionary 
one. I am convinced of that, because when I look at the 
politics and the interest groups, and the variables in the 
equation in any given state, they are enormous. And then I try 
to imagine multiplying that by 50, and coming up with a 
solution that is acceptable to everyone, and I have trouble 
seeing how we get there in one big bang.
    What should the objective of health reform be? In my 
written testimony, I have gone on in some length on this. I 
believe the objective should be something that we very rarely 
hear talked about in health care. We hear talk about cost, 
access, occasionally quality, maybe even benefit. But the real 
missing word, in my view, is ``value.'' Are we getting our 
money's worth?
    I think that we can all agree that, both at an individual 
level and a societal level, we are either paying too much for 
what we're getting, or we're not getting what we should be for 
what we're paying. And that is both in terms of our personal 
interaction with the system, and also societal. In other words, 
we are spending all this money, yet we have these uninsured.
    So, the question for me is how do we increase the value 
proposition in health care? How do we get more for less? How do 
we have health care work like other sectors of the economy, 
such as electronics, where next year's model has more features 
at the same price, or maybe even lower than last year's? That 
should be the objective.
    Now, the mechanism, as I see it, that will get us there is 
to focus more on making the system and the actors in the 
system--the providers, the insurers, everybody else--respond to 
the needs and demands of patients and consumers. I use the term 
``consumer'' to mean somebody who is buying insurance, but not 
at the moment seeking medical care.
    What I think was significant about Massachusetts--and I 
wrote about this right after it was enacted--is that they 
essentially tackled two things simultaneously. And states that 
I have been working with are looking at doing one or the other, 
or both.
    The first key element was insurance market reforms to 
create--and to work out the details of--exactly what Dr. Lewin 
pointed out, which is to work within the context of employer-
provided insurance, but create a mechanism whereby the coverage 
was actually chosen by the individual, owned by the individual, 
and could be taken with them from job to job, but at the same 
time didn't lose any of the protections of Federal law, or any 
of the tax benefits, or the subsidies associated with that. 
That is the first piece.
    The second piece--and, again, this is what Massachusetts 
embarked on, only in part, but other states are looking at 
going further--is to restructure the existing public spending, 
principally to shift from subsidizing providers for treating 
the uninsured, to using those dollars to buy the uninsured 
coverage. And I would submit, Mr. Chairman, that anybody who is 
interested in expanding coverage needs to look closely at that 
model. Because if you go about trying to expand coverage 
without making that financial shift, then you're, in effect, 
paying twice for the same thing, and you have got a tough road 
to hoe.
    Anybody who is concerned about value, about quality, about 
competition, also needs to look at that, because if you 
perpetuate a system that subsidizes providers for their 
existence--particularly subsidizes certain providers, versus 
others--then you will never create the kind of competition 
where patients go and insurers steer people to the providers 
who offer the best results at the best price.
    So, I think, from both the left and right, there is a lot 
to learn from that experiment.
    Finally, let me conclude by saying that my bottom line in 
all of this is that we need to reform the incentives in the 
system, in terms of how private insurers operate, in terms of 
how the delivery system delivers care, to achieve better value, 
to create incentives where the winner is the one that figures 
out how to provide more people with better results, at a lower 
cost.
    Once we do that, the task of making sure that everyone, 
without exception, is able to participate in the system, and 
that the disadvantaged are subsidized to buy into it, becomes, 
in my view, a much easier task, and is certainly doable.
    Thank you very much. I will be happy to answer your 
questions.
    [The prepared statement of Mr. Haislmaier follows:]

Statement of Edmund F. Haislmaier, Senior Research Fellow, The Heritage 
                               Foundation

    Mr. Chairman and members of the committee, my name is Edmund F. 
Haislmaier. I am Senior Research Fellow in health policy at The 
Heritage Foundation. The views I express in this testimony are my own, 
and should not be construed as representing any official position of 
The Heritage Foundation.
    Thank you for extending to me an invitation to testify before you 
today on state health reform initiatives. During the past three years I 
have had the opportunity to assist, in one way or another, health 
reform and coverage expansion efforts in about eighteen different 
states.
    In the process I have been impressed by the interest of state 
lawmakers from both parties, and from widely differing states, in 
developing health reform solutions that are truly patient-focused and 
consumer-centered. I believe that putting patients and consumers first 
in health care is the key to creating a value-maximizing health system 
that includes all Americans.
    Furthermore, my work with the various states has given me a greater 
appreciation for their diversity, including the diversity of their 
health care financing and delivery systems. I have come to believe that 
the most likely path to national health reform in the United States is 
through an evolutionary, not revolutionary, process resulting from a 
mix of state and federal initiatives.
    With that perspective, I present in this written testimony what I 
view as the key principles for designing a health system that is truly 
patient and consumer-centered.
Key Principles
    The fundamental objective of a patient-centered health care system 
is to maximize value for individuals and families so that they receive 
more benefit and better results for their health care dollars, both as 
patients and as consumers buying health insurance. Only when 
individuals choose and own their own health insurance will the other 
actors in the system--health plans and providers--have the right 
incentives to deliver better value in the form of improved results at 
lower prices.
    If policymakers are serious about real patient-centered, consumer-
driven health care reform, they should ensure that their legislative 
proposals embody six key principles:

      Individuals are the key decision makers in the health 
care system. This would be a major departure from conventional third-
party payment arrangements that dominate today's health care financing 
in both the public and the private sectors. In a normal market based on 
personal choice and free-market competition, consumers drive the 
system.
      Individuals buy and own their own health insurance 
coverage. In a normal market, when individuals exchange money for a 
good or service, they acquire a property right in that good or service, 
but in today's system, individuals and families rarely have property 
rights in their health insurance coverage. The policy is owned and 
controlled by a third party, either their employers or government 
officials. In a reformed system, individuals would own their health 
insurance, just as they own virtually every other type of insurance in 
virtually every other sector of the economy.
      Individuals choose their own health insurance coverage. 
Individuals, not employers or government officials, would choose the 
health care coverage and level of coverage that they think best. In a 
normal market, the primacy of consumer choice is the rule, not the 
exception.
      Individuals have a wide range of coverage choices. 
Suppliers of medical goods and services, including health plans, could 
freely enter and exit the health care market.
      Prices are transparent. As in a normal market, 
individuals as consumers would actually know the prices of the health 
insurance plan or the medical goods and services that they are buying. 
This would help them to compare the value that they receive for their 
money.
      Individuals have the periodic opportunity to change 
health coverage. In a consumer-driven health insurance market, 
individuals would have the ability to pick a new health plan on 
predictable terms. They would not be locked into past decisions and 
deprived of the opportunity to make future choices.
The Key Tests of Reform
    Not all health care reform legislation that is labeled consumer-
oriented is equally effective or significant. The key test is whether 
or not it puts in place structural changes that maximize the ability of 
a large number of individuals to make basic choices about their own 
health insurance coverage and medical care.
    Individuals are both consumers and patients. In a consumer-centered 
health system, individuals directly control the flow of dollars, buy 
and own their own health plans, pick the kinds of coverage that they 
want, and determine which plans offer them the best value.
    In such a system, consumers expect transparent prices, and consumer 
choice stimulates competition among plans and providers to offer better 
value for money. That competition, in turn, drives innovation in both 
clinical practice and plan design. For individuals as patients and 
consumers, value for money is judged in terms of results: better 
medical outcomes, improvements in their health condition or status, 
cost-effective treatments, and health plans that save them money by 
helping them stay well and, when they do need care, by identifying the 
providers that offer the best results at the best price for their 
particular condition.
    Thus, true consumer-centered health reform is system-focused 
reform, not product-focused reform. Its objective is to improve 
performance and results by changing the basic structure and incentives 
of health care markets so as to maximize value for money in health 
insurance and medical care. It is not simply an exercise in legislating 
new product designs or trying to plug gaps in coverage by crafting new 
programs for targeted subpopulations. Instead, true consumer-centered 
health reform focuses on making fundamental structural changes in the 
system, as opposed to merely expanding the existing system or 
micromanaging insurance plan designs or provider reimbursement 
methodologies.
    Policymakers need to step out of the conventional mindset that 
accepts the basic structure of the present system as a given and 
attempts only to modify it around the edges. For example, legislative 
proposals to promote certain product types--e.g., health maintenance 
organizations (HMOs) and health savings accounts (HSAs)--may well have 
beneficial effects, but they do not fundamentally change how the system 
functions as long as someone else picks the health plan for the 
individual. Similarly, no amount of regulatory tinkering with provider 
reimbursement rates or payment methodologies can create more than 
marginal improvements in value as long as the system vests control over 
key decisions with employer and government ``payers'' who are not the 
ones receiving the medical care or using the health insurance policy.
    Rather, consumer-centered health reform challenges policymakers to 
redesign the basic rules of the health care market to create new 
incentives for all of the actors in the system to put the interests of 
consumers and patients first.
    Properly designed structural reforms will also produce a better 
framework and new incentives for addressing the current system's 
failings in cost, access, and quality more effectively. If responding 
to consumer needs and preferences is made the organizing principle of 
the system, then insurers and providers will have the right incentives 
to develop innovative ways to deliver better value to consumers and 
patients in the form of lower costs and improved outcomes.
    In a reformed market, competition will produce new and better plan 
designs, clinical practices, and provider payment arrangements without 
lawmakers needing to micromanage the process. At the same time, it will 
generate new opportunities for lawmakers to focus public assistance 
more effectively to ensure that all Americans have access to the 
benefits of a system that offers better value.
    The fundamental problem with the current system is that it 
encourages all participants (payers, insurers, providers, and patients) 
to engage in a giant game of cost-shifting, with each party trying to 
stick one or more of the others with a bigger share of the bill. Thus, 
while there may be plenty of competition in the present system, much of 
it is a zero-sum competition in which there is a loser for every 
winner. What America's health care system desperately needs are 
structural changes that create positive-sum competition in which all 
participants can ``win'' by working, often collaboratively, to improve 
the health care value proposition.\1\
---------------------------------------------------------------------------
    \1\ For a concise discussion of why structural change is needed and 
how to refocus competition on value maximization, see Michael E. Porter 
and Elizabeth Olmsted Teisberg, ``Redefining Competition in Health 
Care,'' Harvard Business Review, June 2004. For a longer discussion, 
see Michael E. Porter and Elizabeth Olmsted Teisberg, Redefining Health 
Care: Creating Value-Based Competition on Results (Boston, Mass.: 
Harvard Business School Press, 2006). See also Regina E. Herzlinger, 
Who Killed Health Care? America's $2 Trillion Medical Problem--and the 
Consumer-Driven Cure (New York, N.Y.: McGraw-Hill, 2007).
---------------------------------------------------------------------------
The Consumer As Key Decision Maker
    The place to start examining any economic or social system is with 
its basic organizing principle, which is identified by asking ``Who is 
the key decision maker in the system?'' In any economic or social 
system, the key decision maker is the one who sets the parameters for 
the other participants in the system. The other participants must act 
in response to the needs or preferences of the key decision makers.
    Political science clarifies this process. For example, in a 
democratic system of representative government, the organizing 
principle is popular sovereignty, identified by the fact that voters 
are the key decision makers. Other participants (e.g., office holders, 
public employees, lobbyists, and interest groups) operate within the 
framework of the preferences periodically expressed by voters in 
elections. To advance his or her interests successfully, another 
participant must ultimately persuade voters either that they already 
want what the participant is proposing or that they should want it.
    This creates a cascading chain of incentives throughout the system. 
For example, the most successful way for a lobbyist to persuade a 
politician to vote for what the lobbyist wants is to show the 
politician how such a vote would be popular with voters.
    Other political systems (e.g., monarchies, aristocracies, and 
dictatorships) have different organizing principles, each of which can 
be determined by identifying the key decision makers in these systems.
    The same holds true in economics. Most market economic systems are 
``consumer-driven'' because the individual customer is the key decision 
maker. The other participants (e.g., producers, shippers, wholesalers, 
and retailers) must operate within the framework of the consumers' 
preferences as expressed through their purchases. To advance their own 
interests successfully, the other players must find ways to persuade 
customers either that they are offering what the customers already want 
or that the customers should want what they are offering.
    Again, the result is a cascading chain of incentives. Thus, the 
surest way for a shipper to get a producer's business is to demonstrate 
that it can deliver goods to retailers or consumers more quickly and at 
less cost.
    As in politics, alternative economic system designs can be 
recognized by identifying the key decision makers and, thus, the 
systems' organizing principles.
    For example, the organizing principle of a monopoly is that the 
economic sector is ``producer-driven.'' A monopoly exists (whether by 
accident or by design) when only one producer provides a particular 
product, thus making that producer the key decision maker. With no 
alternative producers available, other participants in the sector 
(e.g., consumers and retailers) are constrained by what the sole 
producer decides to produce and its quantity, timing, and price.
    Likewise, when suppliers collude, such as through a guild or 
cartel, the resulting market can be described as ``supplier-driven,'' 
reflecting the fact that suppliers hold the key decision-making power 
in that particular sector.
The Health Care Sector Anomaly
    In health care, on the supply side of the supply and demand 
equation are physicians, hospitals, and other health care professionals 
and institutions. Collectively, they are commonly referred to as health 
care providers. On the demand side are the patients who are seeking or 
receiving medical treatment. The broader term ``consumer'' encompasses 
not only patients, but also individuals who, while not actively seeking 
or receiving medical care, purchase related products and services, most 
notably health insurance.
    In the U.S. and many other countries, health care differs from most 
other economic sectors because government policies have sponsored, 
promoted, and maintained an anomaly in the sector--an additional set of 
participants known as third-party payers. While individuals always 
ultimately pay the costs of any health system, governments have 
instituted policies that effectively divert a portion of their incomes 
into the hands of others (the payers), who then make the basic or key 
decisions on how to spend the money on behalf of patients.
    The simplest variant of this arrangement is the single-payer 
system, in which the government taxes its citizens and then pays 
medical providers for treating them. The U.S. and some other countries 
have developed multipayer variants of the same basic model.
    In multipayer health systems, the government is almost always one 
of the payers, but its role is more limited than in single-payer 
systems, typically operating tax-funded medical care payment programs 
only for certain subgroups of the population. For example, in the U.S., 
the Federal Government runs a tax-funded single-payer system for the 
elderly called Medicare, while the state governments run a similar 
system for the poor called Medicaid.
    However, for the majority of individuals in countries operating 
multipayer health systems, the relevant third-party payers are private 
entities: most often their employers, although in some instances unions 
or associations. These private payers divert a portion of their 
workers' or members' income either to buy health insurance or to pay 
medical bills directly on behalf of their employees or members. These 
arrangements can be either mandatory, as in Germany, or voluntary, as 
in the U.S.\2\
---------------------------------------------------------------------------
    \2\ For a concise overview of the German health system, see David 
G. Green, Ben Irvine, and Ben Cackett, ``Health Care in Germany,'' 
Civitas, 2005, at www.civitas.org.uk/nhs/germany.php (April 15, 2008).
---------------------------------------------------------------------------
    Yet, in a voluntary third-party payment system, individuals are 
unlikely to hand over large chunks of their income and the authority to 
spend it without something that makes the arrangement significantly 
more advantageous to them than buying the services directly. That is 
particularly true for something as personal and important as health 
insurance and medical care.
    In the U.S., these arrangements exist largely because employee 
compensation that is diverted through employers to buy the employees' 
health insurance is exempt from federal income and payroll taxes. In 
contrast, if workers wanted their employers to divert part of their 
compensation for other purposes--such as buying groceries, paying for 
their housing, or leasing cars for their personal use--they would find 
that tax law treats such arrangements as income and taxes the workers 
accordingly. While the law does not prevent employers and workers from 
entering into third-party payment arrangements for food, housing, 
transportation, or anything else, such arrangements are uncommon 
because they offer no clear advantage (tax or otherwise) to workers 
over receiving their compensation in cash and then paying directly for 
the goods or services of their choice.
The Evolution of the Health Care System
    Current health care systems are a relatively recent phenomenon. 
They evolved in response to advances in biology, chemistry, and physics 
since the end of the 19th century that transformed medicine into a 
scientific discipline and an expanding economic sector. Even though the 
purpose of medicine is to better the lives and health of patients, the 
health care financing arrangements that evolved over the past century 
have never been truly consumer-centered.
    Through at least the first half of the 20th century, health systems 
were essentially provider-centered. Patients were expected to defer to 
the judgment of medical professionals and to pay what was charged. It 
was considered highly unprofessional for physicians to engage in 
explicit price competition. Hospitals granted admitting privileges to 
physicians, and physicians referred patients to the hospitals where 
they had such privileges. Thus, a hospital's real customers were the 
doctors who controlled the flow of paying patients, not the patients 
themselves.
    This basic structure persisted even as third-party payers, whether 
governments or employers, were introduced into the equation. Third-
party payers were expected to pay the usual and customary charges 
billed by physicians and hospitals for their services, but not to 
question the benefits, quality, or value of these services. This 
provider-centered focus can be seen in early health insurance 
arrangements. For example, in the 1930s, hospitals organized Blue Cross 
and doctors organized Blue Shield to guarantee providers steady, 
predictable income streams by having patients--and later, their 
employers--effectively prepay for medical care on a subscription basis.
    However, the resulting growth in the cost of medical care 
eventually spurred payers to start questioning the bills, beginning in 
the 1970s. At first, the focus was on the prices charged by providers. 
Payers, both government programs and private insurers working for the 
employers who were their customers, imposed payment limits on provider 
charges. Over time, those initial limits evolved into complex and 
comprehensive payer-imposed provider fee schedules.
    However, as the payers soon discovered, prices constituted only 
half of the cost equation. Costs were still climbing thanks to steady 
increases in the volume and intensity of the medical care being 
provided. In recent decades, payers have tried to tackle this other 
half of the cost equation with a variety of restrictions on patient 
access to specific treatments or technologies.
    The result is that today's health care financing systems, whether 
at home or abroad, are functionally payer-centered, with third-party 
payers having displaced providers as the key decision makers in the 
system.
    In this specific sense, there is no qualitative difference between 
a single-payer system and a multipayer system. Both systems are payer-
centered. Consequently, both systems generate the same incentives for 
other participants to respond to payers' demands and preferences rather 
than those of providers or patients. In a single-payer or a multipayer 
system, the payers decide whether or not to contract out to private 
insurers all or part of their role in managing the system, and they 
determine the terms and extent of such contracts. Private insurers 
therefore first serve the interests of the third-party payers who are 
their customers.
    Thus, the relevant question is ``For whom do the private insurers 
work?'' not ``Are private insurers part of the system?''
The Alternative: A Patient-Centered, Consumer-Based System
    The obvious shortcoming of a provider-centered system is that it 
distorts the system in the direction of providing more, regardless of 
cost. The natural tendency of providers is to assume that increasing 
the volume and intensity of medical services will generate more 
benefit. Of course, this assumption is not consistently true. Depending 
on the circumstances, a particular test or therapy can be unnecessary 
or ineffective. Indeed, many medical interventions entail significant 
risks to the patient and can cause more harm than good. At other times, 
the modest benefits are not worth the costs.
    In contrast, the shortcoming of a payer-centered system is that it 
distorts the system in the opposite direction by focusing on the cost 
side of the equation to the detriment of the benefit side. The most 
obvious, most effective, and simplest way to limit costs is by not 
spending money, but simply paying less or refusing to pay at all does 
not inherently produce more benefit or better value for the patient.
    Furthermore, both a provider-centered system and a payer-centered 
system have an inherent bias to favor short-term considerations over 
long-term considerations. In a provider-centered system, the incentive 
is to do more now without adequately considering the possibility that 
such a course of action could produce a worse result later. In a payer-
centered system, the incentive is to save money today without 
adequately considering the possibility that this could increase future 
costs.
    Neither a provider-centered system nor a payer-centered system has 
the requisite incentives to maximize value systematically and 
consistently. Only consumers have a natural interest in a system that 
reduces costs while simultaneously improving results over the long 
term.
    For any economic system to be value-maximizing, it must 
consistently and broadly reward consumers with lower cost and greater 
benefits if they seek the best value and must reward producers and 
suppliers with more business and higher incomes if they offer a better 
value than their competitors.
    Thus, the foundational insight behind consumer-centered health care 
reform is that the only way to achieve better value in health care is 
to make the consumer the key decision maker in the system. Only when 
users and payers are the same will the incentives in the health care 
system properly align to seek and generate better value. Since third-
party payers are never the users of the system--doctors and hospitals, 
not governments or companies, provide medical care to people--the only 
way to align the incentives to produce better value is to give those 
who use the system (patients and consumers) control over the funding 
and the associated spending decision. No other alternative arrangement 
can systematically and consistently produce more for less and secure 
value for the patient.
The Objectives of Patient-Centered, Consumer-Based Reform
    The overarching objective of consumer-centered health care reform 
is to transform the health care market into one that maximizes value, 
meaning that the system's operational dynamic is competition among 
participants to produce better results at lower cost for patients and 
consumers. Once delivering better value to consumers becomes what 
enables other participants (e.g., doctors, hospitals, insurers, drug 
makers, and insurance agents) to ``win'' within the system, many of the 
current problems start to solve themselves. A consumer-centered system 
begins to control costs because it creates increased pressure to 
justify costs better in terms of demonstrated benefit. At the same 
time, a consumer-centered system generates pressure to improve results 
by demanding data showing that anticipated benefits are commensurate 
with expected costs.
    Consumer choice also creates stronger incentives for measuring and 
reporting quality and performance because consumers need that 
information to make better decisions, thus producing improvements in 
those areas as well. Even a portion of the access problem begins to 
solve itself. When health insurance attaches to the person instead of 
to the job, fewer people encounter circumstances in which they lose 
their health insurance coverage, and the size of the uninsured 
population is commensurately reduced.
    A secondary objective is to provide lawmakers with a better 
foundation on which to build complementary public policies that more 
effectively address those access issues that competitive markets alone 
cannot solve. For example, the existence of a consumer-centered market 
for food makes it easier for policymakers to assist those who need help 
beyond what the market can provide through such means as subsidies in 
the form of food stamps or targeted incentives for grocery stores to 
operate in economically or geographically marginal, underserved areas. 
In a similar fashion, the presence of a consumer-centered, value-
maximizing health system would allow lawmakers to focus tax dollars on 
helping those individuals who are financially or geographically 
disadvantaged to ``buy into'' a well-functioning system.
    Another secondary objective is to encourage greater innovation. In 
this regard, health system innovation encompasses not only medical 
innovation to produce new and better treatments and therapies, but also 
innovation in organization and financing such as developing better 
clinical practices for treating patients, better provider payment 
arrangements, and better insurance plan designs.
    This last point is particularly important. By putting the interests 
of patients and consumers first, a consumer-centered system forces 
other participants, particularly insurers and providers, to rethink 
their relationships and interactions. The current confrontational 
dynamic, in which providers try to force payers to spend more and 
payers try to force providers to charge less and do less, becomes an 
unproductive strategy for both sides because it does not produce the 
better value that consumers want. Instead, in a consumer-centered 
market, providers and insurers would find that they can both win (gain 
market share and increase income) if they collaborate to deliver better 
value (more benefits for less costs) to patients and consumers. This 
forces them to think more creatively and urgently about how providers 
can improve their quality, results, and efficiency and how insurers can 
restructure provider payment and contracting arrangements to capture 
newly created value and pass the savings and benefits on to their 
customers.\3\
---------------------------------------------------------------------------
    \3\ See Porter and Teisberg, ``Redefining Competition in Health 
Care'' and Redefining Health Care: Creating Value-Based Competition on 
Results.
---------------------------------------------------------------------------
The Key Principles of Real Reform
    Lawmakers looking to design the right policy framework for enabling 
a consumer-centered, value-maximizing health system need to start with 
six key principles.
Principle #1: Individual consumers are the key decision makers in the 
        system.
    In a consumer-centered health care system, individuals are the key 
decision makers with respect to medical treatments and health 
insurance. The current payers in the system (governments and employers) 
will still play an important role, but in a different fashion. They 
will no longer manage the details of the system, but will instead play 
supporting roles in assisting consumers, who become the system's 
primary decision makers. The role of employer will center on providing 
their employees as consumers with financial engineering and decision-
support services.
    The financial engineering aspect encompasses various employer 
strategies to help workers participate in the system more efficiently. 
For example, the workplace is a convenient location for distributing 
information and handling administrative tasks, such as workers choosing 
coverage from a menu of options during an annual open season. 
Similarly, employer participation in an automatic payroll deduction 
system for insurance premiums is an administrative efficiency that 
benefits workers at very little cost to employers.
    Most important, as long as federal tax policy treats worker 
compensation for health care as tax-free to the worker if it is passed 
through the employer's hands, employers can leverage the tax code to 
ensure that their employees' spending on health insurance and medical 
care takes advantage of that favorable tax treatment. Doing so 
effectively lowers the cost of health insurance and medical care to 
workers by 15 percent to 50 percent because workers do not pay taxes on 
this compensation.\4\
---------------------------------------------------------------------------
    \4\ The value to a worker of the tax exclusion for employer-
sponsored health insurance is equal to the combined marginal income and 
payroll tax rates that would be imposed if the compensation were 
instead paid to the worker as taxable cash income. For a low-wage 
worker with no federal income tax liability, the tax exclusion is worth 
15.3 cents per dollar of health benefits, reflecting the combined 
employee and employer payroll (FICA) tax rate. Thus, the value of the 
tax exclusion for that worker is effectively a 15 percent discount on 
the cost of buying health insurance. For a worker in the 28 percent 
income tax bracket, the value of the tax exclusion is 43 percent (15 
percent payroll tax plus 28 percent federal income tax) and, depending 
on the applicable state income tax rate, can approach 50 percent when 
avoidance of state taxes is included.
---------------------------------------------------------------------------
    Employers can also play a decision-support role by assisting their 
employees with information and guidance in making health care choices. 
Most often, this will take the form of the employer or an insurance 
broker under contract with the employer helping individual workers pick 
the insurance plans that best suit their personal circumstances and 
preferences. Employers can also offer their employees a range of 
related services, such as workplace clinics; health promotion programs; 
information on the costs, risks, and benefits of common treatments; and 
comparative data on the quality and results of health care providers. 
Employers inclined in this direction will find that numerous vendors 
already exist who are willing and able to bring these and similar 
programs into the workplace.
    For governments, their role in a consumer-centered system shifts to 
financial assistance. Ultimately, the goal should be for the government 
to stop trying to design and operate public health insurance plans and 
instead focus on providing disadvantaged individuals with the necessary 
funds to buy into the same consumer-centered system that everyone else 
uses.
    This will primarily take the form of steps to shift public 
assistance from a defined-benefit model to a premium-support model. In 
the current defined-benefit model, the government operates separate 
public health insurance plans for specified subsets of the population--
something that government is poorly equipped to do competently. In a 
premium-support model, the government would operate programs to 
supplement the incomes of those who do not have sufficient funds to buy 
adequate health insurance and medical care in the market, just as the 
government now does with food stamps to help the poor buy groceries.
    In some places, such as rural areas or economically distressed 
locations, governments might also provide assistance in the form of 
targeted subsidies or incentives to ensure that essential health 
services are available--for example, by funding clinics or offering 
inducements to health professionals to practice in those areas.
Principle #2: Individuals buy and own their own health insurance 
        coverage.
    For a health system to be consumer-driven, health insurance 
coverage must be purchased and owned by individual consumers. In other 
words, the coverage contract must be an agreement between the insurer 
and the individual consumer. If the contract is between the insurer and 
some other party, such as an employer or a government, then the other 
party, not the individual consumer, is the insurer's real customer.
    While at one level a coverage contract is a legal arrangement, it 
is primarily an economic arrangement. The legal aspects of the contract 
simply define the specifics of the underlying economic arrangement 
between the insurer as the supplier and the counterparty as the 
customer. As a supplier, the insurer is legally obligated and 
economically motivated to work in the interest of its customers. 
However, when the counterparty is an employer or government, that 
entity becomes the insurer's customer, and the counterparty's interests 
may differ from or be contrary to the individual's interests, even if 
the coverage is ostensibly purchased for the individual.
    A simple analogy illustrates this key point. When a parent 
purchases breakfast cereal for a child, the customer is the parent, not 
the child. The parent and the child may have different opinions as to 
the best cereal to purchase. Indeed, these different opinions likely 
result from differences between the interests and preferences of the 
parent and the child. For example, the child likely prefers flavor over 
nutrition, while the parent will likely view nutrition as more 
important than flavor. Of course, the child's preferences likely 
influence, at least partially, the parent's decision, and cereal makers 
may even try to exploit this by pitching advertising to the child in 
the hope that he will influence his parents.
    Ultimately, the buying decision rests with the parent, who is 
therefore the cereal maker's true customer. For the child to be the 
customer, the child must make the purchasing decision, using either his 
own money or money given him by a parent. Absent such a shift in 
decision-making authority, to sell more cereal, the cereal maker must 
first make its products attractive to the parents who will buy them, 
regardless of how attractive it makes the cereals to the children who 
will eat them. This means that the cereal maker must focus on the 
aspects that matter most to parents, such as nutritional content or 
pricing that gives them good value for their money.
    While parents letting their children choose which breakfast cereal 
to buy is probably not a good idea, having individual consumers--not 
their employers or the government--choose their own health insurance 
plans is a good idea.
Principle #3. Individual consumers choose their own health insurance 
        coverage.
    Individual ownership of coverage is an essential criterion for a 
consumer-driven market, but it is not the only criterion. A market 
characterized by individuals purchasing the product is still not a 
consumer-driven market if only one product is available, if there is 
only one supplier, or if the suppliers are organized in a cartel.
    In such monopolistic circumstances, the lack of meaningful choice 
for consumers means that the key decision-making power still resides on 
the supply side of the economic equation. For the market-shaping power 
of the key decision maker to shift from the supply side to the demand 
side, consumers must have a choice of competing products and suppliers. 
Only then must suppliers respond to consumers instead of the other way 
around.
    The linchpin of a consumer-centered health care market is the 
opportunity for individuals to choose the health insurance coverage 
that best suits their own preferences. While choice of health care 
providers is certainly essential to a well-functioning, consumer-
centered market, the ability to choose among a diverse array of 
competing health insurance plans is the most important feature. This is 
true for two reasons.
    First, health insurance is the principal mechanism for financing 
medical care. Indeed, this is true even when consumers opt for high-
deductible plans and purchase much of their routine medical care 
directly from providers. For a health system to be truly consumer-
centered, individual consumers must ultimately decide how the money in 
the system is spent. Thus, the first and most basic decision that 
consumers must be allowed to make is which health insurance plan to 
purchase.
    Second, the choice of a health insurance plan of necessity 
incorporates a whole set of other implicit choices, such as what the 
plan will pay for versus what the consumer will purchase directly from 
providers, how and from whom the consumer will receive care, and how 
the plan will assist consumers in deciding among competing providers 
and treatment options. This last consideration is particularly 
important. Even the most sophisticated consumer may not have all of the 
relevant information available or have sufficient time to gather and 
analyze it when deciding among providers and treatments. However, 
health plans have--or should have--the information and expertise to 
assist consumers in making these decisions.
    What consumers want is good value--meaning the best medical care at 
the best price. In a competitive market in which consumers choose their 
own health insurance, insurers succeed and prosper by offering 
consumers a better value proposition than their competitors offer. In 
other words, they apply their data and expertise to finding their 
customers the best medical care at the best price or, better yet, to 
finding ways to help their customers minimize their medical spending by 
staying or becoming healthy.
    Thus, when individual consumers decide which insurance plan to 
purchase, insurers become the consumers' expert agents, helping them to 
navigate the health care system and obtain the best results at the 
lowest cost.
Principle #4: Individuals have a wide range of coverage choices.
    In any truly consumer-centered market, multiple suppliers compete 
to offer consumers better products at better prices. Yet for market 
competition to produce better value consistently--that is, by 
simultaneously increasing benefits while decreasing costs--consumers 
must be free to choose from a range of different options, and suppliers 
must have wide latitude to innovate in meeting consumer demands and 
preferences with new and better products. Thus, a precondition to any 
well-functioning, consumer-centered market is that lawmakers avoid 
unduly restricting either the options available to consumers or the 
scope for supplier innovation.
    Government does need to set some basic rules for any well-
functioning market. Much like establishing product safety standards or 
a uniform system of weights and measures, government can establish 
rules that facilitate well-functioning markets without unduly 
restricting supplier innovation or consumer choice. However, for a 
competitive market to function optimally, the basic rules need to 
permit wide scope for suppliers to innovate in developing new and 
better products and features to meet consumer needs and preferences.
    Furthermore, lawmakers need to recognize that not all consumers 
have the same needs, preferences, or priorities. Suppliers must be free 
to innovate in offering different products to different subsets of 
consumers, targeting their different needs and preferences. This is 
particularly important in the health care sector where constantly 
expanding scientific knowledge and the resulting innovations in medical 
treatment force continual reassessment of what is ``best'' for 
individual patients and specific medical conditions.
    For example, in health care, it is appropriate for government to 
limit the practice of medicine to those who demonstrate adequate 
knowledge and skill, but lawmakers should avoid inappropriately 
restricting provider competition with rules beyond those necessary to 
ensure basic provider competence and patient safety. Likewise, 
lawmakers should also take care to avoid imposing regulations that 
needlessly micromanage providers, stifle innovation in clinical 
practices, or favor one set of providers over another.\5\
---------------------------------------------------------------------------
    \5\ Examples of such counterproductive regulations include 
certificate-of-need laws that restrict the availability of medical 
facilities, technologies, or services; insurance benefit laws that 
dictate how plans are to pay certain favored health care providers; and 
laws that unreasonably restrict competition among providers, such as 
ones that bar the creation of specialty hospitals. For further 
discussions of these various regulations, see Michael J. New, ``The 
Effect of State Regulations on Health Insurance Premiums: A Revised 
Analysis,'' Heritage Foundation Center for Data Analysis Report No. 
CDA06--04, July 25, 2006, at www.heritage.org/Research/HealthCare/
cda06-04.cfm; Ashok Roy, ``How Congress Is Killing Competition: The 
Future of Specialty Hospitals,'' Heritage Foundation WebMemo No. 1740, 
December 13, 2007, at www.heritage.org/Research/HealthCare/wm1740.cfm; 
U.S. Federal Trade Commission and U.S. Department of Justice, Improving 
Health Care: A Dose of Competition, July 2004, at www.justice.gov/atr/
public/health_care/204694.htm (April 15, 2008); and Patrick A. Rivers, 
Myron D. Fottler, and Mustafa Zeedan Younis, ``Does Certificate of Need 
Really Contain Hospital Costs in the United States?'' Health Education 
Journal, Vol. 66, No. 3 (September 2007), pp. 229--244.
---------------------------------------------------------------------------
    In the same fashion, lawmakers need to set basic standards and 
rules for health insurance products and the companies that offer them. 
Yet they need to resist the temptation to substitute their judgment for 
the consumers' judgment.
    In setting health insurance market rules, lawmakers should focus on 
establishing the broad market parameters and allow market competition 
to work out the details. For example, in setting coverage standards, 
lawmakers should limit themselves to specifying basic coverage 
categories, such as physician services, hospital services, and 
prescription drugs. They should avoid micromanaging the market by, 
among other things, imposing coverage mandates for specific conditions 
or treatments or by stipulating how plans must contract with providers.
    Similarly, lawmakers should not enact measures that favor one 
particular plan design over others. Government policy should treat all 
plan designs (e.g., HMO, preferred provider organization (PPO), 
indemnity insurance, and HSA with high-deductible insurance) equally. 
Such an approach not only permits beneficial competition and 
innovation, but just as importantly respects and accommodates differing 
personal preferences among consumers.
Principle #5: Prices are transparent to consumers.
    The same holds true in establishing rules for the price side of the 
price/benefit equation. In all cases, lawmakers should avoid direct 
``price setting'' because such interventions inevitably distort the 
market in ways that end up harming both suppliers and consumers.
    Yet government does play a legitimate role in ensuring that a 
market functions fairly and smoothly by establishing basic pricing 
rules, which enable consumers to comparison shop effectively by clearly 
informing them up front about the price of each option. For example, 
government requires grocers to include the unit price on the label of 
products sold by weight or volume and requires lenders to disclose the 
effective annual percentage rate (APR) of a loan when offering 
financing to prospective borrowers.
    In a similar fashion, lawmakers will need to reach agreement with 
stakeholders on the appropriate standards for calculating and 
communicating prices to consumers in the health system. While enhanced 
price transparency at the provider level will certainly improve the 
functioning of the health system, the bigger issue will be the rules 
for how insurers price their health plan offerings.
    Because insurance premiums can be calculated in a number of 
different ways, lawmakers need to establish rules for reporting those 
prices so that consumers can comparison shop among the different 
offerings. In other words, which factors and parameters will be used in 
reporting prices? Will prices (premiums) be reported on an age-adjusted 
basis? If so, will the competing plans produce rate tables priced in 
one-year age increments, or will five-year age increments be sufficient 
for insurers and simpler for consumers? Lawmakers will need to address 
similar questions about other possible rating factors, such as 
geography and family status.
    Regardless of the specifics, lawmakers need to establish some set 
of basic rules on reporting premiums. Otherwise, if competing insurers 
priced their plans in different ways, or if insurers customized the 
premium charged to each individual customer, it would be difficult or 
even impossible for consumers to comparison shop among plans. Without 
some agreed convention on reporting prices, the balance of power in the 
market shifts back to the supplier because the answer to the consumer's 
question ``What is the price?'' becomes ``It depends.'' This makes it 
difficult for consumers to weigh the relative costs and benefits of 
competing options accurately and makes the market supplier-driven 
instead of consumer-driven.
    The specifics of the pricing convention are less important than 
making certain that some standard pricing convention is used. For 
example, for many years the standard convention on the New York Stock 
Exchange was to price stocks in eighths of a U.S. dollar, while the 
London Stock Exchange used hundredths of a British pound. Although they 
used different pricing conventions, both markets worked equally 
smoothly. Indeed, when U.S. stock markets switched to using hundredths 
of a U.S. dollar, some market participants fared marginally better or 
worse than they had fared under the previous convention, but the 
markets continued to function smoothly. In contrast, a stock market 
would become less transparent and less efficient if each company was 
listed using its own choice of currency and fractional system.
    In setting these and other market parameters, lawmakers should 
focus on ensuring that the resulting rules are transparent and 
equitable to consumers and that they provide insurers with a level 
playing field while accommodating their legitimate business concerns.
Principle #6: Consumers have regular opportunities to make coverage 
        choices on predictable terms.
    For a market to be truly consumer-centered, individuals must be 
able, at least periodically, to reconsider past purchasing decisions 
and make different ones. A market that restricts consumer choice by 
unreasonably locking consumers into past decisions also has the effect 
of shifting the balance of power in the market back to suppliers.
    For example, if a market rule locked consumers into buying new cars 
only from the manufacturers of their first cars, this would clearly 
shift market power from consumers back to suppliers and reduce producer 
competition and its resulting benefits. With much of its customer base 
locked into its product line, each producer would have significantly 
less incentive to respond to consumer demands for better products, more 
innovative features, and lower prices.
    For the health insurance market to be truly consumer-driven, a 
clear set of rules must establish when and under what terms consumers 
can choose among competing options. Otherwise, adverse selection or 
constant churning could undermine the stability and viability of these 
markets. Nonetheless, these rules need to ensure that the market puts 
the interests of consumers firmly ahead of the interests of suppliers 
(the insurers) while still accommodating the legitimate business 
concerns of the suppliers.
    This feature of consumer-centered health reform will likely be the 
most unsettling to many insurers because it will require them to adjust 
their business practices to accommodate a new market dynamic in which 
the customer picks the supplier. In the current dynamic, the supplier 
picks its customers through various strategies that focus on selling to 
some potential customers but not to others.
    In setting this portion of the market rules for a consumer-centered 
system, lawmakers need to start from a clear understanding of both the 
product in question and the needs and behavior of consumers.
    A significant portion of any health insurance plan is not insurance 
in the classic sense of financial protection against unpredictable 
risks or costs. All health insurance plans still retain some element of 
this protection, but it is no longer their primary feature. Rather, a 
large share of health insurance today consists of prepayment for 
medical care of varying cost and predictability. While the concept of 
using health insurance to pay for a full range of possible medical care 
was originally developed decades ago to serve the providers' interest 
in having more predictable income, that concept has since superseded 
its original intent.
    Today, health insurance plans are a way for consumers to manage 
their need to finance medical care of varying predictability. In recent 
decades, advances in medical science have steadily made more medical 
services more predictable for more patients. Furthermore, the current 
trends in scientific discoveries and their practical applications in 
the clinical setting will make even more medical care more predictable 
for more patients in the future. This is an irreversible dynamic that 
is driven by steadily expanding knowledge in the basic sciences of 
biology, chemistry, and physics, closely followed by constant practical 
innovation in applying that knowledge to the development of new tests 
and therapies.
    This ongoing scientific evolution has several practical 
implications for health insurance and health insurance markets. First, 
it is no longer practical or desirable for policymakers to attempt to 
fight the rising tide of scientific knowledge by trying to restrict 
health insurance plans to paying only for the limited and ever-
shrinking share of medical care that is genuinely unpredictable. Even 
the more consumer-directed plan designs that limit coverage by 
requiring subscribers to pay directly for more of their routine care 
will need to evolve to accommodate this new reality--for example, 
through mechanisms to ensure that incentives are properly aligned 
between the care that subscribers purchase directly and the care paid 
for by the plan--so that the totality of treatment is integrated and 
produces optimal results. While such plans will continue to attract a 
share of consumers, they will need to demonstrate in a competitive 
market that the total proposition offered--the combination of services 
paid directly by the consumer and services reimbursed by the plan--is a 
good value compared to other plan designs and produces a combined 
outcome for the consumer that is as good as or better than that offered 
by alternative, competing arrangements. Second, plans will need to 
become more of the consumer's ``expert agent'' who works to identify 
for customers the best providers and treatment options available at the 
best prices. Some current business practices, such as negotiating 
provider contracts based mainly on price and then steering patients to 
those providers, will not compete adequately in a value-maximizing 
market.\6\ Instead, plans will need to develop new strategies. For 
example, they might cover all providers in a given market but vary 
patient co-pays according to an analysis, which the plan makes 
available to its subscribers, of which providers offer the best results 
at the best prices. Pharmacy benefit managers have already pioneered 
such a business strategy in the form of tiered co-pays for different 
competing drugs. Third, a consumer-centered system will need to curtail 
some current insurer underwriting practices that exclude, limit, or 
charge above-standard rates for coverage for certain individuals or 
certain medical conditions. While these traditional practices will need 
to be retained in a limited form as penalties against those who wait 
until they are sick to buy coverage, they cannot be applied when 
individuals with coverage choose a different plan if the new market is 
truly consumer-centered. One of the important incentives for purchasing 
health insurance when an individual is healthy must be the assurance 
that future changes in health status will not disadvantage the 
individual when retaining existing coverage or choosing new 
coverage.\7\ Fourth, as science increasingly makes more medical care 
more predictable, health plans must recognize that they are 
increasingly less in the business of cross-subsidizing unpredictable 
risks and more in the business of cross-subsidizing health status. In 
this regard, cross-subsidizing health status is not only a horizontal 
exercise--commonly understood as the healthy paying for the sick--but 
also a longitudinal one in which a healthy person today will probably 
be in poorer health at some point in the future or even vice versa.A 
competitive, consumer-centered system will force insurers to rethink 
some of their business practices in this area as well. For example, 
insurers might experiment with offering features such as multi-year 
contracting, premium discounts for participation in wellness or disease 
management programs, or cash rebates to subscribers who successfully 
meet agreed-upon health improvement goals. These and other novel plan 
designs can create powerful new incentives for consumers, providers, 
and insurers to work together to achieve better value by keeping or 
making consumers healthier at a lower cost. Fifth, lawmakers must 
ensure that the market rules in this regard are fair to consumers, 
while also accommodating the legitimate business concerns of insurers. 
For example, if consumers are to be able to choose coverage at standard 
rates regardless of health status, it will be necessary to limit when 
consumers can make these choices to avoid confusion in the market. For 
instance, consumers could be limited to choosing or changing coverage 
only during an annual open season, or for some other fixed period of 
time, with exceptions for special circumstances such as loss of 
employment or loss of coverage under a spouse's plan.Similarly, 
lawmakers will need to work closely and cooperatively with insurers to 
devise risk-adjustment mechanisms to give insurers incentives not to 
avoid subscribers with health problems, but rather to help them get 
better outcomes at better prices or even to specialize in identifying 
and organizing cost-effective treatments for patients with specific 
conditions, such as diabetes, cancer, and heart disease. The market 
will need risk-adjustment mechanisms that allow each insurer to accept 
all customers regardless of their individual health status and that 
permit all insurers to aggregate a portion of their large claims and 
equitably redistribute these costs across all consumers in the 
market.\8\
---------------------------------------------------------------------------
    \6\ See Porter and Teisberg, ``Redefining Competition in Health 
Care'' and Redefining Health Care: Creating Value-Based Competition on 
Results.
    \7\ As a practical matter, in the employer group market, federal 
law already provides for limited guaranteed issue of coverage and 
prohibits individual medical underwriting. Consequently, consumer-
centered insurance market reform within the existing framework of 
employer-sponsored coverage will focus primarily on expanding the 
coverage options available to workers and shifting ownership of the 
policy from the employer to the individual. That way, coverage becomes 
truly portable and the interests of insurers are aligned with those of 
consumers who are seeking better results for their health care dollars. 
Such changes in the employer context are analogous to the changes 
introduced by 401(k) plans, which created the option of individual 
choice, ownership, portability, and control within the framework of 
tax-favored employer-sponsored retirement savings. The more contentious 
aspect will be expanding those same rules to include the non-group 
market as well.
    \8\ For a further discussion of risk-adjustment mechanisms, see 
Edmund F. Haislmaier, ``State Health Care Reform: The Benefits and 
Limits of ``Reinsurance,'' Heritage Foundation WebMemo No. 1568, July 
26, 2007, at www.heritage.org/Research/HealthCare/wm1568.cfm.
---------------------------------------------------------------------------
Conclusion
    The current debate over health care reform is usually framed in 
terms of addressing cost and access problems, accompanied by occasional 
discussions about the need to improve quality and outcomes in the 
system. Yet those issues are all manifestations of a more fundamental 
dissatisfaction with the status quo. Implicitly, both policymakers and 
the public are motivated by a sense that health care today is not 
living up to their expectations for value at either the individual 
level or the societal level.
    While America's current health system has clear strengths, it also 
has significant weaknesses. For all the benefits that it provides in 
helping people to live longer and healthier lives, America's health 
care system seems too costly, confusing, inefficient, and uneven in its 
results, and it leaves too many people without adequate access to its 
benefits. Fundamentally, Americans as individuals and as a society 
intuitively recognize that the present health system could do a much 
better job of delivering value.
    Put simply, Americans rightly sense that either they are paying too 
much for their present health system or the system should be delivering 
better results given what they are already paying.
    The solution and the challenge for policymakers is to undertake the 
reforms needed to transform the present system into one that does a 
much better job of rewarding the seeking and creation of better value. 
As the experience of other economic sectors shows, health care need not 
be a zero-sum game in which costs can be controlled only by limiting 
benefits and benefits can be expanded only by increasing costs. Rather, 
a value-maximizing system will simultaneously demand and reward 
continuous improvements in benefits while continuously reducing costs.
    Such a value-maximizing result can be achieved in health care only 
if the system is restructured to make the consumer the key decision 
maker. When individual consumers decide how the money is spent, either 
directly for medical care or indirectly through their health insurance 
choices, the incentives will be aligned throughout the system to 
generate better value--in other words, to produce more for less.
    All Americans should be able to agree with the goal of creating a 
value-maximizing health care system. Consumer-centered health care 
market reforms are the only effective means for achieving that goal.
    This concludes my prepared remarks. Thank you Mr. Chairman and 
members of the committee for the opportunity to testify today. I will 
be glad to answer any questions you may have.
    The Heritage Foundation is a public policy, research, and 
educational organization operating under Section 501(C)(3). It is 
privately supported, and receives no funds from any government at any 
level, nor does it perform any government or other contract work.
    The Heritage Foundation is the most broadly supported think tank in 
the United States. During 2006, it had more than 283,000 individual, 
foundation, and corporate supporters representing every state in the 
U.S. Its 2006 income came from the following sources:

    Individuals 64%
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    Corporations 3%
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    Publication Sales and Other 0%

    The top five corporate givers provided The Heritage Foundation with 
1.3% of its 2006 income. The Heritage Foundation's books are audited 
annually by the national accounting firm of Deloitte & Touche. A list 
of major donors is available from The Heritage Foundation upon request.
    Members of The Heritage Foundation staff testify as individuals 
discussing their own independent research. The views expressed are 
their own, and do not reflect an institutional position for The 
Heritage Foundation or its board of trustees.

                                 

    Chairman STARK. Well, thank you all. I--it is an amazing 
and complex problem.
    Let me just try a couple of issues that I have been 
concerned about, and maybe we can--there is this--if there are 
no children in the audience--a horrid word--a few back there? 
Oh, I am sorry. But in mixed company, and in polite society, 
this word ``mandate'' has caused great concern among parents. 
They rush to their children, put wax in their ears, and get 
them out of the room.
    But last time I looked, the former Governor of 
Massachusetts who I don't recall ever being accused of being a 
flaming liberal. And I don't recall Governor Schwarzenegger 
being accused of being a Socialist, save perhaps in Germany or 
Austria. But both were able, one way or another, to use that 
word ``mandate.'' And I suspect we have it in auto insurance 
and driver's licenses and income--we have a lot of mandates in 
our lives.
    Is there--are there any of you who feel that we can 
achieve, over a period of time, universal coverage and a 
reasonable quality of care for all of our residents, without 
using mandates, whether it is requiring certain groups--
businesses to pay, for example, or all people to have a policy, 
or have a provider, if they can afford it? Is there a major 
objection to a mandate? Jack?
    Dr. LEWIN. Well, I think that--you know, we don't have 
anything to point to in this country, Chairman, that would 
indicate universal voluntary anything. We really don't have any 
universal voluntary programs out there.
    So, I think if we want everybody to be covered, and we want 
everyone to pay their fair share, including the immortal and 
young, who think that they can avoid coverage, but also those 
who really need the coverage and can't afford it, I think we 
need to make a policy that is either a mandate, or an incentive 
so strong that they're the equivalent of a mandate.
    Chairman STARK. Anybody else? Ms. Bigby.
    Dr. BIGBY. I think that the individual mandate is a key 
part of reform in Massachusetts, and we have a recent survey 
that demonstrates that the majority of people in Massachusetts 
actually support the mandate, and do not think that it should 
be repealed. I think the key is the mandate is for people who 
have access to affordable insurance. And defining affordability 
and a mechanism for ascertaining affordability and having 
alternatives, I think, is key to implementing a mandate.
    Chairman STARK. Mr. Haislmaier, given a plan that would 
meet your other requirements of people being able to select on 
the basis of quality and price, can you--could you live with, 
say, for these plans to work, everybody has to be in them, and 
some groups have to pay----
    Mr. HAISLMAIER. The answer, Mr. Chairman, is yes to 
maximize coverage to everyone; and, for the system to work with 
maximum efficiency, everyone has to be in that.
    However--and this is important--there are different 
mechanisms for getting to that point. There is no one single 
mechanism. And one can disagree as to how it is done.
    I would simply make an observation, if I could, about what 
happened in Massachusetts. Governor Romney did not initially 
propose an insurance mandate. What he said is that, under the 
plan that he submitted to the legislature, insurance would be 
made more affordable. It would create a mechanism where it 
would be easier for employers to at least offer the coverage, 
since they wouldn't have to, you know, run their own plan, they 
could simply bring people to the Connector and let them choose. 
So, there was no reason to not offer the coverage. And finally, 
the insurance would be subsidized for those below 300 percent 
of poverty.
    And the position that he took in his initial proposal was, 
``Okay, folks, you've kind of run out of excuses, if we do all 
these things, for not having insurance. So I am not going to 
make you buy it, but I am going to say that you have to live 
with the consequences if you don't. Because if you don't buy 
it, and then you go and get treated, and then you don't pay 
your bill, well, it's not the fault of the hospital, it's your 
fault.''
    Now, the legislature, in its wisdom, turned that into a 
``buy insurance or we will fine you'' mandate. Okay, one 
could----
    Chairman STARK. No death penalty?
    Mr. HAISLMAIER. Pardon?
    Chairman STARK. Just a fine? No death penalty?
    Mr. HAISLMAIER. No death penalty, no, it was a fine. And 
one can disagree, as to the approach. But I think, 
philosophically, they are the same thing.
    The point I would make is that what happened in 
Massachusetts is that they tried to design their reforms so 
that everyone participating--individuals, the providers, the 
employers--would see it as a good thing, and want to 
participate. And it was only at the end of that process did 
they then say, ``Well, now, do we need to make people buy it?''
    And the concern that I have is that, if you start by 
saying, ``Well, we are going to make everybody buy it,'' then 
you skip the necessary hard thinking about, ``Well, what do we 
have to do to make people want this without requiring them to 
buy it,'' because that is going to make a difference, as to how 
effective it is. If people just want it, regardless of you 
requiring them, then any requirement is really to clean up the 
last two or 3 percent.
    Chairman STARK. That is fine. Thank you. Mr. Weil, I think 
you suggested that we need Federal action. Can you give me--I 
would think of issues like setting some kind of minimum benefit 
standards, the issue of how we deal with Medicaid, as opposed--
if we set a national standard, Medicaid, Medicare, how do we 
get those--you know, can you give me a couple or three areas in 
which you think Federal action would be the most important?
    Mr. WEIL. Mr. Chairman, first and foremost, there needs to 
be a national commitment to universal coverage. Without that, 
the ability of states to feel confident in the resources and in 
their ability to move forward, I think everything else will 
suffer without that.
    And, of course, once you talk about universality, you do 
have to answer some important questions: What does that mean; 
What are the standards to give people confidence that they will 
have coverage?
    We already have a lot of leadership from the Federal 
Government around quality improvement. But we could use more. 
The field--I think the discussion about value is actually very 
much on the table now, and the ability of the Federal 
Government to lead and work as the dominant purchaser with 
states as major purchasers in their domain, it provides 
tremendous opportunity for forward progress.
    And issues of cost. We simply can't--everyone says the 
incentives are wrong, and then they go off and do their own 
thing to fix the incentives, and the incentives continue to be 
fragmented, and they continue to be wrong. And if we are going 
to actually reach any agreement to try to align those 
incentives to improve the value in the system, the different 
purchasers have to work together, and within any given state, 
the Federal Government and the state are right up there at the 
top.
    I think there is potentially a very long list of areas for 
cooperation between the Federal Government and the states. But, 
as I say, really what the country needs, first and foremost, is 
a commitment to universal coverage. And then states within that 
framework, I think, could go a long way.
    Chairman STARK. Jack, could you just expand a little bit on 
the issue--it's one with which I agree--but beyond the idea 
that we have got, what, 160 million people who now get 
insurance through their place of employment, and the idea that 
we would suddenly say to those 160 million people, ``Well, wipe 
it clean, and we're going to give you a nice plan that Dave 
Camp and Pete Stark write,'' you would scare the begeezus out 
of 160 million people, or at least 159 million of them, right 
away.
    And so, I have felt that there is a political issue of just 
saying we are going to disband the coverage that this many 
people have. Are there other reasons that you think we have 
to--we should keep that part of any plan?
    Dr. LEWIN. Yes, I do. Thank you, Mr. Chairman. You know, I 
think that we--first of all, the employer-based system works 
fairly well for most parties. What we don't have there is 
portability, we don't have--we need some insurance reforms, and 
as we mentioned before, there is the issue of choice of 
coverage that we need to expand.
    So, if we could add those features to employer coverage, we 
would strengthen that. And I would fear that were we to even 
send the message that we are moving away from employer 
coverage--and we have seen erosion of employer coverage in many 
places: California, in particular. What happens there is we're 
more likely to shift people to the public sector in a way that 
we couldn't accommodate the absorption of the cost and really 
handling of that.
    So, if, over time, our long-term policy was individual 
coverage, and we had a long ramp-up period to it, I would 
imagine we could find a way to get there, and it could work. 
But I think it would be precipitous and dangerous to send that 
message now, with the vast majority of people covered there.
    Some employers are beginning now to take some actions, as 
well, to strengthen the health of their workers, and 
recognizing that they have got another role, in addition to 
being the administrators and the accountants, if you will. And 
I think there is some hope out there that employers could be 
encouraged to do some more activities.
    You see what Safeway is doing, for example, for its 
employees, and other large corporations that are deciding to 
take some matters into their own hands, and through voluntary 
approaches, incentivizing healthy behaviors and rewarding those 
behaviors, without penalizing people who have, for genetic 
reasons or other reasons, a health problem that they can't--
that needs attention.
    So, I think there is a lot going in the employer side right 
now that we should retain. If we want to focus on those sectors 
that don't provide employer-based coverage--retail, 
agriculture, food services, small businesses--that is maybe 
where we could make the gains with individual coverage, to 
start the process there, and maybe that is a way to avoid a 
fight, if you will, with some entrenched sectors that would 
make it hard for us to make some progress.
    So, there is a reason, I think, to approach those sectors 
with individual coverage. But I think, for the rest of the 
marketplace, we ought to try to protect employer coverage, and 
improve it.
    Chairman STARK. Let me ask, if I may, Dr. Bigby, and go on. 
But we have heard the issue of quality mentioned time and time 
again. My concern is that we really don't now have the ability 
or the data to determine quality in any kind of an empirical 
manner. And unless and until we get outcomes research--which 
would probably take us 5 or 10 years of accumulating data--that 
the idea of, you know, what one internist is--are they worth 
$70 for a 15-minute consultation, or is another one worth $100?
    I don't know that there is any way on God's green Earth 
that one can determine that without this database. That is--
don't we have to do a lot of work to build the data information 
before we can start to say we're going to pay for quality?
    Dr. BIGBY. I think that that is absolutely right. One of 
the features of Massachusetts's health care reform was the 
creation of the Health Care Quality and Cost Council, and a 
requirement that that council post cost and quality data for 
providers in Massachusetts. We are working very hard to get 
those data up on a consumer-friendly website.
    But the things that we are struggling with is that we have 
very few measures of quality. Those individual measures of 
quality don't give us an overall measure of quality for an 
institution like a hospital or provider groups. They are just 
that: individual measures. And they may not be that great. We 
are finding that they don't distinguish care sufficiently 
across providers in Massachusetts. So, you know, we will post 
data that shows that everybody is doing okay.
    And what do we do with that type of information? As we have 
come together in the state, all of our public purchases, 
Medicaid, our state employee program, the Connector, we are 
looking at our purchasing power to try to implement reforms in 
the way we pay for services to define value. But we can agree 
on a few things, but we understand that that doesn't 
necessarily represent overall quality.
    Chairman STARK. Thank you. Thank you all very much. Mr. 
Camp, would you like to inquire?
    Mr. CAMP. Well, thank you, Mr. Chairman. Dr. Lewin 
mentioned, certainly with self-employed people, they don't have 
access to employer-provided care, and that there might be 
something we could do there.
    Mr. Haislmaier, is there a way to have, you know, an 
individual consumer policy available, and not erode the 
employer-provided care that most--that 85 percent of Americans 
have?
    Mr. HAISLMAIER. Yes, I believe there is. And that is sort 
of the core of the insurance market reforms that I worked with, 
with the then-commissioner of insurance under Mayor Williams 
here, in the District of Columbia. And the advantage was, of 
course, that when we tried to work out the details of how a 
state regulating insurance would interact with Federal law, we 
just got in a cab and went and saw the Department of Labor, or 
Department of Treasury. And that basic design was what was 
incorporated in the Massachusetts reform, we shared that with 
them at the time they were developing it. And I have since 
then--in working with other states--made refinements to it.
    The analogy, really, is to what we did with 401(k)'s in the 
pension area. In other words, instead of presuming that every 
small business could run a defined benefit pension plan, where 
you work 30 years and then you get so much, and the business 
has to invest it and all, you create a system within the 
context of employer offering, and all the advantages of that, 
where people have an account and they invest in it and they 
take the money with them from job to job.
    That is what the Connector is designed to do. That part has 
not entirely come online in Massachusetts. They have only done 
that, so far, for the part-time and temporary workers, and for 
the individual market. But they're working toward--based on 
discussions I have had with the Connector leadership--they are 
working toward a goal of this fall, bringing online the ability 
of a business to simply go there and say, ``This is my employer 
plan. What does my employer plan consist of? It consists of 
this menu of 40 different options in the Connector. My 
insurance agent will sit there with you, as a benefits 
counselor, to figure out with you what's best for you, and help 
you pick a plan.''
    Now, that has all the protections--guaranteed issue, et 
cetera--of Federal law, with respect to employer coverage. It 
all qualifies as tax free. But the individual owns the policy, 
and can take it with him to the next job.
    So that's, essentially, the design. And I see that that is 
sort of the first step in insurance market reform that a number 
of states are looking at. Massachusetts went a little further, 
in also including their individual market. In some other 
states, that may take some time, because some of the issues are 
a bit more contentious.
    Mr. CAMP. Well, thank you. And, Mr. Weil, you mentioned in 
a study you wrote or co-authored that one function would be for 
state government to provide a well-functioning market. And what 
are some of the things you envision in a well-functioning 
market, and how does that differ from what we currently have, 
and what reforms might be included in that?
    Mr. WEIL. I think we can all agree that providing employees 
with more of a choice of plan would be a benefit to most of 
them. Whether it would really drive these broad reforms in the 
health care system is more uncertain. But it is the case that 
most employees do not get a choice of plan; most employers pick 
a single plan, or a number of variants from the same carrier.
    But there is an infrastructure there that the employer 
provides that needs to reside somewhere if it leaves the 
employer. I know, in my small business, it may be a non-profit 
business, but we spend a lot of time helping our employees 
navigate their insurance product. And we only have 1 of them; 
imagine if there were 100 of them to choose from. Someone still 
needs to play that role.
    I think the real issue in regulating the market is a series 
of policy choices regarding pricing and availability. There are 
many states in which the small group market--and most states in 
which the individual market--has fairly liberal rules with 
respect to the insurance industry practices regarding rating up 
the policies of those who are older, those who may have an 
illness, those who----
    Mr. CAMP. Well, would you allow individuals to buy 
insurance products across state lines?
    Mr. WEIL. Would I? No, I would not do that. And the reason, 
Congressman----
    Mr. CAMP. It would be a bigger pool, for example, for all 
the Realtors that are out there, or contractors that are 
involved----
    Mr. WEIL. It would----
    Mr. CAMP [continuing]. In some association.
    Mr. WEIL. The concern--I think it's a very rich topic for 
discussion, and I certainly don't suggest my own views are the 
only you should hear, but my sense of the problem with going 
across state lines is that there are pooling rules within each 
state. And the moment I, if I lived in Massachusetts, can buy 
my product from the unregulated state next door, then the pool 
that you've created to create an affordable system in 
Massachusetts unravels, as the low-cost folks purchase across 
lines in a state that doesn't' community-rate, and gives them a 
cheap product.
    So, all the consumer protection issues aside, which I think 
are very large, from a simple pooling perspective, allowing 
purchase across state lines unravels any effort to create 
larger pools of cross-subsidy within a state. And that means we 
will all purchase our own insurance. Our own prices that we 
will face will be those of the risk profile of ourselves. Older 
and sicker people will, by definition, pay more because younger 
and healthier people will find a state where they can buy a 
product that is priced at their low cost.
    So--and I think that is a dramatic policy choice for the 
nation, as a whole, to say that a state like Massachusetts 
cannot create a single pool across which all residents of that 
state will make contributions.
    Mr. CAMP. Well, I see my time has expired. Thank you all 
for being here. Thank you all for all the hard work you are 
doing, and for your testimony this morning. Thank you. Thank 
you, Mr. Chairman.
    Chairman STARK. Mr. Doggett.
    Mr. DOGGETT. Thanks very much for your insightful 
testimony. Secretary Bigby, in your state, you gave the 
responsibility, or the legislature gave the responsibility, of 
giving meaning to terms like ``affordable,'' ``minimal credible 
service,'' ``reasonably comprehensive'' to a board, rather than 
having the legislative body try to define all aspects of that.
    At the Federal level, is that the best approach? And 
perhaps you might have some thoughts, as well, on the concept 
of a board modeled on the Federal Reserve, such as that that 
former Senator Daschle has recommended.
    Dr. BIGBY. Yes, I think that's a very good question. I am--
I will say that I think the legislature realized that they 
could never come to agreement on what the definition of minimal 
credible coverage was, or what affordability might be. And so 
they did give this responsibility to the Connector board.
    I think that the composition of the board was very 
thoughtful, in terms of who is represented: the type of 
knowledgeable people that are there, but also those who 
represent consumers and can advocate for them. So I think that 
the concept of that type of board that has the authority to do 
that was an excellent thing. And I think it could be done at 
the national level.
    Mr. DOGGETT. You have managed, in Massachusetts, to reduce 
the number of uninsured citizens significantly over a 
relatively short period of time. At this point, what do you 
think are the most important steps we need to take at the 
Federal level, to ensure that the job is complete, and that you 
achieve universal coverage for all your citizens?
    Dr. BIGBY. Well, I think that the components of health care 
reform that allowed this progress to occur are still what we 
would like to have in place. Many of those components are there 
because we had partnership with the Federal Government in our 
Medicaid waiver.
    I think that the ability to expand coverage to low-income 
people was very important. When we look at who has benefited 
the most from health care reform, and where we have seen the 
highest increase in insured populations, it's among low-income 
individuals and young men, who tended not to get insurance, 
even if they could afford it.
    I think that those principles of insuring people and using 
resources, as has already been mentioned, that had been going 
to institutions is very important for insuring that we're 
covering individuals, and that is very important.
    In the long term, we know that we have to do better at 
containing costs, so that we can continue to sustain this. And 
I think that the mechanisms that we have for doing that will 
require just as much creativity as the things that we put 
together to ensure access. So, flexibility around payment 
system reform, value-based purchasing is also very important.
    Mr. DOGGETT. Ms. Riley, next door, in Maine, you have 
encountered, I think, some of the same problems trying to 
contain cost that we have, and, in fact, are battling over this 
very day, as we attempt to eliminate the incredible waste of 
unnecessary subsidies in the Medicare program, despite its 
defenders in the White House, and some here, unfortunately, in 
Congress.
    As you look back over your experience, I am sure that any 
health care reform will encounter significant opposition. But 
are there things in the cost containment area that you would do 
differently, or recommend that we approach differently, here at 
the Federal level?
    Ms. RILEY. That is a very tough question.
    Mr. DOGGETT. It is.
    Ms. RILEY. I think that, clearly, when health care is a 
seventh of the economy--it's one in six jobs in Maine--
somebody's idea of cost containment is another person's salary. 
So it is, obviously, very difficult.
    I think it is absolutely incumbent on us to get the 
stakeholders around the table, and to get a vested interest in 
cost containment.
    We initially tried to do a global budget with our 
hospitals. It was highly unsuccessful, and fought viciously. 
But that was replaced by voluntary hospital targets at the 
meeting.
    We have created a Maine quality forum to look at the 
national data, and eliminate the variation that exists, pretty 
dramatically, in our state. And I think that that has been a 
fairly successful approach. And we have instituted medical loss 
ratios in a small group in individual market to do those kinds 
of protections.
    But, in the end, I think it is--the notion of a global 
budget, the notion of everybody coming together and negotiating 
around the inefficiencies of the system to find ways to solve--
to get those inefficiencies out of the system and reinvest them 
makes lots of sense. It has been a very challenging situation 
for us, and I think, in part, because the financing was 
precedential.
    So, one of the problems I think we face as states is, as 
long as states are viewed as laboratory experiments, and 
they're not policy, then the reaction to people is to fight 
them, not to fix them. And I think Alan's point is quite right, 
that we need a sustainable federal policy that says we're 
keeping our feet to the fire, everybody has to work on this and 
get it right. Then I think we can get the right incentives 
around cost containment.
    Mr. DOGGETT. Thank you very much.
    Chairman STARK. Mr. Thompson, would you like to inquire?
    Mr. THOMPSON. Thank you, Mr. Chairman. Thank you for 
holding this hearing, and thanks to all the witnesses for being 
here.
    I would like to know if any of you, in your work with the 
different states, and your efforts to try and move the states' 
health population ahead, have run into any barriers in regard 
to ERISA. Have there been things that you couldn't accomplish, 
or have there been ERISA exemptions that got into the way of 
providing for a healthier community? Jack?
    Dr. LEWIN. Sure. I think that--well, you know, obviously, 
Hawaii couldn't proceed--you know, the courts--throughout their 
law, because it was deemed to have violated ERISA, and we had 
to get this ERISA exemption from Congress. The exemption is a 
frozen exemption. It's--the provision of the whole law are in 
there, and Hawaii is fearful of ever coming back and asking for 
any amendment.
    So, you know, the cost split between the employer and 
employee was set for what the costs were then. Costs have gone 
way up, and the employee's cost remains one-and-a-half percent 
of wage, which is woefully low, and it's unfair to the 
employer. So that's a destabilizer there.
    When we went back in to do a program for the unemployed, 
self-employed, part-time employed, the state health insurance 
program, we had to make that--we wanted to try to get everybody 
covered, but we ran into ERISA barriers with that.
    And, in California, as we tried to proceed with SB-2, we 
also had--knew that when--you know, if a law didn't make it 
through the challenge of the public ballot initiative led by 
Governor Schwarzenegger, we would have been challenged on the 
basis of ERISA at some point in the future.
    So, yes. I think every reform has to dance around ERISA in 
order to try to get more people covered.
    Ms. RILEY. And I think, conversely, any time we talk about 
mandates, employer mandates, or employer requirements, we are 
always--there is always a balancing act about when we're going 
to force employers into the self-insured mode, and away from 
the protections of state regulation. And that's a balancing act 
at the state level.
    ERISA, at is most narrow, though, is critically important 
to--basic to Chairman Stark's concern about quality and data. 
ERISA prevents us from requiring self-insured plans to 
contribute data to our all-payer database. So it's very hard to 
sort of move to a meaningful quality initiative or cost 
initiative without the ability to get that data from self-
insured companies.
    Dr. BIGBY. In Massachusetts, in May, we issued a report 
where we looked at employers who had 50 or more employees on 
state-subsidized health insurance. And that totaled $636 
million. These are mostly part-time workers, or temporary 
workers, or people in the waiting period before their insurance 
takes effect.
    And when we talked to employers about changing their 
policies that would decrease these numbers, the whole issue of 
ERISA came up at that time.
    Mr. HAISLMAIER. Mr. Thompson, a couple of things that I 
would add to my colleagues here, on the data usage, in 
particular. Yes, ERISA provides obstacles to certain things. I 
am not necessarily convinced that that's a bad thing. I mean 
requiring every pizza joint to operate a defined pension plan--
like a defined benefit pension plan like GM--is not necessarily 
a good thing. Similarly, requiring employers to buy and manage 
the insurance isn't necessarily a good thing.
    But there are a couple of points. One is--and this is an 
area I am looking closer at, in both Federal law and ERISA, and 
also state law, with respect to insurance--is the possible 
obstacles to plans offering subscribers rebates for 
successfully completing or participating in disease management.
    I think the problem we see with a lot of the wellness stuff 
is that employers don't feel that they can selectively say, 
``Well, okay, you have diabetes, and if you participate in this 
program, then we reward you at the end for your success.'' 
Employers feel that they would fall under discrimination 
statutes in that case.
    And so, instead, they say, ``Well, here is membership to a 
gym.'' Well, that doesn't seem to produce much in the way of 
improvements. So that is a big of an obstacle. In the states, 
there is a corresponding obstacle that I am looking into where 
those kinds of rebates under some state laws could be seen as 
an improper inducement to coverage. So, that's an area.
    The other area I would touch on is I think that a large 
part of--and I have a paper coming out on this shortly; in 
fact, I will be editing it when I get back--what has to be 
dealt with is the concept of how you risk adjust within any 
system. And in effect, I think that the easier way to do that 
is with a back-end sort of claims pool, where you put all the 
high-risk claims in a pool, and then redistribute the money 
across all the covered individuals, so everybody pays a little 
extra on their premium. The problem is, you can't include ERISA 
plans in that.
    Mr. WEIL. Mr. Thompson, could I add one last item to this 
very, very complete list?
    Mr. THOMPSON. You have to ask the chair; my time is over.
    Chairman STARK. Go right ahead.
    Mr. WEIL. This has been a terrific list of the impediments. 
I would add only one, which is there is growing interest in 
programs called premium assistance, where you blend public 
dollars with employer dollars for those who have an offer of 
coverage at work. And there are a lot of complications around 
those plans.
    But one of the barriers ERISA poses is you cannot mandate 
the participation or even the sharing of information by 
employers that might make it possible to determine whether that 
was a viable option.
    Chairman STARK. Thank you. Mr. Pomeroy, would you like to 
inquire?
    Mr. POMEROY. Thank you, Mr. Chairman. I want to commend you 
for this hearing, and this absolutely superb panel. I used to 
be a state insurance commissioner, it's been my privilege to 
work on these matters with some of you for a long, long time. 
The issues are still very much with us.
    What I think some of the state innovation has done--and I 
chaired, or was part of, an effort to create the second or 
third state high-risk health pool back in my state legislator 
days of the 1981 interim we passed in 1983. And it did provide 
a guaranteed mechanism for high-risk folks that could otherwise 
not get coverage to obtain coverage.
    On the other hand, we did nothing--we didn't address cost 
at all. The premium was 125 percent of average individual 
policy, and it really has been out of reach of most people, 
which gets to the crux of my question.
    If health reform continues to just deal with the financial 
intermediary range of issues, we're missing the underlying 
cause of the whole problem. That is, costs are getting away 
from us. We pay double per capita than any other country pays 
in the world. We are not getting an outcome that would reflect 
that additional investment.
    Indeed, if you look at Medicare data within our country, 
you've got areas of--the higher cost areas are getting the 
worst results, the lower cost areas are getting the best 
results. And we really need to get pretty darn serious about 
this, because literally, hundreds of billions of dollars of 
Federal moneys are going into these expensive areas, not giving 
us best results.
    So, value medicine--not meaning medicine on the cheap, not 
meaning inferior medicine, but value medicine. This is a 
concept that I really think has to come to the fore of our 
health reform discussions. I would like to go down the panel 
and just hear your thoughts about how we advance the notion of 
getting better value out of our care delivery system. Well, I 
will continue on for a moment to give a little more direction 
on the question.
    As we look at value medicine and health reform, maybe we 
ought to look at more ways we build, you know, not just state 
response to insurance, but state-supported delivery systems. 
And we've done a bit of this: community health centers. What is 
your view of the role that they're playing, in terms of cost-
effectively getting broader access to some care to people that 
otherwise don't have coverage?
    School nurses. Is this a meaningful components of getting, 
you know, universal screening out that--to children, where it 
might have tremendous preventative impact and cost savings that 
would result?
    Is there ways that Medicare reimbursements can be 
rejiggered to provide greater incentive to integrate systems, 
and elevate primary care as a principal component of Medicare 
care delivery? Those are issues I am thinking about, and I 
would be very interested in the panel's responses. Thank you.
    Mr. HAISLMAIER. Thank you. At the risk of taking away from 
Secretary Bigby, I would like to actually talk about some of 
the things going on in Massachusetts, because that provides an 
example.
    I actually had the opportunity at another conference 
earlier last week to share the panel with a woman who is the 
CEO of the hospital in Concorde, Massachusetts. And some of the 
discussion was around this. And some interesting things are 
happening in Massachusetts.
    As Secretary Bigby noted in her example of the dry cleaner, 
people are now, with the coverage, getting primary care. They 
have suddenly woken up in the state and realized, ``Well, we 
have a shortage of primary care providers,'' which is something 
that us health policy people have been talking about for years 
and years, and now they're having to do something about it.
    What's interesting is CVS is opening up minute clinics 
there, in Massachusetts. And what I found really interesting 
was when this woman who runs this hospital was discussing this 
on the panel, she said, ``You know, my primary care providers 
don't have a problem with that. In fact, they like that, 
because more and more people are getting the minor stuff seen 
to, and their time is available for the more complicated.''
    So, contrary to what one might think--that there is a clash 
of interest--actually no, it's working out. But what's 
happening is that the intermediaries are seeing that they now 
work for the patient, not the employer. And that is my second 
point, and I will use the illustration of Massachusetts, as 
well.
    We call employers payers, but payers--and the government is 
one, as well--care about three things in the system: cost, 
cost, and cost. So, when the intermediary works for the payer, 
the question is, ``How do I control the cost?''
    Well, there are lots of ways to control costs. In fact, 
some of the easiest ones are ones that don't benefit the 
patient: make it difficult for people to get care, pay the 
doctors and hospitals less. The most effective way to control 
costs is don't pay.
    Now, Massachusetts is about to have a situation where an 
employer, instead of having the insurance company work for them 
and their choice of insurer entirely based on, well, how low is 
your premium, they are going to be able, soon, to give their 
employees the option of going to the Connector and picking a 
plan.
    If you go to the Massachusetts Connector in that scenario, 
and you pick a plan, and you look at the lowest cost plan, and 
you ask them why are they the lowest cost, and the answer is, 
``Well, because when you get sick we make it difficult for you 
to get medical care, and we only send you the providers that 
take very low reimbursement,'' I think you're likely to move on 
to somebody whose answer is, ``Well, you know what? We have 
taken all the data we already have, and we have figured out 
which providers give the best results at the best price, and 
you can go to any provider. But based on this tier--and here is 
the data--these are the ones you get a lower copay for, and 
these are the ones you get charged more for.''
    Ms. RILEY. Thank you. It's good to see you again. I think 
that the variation issue is particularly frustrating, because 
Winberg's work has been out there for 20 years, and we have 
taken very little action on it.
    In Maine, we have created the Maine Quality Forum, whose 
focus is to look at variation, work with the providers, and, 
because you can see a tenfold difference for the same person 
getting the same treatment in Maine's hospitals and in every 
hospital in the country, so that the Maine Quality Forum will 
work with providers to bring that variation down, starting in a 
voluntary way. And I think, over time, we will have to connect 
prices with that.
    The issue of community health centers and school health 
centers and so forth is all very intriguing. But I think what 
McKinsey tells us and most of the studies show is it is the 
fragmentation of our system that causes much of its cost. So, 
while those are extraordinarily important services, how do they 
connect together, and create a system of care, so that we don't 
have redundancies that are terribly, terribly costly. And I 
think we have not been as thoughtful about that as we ought to 
be.
    And, in fact, when you think about Federalism, the 
Federally qualified health centers and community health centers 
have a direct Federal relation, but none to the state. So the 
state, just like a self-insured plan, the state can't ask a 
Federally qualified health center to do something specific as 
part of a plan. And I think that's a question in Federalism 
that ought to be looked at.
    But I do think the big issue of the fragmentation of our 
system is a cost driver. The Federal Government, as a huge 
purchaser of care--Medicare, Medicaid, Federal employee health 
benefit CHAMPUS--could set the same standards, could set--could 
determine prices, could determine ranges of prices. Because 
what we know is we pay more and we have more.
    In Maine, we decided to address the supply question. We 
have a certificate of need program, but added to that a capital 
investment fund that was a budget for new capital that said we 
will have all the capital we need but not more, because we 
recognized that supply, in fact, in this country drives demand.
    And finally, I think if we could look a little at Medicare 
and Medicaid, one of the big cost concerns in the states is 
always the allegation that the public programs underpay. And 
they do. But I think there is a middle ground. How much do the 
public programs underpay, and how much is the price and cost 
too high?
    But the notion of the cost shift is a problem in the 
system. And we need better data to know--we don't have 
comparable data state to state to state about what Medicaid 
pays, or have a good system of looking at what Medicare pays. 
In a rural state like ours, the wage index isn't adjusted. And 
so, we are actually discriminated against in Medicare, and 
don't get--even though we have to compete nationally.
    But I think your question begs a bigger issue about what 
kind of Federal reform we want. I*t may well be that we need to 
think very differently. It may well be that what we need--as we 
talk about the primary care crisis in America, we are now 
talking about reinventing primary care through something called 
an advance medical home. Very good idea, but it has become the 
new sort of silver bullet.
    And I think maybe we should rethink. Maybe there ought to 
be a rethinking of our health care system, where you have a 
publicly supported, primary care preventative program that is 
mandatory for all Americans and we take our public health funds 
and we work with primary care physicians, and then you insure 
just those things that are insurable events--sickness--but 
require insurance companies to guarantee issue, to make sure 
everybody gets access to it. It may be time to really 
fundamentally think differently about how health care is 
provided.
    Chairman STARK. Mr. Becerra, would you like to inquire?
    Mr. BECERRA. Thank you, Mr. Chairman, and thanks to our 
panelists. And, Dr. Lewin, great to see you again.
    Dr. LEWIN. Great to see you.
    Mr. BECERRA. Let me ask a quick question. It appears that 
the President today is prepared to veto legislation that the 
congress passed--both the House and the Senate--with 
overwhelming numbers to try to stave off a cut to doctor 
reimbursement rates, which, in many quarters of the country 
we're hearing, are necessary in order for some of these 
physicians and providers to continue to provide medical 
services to Medicare beneficiaries--most of our seniors 65 and 
over.
    I am wondering if you can tell me: I know we're talking 
more globally, more universally, in terms of coverage for 
health care, but what could be the impact if the President's 
veto--well, first, if the President were to veto; and secondly, 
if the veto were to stand on this cut, or staving off the cut 
of 10 percent to health care providers. Dr. Lewin?
    Dr. LEWIN. Sure. Well, I think it could be significant. I 
think that, for primary care physicians, and for rural 
physicians, and inner-city physicians who--the viability issue 
is very, very real. And I think you can't--it's not like a 
starve the beast, you know, philosophy that is going to work 
here. So I think that is--it's very damaging.
    And it also has kept many of the health policy people in 
the physician community, and among the health care professions 
together, away from the topic of quality for 7 years. We just 
keep fighting this same repetitive battle. We are treading 
water and going nowhere, and I think it's time to get over 
that.
    I--going back to Mr. Pomeroy's questions about quality, you 
know, putting on my cardiology hat, 43 percent of Medicare 
costs are cardiovascular. A lot of that is preventable. If we 
don't work on preventing people in the pipeline from needing 
the services, we are all going to bankrupt the system, just on 
cardio-vascular care, alone.
    But when you get to the care that is needed today, we are 
not very efficiently spending our resources. I mean, we really 
could do a much better job with the dollars we have at 
producing more health by using information, the tools we have 
before us right--today, to shine light on who is doing a better 
job.
    When we, last year, looked at all the hospitals in America, 
and used our registries, the cardio-vascular registries we have 
up across the country, to say how much time--and we have these 
registries in just about every large hospital today, measuring 
outcomes in cardio-vascular medicine--we looked at how much 
time it took to get from the emergency room, when you're having 
a frank heart attack, to getting the blocked coronary artery 
unplugged.
    We note, from the science, that if you take longer than 90 
minutes, that the muscle tissue behind that blockage doesn't 
recover, it becomes a scar, putting you at risk for heart 
failure and enormous cost in the future.
    Every hospital in the country, all the major centers, said, 
``We do this in less than an hour.'' But when we measured it, 
we weren't doing it in an hour, we were doing it in 2 hours, in 
two-and-a-half hours. In 1 year, just by giving people the 
information, just about every hospital in America has gotten 
their time down under 90 minutes, where it needs to be.
    Getting information to doctors and nurses and teams about 
how we're doing in hospitals is something we could do today, 
and it would not only eliminate disparities, it would get rid 
of variation, and it would give people--because nobody wants to 
be conspicuously, you know, spending more or doing less than 
what's appropriate.
    Even at the individual care team or physician, you can 
measure adherence to guidelines and performance measures, and 
the standards we have today. We need more of those. But we 
could measure those today and determine very accurately, for 
every care team and physician, whether people are getting the 
best evidence-based medicine.
    That ought to be our goal. We could get to that so 
inexpensively, that I think that--and so the physician reform 
in the SGR doesn't do any of that really, and there has been 
some movement on the----
    Mr. BECERRA. Let me ask Dr. Bigby and Ms. Riley to respond, 
because you have to run these state programs. And if, at the 
Federal level, we are sending down cuts to some of these 
providers who are saying, ``We are going to possibly get out of 
the system, at least for Medicare,'' I imagine that throws your 
systems out of whack a bit, as well.
    Dr. BIGBY. Yes. Somebody has already raised the issue of 
cost shifting, and it's something that we contend with every 
day.
    You know, I think that the issue of what Medicare rates are 
for different providers is a very important one. There are 
things that Medicare does not pay sufficiently. There are 
things that they pay probably more than they should. Without a 
conversation about looking at that dynamic, and simply cutting 
rates across the board, you just exacerbate a problem that 
already exists.
    Mr. BECERRA. Ms. Riley.
    Ms. RILEY. Well, as the oldest state in the nation, we 
watch very carefully the work on Medicare, and are quite 
concerned. Obviously, when Medicare cuts, somebody pays. And 
that is cost-shifted to premium payers.
    And we are also a state of very small businesses who just 
can't afford to see their costs grow. So we wish you good luck.
    Mr. BECERRA. Yes. And I see my time has expired.
    Chairman STARK. Well, I just wanted to ask Dr. Lewin if he 
didn't think U.S. News and World Report was enough. You want 
more information than that?
    Ms. Schwartz, would you like to inquire?
    Ms. SCHWARTZ. Thank you, Mr. Chairman, and thank you for 
the opportunity to participate in this hearing.
    And I wanted to just follow up on a couple of things. 
First, I did want to thank the panel for acknowledging the good 
work of the Federal-state partnership and the public-private 
partnership on SCHIP. I was involved in Pennsylvania in 1992, 5 
years before the Federal level, and we have done a remarkable 
job, I think, across this country to do more, as you know. We 
have pushed for that. And hopefully we will be able to--under a 
new President--be able to do that.
    And I did want to also acknowledge the point that was made 
about prescribing and the use of health IT. I think, Dr. Lewin, 
you mentioned that. And should we override the President's veto 
on the Medicare bill,we will actually move all physicians under 
Medicare to e-prescribing. So thank you for--physicians, and 
actually all players--helping in getting that done.
    And I will continue to do work on health IT. I think the 
discussion we have had about quality and measurement and 
fragmentation--I think that, Ms. Riley, you mentioned that--all 
or many of those issues could be, at least in part, addressed 
by health IT and linking all of our providers in this country. 
So, thank you for your comments.
    What I wanted to address today is the role of market 
reforms in reaching all Americans, being able to make sure that 
all Americans do get access to universal coverage. I think our 
Chairman reflected that because about 50 or 60 percent of 
Americans have employer-based coverage, we are likely to keep 
that system going forward.
    But as a number of you pointed out, there are major 
obstacles, ERISA being one. But there are other market issues 
in both the individual marketplace and the small group market. 
And, of course, access to the larger employers, because of the 
obstacles from ERISA are major issues.
    And will raise just--I would like you to really--my 
question is whether you could really elaborate--and some of you 
have done this--but even more on what are some of the essential 
market reforms, and the role we would play, at the Federal 
level, so that these market reforms don't happen--so they 
happen individually in every state, that the disparity between 
the states and what mandates at the state level--I actually got 
a lot of mandates down on women's health, in particular, so I 
guess women were not at the table when the insurers decided 
what they wouldn't cover or not, so we did some of that.
    But, first of all, I have a bill to exclude--to prohibit 
the use of some of the pre-existing condition exclusions for 
children. You know, just the very fact that parents may 
actually have their insurance lapse, and then they sign up for 
insurance, trying to do the responsible thing, and they are 
told, ``I am sorry, your child might be a diabetic, but you 
haven't had insurance, you have to wait six months.''
    Now, my guess is that if that child doesn't get help, it's 
pretty bad for that child. But then they are more likely get 
uncompensated care, help, somewhere, and probably the most 
expensive way possible. I think this is unconscionable, that we 
have children in this country to whom insurance companies apply 
pre-existing condition exclusions.
    But there are waiting periods, again, and your employer can 
say, ``I am sorry, I would cover you, but you have to wait 6 
months to get coverage, because I'm not sure you're really 
going to be with us that long.'' We have employees who don't 
sign up for insurance--because they forgot or because they were 
busy when they were new employees--and then they want to sign 
up and the employer says, ``I'm sorry, you didn't sign up in 
the first 3 months, you have to wait for some change in status, 
like you have to get divorced or married or something to make a 
change,'' because again, all--so many of the rules are set up 
to ensure that our insurance companies don't cover people who 
are sick.
    Now, I understand that. They want to be risk-averse. But it 
has worked against even those who have access to insurance, to 
not be able to get meaningful insurance coverage. And so 
really, the issue here, of course, for many of us is not just 
about getting all Americans covered, but to make sure that they 
sign up for it, and it means something to them.
    So, if you could speak more specifically, I have raised 
several of the issues around market reforms. But my concern is 
that, however we go in terms of national reform, to not look at 
these market issues for those who have access to insurance or 
don't. And, of course, one of our nominees for President says 
we should throw everyone into the individual marketplace. Well, 
without market reforms, it's going to be completely meaningless 
for Americans--too expensive, and not mean anything once you 
buy it.
    So, I'm sorry. Long question, but it is not a small area, 
to really look at not only the role of ERISA, but the role of 
the Federal Government in what is now a state-regulated system 
of insurance, health insurance, that makes it completely--
again, fragmented, if you want not just the delivery system, 
but the insurance system, so that Americans don't know that, 
even when they're buying it, or when they get insurance, that 
it's going to cover the health needs that they have.
    So, let's see if we can steal a couple of minutes and 
have--if we could start maybe at the top, or whoever wants to 
really address some of these issues. And it is a larger 
conversation going forward, I know, but I would appreciate your 
input.
    Mr. WEIL. As you note, the insurance regulation primarily 
is at the state level. And I think when the Federal Government 
steps in, it should do so with some caution. But it has done so 
in critical areas, and I think it is appropriate to do so in 
those critical areas.
    I don't think anyone would benefit from a complete Federal 
takeover of the entire system of regulation. And as I responded 
to Mr. Camp earlier, I do worry about the crossing of state 
lines.
    Really, I think the primary caution I would make is one, 
Congresswoman, very similar to the point you made, which is 
that the real Federal issue is don't imagine that a Federal 
policy shifts more people into state insurance markets, 
particularly individual markets, that you know what you will 
get for that investment unless you have some Federal standards 
with respect to what insurance is going to look like.
    Because the degree of variability around the country in 
those markets is so great, a Federal policy designed 
intentionally to move people into those markets will have very 
different consequences in different states, just as a uniform 
tax credit at the national level would mean something very 
different in different states. Because if you have rating rules 
that are community-rated, then that credit will go an equal 
distance in providing coverage for everyone in the state.
    But if you have age or health status rating, a uniform 
credit will be insufficient for other people. It's not that 
that----
    Mr. CAMP. Will the gentleman----
    Mr. WEIL. I will--just one sentence, sorry, which is that 
it's not that these issues can't be overcome, it's simply that 
they should be attended to, as you are considering the Federal 
role.
    Mr. CAMP. But association health plans wouldn't be 
individuals. So they would be involved in nationwide plans, not 
necessarily in individual policy, but in association policy, 
which would have a totally different effect, wouldn't you 
agree, than----
    Mr. WEIL. Absolutely. Associations are very different from 
individuals purchasing across lines.
    Mr. CAMP. Okay.
    Ms. SCHWARTZ. Right. And, Dr. Bigby, if we can indulge----
    Chairman STARK. Well, why don't we let Dr. McDermott 
inquire, and then we can go around and get more----
    Chairman STARK. Thank you, Mr. Chairman. Thank you for your 
indulgence.
    Dr. MCDERMOTT. Thank you, Mr. Chairman. Nothing is going to 
happen in the congress that doesn't solve the problems of New 
York, Florida, Texas, and California. They are not here today, 
except a little bit of California.
    Chairman STARK. Hear, hear.
    Dr. MCDERMOTT. I come from the efficient part of the 
medical delivery system in this country. Minnesota, Washington, 
and Oregon operate way below per person costs of any place in 
the United States.
    And it has struck me that the biggest problem we're going 
to have in this place is do--if we take some way of getting 
everybody in, we're going to bring everybody up to California, 
or everybody up to New York, or everybody up to Boston?
    Now, the average cost--last year we spent $2.1 trillion in 
this country on health care. That is $7,000 per person for the 
country. How--would you, in Massachusetts, and you, in Maine, 
take $7,000 for everybody? If you were guaranteed that amount 
of money, could you deliver health care to your people?
    Dr. BIGBY. Absolutely.
    *Ms. Riley. Maine is one of the most expensive states. 
Massachusetts is the most expensive, and we are second. I would 
love to take on the challenge, but I'm very nervous about it, 
in the same ways that Maine--unlike Massachusetts, which had 
significant Medicaid money to fund its reforms, Vermont 
accepted a block grant-like entity, and we were unwilling to go 
there.
    I think the worry we have when we move from an entitlement 
nature in Medicaid programs and others is that we're moving 
away from universal coverage as we move away from entitlement. 
So I would worry about a block grant approach in its capacity 
to meet everyone.
    But if we were talking about a reform that set a framework 
for national expectations, and set a framework for the----
    Dr. MCDERMOTT. If we design a system, are we going to go to 
an average for the country, or are we going to go to--we're 
going to keep recognizing these huge disparities we have today?
    Ms. RILEY. Oh, I think----
    Dr. MCDERMOTT. Is that what you're saying?
    Ms. RILEY. I think I----
    Dr. MCDERMOTT. We should let Maine be an outlier?
    Ms. RILEY. I would love not to be an outlier. But I think 
the key here is to create the right incentives, though, to make 
sure that the funding, if it's capped, comes at the expense of 
inefficiency, and not at the expense of coverage.
    The worry I have--as you watch some of these reforms, the 
question is always--needs to be asked, what is coverage? 
Because increasing--it's--is it real coverage if we give 
somebody just a bare bones plan? I would argue no.
    Dr. MCDERMOTT. Okay. Let me give you another thing to chew 
on----
    Dr. BIGBY. Can I just----
    Dr. MCDERMOTT [continuing]. Because I think you--this whole 
panel has talked, and not one single word has been said about 
workforce. Not one single word about workforce as the driver of 
costs.
    Now, I'm a physician, so I know. I got out of medical 
school $500 in debt. But the kids coming out of the University 
of Washington today are $150,000 in debt, at a minimum, which 
drives the way they practice medicine.
    I would suggest that one of the things that's got to happen 
in this country is that state medical schools have to become 
free, and require 4 years of service in underserved areas 
within the state for you ever to get the kind of people that 
you need in the rural areas and the underserved areas in the 
country.
    I cannot see how you're ever going to have people not want 
to have a residency at Bent Brigham for ophthalmology or 
gynecology or whatever, if they're $150,000 in debt. If they 
have been guaranteed a free education, they could then be sent 
out someplace. Or, in Minnesota or in Maine, the same thing. I 
don't know how you're ever going to get the primary 
practitioners you're going to need to deal with it.
    Dr. BIGBY. I would argue that it isn't just state medical 
schools who might subsidize that type of service, but the 
Federal Government is already subsidizing----
    Dr. MCDERMOTT. No, they are to--a little bit.
    Dr. BIGBY [continuing]. To the training of the specialists 
that we are producing. I think you are----
    Dr. MCDERMOTT. Yes, but not to the ones at the primary 
level. We're not subsidizing them at all.
    Dr. BIGBY. And that is part of the problem. We get what we 
pay for.
    Dr. MCDERMOTT. Yes, we do. And I think that this argument 
about what--about quality and all the rest of it, until we deal 
with the fact that we, by the way we train and make kids go 
into debt--because I was a poor kid, I didn't get anything from 
my family. The State of Illinois educated me, and the day I 
left--or the day I graduated, I left and never left anything on 
the table for the state of Illinois.
    Now, I think there is some social responsibility that has 
to go into state medical education. That's why I pick on state 
medical schools. Harvard can do what it wants, or Tufts, or all 
the rest of the schools, all the New York schools can do 
whatever they want. But the state schools should be producing, 
they should be investing. The state--people in the state are 
investing in these doctors, but they don't get the benefit of 
them.
    Dr. LEWIN. Maybe the states and the Federal Government 
together could work on even a loan forgiveness program that 
would incentivize more and more people to lead in primary care, 
and then some of those people would enjoy that primary care and 
stay in the primary care area.
    We do have all those--you know, the issue of whether the 
folks would wait until through their residency period. I mean, 
you know, cardiology, it's almost eight years, you know. It's 
after medical school by the time most people are out. And so 
that would be a long wait before they went to the rural area.
    Dr. BIGBY. I do think that the issue of workforce is very 
important. But it's also in the context of the way we practice 
medicine today.
    I am a former primary care physician, so I can say this. If 
we think about 25 years ago, what we knew about the management 
of chronic illness that many primary care physicians are caring 
for, there wasn't really a lot that we could do for people. In 
25 years, that knowledge has grown exponentially, and we have a 
much better understanding of the value of prevention, of 
secondary prevention, of intervention to avoid the 
complications of diabetes and high blood pressure.
    But we still pay people the same way to take care of those 
problems every 15-minute visit. And we don't support the teams 
that we know are important to help patients understand those 
illnesses--so, nurses, health educators, case managers.
    So, if we are going to attract people into primary care, 
it's not just about paying them more, or obligating them if 
they come from a state school, but actually supporting the type 
of practice that they want and that their patients want.
    Dr. MCDERMOTT. Mr. Chairman, could I just tell a short 
story?
    My mother-in-law had a hypoglycemic experience in Seventh 
Crow Wing, Minnesota. Now, this is the boondocks, let me tell 
you. It is way far north. The nearest medical facility of any 
size is Fargo, North Dakota. So they took her over to Park 
Rapids, to the little hospital, and they dealt with her there. 
And they said, ``You know, we can't handle this here. You've 
got to go to U of M, or you've got to go to Mayo.'' And she 
went down there.
    Now, they have figured out a complicated system to deal--
and she had an insulinoma on the tail of a pancreas, so she was 
having serious problems, had surgery, and is back up in Seventh 
Crow Wing today.
    Now, if you can do that in a state and do it for so much 
less than New York or Boston or Los Angeles, or these other 
places, how do you--how do we, as Congressmen--or do we just 
say, ``Well''--we just go the California way?
    Mr. HAISLMAIER. Mr. Chairman, if I could answer, I have 
been anxious to answer Mr. McDermott's question here, because I 
have encountered this situation. I did sort of touch on that 
when I talked about the increase in visits to primary care in 
Massachusetts, and the creation of minute clinics in CVS, which 
are open in the evenings, when people need them, as opposed to 
a doctor's office.
    A couple of points. One, when you look at the emergency 
room data on who uses the ED, what you find is that Medicaid 
patients are using the ED at twice the rates of the uninsured, 
at twice the rates of Medicare patients, and at four times the 
rates of the privately insured. So if you get, as Massachusetts 
is trying to do, these folks out of the ED and into primary 
care, well, first of all, you've got more money to pay people 
in primary care. And so, you know, if you get what you pay, as 
somebody says, you will have a demand there.
    The other point that I wanted to make directly addressing 
your question is I encountered this in Louisiana, where the 
charity hospital that they were using to train physicians at 
LSU was washed out. And I had this conversation with Dr. 
Hollier, the chancellor to the LSU medical school, and I went 
looking for a model, and I found one. And it exists. And it is 
in Utah.
    And what Utah did is they got a waiver from the Federal 
Government--this is when Secretary Levitt was Governor--they 
got a waiver from the Federal Government to put their Medicare 
GME money--both the DME and the IME--in other words, both the 
direct medical education funding and the indirect--into one pot 
under the control of the state, combined with their Medicaid 
money and what they have privately. And that allows them to 
have the dollars follow the residents.
    That enables the state to do a workforce plan--you can go 
online and find all of this stuff, it's up and running--where 
they say, ``This is the mix of providers we want.'' For 
example, ``We want more primary, less orthopedists. This is 
what we will fund, and this is where we will fund it,'' so they 
get them out into those rural areas. I use that as an example 
of the kind of tools that I stumble across, and then share with 
other states.
    So, for example, when I spoke with Dr. Jones at the 
University of Mississippi, he was very keen on this idea of 
maybe, as part of reform in Mississippi, you could use this as 
a tool to get more doctors in the Delta, doing primary care.
    Now, from a congressional point of view, your issue is that 
you, in this Committee, are running a Medicare payment system 
where it's structured so that the money goes to institutions 
because, well, these are the institutions that have always done 
it, as opposed to saying, ``No, the money goes into the pot, 
and the state can allocate those dollars for the kind of 
residents it wants, and where it wants them.''
    So, I would come back to you and say that is something for 
this Committee to think about. In the interim, I am going to be 
talking to these other states about, ``What can you learn from 
how Utah did it, and maybe do it in your state with a waiver.''
    Dr. MCDERMOTT. Thank you.
    Chairman STARK. Ms. Schwartz, I interrupted you when you 
were trying to survey the panel. And now that everybody has had 
a chance at least once, would you like to finish up on your----
    Ms. SCHWARTZ. Mr. Chairman, I think that I appreciate the 
opportunity, but I think that the questions I raised will take 
a longer conversation than anyone might want to tolerate, given 
the hour. So I think I would just ask, if I may, that the 
panelists, should they have some ideas about some of the market 
reforms, particularly more specifically about our role not only 
in ERISA, but in terms of the other kinds of market reforms for 
individual and group, I would be very interested in following 
up after the panel and after this hearing.
    So, thank you for the opportunity, but I will pass for the 
moment.
    Chairman STARK. Mr. Camp, would you like to jump in here 
for a second?
    Mr. CAMP. Thank you, Mr. Chairman. I don't have any further 
questions for the panel.
    Chairman STARK. Okay.
    Dr. MCDERMOTT. Mr. Chairman?
    Chairman STARK. Yes?
    Dr. MCDERMOTT. Could I----
    Chairman STARK. Let me just follow up on yours for a 
minute, and then I will yield to you for more.
    But you talked about costs. My guess is that, as you move 
westward, if you stay north, Hawaii probably has lower costs 
today than Oregon and Minnesota. I--maybe not. But I suspect 
there are very low costs.
    Dr. LEWIN. Yes.
    Chairman STARK. To what--why? Is that because you can't 
leave so easily, you have to----
    Dr. LEWIN. Well, Mr. Chairman, I think a lot of things in 
Hawaii are very expensive. But health care has benefited by 
virtue of having everyone having access to primary care.
    Chairman STARK. Well, wasn't it lower cost when you 
started?
    Dr. LEWIN. Well, Hawaii's costs were--you know, Hawaii had 
a system, in agriculture, for example, of having community----
    Chairman STARK. You had Kaiser.
    Dr. LEWIN. They had clinics out there, they had Kaiser, and 
they had HMSA. So they had a two-payer system.
    Chairman STARK. They had the right idea.
    Dr. LEWIN. And they were ratcheting costs down, even then.
    But also, Hawaii has benefited from universal primary care 
access. And a good safety net, as well, for--even for people 
that didn't fit into the employer mold. And that really made a 
big difference. I mean, Hawaii's data, for example, showed it 
had one of the highest incidences of breast cancer----
    Chairman STARK. You're going to tell me that the universal 
health access for primary care----
    Dr. LEWIN. Yes, because that was covered by the--when 
everybody got that primary care access out of the emergency 
room, that meant that----
    Chairman STARK. When did they get that?
    Dr. LEWIN [continuing]. They were diagnosed earlier and 
treated earlier.
    Chairman STARK. When did they get the----
    Dr. LEWIN. That happened in the early eighties, when the 
employer mandate became activated.
    Chairman STARK. Okay. But I guess what I am saying is, 
prior to that time--at that time--weren't you a low-cost state 
then? I mean----
    Dr. LEWIN. Well, we were a low-cost state for a number of 
reasons. But it wasn't because of genetic superiority, or 
everybody surfing every day. I mean, Hawaii had provided 
primary care to agricultural workers already, for example, and 
had done more in terms of building a safety net than a lot of 
states had done. And I think that contributes.
    I have produced a few articles in the past that show that 
getting that access to primary care for everybody--something 
that most of the world has already learned--reduces all sorts 
of later costs, because you get people diagnosed earlier and 
treated earlier for things that end up, through an emergency 
room, being far more expensive and catastrophic.
    And that is just, you know, a lesson that America hasn't 
picked up, but we certainly ought to soon.
    Chairman STARK. Well, I think Ms. Riley touched on that 
idea, which I thought was very interesting.
    Jim, I am sorry.
    Dr. MCDERMOTT. Mr. Chairman, thank you. Another thing I was 
struck, listening to you, was you all want to keep the 
employer-based system in place, and fiddle with it around the 
edges, whatever people are talking about.
    I remember a guy named Charlie Wilson once said, ``As 
General Motors goes, so goes the United States.'' And General 
Motors, their bonds today are junk bonds. And it is largely 
because of their health care costs and their pension costs. And 
they are closing plants all over the place, and they are 
looking for a way to be more competitive. And they know they 
can't compete with Toyota if they keep that stuff in-house. 
They are trying to get rid of it, as is every airline in this 
country.
    And I think that I--it seems to me you're hanging on to a 
sinking ship. Now, I would like to hear your response to that, 
because what do you see that seems to say--I heard Safeway, 
somebody mentioned Safeway as doing a good thing. But what else 
do you see that makes you think that the work, or the employer-
based system, is going to survive?
    Dr. LEWIN. Well, I guess my point there, Sir, was that if 
we destabilize the employer-based system without putting in 
place the access to care solution with a mandate behind it, so 
that many of those people who are currently covered by their 
employer end up uninsured, we would really do our Nation a 
great disservice.
    So, if we were to shift to an individual mandate approach, 
or an individual coverage approach, and have a mandate in 
place, and then allow a gradual attrition to a new system, that 
might work quite well.
    But I think that the concern I would have right now about 
moving too swiftly or sending a message to employers that you 
might as well--you can let go of this huge burden is that we 
end up with a lot of people who would not elect voluntarily to 
purchase their own coverage, and we have many, many more people 
in the emergency room and uninsured. So, I think we have got to 
be careful about destabilizing.
    On the other hand----
    Dr. MCDERMOTT. What about----
    Dr. LEWIN [continuing]. Try to improve the employer 
coverage, and put it on a level playingfield with individual 
coverage, so that the individual could have portable benefits, 
could have all the same advantages, and then let people have an 
option and maybe let even some competition there exist in the 
market in the future.
    Dr. MCDERMOTT. The chairman has talked on occasion about 
maybe opening up Medicare to let people under the age of 65 buy 
in, or have their employer buy in for them. Is that--would that 
be a safety net enough to satisfy your concern?
    Dr. LEWIN. It might be, as long as--you know, I believe if 
we had an individual mandate in place across this country, and 
then we wanted to look at, you know--an attrition from employer 
coverage, then I think we would be fine.
    But I think if we do a voluntary coverage, and then 
disincentivize employers, that we'll have a lot of people who--
we don't want to create more uninsured people, or more people 
using the emergency room as their medical home. So we need to 
develop a change in the employer policy for those currently 
covered in a careful way, so as not to cast a lot of people out 
as uninsured.
    Mr. WEIL. Congressman, I don't think there is great love 
and confidence in the long-term future of an employment-based 
system. It comes with some negative consequences.
    First of all, I think we would all agree with Dr. Lewin, 
that you have to have something else. And right now, the 
``something elses'' don't look very good. And even if the ship 
is sinking, there are a whole lot of people on it. And it's 
sinking slowly enough that if you accelerate the rate of 
sinking the human consequences are quite dire.
    I do think that we also have a lot of differences around 
the roles that employers pay. Some employers are major 
innovators in the kind of motivation for integration, 
realigning incentives, investment and prevention, and some 
are--particularly smaller ones--don't have the resources, don't 
have the tools to drive that kind of innovation.
    And, finally, employers are a source of pooling of risk--an 
imperfect one, by all tests. But again, if the alternative is 
moving out with complete fragmentation of risk, I think there 
are serious concerns there.
    So, I think what you're hearing--at least I will speak for 
myself--is a lot of anxiety about the unraveling of the system, 
and frankly, not a lot of faith in some very global hopeful 
optimistic--and, in my view, unrealistic--assumptions about 
where people would land if we did unravel that system. And 
those are all reasons for caution, but not reasons, 
necessarily, to say, you know, ``This is the best thing we 
would think of, if we were starting from a blank piece of 
paper.''
    Ms. RILEY. And I think we haven't had the policy 
discussion. We haven't made, as a country, the decision about 
what kind of health care we're going to have. So it's a tacit 
employer-based system. I do think we need to worry about it.
    We need to have the discussion about whether we want to go 
forward with it and how, particularly given two factors. One 
is, increasingly as employers are constrained by the cost 
increases, they are shifting more on to employees, and we see a 
growing class of under-insured, people who don't really have 
coverage, but they're paying for it.
    Dr. MCDERMOTT. Right.
    Ms. RILEY. And, as the workplace changes and there is more 
part-time workers and more people not connected, or who move 
through employment very much more rapidly than our generation 
did, I think we do have to look very carefully and very 
quickly, because our assumptions that that employer base will 
stay the same clearly isn't correct.
    Finally, though, I think the Kaiser Family Foundation and 
others have done some polling that suggests that, like it or 
not, the public is still committed to their employer-based 
system, and very worried about what might replace it.
    Dr. MCDERMOTT. Yes. If you--that is, I think, what I said 
earlier, that while I don't--if I am understanding the panel, 
there are none of you who would say this is the end all and be 
all answer to our problem, but until we have a system that we 
can afford that the public will accept and the providers will 
participate in, we'd better go cautiously about just tossing 
the employer-based system overboard, and somehow see if we can 
move carefully there.
    I wanted to ask one more question, and then Mr. Camp had 
another question.
    In the past, in talking about universal coverage plans, and 
a plan that we had some years back, we had talked about 
subsuming Medicaid into Medicare--the idea that we've got two 
federal systems that often are different and disparate--and 
leave the states with the long-term care question, because they 
get lobbied the most heavily from oldsters like me. Little kids 
and poor people don't lobby very well. So every time there is a 
cut in state Medicaid, it comes out of the hide of the indigent 
and children, and the nursing homes do pretty well, thank you.
    So, leave that portion with the states, and take the acute 
care into one system, whether it's Ms. Riley's idea of a 
universal primary care system, or whether it's some kind of 
Federal option, but not to--is there--how would that work in 
Massachusetts, Dr. Bigby?
    Dr. BIGBY. Well, you know, the idea of merging Medicare and 
Medicaid would allow us to address several problems that we 
would love to address but, as many people on the panel have 
already pointed out, Medicare is a substantial player for a 
large percentage of the population. And without being able to 
formulate reforms within that system, it impedes our ability 
somewhat.
    So, it would give us the ability to do larger experiments--
--
    Dr. MCDERMOTT. And do the--I mean, Medicare, without a 
supplemental add-on, isn't necessarily the most generous or 
complete program. And it would seem to me that that would also 
be something Medicaid would do.
    But if we got the kind of one--and I'm not sure there are 
many states where Medicaid pays more, or as much as Medicare, 
so I don't think I would get any fight from the docs and 
hospitals on it, but I don't know what it would do in the 
states.
    Dr. BIGBY. It would allow us to align policies that we 
think would influence further reforms that have--that are more 
than just covering people and giving individuals access. It 
would allow us to do some of the system's redesign that have 
been talked about. It would allow us to get rid of some of the 
fragmentation in the system.
    So, I think there are some potential positives that come 
out of that.
    Dr. MCDERMOTT. How would Maine----
    Ms. RILEY. Well, again, as the oldest state, Maine would be 
worried, because long-term care and people with disabilities 
are the driving costs of the Medicaid program. So it----
    Dr. MCDERMOTT. No, I'm not saying that they wouldn't 
continue to get that, I'm just saying that we get rid of the 
acute care part of Medicaid, and let them continue--that would 
be their maintenance of effort, and we continue to share the 
cost, Federally, with them.
    Ms. RILEY. I think, as long as there was sort of--usually, 
the states think the opposite: we will keep the acute care, and 
give the long-term care back to----
    Dr. MCDERMOTT. Yes, I know that.
    Ms. RILEY. But I think, for a state like ours that is 
innovating, it would be a shame to lose it. On the other hand, 
I do think there is great value, and you may not even have to 
take over the two programs, but just have the same standards, 
the same payment mechanisms, the same requirements, as a start, 
because there is such fragmentation in those two programs, and 
you could really drive efficiencies if there were just the same 
standards across the two programs.
    Dr. MCDERMOTT. Would it help California?
    Dr. LEWIN. I think I would be--I think it would be a good 
innovation, and worthy--it would be a daunting challenge to get 
it enacted, but I think it would ultimately be a very smart 
move.
    Chairman STARK. Mr. Camp?
    Mr. CAMP. Well, thank you, Mr. Chairman. I sort of heard a 
chorus of mandates this morning, but given that neither Senator 
Obama or Senator McCain support mandates, I think they're 
somewhat unlikely.
    Is there any way, Mr. Haislmaier, that we could incentivize 
people to purchase health care, any sort of structure that 
could be created to do that?
    Mr. HAISLMAIER. Well, yes. And I think what you do is you 
follow, essentially, the prescription that they did in 
Massachusetts, in designing their reforms, which is you find 
ways where you can make it easier for people to get and keep 
coverage.
    So, for example, the Connector in Massachusetts enables 
people to go in there and get coverage in a single place. It 
enables an employer to say, ``Look, I don't have to go out and 
negotiate with Blue Cross Blue Shield, or Fallon. I don't have 
to try to come up with a one-size-fits-all plan for my 
employees, and then the insurer won't give it to me unless I 
have 8 out of 10. I can just take my people down there and say, 
'Here is the menu, here is the money, here is my agent, to help 
you walk through the menu and figure out what's best for you to 
spend the money.' You get the insurance you want, and you take 
it with you from job to job.''
    And if you simply include on that and say, well, you know, 
when the employer does that, they pick, one of the plans as the 
default start that everybody gets, and then they have a choice 
of something else, you're going to cover 80, 90-plus percent of 
people getting it, and you don't have to necessarily require 
them to do it.
    In the end, yes, you will have some residual questions, 
especially if you bring in the individual market. And I think 
it's a very simple rule. I think the rules should be that if 
people buy and keep coverage when they're healthy, they should 
have, as part of the deal, a right to change coverage without 
penalties at certain times--not any time they want, but at 
certain times, like in open season--when they're older and 
sicker.
    And so, what they did in Massachusetts is said, ``Look, 
we're going to make it easier to get, we're going to subsidize 
it for people who need help subsidizing it, and we're going to 
produce the incentives to bring the costs down.''
    Chairman STARK. Thank you. I thank the panel very much. We 
are going to conclude the hearing. Before we do--well, we will 
conclude the hearing, and thank the panel.
    I would like to announce to our guests that you can't go 
out the doors on that side of the room, there is a problem out 
here in the hall. Or, if you go out that way, you have to take 
your shoes off, and you can't take any gels or liquids with 
you.
    [Laughter.]
    Chairman STARK. We have to exit out into this hallway, if 
you will. Thank you very much. Meeting is adjourned.
    [Whereupon, at 12:13 p.m., the Subcommittee was adjourned.]
    [Submissions for the Record follow:]
                            AARP, Statement
    On behalf of AARP's nearly 40 million members, thank you for 
convening this hearing regarding state health care reform initiatives. 
Ensuring that all Americans have access to affordable, high quality 
health care is critically important to AARP members and their families. 
AARP has been centrally involved in state health care reform efforts 
through our offices in the 50 states, as well as in the District of 
Columbia and the territories. AARP has not only represented the health 
care coverage issues facing the 50+ population, but has been an 
advocate for health care consumers of all ages.
    We have seen a great commitment in many states to provide 
affordable, high quality health care. But while the states can be 
laboratories of experimentation, they are often hampered by resource 
and legal constraints.
    There are several lessons that can be learned from the successes 
and challenges states have encountered to date in their health care 
reform efforts:
    (1) Comprehensive state health care reform relies upon a stable, 
clearly defined funding source;
    (2) The employer role--and the applicability of federal standards 
under the Employee Retirement Income Security Act (ERISA)--is unclear, 
particularly as to how ERISA applies to shared employer funding for 
health care; and
    (3) Cost containment is a critical element and must be administered 
carefully.
Need for stable, clearly defined funding
    Comprehensive state health care reform is unlikely without stable, 
clearly defined funding. In most instances, without a stable federal 
funding source, state health reform efforts are jeopardized. For 
instance, Vermont's request for an exception from Medicaid rules for 
federal matching funding for subsidies to provide coverage for those up 
to 300 percent of the Federal Poverty Level (FPL) for its Catamount 
health care reform program was recently rejected, forcing a significant 
increase in premiums that will push some individuals back into the 
ranks of the uninsured. This federal action will also likely reduce 
take-up of Catamount Health, particularly at a time when many families 
are already feeling growing economic pressure. And Massachusetts, which 
successfully enacted comprehensive health care reform legislation in 
2006, is now negotiating to continue to use Medicaid funds for the 
population at 200-300 percent of FPL that currently has subsidized 
premiums and out-of-pocket costs. A final example is Louisiana, where 
lack of clear federal Medicaid commitments was a major factor in the 
failure to enact health coverage legislation in Louisiana post 
Hurricane Katrina.
    Recent experience demonstrates that in order for state initiatives 
to guarantee health security, federal funding sources are critical. 
Adoption of federal standards such as matching funds up to at least 300 
percent of the FPL, requiring full Medicaid coverage for all those with 
incomes up to 100 percent of the FPL, and requiring uniform, minimum 
federal standards on coverage, cost and quality, would foster state 
reforms with access to affordable, high quality health care. 
Improvements in federal Medicaid financing policy could also address 
inconsistencies that arise from the wide variation in health status, 
number of uninsured, poverty rates, and state fiscal conditions found 
across the states.
    Effective state health care reform efforts have relied upon federal 
assistance to serve all needy populations. Current state health care 
systems are highly fragmented, typically with dozens of programs, each 
serving different populations with different eligibility criteria and 
different benefits--all predicated on a hodgepodge of Medicaid and 
SCHIP limitations and waivers. This fragmentation is a particular issue 
for working families and older adults. We need to do much more to 
ensure that older adults enter their Medicare years in good health. 
Reforms need to take into account the premiums that target groups will 
face, otherwise older individuals or people with health problems can be 
charged significantly higher premiums, and many will still not be able 
to afford the coverage made available to them. In Massachusetts, for 
example, some 62,000 individuals with incomes over 300 percent of the 
FPL have been exempted from an individual mandate to purchase insurance 
because the premiums required are not affordable.
Lack of clarity about ERISA's impact
    Employer-sponsored coverage for current employees and retirees 
continues to erode. While state insurance regulation can set standards 
for coverage for all health insurance products, states generally view 
ERISA as a barrier to shared financial responsibility with the business 
sector. Employer mandates were enacted in Vermont and Massachusetts, 
but they require a relatively small ``contribution'' from employers who 
do not provide coverage--$295 and $365 per employee per year, 
respectively. Even these requirements may be susceptible to legal 
challenge under ERISA. Some states have enacted laws that encourage 
employers to provide coverage. For example, Maryland and Iowa offer 
subsidies to small employers, and Massachusetts provides employers 
access to lower cost insurance. But real health care reform will likely 
require state and Federal Governments, individuals, health care 
providers, insurers, and employers to share financial responsibility. 
At present, the scope of ERISA preemption on state health reform--as 
defined through the case law--is unclear, and the lack of clarity has 
contributed to inaction on state health care reform efforts. Therefore, 
further examination of how ERISA impacts state reform efforts is 
warranted.
Cost containment is critical
    Stemming the tide of rising health care costs is a critical health 
care reform element. Unless we are able to rein in health care 
spending, affordable coverage will continue to elude millions of 
Americans. Cost pressure on employers and private individuals, as well 
as the pressure on public programs like Medicare and Medicaid, will 
continue to erode health care coverage and affordability.
    AARP believes that consumers share responsibility for living 
healthier lives. We have supported state efforts to expand the use of 
preventive services and chronic disease management, including efforts 
to implement and appropriately reimburse care coordination. We have 
also supported programs that encourage and facilitate consumer use of 
these services, such as Vermont's Catamount and Blue Print for Health 
programs. These programs provide access to preventive care and chronic 
management services without consumer cost sharing and promote healthy 
behaviors through programs in schools, public health agencies, and 
other community-based sites, including the workplace. With the portion 
of the population with chronic diseases growing, these initiatives hold 
promise for long-term health benefits and cost containment in the 
public and private sector that will inure to the advantage of consumers 
as well.
    Similarly, AARP believes that payment needs to be reformed to 
better align delivery system financial incentives with desired health 
outcomes; evidence should be the basis of clinical, consumer, and 
public sector decisions; and quality and safety should be improved by 
reducing waste, medical errors, and disparities based on socio-economic 
factors, race, and gender. These objectives could all be hastened, we 
believe, by accelerating the pace of adoption of health information 
technology. We support efforts to discourage over-utilization of 
medical services. Incentives need to be designed so that they produce 
the proper response, and that do not establish barriers to needed care 
or impose incentives that will have unintended consequences. 
Ultimately, these changes should help prevent the continued shift of 
medical costs to consumers and other payors.
    Quality and price transparency is an effective tool in changing 
provider and patient behavior. Although information for consumer 
decision making is growing and improving, we must have realistic 
expectations for its use. For example, ``good'' information is not 
ubiquitous and does not always apply to the level of analysis most 
important to consumers; and the public still is not informed about 
where to find information on quality and cost even when it has been 
developed. Moreover, millions of consumers have poor health literacy or 
inadequate decision skills and require support to use information on 
quality and cost. Finally, designing information can be a source of 
contention among stakeholders--health care providers are particularly 
sensitive to publishing information on their performance. And 
collecting and reporting information is costly. Massachusetts has been 
trying to develop consumer-oriented cost and price reporting for over 
two years. Iowa and Minnesota recently enacted price and quality 
transparency legislation, but implementation has been slow due to 
controversial debates as to appropriate measures of quality and 
calculation methodology for cost.
    All stakeholders, including patients, purchasers, and providers, 
should collaborate in identifying information that is published for 
consumer decision making. In addition, purchasers and providers should 
use evidence-based information for making their own contracting and 
referral decisions. Quality and price transparency are just two 
components of a multi-faceted approach to quality improvement and cost 
containment. Developing the evidence base to support the development of 
guidelines and performance measures that can be used as the basis for 
payment reform, as well as using health information technology to 
support better clinical and patient decisions, are additional 
components of an agenda to reform our state and national health care 
systems.
Conclusion
    We commend the Subcommittee for holding this important hearing to 
focus more attention on state efforts to tackle health reform. We hope 
that this hearing is just the beginning. AARP looks forward to working 
with you and your colleagues on both sides of the aisle to enact 
measures that broaden health care reform in the nation and the states.

                                 

                  Cleveland Jobs with Justice, Letter
Chairman Stark and Members of the Subcommittee on Health, Committee on 
Ways and Means:

    We would like to thank you for the opportunity to provide this 
written testimony on behalf of the 59 member organizations of Cleveland 
Jobs with Justice. For over 16 years, we have been the unified voice of 
faith, labor and community organizations working together to promote 
workers' rights and social justice throughout Northeast Ohio.
    We are providing this testimony today to voice our concerns with 
regard to the faulty, inequitable and unjust health care system and 
offer our alternative solution for comprehensive health care reform in 
the United States. The overwhelming statistic of over 47 million 
uninsured Americans clearly illustrates the efforts and energy needed 
to resolve the problem of the uninsured and/or underinsured extends 
well beyond our local communities and state-wide efforts. We need 
reform on a national level. We need you, our elected representatives, 
to take initiative towards a national single payer system, such as the 
one outlined in H.R. 676.
    Cleveland Jobs with Justice believes access to health care should 
be viewed as a basic human right eliminating all barriers, especially 
those encountered by low income people and minorities.
    Health care should be available to every American regardless of 
age, ethnicity, marital status, income, employment status, residency, 
pre-existing conditions or any other potential barrier currently thrown 
in the way of access. As long as our access to health care continues to 
be dictated by the insurance companies' bottom lines, we can rest 
assured the decisions about a person's wellbeing will continue to 
depend solely upon increasing profits.
    The scope and impact of our broken health care system expands well 
beyond the sphere of citizens' health and is bearing negative effects 
on our country's already increasingly vulnerable workforce. The high 
costs paid by American businesses to provide health care to their 
employees is making it more and more difficult for American companies 
to compete in a global marketplace. In 2006, employer health insurance 
premiums increased by 7.7%--two times the rate of inflation. Employers 
are reacting to these dramatically rising health care costs by shifting 
increases to their employees, decreasing coverage, eliminating coverage 
all together or moving their operations to other nations where health 
care is less expensive. Retirees' benefits are constantly threatened or 
taken away, leaving them with employment related illnesses but no 
health insurance coverage. Many labor strikes are caused by an 
employer's attempt to reduce or eliminate health care benefits. Labor 
contract negotiations are often stalled over health care benefits. All 
of this is sending a clear and loud message that our health care system 
is in crisis and immediate, substantial reform is needed.
In addressing the faults and consequences of our health care system, 
        Cleveland Jobs with Justice researched our current system and a 
        variety of proposed reform models, finding faults in nearly all 
        plans:
      Our current health insurance approach to coverage makes 
health care a commodity, not a right. HMOs and health insurance 
companies have a fiduciary duty to their stockholders to provide them 
with the highest profits possible. This means maximizing income while 
limiting expenditures. Of course, this is a significant conflict of 
interest with the fiduciary duties of health care providers to their 
patients, as well as in conflict with the patient's self-interest. Any 
new system must resolve this conflict and bring integrity to a process 
that frequently violates the Hippocratic Oath of ``Do no harm.''
      Plans that propose an expansion of programs such as 
Medicaid as a cornerstone for providing coverage to ``all'' are not 
acceptable. We liken them to building a structure on a sand dune. You 
know the sands are going to shift every budget cycle, depending upon 
how the political winds are blowing. Eventually that structure will 
collapse. What may be fully funded one budget cycle may be gutted the 
next. We certainly do not want to have to fight every budget for needed 
health care dollars. Just consider the recent battle over SCHIP. We 
should not have to rely upon a faulty funding structure for a reliable 
health care system.
      Personal mandates will result in people being moved from 
the list of ``uninsured'' to that of the ``underinsured''. Please 
remember, there is a significant difference between having ``health 
insurance'' and having access to ``health care''. Many people, even 
with ``subsidies'' are still only going to be able to purchase a bare 
bones insurance policy or may not be able to afford one at all. This 
results in a faulty system where people will still fall through the 
cracks. This predicament is best exemplified by the situation in 
Massachusetts where many people unable to afford the requirement under 
the State's personal mandate have been exempted from coverage. This 
entirely defeats the purpose of a personal mandate system as a strategy 
to expand affordable, accessible health care or in other words, 
universal health care.
Our exploration into proposed plans led us to the conclusion that the 
        solution to health care in America is a truly universal plan, a 
        single payer system.
    The only real answer to providing health care to every American is 
a single payer model, as outlined in the U.S. National Health Insurance 
Act, H.R. 676, introduced by Congressman John Conyers. Not only is this 
act fiscally responsible, it guarantees access to health care to each 
and every American. By removing for-profit insurance companies, we 
eliminate:

      Excessive administrative costs
      Widespread underinsurance and bankruptcy
      Interference in physician decision making
      Lack of coordination, budgeting and planning
      Excessive complexity
      Regressive financing
      Continuously rising costs

    We are not alone in supporting a single payer health care delivery 
system. H.R. 676 has been endorsed by 447 union organizations in 48 
states including 110 Central Labor Councils and Area Labor Federations 
and 36 State AFL-CIO's. This list of union endorsers is continuously 
expanding. It is with great confidence that we hope you consider the 
support of the millions of members represented by these labor 
organizations far more substantial than the billions of dollars spent 
by health insurance lobbyists and pharmaceutical companies to deny 
Americans of their health and well being.
    In closing, we ask you Chairman Stark and members of the committee, 
to act in the best interest of all Americans, not insurance companies, 
and support the only true solution to the problem of health care in 
America, the U.S. National Health Insurance Act, H.R. 676.

                                 

                        James Donbavand, Letter
Dear Chairman Stark,

    I have been actively engaged in the field of healthcare finance for 
nearly 30 years in the area of acute care hospital financial 
management. As such, I have been responsible for rate setting, 
reimbursement, budgeting, cost accounting and program analysis.
    I note there appear to be only physicians on your panel. I would 
suggest half your panel be comprised of nurses or hospital CEOs. They 
are more familiar with what the real issues are. Most non-routine 
patient care is delivered in hospitals. Physician offices are able to 
decline new patients based on their insurance or lack thereof. 
Hospitals aren't. Most that are not for profit would not.
    It is my opinion that the issue you describe as a healthcare 
coverage instability', commonly referred to as ``access'', is one of 
financing. As you know from having been active in healthcare reform for 
decades, a hospital may not refuse, modify or curtail services to a 
patient based on ability to pay. There are laws governing the transfer 
process as well. Therefore, if that were the definition of access' I 
would suggest there is no problem.
    In actuality, as you know, patients without insurance often have no 
physician. They use the county hospital or local ER as their primary 
care giver. Some say this drives up cost. I disagree. Efficiencies have 
been in place for years to deal with the variability of acuity in ERs. 
Again, patients are not turned away--so access is there, depending on 
your definition of the term.
    Your issue, I believe, is that there are higher levels of care 
which you and I have access to that the uninsured and under-insured do 
not. CMS initiatives regarding quality which are being extended to 
reduce reimbursement will reduce this disparity. However, differences 
in quality of healthcare are similar to the differences that exist in 
education, for example choices between Harvard and the local Junior 
College, or between a good' high school with a higher tax base and one 
in an economically deprived area. Similar differences exist in the 
availability of legal representation in the criminal justice system.
    Your intent, I believe, is to suggest that the overall quality of 
our country's healthcare system would be improved (because you are 
investigating its ``instability''), if your committee can lay a 
foundation for socializing healthcare. I caution you to look to the 
models' held up in the past when this has been proposed. Canada's 
healthcare access is far inferior to ours. So is Great Britain's.
    As people of my generation approach the time in their lives where 
healthcare is a priority, I think you will find that we will not as 
quickly agree that more government will solve the few problems caused 
by inadequate funding, and over-regulation. The introduction of PPS did 
not solve hospitals' problems, it only reduced their funding. Nor did 
the government's enabling the insurance industry to introduce Managed 
Care payment reduction systems. Neither did the creation of CMS. Nor 
did the more recent doubling of DRGs from 500 to 1000 by CMS with 
different weights for Medicare and Medicaid.
    Access for all patients to the highest quality of care is a direct 
consequence of inadequate funding. Since it is not possible to fund the 
highest quality of care for all, the only solution is to lower the 
quality of care for those who have insurance. Socialization, of course 
is a dead end from which there is no return. I ask that you not destroy 
our healthcare industry by taking over complete control of it.
    Thank you for the opportunity to share my opinions with you.
            Sincerely,
                                             James Joseph Donbavand
                                                     6326 Diego Ln.
                                           San Antonio, Texas 78253

                                 

                  Jill Levine and Ray DiCarlo, Letter
Dear Chairman Pete Stark and Members of the House Ways and Means Health 
Subcommittee:

    As Congress prepares to embark on national health care reform, we 
commend you for holding a hearing on the instability of health coverage 
in America. Thank you for allowing individuals and organizations, who 
were not invited to give oral testimony, the ability to submit a 
written statement for consideration by the Committee. This is the 
written testimony of Jill Levine and Ray DiCarlo, Ohio organizers for 
Healthcare-NOW, a national grassroots organization campaigning for 
privately delivered and publicly funded national affordable health care 
for all. Healthcare-Now is active in almost every state in more than 
300 cities across the nation. As founding members of the Ohio Chapter 
of the Physicians For a National Health Program (PNHP), we have 
committed our time and resources to advocate for a comprehensive 
national health insurance program. PNHP is a non-profit research and 
education organization of 15,000 physicians, medical students and 
health professionals who support single-payer national health 
insurance. We hope the Committee will consider our testimony for 
inclusion in the printed record of the hearing.
    In 1945, President Harry S. Truman was the first U.S. president to 
propose a prepaid health insurance plan for all Americans through the 
Social Security system. Over the following years, lawmakers narrowed 
the scope for health insurance recipients to the elderly and the poor. 
Twenty years later, in 1965, Lyndon B. Johnson signed H.R. 6675, (The 
Social Security Act of 1965), the Medicare and Medicaid Bill, (Title 
XVIII and Title XIX of the Social Security Act), providing 
comprehensive national health insurance for all Americans age 65 and 
over and certain low income persons.
    Two Social Security Amendments were enacted in 1972 which expanded 
Medicare to provide national health insurance to two additional high 
risk groups--certain disabled persons and persons suffering from end-
stage renal disease. Since 1972, little has been done nationally to 
assist the millions of uninsured middle class Americans. Absent of a 
national health insurance program for all Americans, states began 
taking the lead and designing their own state health reform 
initiatives. Massachusetts (1988), Oregon (1989), Minnesota (1992), 
Vermont (1992), Washington State (1993), Hawaii (1994), Tennessee 
(1994), and Maine (2003) have each passed a state initiative, with 
different ideological plans and funding mechanisms, but all have ended 
in failure. Lessons learned from these state health reform initiatives:

      One state's regulatory power cannot force national 
insurers to offer a comprehensive benefit package, accept all residents 
for a large purchasing pool, and offer these packages at affordable 
prices.
      Program funding must be consistent and reliable during 
economic downturns. Since state government is constitutionally barred 
from running budget deficits, during an economic downturn, increased 
funding will be needed for the growing ranks of the uninsured and the 
subsidized poor. This is the very time there would likely be decreased 
tax revenue to fund the program.
      Poor states, with a high number of uninsured and low 
median household incomes, will never be able to pass the state tax 
increases needed to cover the uninsured and fund the massive subsidies 
needed for the poor to purchase their insurance.
      Health insurance costs cannot continue to increase at 2-3 
times the rate of inflation and workers wages for sustained program 
survival. Program costs need to be reduced and controlled, rather than 
reducing patient benefits or increasing co-pays and deductibles.
      Once a state program is up and running, health care 
benefits entice individuals with expensive or chronic medical 
conditions to become residents of that state, leading to more 
applicants and higher costs than anticipated.

    On their own, few if any states are economically, structurally, and 
statutorily capable of sustaining a comprehensive affordable health 
insurance program for all their residents.
    Today, 47 million Americans, 16% of all U.S. citizens find 
themselves uninsured. Nationally, it has been estimated that 22,000 
Americans died in 2006 because they were uninsured. (1) Is 
national health insurance a right for all Americans over 65 yrs of age, 
but not for all others? Is one American life more valuable than 
another? Some Americans have paid the ultimate price--their deaths have 
been attributed to a lack of health insurance, (2) while 
millions more are suffering daily. Almost 100 million Americans, 47 
million uninsured plus an estimated 50 million underinsured, are now 
postponing needed care when sick, not getting recommended preventive 
health screenings, using emergency rooms for primary care, and/or 
amassing high medical debt.
    In today's economy, America's health care cost trends cannot be 
fiscally sustained. Health insurance premiums are now rising at twice 
the rate of wages and inflation. (3) Health insurance rates 
have increased 73% since 2000(4) forcing employers to shift 
more of their health insurance costs onto their employees and to cut or 
eliminate benefits. The average premium for family health insurance 
today is $12,106/year.(5) The average American family is 
less able to afford basic comprehensive insurance to cover all 
medically necessary care, so they buy what they can afford at the time. 
Families with health insurance are now finding that the premiums, 
deductibles, and co-pays, leave them unable to pay for their share of 
any medical bills incurred. With almost half of all bankruptcies now 
caused by medical bills, millions of families are just one major 
illness away from declaring bankruptcy. Three-fourths of those bankrupt 
had health insurance at the time they got sick or injured. These health 
care trends need to be stopped. Now is the time for an efficient 
national health insurance program that is affordable for all Americans.
    The U.S. National Health Insurance Act, H.R. 676, has already been 
introduced in the U.S. House of Representatives and currently has 91 
co-sponsors. This single-payer national health insurance model puts the 
health of American citizens before the profits of the insurance 
companies. Studies by the U.S. General Accounting Office and many 
others have shown that this reform model will save at least 10% of all 
health care spending from administrative cost savings. Medicare spends 
4 cents per health care dollar on administration while the private 
sector insurance companies spend 20-30 cents per dollar. Additional 
cost savings from eliminating the profit and overhead of the private 
health insurance industry, negotiating fair and reasonable drug prices 
through bulk purchasing of prescription drugs and putting all Americans 
in one large risk pool will be realized. These savings will combine to 
save Americans over 400 billion dollars annually which is more than 
enough to cover all of our nation's 47 million uninsured and the 
estimated 50 million underinsured without any increase in health care 
spending. The single-payer reform model is also the best model to 
control ever increasing health insurance costs.
    H.R. 676 has considerable state, city, and county support. It was 
recently endorsed by the U.S. Conference of Mayors, representing over 
1,000 cities with populations over 30,000. It has been endorsed by the 
Kentucky and New Hampshire House of Representatives, the New York State 
Assembly, and by dozens of cities and counties from Baltimore to San 
Francisco and from Warren County Tennessee to the majority Republican 
Renssalaer County Legislature in New York.
    Public support is firmly behind a guaranteed national health 
insurance program for all. According to the latest nationwide survey, 
65% of all Americans believe that: ``The United States should adopt a 
universal health insurance program in which everybody is covered under 
a program like Medicare that is run by the government and financed by 
taxpayers.''(6) Physician support is strong too. According 
to the latest survey published in the Annals of Internal Medicine, 59% 
of all physicians now ``support government legislation to establish 
national health insurance.'' (7) The American College of 
Physicians, deans of major medical schools, former editors of the New 
England Journal of Medicine, and former surgeon generals are all 
supporting a single-payer national health insurance reform model. Union 
support for an ``Expanded and Improved Medicare for All Program like 
H.R. 676, The U.S. National Health Insurance Act'' is widespread. H.R. 
676 has been endorsed by 447 union organizations in 49 states including 
110 Central Labor Councils and Area Labor Federations and 36 state AFL-
CIO's (KY, PA, CT, OH, DE, ND, WA, SC, WY, VT, FL, WI, WV, SD, NC, MO, 
MN, ME, AR, MD-DC, TX, IA, AZ, TN, OR, GA, OK, KS, CO, IN, AL, CA, AK, 
MI, MT and NE). International union endorsements include the SEIU, UAW, 
NEA, ILWU, NALC, IAM, Plumbers & Pipefitters (UA), Musicians (AFM), UE, 
CNA/NNOC, SMWIA, IFPTE and OPEIU. The General Assembly of the 
Presbyterian Church USA, the General Assembly of the Unitarian 
Universalists, the United Church of Christ, and the United Methodist 
Global Board of Church and Society have all endorsed H.R. 676.
    Thank-you Mr. Chairman and members of the Committee, for providing 
us this opportunity to focus your attention on the need for a national 
solution to America's health care problems.
    Jill Levine and Ray DiCarlo, Co-Chairs
    Healthcare Now Committee
    Patriots for Change
    Physicians For a National Health Program--Ohio Chapter

Sources

        1.  Urban Institute, January 2008
        2.  ``Care Without Coverage'', Institute of Medicine, 2002
        3.  KFF/HRET Survey of Employer-Sponsored Health Benefits, 
        1999-2007; KPMG Survey of Employer-Sponsored Health Benefits, 
        1993, 1996; HIAA, 1988, 1989, 1990; Bureau of Labor Statistics, 
        Consumer Price Index (U.S. City Average of Annual Inflation, 
        1988-2007; Bureau of Labor Statistics, Seasonally Adjusted Data 
        from the Current Employment Statistics Survey, 1988-2007. Note: 
        Data on premium increases reflect cost of premiums for family 
        of four.
        4.  Kaiser Family Foundation. (2005). Trends and indicators in 
        the changing health care marketplace. Menlo Park, CA: Kaiser 
        Family Foundation.
        5.  Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 
        2007.
        6.  AP-Yahoo poll, December 2007
        7.  Annals of Internal Medicine, April 2008.

                                 

                   The Milliman Medical Index, Letter
Chairman Stark, Ranking Member Camp, and Members of the Subcommittee:

    Thank you for the opportunity for us to submit for the hearing 
record the 2008 Milliman Medical Index (MMI). We commend the House Ways 
and Means Committee's Subcommittee on Health for holding this important 
hearing on state initiatives as Congress considers key healthcare 
reform issues.
    Milliman, whose corporate offices are in Seattle, provides 
actuarial and consulting services in the areas of employee benefits, 
healthcare, life/financial services, and property and casualty 
insurance to the full spectrum of business, financial, government, and 
union organizations. Founded in 1947 as Milliman & Robertson, the 
company has 48 offices in principal cities in the United States and 
worldwide.
    Our extensive knowledge of and experience in the healthcare arena 
may be helpful in your deliberations. This MMI submission presents our 
findings of healthcare costs and examines the drivers of those costs. 
The MMI has, for a number of years, analyzed healthcare costs for the 
``typical American family of four'' covered by an employer-sponsored 
preferred provider organization (PPO) plan. Our most recent MMI found 
that, while the average cost nationwide for this family is $15,609 in 
2008, costs vary widely by geographic area: Atlanta ($14,845), Boston 
($16,278), Chicago ($18,001), Dallas ($15,326), Denver ($15,289), Los 
Angeles ($15,861), Miami ($18,780), Memphis ($16,853), Minneapolis 
($15,909), New York ($18,424), Philadelphia ($16,324), Phoenix 
($13,868), Seattle ($14,340), and Washington, DC ($16,491).
    We applaud the serious efforts of the Subcommittee to explore the 
nation's healthcare system and thank you for considering this 
submission. Please contact me if you have questions or would like any 
assistance our healthcare experts can provide.
            Sincerely,
                                       Lorraine W. Mayne, FSA, MAAA
                                   Principal and Consulting Actuary
                                                           Milliman
Executive summary
    Milliman's fourth annual study of average medical spending for a 
typical American family of four looks at key components of actual 
medical spending and tracks the changes over time. In addition to 
analyzing changes in national average health costs, the Milliman 
Medical Index (MMI) this year presents health-cost data for 14 major 
U.S. metropolitan areas.
The 2008 MMI's key findings include:
      The total medical cost in 2008 for a typical American 
family of four is $15,609 (compared with $14,500 in 2007).
      The average annual medical cost of the family increased 
by 7.6% from 2007 to 2008. While the $1,109 increase is a big expense, 
the rate of increase was down for the second straight year and is the 
lowest rate of increase in the past five years.
      There is a wide variation in costs across the country. 
Among the 14 metropolitan areas studied, healthcare costs varied by 
more than 35% from lowest to highest.
      While the overall rate of cost increase was down this 
year, the rate of prescription-drug cost increase was up for the first 
time since 2006.
      For the employee's share of spending on healthcare 
services, 2008 marks the second consecutive year of double-digit 
increase.
TABLE OF CONTENTS
    Executive summary 2
    Medical costs for 2008 2
    Geographic variation in health costs 2
    Medical cost categories 2
    Variation in costs 2
    Pharmacy trends 2
    Cost sharing 2
    Other healthcare trends 2
    Technical appendix--Milliman Medical Index 2
Medical costs for 2008
    The 2008 Milliman Medical Index (MMI) measures average medical 
spending for a typical American family of four covered by an employer-
sponsored preferred provider organization (PPO) program.\1\ The MMI 
also examines key components of medical spending and the changes in 
these components over time.
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    \1\ The Milliman Medical Index is based on analysis of claims for 
millions of members in a wide variety of areas of the country. It takes 
into account estimated U.S. average provider payment rates and 
Milliman's analysis of historical claim data and understanding of 
trends in provider contracting. Utilization of medical services for a 
particular family varies significantly based on the family's ages, 
geographic area, health status, and random fluctuations due to 
unpredictable events.
---------------------------------------------------------------------------
    The MMI estimates the total annual medical costs in 2008 for a 
typical American family of four at $15,609, up from $14,500 in 2007. 
This is an increase of 7.6% over the 2007 MMI. The 2007 rate of 
increase was 8.4%.
    Overall cost trends have declined over the last five years, from 
around 10% to the current 7.6%. Some of the forces leading to the 
recent modest downturn in trend are the result of temporary slowdowns 
in cost increases that may be offset by higher increases in other cost 
areas, some of which are discussed in greater detail throughout this 
report.
Drivers of cost increases include:
      Increases in wages and cost of materials
      Improved technology and new drugs
      Economic incentives for healthcare providers
      Consumer demand
      Demographics
      Benefit mandates and regulations
      Cost shifting
FIGURE 1
[GRAPHIC] [TIFF OMITTED] T9690A.006


FIGURE 2
[GRAPHIC] [TIFF OMITTED] T9690A.007

Geographic variation in health costs
    Figure 3 shows healthcare costs for 14 major U.S. metropolitan 
areas. The costs vary by more than 35% from high to low. Cities in 
western, southern, and mountain states generally have lower costs than 
those in central and eastern states. The variations from city to city 
result from a complex array of regional factors, including medical-
service treatment patterns, utilization of healthcare services, and 
costs per service. The geographic indices were developed on a 
consistent basis using standard actuarial principles.
FIGURE 3
[GRAPHIC] [TIFF OMITTED] T9690A.008

Medical cost categories
    The MMI categorizes medical costs into the following major 
groupings:

      Outpatient facility services
      Physician services
      Prescription drugs
      Other services including ambulance, durable medical 
equipment, private-duty nursing, and home health

    Figure 4 shows the distribution of the $15,609 total medical costs 
paid for by and on behalf of the typical American family of four. It 
includes both the portion of the costs paid by an employer's benefit 
plan and the portion paid by the family in the form of out-of-pocket 
cost sharing. Inpatient hospital and outpatient facility services 
combined represent 46% of the total annual medical costs, physician 
services represent 35%, prescription drugs 15%, and other miscellaneous 
services represent 4%. This distribution of costs reflects a modest 
shift in 2008 toward more pharmacy spending and less relative physician 
spending.
    For the first time in three years, pharmacy cost trends exceeded 
other categories of service (see discussion on page 8). Physician costs 
once again increased at the lowest rate.
    At 7.1%, the estimated inpatient hospital trend decreased relative 
to the overall national trend, while the outpatient facility trend 
dropped from 9.8% to 9.4%. The physician trend declined from 6.8% to 
6.2% and is still the lowest cost increase of the major components. 
After two years of decreases, pharmacy trend increased by double digits 
at 10.6%. The increase in other services was similar to the overall 
increase.

FIGURE 4
[GRAPHIC] [TIFF OMITTED] T9690A.009

FIGURE 5
[GRAPHIC] [TIFF OMITTED] T9690A.010

    Hospital services and physician services contributed $530 and $315, 
respectively, to the $1,109 total increase in total annual medical 
costs between 2007 and 2008. Pharmacy's contribution was $221. Notably, 
the dollar increase for hospital and physician care is lower than the 
prior year's increase.
FIGURE 6
[GRAPHIC] [TIFF OMITTED] T9690A.011

Variation in costs
    Although the cost for a typical family of four is $15,609, any 
particular family could have significantly different costs. Variables 
that have a significant impact on average costs include:

      Age and gender. There is wide variation in costs by age, 
with older people generally having higher costs per person than younger 
people. For example, a male aged 60-64 has healthcare expenditures 
approximately five to six times as high as a male aged 25-29.\2\ 
Variation also exists by gender. For example, partly due to maternity 
costs, a female aged 25-29 typically has healthcare costs approximately 
two and a half times as high as a male aged 25-29.
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    \2\ Milliman 2008 Health Cost Guidelines Commercial Rating 
Structures
---------------------------------------------------------------------------
      Individual health status. Beyond cost variation due to 
age and gender differences, tremendous variation also results from 
health status differences. People with chronic conditions such as 
diabetes, asthma, and heart disease are likely to have much higher 
average healthcare costs than people without these conditions. In a 
typical population of people covered by an employer-group medical plan, 
approximately 7% will have no healthcare insurance claims during a 
given year, while approximately 22% of people will have claims that are 
at least ten times the cost of the average person.
      Geographic area. Significant variation exists in 
healthcare costs by geographic area, due to differences in healthcare 
provider practice patterns and average costs for the same services. 
Practice pattern differences result in patients with the same (or very 
similar) conditions being treated differently by different providers.
      Provider variation. The cost of healthcare depends on the 
providers used. In a recent study Milliman prepared for the Pacific 
Business Group on Health (PBGH), we found that California hospital 
costs varied widely because of differences in both billed charge levels 
and discounts that payers had negotiated.\3\
---------------------------------------------------------------------------
    \3\ Full report is available at: http://www.pbgh.org/documents/
Milliman_OSHPD_Report_FINAL_20071017.pdf
---------------------------------------------------------------------------
      Insurance coverage. The presence of insurance coverage 
and the ``richness'' of that coverage also affect healthcare spending. 
The cost- and utilization-reducing implications of leaner coverage are 
documented in Milliman's Consumer-driven Impact Study,\4\ published 
earlier this year. The results of this study show that, after adjusting 
for different risk factors and the reduced utilization that is inherent 
in consumer-driven health plans (CDHPs), these plans produce savings of 
4.8%. When people are responsible for more of the cost, they tend to 
engage the healthcare system less often, which minimizes unnecessary 
utilization.
---------------------------------------------------------------------------
    \4\ Milliman Consumer-driven Impact Study, April 2007, by Jack 
Burke and Rob Pipich. Full report is available at http://
www.milliman.com/expertise/healthcare/publications/rr/consumer-driven-
impact-study-RR04-01-08.php
---------------------------------------------------------------------------
Pharmacy trends
    Although last year's MMI showed a drop in pharmacy cost trend for 
the second year in a row, the 2008 study identified an increasing cost 
trend that is expected to continue for the next few years. The 
declining trend of 2006 and 2007 was the result of increased adoption 
of generic drugs; that adoption rate has now slowed. Very few high-
volume drugs will see their patents expire this year or for the next 
several years. Lipitor' is the next high-volume drug 
scheduled to clear patent, in 2010. Even though a drug's patent is 
scheduled to expire on a certain date, the generic version is not 
necessarily imminent. The recent delay in bringing to market a generic 
version of Nexium' (pushed back to 2014) provides a recent 
example.
    While the cost trend is unlikely to decline in the next several 
years because of the dwindling introduction of generic drugs, 
individual employee benefit plans that provide incentives to shift from 
brand-name to generics can still favorably influence the nonspecialty 
drug trend. The nonspecialty drug trend may also be affected if some 
manufacturers increase certain drug prices in anticipation of expiring 
patent protections.
    The increased use of coinsurance may help reduce pharmaceutical 
cost trend while value-based insurance design (VBID) strategies may 
increase pharmaceutical cost trend.
    Specialty drug trend is projected at 17.6% \5\ for 2008, continuing 
to increase its contribution to the total drug trend. Factors affecting 
the increase in specialty drug trend include:
---------------------------------------------------------------------------
    \5\ Express Scripts 2007 Drug Trend Report, http://www.express-
scripts.com/industryresearch/industryreports/drugtrendreport/2007/

      An increase in the number of specialty drugs coming to 
market, as well as new indications for existing drugs, particularly for 
rheumatoid arthritis, multiple sclerosis, and cancer.
      An increase in utilization and unit cost for many 
specialty products (e.g., increased utilization of anticoagulants and 
drugs indicated for rheumatoid arthritis, and increased unit cost for 
multiple sclerosis and cancer drugs).
      A shift of specialty pharmacy products from the medical-
benefit category to the prescription-drug-benefit component.
      The shift in specialty pharmacy from the medical benefit 
to the prescription-drug benefit should result in a corresponding 
reduction in medical costs.

    As in past years, consumers are bearing a larger share of the total 
cost of pharmacy services, especially proportionate to other components 
of care. However, consumers can often reduce their copays by requesting 
generic or formulary drugs. As many insurers move to coinsurance, 
patients may start to ask more questions about drug costs, and by so 
doing, the pharmaceutical dynamic could change.

FIGURE 7
[GRAPHIC] [TIFF OMITTED] T9690A.012

Cost sharing
    As was the case last year, healthcare costs have continued to shift 
from employers to employees. Previously, when trends were high, 
employers would absorb the majority of the cost increases to mitigate 
the effect on employees. But as trends have moderated in recent years, 
our data shows employers allowing the full trend increase, plus some of 
the past shortfall, to be passed on to employees.
    While the dollar amounts paid by families for cost sharing have 
increased from 2003 to 2006, the rate of growth in out-of-pocket cost 
sharing has been slightly lower than overall trends during that time. 
In 2007 we saw a reversal to this movement, and in similar fashion our 
data for 2008 indicates average out-of-pocket cost sharing increasing 
at a higher pace than overall costs (10.5% vs. 7.6%).
    Figure 9 shows that of the $15,609 total medical cost for a family 
of four under a PPO, the employer pays about $9,442 (60%), and the 
employee pays about $6,167 (40%). Just over half of the employee's 
share, or $3,492, is paid through payroll deductions, while $2,675 is 
paid in cost sharing at time of service.
    In addition to increased cost sharing, employees are bearing a 
greater portion of the monthly premiums paid through payroll deductions 
compared with 2007. Unlike time-of-service cost sharing, employee 
contributions have a broad impact: they affect all participants, not 
just those who visit a healthcare provider. Based on Milliman's 
national survey of more than 4,000 employee benefit plans, as well as 
data from the Kaiser Family Foundation, we estimate employees' portion 
of the premiums increased 10.1% in 2008 over 2007. Although the 
employee contribution only represents, on average, about one-quarter 
(27.0%) of the total premium, the increase consumes a significant 
portion of wages for some employees.

FIGURE 8
[GRAPHIC] [TIFF OMITTED] T9690A.013

FIGURE 9
[GRAPHIC] [TIFF OMITTED] T9690A.014

    Cost trends in employee contributions lag behind the broader 
medical cost trend by 12 to 18 months. Thus, much of the 2008 increase 
for employee contributions is related to the higher past increases. The 
delay can be traced and attributed to a typical benefit-planning cycle. 
Employers set employee contributions only once each year, often months 
before the start of the plan year. Medical costs may sometimes increase 
at a higher rate than employers had initially forecast--and to more 
than overall compensation increase targets. In light of this, employers 
sometimes struggle to distribute the increase between the employer's 
portion, employee cost sharing (copays, deductibles, etc.), and 
employee contributions (payroll deductions) while maintaining 
competitive plans to attract and retain employees.
    Since 2004, the employer's share of costs increased at an average 
rate of 8.8% while the average rate of employee's total costs increased 
8.5%.
Other healthcare trends
    Employers continue to tweak plan designs and funding options to 
address the desire of participants for low-cost, high-value plans. In 
particular, CDHPs continue to grow in popularity, although the 
prevalence varies by region and size of employer. Generally, the 
largest employers and small employers have been the early adopters. 
(See Milliman's Consumer-driven Impact Study for a comprehensive 
analysis of CDHPs.)
    The adoption of population health-management approaches, 
particularly wellness and health promotion programs, has become 
mainstream, yet medical cost savings outcomes have been inconclusive. 
Employers report positive outcomes for other metrics such as worker 
productivity, absenteeism, morale, and retention. The purchase of 
disease management services by employers recently leveled off with the 
continued lack of convincing evidence of medical cost savings.
    Value-based insurance design (VBID) for pharmaceuticals is a 
relatively new trend that is intended to increase prescription-drug 
compliance for the chronically ill by reducing or eliminating copays 
for maintenance drugs. Medical cost savings is inconclusive at this 
early stage. In the short term, employer spending will increase as 
copays are reduced for those already compliant and drug utilization 
increases for those not compliant.
Technical appendix--Milliman Medical Index
    The Milliman Medical Index (MMI) is a byproduct of Milliman's 
ongoing research in healthcare costs. The MMI is derived from 
Milliman's flagship health-cost research tool, the Health Cost 
Guidelines', as well as a variety of other Milliman and 
industry data sources, including the Group Health Insurance 
Survey', the Milliman Mid-Market Survey, and the Consumer-
driven Impact Study.
    The MMI represents the projected total cost of medical care for a 
hypothetical American family of four (two adults and two children) 
covered under an employer-sponsored PPO health benefit program, and 
reflects the following:

      Nationwide average provider-fee levels negotiated by 
insurance companies and PPOs.
      Average PPO benefit levels offered under employer-
sponsored health benefit programs. For 2008, average benefits are 
assumed to have an in-network deductible of $366, various copays (e.g., 
$65 for emergency room visits, $19 for physician office visits, $11/
25%/30% for generic/formulary brand/non-formulary brand drugs), and 
coinsurance of 16% for non-copay services.
      Utilization levels representative of the average for the 
commercially insured (non-Medicare, non-Medicaid) U.S. population.
About the Milliman Medical Index (MMI)
    The MMI includes the cost of services paid under an employer 
health-benefit program, as well as costs paid by employees in the form 
of deductibles, coinsurance, and copays. The MMI represents the total 
cost of payments to healthcare providers, the most significant 
component of health insurance program costs; it excludes the nonmedical 
administrative component of health plan premiums. The MMI includes 
detail by provider type (e.g., hospitals, physicians, and pharmacies) 
for utilization, negotiated charges, and per capita costs, as well as 
how much of these costs are absorbed by employees in the form of cost 
sharing.
    The 2008 report marks the fourth year of the MMI, although we 
report on data from the last five years. For historical context, we 
have used the MMI methodology and prior research data to calculate MMI 
values for 2004.
    The MMI incorporates proprietary Milliman studies to determine 
representative provider-reimbursement levels over time, as well as 
other reliable sources, including the Kaiser Family Foundation/Health 
Research and Educational Trust 2007 Annual Employer Health Benefit 
Survey (Kaiser/HRET), to assess changes in health-plan benefit level by 
year.
About the Health Cost Guidelines'
    Launched more than 50 years ago, the Health Cost 
Guidelines' are an industry standard, now used by more than 
90 leading insurers to estimate expected health insurance claim costs. 
The seven-volume publication includes utilization rates for specific 
services and variations in costs in different parts of the country--
critical data used by traditional health carriers and managed-care 
organizations for product pricing. In addition, the 
Guidelines' provide utilization benchmarks for managed-care 
arrangements. The Guidelines are updated annually from core data 
sources, which contain the complete annual health services of more than 
15 million lives as well as various specialized proprietary databases.
About the Group Health Insurance Survey'
    The Group Health Insurance Survey' (formerly, HMO 
Intercompany Rate Survey'), launched in 1992, provides the 
industry's only survey measuring rate levels, trends, and experience 
for a uniform population, and benefit design for HMO and PPO plans from 
across the nation. Survey results are provided by metropolitan 
statistical area, state, region, and nationwide. The survey is used by 
managed-care organizations nationwide to compare their premiums, 
trends, and experience with those of their competitors. Published 
results include premiums, rate trends, anticipated future-year premium-
rate change, inpatient utilization levels, physician reimbursement 
levels, medical expense ratios, and information on other current 
industry topics.
About the Consumer-driven Impact Study
    The Consumer-driven Impact (CDI) Study, released by Milliman 
earlier this year, provides the first independent risk-adjusted 
analysis of CDHP savings. Developed in partnership with the National 
Business Group on Health, the CDI Study shows that CDHPs are creating 
savings of 4.8% for employers. After adjusting for induced utilization 
typically found in high-deductible plans, the savings amount to 1.5%. 
The more significant savings should not be dismissed, however, because 
induced utilization is a key component of the savings strategy inherent 
to CDHPs. These results reinforce the need for better consumer 
information. Actual savings are likely to increase when people have the 
consumer research resources they need to truly compare and shop for 
healthcare based on quality and cost.

                                  
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