[Senate Hearing 111-960]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-960
 
     ADDRESSING INSURANCE MARKET REFORM IN NATIONAL HEALTH REFORM 
                              (ROUNDTABLE 
                              DISCUSSION)

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

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING ADDRESSING INSURANCE MARKET REFORM IN NATIONAL HEALTH REFORM

                               __________

                             MARCH 24, 2009

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


      Available via the World Wide Web: http://www.gpo.gov/fdsys/



                  U.S. GOVERNMENT PRINTING OFFICE
48-406                    WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  


          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

               EDWARD M. KENNEDY, Massachusetts, Chairman

CHRISTOPHER J. DODD, Connecticut     MICHAEL B. ENZI, Wyoming
TOM HARKIN, Iowa                     JUDD GREGG, New Hampshire
BARBARA A. MIKULSKI, Maryland        LAMAR ALEXANDER, Tennessee
JEFF BINGAMAN, New Mexico            RICHARD BURR, North Carolina
PATTY MURRAY, Washington             JOHNNY ISAKSON, Georgia
JACK REED, Rhode Island              JOHN McCAIN, Arizona
BERNARD SANDERS (I), Vermont         ORRIN G. HATCH, Utah
SHERROD BROWN, Ohio                  LISA MURKOWSKI, Alaska
ROBERT P. CASEY, JR., Pennsylvania   TOM COBURN, M.D., Oklahoma
KAY R. HAGAN, North Carolina         PAT ROBERTS, Kansas           
JEFF MERKLEY, Oregon                 
  


           J. Michael Myers, Staff Director and Chief Counsel

     Frank Macchiarola, Republican Staff Director and Chief Counsel

                                  (ii)

  
?



                            C O N T E N T S

                               __________

                               STATEMENTS

                        TUESDAY, MARCH 24, 2009

                                                                   Page
Bingaman, Hon. Jeff, a U.S. Senator from the State of New Mexico, 
  opening statement..............................................     1
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     2
Roberts, Hon. Pat, a U.S. Senator from the State of Kansas.......     3
Brown, Hon. Sherrod, a U.S. Senator from the State of Ohio.......     4
    Prepared statement...........................................     5
Hagan, Hon. Kay R., a U.S. Senator from the State of North 
  Carolina.......................................................     7
Trautwein, Janet, Executive Vice President and CEO, National 
  Association of Health Underwriters, Arlington, VA..............     8
    Prepared statement...........................................     9
Williams, Ronald A., MS, Chairman and Chief Executive Officer, 
  Aetna, Inc., Hartford, CT......................................    19
    Prepared statement...........................................    20
Pollitz, Karen, M.P.P., Research Professor, Health Policy 
  Institute at Georgetown University, Washington, DC.............    25
    Prepared statement...........................................    25
Ignagni, Karen, M.B.A., President and CEO, America's Health 
  Insurance Plans, Washington, DC................................    31
    Prepared statement...........................................    32
Nichols, Len, Ph.D., Director, Health Policy Program at the New 
  America Foundation, Washington, DC.............................    41
    Prepared statement...........................................    42
Baicker, Katherine, Ph.D., Professor of Health Economics, 
  Department of Health Policy and Management at the Harvard 
  School of Public Health, Cambridge, MA.........................    46
    Prepared statement...........................................    47
Praeger, Sandy, Health Insurance Commissioner, State of Kansas, 
  Kansas City, KS................................................    53
    Prepared statement...........................................    54

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Senator Enzi, prepared statement.............................    90
    Response to questions of Senator Hatch by:
        Karen Ignagni, M.B.A.....................................    91
        Sandy Praeger............................................    92
        Katherine Baicker, Ph.D..................................    93
        Ronald A. Williams, MS...................................    93
        Len M. Nichols, Ph.D.....................................    98

                                 (iii)

  


     ADDRESSING INSURANCE MARKET REFORM IN NATIONAL HEALTH REFORM 
                        (ROUNDTABLE DISCUSSION)

                              ----------                              


                        TUESDAY, MARCH 24, 2009

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m. in 
Room SD-430, Dirksen Senate Office Building, Hon. Jeff Bingaman 
presiding.
    Present: Senators Bingaman, Harkin, Brown, Casey, Hagan, 
Merkley, Burr, Hatch, Coburn, and Roberts.

                 Opening Statement of Senator Bingaman

    Senator Bingaman. OK. Why don't we get started? We have a 
few people here, and we thank everybody for coming.
    Senator Enzi, I am told, is snowed in Appropriations 
Wyoming and is not able to be here. Senator Roberts is going to 
fill in for him and is on his way. But since we have several 
Senators here, why don't we go ahead and get started?
    Let me make a few comments here and then ask any other 
Senator that wants to make comments to do so. Then we will turn 
to our witnesses, and we have sort of set this up as a 
roundtable discussion so that we don't have it as formal as 
usually is the case with hearings.
    This is the second in a series of hearings that were 
designed to explore key issues surrounding legislation to 
provide meaningful and affordable health insurance for all 
Americans. Today's hearing focuses on the insurance market 
reforms that are needed to achieve that goal. Particularly, it 
is focused on small group and individual insurance markets, and 
we thank all the panelists for being here.
    Approximately 60 percent of Americans receive their 
coverage today, their private insurance coverage from large 
employers. That is employers with 50 or more employees. 
Insurance offered through these employers include many 
protections, such as requirements that insurance companies 
provide coverage to all interested employees, the creation of 
large risk pools to spread the cost of coverage, and 
prohibitions on excluding coverage for specific pre-existing 
conditions.
    In contrast, the coverage in the individual market is much 
less predictable, and regulations governing this market vary 
considerably from State to State. Individuals may or may not 
have important protections to ensure that coverage is 
meaningful and affordable.
    For example, individuals may have critical health 
conditions that are excluded from coverage, or they may have 
very high cost-sharing requirements or be excluded from 
coverage altogether based on broad nonmedical characteristics. 
For example, older individuals on average are charged six times 
more for a policy than younger individuals, and women may be 
charged as much as 50 percent more for coverage than their male 
counterparts.
    The National Women's Law Center indicates that it is still 
legal in nine States for insurers to reject individual 
applicants on the basis of having experienced domestic 
violence. In the end, about 30 percent of individuals applying 
to the individual insurance market are either denied a policy 
or are forced to pay significantly more for coverage, and only 
about 15 million to 17 million Americans purchase policies on 
the individual market.
    As to the small business or small group market, that is, 
frankly, a market very relevant in my State, where most of the 
employers are small employers. In this market, like in the 
individual market, it is more difficult to spread risk because 
of the small size. Similarly, small employers have less 
bargaining power to negotiate affordable and meaningful 
coverage.
    In many cases, small businesses have found it difficult to 
find affordable and meaningful coverage and have chosen not to 
provide health insurance to their employees. According to the 
Kaiser Family Foundation, less than two-thirds of small 
businesses offer health benefits to their employees, and this 
problem is apparently getting worse. Ninety percent of the 
decline in employer-sponsored coverage has been attributed to 
small businesses.
    So we want to explore these issues with this group of 
panelists. I was told that Senator Roberts was going to come 
and stand in for Senator Enzi here. He is not here. Let me just 
see if Senator Hatch--excuse me? Oh, here. He arrives right 
now. OK.
    Senator Roberts. What are you doing down there?
    [Laughter.]
    Senator Bingaman. Come on down here. We are waiting for you 
to tell us what you know on this subject.
    While I am doing that, I will just call on Senator Hatch 
and any other Senator who wants to make any initial statement 
here before we get into this.
    Senator Hatch. Do you want me to go?
    Senator Bingaman. Go right ahead.

                       Statement of Senator Hatch

    Senator Hatch. Well, we welcome all of you experts here 
today. It is very important because we know that insurance is 
one of the most important issues that we have in all of 
healthcare, and I don't believe you can do a healthcare bill 
without resolving some of the problems that exist in the 
insurance industry.
    You folks, you do a lot of good for the industry, but there 
are also a lot of things that are challenges and problems that 
we have got to work out. Insurance market reform, there is no 
question about it, is a critical piece of any kind of 
healthcare reform if we are going to do it at all.
    I think virtually everybody agrees that reform is 
necessary, and the question is what reforms should be 
implemented, both on the State and Federal levels? I am going 
to be very interested in what you have to say here today. We 
have chatted with a number of you in the past, and we are very, 
very impressed with this panel.
    We welcome you to the Senate. We look forward to hearing 
from you.
    Thanks, Mr. Chairman.
    Senator Bingaman. All right. Senator Roberts, did you want 
to go ahead?

                      Statement of Senator Roberts

    Senator Roberts. Yes, sir. Thank you very much.
    I apologize to the group for being late. I was just 
finishing up finally reading the entirety of the stimulus bill. 
That is a joke. That is not--well, it is not a joke.
    Senator Bingaman. Please continue to tell us whenever you 
do tell a joke.
    Senator Roberts. Yes. OK.
    [Laughter.]
    OK. Mr. Chairman, I want to thank you for holding this 
roundtable today, and I want to pass on Senator Enzi's thanks 
as well for the members of the committee. I know he would like 
to be here with us today, but the weather in Wyoming is not a 
very good situation. The weather had other ideas. He is 
starring in that movie, ``I Am Snowed In In Wyoming.''
    I understand the staffs worked very closely to plan today's 
roundtable, as well as set an agenda for two additional 
roundtables in the future. This is a very good thing. I 
appreciate that. I know Senator Enzi does as well, as does the 
chairman.
    I think we have a stellar panel. I am looking forward to 
hearing from our experts and getting into the details of 
insurance market reforms. I believe it is very helpful to hear 
from people that have actually enacted policies in the real 
world. This is called reality, a reality hearing. You can tell 
us what you did right, what you did wrong, and how you would 
improve things moving forward.
    As a Senator from the State of Kansas, I could not be more 
proud that one of these experienced people on our panel today 
is Kansas insurance commissioner, former Kansas legislator, and 
my very good friend Sandy Praeger.
    Commissioner Praeger was first elected as the Kansas 
insurance commissioner in 2002, went on to re-election in 2006. 
Her health insurance expertise and her leadership abilities 
have also been recognized at the national level. She is the 
most immediate past president of the National Association of 
Insurance Commissioners.
    In addition, she has experience as a past mayor of the city 
of Lawrence, no small task. Lawrence, that is the home of the 
Jayhawks, right? Right. That comes from a Wildcat, Mr. 
Chairman. You would have to understand that if you were from 
Kansas.
    A past member of both chambers of the Kansas legislature. I 
am so pleased that Sandy could be here today to share her 
considerable experience with health insurance market regulation 
with this committee.
    Thank you, Sandy, and thank you to all of our panelists for 
taking time out of your very valuable schedule to be here 
today. I look forward to hearing from you.
    I hope the members of this committee can learn from all of 
our witnesses and use that knowledge to better inform their 
decisions on healthcare reform legislation. Healthcare reform 
will be difficult. There will be tradeoffs with any policy we 
devise. Insurance reforms all result in tradeoffs.
    Rating rules are a perfect example. We must be cautious 
when considering reforms that may result in unaffordable prices 
for our young and healthy. We need those folks to participate 
because they help keep costs down. However, ensuring access to 
quality insurance for those struggling with health conditions 
is, I hope, our top priority.
    Our job here is to find a balance that accomplishes our 
goals but doesn't create a disruption in our insurance 
marketplace. While it is critical we get the policy of 
insurance market reform right, I would be remiss if I didn't at 
least mention the perils of the process. Without the right 
process, we can't move forward on the best healthcare reforms 
for the American people. I doubt seriously if we can do this in 
100 days.
    If those in the majority attempt to use the budget 
reconciliation process to put healthcare reform through the 
Senate--or a better word would be ``jam''--they will be sending 
a clear signal that they are not interested in a truly 
bipartisan effort.
    With that, I look forward to our witnesses to make 
recommendations on how we should shape policies of healthcare 
reform.
    Mr. Chairman, thank you again for holding this roundtable.
    Senator Bingaman. Well, thank you again. Thank you.
    Let me just see if Senator Brown or Senator Coburn or 
Senator Hagan wish to make any statement?

                       Statement of Senator Brown

    Senator Brown. Just a few comments. Thank you, Mr. 
Chairman, for your leadership.
    Thank you all, members of the panel, for your distinguished 
service to our country and for being here today.
    Recently, a couple of weeks ago, my office conducted a 
seminar, if you will, for the five new Ohio House members 
elected last year, bipartisan, some in both parties--new House 
members from my State--to talk about case work and to sort of 
help them work their way through these first months in office 
in dealing with all the problems that people bring to our 
offices. And obviously, one of the issues that comes up so 
frequently is how do you deal with health insurance companies?
    I think we all--our offices, if we are paying attention--
all of our offices spend an awful lot of time fighting with 
insurance companies on behalf of our constituents. Insurance 
companies that often, and probably the perception of many, 
discriminate based on age and gender or medical history. 
Insurance companies that seem to put restrictions on treatments 
and prescription drugs that patients get, the wait for 
reimbursement, the wait to pay claims, and pre-existing 
conditions. All of the issues that we have disagreements on and 
that it is our job as elected officials to fight for our 
constituents to be treated fairly.
    Let me share one real quick story about all of this that 
may bring this home in some sense. A woman named Deborah from 
Summit County, Ohio--the city of Akron is the county seat 
there--she is one of the 50 million Americans left out of our 
healthcare system because she lacks insurance, she can't get 
insurance.
    Her income is too high for Medicaid. Her pre-existing 
condition--she has had two heart attacks. She has a spinal 
injury. Those conditions disqualify her from finding private 
insurance in the private market, her inability finding 
affordable insurance in the private market--no surprise there.
    She wrote to me,

          ``My only option is to start paying for my funeral. 
        While everyone on Capitol Hill argues the point, people 
        are suffering and dying. America proclaims itself the 
        wealthiest and most powerful Nation in the world. If 
        that is the case, why do we have people suffering and 
        dying for lack of simple healthcare?''

    We know what we need to do this year, and I think Deborah's 
words speak it certainly more persuasively than any of us 
could.
    Last point, Mr. Chairman, I think that the President is 
right when he said there should be an option like the original 
Medicare, some public option to bring competition. Competition, 
as we hear from our friends in the insurance industry and hear 
from people on all sides of political debates, competition is 
the American way. It is healthy for our society.
    I think competition in healthcare with a public option, 
whether it takes the form of FEHBP in some case, some sense, or 
a public, more Medicare look-alike option is a good thing, I 
think, for the insurance industry. It is a good thing for the 
country, and it is something that this committee I think should 
and will pursue.
    I again thank the chairman for having this hearing today.
    [The prepared statement of Senator Brown follows:]

                  Prepared Statement of Senator Brown

    I want to first thank the Senator from New Mexico for 
holding this important hearing. He has been doing a great job 
leading the HELP working group on coverage and I look forward 
to working closely with him as our committee's effort to reform 
the health care system moves forward.
    I think we can all agree that the private health insurance 
market in this country is broken.
    Every day I hear from constituents who are frustrated:

     with health insurance that is nearly impossible to 
afford;
     with health insurance that fails to protect them 
from catastrophic health costs;
     with health insurance that openly discriminates 
based on their age, gender, location, or medical history;
     with health insurance that puts onerous 
restrictions on which providers patients can see and on which 
treatments and prescription drugs they can get;
     with health insurance that waits literally months 
to pay claims, or requires enrollees to fight for every penny 
the insurer owes;
     and with health insurance that doesn't respond to 
customers' questions, problems, and appeals.

    Take, for example, Debra from Summit County, Ohio. She is 
one of the nearly 50 million Americans locked out of our health 
care system because she lacks insurance. Her income is too high 
for Medicaid, and her pre-existing conditions--she has a spinal 
injury and is recovering from two heart attacks--disqualify her 
from finding affordable insurance in the private market. As a 
result, she has piled up thousands of dollars in unpaid bills 
and is in constant pain.
    She writes, ``My only option [is] to start paying for my 
funeral. . . .While everyone on Capitol Hill argues the point, 
people are suffering and dying. . . . America proclaims itself 
the wealthiest [and] most powerful Nation in the world. If this 
is the case, then why do we have people suffering and dying for 
lack of simple health care?''
    Or then there are those, like Barbara and Allen from 
Lyndhurst, Ohio, who have what is considered very good 
insurance, but it was not enough to protect them from a rash of 
bad luck.
    Barbara was diagnosed with a rare form of muscular 
dystrophy 15 years ago. She has insurance, but the payments for 
the chronic disease management she needs are not sufficient to 
ensure access. In fact, the local hospital sometimes refuses to 
admit her because it would rather fill its beds with more 
lucrative patients.
    Allen developed stage 4 Non-Hodgkin's lymphoma while 
working as a physician for a medical center in Cleveland; 
though he recovered from the disease he was forced out of his 
job and now is discriminated against by potential employers 
because his medical status skews the risk pool that insurers 
use to price their plans. Unfortunately, these stories are not 
unique. They represent the experience of thousands of Ohioans 
and millions of Americans who are being ill-served by the 
private health insurance market.
    And it is because of stories like these that I am skeptical 
of any health reform proposal that relies solely on the private 
insurance market to solve all of our problems.
    It is private insurers who decided to experience-rate 
enrollees and apply pre-existing condition exclusions, which 
has skewed risk pools, forced Federal and State Governments to 
cover more Americans, and enriched insurers by allowing them 
not to do their jobs.
    It is private insurers who have set ``reasonable and 
customary'' reimbursement rates so low that balance billing has 
become the norm and ``participating'' providers an endangered 
species.
    It is private insurers who instruct their claims personnel 
to deny claims first so they can hold on to premium dollars for 
as long as possible.
    Private insurers have helped to create a system of winners 
and losers, a system in which insured individuals can still be 
bankrupted by health expenses and uninsured individuals can die 
far too young because they can't get the care they need.
    There are good insurers and bad insurers, but the private 
insurance system is not, by any stretch, the complete answer to 
any question in health reform.
    Insurance reform is positive, insurance reform is 
essential, but insurance reform is only a piece of the health 
reform puzzle.
    There are those who believe that health reform can be 
achieved by tightening insurance regulation.
    When the Medicare Advantage program was launched, private 
insurers promised that taxpayers would get better coverage at a 
lower price.
    Medicare remains far more popular, with far fewer 
complaints, than Medicare Advantage, and taxpayers are paying 
significantly more for Medicare Advantage than they are for 
Medicare.
    Private insurance reform isn't a panacea. Regardless of 
what insurance reforms we apply, President Obama is right that 
there should be an option like original Medicare for Americans 
to choose--the competition will be healthy, and those Americans 
who want to avoid health plans tethered to profit targets 
should have another choice.
    I am looking forward to today's testimony and know it will 
be helpful. Health reform is a puzzle we can solve; this is one 
of the pieces that will help get us there.
    Thank you, Mr. Chairman.
    Senator Bingaman. Senator Coburn.
    Senator Coburn. I will pass.
    Senator Bingaman. Senator Hagan.

                       Statement of Senator Hagan

    Senator Hagan. Thank you, Mr. Chairman.
    I would like to welcome all of the panelists here.
    I think this issue is one of the biggest issues facing the 
Nation right now, the affordability, accessibility, and in 
particular, the portability of insurance so that people can 
change jobs, especially those with pre-existing conditions. I 
think this roundtable will help bring some of this to light.
    It is certainly a huge issue facing our country today, and 
I am thrilled to be at the table.
    Thank you.
    Senator Bingaman. Well, thank you.
    Let me just very briefly introduce this distinguished group 
of witnesses we have here.
    Janet Trautwein is the executive vice president and CEO of 
the National Association of Health Underwriters in Arlington, 
VA. Thank you for being here.
    Ronald Williams is chairman and chief executive officer of 
Aetna, a leading diversified health insurance company.
    Karen Pollitz is a research professor at the Health Policy 
Institute at Georgetown University. Thank you for being here.
    Karen Ignagni--am I pronouncing that right? OK. President 
and CEO of America's Health Insurance Plans, a trade 
association that represents the Nation's health insurance 
organizations.
    Len Nichols directs the health policy program at the New 
America Foundation and has a distinguished background in these 
issues as well.
    Katherine Baicker is a professor of health economics at the 
Department of Health Policy and Management at Harvard School of 
Public Health. Thank you very much for being here.
    And Ms. Praeger was just introduced, Commissioner Praeger. 
So we welcome you as Kansas's 24th commissioner of insurance, 
and we appreciate you all being here.
    I guess the idea here was to have you each take a couple of 
minutes and tell us the most important things you think we need 
to be aware of in trying to understand the issue and how to 
proceed. I think that, at least from my perspective, the real 
issue is what are the most critical reforms that we need to try 
to enact in these areas?
    Ms. Trautwein, why don't you go ahead? Then we will just go 
down the panel, and after we have heard from all of you, then 
we will have questions.

 STATEMENT OF JANET STOKES TRAUTWEIN, EXECUTIVE VICE PRESIDENT 
     AND CEO, NATIONAL ASSOCIATION OF HEALTH UNDERWRITERS, 
                         ARLINGTON, VA

    Ms. Trautwein. Thank you, Mr. Chairman.
    I really am very pleased to be here today. This is a very, 
very important topic. The rising cost of health insurance is a 
problem that is driven by the rising cost of healthcare itself. 
As a part of any health reform package, I just want to stress 
that it is essential that we do everything possible to lower 
healthcare costs.
    Keep in mind that of every premium dollar, 88 percent 
nationwide goes to cover claims, which is healthcare itself. I 
do also believe and NAHU believes that any health reform 
package should also include some very important health 
insurance reforms and that we can do this in a way that is both 
effective and affordable.
    Now our members are benefit specialists. They help 
individuals and businesses purchase coverage on a daily basis. 
After the coverage is purchased, they also work with them 
through any problems that come up, and we are very familiar 
with what kinds of problems those are.
    In fact, this service aspect of their jobs is the biggest 
part of their jobs, and it is something that most people are 
not aware of. There is a lot to do with not only getting 
coverage in place, but keeping it in force.
    It gives us kind of a unique ability, this very frequent 
interaction with consumers, to understand what the greatest 
issues are. I will share what some of those are very briefly.
    The biggest response that we get from most people who are 
covered by employer-sponsored plans, as you indicated, is that 
they love their employer-sponsored plans. I would just start 
off saying that we strongly believe that any reform package 
should include employer-sponsored coverage as its core. That is 
for large and small employers.
    We do have, today already, about 14.5 million Americans 
that are already in the private individual health insurance 
market because either they choose to purchase individual 
coverage or employer-sponsored coverage is just not available 
to them. It is for this reason that we have looked very, very 
carefully at the individual market, which we think is a key 
place to start with reforms.
    We have put together 10 very specific policy 
recommendations, which I am happy to go through during the 
course of our discussion today. But in general, what those 
recommendations do is ensure that coverage is available to 
everyone regardless of their health status, that everyone can 
afford coverage that is not only there and available to them, 
but they can pay for it, that it is affordable to them. I have 
included a lot of detail in my written statement.
    I would also say that some of our recommendations also have 
to do with portability, and greater portability than what 
people have today. They have to do with what happens when they 
leave a group plan, and let us say they are going to start 
their own business and what faces them and what are the options 
in the event that they have a chronic health condition, but 
they still are going to start this business? What is available 
to them?
    This is what our recommendations revolve around, and I do 
just want to applaud you for putting this together. I think 
this discussion is so important, and I think we have a lot of--
my fellow panelists are just excellent, and I think that we 
will have a good discussion this morning.
    [The prepared statement of Ms. Trautwein follows:]

              Prepared Statement of Janet Stokes Trautwein

                           EXECUTIVE SUMMARY

    The National Association of Health Underwriters (NAHU), a 
professional trade association representing more than 20,000 health 
insurance agents, brokers and benefit specialists nationally, whose 
members help individuals and businesses purchase private health 
insurance coverage on a daily basis, feels that we must keep private 
individual health insurance coverage accessible and affordable for all 
Americans. Although we strongly feel that any health reform effort 
should be centered on employer-sponsored plans, it is critical that we 
look first at the individual market to be certain that it functions 
effectively and affordably for those who purchase coverage there. Since 
each State's individual market is uniquely regulated, consumers in some 
States are faring better than in others, but no State's individual 
health insurance market is problem-free.
    Americans deserve to see what can be done at the Federal level to 
provide better access to individual coverage for everyone who needs it, 
and great care needs to be taken when implementing these market reforms 
on a national level so that coverage is affordable. No matter how 
``fair'' a market-reform idea might seem on its surface, it's not at 
all ``fair'' if it also prices people out of the marketplace.
    NAHU has developed 10 specific policy recommendations to ensure 
that all people, regardless of their health status and pre-existing 
medical conditions, have the ability to purchase affordable private 
individual coverage. It should be noted that some of these requirements 
may need to be present only during a transition process to complete 
guaranteed issuance of coverage. However, they still are quite 
important to achieving the affordability of coverage so crucial to 
getting everyone in the system. Our proposed requirements could either 
be enacted as part of a transition process to complete guaranteed 
issuance of coverage or they could be stand-alone requirements. Our 
recommendations are to:

    1. Require guaranteed access to individual coverage and with State-
level financial backstops for catastrophic risks.
    2. Give pre-existing condition credit for prior individual market 
coverage to ensure true health insurance portability from one 
individual market policy to another.
    3. Standardize State requirements regarding the consideration of 
pre-existing conditions.
    4. Improve Federal group-to-individual coverage portability 
provisions so that people can transition directly from employer 
coverage to individual coverage without hurdles.
    5. Stabilize individual market rates by requiring more 
standardization as to how individual market carriers determine pricing.
    6. Increase consumer protections regarding individual market 
coverage rescissions.
    7. Make it easier for employers to help people purchase individual 
health insurance.
    8. Provide Federal financial assistance to keep individual health 
insurance coverage affordable, including enhanced deductibility, 
subsidies for low-income individuals, and Federal financial support for 
qualified State financial backstop programs.
    9. Ensure that all Americans have health insurance coverage.
    10. Allow State implementation of enhanced consumer protections 
with a Federal fallback enforcement mechanism.

    NAHU urges Congress to carefully consider these ideas and we look 
forward to working with policymakers to fill the gaps in our Nation's 
coverage system and to make private individual health insurance 
coverage more affordable and accessible for all Americans.
                                 ______
                                 
NAHU's Solutions to Create Accessible and Affordable Individual Health 
                     Insurance Coverage Nationwide

    The National Association of Health Underwriters (NAHU), a 
professional trade association representing more than 20,000 health 
insurance agents, brokers and benefit specialists nationally, feels 
that American policymakers must do everything they can to keep private 
individual health insurance coverage accessible and affordable for all 
Americans.
    As an association of benefit specialists who help individuals and 
businesses purchase private health insurance coverage on a daily basis, 
we know that the vast majority of Americans are happy to receive their 
health insurance coverage through the employer-based system. Our 
association believes that any health insurance market reform effort 
should include the employer-based system as its core. But even though 
it works well for many people, the employer-based system isn't an 
option for everyone. Approximately 14.5 million Americans have private 
health insurance coverage that is not connected with an employer-
sponsored plan.\1\
---------------------------------------------------------------------------
    \1\ Urban Institute and Kaiser Commission on Medicaid and the 
Uninsured estimates based on the Census Bureau's March 2007 and 2008 
Current Population Survey (CPS: Annual Social and Economic Supplements) 
http://www.statehealthfacts.org/comparebar.jsp?ind=125&cat=3.
---------------------------------------------------------------------------
         BACKGROUND ABOUT INDIVIDUAL HEALTH INSURANCE COVERAGE

    Since the individual market is so small nationally (only about 5 
percent of the non-elderly population has such coverage) and each 
State's individual market is separate, the ability of an insurer in any 
given State to spread costs and risks across a large pool is very 
limited. Individual-market risk spreading is even more complicated 
because that market is prone to a phenomenon known as adverse 
selection. Adverse selection occurs when a person delays buying an 
insurance product until he or she anticipates an immediate need for the 
benefit. Since individuals always know more about their own health 
status than anyone else does, and because all of the cost of buying 
individual health coverage is generally borne by the insured, the 
amount of adverse selection and poor risk spreading occurring in the 
individual market is very high. This has a direct impact on the pricing 
of individual-market policies.
    The States are the primary regulators of individual health 
insurance policies. This is in contrast to the group health insurance 
market, where fully insured plans are governed primarily by State law 
but self-funded health plans are governed federally under the Employee 
Retirement Income Security Act of 1972 (ERISA). Since each State's 
health insurance regulatory requirements vary, State-specific 
regulations often impact the types of individual policies available in 
each State and their cost. The cost variance from State to State is 
dramatic. Some of the States that have gone to the greatest lengths to 
ensure equal insurance access actually have the highest coverage 
costs.\2\
---------------------------------------------------------------------------
    \2\ For example, a PPO individual health insurance policy for a 37-
year-old male living in Haddonfield, NJ, (a suburb of Philadelphia) 
with a $1,000 deductible and 80/20 percent coinsurance would be $514/
month for coverage beginning on February 1, 2009. New Jersey guarantee 
issues all individual health insurance policies and prices them based 
on a modified community rate. A comparable policy could be issued to 
the same male living in Wayne, PA, (also a Philadelphia area suburb 22 
miles away from Haddonfield, NJ) for $170 a month. Pennsylvania 
medically underwrites its individual policies and imposes pre-existing 
condition look-back and exclusionary periods.
---------------------------------------------------------------------------
    Our States have proven to be an excellent laboratory for health 
reform and have given us some great examples of what does and does not 
work when it comes to providing choice and affordable premiums for 
individual health insurance buyers. Unfortunately, the great 
innovations provided by the States have not produced much consistency. 
Furthermore, State-level consumer protections have sometimes proven to 
be inadequate, resulting in some people not being able to obtain the 
coverage they need at all or at an affordable price.

                         COVERAGE FOR EVERYONE

    One of the greatest problems with individual health insurance today 
is that not all Americans are able to purchase coverage. In some 
States, people with serious medical conditions who do not have access 
to employer-sponsored plans cannot buy individual coverage at any 
price.
    One of the simplest ways to address the access issue in the 
individual market would be to require that all individual health 
insurance policies be issued on a guaranteed-issue basis without regard 
to pre-existing medical history. However, in addition to being 
accessible to all Americans, individual coverage also must be 
affordable. It would be unwise to require insurers to guarantee-issue 
individual coverage to all applicants unless a system where nearly all 
Americans have coverage and full participation in the insurance risk 
pool has been achieved. Due to their small size and the propensity 
towards adverse selection, State individual health insurance markets 
are very fragile and price-sensitive. Also, there currently is no 
controlled means of entry and exit into the individual health insurance 
market independent of health status, like there is with employer-group 
coverage. Without near-universal participation, a guaranteed-issue 
requirement in this market would have the perverse effect of 
encouraging individuals to forgo buying coverage until they are sick or 
require sudden and significant medical care. This, in turn, would 
undermine the core principle of insurance: spreading risk amongst a 
large population. The result would be exorbitant premiums like we 
currently see in States that already require guaranteed issue of 
individual policies but do not require universal coverage or have a 
financial backstop in place.
    Great care needs to be taken when implementing market reforms on a 
national level to not inadvertently cause costly damage to the existing 
private-market system. No matter how ``fair'' a market-reform idea 
might seem on its surface, it's not at all ``fair'' if it also prices 
people out of the marketplace.
           recommendations to achieve near-universal coverage
    To bring everyone into the health coverage system, NAHU believes 
that Congress would be wise to look at our existing system for holes 
and examine what the States have done to successfully fill those 
coverage gaps. A few simple reform measures would go a long way toward 
extending health insurance coverage to millions of Americans. State 
small-group health insurance markets and consumers ultimately benefited 
from the passage of Federal Health Insurance Portability and 
Accountability Act of 1996 (HIPAA); a similar measure that preserves 
State regulation and consumer protections for individual-market 
consumers but would also make coverage options more consistent and 
affordable is warranted.
    Such requirements could either be enacted as part of a transition 
process to complete guaranteed issuance of coverage or they could be 
stand-alone requirements. In either case, NAHU believes that the 
following policy recommendations would have a profoundly positive 
impact on individual health insurance market access and affordability 
nationwide.

Recommendation 1: Require Guaranteed Access to Individual Coverage with 
        Qualified State-level Financial Backstops for Catastrophic 
        Risks to Keep Coverage Affordable
    Federal access protections in HIPAA ensure that small-group health 
insurance customers and individuals leaving group health insurance 
coverage under specified circumstances must have at least one 
guaranteed-purchasing option. But these Federal protections do not 
apply to everyone. People purchasing coverage in the traditional 
private individual health insurance market who are not transitioning 
from an employer's plan do not have Federal guaranteed-issue rights. 
That means right now, in a number of States, there are people with 
serious medical conditions who cannot buy health insurance at any 
price.
    Furthermore, in many of the 45 States \3\ that have independently 
established at least one mandatory guaranteed-purchasing option for 
individual-market consumers with serious health problems, there are 
still access problems due to design flaws. For example, some States 
have required that all people be guaranteed access to all coverage on 
an immediate basis, without regard to health status. Unfortunately, 
merely requiring guaranteed issuance of individual coverage has led to 
adverse selection and, consequently, very high premium rates that 
create a barrier to entry for most consumers. On the other hand, in 
some States that allow for the consideration of health status, there 
can be a great deal of inconsistency in what types of risks are deemed 
to be uninsurable by individual carriers. Also, States with a high-risk 
health insurance pool often have funding difficulties that can result 
in high premiums and pool instability, both of which can be a barrier 
to entry.
---------------------------------------------------------------------------
    \3\ The States without a guaranteed-access mechanism are Arizona, 
Delaware, Georgia, Nevada and Hawaii. Furthermore, Florida's high-risk 
pool has been closed to new applicants since 1992, so it effectively 
also has no access mechanism for new medically uninsurable individuals.
---------------------------------------------------------------------------
    While the mechanism for access to health care coverage may vary 
from State to State, access should not be denied to any American. The 
Federal Government should immediately require that all States have at 
least one guaranteed-purchasing option for all individual health 
insurance market consumers. But, beyond that, the Federal Government 
should also stipulate that a guaranteed-issue mandate, a designated 
carrier of last resort or a high-risk health insurance or reinsurance 
pool alone may not be a sufficient means of providing guaranteed 
access.
    The best solution is a partnership between the private individual 
market and the mechanism for guaranteed access. A State's high-risk 
pool or reinsurance mechanism could serve as a backstop to insulate the 
traditional market against catastrophic claims costs. The Federal 
Government should establish broad guidelines for qualified State-level 
financial backstops (i.e., capped rates for high-risk individuals) to 
allow for State innovation but also ensure consistency of access and 
affordability.
    Several States have been able to successfully combine a guaranteed-
issue approach with universal underwriting criteria for all carriers 
and either a traditional high-risk pool or a reinsurance mechanism. 
When establishing State guaranteed-
access requirements coupled with a financial backstop, four States in 
particular should be looked at as potential models:

    Idaho.--One of the most interesting arrangements is from Idaho. It 
is a hybrid arrangement--the only one of its kind--known as an 
individual high-risk reinsurance pool. Although the idea of reinsurance 
isn't new, Idaho is using it in a manner that is different than what 
has been done before. In Idaho, if a person's health status (based on a 
uniform medical questionnaire that all carriers use) meets a certain 
threshold, the carrier can cede a large part of the financial risk for 
the individual to the reinsurance pool. Individuals who are insured in 
this manner are still issued a policy through the insurer they applied 
for coverage with, but must select one of four standard options. The 
coverage is still comprehensive, but the more limited benefit choices 
make administration of the reinsurance mechanism simpler. The carrier 
pays a premium to the pool in exchange for the pool taking on the risk 
of the individual's high claims. The individual consumer pays premiums 
to the insurer and has coverage issued by that insurer, not the pool 
itself. So the reinsurance mechanism is largely invisible to the 
consumer, although the premium is somewhat higher than the consumer 
would have otherwise paid. This program is funded through several 
mechanisms. First, the State's premium tax, paid by all insurers in the 
State, is the primary funding source and this is considered a stable 
funding source since it is not a State appropriation. In addition, when 
a carrier cedes risk to the pool, it pays a premium to the pool. 
Finally, the pool has the ability to assess insurance carriers for 
funding but, so far, it hasn't needed to do so. The Idaho pool is one 
of the few State programs that has more than enough funds to operate on 
a consistent basis.
    Utah.--In Utah, health insurance carriers in the individual market 
must offer coverage to everyone who applies, but if an individual's 
medical costs are deemed to potentially exceed a set threshold 
ascertained through a medical questionnaire, the carrier can refer the 
person instead to the State high-risk pool. Of importance here is that 
every insurance carrier uses the same medical questionnaire, so the 
pool gets only the most serious health risks and the regular market 
keeps other applicants. The current downside of the Utah arrangement is 
that the excess funding for the pool comes from the State so, while the 
benefits are extremely comprehensive, State budget limitations have 
resulted in the need for an annual cap on benefits that are 
troublesome. But the mechanism is interesting and could be replicated 
and otherwise works well, if the funding issue could be resolved to 
something more stable.
    Washington.--The Washington State high-risk pool and guaranteed-
issue requirements work similarly to those in Utah although, in 
addition to the consistent underwriting requirements, carriers are 
limited to a set percentage of individual business that can be referred 
to the pool. Since Washington's pool isn't State-funded, it does not 
have an annual benefit maximum. It's another example of a partnership 
with the private market and a public guaranteed-access mechanism that 
works and could be replicated elsewhere.
    New York.--Another twist on the reinsurance concept is New York 
with its Healthy New York program. Small employers, sole proprietors 
and uninsured working individuals, regardless of health status, who 
meet set eligibility criteria and participation rules can purchase a 
limited range of comprehensive coverage options offered through private 
carriers and backstopped with a State-level reinsurance pool for 
extraordinary claims. This is a different kind of reinsurance than in 
Idaho, since it works on a retrospective basis, but it is a great 
example of why a backstop can increase affordability. Although New York 
is a guaranteed-issue State, it still uses this mechanism to spread the 
risk of higher risk participants. If we compare the rates for similar 
coverage in New Jersey, also a guaranteed-issue State but with no 
financial backstop, it becomes clear that, although premiums are higher 
than in non-guarantee issue States, the financial backstop provided by 
the reinsurance mechanism has improved affordability there.

Recommendation 2: Give Pre-existing Condition Credit for Prior 
        Individual Market Coverage to Ensure True Health Insurance 
        Portability
    The issue of pre-existing conditions and individual market coverage 
portability has been repeatedly identified as a problem. It's not just 
a problem for people who have a serious medical condition when they 
apply for coverage. People who have obtained individual coverage when 
healthy and then acquired medical conditions over time can be limited 
in their ability to switch coverage plans due to pre-existing 
conditions and medical underwriting requirements.
    HIPAA does provide individual-market consumers some protections, 
but they don't go far enough. Current law requires that all health 
insurance policies be guaranteed renewable unless there is non-payment 
of premium, the insured has committed fraud or intentional 
misrepresentation, or the insured has not complied with the terms of 
the health insurance contract. In addition, most States require that 
individual health insurance policies be renewed at class average rates 
and prohibit the practice of re-underwriting (making people fill out a 
new health questionnaire at renewal), provided that the policyholder 
sticks with the same product.
    The flaw in HIPAA is that it does not protect individuals who want 
to change carriers or health insurance products within the individual 
market. This is not only a problem for the individuals who want to make 
a change, but it also stifles individual market carrier which in turn 
has a significant impact on price.
    To solve this problem, States should be required to adopt a 
qualified access program so that no individual will be denied a private 
health insurance option because of a pre-existing condition, as 
described in Recommendation 1. In addition, individual market health 
insurance carriers should be required to give individual health 
insurance market consumers credit for prior individual coverage when 
changing insurance plans, if there is no greater than a 63-day break in 
coverage, just as is required in the group market by HIPAA. This means 
that existing individual-market consumers who wanted to switch health 
insurance products and/or health insurance carriers would be given 
credit against any pre-existing condition look-back or exclusionary 
periods equal to the amount of prior coverage they have. Furthermore, 
NAHU believes that the 63-day coverage window provisions should be 
amended to specify credit should be granted as long as the individual 
applies for coverage within 63 days, to protect individuals in cases 
where coverage cannot be issued immediately upon application.
    However, to protect against adverse selection, a provision would 
also need to be included to address situations where individual-market 
consumers were substantially changing their level of coverage and/or 
benefits. In these cases, while credit for prior coverage would be 
applicable, carriers would still be able to assess for insurable risk 
when determining initial premium rates.

Recommendation 3: Standardize State-Level Requirements Regarding the 
        Consideration of Pre-existing Conditions
    Right now, State exclusionary and look back periods for pre-
existing conditions in the individual market range from none at all to 
5 years. NAHU believes greater standardization could easily be achieved 
in a similar way as was done relative to the small-group market in 
HIPAA when a Federal maximum look-back window of 6 months and a 12-
month exclusionary period was established for the States. Having a pre-
existing conditions rule that is consistent in both the individual and 
group model would also be much simpler for consumers to understand.
    In the absence of a fully implemented and enforceable individual 
purchase mandate, plans and high-risk options must be able to look back 
at a new applicant's medical history and impose reasonable waiting 
periods in order to mitigate adverse selection. Until implementation is 
complete, greater standardization of limitations is necessary and 
warranted.

Recommendation 4: Improve Federal Group-to-Individual Coverage 
        Portability Protections So That People Can Transition Directly 
        From Employer Coverage to Individual Without Hurdles
    HIPAA attempts to provide individuals who are leaving group health 
insurance coverage with portability protections to make it easier for 
them to purchase coverage in the individual market. Unfortunately, the 
protections are confusing and many consumers unintentionally invalidate 
their HIPAA guaranteed-issue rights without realizing it and then risk 
being denied coverage when they apply for individual coverage.
    Under current law, individuals who are leaving group coverage must 
exhaust either COBRA continuation coverage or any State-mandated 
continuation of coverage option if COBRA is not applicable before they 
have any group-to-individual rights under HIPAA. Once the consumer 
exhausts these options if available, then he or she can purchase 
certain types of individual coverage on a guaranteed-issue basis, 
provided that there is no more than a 63-day break in coverage. Each 
State was required under HIPAA to develop a mechanism for providing 
this coverage. The two most common State elections are to either allow 
HIPAA-eligible people to purchase coverage through a State high-risk 
health insurance pool, or to require all individual market carriers to 
guarantee-issue HIPAA-eligible consumers at least two products, which 
are often priced higher than traditional individual coverage.
    Most people who leave group coverage are unaware of all of the 
stipulations required to receive Federal portability-of-coverage 
protections. Faced with high COBRA or State-continuation premiums, many 
individuals decline such coverage either initially or after a few 
months. Then, depending on their health status or a family member's, 
they may experience extreme difficulty obtaining individual market 
coverage. To solve this problem, the HIPAA requirement to exhaust State 
continuation coverage or COBRA before Federal guarantees are available 
should be rescinded, and individuals leaving group coverage should be 
able to exercise their Federal group-to-individual portability rights 
immediately, provided that there is no more than a 63-day break in 
coverage.

Recommendation 5: Stabilize Individual Market Rates by Requiring More 
        Standardization as to How Individual Market Carriers Determine 
        Pricing
    Another inconsistency among State individual health insurance 
markets is the way that premium rates are determined at the time of 
application. In a few States they are determined merely by geographic 
location (pure community rating) and in several others rating factors 
are determined by the State but are limited in nature (i.e., age, 
gender, industry, wellness, etc.), which is known as modified community 
rating. However, even with States with modified community rating, the 
rating factors and how they may be applied vary significantly by State. 
It is NAHU's view that State individual health insurance markets would 
benefit from greater standardization as to how premium rates are 
determined.
    The first step to greater standardization would be for States to 
adopt a uniform application for applying for individual insurance 
coverage. A clear and understandable uniform application would assure 
full disclosure of accurate and consistent information when individuals 
apply for coverage. It would also be easier for consumers when applying 
for coverage with several different insurance carriers at one time.
    In the vast majority of States, no specific rating structure is 
required in the individual market, and carriers can assess for 
insurable risk at the time of application and discount or increase 
rates based on health status with few limitations. Full, accurate and 
complete risk assessment has proven to be the most effective rating 
mechanism because it has been demonstrated to lower overall premium 
cost. However, the unlimited rating structure used in most State 
individual markets is in contrast to most State small-group health 
insurance markets and can create anti-selection issues between the two 
markets. Most State small-group carriers are also allowed to assess for 
insurable risk but have limitations on the amount of premium 
adjustments based on health status. In addition to these initial 
limitations, most State small-group laws require that premium increases 
are limited on renewal. This means that the amount each small group's 
premium can go up annually is based on the overall health experience of 
the carrier's entire small-group pool and is limited by the State to 
usually 10-15 percent plus an additional amount for inflation.
    The Federal Government could require that States meet a minimum 
standard of rate stabilization by imposing maximum rate variations for 
initial applicants, as well as a cap on renewal premium increases, as 
most States do for their small-group market. Another option would be to 
allow a modified community rate. However, in order to protect against 
runaway costs, the Federal Government should ensure that wide-enough 
adjustments may be made for several key factors. At a minimum, 
variations need to be allowed for applicant age of at least five to one 
(meaning that the rate of the oldest applicant may be no more than five 
times the rate of the youngest applicant). In addition to age, 
variations in premium rates should also be allowed for wellness 
factors, smoking status, gender and geography. Since we know that up to 
50 percent of health status is determined by personal behavior 
choices,\4\ in order to have effective cost containment, we need to be 
able to reward healthy behavioral choices.
---------------------------------------------------------------------------
    \4\ Mercer Management Journal 18. ``The Case for Consumerism in 
Health Care'' http://www.oliverwyman.com/ow/pdf_files/
MMJ18_Case_Consumerism_Healthcare.pdf.
---------------------------------------------------------------------------
Recommendation 6: Increase Consumer Protections Regarding Individual 
        Market Coverage Rescissions
    Under very rare circumstances, individual health insurance carriers 
rescind an insurance policy based on a submission of fraudulent 
information on an application or an intentional omission of required 
information. Surveys of individual health insurance plans indicate this 
happens to far less than 1 percent of individual market consumers 
annually,\5\ but all individuals buying individual coverage deserve 
assurances that they will not be subject to unfair policy rescissions 
or pre-existing condition determinations.
---------------------------------------------------------------------------
    \5\ America's Health Insurance Plans. Comprehensive Health 
Insurance Policy Rescissions in the Individual Health Insurance Market 
Reported by AHIP Member Companies, 2007 Survey.
---------------------------------------------------------------------------
    All States should be required to develop an independent medical 
review process to resolve disputes concerning policy rescissions and/or 
pre-existing condition determinations. In addition, health plans should 
be required to limit rescissions to only material omissions and 
misrepresentations on the uniform insurance application. Health plans 
should be responsible for reviewing all applications received for 
clarity and completeness at the time of application and not after the 
policy is issued. If a carrier does not conduct a review of listed 
medical conditions on the application upon submission, it should not be 
allowed to use any subsequently obtained health information as a 
standard for a rescission, unless fraud or deceit has occurred. Health 
plan consumers should be clearly informed of their rights relative to 
rescissions and pre-existing condition determinations. Consumers also 
should be informed of their obligation to provide complete and accurate 
responses on health plan applications and to provide additional 
information at the time of application upon request of the health plan.

Recommendation 7: Making it Easier for Employers to Help People 
        Purchase Individual Coverage
    One of the biggest complaints about the individual market is that 
coverage is too difficult to purchase independently, and one of the 
greatest advantages of employer-group coverage is its ease of 
enrollment and payment. Many employers would like to offer their 
employees traditional health insurance coverage but simply can't afford 
to do so under current economic conditions. Also, some employers have 
an employee base that is difficult to cover under a traditional group 
scenario. As an alternative, employers should be allowed to work with 
licensed insurance agents and brokers to help employees purchase and 
pay for individual coverage by setting up a Section 125 plan, deducting 
premiums from wages, aggregating premiums and sending them to the 
insurer, and possibly providing a defined contribution. This would be a 
particularly appropriate coverage option for certain types of 
businesses that are rarely able to offer benefits to all employees (for 
example, restaurants and some small retail establishments) and for 
employees who may not be eligible for an employer's group plan, such as 
part-time or contract workers. This could help to draw many uninsured 
individuals into the private health coverage system. In addition, it 
could expand the size of the individual market, making it less fragile 
and, therefore, less costly.
    However, current Federal law requires that all individual health 
insurance policies sold in a group setting are subject to ERISA and all 
of the HIPAA consumer protections relative to group health insurance 
plans, including the group guaranteed-issue and pre-existing 
requirements and all nondiscrimination provisions. Under current market 
conditions, practically no individual-market policies can meet all of 
the HIPAA small-group protections since they are not designed for a 
product that is marketed to individual consumers. In addition, the sale 
of list-billed policies, which are individual policies where the 
employer agrees to payroll-withhold individual health insurance 
premiums on behalf of its employees and send the premium payments to 
the insurance carrier but does not contribute to the cost of the 
premium, is specifically prohibited by some States.
    Congress should overturn State bans of the sale of list-billed 
policies and clarify that individual health insurance policies 
purchased by employees are not the same as group health insurance 
policies and are not subject to the group insurance requirements 
specified in HIPAA or ERISA but rather the newly reformed rules for the 
individual market. In particular, the Federal requirements regarding 
individual policies sold on a list-bill basis need to be clarified, 
since even minimal involvement on the part of the employer could 
trigger group health plan requirements.
    Congress should also establish that all individual health insurance 
policies sold under a list-billed arrangement are subject to all 
insurance regulations governing the issuance of traditional individual 
insurance policies in the State in which the policy was sold. This 
would include rating requirements, issuing requirements and the 
requirement that such products only be sold by licensed health 
insurance producers, among other consumer protections.

Recommendation 8: Provide Federal Financial Assistance to Keep 
        Individual Health Insurance Coverage Affordable
    The most critical problem that we see in State individual health 
insurance markets is affordability, particularly for those individuals 
who have medical conditions. The high cost of coverage for these people 
often doubles as an access barrier.
    There are clear broad-scale solutions that NAHU supports relative 
to coverage affordability. The most important of these is acting on the 
true underlying problem with our existing system: the cost of medical 
care. Health care delivery costs are the key driver of rising health 
insurance premiums, and they are putting the cost of health insurance 
coverage beyond the reach of many Americans.\6\ Addressing the cost of 
care and its impact on the cost of coverage is critical in every 
market.
---------------------------------------------------------------------------
    \6\ PricewaterhouseCoopers. ``The Factors Fueling Rising Health 
Care Costs, 2008.'' http://www.americanhealthsolution.org/assets/
Uploads/risinghealthcarecostsfactors2008.pdf.
---------------------------------------------------------------------------
    However, there are other affordability reforms that could be 
crafted that would specifically help individual market health insurance 
purchasers.
             tax equity--enhanced deductibility of premiums
    The most important step toward making individual coverage more 
affordable would be extending tax equity to individuals and families 
purchasing health insurance coverage on their own and equal tax 
treatment for the self-employed. NAHU believes Federal tax laws should 
be updated to provide the same Federal tax deductions to individuals 
and the self-employed that corporations have for providing health 
insurance coverage for their employees, although not at the expense of 
the existing employer exclusion. Specifically, NAHU feels Congress 
should take action to:

     Remove the 7.5 percent of adjusted gross limit of medical 
expenses on tax filers' itemized deduction Schedule A form.
     Allow the deduction of individual insurance premiums as a 
medical expense in itemized deductions.
     Equalize the self-employed health insurance deduction to 
the level corporations deduct by changing it from a deduction to 
adjusted gross income to a full deductible business expense on Schedule 
C.
     Clarify in statute that employers implementing list-
billing arrangements for their employees may also establish Section 125 
premium-only plans for their workers. This would enable employees to 
pay for their individual policies on a tax-
favored basis. If an individual participated in a section 125 plan for 
a list-billed policy, those premiums would not be eligible for 
deduction as a medical expense under Schedule A.

                               SUBSIDIES

    NAHU also supports targeted premium-assistance programs for low-
income individuals purchasing private coverage, and we feel that the 
Federal Government should finance such programs. A subsidy program 
could be national in scope or each State could be required to create 
one that suits the unique needs of its citizens in partnership with the 
Federal Government. Several States have already created successful 
subsidy programs and their existing structures could be used as a model 
framework for a national reform. I have included a chart at the end of 
this statement that itemizes some of the State subsidy programs that 
provide us with some good models on creative ways to help both 
employers and their employees with the cost of health insurance 
coverage. Two States in particular should be looked to as models:

    Oregon.--The Oregon Family Health Insurance Assistance Program 
(FHIAP) \7\ is one State program that could serve as a model. FHIAP is 
an innovative State coverage initiative that subsidizes both employer-
sponsored coverage and individual insurance coverage. Eligible families 
making over 150 percent FPL who do not receive cash assistance must 
participate if employer coverage is available, and others can 
participate on a voluntary basis. Licensed health insurance 
professionals help both employers and individuals with enrollment and 
participation. The program subsidizes coverage on a sliding scale 
according to income. Subsidies range from 50 percent to 95 percent of 
the premium. Individuals and families use FHIAP subsidies to pay for 
insurance at work or to buy individual health plans if insurance is not 
available through an employer. FHIAP members pay part of the premium. 
They also pay other costs of private health insurance such as co-
payments and deductibles. Once approved for FHIAP, members are eligible 
to remain in the program for 12 months. Three to four months before the 
member's eligibility ends, FHIAP sends a new application and members 
may re-apply. FHIAP provides direct premium assistance through the 
insurer for people who use its benefits to purchase individual 
coverage. For those with employer coverage, FHIAP reimburses employees 
for the cost of their premium within 4 days of receipt of a valid pay 
stub denoting the employee contribution. This program has been around 
for a number of years and struggles each year with funding, but many 
have benefited from it and it is a streamlined approach with little 
administrative cost.
---------------------------------------------------------------------------
    \7\ http://www.oregon.gov/OPHP/FHIAP/.
---------------------------------------------------------------------------
    Oklahoma.--Oklahoma's Employer/Employee Partnership for Insurance 
Coverage (OEPIC or Insure Oklahoma) \8\ is another very successful 
State subsidy program that works with both employer-sponsored and 
individual health insurance coverage for self-employed people, certain 
unemployed individuals, and working individuals who do not have access 
to small-group health coverage. In 2008, 9,923 employees and dependents 
were directly subsidized by Insure Oklahoma, which is a 234 percent 
increase from the previous year.\9\ Licensed insurance agents and 
brokers help identify applicable participants and enroll people and 
employers in the plan. Through the program, the employer pays only 25 
percent of the premium of the low-wage worker, the employee pays up to 
15 percent of the premium and the State pays the remainder. The 
program's passage was supported by insurers, small employers, agents 
and brokers and providers. It is funded by a State tobacco tax and 
Federal funds based on a Medicaid Health Insurance Flexibility and 
Accountability waiver. Twenty insurers participate, offering dozens of 
qualified products that meet simple specified coverage standards.
---------------------------------------------------------------------------
    \8\ http://www.oepic.ok.gov/.
    \9\ Blue Cross Blue Shield Association. ``Insure Oklahoma: Overview 
and Impact.'' http://www.bcbs.com/issues/uninsured/background/insure-
oklahoma-overview.html.
---------------------------------------------------------------------------
       FEDERAL FINANCIAL SUPPORT FOR QUALIFIED ACCESS MECHANISMS

    Finally, we support even more targeted means of providing Federal 
affordability assistance to individual market consumers, particularly 
to individuals with serious medical conditions. Since in any insurance 
pool of risk a small number of insureds incur the majority of claims. 
NAHU's access solutions alone, by guaranteeing that the highest-risk 
individuals are covered in a financially separate private-market pool, 
will help lower costs for all consumers. But even more could be done to 
help lower costs.
    Funding for high-risk health programs is a continual problem in 
some States. When a pool consists of only sick people, there is no 
spreading of risks, so premiums charged to policyholders are never 
enough to cover expenses and additional funding mechanisms must be 
created. A variety of funding sources are currently being used, 
including using State premium taxes, direct State appropriations, 
assessments to carriers that operate in the State, hospital taxes, or a 
mixture of several sources. Current limited Federal grant funds for 
high-risk pools have enabled a number of State high-risk pools to lower 
premiums and even start low-income subsidy programs. NAHU believes this 
funding should not only continue, but it should also be increased and 
expanded to the new qualified access mechanisms outlined in 
Recommendation 1.
    The issue of affordability is key. A State should be required to 
demonstrate that the funding source for whatever high-risk option it 
elects will be both broadly distributed over as much of the marketplace 
as possible and stable over time. CMS could develop broad criteria, and 
this program could be administered easily with the career employees 
already dedicated to the current high-risk pool grants. It would be 
important when establishing criteria not to hinder State innovation 
relative to funding sources as this is a key factor of ensuring 
affordability. Furthermore, due to the high-needs population being 
served, premiums alone cannot be considered a stable funding source.
    Funding could be conditional upon a State's ability to meet 
federally established broad criteria regarding the framework of a 
qualified program. This may be the biggest bargain for Federal dollars 
that exists. A small amount of funding will go a long way. The current 
$75 million grant funding for high-risk pools has helped many pools 
establish low-income subsidies, disease-management programs and other 
important benefits for pool participants. New funding would be used to 
help subsidize premiums for the high-risk beneficiaries because, 
regardless of the backstop option the State creates, premiums alone in 
a State high-risk option will never be enough to satisfy claims, and 
premiums for participants in these programs must be at reasonable 
levels to ensure adequate participation. Funding could also be used as 
an additional backstop to State high-risk options that meet specified 
requirements for those rare individuals whose medical expenses are so 
great they would exceed high-risk pool lifetime caps.
Recommendation 9: Getting Everyone Covered
    NAHU believes that implementing recommendations 1 through 8 will 
bring our country much closer to all Americans having health coverage. 
But an additional way to achieve the standard of near-complete coverage 
that is necessary for stand-alone guaranteed issuance of coverage as 
well as controlled entry and exit into the individual insurance market 
is through the implementation of an enforceable and effective 
individual mandate.
    NAHU has historically approached the idea of an individual mandate 
to obtain health insurance coverage with great caution. Similar 
mandates for auto insurance coverage have failed to reduce the number 
of uninsured motorists.\10\ Also, subsidies, as well as benefit 
standards and enforcement mechanisms, would need to be created to 
fairly implement such a mandate. However, if such barriers could be 
overcome, enough people would be covered to mitigate the problem of 
adverse selection and its resulting cost consequences.
---------------------------------------------------------------------------
    \10\ Insurance Research Council. ``IRC Estimates That More Than 14 
Percent of Drivers Are Uninsured.'' http://www.ircweb.org/news/
20060628.pdf.
---------------------------------------------------------------------------
    If the Federal Government were to require an individual mandate to 
obtain coverage, NAHU feels that it must be structured appropriately. 
The following elements are crucial to an effective and enforceable 
individual mandate:

     While the mandate may need to be phased in over time, 
starting with perhaps select populations like children age 25 and 
under, ultimately it must apply to all populations equally.
     An individual mandate must be accompanied by a national 
qualified guaranteed-access mechanism with a financial backstop as 
described in Recommendation 1 so that all individuals have cost-
effective private health coverage options available to them. This is 
especially critical during the transition period when the mandate is 
being put into place and the entire population is not yet insured.
     An individual mandate should not be accompanied by overly 
rigid coverage standards that would make coverage unaffordable and 
inhibit private plan design innovations.
     Subsidies in the form of direct private coverage premium 
assistance or refundable advanceable tax credits for the purchase of 
private coverage must be made available to low-income consumers.
     An effective coverage verification system must be created, 
with multiple points of verification.
     An effective enforcement mechanism would need to be 
implemented with multiple enforcement points and effective penalties 
for noncompliance.
     Each State must be responsible for enforcement of the 
mandate for its own population. The United States is too large and 
diverse a country for such a mandate to work otherwise.
Recommendation 10: Allow State Implementation with a Federal Fallback 
        Enforcement Mechanism
    States should be given a finite timeframe of several years to 
achieve these reforms through legislative or regulatory means. If a 
State cannot adopt the necessary reforms in the timeframe allotted, 
Federal enforcement through CMS should be the fallback, similar to the 
way CMS serves as the Federal fallback enforcement authority for 
HIPAA's small-group market requirements.

                               CONCLUSION

    NAHU members work on a daily basis to help individuals and 
employers of all sizes purchase health insurance coverage. We also help 
clients use their coverage effectively and make sure they get the right 
coverage at the most affordable price.
    All of this experience gives our membership a unique perspective on 
the health insurance marketplace. Our members are intimately familiar 
with the needs and challenges of health insurance consumers, and they 
have a clear understanding of the economic realities of the health 
insurance business, including both consumer and employer behavioral 
responses to public policy changes. We have had the chance to observe 
the health insurance market reform experiments that have been tried by 
the States and private enterprise, and we have based these individual-
market health reform policy recommendations on what we believe would be 
the most beneficial changes for individual health insurance consumers.
    The NAHU membership urges Congress to carefully consider these 
ideas to improve individual health insurance coverage options for 
consumers nationwide. Our private health insurance plans are 
innovative, flexible and efficient, and our marketplace is up to the 
task of responding to well-structured reforms. We look forward to 
working with Federal and State policymakers to fill the gaps in our 
Nation's coverage system and to make private individual health 
insurance coverage more affordable and accessible for all Americans.
    We appreciate this opportunity to participate in today's hearing 
and look forward to the discussion with the committee and other 
panelists.

    Addendum: Chart on State-Level Private Health Insurance Subsidy 
Programs for Low-Income Individuals

    Senator Bingaman. Thank you very much.
    Mr. Williams, please.

    STATEMENT OF RONALD A. WILLIAMS, MS, CHAIRMAN AND CHIEF 
          EXECUTIVE OFFICER, AETNA, INC., HARTFORD, CT

    Mr. Williams. Good morning, Mr. Chairman and members of the 
committee. It is a pleasure to be here and to see so many of my 
colleagues I have had the privilege to work with over the past 
few years.
    I am Ronald A. Williams, chairman and chief executive 
officer of Aetna, a leader in providing diversified healthcare 
benefits.
    As the healthcare system hurtles toward $4.3 trillion in 
annual spending in 2017, we have an opportunity and an 
obligation to achieve meaningful reform that guarantees access 
and makes health insurance more affordable for all. You have my 
commitment to work with you to transform the healthcare system.
    It is worth noting at the outset that our industry, my 
company, and the expectations of our customers and members have 
changed a good deal over the past several years. Health 
insurance is not about just paying claims anymore. At Aetna, 
our spending on technology and innovation, more than $1.8 
billion since 2005, and the composition of our workforce of 
35,000, nearly 40 percent of whom are clinical and technology 
professionals, are much different than they would have been 
just 10 years ago.
    Transforming our healthcare system will require us to work 
collaboratively to address the key roadblocks that stand in our 
way and build a sensible path to reform. That means building on 
an employer-based healthcare model that already works for more 
than 177 million Americans and accelerating our efforts to 
harness the power of health information technology and 
confronting the challenges associated with rising healthcare 
costs.
    In our view, the following are critical components of 
reform. First, we need to get all Americans covered through an 
enforceable individual coverage requirement combined with 
subsidies and other changes to make coverage affordable. It 
must be coupled with sliding-scale subsidies to ensure that 
income is not a barrier for any individual, and we should offer 
tax credits for small businesses to encourage them to offer and 
subsidize employee coverage.
    Second, we need to take steps necessary to bring affordable 
coverage within reach for everyone. This begins by using health 
information technology as a tool to bend the cost curve and 
addressing our country's pervasive quality issues. We also need 
payment reform because the traditional fee-for-service payment 
structure often rewards physicians and hospitals for the volume 
of services they deliver rather than the value of quality of 
care they provide.
    Third and finally, we need to engage consumers in their own 
healthcare, focusing on prevention and wellness, and provide 
them the tools to be good consumers. The healthcare system 
needs fundamental reform, and that will require unprecedented 
determination and collaboration across the healthcare system.
    We are ready and willing to work with you because we know 
that success will be rooted in a public-private cooperation to 
create and implement practical solutions that drive systemic 
change.
    Thank you.
    [The prepared statement of Mr. Williams follows:]

              Prepared Statement of Ronald A. Williams, MS

    Good morning Chairman Kennedy, Ranking Member Enzi and members of 
the committee. Thank you for the opportunity to be here today. I am 
Ronald A. Williams, Chairman and Chief Executive Officer of Aetna Inc., 
one of the Nation's leading diversified health care benefits companies. 
I appreciate the opportunity to share my views with this committee and 
to continue working with you to transform our health care system, which 
we can all agree is in urgent need of reform. I believe our health care 
system must provide affordable, high quality coverage for all 
Americans.
    My company is committed to taking part in the development of 
meaningful, broad-based solutions, and I am convinced that we can help 
move reform forward. Our views are shaped by our experience with the 
36.5 million unique individuals to whom we provide products and 
services in all 50 States; the 894,000 health care professionals with 
whom we interact daily; and the thousands of employers for whom we 
devise benefits solutions regularly and the 50 States and multiple 
Federal entities that regulate our products.
    Our industry, my company and the expectations of the people who are 
our customers and members have changed a good deal over the past 
several years. Insurance is not just about paying claims anymore. 
Increasingly, our stakeholders expect us to be their partner, to add 
value and to innovate. Employers want affordable, high-quality products 
and services to enhance the health and productivity of their employees. 
Doctors and hospitals want to give their patients access to medical 
innovations and new technologies, with fewer administrative barriers. 
Our members want access to our network of health care professionals, 
tools to make informed decisions, transparency of price and quality 
data, and access to the expertise of nurses and trained professionals 
on issues ranging from chronic disease care to wellness and prevention.
    At Aetna, our business model has changed significantly over time as 
we work to meet these new expectations. We have been at the forefront 
of bringing the information age to health care. That is why we have 
spent more than $1.8 billion on technology and innovation since 2005. 
Our innovations mean that we no longer simply process and pay claims; 
now we have sophisticated systems that scan hundreds of millions of 
interactions between our members and their doctors, hospitals and 
pharmacies to alert them and their physicians to sometimes dangerous 
interactions caused by errors or omissions.
    Our workforce has changed also. Today, nearly 40 percent of our 
workforce are clinical professionals or work in information technology. 
The focus of all our employees is to improve health and ensure our 
consumers get the best, most appropriate treatment possible, including 
wellness and preventive care and managing their complex diseases. If 
you are an Aetna member, you can reach a health care professional at 
any time of the day or evening who can respond to your health care 
needs.
    As the health care system hurtles toward $4.3 trillion in annual 
spending by 2017, we have an opportunity and an obligation to achieve 
meaningful reform and improvement. Our experience and perspective tell 
us that we are a nation and culture unique from the rest of the globe, 
and we require a uniquely American solution that will enable the health 
care system to meet the Nation's expectations for health care quality, 
access and affordability.
    To transform our current healthcare system into what it should be, 
we need to work collaboratively to address the key roadblocks that 
stand in our way and build a sensible path to reform:

     It is essential that we realize real reform while 
preserving and building on the employer-based health care model that 
works for most Americans. We should avoid systemic disruption to the 
177 million Americans who have employer-sponsored coverage, and instead 
build upon the strengths and innovations of private health coverage for 
the good of other populations. Together, employers and insurers are 
driving innovations that are helping many Americans better maintain 
their health, take advantage of helpful health care technology and 
access safe, quality health care.
     We need to accelerate our efforts to harness the power of 
health information technology (HIT), which is so critical to addressing 
cost and quality issues. Congress made a significant investment in HIT 
in the American Recovery and Reinvestment Act, but the United States 
still lags behind other countries in the use of electronic medical 
records (EMRs). If 90 percent of all providers in the United States 
were using EMRs, we could see savings of about $77 billion within 15 
years.\1\ With the advent of sophisticated clinical decision support 
capabilities, those savings, coupled with lives saved, could exceed 
current expectations. At Aetna, we have made significant investments in 
health information technology, and we are not finished. Our investments 
are designed to help patients and doctors take action on their health 
conditions and help patients get the standard of care they expect and 
require.
---------------------------------------------------------------------------
    \1\ Modern Healthcare, ``By the Numbers,'' 2006-2007 Edition, 
December 17, 2006, p. 66.
---------------------------------------------------------------------------
     We need to confront the challenges associated with the 
rising cost of health care. Costs will rise from $8,000 per person this 
year to more than $13,000 per person in the next decade. There is an 
important, but often overlooked connection between health care costs 
and the premiums people pay for health insurance coverage. Health 
insurance premiums reflect the underlying cost of health care. So 
unless we, as a nation, are successful in ``bending'' the cost curve, 
we will see premiums continue to rise at a pace far faster than either 
wage growth or inflation--which puts health insurance out of the 
financial reach of a growing number of U.S. residents. If we do not 
address the issue of costs, reforms made today to improve access will 
not be sustainable. We all have a significant role to play in this 
complex problem. This includes our industry, which is committed to 
achieving new levels of simplification and reduced administrative 
costs.

                     A SOLID FOUNDATION FOR REFORM

    Many are questioning whether we can achieve meaningful health care 
reform. I believe the answer is that we can reform our system and 
simultaneously achieve the dual goals of improving access and making 
healthcare more affordable. All of the players in health care--health 
insurers, hospitals, physicians, employers, pharmaceutical companies, 
consumers, legislators and regulators--will need to focus on achieving 
both of these goals together.
    As you consider how to structure reform, I urge you to build upon 
the current employer-based system that today covers 177 million 
people--60 percent of the American population. When given the choice, 
82 percent of workers who are eligible for employer-offered coverage 
participate in their employers' health plans.\2\
---------------------------------------------------------------------------
    \2\ Pickreign, Jeremy et al. ``Employer Health Benefits 2008 Annual 
Survey,'' Kaiser Family Foundation and Health Research and Education 
Trust, September 2008.
---------------------------------------------------------------------------
    Leveraging the strengths of the employer-based system would enable 
people to keep the health coverage they have if they are satisfied. It 
would also continue the innovation that has resulted from employers and 
health plans working together over decades to improve quality and 
value. We recognize that maintaining the basic structure of health care 
coverage through the employer-based system is not enough. Our customers 
are demanding that we make sound health care investments that 
positively impact their physical and financial health. We have 
responded to this imperative by:

     Developing products and services that improve the quality 
of health care and help control rising benefits costs;
     Providing members with access to convenient tools and 
easy-to-understand information that can help them make better-informed 
decisions about their health and financial wellbeing;
     Introducing new levels of transparency to the health care 
system; and
     Pioneering new ways to focus on wellness and prevention 
programs.

    We recognize that maintaining the current structure is not enough. 
Reform efforts need to focus on access and affordability of insurance 
for the 45 million uninsured Americans and those seeking coverage in 
the individual and small group markets. A growing number of people, 
nearly 18 million under age 65, are accessing insurance through the 
individual market. In addition, coverage is often expensive and 
unstable for the millions accessing coverage through the small group 
market.

                     CRITICAL COMPONENTS OF REFORM

Getting all Americans Covered
    Covering all Americans is imperative for fixing our Nation's health 
care system. An enforceable individual coverage requirement, combined 
with subsidies and other changes to make coverage affordable, is the 
best way to ensure that all Americans have continuous access to 
insurance coverage and high-quality health care. Since 2005, we at 
Aetna have been speaking out in support of an individual coverage 
requirement, as we believe it is the critical step for achieving 
universal coverage.
    One of the great, and often painful, challenges in our system is 
that too many individuals often have difficulty accessing coverage in 
the individual market. Insurers have relied on tools like medical 
underwriting and pre-existing condition exclusions to maintain the 
solvency of the current system, which lacks universal participation. 
Insurance works best when everyone participates in the system 
continuously, whether they are healthy or sick. Today's individual 
market system does not reflect these principles and insurers face 
adverse selection, wherein people enter the insurance marketplace when 
they need coverage and healthcare services.
    An enforceable individual coverage requirement solves this problem 
better than any other proposed policy, because it allows us to bring 
everybody--both healthy and unhealthy--into the insurance pool. By 
using an individual coverage requirement to address the challenge of 
adverse selection, we can transform our system into one where private 
insurance is provided on a guaranteed-issue basis with no pre-existing 
condition exclusions and a rating system that does not include health 
status. We support allowing insurers to provide discounts on premiums 
for those who engage in healthy behaviors to help increase incentives 
for good health. These reforms would allow all Americans access to 
coverage and would help people keep their health coverage as they go 
through life transitions, allowing true portability.
    An individual coverage requirement must, of course, be coupled with 
sliding scale subsidies to ensure that income is not a barrier for any 
individual's fulfillment of this requirement. In addition, we must 
offer tax credits for small businesses to encourage them to offer (and 
subsidize) employee coverage. We must create a rational regulatory 
structure that is conducive to creating affordable coverage options. I 
would encourage greater uniformity of State laws and regulations and 
the development of a new Federal charter. Insurers with a multi-state 
presence face costly administrative burden to comply with divergent 
State laws and regulations, and these higher administrative costs are 
passed onto the market at large through higher insurance premiums. A 
national entity would need to determine a standard benefit package and 
determine what types of actuarially equivalent plans could be offered. 
Under a national framework, plans could cross State boundaries and be 
offered through national, State or regional insurance exchanges that 
create new pooling mechanisms.
    We believe an individual coverage requirement, subsidies and 
insurance market reforms create the best framework for addressing our 
country's access challenge. Others believe a new public plan is the 
silver bullet for the uninsured. I would submit that, for a number of 
reasons, a public plan is not the best way to fix our system.
    First and foremost, insurers bring innovation, value and choices 
that allow individuals to choose a tailored approach to their 
individual needs that a one-size-fits-all public plan just could not 
achieve. With our unique capabilities in the realm of encouraging 
wellness and prevention, providing care coordination and chronic 
disease management, and empowering consumers and providers with health 
information technology, we can offer health care that responds to the 
specific needs of individuals. Health care is one area in which we must 
leverage the agility of the private sector to provide continued 
innovation and customization of health care plans.
    Beyond recognizing the added value that private insurers can 
provide, we must also be aware of the challenges a new public plan 
would impose on the rest of the system. A public plan would most likely 
employ the payment rates used in Medicare, which are far lower than the 
rates paid by private payers. In fact, the average family of four with 
private insurance spends an additional $1,788 on health care each year 
because of Medicare and Medicaid underpayments to providers. On an 
aggregate level, commercial payers incur approximately $89 billion more 
in costs than they would if public and private payers all paid 
equivalent rates.\3\ Expanding the use of low public payment rates 
would mean expanded cost-shifting for our health care system.
---------------------------------------------------------------------------
    \3\ Milliman, Hospital & Physician Cost Shift, December 2008; 
figures reflect 2006 and 2007 data.
---------------------------------------------------------------------------
    There is no doubt that getting all Americans into the health care 
system is of the utmost importance. The best solution for our country 
will not be to shift us over to a system for which the public sector 
gradually takes more and more responsibility and competes with the 
private market, but rather to engage in a public-private partnership 
that allows each sector to focus on what it does best. Aetna is fully 
committed to active participation in this partnership to create a 
better system in which no one is left out.

Bringing Affordable Coverage Into Reach
    If we want to ensure that all Americans have access to high-
quality, affordable health coverage, we must both slow the growth of 
health care costs and get greater value out of our health care 
spending.
    The cost of health care in the United States is growing at an 
unsustainable rate. National health spending will reach $2.5 trillion 
in 2009 and by 2018, it is expected to reach $4.4 trillion and comprise 
just over one-fifth (20.3 percent) of Gross Domestic Product (GDP). 
This year, we can expect the top three cost drivers--hospitals, 
physicians and prescription drugs--to comprise 73 percent of health 
care spending.\4\
---------------------------------------------------------------------------
    \4\ Centers for Medicare and Medicaid Services, ``National Health 
Expenditures Projections: 2008-2018.''
---------------------------------------------------------------------------
    If we fail to effectively address our Nation's health care cost 
problem, which is ultimately driven by the increasing illness burden 
borne by our population, we will find that access expansions will be 
unsustainable. A case in point is Massachusetts, where the absence of 
payment reform and more effective utilization threatens to undermine 
the ultimate success of truly commendable access reforms. Investments 
in health information technology and tackling payment reform are both 
necessary to slow the cost growth and improve quality.
    HIT can live up to expectations: The use of health information 
technology will not only be a powerful tool to bend the cost curve, but 
will also help address our country's pervasive quality issues. The 
United States continues to lag behind its peers globally in embracing 
HIT solutions necessary to yield cost reductions and quality gains. 
Compared to other developed nations the United States trails in its 
overall use of electronic medical records (EMR), with an adoption rate 
of only 28 percent.\5\ A New England Journal of Medicine survey 
suggests that 83 percent of U.S. doctors have still not adopted EMR 
technology.\6\ Consequently, Aetna continues to strongly support the 
President's initiatives to accelerate HIT adoption and commends the 
Congress' recent work to invest up to $22 billion to promote the use of 
electronic health records that have clinical decision support capacity 
as recommended by the Institute of Medicine.
---------------------------------------------------------------------------
    \5\ The Commonwealth Fund, ``2006 International Health Policy 
Survey of Primary Care Physicians in Seven Countries,'' November 1-2, 
2006.
    \6\ The New England Journal of Medicine, ``National Survey on 
Physician Adoption of Electronic Health Records,'' July 2008.
---------------------------------------------------------------------------
    Over the past 4 years, Aetna has invested more than $1.8 billion in 
deploying health IT solutions that improve both the quality and cost-
efficiency of the care that is delivered to our members. In making 
these investments, Aetna recognized from the outset that beyond its 
other claims and care management technologies, robust clinical decision 
support capabilities are essential to yielding the desired quality and 
cost returns necessary to produce a return on HIT investment. This was 
a key reason for Aetna's 2005 acquisition of Active Health Management 
and its innovative Care Engine technology.
    This unique technology provides a truly integrated solution for 
providers to extend clinical decision support beyond the electronic 
records platforms that may be contained in a physician's office or 
hospital. Care Engine scans millions of lines of pharmacy, lab, 
diagnostic, claims and other clinical data and matches them up to the 
latest available medical literature. It can scan disease management 
members' data for opportunities to improve care through enhanced 
diagnostic and therapeutic precision, and then notify physicians and 
patients with actionable information that can lead to improved outcomes 
at the point of care. Among the providers and plan sponsors now 
utilizing Care Engine, it has demonstrated that the technology's use 
can generate a meaningful return on investment by measurably improving 
quality outcomes (e.g., 19 percent reductions in overall 
hospitalizations)\7\ while producing overall cost savings (e.g., eight-
fold ROI or 6 percent reduction in average charges).\8\
---------------------------------------------------------------------------
    \7\ The American Journal of Managed Care, ``Using a Claims Data-
Based Sentinel System to Improve Compliance With Clinical Guidelines: 
Results of a Randomized Prospective Study,'' 2005;11:93-102.
    \8\ The Journal of Health Economics, ``Information Technology and 
Medical Missteps: Evidence From a Randomized Trial,'' 2008; 585-60.
---------------------------------------------------------------------------
    As we look ahead to ensure the public also receives a strong ROI 
for this new national HIT investment, it will be important for the 
Secretary and the Office of the National Coordinator within the 
Department of Health and Human Services to reinforce expectations in 
regulation and other guidance that: (1) providers meet measurable 
targets focused on quality outcomes in their use of publicly financed 
health information technology; and (2) that these technologies measure 
up to standards that ensure their capability to assist providers with 
clinical decision support that integrates pertinent data from all of 
the critical points within the health care system.
Addressing Health Care Costs and Quality: A Critical Foundation
    On an annual basis, the United States spends $650 billion more on 
health care than peer OECD countries, even after adjusting for 
wealth.\9\ The vast majority ($436 billion) of this ``excess'' spending 
results from outpatient care. There are other factors that contribute 
to the ``excess,'' including technological innovation, high levels of 
utilization, misaligned incentives for providers, lack of transparency 
and consumerism, higher prices and population health challenges.
---------------------------------------------------------------------------
    \9\ McKinsey Global Institute, ``Accounting for the cost of U.S. 
health care: A new look at why Americans spend more,'' December 2008.
---------------------------------------------------------------------------
    We need to tread carefully when it comes to some of these cost 
factors, as we do not want to stifle the innovation that drives 
improvements in our ability to improve and save lives. We can, however, 
work to ensure that technology is used appropriately to improve the 
standard of care and drive better patient outcomes. We can also re-
align incentives in our system to ensure that quality and value serve 
as the primary motivators for choosing specific treatments.
    The American health care system is wrought with inefficiencies, 
wasteful duplicative spending and poor performance. Understandably, 
there is a strong concern that our inputs in health spending are not 
yielding high enough quality output in care and outcomes, and the 
impact of these quality disparities is brought to bear in very real 
terms. In fact, between 35,000 and 75,000 avoidable deaths and $2.7 
billion to $3.7 billion per year in avoidable medical costs can be 
attributed to unexplained variations in care,\10\ underscoring the need 
for widespread dissemination of evidence-based medicine and standards. 
The guidelines must ultimately be applied at the individual member 
level to mitigate variation and wasteful spending.
---------------------------------------------------------------------------
    \10\ National Committee for Quality Assurance, ``The State of 
Health Care Quality,'' 2007.
---------------------------------------------------------------------------
    Payment reform will also be a critical tool to improve quality and 
bending the cost curve: The traditional fee-for-service (FFS) payment 
structure often rewards physicians and hospitals for the volume of 
services they deliver rather than the value or quality of care they 
provide. Aetna supports transforming the payment system into one that 
aligns provider reimbursement incentives with the pursuit of high-
quality outcomes for patients. We need a payment system that works for 
the patient, bringing them value--high quality at the right cost.
    Reform needs to focus on promoting patient-centered care that 
integrates the multiple aspects of the health care delivery system and 
shifts the model from episodic, acute care to comprehensive, evidence-
based care. Yet equally important is that any attempts to enact 
comprehensive payment reform include the input and support of the 
multiple stakeholders that make up the system, including providers, 
patients, employers and health plans. The managed care backlash of the 
1990s taught us the valuable lesson that in order for payment reform to 
succeed, providers need to participate in the agenda-setting and 
metric-development process and patients need to know their interests 
are being served.
    We believe engaging consumers in their own health care is also of 
critical importance in achieving greater value within our health care 
system. As the leader in consumer-directed health plans (CDHPs), we 
continue to help plan sponsors with empowering their employees to make 
informed decisions about their medical care. In fact, the average large 
employer saved more than $7 million per 10,000 members over the course 
of 5 years when an Aetna Health Reimbursement Arrangement (HRA) or 
Health Savings Account (HSA) was offered as a plan option. We also 
found that Aetna customers with CDHPs were much more likely to use 
online consumer tools and information--a leading indicator of employee 
engagement. They were also more likely to use preventive services than 
those enrolled in traditional health plans.
    Congress has taken some important steps forward: I applaud the 
members of this committee, the Senate and the House for their success 
in passing several key reforms that will start to slow the growth of 
our Nation's health care costs while improving healthcare quality. The 
inclusion in the American Recovery and Reinvestment Act of 2009 of $1.1 
billion in funding for comparative effectiveness research will help 
ensure that we invest in treatments that truly offer added benefit to 
the right patients. The commitment of $22 billion to investments in 
health information technology infrastructure and Medicare and Medicaid 
incentives for providers to electronically exchange patient health 
information will not only help to advance quality of care, but will 
help us to achieve long-term savings.

                               CONCLUSION

    I believe that President Obama and this Congress have charted a 
course of change, and I want to make clear that we too are committed to 
expanding access, controlling costs and improving the quality and value 
of care people receive. I hope this committee and the Nation as a whole 
will view Aetna and our industry peers as partners in advancing these 
shared goals. Our experience and effectiveness in developing and using 
technology to drive quality improvements, for example, can inform the 
larger discourse about health information technology and comparative 
effectiveness. We will support those efforts aimed at addressing access 
and affordability as well as the quality and value of health care in 
America. Over the past several years, Aetna has tried to lead by 
harnessing innovation and utilizing technology to serve people, and by 
stepping out front on issues that we believe can truly make a 
difference to our country.
    The health care system needs fundamental reform, and that will 
require determination and collaboration across the health care system 
that is unprecedented. We are ready and willing to work with you--
because we know that success will be rooted in public/private 
cooperation--to create and implement practical solutions that drive 
systemic change.
    Working together, I believe that the path forward is achievable and 
that we will be able to bring a new approach to health care that 
efficiently and safely gets people to their desired destination--
optimal health.
    Thank you.

    Senator Bingaman. Thank you very much.
    Ms. Pollitz. 

STATEMENT OF KAREN POLLITZ, M.P.P., RESEARCH PROFESSOR, HEALTH 
   POLICY INSTITUTE AT GEORGETOWN UNIVERSITY, WASHINGTON, DC

    Ms. Pollitz. Good morning, Mr. Chairman, members of the 
committee.
    I am Karen Pollitz, and I direct research on private health 
insurance at Georgetown University.
    Very briefly, I think the challenges facing this committee 
are daunting, but doable. I think the first thing that you need 
to do to get health insurance to work the way you want it to is 
to stop it from discriminating against people based on their 
health status, their age, their gender. The cherry-picking, 
lemon-dropping activities that are common in the insurance 
market today need to end.
    You also need to stop the sale of health insurance that is 
inadequate. We have 57 million Americans who are struggling 
with medical debt today, and most of them have health 
insurance. Twenty-two percent of insured cancer patients 
nonetheless burn through their life savings paying medical 
bills.
    These practices are defended because they make health 
insurance cheaper, but it is not really a good kind of cheaper 
because it makes protection flimsier. So we need to make 
insurance affordable by providing subsidies for good coverage 
and dependable coverage that is always there. To make sure that 
these prohibitions on these kinds of bad practices are 
followed, you are going to need an unprecedented level of 
accountability and transparency in market practices so that you 
can ensure that they actually stop.
    Then I think you need to reorient the market and organize 
it to compete in ways that we want it to. And in particular, I 
think introduction of a public plan, a public health insurance 
plan option in health insurance markets is a good thing. It can 
cue the market to compete in the ways that you want it to, to 
be a tough price negotiator, to be an innovator, and to share 
those innovations widely, not just bottle them up as trade 
secrets.
    I think there will be a lot of talk about a public health 
insurance plan today and sort of whether that is a fair thing 
or not, and I would just encourage you not to get too caught up 
in that. I don't think a public plan should be there to bully 
private insurers, but I don't think it is there to prop it up 
either.
    I think you want the market to have very specific goals and 
have an entity out there that is cueing the market to get it to 
move in the direction of those goals.
    Thank you.
    [The prepared statement of Ms. Pollitz follows:]

              Prepared Statement of Karen Pollitz, M.P.P.

    Mr. Chairman and members of the committee, thank you for inviting 
me to testify on opportunities to strengthen health insurance markets 
in health care reform. My name is Karen Pollitz. I direct the study of 
private health insurance and its regulation at Georgetown University's 
Health Policy Institute.
    A program of health reform to guarantee universal coverage 
including through private health insurance will need to address several 
key shortcomings of private markets today. These include:

    1. Discrimination based on health status and risk selection;
    2. Inadequate coverage;
    3. Affordability challenges for low- and middle-income people;
    4. Rising costs; and
    5. Lack of transparency and accountability.

    Part of the solution to these problems will lie in strengthening 
and reorganizing private health insurance markets to produce the 
coverage results we seek. A health insurance Exchange--sometimes 
referred to by other names, such as ``Connector''--can be established 
to pursue the goals of reform and to hold markets accountable for 
progress toward those goals.

                  PROMOTE RISK SPREADING AND STABILITY

    It has long been true that approximately 20 percent of the 
population accounts for 80 percent of health spending. The sickest 1 
percent account for nearly one-quarter of health expenditures. We rely 
on health insurance to spread costs more evenly across the population 
and protect all of us from the risk that we may find ourselves in need 
of expensive care in any given year. Unfortunately the distribution of 
medical care needs creates a powerful economic incentive to avoid risk, 
not spread it. Discrimination based on health status is a problem for 
all health insurance purchasers, although most pronounced in the 
individual market today. Even consumers with mild conditions may be 
turned down, charged more, or offered a policy with permanent coverage 
exclusions. More expensive health conditions such as cancer, diabetes, 
pregnancy, will always render a person uninsurable in medically 
underwritten individual markets.
    Risk avoidance practices continue even after coverage is issued. 
Last summer, the House Committee on Oversight and Government Reform 
studied problems relating to post-claims underwriting and rescission. 
Individual market policyholders who make claims in the first year of 
coverage may be investigated for evidence their health condition was 
pre-existing or not fully disclosed during the initial medical 
underwriting process. Claims may be denied or coverage cancelled or 
rescinded as a result. Although these practices are intended to protect 
against fraud, abuses have also been documented.\1\
    Stability and long term affordability of coverage is also highly 
problematic in the individual market today. Typically people remain 
enrolled in policies for less than 2 years.\2\ High rates of turnover 
result from several factors. In general, the individual market today is 
a residual market and unsubsidized, so participants tend to leave as 
soon as they regain eligibility for subsidized job-based or public 
coverage. However, for those who must remain longer, various market 
practices encourage churning or make it increasingly unaffordable to 
remain covered.
    Age rating makes it difficult to afford coverage over time. 
Insurers typically charge people in their early sixties three to six 
times the premium for people in their early twenties. The slope of this 
age climb varies, but often age adjustments are modest for young 
adults, becoming more pronounced for people in their fifties and early 
sixties, not coincidentally, when the incidence of many high-cost 
medical conditions also increases.



    Durational rating is used by many insurers to increase premiums 
based on the tenure of the policyholder. The predictive power of 
medical underwriting wears off over time; policyholders who were young 
and healthy when they first applied for coverage tend not to remain 
that way. By applying tenure surcharges, insurers encourage those 
enrollees who are still healthy to apply for new coverage, and resubmit 
to medical underwriting, in order to hold premiums down. This practice 
has the effect of segregating policyholders who have gotten sick, 
forcing their premiums even higher.
    In a related practice, insurers may introduce new policies into the 
marketplace every few years, leaving older policies in force but no 
longer actively marketed. With freshly underwritten applicants diverted 
to new policies, the claims experience of the ``closed'' policies 
deteriorates, driving up premiums. People healthy enough to leave the 
closed block will do so, further escalating premiums for those with 
health problems who are stranded.\3\
    A recent health insurance survey of family farm and ranch 
operators, who rely disproportionately on the individual health 
insurance market, found high rates of financial burden due to these 
kinds of market practices.\4\
    How reform can help.--Congress can and must change the rules of the 
health insurance marketplace so that insurers no longer compete on the 
basis of risk selection, but instead, on the basis of efficiency and 
customer service. All policies should be sold on a guaranteed-issue 
basis.
    Premiums should be determined based on community rating.* Pre-
existing condition exclusions should end. Federal minimum standards for 
health insurance should be strengthened so that these protections apply 
to all types of health coverage. Vigorous oversight to ensure 
compliance is also essential.
---------------------------------------------------------------------------
    * As an alternative, some have suggested modified community rating 
that would allow premium adjustments for age but not health status. 
Because income generally increases with age, it is argued, age 
adjustments would be more equitable. However, income does not rise 
nearly as fast with age as do health insurance premiums. For example, 
median household income at age 55 is only 30 percent higher than for 
age 25. By contrast, under age rating, a 55-year-old's health insurance 
premium could be surcharged by a factor of 2 to 5. If modified 
community rating is adopted and income equity is a goal, premium 
subsidies will need to reach farther up the income scale for 
individuals as they age. Age rating is also problematic because age 
strongly correlates to health status. The incidence of many chronic 
conditions increases steadily with age. As a result, age rating will 
tend to disproportionately surcharge premiums for people with heart 
disease, cancer, and other conditions. If age rating is permitted, at a 
minimum, its impact on affordability of coverage for the chronically 
ill will need to be closely monitored.
---------------------------------------------------------------------------
                        ASSURE COVERAGE ADEQUACY

    Under-insurance is a serious and growing problem. In 2007, 57 
million Americans lived in families struggling with medical debt--a 33 
percent increase since 2003--and 75 percent of them had health 
insurance.\5\ Policies that fail to cover key benefits, such as 
prescription drugs, maternity care, and mental health care, can leave 
people under-insured. Likewise, caps on covered benefits leave patients 
at risk for catastrophic medical expenses. High deductibles, co-pays, 
and other cost sharing are also problematic.
    In an effort to offset rising premiums and stem coverage loss, the 
content of coverage under many health insurance plans and policies has 
eroded steadily. However, this strategy has proven to be ineffective. 
Coverage erosion leaves the under-insured in circumstances very similar 
to the uninsured--they forego or delay needed medical care due to 
costs, experience poorer quality care, and suffer financial burdens.\6\
    Coverage adequacy is particularly important for patients with 
chronic conditions. Even modest co-pays for services can accumulate to 
burdensome levels for patients who need medical care and prescriptions 
on a regular basis. For example, a study of the effect of doubling 
prescription drug co-pays--from $6 to $12 for generic drugs and from 
$12 to $25 for brand name drugs--found that patients with diabetes, 
hypertension, and depression reduced use of their respective 
medications by nearly one-quarter.\7\ Failure to properly manage 
chronic conditions often leads to the development of more serious and 
expensive medical complications. Under-insurance among the chronically 
ill should be viewed as a threat to public health. There is also 
evidence high-cost sharing is exacerbating collections problems and 
fueling bad debt for hospitals and doctors.\8\
    How reform can help.--A key goal of health reform must be to ensure 
that all people have adequate coverage. Minimum standards for what 
health insurance covers must be developed and explicitly take into 
account what insured patients will be left to pay out-of-pocket when 
they need medical care. Research finds that when out-of-pocket spending 
for health care services exceeds just 2.5 percent of family income, 
financial pressures on families from medical bills increase 
dramatically. Financial burdens arise for low-income families at even 
lower levels of out-of-pocket spending.\9\ Accordingly, the design of 
all health insurance plans and policies must consider the care needs of 
patients with cancer, diabetes, heart disease and other serious medical 
conditions. Coverage for care needs of people when they are healthy--
primary and preventive care services and maternity care--must also be 
included. Cost sharing must be held to modest levels and further 
subsidized for low-income individuals.
    A condition of insurer participation in a health insurance Exchange 
must be the offering of policies that meet minimum coverage standards. 
The elimination of substandard coverage options will not only address 
the problem of under-insurance, it will reinforce risk spreading. When 
all policies provide adequate coverage, people will not sort themselves 
by risk status across plans that offer widely varying levels of 
insurance protection.

                          ASSURE AFFORDABILITY

    Overwhelmingly, the uninsured lack coverage today because they 
cannot afford it. Most uninsured have incomes below twice the Federal 
poverty level. Significant assistance is needed to make coverage 
affordable. As just discussed, artificially depressing premiums by 
offering substandard policies will not help.
    Affordability must be measured against the cost of comprehensive 
coverage. Job-based group health plans offered by large employers today 
suggest one benchmark for the likely cost of adequate coverage. Such 
plans currently cost approximately $4,800 per year for self-only 
coverage and $13,000 for family coverage.\10\
    How reform can help.--Subsidies are essential to make coverage 
affordable for millions of uninsured Americans. Defining affordability 
will certainly entail some subjective judgments. However, economic 
studies of consumer spending suggest health insurance may be affordable 
for middle-income families as long as premiums do not exceed 4 to 8 
percent of household income, with lower affordability thresholds for 
lower income families.\11\ A similar standard has been adopted by the 
State of Massachusetts in determining its premium subsidies and 
affordability index, and as a result, subsidies for both premiums and 
cost sharing are available for individuals and families with income to 
300 percent of the poverty. Residents with income to 500 percent of 
poverty are ineligible for subsidies but may receive a waiver of the 
requirement to buy health insurance on grounds of affordability.

                            COST CONTAINMENT

    Since 1999, employer-sponsored insurance premiums have more than 
doubled, well outpacing inflation and the rise in earnings.\12\ In 2007 
total national health expenditures reached $2.2 trillion, or more than 
$7,400 per capita and more than 16 percent of GDP.\13\ All indications 
are that unless we take action through health care reform, health 
spending will continue to rise at levels beyond what families, 
employers, and taxpayers can afford.\14\
    In today's private health insurance markets, competition between 
carriers does not help control costs. Quite the opposite, data show 
there is a high degree of concentration among insurers, with just a 
handful of carriers accounting for the majority market share in most 
States. Insurers have not used their market power to negotiate 
favorable provider rates or otherwise control costs as might be 
expected; rather, they've passed on health care costs to consumers 
while increasing profitability at the same time.\15\
    How reform can help.--Health insurance markets can be better 
organized to generate new forms of competition and more effective cost 
containment strategies. First and foremost, once all policies meet 
standards for comprehensive coverage, it will be easier for consumers 
to shop on the basis of price prompting insurers to behave more cost 
effectively.
    As is the case in Massachusetts, the Exchange could also be given 
authority to negotiate with health insurers over premiums and to 
exclude the least efficient and effective carriers from participation. 
The Exchange might also adopt minimum loss ratio targets, adopt 
standards for broker commissions, and institute other expectations of 
efficiency to lower health insurance administrative costs.
    Importantly, a public health insurance plan option should also be 
offered to heighten competitive pressures to contain costs. A public 
health insurance plan can substantially influence market innovation by 
investing in new approaches to disease management or more effective use 
of information technology. Such innovations should be freely shared 
with other insurers so they could adopt them at lower cost. A public 
health insurance plan also could induce other insurers to be tougher 
price negotiators with providers.
    The issue of a public health insurance plan option has prompted 
concern that it would constitute unfair competition with private 
insurance companies, and might even result in the elimination of 
private insurers over time. However, experts suggest a different 
outcome seems as or more likely because a public health insurance plan 
will face other unique constraints. In particular, health care 
providers have been formidable in their exercise of political pressure 
to oppose payment rate cuts under Medicare, as evidenced by Congress' 
vote to prohibit Medicare from negotiating prescription drug price 
discounts under the Part D program. While a public health insurance 
plan will likely enjoy some cost advantages over private insurers, 
political constraints will prevent it from exploiting those 
advantages.\16\
    In addition, it is important to remember how private insurers have 
benefited from public programs by shifting costs to them. Thanks to 
Medicare, the private market no longer finances most medical care for 
the elderly and disabled, nor for patients with ESRD and ALS. Medicaid 
eligibility categories now include women with breast and cervical 
cancer who are under-insured for this care. Three-fourths of States 
have opened high-risk pools for uninsurable residents whom private 
insurers refuse to cover. In 2000, Minnesota's attorney general found 
private health insurers were shifting to taxpayers the cost of mental 
health care it contracted to provide its beneficiaries by forcing 
policyholders, through claims delays and denials, to turn to public 
programs for mental health care.\17\ Offering a public health insurance 
plan option also ensures that the sickest patients will always have a 
source of affordable, adequate health coverage in the event that some 
private insurance companies do not immediately cease cost avoidance 
activities.

                    TRANSPARENCY AND ACCOUNTABILITY

    Finally, transparency of information is critical in a competitive 
market where consumers have choices. Lack of transparency promotes 
inefficiency and bias in consumer choices.\18\ Health insurance 
policies are complex and confusing for consumers, who often do not 
understand what type of coverage they have or how it works.\19\ One 
industry survey found that less than one-fourth of consumers understand 
the terminology in their health insurance contracts; and rather than 
try to read their policy, most would prefer to prepare their income 
taxes or go to the gym.\20\
    Greater transparency in market behaviors will also be needed to 
ensure accountability. Compliance with market rules must be closely 
monitored and enforced if we want insurers to cease competition on the 
basis of risk selection.
    How reform can help.--In an organized marketplace, there can be 
rules to ensure that insurance products are understandable. One 
important task of an Exchange must be to provide more and better 
information about health insurance than most consumers have today. The 
Commonwealth Connector, for example, designates types of health 
insurance plans as gold, silver, and bronze to make it easier for 
consumers to compare across option. In addition, the Connector makes 
available plan comparison tools that highlight differences in key plan 
features such as deductibles, co-pays, and benefit limits.\21\ Members 
of Congress and other participants in the Federal Employees Health 
Benefits Program (FEHBP) have on-line access to full health insurance 
policy language for each available plan option. Under health reform, 
the Exchange should require all health insurance policies to be 
available for public inspection at all times in order to promote 
transparency.
    If a goal of reform is to encourage health insurers to compete on 
the basis of efficiency, this information must also be readily 
available. In Washington State, for example, the Office of the 
Insurance Commissioner (OIC) makes available a Health Carrier 
Information Comparison tool with information about carrier loss ratios, 
profit margins and other characteristics to help consumers see how much 
of their premium dollars are spent on medical claims vs. administrative 
costs.\22\ Health insurers should be required to disclose plan loss 
ratios including detailed information about administrative costs by 
type and amount. In addition, price transparency will help consumers 
and providers see and compare variation in prices (charged and allowed) 
for different health care services.
    The Exchange should also collect data to hold health plans 
accountable for compliance with nondiscrimination rules. Insurer 
marketing, rating, and plan administration practices that might be used 
to evade such rules must be monitored. Disclosure must include data on 
applications, enrollment and disenrollment by plan, including 
demographic and health status characteristics. Rating of policies at 
issue and renewal must also be monitored. In addition, it will be 
important to track claims handling practices, including payment denials 
and delays, with detail disclosed on type of service and patient 
diagnosis. Data on grievance and appeals procedures and outcomes will 
also be needed.
    In recent months, accountability and transparency have become 
watchwords in our effort to strengthen financial markets and the 
economy generally. These themes must also apply to health insurance and 
guide your efforts on health care reform.

                               End Notes

    1. See committee hearing transcript at http://oversight.house.gov/
story.asp?ID=2089. See also Girion, L., ``Health insurer tied bonuses 
to dropping sick policyholders,'' Los Angeles Times, November 9, 2007.
    2. ``Individual Health Insurance: An Update'' Henry J. Kaiser 
Family Foundation, August 2004. http://www.kff.org/insurance/7133.cfm.
    3. ``On their own,'' Consumer Reports, January 2008. Available at 
http://www.consumerreports.org/health/insurance/health-care-on-your-
own-1-08/overview
/health-care-on-your-own-ov.htm.
    4. ``2007 Health Insurance Survey of Farm and Ranch Operators'' 
Issue Brief No. 3, The Access Project, September 2008. Available at 
http://accessproject.org/adobe/issue_brief_no_3.pdf.
    5. Cunningham, P., ``Tradeoffs Getting Tougher: Problems Paying 
Medical Bills Increase for U.S. Families, 2003-2007'' Center for 
Studying Health System Change, Tracking Report No. 21, September 2008.
    6. Schoen, C., et al., ``How Many Are Underinsured? Trends Among 
U.S. Adults, 2003 and 2007,'' Health Affairs, Web exclusive (June 10, 
2008).
    7. Goldman, D, et al., ``Pharmacy Benefits and Use of Drugs by the 
Chronically Ill,'' Journal of the American Medical Association, Volume 
291, No. 19, May 19, 2004.
    8. See for example, ``Hospital Strategies for Addressing Out-of-
Pocket,'' Healthcare Financial Management Association Roundtable, 
October 1, 2008. Available at http://www.allbusiness.com/company-
activities-management/operations/11664702-1.html. See also Cash, 
Cheryl, ``Adding up the cost of high-deductible health care plans: 
Quality care, billing and collection challenges face many pediatricians 
as more families switch to consumer-driven health insurance,'' AAP 
News, Volt. 28, No. 1, January 1, 2007.
    9. Cunningham, P. et al., ``Living on the Edge: Health Care 
Expenses Strain Family Budgets'' Center for Studying Health System 
Change, Research Brief No. 10, December 2008.
    10. ``Employer Health Benefits 2008 Annual Survey,'' Henry J. 
Kaiser Family Foundation and Health Research and Educational Trust, 
available at http://ehbs.kff.org/pdf/7790.pdf.
    11. Blumberg, L., et al., ``Setting a Standard of Affordability for 
Health Insurance Coverage'' Health Affairs Web Exclusive, June 4, 2007.
    12. Kaiser Family Foundation. http://ehbs.kff.org/pdf/7790.pdf.
    13. http://www.cms.hhs.gov/NationalHealthExpendData/
02_NationalHealth
AccountsHistorical.asp#TopOfPage.
    14. http://www.cms.hhs.gov/NationalHealthExpendData/Downloads/
proj2007
.pdf.
    15. Robinson, J., ``Consolidation and the Transformation of 
Competition in Health Insurance,'' Health Affairs, Volt. 23, No. 6, 
November/December 2004.
    16. Holahan, J. and Blumberg, L., ``Can a Public Insurance Plan 
Increase Competition and Lower the Costs of Health Reform?'' The Urban 
Institute, 2008. http://www.urban.org/UploadedPDF/
411762_public_insurance.pdf.
    17. Hausman, K., ``Insurer Admits Errors, Agrees to Implement 
Parity,'' Psychiatric News Vol. 36, No. 14, July 20, 2001.
    18. Gabix, Xavier and Daibson, David, ``Shrouded Attributes, 
Consumer Myopia, and Information Suppression in Competitive Markets,'' 
The Quarterly Journal of Economics, Volt. 121, No. 2, PP. 505-540, May 
2006. http://www.mitpressjournals.org/doi/abs/10.1162/
qjec.2006.121.2.505.
    19. Reschovsky, J., and Hargraves, J.L., ``Health Care Perceptions 
and Experiences: It's Not Whether You are in an HMO, It's Whether You 
Think You Are,'' Center for Studying Health System Change, Issue Brief 
No. 30, September 2000.
    20. ehealth, Inc., ``New Survey Shows Americans Lack Understanding 
of Their Health Coverage and Basic Health Insurance Terminology,'' 
January 3, 2008, available at http://www.marketwire.com/press-release/
Ehealth-Inc-NASDAQ-EHTH-806855.htm.
    21. See http://www.mahealthconnector.org.
    22. See https://fortress.wa.gov/oic/hcis/public/
comparisonhome.aspx.

    Senator Bingaman. Thank you very much.
    Ms. Ignagni. 

    STATEMENT OF KAREN IGNAGNI, M.B.A., PRESIDENT AND CEO, 
        AMERICA'S HEALTH INSURANCE PLANS, WASHINGTON, DC

    Ms. Ignagni. Thank you, Mr. Chairman, members of the 
committee. It is a pleasure to be here.
    Our members are providing health insurance services to over 
225 million people through a diversified product mix. We are 
committed to reform, as Mr. Williams indicated. He is a member 
of our board of directors and has been a leading member of the 
committee on the board that has worked to propose solutions to 
the problems that you are talking about today.
    Our members believe that health insurance reform needs to 
be done this year. We want to participate with you in helping 
to get legislation passed. We believe that the legislation 
needs to have three parts--universal access, cost containment, 
and modernization--to bring us into the 21st century and begin 
to pay for value, not volume. We have offered very specific 
proposals in each of these areas that are outlined in our 
testimony.
    In addition, as to the matter before you this morning, we 
took the responsibility to look at the issues that affect our 
industry. We have considered them very carefully, and we have 
proposed major changes that can be made to ensure that no one 
will fall through the cracks, that no one is discriminated 
against because of a pre-existing condition, and that there is 
guaranteed issue.
    Second, today we have sent a letter to the committee to 
outline jointly with the Blue Cross Blue Shield Association a 
package of solutions that, if implemented together, can phase 
out the practice of varying premiums based on health status. We 
are committed to giving Americans health security.
    There have been certain aspects of the market that has 
caused it to work the way it does. We are very much interested 
in engaging with you about what those issues are, how we 
believe we can solve them, and how we can demonstrate to the 
committee and to the Nation that our members can be counted 
upon to offer transparent, equitable, safe, fair health 
insurance products. We are delighted to be here this morning.
    Thank you.
    [The prepared statement of Ms. Ignagni follows:]

              Prepared Statement of Karen Ignagni, M.B.A.

                                SUMMARY

    AHIP's members believe that health care reform legislation needs to 
be enacted and signed into law this year. Our Board of Directors has 
devoted hundreds of hours to the development of policy proposals for 
building a stronger health care system. From the outset, we have 
committed to a series of proposals that would transform the health care 
system. Our Board has made it clear that it does not view the status 
quo as acceptable, and it is deeply committed to helping this 
committee, the Congress, and the Administration achieve workable 
reforms.
    In December 2008, the AHIP Board announced a comprehensive proposal 
for restructuring the health care system with these cornerstone goals: 
achieving universal coverage, reducing the future growth rate of health 
care costs, and improving quality of care. To ensure that no one falls 
through the cracks of the U.S. health care system, our proposals 
include insurance market reforms addressing guaranteed coverage for 
people with pre-existing medical conditions, portability of coverage, 
continuity of care, and other solutions for addressing the concerns we 
heard during a nationwide listening tour we conducted last year as part 
of AHIP's ``Campaign for an American Solution.'' Our written testimony 
outlines specific proposals addressing three major priorities:

    Insurance Market Reforms to Provide Affordable, Portable Coverage 
to All Americans:

     Improving the individual market.
     Helping small business.
     Strengthening the small group market.
     Establishing an essential benefits plan.
     Confronting cost-shifting.
     Improving public programs.
     Protecting Americans from bankruptcy.

    Containing Health Care Costs:

     Setting a goal for reducing the future rate of growth in 
health care costs.

    Steps for Creating a High-Value Health Care System:

     Incentives for more effective and coordinated delivery of 
care.
     Prevention, early treatment, and coordinated care for 
chronic conditions.
     Uniform standards for quality, reporting, and information 
technology.
     Comparative effectiveness research.
     Targeted investments in public health infrastructure.
                                 ______
                                 
                            I. INTRODUCTION

    Senator Bingaman, Senator Enzi, and members of the committee, I am 
Karen Ignagni, President and CEO of America's Health Insurance Plans 
(AHIP), which is the national association representing approximately 
1,300 health insurance plans that provide coverage to more than 200 
million Americans. Our members offer a broad range of health insurance 
products in the commercial marketplace and also have demonstrated a 
strong commitment to participation in public programs.
    We appreciate this opportunity to testify on solutions for 
achieving health care reform and how insurance reforms are integral to 
this effort. We believe that legislation needs to be enacted and signed 
into law this year, and we are committed to playing a meaningful role 
in this debate. To that end, we have worked hard to bring tangible 
strategies to the discussion that will address market issues, make the 
system more affordable, and facilitate the modernization that needs to 
occur in the delivery of health care services.
    In December 2008, the AHIP Board announced a comprehensive proposal 
for restructuring the health care system with these cornerstone goals: 
achieving universal coverage, reducing the future growth rate of health 
care costs, and improving quality of care.
    The AHIP proposal is the culmination of 3 years of policy work by 
our Board of Directors, which has focused on developing workable 
solutions to the health care challenges facing the Nation. It also 
responds to the concerns and incorporates the ideas that were raised by 
the American people during a nationwide listening tour we conducted 
last year as part of AHIP's ``Campaign for an American Solution.'' This 
listening tour included roundtable discussions involving Americans from 
all walks of life, including people with and without insurance, small 
business owners and their employees, union leaders and members, elected 
officials, and community leaders.
    Since June 2008, our Board has held eight in-person meetings and 11 
conference calls, devoting hundreds of hours to the development of 
policy proposals for building a stronger health care system. From the 
outset, our community has committed to a series of proposals that would 
transform the health care system. Our Board has made it clear that it 
does not view the status quo as acceptable, and it is deeply committed 
to helping this committee, the Congress, and the Administration achieve 
reforms that work and become the building blocks on which a uniquely 
American system can be built.

 II. INSURANCE MARKET REFORMS TO PROVIDE AFFORDABLE, PORTABLE COVERAGE 
                            TO ALL AMERICANS

    As this debate moves forward, we believe all participants in the 
health care system have a responsibility to play a leadership role in 
identifying strategies in their sectors that will allow the Congress to 
pass health care reform legislation that will work and that can be 
sustained.
    Rather than build on the existing regulatory structure, we are 
proposing a fundamental overhaul that would bring all individuals into 
the system, and allow major changes to be made that would ensure that 
all Americans can obtain affordable health insurance and do so 
irrespective of their health care history. We are proposing a series of 
policy changes which, if implemented together, will ensure that no one 
falls through the cracks, that coverage will be portable, and that 
information will be given to consumers that they need and want. To 
achieve these goals, the following steps are necessary:

Helping to Ensure Portability and Continuity of Coverage for Consumers 
        in the 
        Individual Market
     Ensuring that no one falls through the cracks by combining 
guarantee-issue coverage (with no pre-existing condition exclusions) 
with an enforceable individual mandate: For guarantee-issue to work, it 
is necessary for everyone to be brought into the system and participate 
in obtaining coverage. Achieving this objective will require specific 
attention to the mechanisms for making the mandate enforceable and will 
require coordinated action at multiple levels of government.
    Indeed, the importance of combining guarantee issue with an 
enforceable individual mandate is borne out by research and experience 
from the States. For example, a report by Milliman, Inc. found that 
States that enacted guarantee-issue laws in the absence of an 
individual coverage requirement saw a rise in insurance premiums, a 
reduction of individual insurance enrollment, and no significant 
decrease in the number of uninsured.
     Ensuring fairness in the tax code: Currently, individuals 
purchasing insurance on their own cannot deduct expenses for health 
insurance coverage unless total health care expenses exceed 7.5 percent 
of adjusted gross income. This should be corrected to promote tax 
equity and help make health care more affordable whether coverage is 
obtained through an employer or the individual market.
     Ensuring a stable market for consumers: A broadly funded 
mechanism which spreads costs for high-risk individuals across a 
broader base needs to be put in place to ensure premium stability for 
those with existing coverage.
     Ensuring that coverage is affordable for lower-income 
individuals and working families: Refundable, advanceable tax credits 
should be available on a sliding scale basis for those earning less 
than 400 percent of the Federal Poverty Level (FPL), as discussed 
below.

Helping Small Business Provide Health Care Coverage More Affordably
    Small business owners find themselves in an increasingly difficult 
marketplace for health insurance because of constantly rising health 
care costs and the limited ability of most small businesses to bear 
risks, contribute a substantial share of costs, or support 
administrative functions. On March 9, AHIP's Board of Directors 
approved a policy statement outlining solutions to help small business 
based on the following three core principles:

Affordability

     Essential Benefits Plan: As discussed below, we propose 
the creation of new health plan options that are affordable for small 
employers and their employees. These ``essential benefits plans'' would 
be available nationwide and provide comprehensive coverage for 
prevention and wellness as well as chronic and acute care. In addition, 
these plans would be subject to State regulation, but would not be 
subject to varying and conflicting State benefit mandates that result 
in increased costs to small businesses (and that do not apply to the 
generally larger employers that enter into self-funded health care 
coverage arrangements).
     Tax Credits or Other Incentives to Assist Small Business: 
We support the establishment of tax code incentives or other types of 
assistance that encourage both small business owners to offer coverage 
to their employees and employees to take up coverage. We recognize the 
special challenges, both administrative and financial, that small 
businesses face in offering contributions toward their employees' 
coverage. Providing assistance can encourage these contributions and 
help enable employees to take up coverage which improves predictability 
and stability in the small group market.
     Improving Coordination of Private and Public Programs 
Strengthens Small Group Coverage: Premium or other assistance offered 
to low-income individuals and working families can be applied to and 
work with employer-sponsored coverage. This is important whether the 
assistance is provided through Medicaid, the Children's Health 
Insurance Program (CHIP), or other expanded programs designed to help 
individuals and families obtain coverage. Improved coordination allows 
workers to take up coverage offered by small businesses by leveraging 
both public and private sources of assistance, and benefits the firms' 
employees as a whole by increasing rates of participation in the small 
group plan.

Flexibility
    We are committed to working with the small business community to 
ensure that small businesses have access to a range of options and 
tools that better assist them in helping their employees obtain health 
care coverage. One-size-does-not-fit-all, as the needs of diverse small 
firms vary greatly.

     Micro-firms: As an example, ``micro-firms'' (those with 
fewer than 10 employees) face special challenges in offering coverage. 
Statistics show that only about one-third of these firms offer 
coverage. This reflects the administrative, financial, and logistical 
challenges many micro-firms face in setting up and establishing plans 
and offering and contributing to their employees' coverage. To help 
these firms meet these challenges, enhanced tools could be developed 
that would allow those micro-firms that have found it impractical to 
offer coverage, to contribute to coverage purchased on a pre-tax basis 
by individual employees. As part of comprehensive health care reform, 
employees could then use these contributions to help purchase coverage 
in a reshaped health care system that combines an individual 
requirement to obtain coverage with reforms in the individual market.
     One-stop information source: All small firms will benefit 
from collaborative efforts between health plans and the public sector 
(e.g., insurance commissioners) to ensure that small employers and 
individuals have one-stop access to clear, organized information that 
allows them to compare coverage options. This one-stop shop could also 
allow individuals to confirm eligibility for tax credits or other 
assistance and even provide a mechanism to aggregate premium 
contributions from multiple sources. By providing a mechanism to 
combine even modest contributions from multiple sources (public and 
private), this new one-stop shop could be especially helpful to 
employees who may hold multiple jobs.

Simplicity
    Small businesses may find the current system difficult to navigate 
with a lack of simple, streamlined information about multiple coverage 
and care options and related assistance programs. We propose 
modifications to introduce greater simplicity to the system through 
technology and regulatory reform and the creation of a one-stop 
information source as described above. These proposed efforts will 
benefit all participants in the health care system, including the small 
business community.

     Technological advances: In our December 2008 Board 
statement, we emphasized that any health care reform proposal should 
include recommendations to streamline administrative processes across 
the health care system. Success will require advances in automating 
routine administrative procedures, expanding the use of decision 
support tools in clinical settings, and implementing interoperable 
electronic health records. Using technology to help streamline 
administrative processes will improve care delivery, enhance the 
provider and patient experience, and speed claims submission and 
payment. Done right, streamlining can also help reduce costs 
systemwide, leading to improved affordability.
     Regulatory reform: Regulatory structures should be 
rethought so that they work better and provide for a more consistent 
approach in areas such as external review, benefit plan filings, and 
market conduct exams. In a reformed market, policymakers should be 
driven by striking a balance between the traditional roles of the 
Federal Government and the States, and the objectives of achieving 
clearer and ``smarter'' regulation that promotes competition and avoids 
duplication of existing functions. Greater consistency in regulation 
and focusing on what works best will enhance consumer protections 
across States and help improve quality, increase transparency, and 
increase efficiency leading to reduced administrative costs.

Strengthening the Large Group Market
    We support building upon the existing employer-based system, which 
currently covers 177 million Americans according to the U.S. Census 
Bureau. It is a key part of our economic fabric. Although the employer-
based system faces challenges, more than 90 percent of employers report 
that offering high-quality coverage is important to their ability to 
recruit and retain valuable workers and enhance employee morale. Thus, 
as a first priority, the Nation's reform agenda should be committed to 
a policy that ``first does no harm'' to that system and limits 
strategies that would reduce employer coverage. Focus should be placed 
on retaining a national structure for the large group market that 
continues to promote uniformity and ensures the smooth functioning of 
the employer-based system.
    At the same time, the Nation's economic uncertainties and job 
losses underscore the need for new strategies to assist individuals who 
become unemployed or are transitioning from job to job. While a 
Congressional Budget Office (CBO) study found that nearly 50 percent of 
the uninsured go without coverage for 4 months or less, additional 
protections are still needed. We propose ensuring that tax credits are 
available to individuals on an advanceable basis to help them through 
job transitions along with access during these times to more affordable 
coverage options consistent with our proposal for a basic benefits 
plan.

Establishing an Essential Benefits Plan
    Individuals and small businesses should have access to an 
affordable ``essential benefits plan'' available in all States that 
provides coverage for prevention and wellness as well as acute and 
chronic care. To maintain affordability, the essential benefits plan 
should not be subject to varying and conflicting State benefit 
mandates.
    An essential benefits plan should include coverage for primary 
care, preventive care, chronic care, acute episodic care, and emergency 
room and hospital services. Alternatively, it should include coverage 
that is at least actuarially equivalent to the minimum Federal 
standards for a high-deductible health plan sold in connection with a 
health savings account, along with the opportunity to include 
enhancements such as wellness programs, preventive care, and disease 
management.
    Allowing benefit packages to vary based on actuarial equivalence is 
crucial to ensure that any package can evolve based upon new 
innovations in benefit design and the latest clinical evidence.

Confronting the ``Cost-Shifting Surtax'' Currently Imposed On Employers 
        And Consumers Purchasing Health Care Coverage
    As part of any national health care reform initiative, Congress 
must address the fact that reducing outlays in one area inevitably 
means shifting costs elsewhere. Underpayment of physicians and 
hospitals by public programs shifts tens of billions in annual costs to 
those with private insurance. A December 2008 study by Milliman, Inc. 
projects that this cost shifting essentially imposes a surtax of $88.8 
billion annually on privately insured patients, increasing their 
hospital and physician costs by 15 percent. This study concluded that 
annual health care spending for an average family of four is $1,788 
higher than it would be if all payers paid equivalent rates to 
hospitals and physicians. The transfer of these costs to those with 
private coverage cannot be sustained and is critical to addressing 
concerns over affordability.
    The impact of cost-shifting is dramatically illustrated by the 
tables below, which use real data showing that hospitals in California 
recorded significant losses in 2007 by serving Medicare and Medicaid 
beneficiaries. These losses are offset, however, by higher costs 
charged to commercial payers. This cost shifting translates into higher 
premiums for working families and employers.

                                    Hospital Net Income Figures in California
                                                  [In millions]
----------------------------------------------------------------------------------------------------------------
                                                         Medicare and         Commercial             Total
                                                           Medicaid      ---------------------------------------
                        Year                         --------------------
                                                         DSH     Non-DSH     DSH     Non-DSH     DSH     Non-DSH
----------------------------------------------------------------------------------------------------------------
2001................................................       256    (1051)       137      1621     (825)       853
2007................................................     (914)    (4292)       790      6230    (1450)      1852
----------------------------------------------------------------------------------------------------------------


 Hospital Payments to Non-DSH Hospitals Relative to Costs in California
                              [In Percent)
------------------------------------------------------------------------
                  Year                    Commercial  Medicare  Medicaid
------------------------------------------------------------------------
2001....................................         117        98        67
2007....................................         142        85        56
------------------------------------------------------------------------


                 Non-DSH Hospital Margins in California
                              [In Billions)
------------------------------------------------------------------------
                  Year                    Commercial  Medicare  Medicaid
------------------------------------------------------------------------
2001....................................         2.0     (0.2)     (0.9)
2007....................................         6.2     (2.4)     (1.9)
------------------------------------------------------------------------

    In addition, the U.S. currently spends approximately $50 billion 
each year to provide health services to those without coverage, leading 
to high levels of uncompensated care. This too results in cost-shifting 
to those with coverage in the form of higher premiums and other related 
costs. According to a 2005 Families USA study, the cost-shift due to 
uncompensated care adds $922 annually to family premiums. When these 
costs associated with uncompensated care are combined with the cost 
shifting that results from the underfunding of Medicare and Medicaid, 
the impact for families with private coverage is an overall surtax of 
$2,710 annually due to cost-shifting.

Improving Public Programs
    For health care reform to succeed, we also need to improve the 
public safety net. We strongly supported the funding that is committed 
to this priority by H.R. 2, the ``Children's Health Insurance Program 
Reauthorization Act of 2009'' (CHIPRA). We also support extending 
Medicaid eligibility to all individuals with incomes at or below 100 
percent of the FPL. In addition, adequate support should be provided to 
community health centers, recognizing the critical role they play in 
providing access to services for vulnerable populations and to ensure 
they can continue this role in the future.

Protecting Americans from Bankruptcy
    To guard against medical bankruptcy, a system of tax credits should 
be designed for lower-income individuals and working families that 
would cap their total health care expenses (to include spending on 
premiums and cost-sharing) as a proportion of income. Achieving the 
goal of universal coverage is also critical to preventing medical 
bankruptcies, as research shows medical expense related bankruptcy is 
most prevalent among those without health insurance coverage.

                   III. CONTAINING HEALTH CARE COSTS

    A broad consensus is emerging that reform of the system--that 
covers all Americans and provides safer and more effective care--is 
possible if we can contain the future growth in health care costs. At 
present, U.S. health expenditures are rising at an unsustainable rate, 
placing unaffordable burdens on families and small businesses, and 
hampering our competitiveness as a nation. In order to confront these 
issues, all stakeholders need to be challenged to innovate, perform 
better, and come to the table with solutions.
    Health plans are leading the way by pioneering disease management 
and care coordination programs, promoting prevention, wellness and 
early intervention, and implementing innovative payment strategies that 
reward performance and outcomes. We are committed to working with the 
Administration, Congress and other stakeholders to advance strategies 
that promote effective, efficient, and high value health care.
    At the same time, efforts to make our health care system more 
affordable for the long run will succeed only if the Nation as a whole 
makes a strong commitment to reducing the future rate of increase in 
health costs and we all work together to achieve it. The critical link 
between reducing costs and increasing quality should help guide this 
effort. Spending more on health care does not necessarily equate to 
better quality; rather, the opposite has been shown. In particular, 
many regions of the Nation with higher spending actually have poorer 
quality of care and exhibit wide variations in practice and treatment 
patterns.
    Recognizing the need for bold action, we are encouraging Congress 
to consider setting a goal for reducing future health care costs over a 
10-year period and designate a public-private advisory group to develop 
a roadmap to reduce projected growth by 1.5-1.7 percentage points. The 
importance of such an effort cannot be overstated, nor can the 
responsibility that each stakeholder group must assume. Leaders in each 
sector know best about how to reduce future cost trends, and we are 
proposing a strategy where each of the key groups would be expected to 
take the lead in outlining a blueprint to reduce future cost growth in 
their sector.
    The value of launching such an effort is illustrated by the chart 
below, which shows the dramatic impact of reducing annual increases in 
the projected growth of national health expenditures by 1 percentage 
point, 1.5 percentage points, or 1.7 percentage points. The aggregate 
cost savings under any of these scenarios would be very large, with the 
third scenario--achieving a reduction of 1.7 percentage points--
yielding savings of $3.5 trillion over 10 years, or more than $700 
billion in 2018 alone.



    Reducing cost trend in this manner would strengthen the Nation's 
economic position relative to the global economy, provide significant 
relief to individuals and employers, and improve the solvency of the 
Medicare trust fund. Moreover, cost savings of this magnitude could go 
a long way toward ensuring that every American has access to 
affordable, quality coverage and care. These savings could help finance 
part of the costs of providing coverage to the uninsured, as well as 
reduce costs for those who are currently covered.
    The impact on the U.S. economy is particularly important, as the 
chart below shows. Modest reductions in cost trends would have a 
dramatic effect in holding down future projections of national health 
care spending as a percentage of our Nation's gross domestic product 
(GDP).



    A financially sustainable and affordable health care system can 
only be achieved by bringing underlying medical costs under control. If 
health care costs are allowed to continue rising at rates far exceeding 
economic growth, they will stall all efforts to expand coverage and 
improve care. Meeting specific affordability goals will require 
leadership from all stakeholders. Health plans are prepared to step up 
and meet that challenge and participate in a fast-track process with 
other stakeholder groups.

              IV. CREATING A HIGH-VALUE HEALTH CARE SYSTEM

    The goal of containing costs can only be realized if it is coupled 
with parallel efforts to improve the ability of our health care system 
to deliver high-quality care that is in line with best practices and 
addresses the disparities in care experienced by cultural and ethnic 
minorities.
    The fragmented U.S. health care delivery system is wasteful and 
unsustainable. Patients across the Nation fail to receive high quality 
care on a consistent basis, while the system overpays and encourages 
the overuse of costly specialty care, yet underpays primary care which 
fosters care coordination and chronic care management. About 18 percent 
of Medicare hospital admissions result in re-admissions within 30 days 
of discharge, accounting for $15 billion in spending and $12 billion in 
potentially preventable re-admissions.
    The total costs of preventable medical errors that result in injury 
are estimated to be between $17 billion and $29 billion--of which over 
half represent health care costs. Additional research demonstrates that 
there is an alarming gap between what is recommended by scientific 
evidence and what is actually practiced, including a 2003 RAND study 
which found that only 55 percent of patients receive treatments based 
on best practices.
    To address these challenges, we need to focus on several critical 
areas to create a high-value health care system.

     Updating and recalibrating the Medicare physician fee 
schedule. The current process for determining physician payment across 
different specialties under the Medicare program should be overhauled, 
and a transparent, public process should be created. Payment levels 
should be adjusted for cognitive and procedural services as well as 
account for gains in efficiency and provider productivity. 
Recalibrating the value of professional services will create renewed 
interest in important areas such as primary care.
     Setting standards and expectations for the safety and 
quality of diagnostics. The 2001 Institute of Medicine's landmark 
report, Crossing the Quality Chasm, recommended setting and enforcing 
explicit professional and facility standards through regulatory and 
other oversight mechanisms, such as licensure, certification and 
accreditation, that define minimum threshold performance levels for 
health care organizations and professionals. Standards will hold 
providers accountable for ensuring a safe environment in which patients 
receive care.
     Promoting care coordination and patient-centered care by 
designating a medical home as well as supporting other primary care 
delivery models. The patient-centered medical home is a promising 
concept that would replace fragmented care with a coordinated approach 
to care. By providing physicians with a periodic payment for a set of 
defined services, such as care coordination that integrates all 
treatment received by a patient throughout an illness or an acute 
event, this model promotes ongoing comprehensive care management, 
optimizes patients' health status, and assists patients in navigating 
the health care system. Other models which utilize nurses and other 
professionals to coordinate and manage patients' care also should be 
explored.
     Linking payment to quality. Payment incentives which 
reward physicians that practice both efficiently and consistently with 
clinical practice guidelines should continue to be promoted. The next 
generation of pay-for-performance models will move beyond the current 
focus of ensuring that processes of care are followed and performance 
metrics are reported, and instead, reward providers for achieving 
results including better clinical outcomes, improved patient 
experience, and lower total cost of care. Similar incentives which 
apply to hospitals also may have potential benefits.
     Bundling payments for better management of chronic 
conditions across practitioners and facilities. Bundled payments could 
allow for better management of chronic conditions by providing a single 
prospective payment for all providers involved in the management of a 
patient's condition. Under this model, providers would have shared 
accountability and responsibility, and thus be motivated to 
individually provide quality care in more efficient ways as well as 
work with other professionals to improve collective performance.
     Redesigning acute care episodes. Global case rate models--
which typically provide an all-inclusive payment for a defined set of 
services, regardless of how much care is actually provided--may be a 
beneficial payment approach for procedures and conditions which have a 
relatively clear beginning and end.
     Refocusing our health care system on keeping people 
healthy, intervening early, and providing coordinated care for chronic 
conditions. Additional proactive steps need to be taken to identify 
individuals at risk for chronic conditions, help them access care, and 
encourage them to maintain healthy lifestyles. A proactive approach 
that keeps people healthy and productive needs to: (1) address the 
growing shortage of physicians and nurses in selected disciplines, 
including primary care and general surgery; and (2) reward providers 
for spending time with patients and coordinating their care.
     Improving care nationwide by adopting uniform standards 
for quality, reporting, and information technology. AHIP strongly 
supports the investments in health information technology that were 
enacted as part of H.R. 1, the ``The American Recovery and Reinvestment 
Act of 2009.'' This legislation lays the groundwork for steps that must 
be taken to ensure that health care providers, consumers, payers, and 
policymakers have access to consistent and useful data on the quality 
of care delivered.
     Investing more in research to better understand which 
treatments and therapies work best. We need to close gaps in research, 
organize information on practices yielding the best outcomes for 
patients, and diffuse this information among practitioners and 
patients. H.R. 1, the ``American Recovery and Reinvestment Act of 
2009,'' provided $1.1 billion in Federal funding--which we strongly 
supported--to support research that will advance these important 
priorities.
     Creating accountability for consistently delivered, high-
quality care based on the best evidence. All stakeholders should 
promote the delivery of the best clinical outcomes and patient 
experience while ensuring the most effective and appropriate 
utilization of health care services. To accomplish this objective, 
investment in the development of new and improved measures that assess 
episodes of care and efficiency must be fast-tracked as part of health 
care reform.
     Making targeted investments in our public health 
infrastructure. Our public health infrastructure needs to be better 
positioned to implement strategies that prevent or ameliorate health 
care concerns and promote well-being and healthy lifestyles as part of 
health care reform. We advocate a new, targeted national initiative to 
increase public awareness of the links between preventable conditions 
and chronic illness and to support new and existing prevention programs 
in our schools, worksites, and communities. Health plans are committed 
to working directly with communities to promote safe and healthy living 
and provide models for targeted investments in public health across the 
Nation.

    The visual on the following page shows that many of the initiatives 
that have been implemented in the private sector today are paving the 
way for future innovations under a reformed health care system. 
Existing programs listed in the left column provide a valuable 
foundation for the tools and strategies of tomorrow's health care 
system.



                             v. conclusion
    AHIP appreciates this opportunity to outline our suggestions for 
enacting meaningful health care reforms. We are doing our part to 
advance new strategies, and we are strongly committed to working with 
committee members and other stakeholders to develop solutions for 
ensuring that all Americans have access to high quality, affordable 
health care coverage.

    Senator Bingaman. Thank you very much.
    Dr. Nichols.

  STATEMENT OF LEN M. NICHOLS, Ph.D., DIRECTOR, HEALTH POLICY 
     PROGRAM AT THE NEW AMERICA FOUNDATION, WASHINGTON, DC

    Mr. Nichols. Mr. Chairman, it is a real honor to be before 
you and to work with this storied committee today.
    My name is Len Nichols, and I direct a health policy 
program at the New America Foundation.
    I am here to say that our insurance markets are failing us. 
They lead to inefficiency, unnecessary human suffering, death, 
and loss of productivity from that premature death and 
prolonged morbidity. But it is important we recognize that the 
fault lies not with the people who run the insurance companies. 
The fault lies in the rules we have set for them.
    By and large, they follow the rules, and those rules are 
stupid. We need to acknowledge that smart rules can make 
markets more efficient and work better. They can make markets 
more efficient and more fair.
    The role of policy, in my view, is to set rules that 
channel self-interest to serve the public interest. Our goal 
should be to create marketplaces wherein insurers that adopt 
socially responsible business models will thrive.
    The obsolete business model that has led to all this 
inefficiency and human suffering is centered on aggressive 
underwriting and risk selection. So the simple thing to do is 
outlaw it. We want insurers to compete on price, clinical 
value-added, and consumer satisfaction, not on avoiding the 
sick and strategically denying valid claims.
    Therefore, to that end, I think it is very clear you need 
to think about rules that would end discrimination based on 
health status. You have heard a lot about that. Sounds like we 
got a consensus. Let us just do it this afternoon. End 
discrimination based on health status.
    Guaranteed issue. Sell to all comers. Guaranteed renewal. 
Some kind of modified community rating so you don't use health 
as a discriminating factor.
    Then I would say you need to avoid adverse selection. You 
have to have an individual mandate to require people to 
purchase that insurance. If you are going to ask insurers to 
take all comers, you have to make sure the population they are 
covering is the full population and not just the sick.
    Thank you very much.
    [The prepared statement of Mr. Nichols follows:]

              Prepared Statement of Len M. Nichols, Ph.D.

    Chairman Kennedy, Ranking Member Enzi, Senator Bingaman and other 
distinguished members of the committee, thank you for inviting me to 
testify today on this central topic of health reform and how best to 
organize insurance markets. My name is Len M. Nichols. I am a health 
economist and direct the Health Policy Program at the New America 
Foundation, a non-profit, non-partisan public policy research institute 
based in Washington, DC, with offices in Sacramento, CA. Our program 
seeks to nurture, advance, and protect an evidence-based conversation 
about comprehensive health care reform. We remain open-minded about the 
means, but not the goals: all Americans should have access to high-
quality, affordable health insurance and health care that is delivered 
within a politically and economically sustainable system. I am happy to 
share ideas for your consideration today and hereafter with you, other 
members of the committee, and staff.
    Insurance markets are a great place to focus on early in your 
inquiries. We know that having quality health coverage is literally a 
matter of life and death. The Institute of Medicine (IOM) estimates 
that over 18,000 Americans die every year because they do not have 
access to the timely and necessary care that health insurance 
affords.\1\ Many of us in this room take this kind of seemingly routine 
care for granted, yet I know that securing access to health insurance 
for all is a moral obligation that many members of this committee 
share.
---------------------------------------------------------------------------
    \1\ Institute of Medicine, Coverage Matters: Insurance and Health 
Care, (National Academies Press: Washington, DC, 2001).
---------------------------------------------------------------------------
    The truth is many insurance markets do not work very well for many 
of our fellow citizens. Small employer groups with fewer than 50 or 100 
members lack bargaining power, administrative economies of scale, and 
the ability to self-insure. As a result, they pay very high prices for 
coverage.\2\ Perfectly healthy and higher income individuals do 
satisfactorily well in the non-group market most of the time. However, 
those with health conditions, even fairly minor ones, often encounter 
carriers who refuse to sell to them at all or only at a greatly 
inflated price.\3\ The non-group market can never work well for those 
with serious health conditions and modest incomes.\4\
---------------------------------------------------------------------------
    \2\ The ``price'' of insurance is the ``load,'' the difference 
between the premium paid and the amount of money paid to medical 
providers for health services. Individuals pay loads between 30-40 
percent, small groups pay 25-30 percent, and large groups pay 6-15 
percent.
    \3\ Karen Pollitz and Richard Sorian, ``Is the Individual Market 
Ready for Prime Time?'' Health Affairs Web Exclusive, October 23, 2002; 
Karen Pollitz, Richard Sorian, and Kathy Thomas, ``How Accessible is 
Individual Health Insurance for People in Less-Than-Perfect Health?'' 
Kaiser Family Foundation, June 2001.
    \4\ Mark V. Pauly and Len Nichols, ``The Nongroup Insurance Market: 
Short On Facts, Long On Opinions And Policy Disputes,'' Health Affairs 
Web Exclusive, October 23, 2002.
---------------------------------------------------------------------------
    Even large group markets are not working all that well. Large 
employers are increasingly focused on cost and quality issues as much 
as and in some cases more than everyone else. Most large employers 
self-insure because they concluded long ago that they were not getting 
value for the risk-bearing services they were buying from insurers. 
Today, many large employers just buy claims processing and provider 
contracting services. Furthermore, many employers actually engage in 
benefit design and care management efforts themselves, sometimes in 
concert with insurers acting as third-party administrators, but often 
alone.
    Thus, insurance markets need to be reformed--and some people must 
be given substantial subsidies--for us to reach the goal of covering 
all Americans in a sustainable way.
    I will get specific in short order, but I prefer to start with a 
big picture perspective. To reform our health system generally and our 
insurance marketplaces specifically, we must re-align incentives quite 
profoundly. The role of policy is to set the rules so that self-
interest is channeled to serve the social interest. We have not done 
this very well with regard to insurance regulation, either at the 
Federal or State levels. We can do far better.
    Our goal should be to create marketplaces wherein insurers who 
adopt socially responsible business models will thrive. The obsolete 
business model that has inflicted so much inefficiency and human 
suffering on so many is centered on aggressive underwriting and risk 
selection. Under this model, insurers compete to insure the best risks 
and avoid the sick at all costs. Americans will be much better served 
by rules that make it unprofitable and illegal to continue these 
strategies.
    It is necessary to institute rules that will encourage insurers to: 
interact with enrollees efficiently, respectfully, and transparently; 
help us get and stay healthier; identify outstanding and efficient 
providers and use information tools and incentives to help them deliver 
better care; and, structure payments to providers so that continuous 
quality improvement is embedded in every care process, regardless of 
whether the care is being delivered in the physician's office, the 
hospital, or elsewhere. In other words, we want to create markets 
wherein insurers compete based on price, clinical value-added, and 
consumer satisfaction, rather than on avoiding the sick and 
strategically denying claims.

                           NECESSARY REFORMS

    The following reforms are necessary to create an insurance market 
that is accessible and affordable for all:

    A new marketplace that extends the advantages of large group 
purchasing--large, balanced risk pools and administrative economies of 
scale--to all. This new marketplace or ``exchange'' could be organized 
nationally. But insurance markets, like health service markets, are 
inherently local. The conditions on the ground vary quite a bit across 
the country and even within States. For example, integrated health 
systems, large multi-specialty physician groups, and effective and 
responsive local non-profit health plans are not as widespread as most 
of us would prefer. Therefore, creating several marketplaces or 
exchanges on a regional, State, or sub-state level (or some 
combination), would be preferable to a single national marketplace.
    However, and this should be made abundantly clear, the most 
important rules that govern the new marketplace must be uniform across 
the country. We cannot serve all Americans well with a regulatory 
patchwork that reflects local lobbying disparities more than good 
policy sense.
    The responsibility for enforcing the new insurance regulations 
should remain with the States. As a result of their current role, 
States have more functional knowledge about regulating insurance 
companies and of the local nuances of local markets than the Federal 
Government. However, the Federal Government will need to invest in 
back-up regulatory authority if States fail to act consistently with 
the intent of Federal legislation.
    Initially, the new exchanges should subsume today's small group and 
non-group markets. This will enable people who are not eligible for 
Medicaid (or Medicare) who work in small firms or are without access to 
employer-sponsored coverage to enter right away. No residual market 
outside the exchange should be allowed for these small groups and 
individuals. This will eliminate risk selection once and for all. Over 
time, large (currently self-insured) groups might be allowed to enter 
into the market, perhaps starting with State and Federal employees. 
Care must be taken to protect against risk selection, however, so large 
groups should be allowed to come in only as a result of employer 
choice, not the choice of individual employees.
    The marketplaces should be governed by a balanced, non-profit board 
of directors appointed by political leaders. Insurers will need to meet 
specific standards in order to participate. They should be required to 
report data (for comparative performance purposes) and abide by the 
marketing rules and open enrollment period policies set by the board.
    Prohibit discrimination based on health status. No American should 
be denied coverage or charged differential premiums because of their 
health status or family history. To achieve this goal, the following 
reforms are absolutely necessary: guaranteed issue (all insurers must 
sell all products to all people within the exchange and outside the 
exchange large employers must allow all workers to join their plans at 
group rates), no exclusions based on pre-existing conditions (once 
virtually all Americans are covered), guaranteed renewability (plans 
cannot refuse to continue covering individuals or differentially change 
their premium as a result of changes to health status), and modified 
community rating (premiums may not vary based on health status, but can 
vary by age, geography, and family size).
    Minimum benefit package. All Americans should have coverage that 
protects their health and financial needs. Therefore, Congress or 
another authority should require a minimum level of benefits to 
guarantee the quality of coverage being offered in the marketplace and 
protect against adverse selection that could result from wide 
variations in product design.
    The minimum benefit standard could be designed as a specific 
minimum benefit package or an actuarial value target. An actuarial 
value test, while not as effective for market competition as a specific 
benefit minimum package, would nevertheless preserve some flexibility 
for benefit and cost-sharing design and still guarantee quality 
coverage. If done carefully, this strategy could also protect against 
extreme adverse selection.
    Risk adjustment (distributing payments to insurers based on 
differential risk profiles) will be necessary to help reduce the 
consequences of adverse selection as well. Insurers should also be 
permitted to sell supplemental products; however, these packages must 
be priced and described separately to allow consumers to easily compare 
different choices and create transparency regarding cost and value.
    Subsidies. Health care costs have risen faster than wages for some 
time. As a result, health insurance and health care have become more 
unaffordable for more and more American families every day. Therefore, 
we will need to devote substantial subsidy dollars to make health 
insurance and health care affordable for all Americans. However, 
affordability has two dimensions--for households and for governments. 
Ultimately, the final definition of affordability will reflect 
political judgments about what households and governments can afford. 
This definition may evolve over time, as will delivery system 
efficiencies, demographic trends, and economic growth.
    Reform proposals should include sliding scale subsidies for 
individuals and families who need help affording coverage (again, 
defined by the community). Subsidies could be available for both 
premiums and cost-sharing requirements (depending on the design of the 
minimum package) and made available directly or through the tax code.
    We should keep in mind that the Federal Government already spends 
more than $200 billion per year subsidizing insurance through the tax 
treatment of employer-provided health coverage. Economists, analysts, 
and courageous policymakers have argued for years that the income tax 
exclusion for employer premium payments is both regressive and 
inefficient relative to other ways to subsidize insurance coverage. The 
current employer tax exclusion is a poorly targeted subsidy that we 
could and should use to make our health system both more efficient and 
more fair. Therefore, as we think about how to finance coverage 
expansion and necessary subsidies, we should remember that some of the 
resources we have dedicated already could be targeted far more 
efficiently.
    Requirement to purchase coverage. No one suggests an individual 
mandate because they want to ``make'' people buy insurance. Rather, 
when combined with the reforms described above, a requirement to 
purchase coverage is necessary to make the insurance market function 
efficiently and fairly. Without a purchase requirement, insurers will 
legitimately fear that only the sick will buy health insurance (adverse 
selection). That fear will produce higher premium bids, which will cost 
people and governments more money. Purchase requirements will guarantee 
that the population seeking care represents the entire population. As a 
result, insurers will bid lower in a competitive context. Massachusetts 
has seen this happen in real life.
    Once insurance is accessible (through the newly reformed 
marketplace) and affordable (through subsidies), all individuals should 
be required to purchase coverage to make sure everyone pays their fair 
share and reduce the costs shifted to the insured by free riders. A 
free rider is an individual who could afford to purchase coverage, but 
does not enroll. Ten percent of the uninsured make more than four times 
the Federal poverty level.\5\ Often when a free rider gets seriously 
ill they visit a hospital emergency room and indicate that they cannot 
pay for the services provided to them. Their costs are shifted to the 
insured in the form of higher provider prices and in turn higher 
private insurance premiums. Roughly 16 percent of our uncompensated 
care expenses for the uninsured go to people who make more than 400 
percent of the poverty level.\6\
---------------------------------------------------------------------------
    \5\ Kaiser Family Foundation, ``The Uninsured, A Primer: 
Supplementary Data Tables,'' October 2008.
    \6\ Sarah Axeen and Elizabeth Carpenter, ``Who Receives 
Uncompensated Care,'' New America Foundation, March 2008.
---------------------------------------------------------------------------
    In addition, 25 percent of people eligible for public coverage at 
little to no cost do not enroll.\7\ While these individuals are not 
free riders, they still contribute to the cost-shift or ``hidden tax,'' 
which results in higher premiums for the insured. An individual mandate 
would necessitate effective outreach and enrollment efforts to minimize 
the number of people who are currently missed by the system and ensure 
this vulnerable population is taking advantage of available coverage. 
In the long run, this should help them get healthier and become more 
productive citizens.
---------------------------------------------------------------------------
    \7\ John Holahan, Allison Cook, Lisa Dubay, ``Characteristics of 
the Uninsured: Who is Eligible for Public Coverage and Who Need Help 
Affording Coverage,'' Kaiser Family Foundation, July 2007.
---------------------------------------------------------------------------
    Finally, as a condition of living in a community that helps 
individuals afford insurance and care, everyone has a personal 
responsibility to maintain their own health. Value-based design 
features in the minimum benefit package that encourage healthy eating, 
exercise, and lifestyle behaviors will help give Americans some of the 
tools they need to achieve this goal. In addition, part of taking 
responsibility for our own health includes a requirement to access 
appropriate health care services when necessary. This is possible only 
if a person is insured. Therefore, a requirement to purchase or enroll 
in available coverage represents one part of an individual's personal 
responsibility to the larger community.
    Transparency for insurers. In general, we must increase 
transparency within our insurance markets to engender fair competition 
and give consumers the information they need to make informed choices 
about the insurance products that are right for them. Insurers should 
be required to report information on the quality of care their 
enrollees are getting, as well as patient satisfaction indicators that 
will be made public by the exchanges. The Healthcare Effectiveness Data 
and Information Set (HEDIS) measures, which are continually updated by 
the National Committee for Quality Assurance (NCQA), seems like a 
reasonable place to start. Also, exchanges will want to help the public 
compare administrative efficiency by making available the ratio of 
premiums collected versus dollars spent on patient care. The risk 
profiles of enrollees will need to be reported for exchange-wide risk 
adjustment as well.

                            OPTIONAL REFORMS

    The reforms described above could achieve satisfactory performance 
from a market comprised exclusively of private health insurance plans. 
Yet, I admit that there are few real-world examples that prove this 
kind of system would function as anticipated, though reforms in 
Massachusetts are making great strides. (Since Massachusetts remains a 
work-in-progress I will not analyze it in detail in the written 
testimony but will gladly discuss my impressions of what we know so far 
in the hearing itself, or later). While my personal views lead me to 
believe that private insurers alone could enable our new marketplace to 
deliver excellent performance in the future, I understand profoundly 
that many advocates and citizens are skeptical that regulations or 
contracts will be able to ensure that private insurers actually comply 
with all reforms for all people.
    Several leading reform proposals recommend allowing consumers to 
choose between public and private health plans. Therefore, it is worth 
exploring how to design an insurance marketplace wherein private and 
public plans can compete fairly.
    Public plan. Let me be crystal clear: if the playing field is 
level, it is possible for public and private health insurance plans to 
compete and deliver value for consumers without distorting the 
insurance market. This policy question should not create an impasse or 
stall reform efforts.\8\
---------------------------------------------------------------------------
    \8\ For further information on my thoughts about a competing public 
plan, see: Len M. Nichols and John M. Bertko, ``A Modest Proposal for a 
Competing Public Insurance Plan,'' New America Foundation, March 2009.
---------------------------------------------------------------------------
    Fair competition, however, will require separating the oversight of 
the public plan from that of the managers of the marketplace or 
exchange(s). It will also require that all rules of the marketplace--
benefit package requirements, insurance regulations, and risk 
adjustment processes--apply to all plans equally, whether public or 
private.
    More than 30 State governments offer their employees a choice 
between traditional private health insurance products and a plan self-
insured by the State. This experience combined with historic 
competition between public and private plans in both the Medicare 
program and California Public Employees Retirement System (CALPERS) 
serves as proof-of-concept: plans operating with politically appointed 
managers can compete with plans run by private managers if the rules of 
engagement are structured properly.
    Again, State employee plans offer an excellent model for how we 
could structure a choice of a public health insurance plan. More than 
30 State governments offer their employees a choice between traditional 
private health insurance products and a plan self-insured by the State. 
In the case of the self-insured product, the State or a third party 
administrator (TPA) negotiates provider contracts and performs 
administrative functions. While the State may pay a TPA (usually the 
resident ``Blue'' plan) to handle some tasks, the plan is publicly 
owned and the State bears the insurance risk. If claims outpace 
premiums in a given year, the State pays and is at risk for the 
difference. Likewise, if the TPA collects more premiums than it pays 
out in claims, the surplus dollars are usually allocated to a premium 
stabilization fund or remain with the State's general revenues. Neither 
the TPA nor the State plan's managers profit from stinting on care. 
This credible reassurance seems to be what most advocates for the 
choice of a public health insurance plan seek.
    Therefore, I believe the type of public plan I describe above can 
achieve many of the goals of public plan advocates, while preserving 
fair and effective market competition, negating the risk of excess 
cost-shift, and avoiding any kind of inevitable progression toward a 
single payer health system. Yet, this approach will require us to 
systemically address delivery system reforms that can deliver more 
value and lower cost growth trajectories over time. But that is a 
subject for another day.

                               CONCLUSION

    Insurance market reforms are an essential part of re-making our 
health system into one that works for all Americans in the 21st 
century. Comprehensive health reform must also include efforts to 
improve quality and reduce cost growth. But the foundation of a health 
system must be coverage. Without coverage, tens of millions of 
Americans will never have access to appropriate care and health-
enhancing interventions.
    There is a compelling collective interest in making sure coverage 
is a reality for all Americans: the economic loss we suffer as a result 
of the uninsured exceeds the cost of covering everyone.\9\ Also, we 
must cover all Americans to allow the information system and quality 
innovations, that we desperately need, to work successfully. Therefore, 
making insurance markets work for all is a crucial step on the road to 
real reform, the kind of reform your committee has long sought and that 
our Nation desperately needs. I hope this testimony is useful and I 
remain, as always, eager to answer any questions.
---------------------------------------------------------------------------
    \9\ Health Policy Program, ``The Case for Health Reform,'' New 
America Foundation, 2009.

    Senator Bingaman. Thank you very much.
    Dr. Baicker. 

  STATEMENT OF KATHERINE BAICKER, Ph.D., PROFESSOR OF HEALTH 
 ECONOMICS, DEPARTMENT OF HEALTH POLICY AND MANAGEMENT AT THE 
         HARVARD SCHOOL OF PUBLIC HEALTH, CAMBRIDGE, MA

    Ms. Baicker. Thank you.
    It is an honor to be here to talk with you about the 
crucial issue of making our health markets work better. Our 
system should provide both high-quality care and high-value 
insurance, and those aren't necessarily the same thing, 
although they are surely related.
    High-value healthcare would end the overuse of intensive 
procedures of questionable value and the under use of 
procedures of high health value and usually low intensity that 
we see in varying degrees across the country. There are parts 
of the country that spend two or three times as much money as 
other parts to deliver care that is of no higher value to the 
recipients.
    High-value health insurance would deliver protection 
against the risk of needing expensive healthcare not only this 
year, but against the risk of developing conditions that would 
require much more expensive healthcare in years to come. Market 
reforms can make that kind of high-value health insurance more 
widely available to everyone, but they work best when everyone 
gets insured early because insurance is about that risk.
    We don't need health insurance because healthcare is 
expensive. We need health insurance because healthcare is 
uncertain and expensive, and that is when we value health 
insurance the most.
    Health insurance can do a good job in the private market of 
redistributing money. If you want to redistribute money to high 
health risk people, you need to also include a bundle of social 
insurance to wrap around private market insurance, and that 
social insurance need not be socialized. It can be a risk-
adjusted voucher or other mechanism to ensure that vulnerable 
low-income, high-risk populations also have access to the 
lifesaving healthcare that their insured counterparts enjoy.
    Thank you.
    [The prepared statement of Ms. Baicker follows:]

             Prepared Statement of Katherine Baicker, Ph.D.

    My name is Katherine Baicker, and I am a Professor of Health 
Economics in the Department of Health Policy and Management at the 
Harvard School of Public Health. I would like to thank Senator Kennedy, 
Senator Enzi, and the members of the committee for giving me the 
opportunity to speak today about how we can address the crucial policy 
challenge of health insurance market reform. This testimony is derived 
in large part from recent academic work with my colleague Amitabh 
Chandra that appeared in the journal Health Affairs. I summarize that 
work here.
    This morning I would like to discuss several general principles 
about the nature of health insurance. Misunderstandings about these 
principles have the potential to impede the development of a much-
needed consensus on how to engineer reform. Uncovering the kernels of 
truth that underlie these misperceptions can help focus reform efforts 
on the critical challenges facing our health system.
    A key distinction should be made between health care and health 
insurance. Insurance works by pooling risks: many pay a premium up 
front, and then those who face a bad outcome (getting sick, being in a 
car accident, having their home burn down) get paid out of those 
collected premiums. The premium is the expected average cost of 
treatment for everyone in the pool, not just the cost of treating the 
sick. Because not everyone will fall sick at the same time, it is 
possible to make payments to those who do fall sick even though their 
care costs more than their premium. This is also why it is particularly 
important for people to get insured when they are healthy--to protect 
against the risk of needing extra resources to devote to health care if 
they fall ill.
    Uncertainty about when we may fall sick and need more health care 
is the reason that we purchase insurance--not just because health care 
is expensive (which it is). Many other things are expensive, including 
housing and college tuition, but we do not have insurance to help us 
purchase them because they are not uncertain in the way that 
potentially needing very expensive medical care is. The more 
uncertainty there is, the more valuable the insurance is.

                 THE PROBLEM OF THE SICK AND UNINSURED

    Insured sick people and uninsured sick people present very 
different issues of public policy. People who have already purchased 
insurance and then fall sick pose a particular policy challenge: 
insurance is not just about protecting against unexpected high expenses 
this year, but also about protecting against the risk of persistently 
higher expenses in the case of chronic illness. This kind of protection 
means that once insured, enrollees' premiums would not rise just 
because they got sick, but this is not always the case today. In fact, 
insurers have an incentive to shed their sickest enrollees, suggesting 
a strong role for regulation protecting them. Nor are insurers held 
responsible when inadequate coverage raises the costs of a future 
insurer, such as Medicare for those over 65. These problems highlight 
the limited availability of true long-run insurance offerings, a reform 
issue that is often glossed over in the conflation of health care and 
health insurance.
    Uninsured Americans who are sick pose a very different set of 
problems. They need health care more than health insurance. Insurance 
is about reducing uncertainty in spending. It is impossible to 
``insure'' against an adverse event that has already happened, for 
there is no longer any uncertainty. If you were to try to purchase auto 
insurance that covered replacement of a car that had already been 
totaled in an accident, the premium would equal the cost of a new car. 
You would not be buying car insurance--you would be buying a car. 
Similarly, uninsured people with known high health costs do not need 
health insurance--they need health care. Private health insurers can no 
more charge uninsured sick people a premium lower than their expected 
costs. The policy problem posed by this group is how to ensure that 
low-income uninsured sick people have the resources they need to obtain 
what society deems an acceptable level of care--and ideally, as 
discussed below, to minimize the number of people in this situation.
    This highlights one of the many reasons that health insurance is 
different from car insurance: the underlying good, health care, is 
viewed by many as a right. Furthermore, we may want to redistribute 
money from the healthy to the sick, in the same way that we 
redistribute money from the rich to the poor. This kind of 
redistribution is fundamentally different from private insurance--it is 
social insurance, and it is hard to achieve through private markets 
alone.\1\ Medicare, which insures the aged and disabled, is an example 
of a social insurance program. Private markets can pool risk among 
people starting out with similar health risks, and regulations can 
ensure that when some members of those risk pools fall ill, insurers 
cannot deny them care or raise their premiums, but transferring 
resources to people who are already sick and uninsured or transferring 
resources from lower health risk groups to higher health risk groups 
requires social insurance.
    How then do we provide the sick and uninsured with socially 
acceptable care? Private health insurance alone is unlikely to achieve 
this goal: no insurer will be willing to charge a premium less than an 
enrollees' likely health costs. Instead, they could be provided with 
health care directly or a premium subsidy equal to their expected 
health care costs. Alternatively, we could force sick people and 
healthy people to pool their risks, such as through community rating 
coupled with insurance mandates (to preclude healthy people from opting 
out of subsidizing sick ones). These kind of transfers are based on 
social choices about redistribution.
    The advantage of social insurance programs, including a 
nationalized health care system, is that they can achieve 
redistribution that private markets alone cannot. They may also provide 
benefits with lower administrative costs (although, in the case of 
moving to a single payer system, the size of administrative savings 
relative to overall health care cost growth is likely to be small).\2\ 
There are, of course, costs associated with social insurance programs 
as well. First, there is the drag on the economy imposed by raising 
revenues to finance them. Second, there is the loss of competition, 
diverse offerings for diverse preferences, and market discipline that 
private provision brings--and that promote higher value and innovation. 
This means that the social insurance program may be both expensive and 
inefficient--and thus impose an even larger burden on already strained 
public budgets. These pressures have, perhaps unsurprisingly, spawned 
additional misconceptions that suggest that the costs of expanded 
insurance are lower and the benefits higher than the data support.

                   THE COST OF COVERING THE UNINSURED

    A common and deceptively appealing argument for expanding insurance 
coverage is that we could both spend less and achieve better health by 
replacing the inefficient emergency room care received by the uninsured 
with an insurance plan. Unfortunately, this argument finds little 
empirical support. ER care for the uninsured is indeed inefficient and 
might have been avoided through more diligent preventive care and 
disease management. Diabetes treatment is a good example; it is much 
cheaper to manage diabetes well than wait for a hospitalization which 
requires a leg amputation. Having health insurance may lower the costs 
of ER and other publicly provided care used by the uninsured through 
better prevention and medical management. But empirical research also 
demonstrates that insured people consume more care (and have better 
health outcomes) than uninsured people--so universal insurance is 
likely to increase, not reduce, overall health spending.\3\
    Why does insurance cause greater consumption of health care? 
Insurance, particularly insurance with low cost-sharing, means that 
patients do not bear the full cost of the health resources they use. 
This is a good thing--having just made the case for the importance of 
the financial protections that insurance provides--but comes with the 
side-effect of promoting greater consumption of health resources, even 
when their health benefit is low. This well-documented phenomenon is 
known as ``moral hazard,'' even though there is nothing moral or 
immoral about it. The RAND Health Insurance Experiment (HIE), one of 
the largest and most famous experiments in social science, measured 
people's responsiveness to the price of health care. Contrary to the 
view of many non-economists that consuming health care is unpleasant 
and thus not likely to be responsive to prices, the HIE found 
otherwise: people who paid nothing for health care consumed 30 percent 
more care than those with high deductibles.\4\ This is not done in bad 
faith: patients and their physicians evaluate whether the care is of 
sufficient value to the patient to be worth the out-of-pocket costs. 
The increase in care that individual patients use because of insurance 
has even greater system-wide ramifications. R&D in new medical 
technologies responds to the changes in aggregate incentives driven by 
health insurance. While these technologies may improve welfare, they 
also raise premiums because of larger armamentarium of treatments 
available to the sick. There is evidence of these system-wide effects: 
when Medicare was introduced in 1965, providers made spectacular 
investments beds in high-tech care, and hospital spending surged over 
25 percent in 5 years.\5\
    Even increases in preventive care do not usually pay for 
themselves: in general prevention is good for health, but does not 
reduce spending. Some preventive care has been shown to be cost-
saving--such as flu vaccines for toddlers or targeted investments like 
initial colonoscopy screening for men aged 60-64--but most preventative 
care results in greater spending along with better health outcomes. 
Indeed, some money spent on preventive care may not only cost money, 
but may be no more cost effective than some ``high-tech'' medical care. 
For example, screening all 65-year-olds for diabetes, as opposed to 
only those with hypertension, may improve health but costs so much 
(about $600,000 per Quality Adjusted Life Year) that that money might 
be better spent elsewhere.\6\
    All of this suggests that insuring the uninsured would raise total 
spending. This doesn't mean that it would not be money well spent 
(which I believe it would be). Spending more to attain universal 
insurance is not a problem if it generates more value than it costs, 
and the view that health care is a right is not inconsistent with this 
framework. First, and sometimes overlooked, is the security that 
insurance provides against the uncertainty of unknown health care 
expenses. The value of this financial smoothing alone is estimated to 
be almost as much as the cost of providing people with insurance.\7\ 
Second, much of the additional health care that the newly insured would 
receive is likely to improve health. (But this is by no means 
automatic, for as discussed below, being insured is not enough to 
guarantee good health care.) Extending health insurance coverage is 
worth it for these reasons--but not because it would save money.

                        GETTING HIGH-VALUE CARE

    Having insurance may increase the quantity of care patients 
receive, but it is no guarantee that they will receive high quality 
care. A recent study found that Americans received less than 60 percent 
of recommended care, including preventive, acute, and chronic care, and 
including such low-cost interventions as flu vaccines and antibiotics 
for surgical patients.\8\ Beginning with the work of John Wennberg at 
Dartmouth, an immense literature in medicine and economics has found 
that even among Medicare enrollees, there are enormous differences in 
the quality of care received: in fact, in areas where the most is spent 
on Medicare beneficiaries, they are the least likely to get high 
quality care. The use of mammograms, flu-shots, beta-blockers and 
aspirin for heart attack patents, rapid antibiotics for pneumonia 
patients, and simple laboratory tests to evaluate the management of 
diabetes are all lower in higher-spending areas.\9\ Higher spending is 
not even associated with lower mortality, which suggests that more 
generous insurance provision does not necessarily translate to better 
care or outcomes.
    When these results showing the lack of relationship between 
spending and quality were first reported there were two predictable 
responses by skeptics: that high spending areas had sicker patients who 
were (appropriately) less likely to receive these therapies, and that 
patients in high-spending had higher satisfaction even if their 
measurable health outcomes were the same. Neither claim is supported by 
the evidence.
    What, then, do patients in high-spending areas get? Evidence 
suggests that this higher intensity is driven by greater use of 
procedures with questionable clinical value--that may even be 
associated with under-use of high value, less-intensive care. Patients 
in high-spending areas are no more likely to receive surgery, but see 
more specialists more frequently, have more diagnostic and imaging 
services, and get more intensive care in the end of the life--none of 
which has been shown through clinical trials to improve health.\10\ 
``Coordination failures'' in delivery may both raise costs and lower 
quality, even among the insured.
    Thus, while health insurance increases the quantity of care 
patients receive, being insured alone is not sufficient to ensure high 
quality care. Insuring the uninsured will give them access to the sort 
of health care that the rest of us receive: a combination of valuable 
care, overuse of some costly interventions with little proven benefit, 
and under-use of some vitally important therapies, care that is 
sometimes coordinated but often fragmented. This is better than no 
care, but it highlights the problem of collapsing the entire debate 
about U.S. health care reform down to the issue of uninsurance: health 
insurance alone does not guarantee good health care.

                         THE ROLE OF EMPLOYERS

    Employees ultimately pay for the health insurance that they get 
through their employer, no matter who writes the check to the insurance 
company. The view that we can get employers to shoulder the cost of 
providing health insurance stems from the misconception that employers 
pay for benefits out of a reservoir of profits. Regardless of a firm's 
profits, valued benefits are paid primarily out of workers wages.\11\ 
While workers may not even be aware of the cost of their total health 
premium, employers make hiring and salary decisions based on the total 
cost of employment, including both wages and benefits such as health 
insurance, maternity leave, disability and retirement benefits.\12\ 
They provide health insurance not out of generosity of spirit, but as a 
way to attract workers--just like wages. When the cost of benefits 
rises, wages fall (or rise more slowly than they would have otherwise), 
leaving workers bearing the cost of their benefits in the form of lower 
wages.\13\
    The uncomfortable arithmetic of this wage-fringe offset is seen in 
other contexts--for example, workers bear the costs of workers 
compensation, and mandated maternity benefits primarily reduce the 
wages of women of child-bearing age.\14\ When it is not possible to 
reduce wages, employers may respond in other ways: employment can be 
reduced for workers whose wages cannot be lowered, outsourcing and a 
reliance on temp-agencies may increase, and workers can be moved into 
part-time jobs where mandates do not apply. These adjustments are 
neither instantaneous nor one-for-one for every person (depending, for 
example, on wage rigidities, how much individuals value the insurance 
benefit, and how heterogeneous the employees' income and health are)--a 
fact that obscures the underlying connection. This also means that the 
claimed connection between health care costs and the ``international 
competitiveness'' of U.S. industry is murky at best: higher health 
costs primarily lower current workers' non-health compensation, rather 
than firms' profitability (although the same trade-off cannot operate 
in retiree health benefits, making their effects more complicated).\15\
    Why, then, do we have a private health insurance system based 
primarily on policies offered through employers? There is a preference 
in the tax code for premiums paid by employers relative to premiums 
paid by individuals or direct payments for health care. This tax 
preference drives both the predominance of employment-based policies 
and the prevalence of policies with low cost-sharing, because care paid 
for in the form of higher employer premiums comes at a lower after-tax 
price than care paid for out-of-pocket. Of course, this tie between 
employment and insurance comes at a well-known cost: workers who leave 
or lose a job risk losing their insurance or facing much higher 
premiums, sometimes forcing them to stay in a job to retain health 
insurance.\16\
    This is not to say that there are not important advantages to 
getting insurance through an employer instead of on the individual non-
group insurance market (especially given the current state of 
individual market), including better pricing and risk pooling. The 
employer market is the primary mechanism for maintaining cross-
subsidization from low-risk populations to high-risk ones, with tax 
subsidies adding an element of social insurance (albeit one that is not 
particularly progressive).\17\ It is these benefits that are the main 
advantages of access to employer policies, not the fact that employers 
nominally pay part of the premium.

                          EFFICIENT INSURANCE

    Greater patient cost-sharing could help improve the efficiency of 
health care spending, but it is not a cure-all. It is certainly true 
that first-dollar insurance coverage (that is, insurance coverage for 
the first dollar of health care expenditures or insurance with very low 
cost-sharing more broadly) encourages use of care with very low 
marginal benefit and that greater cost-sharing would help reduce the 
use of discretionary care of questionable value. But there is also 
evidence that patients under-utilize drugs with very high value when 
confronted with greater cost-sharing (whether because they lack 
resources or information). Worse, there is evidence that even $5-$10 
increases in co-payments for outpatient care can result in some 
patients getting hospitalized as a result of cutting back too much on 
valuable care, offsetting the reduced spending.\18\ Capping total 
insurance benefits is also short-sighted and imprudent: not only does 
evidence suggest that such caps result in adverse clinical outcomes, 
worse adherence, and increased hospital and ER costs, but the presence 
of caps means that patients are not insured against catastrophic 
costs--exactly what insurance is supposed to protect against the most.
    There is no reason to think that the optimal insurance structure 
would look like the typical high-deductible plan. Rather, it might 
subsidize high-value care such as treatments to manage diabetes or 
asthma, while imposing greater cost-sharing on care of lower value, 
such as elective surgeries with limited health benefits. People would 
choose the insurance plans that offered them the best benefit mix--
trading off higher premiums for plans that covered care of diminishing 
marginal value. Of course, what may be valuable to one patient could be 
wasteful for another, and the key challenge for ``value-based insurance 
design'' policies is to differentiate these cases. Many firms are 
experimenting with these plans.\19\ Focusing exclusively on high-
deductible plans that rely on a blunt structure of patient cost-sharing 
and perfectly forward-looking patients may forestall the development of 
even more innovative plans.
    This does not mean that competition and cost-sharing have no role 
in driving higher value spending, however. Competition between insurers 
to offer plans that have the mix of benefits enrollees find most 
valuable could drive the kind of innovative plans described above. 
Increased cost-sharing such as that promoted by high deductible 
policies coupled with health savings accounts can also be an important 
tool for improving the value of care. As the evidence from the RAND HIE 
discussed above shows, the low-cost sharing plans fostered by the 
current tax treatment of health insurance (which look more like pre-
paid health care than true insurance) promote the use of care that is 
of limited health benefit. While most spending is indeed done by people 
with very high total costs, well-designed cost-sharing programs could 
still have substantial effects on spending decisions. Most spending is 
not done in emergency settings, and even limited cost-sharing can have 
an effect on a substantial share of total spending.\20\ This suggests 
that carefully designed incentives could have a big effect on improving 
the value of care delivered.

                               CONCLUSION

    We know that our health care system is not delivering the 
consistently high-quality, high-value care that we should expect. While 
there are many open questions in the design of the ideal system, with 
millions uninsured and rising costs threatening to swamp public and 
private budgets alike, we cannot afford to wait to act.
    Focusing on the underlying issues discussed here suggests that the 
fundamental problems facing our health insurance system are unlikely to 
be cured by the extremes of either a single payer system or an 
unfettered marketplace. On the one hand, the unregulated marketplace is 
unlikely to provide long-run stable insurance. Private insurers will 
always have an incentive to try to shed their highest cost enrollees, 
so without regulatory safeguards even the insured sick will be at risk 
of losing the insurance protections to which they are entitled. Private 
insurance fundamentally cannot provide the kind of redistribution based 
on underlying health risk or income that social insurance can. On the 
other hand, a single payer system does not automatically provide high 
quality care: the provision of low-value care is as pervasive in the 
single payer Medicare system as it is elsewhere. Single-payer systems 
are also slow to innovate--as suggested by the fact that it took 
Medicare 40 years to add a prescription drug benefit, long after most 
private insurers had done so. Nor do calculations of the costs of a 
single-payer system measure the utility loss from forcing people with 
different preferences into a monolithic health insurance plan. The 
private facilities that have sprung up in Canada to meet the demands of 
those who want more health care than the public system provides 
fundamentally undermine the ``single payer'' nature of the system.
    How one balances these trade-offs is likely driven as much by 
philosophy as economics, and any reform will involve tough choices 
between competing values. Serious reforms would focus not exclusively 
on lowering costs, but on increasing the value that we get from health 
insurance and health care.\21\ Reforms that promoted higher-value 
insurance could both extend coverage so that more people benefit from 
the protections that insurance affords and ensure that those 
protections are secure for those who fall ill. These reforms would not 
be enough to achieve uniformly high-quality care, however. The frequent 
failure of the use of best practices and the tremendous geographic 
variation in the use of costly care of uncertain medical benefit are 
often obscured in the focus on the uninsured. That many nations, 
including both the United States and Canada, struggle with these 
challenges suggests that reforms of the payment system alone are 
unlikely to solve all of these problems. A comprehensive reform 
proposal that aimed both to extend insurance protections to those who 
lack them and to improve the value of care received by those who are 
insured would be more likely to succeed at each goal than proposals 
that focused on just one.
    Thank you again for the opportunity to meet with you. I would be 
happy to answer any questions that you might have.

                               References

    1. Jonathan Gruber, Public Finance and Public Policy (New York: 
Worth Publishers, 2007).
    2. Henry J. Aaron, ``The Costs of Health Care Administration in the 
United States and Canada--Questionable Answers to a Questionable 
Question,'' New England Journal of Medicine 349, no. 8 (2003): 801-803; 
Steffie Woolhandler, T. Campbell and David U. Himmelstein, ``Costs of 
Health Care Administration in the United States and Canada,'' New 
England Journal of Medicine 349, no. 8 (2003): 768-775; Ken E. Thorpe, 
``Inside the Black Box of Administrative Costs,'' Health Affairs 
(Millwood) 11, no. 2 (1992): 41-55; Joseph P. Newhouse and Anna 
Sinaiko, ``Can Multi-Payer Financing Achieve Single-Payer Spending 
Levels?,'' Forum for Health Economics & Policy 10, no. 1 (2007): 
Article 2; Chapin White, ``Health Care Spending Growth: How Different 
Is the United States from the Rest of the OECD?,'' Health Affairs 26, 
no. 1 (2007): 154-161.
    3. John M. McWilliams, Ellen Meara, Alan Zaslavsky and John Z. 
Ayanian, ``Use of Health Services by Previously Uninsured Medicare 
Beneficiaries,'' New England Journal of Medicine 357, no. 2 (2007): 
143-153; Jack Hadley, John Holahan, Teresa Coughlin and Dawn Miller, 
``Covering the Uninsured in 2008: Current Costs, Sources of Payment, 
and Incremental Costs,'' Health Affairs (2008): hlthaff.27
.25.w399.
    4. Joseph P Newhouse, and the Insurance Experiment Group, Free for 
All?: Lessons from the Rand Health Insurance Experiment (Cambridge, MA: 
Harvard University Press, 1993).
    5. Amy Finkelstein, ``The Aggregate Effects of Health Insurance: 
Evidence from the Introduction of Medicare,'' Quarterly Journal of 
Economics (2007).
    6. J.T. Cohen, P.J. Neumann and M.C. Weinstein, ``Does Preventive 
Care Save Money? Health Economics and the Presidential Candidates,'' 
New England Journal of Medicine 358, no. 7 (2008): 661-663; L.B. 
Russell, ``The Role of Prevention in Health Reform,'' New England 
Journal of Medicine 329, no. 5 (1993): 352-354.
    7. Amy Finkelstein and Robin McKnight, ``What Did Medicare Do? The 
Initial Impact of Medicare on Mortality and Out-of-Pocket Medical 
Spending,'' Journal of Public Economics 92 (2008): 1644-1669.
    8. E.A. McGlynn et al., ``The Quality of Health Care Delivered to 
Adults in the United States,'' New England Journal of Medicine 348, no. 
26 (2003): 2635-2645; John Wennberg and Megan Cooper, The Dartmouth 
Atlas of Health Care (Chicago: American Hospital Association Press, 
1999).
    9. Katherine Baicker and Amitabh Chandra, ``Medicare Spending, the 
Physician Workforce, and Beneficiaries' Quality of Care,'' Health 
Affairs (Millwood) Suppl Web Exclusive (2004): W184-197.
    10. Elliott S. Fisher, David E. Wennberg, Therese A. Stukel, Daniel 
J. Gottlieb, F. Lee Lucas and E.L. Pinder, ``The Implications of 
Regional Variation in Medicare Spending. Part 1: The Content, Quality 
and Accessibility of Care,'' Annals of Internal Medicine 138, no. 4 
(2003): 273-287; ___, ``The Implications of Regional Variation in 
Medicare Spending. Part 2: Health Outcomes and Satisfaction with 
Care,'' Annals of Internal Medicine 138, no. 4 (2003): 288-298.
    11. Lawrence Summers, ``Some Simple Economics of Mandated 
Benefits,'' American Economic Review 79 (1989): 177-183.
    12. Janet Currie and Brigitte Madrian, ``Health, Health Insurance 
and the Labor Market,'' In Handbook of Labor Economics, edited by Orley 
Ashenfelter and David Card. Amsterdam: Elsevier Science, 2000.
    13. Katherine Baicker and Helen Levy, ``Employer Health Insurance 
Mandates and the Risk of Unemployment,'' Risk Management and Insurance 
Review 11, no. 1 (2008): 109-132; Katherine Baicker and Amitabh 
Chandra, ``The Labor Market Effects of Rising Health Insurance 
Premiums,'' Journal of Labor Economics 24, no. 3 (2006).
    14. Jonathan Gruber and Alan Krueger, ``The Incidence of Employer-
Provided Insurance: Lessons from Workers' Insurance,'' Tax Policy and 
the Economy 5 (1991): 111-143; Jonathan Gruber, ``The Incidence of 
Mandated Maternity Benefits,'' American Economic Review 84 (1994): 622-
641.
    15. Len Nichols and Sarah Axeen, `` Employer Health Costs in a 
Global Economy: A Competitive Disadvantage for U.S. Firms,'' New 
America Foundation Working Paper (2008).
    16. Brigitte Madrian, ``Employment-Based Health Insurance and Job 
Mobility: Is There Evidence of Job-Lock?,'' Quarterly Journal of 
Economics 109, no. 1 (1994): 27-54.
    17. Mark V. Pauly and Bradley Herring, ``Risk Pooling and 
Regulation: Policy and Reality in Today's Individual Health Insurance 
Market,'' Health Affairs 26, no. 3 (2007): 770-779.
    18. John Hsu, M. Price, J. Huang, R. Brand, V. Fung, R. Hui, B. 
Fireman, J.P. Newhouse and J.V. Selby, ``Unintended Consequences of 
Caps on Medicare Drug Benefits,'' New England Journal of Medicine 354, 
no. 22 (2006): 2349-2359; Amitabh Chandra, Jonathan Gruber and Robin 
McKnight, ``Patient Cost-Sharing, Hospitalization Offsets, and the 
Design of Optimal Health Insurance for the Elderly,'' NBER Working 
Paper 12972 (2007).
    19. Michael E. Chernew, Allison B. Rosen and A. Mark Fendrick, 
``Value-Based Insurance Design,'' Health Affairs (Millwood) 26, no. 2 
(2007): w195-203.
    20. Katherine Baicker, ``Improving Incentives in Health Care 
Spending: Properly Designed Health Spending Accounts Can Be a Major 
Step,'' Business Economics (2006); Katherine Baicker, William H. Dow 
and Jonathan Wolfson, ``Lowering the Barriers to Consumer-Directed 
Health Care: Responding to Concerns,'' Health Affairs (Millwood) 26, 
no. 5 (2007): 1328-1332.
    21. Elliott S. Fisher, Douglas O. Staiger, Julie P.W. Bynum and 
Daniel J. Gottlieb, ``Creating Accountable Care Organizations: The 
Extended Hospital Medical Staff,'' Health Affairs 26, no. 1 (2007): 
w44-57.

    Senator Bingaman. Well, thank you very much.
    Ms. Praeger, go right ahead.

  STATEMENT OF SANDY PRAEGER, HEALTH INSURANCE COMMISSIONER, 
                STATE OF KANSAS, KANSAS CITY, KS

    Ms. Praeger. Good morning. Thank you, Senator.
    It is always a pleasure to see my own Senator Roberts, and 
thank you for that nice introduction.
    And it is a pleasure to be here, representing the Nation's 
insurance commissioners. I am optimistic after what I have just 
heard from this very distinguished panel that there is an awful 
lot of agreement among the panel members about both the problem 
and I think some potential solutions.
    I just have four points I want to make on behalf of our 
national association. First, any solution, as we have all said, 
must address the rising cost of healthcare, and you cannot 
expect the insurance mechanism, which is the payment system, to 
fully address the rising cost. I think that is going to require 
some aggressive action on the part of you all at the Federal 
level.
    Whatever solutions are proposed, we certainly hope that 
consumer protections will still be in place and enforced at the 
State level. States have already taken great strides in putting 
in place patient protection legislation, solvency standards for 
companies, fraud prevention programs, and oversight mechanisms 
that enable us to answer those questions that Senator Brown 
talked about in his opening comments.
    When consumers feel that they are being unjustly treated by 
their insurance company, it is our insurance commissioners 
across the country that are on the ground day in and day out 
with those consumer protections. So we hope that any solution, 
first and foremost, recognizes those important elements of 
consumer protection.
    It is easy, as we look at solutions, to create an 
opportunity for adverse selection. We would just obviously 
caution against that. I think rating reforms are necessary. I 
also agree that rating based on health status should be 
eliminated.
    I think individuals should be required, all people should 
be required to have coverage, but there needs to be consistency 
across markets so that if you have different rating rules at 
the State level and you have a national plan that does 
eliminate health status rating, then you will get adverse 
selection into that national plan, which will make it 
eventually very costly and unaffordable. So avoiding adverse 
selection is critically important.
    Again, I would just emphasize the importance of preserving 
a State role in the process. I think we recognize that States 
alone cannot solve the problem. It will require working 
collaboratively with the Federal Government on a number of 
issues--sliding-scale subsidies, for example, for low-income 
folks.
    Assisting us with a reinsurance mechanism for the high-cost 
utilizers. We have in place the high-risk pools. Congress has 
helped us through grants back to the States for high-risk 
pools, but that is another area where certainly State and 
Federal cooperation and collaboration is important.
    And I would point out that our national association has 
expertise here in Washington ready, willing, and able to assist 
in hammering out the details of any legislation that is put 
forward. We have been actively involved with Senator Durbin. 
His SHOP Act, I think, has some very good components. Several 
years ago, we were actively involved with Senator Enzi of this 
committee.
    So we want to be a resource. We want to assist. We know the 
system is broken, and it is time to address it.
    [The prepared statement of Ms. Praeger follows:]

                  Prepared Statement of Sandy Praeger

                              INTRODUCTION

    The NAIC represents the chief insurance regulators from the 50 
States, the District of Columbia, and five U.S. territories. The 
primary objective of insurance regulators is to protect consumers and 
it is with this goal in mind that the members of the NAIC submit these 
comments today on the health of the private insurance market.
    To begin, we recognize the failures in the current market, they are 
well documented. Over 15 percent of Americans, almost 46 million 
people, go without coverage. For most, coverage is simply too 
expensive, a result of medical spending that has run out of control and 
consumes 16 percent of our economy. For others, those without coverage 
through an employer and with health problems, coverage is not available 
at any price. For Americans lucky enough to have insurance, premiums 
take ever larger bites out of the monthly paycheck, even as rising 
deductibles and co-payments shift more of the financial burden of 
sickness to the patient. Insurance Commissioners see this every day, 
and we welcome Congress' interest in helping the States tackle this 
challenge.
    State insurance commissioners believe it is important to ensure 
that affordable, sufficient health coverage is available to small 
business owners, their employees, and individuals. The NAIC offers its 
full support in developing Federal legislation that will reach this 
goal--a goal that can only be attained through Federal-State 
coordination. We offer the experience and expertise of the States to 
Congress as it attempts to improve the health insurance marketplace.

                            STATE EXPERIENCE

    States led the way in requiring insurers to offer insurance to all 
small businesses in the early 1990s, and the Federal Government made 
guaranteed issue the law of the land in 1996 \1\ for all businesses 
with 2-50 employees. Federal law does not limit rating practices, but 
48 States have supplemented the guaranteed issue requirement with laws 
that limit rate variations between groups, cap rate increases, or 
impose other limitations on insurer rating practices. These rating laws 
vary significantly in response to local market conditions, but their 
common objective is to pool and spread small group risk across larger 
populations so that rates are more stable and no small group is 
vulnerable to a rate spike based on one or two expensive claims.
---------------------------------------------------------------------------
    \1\ 42 U.S.C. 300gg-12.
---------------------------------------------------------------------------
    In addition to requiring insurers to pool their small group risk, 
many States have established various types of purchasing pools and have 
licensed associations to provide state-approved insurance products to 
their members.
    States continue to experiment with reinsurance, tax credits and 
subsidies, and programs to promote healthier lifestyles and manage 
diseases as they pursue the twin goals of controlling costs and 
expanding access. These state-based reforms are, of necessity, very 
distinct--based on both the specific needs in the marketplace and the 
strengths and weaknesses of the marketplace. For example, the State of 
New York implemented the very successful ``Healthy NY'' program, a 
reinsurance-based program that addresses many of the problems 
identified in New York's individual and small group markets, but 
utilizing its strong HMO networks. Likewise, the Commonwealth of 
Massachusetts has implemented broad reforms built on past reforms and 
the unique insurer, provider and business environment.
    As always, States are the laboratories for innovative ideas. We 
encourage Federal policymakers to work closely with their State 
partners, as well as with health care providers, insurers and 
consumers, to identify and implement reforms that will make insurance 
more affordable to small businesses. And remember, all significant 
reforms will have significant consequences--both positive and negative.

                             KEYS TO REFORM

    Based on the experience and expertise of the States, we encourage 
Congress to consider these four keys for successful health insurance 
marketplace reform:

     Address Health Care Spending. Any effort to increase 
access to insurance will not be successful over time unless the 
overriding issue of rapidly rising health care costs is also addressed. 
While the health care challenge in this country is generally expressed 
in terms of the number of Americans without health insurance coverage, 
the root of the problem lies in the high cost of providing health care 
services in this country. According to the most recent National Health 
Expenditures data, health care spending reached $2.2 trillion in 2007, 
16.2 percent of GDP and $7,421 for every man, woman and child in the 
United States.\2\ This level is twice the average for other 
industrialized nations.
---------------------------------------------------------------------------
    \2\ Centers for Medicare and Medicaid Services, National Health 
Expenditures.
---------------------------------------------------------------------------
    This level of health care spending has badly stressed our health 
care financing system. Health insurance reform will not solve this 
problem, since insurance is primarily a method of financing health care 
costs. Nevertheless, insurers do have a vital role to play in reforms 
such as disease management, enhanced use of information technology, 
improved quality of care, wellness programs and prevention, and 
evidence-based medicine--all of which have shown promise in limiting 
the growth of health care spending. Whatever is done in insurance 
reform should be done in a manner that is consistent with sound cost 
control practices.
     Protect the Rights of Consumers. States already have the 
patient protections, solvency standards, fraud prevention programs, and 
oversight mechanisms in place to protect consumers; these should not be 
pre-empted by the Federal Government. As the members of this committee 
know all too well, the pre-emption of State oversight of private 
Medicare plans has led to fraudulent and abusive marketing practices 
that would have been prevented under State law, bringing considerable 
harm to thousands of seniors. In similar fashion, the Employee 
Retirement Income Security Act of 1974 (ERISA) severely restricts the 
rights of millions of employees covered by self-insured plans. We urge 
Federal policymakers to preserve State oversight of health insurance 
and avoid pre-empting or superseding State consumer protections.
     Avoid Adverse Selection. Any program that grants consumers 
the choice between two pools with different rating, benefit, or access 
requirements will result in adverse selection for one of the pools. For 
example, if a national pool does not allow rating based on age or 
health status, while the State pool does allow rating based on those 
factors, then the national pool will attract an older, sicker 
population. Such a situation would be unworkable. While subsidies or 
incentives could ameliorate some of the selection issues, as costs 
continue to rise and premiums increase, the effectiveness of such 
inducements could erode.
     Preserve a Strong State Role. Congress must carefully 
consider the impact of any new Federal reforms on the States' ability 
to be effective partners in solving the health care crisis. In 
developing a national direction for health insurance reform, we 
encourage Congress to preserve the role of the States in tailoring 
reforms to meet the specific needs of consumers and to promote a 
vibrant marketplace. We also note that States can, and should, play a 
key role in deciding how reforms will be phased-in to ensure the least 
amount of negative disruption.

    In addition, the NAIC urges Congress to review current Federal laws 
and regulations that hinder State efforts to reform the health care 
system. For example, ERISA curtails consumer protections and supersedes 
State laws, and inadequate reimbursement payments in Federal health 
programs have resulted in higher overall costs and decreased access for 
many consumers. Such Federal policies can limit the ability of States 
to implement broad market reforms.

                               CONCLUSION

    Years have been spent talking about broad health care reforms that 
will ensure that all Americans have access to affordable health 
insurance coverage and the peace of mind that goes with it. Action is 
long overdue and we stand ready to assist in whatever way we can.
    The NAIC encourages Congress and the members of this committee to 
work with States and learn from past reforms. Together, we can 
implement successful initiatives that will truly protect and assist all 
consumers.

    Senator Bingaman. Thank you all very much.
    Senator Hatch has to go to the floor to manage a bill, and 
so why don't I call on him first for any comments or questions?
    Senator Hatch. Well, thank you so much, Mr. Chairman.
    We are delighted to have all of you here. You are just 
wonderful leaders in this area, and we appreciate the time that 
you have taken to come and discuss these matters with us.
    Let me just ask one question before I leave, and that is 
although the term ``enforceable mandate'' is often mentioned in 
our healthcare reform discussions, I have a sneaking suspicion 
that the definition of the word ``enforceable'' varies 
depending upon the stakeholder group.
    I would like each one of you to tell us your definition of 
the term ``enforceable individual mandate,'' if you would?
    Mr. Williams. I will go first. I think, simply put, it is a 
way by which the Congress, should it choose to implement such a 
law, would assure that we got everyone into the insurance 
mechanisms that were deemed appropriate. I think we can look at 
Massachusetts as one example of how it has been done through 
the tax system. I think there may be other models that people 
choose to do as a way to achieve it.
    The notion, simply put, is that we have the ability to 
offer insurance to everyone on a guaranteed issue basis, as 
long as everyone is in the insurance pool.
    Ms. Pollitz. Senator Hatch, I think in its simplest form, 
an enforceable mandate is also an entitlement. People are 
entitled to coverage, and they are obligated to have it. You 
can certainly track people's enrollment and have them report on 
their insurance status throughout the year and then assess a 
penalty for not complying with that.
    I think, more importantly, a mandate is only enforceable if 
it is reasonable. So, to tell people that they need to go out 
and buy an insurance policy, which will be expensive, you need 
to make a lot of subsidy money available. Health insurance, 
good health insurance that covers people when they are sick is 
always going to be expensive, even if we succeed beyond our 
wildest dreams in cost containment.
    It will always be expensive, and I have had cancer. It is 
expensive to be sick. And to have coverage that pays those 
bills will cost a lot of money. So people are going to need 
help to afford good coverage, and I think they are going to 
need assurances that the coverage will really take care of 
them.
    That is why I think transparency and accountability 
throughout the marketplace, policies that are simple, that are 
understandable, that are straightforward, that behave, that pay 
claims when they are supposed to, that don't accidentally lose 
people along the way once they start making claims--all of that 
needs to be provided for as well for you to have an enforceable 
mandate.
    Ms. Ignagni. Senator, I think Mr. Williams and Ms. Pollitz 
have said it exactly right. We need a mandate that is 
enforceable so that we can build a system, as you indicate in 
your opening remarks, that really meets the test of what every 
American wants, which is it is fair, it is equitable, it is 
transparent.
    Ms. Pollitz is absolutely right that we need to think about 
subsidies to make sure that people have a helping hand so they 
can afford coverage. But at the same time, and I know we will 
get into this discussion, we also need to have a very specific 
strategy on containing underlying costs, in addition to 
providing subsidies.
    So we agree with both comments that have been made, and we 
think that with those pieces in place, those building blocks, 
you can change the rules to be the kinds of rules that the 
American people are telegraphing they want. We have done a 
great deal of work, and we are looking forward to talking about 
that.
    It is with that idea of taking responsibility to look at 
when you change the rules what is possible and under what 
circumstances, and that is the way our board has proceeded in 
its activity and a very significantly deep dive.
    Mr. Nichols. Senator, I believe individual mandate is about 
having everyone pay their fair share, but no more than their 
fair share. So there have to be subsidies, as Karen said. But I 
also think it really is possible to use modern technology to 
help us enforce it in a way that it might not have been so easy 
15, 20 years ago.
    Let me give you an analogy from car insurance. I grew up in 
rural Arkansas, and my brother taught me the time-honored 
tradition of going to buy your car insurance, register your 
car, driving home, calling up and cancel your car insurance so 
you don't have to pay your premium anymore.
    Well, it turns out that leads to about half the States not 
doing such a good job of enforcing car insurance mandates, as 
you know. It turns out some States have figured this out. 
Georgia, for example, which is not known as a ``big brother'' 
place, figured out that the insurer could send an e-mail to the 
DMV and tell the DMV that Len Nichols just canceled his car 
insurance, at which point the DMV will mail a letter to the 
insured and say, ``We understand you just canceled your car 
insurance. You just lost your driver's license. Have a nice 
day.''
    So it turns out if you share information in a very feasible 
way across settings, you can find out who is and who is not 
paying their fair share. We can enforce this, in my opinion, 
sir. Look at how Georgia went from 78 percent compliance to 98 
percent compliance in 2 years with this kind of technique. You 
can do this and make it completely enforceable in our world.
    Ms. Baicker. Just a quick note that the lines between the 
carrots and the sticks that we are talking about are more 
blurred than one might think that they are. I don't think 
anyone is suggesting that people who don't comply with an 
individual insurance mandate should go to jail. The usual 
penalty is something like not being able to get a tax benefit 
that you would otherwise be entitled to.
    On the other side, if you are trying to design a carrot, 
the way many of the carrots are designed are giving you a tax 
benefit if you are insured. So removing a tax benefit if you 
are not insured versus giving a tax benefit if you are insured 
might have very similar effects if the dollars at stake are 
similar, although there are clearly psychological issues.
    Placing a mandate really changes the way people perceive 
the obligation, the responsibility on them. So they could have 
different effects, but it is not such a bright line, I think.
    Ms. Trautwein. Can I just comment on that real quickly? 
Because I think all of us think that we have to get everybody 
into the system if we are going to be able to effectively make 
these reforms and that they will actually save money. Not to 
throw a wet blanket on the whole discussion, but I think we 
have to be realists about how easy it may or may not be to 
enforce a mandate.
    I agree with Len that we have technology that we haven't 
had before, but this mandate and making it effective and 
enforceable is going to take a long time. We have 300 million 
people in this country. We are not the size of Massachusetts or 
one of the European countries that have been able to enforce 
it.
    It is not that we don't want to do this. I think we just 
have to look and see what we need to do during this time in 
which the mandate is becoming more enforced because we will 
have to figure this out. There are going to be multiple 
checkpoints we will have to do.
    One of the things that we have talked about in our 
recommendations is that we have to make sure that there is some 
system of risk adjustment or modified reinsurance arrangement 
to make sure that during this time when we don't really have 
everyone in the system yet that we have adequate means so that 
we haven't made coverage more expensive and done something that 
is exactly opposite than what we set out to do.
    I just want to mention that it is not that we disagree, but 
we also need to say, yes, we need to do this, and we also need 
to do this other thing, too, just in case it takes us a while 
to get the hang of it.
    Senator Bingaman. Ms. Praeger, did you want to make----
    Ms. Praeger. I just want to add, too, that eventually we 
have to have everyone insured. We will never get our arms 
around the rising cost of healthcare if we don't have everyone 
in the system.
    I think Massachusetts has set a good example in terms of 
their program that phases in the individual mandate. There are 
some penalties, but the penalties are fairly minor initially. 
So, any kind of a mandate ought to be phased in, recognizing 
the impact that it is going to have on individuals and small 
groups.
    I don't think we can mandate people have something they 
can't afford. So we have to--hand in hand goes both subsidies 
and cost reduction measures.
    Senator Hatch. Mr. Chairman, as you said, I have to leave. 
But if each of you would take time and just write to us and be 
even more specific than you have been here. This is a very 
tough issue, as you know. It is not easy to resolve, although 
it may be easier than some of us think.
    I would like to have each of you take time and give us the 
best that you can give us on this. I would personally 
appreciate it very much. I have a lot of other questions, but I 
will submit them for the record. OK? We hope you can answer all 
of the questions that we submit.
    Thanks so much. I am sorry I have to leave.
    Thanks, Mr. Chairman.
    Senator Bingaman. Thank you very much.
    Let me ask one question and then just open it up to anyone 
else who wants to ask questions here.
    This letter, Ms. Ignagni, you referred to the letter that 
you and the president and CEO of Blue Cross Blue Shield 
Association sent, and you have this is dated today, sent to 
Senators Kennedy, Baucus, Grassley, and Enzi, saying that:

          ``By enacting an effective and forceful requirement 
        that all Americans assume responsibility to obtain and 
        maintain health insurance, we believe we could 
        guarantee issue coverage with no pre-existing condition 
        exclusions and phase out the practice of varying 
        premiums based on health status in the individual 
        market.''

    That seems to me to be a significant part of what Dr. 
Nichols was advocating we need to do in the individual market. 
Let me just perhaps ask Dr. Nichols if he thinks that gets the 
job done?
    Mr. Nichols. Well, sir, first I would have to say the 
statement that came from AHIP in that letter is such a long way 
from where we were as a Nation in 1993, we should all take a 
deep breath and have a round of applause. There is no question 
about that. This is real progress. I mean that.
    I would say it is no question that what we want to do is 
end health status rating across the board. I would not limit it 
to the individual market. When you began your remarks, you 
mentioned the fact that two of our markets aren't working very 
well. One is small group and the other is individual.When a lot 
of us with gray in our beard and losing hair on top think about 
this a long time, we think maybe there is no better way to get 
these things fixed than to put them together.
    I wouldn't want to have one set of rating rules for the 
small group market and one set of rating rules for the 
individual market. In my view, you want to put them together.
    The economies of scale are never going to be achievable 
that we want for everyone if the small group market continues 
to buy in groups of 10, 20, 7, 4, whatever. So you want to put 
them all together.
    What I would say is it is a great way to start. What you 
want to do is have a goal of moving toward the end of health 
status rating across the board. I mean, I would ask Mr. 
Williams and Aetna, when they do the big employers, which is a 
large part of their business, as I understand it, they don't do 
health status rating. They do basically community rating across 
the board for those big groups.
    Why not have the same kind of thing for everybody else? 
Therefore, we can move to a world where you make a new 
marketplace for small group and individual, and in that 
marketplace, you have the same rules for everybody, and the big 
guys can leave them alone because the big guys are doing fine 
relative to everybody else.
    Mr. Williams. I would comment on that by saying I think 
there is a general misunderstanding that small groups are 
really not rated on their own health experience as a group. 
They really are part of a small group insurance pool that 
represents all of the small businesses in that geography that 
Aetna would aggregate together.
    That an individual case has no credibility in an actuary--
our underwriter would not attribute the experience of that 
group to its premium until a group is well over close to 400 
employees or so.
    When a small group gets an increase, that increase is not 
the result typically of the health experience of the 
individuals in that group. It is a reflection of the healthcare 
cost in that geography for all the small businesses pooled 
together.
    Now I think there are opportunities to create one-stop 
shopping, and there are other things that we can do working 
with perhaps the brokers and others, other agencies to simplify 
the purchase process. But I think there is a misunderstanding 
about the pooling nature of the small group market.
    Senator Bingaman. I believe Senator Roberts had a question.
    Senator Roberts. Dr. Nichols, in your written testimony, 
you have discussed two options for assuring that all Americans 
have adequate health insurance benefits. First, a minimum 
benefits package requirement, which you have just talked about, 
and then an actuarial value target. Can you tell me who does 
that? Would that be done by States, or would that be done by 
something called a national actuarial exchange?
    The pros and cons of this, I think, are obvious, but I 
don't want a national actuarial exchange morphing into a CMS in 
regards to the insurance industry. Would you care to comment?
    Mr. Nichols. Sure. Fair question. I would say, Senator, the 
basic idea behind having a minimum benefit package that 
specifically specify--let us just take a concrete example of 
the Federal employees? Blue Cross Blue Shield Standard, which 
is kind of a benchmark that a lot of people know. The idea 
behind specifying that is to say that is the package we want 
all insurers to make their initial bid upon so we can compare 
apples to apples and see how their efficiencies rate.
    Then the idea, at least in my head, is to allow insurers to 
offer supplements above that as long as they are priced 
separately. An alternative way to think about setting that 
minimum benefit package to permit apples-to-apples shopping is 
instead of saying Blue Cross Blue Shield Standard with its 
specific deductibles and its specific co-pays and all that 
stuff, allow insurers to offer another plan that would be 
actuarially equivalent.
    You could say the actuarial equivalence of Blue Cross Blue 
Shield Standard, but that would, for example, allow people who 
wanted to offer higher deductibles with different kinds of 
health savings accounts arrangements. It would allow HMOs that 
might want lower deductibles and more access to care, but they 
expect to do more care management. It allows the marketplace in 
many ways to breathe.
    What I believe and my actuarial colleagues have convinced 
me is that if we define that actuarial target appropriately 
enough, sir, it would allow the marketplace to actually be more 
competitive and allow more freedom of choice with some risk of 
adverse selection being created. However, if you define the 
target appropriately, most actuaries I know, the people I 
listen to, believe it is actually manageable. So that is the 
idea.
    The idea is not to impose some standard from God. I would 
suggest that, in fact, what you want is----
    Senator Roberts. I wouldn't refer to CMS as God.
    Mr. Nichols. Well, neither would I. Sorry about that.
    Senator Roberts. Well, you might have it sort of described 
in between there with some words in between God, but that is 
beside the point.
    [Laughter.]
    Mr. Nichols. I will let you go ahead. But what I would say 
is--what I believe you want, sir, is a set of Federal rules 
about the way all markets will work. But I could not agree with 
my colleague Sandy Praeger more. It has to be enforced at the 
State level, and you probably want to let States have some 
breathing room out there.
    Senator Roberts. Well, that was my next question. I just 
don't--pardon me for the noise. A Federal one-size-fits-all 
approach to this issue, we have to preserve State flexibility, 
consumer choice. To be frank with you, the rural healthcare 
delivery system, Senator Coburn knows this--Dr. Coburn knows 
this firsthand. I am just trying to save what we have and 
improve upon it.
    But every provider out there is getting reimbursed 70, 80 
percent, and then choices are being made in regards to Medicare 
that are not good. We are rationing healthcare, and it scares 
me when we get into the individual mandate stuff.
    So thank you, sir.
    Senator Bingaman. Thank you.
    Senator Brown. 
    Senator Brown. Thank you.
    Mr. Williams, your comments about fee-for-service and the 
difficulty of the cost of fee-for-service took me back to 
something Senator Harkin said at the White House summit on 
healthcare, where he said that you pay for quantity, you get 
quantity. You pay for quality, you get quality.
    Would you each talk about how we can manage costs better 
than we have? That it is pretty clear we--Doctor, I remember my 
first year in the Congress was 1993, and we brought in an 
orthopedic surgeon to speak to the Subcommittee on Health in 
the Commerce Committee, which I sat on. And he said,

          ``If I have 10 people come to see me with lower back 
        pain, what I should do is say take a couple of aspirin, 
        go home, get some rest, come back in 2 weeks if you 
        still have pain.''

    He said,

          ``But what I do is I order tests. I order tests for 
        three reasons. One is I make more money if I order 
        tests. Two, if I don't order tests, I might get sued. 
        And three, if I don't order tests, the patient will go 
        to another doctor.''

    It is a bit simple, but not too far off perhaps.
    Just your comments generally, Mr. Williams, since you have 
made me think of it. Start with you, but I would like to hear 
all of your thoughts on when you pay for quantity, you get 
quantity.
    Mr. Williams. Well, I think that there is a huge 
opportunity to re-align the incentives in the system, both at 
the physician level as well as at the member level. What I mean 
is that the best investment we can make is in how we manage the 
chronic conditions--the asthma, the diabetes, the hypertension. 
Because the most effective thing we can do is avoid the health 
event so that we don't have to pay for the activity.
    What we need is a healthcare system that emphasizes primary 
care, emphasizes prevention. If you look at the way the values 
are set for what physicians are paid, the system that has been 
put in place utilizes something called the RUC Committee. It is 
a committee of the AMA that operates under legislation of 
Congress, as I understand it.
    That committee has 26 physicians on it. Twenty-three of 
them are specialists, and three are primary care. What happens 
is the reimbursement for primary care is at the low end of the 
spectrum, and the reimbursement for procedures is greater.
    What that means is as a system we are not paying primary 
care, family practice, pediatricians to invest the time to help 
the patient understand their condition and stay healthy. So we 
need to change the system in terms of paying for activity to 
really paying for more managing of the population.
    I think also we do have to address the tort reform issue in 
the sense that we need to recognize bad things do happen. 
People need to be compensated. But replacing a physician in the 
place, as your colleague described, they are going to be put on 
the witness stand and asked, ``Was there any other test you 
could have conducted, no matter how remote the indications were 
for that patient?''
    And that physician wants to say, ``No, I did every 
conceivable test.'' And that drives cost.
    So, we need to think about the evidence base, the 
guidelines, and give physicians some way to say that they are 
practicing consistent with evidence-based guidelines and 
applying their own clinical judgment. That if something bad 
happens, there is a way, through health courts or other 
mechanisms that States have come up with, to give us an 
opportunity to deal with that.
    Senator Bingaman. Ms. Pollitz.
    Ms. Pollitz. Senator, I think that was very excellent, and 
I would add that we need to also look at some very basic design 
elements of our insurance policies with respect to chronic 
conditions. We have to remember that people who have chronic 
conditions use care all the time for a long period of time, 
sometimes for their whole lives.
    Research shows that even little co-payments, things that we 
would think--you know, $6 co-payments for a prescription--will 
confound the ability of many patients with chronic conditions--
diabetes, asthma, arthritis, depression--of taking the drugs 
that they need. They don't fill their prescriptions as often. 
They split pills. They get by. Because it is not just $6, it is 
$6 times 3 prescriptions that they have to fill every week.
    We need to really focus, I would agree very much, on 
chronic conditions. That accounts for 75 percent of our medical 
spending. We need to take down barriers, including barriers 
that we build into our insurance policies, and not keep dinging 
people a little bit here, a little bit there. It really adds 
up.
    I think we need to examine, back to Senator Roberts's 
question, when we look at the design of our health insurance 
policies and what should be covered and what is minimum 
credible coverage, in addition to any actuarial standard that 
we may decide upon that we feel sort of lives within our 
overall budget goals--I know this is going to be hard to 
afford. We need to line up those policies against what the very 
specific care needs will be for people who have chronic 
conditions and say how much are they going to be left to pay 
out-of-pocket?
    If it gets very high, we need to recognize the fact that 
they won't be able to manage their conditions. However much we 
may pay doctors to try to do a better job, they just won't be 
able to afford the cost sharing.
    Senator Bingaman. Senator Coburn.
    Oh, did you have more? Oh, go ahead.
    Senator Brown. I wouldn't mind hearing from others, if that 
is OK?
    Senator Bingaman. Yes, you could give a brief answer so we 
could get on to that other question, too.
    Ms. Ignagni. Yes, sir. I think Senator Brown has asked a 
very important question. And quickly, there are three buckets I 
think you want to look at.
    A number of the stakeholder groups have been working 
together on quality performance and how we can make 
recommendations to all of you. We have conferred with your 
staff about how you map all of this, and so I won't spend too 
much time, but to say there needs to be uniformity of 
performance measurement so physicians and hospitals aren't 
frustrated that many different payers, whether public or 
private, use different systems.
    They need to be very oriented toward what are the goals, 
what are we measuring, No. 1? One bucket.
    No. 2, there is a very significant need to--there has been 
underinvestment in research. The Institute of Medicine has 
repeatedly pointed to this. This is very important as we 
transition to a 21st century system. How do we get that 
research diffused into practice? That is a second issue in that 
bucket.
    Third bucket----
    Senator Brown. Is that comparative effectiveness?
    Ms. Ignagni. Well, it is not exclusively comparative 
effectiveness. Comparative effectiveness will talk about the 
effectiveness of drug-to-drug, drug-to-device, drug-to-bio, 
drug-to-therapy. What the investment in research, in addition 
to what I am talking about, is that the Institute of Medicine 
has pointed to gaps in research in specific areas.
    So we need to have not just more evaluation of what works. 
That is very, very important. But in addition, research the 
gaps in evidence. How do we get the best practices, that the 
professional societies are coming up with, very importantly 
diffused into practice? Atul Gawande has talked about an 
``institute of best practice.'' There are many things in that 
area.
    Third bucket--and I know, Senator, you want to move on, so 
I will be very quick about this--the whole idea of moving away 
from paying for a particular body part to be treated. Bundling 
services, episodes, global payments, capitation, a range of 
issues that were brought out in the 1990s, and from a health 
plan perspective, we understand what caused abrasion with 
physicians in the 1990s. And we have worked very, very hard.
    Now in the area of imaging, for example, you have 
physician-to-physician conferring about what is being ordered 
and what would be better based on physician practice 
guidelines. There is much more sophistication about this. That 
is just one example.
    But care coordination, as Karen said, is--Ken Thorpe has 
done terrific work here--how we can bundle things more 
effectively, do early intervention, keep people healthy. So I 
know, Senator, you want to move on, but those are just the 
highlights of the buckets, and we could provide more 
information.
    Mr. Nichols. I will be very brief as well. I just wanted to 
point out there are two dimensions I would say, and I agree 
with everything that has been said so far, on how to reduce 
cost.
    In the insurance case specifically, if you outlaw 
underwriting and aggressive risk selection and you make it not 
profitable, they will stop it. When they stop it, you will get 
money back.
    The difference between a premium and the claims costs, that 
is to say medical gloss ratio, is made up of a lot of 
activities, all of which are designed to make money for the 
company or help it break even. If you take away that incentive 
to do that, that will save a bunch of money.
    That is a fundamental difference between their load, by the 
way, in a large employer and a small employer. Ron is right. 
They don't risk rate individual employers when they are small, 
but they do put them into classes. There are a bunch of 
classes.
    What is interesting is the load they pay in that small 
group market is much higher than in the large group market. 
What we want to have is a country where all of us get the large 
group load.
    The second way is everything Karen just said about buying 
smart. The way I would put it, we want to re-align incentives 
so that hospitals and clinicians, and I mean across all sites 
of care, including drugs and devices, all of them should be 
aligned with the payers and the patients. We want high-quality 
care the first time, the best kind of care the first time. We 
want everybody to pay their fair share, but we want the docs 
and the hospitals to have the same interest in achieving that 
level of efficiency. To do that, you have to bundle.
    There are a lot of experiments going on right now. A lot of 
us are thinking about this really hard. A lot of smart people 
are working on it. I would just tell you to stay tuned. But I 
do think you have to move toward paying for a bigger bundle of 
services than not.
    Senator Bingaman. Senator Coburn.
    Senator Coburn. Thank you.
    First of all, let me thank you for being here. There are a 
lot of approaches for us getting to where we have a broad 
insurance market. I am convinced we don't have a market today. 
I don't think there is one that is really out there.
    The idea of stopping cherry-picking. If, in fact, we had a 
real transparent market, a truly transparent market where 
everybody could see, and we had true risk adjustment based on a 
penalty, based on what that risk is, why would that not work in 
terms of averaging out the cost to everybody and averaging away 
from the cherry-picking? Having real interest where we spread 
the cost of this all over everybody, including the highly sick 
and the highly well, why would that not work?
    Ms. Baicker. Let me give a 30,000-foot view and then let 
the experts weigh in. One of the reasons the small and nongroup 
market, I think, works so badly is the different risk rating 
that goes on in large groups versus small groups. If there is 
an opportunity for low-risk people to move across markets and 
see their premiums drop, then you have a devolution of risk 
pooling that is always churning underneath.
    How could you avoid that? Well, if each individual person 
were paying his or her expected costs, and sick people were 
paying a lot more and healthy people were paying a lot less, 
you wouldn't have any incentive for insurance companies to 
cherry-pick, and you wouldn't have any churning between 
markets. But we don't find that acceptable because we don't 
want sick people to have to pay a lot more for their healthcare 
than healthy people.
    There are ways to get around that, such as the risk-
adjusted vouchers I mentioned, where individuals are 
contributing the same amount to their healthcare regardless of 
whether they are high or low risk. But then insurers are 
getting paid more if they have a sicker pool and less if they 
have a less sick pool.
    Senator Coburn. That is what risk adjustment does.
    Ms. Baicker. Exactly. That, I think, would both undo the 
incentive for cherry-picking and would also undo the pressure 
that destabilizes market pooling. That could be done through 
side payments between insurers, or it could be done more 
centrally through public funds being paid out to higher risk 
groups and taxes being levied on lower risk groups.
    Senator Coburn. OK.
    Senator Bingaman. Anyone else want to comment on that?
    Mr. Williams. Yes, I would just comment briefly. I would 
first say that I think that there is an insurance market, 
particularly in the commercially insured sector where we have 
177 million people in that sector and where the purchasers are 
incredibly innovative.
    For example, one of the things that we are working on with 
our clients is a value-based insurance design that recognizes 
that for a person who has cancer, their medication has a very 
different implication for them than someone who is taking a 
convenience drug that you can do without based on their 
physician's judgment.
    And for the patient who needs that medication, their co-pay 
may be zero. In some instances, we have clients we are thinking 
about paying them to take the medication. So, the level of 
innovation that goes on in the commercial sector is much 
greater than goes on in other sectors.
    I think transparency is enormously important. But I think 
we focus a lot on transparency in the insurance component of 
the sector, but consumers need transparency at the physician's 
office.
    Mr. Nichols. You bet.
    Mr. Williams. They need it in the hospital. For example, at 
Aetna, any one of our members can go online and find out what 
the Aetna negotiated rate is for their physician and understand 
what they are going to pay for those top 30 procedures before 
they go see the physician.
    Now we also would love to enrich the level of quality data 
that we have, but we do believe there should be national 
standards and should be easy for physicians and quality data 
that physicians believe is clinically meaningful.
    I think what you miss is the level of innovation I 
mentioned. We have spent, one company, $1.8 billion, which is 
almost 10 percent of the entire amount that we are committing 
to health IT in the country. And so, the question of what do 
for-profit companies do?, we invest in innovation that really 
is about managing healthcare.
    Two-thirds of our customers are self-insured Fortune 100 
companies who very much have a population, long-term point of 
view. Their interest is, I have the employee now. I am going to 
have them mid-career, and they are going to work for me up 
until they retire. And so, there is just an enormous amount of 
innovation that goes on that would be missed.
    Senator Coburn. Well, let me just say in follow-up we spend 
twice as much as any nation per individual on healthcare. The 
closest to us is Switzerland. They are 25 percent below us. I 
don't think we need to put another dollar into healthcare. What 
I think we need to do is let market forces truly work, and we 
can do that through universal access. We can have everybody 
covered, and we can still get great quality healthcare.
    The idea of adding another $80 billion or $90 billion a 
year to enhance that, all that was going to do is make our 
problem worse. It is not going to make it better.
    I appreciate so much the idea that we have incentivized 
subspecialization in this country to a lot of benefit. There is 
no question. But we have disincentivized primary care to a 
tremendous disbenefit to everybody in this country. We are 
never going to get the prevention dollar savings until we start 
incentivizing primary care.
    Senator Bingaman. Senator Merkley.
    Oh, yes, did you want to make a comment on that?
    Ms. Ignagni. Could I just make one comment? I think Senator 
Coburn said something very important here, and one of the 
issues we have been working very closely with is the specialty 
societies are the primary care area, and it is very clear that 
there are shortages of slots in medical schools for primary 
care physicians. There aren't enough medical students going 
into primary care.
    The one thing the committee might consider as it constructs 
its recommendations is giving very significant help, if not 
free tuition, for the best kids to go through in primary care, 
a sort of National Merit Scholar Program.
    Senator Coburn. That doesn't solve the problem. Here is how 
you solve primary care: you pay them what they are worth. You 
pay for prevention. We have a pay differential where a 
pediatrician makes a third of what the average physician in 
this country makes.
    Ms. Ignagni. I agree.
    Senator Coburn. If you want people to go into pediatrics, 
you have to pay them.
    Ms. Ignagni. I agree. We totally agree with that.
    Senator Coburn. That means you may have to decrease some on 
the top side.
    Ms. Ignagni. Right.
    Senator Coburn. But to incentivize them to go there, when 
they are not going to be able to pay the med school loans 
afterwards, they are not going to stay there. That is what 
happens. We have internists all the time. Two percent of the 
medical school graduates this year went into primary care. That 
is 1 in 50. Forty-nine went into specialization or 
subspecialization, and it is going to accentuate our costs. It 
is going to drive the costs higher, much like the orthopedics.
    Ms. Ignagni. Senator, you just hopped in right before I 
took the breath to say exactly what you did, which is that I 
think you could attack this on two ends very productively. But 
a small investment in the beginning of the pipeline could help 
considerably, in addition to exactly what you have just said.
    Senator Coburn. We did it with the stimulus package. The 
fact is, it is not going to work until you make payment 
equitable.
    Ms. Ignagni. We have to make payment equitable.
    Senator Bingaman. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair.
    Some of you have touched on this, but I want you to try to 
address it straight on. That is incentives or adjustment in the 
structure of insurance related to health smart behaviors.
    We had the CEO of Safeway here a few weeks ago, and he has 
really been driving the concept in their organization of 
addressing issues of smoking, of weight. I believe exercise was 
somehow incorporated into the model.
    Individuals see financial rewards, if you will, for 
behavior that reduces the healthcare impacts, thereby making 
their quality of life higher and the costs for the organization 
much lower. I just wonder if you all would like to address the 
appropriateness of this in a broader healthcare strategy?
    Ms. Pollitz. 
    Ms. Pollitz. I would absolutely agree that prevention and 
wellness is an overwhelming public health issue, goes way 
beyond the bounds of insurance coverage. Having worked in my 
younger days at the Department of Health and Human Services and 
having come to appreciate the unsung heroes in the Public 
Health Service and how difficult it is to promote public 
health, I think the more you can invest in that, the better.
    I would add, though, that you will need to be very careful, 
and here is another area where accountability and transparency 
in your insurance products is going to come into play. You are 
going to need to be very careful about designing insurance 
products in ways that promote wellness or penalize non-
wellness.
    The Bush administration rewrote the rules. Congress passed 
a rule in 1996 that said group health plans may not 
discriminate against members based on their health status. 
Everyone in the group is the same. They get treated the same. 
They get the same benefits. They pay the same.
    There was a small exception for modest premium surcharges 
or discounts that could be provided for wellness, but those 
were very much hemmed in. So that you could get a discount, for 
example, a wellness discount on your insurance premium if you 
took a smoking cessation class, but not only if you could quit 
smoking. Because they didn't want to kind of cross the line 
into treating people differently based on how healthy they 
were.
    The Bush administration rewrote those rules and said that 
now group health plans can have penalties as big as 20 percent 
of the entire cost of the health insurance premium for people 
who not only don't enroll--who enroll in wellness programs, but 
who actually meet healthcare targets.
    Days after this regulation took effect, new products came 
on the market that offered to small employers now who had been 
buying, say, a $500 deductible for their group, to give them a 
$2,500 deductible and then require all the employees to come in 
for a health screen. And every time you pass a test, you get a 
$500 reduction in your deductible.
    So if you reduce your blood cholesterol, if your body mass 
index is the right amount, if you don't use tobacco products, 
if your blood pressure is not high, then you get a low 
deductible. But if you can't pass those things, now you are in 
a $2,500 deductible.
    The effect of that is to split up the pool, and it puts the 
sick people in the high deductible plans, and it puts the 
healthy people in the low deductible plans. That may be a 
wellness incentive, but it also makes it hard for people who 
have high cholesterol all of a sudden to afford their 
cholesterol medication because it is subject to a $2,500 
deductible.
    When you look at the Web site of the company that is 
offering this, right on their Qs and As for employers, how can 
you save money with this? It says some of your sick people will 
go somewhere else. They won't like it. They will sign up for 
their spouse's plan that doesn't have this.
    I think we want to create opportunities for wellness. Many, 
many opportunities for wellness. Make it hard for people to not 
lead healthy lives. But we want to be very careful about 
penalizing them in their health insurance and in particular in 
their deductibles and co-pays and charging them more when they 
get sick because that has now crossed a line into 
discrimination, and it is going to be counter to good public 
health.
    Senator Bingaman. Ms. Praeger, did you want to comment?
    Ms. Praeger. I would like to comment on that because it 
does go back to the re-alignment of payment incentives. A 
primary care physician can be a great partner in helping a 
person achieve wellness, but they get no reimbursement. They 
get no reimbursement for spending the time that would be 
necessary to help counsel that person.
    So re-aligning the payment mechanism I think is one of the 
real keys to achieving some overall--maybe not cost reduction, 
but certainly slowing down this escalating rising cost where 
the payment incentives are just----
    Senator Bingaman. Ms. Ignagni.
    Ms. Ignagni. Yes, Senator, the plans in your area that I 
know you know have been doing path-breaking work with primary 
care physicians. They are paying them significantly over the 
Medicare rates to actually take responsibility to help 
coordinate the care and support these healthy choices.
    There is great data. So we would be happy to provide it to 
you. But you have some path-breaking things going on in your 
State that you should be very proud of, particularly in the 
area of Medicare Advantage.
    Senator Bingaman. Mr. Williams and then Ms. Trautwein.
    Mr. Williams. Just a couple of comments. I would agree 
wholeheartedly that this area is a slippery slope. But I think 
that we see a tremendous level of enthusiasm among the employer 
community to implement well thought out, appropriate programs. 
I can tell you from our own experience with 36,000 employees, 
our medical costs went up 3 percent last year.
    The reason it went up only 3 percent was because our 
employees engage in wellness and fitness strictly on a 
voluntary basis, and each employee had an opportunity to earn 
an incentive based on their participation in exercise and 
wellness and fitness and really doing things that they were 
very comfortable with. Strictly voluntary basis.
    We see this among a large number of employers, and I think 
given the obesity epidemic we have in the country and the 
tremendous problems with chronic conditions, it is very 
important.
    Now one final comment is, again, another example with 
innovation. We are working with five large employers and with 
President Clinton's foundation and actually working with 
pediatricians so that children who are obese do not have to be 
diagnosed with a particular health condition in order for Aetna 
to pay for nutritional counseling, extra income for the 
pediatrician, and counseling sessions for the family with the 
dietician so that the family can have the dietician who is 
culturally appropriate to their background and can help them 
figure out what they need to do. It is another example of 
innovation really tackling what we all, I think, would agree is 
a fundamentally important problem.
    Senator Bingaman. Ms. Trautwein, and then Senator Burr had 
a question.
    Ms. Trautwein. I just want to mention one more thing on the 
wellness and just to add on to what everyone else has said 
here.
    You can set up these wellness programs, and most of them 
are set up based on a patient deciding what their own 
objectives are, and any rewards that they might receive are 
based on the plan that they have put together. So certainly 
someone that is in a wheelchair will have different objectives 
than someone who runs marathons, and that is critically 
important to know that the plan is not the same for everyone.
    Now I really don't think that we do enough to encourage 
employers today to put these programs together. I think our 
incentives should be greater, not less. That they should be 
able to provide bigger incentives, and some of them have 
nothing to do with insurance. There are all kinds of things 
that employers can do, and I think engaging employers is the 
key to making this whole thing work because, in fact, that is 
where most of the people are every day.
    Senator Bingaman. Senator Burr.
    Senator Coburn. Mr. Chairman.
    Senator Bingaman. Yes?
    Senator Coburn. Will we be allowed to submit written 
questions?
    Senator Bingaman. That is fine with me, if the witnesses 
are willing to answer them.
    Senator Coburn. Thank you.
    Senator Bingaman. I think it is a good idea.
    Senator Burr.
    Senator Burr. Thank you, Mr. Chairman. More importantly, 
thank you for taking some written questions because I certainly 
have more than the chairman seems scheduled to take.
    Let me just make a comment on this last question, and that 
is that individuals who receive some benefit participate in 
wellness and prevention programs at a much higher rate. Self-
insured employers have proven it, and they don't have to be 
punitive in the way they apply it.
    But if you want prevention and wellness to be a centerpiece 
of healthcare in the future, then you have to make sure the 
individual feels the financial benefits of the decisions that 
they make. It is tough to run 2 miles in the afternoon. But 
when you see a financial benefit come to you for doing it, you 
are more inclined to do that and then to diet in conjunction 
with it because that might benefit the cost of your overall 
healthcare plan as well.
    Now prior to the last two questioners, I was somewhat 
dumbfounded by the words that I hadn't heard. I read them in 
your testimony, but I didn't hear them in the verbal 
testimony--medical home, prevention and wellness. I was 
beginning to think maybe we were going to miss out on some 
things that I thought were absolutely staples of reform.
    The words that I did hear the most often, subsidies and 
incentives. That is troubling because it sort of suggests right 
at the beginning that you can't change the model so it works 
without subsidies or incentives. I remember when Dr. Coburn and 
I offered an alternative to the SCHIP proposal a month or so 
ago that covered all children under 300 percent poverty, and it 
did it some $100 billion cheaper than the proposal. It didn't 
pass.
    You can, with the right level of creativity, offer expanded 
coverage from the standpoint of the population and do it for 
less money. But you have to be willing to change what you are 
willing to try to achieve and how you are willing to structure 
that.
    I want to move to Ms. Pollitz for just a minute because I 
think if I heard you correctly, you insinuated that co-
payments, especially as it related to chronically ill patients, 
would alter whether they would get care. It may force them to 
get less care. It may force them not to get the preventive care 
that they need.
    The Rand Health Insurance Experiment found that people that 
paid nothing for their healthcare consumed 30 percent more than 
those who had some skin in the game--co-payment, deductible. So 
how do we balance between what the Rand Corporation went out 
and found, and that is that when we have no skin in the game, 
there is a 30 percent higher rate of consumption by those 
individuals. When you require some degree of responsibility for 
payment, you begin to have at least less care delivered, and I 
think their conclusion was, more appropriately, the care that 
they needed versus the care that they just wanted?
    Ms. Pollitz. Well, I think the finding, Senator, of the 
Rand experiment was that cost sharing is a blunt instrument, 
that it deters people from seeking necessary care as well as 
from seeking care that they could do without.
    Senator Burr. Well, as a matter of fact, what it found was 
a greater consultation with their doctors about the care that 
they did receive, that it was appropriate, that it was needed, 
but more importantly, that it would benefit their health 
outcome. I think that is the conclusion they came to.
    Ms. Pollitz. Well, and to go back to your opening about how 
much incentives versus how much medical homes, I think you are 
right. We need to find a balance.
    But at the end of the day, once someone has been diagnosed 
with diabetes, they need to test their blood four times a day. 
They need to take their insulin and their diabetes medications. 
They need to have regular physician checkups, labs, eye visits, 
check their feet. They need these things. This is not optional 
care. This is what it takes to manage diabetes well.
    And when they don't get that, they develop severe and 
expensive and life-threatening complications. They lose their 
eyesight. Their kidneys fail. Our ESRD program on Medicare, 
that is the most expensive healthcare program that is out there 
when people's kidneys fail, and half the people who are 
enrolled in that program have diabetes.
    So when we try to save money, you know, just pay me a 
dollar every time for a co-pay for every one of your things, 
every one of your doctor visits, every one of your medications, 
all of your diabetes supplies, we are erecting barriers to 
people getting that care because some just can't--they just 
can't do it.
    I think we need to examine the role of co-payments and 
financial incentives and say for things that we know are tried 
and true, or as Mr. Williams said, once somebody gets cancer, I 
want them to take their antiemetic so that they can complete 
their chemotherapy course. I don't want them to pay for the 
cost of $1,000 drug.
    Senator Burr. I think what Aetna's experience has been is 
that once they educate their beneficiaries on why they follow 
the path that Aetna and the healthcare professional lays out 
that, No. 1, the outcome is better and, No. 2, the amazing 
thing is the cost is less. So it actually suggests that if it 
takes co-payments to get people in a different conversation 
with their healthcare professional, that is probably a good 
thing.
    Now you did say as well in your testimony that the public 
plan--I guess it is this public competition that we are talking 
about with the private sector--should be a tough negotiator. Is 
Medicare and Medicaid a tough negotiator?
    Ms. Pollitz. Well, Medicaid I think is an example of a 
strapped program that is underfunded.
    Senator Burr. OK, let us just talk about Medicare.
    Ms. Pollitz. It absolutely underpays, and we should fix 
that. Is Medicare a tough negotiator? Medicare pays what it 
pays.
    Senator Burr. Do we adequately address prevention and 
wellness in Medicare?
    Ms. Pollitz. Oh, I think we have improved over the years 
coverage of certain preventive services, but, no, I think we 
could do a better job.
    Senator Burr. Certain preventive services, maybe six of 
them that we added----
    Ms. Pollitz. Exactly.
    Senator Burr [continuing]. In the 1990s, and we fought 
tooth and nail to get that.
    Ms. Pollitz. Right.
    Senator Burr. But when you look at those six services and 
you talk about prevention and wellness, they fall so far short 
from a standpoint of what is coverage, and that is a public 
plan. That is the U.S. Government. That is CMS. That is 
basically a plan that has been unlimited from a standpoint of 
what they could spend, but I think an example of a serious flaw 
in architecture compared to exactly what all of you have 
described today the architecture of the future.
    Mr. Nichols. Sir, if I could jump in, I would just say that 
I agree with you----
    Senator Bingaman. Why don't you give that answer, and then 
I will call on Senator Hagan?
    Mr. Nichols. OK, sir. I agree with you. We have essentially 
tied Medicare's hands from becoming a very prudent purchaser, a 
value-based purchaser, and there is a lot of discussion about 
how to make Medicare a better buyer. But it ends up kind of 
making your fundamental point that is motivation and incentives 
are all part of this. But at the end of the day, we need to 
recognize it is in our interest if the chronically ill get 
appropriate services early, and that is really what Karen is 
talking about. She is talking about ways to try to figure out 
how do we make that happen.
    I remember Ron talking about how in Aetna now they have a 
product where they are actually going to have zero co-pay for 
certain things, maybe even pay people to do certain things 
because we are all better off if those diabetics manage their 
care with their condition absolutely appropriately and stay out 
of the hospital. That is really what we are all trying to work 
toward here, I think.
    Senator Burr. Thank you, Mr. Chairman.
    Senator Bingaman. Senator Hagan and then Senator Harkin.
    Senator Hagan. Thank you, Mr. Chairman.
    I had the privilege to sit on the State employee health 
plan for the State of North Carolina, where we covered about 
800,000 people. What we are talking about right now is the fact 
that so much of the cost is really for chronic disease--
diabetes, cardiac failure. That is where so much attention 
needs to be given, wanting to be sure people take their 
medication on a timely basis.
    What I really wanted to ask about right now has to do with 
cost, and Mr. Williams, this question is addressed to you. So 
many of the physicians that I talk to say that if health 
insurance plans have a standardized format, that is just the 
standardization of forms, they could save so much money in 
their individual offices from just handling the forms. Why 
can't we do that?
    Mr. Williams. I would say that I think there are important 
and significant opportunities to administratively simplify so 
that physicians are spending less time on paperwork. We have a 
major initiative across the industry, that I am chairing, 
taking a look at what we can do to standardize processes and, 
most importantly, also automate processes.
    For example, in our plan, we get over 80 percent of our 
claims electronically. Over 26 percent of the physician 
inquiries are handled over the Internet, where a physician gets 
the data they need electronically. We are trying to put in 
place a multipair portal so the physician can go one place and 
reach out to any health plan and get eligibility data.
    I think it is a fair criticism, and I think it is an 
opportunity for the industry to really work hard to 
administratively simplify what we do.
    Senator Hagan. And to the whole panel, do you think this is 
something that Congress should weigh in on? Yes.
    Ms. Ignagni. Senator, I think you should expect stakeholder 
responsibility. Mr. Williams said it very well. He is chairing 
a major effort that we are undertaking with the Blue Cross Blue 
Shield Association together to look at every area where we can 
simplify administrative processes and costs, and reduce costs.
    I think you should expect us to come forward and identify 
that, talk about what the Government in a healthcare reform 
effort could facilitate as you move forward in developing 
legislation, what should be expected in the private sector. We 
hope by doing so, that might start a series of stakeholder 
responsibility conversations about the area, the broad area of 
cost containment and the opportunity to take a point or a point 
and a half off future growth.
    We gave you a chart in our testimony if we were able to do 
that as a society, just over 10 years, if you took 1.7 
percentage points off future rate of growth, the projections, 
you are talking about savings in the neighborhood of $3.5 
trillion. Those are quite significant.
    But you should expect us to come forward and identify that.
    Senator Hagan. I do think with the initiative that we have 
from the health IT perspective that it is going to drive quite 
a bit of the standardization of these forms.
    I had one other question having to do with the minimum 
benefit package, and I know a lot of regulation has to go on at 
the State and the Federal level. Many States have different 
individual requirements on benefits that they mandate that are 
covered at the State level.
    This question has to do with how would a minimum benefit 
package be put together that would be available across all 50 
States? Dr. Nichols, that was directly in one of your 
statements.
    Mr. Nichols. I would say that the way you want to think 
about this, first of all, let us all get the same set of facts 
in our heads. A lot of discussion about the cost of benefit 
mandates out there, a lot of empirical work that would show, in 
fact, benefit mandates don't really add that much to cost. The 
serious econometric work that is in my profession suggest 3 
percent to 5 percent. CBO has concluded that.
    The State of Texas Department of Insurance, not a noted 
left wing organization, concluded 3 percent in the State of 
Texas. And by the way, they include in-patient adult rehab and 
alcohol counseling. So it is serious benefits there.
    The point is this, how we pay for and manage care is far 
more important than the benefits that are covered. The reason 
those econometric studies find there is very little net impact 
of specific benefit mandates is because they compare the small 
group pockets where those things are relevant to the large 
group pockets. The large group pockets are uniformly more 
generous, and yet they have lower cost.
    So let us ask ourselves how do they do that? A, they do 
what Ron said a moment ago. The big employers really have the 
time and potential in resources to work with the third-party 
administrators to try to be smarter about what they buy, and 
they also negotiate better contracts with the clinicians 
because they have buying power.
    The point is we need to extend that bargaining power and 
that information utilization potential to all of us and not 
just some of us. So I would say the one thing Congress could do 
in the short run is to mandate transparency about how different 
activities are spent. That will encourage the industry and the 
clinicians to work together.
    But on sort of selecting the benefit package itself, I 
would come back to at some level it has to be a Federal 
decision. You don't want 50 different benefit packages around 
the country.
    What you do, however, want is to allow the market to 
breathe. You do not want this to be something that is 
absolutely written in stone and force, say, very efficient 
integrated health systems who are very good at managing care 
and patient satisfaction, you don't want to force them to a 
certain kind of deductible.
    Similarly, you don't want to force folks who manage care 
differently to have a particular product. So, in my view, you 
want an actuarial value standard and let the market go.
    Senator Hagan. Ms. Pollitz.
    Ms. Pollitz. I would just add to that that while I agree 
you need to set a Federal standard--I mean, if people need 
coverage, they need coverage. It doesn't matter where they 
live.
    To the extent that you are going to allow some flexibility 
through an actuarial equivalent standard, and I appreciate 
Len's stress on sort of the positive implications of certain 
kinds of different benefit designs, but I think you need to be 
very careful, and two actuarial equivalent plans might on 
average cover the same thing. But this plan covers 100 percent 
of what cancer patients need, but nothing of what diabetics 
need. This one, 100 percent of what diabetics needs and 
nothing----
    We can't just sort of say actuarial equivalence is close 
enough. I think in the quest for transparency and monitoring 
this over time, you will also need to develop some better 
measures of uncompensated care and medical debt and check those 
frequently.
    To the extent that we find that our actuarially equivalent 
plans that are meeting our standards are still leaving people 
in medical debt, and check them by conditions, then you need to 
go back and tweak it. But I think we buy health insurance in 
case we get sick. So the standard that you set needs to take 
care of people when they have cancer and diabetes and heart 
attacks and when they get pregnant, and it can't leave them 
with thousands of dollars of medical bills every year that they 
have to keep paying in addition to what we are asking them to 
pay for their premiums.
    Senator Bingaman. Senator Harkin.
    Senator Harkin. Thank you, Mr. Chairman.
    I have been trying to get my head around how insurance is 
utilized more effectively in the field that everyone has 
mentioned here earlier, and that is in prevention and wellness. 
How do we get insurance involved in that?
    Just a couple of observations, 75 percent of all Medicare 
spending is on chronic illnesses, most of which are 
preventable. So the old saw, you cut where the fat is the 
thickest.
    I saw a picture, a PowerPoint that Dr. Dean Ornish put up 
one time, and the first picture was of a sink that was 
overflowing with water, and you had people on the floor mopping 
it up. His point was that for most of our healthcare today, we 
are mopping up the floor, but no one is shutting off the sink.
    It seems to me that is what insurance is. The insurance is 
paying for mopping up the floor, but not paying much to think 
about shutting off the sink. So, I have been trying to figure 
out how do we make it so?
    Mr. Williams, your company, you have to pay your 
shareholders. Your obligation is to your shareholders. You have 
to make a profit. All insurance--well, except maybe mutuals. 
But that is a different situation.
    We all know about prevention and wellness. Everyone has 
mentioned it. We have to focus more on that. What is the role 
of insurance in insuring people for engaging in healthful 
lifestyles, for businesses to be involved?
    I can figure out the taxing system. I mean, I can figure 
tax incentives for businesses and individuals that can 
motivate, provide financial incentives and things like that. 
That is not a heavy lift.
    Please explain for me how we get the insurance companies 
involved in this.
    Mr. Williams. Sure. I would first start off by describing 
our business model today versus a number of years ago. A number 
of years ago, we were a financing mechanism. We paid the 
claims, and we provided customer service.
    Over the past 10 years, we have transformed and added a 
whole set of prevention and wellness and clinical support in 
health informatics functions and capabilities, and I will be 
more specific. Twenty percent of the people who work at Aetna 
are nurses, doctors, pharmacists, behavioral health 
specialists, and 20 percent more are IT professionals.
    Senator Harkin. IT.
    Mr. Williams. IT. What the IT professionals do is help us 
identify from the claims data, the pharmacy data, the lab 
values, the health risk assessments, patients or members who 
are on the path to becoming a diabetic or on the path to 
becoming a hypertensive.
    Now our job is not to treat them. Our job is to identify 
them and offer them on a voluntary basis education, 
information, counseling support so that when they go see the 
doctor, they are in a position to really fully engage in 
understanding their health status. Because if you are a 
diabetic and you take better care of yourself, there are fewer 
claims.
    Senator Harkin. Pre-diabetic?
    Mr. Williams. Pre-diabetic. Well, even if you are in an 
early stage of being a diabetic. What happens is most of these 
conditions are progressive. You start out ``pre.'' You enter 
the early. You go through the mid-stage, and then you go 
through the late stage.
    What we spend our time doing is first identifying people 
who have the condition, understanding the stage they are at, 
and trying to make certain they are educated and understand 
what they need to do to slow down the progression through that 
process.
    Senator Harkin. Let me ask one question. Medicare right 
now, Medicare will pay for nutrition counseling if you are 
diabetic.
    Mr. Williams. Right.
    Senator Harkin. But they will not pay for nutrition 
counseling if you are pre-diabetic. Well, that doesn't make 
sense.
    Mr. Williams. Well----
    Senator Harkin. Now let me ask you, does your insurance 
company, do you have policies that say to your policyholder 
that if you go in and get tested and you meet certain indices 
for being pre-diabetic, we will pay for you, we will cover you 
to go get nutrition counseling?
    Mr. Williams. Yes, we do have. Yes, the short answer is 
yes.
    Senator Harkin. You have policies that do that? Covers 
everybody?
    Mr. Williams. That is correct. Yes.
    Senator Harkin. Or is it a special thing that you have to 
get in a policy?
    Mr. Williams. Well, what would happen is the policy choice 
is always the employer's choice. But I would say the vast 
majority--and let me answer more broadly. There is a set of 
recommended prevention guidelines recommended by the U.S. 
Preventive Services Task Force.
    Senator Harkin. I am very familiar with it.
    Mr. Williams. We cover it, period. If it is recommended as 
a preventive service, we cover it.
    Then there are a set of things that relate to chronic 
conditions, and we have the flexibility to identify what we 
believe is a good investment to slow down the rate of increase. 
So we would pay for nutritional counseling. We pay for a whole 
host of things that would be appropriate services to slow down 
the rate of progression through a chronic condition. At our 
heart, our business is today managing that.
    Senator Harkin. That would be a minimum benefit in every 
one of your policies then?
    Mr. Williams. Yes.
    Senator Harkin. And you have a smoking cessation, anything 
that is on the U.S. Preventive Health Task Force, the A or B?
    Mr. Williams. Yes, we would typically cover. I mean, there 
would be rare exceptions. But I mean, just to be clear, I would 
easily--just sitting here today, I would say 85, 90 percent 
would easily cover everything.
    Senator Harkin. Right now, only 7 percent of employers 
offer wellness and prevention programs to their employees. 
Seven percent offer some form of wellness and prevention 
programs to their employees. So we have a long way to go to get 
in business.
    Now again, we can figure that one out. With tax incentives 
and things like that, that is not a heavy lift. We can figure 
that one out. I still wonder about getting up front on the 
prevention side because a lot of what you are dealing with in 
insurance is the result of something that happens before 
insurance ever kicks in.
    For example, Mr. Williams and Ms. Ignagni, I mean, 
representing the two insurance industries here, you should be 
in the forefront of the fight to get sugary sodas out of our 
schools and junk food out of our schools and getting kids 
exercise in schools, you know? You have to be in the forefront 
of that because kids learn their bad habits there.
    What do we say to our kids when they go to school and they 
see soda machines and vending machines with all the junk food? 
What message are we sending to them? That is OK, fine. You go 
ahead and do that.
    Again, this is not in your insurance realm, but it would 
seem to me as an insurance company, you ought to be in that 
battle, in that fight to have better--and also advertising to 
kids. Right now, a kid, a child--I am a little off here now--
between 7 and 12, somewhere in that neighborhood, 5 to 12, sees 
an average of I think it is pretty close to 200, maybe in the 
thousands of ads on TV every year. OK, it is in the several 
thousands of ads they see every year for food. Just food ads.
    How many of those ads are for fruits and vegetables and 
good eating and nutrition? None of them. They are all for 
sugar, starches, sodium, things that just lead to bad habits.
    Well, you know, if we don't correct that, we are mopping 
the floor, and your insurance companies are paying for mopping 
the floor. I, as a policyholder, am paying more for mopping the 
floor, and I don't want to pay anymore for that.
    So, I just urge you to get engaged in that. Now I didn't 
mean to give a speech on that, but every one of you mentioned 
prevention and wellness as part of this battle. Well, it seems 
to me we have to do both. We have to figure out how the 
insurance companies handle that later on and then how we move 
up forward and start early programs.
    I don't know how insurance is at all--you have just got to 
do it as a public policy thing? Well, maybe there is a bottom 
line. Looking ahead, there would be a bottom-line benefit for 
you if less people became obese or less people smoked and less 
people had chronic illnesses. It would be better for your 
bottom line, too, I guess, now that I think about it.
    Let me ask one more question. My time is running out. I 
want to ask about a public plan. I think Senator Brown brought 
it up.
    Can a public plan co-exist with private insurance plans? 
That seems to be a question I am getting all the time. Can we 
have a health reform that has all these private plans and then 
have a public plan? What do you think? I don't know.
    Mr. Williams. My opinion is, no, it cannot.
    Senator Harkin. It cannot.
    Mr. Williams. The public plan, Medicare does not negotiate. 
I have not yet met a physician who has negotiated with Medicare 
or a hospital that has negotiated with Medicare. It sets a 
market rate, and that is the rate.
    It is extremely difficult for any one entity to be both the 
referee and a player in the game. I think that there are many 
opportunities to improve the market by having the Federal 
Government play a role in the context of regulator and referee, 
which we have talked about extensively today.
    I think that the problem we are trying to solve, which is 
making certain that everyone has access to healthcare services, 
can be addressed through the guaranteed issue, no pre-existing 
exclusions, and some of the other reforms that we are 
describing. I also believe that when we look at why private 
insurance costs so much, we must confront the data I have seen 
that suggest private employers are paying $90 billion more than 
they would otherwise pay because of the cost shift from 
Medicare to the private sector.
    To the extent that we create a public plan that exacerbates 
the cost shift, we are on the slippery slope, and I would say 
it probably would have been greased to accelerate our momentum 
toward a single payer system.
    I believe that the innovation that the private sector 
represents is extremely important. I think we have 177 million 
people in that sector that is working well, and I think if we 
can address the limitations we have to make certain that 
everyone has access to healthcare without pre-existing 
conditions and that we are not looking at health status as a 
means of rating, that we can solve the problem in a way that 
would address the underlying issues.
    Senator Harkin. Ms. Trautwein, do you have--I am just going 
to go down the line. Do you have any views on that?
    Ms. Trautwein. Yes, I would just add to that, and I also 
don't think that it is possible for a public and private sector 
to compete on a level playing field. I don't see any way that 
is possible, given the nonrate negotiation that Ron was talking 
about.
    I think when you don't have a level playing field, what 
happens is one entity or the other is selected against. So I 
suppose the public program could be set up so that it gets all 
the bad selection, but more likely what is going to happen is, 
as Ron said, the private programs will be selected against even 
more than they are today, and the cost shifting would be 
exacerbated even more than it already is. I just think that is 
a recipe for disaster.
    Senator Harkin. Ms. Pollitz.
    Ms. Pollitz. Private health insurance and public plans co-
exist today. Almost half of our healthcare spending is covered 
by public programs today.
    When you talk about the cost shift, we have had to develop 
public programs because private insurance won't take care of 
people who are vulnerable. That is why we created the Medicare 
program because private insurance wasn't taking care of people 
who are elderly or disabled or when their kidneys failed or 
when they got ALS. So we had to create a public program for 
that.
    Two-thirds of the States have high-risk pools.
    Senator Harkin. Say that again.
    Ms. Pollitz. Two-thirds of the States have high-risk pools, 
public plans when private insurance won't take care of people, 
won't cover them because they are uninsurable. We have come up 
with this concept of uninsurable. So we had to create public 
plans to take care of that.
    Our latest eligibility category for the Medicaid program 
was underinsured women who have breast and cervical cancer. 
That is now a reason that you can get into the Medicaid program 
to get treatments because the private sector isn't providing 
good coverage that takes care of what people need.
    Of course, they can co-exist. They do co-exist. The cost 
shift overwhelmingly goes in the direction of the public plans. 
They do get--they get all of the expensive vulnerable cases 
that private insurance won't take care of. Now granted, as Len 
said, we need to change the business model and change the way 
markets compete so that we can try to get private insurers to 
begin, for the first time, to compete to take care of people 
when they are sick and not just to avoid them.
    But I think, given that the track record on that is pretty 
sparse, it is very helpful to have a public plan that you 
create for that very purpose. It cues the market. It says this 
is the kind of behavior we want, and you can charter that plan 
so that it doesn't just compete. It certainly won't compete to 
maximize profits.
    But you can charter that plan to be an innovator, not to 
crowd out other private sector innovations, but to be where 
public plans brought us DRGs and RBRVS and a lot of innovations 
that we have in payment that have been widely adopted by 
private carriers.
    A public plan can do that and can be tasked in its charter 
with sharing what it learns and what it gains from that 
investment and not just trying to keep all those secrets for 
itself. I think it is absolutely essential.
    Senator Harkin. Very good.
    Ms. Ignagni. We started our work from the proposition that 
the status quo was not acceptable. Everything we have proposed 
today and all the work we have done over the last 2 years is 
designed to change the market as it exists today. So we hope 
that you don't make judgments about what is the case today and 
what is to be the case tomorrow based on what are the rules 
today.
    If we get everyone in, we can change the system 
dramatically to guarantee issue, to deal with the health status 
rating, to make the system more transparent and consistent 
across 50 States, and to create the kind of system that we 
believe the American people want. To have a system, we do have 
significant amount of cost shifting.
    We have provided some data based on California, which is 
the best data system in the country, that shows you real cost 
shifting as Government continues to underpay both in Medicaid 
as well as Medicare. So this is a very significant issue in 
terms of ever establishing a level playing field.
    Second, all of the work that is being done in disease 
management, care coordination, medical homes that are working 
right now, pay-for-performance, upside, downsides, and real 
measurement to actually do it in the way that all of you have 
suggested, all of that is being done and pioneered in the 
private sector.
    We have data that is beginning to come in, and it is very 
impressive. It is going to be shared. It will be researched. It 
will be third party verified. So we have a lot to report about 
what is happening.
    Clearly, the market today doesn't work because we don't 
have everyone in. Everything that is now in existence in terms 
of the regulatory structure works through that prism. When you 
change that and you create subsidies, there are a package of 
things you can do that will change everything.
    What we have done is proposed an aggressive system of 
Government regulation that would supervise private sector 
competition and the competition that I think the people want.
    Mr. Nichols. Senator, you asked a great question, and I 
would say in some ways, it is sort of the question of the week 
or month at least. I would say there really are two ways to 
start answering it.
    The first is, to build on what Karen just said, the market 
is broken now. It is not working, and the consequence of that 
is that a lot of people have lost their trust. They have lost 
their trust in our ability to change the rules in such a way 
that all insurers will behave the way most of us think they 
would if you change the rules.
    That lack of trust is real and that need for, if you will, 
reassurance of some other kind of plan being available is a 
real, profound, I would say, demand out there.
    The second thing that we need to keep in mind is that if we 
just decide to put everybody into Medicare, except for the 
private plans that would survive for maybe 3 years--I will give 
Ron that--we are going to end up with a system that is 
basically going to be run from Washington and Baltimore. I 
don't think many of us are in favor of that either.
    So what I would propose is you think about a public plan 
model more like what State employees do. Maybe we should ask 
Senator Hagan how it worked down there in North Carolina? But 
in general, States, 34 of them today, decided to have a self-
funded plan for which the State bears the insurance risk. That 
is to say the State has appointed the leaders of the plan. They 
don't profit in any way from the hint of denying care. They 
can't.
    Senator Harkin. Thirty-four?
    Mr. Nichols. Thirty-four. Yes, sir. We can give you names 
and so forth. What they do with that plan, sir, is they let it 
compete with the private insurance industry, and in most cases 
where they have been doing this, they have been doing it more 
than 15 years. I am not making this up. This has been going on 
for a long time.
    So what is the deal? The deal is they wanted a plan where 
they had basically--it is typically a PPO type arrangement--
larger providers. They typically hire a private insurer to 
process claims and negotiate with contracts with the providers. 
So they got a big network. They compete head-to-head on a 
fairly level playing field.
    Now it turns out we wrote a paper just last week, and we 
would be glad to send it to you and talk with you about it, 
that would outline kind of how you could do this. We would 
suggest even stronger firewalls between the people who run the 
new marketplace and the people who run the plan.
    But the point is these States have been doing it without 
the kind of firewalls we would recommend you consider, and 
still it functions effectively and has led to, in many cases, 
better performance in that part of the insurance market than 
any other part of a lot of States. So I do think there is a 
model between Medicare and nothing that could get us where we 
need to be.
    Senator Harkin. I would like to see that paper.
    Ms. Baicker. Very briefly, I agree that in theory there 
could be great gains to having a public plan, and I worry that 
in practice one ends up doing more harm than good. So it very 
much depends on the implementation details.
    With your indulgence, just one sentence or two on your last 
question about why we don't see more investment in prevention 
and wellness by insurers. I think there is an upstream problem 
and a downstream problem that as people age onto Medicare, the 
problems that they develop in middle age they bring with them 
to another insurer. So private insurers may not have the 
incentives to invest in wellness when the cost--or benefits 
accrue much further down the line.
    Similarly, a lot of the problems that private insurers 
inherit happened at a time way before they had any control over 
what was going on, and that is a key case for public policy 
intervention that when we are talking about health reform, not 
just health insurance reform, but health reform to get all 
Americans access to better health through a lifetime, that has 
to be investment in wellness, in the availability of healthy 
foods.
    If you go to poor neighborhoods, there aren't supermarkets 
in a lot of places, and that is a matter of public policy. 
There aren't green spaces to exercise in. That is a matter of 
public policy. So I think we have to look at health reform as a 
much broader endeavor, and that may be much more cost effective 
than anything we can do within the healthcare or health 
insurance system.
    Thanks.
    Ms. Praeger. Thank you, and I just have to comment on the 
supermarket. If you go to a supermarket in an affluent 
neighborhood, the fresh produce is like you are in an art 
museum. It looks gorgeous. It is beautiful. It is perfect. If 
you go into low-income neighborhoods, if they have fresh 
produce at all, it doesn't look very good, and it is kind of 
expensive. So it is no wonder the diet issue is a problem.
    The public plan, and I have read Dr. Nichols's report. It 
is a good read and a fast read, and I think he makes some very 
good points.
    Senator Harkin. You mean we could probably understand it?
    [Laughter.]
    Ms. Praeger. Well, I could, so, yes.
    The public plan, if it is competing on a level playing 
field with the private marketplace, I think there can be some 
benefits to it. But I think, first, you need to make sure that 
that public plan is charging a premium that is sufficient to 
pay the claims, and that is critically important for the long-
term viability and for the competitiveness of it.
    The public plan should comply with all of the State 
regulations that are in force in that State where that public 
plan is offered, and Kansas is a State that has a State-run, 
State public plan for its State employees, and it does work 
side by side with the private market plans.
    Then the payment system should be based on a negotiation 
and not just dictated that this is what providers will be paid. 
So if you have equal rules and are treating the public plan the 
same as the private plan, it can help drive market changes 
because of the ability to perhaps bring some standards across 
the States, and I think eventually there are areas where 
standards set at the Federal level are pretty important.
    Some of the things that we have done through State 
regulation that we are advocating should happen in all States 
are things that would address some of the administrative costs 
that Senator Hagan referred to a few minutes ago. Utilization 
review ought to be standardized, and we have worked with our 
health insurance plans to get model legislation drafted so that 
utilization review is handled in the same way so that companies 
don't have to comply with different rules in different States.
    External review, the same. Rate and form filing. We have a 
system for electronic rate and form filing through our national 
association, and that needs to be extended to health insurance 
as well. So uniform standard. So there are a lot of things that 
the States are working on that could benefit and inform and 
perhaps lead to greater uniformity by those things being 
adopted at the Federal level.
    Senator Bingaman. Senator Casey is the only one who hasn't 
had a chance to ask some questions. Go ahead.
    Senator Casey. Thank you, Senator Bingaman.
    I appreciate and it was interesting to listen to that line 
of questioning that Senator Harkin was propounding to the 
witnesses. I appreciate that. Whenever Senator Harkin is 
speaking, we listen and we learn. He has a lot of wisdom.
    And I have you for the next 2--no, I am only kidding. I was 
going to say 2 hours.
    [Laughter.]
    We have some time here. I wanted to pick up on--I am 
serious about one of the lines of questioning that Senator 
Harkin focused on. I will deal with two things. One is the 
question of what we are going to do going forward on the 
individual market and small group markets. But before I get to 
that, I wanted to get back to prevention because he asked some 
important questions.
    Dr. Baicker, I wanted to start with you. So many Americans 
today understand what we are talking about here when we talk 
about prevention and wellness. They get it. We may not practice 
it enough. The statistic about 7 percent of employers having it 
in place, even if that were tripled, it wouldn't be enough.
    I think people understand it, but they also understand that 
we are not there yet. Tell me two things, if you can--and I 
will ask anyone else to chime in--what are the strategies on 
prevention and wellness that we know work, that it is 
irrefutable that the strategy works?
    And second, tell me the mechanics of getting there. It is 
great to have something that works. We can point to programs 
that work. We can point to strategies that work and a whole 
series of whether it is healthcare or other parts of our 
economy, but we have to put in place a strategy that we know 
will work. We also have to have the mechanics to make sure it 
gets implemented so that it actually will work and not just 
theoretically work.
    But tell us about that. Tell us what we know that--and not 
that it is a Democratic idea or a Republican idea, tell me what 
we know about the consensus of what works strategically for 
prevention and wellness.
    Ms. Baicker. That is a great question, and I wish I could 
give you a complete answer. But I am not sure we have a 
complete answer. I will give you my best answer.
    Senator Casey. In other words, let me just interrupt for 
one second. If you had a magic wand and you had total control 
over what the U.S. Senate does on healthcare, what are the 
three things you would do on prevention and wellness? What 
would you put in the statute?
    Ms. Baicker. You are going to want to take the wand back.
    [Laughter.]
    Senator Casey. Give it a try. This is not a real formal 
hearing. Give it a try.
    Ms. Baicker. I know there is no wand. I would like to 
unbundle the idea of prevention or wellness as a monolithic 
thing because I think there are many different things with 
different implications for cost and effectiveness that 
frequently get bundled up together, and I think that damages 
the debate.
    Senator Casey. OK.
    Ms. Baicker. We talk a lot about should preventive care be 
coverage and preventive care have no co-payment. Shouldn't we 
invest more in preventive care? By and large, preventive care 
does not save money. There are lots of chunks of preventive 
care that are cost effective, meaning you spend some money and 
you get a lot of health for it.
    The best, most cost-effective items in what we generally 
call preventive care do save a little bit of money. Flu shots 
for toddlers. There are some interventions that when you spend 
money on them, you actually reduce healthcare spending over the 
short run, but there are very few.
    Senator Casey. Let me stop you there for a second. Tell me 
about the ones that--preventive strategies that are helpful to 
the individual but don't save money.
    Ms. Baicker. There is a great article on this in the New 
England Journal of Medicine----
    Senator Casey. It is still the idea of the----
    Ms. Baicker [continuing]. That I would love to send your 
way, not authored by me. That there are a chunk of tests that 
yield life savings at a reasonable cost. So the metric that I 
am using is how much does it cost to save a life year? For the 
most cost-effective things, flu shots, you actually save money 
and save a life year.
    Then there is a chunk of things that cost money, but buy 
you life years at a very reasonable rate, at a rate that we 
think, boy, that is worth the money spent on it instead of 
spending it on other things besides healthcare. So things like 
screening people who are at risk of hypertension or who are at 
risk of diabetes or other complications.
    Now that same screening procedure that is done on a person 
who has risk factors, if, instead, you do that on a much older 
person or a person without those risk factors, it becomes cost 
ineffective. So the very same procedure is cost effective for 
some people and not cost effective for others based on the 
underlying risk, based on the individual circumstances.
    Some of the innovation that Mr. Williams was talking about 
at Aetna is how do you tailor your insurance design to promote 
the kind of consumption that is high value while not promoting 
the kind of consumption that is low value? That is tricky when 
the same procedure sometimes falls into one category, or 
sometimes falls into the other.
    Now there are some procedures that are almost never cost 
saving, or never cost effective, that are still preventive, but 
they are tests that really yield very low returns in terms of 
health. Those you probably don't even want to think of as 
preventive care.
    How do you get there for preventive care? Then I will do a 
quick recap on wellness. On preventive care, value-based 
insurance design is one promising angle, where you pay people 
to get the care that is of high value and you charge much 
higher co-payments for the care that is of lower value. Lots of 
things are going to fall differentially along that spectrum 
based on the individual patient's risk characteristics.
    That makes for a very tricky contract, and the logistics of 
how you write that down in a way that promotes stretching our 
healthcare dollars as far as possible while not being 
discriminatory or unenforceable or tricking people into 
thinking that they are getting protections when they aren't, 
that is an important regulatory question.
    On the wellness side of things, I think the reason we are 
seeing a rising roll of employers in that market where you 
would naturally think why aren't the insurers doing this is 
that employers often have a longer-run relationship with their 
employees than insurers have with their covered lives.
    If you are going to be at an employer for a decade, your 
health and productivity matters more to that employer than it 
does to the insurer when you might only be in their plan for a 
few years. Employers also accrue some of the benefits of having 
you be more productive in terms of being a more productive 
worker.
    So we would like to think that individuals should just do 
this on their own for their own health, but there are all sorts 
of barriers to individuals being able to successfully implement 
a lifelong wellness program, where an employer might be able to 
step in with an environment that promotes it 8 hours a day 
instead of the few interactions that you have with your insurer 
or even with your physician.
    So what works on the wellness front, evidence is still 
coming in on that. But I think there is strong evidence that it 
matters a lot that there be day-in, day-out enforcement of 
health behaviors, re-
inforcement of good health behaviors, and the workplace is one 
place for that. Communities are another place. You want 
integration of community efforts and employer efforts. Again, 
that is a matter of public policy, not one that I think 
insurers can implement on their own.
    Senator Casey. Let me stop you there for a second and put 
you on the spot with regard to employers. Give us a large 
employer example of the strategy just on wellness that is 
working.
    Ms. Baicker. I am hesitant to name a particular employer, 
but Len said Safeway.
    [Laughter.]
    But there are----
    Senator Casey. What do you say?
    Mr. Nichols. Pitney-Bowes.
    Ms. Baicker. That is another good example.
    Senator Casey. Tell me what they did. In other words, 
around here, there aren't always a lot of original ideas in 
Washington. We borrow all the time, and there is nothing wrong 
with being a copycat if it is a good idea.
    Tell me--if you don't want to specify a company--what the 
elements are that are in place for those big companies that we 
should put in the bill.
    Ms. Baicker. Those are two different questions, and I think 
it is a key distinction. The things that seem to work are 
highly integrated efforts where it is not just a class once a 
week or once a month. It is not a bonus at the end of the 
quarter if you have reached a goal.
    It is every day at lunch there is a class. Every morning 
there is stretching exercises. You have time off from work to 
participate in those activities. The employer provides----
    Senator Casey. There are lots of opportunities.
    Ms. Baicker. So it is an environment. It is not just a 
limited program. Now those are the things that work.
    Senator Casey. A culture, right?
    Ms. Baicker. I hesitate to say that you can legislate a 
culture that way. I don't know how you would write down a bill 
that promoted that kind of culture without----
    Senator Casey. Right. OK.
    Ms. Baicker [continuing]. Being so prescriptive that you 
shut down the innovation that you are trying to foster.
    Senator Casey. Good point. OK.
    Ms. Pollitz. Senator.
    Senator Casey. Yes? And we have others.
    Ms. Pollitz. I would just add I think an investment in 
public health is so important. That tens of billions of dollars 
that you just invested in IT, you should at least match that 
for new investment in public health.
    Prevention may not score savings, but public health does 
save, and we underinvest in public health more than just about 
any other developed nation. The root cause of so much of our 
healthcare spending is in junk food, as Senator Harkin said, 
gun violence, speed limits, people who don't wear helmets, lack 
of family planning, food safety problems. I mean, I am not 
buying peanut butter still.
    So we need to invest in public health in a big way. And 
with Senator Harkin here--I think you are still on 
Appropriations, right? So you can authorize the spending here 
and send him next door to make the money available in the 
budget. But we do underinvest.
    I know you are a champion, Senator, of our Public Health 
Service agencies, and I know they always eat last at the trough 
after everybody else comes in. But we need to stop that, and 
that is such a cost-effective investment, and it will just 
embrace all of these other things that we are talking about. I 
just think that has to be a priority in this legislation.
    Senator Casey. I want to go to the other question, but 
anyone else have anything on----
    Mr. Williams. Yes, just quickly on----
    Senator Casey. Mr. Williams, you have been dealing with 
this at the insurance company level.
    Mr. Williams. We deal with it quite extensively, and I 
think that the large employers we work with, which I described 
earlier is two-thirds of our almost 19 million medical members, 
are very focused on this fundamentally as a productivity issue 
in the context of their employees. Smoking cessation is 
absolutely critical.
    I think the other area that we haven't talked about, which 
I think was addressed through the mental health parity bill, is 
the undertreatment of depression and being certain that the 
whole issue of depression is thought about holistically and 
that we don't send the person over here for their medical care 
and over there for their behavioral health but is thought about 
holistically.
    The person who has a heart attack is screened for 
depression because they may very well be depressed. They might 
not take their medications. They might not engage in their 
rehabilitation. And therefore, their recovery is prolonged. So 
I think that is a huge area.
    Ms. Ignagni. Senator, just a footnote on that. Fifteen 
years ago, there was a lot of discussion about managing care 
that went out of favor, but the concept--we threw the baby out 
with the bathwater. Clearly, over the last 15 years, our plans 
have been re-inventing the tools, and now care management is 
about doctor-to-doctor, using specialty society guidelines, 
best practice, etcetera.
    We are about to issue a study on disease management and 
care coordination for Medicare Advantage participants, many in 
your area, and we can show a reduction, significant reductions 
because of disease management in ER usage in days per 
thousands.
    So, as Mr. Williams said, there are phases of 
intervention--early, middle, and late. But if you get the 
chronically ill organized into care systems that are supported 
by physicians, organized by physicians, you can see some major 
implications here that are quite productive.
    If you marry that with the kind of public health investment 
that Ms. Pollitz is talking about, I think particularly in the 
area of obesity, we attack smoking in a very significant area. 
A number of decades ago, the surgeon general stood up before 
the American people and said we have to attack this. Similarly 
for obesity because it runs through every chronic illness.
    The area of disparities. There are a number of things that 
we put in our testimony that Congress can do now in addition to 
what is being done in the private sector. Our health plans are 
monitoring disparities. In some cases, we can't collect data or 
there are barriers at the State level from doing that. That 
should be addressed.
    We now can target early individuals who are at risk of 
certain things. So we can go on and on, but there is quite a 
body of evidence and experience now to really begin to answer 
your question of where do we intervene, how do we do it, and 
how do we do it in the way that is most effective, cost 
efficient, and provides the highest value?
    Senator Casey. Thank you.
    I know we are running out of time. Senator Harkin may say 
we are out of time. He is in charge now. We have to be 
cognizant of that.
    But just a few more moments. I wanted to--and at the risk 
of being redundant here because I know I missed the first 45 
minutes or so--with regard to one topic and one example. The 
topic is the individual and small group market for insurance, 
and the example is Massachusetts. What, if anything, have we 
learned from their experience with the exchange concept?
    Well, A, what have we learned? And B, no matter what we 
have learned, can we apply that lesson to what we do in a 
Federal or a national sense? Anybody want to try a take on it?
    Doctor?
    Mr. Nichols. Senator, I would certainly start by saying 
what we learned is you can achieve bipartisan agreement on how 
to reform a health system. Let us go back to Governor Romney, 
who was at the time a Republican presidential aspirant, willing 
to use the word ``all.'' And you had a Democratic legislature 
maybe among the bluest on the planet willing to accept the word 
``limit.''
    That was an appropriation bill. Not an entitlement. So what 
you had there, I think, is a very good lesson for how you all 
can move forward.
    Senator Casey. Good point.
    Mr. Nichols. Second, I would say what they have done 
technically is they were, believe it or not, even though it was 
Massachusetts, they were humble. They didn't try to do it all 
in 60 days. They tried to do it all over a couple of years. 
They phased it in, and they were very intentional about 
signaling where they were going.
    We are going to essentially eventually meld the individual 
and small group markets. We are going to build on what we have 
now. We are not going to blow up the employer system. We are 
not going to do away with Medicaid. In fact, we are going to 
strengthen both.
    But we are going to move into a world where we absolutely 
outlaw discrimination based on health, and we encourage people 
to buy and we are going to give them incentives to buy. We are 
going to give them subsidies to buy. But we are going to 
require them to fulfill their part of the bargain, which is to 
make sure they achieve the level of coverage so that they can 
get the care they need so there are no more free riders.
    They exempted people they thought couldn't afford it. So 
they were mindful of the affordability. That is a very small 
number in Massachusetts, but it is nevertheless a very 
important principle.
    Then I would say the final thing they did was they made it 
clear that we are going to have a penalty on not buying 
coverage, but we are going to phase it in. So we are going to 
take Janet's point, you can't move there in a very fast way. 
You have to be cognizant of human nature. At the same time, 
made it very clear where they are going, and I think it is a 
very interesting model.
    Senator Casey. So you think it is readily applicable to 
what we are trying to do here?
    Mr. Nichols. I think all of those things are readily 
applicable. The details will certainly have to be different. 
Massachusetts is not Utah, or Pennsylvania, or Iowa, so you are 
going to have a little bit of different things on the ground in 
those places.
    But at a minimum, that structure is a very good structure 
to go with, yes.
    Senator Casey. Thank you.
    Anybody else?
    Ms. Praeger. Senator, I think the healthcare costs will 
need to be addressed because I do think it is becoming 
increasingly more expensive. So I think any reform again has to 
address the underlying increasing costs of just the healthcare 
delivery system.
    I want to re-emphasize also the point about public health. 
I think public health is a critical component. We all have the 
opportunity in our States to advocate for clean water, clean 
air, healthy schools, and healthy environments for our schools. 
We need to partner with the schools to get junk food out of 
school cafeterias and out of the vending machines.
    There are just a lot of things that we can do from a public 
health standpoint that I think will serve us well for the next 
several generations.
    Senator Casey. I know we have to wrap up. Anyone else who 
didn't have a chance here? Yes?
    Ms. Ignagni. Senator, I think that I agree with my 
colleagues, the observations they have made. This point about 
proceeding to line up cost containment and universal access 
together.
    I don't think they did enough in Massachusetts early on, 
and I think that most people there would agree with that now, 
and they are trying to catch up and figure out what to do. So 
that is point No. 1. This is the hardest thing to do, to 
actually achieve consensus on cost containment.
    The second thing is to the extent that you have the kinds 
of rules, aggressive rules and robust rules that everyone on 
the panel is talking about, to what extent do you need 
purchasing through a connector, or is that connector there to 
supervise, provide information about plan selection, track 
subsidies, et cetera, et cetera?
    I think there will be a lot of important discussion around 
that principle.
    Senator Casey. Well, unless anyone else--Ms. Pollitz.
    Ms. Pollitz. I would just add I am not sure if I am 
disagreeing with Karen or I misheard her, but I agree that you 
need to address getting everybody coverage and addressing 
rising costs. But I wouldn't, I absolutely wouldn't urge that 
you wait to cover everybody until you have figured out how to 
cover the costs.
    I think we have been doing that for decades, and we need to 
cover everybody now because people are in need, and we do need 
to figure out how to control costs. I think, as Sandy Praeger 
said earlier, that will be easier to do once we have everybody 
invested in the system.
    Senator Casey. Well, thanks, everyone.
    I don't have the gavel near me, but I am going to bang the 
gavel. Hearing adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

                   Prepared Statement of Senator Enzi

    Mr. Chairman, I want to take a few minutes to express my 
very sincere gratitude to Senator Bingaman and his staff. They 
have worked very closely with my office to plan today's 
roundtable as well as set an agenda for two additional 
roundtables in the near future. Senators Kennedy and Baucus 
have laid out very aggressive schedules for moving forward on 
health care reform legislation and Senator Bingaman's job of 
working on the coverage piece is so vital to the larger health 
reform debate.
    I also appreciate how much Senator Bingaman's staff worked 
with my staff to come up with the list of witnesses before us 
today. I think we have a stellar panel and I am really looking 
forward to hearing from our experts and getting into the 
details of insurance market reforms. I have said many times how 
helpful it is to hear from people that have actually enacted 
policies in the real world who can tell us what they did right, 
what they did wrong, and how they would improve things moving 
forward. I hope the members of this committee can learn from 
our witnesses and use that knowledge to better inform their 
decisions on health care reform legislation.
    I travel back to Wyoming almost every weekend and lately I 
have been really worried by what I am hearing. Most people 
think that once Congress moves forward on health care reform, 
their health care will be free. This worries me; nothing is 
free. The humorist and writer P.J. O'Rourke once noted, ``If 
you think health care is expensive now, wait until you see what 
it costs when it's free.''
    Even more disturbing than misunderstandings outside of 
Washington about free health care are the reports of the 
hospitals, physicians, drug manufacturers, health plans, and 
others who don't think that Congress should pay for health care 
reform. They see a price tag of over a trillion dollars and 
say, charge it. This thoughtless disregard for the long-term 
economic health of our Nation, and for the future of our 
children and grandchildren, is reckless and irresponsible.
    These health care stakeholders all seem determined to 
ignore the fundamental problem that plagues the U.S. health 
care system. The truly difficult challenge that Congress must 
address is how to get control of America's exploding health 
care costs. Simply throwing more money at the problem is not a 
solution.
    The fact is health care isn't free and there will be 
tradeoffs with any policy we devise. Insurance reforms all 
result in tradeoffs. Rating rules are a perfect example. We 
must be cautious when considering reforms that may result in 
unaffordable prices for our young and healthy--we need those 
folks to participate because they help keep costs down. 
However, ensuring access to quality insurance for those 
struggling with health conditions is, I hope, a priority for 
all of us. Our job here is to find the sweet spot that 
accomplishes our goals but doesn't create a disruption in our 
insurance marketplace.
    I have a few ideas about ways we can reduce costs--some of 
them pertain to getting better value out of every dollar we 
spend on health care by reforming the health care delivery 
system. Other ideas include making the health insurance market 
function more efficiently by encouraging insurance companies to 
compete and offer the best plans at the most affordable prices. 
I look forward to hearing suggestions from our witnesses about 
ways to reform the health insurance market.
    While it is critical that we get the policy of insurance 
market reform right, I would be remiss if I didn't at least 
mention the perils of process. Without the right process, we 
can't move forward on the best health care reforms for the 
American people. The first real test of whether the new 
Administration and Senate leaders are serious about developing 
bipartisan solutions will be how the upcoming budget addresses 
healthcare. Reconciliation cuts off most avenues for real 
debate in the Senate and is intended primarily as a tool to 
reduce the deficit. If those in the Majority attempt to use the 
budget reconciliation process to jam health care reform through 
the Senate, they will be sending a clear signal that they are 
not interested in a truly bipartisan effort. I urge President 
Obama to stand by his promise to work on health care in a 
bipartisan way by pledging that he will not support passing 
reform through reconciliation.
    With that, I will look to our witnesses to make 
recommendations for how we should shape the policies of health 
care reform. Mr. Chairman, thank you again for holding this 
roundtable today.
                                ------                                

           America's Health Insurance Plans (AHIP),
                                      Washington, DC 20004,
                                                    March 27, 2009.
Hon. Jeff Bingaman,
Hon. Orrin Hatch,
Senate Committee on the Budget,
U.S. Senate,
Washington, DC 20510.

Re: Response to Senator Hatch's question submitted for the record 
        regarding the 
        implementation of an enforceable individual mandate.

    Dear Senators Bingaman and Hatch: On behalf of America's Health 
Insurance Plans (AHIP), I appreciated the opportunity to testify and 
participate in the roundtable discussion hosted by the Senate Committee 
on Health, Education, Labor and Pensions on March 24, 2009. AHIP is the 
national association representing approximately 1,300 health insurance 
plans that provide coverage to more than 200 million Americans. Our 
members offer a broad range of health insurance products in the 
commercial marketplace and also have demonstrated a strong commitment 
to participation in public programs.
    We are responding to a question Senator Hatch submitted for the 
record regarding how the panelists would construct an individual 
mandate to purchase health insurance coverage. AHIP's Board of 
Directors is continuing to examine this issue as a part of our effort 
to bring tangible strategies to the discussion that will address 
specific problems in the health insurance market. In response to 
Senator Hatch's question, we offer one potential method to construct an 
enforceable mandate for individuals to obtain and maintain coverage.
    We believe that an enforceable individual mandate is an essential 
reform to bring everyone into the system. An individual mandate 
combined with other market reforms, including guarantee-issue of 
coverage and removing health status as an allowable rating factor in 
the individual market, are important building blocks in constructing a 
21st century health care system. Achieving universal participation with 
an individual mandate will require specific attention to the mechanisms 
for making the mandate enforceable and will require coordinated action 
at multiple levels of government.
    First, an effective individual mandate must be supported with 
premium assistance for lower-income individuals and working families. 
Refundable, advanceable tax credits should be available on a sliding 
scale basis for those earning less than 400 percent of the Federal 
Poverty Level (FPL).
    Second, individuals need access to affordable, quality health 
insurance. To this end, AHIP supports the ability for health insurance 
plans to establish ``essential benefits plans'' that are available 
nationwide, provide coverage for prevention and wellness as well as 
acute and chronic care, and are not subject to varying and conflicting 
State benefit mandates. The coverage under an essential benefit plan 
must be at least actuarially equivalent to the minimum Federal 
standards for a high-deductible health plan sold in connection with a 
health savings account, along with the opportunity to include 
enhancements such as wellness programs, preventive care, and disease 
management.
    Third, the verification and enforcement of an individual mandate 
may be achieved through the Federal tax code. The Federal tax return 
could ask for any applicable information, including affordability or 
financial hardship standards, the availability of employer coverage, 
and eligibility for government subsidies. Individuals would then 
indicate their insurance status over the course of the year. A 
financial penalty should be imposed for all breaks in coverage or an 
allowance could be made for short breaks in coverage. Such penalty 
could equal 100 percent of the premium for the essential benefits plan 
offered in the individual's geographic area. The financial disincentive 
must be close enough to the actual cost of coverage in order to deter 
individuals from foregoing health insurance coverage until a 
significant medical need arises.
    Last, individuals should have the opportunity to enroll in health 
insurance coverage during an initial open enrollment period (after 
enactment of health care reform) without the imposition of a 
preexisting condition exclusion. Individuals should face disincentives 
if they elect health insurance coverage after this initial open 
enrollment or after a significant break in coverage.
    We appreciate the opportunity to offer suggestions regarding the 
implementation of an enforceable individual mandate. AHIP believes that 
health care reform will only occur when individuals and stakeholders 
bring concrete solutions to the table, and we are doing our part to 
advance new strategies.
            Sincerely,
                                             Karen Ignagni,
                                                 President and CEO.
                                 ______
                                 
   National Association of Insurance Commissioners 
                                            (NAIC),
                                 Washington, DC 20001-1509,
                                                    April 20, 2009.
Hon. Orrin Hatch, 
U.S. Senate,
Washington, DC 20510.

    Dear Senator Hatch: During the HELP Committee Roundtable Hearing on 
health insurance reform on Tuesday, March 24th, you asked each witness 
to describe an ``enforceable'' individual mandate. Since time was not 
sufficient for a verbal response, I am happy to provide my answer via 
this letter.
    To begin, let me say that as a State regulator I can see great 
benefit to an effective individual mandate. If our goal, as a nation, 
is to make quality health care accessible and affordable to all 
Americans, then making comprehensive insurance coverage available to 
every American is critical. However, if only those in need of medical 
care purchase insurance, then the insurance market could become 
unsustainable. An individual mandate that ensures the young and healthy 
participate in the marketplace will allow the risk to be spread over a 
broader population and stabilize the insurance pool.
    This, of course, brings us to your question, ``What is an 
enforceable mandate?'' State regulators look at this question from two 
different perspectives.
    First, an enforceable mandate must have sufficient penalties and 
oversight to ensure compliance. As has been seen with some automobile 
insurance laws, low penalties and/or lax oversight can lead to low 
compliance. The penalties must be high enough to make purchasing 
insurance the better option and there must be constant oversight to 
identify those who are noncompliant and ensure that people remain 
compliant. We can look to States' experience with auto insurance, and 
to Massachusetts with health insurance, to craft an effective 
enforcement plan.
    Second, an enforceable mandate must provide affordable options so 
people can comply with the mandate. If consumers are required to 
purchase a ``Cadillac'' plan that they cannot afford, and subsidies are 
insufficient, then people will be forced into noncompliance. This is 
probably the trickiest, and certainly the most expensive, part of 
developing an enforceable mandate. Some flexibility at the State level 
may be the best approach.
    As I stated in my testimony, years have been spent talking about 
broad health care reforms that will ensure that all Americans have 
access to affordable health insurance coverage and the peace of mind 
that goes with it. Action is long overdue and State regulators stand 
ready to assist Federal lawmakers in whatever way we can.
    The NAIC encourages Congress to work with States and learn from 
past reforms. Together, we can implement successful initiatives that 
will truly protect and assist all consumers.
            Sincerely,
                                      Sandy Praeger, Chair,
                    NAIC Health Insurance & Managed Care Committee,
                        Commissioner of Insurance, State of Kansas.
                                 ______
                                 
   Response to Question of Senator Hatch by Katherine Baicker, Ph.D.
    According to a study published in 2007 by the National Bureau of 
Economic Research, an employer mandate of $9,000 for family coverage 
would reduce wages by $3 per hour and cause 224,000 workers to lose 
their jobs.
    Your colleague, Dr. Chandra, himself in the past on employer 
mandates has stated that ``The populist view is this will only come out 
of profits. But, ultimately, the money will come out of wages. And, 
worse, for some people, it can't come out of wages.''
    Question. What are your thoughts on imposing an employer mandate 
during current conditions on your labor sector and economy in general?
    Answer. The effectiveness of a mandate depends both on the ability 
to enforce it and on the size of penalty imposed. The ability to 
enforce requires the existence of and access to administrative data on 
compliance (such as centralized data from insurers). The size of the 
penalty depends on the dollar value of the fine (assuming the penalty 
is a fine and not a jail sentence) and, just as importantly, the 
frequency with which it is imposed. A mandate that is ``enforceable'' 
but rarely enforced would not likely meet with universal compliance.

      Response to Questions of Senator Hatch by Ronald A. Williams
    Question 1. Our goal in health reform is to provide affordable and 
meaningful health insurance for all Americans. Assuming this is our 
goal, many health policy experts have identified significant problems 
in the American health insurance markets, particularly in the small 
group and individual market. As a result, they have proposed 
significant health insurance reforms. What are the most critical 
challenges we face in American health insurance markets (if any) and 
what are the most critical reforms needed to address these challenges 
(if any)? Are there any reforms that have been discussed that concern 
you?

          CRITICAL CHALLENGES FACING HEALTH INSURANCE MARKETS

    Answer 1. There are a number of critical challenges we face in 
American health insurance markets:
     Lack of universal coverage creates an expensive, 
inefficient system. Individuals often have trouble accessing insurance 
coverage in the individual market. Insurers who offer products in the 
individual market face adverse selection--wherein only those who are 
sick or anticipate needing expensive medical treatment choose to buy 
insurance. For these people the costs of the medical care they need can 
greatly exceed the costs of insurance premiums they would pay. In other 
words, those who join the system late are not purchasing ``health 
insurance,'' but rather ``pre-paid health care,'' which is something 
health insurers cannot provide in an economically sustainable way. 
Therefore, insurers need to employ preexisting condition exclusions and 
medical underwriting to encourage people to become and stay insured 
even when they are not sick, keep the population of insureds balanced 
between sick and healthy people, and keep premium costs stable. As a 
result, high-risk individuals who are not covered through the employer-
based system face challenges accessing individual insurance in many 
States. In those States where they do not have trouble accessing 
insurance--States with guaranteed issue and community rating--healthier 
individuals often go uninsured as they are reluctant to purchase 
coverage before they need it because of its high cost. The differences 
in premiums for nearly identical products in the neighboring States of 
New Jersey (community rating and guaranteed issue) and Pennsylvania 
(medical underwriting) is illustrative, with premiums for a 35 year-old 
male purchasing a standard HMO product being 158 percent to 368 percent 
higher in New Jersey than in Pennsylvania.\1\
---------------------------------------------------------------------------
    \1\ Based on comparison of quotes derived on 
www.ehealthinsurance.com on July 11, 2008 for an August 1, 2008 start 
date. The percentage range is based on the premium in Pennsylvania 
reflecting 100 percent to 150 percent of the standard (quoted) rate, 
depending on medical underwriting.
---------------------------------------------------------------------------
    With people unwilling or unable to participate in the individual 
market, we have a universally acknowledged access problem that affects 
both the uninsured and the insured. The uninsured face decreased access 
to health care and expensive medical bills for the care they do 
receive, while the average insured family pays an additional $922 in 
premiums (or 8 percent of total premiums paid) each year as a result of 
cost-shifting from care being provided to the uninsured.\2\ This does 
not even consider the cost-shifting from government programs.
---------------------------------------------------------------------------
    \2\ Families USA, ``Paying a Premium: The Added Cost of Care for 
the Uninsured.'' Publication No. 05-101, June 2005. Available at 
www.familiesusa.org.
---------------------------------------------------------------------------
     Chronic illness can be exacerbated, and its expense 
multiplied, by delays in care. Uninsured and under-insured individuals 
with chronic illnesses often wait until an acute episode to seek 
medical care or insurance coverage, as discussed above. This increases 
costs for everyone in the system and results in poor quality and 
possibly worse outcomes for those who are forced to wait. Greater 
attention must be placed on prevention, wellness and chronic disease 
management, and on getting these people early and continuous access to 
the health care insurance system.
     Cost inflation results in part from misaligned incentives 
in our payment system. The current system is filled with incentives to 
offer more services, typically failing to discriminate between services 
with high and low value. Health insurance premiums directly reflect the 
underlying costs of health care, with premiums rising because of 
increasing doctor, hospital, drug and other medical costs. In fact, in 
2007, health care costs grew at an annual rate of 6.4 percent while the 
cost of health insurance premiums increased at an annual rate of 6.1 
percent.\3\ If we want to ensure the affordability of coverage, we have 
to address health care costs, and without effective payment reform the 
cost of health care will continue to grow.
---------------------------------------------------------------------------
    \3\ PriceWaterhouseCoopers, ``The Factors Fueling Rising Healthcare 
Costs 2008.'' Prepared for America's Health Insurance Plans, December 
2008.
---------------------------------------------------------------------------
     Divergent State laws and regulations add complexity that 
increases costs. The complex and duplicative web of 50 State insurance 
laws and regulations is administratively burdensome and unnecessarily 
increases healthcare costs and premiums for health insurance.

             TYPES OF REFORMS NEEDED TO ADDRESS CHALLENGES

     Individual Mandate. We at Aetna, believe that an 
enforceable individual coverage requirement is the key to addressing 
our country's access challenge because it allows us to bring 
everybody--both healthy and unhealthy--into the insurance pool. By 
using an individual coverage requirement to address the challenge of 
adverse selection, we can transform our system into one where private 
insurance is provided on a guaranteed issue basis with no preexisting 
condition exclusions and a rating system that does not include health 
status.
     Subsidies. We believe that an individual coverage 
requirement must be coupled with sliding scale subsidies to ensure that 
income is not a barrier for any individual's fulfillment of this 
requirement. In addition, we must offer tax credits for small 
businesses to encourage them to offer (and subsidize) employee 
coverage.
     Health Insurance Exchange and Federal Charter. We believe 
that we must create a rational regulatory structure that is conducive 
to creating affordable coverage options. Our system would be best 
served by a Federal regulatory structure for health insurance, with 
regulation enforced by State insurance departments. A national entity 
would need to determine a standard benefit package and determine what 
types of actuarially equivalent plans could be offered. Under a 
national framework, plans could be offered through a national exchange, 
or through State or regional insurance exchanges that create new 
pooling mechanisms. At the very least, we would encourage greater 
uniformity of State laws and regulations and the development of a new 
optional Federal charter. Today, insurers with a multi-state presence 
face costly administrative burdens to comply with divergent State laws 
and regulations, and these higher administrative costs are passed onto 
the market at large through higher insurance premiums.
     Payment Reform. Payment reform will also be a critical 
tool to improve quality and bend the cost curve. The traditional fee-
for-service payment structure often rewards physicians and hospitals 
for the volume of services they deliver rather than the value or 
quality of care they provide. Aetna supports transforming the payment 
system into one that aligns provider reimbursement incentives with the 
pursuit of high-quality outcomes for patients. We need a payment system 
that works for patients, bringing them value-high quality at the right 
cost. Reform also needs to focus on promoting patient-centered care 
that integrates the multiple aspects of the health care delivery system 
and shifts the model from episodic, acute care to comprehensive, 
evidence-based care.
     Health Information Technology. The use of health 
information technology (HIT) will not only be a powerful tool to bend 
the cost curve, but will also help address pervasive quality issues. 
The United States continues to lag behind its peers globally in 
embracing HIT solutions necessary to yield cost reductions and quality 
gains. Aetna continues to strongly support the President's initiatives 
to accelerate HIT adoption and commends the Congress' recent work to 
invest up to $22 billion to promote the use of electronic health 
records that have clinical decision support capacity as recommended by 
the Institute of Medicine. If 90 percent of all providers in the United 
States were using EMRs, we could see savings of about $77 billion 
within 15 years.\4\ With the advent of sophisticated clinical decision 
support capabilities, those savings, coupled with lives saved, could 
exceed current expectations. At Aetna, we have made significant 
investments in health information technology, and we are not finished. 
Our investments are designed to help patients and doctors take action 
on their health conditions and help patients get the standard of care 
they expect and require.
---------------------------------------------------------------------------
    \4\ Modem Healthcare, ``By the Numbers.'' 2006-2007 Edition. 
December 17, 2006, p66.
---------------------------------------------------------------------------
                  TYPES OF REFORMS THAT RAISE CONCERNS

     Public Plan. First and foremost, insurers bring 
innovation, value and choices, allowing individuals to choose a 
tailored approach for their own needs that a one-size-fits-all public 
plan could just not achieve. Health care is one area in which we must 
leverage the agility of the private sector to provide continued 
innovation and customization of health care plans. We believe that this 
incentive to innovate will be stifled if a public plan is put into 
place.
    A new public plan could also have negative repercussions for those 
who are already privately insured. A public plan would most likely 
employ the payment rates used in Medicare, which are far lower than the 
rates paid by private payers. In fact, the average family of four with 
private insurance spends an additional $1,788 on health care each year 
because of Medicare and Medicaid underpayments to providers that result 
in cost-shifting to the privately insured. On an aggregate level, 
commercial payers incur approximately $89 billion more in costs than 
they would if public and private payers all paid equivalent rates.\5\ 
In other words, while the government saves money with underpayments, 
the 200 million Americans with private insurance are paying for it. 
Expanding the use of low public payment rates would mean expanded cost-
shifting for our health care system, with providers charging higher 
rates to privately insured individuals, ultimately raising their 
insurance premiums and decreasing the affordability of their insurance. 
Moreover, a public plan is not the most direct or precise policy 
intervention to reduce significantly the number of uninsured. The 
Massachusetts health reform plan, for example, does not include a 
public plan and has achieved near-universal coverage.
---------------------------------------------------------------------------
    \5\ Milliman, Hospital & Physician Cost Shift, December 2008: 
figures reflect 2006 and 2007 data.
---------------------------------------------------------------------------
    Finally, there are some who argue that a public plan is the only 
way to ensure access to coverage for all Americans, regardless of 
health status. However, it is important to remember that in the absence 
of an individual coverage requirement, a public plan would face the 
exact same selection problems that private plans face today. As such, a 
public plan is not the silver bullet for the guaranteed issue of high-
quality coverage. With the right regulations in place, however, private 
plans can provide guaranteed access to coverage for all Americans, 
while fostering innovation in the realms of wellness and chronic 
disease management and providing a suite of coverage options designed 
to respond to the unique needs of different people. A new public plan 
is not only an unnecessary use of public dollars, but also not the most 
effective policy response to the problem at hand.
     Elimination of Employer-Sponsored Health Insurance. We 
should avoid systemic disruption to the 177 million Americans who have 
employer-sponsored coverage, and we should build upon the strengths and 
innovations of private health coverage for other populations. Many 
Americans are satisfied with their current employer-sponsored coverage. 
According to a survey performed by the National Business Group on 
Health, 67 percent of employees believe their health plan is excellent 
or very good, and 75 percent consider a health plan to be the most 
important employee benefit. Eighty-three percent of employees surveyed 
would rather see their salary or retirement benefits reduced than their 
health benefits if an employer needed to reduce their total 
compensation.\6\ Among workers who are offered health insurance 
coverage, 82 percent elect to participate in their employers' health 
plans.\7\ Instead of disrupting a system that works for many 
individuals, it would be more effective to explore ways to extend 
coverage to those currently not in the system.
---------------------------------------------------------------------------
    \6\ National Business Group on Health, ``Employer-Based Health 
Benefits Survey.'' April 2007. http://vww.businessgrouphealth.org/
pressrelease.cfm?ID-87
    \7\ Pickreign, Jeremy et al. ``Employer Health Benefits 2008 Annual 
Survey.'' Kaiser Family Foundation and Health Research and Education 
Trust. September 2008.

    Question 2. Individual health insurance markets are regulated both 
at the State level and Federal level. Should regulations be reformed at 
the national level, State level, or some hybrid? Additionally, if you 
think that regulation should occur to some degree at the national 
level, is it necessary for Congress to consider a phased-in approach or 
some other mechanism to address the diversity of initial regulatory 
conditions in each State?
    Answer 2. We must create a rational regulatory structure that is 
conducive to creating affordable coverage options. Today's system of 50 
divergent sets of State regulation imposes unnecessary and costly 
administrative burdens on our existing system. As such, I believe our 
system would be best served by a Federal regulatory structure for 
health insurance, with regulation enforced by State insurance 
departments. Given the current diversity in State regulation, a phased 
approach will be necessary to provide Americans with a seamless 
transition over to a new system.
    As we make the system more accessible to all Americans, it is 
important to consider the 18 million people currently enrolled in the 
individual market whose initial premiums are based on health status. 
The transformation to the new system would result in a larger pool that 
would include previously uninsured, high risk people who, in a 
community rated system, would likely increase premiums for the already 
insured persons.

    Question 3. Thus far, Massachusetts is the only State to 
successfully achieve a near universal expansion of health insurance. 
Before implementing the following reforms, Massachusetts had already 
made significant reforms to its insurance market and stood to lose 
Federal Medicaid dollars if they did not enact additional reforms. The 
2006 Massachusetts insurance reforms focused on: (1) developing a 
statewide exchange that pools the small group and individual markets, 
(2) developing a minimum coverage standard, (3) mandating that all 
individuals secure health insurance, and (4) including subsidies for 
low-income individuals. Do you believe the Massachusetts' reform could 
serve as a model for national reform? What aspects of the reform are 
most promising (if any) and what aspects raise the most significant 
concerns (if any)?

           GENERAL COMMENTS ABOUT MASSACHUSETTS HEALTH REFORM

    Answer 3. One of the key issues in insurance reform is determining 
how to disperse risk across a group of people. The Massachusetts health 
reform plan has demonstrated that creating an insurance exchange is an 
effective mechanism to spread risk while ensuring that everyone has 
access to coverage. The Massachusetts Connector creates a level playing 
field for offering and purchasing health insurance for those unable to 
access coverage through an employer. The exchange also offers many of 
the same efficiencies as a large group market.
    While the basic components of the Massachusetts model could serve 
as a national model for health reform, there are several key issues 
that should be addressed before implementing this type of plan at a 
Federal level. In particular, we need to fix our current volume-based 
payment system and address the growth of health care costs. Not doing 
so will greatly impact affordability of health insurance and 
sustainability of efforts to achieve universal coverage. In addition, 
increasing the role and supply of primary care providers will be 
essential.

          KEY COMPONENTS OF MASSACHUSETTS' HEALTH REFORM PLAN

The Connector Exchange
    What works well: The Connector creates a centralized location for 
individuals and employees of small businesses to purchase health 
insurance. This type of insurance pooling also helps to expand the risk 
across these different market segments. Additionally, the Connector 
does not have a public plan.
    Opportunities for change: The Connector limits participation to six 
insurers who must bid for a spot on the exchange. In any future 
adaptation of the Massachusetts plan, we believe we must provide for 
open competition, allowing consumers to be the true judges of 
``winners'' and ``losers'' among companies providing insurance 
coverage.

Individual Mandate
    What works well: Requiring individuals to purchase health insurance 
is critical to reforming the healthcare system. An individual mandate 
is an effective method of ensuring all people--healthy and sick--are 
included in the system, thus avoiding adverse selection where people 
only seek insurance when they need it and when their health care costs 
are higher. Massachusetts redirected money previously spent on 
providing care to subsidize new insurance options for the uninsured.
    Opportunities for change: In Massachusetts, the individual mandate 
was not enforceable until 2008, 2 years into the program. For an 
individual coverage requirement to be effective, it has to be enforced 
as early as possible. Also, if Congress phases in an individual mandate 
nationally, effective risk adjustment mechanisms must be explored to 
help offset the risk of adverse selection and keep individuals' 
premiums affordable.

Insurance Regulation
    What works well: Even before Massachusetts' health reform plan was 
enacted, the State required guaranteed issue and renewal, prohibited 
medical underwriting, limited preexisting condition exclusions and had 
modified community rating rules. By adding an individual mandate and 
subsidies to help lower-income people afford coverage, the 
Massachusetts reform plan stabilized the market and the exchange more 
effectively pooled risk than the market did prior to reform.
    Opportunities for change: Particularly if there is a phase-in of 
the individual mandate, there needs to be risk adjustment provisions to 
help offset the costs of adverse selection and keep the system and 
individual premiums stable. Importantly, a well-enforced individual 
coverage requirement with risk adjustment or reimbursement provisions 
will enable insurers to provide access to insurance on a guaranteed 
issue basis without exclusions for preexisting condition or rating on 
the basis of health status, similar to the regulation in place in 
Massachusetts.

Premium Assistance
    What works well: The sliding scale subsidies available for those 
under 300 percent FPL is an effective method of ensuring low-income 
individuals and families can purchase insurance.
    Opportunities for change: Many of the insurance products available 
are still unaffordable for those under 400 percent FPL. Insurance 
providers should be given the flexibility to create a variety of 
benefit packages that meet consumer's expectations. Available subsidies 
should be generous enough to allow low-income individuals and families 
to purchase insurance.

Financing and Cost-Containment
    What works well: Creating viable opportunities for the uninsured to 
access health insurance is a start to reducing the cost of providing 
care to individuals currently accessing the healthcare system at 
expensive points of entry (e.g. emergency rooms) and with potentially 
untreated and complicated medical problems.
    Opportunities for change: Massachusetts' health reform has done 
little to address the issue of cost containment. A Massachusetts-like 
program implemented at a Federal level must include payment reform and 
further investments in HIT and comparative effectiveness to bend the 
cost curve. Without changes to improve the value of healthcare, reform 
efforts will quickly become unaffordable.

Benefit Package
    What works well: Massachusetts established actuarial equivalence 
for the plans offered through the Connector, allowing insurers the 
flexibility to design their benefits within a set of requirements.
    Opportunities for change: The minimum benefit package levels under 
the Massachusetts plan are very comprehensive, requiring people to 
purchase plans that may be richer than what they truly need. It would 
be more cost-effective for minimum benefits levels to be set at a more 
modest level (e.g., only cover catastrophic and preventive services), 
allowing individuals to purchase other coverage as they see fit.

Expanding Public Programs
    What works well: Massachusetts expanded Medicaid eligibility to all 
those under 100 percent FPL. This not only expands coverage to a 
vulnerable population, but ensures that cost-sharing is not a deterrent 
for care for low-income citizens. Aetna supports this expansion of 
Medicaid, as those living beneath the Federal poverty level would be 
very unlikely to be able to pay for or access another source of 
insurance coverage.

    Question 4. How should an individual coverage requirement be 
enforced?
    Answer 4. Aetna believes an individual coverage requirement should 
be enforced through the tax system, with verification conducted through 
annual income tax forms. Under a prospective enforcement system, 
individuals would be expected to provide proof of government or private 
coverage--or demonstration of financial hardship, the standards for 
which would need to be determined in advance. Those individuals not 
complying with the individual coverage requirement would need to pay a 
penalty equivalent to the cost of an essential benefits plan in their 
geographic area. With a penalty set at this level, there would be a 
lower incentive for noncompliance, with most individuals likely 
calculating that their dollars are better spent on a health insurance 
policy than on an equivalent penalty. The penalty could be delivered 
either through reduction of the individual's tax refund or as an 
additional tax liability.
    Enrollment in insurance coverage should also be facilitated at the 
point of health care service, with uninsured individuals enrolled in 
either a government program, if eligible, or in a basic essential 
benefits package.
     Response to Question of Senator Hatch by Len M. Nichols, Ph.D.
    Question. What is an enforceable individual mandate?
    Answer. Considerable evidence suggests that an individual mandate 
is enforceable. This is fortunate because an individual purchase 
requirement is absolutely necessary to make private insurance markets 
work for all Americans. Insurers must be required to sell to all comers 
regardless of health status. However, insurers must also be assured 
they will get to insure the entire population, not just the sick, to 
make the market work efficiently and fairly. Relevant research and our 
moral compass also tell us that the first step toward making a mandate 
enforceable is making the cost of compliance affordable. Therefore, in 
order to enforce a mandate we must first ensure that health insurance 
is accessible and affordable for all.
    The key to an enforceable individual mandate is combining and 
integrating a number of approaches. Enforcement methods in a U.S. 
context should include:

     Information sharing: Electronic information sharing 
between citizens and the institutions they come in contact with, 
including: insurance marketplace managers, (i.e., those who administer 
enrollment for the ``exchange''), employers, health providers, health 
insurers, schools, department of motor vehicles, and government 
agencies. This does not mean turning schools, hospitals, etc., into 
enforcers. These institutions need never be asked to deny care or 
service. But they would be asked to inform the authority responsible 
for enrollment records that a particular individual does not appear to 
be insured as of a particular date. The uninsured person would then be 
contacted by the exchange administrator's office and either enrolled in 
a plan of the enrollee's choice or possibly levied with a penalty and/
or a requirement to pay back premiums.

    We would need to allow insurance administrators to systematically 
review and monitor enrollment. Increased information sharing of this 
sort would also help identify people who are eligible for public or 
subsidized coverage but who are not enrolled. Information sharing has 
proved particularly effective in raising the rate of compliance with 
car insurance mandates.

                POLICY SPOTLIGHT: GEORGIA CAR INSURANCE

    In 2001, Georgia's uninsured motorist rate was 20 percent. 
Legislators recognized that individuals were purchasing car insurance 
in order to register their vehicle, but were cancelling their insurance 
when the registration process was completed.
    To address this problem, Georgia requires all insurers to report 
policy enrollments and cancellations to a central database. This 
information is then cross-referenced with the car registration 
information. If after 30 days the system finds a motorist with a 
cancellation entry but without a new policy enrollment, a set of 
penalties (including fines and registration suspension) is put in 
motion. This process reduced Georgia's uninsured motorist rate from 20 
percent to 2 percent in less than 2 years.

     Proof of insurance on tax returns: Many uninsured 
Americans could be identified through the tax system. While not all 
low-income individuals file tax returns, this could be a useful 
mechanism to identify middle- and high-income uninsured Americans. 
Almost 20 percent of uncompensated care in the U.S. is delivered to 
people who make more than four times the Federal poverty level.
     Auto-enrollment/insurance checks at point of service: 
Individuals who do not sign up for their own insurance (or if eligible, 
do enroll in a government program) would be automatically enrolled in a 
health plan by an insurance administrator. When they seek medical care 
from a doctor, hospital or clinic, their insurance status would be 
checked. Unpaid premiums would be reported to the insurance exchange 
administrator. A payment schedule would be identified, based on the 
uninsured person's income and ability to pay, to pay the overdue bills.

    The idea is to create a seamless system and normative expectation 
that all citizens would have and maintain coverage. The net result of 
these information conduits is to make sure each person/family pays 
their fair share and no more. We do not need nor recommend criminal 
penalties. Monetary penalties should suffice. Remember, most people buy 
insurance today without a mandate, and the vast majority of the 
uninsured are in that situation because they cannot afford health 
insurance. Most uninsured are likely to buy as soon as we make it 
accessible and affordable.
    No one suggests an individual mandate because they want to ``make'' 
people buy insurance. When combined with insurance markets and 
subsidies, an individual requirement to purchase coverage will actually 
help the market function more efficiently and fairly. In addition, a 
more sustainable health system will be a shared responsibility between 
individuals, employers, providers, and governments. A requirement to 
purchase or enroll in coverage represents one part of an individual's 
responsibility to the larger community.

    [Whereupon, at 12:24 p.m., the hearing was adjourned.]

                                   

      
