[Senate Hearing 110-175]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-175
 
     ALTERNATIVES FOR EASING THE SMALL BUSINESS HEALTH CARE BURDEN

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


                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP



                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 13, 2007

                               __________

      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                 JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan                 OLYMPIA J. SNOWE, Maine
TOM HARKIN, Iowa                     CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut     NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana             DAVID VITTER, Louisiana
MARIA CANTWELL, Washington           ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana                   JOHN THUNE, South Dakota
MARK PRYOR, Arkansas                 BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         MICHAEL B. ENZI, Wyoming
JON TESTER, Montana                  JOHNNY ISAKSON, Georgia

                 Naomi Baum, Democratic Staff Director
                Wallace Hsueh, Republican Staff Director


                            C O N T E N T S

                              ----------                              

                                                                   Page

                           Opening Statements

Kerry, The Honorable John F., Chairman, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Massachusetts..................................................     1
Snowe, The Honorable Olympia J., a United States Senator from 
  Maine..........................................................     4

                           Witness Testimony

Senkewicz, Mary Beth, Independent Consultant, MBS Consulting.....     7
Bragdon, Tarren, director of Health Reform Initiatives, The Maine 
  Heritage Policy Center.........................................    12
Kingsdale, Jon M., executive director, Commonwealth Health 
  Insurance Connector Authority..................................    19
Sweetnam, Jr., William F., former benefits tax counsel, Office of 
  Tax Policy, U.S. Department of Treasury........................    25
Sullivan, Ann, Federal legislative consultant, Women Impacting 
  Public Policy..................................................    36

          Alphabetical Listing and Appendix Material Submitted

Bragdon, Tarren
    Testimony....................................................    12
    Prepared statement...........................................    14
    Responses to post-hearing questions from Senator Lieberman...    59
Enzi, The Honorable Michael B.
    Prepared statement...........................................    58
Kerry, The Honorable John F.
    Opening statement............................................     1
Kingsdale, Jon M.
    Testimony....................................................    19
    Prepared statement (with attachment).........................    21
    Responses to post-hearing questions from Senator Lieberman...    60
Lieberman, The Honorable Joseph I.
    Post-hearing questions posed to:
        Mary Beth Senkewicz......................................    59
        William F. Sweetnam, Jr..................................    59
        Tarren Bragdon...........................................    59
        Jon M. Kingsdale.........................................    60
Senkewicz, Mary Beth
    Testimony....................................................     7
    Prepared statement...........................................     9
    Responses to post-hearing questions from Senator Lieberman...    59
Snowe, The Honorable Olympia J.
    Opening statement............................................     4
Sullivan, Ann
    Testimony....................................................    36
    Prepared statement...........................................    38
Sweetnam, Jr., William F.
    Testimony....................................................    25
    Prepared statement...........................................    28
    Responses to post-hearing questions from Senator Lieberman...    59

                        Comments for the Record

National Small Business Association (NSBA).......................    62
AARP.............................................................    72


     ALTERNATIVES FOR EASING THE SMALL BUSINESS HEALTH CARE BURDEN

                              ----------                              


                       TUESDAY, FEBRUARY 13, 2007

                      United States Senate,
                    Committee on Small Business and
                                          Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:11 a.m., in 
room 428A, Russell Senate Office Building, the Honorable John 
F. Kerry, Chairman of the Committee, presiding.
    Present: Senators Kerry, Cardin, Snowe, and Thune.

  OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, 
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A 
            UNITED STATES SENATOR FROM MASSACHUSETTS

    Chairman Kerry. Well, officially, this hearing will open, 
since we already have order. Welcome, everybody. Thank you very 
much for coming in today. We welcome all of our witnesses.
    Senator Snowe and I share the opportunity of both serving 
in a responsible position on this Committee and also being on 
the Finance Committee, so we thought we would take advantage of 
that and lay a foundation here with respect to the health care 
issue and then dovetail and try to advance it within the 
framework of the Finance Committee, which has major 
jurisdiction, together with the HELP Committee, and see if we 
can't move that.
    This is, without doubt, the single most important issue 
that any of us hear about as we criss-cross the country and 
talk to small business owners. The inability and struggle of 
small businesses to be able to provide health care to their 
families and their employees is a growing crisis. All of us 
understand that we have to reform the system, and I think a lot 
of us are getting a little bit exhausted with the expenditure 
of Congressional rhetorical energy on this instead of 
legislative energy. It is really almost incomprehensible how 
people can be watching the trend lines--I don't know if we have 
a chart here somewhere--without a growing appetite for 
something to be done, hopefully.
    There are unlikely alliances between traditional rivals. 
Just the other day, we saw SEIU and Wal-Mart, who had been at 
loggerheads, stand up and join forces in a push to try to get 
everybody covered by health care.
    Done the right way, health care reform ought to be able to 
solve the three major challenges that we and particularly small 
businesses face. No. 1, give them access to a functioning 
insurance market. That is the first thing you have to do. The 
second thing is you have to make sure that whatever is offered 
in those markets are sensible quality care opportunities. And 
finally, the affordability issue. You have to be able to help 
people be able to afford it and buy it once they have the 
access.
    My own State of Massachusetts has made a step towards 
trying to do this. We are still going to try to figure out 
whether there is enough money in the system to handle it. But 
the basic structure is to create a central purchasing exchange 
for individuals and small businesses and to offer financial 
help on a sliding scale to small businesses and low-income 
residents, but requiring as a mandate that everybody has got to 
purchase some type of insurance.
    The fact is, and none of us, I think, take pleasure in 
this, but the fact is that in 6 years, we have had a failure of 
executive leadership here. They just haven't wanted to tackle 
this, period. There is no other way to explain it. There hasn't 
been one proposal of major broad coverage, no significant 
effort. We have had small little chinks here and there, 
including one we will talk about today, Health Savings Plans, 
but any legitimate analysis of that has to acknowledge the 
narrowness of the market being served and the folks that are 
helped by it.
    So we still have the larger issue. The President is now 
proposing a standard deduction for those who have health 
insurance, but the difficulty with that is it is not even based 
on actual health care expenses. Many observers think that 
approach actually hurts small businesses in a couple of ways 
because while small employers would get a tax deduction for 
covering themselves and their families, they wouldn't be 
required to provide a similar benefit to their employees, so 
there is not necessarily a downstream impact here.
    And secondly, small businesses that currently offer health 
insurance to their workers would be less able to do so under 
the President's plan. If just one of their employees gets sick, 
the insurance premium could easily exceed the amount of the 
deduction, thereby imposing tax penalties on all the workers or 
causing the small business itself to drop coverage as a 
consequence.
    So we have got to look carefully at the tax incentives and 
see what push-pull occurs as a consequence of whatever the 
proposal is.
    As we know, the Health Savings Accounts are still on the 
table. I think it is a fine option for somebody who has the 
ability to save to be able to deduct, though in many cases 
those most able to save are those who least need the deduction. 
But it must be acknowledged as a niche market. And for those 
who lack insurance or who lack the ability to have a tax 
impact, it just does nothing. That is the bottom line.
    So whether the President is with us or not, I think this 
Congress has to try to move forward, and Senator Snowe, as I 
mentioned before you got here, the fact that you and I serve on 
the Finance Committee, I think gives us particular ability to 
try to leverage what we glean here and the record that we build 
here to be quickly transferred over there to help support 
whatever efforts we try to make.
    The reauthorization of the children's health insurance 
program this year is key to whatever we might be able to do. We 
have 11 million uninsured children under 21 in this country. I 
proposed legislation 3 years ago called Kids First which would 
help us move down the road of at least insuring all children in 
America. If you can't do that, where can you begin? It seems to 
me that it would be enormously helpful, also, to a lot of the 
small businesses.
    The statistics, if you look over at the graphs over here, 
since the year 2000, premium prices have gone up by a total of 
87 percent compared with almost stagnant growth, as you can see 
in the lower two lines, in worker wages and inflation. As a 
result of these increases, a mere 48 percent of firms with 10 
or fewer employees are offering health benefits. This 
percentage, sadly, is down from 58 percent just 5 years ago, so 
we are clearly going in the wrong direction.
    According to a study done by the Kaiser Family Foundation, 
the number of uninsured employees increased by 3.4 million 
between 2001 and 2005, and two-thirds of that increase, ladies 
and gentlemen, came from low-income families. So that brings 
the number of uninsured employees and self-employed people to a 
staggering 23 million Americans. So 23 million Americans play 
by the rules, pay their taxes, get up, and go to work, but they 
are either self-employed or employees of a company and they 
have no health insurance whatsoever.
    It is simply an unacceptable statistic in a civilized, 
wealthy nation such as ours which has the ability to provide 
care in a more effective and thoughtful way. I am not saying 
that some of those folks, if they get sick, don't get care. We 
all know what happens. You go to the hospital and somebody 
takes care of you. But it is a remarkably inefficient way to 
care for people. It is a remarkably inefficient way to 
distribute the costs.
    And all our businesses wind up picking up those costs, 
which is why it is so staggering that we can't persuade people 
to get smart up front and do it in a smart way. I mean, we 
could save $100 billion from early screening of diabetes alone 
so you don't wind up with amputations and dialysis, the most 
expensive form of treatment, instead of preventing it early.
    It is the same thing for many cancers. I was very lucky. I 
had early cancer screening. I caught it, managed to have an 
operation, got rid of the cancer, knock on wood, but a lot of 
people don't get early screenings. That is particularly the 
case among African-Americans in this country, where they have a 
much higher rate of death, as well as incidence of cancer. 
Screening and prevention are key components and we need to get 
there.
    So I am glad Massachusetts has taken some steps. California 
is now wrestling with the idea. Others are looking at it. As 
with many other issues, like global climate change and other 
kinds of issues, the American people and the local communities 
are way ahead of the United States Congress.
    So my hope is we can take a good look at that this morning. 
I have introduced the Small Business Health Care Tax Credit 
Act, which is an effort to try to cut the cost of health 
insurance by up to 50 percent for small business owners with 
fewer than 50 employees, and that would provide health 
insurance for their low- and moderate-income employees. But 
until we can enact proposals that will reduce the cost for 
small and large business alike and help with health information 
technology, which the RAND group estimates could save an 
astounding $81 billion per year, this tax credit legislation is 
the best way we have to go until we do some sort of 
comprehensive effort.
    So I am hopeful that we can work with the States. Senator 
Snowe, I hope you and I can help this Committee to make a 
contribution to this dialogue. But we are going to have to 
really find a new equation around here to figure out how we do 
this in tough budget times with the other issues we have 
created for ourselves.
    There are some other issues here. Senator Lincoln and 
Senator Durbin have taken an idea that I talked about a lot in 
2004, which was access to the FEHP program. If we allowed 
people to have access to a system like that, they could buy in 
and you would have greater affordability for everyone. There 
are a number of different ways to skin this cat.
    I was talking the other day with my colleague, Senator 
Kennedy, who spent 40 years trying to get health care 
legislation through here, and there are 12, 11, 10, whatever 
number of ways that you could do it. It is really the lack of 
willpower, not the lack of different modalities for how you do 
it.
    The astounding thing is that Americans always say, well, I 
don't want a Government program, but the fact is, over 50 
percent of our health care system is devoted to much beloved 
health care programs called Medicare, the Veterans 
Administration, and Medicaid.
    So we are kind of spinning wheels and going around in 
circles and talking past each other, and my hope is that we can 
get a conversation going on here that helps us to be smart and 
do something better about it.
    Thank you all for being here. I will introduce you in a 
moment after Senator Snowe says a word.

 OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, A UNITED 
                   STATES SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman. First of all, I 
thank you for focusing on such a pivotal issue as one of your 
first hearings as Chair of this Committee. It is obviously of 
crucial concern to the small business community throughout the 
country and I welcome our panel here today and most especially 
Tarren Bragdon from Augusta, Maine, who is the director of 
Health Reform Initiatives at the Maine Heritage Policy Center 
and is an authority on the Maine health insurance landscape and 
also small business health plans, Health Savings Accounts, and 
also the impact of potential reforms on small business. I 
welcome you, Tarren, here today, and I welcome all of you.
    It is critical that we build a record that hopefully will 
be the impetus for change in this Congress. It is long overdue, 
we recognize that. Chairman Kerry and I have worked together on 
this initiative in the past and hope to break the deadlock and 
stalemate on this issue.
    This is a crisis for small businesses. I certainly heard 
that repeatedly in the State during the fall. Without question, 
it is a crisis across this country. It is a foremost concern 
among small businesses in each and every one of the 50 States 
based on all the surveys. It is a crisis. Hopefully, the 
Congress can ultimately respond by addressing this issue.
    It is going to require a variety of components to make it 
happen, and I do believe that it is possible to get there. I 
think it is a question of political will in the final analysis 
and trying to determine how we can overcome the criticisms of 
creating small business health insurance plans, and there are 
going to be differences. Senator Enzi chaired the HELP 
Committee in the last Congress, which managed for the first 
time to at least report out of Committee a bill concerning 
small business health insurance plans.
    On the other hand, it would have harmonized health 
insurance regulations across State lines. That engendered 
considerable concern and opposition. We tried to deal with the 
preemption of mandates. I had an amendment that would have 
created a uniform 26-State ``floor'' or threshold. If 26 States 
had enacted a benefit, that benefit that would have to be 
included in the minimum package within any standard benefits 
package of a small business health plan.
    Nevertheless, we weren't able to get there from here, as 
the saying goes in the State of Maine. But the question is, 
what can we do now to overcome the obstacles and criticisms of 
the previous plans that have been offered and how can we 
coalesce around these issues?
    One potential solution is using the tax code, as Senator 
Kerry said. We are both Members of the Senate Finance 
Committee. I think that it is certainly possible to create 
incentives to help solve this crisis.
    Second, how do we price or ``rate'' these products? How do 
we make small group markets more competitive, because that is a 
crucial challenge. As you see all the statistics and the 
dominance of health insurers, few health insurers in our State 
and across this country dominate the markets. I requested a GAO 
report that indicated that fact precisely. Large insurers 
control 43 percent of State small group markets. The five 
largest carriers now have more than 75 percent of the market 
share in 26 States, and more than 90 percent market share in 12 
States. In Maine, one insurance carrier currently controls 63 
percent of the market share. Five have 98 percent.
    I think it illustrates the point. There is very little 
competition. When you have low competition, you have higher 
prices. Higher prices mean no health insurance. It is as simple 
as that, and that is exactly what has happened. Health 
insurance has moved out of reach for most small business 
owners.
    Last October, I remember doing my very first walking tour 
during the campaign recess, and I walk into the first shop and 
this store owner puts down his Blue Cross-Blue Shield increase, 
which was more than 20 percent in addition to 16 percent last 
year, and also his bill for a family plan. It was exorbitant, 
making it out of reach for the average small business owner and 
their families and their employees.
    If the uninsured is growing at a great number as it is, now 
to almost 47 million Americans, we could have a substantial 
impact on that if we address this crisis because 60 percent or 
more of those uninsured work for small businesses or depend on 
somebody who does. So clearly, the evidence, I think, speaks to 
the fact that we have to address and to tackle this problem.
    I also have another chart here, and I think that we are 
seeing what higher prices are also doing in terms of employer-
sponsored health insurance. It has declined by 10 percentage 
points over the last 5 years. That is a dramatic drop, frankly, 
because again, it puts health insurance out of reach. Small 
businesses cannot compete with large companies who offer this 
vital benefit. People seek jobs that provide attractive 
benefits, and one of which is health insurance. So it makes 
small businesses less competitive with other companies to 
attract the talent and the skills necessary to be competitive 
with other larger entities.
    So that is the problem. I think that it is possible to get 
this done if we can build around some common ground, and I 
think there are some common elements to all of these plans. So 
many people have some great ideas and I think it is possible to 
accomplish it and provide some form of pooling. For example, 
Senator Kerry and I worked on developing regional small 
business health plans. That was one initiative. I am working 
with Senator Lincoln on other possible initiatives. Senator 
Enzi came up with his proposal. I think there are workable 
solutions if we can just build across the party line.
    Second, HSAs are a component, an option, especially with 
high-deductible health plans. I think that is crucial. I have 
introduced legislation on cafeteria tax plans, to give more 
flexibility for small businesses to offer those plans because 
that is another dimension that is very attractive in making it 
easier and creating more flexible regulations for small 
businesses to offer cafeteria plans. Again, it is another 
option that should be available and we should make it easier 
for small businesses to offer it, as well.
    So there are a number of issues, an array of components, 
and I think it is a question of if we can build that support. 
But hopefully, this is going to be the year to do it, Mr. 
Chairman, and I think that this is a great start and hopefully 
we can get there. Thank you.
    Chairman Kerry. Thank you, Senator Snowe. Thank you very 
much. Thanks for your cooperative effort on this, which I 
really hope we can leverage with Senator Baucus and Senator 
Grassley.
    Mary Beth Senkewicz is president of MBS Consulting, former 
senior counsel for National Policy at the National Association 
of Insurance Commissioners.
    Tarren Bragdon has already been introduced by Senator 
Snowe. We welcome you here from the Maine Heritage Policy 
Center.
    Jon Kingsdale, executive director, Commonwealth Health 
Insurance Connector Authority.
    William Sweetnam, Jr., former benefits tax counsel, Office 
of Tax Policy, U.S. Department of Treasury, and also formerly 
worked up here.
    And Ann Sullivan, head of Government Relations for Women 
Impacting Public Policy.
    Thank you all for being here. Your full testimony will be 
put in the record as if read in full, so if we could ask you to 
summarize your prepared comments in 5 minutes, that will give 
us more chance to have a little exchange.
    Ms. Senkewicz?

 STATEMENT OF MARY BETH SENKEWICZ, INDEPENDENT CONSULTANT, MBS 
                           CONSULTING

    Ms. Senkewicz. Chairman Kerry, Senator Snowe, I appreciate 
the opportunity to testify before you today on small businesses 
and health care insurance.
    With the ever-increasing numbers of uninsured in our 
country, it is apparent that the system is not functioning 
efficiently or fairly. Small businesses have been hit 
particularly hard. Small businesses have more difficulty 
regarding health insurance for their employees primarily 
because they are small. Insurance is about spreading risk, and 
in order to spread risk more efficiently, larger pools of 
insureds are required. Insurance is about the law of large 
numbers. That is why one small employer can't be a pool by 
itself. If an employee becomes ill, their group is quickly 
priced out of the market.
    As Congress contemplates the complex issues surrounding our 
troubled health care system and financing mechanisms, it is 
important to keep certain principles in mind to ensure that any 
proposals are likely to result in a fairer, more stable system.
    At Georgetown's Health Policy Institute, my colleagues have 
developed a ``triple A'' of principles to consider in thinking 
through these issues. Any outcome of thoughtful public policy 
should have these principles fulfilled.
    The first ``A'' is adequacy of coverage. This generally 
means coverage without holes. This principle is particularly 
important because if coverage has significant holes, it can 
lead to risk selection, which results in sicker persons in any 
pool thereby driving up premiums. Therefore, we need to address 
minimum benefit packages so insurers cannot risk select by 
benefit design.
    The second ``A'' is affordability of coverage. This 
principle is self-evident. The primary reason small businesses 
don't buy health insurance for their workers or cut back on 
benefits is because it costs too much. Health care costs have 
spiraled, and that fact is simply reflected in health insurance 
premiums.
    The third ``A'' is availability of coverage. Some 
proposals, such as the Durbin-Lincoln bill, try to address this 
issue by creating regional or national purchasing pools where 
small businesses can shop for insurance. Policy makers should 
be wary of sending small businesses and individuals to shop in 
markets where they can be denied coverage or rated up sharply 
for adverse health conditions. Health insurance needs to work 
for people when they are sick. After all, 80 percent of claims 
are generated by 20 percent of insureds. A system that works 
will cover people who are sick when they need the coverage the 
most rather than having them discover the plan has so many 
holes as to be almost worthless or price them out through 
punitive premium increases. But the only way to cover them when 
they are sick is to cover them when they are well, to spread 
the risk as broadly as possible.
    More efficient pooling is necessary to help small 
businesses with health insurance. Larger pools can spread risk 
across larger populations with those attendant benefits. Larger 
pools will also have lower administrative costs, one factor in 
the price of health insurance. The pools can have rules that 
treat people fairly and don't kick them when they are down, 
such as a prohibition against rating up based on health status. 
The pools can have rules about minimum benefit packages to 
avoid risk selection. A fair and efficient pooling mechanism 
will go a long way to stabilizing a market in the long run. And 
rules do not necessarily mean less choice. Rules just mean 
there is a level playing field.
    There are other mechanisms being considered as part of the 
solution. We will hear later about the Massachusetts law, and 
other States are considering employer and individual mandates. 
Reinsurance, purchasing groups, and tax credits to help small 
employers with the purchase of insurance are options on the 
table.
    One common thread running through many of these proposals 
is subsidies to assist with the purchase of health insurance. 
The simple fact is, health insurance costs a lot of money and a 
lot of people simply can't afford it. It is going to cost tax 
dollars to provide subsidies so people can become insured and 
access the health care system most efficiently. Employer and 
individual contributions can contribute to the financing, but 
some subsidization is almost certainly going to be required.
    Thank you. It is heartening to see your Committee tackle 
these issues so early in this Congressional session.
    [The prepared statement of Ms. Senkewicz follows:]
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    Chairman Kerry. Thank you very much, Ms. Senkewicz.
    Mr. Bragdon?

    STATEMENT OF TARREN BRAGDON, DIRECTOR OF HEALTH REFORM 
         INITIATIVES, THE MAINE HERITAGE POLICY CENTER

    Mr. Bragdon. Good morning, Chairman Kerry and Ranking 
Member Snowe. Thank you for inviting me to testify.
    I believe there are five specific steps that Congress 
should take to assist small businesses. One, encourage small 
employers to offer coverage regardless of the share of the 
premium paid by the employer. While a lot has been said about 
the cost of health insurance, employees are very likely to get 
coverage through their employer if it is simply offered, even 
when the employer pays only a small share of the premium. 
Employees in the highest cost-sharing category have a take-up 
rate of 68 percent, compared to those who have 100 percent 
employer-paid coverage have a take-up rate of 89 percent. So 
even with high cost-sharing, employees are very likely to buy 
health insurance if they can buy it through the workplace.
    A lot has been said about choice, as well. Blue Cross-Blue 
Shield of California has introduced a small business option 
that allows small businesses to offer up to 17 different plans 
to their employees with a minimum employer share of the premium 
of just $100 per employee per month. Again, I think insurers 
are beginning to recognize that if they can buy through the 
workplace, more people will purchase coverage.
    All this would suggest that a fairly modest Federal tax 
incentive encouraging very small businesses, those with less 
than 25 employees, to offer coverage would greatly increase 
offer rates and likely also increase the take-up rates for the 
25 million employees who work in these very small businesses. 
Employer premium subsidies as provided in the Chairman's 
legislation would likely increase offer and take-up rates even 
further.
    Second, I would encourage you to consider a regional 
approach to small business health plans. We appreciate Senator 
Snowe's long-standing support of association health plans and 
small business health plans. These would provide critical and 
immediate Federal relief to small businesses. This is most 
acute, the need for this relief, in Maine. We only have four 
active insurers in the small group market, yet we have the 
eighth highest premiums small businesses pay in the country.
    Medicare provides a model of a regional approach, giving 
more options to individuals in particularly small or rural 
States than would be likely available if each State were its 
own region. Maine and New Hampshire, as well as the four New 
England States, are combined into two Medicare regions. This 
provides many more options for Maine people, Maine seniors, 
than if they were in their own single-State Medicare region.
    New England States have a total of 55 unique benefit 
mandates that are required in one but not all of the six 
States. Sixteen of these mandates are required in a majority of 
the New England States, but only 10 of those same 16 mandates 
are required in a majority of all 50 States. Therefore, if you 
had a regional approach to small business health plans, you 
would include mandates in a majority of States in that region 
and reflect regional values.
    Three, allow employees to easily pay their share of the 
premium pre-tax. Senator Snowe's proposal that would allow very 
small businesses to more easily set up Section 125 plans is a 
critical step. It is not enough to just offer health coverage. 
You also have to allow employees to pay for it pre-tax. A Maine 
family earning $50,000 a year would save about 30 percent if 
they could pay their share of the premium pre-tax through a 
Section 125 plan.
    Fourth, I would encourage you to consider auto-enrollment 
in a default health plan. The Pension Protection Act of 2006 
allows companies to auto-enroll people in a 401(k) plan. That 
increases employee participation by 25 percent. Why not allow 
employers to do the same with a default health plan? The 
average employer-sponsored HSA-qualified plan requires an 
employee contribution of just $9 a week. Often, young and 
single employees are the least likely to participate in 
employer-sponsored coverage. Auto-enrollment could encourage 
increased take-up and spread the risk across a larger and 
healthier population.
    Five, create a national or regional market for individual 
insurance, as well. Often, this gets lost in the conversation 
about the small group market, but Congress needs to consider 
allowing more competition and options in the individual market. 
For very small businesses, entrepreneurs, freelancers, and 
independent contractors, the individual insurance market is the 
only place to purchase coverage.
    Again, Maine has led the way in how not to regulate. In 
Augusta, Maine, a $10,000 deductible policy for my family, my 
wife and our one son, costs $511 a month, a $10,000 deductible 
policy. That same plan in Alexandria, Virginia costs $145 a 
month. Regulations matter.
    High individual insurance costs discourage entrepreneurs 
from setting out a shingle and starting a new business. Drawing 
from the Small Business Health Plan legislation or Senator 
DeMint's Health Care Choice Act, Congress should consider 
national or regional individual insurance carriers and plans.
    Thank you for holding this hearing and allowing me to 
testify.
    [The prepared statement of Mr. Bragdon follows:]
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    Chairman Kerry. Thank you very much, Mr. Bragdon.
    Mr. Kingsdale?

STATEMENT OF JON M. KINGSDALE, EXECUTIVE DIRECTOR, COMMONWEALTH 
              HEALTH INSURANCE CONNECTOR AUTHORITY

    Mr. Kingsdale. Good morning, Chairman Kerry, Senator Snowe. 
Thank you for the attention that you are paying to these 
important issues. I am Jon Kingsdale, executive director of 
Commonwealth Connector, and I thought I would describe to you 
briefly how we are tackling some of the problems you have 
identified in Massachusetts.
    As part of an extensive reform to cover the uninsured in 
Massachusetts, the Connector contracts with private health 
plans and enrolls individuals and small employer groups in 
those plans. In the last 7 months, we have actually added 
100,000 people, which is more than 25 percent of the uninsured 
in Massachusetts, newly to the private plans that the Connector 
contracts with and to our expanded Mass Health Program and to 
an insurance partnership program for small employers of low-
wage workers.
    Massachusetts health reform is based on five principles 
listed in my testimony. I am going to focus on three of those 
that I think are particularly pertinent to the issues under 
discussion here.
    First of all, we require universal adult participation in 
health insurance as of July 1, 2007. Second, we require 
employers of more than 10 workers to help finance their 
employee health benefits. Third, we offer the small group and 
non-group end of the market for health insurance, more choice, 
and better information.
    These building blocks address issues especially relevant to 
the small end of health insurance market. First, insurance is 
designed to pool risk. You have heard about that already from 
other witnesses. Carriers can identify and select relatively 
health individuals and small groups, leaving the unhealthy 
unprotected, and frankly, small employers and individuals can 
try to participate at times and in ways such that their own 
medical costs are likely to exceed the premiums they pay. So 
both sides can game this.
    To protect against both forms of discrimination, our health 
plans are required, A) to issue and renew coverage, B) to 
ensure individuals and small businesses underrate formulas that 
cross-subsidize between healthier and sicker populations, and 
most adults will soon be required to have insurance. This 
protects the sick and it keeps the healthy in the insurance 
risk pool.
    Second, while most large employers, 98 percent nationally, 
offer health benefits, some 40 percent of small employers do 
not, and in Massachusetts, small businesses actually represent 
and employ two-thirds of the working uninsured. Group health 
benefits are designed not only to pool risk, but, of course, to 
subsidize coverage and to encourage group insurance, 
Massachusetts now requires employers with 10 or more employees 
to make a fair and reasonable contribution toward their 
workers' health benefits, and we will soon require them to 
offer a Section 125 pre-tax payroll deduction plan.
    Our requirement that adults, healthy or sick, buy a minimum 
level of insurance and that employers contribute are designed 
to encourage employers not only to help subsidize, but to make 
both the young and healthy as well as the sicker and older 
populations accept those offers and participate.
    Of course, medical care is expensive stuff no matter how 
you divide it and costs are especially burdensome for small 
business and low-wage employees. To assist them, our State's 
Insurance Partnership Program subsidizes premium costs for both 
small employers of low-wage employees and low-wage workers. I 
note the similarity to S. 99, the Small Business Health Care 
Tax Credit Act, sponsored by Chairman Kerry, among others. 
Moreover, S. 99 offers certainty and outreach associated with 
using the Federal tax code, which frankly would benefit our own 
State Insurance Partnership Program.
    The third principle we are addressing is about individuals 
on their own in small employee groups who often lack choice of 
health plans. Limited choice is itself a cause of 
dissatisfaction, of course, but equally importantly, it blocks 
innovative efforts to control costs and add value to address 
that skyrocketing trend that Chairman Kerry pointed to. To 
provide more choice, Massachusetts will require health plans to 
offer to non-group individuals the same options and at the same 
prices that they offer small businesses, and the Connector will 
offer to individuals, those who work for small businesses and 
those who buy on their own, the kind of broad choice of 
qualified health plans that employees of many large 
organizations, including Federal employees, currently enjoy.
    The following table, if somebody could put it up, 
illustrates the choice under the Connector. The small employer 
will make a defined contribution toward a benchmark plan. Then 
his or her employees would have the option of using that 
contribution among any of a broad range of comparable options. 
The Connector will eliminate hidden variations among the 
plans--how a plan defines durable medical equipment versus 
another plan's definition, for example--and highlight the 
important distinctions, for example, differences in premiums, 
cost sharing, which doctors and hospitals participate. This 
transparency is intended to stimulate competition among the 
health plans, much as FEHBP does. We are also working on state-
of-the-art shopping tools, such as virtually test driving a 
health plan before finalizing the election to enroll in it.
    The Connector also relieves small business of the burden of 
pricing, shopping, explaining, and policing a plan each year. 
Instead of reacting to their plan's annual premium increase, as 
so many employers do now, by shopping for a new one, they can 
leave it to the Connector to offer best in value and to their 
employees to comparison shop among pre-screened options. This 
promises significant administrative savings to small 
businesses, which hardly have the manpower, the expertise, or 
the time to go shopping for complex financial services like 
employee health benefits.
    Thank you for this opportunity to testify and I would be 
pleased to answer your questions.
    [The prepared statement of Mr. Kingsdale and an attachment 
follow:]
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    Chairman Kerry. Thank you very much, Mr. Kingsdale. That is 
very helpful.
    Mr. Sweetnam?

  STATEMENT OF WILLIAM F. SWEETNAM, JR., FORMER BENEFITS TAX 
   COUNSEL, OFFICE OF TAX POLICY, U.S. DEPARTMENT OF TREASURY

    Mr. Sweetnam. Chairman Kerry and Senator Snowe, I would 
like to thank you for this opportunity to testify before the 
Committee.
    As you have stated before, there are problems with the 
small business market providing health insurance coverage to 
their employees. The availability of HSAs and high-deductible 
health plans makes it easier for small employers to provide 
their employees with affordable health coverage. The purpose of 
my testimony is to urge Congress not to cut back on any of the 
tax advantages that are afforded to HSAs and to provide 
additional changes to the HSA rules which will make HSAs and 
high-deductible health plans more attractive to employers and 
employees.
    Small businesses are very cost sensitive when it comes to 
providing health insurance to their employees. As the cost of 
health insurance goes up, small business owners have few 
choices. One option is not to offer coverage if the cost of 
health insurance coverage is too large. Other options would be 
to increase the costs that employees have to bear to continue 
to have that health coverage.
    That cost increase to employees could come in different 
ways. One way would be to increase the premium that the 
employee pays to participate in the employer's health care 
plan. This, of course, raises the likelihood that the employee 
will decide that he or she cannot afford health care coverage 
and not participate in the employer's health insurance plan.
    Another method of controlling cost is to increase the 
amount of deductible under the health insurance plan or to 
increase the amount of copayments for each service or visit to 
the doctor. This helps keep the monthly premium down, but 
increases the cost for the individuals when using health care 
services under the plan. The fact that small businesses are 
already raising the deductible under their health plans is an 
important factor to remember when talking about Health Savings 
Accounts and high-deductible health plans.
    HSAs are really a funded account, similar to an IRA. A 
contribution to an HSA may be made within specified limits by 
individuals who are not yet entitled to Medicare or by 
employers on behalf of such individuals. Contributions to the 
HSA by an eligible individual are fully deductible by the 
individual making the contribution, regardless of whether the 
individual is employed. Amounts in the HSA grow on a tax-free 
basis, and if used for medical expenses may be withdrawn on a 
tax-free basis. Amounts may be distributed for non-medical 
purposes, but such distributions are subject to income tax and 
be subject to a 10 percent additional tax.
    In order to contribute to an HSA, an individual must be 
covered under a high-deductible health plan and may not 
participate in any non-high-deductible health plan, subject to 
certain exceptions. For 2007, a high-deductible health plan is 
defined as a plan with minimum average deductible of $1,100 for 
self-only coverage or $2,200 for family coverage. There is also 
an annual out-of-pocket cap for the HDHP. As with other 
traditional health insurance, premiums that the employer pays 
for the high-deductible health plan are excludable from the 
employee's income.
    The premium for a high-deductible health plan is usually 
much less than the insurance premium for typical health 
insurance. With the lower premiums, employers have savings that 
they can contribute to an HSA. In 2004, the first year that 
HSAs were available, there were many examples of small 
businesses that purchased high-deductible health plans for 
their employees and with the savings due to the lower premiums 
made contributions to the HSAs for their employees. I give you 
two examples.
    One, Activities Press of Ohio, a small business with 45 
employees, switched to an HSA-HDHP arrangement. They 
contributed $2,000 to their HSAs for employees with family 
coverage and $1,000 for employees with individual coverage. 
Their total cost savings after this switch was $56,500.
    Mercury Office Supply had 13 employees. They made 
contributions to the HSAs for their employees of $2,500 for 
those with families, $1,200 for those with individuals. They 
had savings of $12,000 in 2004.
    There is really little recent Government data on how many 
HSAs have been opened. That information would be derived from a 
compilation of income tax returns and that information is only 
available years after the return is filed. Since HSAs have only 
been available since 2004, there has not been enough time for 
an adequate determination from Government sources of the number 
of HSAs that have been established. However, industry surveys 
have shown a growth in enrollment from 438,000 in 2004 to 3.2 
million in 2006. In the small business market, enrollment 
growth is from 79,000 in 2004 to 510,000 in 2006.
    The survey also found that in the small group market, 33 
percent of the small group policies were purchased by employers 
that had previously offered no health care coverage for their 
workforce.
    In another study from the United Health Group, it found 
that despite fears that HSAs would appeal only to the wealthy, 
HSAs, they found, are utilized by consumers across all income 
ranges.
    Policy makers should not take from the current data that 
HSAs are not successful and that they should be curtailed. HSAs 
are a new product. There must be time given for them to be more 
fully accepted in the marketplace. You know, 401(k) plans were 
once new and untested, yet no one now believes that in the slow 
early years of 401(k) adoption we should have had Congressional 
action to eliminate the 401(k) plan as an alternative savings 
program. HSAs should have the same chance to mature in the 
marketplace as 401(k) plans did.
    Finally, I just want to mention that Senator Snowe has 
recently introduced legislation that will make it easier for 
small businesses to establish a cafeteria plan. The 
legislation, called the Simple Cafeteria Plan Act, will provide 
small businesses another way to offer cafeteria plans for their 
employees by providing that the non-discrimination rules will 
be met if the employer provides a matching contribution on 
behalf of lower-paid employees. This will provide one more way 
for small businesses to provide tax-effective health care 
coverage to their employees and Congress should seriously 
consider its enactment.
    I thank you for the opportunity to testify and I am 
available to answer any questions that you may have.
    [The prepared statement of Mr. Sweetnam follows:]
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    Chairman Kerry. Thank you, sir. I appreciate it.
    Ms. Sullivan?

  STATEMENT OF ANN SULLIVAN, FEDERAL LEGISLATIVE CONSULTANT, 
                 WOMEN IMPACTING PUBLIC POLICY

    Ms. Sullivan. Good morning, Chair Kerry, Senator Snowe. I 
am Ann Sullivan. I represent Women Impacting Public Policy in 
Washington. WIPP is a bipartisan public policy organization 
representing over half-a-million women and minorities in 
business nationwide, including 47 organizations as well as 
individual members. Thank you for holding this hearing. I am 
appreciative of the efforts that you have had in the past with 
regard to solving our health care issue and look forward to 
working with you this Congress.
    Every year, WIPP conducts an annual issues survey to its 
members. We are still in the stage of getting preliminary 
results, but we see a significant shift among our members on 
the health care issues. In past polls, our members have 
identified national trends before the rest of us do, so I would 
like to share these results with the Committee.
    There are two significant policy changes that we found in 
the health care questions in the survey this year. One, our 
members have shifted their thinking with respect to employer-
sponsored health care. When we asked the question, ``Do you 
believe that businesses, either large or small, should be the 
main provider of health care coverage for their employees'', a 
majority said ``no''. Our members do not believe health 
insurance should be the sole responsibility of employers. They 
believe the conversation around health care needs to shift to 
individuals, as well.
    When asked a question, a ``proposal pending in Congress 
would allow uninsured individuals to shop for health insurance 
across State lines, do you believe this proposal would result 
in providing more individuals with health care coverage,'' 64 
percent said ``yes''. This, I believe, is affirmation that 
changes have to occur to make the individual market strong 
enough to sustain the shift to individual coverage.
    The second policy shift reflected in our survey was a 
willingness by WIPP members to consider a number of different 
health care proposals being discussed in the Congress. When a 
question described a proposal by Senators Lincoln and Durbin 
clearly stating that small businesses could opt into the pool 
and that the insurance would be provided by private insurers 
rather than a Government program, preliminary results 
overwhelmingly supported that proposal--84 percent.
    When our members were asked whether States should require 
everyone to carry health insurance either by their employer or 
by themselves with State programs to assist those who fall 
below a set income level, 42 percent said yes and 39 percent 
said no. Small businesses who have operations in multiple 
States, even if it is one employee, find navigating multiple 
State requirements very difficult.
    This policy shift from employer provided to individual 
introduces a different way of thinking about health care and 
how to obtain it. President Bush, in his State of the Union 
Speech, proposed a shift from employer-sponsored health care to 
individual health care by proposing that the tax deduction be 
made available to individuals as well as employers. We note 
that States like California and Massachusetts, who are 
grappling with how to insure their residents, are proposing the 
responsibility of obtaining insurance lie with the individual.
    Having said that, the individual market as it exists today 
is not strong enough in our opinion to sustain a wholesale 
shift. According to the Kaiser Family Foundation, in 2005, only 
5 percent or 14 million Americans are insured through the 
individual market. A 2005 survey conducted by the Commonwealth 
Fund compared the experience of adults aged 19 to 64 in the 
individual insurance market compared with adults with employer-
based coverage. Adults in the individual market gave their 
health plans lower ratings. They pay more for out-of-pocket 
expenses for premiums. They face higher deductibles and spend a 
greater percentage of income on premiums and health care 
expenses.
    The only solution for small businesses and their employees, 
as we see it, is to strengthen those two markets. One is 
achieved by encouraging individuals to purchase insurance, the 
other panelists have talked about how it increases the size and 
strength of the pool. The second is to strengthen the small 
business market by increasing the bargaining power of a small 
business. That involves establishing large pools that can 
negotiate better prices with the insurers, and the reason 
behind WIPP's support in the past of the creation of 
association health plans or SBHPs for many years.
    Another proposal providing additional tax incentives to 
employers to offset the exorbitant price of premiums would be 
helpful to small businesses. I understand Senators Snowe, Bond, 
and Bingaman just introduced a bill to establish a simple 
cafeteria plan for small businesses and we welcome those 
changes to current law.
    The health care solution has many tentacles, such as using 
technology to centralize medical records, limiting medical 
malpractice, and instituting healthy employee programs to 
reduce medical claims. While we do not believe universal health 
care run by the Government as opposed to the private sector is 
a good solution, we are open to ideas on how best to increase 
the buying power of individuals and small businesses for their 
health care.
    We are not as presumptuous to suggest that we have the 
solution, but we live with the problem every day. We believe it 
is a reasonable request from our membership that Congress take 
action to ensure that small businesses can offer health care to 
employees at reasonable rates or make it possible for employees 
to obtain individual insurance at rates they can afford. When 
large employers and small employers are saying the system is 
broken, when 46.6 million Americans are without health 
insurance, it is time for the Federal Government to adopt 
changes which will make the small business and the individual 
market work.
    Thank you.
    [The prepared statement of Ms. Sullivan follows:]
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    Chairman Kerry. Thank you. Thank you very much, Ms. 
Sullivan.
    I am trying to figure out where to begin because it is a 
big menu out there. Let me ask you, Mr. Sweetnam, if Senator 
Snowe and I said to you, look, we want to reach beyond just 
small business, you can write a health care policy for the 
entire country, would you just be content with HSAs?
    Mr. Sweetnam. I think the HSAs provide one way of getting 
people appropriate health insurance. I think that what we are 
seeing is that companies are moving to higher and higher 
deductibles. The problem right now with the way that our tax 
policy works with regard to the health insurance is that if I 
receive my health insurance through my employer, anything that 
goes through my employer is tax excluded, so I don't pay any 
tax on that at all. If I pay for it by myself, I don't get a 
deduction. I get an itemized deduction, but it is only if you 
are above 7.5 percent of adjusted gross income. That very 
rarely happens. So really, unfortunately, as the deductible 
goes up, you are pushing more and more costs onto the employee 
and the employee doesn't get the tax benefit of being able to 
do that.
    Using an HSA, I can use that HSA and get the tax deduction 
when I use it for the----
    Chairman Kerry. I completely understand the benefit of the 
tax deduction to the person who gets it. I obviously understand 
that. My question to you is, if you were tasked with the effort 
to write a plan that is going to cover everybody, would you 
just have a plan that had HSAs?
    Mr. Sweetnam. No. I would continue----
    Chairman Kerry. What else would you do?
    Mr. Sweetnam. I would continue to give the employer the 
opportunity to offer all different types of health plans, 
depending on what their particular marketplace----
    Chairman Kerry. So you would give them the opportunity----
    Mr. Sweetnam. Right.
    Chairman Kerry. Would you mandate that opportunity? We want 
to get everybody covered.
    Mr. Sweetnam. I guess my personal background is not to 
mandate but to give incentives to have people--have employers 
get into coverage.
    Chairman Kerry. Notwithstanding the fact that experience 
has shown that it won't necessarily cover people, because 
people don't always take advantage of incentives, do they?
    Mr. Sweetnam. Well, people don't always take advantage of 
incentives, but I think that the other side would be to require 
employers to provide coverage and then what you are really----
    Chairman Kerry. That is what happened in Massachusetts with 
the support of the business community.
    Mr. Sweetnam. I understand. The issue that I think people 
are trying to wrestle with there is what are the costs that are 
then going to come out of requiring your employers to do 
things.
    One of the other issues that you have to worry about is 
under ERISA, the Employee Retirement Income Security Act, there 
are restrictions on State mandates on various types of employee 
benefit plans so that you are going to see challenges under the 
Massachusetts law as you have seen challenges under other State 
law mandates. If Congress wanted to allow State law mandates, 
they would have to go in and they would have to change ERISA.
    Chairman Kerry. Well, I mean, you have got to change what 
you have got to change here. There are going to have to be a 
lot of changes in order to effect this. But if deductibles, if 
the higher deductibles are increasingly what is happening, and 
that is what is happening, I think we are shifting from defined 
benefit to defined contribution and they are going out and 
getting higher deductibles because it is all they can afford 
because the premiums are such that it is the only way to bring 
the premium down. So they take their whack and they hope they 
don't get sick. If they get sick, they wind up paying a heck of 
a lot more.
    The question is, how do you counter that trend without 
expanding the pool, and that comes back to what all of you have 
said. A broader pool with more participation means a lower 
cost, correct? If you leave it completely to the marketplace, 
you have no effective leverage over the size of that pool.
    Mr. Sweetnam. Well, there----
    Chairman Kerry. Or even its makeup.
    Mr. Sweetnam. I mean, there have been a number of proposals 
that--and I believe, Senator Snowe, you worked with regard to 
AHPs, Association Health Plans, that have sort of looked to 
expand the pool of those being insured. One of the things that 
occur when you are expanding the pool in AHPs is what you are 
overriding State insurance mandates, which has been one of the 
reasons why people have been against expanding under AHPs.
    So I guess one of the tough decisions that we have to make 
is whether we want a plan that is developed in Washington that 
sort of says, OK, we are going to set what the rules of the 
game are across all the various States, and that is pretty much 
what we have with employer-sponsored plans under ERISA, or do 
we want to let the States come in and do individual mandates 
that they want in the States.
    I think the----
    Chairman Kerry. Well, they are doing that now. That is what 
the States have now.
    Mr. Sweetnam. And I think that is one of the problems that 
you are seeing with high insurance costs in the individual 
marketplace. So if----
    Chairman Kerry. Well, but there is a balance here. There is 
a public policy balance, and this is tricky. Senator Snowe and 
I worked very hard last year to see if we could get together on 
that and we certainly tried to bring in some colleagues outside 
of this Committee who are important to the health care debate. 
That issue of the mandate and standard quality that you are 
going to provide is really a key issue.
    We all agree that we want to expand the pool. I mean, that 
is just common sense. Bigger pool, more people participating, 
risks spread more intelligently, hopefully lower cost, and 
usually lower cost. So that makes sense.
    The problem obviously comes in, and you are mentioning it, 
when you are trying to expand that pool across jurisdictions 
that have different requirements of what they think is quality 
care. In some States, people think that one screening for 
cancer or a mammary gland scan per year or one pap scan, one 
whatever is a fair standard of quality of care and then absent 
that, there is a history of people being ripped off, of plans 
that don't give you much and try to cherry pick and keep the 
healthy and get rid of the sick and push the sick onto the 
Government and we will charge good premiums to people who 
aren't going to wind up using our service, which is a really 
nice business, but it is not insurance.
    Insurance is supposed to be that when you buy your home, 
you insure against fire, flood, theft, whatever. There is an 
actuarial table that figures out how often in that particular 
area that happens and the risk is spread. We don't do that in 
health care. It isn't insurance. It is called insurance, but it 
is not insurance.
    So how do you sort of skin this cat of trying to maintain a 
high standard of care and still expand the pool--and I would 
like to get more people into this discussion--so that you are 
not lowering the quality of care? The unfortunate history of 
the marketplace is, and I am not saying everybody behaves this 
way, but there is a long history of people trying to get us to 
legislate their monopolies, a long history of people trying to 
scheme the market in a way that they are minimizing their costs 
and maximizing their profit. We all understand that is the 
nature of the beast. And so we eventually had the development 
of consumer standards, consumer protection at FDA, FTA, 
different kinds of things, because you wanted to prevent that 
kind of practice.
    The same thing is true in health care. We have had fraud 
within Medicare, fraud within Medicaid. I mean, all these kinds 
of things happen because people try to walk away with profits 
unduly. So how do you balance that in terms of these pools, 
where you can expand the pool, maintain a high quality of care, 
not have the cherry picking, and not allow for a kind of 
dumbing down, if you will, of what is provided to people as a 
consumer choice?
    Ms. Senkewicz?
    Ms. Senkewicz. Thank you, Senator Kerry. Yes. I think that 
is a really important issue, but it raises a question that I 
think we need to address, and one is a serious dialogue between 
the Federal Government and States, which I don't really think 
has thoroughly occurred, because obviously we do have issues 
here with various State laws on mandates, on rating rules, a 
whole variety of things with respect to insurance.
    But what we do need are larger pools. So in order to expand 
pools and maintain that quality of care, though, if we enter 
into a dialogue with the States to retain the partnership, 
because believe me, the Federal Government doesn't want to go 
taking over the regulation of insurance. The States do a lot of 
things very well in that regard. I believe the Senators need to 
sit down with the National Governors Association, the National 
Conference of State Legislatures, the NAIC, and begin to try to 
coalesce around standards that are acceptable nationally, but 
then a national standard could be set that the States could 
then administer. And the same thing will work with regional 
pooling across State lines, as well.
    Chairman Kerry. When you said national standards would be 
set, what happens when one State has a very high level of care 
and the national standard doesn't achieve it? Are they going to 
feel you are requiring something less than what we think our 
citizens ought to get?
    Ms. Senkewicz. Yes. Clearly, compromise is involved here, 
and that is why I am saying a long dialogue and a fruitful 
dialogue and hopefully compromises can be reached. But clearly, 
you are not going to be able to satisfy--I mean, hopefully, you 
can reach the point where everyone is satisfied, but clearly, 
there will have to be compromises if we are going to be able to 
create larger pools across State lines, because that is an 
issue.
    I worked in Wyoming. Wyoming has less than 500,000 people. 
I understand Senator Snowe's concern about competition, but on 
the other hand, there are only less than 300,000 or 200,000 
people in Wyoming to be insured not through Medicaid or 
Medicare. There are only so many people among whom to spread 
that risk. That is why you need to cross State lines to create 
larger pools so that you can have more competition, because in 
States like that, it is not viable for many insurers to pick up 
10 percent of the market and be able to compete.
    Chairman Kerry. How do you feel about--I mean, I would like 
each of the others here to comment on the tax approach, as in 
how far do you see the tax approach being able to have an 
impact.
    Ms. Senkewicz. I think that the tax approach in its variety 
of forms can nibble around the margins, nibble around the 
edges. For example, as you mentioned in your opening statement, 
Senator, President Bush's deduction proposal, sure, that would 
help me personally. I am not getting anything now being on my 
own, self-employed, but I think that, No. 1, it is not equal. 
No matter what, I could go out and shop for some really cheap 
high-deductible plan and still get the same deduction as 
somebody who has a more comprehensive plan. And secondly, as we 
have all mentioned, the way the individual market works today, 
we have got to be careful about pushing people into the 
individual market where they may not be able to get insurance. 
But tax credits, that is another thing that can help, obviously 
can help people.
    The whole high-deductible issue and the tax incentives 
there, I think you hit it right on the head. That is a niche 
market. If I am a low-wage worker, which three-quarters, 
apparently, of the unemployed [sic] are connected to or are 
low-wage workers, a $10,000 deductible plan is not going to 
help me. If I still have to pay out of my pocket up to whatever 
hundreds of dollars a month and then still have to run through 
$3,000 or $4,000 or $10,000 to get coverage, I am not going to 
invest in that.
    Chairman Kerry. One last question before I turn it over to 
Senator Snowe. Mr. Kingsdale, how does the Massachusetts 
experience address both of these issues, the tax piece that Mr. 
Sweetnam was talking about and this pool piece?
    Mr. Kingsdale. Well, to take the tax piece first, we are 
working hard in a, frankly, somewhat cumbersome manner to 
expand tax deductibility for employees by creating a pool, in 
effect, for cafeteria Section 125 plans and by mandating that 
employers with more than 10 employees offer, even if they don't 
pay for insurance for their employees, they offer this payroll 
deduction.
    Frankly, it would be very helpful in dealing with the issue 
of affordability to have a clear, simple way for everyone, even 
individuals, to take advantage of the tax incentives available 
to employees typically to purchase insurance.
    I would note that the question in my mind is why don't all 
employers offer a Section 125 plan? There is literally a 48 
percent tax subsidy available to a dollar in premium 
contribution by the employee or the employer versus putting 
that dollar into wages. So I would like to see that made 
available to individuals and to smaller employers, as well.
    On pooling, that is an important issue. This market, and I 
was 25 years on the insurance side of it, doesn't work very 
well at the small end. You don't have to have--when I say big 
end, you don't have to--a couple hundred thousand is a huge 
pool. That is perfectly fine, frankly, for spreading risk. But 
it doesn't work very well for 10, 20 employees or for an 
individual because of all the selection dynamics.
    So you do need a set of regulations, and clearly, we need 
to either do it at the Federal level or at the State level. To 
refer back to your reference to Senator Kennedy, there must be 
10 or 12 different ways to do this. We seem to have a pretty 
good consensus at the national level that we ought to have 
insurance. We have lots of different ideas at the State and 
local idea about how.
    And so, since regulation is currently vested at the State 
level, since we have a lot of regional differences, I think 
that it makes a lot of sense to look at Federal encouragement 
but State pooling arrangements. Otherwise, there are a whole 
bunch of other issues that the Federal Government is going to 
have to take on if you want to structure effective pools across 
State lines, in terms of shaping participation and regulating 
the sale and purchase of insurance that you are just going to 
have to take on as part and parcel of cross-State regulation. 
And that may be the decision you want to take, but I think 
there are some good reasons to encourage Statewide and within-
State efforts to do that.
    Chairman Kerry. Thank you.
    Senator Snowe?
    Senator Snowe. Thank you, and thank you all for great 
testimony.
    Ms. Senkewicz and Mr. Bragdon, maybe you could just talk 
for a minute about minimum benefits. One key challenge, when we 
considered small business health plan legislation on the floor 
last spring was the minimum benefits package, and I know, Ms. 
Senkewicz, you were speaking to a national standard. Would you 
support a regional approach?
    Ms. Senkewicz. Yes. I think anything that promotes better 
pooling with addressing the adverse selection issues is a 
reasonable way to go, and it could be regional or it could be 
national.
    Senator Snowe. We, and Mr. Bragdon, you were illustrating 
that point with New England and talking about the 55 benefits 
that were available in one or more States. Would you support a 
regional approach in that sense? You mentioned the Medicare 
Part D as sort of a template for that, and that is an 
interesting thought in terms of crafting regions across the 
country. How would you design a benefits package for a regional 
approach?
    Mr. Bragdon. I think there are two things you can look at. 
You can look at the minimum provider and mandated benefits. But 
separate from that and where, in particularly, in Maine we have 
lots of challenges are the mandates regarding rate regulation 
and how much variation you can have in premiums depending on 
the age or gender of the workforce. So I think we need to 
separate these issues in the policy discussions. I think for 
provider and benefit mandates, it makes a lot of sense to have 
a regional approach. What I think you will need to separately 
look at, though, is how can you adequately provide flexibility 
so that premiums can be attractive, so if you have a business 
with lots of young employees, it is attractive for them to buy 
into the market and share risk with a small business that might 
have a lot of near-retiree employees.
    Senator Snowe. It is sort of interesting because the 
regional approach that Senator Kerry and I had designed 
required that minimum benefits package would include the 
majority of benefits that are offered within a majority of 
States in that particular region, which is one way of sorting 
through it. I had the amendment on a 26-State threshold, for 
example, that I would have offered to Senator Enzi's 
legislation on the floor, but we never got to that point. We 
couldn't get beyond cloture. But nevertheless, that was another 
idea to establish a minimum benefits package. I notice that you 
said there are 16 benefits in the New England region that 
essentially are in the majority of States, is that correct?
    Mr. Bragdon. Correct.
    Senator Snowe. So a minimum benefit floor would obviously 
minimize the discussion and the debate because it became 
controversial about preempting all benefits, so trying to 
establish that benefit either on a national basis or on a 
regional basis. Yes?
    Ms. Senkewicz. Very briefly, Senator, one other way to 
approach it, aside from counting up States, is to benchmark it 
to an existing package, for example, the FEHBP or some other 
existing package that has a good solid benefit structure.
    Senator Snowe. No, that is a good point. I think we were 
within the realm, but that is an interesting measurement in 
making it competitive and attractive.
    Did you want to say something to that point?
    Mr. Bragdon. I just think it is so important in this whole 
conversation about a minimum package or minimum benefits to 
recognize that people place very, very different value 
propositions on health insurance depending on where they are in 
life, and a lot of people who tend to be uninsured are young 
people who are not going to spend a lot of money for a package 
that they have a very low chance of using, regardless of what 
the deductible is.
    There is a great example of this with Southern Maine 
Community College requires health insurance now for the first 
time for students taking more than 12 credit hours. They had a 
significant increase in the number of students enrolled at the 
campus, but a decrease in the number of credit hours. Students 
didn't want to pay the $250 a year for the health plan, so they 
took fewer classes.
    Senator Snowe. Was it offered by Southern Maine Community 
College?
    Mr. Bragdon. Through the community college.
    Senator Snowe. Through the community college.
    Chairman Kerry. Could I just interrupt for one second? But 
at the same time, that is where this issue of mandate comes in. 
Don't we have a responsibility to say, look, they pay into 
Social Security, too, but they have absolutely zero chance of 
using that until they are 65. So why shouldn't this be the same 
way? If you are going to spread risk, you spread risk 
appropriately and you may or may not use it when you are young. 
If you have a car accident or you fall off a building or 
something, you are going to use it, and you can't predict that. 
So why shouldn't we mandate it? That was the decision we made.
    Mr. Kingsdale. I am certainly not going to speak against 
mandating. I do think that it is important to distinguish two 
elements, though, Senator. One is asking everybody to 
participate in the program--that is what Massachusetts is 
doing--and deciding what it is they have to buy. So the 
question of participation in the pool is one, but what do they 
have to buy----
    Chairman Kerry. But Senator Snowe was talking about a 
minimum package----
    Mr. Kingsdale. Right, and so I think it is important, 
thinking about the 25-year-old or the 22-year-old you just 
cited, and Massachusetts actually requires students to 
participate, but in a very, very slimmed down insurance 
package. It is important to think--underline the word 
``minimum.''
    Chairman Kerry. Thank you.
    Senator Snowe. I think the design of the 26-benefit mandate 
was tied to the Federal employees' three largest plans and how 
they were offered, but anyway, that is one of the obstacles.
    The second obstacle is the at risk and the multi-State 
pooling and community rating and whether or not to create--what 
kind of standard do you create. Now, Maine has a modified 
community rating, as Mr. Bragdon knows. Other States have rate 
bands so it allows greater variations in the premiums. Does 
anybody want to tackle that question, because that is one of 
the other challenges in crafting legislation as to whether or 
not you go less or more in terms of how are you going to rate 
these products.
    Mr. Bragdon. I think it makes sense to probably have some 
sort of limitations on variation according to health status 
because you don't want to significantly punish people just 
because they happen to, in many cases, have bad genes, if you 
will, and have certain health conditions. So it makes sense to 
limit variation based on health status to some reasonable 
range. I think the NAIC standard is plus or minus 25 percent.
    I think other than that, though, you need to recognize that 
that kind of premium variation reflects in many cases the value 
that the people buying the product will place on it. If it 
costs me as much to buy life insurance at 31 years old as it 
would at 61 years old, I wouldn't have it right now. Yet for 
some reason, when we get into the health insurance world, 
people so often assume that individuals aren't going to make 
those same economic trade-offs.
    Senator Snowe. Mr. Sweetnam, on HSAs, do you think there 
are any other changes that we should make to the HSAs to 
improve them? We made some technical corrections in the last 
Congress, but should we go further in any way to make them 
attractive? I like the idea of this whole auto-enrollment on 
health care, by the way. I think that is an interesting 
concept, comparatively speaking with the 401(k)s that we 
enacted, as well, to have people automatically enrolled. I 
think that that is really a good idea, frankly.
    Mr. Sweetnam. The legislation that you had recently passed 
at the end of last year went very far and did some really very 
good things in order to make it easier for companies to offer 
HSAs and to give them an ability to sort of move from a 
traditional model into an HSA model.
    There are a few things that the President has proposed in 
his budget which would be helpful, such as saying that if you 
could give a higher contribution on behalf of someone that is 
chronically ill, then you can under the current laws, or ways 
that you can design a high-deductible plan that is not like our 
high-deductible is under current law. The high-deductible now 
is you get no coverage up until you reach a dollar amount and 
then you get coverage after that. It says, the type of 
qualifying plan could be--let us say that you pay 50 percent, 
the insurance pays 50 percent of the benefits up until a 
particular point. As long as the premium is about the same, 
people should get the same ability to go into an HSA.
    I mean, those are little, incremental steps. I think that 
right now, I mean, we had such a sea change when we moved in 
2004 and 2005 with HSAs and I think right now, let us try to 
see how they develop. We did an awful lot of regulation when I 
was at Treasury and trying to set these things up and give a 
lot of guidance. I think just little things, I don't think 
major wholesale changes, need to be made.
    And just sort of as another point, you do make a very good 
point about automatic enrollment in plans. It is something that 
can be done under the Internal Revenue Code, and in fact, there 
were a number of rulings that we had given in the Internal 
Revenue Code allowing this sort of automatic enrollment.
    One of the things that you have got to wrestle with is what 
happens if somebody doesn't remember that he decided that he 
didn't want to enroll, and so you have to map out the way that 
people can get out of those automatic enrollment, and that is, 
I think, a place where legislation could be helpful, much like 
last year's legislation, the automatic enrollment in 401(k) 
plans. As a retirement policy person, that was the best thing 
that you guys did in that bill and that is the sort of thing 
that I think really helps savings. If you did something like 
that in health care, and you gave people the way that they can 
back out--I think that would really help a lot, too.
    Senator Snowe. Thank you. Thank you very much, Mr. 
Chairman.
    Chairman Kerry. Thank you, Senator Snowe.
    Senator Thune?
    Senator Thune. Thank you, Mr. Chairman and Senator Snowe, 
one, for holding this hearing. I think it is a really important 
issue and I want to thank our panelists for sharing their 
insights and experiences with us regarding solutions that would 
help quell the rising cost of health care for small businesses.
    The estimates are that about half of the 45 million 
uninsured Americans are employees of or are family members of 
employees who work for small businesses. In 2003, only 43 
percent of small businesses with 50 or fewer employees offered 
health insurance to their employees. In my State of South 
Dakota, only 34 percent of small firms offered health 
insurance. In contrast, firms with 50 employees or more offered 
health insurance to 95 percent of their employees.
    So clearly, this is an issue which profoundly impacts small 
businesses and the No. 1 reason cited by small businesses for 
not offering health insurance is the high cost. Obviously, 
coming up with solutions that promote or put in place 
incentives for small businesses to offer their employees health 
benefit options is really important, and some of the things 
that have been discussed earlier today move in that direction.
    I was disappointed, as were a lot of others, that we 
weren't able to bring to closure bipartisan legislation that we 
have talked about around here for a long time on small business 
health plans during the last session of Congress. I have 
supported that since my arrival here as a Member of the House 
back in 1996, and again, I think it is really important that we 
figure out a way for small businesses to drive down the 
administrative costs that they have to deal with when they 
offer plans and I think that the concept of small business 
health plans, or as they were once referred to, association 
health plans, really move us in that direction and so I would 
have liked to have seen that enacted and I hope we will get 
some action on it yet in this session of Congress.
    Just a couple of questions. I appreciate some of the 
testimony that has been provided with regard to the 
Massachusetts plan. I applaud Massachusetts for taking the 
initiative to provide health care coverage for the uninsured 
and folks in your State. I guess my question has to do with, 
and I know it is probably a little early to determine whether 
or not and how that is working, but States that are taking 
initiatives to help the uninsured in their States, the one 
concern I have is, is there cost shifting that it creates 
between the State and Federal Government? Can you comment on 
how, if any, the new Massachusetts Health Insurance Connector 
Authority shifts costs? I guess that would be for Mr. 
Kingsdale.
    Mr. Kingsdale. Sure. I would be happy to. Thank you, 
Senator. There are a number of different ways cost shifting can 
occur and I am not sure I am going to hit exactly the right one 
that you had in mind. Let me try and you can point me in 
another direction if I am not addressing your question.
    There is behind this reform a principle of shared 
responsibility, so we have individuals who have to participate, 
employers who have to participate financially, and 
significantly subsidized insurance available for low-income 
workers and others who are uninsured, and that is available 
through an expansion of the Medicaid program and the 
development of a new program that the Connector offers. Both of 
those, as you are well aware, are State and federally financed.
    So in that sense, as we expand coverage--and this is 
expensive stuff, there is no question about it--there are costs 
to State and Federal Government for both tax subsidies for 
people and employers who buy it on their own and more direct 
subsidies through Medicaid and the so-called Commonwealth Care 
Program that we started, which inure to both the State and the 
Federal Government.
    Senator Thune. The Federal Government does have caps for 
total Medicaid spending in the individual States, is that 
correct?
    Mr. Kingsdale. Yes.
    Senator Thune. In your plan, how do you define the fair and 
reasonable contribution for employers?
    Mr. Kingsdale. Well, it is under draft regulations right 
now and it is defined as one of two tests. An employer must 
pass either one of the following two tests. One is that 25 
percent of the employees actually participate in the employer-
sponsored plan, and the other one is that the employer 
contribute a minimum of 33 percent towards individual coverage, 
20 percent towards family coverage on behalf of his or her 
employees. So either test.
    Senator Thune. OK. And that 20 percent and 33 percent of 
the total cost of----
    Mr. Kingsdale. Health insurance.
    Senator Thune. OK. Let me just, if I might, direct a 
question to Ms. Senkewicz. You had mentioned in your 
testimony--cautioned against too much choice for individuals in 
choosing health care plans, and I think you did mention 
Medicare Part D as an example of that. I guess the thing that 
we--the experience at least so far, and this is fairly early on 
in terms of Medicare Part D, too, is that it does have the 
potential to drive health care costs down. We have seen the 
Part D premiums are about 40 percent lower than they had 
initially been estimated. And so far, knock on wood, there is 
about an 80 percent satisfaction rate of those participants who 
enrolled in the Medicare Part D program.
    So I guess my question is, could you elaborate on how the 
competition promotes inefficiency? I mean, we would like to 
think of it as----
    Ms. Senkewicz. Sure.
    Senator Thune [continuing]. Competition working to drive 
costs down and create----
    Ms. Senkewicz. Actually, I was talking more about 
inefficiency of consumer output. I mean, anyone who had to deal 
with a parent in Part D, it was just enormously time consuming 
to actually try to go through every plan that was available, 
and I am just not sure that, while everyone is--the 
satisfaction rate is high, you really never do know, in fact, 
whether you have the best plan for you in Part D. You just 
don't. I mean, to a certain extent, it was just, let us hope. 
So I just think that there is a balance to be made. To have to 
choose from several tens of plans or a hundred plans, I just 
don't think is the most efficient use of consumer time in order 
to get them into the best plan for them. I mean, there is a 
balance.
    Senator Thune. Right.
    Mr. Kingsdale. If I may add a comment on that, we have 
actually done market research at the Commonwealth Connector, 
what kind of choice do people want who are uninsured, and what 
we hear is they would like, to illustrate on this chart, 
different levels of coverage, so what we have labeled premier, 
which is pretty comprehensive, all the way down to very basic, 
and four to six plan options at each of those levels.
    So I think it is a matter of striking a balance between 
overwhelming choice and what unfortunately is typical in the 
small business world today, which is your employer picks your 
health plan and you have no choice, which as I stated earlier--
I think you were out of the room--leads to employee 
dissatisfaction and leads to a development or a design of plans 
to the lowest--to the single common denominator, so a narrow 
network plan or a plan with aggressive pharmacy management 
programs or other innovations that might appeal to Mary and not 
to Joe are not available for Mary and Joe to choose between 
when the employer picks only one.
    I think we are trying to strike the right balance. In fact, 
we have prequalified plans and asked the employee to make some 
choices rather than make the employer, a three-person shop, go 
out and shop health insurance, which is a complicated selection 
every year.
    Senator Thune. Well, I know as a practical--go ahead.
    Ms. Senkewicz. I am sorry, just one thing. But what he 
talks about, Senator, is you are talking about common elements, 
too, which is one thing that is not present in Part D. You are 
talking about the apples-orange comparison, which I think helps 
a lot when you are doing apples to apples.
    Senator Thune. As a practical matter, and I will say 
because my father is 87, my mother will be 86 here in a few 
months, as we went through the Part D thing, yes, it was 
numbing in terms of seniors trying to go through, but it does 
strike me, too, that having lots of choices is a high-class 
problem to have. But from a practical standpoint, when you are 
talking about an elderly and a senior population, you obviously 
want to make it as user-friendly as possible.
    Thank you, Mr. Chairman, and I thank the panel.
    Chairman Kerry. Thank you, Senator Thune.
    Senator Cardin?
    Senator Cardin. First, let me apologize for missing your 
testimony. My staff was here and I assure you that I am very 
much interested in the issues involving small business and 
health care. I can tell you, I hear more about that from my 
small business community than any other single issue. We need 
to be more aggressive in how we help companies and their 
employees deal with the health care dilemmas that we have in 
this country. So, Chairman, I look forward to reviewing the 
testimony and I thank our witnesses for being here.
    Chairman Kerry. Thank you very much, Senator Cardin.
    Let me make clear that my reaction to the HSAs is not that 
it is a bad idea per se, but that it is sort of free-standing 
out there, that there is not a lot of other effort. You have 
got the health plan, the association health plan effort, and 
the HSAs have been the only really two things on the table for 
the last years. They really don't address the large uninsured 
population, the low-income population, or the cost reduction 
issue, or affordability issues for most people. Would you not 
agree with that fundamentally?
    Mr. Sweetnam. I think there have been a few other things 
like tax credits being provided both for individuals and----
    Chairman Kerry. Well, I have recommended we put those out 
there, but we have never had a serious bite at them from any 
Committee or any budget.
    Mr. Sweetnam. But I would tend to agree with you, Senator, 
that there hasn't been a concerted effort.
    Chairman Kerry. So my desire would be--you know, there are 
things that--I mean, I like a big menu and the more you can 
have people choose. That is America, and the marketplace ought 
to be that way. But what is happening is we are putting our 
focus and our energy into these narrow areas where the return 
on investment of that energy is not significant enough to the 
health care system, which is why the States are now jumping up 
and saying, we are going to do something. I mean, when 
California, the sixth largest economy in the world, steps up 
and says we have got to do this, it ought to ring some bells 
around here.
    The Kaiser Family Foundation did a survey last year of 
enrollees in the high-deductible plans with HSAs. Are you 
familiar with that?
    Mr. Sweetnam. Generally.
    Chairman Kerry. Sixty-four percent of the people who 
participated said that they participated to get the lower 
premium option. Sixty-one percent participated because it would 
be a savings account for future expenses. Now, would you agree 
that the savings account incentive is an important incentive?
    Mr. Sweetnam. That is one of the helpful things. I think 
people have been--they don't like cafeteria plans because when 
they put their money into a cafeteria plan, they lose it at the 
end of the year.
    Chairman Kerry. This way, you have a pot of money at the 
end that you can use. Now, that said, let me ask you this. The 
tax code itself, we have created other savings incentives in 
the tax code. Wouldn't it be more efficient to provide tax 
relief that helps with the cost of insurance and let the 
incentives in the tax code for savings take care of themselves 
for future health care?
    Mr. Sweetnam. Well, really, you are in a way incenting 
lower cost, because the only way that you can make a 
contribution into an HSA is if you go into a high-deductible 
health plan and a high-deductible health plan has lower 
insurance premiums than the traditional insurance. So yes, I 
would say that you are----
    Chairman Kerry. Fair enough, but that is really a cost 
shift. It is not a cost deduction, in fairness. It is a cost 
shift to the consumer. It hasn't done anything to reduce the 
fundamental cost or the rise in the premiums for the benefit 
you might get somewhere else. I don't accept that. It is not a 
cost reduction. It is a cost shift. It is a shift from the 
insurer or the business, where the cost of doing that business 
was, No. 1, deductible, and No. 2, transferred to the product, 
the cost of goods, to purely shifting it to the individual 
consumer who just picks it up willy-nilly. I don't think it is 
an efficient system at all.
    Mr. Sweetnam. I think that it is driving individuals to be 
more efficient consumers. I mean, as a staffer, you always 
hated when somebody used themselves as an example, but I will 
do that anyway. I just did my first HSA this year. I had to put 
my money where my mouth was. I regulated HSAs for 4 years. I 
probably should join one. And what I have found, I do take a 
lot of drugs, prescription medications----
    Chairman Kerry. The right kind.
    Mr. Sweetnam. Yes, the right kind.
    [Laughter.]
    Mr. Sweetnam. No, once I left Government, I didn't need as 
many drugs.
    [Laughter.]
    Mr. Sweetnam. What I found is that I do get cheaper costs 
on my drugs because I have been doing generics. And, in fact, 
my pharmacist makes sure that he recommends the generics to me. 
So I would say that that is a cost savings and not a cost 
shifting. So by being a more effective consumer, I think that--
and that is what HSAs and high-deductible health plans are 
intended for you to do--I think that that does bring some cost 
savings into the system.
    Chairman Kerry. But here is the critical point, is you 
weren't uninsured before you did that.
    Mr. Sweetnam. No, that is for sure.
    Chairman Kerry. That is the bottom line.
    Mr. Sweetnam. But as we found, a third of the people that 
take HSAs were currently uninsured before, so there must be 
something there for them. If it is just the low premiums on the 
high-deductible health plan, that is something. That is 
something.
    Chairman Kerry. Well, the Employee Benefit Research 
Institute did a report which said only 1 percent of the 
privately-insured population ages 21 to 64 are enrolled in 
high-deductible plans including an HSA, and it said that they 
are no more likely to have been uninsured prior to enrolling in 
their plan than those in the comprehensive plan.
    Mr. Sweetnam. That is true, but look at the data that they 
are looking at. The data that they are looking at is the first 
year in which HSAs have been available and so I----
    Chairman Kerry. Well, here is the bottom line. The bottom 
line is that I think you have agreed with me that it would be 
more valuable for us to put our energy into a broader-based 
effort to be more inclusive and to reach the uninsured and that 
HSAs may be part of the mix but they shouldn't be the sort of--
--
    Mr. Sweetnam. I think that HSAs are a very important thing, 
but yes, I think----
    Chairman Kerry. The problem is, we keep considering them 
free-standing, not as part of a mix. And if they are part of a 
mix, I am a happy puppy, but I am concerned that they are not 
and are sort of out there as, boy, here is our plan for 
America. We are going to have an HSA. We are going to have 
association health plans, which just don't do what we need to 
do to broaden participation, access, and cost reduction. And 
access and cost reduction are going to come through a more 
comprehensive approach.
    Yes, Mr. Kingsdale?
    Mr. Kingsdale. Just very briefly, and this may sound self-
serving and parochial, but why not. You know, in Massachusetts 
we spent 3 years building a consensus to do health reform and 
we will spend another 2 years trying to define it and implement 
it. So it is a 5-year process. This is 16 percent of GDP. It is 
a huge effort to refinance it.
    There seems to be a consensus in this country that we ought 
to have broader access to financing health care, but lots of 
different approaches that necessarily have to take some local 
conditions into account. To the extent that Congress and the 
Federal Government were to provide incentives, encouragement, 
sticks and carrots, if you will, and they clearly did in 
Massachusetts--there was, as you well know, $385 million a year 
in Federal dollars on the table to be lost if everybody 
retreated to their corner rather than come to agreement. If 
similarly there were significant incentives for other States to 
act, I believe that, as you have noted, there are a lot of 
States that want to act. It will take a long time to do it and 
it has to be somewhat locally tailored. So that kind of 
Federal-State partnership, I would recommend, coming back to 
your concern, how do we deal with the whole issue, is a very 
good model.
    Chairman Kerry. Do you think that in looking at the pools--
take a State like Maine where the cost of living is less than 
Massachusetts, it also has a different income scale--that you 
ought to look at a different kind of pool, for instance, Maine 
maybe linking to more rural and alternative kinds of pools 
where you might find an easier marriage to the mandates or to 
the plans offered, or is that discriminating against them?
    Mr. Kingsdale. I think Mr. Bragdon should answer that, but 
I want to make two quick points. One is probably there are 
different circumstances in Maine than Massachusetts that 
justify a different approach, but more importantly, this is 
really tough political stuff and the solution has to be bought 
into by those who know and work in Maine.
    Chairman Kerry. Mr. Bragdon?
    Mr. Bragdon. I think that it is OK to link those different 
regions if you are going to set up a system where you provide 
people with lots of different options so that they can then 
pick the option that makes the most sense given their own 
economic family situations.
    I think you are absolutely correct. Maine is a low-income 
rural State. Hopefully, we won't always be, so maybe in a way, 
if you link us with other States, providing options, making 
health care more affordable, it will allow entrepreneurs and 
small businesses to flourish.
    Chairman Kerry. That is why I raised the discrimination 
issue. So the key would be the menu that you provide, the 
options that you provide, but again, you would have to have 
some sort of affordability sliding scale, wouldn't you?
    Mr. Bragdon. I think ideally, yes.
    Chairman Kerry. Senator Cardin?
    Senator Cardin. If I may follow up on that, one of my 
concerns, if we are dealing with affordability of health care, 
it is a national issue. We have to deal with the cost centers 
of the number of uninsured, the high cost of prescription 
medicines, how we get long-term care, and the whole gamut of 
issues. My own State of Maryland has small market reform to try 
to help small business and I believe it has been effective in 
Maryland. Is it solving the problem? No, it is not. Do we need 
national help? Yes, we do.
    But one of my concerns is that if we look for models such 
as association health plans or over-reliance on Health Savings 
Accounts that it can compromise work done in my State of 
Maryland with small businesses that are benefitting from small 
market reform who will probably lose that if we go to 
association health plans, because the market, the adverse risk 
selections will be there and we won't be able to continue those 
plans.
    So I think, Senator Kerry, you have raised a good point 
about uniqueness of our States. We have to be mindful that 
there has been reform done. There has been progress made in 
some States and some of the solutions that are looked at at the 
national level, if not taken on a comprehensive approach, if it 
is just taken as one option, as the solution, could very well 
be harmful to many of our States and the reforms that they have 
already moved forward. I welcome any of your thoughts in that 
regard. I know in Maryland, our small market reform is welcomed 
by our small business community.
    Mr. Kingsdale. Just one thought, which is that there are a 
whole bunch of issues about pooling and participation and 
segmenting markets and risk and so forth that we have discussed 
today that are all addressed currently by State regulation. The 
point I would make is that if you are going to talk about 
cross-State insurance options, you need to talk about cross-
State insurance regulation and that is a big undertaking. So I 
would suggest there has to be a marriage and a synchronization 
of the regulatory framework that is so critical to these 
pooling and other issues with any effort to break down State 
regulation. You are going to have to then at the national level 
take up those same issues.
    Ms. Sullivan. Well, representing the small businesses, we 
already have that system where every State does what they want 
to. It is not working. When we are talking about pooling, that 
is because we think we need more than just individual States 
acting. I would just say the worry about losing mandates or the 
coverage that maybe one State wants over another, the point is 
it is not working as it currently is structured. We would urge 
you to think broader and to think in a bigger way about how you 
can help us on a national level.
    Senator Cardin. I would just point out, it is working in 
Maryland. It is working. The small market reform overrides 
State mandates for our State. We have a commission that meets 
with small business and the advocacy community and works out an 
affordable product for small business. If the Federal 
Government were to come in and mandate association health 
plans, we would lose our small market reform in Maryland. We 
would lose our plan. That is why our Governor, our Republican 
Governor, urged against association health plans and we have 
opposed it in Maryland. So some States are moving in that 
regard.
    Ms. Sullivan. It is working in some States, perhaps.
    Chairman Kerry. An issue that I have been championing for a 
number of years now is reinsurance, that if we were to create a 
reinsurance pool, you know, 20 percent of the costs of health 
care are contained in 1 percent of the billings. That is 
basically the most catastrophic care. If we were to limit the 
exposure of every business and every individual in America to 
$50,000 of risk exposure, then your premiums would drop per 
person in a business by about $1,500 and you could take care of 
those other cases out of your reinsurance pool at the Federal 
level, which would have a true cost reduction.
    Then all of a sudden, if you coupled that with a tax credit 
for small businesses, say up to 50 percent, you would have a 
double-whammy premium reduction. You have the tax credit 
benefit coupled with the premium reductions by capping 
catastrophic. You would lower premiums across the country and 
make our businesses more competitive and have a certainty as to 
what the risk is that you are going to be exposed to in the 
marketplace.
    Does it cost a little bit of money to create the Federal 
insurance pool? Yes, it does. It costs a fraction of what we 
are spending in Iraq, but it costs some money. So these are the 
choices we need to make.
    How would you respond to having a reinsurance pool and 
lowering costs in that manner and making that available? 
Wouldn't that--if every business in America could say, whoa, my 
premiums are down by $1,500, every car in America would go down 
by $1,500 per car. That is the cost that goes into each car 
made in America to pay for health care for workers. All of a 
sudden, you are more competitive with foreign manufacturers, et 
cetera. It would be a plus for the economy, not a negative. 
Would any of you have any response? No response?
    Ms. Senkewicz. Yes, Senator. Absolutely. I mean, 
reinsurance--essentially what you are talking about is, and I 
touched on it, how do we take care of the sick, and reinsurance 
for the highest claims is certainly one way to look at it. 
Healthy New York used a reinsurance mechanism. They have been 
very successful in reducing the uninsured rate. You just have 
to be careful about how you do it. That is what the States are 
doing now with high-risk pools. Essentially, it is trying to 
get--and that is financed, subsidized through premium payments, 
State tax money, a variety of ways, but that is exactly what 
you are doing. If you can cut off that most expensive risk off 
the top somehow and get that out of the pool so that the 
general pool can take care of itself, I think you can go a long 
way towards solving some of the problem.
    Chairman Kerry. That is a different discussion probably in 
a different Committee, but at any rate. I appreciate all of 
your input today. It has been very helpful. We are going to 
leave the record open for 2 weeks for colleagues to be able to 
submit questions in writing, which you may receive.
    We really appreciate you taking the time to come in here 
today. We are going to try to synthesize this. We will probably 
have some additional questions for the record just to fill it 
out a little bit. So thank you very much for being here.
    We stand adjourned.
    [Whereupon, at 11:54 a.m., the Committee was adjourned.]
                      APPENDIX MATERIAL SUBMITTED
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           Responses by Mary Beth Senkewicz to Questions from
                      Senator Joseph I. Lieberman

    Question 1. In your testimony, you stated that Congress 
should create a more efficient national pooling mechanism to 
reduce the cost of health care for small businesses. Can you 
provide more details about your ideas to improve efficiency in 
pooling? How can the Federal Government achieve this goal?
    Answer. [A response was not available at press time.]
                              ----------                              


        Responses by William F. Sweetnam, Jr. to Questions from
                      Senator Joseph I. Lieberman

    Question 1. The deductible of a qualifying health plan for 
a HSA (health savings account) sounds high to me--$2200 for a 
married couple. That deductible might help a middle income 
family in the United States, but I am concerned about our lower 
income families who would find it difficult to handle a 
deductible of that amount. In your testimony, you stated that 
HSAs are utilized by citizens of all income levels. Please 
provide the Committee with statistics to support your claim, 
including the percentages and numerical frequencies of HSA 
users, categorized by income level.
    Answer. The statistics that I used in my testimony were 
based on an analysis conducted by UnitedHealth Group, which is 
the largest provider of HSAs in the country with nearly 1 
million HSA members. The analysis was based on the saving and 
spending patterns of 25,000 individuals enrolled in its 
employer-sponsored HSA plans for all 12 months of 2005. This 
study paired health plan membership information with financial 
transaction data from the company's own health care bank, 
Exante Financial Services.
    The study found that HSAs are utilized by consumers across 
all income ranges. Overall, the rate of account openings varies 
only from 80 percent to 84 percent across all income ranges. 
Most notably, when their employer makes a contribution to the 
HSA, 80 percent of low-income individuals (those earning 
$25,000 or less annually) open their accounts. However, income 
plays a clear role in account adoption when the employer does 
not make a contribution to the account. In those cases, 
accounts are opened by:

     23 percent of those earning less than $25,000
     39 percent of those earning $25,000 to $49,000
     50 percent of those earning $50,000 to $99,000
     58 percent of those earning $100,000 or more.

    The study that UnitedHealth conducted did not have any 
analysis of the distribution for HSAs based on income levels.
                              ----------                              


             Responses by Tarren Bragdon to Questions from
                      Senator Joseph I. Lieberman

    Question 1. What is the rationale for not mandating 
participation in a minimal benefit health plan, if such 
widespread participation reduces the overall risk pool?
    Answer. It is easy to propose in theory an individual 
mandate. However, it is very difficult to administer one. 
Almost all States have an auto insurance mandate, yet often 
upwards of 25 percent of all drivers do not have auto liability 
insurance.
    Rather than mandate participation, I believe that the key 
is to have various affordable private health insurance options 
so that individuals can choose the best plan for themselves, 
given their own life and economic circumstances. One person's 
``minimal benefit'' may be more comprehensive than what another 
person needs, wants or can afford.

    Question 2. You testified that you would support auto-
enrollment in a default health plan for employees that do not 
have health coverage. Please discuss how you think auto-
enrollment should be structured to provide the best coverage to 
newly hired employees? Would a 21-year-old receive the same 
coverage as an older adult? Would gender affect default 
coverage? Who would make these decisions?
    Answer. Auto-enrollment would be simple. A company could 
choose to auto-enroll employees in employee-only coverage. For 
companies offering more than one health plan, the company would 
choose the default plan for auto-enrollment, which would 
presumably be the most affordable plan (requiring the lowest 
employee share of the premium).
    All employees would auto-enroll into the same default plan, 
regardless of age, gender or another other demographic.
    Employees could select a different plan, if available, or 
opt-out of coverage entirely, if desired. But the default would 
be to opt-in. Currently, the default is to opt-out.
                              ----------                              


            Responses by Jon M. Kingsdale to Questions from
                      Senator Joseph I. Lieberman

    Question 1. I understand that healthy competition is an 
incentive for lower cost insurance. Given this fact, I am 
puzzled by the fact that big insurers often compromise the 
market, raise health care prices, and provide less coverage 
without any intervention. What is Massachusetts doing to 
curtail the monopolization of the insurance market by large 
insurance companies?
    Answer. Under Massachusetts' health reform, the 
Commonwealth Health Insurance Connector Authority has initiated 
competitive, open bidding and invited eligible health plans to 
respond to our requests for proposals. As a result, several 
developments have already occurred that tend to create more 
competition, especially on the part of smaller health plans, in 
the insurance market.
    1. In response to an RFP issued by the Connector last 
August for our new subsidized private health plans for low-
income uninsured, several Medicaid Managed Care organizations 
are becoming licensed to offer commercial insurance in the 
Commonwealth--adding to the number of smaller health plans 
(several hundred thousand members each) that can compete here 
for both low-income and regular commercial membership.
    2. In response to an RFP issued by the Connector last 
December for non-subsidized health plans to be offered through 
the Connector to individuals and selected categories of 
employers, we approved for offering 42 health benefits plans 
offered by 6 carriers in Massachusetts. While none of the 6 are 
new insurance companies in the State, several are relatively 
small plans, which as a result of being offered through the 
Connector, will have access to many new members. The 6 carriers 
have proposed innovative, limited-network products, and are 
already experiencing membership growth as a result.
    3. Because the Connector provides far greater transparency 
and ease of comparison shopping for health insurance than 
previously existed, and because the State's health insurance 
reforms tie carriers' non-group offerings to their commercial 
group offerings, options for non-group purchasers have expanded 
considerably. The Connector functions for insurers much like 
Travelocity for airlines, making it easier and more affordable 
to buy insurance and for smaller health plans to reach more 
potential consumers. As a result, we have already observed 
several promising competitive responses in the way health 
insurance carriers compete and market their products outside of 
the Connector as well.
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