[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                   HEALTH REFORM IN THE 21ST CENTURY: 
                      EMPLOYER-SPONSORED INSURANCE 

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

                                HEARING

                               before the

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

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 29, 2009

                               __________

                             Serial 111-17

                               __________

         Printed for the use of the Committee on Ways and Means

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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       DAVE CAMP, Michigan
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            SAM JOHNSON, Texas
JOHN LEWIS, Georgia                  KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts       PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee            ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
LLOYD DOGGETT, Texas                 DEVIN NUNES, California
EARL POMEROY, North Dakota           PATRICK J. TIBERI, Ohio
MIKE THOMPSON, California            GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut          GEOFF DAVIS, Kentucky
EARL BLUMENAUER, Oregon              DAVID G. REICHERT, Washington
RON KIND, Wisconsin                  CHARLES W. BOUSTANY, JR., 
BILL PASCRELL, JR., New Jersey       Louisiana
SHELLEY BERKLEY, Nevada              DEAN HELLER, Nevada
JOSEPH CROWLEY, New York             PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK B. MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
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current publication process and should diminish as the process is 
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                            C O N T E N T S

                               __________

                                                                   Page
Advisory of April 22 announcing the hearing......................     2

                               WITNESSES

Elise Gould, Ph.D., M.P.Aff., Director of Health Policy Research, 
  Economic Policy Institute......................................     7
J. Randall MacDonald, Senior Vice President for Human Resources, 
  IBM Corporation................................................    22
Kelly Conklin Owner, Foley-Waite Associates, Bloomfield, New 
  Jersey.........................................................    30
Denny Dennis, Senior Research Fellow, NFIB Research Foundation...    36
John Sheils, Senior Vice President, The Lewin Group, Falls 
  Church, Virginia...............................................    41
Gerald Shea, Special Assistant to the President, AFL-CIO.........    55

                       SUBMISSIONS FOR THE RECORD

Joe Solmonese, Statement.........................................   108
Judy Waxman, Statement...........................................   109
National Small Business Association, Letter......................   116


                   HEALTH REFORM IN THE 21ST CENTURY:
                      EMPLOYER-SPONSORED INSURANCE

                              ----------                              


                       WEDNESDAY, APRIL 29, 2009

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:05 a.m., in Room 
1100, Longworth House Office Building, Hon. Charles B. Rangel 
[Chairman of the Committee] presiding.
    [The Advisory of the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-3625
FOR IMMEDIATE RELEASE
April 22, 2009
FC-8

             Hearing on Health Reform in the 21st Century:

                      Employer-Sponsored Insurance

    House Ways and Means Chairman Charles B. Rangel (D-NY) announced 
today that the Committee will hold another hearing in the series on 
health reform. This hearing will focus on employer-sponsored insurance. 
The hearing will take place at 10:00 a.m. on Wednesday, April 29, 2009, 
in the main committee hearing room, 1100 Longworth House Office 
Building.

    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.

BACKGROUND

    Nearly 160 million people receive health benefits through their 
employer, making it the predominant form of health coverage in America. 
Employer-sponsored insurance expanded significantly during World War II 
as a way for employers to provide extra benefits to compete for scarce 
workers when the National War Labor Board (NWLB) froze wages. 
Clarifications of the Internal Revenue Code in the 1940s and 1950s 
established that employer-provided health insurance coverage is 
excludible from an employee's taxable income. As a result, the number 
of employers offering coverage and the number of people receiving 
health coverage at their place of employment grew. While the rate of 
employer-sponsored coverage has dropped in recent years and millions of 
workers are not eligible for coverage offered by their employers, it is 
still the primary source of coverage for nearly 63 percent of 
individuals under age 65. It is also a stable source of coverage for 
millions, with 98 percent of firms with more than 200 workers 
consistently offering coverage for the past ten years.

    One advantage of employer-sponsored insurance is that workplaces 
pool large groups of people irrespective of health status, in order to 
balance the health risk of employees. Small businesses and their 
employees do not have the same advantage of large risk pools, tend to 
have higher administrative costs than large employers, and are exposed 
to premiums that can vary greatly from year to year. As a result, large 
firms are more likely to offer coverage than small firms, with an 
estimated 99 percent of firms with 200 or more employees offering 
coverage as compared to 62 percent of firms with 3 to 199 employees.

    A challenge for employer-sponsored health insurance is that costs 
have risen faster than inflation or wages. Between 2001 and 2007, 
premiums for employer-sponsored health insurance rose 78 percent, while 
general inflation increased at a rate of 17 percent and workers' 
earnings increased at a rate of 19 percent over the same time period. 
These rising costs have forced some employers to reduce, alter or 
eliminate their offerings. Workers that still have offers for coverage 
from their employers must shoulder an increasing share of the cost. 
From 2006 to 2008, the percentage of workers facing deductibles of 
$1,000 or more increased from ten percent to 18 percent. A higher rate 
of individuals working in firms with less than 200 employees saw this 
rise in deductibles, with employees facing deductibles of $1,000 or 
more growing from 16 percent to 35 percent.

    To minimize disruption for the overwhelming majority of those with 
private coverage today, health reform must preserve and encourage 
employer-sponsored insurance. In addition, reform must help slow the 
rise in health costs for all health care purchasers, including 
employers and individuals, through delivery and payment system reform 
proposals, as well as other reforms.

    In announcing the hearing, Chairman Rangel said, ``A healthier 
American workforce is a more competitive workforce in the global 
marketplace. Health reform efforts need to build on, and strengthen, 
employer-sponsored insurance, which provides coverage for approximately 
160 million people in working families. American businesses should be 
lining up to help comprehensive health reform become a reality so that 
we can ensure that everyone has affordable care that meets their needs 
and work to reduce the rate of spending and control health care costs 
to enable economic growth.''

FOCUS OF THE HEARING:

    The hearing will focus on trends in employer-sponsored health 
insurance and strategies to strengthen and build upon job-based 
coverage.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    Please Note: Any person(s) and/or organization(s) wishing to submit 
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FORMATTING REQUIREMENTS:

    The Committee relies on electronic submissions for printing the 
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    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
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    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

                                

      
    Chairman RANGEL. Good morning.
    This is the fourth in a series of hearings that we have had 
for national health care. We have a very exciting panel of 
witnesses. We hope, in working with Energy and Commerce, that 
we can combine their jurisdiction over Medicaid with our 
jurisdiction over Medicare; and at the end of the day make 
certain that no one falls between the cracks as we move on the 
President's wish to sign a mandate that we have quality care, 
lower cost and maximum coverage, for everyone.
    Today we will be concentrating on the employer-sponsored 
insurance and making certain that we recognize how important it 
is and that we do everything to strengthen it. And as the 
President says, If you like what you have got, we are not 
thinking about doing anything except trying to lower the cost 
across the board.
    We want also to make certain that the private insurance 
plans do take the high-risk people, that preconditions are not 
an issue. And we will be entertaining the question of employer 
mandate, we will be entertaining the question of a public plan. 
All of these things will be discussed.
    And so, again, sometimes on our side, David, we believe 
that the hearings are the best that we can do. But it is almost 
not fair to the witnesses to prepare and then have 5 minutes 
and just the questions. But we do hope all of you will make 
yourselves available if we have a roundtable where you don't 
have the 5 minutes, where you can expand on your visions as to 
how we can make a healthier America.
    I would like to yield at this time for Mr. Camp.
    Mr. CAMP. Thank you for yielding, Mr. Chairman.
    And before I make my opening statement, I just want to take 
a moment and recognize the chairman's commitment to the issue 
before us, health reform in the 21st century, and his 
receptiveness to working together to find the right way to 
reform health care in this country.
    Now, last week, I requested additional witnesses so that we 
could fully vet the complexities involved in improving both 
health insurance and health care. And I just want to say that 
the chairman has granted the minority an additional witness. 
Mr. Chairman, I need not tell you, there are several new 
Members on this Committee, particularly on our side as well, 
and this is not an insignificant act on your behalf, and I want 
to thank you personally very much for that.
    I look forward to continuing this approach to health care 
reform; and hopefully, this will spur further bipartisan talks 
and negotiations. I remain confident that we can find common 
ground.
    Health care reform should not be a partisan issue. It is 
not a partisan issue; it is not a Republican issue or a 
Democrat issue. It is an American issue.
    It is not to suggest we don't face difficult questions. In 
fact, today's hearing will explore one of the tougher 
challenges we face: How do we protect employer-sponsored 
insurance and the access to affordable health care it provides 
millions of Americans? And today we will hear from several 
employers, one of them Denny Dennis of the National Federation 
of Independent Business, which represents hundreds of thousands 
of small businesses, businesses that typically employ about 
five people, and collectively create 60 to 80 percent on the 
new jobs in America.
    Of particular concern to these job providers and creators 
is a Federal mandate to provide insurance or pay a penalty. 
That tax, per Mr. Dennis' testimony, would harm small 
businesses, especially those operating at the margin, and 
disproportionately impact low-income workers.
    Others today will suggest that a government-run health plan 
must be a part of the solution, though such an option carries 
significant risks. As Mr. Sheils at The Lewin Group will 
testify, their April 2009 study that found the introduction of 
a government-run plan that reimbursed providers at government-
set Medicare rates would have significant ramifications for 
those who already have health insurance, one finding almost 120 
million Americans would lose their current health insurance 
coverage. Inside that data we found that of the 120 million who 
lose their coverage, 108 million are those who have employer-
provided insurance.
    A total of roughly 160 million Americans have health 
insurance through an employer. That means seven out of ten 
people--workers, husbands, wives, children--will lose their 
health insurance provided by employers due to a government-run 
plan. I think my colleagues on both sides of the aisle will 
agree that it is difficult enough to provide access and 
coverage for the 30 to 45 million Americans without insurance 
without having to take on the responsibility of an additional 
108 million individuals with employer-sponsored insurance.
    Nor does an employer mandate which trades job creation for 
insurance coverage make our job any easier. Employer-provided 
insurance is under pressure and in many cases is already 
eroding. This is a trend we need to reverse, not accelerate. We 
need to improve upon our current health care system, not end 
it.
    Now, I know some of the majority have suggested Republicans 
are making the government-run plan an issue. And as I noted 
last week, even the White House has said that reform does not 
hinge on the inclusion of this provision. And just yesterday 
the Washington Post opined, and I quote, ``It is entirely 
possible to imagine effective health care reform changes that 
would expand coverage and help control costs without a public 
option.'' And the editorial went on to read in part, and I am 
quoting again, ``It is difficult to imagine a truly level 
playing field that would simultaneously produce benefits from a 
government run system. Medicare keeps costs under control in 
part because of its 800-pound-gorilla capacity to dictate 
prices, in effect to force the private sector to subsidize it. 
Such power of exercising a public health option eventually 
would produce a single payer system. If that is where the 
country wants to go, it should do so explicitly, not by 
default.''
    And, Mr. Chairman, I ask that the Washington Post editorial 
be submitted into the record.
    And with that, I yield back the balance of my time. Thank 
you.
    Chairman RANGEL. Thank you. Without objection, Mr. Camp.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman RANGEL. In furthering an opportunity to make 
certain that we have maximum participation, even if we don't 
get maximum support, if the minority really feels that there 
are some things here that can be worked out without having 
formal hearings, there is no reason why we cannot get experts 
to take a look at that, whether we use the library, H-137, or 
even the hearing room.
    But this is so important that even if you can't vote for 
it, we would like to be able to accommodate in terms of 
bringing the experts here that you might need or we might need 
to better understand some of the complexities that just may 
impede someone from wanting to receive the goal, but just not 
being able to support a bill that has it or doesn't have it. So 
we will work that out after.
    We have an outstanding group of witnesses: Dr. Elise Gould; 
Randy MacDonald; Bill Pascrell from Jersey will be introducing 
a small business man from his district, Kelly Conklin; Denny 
Dennis, who is a research policy person from the National 
Federation of Independent Business; John Sheils is Senior Vice 
President of The Lewin Group; and our last witness will be 
Gerry Shea, who comes representing the President of the AFL-
CIO. So this is going to be a good day for all of us.
    We will start with Dr. Gould, who is the Director of Health 
Policy Research, an outstanding background, an author and 
lecturer; and she will give us some views on why a public 
health insurance plan would be able to help us.
    Thank you for taking time to share your views with us. You 
may proceed. As you know, we have 5 minutes more or less, and 
we want to give the Members an opportunity to ask questions 
while you are here. Thank you. You may proceed.

  STATEMENT OF ELISE GOULD, PH.D., DIRECTOR OF HEALTH POLICY 
              RESEARCH, ECONOMIC POLICY INSTITUTE

    Ms. GOULD. Good morning Chairman Rangel, Ranking Member 
Camp and distinguished Members of the Ways and Means Committee. 
My name is Elise Gould, and I am a health economist and 
Director of Health Policy Research at the Economic Policy 
Institute. I appreciate the opportunity to appear before you 
today to share my views.
    Employer-sponsored insurance--I will call it ESI from here 
on out--provides insurance for the majority of under-65 
Americans. ESI, particularly among large firms, works because 
it pools risks, has low administrative costs and offers a 
stable source of coverage for a large share of the population.
    Many of these people enjoy the benefits they receive and 
would like to keep them. However, we have seen a weakening in 
ESI over the last several years, and it is important to examine 
strategies--and I commend that Chairman Rangel in holding a 
hearing to examine strategies--to strengthen ESI and find ways 
to provide this high-value coverage to more Americans.
    The employer-sponsored health insurance industry in the 
United States did not flourish until the middle of the 21st 
century. During World War II, employers offered health benefits 
as a way to attract workers when the National Labor Board froze 
wages. In 1954, Congress amended the Internal Revenue Code to 
clarify and expand a 1943 administrative tax ruling that 
granted tax exempt status to employers contributions for their 
employees' group medical and hospitalization premiums. 
Excluding premium contributions from taxable income made $1 
worth of health insurance less expensive to provide than $1 
worth of wages.
    In general, this tax exemption, effectively a government 
subsidy, reduced aftertax insurance premiums enough to 
encourage even the healthiest employees to enroll. In that way, 
sustainable risk pools were formed and group policies became 
more attractive to insurance companies.
    Over the latter half of the 20th century, employer-
sponsored health insurance became increasingly popular. Workers 
have grown to rely on employers to provide insurance and 
employers have used it as a tool to attract and retain the best 
workers and improve the health of their workforce.
    Employer-based coverage remains the most prominent form of 
health insurance today. About 63 percent of the under-65 
population has insurance either through their own or a family 
member's employer. Over 80 percent of the college educated and 
80 percent of those in the top half of the income distribution 
have ESI coverage. In fact, if you break the nonelderly 
population in fifths by household income, we would see that 
those in the top-income fifth are nearly four times more likely 
to have coverage than those in the bottom fifth. So we see that 
employer-sponsored health insurance is working well for tens of 
millions of American workers and their families.
    That said, the problem remains that many folks who are left 
out are ill served by the employer-sponsored system. Further, 
while ESI remained the dominant form of health coverage through 
the 2000s, the share of people covered by ESI declined 5 
percentage points since 2000. This erosion, or unraveling, was 
occurring even during the economic recovery.
    During an expansionary period, we would have expected 
coverage to increase as employment grew, but it simply did not. 
High and rising health costs are mostly to blame. Average 
premiums for an employer-sponsored family plan have risen 
nearly 120 percent since 1999, three-and-a-half times faster 
than workers' earnings and more than four times faster than 
general inflation.
    Small business owners and their workforce face particular 
challenges in obtaining ESI. The coverage rates in firms with 
fewer than 10 workers is less than half that of workers in 
firms with more than 100 workers. Half of all the uninsured are 
employed by a business with fewer than 100 workers, and 36 
percent work in firms with fewer than 25 employees.
    Small firms that do offer health insurance face high costs, 
paying on average 18 percent more than larger firms for 
identical policies. This is due to higher and more variable 
health risks, a lack of competition amongst insurers and 
greater administrative expenses.
    I know, in 2007, in the small firm where I work, with less 
than 30 days' notice, our insurer raised rates by 27 percent, 
forcing us to switch carriers at the last minute, which is not 
easy in the limited marketplace. It is these high and 
unpredictable costs that have made it increasingly difficult 
for small firms to provide the insurance they want to offer 
their workers.
    So what does the future hold? The current economic downturn 
and forecasts of high employment indicate continued erosion of 
employer-sponsored insurance in the near future. I estimate 
that by the end of 2009, nearly 50 million nonelderly will be 
uninsured.
    The link between insurance and work has been a tradition in 
this country. ESI, particularly in large group markets, can 
effectively pool risk, lower administrative costs and maintain 
stability. But we must recognize its limitations. There has to 
be a way for nonworkers, part-time workers and even those full-
time workers that have been closed out of the current system to 
find affordable coverage.
    Private market reform, such as community rating and 
guaranteed issue, can improve competition between insurance 
companies by ensuring that this competition takes place on the 
grounds of efficiency and not on a company's ability to sort 
the population for the lowest risk.
    The best way to ensure that coverage is universally made 
available to those who do not have good ESI is to construct a 
national insurance exchange that includes a public health 
insurance option. A public health insurance option is an 
essential part of this exchange. While giving Americans more 
choices for coverage, it also has the added advantage of 
increasing competition to already limited markets, reducing 
costs and cost growth, driving quality advancement and 
innovation and serving as a benchmark for the insurance market.
    As we move forward to a meaningful reform, we must be wary 
of quick fixes to our insurance system. One such fix involves 
taxing health benefits. Research shows that taxing high-priced 
health coverage will heavily burden two groups: workers in 
small firms and workers in employer pools with higher health 
risks, such as those with a high percentage of older workers. 
Small businesses are paying high premiums for the insurance 
they provide to their employees not because the plans are 
especially lavish, but because they have high administrative 
costs and include too few employees to constitute the broader 
risk pool that would qualify them for lower premiums.
    Capping the tax exclusion exacerbates the problem small 
firms already have. It would encourage the young and healthy to 
opt out of these pools, and upon their exit, premiums would 
likely rise for those remaining. Instead, we should build on 
what works well in today's American health care system, ESI for 
the bulk of the workforce, as well as extremely popular public 
programs like Medicaid.
    Thank you, and I am more than happy to answer any questions 
you may have.
    Chairman RANGEL. Thank you so much for your testimony.
    [The statement of Ms. Gould follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman RANGEL. We would now like to call on Randy 
MacDonald, who is a Senior Vice President for Human Resources 
at the IBM Corporation, and is the chairman of the board of the 
Policy Association, that represents more than 250 of the 
largest corporations in the United States. And he is committed 
to providing health insurance to employees, but he is 
concerned, as all of us are, with the rising health care costs.
    So we are very anxious to get your views on how we can be 
helpful with our bill.

 STATEMENT OF J. RANDALL MACDONALD, SENIOR VICE PRESIDENT FOR 
                HUMAN RESOURCES, IBM CORPORATION

    Mr. MACDONALD. Good morning, Chairman Rangel, Ranking 
Member Camp and Members of the Ways and Means Committee. My 
name is Randy MacDonald. I am the Senior Vice President of 
Human Resources for the IBM Corporation. As mentioned, I also 
serve as Chairman of the HR Policy Association, a group of 
chief human resource officers for more than 260 of the largest 
corporations in America.
    Simply put, IBM is building smarter health systems with a 
more personalized experience for patients. A smart health care 
system will be better instrumented, interconnected and 
intelligent, centered around the patient. IBM intends to be a 
leading proponent of health care reform because it is both a 
competitive necessity and because it is good business for us.
    We believe that broad systemic reform is necessary. A 
successful agenda will build on a patient-centered, 
accountable, competitive health care market that delivers 
effective outcomes in improving the cost.
    I must say, adding millions of people to an overburdened, 
underperforming system is somewhat like diverting water into 
the Red River while you are piling up sandbags. Change must be 
structured, it must be planned and it must have incremental 
giant steps.
    IBM has 450,000 reasons to be an active participant in this 
national discussion. Those reasons are employees, our retirees 
and their dependants, and the fact that we spent $1.3 billion 
on health care in 2008 alone.
    Successful health care reform doesn't have to begin from 
scratch. Employer-based health care is a good starting point, 
but we need a broad-based approach to fix fundamental flaws, 
including effective incentives for wellness, prevention, 
primary care, better cost controls and higher quality outcomes.
    Earlier this decade, IBM had double-digit cost increases. 
Accountability and transparency were nonexistent for employee 
decisionmaking. Real cost, prices and subsidies were actually 
hidden. Between 2005 and 2007, our assessment showed dramatic 
declines in employee health risk, including behaviors such as 
smoking. Participation in wellness programs rose sharply and 
more adopted healthy behaviors such as exercise and good 
nutrition. Program costs during this period were $81 million 
with a total savings approaching $200 million.
    Today, our employee population is healthier, employee costs 
remain lower than our benchmarks. With this experience, we 
support a national health care reform agenda with seven 
recommendations.
    First, strengthen the voluntary employer-based system of 
health care;
    Second, adopt a comprehensive national reform agenda;
    Third, significantly improve wellness, prevention and 
primary care;
    Fourth, create a competitive and accountable marketplace;
    Fifth, control cost, improve quality and reduce cost 
shifting;
    Sixth, assure adoption of health care information 
technology; and
    Seventh, ensure all Americans have health insurance.
    Mr. Chairman, reform can only succeed with an approach 
built on shared responsibility. All stakeholders must come here 
with an open mind and share the burdens as well as the benefits 
of reform. In my written testimony and through the work of the 
HR Policy Association, I have detailed what we see as those 
stakeholder responsibilities.
    In sum, we believe that the crisis in American health care 
is too complex for any one person, for any one organization or 
one sector of our society to figure out the best solution. We 
need a comprehensive solution. Not a Band-Aid here or there, 
but a solution.
    The panacea in health care is a system that does more than 
just deliver quality care at reasonable cost. Our aim should be 
to make all Americans healthier and our economy stronger. Thank 
you.
    Chairman RANGEL. Thank you, Mr. MacDonald.
    And we will make certain that whatever we move forward we 
don't hurt what is already working for IBM and for America. So 
thank you for your contribution.
    [The statement of Mr. MacDonald follows:]
      Statement of J. Randall MacDonald, Senior Vice President for
                    Human Resources, IBM Corporation
    Good morning, Chairman Rangel, Ranking Member Camp and Members of 
the Ways and Means Committee. My name is Randy MacDonald and I am the 
Senior Vice President for Human Resources for the IBM Corporation. In 
the United States during 2008, IBM provided health coverage for 118,500 
employees, 93,200 retirees, and 235,000 dependents--a commitment of 
some $1.27 billion in 2008 alone.
    In addition to leading IBM's global human resources organization, I 
also serve as the Chairman of the Board of the HR Policy Association 
(HRPA), a group of the chief human resource officers of more than 260 
of the largest corporations in the United States. Representing almost 
every industry, HRPA members employ more than 12 million persons in the 
United States.
    IBM is also working to create smarter health systems, with an 
increasingly more personalized experience. A ``smart'' health care 
system will be better instrumented, interconnected and intelligence-
centered around the patient. In a smarter, IT-enabled health system, a 
networked, collaborative team of care-providers will work with 
individuals and families with children at the center to build strong 
trusting relationships which promote wellness, prevent and control 
chronic disease and disability. This smarter health care system will 
enable behavior change and vastly improved health care decisions that 
produce better health outcomes and greater efficiency by eliminating 
waste, and needless administrative cost.
    A successful health care reform agenda will build a patient-
centered, accountable and competitive health care market place that 
delivers effective outcomes and improved unit costs. It will:

      build upon our employer-based system
      control costs and improve value in terms of quality and 
health status
      ensure all Americans have health insurance,
      enhance the focus on wellness, prevention and primary 
care, and
      accelerate the adoption of health information technology.

    We believe the crisis in American health care is too complex for 
any one person, one organization, or one sector of our society to 
figure out the best option for reform. Our ideas are offered in the 
spirit of stimulating a discussion with Congress, the administration, 
and other stakeholder groups to figure out the best solution. We look 
forward to building consensus to achieve the collective goal of 
transforming the nation's troubled health care system and improving the 
health and productivity of our population.
    There is growing consensus among all key stakeholders, including 
large employers that purchase billions of dollars of health care 
products and services, that the current system of health care in the 
United States will be further stressed by improving access without at 
the same time fundamentally reforming the system.
    Large employers like IBM have become more active in this debate 
because we see pervasive deficiencies in the availability of 
comprehensive primary care; the lack of evidence-based use of medical 
technologies; insufficient transparency to allow consumers to make 
informed decisions; and inadequate adoption of information technology 
that would make care safer and more efficient.
Coverage Provided to IBM employees
    Let me explain how IBM has worked to tackle some of these problems. 
IBM provides coverage to both full-time, part-time, and long term 
supplemental employees of IBM, as well as retirees and dependents. IBM 
and our retirees participate in the Part D Retiree Drug program sharing 
in any subsidies provided by the government--splitting the subsidy in 
proportion to their respective contribution to the retirees' aggregate 
prescription drug costs.
    We operate our plans for employees across the nation and there are 
no geographic differentials in employee/retiree contributions for our 
self-insured plans.
    There are a number of innovative features in the coverage for IBM 
employees:

      Eligible full time employees have access to at least one 
health plan at no cost.
      Enrollees receive deductible-free coverage for preventive 
services
      Primary Care is covered deductible free and at a low 
coinsurance
      Employees are offered a Healthy Living Rebate Program 
(130K rebates earned in 2008)--employees earn up to $300/year to 
complete healthy activities such as physical activity-nutrition, 
preventive care and the cutting edge Children's Health Rebate for 
family-based activities to build healthy weight behaviors in children 
and youth
      Over 80,000 IBMers are now physically active and over 
half of our employees who were in a high health risk group have lowered 
their risk category
      From 2004 to 2008, IBM paid out over $133 million to the 
Healthy Living Rebate program.
      IBM offers all employees an on-line Health Risk 
Assessment (64,000 completed 2008) and Personal Health Record
Our efforts to improve IBMers health and reduce costs
    Earlier this decade, we were seeing double-digit increases in 
health care costs for IBM. Our contracting strategy was not optimized 
for quality, service, efficiency or price. Population health status and 
prevention, clinical care needs for chronic diseases, and coordination 
of care were absent in the marketplace. Accountability and transparency 
were non-existent for consumer decisionmaking--real costs, prices and 
subsidies were hidden.
    IBM talked the problem through a new vision: healthy people for 
high performance.
    Our strategy currently combines:

      Value (quality and cost)
      Meaningful choice
      Sustainable cost structures
      Prevention
      Primary care
      Smart decisions
      Privacy and HIT

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                                        Today, our employee population 
                                        is healthier and our costs are 
                                        lower. For both cost and trend, 
                                        IBM is routinely at or below 
                                        market. Employee costs remain 
                                        lower than benchmarks. In 2008, 
                                        our costs were $8,585 per 
                                        capita while the marketplace 
                                        benchmark was $8,895. Between 
                                        2004 and 2007, our internal 
                                        health assessments showed 
                                        dramatic declines in employee 
                                        health risks. Participation in 
                                        the wellness programs rose 
                                        sharply and our employee 
                                        population reduced risky 
                                        behavior such as smoking, while 
                                        increasing healthy behavior 
                                        such as exercise and

healthy nutrition. Over 80,000 IBMers participate in our physical 
activity incentive program. Generic drug utilization has increased to 
96% without reducing medication options. The reduction in health risks 
translates into savings in health care claims costs estimated at $79 
million between 2004 and 2007 alone.
    But we are only one company. Systemic problems are at issue and we 
need to ensure we are all focused on the right problems.
It's Not Just a Covered Problem; It's Also a Cost and Quality Problem
    While some health care reform advocates believe that we can reform 
our nation's health care system by simply creating universal coverage 
through private insurance reforms or some form of a government-run 
single-payer system, we do not believe this would achieve our goals for 
health and health care. Above all, our society cannot afford to pay 
billions more into a fundamentally flawed delivery system to provide 
uninsured Americans access to the fragmented, episodic, procedure-
oriented care that delivers poorer outcomes compared to other OECD 
countries. This is why we believe that broad, systemic reform is 
necessary. Our problems will only be exacerbated by bringing the 
uninsured into our current dysfunctional health care system.
Objectives of Health Care Reform
    We support a national health care reform agenda that meets the 
following seven objectives:

    1. Make Significant Improvements in the Voluntary Employer-Based 
System of Health Care In Order to Ensure Its Continued Existence

    IBM and other HRPA members have expressed a commitment to 
maintaining the nation's voluntary system of employment-based health 
insurance if and only if major reforms to improve value, efficiency, 
and transparency can be achieved. The majority of Americans--more than 
160 million--receive health care through employment-based coverage, and 
most Americans who do so are pleased with it. Even with its existing 
flaws, we believe our mix of employer-based coverage, private market, 
and public safety-net programs is superior to shifting to a government-
run, single-payer system. Because of the lack of choice and stifled 
innovation that would result from a single-payer system, we are 
committed to working from the foundation of our current system to make 
significant improvements.
    I know that there are questions about the proper balance between 
public and private insurance options as we look at health care reform. 
It is a fact that the government has long played a vital role in 
providing coverage for difficult-to-cover populations. Indeed, many IBM 
retirees already participate in Medicare Part D--a public plan, and 
expansions in the CHIP program this year will provide much needed 
assistance for uninsured children and youth. The question is how to 
strike the right balance between providing public options for those who 
truly need them, without undermining the bedrock of our U.S. health 
care system, which is voluntary employer-provided private insurance 
options.
    We need to identify a balance that avoids problems like adverse 
selection for private sector plans, and we must proceed quite carefully 
as we consider the impact to the voluntary employer-based system of 
proposals that expand public coverage to those who are uninsured or 
disadvantaged in the individual group market like small businesses and 
the self-employed. We need to be careful because public plans might 
change the pool characteristics of private sector plans in a way that 
could shift costs onto private, employer-sponsored plans that have been 
the force for many innovations in wellness and health promotion, care 
services, transparency and pay for performance.
    The ability of large employers to continue providing voluntary 
coverage depends greatly on the near-term adoption of significant 
changes that would help contain skyrocketing costs, improve the 
effectiveness and efficiency of health care, improve health outcomes, 
eliminate waste, and transform quality processes and accountability 
throughout the health care system. Changes in the employer exclusion of 
health care costs would threaten that system by adding to the burden 
employers are already carrying in providing health care coverage 
without addressing the need for shared responsibility across all 
stakeholders.

    2. Adopt a Comprehensive National Reform Agenda

    While there is considerable experimentation underway at the state 
and local level, at present more than half of Americans are covered by 
employer-based health insurance; many of these workers are employed by 
companies doing business across state lines. Many large employers offer 
benefits that are regulated by the Employee Retirement Income and 
Security Act (ERISA), which provides uniform rules for the health 
benefits enjoyed by millions of workers and their families. ERISA 
preempts state laws that relate to ERISA plans in order to ensure 
uniformity among the states.
    Pressure on ERISA is constant. States and localities relentlessly 
search for ways to penetrate its protective shield. For example, some 
states and localities have recently started to attach benefits 
requirements to public sector contracts--threatening to create the 
benefits patchwork that ERISA and the courts have long prevented.
    The nature of health benefits offered by multi-state employers 
makes it unworkable--and unfair--to reform health care using a 
patchwork of state and local solutions. Rather, our health care system 
should have consistent and uniform guidelines to ensure that affordable 
and comprehensive benefits can be delivered to all Americans.

    3. Significantly Improve Wellness, Prevention, and Primary Care

    A successful national reform agenda must focus on maximizing the 
health status of individuals, not just treating the sick. Costly 
chronic conditions such as diabetes, coronary artery disease, obesity, 
and asthma account for a disproportionate share of health care costs. 
Half of the population spends little or nothing on health care, while 
five percent of the population accounts for almost half of the nation's 
health care expenditures.
    Health care reform must build a strong primary care foundation for 
the health care delivery system. Many health care providers, especially 
primary care physicians, share the frustration of payers and consumers 
about our current health care system's focus on the delivery of acute 
and episodic care, high volumes of procedures, intensive use of high-
cost technology, specialty services, and administrative overhead. 
Primary care physicians want to provide accessible, continuous, 
coordinated and comprehensive care, but to do this a payment model in 
which they do not have to suffer financially for providing evidence-
based medicine and communicating and coordinating care that keeps their 
patients healthy. Payment reform and new models of care delivery with 
primary care providers, such as occurs within a ``patient-centered 
medical home'' model, can encourage providers to keep patients healthy 
and deliver timely, comprehensive, and appropriate care.

    4. Create a Competitive and Accountable Marketplace

    Two key elements that drive healthy markets--consumer information 
(transparency) and choice--are woefully lacking in our health care 
system. Providers operate under perverse incentives that reward the 
volume of services delivered, rather than the quality and efficiency of 
the care provided. Many consumers receive coverage through a third 
party that pays for their health insurance without knowledge of the 
cost of services. Health insurers compete based on the avoidance of 
risk (i.e., individuals who are most likely to generate medical bills), 
leaving many people with individual policies without access to coverage 
or unable to afford it. The U.S. must inject market-based principles 
that foster competition among health care providers and choice among 
consumers to help lower overall costs and increase value within our 
health care system.

    5. Control Costs and Improve Quality

    A successful reform agenda must control costs and ensure that our 
health care system delivers consistent high quality care to everyone. 
While the United States pays $7,026 per capita on health care--more 
than any other nation--we rank near the bottom on a variety of health 
care indicators, including infant mortality, obesity, and potential 
years of lost life due to diabetes. Disparities in health care quality 
are pervasive, with minorities and low-income people often receiving 
lower-quality care across a variety of measures.
    The business community has a record of banding together on quality 
and efficiency issues. For example, HRPA's Pharmaceutical Coalition is 
made up of 60 member companies who purchase pharmacy benefits for more 
than five million Americans. In 2005, they launched the Transparency in 
Pharmaceutical Purchasing Solutions (TIPPS) initiative. TIPPS is an 
effort by the Coalition to ensure the interests of a pharmacy benefit 
manager (PBM) are aligned with those of its employer clients. The 
Coalition has developed a uniform set of rigorous transparency 
standards for PBMs when contracting with Coalition members. PBMs are 
certified annually by completing a RFP process to ensure they are 
willing to meet the TIPPS standards.
    Our experience with the TIPPS initiative has demonstrated that in 
some instances market reforms can be successful. When the program was 
first launched in 2005, only three PBMs were willing to meet the 
standards. Today, 15 PBMs have been certified, representing more than 
50 percent of the market that serves large employer clients.
    Another example of businesses banding together to solve health care 
problems is HRPA's Retiree Health Access (RHA). The Association 
developed RHA as an alternative solution to provide coverage to pre- 
and post-65 retirees. RHA was introduced in 2006 with five employers 
and 40,000 retirees participating.
    At the time, carriers aggressively competed for post-65 retirees--a 
population that comes with significant employer contributions and 
government funding. However, no carrier would offer comprehensive, 
guaranteed issue coverage to early retirees without substantial 
employer subsidies and minimum levels of retiree participation.
    As a result, the Association elected to place its RHA business out 
to bid in an effort to secure coverage for early retirees on a 
guaranteed issue basis without an employer subsidy or minimum 
enrollment requirements. The result of that bidding process was that a 
new RHA benefit offering guaranteed issue coverage for pre- and post-65 
retirees became available January 1, 2008. This has proven to be a very 
popular solution. Since the new RHA solution was announced in 2007, 
more than 200 employers have expressed an interest in considering it. 
As of December 2008, 48 employers had decided to offer RHA with more 
than 80,000 retirees enrolled.
    Reforms must include changes to the current provider reimbursement 
models within private reimbursement arrangements and in public programs 
such as Medicare and Medicaid to promote and reward value.
    In addition, the business community must sponsor and support 
quality initiatives such as requiring providers and health plans to be 
involved in collecting and managing quality data. Enabling innovation 
to find new ways to treat patients, balanced with research into the 
comparative effectiveness and efficiency of various treatments, can be 
applied to improve care and lower costs.

    6. Ensure All Americans Have Health Insurance

    There is clear consensus that any successful health care reform 
agenda must result in the uninsured becoming insured. People who lack 
health insurance do not receive timely care and tend to use the most 
expensive care option--emergency rooms--when they are sick. Health care 
providers then shift the cost of the uninsured on to those paying for 
health care services, resulting in an extra $922 per year for family 
health insurance and $341 for individuals.
    A successful solution has to take into account the different 
circumstances of those who are uninsured. This group includes low-
income people eligible for public programs but who are not enrolled, 
those who make too much to qualify for public programs but still 
struggle to pay for coverage, employees of small businesses, 
individuals at high risk or with pre-existing conditions, and pre-65 
retirees who are not yet eligible for Medicare. In addition, people who 
can access and are able to afford coverage, yet choose not to purchase 
insurance, make up another segment of the uninsured that must be 
addressed.
    One of the greatest advantages of the employer-based system is that 
employees typically form large and diverse risk pools--an important 
factor that, when combined with significant employer subsidies, results 
in relatively stable and affordable premiums for workers. However, 
individuals faced with purchasing coverage on their own in the 
individual market, especially those who are sick or high-risk, can face 
challenges in securing affordable coverage due to unaffordable premiums 
and policy denials. People without access to employer-sponsored 
coverage should be able to have guaranteed access to private coverage 
and comparable tax breaks to purchase coverage on their own.

    7. Assure Adoption of Health Information Technology

    Health care information technology (HIT) needs to be widely adopted 
by health care providers to improve patient safety, increase 
efficiency, and produce significant savings throughout our health care 
system. The potential for HIT to improve care and lower costs has been 
well documented when it has been put in place. It is clear that the 
technology is available. Other industries such as the airlines, 
finance, and consumer electronics have been able to achieve a level of 
interoperability for years, despite rapidly changing technology and 
constant innovation. Although the health care industry is not perfectly 
analogous to other industries, there is significant room for 
improvement to expand the adoption of HIT. Health systems can connect 
people to information, to experts and to each other and can act 
proactively to better manage and deliver preventative and therapeutic 
care. Strong incentives need to be put in place to encourage providers 
to consistently adopt this technology in a manner that benefits 
patients through safer and more convenient care, and in a way that 
lowers administrative costs.
Achieving the Objectives Through Mutual Responsibility
    To achieve true reform of the health care system in the United 
States, we have adopted an approach of Mutual Responsibility. All key 
stakeholders must compromise and accept added responsibility, and share 
in the burdens as well as the benefits of reform. Our HRPA 
comprehensive national reform agenda includes the following mutually 
complimentary elements:

      Federal Government. Public spending on health care, 
primarily for Medicare and Medicaid, accounts for approximately 46 
percent of total health spending. Therefore, the federal government 
must play a critical role in health care reform. The federal government 
should, among other things, maintain the ERISA framework to enable the 
continuation of the employer-based system and not erode the employer 
based system by capping the employer exclusion of health care expenses; 
eliminate cost shifting from public programs to private payers; 
restructure public programs to move away from traditional fee-for-
service reimbursement that pays providers based on volume of service 
toward value-based purchasing; stimulate the growth and availability of 
comprehensive primary care, pay providers to reward prevention and the 
delivery of evidence-based medicine; facilitate and promote prevention 
and wellness programs in the public and private sector; and; adopt 
uniform interoperability standards for health IT.

      Individuals. The Congressional Budget Office estimates 
that 13 percent of the nonelderly accounts for 68 percent of health 
care costs. We will not realize higher quality and lower costs within 
our health care system without individuals being more responsible for 
managing their health. Individuals should:

          maintain health insurance coverage through a private 
        plan or a public program if eligible;
          take greater accountability for their health care by 
        living healthier lifestyles and participating in available 
        prevention and wellness programs in order to receive public and 
        private subsidies for health care; and
          take steps to manage chronic conditions to avoid 
        acute illnesses where possible.

      Health care providers. Most health care in the United 
States is paid on a fee-for-service basis, which encourages providers 
to deliver a higher volume and intensity of services instead of 
providing the most effective treatments as efficiently as possible. 
Health providers should:

          publicly report on quality and cost measures using 
        uniform standards adopted by the federal government;
          treat patients based on evidence-based medicine in 
        accordance with uniform standards and the specific 
        circumstances and needs of each individual patient;
          transition away from fee-for-service reimbursement 
        and embrace new reimbursement models that require 
        accountability and reward superior quality and efficiency; and
          focus on improving individual and population health 
        and the delivery of high quality, cost-effective, evidence-
        based care.

      Insurance carriers. Health insurers play an important 
role by covering people in fully insured arrangements or as third-party 
administrators for self-insured plans. Insurers are in a position to 
change misaligned incentives, disseminate quality and cost information, 
and give individuals access to the most cost-efficient benefit plans 
via individual and group coverage solutions. Insurers should:

          cover all individuals seeking coverage on a 
        guarantee-issue or modified guarantee-issue basis without 
        regard to preexisting condition or risks;
          shift away from fee-for-service reimbursement to pay 
        providers to encourage quality and efficiency; and
          report cost and quality measures for health care 
        providers using national standards.

      Employers. Nearly 160 million Americans under age 65 
receive coverage through an employer-based plan. While employer-
sponsored coverage, especially coverage offered by large employers, 
provides some advantages over individual health insurance--including 
relatively lower premiums, more stable premium increases, and 
guaranteed access to coverage for eligible beneficiaries--there are 
steps that employers can take to improve our health care system. Under 
our plan, employers would:

          design and offer benefit plans that encourage 
        individual and population health by creating incentives to 
        encourage individuals to establish continuous care in primary 
        care practices, seek timely preventive care, participate in 
        health assessments, and participate in prevention and wellness 
        programs; and
          push for benefit plans that reward providers for 
        delivering high quality and cost-effective care.
Employer Play-or-Pay Mandate
    We strongly believe in the voluntary nature of the employment-based 
health care system. Only when all other reforms discussed in HR 
Policy's reform position have been undertaken should Congress consider 
the possibility of implementing some form of a federal play-or-pay 
mandate for certain employers to contribute to the cost of providing 
coverage for certain full-time workers. The mandate to contribute a 
specified minimum amount toward the cost of coverage should apply only 
for W-2 employees who work more than 30 hours per week. Under no 
circumstances would it be acceptable to pursue a state-by-state or 
local play-or-pay mandate scheme. Moreover, any employer mandate should 
not discourage employers from designing and offering cost-effective 
health benefit plans. For example, an approach that requires employers 
to spend a minimum percentage of payroll on health care benefits could 
cause many employers to abandon efforts to contain costs.
    Even under a uniform federal standard, there are instances in which 
unintended consequences might occur if employers were required to 
provide coverage. For example, companies that employ large numbers of 
low-wage, part-time, and seasonal workers may find it economically 
burdensome if subjected to an employer play-or-pay mandate. As such, 
Congress may carefully weigh all factors when considering proposals 
that include a play-or-pay mandate.
    In reviewing those recommendations, we cannot stress too strongly 
that we see the interplay of all elements of the package necessary for 
reform. We do not intend for this reform position to be a menu for 
policy makers and other stakeholders to select the items they find most 
appealing. Highlighting individual elements without reference to the 
entire position would result in a misunderstanding of the systemic 
nature of the problems we are facing.
    Mr. Chairman, we believe the crisis in American health care is too 
complex for any one person, one organization, or one sector of our 
society to figure out the best option for reform. Our ideas are offered 
in the spirit of stimulating a discussion with Congress, the 
administration, and other stakeholder groups to figure out the best 
solution. I hope the IBM experience I have discussed here today, and 
our ideas for reform, will be helpful to you and the Committee as you 
take on this most important task.
    Thank you.
IBMs Employee-centered Health care Innovations
2004
      IBM defines contribution for health care (50/50 share of 
trend)
      Employee-centric subsidy allocation strategy
      ``Free'' PPO & Buy-Up options
      Focus on prevention: no deductible, disease management, 
healthy living rebates: smoking cessation, physical activity
      Move toward strategic plan mix: eliminate Indemnity Plan, 
opt out credit
      Dependent de-subsidization
2005
      Improve purchasing efficiency via best in market vendor 
strategy
      Reach strategic plan mix (all PPO based)
      Introduce Health Savings Account
      Enhanced web-based total health management portal with 
quality, plan/provider and self-managed tools
2006
      Offer 100% coverage for prevention benefits (no co-pay)
      Primary Care: deductible-free
      Introduce new Healthy Living Rebate driving preventive 
care
      Update dollar features of plans (Deductibles, Out-of-
Pocket Maximums, etc.) in keeping with cost inflation
2007
      Care coordination program to assist with rapid, effective 
services access
      Behavioral health care advocacy progam
      Expanded Healthy Living Rebate program
      Maintain full coverage for routine preventive services
      Patient-centered primary care pilot in Mid-Hudson Valley 
NY
2008
      Children's Health Rebate, helping parents & families with 
healthy nutrition, meals, physical activity for healthy weight
      Women's and Men's Health resources optimizer tool added 
to Preventive Care Rebate Program
      Primary care: reduced coinsurance employee pays for 
primary care
      Expanded flu shot coverage
2009
      Patient-centered primary care (medical home) pilots in 
Arizona, Vermont
      Generic drug Incentive Program
      Generics Advantage program drives efficient use of 
generic pharmaceuticals
      Program introduced to optimize safe usage of specialty 
medications

                                 

    Chairman RANGEL. Mr. Pascrell will have the honor of 
introducing his--a Member, outstanding Member of his community. 
I yield to Congressman Pascrell.
    Mr. PASCRELL. Thank you, Mr. Chairman. I am proud that we 
have on our panel today Mr. Kelly Conklin, who both lives and 
works in my district. Mr. Conklin is the cofounder of Foley-
Waite Associates, an architectural woodworking company in 
Bloomfield, New Jersey. He and his wife and business partner, 
Kit, started their business in 1978.
    Foley-Waite Associates specializes in the fabrication of 
architectural woodwork and serves an exclusive high-end 
clientele in New York. He employs highly skilled experienced 
craftsmen in wood and related materials.
    Mr. Conklin and his wife are lifetime residents of New 
Jersey. They currently live in Glen Ridge.
    And, Mr. Chairman, if you will note during the testimony, 
if you haven't already read the testimony, it specifically 
zeros in on the question of transparency and where do our 
premium dollars go.
    So Mr. Conklin thank you for joining us.
    Mr. Chairman, thank you for allowing me to introduce him.
    Chairman RANGEL. Mr. Conklin, the Chair anxiously awaits 
the comments of the business gentleman from New Jersey.

   STATEMENT OF KELLY CONKLIN, FOLEY-WAITE ASSOCIATES, INC., 
                     BLOOMFIELD, NEW JERSEY

    Mr. CONKLIN. Thank you, Mr. Chairman, Members of the 
Committee, Mr. Pascrell. My name is Kelly Conklin and I am here 
to talk about health care and its impact on small business.
    I would like to make one thing clear right up front. I am 
not a policy expert on health care, but I deal with broken 
policy every day in my business. I own, with my wife, Kit, as 
the Congressman said, our business in Bloomfield, New Jersey; 
and my purpose today is to give you a window into small 
companies like mine and how the mess that is our current health 
care system impacts us. I will start with some background to 
try to explain where we are and finally lay out a few ideas as 
to where we might go.
    A little history. My wife and I opened Foley-Waite in 1978 
in a 700-square-foot shop in Montclair, New Jersey. In 1987, we 
expanded and hired four employees and we started offering 
health insurance. The premiums were about 5 percent of our 
payroll, and we paid it all.
    Today, we employ 13 people, occupy 12,000 square feet of 
loft space and serve some of the most influential people in the 
world, and we fork over $6,000 a month in health insurance 
premiums. That is 20 percent of our payroll, one of the largest 
single expenses in our budget.
    Why do I still offer coverage? Practically, it is necessary 
to attract and retain skilled employees, but I do it because it 
is the right thing to do for my people, it is the responsible 
thing too. If I didn't offer coverage, I just would be shifting 
costs onto someone else.
    We have got to stop pretending that we can escape this 
cost. It is a fixed cost. When responsible employers offer 
coverage and others don't, it creates an unlevel playing field. 
If I am contributing for my employees and a competitor isn't, 
they have an advantage.
    We would be much better off in a system where all employers 
contribute a reasonable amount instead of this game of cost-
shifting. That is why a supported system of shared 
responsibility where employers pitch in their fair share.
    April is a month that I dread, but not for taxes. Taxes are 
simple. I call my accountant. But health insurance renewal is a 
nightmare. Rising costs force us to cap our contributions for 
employees' coverage, and we are switching carriers each year. 
We had a rise in Blue Cross/Blue Shield, but they just raised 
our rates 25 percent, so we are switching to Health Net. That 
means new primary care physicians, and for my wife, who has a 
chronic illness, a new doctor who knows nothing of her medical 
history.
    It is very frustrating as the person who writes and signs 
the checks every month to know that a lot of that money we 
spend isn't going to health and it isn't going to care. My 
shopping for health insurance, my choice, is who is the 
cheapest this year--3 years, three insurance companies. And 
over the past 2 months, as we transition to our new carrier, 
our premium bills are now $8,700 per month. While I am writing 
the check for the new company, I am paying full freight for the 
old company.
    This is efficiency? This is not bureaucratic? This is cost 
effective? Really?
    The health insurance market has failed to deliver on its 
promise for small business. It fails to contain cost, enhance 
efficiency or improve outcomes. It fails to provide coverage to 
millions--our dry cleaners, our corner store owners, Joe the 
Plumber and Al the Mechanic. Something has to be done.
    I think transparency is critical. It is time to have the 
insurance companies come clean and say up front what is covered 
and what is not. It is time to ensure everyone access to 
affordable health care based on shared commitment where 
employers like me, our workers, health providers and the 
government all pitch in.
    We can take a big step by creating a public health 
insurance option. A well-designed public health insurance plan 
would finally give small businesses like mine real bargaining 
power, provide a guaranteed backup and introduce greater 
transparency. Most importantly, by creating genuine competition 
and restoring the vitality of the market, dynamic innovation in 
the private sector will occur.
    I am not against private insurance; I am just saying we 
need more options. As a cabinetmaker by trade, I think about it 
like this: A toolbox holds a variety of tools, each perfected 
to perform a specific task. You can't drive nails with a 
screwdriver or cut wood with pliers. And in my experience, when 
a critical tool is missing, well, things can get ugly.
    With health care, we have tried to do everything with a 
hammer. The public plan option is a critical tool missing from 
the toolbox, the one that could stem rising costs.
    According to Commonwealth Fund, reform with a public option 
would save employers $231 billion between 2010 and 2020 and $3 
trillion for the Nation. Without a public plan, we lose three-
quarters of that. Billions for the little guy, imagine what we 
could do with that.
    I have read about ideas I can't support. I don't think new 
tax credits are the solution to this problem. I would rather 
have real health reform that addresses costs rather than a tax 
credit that will only be consumed with skyrocketing premiums. 
We don't need to fiddle with taxes or jigger the Tax Code; we 
need policies to stabilize a health care system in critical 
condition.
    I know I am not alone. I am a member of the New Jersey Main 
Street Alliance, a coalition of over 300 New Jersey businesses 
working for health reform that works. In a survey referenced in 
my written testimony, small business owners said three things:
    One, we are willing to contribute, but we can't go it 
alone. Seventy-three percent said they would, 12 percent said 
they wouldn't; that is a six-to-one ratio.
    We support reform that includes choice of a public health 
insurance plan, 59 to 26 percent, two-to-one.
    We want government to play a stronger role in making health 
care work, 70 to 16 percent, four-to-one.
    Businesses are looking to you for leadership. We need you 
to enact health reform that works for us and our employees this 
year so we can do our part for economic recovery.
    Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you Mr. Conklin. Tell our friends in 
New Jersey help is on the way.
    Mr. CONKLIN. Thank you, Mr. Chairman.
    [The statement of Mr. Conklin follows:]
       Statement of Kelly Conklin, Owner, Foley-Waite Associates,
                         Bloomfield, New Jersey
Introduction
    I would like to thank the Chairman and Members of the Committee for 
this opportunity to share my experience with and views on our employer-
sponsored health insurance system as a small business owner. My name is 
Kelly Conklin, and I am a co-owner of Foley-Waite Associates, an 
architectural woodworking company in Bloomfield, New Jersey.
    We've been in business for thirty years, and have worked for a wide 
range of commercial clients including Prudential Insurance, First 
Fidelity Bank, Shering Plough, Merck, and Citi Bank. For the past 15 
years, we've focused on serving a high-end residential customer base in 
New York City. We have 13 employees, and currently we pay about $6,000 
a month in health insurance premiums. Health insurance is close to 20 
percent of our payroll at this point, and it's the third largest single 
expense in our budget. So this is an issue of great concern to me.
Small Businesses and Health Insurance: Responsibilities and Challenges
    I share below a brief ``health history'' of my business to show 
what things are like on the ground level, but I'll first address the 
big picture of what small businesses are facing now with health 
insurance. It is often repeated in the public square that small 
business is the backbone of our economy. It sometimes looks from Main 
Street, that along with the economic and political well-being of the 
free world, the small business community is charged with the health and 
wellness of the American worker. But the skyrocketing costs of health 
coverage for small businesses are pushing us to the brink.
    Why even offer health coverage? First, there's a strong business 
case: it's a critical benefit to attract and retain the skilled 
employees we need to succeed as a company. But there's more to it. I do 
it because I feel it's the right thing to do for my employees. Part of 
why we started our own business was to create an environment where we 
ourselves would want to work. I once had a business consultant advise 
me that I should tell my employees I had to drop their health coverage 
to ensure their job security, but I just couldn't do it--the ethics 
seemed questionable. It's also the responsible thing to do because if I 
didn't offer coverage, I'd just be shifting the cost of my employees' 
health care onto someone else.
    It's counterproductive to try to escape the costs of health care. 
From my standpoint, it's a fixed cost, an inescapable cost. The way 
we're doing things now, where responsible employers offer coverage and 
others don't, that creates an incredibly unlevel playing field. If my 
employees and I are sharing the costs, then another employer who isn't 
contributing for health care has a competitive advantage over us. We'd 
be much better off in a system where all employers are contributing a 
fair share, instead of this game of cost-shifting we're stuck with now. 
Small business owners like me are willing to contribute--73 percent 
said so in the Taking the Pulse of Main Street survey I was a part of 
last year.
    Small businesses who want to offer health coverage face a number of 
serious challenges. We have no bargaining power with the insurance 
carriers--it's ``take it or leave it.'' We pay more in administrative 
costs--25 percent or more of our premium dollars, compared to around 10 
percent for larger groups. Because of our small size, we can't spread 
risk effectively, and we get penalized for it. Because of rising costs, 
we're forced to reduce benefits by increasing deductibles and our 
employees' share of the premiums. And, we must contend with the great 
lack of transparency in the insurance market. It's so hard to know what 
you're buying and impossible to determine whether your dollars are 
being spent well.
    April is a month I dread, not for taxes, but for health care. We 
struggle every year to find a way to make it work. We've been forced to 
cap our contributions for employees' coverage, and we've gotten used to 
switching carriers every year. We had Horizon Blue Cross/Blue Shield 
last year, but they raised our rates 25 percent, so we're switching to 
Health Net. That means enrollment forms, discontinuation forms, finding 
new primary care physicians and, because my wife has a chronic illness, 
new specialists who know nothing about her health history. It's 
extremely frustrating, as the person who literally writes and signs the 
check every month, to know that a lot of that money is not going to 
provide care for the people I'm paying the benefit for--I pay thousands 
of dollars for a system that is inefficient and doesn't deliver the 
promise of decent care or financial security.
    Back in '78 if you had told us that one day we would employ 13 
people, occupy 12,000 square feet of loft space, serve some of the most 
influential people in the world and fork over $6,000 a month in health 
insurance premiums, we would have questioned your sanity. Like 
thousands of other small company owners we felt our way along, picking 
up sound business practices by the seat of our pants, usually preceded 
by a swift kick to the same. Not many graduates of the Wharton School 
work on Main Street, or make their living as plumbers or serving 
hamburgers and soda at the corner coffee shop or turning wrenches at 
the local auto repair. To this day I am appalled whenever I read on a 
health insurance document that if an employee should have a question or 
problem with their health insurance plan they should ``first contact 
the company health insurance administrator''--that being me. Talk about 
``in the land of the blind a one-eyed man is king.''
    My ``shopping'' for health insurance consists of finding the least 
expensive policy--my ``choice'' is who is cheapest this year. Three 
years, three health insurance companies and over the past two months as 
we ``transition'' to our new carrier, our premium bills are $8,700 per 
month. Some of that premium money will be returned, but when my broker 
walks in the door with enrollment forms I have to write the check then 
and there for the new carrier, while maintaining current coverage with 
the ``old carrier.'' This is efficiency? This is not bureaucratic? This 
is ``cost effective''? Really?
    Too often the ``catastrophe'' in catastrophic illness is not the 
disease, it's the devastation of medical bankruptcy in the aftermath. 
The lack of transparency in health insurance policies means that the 
insurance purchased in this case by your local cabinet maker (me) could 
be a financial disaster waiting to happen. What are the limits of our 
policy? How many Americans think they're covered but then find 
themselves destitute because their employer ``shopped'' for the 
cheapest coverage? How many of us actually know our policy limits and 
how that compares to what we might need? And how much of what I and my 
employees spend on health insurance goes to make up the system's 
shortfall because millions of our fellow Americans are too poor to 
afford any insurance at all and receive their care in the emergency 
room, where the costs are highest and the outcomes least certain?
    The health insurance market has failed to deliver on its promise 
for small businesses. It fails to provide peace of mind or deliver 
quality care. It fails to contain costs, enhance efficiency or improve 
outcomes. It fails to provide coverage to millions of our poorest 
citizens, to our low-wage workers, to our sole proprietors, to our 
corner coffee shop owner, our local plumber and car mechanic. Something 
has got to be done.
Real Solutions for Small Businesses
    We need to stop whistling past the graveyard and face this problem 
full on. There are no cheap or easy solutions. But there are things we 
can do.
    We can promote transparency by having the private insurance 
companies come clean in plain English about where our premium money 
goes. We can have the private insurance companies produce policies that 
clearly explain and comparatively measure regional cost and 
probabilities so consumers can understand what it is they can expect 
and how secure they are from medical bankruptcy. We can assure everyone 
access to health care, preventative and therapeutic, and we can agree 
that this should be a shared commitment where employers like me, our 
workers, health providers and the government all contribute to make it 
so.
    I believe we can go a long way toward these goals by creating a 
public health insurance option. The choice of a public health insurance 
plan would finally give small businesses like mine real bargaining 
power, it would provide a guaranteed backup, and it would promote 
greater transparency in the system. Perhaps most importantly, by 
creating genuine competition and restoring vitality to the market 
dynamic, this will bring about broad-based positive change in the 
private sector health insurance industry. According to the Commonwealth 
Fund, health reform that includes a public option has been estimated to 
save employers $231 billion over 2010-2020, and $3 trillion for the 
nation. Without the public plan option, those savings shrink from $3 
trillion to less than $800 billion: we lose three quarters of the 
savings. I would submit that these are savings we cannot afford to pass 
up.
    A word of caution about some things I believe won't help address 
the problems we face as small businesses. I don't believe new tax 
credits are a good solution to this problem. I would rather have real 
health reform that addresses the cost drivers in health care and bends 
the cost curve down than a tax credit that won't mean anything in two 
years after the costs just keep skyrocketing. That said, I'm against 
capping the employer exclusion for health benefits: this would only 
push more small businesses over the edge into dropping coverage. We 
need to create a more stable environment so businesses and employees 
can afford to contribute, not undermine that stability.
The Brief Health History of a Small Business: Foley-Waite Associates
    In 1978, my wife and partner Kit Schackner and I formed Foley-Waite 
Associates in Montclair, New Jersey. Our shop, equipped with machines 
built between the Wilson and Eisenhower administrations, occupied 700 
square feet. As a new enterprise, we aspired to furnish homes and 
businesses with fine woodwork and furniture. Working side by side and 
determined to survive, we realized anything made with our tools and 
talent that paid the rent and kept the lights on would have to suffice 
while we built a reputation and client base. The glory work would have 
to wait. Luxuries like plastic garbage bags and Coca-Cola would have to 
wait, too. Our gross receipts that first year were $27,000. Medical 
insurance, as it was known then, wasn't even on the radar. After all, 
we were young, healthy and broke.
    We survive on Main Street by honing the specialized skills of our 
trades, by our reputations for dependability and a strong work ethic. 
Administration and paperwork, like payroll filings, workman's comp 
insurance and government mandated reports, are pretty well down the 
daily priority list. That's one reason that on Main Street so many 
small enterprises are the simplest and smallest, a ``sole proprietor'' 
or a ``mom and pop'' partnership that statistically will likely fail in 
its first year. For these, the hardest working, most at risk in 
business, medical insurance is an unattainable goal. There is something 
very wrong with that.
    Along with our company's slow but steady growth came the ability to 
start a family and in 1984 our daughter Louisa was born. With Kit's 
pregnancy a new awareness of the cost of medical care came into clear 
focus. We bought medical insurance. As I recall, that insurance was 
``basic medical,'' meaning it would provide payment of medical bills 
for catastrophic illness and of course pregnancy. Primary care 
physicians, referrals, deductibles, co-pays and denial notices were all 
new to us.
    We had previously had a relationship with our doctor. He knew us 
and more important our medical history, because he was writing it. Our 
first insurance policy changed all that: our doctor didn't take our 
medical insurance. With no awareness of what the future would hold, we 
began a long, expensive, frustrating journey into the mess that is 
modern health insurance.
    Aside from Kit's OBGYN and Louisa's pediatrician, Kit and I didn't 
see a doctor for years. At the time, that did not seem unreasonable. 
For my wife and me, our health care insurance plan provided little in 
the way of health or care. We were still young and pretty healthy, but 
that would change.
    We moved our little operation from Montclair to Bloomfield in 1987. 
Our enterprise evolved: it could no longer survive as a mom and pop. We 
would have to assemble a crew of skilled workers trained in our trade 
to meet the demands of a growing customer base. Our new shop was a vast 
space of 4,500 square feet and Louisa's bedroom no longer served its 
dual purpose as Kit's office. We now had 4 employees and our project 
list included a conference table for the board room of The Prudential 
Insurance Company's headquarters in Newark, New Jersey.
    We offered health insurance to employees who were with our company 
for six months or more. There was no employee contribution. To find 
skilled workers and most importantly to keep them, Foley-Waite 
Associates had to offer health insurance. At that time, it wasn't easy 
but it wasn't impossible. Our health insurance premiums were about 5 
percent of our payroll.
    Health coverage is personally very important to me because my wife 
suffers from a chronic condition. She has Discoid Lupus: a chronic, 
disfiguring auto-immune disease of the skin, hard to diagnose and 
almost impossible to effectively treat. She lives with the symptoms of 
this disease every day, and has become a master of theatrical make-up 
and can paint out with brown spray paint the ever-more-difficult-to-
hide signs of alopecia.
    For nearly 10 years, general practitioners--our ``primary care 
physicians''--were stumped. The local ``in-network'' dermatologists she 
saw seemed to quickly lose interest in her disease, when it became 
clear that the conventional therapies would offer no real relief. 
Instead they resorted to scolding her about lifestyle choices, like 
gardening. Her case is special, but that's no excuse for the clumsy and 
ineffectual way it has been handled by an overly complex, disconnected, 
impersonal and incompetent ``health care system.'' Just in the last 3 
years she found a dermatologist at NYU who has for the first time given 
her the sense that someone competent and caring will do everything he 
can to help her with this relentless disorder. There is only one 
problem--like many of this country's best and brightest doctors, he 
doesn't take ``health care insurance''; period. Cash only, pay as you 
go.
    Ten of Foley-Waite's eligible employees participate in our health 
care plan. One who does not is a permanent resident of the United 
States and a citizen of Great Britain. Before he came to work for us, 
he had a real scare a few years back when he discovered a lump on his 
leg and went to the doctor in New Jersey. A biopsy was taken and he was 
given the terrible news that he had aggressive melanoma. He was advised 
to get his affairs in order, the prognosis was terminal.
    He decided to get a second opinion in England. He hopped on a plane 
and went to a doctor near his family's home in London, where a second 
biopsy was performed and the diagnosis of his American physician was 
confirmed. He did indeed have a rare, very aggressive form of cancer 
that would require immediate surgery and a relatively new but promising 
course of chemo-therapy. He agreed to the English doctor's 
recommendation, had the surgery within days of the diagnosis and began 
a rigorous course of chemo. As he says, ``The chemo almost killed me, 
but with my faith in god, the help of my family and the British 
doctors, I survived.'' That was five years ago and after his most 
recent visit to his English doctor, his prognosis is excellent.
    Another employee, one who participates in our health plan, had a 
simple but painful medical condition requiring a routine outpatient 
procedure. He went to his primary care doctor, got the diagnosis and 
with his HMO Blue Access card in hand showed up on the appointed day 
for his surgery. The person behind the reception desk in her white 
uniform, the nearest ``expert,'' informed him he needed a referral. He 
called me and I told him he didn't, but to no avail. Back to the 
primary, the surgery appointment blown, he found that I was right, the 
expert was wrong and the surgery was re-scheduled. By this time the 
condition was too painful for him to come back to work while he waited 
for his surgery. He had the surgery on a Thursday. Over the weekend the 
stitches pulled, the surgical site became infected and my guy, now in 
great discomfort, was back at the doctor's office Monday morning. 
Ordered home with a new course of medication, he was told to stay home 
for the rest of the week. Out of work two weeks.
    Compare the stories of these two employees: It took as long for his 
doctor to treat a hemorrhoid as it did for a doctor in England to 
perform a biopsy, diagnose a deadly cancer, perform surgery and begin a 
state-of-the-art course of chemotherapy. This is the health care system 
as my employees and I experience it. This is what I pay $6,000 a month 
for. This is the best health care in the world?
Looking to Congress for Leadership
    My challenges with health care and my views on what needs to be 
done to fix it are by no means unique. Back home in New Jersey, I'm a 
member of a coalition called the New Jersey Main Street Alliance. We're 
a coalition of over 300 New Jersey small businesses that are working 
together to support health reform that works for us. Last year I was 
surveyed as part of a national small business survey project, where 
surveyors polled Main Street business owners door to door and asked 
face to face what we thought about the state of health care.
    The results of this survey, reported in Taking the Pulse of Main 
Street: Small Businesses, Health Insurance, and Priorities for Reform, 
confirm that the views of my fellow business owners across America are 
quite different than those often attributed to us. The survey results 
challenge the conventional wisdom on small business and health care in 
three key areas:

    1.  Our willingness to contribute: When asked if we were willing to 
contribute for health coverage for our employees, more than two thirds 
(73 percent) of small employers said yes. Furthermore, 63 percent 
indicated a willingness to pay 4-7 percent of payroll (in some cases 
more) to guarantee effective, affordable coverage for our employees.

    2.  Our support for real choices, including a public health 
insurance option: When asked to choose between a proposal with a public 
insurance option and a proposal with more private options, respondents 
chose the proposal with a public alternative two to one (59 percent to 
26 percent, with 14 percent undecided/other).

    3.  The role of government in making health care work for us: When 
asked about public oversight and the role of government, small business 
owners supported more public oversight of the insurance industry by a 
margin of almost six to one (75 to 13 percent), and a stronger 
government role in guaranteeing access to quality, affordable health 
coverage by a margin of over four to one (70 to 16 percent).

    We need Congress to act, and act swiftly, to advance real health 
reform, this year. In closing, I would like to thank the Chairman and 
Members of the Committee for allowing me to share my experiences as a 
small business owner. I am certain that if Congress can step back for a 
moment from the political blood battles that dominate the nightly news 
and instead keep Main Street in mind, you can craft the legislation we 
so desperately need to fix health care.

                                 

    Chairman RANGEL. I would like to yield to Mr. Camp to 
introduce our next couple of witnesses.
    Mr. CAMP. Well, thank you.
    Our next witness is Denny Dennis, who is a Senior Research 
Fellow at the NFIB Research Foundation. And following that we 
will hear from John Sheils, Senior Vice President of The Lewin 
Group in Falls Church.
    Thank you.
    Mr. Dennis.

 STATEMENT OF WILLIAM J. DENNIS, JR., SENIOR RESEARCH FELLOW, 
                    NFIB RESEARCH FOUNDATION

    Mr. DENNIS. Thank you very much Mr. Chairman and Mr. Camp. 
This is an interesting day because Friday I start my 34th year 
in NFIB.
    I would like to make two points initially in my testimony. 
The first one is, employer-mandated health insurance that is in 
the form of just funding premiums--pay-or-play, the payroll 
tax, they are all the same thing--they all become a mandate, 
are bad for small business, are bad for low-income people and 
they are bad for the economy.
    The second point I would like to make is that health care 
costs must be addressed, preferably prior to coverage 
expansion, certainly no later than simultaneous to coverage 
expansion, and hopefully not later than coverage expansion.
    As to the former, mandates are bad for small business 
because, initially--and I am going to underscore the word 
``initially''--in the short term, small business will absorb 
the brunt.
    Now, since there is a direct correlation between the amount 
of income that a small business owner takes from the business 
and his propensity to provide health insurance, meaning that if 
you take a lot out, you tend to, almost always, provide health 
insurance; if you take a little bit out, you tend not to 
provide health insurance. Under those circumstances, the abrupt 
necessity to absorb additional costs, attack the most marginal 
and vulnerable of employers. The same is true not only with 
low-income employers, but low-margin businesses.
    Second, an employer mandate effectively requires not only 
subsidization of low income, but also sometimes high income, 
which means it is a very blunt instrument, and you are looking 
for a targeted instrument.
    And, finally, it really embeds an employer-based system on 
smaller firms when an employer-based system clearly does not 
work for smaller firms. One of the things we are going to have 
to talk about is who the system works for and who it doesn't; 
and clearly, for small businesses, it doesn't.
    The employer mandate is also bad for low-income people 
because they are eventually going to have to pay for this. They 
pay for it in lost wages, they pay for it in lost employment 
and they pay for it in other opportunities such as shorter 
working hours. This is generally understood by economists. This 
isn't new. In fact, I cite several prominent articles in my 
written testimony.
    One of them is particularly interesting. It comes from the 
American Economic Review, 1989, written by someone I think most 
of us, or probably all of us, in this room have heard of, a 
fellow by the name of Larry Summers.
    Recently, there came an article in the Journal of the 
American Medical Association, JAMA, also from some people we 
have probably heard of, Ezekiel Emanuel and Victor Fuchs, which 
concludes the same thing, that the cost of mandates is all 
passed back to low-income people.
    And then, thirdly, it is bad for the economy because it is 
essentially a regressive tax, a very regressive tax, and 
supposedly we are concerned in this day and age about income 
inequality. Yet we are going to try and add more cost onto all 
our low-income people.
    So your choice is this when it comes to the employer 
mandate: Make low-income people pay for their health insurance, 
effectively in a hidden, blunt and politically easy way under 
the guise of employer money on the table; or you can subsidize 
the health insurance of the low-income, target your subsidies, 
but do so in a politically more difficult way.
    With regard to costs--I think we all agree that a major 
reason for the coverage problem is cost. I don't think that is 
in dispute. But what we are talking about here is a sequencing 
issue.
    Let's take a look at Massachusetts. Massachusetts took up 
coverage first and now they are concerned with cost. So what 
happened? Between 2005 and 2007 Massachusetts cut its uninsured 
rate by about half. There is some argument about numbers, but 
it is about half. Meanwhile, costs, the entire costs of health 
care in Massachusetts, rose 23 percent. The entire health care 
cost in the United States comparatively rose 11 percent.
    Now, if we do the same sequencing in the United States that 
they did in Massachusetts and have the same results that they 
had in Massachusetts, we are going to have a much worse 
problem, because Massachusetts started out with a very low 
uninsured rate, much lower than the Nation as a whole, plus 
they had a series of other advantages.
    So your choice then is really to enact cost-control reforms 
before or simultaneous to coverage, because after there will be 
a huge new demand placed on the system for which there will be 
no offsets.
    I thank you very much, Mr. Chairman. I would be more than 
happy to answer questions, and also to go more into the 
employer-based system and why it doesn't fit small business 
very well. Thank you.
    Chairman RANGEL. Thank you.
    [The statement of Mr. Dennis follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman RANGEL. Our next witness.
    Mr. CAMP. Thank you.
    Mr. Sheils, you have 5 minutes.

           STATEMENT OF JOHN SHEILS, VICE PRESIDENT,
                        THE LEWIN GROUP

    Mr. SHEILS. Thank you. I am a Vice President with The Lewin 
Group. We are a nonpartisan health management consulting firm 
specializing in health care; we don't advocate for or against 
any legislation.
    President Obama's proposal, while running for the 
presidency last year, was to create a public plan that would be 
available to people who are self-employed and small businesses 
that want to offer insurance to their employees.
    Senator Baucus' proposal states that the new public plan 
would be similar to the Medicare Program. And implementing the 
program in a manner that is consistent with Medicare has some 
huge implications.
    If you turn to page 4 of the testimony, right now, payment 
rates for providers under the Medicare Program are equal to 
about 71 percent of what private payers pay. For physicians' 
care, the payments are equal to about 81 percent of what 
private insurers pay. So you have a 25 to 30 percent lower 
price, lower premium, as a consequence of that.
    In addition, there are some--in addition, administrative 
costs are lower under the program. For private insurance--for 
private-sector insurance, administrative costs average around 
13.4 percent of claims. In the public program, we expect the 
costs to be about 7 percent of claims. So we have a premium 
that is 20 to 30 percent lower than the premium that you have 
in private insurance today.
    And if you look at the chart on page 5, average private 
coverage premiums right now are about $970 per month per family 
for family coverage. That would drop to $7,600 per family, if 
you were to buy it through this public plan. That is a savings 
of about $2,500 over the course of a year. So it is going to be 
a very attractive option; lots of people are going to want to 
go into it.
    On page 6, we show what happens under the proposal. But to 
give it a little better context, the public plan has been 
proposed as part of efforts to expand coverage. One of those 
requirements is a requirement that the employer either pay a 
tax or provide insurance.
    Also, President Obama's proposal included some expansions 
of Medicaid and some new tax credits to help people buy 
insurance. So we ran the model, did our estimates with simply 
those assumptions.
    If you look at the right side of the chart, we show first 
of all that there are about 28 million people who are uninsured 
today who would become covered under the program as a result of 
the program. That includes an increase of 16 million people on 
Medicaid.
    The public plan would cover about 132 million people, but 
most of that is going to be people dropping their private 
coverage and moving into the public plan. That is about 120 
million people and 70 percent of the private insurance market.
    Just to--in our paper we also looked at the impact if you 
would limit it just to small firms, and that is on the left 
side of this page; and in that case, if you limit it just to 
small firms, overall there is a loss of private coverage of 
about 32 million people.
    For employer coverage specifically, again on the right-hand 
side of the table, private employer insurance would go down by 
107.6 million people. There would be an increase in the number 
of employers who are buying coverage for their workers through 
the public plan of 113 million. It is really a net increase in 
the number of employers contributing to the cost of the 
insurance for the worker that derives primarily from the pay-
or-play requirement, which is to provide insurance or pay a 
tax. So this is a very large shift away from employer coverage.
    On page 10 we have an estimate of what happens to provider 
income if we were to set up a program available to all firms, 
using Medicare provider payment rates. Hospitals would lose 
about $36 billion in net income, physicians would lose about 
$33 billion. If you limit it to small firms, actually hospitals 
come out a little bit ahead. And that reflects the fact that 
there is uncompensated care that is reduced by covering more 
people. These are net figures. But covering everyone under 
Medicaid with--under Medicare payment rates would have a fairly 
substantial negative effect.
    The last thing I wanted to talk about is cost-shifting. 
This is a chart on page 11 which summarizes the payment system 
for hospitals in the United States. And we have arrayed people 
by their source of coverage and we have expressed the payments 
as a percentage of costs.
    Right now, in the middle, Medicare--actually, in 2003, 
payments were equal to about 95 percent of costs. Medicaid 
payments were lower, about 89 percent. And then the uninsured 
accounted for a substantial amount of uncompensated care.
    To recover those shortfalls, the hospitals, and physicians 
as well, will increase what they charge private payers. Private 
payers were paying 122 percent of costs. And the key to 
understand here is, when you put more people in Medicare where 
their payment rates are at this level, it will push down 
revenues for hospitals for those people and require the 
hospitals to increase their charges to privately insured 
people.
    If you look at the final page here, we estimate that if we 
were to set up a program where all firms can go in using 
Medicare rates, there would be a cost shift to privately 
insured people of about $526 per person for a privately insured 
person, and maybe $1,500 for a family policy. But if you were 
to limit it to just small employers, small firms, the program 
would have less of a cost shift. In fact, because of the 
reduction on compensated care, it actually would be a small 
reduction in the cost shift.
    So the point of the paper was to explain that there are 
different ways that you can construct this program. You don't 
have to use Medicare rates; you could use midpoints between 
private and Medicare.
    There are a number of choices, and in our study, we look at 
the impacts, all of these impacts, under those various several 
scenarios. Thank you.
    Chairman RANGEL. Thank you very much.
    [The statement of Mr. Sheils follows:]
            Statement of John Sheils, Senior Vice President,
                The Lewin Group, Falls Church, Virginia
    The Lewin Group is a health care and human services policy research 
and management consulting firm. We have over 25 years of experience in 
estimating the impact of major health reform proposals. The Lewin Group 
is committed to providing independent, objective and non-partisan 
analyses of policy options. In keeping with our tradition of 
objectivity, The Lewin Group is not an advocate for or against any 
legislation. The Lewin Group is part of Ingenix, Inc., which is a 
wholly owned subsidiary of the UnitedHealth Group. To assure the 
independence of its work, The Lewin Group has editorial control over 
all of its work products.
The Cost and Coverage Impacts of a Public Plan
    Thank you for this opportunity to address the committee on the 
coverage effects of a public plan. I am a Vice-president with The Lewin 
Group with 25 years experience in studying and analyzing proposals to 
reform health care and extend health insurance to the uninsured. We are 
committed to providing independent, objective and non-partisan analyses 
of policy proposals. The Lewin Group does not advocate for or against 
legislative proposals.
    President Obama and Senator Baucus have proposed to create an 
``exchange'' offering individuals and employers a selection of health 
plans. They also propose to create a new ``public plan'' that would 
compete for enrollment with private insurance plans in the exchange. 
Premiums under the public plan would be up to 30 percent less than 
private insurance plans if Medicare payment levels are used. Due to 
this substantial cost advantage, we estimate that up to 119.1 million 
of the 171.6 million people who now have private employer or non-group 
coverage would move to the public plan (70 percent).
    Although the details of these proposals are still being developed, 
President Obama's health reform proposal from the 2008 presidential 
campaign states:
    ``The new public plan will be open to individuals without access to 
group coverage through their workplace or current programs. It will 
also be available to people who are self-employed and small businesses 
that want to offer insurance to their employees.'' \1\
---------------------------------------------------------------------------
    \1\ ``Barack Obama's Plan for a Healthy America: Lowering health 
care costs and ensuring affordable high-quality health care for all.''
---------------------------------------------------------------------------
    The white paper on health reform developed by Senator Baucus would:
    Create an exchange ``through which individuals and small businesses 
in the market for insurance could obtain affordable health care 
coverage'' and states that ``the exchange would also include a new 
public plan option, similar to Medicare.'' \2\
---------------------------------------------------------------------------
    \2\ ``Call to Action: Health Reform 2009,'' U.S. Senator Max 
Baucus, Chairman, Senate Finance Committee.
---------------------------------------------------------------------------
    Also, the Commonwealth Fund reform proposal would eventually allow 
employers of all sizes to purchase coverage in the public plan for 
their workers.\3\
---------------------------------------------------------------------------
    \3\ ``The Path to a High Performance U.S. Health System: A 2020 
Vision and the Policies to Pave the Way,'' The Commonwealth Fund 
Commission on a High Performance Health System, February 2009.
---------------------------------------------------------------------------
    To assist in designing the public plan, we developed estimates of 
the number of people enrolling in the plan under alternative design 
features. We estimated the effect of varying eligibility by firm size 
and provider payment levels under the program, which at this time seem 
to be the key design features.
    Our estimates and methodology and results are presented in the 
following sections:

      Features of the public plan;
      Premiums in the public plan;
      Coverage effects;
      Employer Coverage;
      Provider impacts; and
      Cost-Shifting.
Features of the Public Plan
    The public plan has been proposed as part of broad health reform 
proposals that would substantially expand insurance coverage. For 
illustrative purposes, we assume that the public plan would be 
implemented as part of a health reform program that includes coverage 
expansions similar to those proposed by President Obama in the 2008 
campaign. Key elements of the President's proposal include: \4\
---------------------------------------------------------------------------
    \4\ ``McCain and Obama Health Care Policies: Cost and Coverage 
Compared,'' The Lewin Group, October 8, 2008.

      There would be a mandate for children to have coverage;
      Medicaid eligibility is expanded to include all adults 
living below 150 percent of the Federal Poverty Level (FPL), including 
able-bodied adults without custodial responsibilities for children;
      Tax credits are provided to people purchasing private 
insurance who live between 150 percent and 400 percent of the FPL;
      Medical underwriting and health status rating is 
eliminated in all insurance markets, but rating by age is permitted;
      Medium and large employers are required to offer 
insurance or pay a payroll tax; and
      Tax credits are provided to small employers (fewer than 
10 workers) with low-wage workers for up to 50 percent of employer 
spending for worker coverage.

    We assume that the benefits provided under the public plan are the 
same as those offered under the BlueCross/Blue Shield Standard Option 
offered to Members of Congress and Federal workers under the Federal 
Employees Health Benefits Plan (FEHBP) (as proposed by President 
Obama). These benefits include hospital care, physician services, 
prescription drugs, substance abuse, mental health services and dental 
care. For in-network utilization, there is a $15 copayment for office 
visits with no deductible. The plan includes a $250 deductible and 
higher copayments for out-of-network utilization, up to a maximum out-
of-pocket limit amount of $4,000.
    We used The Lewin Group Health Benefits Simulation Model (HBSM) to 
simulate the effect of such a program on coverage.\5\
---------------------------------------------------------------------------
    \5\ ``The Health Benefits Simulation Model (HBSM): Methodology and 
Assumptions,'' The Lewin Group, February 19, 2009.
---------------------------------------------------------------------------
Premiums in the Public Plan
    For illustrative purposes, we begin the analysis by estimating the 
effect of creating a new public plan modeled on Medicare that is 
available to individuals and the self-employed. We began by estimating 
the effect of the plan assuming that it would use Medicare provider 
reimbursement levels. We then estimated enrollment and costs assuming 
enrollment is limited to small firms and under alternative provider 
reimbursement assumptions.
    We estimate that premiums for the public plan under this scenario 
would be roughly 30 percent less than premiums for comparable private 
coverage (effects vary by firm size). As shown in Figure 1, provider 
payment levels for hospital services under Medicare are equal to only 
about 71 percent of what is paid by private health plans for the same 
services. In fact, Medicare payments to hospitals are actually equal to 
only between 92 percent and 95 percent of the cost of the services 
provided by hospitals.\6\ For physician services, Medicare pays only 
about 81 percent of what is paid by private health plans for the same 
services.\7\
---------------------------------------------------------------------------
    \6\ American Hospital Association, ``Trends Affecting Hospitals and 
Health Systems,'' TrendWatch Chartbook, April 2008.
    \7\ State Health Facts, The Kaiser Family Foundations (KFF), 2003 
report.
---------------------------------------------------------------------------
Figure 1
Benefits and Administrative Costs under a Medicare-based Public Plan 
        and Private Insurance Compared: 2010

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
                                                  Source:
                                                  American Hospital
                                                  Association, ``Trends
                                                  Affecting
                                                  Hospitals and
                                                  Health
                                                  Systems,'' TrendWatch 
                                                  Chartbook
                                                  April 2008;
                                                  ``Report to
                                                  Congress: Medicare
                                                  Payment
                                                  Policy,''
                                                  Medicare
                                                  Payment
Advisory Commission (MedPAC), March 2008; and State Health Facts, The 
Kaiser Family Foundations (KFF), 2003 report.

    Administrative costs are also expected to be lower for the public 
plan than under private insurance, reflecting that the public plan 
would not include an allowance for insurer profit and insurance agent 
and broker commissions and fees. Administrative costs, including profit 
and commissions, for privately insured firms are on average equal to 
about 13.4 percent of covered benefits. If implemented through 
Medicare, administrative costs would be equal to about 7.0 percent of 
covered services.
    Our estimate of administrative costs is based upon a detailed 
analysis of administrative costs under insurance pools which we present 
in our model documentation.\8\ These administrative costs are about 
twice what administrative costs currently are in the Medicare program 
(about 6.5 percent of benefits). Costs will be higher in the public 
plan than in Medicare because the program will need to process the 
movement of individuals across health plans when people decide to 
change their source of coverage. The plan will also need to collect 
premiums from individuals and employers who decide to enroll. These 
functions are not required for the current Medicare populations once 
enrolled.
---------------------------------------------------------------------------
    \8\ ``The Health Benefits Simulation Model (HBSM): Methodology and 
Assumptions,'' The Lewin Group, February 19, 2009.
---------------------------------------------------------------------------
    Figure 2 presents our estimates of the average cost of insurance 
for individuals in the public plan and in the private insurance 
markets. Premiums for family coverage under the public plan would 
average $761 per month compared with $970 per month in the current 
private insurance market.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Figure 2
Impact of Using Medicare Provider Payment Rates on Premiums in the 
        Public Plan in 2010
Source: The Lewin Group estimates using the Health Benefits Simulation 
Model (HBSM).
Coverage Effects
    We estimate that the Obama-like health reform program described 
above would reduce the number of uninsured by about 28 million people. 
This reflects expanded eligibility under Medicaid/CHIP, and the tax 
credits under the proposal.
    As discussed above, the President's campaign proposal would limit 
enrollment to individuals, the self-employed and small employers. Large 
employers would not be permitted to cover their workers through the 
public plan. Under this scenario, about 42.9 million people would be 
enrolled in the public plan (Figure 3). The number of people with 
private coverage would fall by about 32.0 million people.
    If we assume that the public plan is open to all individuals, the 
self-employed and all firms, the public plan would enroll about 131.2 
million people (includes some uninsured who become covered). The number 
of people with private health insurance would decline by about 119.1 
million people (Figure 3). This is equal to about 70 percent of all 
people currently covered under private health insurance (excludes 
supplemental coverage for Medicare beneficiaries).

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                                  Figure 3

                                                  Public Plan 
                                                  Enrollment 
                                                  and Reduction in Priva
                                                  te Coverage 
                                                  under a Public Plan Us
                                                  ing Medicare Payment 
                                                  Levels 
                                                  2010 (millions)

                                                  a 
                                                  Changes in coverage 
                                                  under Medicaid and oth
                                                  er programs not 
                                                  shown.

Source: The Lewin Group estimates using the Health Benefits Simulation 
Model (HBSM).

    The impact of the program on private coverage would depend largely 
on the levels of reimbursement under the program. While Medicare 
payment levels have been proposed, it would be possible to pay 
providers at other levels. To illustrate, we estimated the number of 
people enrolling in the public plan under two alternative payment level 
assumptions.
    If the program is implemented using private payer rates (i.e., 
``negotiated'' rates), premiums under the public plan would be only 6 
percent to 9 percent less than in private plans, reflecting that the 
program would still have lower levels of administrative costs than 
private insurance. Public plan enrollment, assuming all firms are 
eligible to enroll, would fall from 131.2 million people with Medicare 
reimbursement levels to about 20.6 million people at private payer 
levels (Figure 4). We also show enrollment assuming payments are set at 
the midpoint between Medicare and private payment levels.
Figure 4
Enrollment in Public Plan Under Alternative Public Plan Scenarios

----------------------------------------------------------------------------------------------------------------
                                                                         Eligible Groups
                                               -----------------------------------------------------------------
                                                 Small Firms, Self-employed and    All Firms, Self-employed and
                                                        Individuals Only                   Individuals
                                               -----------------------------------------------------------------
                                                 Private    Midpoint   Medicare   Private    Midpoint   Medicare
                                                  Payer     Payment    Payment     Payer     Payment    Payment
                                                  Levels     Levels     Levels     Levels     Levels     Levels
----------------------------------------------------------------------------------------------------------------
Public Plan Premiums as Percent of Private         -9% to    -15% to    -25% to     -6% to    -12% to    -25% to
                                                     -11%       -30%       -40%        -9%       -24%       -32%
----------------------------------------------------------------------------------------------------------------
Coverage Effects (millions)
----------------------------------------------------------------------------------------------------------------
Reduction in Uninsured                               23.8       26.1       27.4       25.1       26.7       28.2
----------------------------------------------------------------------------------------------------------------
Enrollment in National Public Plan                   17.0       31.5       42.9       20.6       77.5      131.2
----------------------------------------------------------------------------------------------------------------
Change in Private Coverage                          -10.4      -21.5      -32.0      -12.5      -67.5     -119.1
----------------------------------------------------------------------------------------------------------------
Source: The Lewin Group estimates using the Health Benefits Simulation Model (HBSM).

Employer Coverage
    We estimate there will be about 157.4 million people with private 
employer-sponsored Insurance (ESI) in 2010 including workers, 
dependents and retirees. These include both private employer and 
government worker programs. In Figure 5, we present our estimates of 
the changes in the number of workers and dependents where the employer 
contributes to the health insurance premiums.
Figure 5
Changes in Employer Participation in Worker Coverage Using Medicaid 
        Payment Levels in Public Plan (millions)

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

a Assumes employers are required to either provide insurance 
or pay a 6 percent payroll tax.
Source: The Lewin Group estimates using the Health Benefits Simulation 
Model (HBSM).

    We estimate that if all firms are permitted to buy coverage for 
their workers through the public plan assuming Medicare payment levels, 
about 107.6 million workers and dependents would lose the private 
employer coverage they now have. However, employers would pay the 
premium for coverage under the public plan for about 113.9 million 
people. This would result in a net increase in the number of workers 
and dependents where the employer is contributing to the cost of 
insurance of about 6.3 million people. These include primarily workers 
in firms where the employer decides to cover their workers under the 
public plan rather than pay the payroll tax.
    Figure 6 presents the impact of the proposal on employer 
participation in worker health benefits under alternative design 
scenarios.
Figure 6
Changes in Employer-Sponsored Insurance (ESI) under Alternative Public 
        Plan Scenarios (thousands)

----------------------------------------------------------------------------------------------------------------
                                                                         Eligible Groups
                                               -----------------------------------------------------------------
                                                 Small Firms, Self-employed and    All Firms, Self-employed and
                                                        Individuals Only                   Individuals
                                               -----------------------------------------------------------------
                                                 Private    Midpoint   Medicare   Private    Midpoint   Medicare
                                                  Payer     Payment    Payment     Payer     Payment    Payment
                                                  Levels     Levels     Levels     Levels     Levels     Levels
----------------------------------------------------------------------------------------------------------------
Currently with Employer Coverage                  157,448    157,448    157,448    157,448    157,448    157,448
----------------------------------------------------------------------------------------------------------------
 Changes In Employer-sponsored Insurance (thousands)
----------------------------------------------------------------------------------------------------------------
Change Private ESI                                (6,732)   (13,917)   (24,417)   (10,120)   (59,917)  (107,617)
----------------------------------------------------------------------------------------------------------------
Employer Pays Public Plan Premium                   8,905     18,553     29,667     12,732     65,259    113,948
----------------------------------------------------------------------------------------------------------------
Change in Employer Participation In Coverage        2,173      4,636      5,250      2,612      5,342      6,331
----------------------------------------------------------------------------------------------------------------
Source: The Lewin Group estimates using the Health Benefits Simulation Model (HBSM).

Provider Impacts
    The program would have a significant impact on provider net 
incomes. Expanding coverage would reduce uncompensated care for 
uninsured people and would result in increased health services 
utilization for the newly insured, all of which would represent new 
revenues to providers. These increases in revenues would be largely 
offset by reductions in payment levels for people who shift from 
private insurance to the public plan and the provider's cost of 
providing additional care to the newly insured.
    Assuming the public plan is open to all individuals and all 
employers, total hospital margin would fall by $36.0 billion in 2010 
(Figure 7). This is equal to about 4.6 percent of total hospital net 
revenues (i.e., gross revenues less contractual allowances) in that 
year. Physician net income would fall by about $33.1 billion, which is 
equal to about 6.8 percent of physician revenues. Thus, under this 
scenario, health care providers are providing more care for more people 
with less revenue.
    The effect on provider income is substantially smaller under a 
scenario where large firms are excluded from participation in the 
public plan. For example, hospital margin would actually increase by 
$11.3 billion in 2010, assuming the plan is limited to only 
individuals, the self-employed and small firms. Thus, the increased 
revenues for newly insured people (including reduced uncompensated 
care) are greater than the loss of revenues for people who would become 
covered under the public plan. Physician income net of practice 
expenses would fall by $3.0 billion under this scenario.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Figure 7
Impact of Public Plan on Provider Income if Medicare Provider Payment 
        Rates Used
Source: The Lewin Group estimates using the Health Benefits Simulation 
Model (HBSM).

    In Figure 8, we present estimates of the impact of the program on 
provider incomes under alternative payment level assumptions for the 
public plan.
Figure 8
Impact on Hospital and Physician Net Income in 2010 (billions)

------------------------------------------------------------------------
                      Hospital Income              Physician Income
               ---------------------------------------------------------
                  Small Firms    All Firms     Small Firms    All Firms
                     Only         Eligible        Only         Eligible
------------------------------------------------------------------------
Assuming Medicare Payment Levels
------------------------------------------------------------------------
Payment Level           -$10.7       -$58.0           -$6.0       -$36.1
 Reduction
------------------------------------------------------------------------
Payments for             $22.0        $22.0            $3.0         $3.0
 Previously
 Uncompensated
 Care
------------------------------------------------------------------------
Net Change               $11.3       -$36.0           -$3.0       -$33.1
------------------------------------------------------------------------
Change as a               1.0%        -4.6%           -1.6%        -6.8%
 Percent of
 Total Revenue
------------------------------------------------------------------------
Assuming Midpoint Payment Levels (i.e., between Medicare and Private
 Payer Rates)
------------------------------------------------------------------------
Payment Level            -$6.1       -$29.3           -$4.8       -$19.8
 Reduction
------------------------------------------------------------------------
Payments for             $22.0        $22.0            $3.0         $3.0
 Previously
 Uncompensated
 Care
------------------------------------------------------------------------
Net Change               $15.9        -$7.3           -$1.8       -$16.8
------------------------------------------------------------------------
Change as a               2.0%         0.9%           -0.5%        -3.1%
 Percent of
 Total Revenue
------------------------------------------------------------------------
Source: The Lewin Group estimates using the Health Benefits Simulation
  Model (HBSM).

Cost-Shifting
    Provider payments under private insurance are inflated to cover 
uncompensated costs for the uninsured and underpayments for services 
under public programs. This added cost to the privately insured is 
known as the cost-shift. For example, Figure 9 depicts hospital 
payments for various payer groups. In 2003, Medicare payments were 
equal to only about 95 percent of the cost of the care provided. 
Hospital payments under Medicaid were equal to 89 percent of costs and 
payments by the uninsured were equal to about 14 percent of the cost of 
their care.
    To compensate for these shortfalls in payment, hospitals typically 
charge higher amounts to privately insured patients. In 2003, payments 
for privately insured people were equal to about 122 percent of costs. 
Thus, payments under private insurance are inflated by the cost of 
covering uncompensated care and payment shortfalls under public health 
coverage programs.
Figure 9
Average Payment-to-Cost Ratios for Hospitals by Payer Group Nationally 
        for 2003

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

Source: Al Dobson, Joan DaVanzo and Namrata Sen, ``The Cost-Shift 
Payment `Hydraulic': Foundation, History, and Implications,'' Health 
Affairs, January/February 2006, volume 25, number 1.

    Data provided by MedPAC show that as the growth in provider 
payments under public programs is slowed, provider payments under 
private insurance increase. For example, Medicare hospital payment 
levels declined from 95 percent of costs in 2003 to 91 percent of costs 
in 2007. At the same time, private payer rates increased from 122 
percent of costs in 2003 to about 132 percent of costs in 2007.
    Not all of the shortfalls in payments are shifted to private 
insurers. The literature indicates that only about 40 percent of 
uncompensated care and payment shortfalls are passed-on as higher 
prices for the privately insured. The remainder (60 percent) appears to 
be absorbed through reductions in costs and net income. Similar effects 
also have been observed for physician care. The evidence on cost-
shifting includes:

      There are two separate studies indicating that about one-
half of hospital payment shortfalls are passed on to private payers in 
the form of higher charges.\9\ Two other studies showed considerably 
less evidence of hospital cost-shifting, although they did not rule out 
a partial cost-shift.\10\
---------------------------------------------------------------------------
    \9\ Dranove, David, ``Pricing by Non-Profit Institutions: The Case 
of Hospital Cost-Shifting,'' Journal of Health Economics, Vol. 7, No. 1 
(March 1998); and Sloan, Frank and Becker, Edward, ``Cross-Subsidies 
and Payment for Hospital Care,'' Journal of Health Politics, Policy and 
Law, vol. 8., No. 4 (Winter 1984).
    \10\ Zuckerman, Stephen, ``Commercial Insurers and All-Payer 
Regulation,'' Journal of Health Economics, Vol. 6. No. 2 (September 
1987); and Hadley, Jack and Feder, Judy, ``Hospital Cost-Shifting and 
Care for the Uninsured,'' Health Affairs, Vol. 4 No. 3 (Fall 1985).
---------------------------------------------------------------------------
      One study of physician pricing by Thomas Rice et al., 
showed that for each one percent reduction in physician payments under 
public programs, private sector prices increased by 0.2 percent.\11\
---------------------------------------------------------------------------
    \11\ Rice, Thomas, et al., ``Physician Response to Medicare Payment 
Reductions: Impacts on public and Private Sectors,'' Robert Wood 
Johnson Grant No. 20038, September 1994.
---------------------------------------------------------------------------
      Our own analysis of hospital data indicates that about 40 
percent of the increase in hospital payment shortfalls (i.e., revenues 
minus costs) in public programs were passed-on to private-payers in the 
form of the cost-shift during the years studied.\12\
---------------------------------------------------------------------------
    \12\ Sheils, J., Claxton, G., ``Potential Cost-Shifting Under 
Proposed Funding Reductions for Medicare and Medicaid: The Budget 
Reconciliation Act of 1995,'' (Report to the National Coalition on 
Health Care), The Lewin Group, December 6, 1995.

    Based upon this evidence, we estimate that increasing the number of 
people covered under Medicare will increase the cost-shift for people 
who remain uninsured. This increase would be partly offset by reduced 
uncompensated care resulting from the expansion in coverage under the 
Obama proposal (28 million uninsured become covered under the 
proposal). Using existing research, we assume that 40 percent of the 
net reduction in provider payments would be passed back to private 
payers through the cost-shift.
    Using these assumptions, we estimated the change in the cost-shift 
for each of the six scenarios presented above. The cost-shift would 
increase by about $526 per privately insured individual the scenario 
where Medicare payment rates are used and firms of all sizes are 
permitted to enroll their workers in the public plan (Figure 10).
    These cost-shift assumptions are highly speculative, however. For 
example, the health plans most likely to survive in a system dominated 
by the Medicare plan are likely to be integrated delivery systems such 
as HMOs. Many of these systems have their own hospitals and would be 
able to avoid cost-shifting, because they serve only those enrolled in 
their plan. Thus, it is difficult to be sure of the extent of cost-
shifting with the public plan.
Figure 10
Change in Cost-Shift per Privately Insured Person under Alternative 
        Public Plan Scenarios

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        

Source: The Lewin Group estimates using the Health Benefits Simulation 
Model (HBSM).

                                 

    Chairman RANGEL. Now we hear from Gerry Shea, who is the 
Special Assistant to the President, John Sweeney, right?
    Mr. SHEA. Thank you, Mr. Chairman. I am Gerry Shea. I am 
the assistant to John Sweeney.
    Chairman RANGEL. Let me ask you this. The Service Employees 
International Union, are they working with the AFL in terms of 
monitoring what we are going through and seeing what labor 
drink is best for their members?
    Mr. SHEA. Very closely. My last meeting yesterday was at a 
meeting with a number of unions, including both the Service 
Employees and the United Food and Commercial Workers, neither 
of which are affiliated with the AFL-CIO, as well as a number 
of the AFL-CIO unions--and the NEA by the way.
    Chairman RANGEL. That is very helpful. We anxiously await 
your testimony.

   STATEMENT OF GERALD M. SHEA, ASSISTANT TO THE PRESIDENT, 
    AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL 
                         ORGANIZATIONS

    Mr. SHEA. Thank you, Mr. Chairman and Mr. Camp. We 
appreciate the invitation to share our perspective based on the 
union's bargaining experience with 40 million Americans, and I 
am honored personally to be before this Committee.
    You have a tremendous responsibility in providing 
leadership on this crucial question, and I come to you both 
with a plea for help, which you have heard before, and also a 
pledge for cooperation and flexibility in terms of approaching 
this.
    We have to solve this problem this year. And, in part, we 
have to solve this problem because even though the employer-
based system, which is after all the backbone, as you pointed 
out, of our health care coverage and financing situation has 
served us pretty well, it is really hanging on, holding on, by 
its fingertips.
    I can tell you that based on our experience monitoring 
bargaining situations across the country, this continues to be 
the most difficult issue in bargaining. I could give you 
examples today if I were free to share some confidential 
information about current large bargaining, where this is the 
only issue on the table and where strikes may ensue in short 
order in some very critical services because of this.
    It is true that large firms still provide coverage. But 
when you look beneath those gross statistics, you see that 
there is very substantial cost-shifting to individuals. So that 
the studies are that the number of uninsured have gone, or the 
percentage of underinsured, have risen from 15 percent to 25 
percent over the past 5 years. Those are people who have 
insurance, but can't afford to get the care that they are 
prescribed to get.
    So we are just seeing the erosion of the employment-based 
system. And even if you didn't want to do national health 
reform and cover everybody, we would need your help to 
stabilize that system because it can't be done without 
government leadership.
    I am involved many, many hours a day working with employers 
and with other unions on ways that we can restructure health 
care to make it higher quality and more efficient. Those are 
very, very important conversations from our point of view. They 
are vital to the future of health care in this country.
    One of the clear lessons from that is that we can't do it 
alone as the private sector. This has to be done by the private 
sector and the public sector, that is, with government, working 
together.
    So what are the elements of stabilizing employment-based 
coverage in our opinion? One, it is controlling costs, because 
without controlling costs, whether you look at a private 
employment-based system or a public, say, single-payer system, 
without controlling costs, we can't afford the health system we 
now have. It is simply unsustainable for anybody. So that is 
priority number one in terms of employment-based coverage as 
well as other coverage.
    Secondly, you have to have everybody in the system. If you 
are going to continue, if you want to rely on the employment-
based system, we have to have all individuals and all companies 
participating in the financing of that care.
    And then, thirdly, government has to play the role of 
making sure that there are fewer rules that are enforced across 
the board and, in our opinion, by sponsoring a public health 
insurance plan option.
    So let me just elaborate a little bit, first, on costs. 
Long term we need to restructure the way we deliver and pay for 
care. The estimates from the Institute of Medicine are that 
$300 billion a year in this--of what we spend, go to care that 
is neither beneficial and sometimes downright dangerous for 
people. That is a lot of waste and inefficiency, and we know we 
can do better.
    We have shown in many institutions that we can reduce 
hospital-acquired infections; we have shown that we can reduce 
the readmission rates in a number of hospitals by taking 
certain proven steps; we have shown that we can reduce the 
horrific problem of mistakes in surgery by simple protocols 
checklist and time-out kinds of procedures.
    We can do this. It won't be easy, and it won't be 
overnight, but we can do it; and that is the most important 
thing, long term. Because while there are a lot of ways that 
you could control costs in health care we think that the best 
way and the most acceptable way to people in this country is 
going to be by improving the quality and efficiency of that 
care.
    Secondly, the point about including a public insurance plan 
plays in here. Mr. Sheils has talked about the effect of a 
public insurance plan in terms of the savings that it could 
engender. We believe, while there is a lot of policy dispute 
about the number of people who would shift from the private 
insurance to the public insurance sector, Mr. Sheils has rather 
high estimates of that, in our opinion.
    There is a clear understanding that this would reduce costs 
and save us money, so we think that is a critical step.
    On the issue of cost-shifting, by the way, of the private 
sector--and this goes to the point about whether or not we 
should require everybody to pay--let me just give you our 
experience. Workers regularly trade off wages to keep health 
benefits. They make this decision on the ground every day, and 
their decision is consistently, we want health benefits, even 
if it means trading off wages and, in some cases, even trading 
off jobs. It is that important to American families for the 
simple reasons that you would all understand. We all hold the 
same position on this.
    So people want everyone to participate. They are willing to 
pay their fair share in this as long as everybody else does.
    And then, last, the government must maintain the rules to 
the road for everybody. And we are doing--we are starting this 
in a number of the quality improving areas by requiring 
reporting on uniform national standards of quality and making 
that information public to inform both purchasers, individuals 
and clinicians; and we need to extend that beyond this.
    So, Mr. Chairman and Mr. Camp, I appreciate the opportunity 
to appear before you. I just want to make one last point if I 
could; and that is that the idea of taxation of health benefits 
has come up as a way to raise money. And I just want to say--
going back to my point about what we need to focus on here is 
stabilizing the employment-based system--if we were to go to 
taxation of benefits, that would be the ultimate destabilizing 
step we could take.
    You may consider the employment-based system, an accident 
of history in the United States; we heard some of the history 
from Dr. Gould. It is, however, composed of several core 
elements, one of which is the tax preferred treatment of 
benefits. You take that away and you are really pulling the rug 
out from under this system.
    Now, maybe you want to change the system altogether. There 
are a lot of proposals to do that. But this taxation of 
benefits would certainly stabilize it. And in terms of the 
public support for health reform, asking people to pay again 
for the health insurance they already think they pay an 
enormous amount for is not going to wash. This is not going to 
get public support; it is going to get tremendous public 
opposition. So I would just caution against going down that 
road.
    Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you.
    [The statement of Mr. Shea follows:]
 Statement of Gerald Shea, Special Assistant to the President, AFL-CIO
    Good morning, Chairman Rangel, Congressman Camp and distinguished 
Members of the Committee. Thank you for the invitation to participate 
in this hearing and to offer our perspective, on behalf of working 
women and men, on the role of employer-sponsored health insurance in 
health reform. I would like to commend the committee for launching this 
series of hearings on health reform and for the commitment this 
Congress and our President have made to enacting comprehensive health 
care reform this year, in order to secure affordable, high-quality 
health care for all Americans.
    Employer-sponsored insurance is the backbone of health coverage and 
health financing in America. Over 160 million people under age 65 have 
health benefits tied to the workplace. Despite its shortcomings, 
employer-sponsored insurance has proved remarkably successful and 
durable. It is widely considered to be the base on which health reform 
should be built, allowing working families to keep what they now have 
or choose from a new set of options to maintain coverage. Additionally, 
it is seen as the anchor for health reform, where all people would have 
affordable, high quality care.
    But realizing this vision requires action to stabilize employment-
based coverage and reverse the steady erosion in coverage caused by 
unsustainable cost increases. Our system of employer-sponsored health 
benefits is not falling apart but is teetering on the brink. For 
several years coverage has been declining at an accelerating 
rate.i Without prompt, strong action, that rate is likely to 
increase dramatically.
---------------------------------------------------------------------------
    \i\ E. Gould, ``The Erosion of Employer-Sponsored Health Insurance: 
Declines Continue for the Seventh Year Running,'' Economic Policy 
Institute, October 9, 2008.
---------------------------------------------------------------------------
    Today, I want to share the AFL-CIO's view of what needs to be done 
to return employer-sponsored insurance to a successful path. Doing so 
will require the willingness to change by all parties--providers of 
care, insurers, consumers and employers, both those now providing 
benefits and those not.
    The AFL-CIO represents 11 million members, including 2.5 million 
members in Working America, our new community affiliate, and 56 
national and international unions that have bargained for health 
benefits for more than fifty years. Our members are among the most 
fortunate: through bargaining, they have good benefits from their 
employers. Yet even the well insured are struggling with health care 
costs hikes that are outpacing their wage increases and far too many 
working families increasingly find themselves joining the ranks of the 
uninsured or under-insured as businesses close or cut back. If we could 
take a snapshot of coverage at this point in our economic crisis, the 
number of uninsured would almost certainly be north of 50 million.
    Between 1999 and 2008, premiums for family coverage increased 119 
percent, three and one half times faster than cumulative wage increases 
over the same time period.ii Workers' out of pocket costs 
are going up as well, leading to more under-insured Americans who can 
no longer count on their health benefits to keep care affordable or 
protect them from financial ruin. Between 2003 and 2007, the number of 
non-elderly adults who were under-insured jumped from 15.6 million to 
25.2 million.iii And skyrocketing costs are pushing more 
workers out of insurance altogether. About 18 million of the 47 million 
uninsured have a household income that exceeds $50,000.iv
---------------------------------------------------------------------------
    \ii\ Kaiser Family Foundation and Health Research & Educational 
Trust Employer Health Benefits 2008 Annual Survey, September 2008.
    \iii\ C. Schoen, S.R. Collins, J.L. Kriss and M. M. Doty, ``How 
Many Are Underinsured? Trends Among U.S. Adults, 2003 and 2007,'' 
Health Affairs Web Exclusive, June 10, 2008.
    \iv\ C. DeNavas-Walt, B. Proctor, J. Smith, ``Income, Poverty, and 
Health Insurance Coverage in the United States: 2007,'' U.S. Census 
Bureau, Issued August 2008.
---------------------------------------------------------------------------
    Health costs are also straining American businesses. Globally, U.S. 
manufacturing firms pay more as a percent of payroll and as an hourly 
cost than our major trading partners.v Here at home, firms 
that provide good benefits to their workers and their families find 
themselves at a competitive disadvantage to firms that either don't 
offer affordable coverage or don't provide coverage at all. Their 
payroll costs are higher by virtue of being good employers who provide 
health benefits and they shoulder an additional burden picking up costs 
from their competitors that skimp on care. Even public employers that 
have typically provided good health benefits are struggling under 
growing cost pressures, especially as more states find their budgets 
hit by the economic crisis.
---------------------------------------------------------------------------
    \v\ L. Nichols, S. Axeen, ``Employer Health Costs in a Global 
Economy: A Competitive Disadvantage for U.S. Firms,'' New America 
Foundation, May 2008.
---------------------------------------------------------------------------
    Without fundamental reforms aimed at substantially lowering the 
health care costs that are driving these growing gaps in coverage, we 
will continue to see a depression of wages and economic activity, as 
well as a federal budget increasingly consumed by health care costs. As 
then CBO director and now OMB director Peter Orszag has noted, health 
care cost trends are the ``single most important factor determining the 
nation's long term fiscal condition.'' vi
---------------------------------------------------------------------------
    \vi\ P.R. Orszag, ``Growth in Health Care Costs: Statement Before 
the Committee on the Budget, United States Senate,'' January 31, 2008.
---------------------------------------------------------------------------
    The statistics we all regularly cite are broadly recognized signals 
of a system under severe strain. But this hearing and others in the 
series reflect your commitment to moving past simply a recitation of 
the problems to focusing on a comprehensive solution that will extend 
coverage to all Americans and curb health care cost hikes that are 
crippling families, business and government at all levels. Health 
reform done right is key to fixing our economy and putting future 
federal spending on a more sustainable track.
    Our view of health reform builds on three primary principles: (1) 
everyone must participate in the system, both employers and 
individuals; (2) the government has a key role to play by setting and 
enforcing rules for a fair insurance market and by sponsoring a public 
health insurance plan to compete with private plans; and (3) costs must 
be constrained through delivery system reforms that link quality to 
payment and through the cost savings achieved with the efficiencies and 
purchasing power of a new public health insurance plan.
    We believe the solution should build on what works in our health 
care system--public and private coverage--in order to close gaps, 
improve quality and lower costs. The majority of non-elderly Americans 
(62%) obtain coverage through employer-sponsored health plans. And 
despite its flaws--including higher cost sharing and the hassles and 
outright denials they've come to expect from insurance companies--most 
Americans are happy with their employer-based health benefits, in large 
part because they know it is still far superior to being on their own 
in the individual insurance market. Building on this core piece of our 
health care system will both minimize disruption and garner greater 
public support.
    To be sure, employment-based health benefits have significant 
advantages. They provide a natural pooling mechanism, lowering costs 
and covering individuals who might not otherwise be able to afford 
coverage if they were subjected to medical underwriting or rating based 
on age. It makes plan choice convenient, facilitates enrollment, and 
lowers transaction costs. It has, in many cases, spurred innovation in 
workplace programs to promote healthy living, assist workers with 
family caregiving, and address problems related to chronic disease, 
substance abuse, and stress. And in unionized workplaces, it has also 
led to cooperation between unions and employers to advocate for 
improved quality and efficiency.
    To build on the employer-based system, we must stabilize it by 
lowering costs that have driven the steady erosion of employer-
sponsored benefits so that workers can retain the coverage they have 
and other workers now left out can gain health coverage. Doing so will 
reverse the trend to more and more uninsured: the share of Americans 
who obtain coverage through their employer is strongly and inversely 
correlated to the share of Americans who are uninsured.
    Another significant component of stabilizing employer-based 
coverage would be to require employers to either offer health benefits 
to their workers directly or pay into a public fund to help finance 
workers' coverage, i.e. ``pay or play.'' There are significant benefits 
of this approach. First, it will create a more level playing field 
between firms that offer health benefits and those that don't. It will 
also eliminate the cost shift that occurs when employers offering good 
family coverage see their costs rise when they provide coverage for 
spouses employed in firms that either offer too costly coverage or no 
coverage at all. To the extent policymakers may choose to construct pay 
or play in a way that allows families to be enrolled in the same 
employer plan, we believe one approach to consider would be to require 
a dependent's employer to make a contribution to the employer covering 
the whole family.
    Furthermore, given other policy elements under consideration and 
the federal fiscal challenges affecting health reform, pay or play will 
be a necessary component if health reform is to succeed. If reform 
includes a new requirement that all individuals obtain coverage, 
expanding employer based health benefits will be key to making coverage 
affordable for workers that do not qualify for income-based public 
subsidies. It will also bring in a modest amount of revenue to help 
fund subsidies for low-income individuals and extend coverage to many 
of the uninsured since most are in families with at least one full time 
worker. Finally, without a requirement that employers participate in 
the new system, health reform that includes publicly subsidized 
coverage for low-wage workers will prompt many employers of low-wage 
workers to eliminate their coverage to take advantage of public 
subsidies. The resulting increase in federal costs may well doom reform 
efforts.
    The design issues involved in a pay or play approach are critical, 
as they can create both opportunities and limits. Policymakers will 
have to define a ``play'' test, or the minimum amount employers must 
spend directly on job-based benefits, as well as the ``pay'' 
requirement for those employers not directly offering benefits.
    Employers opting to ``play'' must be required to offer benefits 
that are at least adequate enough to allow their employees to meet an 
individual requirement to purchase coverage. The ``play'' test should 
also require employers to make a defined minimum contribution to the 
premiums for that coverage.
    A ``pay'' requirement could be calculated from the costs associated 
with offering and subsidizing benefits that meet the ``play'' test. 
This contribution rate could take a number of forms, from a payroll tax 
to an amount per worker, and there are tradeoffs associated with each.
    Setting the contribution rate based on payroll would lessen the 
impact on low-wage workers and would be a better measure of a firm's 
capacity to contribute to health benefits than the number of employees. 
Alternatively, a requirement tied to each individual employee will be 
more effective at reaching the entire workforce than a requirement tied 
to a percentage of total payroll, since it will protect against an 
employer meeting the percent of payroll test by offering relatively 
generous benefits to only a share of their workforce. However, such an 
approach, if applied only to full-time workers, would create incentives 
for employers in certain sectors to hire part time workers or reduce 
workers' hours to minimize the application of the contribution rate. 
The contribution rate could be prorated for part-time workers, in order 
to protect workers and to ensure adequate revenue for subsidized 
coverage.
    Another key consideration is how to index the contribution rate. To 
keep pace with actual costs, the index should be constructed to reflect 
health care inflation, so long as other reforms achieve cost savings 
and lower year-to-year cost increases. In the absence of reduced health 
care costs over time, the risk of future cost growth is not easily 
resolved in a manner that gives assurances to employers that they will 
have stable and predictable costs and to consumers that they will have 
access to affordable coverage to meet their requirement to purchase 
coverage.
    Policymakers will also have to prescribe which firms are covered 
under an employer obligation to offer coverage. While many proposals 
exempt small businesses, since those firms face higher premiums in the 
current market, we believe this ignores important factors. First and 
foremost, the number of employees is a poor predictor of a firm's 
ability to pay: a doctor's office or small law firm may have more 
capacity than a larger restaurant or store. A carve out for small firms 
also creates a potentially costly hurdle for a firms near the threshold 
to hire additional employees. In addition, many health reform proposals 
under review would make it easier for small businesses to meet the 
``play'' requirement by allowing them to buy coverage through a newly 
constructed exchange, including a public health insurance plan that 
would make coverage more affordable. If policymakers choose to treat 
small business differently, either in the application of pay or play or 
with additional help to purchase coverage (i.e., a tax credit for small 
employers), we believe the committee should consider phasing out that 
special treatment over time to eliminate disparities based on firm 
size.
    Opponents to including an employer requirement in health reform 
will raise objections based on new costs for firms. However, the impact 
on businesses would vary depending on whether they are currently 
offering health coverage or if they are offering coverage that is 
inadequate. Those firms that do not offer health benefits would be 
directly affected by a new ``pay'' requirement, and others will have to 
spend more on the benefits they now offer in order to meet the 
requirement. These objections are misplaced.
    Opponents may argue that employers subject to new health care costs 
may be less likely to raise wages in the short term; however, the 
widely endorsed economic view is that these employers would still raise 
wages over the long term. Opponents may also argue that employers 
subject to new health care costs may eliminate jobs or hire more 
slowly. However, we can expect results similar to the experience with 
raising the minimum wage. Recent studies of minimum wage raises have 
found no measurable impact on employment.vii Furthermore, 
economists often note that employers faced with higher costs under a 
minimum wage increase can offset some of the costs with savings 
associated with higher productivity, decreased turnover and 
absenteeism, and increased worker morale.viii We can expect 
similar results with a pay or play requirement.
---------------------------------------------------------------------------
    \vii\ A. Dube, T. W. Lester, M. Reich, ``Minimum Wage Effects 
Across State Border: Estimates Using Contiguous Counties,'' Institute 
for Research on Labor and Employment Working Paper Series No. iiwps-
157-07, August 1, 2007.
    \viii\ J. Bernstein, J. Schmitt, ``Making Work Pay: The Impact of 
the 1996-1997 Minimum Wage Increase,'' Economic Policy Institute 
(1998); D. Card, A. Krueger, ``Myth and Measurement: The New Economics 
of the Minimum Wage,'' Princeton University Press, 1995.
---------------------------------------------------------------------------
    There are other factors that will compensate for any increase in 
employer cost. First, the majority of firms that currently do not offer 
health benefits are in markets where their competitors also do not 
provide benefits, so they would see increases similar to those of their 
competitors. Second, firms that will pay more for health care than they 
currently do will see at least some of those costs offset by a 
healthier workforce. Third, broadening the pool of employers that would 
contribute to health financing could improve competition among firms 
within sectors by creating a more level playing field based on health 
benefit costs. Fourth, to the extent there is currently a shift of 
uncompensated care costs to employer-sponsored plans, all firms now 
offering coverage will see their costs decrease as we expand coverage. 
Finally, our economy as a whole will benefit from more rational job 
mobility and a better match of workers' skills to jobs when health 
benefits are no longer influencing employment decisions.
    Finally, concern about new health costs to firms ignores a key 
element of reform that is not part of your focus in today's hearing but 
very much bears upon the success of efforts to stabilize the employer-
based system. Creating a public health insurance plan to compete with 
private health insurance plans will lead to substantial savings 
throughout our health care system as a result of that competition. 
Employers that continue to provide benefits directly will benefit from 
these savings, as will employers that will be able to purchase coverage 
for their workers through the exchange. Building a public health plan 
option into reform is essential to holding down costs for employers, 
consumers and government.
    I want to offer one final note of caution. Some of your colleagues 
in the Senate are considering changes to the current exclusion of 
health benefits from income and payroll taxes. We believe this would be 
a step in the wrong direction. A cap on the tax exclusion would 
disproportionately affect firms with higher cost plans because of 
factors other than the level of coverage, including a higher percentage 
of older workers, higher risk in the industry and firm size. There is 
also likely to be some employer response even to capping the exclusion, 
including increases to employee cost sharing to a level where they may 
become unaffordable for low-wage workers. Finally, capping the tax 
exclusion would undermine the place where most Americans now get their 
coverage before we have built a proven effective, sustainable 
alternative to employer-based plans.
    It is hard to imagine successful health reform that does not 
include a substantial role for employer-based coverage. To secure that, 
with a stable source of affordable coverage where workers can meet a 
coverage requirement and enhanced revenues for public subsidies, 
Congress must require employers to contribute to their workers' 
coverage within a well designed pay or play component. Failure to do so 
will undermine the ``shared responsibility'' that is the key to 
enacting effective, sustainable, equitable and broadly supported health 
reform.

                                 

    Chairman RANGEL. Let me make it clear--I want to thank the 
panel and to make it abundantly clear that we recognize that 
you are not Republican and Democratic witnesses; it is just who 
invited you. But we know that all of you are concerned about 
improving the health care of Americans and that they get access 
to affordable health care.
    I don't think it is necessary to say that, but I just want 
to make the record clear as I tear into Denny Dennis, the 
Republican witness.
    Mr. Dennis, you made it abundantly clear that cost is a 
factor in terms of people having access to health care. We 
have, I guess, 45 million people, half of which work every day. 
And if they have a serious illness in this great country of 
ours, they have got to get care; do you agree?
    Mr. DENNIS. Yes.
    Chairman RANGEL. Where would they get this care?
    Mr. DENNIS. Where would they get this care today?
    Chairman RANGEL. If they are going to be treated, they have 
the swine flu, colds, broken legs; they don't have insurance. 
They work hard every day, their employer loves them, but can't 
afford health insurance. Where do they get it?
    They don't ask whether they are Republican or Democrat. 
They say, Have you got insurance? They say ``no.'' In some 
moral mandates, the people have to take care of these people, 
especially in our hospitals, especially in the emergency rooms.
    Mr. DENNIS. Correct.
    Chairman RANGEL. What do we do with these people? Do we 
allow them to continue not to be insured? They don't pay for 
it, the taxpayer pays for it. What would you suggest we do for 
them?
    Mr. DENNIS. Well, one of the things that we suggested, as 
far as smaller firms are concerned----
    Chairman RANGEL. No, no, I am talking about the employee. 
He is right now, as you and I talk, working every day, scared 
to death the kids are going to get sick. He can't afford 
insurance; the employee can't afford insurance. They are here 
in large numbers, millions of people.
    So we can't ignore them if we are talking about universal 
coverage. But for you, recognizing costs, what do we do?
    Mr. DENNIS. In terms of making sure that they have coverage 
and care, yes, they do. The question becomes who is going to 
pay for it, and that is the issue.
    There are certainly better ways to deliver care for the 
low-income folks who are not insured than we are doing today. 
We are doing it through emergency rooms. Why aren't we doing it 
through clinics?
    Chairman RANGEL. Well, your contribution would be expand 
community health care clinics?
    Mr. DENNIS. I am suggesting that would be--there are 
several steps that we could take, Mr. Chairman, that would----
    Chairman RANGEL. Well, that is what we are here for, 
because we have a serious problem. It is going to cost money.
    Many of us truly believe that the facts yell at us that it 
is going to save money. They kind of believe--I am no doctor 
and neither are you--that if these people have preventive care, 
have examinations, where they are tired of hearing, You should 
have come earlier; now you have to be admitted to the hospital, 
which is the most expensive type of care.
    But if they knew that their kids could get examinations, if 
they knew they had the dignity to ask the employer, I have got 
to go for my check-up.
    You just don't have to be a scientist to know you are 
saving money. And as a patriot and the chairman of this 
Committee, to me, it means they are healthy, they will be 
working, they will be paying taxes.
    Mr. DENNIS. Yes, Mr. Chairman, we had a study done for us 
by Professor Rossiter at William and Mary to look at costs, 
precisely places that we can go to save costs, and we have 
given a copy to Committee staff.
    Chairman RANGEL. Where? Well, I have already said, and you 
are not going to contradict, that 48 million people that don't 
have health insurance, if we give them, overall the country is 
going to save money. Forgetting productivity and all that 
economist talk, we have got to save money in terms of them not 
costing society----
    Mr. DENNIS. Yes.
    Chairman RANGEL. Health care that they don't have insurance 
to pay for.
    What I want you to do is not to admit that we have a 
problem, but we are mandated today to move forward and resolve 
this problem, and we just need your expertise to say if I tell 
you that one of the things we are considering is having a 
public plan----
    Mr. DENNIS. Yes.
    Chairman RANGEL. If the employer has a plan, you keep it if 
you like it.
    Mr. DENNIS. Yes.
    Chairman RANGEL. But if indeed you have got a precondition, 
you can't get in the plan, or it is too costly, that the 
government would say, this is backup.
    Mr. DENNIS. Yes.
    Chairman RANGEL. This is backup for you. And you have got 
to do it. Could you go along with it?
    Mr. DENNIS. No.
    Chairman RANGEL. No?
    Mr. DENNIS. No, not with that particular proposal. What we 
would suggest instead is to look at the Massachusetts----
    Chairman RANGEL. Forget Massachusetts. Tell me how it 
works.
    Mr. DENNIS. Essentially we have something called a 
connector or an exchange. It provides a central clearinghouse, 
we want to talk about a clearinghouse, where insurance 
companies register their plans, and people can go to them, 
particularly low-income folks can go to them, individuals can 
go to get their insurance. And so it is like a big, central 
marketplace where individuals and small business have more 
choices to shop for better plans.
    Chairman RANGEL. And the government mandates that the 
employers must insure these people.
    Mr. DENNIS. No.
    Chairman RANGEL. Not with compassion.
    Mr. DENNIS. No, it doesn't.
    Chairman RANGEL. I understand that is the Massachusetts 
plan, that it is an employer mandate.
    Mr. DENNIS. Well, it is $295 worth of mandate.
    Chairman RANGEL. I don't care how much of mandate. I am 
saying an employer has to provide insurance for an employee.
    Mr. DENNIS. Why would you want to put people out of work? 
Why would you want to depress wages? There has got to be a 
different way to approach this. The question becomes--there is 
an interesting issue here. It is called--you know, we use the 
politically really nice term of ``shared responsibility.''
    Chairman RANGEL. You are using it.
    Mr. DENNIS. I am just bringing it up. I am not using it. I 
am saying I don't know what that means. I know what----
    Chairman RANGEL. You don't have to know, I didn't raise it. 
You can argue with yourself what it means. I am saying that----
    Mr. DENNIS. Okay.
    Chairman RANGEL.--we have to do something, and you are 
suggesting I don't know what.
    Mr. DENNIS. No, no, I am not suggesting.
    Chairman RANGEL. We are going to take care of these people, 
and if you don't help us to do it, we may have a way to do it 
that you don't like.
    Mr. DENNIS. No.
    Chairman RANGEL. We are going to say that the employer has 
a responsibility, and the employee has a responsibility, and 
the government has a responsibility. And we are not going to 
Massachusetts, we are staying right here and hammer this thing 
out. So when you think of something that you say, well, that 
makes some sense, I don't agree with it all, then come back and 
we will talk.
    Mr. DENNIS. Well, let me say, Mr. Chairman, that the 
pooling and the whole idea of getting rid of being able to rate 
on claims experience and that sort of thing, which is all 
inherent in the system I am talking about, is certainly very 
much directed toward the type of thing that you are talking 
about. After all, the State cut its insurance or its number of 
uninsured by half. That certainly gets to, I think, what you 
are looking at, isn't it?
    Chairman RANGEL. I am talking about full coverage.
    Mr. DENNIS. So I think, well, it would be nice, yes. But at 
least we are moving in the right direction. This is clearly, I 
think, a very positive suggestion, and we know there are other 
kinds of things that could easily be done. Excuse me, I take 
that back. I will get rid of the word ``easily.'' Other things 
that can be done to lower costs which will bring in more people 
into the system. So I think indeed that we are proposing some 
very positive steps to directly go after the kind of concerns 
that you have.
    Chairman RANGEL. Well, would you write an amendment to your 
written testimony and spell out what you think those are, and 
by unanimous consent I will have it put in the record. And once 
I see what your ideas are, then we will get back to each other. 
But it is not easy.
    [The information requested by the Chairman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    I yield to David Camp.
    Mr. CAMP. Thank you, Mr. Chairman.
    Thank you all for your testimony this morning.
    Mr. Sheils, in your testimony you mention that if a new 
government-run health plan paid providers at private market 
rates, the premiums in the government-run plan would be 6 to 9 
percent below those in the private market.
    Mr. SHEILS. Yes.
    Mr. CAMP. You cite the reason as higher administrative 
costs in the private sector. And this has been a discussion we 
have had in the Committee over many months about comparing 
administrative costs between the government and private-sector 
health programs. And my comment is I believe it is an apple-to-
oranges comparison. There are many programs that significantly 
improve the health and well-being of those in private health 
coverage that I believe are considered administrative costs, 
disease management programs, 24-hour nurse help lines. I think 
those serve critical functions, but they are considered 
administrative costs in this comparison that often occurs. And 
private plans also spend money building provider networks which 
can improve access, for example, to top-quality providers and 
exclude poor performers. And so this provides real value to the 
employees, but also falls into the category of administrative 
costs.
    And similarly, antifraud programs which help reduce the 
cost of health care. I think those are irrelevant in private 
health plans, while government-run programs like Medicaid and 
Medicare have pretty poor records on fraud and abuse. In fact, 
there was a recent article in Congressional Quarterly, and it 
found that, and I am quoting, ``The government has never done a 
particularly good job detecting fraud in Medicare much less 
preventing fraud in the first place. Most claims are never 
checked at all.'' But these antifraud programs and other costs 
are also considered administrative.
    So I would ask unanimous consent to submit for the record a 
letter to the editor in the Wall Street Journal which was 
written by the former Administrator of CMS that highlighted 
some of the problems of trying to compare administrative costs 
between Medicare and private health insurance, and I would just 
like to ask your comment on that.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. SHEILS. Sure. There are management--utilization 
management functions that most private health plans have. 
Precertification. You might find on your insurance card you 
have got to call in to get permission to go get an MRI, you 
have to get permission to go to the emergency room and so on. 
Those things are estimated to save costs between 4 and 8 
percent. Our own study came up with something in the 
neighborhood of 4 percent.
    The numbers we have on the cost of services are adjusted in 
here to roughly reflect that adjustment. So we are not really 
counting it--we are counting it where I think you should count 
it, the cost of the utilization.
    The administrative costs are what they are. But then the 
differences in utilization and the impact that has on the 
premium is also part of it. So it accounts for that very 
roughly. I can't say--it roughly accounts for it.
    Mr. CAMP. And, Mr. Sheils, Lewin Group has done work for 
hospitals and physicians, but you have also done work for the 
Economic Policy Institute, who is testifying here today, as 
well as for The Commonwealth Fund; is that accurate?
    Mr. SHEILS. That is right.
    Mr. CAMP. Mr. Shea, would it be a fair statement to say 
most of your members would like to keep what they have?
    Mr. SHEA. That would be a fair statement, sir.
    Mr. CAMP. And would it also be fair to say that a Medicare-
like coverage would probably not be an acceptable replacement 
for the level of benefits that most of your members have now?
    Mr. SHEA. We cover many retirees, including Medicare 
recipients, Mr. Camp, and we usually supplement the Medicare 
benefits to bring them to the standard of what active workers 
get.
    Mr. CAMP. Particularly the nonretiree members would find a 
Medicare-like plan to be significantly below the benefit level 
they are receiving now; would that be fair to say?
    Mr. SHEA. We strongly believe that with a public plan, you 
need to allow for a private insurance role, a private union 
fund role----
    Mr. CAMP. Yes.
    Mr. SHEA.--that would supplement or compete with. You want 
to have something not just a public plan.
    Mr. CAMP. Yes, but comparing the two, a Medicare-like plan 
has much--the plan they have now has a much higher benefit 
level than a Medicare-like plan.
    Mr. SHEA. That is true. And widely for many years people 
have said if we were to extend Medicare to other people, you 
would have to raise the benefits and modernize them.
    Mr. CAMP. Yeah. And so that for your retirees, as you 
mentioned, you use a supplement.
    Thank you all for your testimony. I yield back the balance 
of my time.
    Mr. LEVIN [presiding]. It is interesting, Mr. Sheils, when 
Mr. Camp asked you about the administrative costs, you said 
that you were comparing apples and oranges. I think your answer 
was you are not.
    Mr. SHEILS. You are correct. I would say that is correct.
    Mr. LEVIN. Okay. So I don't think we can just pick and 
choose when we like your results and when we don't. But I think 
we can question your--some of your assumptions in terms of what 
would be the transfer from employer insurance to a public plan, 
because as people thought about transferring, the private 
sector might well respond to competition, to competing with the 
public plan, right?
    Mr. SHEILS. Yes.
    Mr. LEVIN. And so therefore, the private plan might become 
more effective, right?
    Mr. SHEILS. We expect improvements, but we don't think that 
they will be able to--most plans won't be able to survive in 
that environment. The ones that will survive will tend to be 
integrated systems, HMOs. And where, for example, some of these 
HMOs own their own hospitals, they don't have to worry about 
the cost shift.
    Mr. LEVIN. Let me ask you this: If you look at employer 
plans in the construction industry, which I used to know 
something about, you assume that the employers would shift to 
the public plan en masse.
    Mr. SHEILS. Based on the price for coverage that they would 
be offered, it differs a little bit by firm size, but we 
basically figure out what the cost of insurance is in today's 
market for individuals, which is kind of an involved process. 
And then we figure out what the cost of the plan is for the 
plan, and then we use models of how people respond to changes 
in the relative prices of health care to figure out how many 
people go into the public plan.
    Mr. LEVIN. But these employer-based plans are controlled by 
collective bargaining agreements, aren't they?
    Mr. SHEILS. Well, 16 percent of----
    Mr. LEVIN. I am talking about in the construction industry.
    Mr. SHEILS. In the construction industry, I believe that is 
correct, yes.
    Mr. LEVIN. Your assumption is there would be a massive 
shift, that they are subject to collective bargaining 
agreements, and that the employee representatives would decide 
to shift to a public plan?
    Mr. SHEILS. Yes. There are two things to consider. First of 
all, in a competitive environment you would want--you know, you 
almost have to. I mean, if your competitor uses a public plan 
and is saving $2,500 a year for family coverage, then you are 
going to be at a competitive disadvantage unless you do the 
same thing.
    Mr. LEVIN. Of course if----
    Mr. SHEILS. I just want to add that Mr. Shea pointed out 
that workers explicitly make these trade-offs between costs and 
benefits, and it seems to me likely that when a family has a 
chance to save that kind of money, the workers may develop a 
considerable demand for the change.
    Mr. LEVIN. Okay. Though one plan might be better than the 
other.
    Mr. SHEILS. Yes.
    Mr. LEVIN. Your figures assume that there would be a major 
reduction in the uninsured?
    Mr. SHEILS. Yes.
    Mr. LEVIN. Mr. Dennis, just to pick up what our Chairman 
was saying.
    Mr. DENNIS. Yes, sir.
    Mr. LEVIN. I reread your testimony, and the problem is you 
don't like a mandate, you don't like a public plan, but you 
have no plan. I mean, the problem with the opposition here, 
they don't like a public plan, they don't like the mandate, 
they have some other complaints, but coming up with a plan that 
will clearly reduce the uninsured of close to 50 million people 
in this country, there is no plan. And I think you should take 
up our Chairman's offer.
    I have your small business principles, but I think what you 
need to do if you don't like the mandate and you don't like the 
public plan is to come forth with a very specific proposal that 
would assure that there would no longer be 50 million uninsured 
in this country, and that in a reasonable period of time the 
number would be essentially zero or close to that, because 
otherwise simply trying to slug it out by critique doesn't work 
if there is no alternative.
    My time is up.
    Chairman RANGEL [presiding]. Thank you, Mr. Levin.
    Mr. Herger from California.
    Mr. HERGER. Thank you, Mr. Chairman.
    As you know, at last week's hearing Ken Sperling testified 
on behalf of the National Coalition of Benefits. The Chair 
asked about the Coalition's view on a government-run plan. 
Since then, Members of National Coalition of Benefits Steering 
Committee, who collectively represent hundreds of employers 
that sponsor health benefits for tens of millions of Americans, 
sent a letter to you stating their position on a government-run 
plan.
    In part the letter says, ``Proposals to have a public plan 
compete in the private marketplace are of grave concern to 
employers who provide health insurance coverage. The public 
plan's unfair competitive position, both by size and regulatory 
authority, will merely shift cost to the private sector and 
employees covered by private plans.''
    The letter goes on to say, ``Medicare's underpayment 
results in private payers and the people covered by these plans 
making up the shortfall, and increases the cost to employers of 
providing quality health-care coverage. A public plan option 
administered by the Federal government is inherently 
destabilizing to employed-based health insurance benefits,'' 
close quotes.
    Mr. Chairman I would ask unanimous consent to enter the 
letter into the record.
    Chairman RANGEL. Without objection, Mr. Herger.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. HERGER. Mr. Sheils, you estimate that a government-run 
health plan paying Medicare rates would mean a $36 billion cut 
to hospitals and a $33.1 billion cut to physicians, and that is 
just in 1 year. Since it is paying below-market rates, the 
government-run plan could charge below-market premiums. While 
the government-run health plan might be cheaper, it doesn't 
mean it will be better.
    I worry that people enrolled in the new government-run plan 
may find themselves with health coverage, but without access to 
care. Today half of physicians are no longer accepting Medicaid 
patients, and 28 percent of Medicare beneficiaries searching 
for a new primary-care physician are having a problem finding 
one.
    Wouldn't a public option, that is a government-run plan, 
paying providers Medicare rates only exacerbate access-to-care 
problems?
    Mr. SHEILS. I think you are correct, it would make it much 
more difficult for the providers. It is fair to say that our 
numbers are showing that the physicians under this plan and 
hospitals will be providing more services to more people for 
less money. And it is hard to imagine you can do that without 
something bad happening somewhere.
    I think that we spend enough on health care in this country 
that through efficiencies we could get by on a level of 
spending. The question is will a system actually give us those 
efficiencies, or will it simply, as you say, cause some 
providers to stop seeing privately insured--the members of the 
plan and so on.
    I don't think there would be a wholesale rejection of the 
plan by providers, however, because so many people would go 
into the public plan. Who would you care for; if you didn't 
accept Medicare, who would you care for? There would be 120 
million people in it; 132 million people in it plus Medicare 
itself, so it is 170 million people. I don't think any provider 
will be able to walk away from what is probably 60, 70 percent 
of the whole marketplace that way.
    Providers will have to somehow do it within the amounts 
they are being paid. Whether that compromises the quality of 
care or not is an open question. It could be done in ways which 
are bad for patient health. It could be done in ways, if we are 
careful, where it does not impact patient health so seriously.
    But it is very hard to imagine taking this much money out 
of the system while at the same time increasing demand for 
services without something bad happening somewhere. So I guess 
that would be my answer. I am not terribly specific, I 
apologize.
    Chairman RANGEL. Let me thank you and the panel and tell 
you where we are. The bells mean we have to respond. The budget 
bill is on the floor. It will take 15 minutes, roughly 10 are 
left, to answer that. And then two suspensions are there. That 
is roughly 5 minutes. And so if we could suspend and all return 
at 12 o'clock. I apologize to the panel for this break, but you 
might be able to get something to eat, and we will come back, 
start promptly at 12 o'clock, and we will try to proceed as 
expeditiously as possible.
    Chairman RANGEL. Thank you, and we adjourn until 12:00.
    [Recess.]

RPTS DEAN
DCMN NORMAN

    Mr. MCDERMOTT [presiding]. If the witnesses will take their 
seats, we will resume the hearing. Although I took the Chair 
here, I also am the next one to ask questions so I will start.
    I am having a little trouble understanding where a couple 
of you people are coming from. I can understand a big company 
having their employees and want to keep them in private, inside 
the company in some kind of a health plan, because you have got 
them trapped today. They are scared of losing their jobs so 
they will accept whatever you do, and you can keep off-loading 
the health-care costs onto the employees of the company. But 
what I am having trouble understanding is what happens to the 
smaller employer who sounds like they are represented by the 
NFIB.
    But, Mr. Conklin, I don't understand; you started out 
paying 5 percent of payroll and now you are up to 10 percent of 
payroll?
    Mr. CONKLIN. No, Mr. McDermott; it is 20 percent.
    Mr. MCDERMOTT. So you are 20 percent of payroll. Now, I 
hear from your industrial organization there that if you have 
that kind of cost, you will have to lay off people. Have you 
laid off anybody?
    Mr. CONKLIN. No, sir. In fact we just recently hired up. So 
the fact that health-care costs go up to the employer does not 
that you are going to lay off workers?
    Mr. CONKLIN. No, we--I mean we have to offer that benefit 
in order to attract workers. It is an expectation.
    Mr. MCDERMOTT. So at what point--I mean you are paying--I 
can't quite tell from your testimony--I read it all--you are 
paying $8,700 per person?
    Mr. CONKLIN. No, $8,700 for the company. I have 10 people.
    Mr. MCDERMOTT. Per month?
    Mr. CONKLIN. Right.
    Mr. MCDERMOTT. So that is $870 per person, per month?
    Mr. CONKLIN. Right. And I want to make sure that this is 
understood for the record. This is during the transition. Now, 
what is happening is I have some employees coming off our old 
carrier and going on to a new carrier. And while that is 
happening I have to keep the old policy in place and pay a 
percentage of the new policy.
    Now, this process is taking 2 to 3 months, so we will have 
$8,700 outlays for 2 to 3 months. And then at some point in the 
future, our old carrier, HMO BlueCross, will return the unused 
portion, so to speak. But like all insurances I have to pay it 
up front. In order to maintain coverage for everybody until 
this process is complete, that is my premium expense.
    Mr. MCDERMOTT. Why wouldn't you want to have--given that 
story you just told, why wouldn't you want to have a public 
option that you could say to your employees, go to this public 
option, it is a generous program, it is as good as what I am 
able to buy for you, and be able to get it for, say, 10 percent 
of payroll?
    Mr. CONKLIN. I have no difficulty with that. My hope is 
that if that option were available, and I would hope from this 
process that if it is done right, the public option would serve 
a couple of different purposes. One is--and it is very 
important--is that it would make it easier for me as an 
employer to understand and explain to my employees what they 
are getting for our money, because they are making a 
contribution too. I don't pay the whole freight on this. And if 
we could do that and there was a plain-language component of 
the public sector solution, whatever form that public sector 
solution takes, then the private sector, which I think has some 
conflicts of interest that it tends to camouflage, and the way 
it presents the products would be forced to reveal what the 
real costs are.
    Mr. MCDERMOTT. Tell me how they camouflage.
    Mr. CONKLIN. Well, they camouflage it by presenting me with 
a 3/4-inch thick booklet of arcane, legalistic language that 
explains what the policy really is. And what I am looking for 
is a very plain-English thing that says here is what you are 
getting. This is what the co-pays are, that is all there; and 
what the deductibles--this is how much you will spend each 
month, but here are the limits of the policy. If you go into 
the hospital and you have a serious problem and that problem 
is, let's say, cancer, the average cost of, say, a cancer 
treatment in the New York Metropolitan Area for a serious 
illness is, say--and am making all this up, like I said, I am 
not a policy expert but this is sort of my thinking--and that 
problem or that illness on average costs $1.5 million to treat 
in New Jersey, okay; our policy only covers 1.25 million. You 
are going to be on the hook for 250,000, because when you go in 
the hospital, you sign that document that says whatever the 
insurance company doesn't pick up, I will pay.
    So one of the things I am hoping is if we have that sort of 
transparency in the process, then we can also have an honest 
discussion about medical bankruptcy. And then we are going to 
really know what insurance should cost and how we can fully 
cover everybody. Until we have that kind of transparency, I 
don't even think we know how much health insurance really 
costs.
    Mr. MCDERMOTT. Do you have an idea what is a fair amount 
for a small businessperson to spend on the health care of their 
employees; 5 percent, 2 percent, 1 percent, 8 percent?
    Mr. CONKLIN. Well, it would be great if it is 1 percent or 
it would be great if it was half of a percent. But if it costs 
10 percent, then as an employer I want to pay 10 percent. And I 
want the guy down the street to pay 10 percent, I want the guy 
up the block to pay 10 percent. But if what we have to do to 
cover everybody is create a progressive payment system, I will 
live with that too.
    When I started my business, and it was my wife and I, we 
had no health insurance, but we were young and we were healthy 
and, as I said in my written testimony, we were broke. So we 
weren't going to go out and buy any health insurance.
    That is a problem that has to be addressed. I don't know 
whether you will be able to address that level of detail in the 
legislation you are considering now. And I hope that as this 
discussion continues, we realize that we are probably not going 
to get it right this time. It is probably not going to be 
perfect, whatever you come up with. If you come up with a 
public option, it is probably not going to be perfect.
    And if we don't cast it into stone or steel and say that 
its a Federal program that can never be changed but we 
recognize that through this process we are going to have to 
make adjustments and improvements, then I think, great. 
Anything that gets it closer to a fair, equitable system that 
gets 100 percent coverage has to be reflected in my bottom line 
and reduce cost. That just--I am giving it to you from my 
perspective, which is on the street.
    I was thinking earlier during the testimony that there used 
to be a TV program, ``Homicide: Life on the Street,'' this is 
sort of like ``Health Care: Life on the Street.'' And, you 
know, what I experience is something different than what I am 
hearing from the other panelists, which is not to say that 
their testimony is inaccurate or hasn't been well thought out. 
It is just not quite--it doesn't quite jibe with what happens 
in real life as I have experienced it.
    Mr. MCDERMOTT. You would like a public option, you could 
pay 10 percent?
    Mr. CONKLIN. Absolutely.
    Mr. MCDERMOTT. Would you move tomorrow to that?
    Mr. CONKLIN. Well, I would certainly give my broker the 
opportunity to convince me that it wasn't a good idea. And if 
he could do it at a competitive rate, and tell me why it wasn't 
a good idea, in clear language, and if he had a competitor who 
was giving me the real information, then he would be forced to 
do that.
    Mr. MCDERMOTT. Thank you very much.
    Mr. MACDONALD. The whole issue about migration to a public 
plan; I think if we took a real-life example that I have is 
migration is going to occur as quickly as others would suggest 
it is. A case in point would be a couple of years ago, through 
a consortium, several companies created what was called Retiree 
Health Access, and the actuaries in the IBM case thought that 
probably about 60,000 would migrate to that plan. The first 
year was 2,000 people.
    I think there is a general reluctance for people to migrate 
away from an employer plan. So I think a lot of it will be 
driven off of the design, the cost structure, the access. I 
don't think you will see that migration as quickly as some 
would suspect that you would.
    I think the second thing is when you raise the issue around 
cost; is there an argument being made that you are laying off 
people because of health care costs? I think Gerry said it 
quite appropriately; there is a tradeoff of costs. If health 
care is rising at 20 percent or 10 percent, whatever the number 
is, then you make decisions around what are my raises going to 
be this year? What am I going to do in investing in human 
capital? What am I doing for training programs? There is always 
offset. Somewhere there is always offset. It is not incremental 
upward, it is always trying to create a level playing field. So 
I don't see the migration as quickly as others do.
    Mr. MCDERMOTT. May I ask you one other question?
    Mr. MACDONALD. Sure.
    Mr. MCDERMOTT. If you lay people off at IBM, where do they 
go? Can they afford the COBRA option?
    Mr. MACDONALD. First of all, we have a benefit continuation 
policy that is up to 6 months right off the bat. So we pay for 
that, and they go beyond that with COBRA.
    Mr. MCDERMOTT. And at the end of 6 months they are on their 
own.
    Mr. MACDONALD. Then they go to COBRA. They go to a 
continuation----
    Mr. MCDERMOTT. And where you are operating, is COBRA enough 
money--I mean, can you make out of your unemployment insurance 
enough to pay COBRA and the house rent?
    Mr. MACDONALD. Well, in the spirit of bluntness, IBMers 
tend to be at the higher end of the pay scale. And so in the 
spirit of honesty, our average wage is close to approaching 
$100,000. So you would assume there is some level of savings 
there to create that offset.
    Mr. MCDERMOTT. Thank you very much.
    Chairman RANGEL [presiding]. No one is thinking about IBM 
planning to go to any public plan.
    Mr. MACDONALD. That is what I am suggesting.
    Chairman RANGEL. I know you are. It just makes sense that 
every plan is not as good as yours, but the plan that we are 
talking about, when Mr. Conklin sees his competitor with 
nothing and he is paying this large amount, he wants everyone 
to get in there and share this so that his competitors would 
include health care as a part of doing business. It just 
makes--Mr. Sheils, are you here in Washington?
    Mr. SHEILS. Yes, sir.
    Chairman RANGEL. Talk with my buddy from New Jersey. 
Because, you know, you have got the theory and everything, but 
like he says, he has to deal with this every day. It is a cost 
on him. And I am not talking about compassion, I am talking 
about saving money. Having people working every day, not having 
to worry about their kids getting sick or their wife not being 
able to get medicine, but being able to concentrate on making 
some cabinets. But a person in trouble, with no health care, is 
not a productive person.
    And so, you know, we have got to do something about it. And 
I would rather work with you so that we can get bipartisan 
support of this darn thing. You come in with something--you 
talk with Mr. Conklin and if he is convinced, we have got a 
deal.
    Let me call on my hero of the Congress, Mr. Johnson.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    Mr. Dennis, the Economic Policy Institute has proposed 
imposing a health care pay-or-play mandate on businesses. And 
their proposal would require employers pay 75 percent of 
individual premiums and 66 percent of family premiums for all 
employees working at least 20 hours a week. Employers who can't 
meet these requirements would be forced to pay 6 percent 
payroll tax.
    The Lewin Group estimates this would represent a tax 
increase of nearly $1,600 per employee. Is this mandate the 
type of thing that small businesses could afford?
    Mr. DENNIS. First, let me just say this, Mr. Johnson. 
Whether you call it paying for the premium, pay-or-play, or a 
payroll tax, it is the same thing. So we are talking about a 
generic group here where the parts are equivalent to one 
another.
    If initially the business has to pay $1,600 per employee, 
and the business has 10 employees, that is $16,000. Sixteen 
thousand dollars, the question is where do you get that money? 
One place is to take it off your salary, the owner's income. I 
don't think any of us want to have $16,000 taken off our 
salary.
    This is just another mandate. It is going to end up in lost 
jobs, it will end up--we have already talked about how 
employees' wages are depressed because of benefit costs.
    Mr. JOHNSON. Well, it seems to me--and I had a small 
business at one time--if you are not making money or on the 
margin a little bit, you are going to have to--you can't afford 
another increase. What you will do is probably lease out your 
medical stuff. You know, fire the employees and work them out 
of a different organization, you know, I don't think any of you 
realize what it costs to run a small business. It is not a 
simple operation. And some of you know. You work sometimes, 
some months, just to make ends meet. And if we stick you with 
another tax, which is what that is, I don't think you are going 
to like it. Mr. Conklin, I don't think you would either.
    Mr. DENNIS. I think, Mr. Johnson, there is one really 
important point in this, and that is we have about 5.9 million 
small employers in this country. Some of them are doing very 
well. It sounds like Mr. Conklin's business is doing quite 
well. That is great. I am all for that. There are some others 
that aren't doing so well, and there are some others that are 
just starting. The condition of each business is very 
different. And I am not talking about one business, I am 
talking about the group of businesses, all of them together. 
Some provide.
    I think the very fact there is a relationship--and I 
repeat--there is a relationship between what you take out of 
the business and whether or not you provide employee health 
insurance, a direct relationship. That speaks volumes.
    When business does well, the employer does well and the 
employees do well. When a business doesn't do so well, the 
employees don't do so well and the employer doesn't do so well.
    Mr. JOHNSON. Yeah, I know. There are some companies who 
provide health insurance. Exxon is one of them. And about 20 
percent of their people don't take advantage of the program 
they offer, because they think they are bulletproof. You 
understand that. The 21- to 35-year-old guys. In fact, one of 
you testified that you didn't have insurance; I think it was 
Mr. Conklin.
    Well, I appreciate, Mr. Conklin, the efforts you have taken 
to continue providing health insurance for your employees. I 
have heard from a number of small business owners, just like 
you, are finding health insurance to be increasingly 
unaffordable. And we need to reverse that trend.
    You mentioned the inability to pool employees and spread 
risk the same way large employers do. I wonder if you would 
support reforms that would allow small businesses to join 
together and pool their risk. Association health plans never 
have been passed up here. And the independent guys, i.e., 
Realtors, for example, are all for that kind of a program, and 
they don't have health care, a lot of them. So doesn't buying 
in bulk for supplies reduce cost?
    Mr. CONKLIN. Yes, Congressman. Buying lumber bulk does 
reduce costs. I don't think you want the same model to 
determine what you are going to buy in health insurance. I 
think one of the problems we have in the discussion we are 
having about health insurance is we keep applying this business 
model as if we were talking about widgets. But what we are 
really talking about is people and the kind of care that is 
available to them.
    And when these larger groups, the question I have and I 
can't--again, I am admitting I am not a policy expert--but the 
question I have is who is going to determine who my carrier is 
in this larger group. We are going to form an association and 
we are going to go out in this group and shop for health 
insurance. And then we are all going to somehow agree that the 
best provider of health insurance for us is the X, Y, Z 
company.
    Now, I am not sure who makes that decision. I am not sure 
what that decision is based on. And we are still stuck with 
this sort of opaque process by which I don't really have a 
choice, I have an option: join the association, shop for health 
insurance in the open market.
    Mr. JOHNSON. Well, association health plans don't have to 
be one provider; it can be five or six and they can pick.
    Mr. CONKLIN. We are still there, though. We may be saving a 
few dollars on the side, but the group and the way the group is 
structured and the available selections are still limited 
within this organizational model. So I don't see that as being 
a vast improvement over the system.
    Mr. JOHNSON. Well, it is because they don't have any 
insurance right now.
    Mr. CONKLIN. Well, look, I said earlier that all the 
solutions--I used the tool-box analogy. If that tool functions 
the way some people are saying it might function, then it may 
be useful to add it, but it is not going to solve the problem.
    Ms. GOULD. Congressman, do you mind if I respond, as you 
brought up my employers?
    Mr. JOHNSON. Mr. Chairman? Go ahead.
    Ms. GOULD. Thank you. You brought up the estimates of what 
it might cost, 6 percent of payroll for small employers to 
contribute. But what wasn't also brought to light in that 
research that the Lewin Group did analyze is that the national 
exchange with the public plan, small employers who are 
currently offering insurance would actually experience windfall 
savings with that kind of a framework. In fact, firms with 10 
or fewer workers would save about $3,500 per worker compared to 
even lower savings that you would see across all firm sizes. So 
small firms stand to gain a lot from that kind of structure.
    Chairman RANGEL. Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. I commend the panel. 
It has been a very interesting discussion. And Mr. Conklin, you 
are the guy off the street; you have had compelling testimony 
today, absolutely delightful.
    I will start with Mr. MacDonald. In your capacity as a 
leader within the HR world, let alone IBM, you would have an 
expert view on the notion of whether or not the employer 
platform ought to be a base for the delivery of health benefits 
in the first place. Some believe it is time to move off of 
that.
    I would tell you I disagree with that. I believe there is 
still enormous value, let alone the fact that we have got 65 
percent, as Dr. Gould told us, covered with the employer model, 
the platform. I believe we keep that part and build out, not 
blow it up and start all over.
    What are your thoughts on that?
    Mr. MACDONALD. Clearly, as I think I said in my opening 
statement, we shouldn't start from scratch, and that the 
employer plan is a base or a foundation. As I look at whether 
we want to talk about it in terms of a public plan or some 
individual mandate, you know, perhaps we have to migrate there 
over time. And I think part of the issue has to be that you use 
employer-based plans as that model. Employer-based plans 
typically have a foundation for wellness, they have a 
foundation for preventive care, and a foundation for primary 
care. Those are, I think, absolute critical components to any 
plan that is designed, whether it be at a large employer or a 
small employer.
    Mr. POMEROY. Mr. MacDonald, how about Medicare? I am 
dismayed that those elements did not seem to be advanced 
effectively in present Medicare reimbursement incentives. Have 
you been able to achieve a greater role for primary care, 
preventive care, wellness and impacted your cost curve? If so, 
you have got information that we desperately need to consider 
as we develop Federal reinvestment policy.
    Mr. MACDONALD. I would agree with you on the inefficiency 
and the lack of effectiveness in the Medicare arena. And the 
answer is yes. For instance, in the 3-year study that we did 
where we fundamentally created what we call a healthy living 
rebate, where we focused on nutrition, childhood obesity, 
physical exercise and smoking cessation, we invested around $81 
million. And in that 3-year period we saved $200 million.
    At the same time we had a high-risk population that we 
identified at about 13 percent of our population; 55 percent of 
that high-risk population is now down to less than 7 percent. 
So we see a direct correlation for making investments in areas 
of preventive care, primary care that yields returns.
    Mr. POMEROY. Did you elevate the role of primary care in 
your interaction with your insureds? Is that how you were able 
to maintain the behavioral modifications that produce this 
positive health result?
    Mr. MACDONALD. It is a two-prong approach. Yes, working 
with our carriers and other insurers that we work with, was one 
way we created designs. But part of that investment was a 
significant investment in making the employee and their 
dependents educated consumers.
    Let me just give you an example on childhood obesity. You 
say why childhood obesity, they are not your workers. Well, it 
is also a statement of society, but more importantly, it really 
reflects that if an employee goes to work and feels good about 
their family situation, there is not an issue there, they will 
be more productive and more satisfied.
    One of the things we did is created IT tools, not 
surprisingly, for people to go on and look at what does it mean 
to have nutrition for children and exercise programs. One of 
the interesting byproducts was that coming back in the surveys, 
we found it was more family friendly. People began to discuss 
what they were eating at dinner and what they were doing during 
the day. A simple thing like not watching TV more than hour, 
and the type of TV that the child was looking at, not being a 
couch potato. All those things helped immensely in intervening 
in those costs.
    Mr. POMEROY. Your confidence in your plan indicates perhaps 
to me that IBM would be one in a new insurance world where 
large employers could continue to offer what they had been 
offering or send their employees to shop in an insurance 
exchange. You may very well continue to do what you have been 
doing.
    Mr. MACDONALD. Regardless of your aspiration about a public 
plan or not, the thing that I would caution us as patriots, 
using Chairman Rangel's approach, describing us appropriately 
so by the way, we have to ensure that we are still engines for 
information and transformation. I mean, what I was just 
describing was a sense of transformation within the health-care 
arena. And I think that has to be a fundamental premise of what 
we are doing going forward.
    I agree, by the way, with Gerry. The whole concept of 
taking out the exclusion for tax deferral, we would completely 
agree; and I think there would be a mutiny at the gate, so to 
speak, if that were to occur. I think there are fundamental 
things we have to maintain.
    Mr. POMEROY. Mr. Chairman, may Mr. Shea also respond?
    Mr. SHEA. Thank you, Mr. Chairman. I just wanted to 
piggyback on Mr. MacDonald's comments and to make the point 
that I really don't think it is useful for us to see this as 
either/or--either Medicare is good or private is good.
    If you look at the experience of people who have been 
working together--I am talking about large employers, small 
employers, purchaser groups, consumer organizations--and I 
would put us in that category--or AARP, physician groups, 
hospital groups, how you restructure the system to get better 
value--a key component of that is what the government does. We 
can do these things if we do them together. That is the lesson 
from what has gone on in the last 10 years.
    I think Mr. MacDonald would probably agree. Medicare has 
led the way in terms of quality measures and quality reporting. 
They, with a fairly modest investment, have got every acute-
care hospital in the country reporting on a standardized set of 
measures. And one of the things that the hospitals will tell 
you and the employers will tell you is, we don't want to have 
one measure set over here and one measure set over there. 
Medicare instituted a uniform set of measures that everybody 
reports on. And we know from the statistics, even in the first 
5 years of that, that has improved quality. The performance has 
really improved on those measures. That is something Medicare 
did that the private sector wants to emulate and be part of.
    One of the things that bothers me about the debate over the 
public insurance is it is like we are back to yesteryear this 
is a polarized debate, in my humble opinion, which has 
prevented us from straightening out our health care mess now 
for decades. It is that precise kind of thing.
    The only reason we talk about the public insurance program 
is we think it is a good cost-containment mechanism. If the 
private insurers want to come up and present a credible case 
that they can control costs, then we would be very interested 
in hearing it. But their history does not indicate that they 
can make that case based on what they have done in the past. 
So, therefore, we simply say, well let's try the public 
insurance alternative and see if competition might get us 
someplace that the private insurance market has never been able 
to do. This is not--we are not enshrining a public insurance 
program. We are trying to get these costs under control.
    Mr. POMEROY. Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you. Mr. Brady from Texas may 
inquire.
    Mr. BRADY. Thank you, Chairman. I agree with Mr. Conklin 
the churning of the health insurance adds to the problem a 
great deal, not just in the private sector. We had Texas 
Childrens Hospital and Texas Medical Center trade a nonprofit 
health insurance program to try to lower costs, and they 
failed, as they told me, mainly because small businesses have 
to churn, move from insurance plan to insurance plan every 1 
year, 2 years, 3 years, as they did in my small business, to 
try to contain costs. The point from the leaders of the 
Childrens Hospital is that until you connect behavior of that 
patient to their health-care plan prevention, other 
initiatives, won't really help.
    I want to describe to you a model that I found in a small 
town in east Texas; Evadale, Texas, just north of Orange. There 
they have a papermill, and 7 years ago the papermill management 
and the union there, the steelworkers, agreed that the 
steelworkers would run the health-care plan. What they did was 
they put together a very commonsense patient consumer model 
that had three parts to it. One, they built a clinic at the 
front gate of the plant so that every union--and there are 
3,000 workers--and their family had immediate access to 
preventive care. When the family, child, whatever got ill, 
immediate access.
    Secondly, they went out to bid for imaging and specialty 
services, and even had insurance companies bid on that; put 
together a list of good, qualified specialty imaging services.
    Thirdly, they hired Navigator, a group that would help 
their members navigate the health-care system to the point 
where if you had a chronic disease or multiple illnesses, they 
would send a nurse along with them to go from doctor to doctor, 
and then sit down with that steelworker and work through the 
options to continue the medication and make the right 
decisions. It was a very basic process. The company pays an 
average health-care costs. This group who I visited with, 
toured the center, sat down with the groups, haven't had a 
health-care premium increase in 7 years.
    When you talk to union workers, they say, look, if my child 
gets sick I take them to the clinic immediately, because if I 
don't, not only do they not get well but that money comes out 
of my pocket. When they needed to even blacktop the front of 
the clinic, the union workers said, no, don't use our money for 
that; just buy the materials, we will do it because that is our 
health-care money.
    You talk to the doctor who is there, who is hired by the 
steelworkers, said I am practicing medicine the way I always 
hoped to. Instead of spending 15 minutes with the patient and 
15 minutes with paperwork, spends the whole 30 minutes 
providing quality care; one, because he loses his job if he 
doesn't. But second, he said, I don't have to worry about them 
suing me. They are not anxious to sue themselves, because this 
is their health-care money.
    And then talked to the PA and they are all cross-trained in 
the office. And their point was that one had worked at another 
institution, at a hospital, and if someone came in with a sore 
neck, they checked the insurance policy, and if this imaging 
was allowed and that imaging was allowed then everything was 
run, mainly because they could; and, second, because they lost 
money on the ER and uncompensated care in Medicare. So we don't 
do the cost-shifting here. We don't shift cost.
    Bottom line, there was a direct connection between the 
behavior of the patients, of those who were being covered, and 
the health-care costs. I am convinced that no matter what model 
we create--that was for 3,000 workers, so it wasn't a big 
model. In fact, smaller may be better if we are going to try to 
connect the consumer to the health care they get and the 
ultimate cost of it.
    My question is, regardless of what model we pick, how do we 
really change behavior to prevention, to immediate action, to 
quality care, if we don't, in whatever we do, connect that 
informed consumer, provide them easy access to prevention, and 
make sure they understand that those are their health-care 
dollars. And I would open it up to the panel for any comments 
you have.
    Mr. CONKLIN. Can I get a job at that mill? It sounds great. 
You know, if you could come up with a workable model for a 
company of 13, I would say we are in. Again, I would say these 
are the kind of examples and the kinds of ideas that we really 
need to think through carefully and see how they might apply 
within the broader marketplace.
    One the problems I see with that example in our part of the 
country is that----
    Mr. BRADY. It isn't geographic. That model works wherever 
you take it.
    Mr. CONKLIN. It may or may not. And it may work at 3,000 
and not work at 20.
    Mr. BRADY. Obviously, a model like that--I don't want to 
cut you short--but let's get serious. We are not talking about 
that model for 13 workers or 20. You are talking about putting 
together an amount that can create that synergy and do that 
bidding. Any other comments?
    Mr. MACDONALD. Congressman, I might suggest that one of the 
ways of doing that is to focus on--some of us are old enough to 
remember this--I am not suggesting that we go back that far--
but when the physicians visited us at our homes in the young 
years.
    But I would also argue that now one of the things that we 
have done to incent that behavior that you discussed is really 
trying to focus on the primary care physician, making the doc--
if you will, using a sports analogy--the quarterback, the 
ability to coordinate care, the ability to take that medical 
home approach.
    You talk about paperwork, the inability of either the doc 
or hospitals or the insurers to have a coordinated effort 
around the IT function that needs to be brought into the 
system. Those are three or four things that could be done 
readily and we already have experience that have actually 
proved to be very beneficial to an awful lot of people.
    Mr. BRADY. Chairman, thank you.
    Chairman RANGEL. It would help if the members shorten their 
questions, so that within the 5-minute period we might get the 
benefit of our distinguished guests who are here, because it is 
embarrassing for the Chair to cut off the guest when he was 
asked a question and time wouldn't permit it.
    But having said that, we will go now to the gentleman from 
New Jersey who brought the guest here, Mr. Pascrell.
    Mr. PASCRELL. I thank the Chairman. I thank the panelists. 
Excellent, all of you.
    Mr. Conklin, I have a question for you and I have a 
question for Mr. Dennis. I contend that an important part of 
health reform is providing at least the minimum benefit to 
ensure that individuals have meaningful coverage. Without this 
component, I fear we will have a race to the bottom that leaves 
many sick people behind and others with coverage that fails to 
meet their needs.
    Some have argued that a health-reform package that provides 
for minimum benefit will restrict employers' ability to tailor 
the benefits to the employees' needs. In your testimony you 
highlight the experience you faced each year when you were 
shopping for coverage, to use your word.
    As I understand it, there is relatively no choice in either 
what you are able to offer your employees and, consequently, no 
choice in the options among what your employees can choose.
    Now, this is a problem that is not just unique to your 
business. I think you would agree with that. My question is 
this: Given your experiences in shopping for coverage that 
meets your employees' needs, do you really believe that a 
minimum benefit standard would impede your ability to provide 
adequate coverage to your employees?
    Mr. CONKLIN. No, Congressman, I don't. I think it would be 
one of those very useful tools in helping us evaluate and 
understand what that minimum--we don't know what that minimum 
is, I don't know what it is, and it would be great if somebody 
could inform me in that way--and the employees.
    Mr. PASCRELL. Thank you very much. Mr. Dennis, in your 
position paper, one of the primary points made against an 
employer mandate is that it fails to address the real problems 
of the health-insurance market for small businesses, which is 
primarily affordability. I agree with you to a point. An 
employer mandate alone will not even begin to solve the 
problems. I would like to make it perfectly clear that no one 
here has claimed that making any single change will solve the 
problems of our health systems. You haven't heard that from 
anybody on either side. In fact four of President Obama's eight 
health-reform principles address cost growth and affordability. 
So I venture to say affordability is the single most important 
issue in this debate.
    On that note, I would like to point out that some of the 
options you have provided us in reducing health-care costs 
include expanding high-deductible plans--this is in your 
testimony--preempting State laws that serve to provide 
assurances of adequate insurance coverage. It is there. It 
attempts to allow employers to offer the most bare-bones 
policies.
    Now let's get down to the nitty-gritty, because I have 
heard some folks from the other side, my good friends, you 
would almost think that Medicare was a bare-bones plan. So my 
question to you is this: How do more bare-bones policies that 
ignore State laws and fail even to cover reasonable benefits 
provide protections for individuals, particularly those with 
chronic conditions or complex health-care needs?
    Are you suggesting therefore, Mr. Dennis, that we ration--
that we ration health care? Is that what you are suggesting.
    Mr. DENNIS. When you are talking about a minimum benefit, 
minimum benefit plans, you could have one with virtually 
nothing in it; or you could have Cadillac-after-Cadillac-after-
Cadillac of plans.
    Mr. PASCRELL. No, we are not talking about that kind of 
distinction. Nobody on either side, sir, has ever said it is an 
either/or proposition.
    Mr. DENNIS. Oh, no, I'm sorry. I didn't mean to leave you 
with that impression.
    Mr. PASCRELL. Good.
    Mr. DENNIS. Without saying there are two extremes to this, 
you can go either very small and very bare bones, or you can go 
to very expensive, let me put it that way. And there are all 
kinds of gradations in between. Whenever you set a minimum 
policy, whatever that policy is, there will be--that is the 
level from where you start, and that is obviously the minimum 
benefit. It can be either a very good policy or a very poor 
policy.
    Chairman RANGEL. It could be a good policy or a bad policy. 
I want you to take notes.
    Mr. DENNIS. My point is it is directly tied to cost.
    Chairman RANGEL. I understand. It makes a lot of sense.
    Mr. DENNIS. Directly tied to costs. And so what we are 
talking about here is a cost issue. I am not sure, maybe I 
don't understand the question.
    Chairman RANGEL. No, we can't go through the question 
again.
    Mr. PASCRELL. I thought the question was pretty clear, Mr. 
Chairman.
    Chairman RANGEL. Well, anyway, we have to move on. We 
certainly appreciate that on our side.
    We have Mr. Ryan waiting.
    Mr. RYAN. Thank you, Chairman.
    Mr. Shea, I enjoyed the point you made before. I actually 
agree with a lot of what you had said, which is the current 
system is not getting costs down. We are not attacking the root 
cause of health inflation. I don't think anybody is trying to 
defend the current system from that perspective.
    I guess there are just going to be two big different 
approaches here on how best to attack the root cause of health 
inflation. We need to do a better job of offering an 
alternative, if we don't think that this is the plan to go 
with.
    On that, Mr.--is it Sheils or Sheils?
    Mr. SHEILS. Sheils.
    Mr. RYAN. I have been on the floor with the budget all day. 
I apologize, I just arrived.

RPTS MERCHANT
DCMN SECKMAN

    Mr. RYAN. I want to get into your actuarial analysis of the 
EPI plan, and Ms. Gould, if you want to jump in, because I 
don't want to unfairly characterize your plan, walk me through 
what it seems to me is sort of a death spiral of private plans 
that occurs. How do you arrive at the $119 million or $120 
million figure whereby people lose their private health 
insurance and go onto the government plan, as you have done in 
your analysis? What is the dynamic that occurs that makes that 
happen.
    Mr. SHEILS. The dynamic that occurs is that people are 
going to gravitate to the lowest-cost plan. The difference here 
for a family in annual coverage cost is $2,500 a year. That is 
shoes for kids. It is getting the car fixed, so you can go to 
work. For uninsured people and people living, those things are 
very, very important, so it is a huge amount of money.
    Mr. RYAN. And that is because the payment rates are set at 
the Medicare rates?
    Mr. SHEILS. That is right.
    Mr. RYAN. Which are lower on average than the private pay 
rates.
    Mr. SHEILS. Substantially, yes.
    Mr. RYAN. And because of the cross-subsidization that 
inevitably occurs with these lower rates than the private 
rates, more people going toward the lower public rates will 
push up prices in the private rates, making private insurance 
that much more expensive----
    Ms. SCHWARTZ. Will the gentleman yield?
    Mr. RYAN. Not right now.
    Go ahead.
    Mr. SHEILS. This isn't the EPI policy. This is the public 
plan. EPI is a different----
    Mr. RYAN. Okay. Got you.
    Mr. SHEILS. It is not the public program that people are 
talking about, no.
    Mr. RYAN. So your $120 million estimate is based upon the 
assumption that we apply Medicare rates to the public plan.
    Mr. SHEILS. Yes, if you were to do that. We also show what 
happens if you are less aggressive in the pricing, use private 
pay rates or use something in between.
    Mr. RYAN. That is crossover, right?
    Mr. SHEILS. Right. And the idea is to sort of give people a 
smorgasbord of options so that you can look at what the impact 
is on providers, on cost shifting, and arrive at some decision 
of your own where you want to place things.
    Mr. RYAN. Dr. Gould, let me ask you then about your plan. 
Tell me if I am wrong, please. Your payment rates here are 
income below 200 percent of poverty, premiums fully subsidized; 
above 200 percent of poverty, you phase in between 200 and 300 
percent of poverty, $70 for an individual, $140 for a couple, 
$200 for a family of four; nonworkers, different payment 
schedule; but the same for everybody based upon their income 
qualifications. Is that essentially----
    Ms. GOULD. You are talking about the subsidy structure for 
low income?
    Mr. RYAN. Yes.
    Ms. GOULD. That is correct.
    Mr. RYAN. And that caps it out of pocket, right, when you 
throw in co-insurance and everything else, right?
    Ms. GOULD. That is correct.
    Mr. RYAN. So here is my question and concern. That is why I 
want to ask Mr. Sheils and yourself, if we are going to pay the 
same for the services, regardless of the quality of the 
services, how are we going to expect the quality to improve, 
meaning not all doctors are the same, not all hospitals are the 
same? They don't give us the same quality of care. But if we 
are going to be paying the same rates for the services, 
regardless on the quality of these services; if a person has 
the same health insurance, which regardless of whether you are 
a smoker or you have bad behavior, if you are going get the 
same deal, aren't we basically having a system where the good 
cross-subsidize the bad in the health care provision of 
services based on quality? And aren't we having a system where 
we are making it harder for us to incentivize healthy living 
and wellness management and those kinds of things if we had 
such a standard plan and the same fixed rates applied against 
providers regardless of their quality?
    Ms. GOULD. I think you are neglecting the employer-
sponsored insurance will continue. And what we will see is what 
we see with the examples of IBM and other large corporations 
that are able to innovate with their delivery system and change 
those incentives. Those can continue. There is no question that 
those kind of innovations can continue.
    Mr. SHEILS. I don't think we have talked today yet about 
the things that are really wrong with the health care system, 
the things that would really control costs. Controlling 
payments, controlling what we pay providers, it reduces your 
cost, but it doesn't affect the basic inefficiencies in the 
system.
    Mr. RYAN. Right.
    Mr. SHEILS. We don't do anything here to correct the 
underlying problem in the system, and that is that the 
incentives for providers are way out of whack. We know that in 
some parts of the country, you get twice as much health care as 
you do in other parts of the country; yet it has been proven 
that there is no correlation to your health status as a result. 
So there is a great deal of suspicion, and much of what we do 
is just plain unnecessary. None of these proposals--the public 
plan proposal does not fix that.
    Mr. RYAN. Right.
    Mr. SHEILS. It does mean we pay less for the services that 
we use.
    Mr. RYAN. But it doesn't address the root cause of----
    Mr. SHEILS. No. In California, we worked on a workers comp 
problem, and people said, you know, our utilization in workers 
comp is four times what it is in the neighboring states. Well, 
we looked at it, but it turned out the costs were pretty much 
the same in the neighboring States. The difference was that, in 
California, the payment rates were much, much lower. I mean, 
dirt cheap, low rates. And there was an increase in utilization 
that was generating the increase, the revenues, so they are 
able to maintain that kind of revenues.
    We don't want to move to a system like this. And I don't 
think that we have at all, whether a public plan or whatever, I 
don't think we have gotten to the nub of the issue at all here.
    Mr. RYAN. He is about to bang the gavel on me. There it is. 
Thank you.
    Chairman RANGEL. Soon and very soon the bells will ring, 
and we will have a 15-minute vote, two 5-minute votes, but also 
a new member is being sworn in. And so it will be at least an 
hour that we will be away from the hearing.
    We have ten members who have not yet had an opportunity to 
inquire. And I would like at this time to see how many of those 
here that haven't asked questions will be willing to come back 
at 2:00. And I can't hold the witnesses to have to stay here, 
but those that can, depending on the number of members that 
would respond, would make a difference.
    So by hands, those who haven't had an opportunity, how many 
would be coming back at 2:00? So I think at this time after Mr. 
Blumenauer gets his 5 minutes that we will then ask everyone 
that is left in order to ask a question and ask who they would 
want to answer, and I would ask the panel to submit an answer 
in writing, and apologize to all of you for the awkwardness of 
this time, but I can't thank you enough for the valuable 
information that you have given to us.
    And I may have to see Mr. Pascrell's friend in New Jersey 
to get this all straightened out, because you told it like it 
was, and we understand that.
    So, Mr. Blumenauer, we are going to stay as long as we can, 
and you are recognized.
    Mr. BLUMENAUER. Thank you, Mr. Chairman. And I will try and 
adhere to your admonition in terms of short questions.
    I would just say that I was very impressed with the track 
record of IBM as being creative, promoting wellness. We have 
got some legislation we have introduced on a stand-alone basis 
to try and further incent that.
    And I appreciate the clarification that was made that a 
private, even if we have a public plan, there will still be 
tens of millions of people through the private sector driving 
those issues of cost containment and promotion.
    I have one specific question, Dr. Gould. The reference that 
I am hearing about people that are going to be crowded out that 
we are going to be seeing; if there is an employer mandate, 
that it is going to lead to significant job losses or 
reductions in wages. This is reminiscent to me of what we heard 
when it was argued that we shouldn't increase the minimum wage 
because that was going to have a massive negative effect.
    In my State of Oregon and others around the country, the 
higher-minimum-wage States actually appeared to be growing, not 
shrinking. Does the research on minimum wage have any 
application to having an employer mandate for health care?
    Ms. GOULD. It absolutely does. When we think about how 
firms paying for health care are going to be offset, you can 
think, at the high end, there would be different forms of 
compensation that could give perhaps. At the low end, you are 
right, you are constrained by the minimum wage. But what we are 
talking about here perhaps is something like a 5, 6, even 7 
percent payment that would be required. Compare that to the 
minimum wage, we have seen in the last 2 years that 27 percent 
increase in the minimum wage.
    We don't know yet really what the effects are of that 
unemployment. But if we look again, as you say, to the minimum 
wage literature in the 1990s, we can see that there were no 
employment effects of that kind of increase. And in fact, I 
would go one step further in saying, if we were to chart really 
contained costs, and I think one thing that hasn't really been 
mentioned here is that the introduction of the public plan 
would actually do a good deal to contain costs and bend that 
cost curve; if we were to do that, it actually can increase the 
competitiveness of our firms.
    Mr. BLUMENAUER. Thank you.
    Mr. SHEILS. And I would challenge that.
    Mr. BLUMENAUER. Excuse me. My time. I asked the witness a 
question. I would like to ask another witness a question, if 
you don't mind. Is that all right? I would like to----
    Mr. SHEILS. I apologize if I have offended you, sir.
    Mr. BLUMENAUER. That is fine.
    I just want to ask my question to Mr. Conklin. You had 
referenced the byplay, that you are on sort of a merry-go-round 
having to switch plans, you are going back and forth trying to, 
what impact does that have on you and your employees being on 
this health care merry-go-round?
    Mr. CONKLIN. Well, it has various impacts. One of them is 
uncertainty for me and my employees. So these transition 
periods cover a quarter of the year, in essence. And during 
that quarter of the year, people still get sick. They don't 
stop getting sick because we are changing our health plan. So 
there is always the question of, which card do I use? And then 
there is the question of, and what am I getting, you know? Is 
it going to be 25 bucks when I go to the drugstore this time, 
or is it going to be 40 bucks, the co-pay?
    But really one of the more significant impacts of the 
constant shifting is, who is your doctor? And who is choosing 
your doctor, because you are not choosing your doctor? The 
health insurance provider is choosing the doctor. I have got a 
stack--I almost wanted to bring them for you so you could see 
it. I got a stack about this high that I have collected over 
the last 5 years of the list of doctors for each insurance 
company.
    Now, sometimes they cross over, and you will find them in 
there, and sometimes they don't. So if you are going to go to 
the doctor and get care, you are going to get it from somebody 
who is as familiar to you as the guy who drives a taxicab. And 
how would, you know, how do you feel going to the doctor 
sharing some of the most intimate aspects of your life with a 
perfect stranger?
    I mean, there is a disincentive to go to the doctor that is 
part of the system. And I think, and this I think is a really 
important part of this discussion, it leads to the perception 
that they are doing this on purpose; they are doing this to 
keep me from going to the doctor. They are doing this because 
it keeps their costs down, and there is an element of distrust 
that now has completely permeated the private insurance system. 
So there is a lot of repair work to do.
    Mr. BLUMENAUER. Thank you, Mr. Chairman.
    Chairman RANGEL. Let's see what we can accomplish with the 
time that is left.
    Mr. Boustany, why don't you inquire for a minute?
    And we ask the panelists to respond in a minute, so that we 
can move on, okay?
    Oh, I am sorry. No. Mr. Boustany arrived earlier, John.
    Mr. Boustany.
    Mr. BOUSTANY. I am sorry. Am I on? Okay.
    Thank you, Mr. Chairman.
    Mr. Dennis, President Obama promised, if you have got 
health care already, and probably a majority of you on the 
panel do, then you can keep your plan if you are satisfied with 
it. But you have research that shows employers, and especially 
small businesses, that would stop offering private coverage 
because employees could receive coverage under a government 
plan. So wouldn't a bill that forces workers to lose existing 
coverage, as has been described by Mr. Sheils, be contrary to 
the President's campaign promise?
    Mr. DENNIS. I am not going to get into that about campaign 
promises.
    But, clearly, I mean, we have a situation that the current 
system itself, the current employer-based system does not work 
for smaller firms. While you can start with the employer-based 
system as a system from which you work around, clearly 
something has to be done at the bottom to help us in that 
regard.
    From the small employer perspective, the costs of the 
system are relatively high, and this gets to your point. There 
was a cite offered earlier about an 18 percent difference in 
relative effective cost between small and large. There is 
another study that shows you get 78 to 83 percent of insurance 
equivalent, which is effectively the same thing. You have 
greater volatility of premiums because you are a small group. 
Owners face real hassles. This was brought up with your 
experience. Everybody agrees on this. A series of people who 
are business owners, who are not experts in insurance, although 
unfortunately they are having to become one.
    We are talking about wellness and prevention. In a small 
business, a 13 person firm, I don't think so.
    And then we have bizarre things that happen in this system. 
For example, you will see that the small businesses are much 
more likely to pay 100 percent of the premiums than the large 
ones; 40 percent of small businesses with insurance pay the 
whole fare.
    Chairman RANGEL. I am sorry to interrupt you, but Mr. Kind 
would you inquire for 2 minutes.
    Mr. KIND. Thank you, Mr. Chairman.
    I will try to be brief. But first of all I want to thank 
Mr. MacDonald for kind of showing us the IBM way of what up-
front preventative investment does to drive down costs in a 
larger employer setting. And I think the testimony was real 
impressive. And hopefully, as we move forward on reform, we 
will figure out ways to further incentivize what IBM and others 
are doing across the country. Because a lot of this is a lot of 
common sense, you know, in the free market working to drive 
costs down.
    Mr. Dennis, let me, agree with you in your opening 
testimony, where I am afraid that if coverage gets out ahead of 
cost, this could become politically very dangerous, and the 
system could be very tough to reform. But I don't want NFIB to 
walk away leaving the impression you don't stand for anything. 
Because I know over the last few years, I have worked closely 
with NFIB. But not just NFIB, but AARP, SEIU, a restaurant 
association, of realtors, to come up with what I think is a 
very viable national purchasing pool plan that we have 
introduced in a bipartisan basis with tax incentives, with 
prohibition against risk-rating, and also virtual HR managers 
for small businesses that could answer a lot of the problems 
small businesses encounter in the free marketplace right now. 
Could you comment on the wisdom of such an approach?
    Mr. DENNIS. Surely. And the answer is yes. We have 
distributed an outline, I believe, to the dais of what the 
basic current SHOP act contains. But essentially, what we are 
looking at is a pooling mechanism, a very large pooling 
mechanism, where we are going to draw employers in, and we are 
going to cap or control the ability to rate on the basis of 
experience, health experiences, and claims, claims histories 
and that kind of thing. So it is a program that I think is 
effective, could work for small businesses. It won't solve 
every problem that the world has ever come up with for us, but 
clearly is a step forward. I think I can speak for our 
legislative staff, of which I am not one, that it would welcome 
any Member to join you in cosponsorship of this bill.
    Mr. KIND. Mr. Dennis, I think you would also agree, 
wouldn't you, if we do the proper health insurance reforms the 
right way, such as eliminating underwriting or rating based on 
health experience, that, too, could benefit small businesses?
    Mr. DENNIS. Absolutely.
    Chairman RANGEL. Mr. Heller, could you inquire for 2 
minutes?
    Mr. HELLER. I will. And I had a prepared question, but I 
will make it brief.
    Mr. Sheils, what else are we not doing here on this panel?
    Mr. SHEILS. Well, I guess the basic concerns for me are the 
incentives in the system. For physicians, the incentives are to 
just provide as many services so that you can crank out as many 
bills. We know, for example, well documented, that if you slow 
the rate of growth in physician payment under Medicare, you get 
a 30-cents-per-dollar offset from increased utilization. Those 
are the things that are out of control.
    We know what works in terms of cost containment. We have 
done this--we have seen it twice. Once is in the 1990s. There 
was a terrific investment in managed care that was made by 
employers in the early 1990s. The rate of growth in spending 
per worker declined from 18 percent a year in 1989 down to 8/
10ths of 1 percent by 1996. Adjusting for inflation, that is a 
net reduction in what we spend on health care.
    And then with the Medicare Part D program, this was a 
competitive market-based approach as well, and we are all 
gratified to hear that the program came in costing a great deal 
less than what we had projected it would cost. And again, this 
has to do with the competition that results. So I think that 
the idea that has worked in the past is performing integrated 
systems where everybody has an incentive to keep people 
healthy, everybody has an incentive not to do things that are 
unnecessary. And those models have worked.
    They are very unpopular. I am talking about managed care. 
They can be pretty unpopular. But there are ways to build on 
that platform. If we have done it once or twice, we can do it 
again. So that is the direction I have tended to think in terms 
of.
    Mr. HELLER. Thank you very much, Mr. Sheils.
    Mr. Chairman, I yield back.
    Chairman RANGEL. Thank you so much.
    Ms. Schwartz, would you please inquire for 2 minutes?
    Ms. SCHWARTZ. Thank you very much.
    And I do want to point out, I know there has been some 
frustration I think I hear from the panelists that you haven't 
been allowed to or been asked very much about all the other 
actions we should take to help improve quality, improve 
efficiency and contain costs. We have had other hearings, and 
maybe we can invite you back to discuss some of those things.
    But the fact is my understanding was this was purposefully 
set up to discuss employer-based health care.
    I do want to say that I acknowledge Mr. MacDonald, 
particularly speaking to health IT. We have done great work on 
that in this administration already in investing in health 
information technology. This Committee has done great work on 
that under Medicare.
    And primary care, we are very, very aware of the increased 
need for primary care providers, and in fact, I am circulating 
a bill today that is going to address many of those issues and 
I hope answer many of those questions. And I do want to also 
just second Mr. Kind's really good work and important work in 
terms of the market reform for small businesses, the agents who 
have joined together to purchase care.
    The question I have has to do with other market reforms. 
And I think I would ask Dr. Gould to start with his reaction to 
the fact that we have talked about community rating, we have 
talked about of course maintaining the employer-based system of 
care. I don't think that we are all talking about that, most of 
us anyway. But we do--I actually do that. It is really hard for 
people to enroll.
    I think that, Mr. Conklin, you talked about this, that even 
when you have coverage, many employees don't take employer-
based coverage. And either they don't sign up, forget to sign 
up, miss the 30-day notice and didn't have to have a life-
changing experience to sign up later; there are waiting periods 
for 6 months, so even if your employer covers you, you can't 
sign up. I think I want to change the playing field on this.
    So my one question is, could we--quick question--maybe it 
is a yes or no answer, if I could. What do you think about 
doing automatic signup if your employer offers you health 
insurance?
    Dr. Gould, do you think we ought to do like we did for 
401(k) fees and just have people automatically signed up? Of 
course, they could opt out if they have health insurance 
elsewhere----
    Chairman RANGEL. The two-minutes have expired. If someone 
wants to answer yes or no.
    Ms. GOULD. I think auto enrollment would be a great idea.
    Mr. MACDONALD. It is wrought with problems.
    Chairman RANGEL. Congressman Roskam from Illinois will be 
recognized for 2 minutes.
    Mr. ROSKAM. Thank you, Mr. Chairman.
    Anticipating the falling gavel, just maybe a word, not 
really time for a question, but just to follow up with the 
exchange between Mr. Dennis and the gentleman from New Jersey.
    I served in the State legislature in Illinois for 13 years 
and served on the insurance committee. What was interesting 
was, take Mr. Conklin's situation, assume for the sake of 
argument that he and his wife, his business partner, decide 
that they are going to put a salesperson out on the road, and 
they need to get a vehicle to do that. Let's say that the 
vehicle is sort of the analogy for a health insurance policy. 
The government comes in and says, you have got to have a really 
safe vehicle. You may say, well, Ford Taurus is pretty safe, 
but there is a government standard that says, no, no, no, Ford 
Taurus, not safe enough, you have got to put them in the best 
Volvo possible. And if you don't put them in a Volvo, you can't 
put them on the road. So you are in a situation then, as the 
owner of a company, that says, well, we can't really afford the 
Volvo; we can give them a Schwinn, but they are not going to 
let us do a Ford Taurus.
    And that is not unlike what insurance is like in the State 
of Illinois and other places where mandate after mandate after 
mandate after mandate comes in. You listen to the testimony, 
and it is sympathetic. Legislatures end up voting in favor of 
these mandates but are really blind to the cumulative cost that 
goes up. So I think that having a legitimate no-frills policy 
has to be a part of this conversation.
    And with that, I yield back.
    Chairman RANGEL. Thank you.
    Bob Etheridge.
    Mr. ETHERIDGE. Thank you, Mr. Chairman.
    Mr. Chairman, I would like to submit a couple of questions 
for the record.
    I will only ask one question in the expediency of time.
    Mr. MacDonald, we have heard from a number of employers, 
not just you but others, that how valuable it is as part of 
your health benefits to really have a prevention and wellness 
program. And in your testimony, you talked about your healthy 
choice that translated into about an estimated $79 million in 
savings in health care claims between 2004 and 2007.
    And I happen to believe that preventative medicine has to 
be a part of any health system we put together. I just think 
that, without doing that, we don't get to where we need to get 
to. My question to you is this: Can you talk just very briefly 
about your program, about the specific cost savings? And 
secondly, do you have any data on this that you could share 
with this Committee?
    Mr. MACDONALD. I won't give you the specifics. I will 
respond in writing on the data, but there is an enormous amount 
of data that we are willing to share. And I really think that 
the primary issue that we have focused on is trying to connect 
the employee and their dependants with the primary care 
physician. I think that begins to drive behavior faster than 
anything. The preventative wellness programs help, but the 
single most important focal point for us is the primary care, 
the medical home approach to medicine.
    Mr. ETHERIDGE. Thank you, Mr. Chairman. I yield back.
    Chairman RANGEL. Thank you so much.
    John Linder, thanks for your patience.
    Mr. LINDER. Thank you, Mr. Chairman.
    Mr. Sheils, how many Americans choose their health care 
provider or their health care insurance?
    Mr. SHEILS. How many choose their provider?
    Mr. LINDER. How many choose their insurance?
    Mr. SHEILS. I think it is 80 percent or more of those that 
are offered it. Most of those people have coverage from some 
other source.
    Mr. LINDER. How many of those people have it chosen for 
them by their employer?
    Mr. SHEILS. Probably 30 or 40 percent.
    Mr. LINDER. Don't the employers make most of the health 
care decisions in this country?
    Mr. SHEILS. They have done, yes, sir.
    Mr. LINDER. Mr. MacDonald, what percentage of your payroll 
does IBM pay for health care?
    Mr. MACDONALD. As a percentage of payroll, it runs about 7 
percent. But you have to remember that we have almost 300,000 
lives, and therefore a lot of people, not a lot, but several 
thousand people opt out, so it actually could be higher. And 
plus our wage, as I indicated before, tends to be at the higher 
end, so that percentage is a little deflated.
    Mr. LINDER. How much does the employee pay? Does the 
employee pay X percent of the premium?
    Mr. MACDONALD. We are one of the few corporations in 
America today that give a free PPO plan to all employees.
    Mr. LINDER. If we had a public plan to compete with, what 
percentage of employees do you think might opt for it?
    Mr. MACDONALD. Before I mentioned to you, in my opinion, 
that there would be little migration to a public plan 
initially; I think that people are very reluctant to change as 
it relates to health care. As evidenced with HSA, they have 
been reluctant. I think a lot of it is really driven off of 
design, access and pricing. And so for me to opine directly on 
a public plan, I don't have the details yet.
    Mr. LINDER. Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you.
    Mr. Yarmuth of Kentucky.
    Mr. YARMUTH. Thank you, Mr. Chairman.
    Mr. Sheils, you mentioned earlier that, you were talking 
about why people would move to a public plan, you talked about 
cost savings and so forth, and seemed to imply that the only 
reason, at least the only one we discussed, was that you could 
pay lower rates to providers and that had a deleterious effect 
on the system. Aren't there other factors involved that may 
make it cheaper, like there is no profit component to the cost? 
There is also the potential of lower administrative costs like 
those achieved by Medicare that would allow the public plan to 
be less expensive.
    Mr. SHEILS. We showed earlier in the testimony that the 
cost to private insurance administration, including profits, et 
cetera, is around 13.5 percent of benefits. Under this plan, it 
probably would be closer to 7 percent under this public plan.
    Mr. YARMUTH. Thank you.
    Mr. Conklin, first of all, thank you for saying a couple of 
things which I have been saying, and that is why I applaud you 
for saying them. And one is, we aren't going to get it right 
the first time. There are going to be thousands of unforeseen 
consequences that we will have to work on, but we need to start 
on this effort.
    And secondly, that we are trying, I think this is the way I 
interpret it, that we are trying to apply business concepts to 
something that is not necessarily a pure business. If you 
wanted to leave your business right now, if you wanted to shut 
it down, if you had a better opportunity somewhere else, given 
unfortunately the condition of your wife, would you have an 
easy time getting insurance if there weren't some kind of a 
public plan?
    Mr. CONKLIN. No, I don't think we would have an easy time 
getting insurance, and the insurance we got would be expensive, 
and I don't think paying more in that scenario would yield 
better results for my wife. Right now, we have a pretty decent 
HMO, and she, we, are paying for the best care she has ever 
gotten 100 percent out-of-pocket.
    Mr. YARMUTH. Thank you.
    One final question. Did under the Lewin Group, Mr. Sheils, 
estimate the, or what did the Lewin Group estimate is the 11-
year savings to national health expenditures under the 
commonwealth plan?
    Mr. SHEILS. I believe it was $4.8 trillion.
    Mr. YARMUTH. So a significant amount. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman RANGEL. Mr. Reichert is recognized.
    Mr. REICHERT. Thank you, Mr. Chairman.
    Would everyone on the panel agree that if an employee today 
is happy with and satisfied with their health plan, that they 
should be able to keep it? Is there anyone who disagrees with 
that comment?
    Mr. Sheils, if a new government-run health plan was created 
and it paid providers Medicare rates, how many Americans would 
lose their employee-based health insurance that they currently 
have?
    Mr. SHEILS. It would be about 108 million people.
    Mr. REICHERT. And Mr. Chairman, I have one other concern. I 
fortunately have been blessed to work with King County for King 
County in Seattle, Washington. A great wellness activities, 
preventative health care plan. I am concerned about saving $18 
million over the last few years promoting prevention, health 
prevention programs; Microsoft does the same thing. I am 
concerned that if we move to a public health plan, a 
government-run health plan, I should say, that we may lose some 
of those innovative ideas.
    And I yield. Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you. Mr. Meek is recognized.
    Mr. MEEK. Thank you so very much, Mr. Chairman.
    Anyone on the panel, one of the main reasons that we are--I 
mean, one of the main issues that we run into with this whole 
health insurance issue is preexisting conditions. And I just 
want to ask anyone that wished to answer, what kind of 
incentives should be out there as it relates to government 
incentives to not only take on preexisting conditions when we 
look at overall insurance?
    Mr. SHEA. Congressman, the word comprehensive is often 
associated with reform in our discussion these days. And I 
really think it is worth bearing in mind that there are very 
concrete parts of that. One of those pieces is that we have to 
accept everybody into coverage. We can't exclude people because 
of preexisting conditions.
    But the correlate of that is if we get everybody in and if 
we get them in from birth, we need to provide them with the 
kind of preventative care, with the kind of early detection, 
with the kind of management of chronic diseases that come up. 
That is where the real cost savings are going to be in terms of 
managing health care. So it is one piece of the overall puzzle, 
and it is important that we address all of them together.
    Mr. DENNIS. Congressman, you have not only the preexisting 
condition in the sense of someone coming into a job, but you 
have a similar situation when someone is in a job and faces, 
job lock, which happens quite frequently in smaller firms. 
Someone will be in a job, have insurance, and then can't move 
to another job because of the health insurance situation.
    Mr. MEEK. Well, that is something definitely we are going 
to have to tackle, because I can see it even going down to 
almost health care employment discrimination saying, well, if 
you have a preexisting condition, I don't need you in my group 
or in my company because you are going to cost us all more.
    Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you.
    You have been one of the best panels that we have had. I 
cannot begin to tell you how many members who have so many 
things to do with so many other pieces of legislation how they 
have stopped by to say what a great panel this has been and how 
important it has been.
    I yield to Mr. Camp before we adjourn.
    Mr. CAMP. Well, I would just agree with the chairman's 
comments.
    Thank you all for being here. I appreciate your testimony 
very much.
    Chairman RANGEL. And with that, most of you veterans know 
how it works here. We regret the awkwardness here, but you made 
a great contribution toward our thinking. We have got to have a 
health bill. And hope all of you would feel that your input has 
been a part of what we are doing. Thank you so much. The 
Committee stands adjourned.
    [Whereupon, at 1:27 p.m., the Committee was adjourned.]
    [Questions for the Record follow:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    [Submissions for the Record follow:]
       Written Testimony of Joe Solmonese, Human Rights Campaign
    On behalf of the Human Rights Campaign and our over 700,000 members 
and supporters nationwide, I thank Representative Rangel for convening 
this hearing on employer-sponsored health insurance. The Human Rights 
campaign is the nation's largest civil rights group advocating for the 
lesbian, gay, bisexual and transgender community. Employer-provided 
health care is of great concern to our community, as it is to most 
Americans.
    Over 60 percent of Americans under age 65 receive their health 
insurance from their employers, who contribute a portion of the premium 
for the employee and, often, for family members covered under the 
employer's plan. Nationwide, employers are increasingly covering same-
sex couples in their insurance plans. As of this hearing, over 57% of 
Fortune 500 companies now offer equal health benefits to their 
employees' same-sex domestic partners--up from only one in 1992.\1\
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    \1\ The federal government, the nation's largest civilian employer, 
does not provide these benefits. As a result, hardworking civilian 
employees with same-sex partners do not receive equal compensation for 
their service to the government.
---------------------------------------------------------------------------
    Unfortunately, our tax system does not reflect this advance toward 
true meritocracy in the workplace. Under current federal law, employer-
provided health benefits for domestic partners are subject to income 
tax and payroll tax. As a result, a lesbian or gay employee who takes 
advantage of this benefit takes home less pay than the colleague at the 
next cubicle. Some families have to forego the benefits altogether 
because this unfair tax renders the coverage too expensive--adding them 
needlessly to the millions of uninsured Americans in this country.
    The following example illustrates how this tax inequity affects a 
same-sex couple with an average income: In 2006 Steve earned $32,000 
per year and owed $3,155 in federal income and payroll taxes. Steve's 
employer also paid the monthly premium of $907 for the insurance 
coverage for Steve and his wife. Of this amount, $572 was the amount in 
excess of the premium for self-only coverage. None of this coverage was 
taxable under current law because employer contributions for the worker 
and a spouse or dependent child are excluded from taxable income. 
Steve's co-worker, Jim, earned the same salary and had the same 
coverage for himself and his same-sex partner. However, the value of 
the coverage provided to the partner is subject to federal income and 
payroll taxes. As a result, $6,864 of income is imputed to Jim and his 
federal income and payroll tax liability increased from $3,155 to 
$4,710. This represents nearly a 50% increase over Steve and his wife's 
tax liability.
    For many families, especially those with modest incomes, the tax 
hit is more than they can bear. In the example above, a family earning 
$32,000 would most likely find that the additional $1,555 in tax 
liability puts coverage beyond their means.
    Taxing these benefits also raises costs for employers. The benefits 
are not only considered imputed income, but also wages for payroll tax 
purposes. As a result, the employer must pay additional payroll taxes 
on these benefits that they do not pay for spouse and dependent child 
coverage.
    The high--and increasing--cost of health insurance is of particular 
importance to LGBT people. Nearly one in four lesbian and gay adults 
lack health insurance and these adults are more than twice as likely as 
their heterosexual counterparts to be uninsured.\2\ For some of these 
people, unfair taxation of employer-provided health benefits is partly 
to blame. Furthermore, the additional tax burden could dampen the 
incentive for employers to choose to offer equal benefits to their 
employees with same-sex partners.
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    \2\ http://www.harrisinteractive.com/NEWS/
allnewsbydate.asp?NewsID=1307
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    It is imperative that the federal government not pile unfair taxes 
onto some families who are coping with the spiraling cost of health 
care. The Tax Equity for Health Plan Beneficiaries Act, which as H.R. 
1820 in the 110th Congress, would eliminate the tax inequity and render 
health insurance more affordable for many American families.\3\ 
Regardless of which approach Congress takes to health care reform, tax 
incentives relating to family health coverage must treat all families 
equally. As this Committee considers the role of employer-provided 
health insurance in the future of health care, we strongly recommend 
that it support eliminating the tax on employer-provided health 
benefits.
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    \3\ A similar bill was introduced in the Senate in the 110th 
Congress_the Tax Equity for Domestic Partner and Health Plan 
Beneficiaries Act (S. 1556).

                                 
                        Statement of Judy Waxman
    Chairman Rangel and Members of the Committee on Ways and Means, 
thank you for this opportunity to provide written testimony on behalf 
of the National Women's Law Center. As a non-profit organization 
dedicated to expanding the possibilities for women and girls in this 
country since 1972, we would like to express our concerns to the 
Committee regarding the harmful practices of insurance carriers in the 
individual and group health insurance markets and the disproportionate 
impact that such practices have on women in the United States.
Introduction
    Women have much to gain from carefully-implemented insurance market 
reforms. Regardless of whether they receive coverage from an employer 
via the group health insurance market or are left to purchase health 
insurance directly from insurers through the individual market, the 
harmful practices of health insurance companies can hinder women's 
ability to obtain affordable and comprehensive health coverage.
    The majority of American women have health insurance either through 
an employer or through a public program such as Medicaid. In 2007, 
nearly two-thirds of all women aged 18 to 64 had insurance through an 
employer, and another 16% had insurance through a public program.\1\ In 
contrast, a very small percentage of nonelderly women--just 7% in 
2007--purchase health coverage directly from insurance companies in 
what is known as the ``individual market.'' \2\ Because this is the 
least common way to get health insurance, few people have any idea just 
how difficult it can be to purchase coverage in the individual market. 
For the 18% of women who are currently uninsured\3\--those who lack 
access to employer coverage, or who earn too much to qualify for public 
programs--the individual insurance market is often the last resort for 
coverage.
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    \1\ National Women's Law Center analysis of 2007 data on health 
coverage from the Current Population Survey's Annual Social and 
Economic Supplement, using CPS Table Creator, http://www.census.gov/
hhes/www/cpstc/cps_table_creator.html.
    \2\ Id.
    \3\ Id.
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    While women who get health insurance from their employer are 
partially protected by both federal and state laws, states are left to 
regulate the sale of health insurance in the individual market with no 
minimum federal standards. In the vast majority of states, few if any 
such protections exist for women who purchase individual health 
coverage. Furthermore, those seeking health coverage in the individual 
market are often less able to afford insurance without the benefit of 
an employer to share the cost of the premium.
    The individual health insurance market presents numerous problems 
for women, but even those who obtain group health insurance from their 
employer are affected by some of the same harmful practices that impede 
access to affordable coverage in the individual market
Women Face Many Challenges in the Individual Insurance Market
    To learn more about the experiences of women seeking coverage in 
the individual insurance market, between July and September 2008, the 
National Women's Law Center (``NWLC'' or ``the Center'') gathered and 
analyzed information on over 3,500 individual health insurance plans 
available through the leading online source of health insurance for 
individuals, families and small businesses.\4\ The Center investigated 
two phenomena: the ``gender gap''--the difference in premiums charged 
to female and male applicants of the same age and health status--in 
plans sampled from each state and the District of Columbia (D.C.), and 
the availability and affordability of coverage for maternity care 
across the country.\5\ In addition, NWLC examined state statutes and 
regulations relating to the individual insurance market to determine 
whether the states and D.C. have protections against premium rating 
based on gender, age, or health status in the individual market, and to 
determine whether states have any maternity coverage mandates requiring 
insurers in the individual market to cover comprehensive maternity care 
(defined as coverage for prenatal and postnatal care as well as labor 
and delivery for both routine and complicated pregnancies).
---------------------------------------------------------------------------
    \4\ This source is eHealthInsurance, available at http://
www.ehealthinsurance.com. Notably, eHealthInsurance may not represent 
all insurance companies licensed to sell individual health insurance 
policies in every state. However, the company bills itself as the 
leading online source of health insurance for individuals, families, 
and small businesses, partnering with over 160 health insurance 
companies in 50 states and D.C. and offering more than 7,000 health 
insurance products online. NWLC chose to use eHealthInsurance for this 
study because it presents the clearest available picture of the 
individual market across the country, and because it is the most 
readily available tool for individuals seeking private insurance who do 
not wish, or cannot afford, to employ the services of an insurance 
agent. Any limitations in eHealthInsurance's scope--in tandem with the 
basic fact that its services are only available online and therefore 
may not be accessible to individuals without a computer or internet 
access or who are not web savvy--simply underscores the challenges 
women (and men) face seeking coverage in the individual market without 
a government-sponsored system to help facilitate their search.
    \5\ While NWLC's review of health insurance plans examined coverage 
for maternity-related care, it was much more difficult to determine 
whether other pregnancy-related benefits, such as contraception or 
pregnancy termination, are covered under a plan; accordingly, our 
review did not include these important reproductive health benefits. 
For example, in many plan brochures, if information about either of the 
above benefits is available at all, it is visible only as part of a 
long list of exclusions. This obfuscation reflects another challenge 
women face in assessing the adequacy of a plan's coverage.
---------------------------------------------------------------------------
    Based on this research, NWLC found that the individual insurance 
market is a very difficult place for women to buy health coverage. 
Insurance companies can refuse to sell women coverage altogether due to 
a history of any health problems, or charge women higher premiums based 
on factors such as their gender, age and health status. This coverage 
is often very costly and limited in scope, and it often fails to meet 
women's needs. In short, women face too many obstacles obtaining 
comprehensive, affordable health coverage in the individual market--
simply because they are women.
    Women often face higher premiums than men. Under a practice known 
as gender rating, insurance companies are permitted in most states to 
charge men and women different premiums. This costly practice often 
results in wide variations in rates charged to women and men for the 
same coverage. The Center's 2008 research on gender rating in the 
individual market found that among insurers who gender rate, the 
majority charge women more than men until they reach around age 55, and 
then some (though not all) charge men more.\6\ The Center also found 
huge and arbitrary variations in each state and across the country in 
the difference in premiums charged to women and men. For example, 
insurers who practice gender rating charged 40-year-old women from 4% 
to 48% more than 40-year-old men.\7\ The huge variations in premiums 
charged to women and men for identical health plans highlight the 
arbitrariness of gender rating, and the financial impact of gender 
rating is compounded when insurers also charge more for age and health 
status when setting insurance premiums.
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    \6\ Lisa Codispoti, Brigette Courtot and Jen Swedish, Nat'l Women's 
Law Ctr, Nowhere to Turn: How the Individual Market Fails Women (Sep. 
2008), http://action.nwlc.org/site/PageServer?pagename=nowheretoturn.
    \7\ Id.
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    It is difficult and costly for women to find health insurance that 
covers maternity care. The vast majority of individual market health 
insurance policies that NWLC examined do not cover maternity care at 
all. A limited number of insurers sell separate maternity coverage for 
an additional fee known as a ``rider,'' but this supplemental coverage 
is often expensive and limited in scope. Moreover, insurers that sell 
maternity riders typically offer just a single ``one size fits all'' 
rider option. Typically, a woman cannot select a more or less 
comprehensive rider policy--her only option is to purchase the limited 
rider or go without maternity coverage altogether.\8\ Individual market 
insurers may also consider pregnancy as grounds for rejecting a woman's 
application for coverage, or as a ``pre-existing condition'' for which 
coverage can be excluded.\9\
---------------------------------------------------------------------------
    \8\ Id.
    \9\ Ed Neuschler, Institute for Health Policy Solutions, Policy 
Brief on Tax Credits for the Uninsured and Maternity Care 3 (March of 
Dimes 2004), http://www.marchofdimes.com/TaxCreditsJan2004.pdf.
---------------------------------------------------------------------------
    The dearth of maternity coverage in the individual health insurance 
market has been documented elsewhere. In California, for example, the 
California Health Benefits Review Program found that only 22 percent of 
the estimated 1,038,000 people in the individual market in California 
in 2009 had maternity benefits--a dramatic decrease from the 82% of 
people with individual policies that covered maternity in 2004.\10\
---------------------------------------------------------------------------
    \10\ California Health Benefits Review Program, Executive Summary: 
Analysis of Assembly Bill 98: Maternity Services, A Report to the 2009-
2010 California Legislature (Mar. 16, 2009), http://www.chbrp.org/
documents/ab_98_fnlsumm.pdf.
---------------------------------------------------------------------------
    Insurance companies can reject applicants for health coverage for a 
variety of reasons that are particularly relevant to women. For 
example, it is still legal in eight states and D.C. for insurers to 
reject applicants who are survivors of domestic violence.\11\ Insurers 
can also reject women for coverage simply for having previously had a 
Cesarean section.\12\
---------------------------------------------------------------------------
    \11\ Women's Law Project & Pennsylvania Coalition Against Domestic 
Violence, FYI: Insurance Discrimination Against Victims of Domestic 
Violence, 2002 Supplement 2 (2002), http://www.womenslawproject.org/
brochures/InsuranceSup_DV2002.pdf. In the early 1990s, advocates 
discovered that insurers had denied applications for coverage submitted 
by women who had experienced domestic violence. See, e.g., 142 Cong. 
Rec. E1013-03, at E1013-14 (June 5, 1996) (statement of Rep. Pomeroy) 
(``the Pennsylvania State Insurance Commissioner surveyed company 
practices in Pennsylvania and found that 26% of the respondents 
acknowledged that they considered domestic violence a factor in issuing 
health, life and accident insurance''). Since 1994, the majority of 
states have adopted legislation prohibiting health insurers from 
denying coverage based on domestic violence, but nine states and D.C. 
offer no such protection to survivors of domestic violence. Even though 
Vermont lacks legislation specifically prohibiting discrimination 
against domestic violence survivors, the state requires guaranteed 
issue of all individual insurance plans. See infra note 94 and 
accompanying text. Though the report identifies nine states, as well as 
the District of Columbia, which do not prohibit this practice, Arkansas 
Gov. Beebe recently signed into law ACT 619, which amends Arkansas Code 
Sec. 23-66-206(14)(G), to add ``status as a victim of domestic abuse'' 
to the list of attributes that insurers may not use as the sole 
justification for denying an individual health insurance coverage.
    \12\ Denise Grady, After Caesareans, Some See Higher Insurance 
Cost, N.Y. Times, June 1, 2008, at A26, available at http://
www.nytimes.com/2008/06/01/health/01insure.html.
---------------------------------------------------------------------------
    While both women and men face additional challenges in the 
individual insurance market, these problems compound the affordability 
challenges women already face. Insurance companies also engage in 
premium rating practices that, while not unique to women, compound the 
affordability issues caused by gender rating. These include setting 
premiums based on age and health status.\13\
---------------------------------------------------------------------------
    \13\ See  supra note 6.
---------------------------------------------------------------------------
Women Face Similar Challenges in the Group Insurance Market
    While there has been significant recent attention on gender rating 
among insurers in the individual market, it is important to recognize 
that this practice also occurs in the group health insurance market 
where employers obtain coverage for their employees. Insurance 
companies in most states are allowed to use the gender make-up of an 
insured group as a rating factor when determining how much to charge 
the group for health coverage. From the employee's perspective, this 
disparity may not be apparent, since employment discrimination laws 
prohibit an employer from charging male and female employees different 
rates for coverage. Yet gender rating in the group insurance market can 
present a serious obstacle to affordable health coverage for an 
employer and all of its employees. If the overall premium is not 
affordable, a business may forgo offering coverage to workers 
altogether, or shift a greater share of health insurance costs to 
employees.
    Gender rating may affect health premium costs for large employers. 
As a result of important state and federal anti-discrimination 
protections that apply to employer-provided health insurance, gender 
rating--while still present in the group market--manifests itself 
differently than in the individual market. Under federal and most state 
laws, employers unlawfully discriminate if they charge female employees 
more than male employees for the same health coverage.
    At the same time, when a business applies for health insurance, the 
majority of states allow insurance companies to determine the premium 
that will be charged using a process known as ``medical underwriting.'' 
As part of this process, an insurer considers various criteria--such as 
gender, age, health status, claims experience, or occupation--and 
decides how much to charge an applicant for health coverage. In the 
large group market, insurers underwrite the group as a whole rather 
than considering the health-related factors of each employee--but this 
limitation provides little relief for employers with a high proportion 
of female workers.\14\ Under the premise that women have, on average, 
higher hospital and physicians' costs than men, insurance companies 
that gender rate may charge employers more for health insurance if they 
have a predominantly female workforce. This can raise premiums for all 
employees and potentially move the employer to forgo providing health 
coverage all together.
---------------------------------------------------------------------------
    \14\ Id.; Henry J. Kaiser Family Foundation, How Private Health 
Coverage Works: A Primer, 2008 Update (Apr. 2008), http://www.kff.org/
insurance/upload/7766.pdf.
---------------------------------------------------------------------------
    Gender rating is a particular problem for small businesses and 
their employees. Though insurers may use gender rating when setting 
premiums for a group of any size, the smaller an insured group is, the 
more harmful gender rating becomes. It may create insurmountable 
barriers to coverage for women who own and work for small businesses, 
in particular. When compared to their larger counterparts, small 
businesses are considerably less likely to offer health coverage to 
their workers, most often citing cost as the reason.\15\ Obtaining 
affordable group coverage is a problem facing many small businesses, 
and gender rating makes health insurance even more expensive for those 
with predominantly female workforces. Indeed, small employers that do 
not offer health coverage tend to have larger proportions of female 
workers.\16\
---------------------------------------------------------------------------
    \15\ Kaiser Family Found. and Health Research and Educ. Trust, 
Employer Health Benefits 2008 Annual Survey 5 (2008), http://
ehbs.kff.org/.
    \16\ Paul Fronstin & Ruth Helman, Employee Benefit Research Inst., 
Issue Brief No. 253, Small Employers and Health Benefits: Findings from 
the 2002 Small Employer Health Benefits Survey 11 (Jan. 2003), http://
www.ebri.org/pdf/briefspdf/0103ib.pdf.
---------------------------------------------------------------------------
Some States Have Taken Action to Protect Consumers in the Individual 
        and Small Group Markets
    Some states have taken action to address the challenges that women, 
and employers with female employees, face in the individual and small 
group markets.
    Protections against gender rating: Because the regulation of 
insurance has traditionally been a state responsibility,\17\ no federal 
law provides protections against gender rating in the individual and 
group markets. Overall, 40 states and D.C. allow gender rating in the 
individual market, with two of these states limiting the amount 
premiums can vary based on gender through ``rate bands.'' \18\ However, 
even states that ban gender rating allow some plans to use this 
practice, such as the bare-bones basic and essential plans offered in 
New Jersey.\19\ There are three basic approaches to prohibit or limit 
gender rating in the individual market:
---------------------------------------------------------------------------
    \17\ McCarran-Ferguson Act, 15 U.S.C. Sec. Sec. 1011-1015 (2008).
    \18\ See  supra note 3.
    \19\ N.J. Dept. of Banking & Ins., N.J. Individual Health Coverage 
Program Buyer's Guide: How To Select a Health Plan--2006 Ed. (2006), 
http://www.state.nj.us/dobi/division_insurance/ihcseh/ihcbuygd.html 
(``carriers may vary the rates for the B&E plan based on age, gender 
and geographic location'').
---------------------------------------------------------------------------
    Explicit Protections against Gender Rating: Four states in the 
individual market--Minnesota,\20\ Montana,\21\ New Hampshire,\22\ and 
North Dakota\23\ have passed laws prohibiting insurers from considering 
gender when setting health insurance rates.
---------------------------------------------------------------------------
    \20\ Minn. Stat. Sec. 62A.65(4) (2008) (``No individual health plan 
offered, sold, issued, or renewed to a Minnesota resident may determine 
the premium rate or any other underwriting decision, including initial 
issuance, through a method that is in any way based upon the gender of 
any person covered or to be covered under the health plan.'').
    \21\ Mont. Code Ann. Sec. 49-2-309(1) (2008) (``It is an unlawful 
discriminatory practice for a financial institution or person to 
discriminate solely on the basis of sex or marital status in the 
issuance or operation of any type of insurance policy, plan, or 
coverage or in any pension or retirement plan, program, or coverage, 
including discrimination in regard to rates or premiums and payments or 
benefits.''). Montana's ``unisex insurance law'' is not limited to 
health insurance; it prohibits insurers from using gender as a rating 
factor in any type of insurance policy issued within the state. See 
Mont. Code Ann. Sec. 49-2-309(1) (2008) (``It is an unlawful 
discriminatory practice for a financial institution or person to 
discriminate solely on the basis of sex or marital status in the 
issuance or operation of any type of insurance policy, plan, or 
coverage or in any pension or retirement plan, program, or coverage, 
including discrimination in regard to rates or premiums and payments or 
benefits'').
    \22\ N.H. Rev. Stat. Ann. Sec. 420-G:4(I)(d) (2008) (allowing 
insurers to base rates in the individual market solely on age, health 
status, and tobacco use).
    \23\ N.D. Cent. Code Sec. 26.1-36.4-06(1) (2008) (imposing a rate 
band under which age, industry, gender, and duration of coverage may 
not vary by a ratio of more than 5 to 1, but providing that ``[g]ender 
and duration of coverage may not be used as a rating factor for 
policies issued after January 1, 1997''). Despite the statutory 
prohibition on gender rating in North Dakota, the only company offering 
individual policies through www.eHealthInsurance.com does use gender as 
a rating factor. In an attempt to understand this seeming 
inconsistency, NWLC contacted the North Dakota Insurance Department, 
which indicated that this company is a ``hybrid situation'' and thus 
permitted to rate its individual policies as if they were sold on the 
group market; gender rating is allowed within limit for groups in North 
Dakota. Telephone Interview with North Dakota Insurance Department 
(Sept. 12, 2008).
---------------------------------------------------------------------------
    Community Rating: Currently, six states prohibit the use of gender 
as a rating factor under community rating statutes: New York imposes 
pure community rating\24\; while Maine,\25\ Massachusetts,\26\ New 
Jersey,\27\ Oregon,\28\ and Washington\29\ impose modified community 
rating that, in addition to prohibiting rating based on health status, 
also bans rating based on gender.
---------------------------------------------------------------------------
    \24\ N.Y. Ins. Law Sec. 3231(a) (McKinney 2008) (defining community 
rating as ``a rating methodology in which the premium for all persons 
covered by a policy or contract form is the same based on the 
experience of the entire pool of risks covered by that policy or 
contract form without regard to age, sex, health status or 
occupation'').
    \25\ Me. Rev. Stat. Ann. tit. 24-A, Sec. 2736-C(2)(B) (2008) 
(prohibiting insurance carriers from varying the community rate due to 
gender or health status). Me. Rev. Stat. Ann. tit. 24-A, Sec. 2736-
C(2)(D)(3) (2008) (imposing a rate band under which insurance carriers 
may only vary the community rate due to age by plus or minus 20% for 
policies issued after July 1, 1995).
    \26\ Mass. Gen. Laws ch. 176M, Sec. 1 (2008) (defining ``modified 
community rate'' as ``a rate resulting from a rating methodology in 
which the premium for all persons within the same rate basis type who 
are covered under a guaranteed issue health plan is the same without 
regard to health status; provided, however, that premiums may vary due 
to age, geographic area, or benefit level for each rate basis type as 
permitted by this chapter''). Mass. Gen. Laws ch. 176M, Sec. 4(a)(2) 
(2008) (imposing a rate band under which the ``premium rate adjustment 
based upon the age of an insured individual'' may range from 0.67 to 
1.33).
    \27\ 2008 N.J. Sess. Law Serv. Ch. 38, page nos. 12, 15 (Senate 
1557) (West) (amending N.J. Stat. Ann. Sec. 17B:27A-2 (West 2008) to 
define ``modified community rating'' as ``a rating system in which the 
premium for all persons under a policy or a contract for a specific 
health benefits plan and a specific date of issue of that plan is the 
same without regard to sex, health status, occupation, geographic 
location or any other factor or characteristic of covered persons, 
other than age,'' and amending N.J. Stat. Ann. Sec. 17B:27A-4 (West 
2008) to require individual health benefits plans to ``be offered on an 
open enrollment, modified community rated basis''). New Jersey law 
excludes bare-bones basic and essential plans from the modified 
community rating requirement.
    \28\ Or. Rev. Stat. Sec. 743.767(2) (2008) (``The premium rates 
charged during a rating period for individual health benefit plans 
issued to individuals shall not vary from the individual geographic 
average rate, except that the premium rate may be adjusted to reflect 
differences in benefit design, family composition and age.'').
    \29\ Wash. Rev. Code Sec. 48.43.005(1) (2008) (defining ``adjusted 
community rate'' as ``the rating method used to establish the premium 
for health plans adjusted to reflect actuarially demonstrated 
differences in utilization or cost attributable to geographic region, 
age, family size, and use of wellness activities''); Wash. Rev. Code 
Sec. 48.44.022(1)(a) (2008) (allowing insurers to only vary the 
adjusted community rate based on geographic area, family size, age, 
tenure discounts, and wellness activities).
---------------------------------------------------------------------------
    Gender Rate Bands: Some states have passed laws limiting insurers' 
ability to base premiums on gender by establishing a ``rate band,'' 
which sets limits between the lowest and highest premium that a health 
insurer may charge for the same coverage based on gender. In the 
individual market, two states--New Mexico\30\ and Vermont \31\--use 
rate bands to limit insurers' ability to vary rates based on gender.
---------------------------------------------------------------------------
    \30\ N.M. Stat. Sec. 59A-18-13.1(A) (2008) (allowing gender 
rating); N.M. Stat. Sec. 59A-18-13.1(B) (2008) (providing that ``the 
difference in rates in any one age group that may be charged on the 
basis of a person's gender shall not exceed another person's rates in 
the age group by more than twenty percent of the lower rate'').
    \31\ Vt. Stat. Ann. tit. 8, Sec. 4080b(h)(1) (2008) (prohibiting 
the use of the following rating factors when establishing the community 
rate: demographics including age and gender, geographic area, industry, 
medical underwriting and screening, experience, tier, or duration); Vt. 
Stat. Ann. tit. 8, Sec. 4080b(h)(1) (2008), 21-020-034 Vt. Code R. 
Sec. 93-5(11)(G), (13)(B)(6) (2008) (providing that upon approval by 
the insurance commissioner, insurers may adjust the community rate by a 
maximum of 20% for demographic rating including age and gender rating, 
geographic area rating, industry rating, experience rating, tier 
rating, and durational rating).
---------------------------------------------------------------------------
    In the small group market, twelve states have banned gender rating 
all together. Three states have applied gender ``rate bands,'' and one 
state prohibits gender rating unless the carrier receives prior 
approval from the state insurance commissioner.
    Explicit Protections against Gender Rating: California,\32\ 
Colorado,\33\ Michigan,\34\ Minnesota,\35\ and Montana\36\ specifically 
prohibit insurers from considering gender when setting health insurance 
rates in the small group market.
---------------------------------------------------------------------------
    \32\ Cal. Ins. Code Sec. Sec. 10714(a)(2), 10700(t)-(v) (West 2008) 
(prohibiting small employer insurance carriers from setting premium 
rates based on characteristics other than age, geographic region, and 
family size, in addition to the benefit plan selected by the employee).
    \33\ Colo. Rev. Stat. Sec. Sec. 10-16-105(8)(a), 10-16-102(10)(b) 
(2008) (prohibiting small employer insurance carriers from setting 
premium rates based on characteristics other than age, geographic 
region, family size, smoking status, claims experience, and health 
status).
    \34\ Mich. Comp. Laws Sec. 500.3705(2)(a) (2008) (prohibiting 
commercial small employer insurance carriers from setting premium rates 
based on characteristics of the small employer other than industry, 
age, group size, and health status).
    \35\ Minn. Stat. Sec. 62L.08(5) (2008) (prohibiting the use of 
gender as a rating factor for small employer insurance carriers).
    \36\ Mont. Code Ann. Sec. 49-2-309(1) (2008) (``It is an unlawful 
discriminatory practice for a financial institution or person to 
discriminate solely on the basis of sex or marital status in the 
issuance or operation of any type of insurance policy, plan, or 
coverage or in any pension or retirement plan, program, or coverage, 
including discrimination in regard to rates or premiums and payments or 
benefits'').
---------------------------------------------------------------------------
    Community Rating: New York \37\ imposes pure community rating in 
its small group market, while Maine,\38\ Maryland,\39\ 
Massachusetts,\40\ New Hampshire,\41\ Oregon,\42\ and Washington\43\ 
ban gender-based rating under modified community rating.
---------------------------------------------------------------------------
    \37\ N.Y. Ins. Law Sec. 3231(a) (McKinney 2008) (requiring all 
small employer insurance plans to be community rated and defining 
``community rating'' as ``a rating methodology in which the premium for 
all persons covered by a policy or contract form is the same based on 
the experience of the entire pool of risks covered by that policy or 
contract form without regard to age, sex, health status or 
occupation'').
    \38\ Me. Rev. Stat. Ann. tit. 24-A, Sec. 2808-B(2)(B) (2008) 
(prohibiting small employer insurance carriers from varying the 
community rate based on gender, health status, claims experience or 
policy duration of the group or group members).
    \39\ Md. Code Ann., Ins. Sec. 15-1205(a)(1)-(3) (West 2008) 
(allowing small employer insurance carriers to adjust the community 
rate only for age and geography).
    \40\ Mass. Gen. Laws ch. 176J, Sec. 3(a)(1), (2) (2008) (allowing 
small employer insurance carriers to adjust the community rate only for 
age, industry, participation-rate, wellness program, and tobacco use).
    \41\ N.H. Rev. Stat. Ann. Sec. 420-G:4(1)(e)(1) (2008) (prohibiting 
small employer insurance carriers from setting premium rates based on 
characteristics of the small employer other than age, group size, and 
industry classification).
    \42\ Or. Rev. Stat. Sec. 743.737(8)(b)(B) (2008) (providing that 
small employer insurance carriers may only vary the community rate 
based on age, employer contribution level, employee participation 
level, the level of employee engagement in wellness programs, the 
length of time during which the small employer retains uninterrupted 
coverage with the same carrier, and adjustments based on level of 
benefits). Overall Rate Band:  50%.
    \43\ Wash. Rev. Code Sec. 48.21.045(3)(a) (2008) (providing that 
small employer insurance carriers may only vary the community rate 
based on geographic area, family size, age, and wellness activities).
---------------------------------------------------------------------------
    Gender Rate Bands: Three states--Delaware,\44\ New Jersey,\45\ and 
Vermont \46\--limit the extent to which insurers may vary premium rates 
based on gender through a rate band.
---------------------------------------------------------------------------
    \44\ Del. Code Ann. tit. 18, Sec. 7205(2)(a) (2008) (allowing small 
employer insurance carriers to vary premium rates based on gender and 
geography combined by up to 10 percent). Age: Del. Code Ann. tit. 18, 
Sec. Sec. 7202(9), 7205 (2008) (allowing the use of age as a rating 
factor if actuarially justified).
    \45\ N.J. Stat. Ann. Sec. 17B:27A-25(a)(3) (West 2008) (providing 
that the premium rate charged by a small employer insurance carrier to 
the highest rated small group shall not be greater than 200% of the 
premium rate charged to the lowest rated small group purchasing the 
same plan, ``provided, however, that the only factors upon which the 
rate differential may be based are age, gender and geography''). Rate 
Band for Age, Gender & Geography:  200%.
    \46\ Vt. Stat. Ann. tit. 8, Sec. 4080a(h)(1) (2008) (prohibiting 
the use of the following rating factors when establishing the community 
rate: demographics including age and gender, geographic area, industry, 
medical underwriting and screening, experience, tier, or duration); Vt. 
Stat. Ann. tit. 8, Sec. 4080a(h)(2) (2008) (providing that upon 
approval by the insurance commissioner, insurers may adjust the 
community rate by a maximum of 20% for demographic rating including age 
and gender rating, geographic area rating, industry rating, experience 
rating, tier rating, and durational rating). Overall Rate Band: 20%.
---------------------------------------------------------------------------
    Other: One state, Iowa,\47\ prohibits gender rating unless a small 
group insurance carrier secures prior approval from the state insurance 
commissioner.
---------------------------------------------------------------------------
    \47\ Iowa Code Sec. 513B.4(2) (2008) (prohibiting the use of rating 
factors other than age, geographic area, family composition, and group 
size without prior approval of the insurance commissioner).
---------------------------------------------------------------------------
    It is important to note that these regulations apply only to health 
insurance sold to small groups, which states generally define as a 
group of 50 people or fewer. Even in the 16 states with group market 
protections against gender rating, premiums for larger groups are still 
subject to this unfair practice.\48\
---------------------------------------------------------------------------
    \48\ Nat'l Women's Law Ctr, ``Women and Employer Sponsored 
Insurance,'' Reform Matters Toolkit (2008), at 9-10.
---------------------------------------------------------------------------
    Maternity mandates: A handful of states have recognized the 
importance of ensuring that maternity coverage--including prenatal, 
birth, and postpartum care--is a part of basic health care by 
establishing a ``benefit mandate'' law that requires insurers to 
include coverage for maternity services in all individual health 
insurance policies sold in their state. Currently, just five states 
have enacted mandate laws that require all insurers in the individual 
market to cover the cost of maternity care. These states are: 
Massachusetts,\49\ Montana,\50\ New Jersey,\51\ Oregon,\52\ and 
Washington.\53\ In New Jersey and Washington, individual insurance 
providers are allowed to offer bare-bones plans that are exempt from 
the mandate and exclude maternity coverage.\54\
---------------------------------------------------------------------------
    \49\ Mass. Gen. Laws ch. 176G, Sec. Sec. 4(c), 4I (2008) (requiring 
health maintenance organizations to include maternity coverage); Mass. 
Gen. Laws ch. 176B, Sec. 4H (2008) (requiring medical service 
corporations to include maternity coverage); Mass. Gen. Laws ch. 176A, 
Sec. 8H (2008) (requiring non-profit hospital service corporations to 
include maternity coverage).
    \50\ Mont. Ins. Or. (Feb. 16, 1994); Bankers Life & Casualty Co. v. 
Peterson, 866 P.2d 241 (Mont. 1993). Mandated maternity coverage is not 
always imposed by state legislation or via administrative regulations. 
Montana's mandate is the result of a 1993 state Supreme Court decision 
which held that a health plan excluding maternity coverage 
unconstitutionally discriminated based on gender.\74\ In response to 
this court decision, the Montana Insurance Commissioner issued an order 
that all insurers in the state must include maternity benefits.\75\
    \51\ N.J. Stat. Ann. Sec. 17B:26-2.1b (West 2008) (requiring all 
individual plans, except the bare-bones basic and essential plans, to 
include maternity coverage). N.J. Dept. of Banking & Ins., N.J. 
Individual Health Coverage Program Buyer's Guide: How To Select a 
Health Plan_2006 Ed. (2006), http://www.state.nj.us/dobi/division-
insurance/ihcseh/ihcbuygd.html (``carriers may vary the rates for the 
B&E plan based on age, gender and geographic location'').
    \52\ Or. Rev. Stat. Sec. 743A.080 (2008).
    \53\ Wash. Rev. Code Sec. 48.43.041(1)(a) (2008) (requiring all 
individual plans, except the bare-bones catastrophic plans, to include 
maternity coverage).
    \54\ Id.; N.J. Dept. of Banking & Ins., supra note 8 (``B&E Plans 
do not provide comprehensive benefits like the standard plans described 
above,'' which include prenatal and maternity care).
---------------------------------------------------------------------------
    Beyond this short list of five, other states have adopted limited-
scope mandate laws that require maternity coverage only for certain 
types of health plan carriers, certain types of maternity care, or for 
specific categories of individuals. Limited-scope mandate laws address 
the provision of maternity care but may fall short of providing women 
with full coverage for the care they need. In California,\55\ 
Illinois,\56\ and Georgia,\57\ for example, only Health Maintenance 
Organizations (HMOs) are subject to state laws that mandate maternity 
benefits in the individual insurance market.
---------------------------------------------------------------------------
    \55\ Cal. Health & Safety Code Sec. 1367(i) (requiring health care 
service plans to provide basic health care services); A.B. 1962, 2007-
2008 Sess. Sec. 1 (Cal. 2008) (recognizing that, in practice, health 
care service plans are required to provide maternity services as a 
basic health care benefit).
    \56\ Ill. Admin. Code tit. 50, Sec. 5421.130(e) (2008).
    \57\ Ga. Comp. R. & Regs. 290-5-37-.03(4) (2008).
---------------------------------------------------------------------------
    In a few instances, state governments have stepped in (at taxpayer 
expense) to fill gaps in private health insurance by establishing 
programs to assist pregnant women who have private coverage that does 
not meet their maternity care needs. At least two states have such 
programs: California's Access for Infants and Mothers (AIM) program is 
a low-cost coverage program for pregnant women who are uninsured and 
ineligible for Medi-Cal (the state's Medicaid program).\58\ New 
Mexico's Premium Assistance for Maternity (PAM) program is a state-
sponsored initiative that provides maternity coverage for pregnant 
citizens who are ineligible for Medicaid.\59\ According to program 
officials in New Mexico, PAM was established expressly because of the 
gaps that existed in private market maternity coverage. If maternity 
care was included as a basic benefit in comprehensive and affordable 
health insurance policies, such programs would be unnecessary.
---------------------------------------------------------------------------
    \58\ Managed Risk Medical Insurance Board, Access for Infants and 
Mothers, http://www.aim.ca.gov/english/AIMHome.asp (last visited Sept. 
17, 2008).
    \59\ Insure New Mexico, Premium Assistance for Maternity (PAM) 
Frequently Asked Questions, http://www.insurenewmexico.state.nm.us/
PAMFaqs.htm (last visited Sept. 17, 2008).
---------------------------------------------------------------------------
Recommendations for Health Care Reform
    To address the harmful practices of insurers in the individual and 
group markets, health reform must:

        Eliminate the individual market;
        Impose strict regulation on the sale of health insurance in all 
        markets, including: a prohibition on premium rating based on 
        gender, age, and health status; guaranteed issue and renewal; 
        and a prohibition on pre-existing conditions exclusions; and
        Ensure women have access to the full range of reproductive 
        health services, including maternity care.
Conclusion
    The individual insurance market is irredeemable; adequate 
alternatives must be developed to eliminate the need for people to 
resort to its use. This can be accomplished by making employer-
sponsored coverage easier to obtain and afford and by creating a health 
insurance exchange or new market place with purchasing pools that are 
large enough to accommodate everyone who needs coverage. In addition, 
to ensure that comprehensive health coverage is easier to obtain and 
afford, insurance carrier participation in all markets must be subject 
to strict regulation. In particular, the harmful practices of gender 
rating and rating based on age and health history should be prohibited. 
Finally, all health insurance policies should cover the full range of 
reproductive health services, including maternity care.
    Without these changes, health reform will be meaningless for far 
too many women; rather than improve women's access to health care, 
reform that does not address these flaws in the individual market will 
leave women in the exact same place where they are today. Too many 
women will have nowhere to turn for health coverage or will be left on 
their own at the mercy of health insurers. Inadequate and unaffordable 
coverage may be their only choice, if they can find coverage at all.

                                 
               National Small Business Association Letter
    Dear Chairman Rangel:
    On behalf of the National Small Business Association (NSBA), the 
nation's oldest nonpartisan small-business advocacy group reaching more 
than 150,000 small businesses nation-wide, I would like to provide 
comments to a recent hearing held by the House Ways and Means Committee 
titled, ``Health Reform in the 21st Century: Employer Sponsored 
Insurance.''
    Attached is a document, Small Business Health Care Reform: A Long-
Term Solution for All, that NSBA has worked on for several years with 
small-business owners and health care experts to address problems with 
the U.S. health care system. The principles outlined in this document 
would benefit the group and non-group market by making the necessary 
and appropriate reforms to the entire U.S. health care system. We trust 
that you will take them into consideration as the Committee continues 
to engage in the health care reform discussion.
    As 99 percent of all employers, small-business owners are a very 
important piece to the overall health insurance puzzle. Of the 47 
million uninsured people in the U.S., roughly half are small-business 
owners or employees. The trend of spiraling health care cost, and the 
current financial markets crisis provides for an unfortunate incentive 
to achieve health care reform in 2009. The ability to offer health 
insurance is creating a significant competitive disadvantage for small 
firms, as 99 percent of large businesses offered health insurance in 
2008. Sixty-nine percent of small businesses surveyed in 2008 said they 
want to offer health insurance, however only 38 percent were able to do 
so--down from 67 percent in 1995.
    NSBA's health care proposal addresses the health care delivery 
system, health insurance market and tax code to deliver the fundamental 
reforms needed by small businesses to provide affordable, quality 
health care to their employees and their dependents. However, several 
items have garnered exceptional attention since NSBA first developed 
Small Business Health Care Reform: A Long-Term Solution for All, 
including the current discussion on a public health insurance option 
and the concept of ``shared responsibility.'' Due to the unrivaled 
challenges that small business currently face in the health insurance 
market, these proposed reforms could prove to be challenging to the 
goals that small business seek in providing quality, affordable health 
insurance. Thus, NSBA would like to provide the following comments on 
each concept.
Public Health Insurance Option
    NSBA is engaged in continual dialogue with small business owners on 
the proposal to establish a public health insurance option to compete 
in the private health insurance market. In general, the concept of 
including a provision that would ensure honesty and trust in the 
private insurance market is commendable. In addition, NSBA believes 
that competition is good, and should be directed to lower cost for 
consumers. However, NSBA urges the Committee to address these goals 
within every aspect of the current health care system, and not simply 
through the creation of a new public health insurance option. 
Furthermore, NSBA is concerned that a public health insurance option 
could do more to undermine than enhance needed market reforms.
    With respect to the June and July goals to present legislation on 
comprehensive reform, NSBA urges that the Committee present details 
expeditiously to allow for appropriate feedback from the small business 
community. We look forward to maintaining dialogue with the Committee 
as more information is made available.
Shared Responsibility
    NSBA is opposed to mandated `pay or play' provisions in any health 
care reform proposal. Although mandating a `pay or play' provision may 
not impact larger businesses that can already afford to offer health 
care to their employees, small business would be forced to make 
extremely difficult decisions to absorb the financial blow during the 
current economy. In addition, proposals that provide cookie cutter 
categories to justify pay or play participation simply fail to 
recognize the diversity and unique goals of every small business. 
Establishing mandates on small businesses based on gross sales, number 
of employees, percentage of payroll, or other methods could prove 
detrimental to some businesses.
    Small employers are running out of options when trying to balance 
their employee's needs with the livelihood of their businesses. The 
combination of record annual increases in health costs and an economic 
recession are forcing small employers to choose between reducing or 
eliminating benefits or employees in order to sustain their businesses. 
Now is not the time to add additional costs or burdens on small 
businesses by mandating their participation in a `pay or play' scheme 
for health insurance.
    NSBA looks forward to working with Members of Congress to find 
appropriate and reasonable streams of revenue to finance comprehensive 
health care reform. However, NSBA opposes any mandates on small 
business employers to provide health insurance to their employees. The 
notion of a `pay or play' scheme on employers is riddled with complex 
financial challenges and repercussions that could have a devastating 
impact on the ability of small businesses to be productive and create 
jobs.
    It has become clear to NSBA that, to bring meaningful 
affordability, access, and equity in health care to small business and 
their employees, a complete reform of the health care and health 
insurance systems is called for. The small business community needs 
substantial relief from escalating health insurance premiums. This 
level of relief can only be achieved through a broad reform of the 
health care system with a goal of universal coverage, focus on 
individual responsibility and empowerment, the creation of the right 
market-based incentives, and a relentless focus on improving quality 
while driving out unnecessary, wasteful, and harmful care.
    For the last decade, health care reform has ranked number one or 
number two on the list of priorities for small-business owners, and 
continues to be among the top challenges facing the future growth and 
survival of their business. Instituting more administrative and 
financial constraints on small businesses in the form of mandates is 
not the reforms that small businesses deserve, particularly in light of 
the current economy. In addition, reforms that could result in the 
deterioration of the private health insurance market should be avoided. 
A pragmatic approach to health care reform would commence with making 
the appropriate changes to the insurance market, delivery system and 
tax code that have been outlined in NSBA's proposal for comprehensive 
health care reform.
    Thank you for the opportunity to provide comments on behalf of the 
small businesses the comprise NSBA. I welcome the opportunity to be at 
the table representing the needs of small business as the Committee 
works to find solutions to American's health care needs.

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

                                 
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