[Senate Hearing 111-1128]
[From the U.S. Government Publishing Office]
S. Hrg. 111-1128
INCREASING HEALTH COSTS FACING
SMALL BUSINESSES
=======================================================================
HEARING
OF THE
COMMITTEE ON HEALTH, EDUCATION,
LABOR, AND PENSIONS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
EXAMINING INCREASING HEALTH COSTS FACING SMALL BUSINESSES
2_________
NOVEMBER 3, 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
75-442 WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
TOM HARKIN, Iowa, Chairman
CHRISTOPHER J. DODD, Connecticut
BARBARA A. MIKULSKI, Maryland
JEFF BINGAMAN, New Mexico
PATTY MURRAY, Washington
JACK REED, Rhode Island
BERNARD SANDERS (I), Vermont
SHERROD BROWN, Ohio
ROBERT P. CASEY, JR., Pennsylvania
KAY R. HAGAN, North Carolina
JEFF MERKLEY, Oregon
AL FRANKEN, Minnesota
MICHAEL F. BENNET, Colorado
MICHAEL B. ENZI, Wyoming
JUDD GREGG, New Hampshire
LAMAR ALEXANDER, Tennessee
RICHARD BURR, North Carolina
JOHNNY ISAKSON, Georgia
JOHN McCAIN, Arizona
ORRIN G. HATCH, Utah
LISA MURKOWSKI, Alaska
TOM COBURN, M.D., Oklahoma
PAT ROBERTS, Kansas
Daniel Smith, Staff Director
Pamela Smith, Deputy Staff Director
Frank Macchiarola, Republican Staff Director and Chief Counsel
(ii)
C O N T E N T S
__________
STATEMENTS
TUESDAY, NOVEMBER 3, 2009
Page
Harkin, Hon. Tom, Chairman, Committee on Health, Education,
Labor, and Pensions, opening statement......................... 1
Prepared statement........................................... 3
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming,
opening statement.............................................. 5
Prepared statement........................................... 7
Cullen, Art, Editor, The Storm Lake Times, Storm Lake, IA........ 10
Prepared statement........................................... 11
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 12
Rowen, Walter, President, Susquehanna Glass Company, Columbia, PA 13
Prepared statement........................................... 15
Roberts, Hon. Pat, a U.S. Senator from the State of Kansas....... 16
Praeger, Sandy, Commissioner, Kansas Department of Insurance,
Topeka, KS..................................................... 17
Prepared statement........................................... 19
Holtz-Eakin, Doug, President, DHE Consulting, LLC, and Fellow
Manhattan Institute, Arlington, VA............................. 22
Prepared statement........................................... 24
Bender, Karen, FCA, ASA, MAAA, Actuary, Oliver Wyman, Milwaukee,
WI............................................................. 30
Prepared statement........................................... 31
Gruber, Jonathan, Professor of Economics, Massachusetts Institute
of Technology, Department of Economics, Cambridge, MA.......... 38
Prepared statement........................................... 41
Merkley, Hon. Jeff, a U.S. Senator from the State of Oregon...... 48
McCain, Hon. John, a U.S. Senator from the State of Arizona...... 49
Franken, Hon. Al, a U.S. Senator from the State of Minnesota..... 52
Prepared statement........................................... 53
Coburn, Hon. Tom, a U.S. Senator from the State of Oklahoma...... 54
Bennet, Hon, Michael F., a U.S. Senator from the State of
Colorado....................................................... 58
ADDITIONAL MATERIAL
Statements, articles, publications, letters, etc.:
Senator Dodd................................................. 74
Senator Burr................................................. 75
Response by Sandy Praeger to questions of:
Senator Enzi............................................. 76
Senator Coburn........................................... 77
Response by Douglas Holtz-Eakin to questions of:
Senator Franken.......................................... 79
Senator Coburn........................................... 80
Response by Karen Bender to questions of:
Senator Enzi............................................. 82
Senator Coburn........................................... 85
Response by Jonathan Gruber to questions of:
Senator Enzi............................................. 87
Senator Coburn........................................... 88
(iii)
INCREASING HEALTH COSTS FACING
SMALL BUSINESSES
----------
TUESDAY, NOVEMBER 3, 2009
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC.
The committee met, pursuant to notice, at 2:37 p.m. in Room
SD-106, Dirksen Senate Office Building, Hon. Tom Harkin,
Chairman of the committee, presiding.
Present: Senator Harkin, Murray, Brown, Casey, Hagan,
Merkley, Franken, Bennet, Enzi, McCain, Murkowski, Coburn and
Roberts.
Also Present: Senator Specter.
Opening Statement of Senator Harkin
The Chairman. The U.S. Senate Committee on Health,
Education, Labor, and Pensions will come to order. Today's
hearing is about the increasing health costs facing small
businesses in America.
I might just say at the outset that about a week ago, on
Sunday, I got a call early in the morning from Senator Specter.
He asked me if I'd read the NY Times. And I said, ``Well, no,
quite frankly I just got up.'' It was that early in the
morning.
And he said, ``Well, there's a story on the front page you
got to read.'' I don't get it delivered so I went down, got the
NY Times and read it. It was about the plight of small
businesses and health insurance.
Senator Specter and I talked about that later on. And
Senator Specter suggested that this would be an apt subject for
a hearing prior to the Senate debating and taking up the Health
Care bill. I agreed wholeheartedly with him.
So, I asked Senator Enzi if we could have such a hearing
and he most obligingly agreed to hold this hearing in this room
and to invite some of our small business people and others to
this hearing. And I've invited Senator Specter, who is not a
member of the HELP Committee, but is a member of the
Appropriations Subcommittee on Health, to join us. So I want to
thank Senator Specter at the outset for that phone call and for
the heads up and for actually asking for this hearing.
Well, we're on the verge of a historic moment in the U.S.
Congress, and I think in the life of our country. Within a few
days we'll begin debate on National Health Reform legislation--
reform the country has so desperately needed, but which has
eluded our grasp for over half a century. This time we won't
fail.
For the millions of small business owners across the Nation
who are desperately struggling to provide affordable health
insurance to their employees, this moment cannot come soon
enough. Over the past decade the cost of health insurance for
small business has spiraled by 123 percent. The most important
reason cited among small businesses who have dropped coverage
is the high cost of health insurance. In an August survey, 15
percent of small businesses reported being offered premium
increases of over 20 percent to renew the same plan they had
last year. And just over a week ago the NY Times ran this
article, this front page article I just mentioned, with reports
of premium increases of an average of 15 percent for the coming
year.
To confirm these trends the National Association of
Insurance Commissioners conducted a survey of State insurance
commissioners. The regulators reported back that in most States
requests for premium increases are averaging 11 to 16 percent
for 2010. In some States requests for premium increases are as
high as 20 to 35 percent. And in five States, regulators have
already taken some form of action to respond to the
unreasonably high premium increases.
As we will hear today from the small business owners on the
panel, these general trends do not even begin to capture the
crippling spikes in premiums that can occur for reasons beyond
the control of the business. For premiums to skyrocket, all it
takes is one diagnosis for one employee or even the spouse of
an employee. All it may take is just one older employee. All it
may take is a drop in the number of employees in the business
or maybe all it takes is sometimes just one employee who
happens to be a woman, especially if she's pregnant. All told,
these arbitrary and discriminatory factors can jack up premiums
for small businesses by 150 to 200 percent or more.
I do not believe that this is right in this country of
opportunity. America's small businesses are woven into the
fabric of the American dream. They reflect our pioneering and
entrepreneurial spirit. And they are the engine of economic
growth in our country.
Over the past decades small businesses have created over 65
percent of all new jobs in our country. But faced with such
wild and unpredictable swings in the cost of health insurance
how are small businesses supposed to budget? How can they take
the risk of expanding? How can someone with a good idea and
with the energy to go out on their own start their own family
business if they are crippled by either no health care coverage
or excessively high coverage?
Under the status quo small businesses are being forced to
make choices they should not have to make. And the fear of
crushing health costs is stifling the entrepreneurial spirit.
At this hearing I would have liked to question health insurance
companies about these trends and practices. We invited them.
But not surprisingly insurance companies are not interested in
discussing them. They declined to appear today.
So today I'm announcing my own investigation into the
pricing practices of health insurance companies that sell
policies to small businesses. Health insurance companies should
open their books. Explain to the American people why they
support a health insurance market for small businesses that is
so dysfunctional and so lacking in transparency.
Small businesses are desperately trying to do the right
thing for their employees. And doing the right thing will also
make them more competitive and profitable. They need some help.
Our legislation will create health insurance exchanges that
pool small businesses together and increase competition. Under
the status quo small businesses pay 18 percent more than large
businesses for exactly the same insurance plan and coverage,
same policy. The exchanges will enable small businesses to
easily compare the prices, benefits and quality of health
plans. In other words, they will make the market more
transparent.
Our legislation will end the discriminatory insurance
industry practice of jacking up premiums because an employee
got sick or older or because the business hired a woman. This
will also reduce premiums because insurance companies will no
longer be allowed to investigate the health condition of
employees, eliminating the wasteful cost of underwriting. Under
our legislation an estimated 3.6 million small businesses
nationwide will qualify for a tax credit of up to 50 percent of
premiums to make coverage more affordable. In my State of Iowa
49,000 small businesses will be eligible for this premium tax
credit.
As is well known, our legislation will ban arbitrary limits
on benefits and place limits on out-of-pocket expenses. It will
require coverage of recommended, preventative care with no cost
sharing, no co-pays, no deductibles. These reforms will provide
security and peace of mind to small business owners. They will
make employees healthier and improve their productivity.
And finally, I'm very pleased that our legislation will
increase competition by providing small businesses with a
choice of a public insurance plan. A lot of times that's
forgotten. Small businesses will be eligible for that public
insurance plan.
As the GAO has found there's very little competition in the
small group market. Under the status quo small businesses do
not have much choice. And we'll guarantee that they do have
more choices.
So to America's small businesses I have a simple message.
We're fighting for you. And help is on the way.
The time has come to act. We will succeed because the
status quo is not an option. It's time to make health insurance
markets work for all Americans--not just the healthy and
wealthy, but also the sick, the old and entrepreneurs in
pursuit of the American dream.
[The prepared statement of Senator Harkin follows:]
Prepared Statement of Senator Harkin
We are on the verge of a historic moment in the U.S.
Congress, and in the life of this great Nation. Within the next
week or so, we will begin debate on national health reform
legislation--reform that this country has so desperately
needed, but which has eluded our grasp for over half a century.
This time, we will not fail.
For the millions of small business owners across the Nation
who are desperately struggling to provide affordable health
insurance to their employees, this moment could not have come
soon enough. Over the past decade, the cost of health insurance
for small businesses has spiraled by 123 percent. As a result,
the percentage of small businesses offering coverage dropped
from 68 percent to 59 percent. The most important reason cited
for not offering coverage is the high cost of health insurance.
In an August survey, 15 percent of small businesses
reported being offered premium increases of over 20 percent to
renew the same plan they had last year. And just over a week
ago, the New York Times ran a front-page article with reports
of premium increases of 15 percent for the coming year.
To confirm these trends, the National Association of
Insurance Commissioners conducted a survey of State insurance
commissioners. The regulators reported back that in most
States, requests for premium increases are averaging 11 to 16
percent for 2010. In some States, requests for premium
increases are as high as 20 to 35 percent. And in five States,
regulators have already taken some form of action to respond to
unreasonably high premium increases.
As we will hear today from the small business owners on the
panel, these general trends do not even begin to capture the
crippling spikes in premiums that can occur--for reasons beyond
the control of small businesses. For premiums to skyrocket, all
it takes is one diagnosis for one employee--or the spouse of an
employee; all it takes is one older employee; all it takes is a
drop in the number of employees in the business; and all it
takes is one employee who happens to be a woman. All told,
these arbitrary and discriminatory factors can jack up premiums
for small businesses by 150 to 200 percent or more.
That is not right in this country of opportunity. America's
small businesses are woven into the fabric of the American
dream: they reflect our pioneering and entrepreneurial spirit.
And they are the engine of economic growth in this country:
over the past decade, small businesses have created 65 percent
of all new jobs.
But faced with such wild and unpredictable swings in the
cost of health insurance, how are small businesses supposed to
budget? How can they take the risk of expanding? How can
someone go out on their own to start their own family business?
Under the status quo, small businesses are being forced to make
choices they should not have to make, and the fear of crushing
health costs is stifling the entrepreneurial spirit.
At this hearing, I would have liked to question health
insurance companies about these trends and practices. But not
surprisingly, insurance companies are not interested in
discussing them. So today I am announcing my own investigation
into the pricing practices of health insurance companies that
sell policies to small businesses. Health insurance companies
should open their books and explain to the American people why
they support a health insurance market for small businesses
that is so dysfunctional, and so lacking in transparency.
Small businesses are desperately trying to do the right
thing for their employees--and doing the right thing will also
make them more competitive and profitable. But they need help.
And with the release of the Senate's legislation within the
next week or so, help is on the way.
As we'll learn today, our reforms will not only help
families, they will also help the economy, too. Our plan for
affordable, quality health care will save small businesses tens
of billions of dollars in spending on health insurance premiums
each year, saving tens of thousands of jobs each year. Now
that's a prescription for progress.
Our legislation will create health insurance exchanges that
pool small businesses together and increase competition. Under
the status quo, small businesses pay a tax of 18 percent on
health insurance because of exorbitant administrative costs.
The exchanges will enable small businesses to easily compare
the prices, benefits, and quality of health plans.
Our legislation will end the discriminatory insurance
industry practices of jacking up premiums by up to 200 percent
because an employee got sick or older, or because the business
hired a woman. This will also reduce premiums, because
insurance companies will no longer be allowed to investigate
the health condition of employees--eliminating the wasteful
cost of underwriting.
Under our legislation, an estimated 3.6 million small
businesses nationwide will qualify for a tax credit of up to 50
percent of premiums to make coverage more affordable. In Iowa,
49,000 small businesses will be eligible for this premium tax
credit.
Our legislation will ban arbitrary limits on benefits, and
place limits on out-of-pocket expenses. And it will require
coverage of recommended preventive care, with no cost-sharing.
These reforms will provide security and peace of mind to small
business workers, make them healthier, and improve their
productivity.
And finally, I am very pleased that our legislation will
increase competition by providing small businesses with a
choice of a public insurance plan. As GAO has found, there is
very little competition in the small group market: the market
share of the largest small group insurer rose from 33 percent
in 2002 to 47 percent in 2008. Under the status quo, small
businesses do not have much choice, and we will guarantee that
they have one.
So to America's small businesses, I have a simple message:
we are fighting for you, and help is on the way. The time to
act has come. We will succeed, because for you and for America,
the status quo is not an option. It is time to make health
insurance markets work for all Americans--not just the healthy
and wealthy, but also the sick, the old, and the entrepreneurs
in pursuit of the American dream.
Senator Harkin. I'd now like to turn to our Ranking Member,
Senator Enzi.
Opening Statement of Senator Enzi
Senator Enzi. Thank you, Mr. Chairman. I appreciate you
holding this hearing. I've had an intense interest in this
since I owned a small business.
The Chairman. Yes, you are a small businessman.
Senator Enzi. It's been working like that for a long time,
and the status quo in health care is unacceptable.
Health care costs are skyrocketing. Insurance premiums are
increasing. And too many small businesses can no longer afford
to offer health insurance to their workers.
While I agree that we need to change our current system,
the approach reflected in the current health reform bills is
the wrong answer. I object to the current health reform bills,
not because I support the status quo, but because the bills
really do little to address the problems of increasing costs
and premiums for small business. These bills will not reduce
health care costs and will actually increase insurance premiums
for most Americans.
I fought for years to enact common sense reforms that will
slow down health care cost growth and make the insurance market
work better for small businesses. Before I entered politics, my
wife and I had shoe stores. We know firsthand how hard it is to
meet payroll and provide meaningful benefits for the employees.
I understand how the current insurance market fails to meet
the needs of many small businesses. That's why I fought for
real reforms that will actually help small businesses. In 2006
I introduced a small business health plan bill that would have
saved the taxpayers about a billion dollars and would have
provided health insurance to almost a million people. The bill
would have made common sense reforms to the insurance market
and given more leverage to small businesses to help them
negotiate lower insurance premiums.
Incidentally, the idea from that came from Ohio because it
was already happening in Ohio where they had a big enough
population that they were able to do small business health
plans. And the people doing that in Ohio said, ``do you know
how much we could save if we could cross State borders, if we
could maybe go nationwide?'' They were saving 23 percent just
on administrative costs.
The insurance industry working closely with many of my
Democratic colleagues fought to defeat my bill. And
unfortunately they were successful on the motion to proceed.
And the motion to proceed kept us from doing the amendment that
would have cleared up probably about 30 more votes to solve the
one outstanding issue that was still there which was the
mandate issue. So we didn't get it in 2006. I know how tough
reform is to get done.
Since 2006 little has changed in the insurance marketplace.
Health care costs and premiums continue to spiral upwards. The
Kaiser Family Foundation reports the cost for small businesses
with less than 200 employees and I've got to tell you I think
200 employees is big business to me.
But nevertheless their study, said with less than 200
employees, rose by 4.7 percent from 2006 to 2007, 2.2 percent
from 2007 to 2008, 5 percent from 2008 to 2009. And they're
expected to rise again this year. Small businesses cannot
continue to sustain these types of price increases.
They need and want reform. And Congress should deliver
reform. Congress should pass a bill that decreases the cost of
health care and reduces insurance.
As I said before, unfortunately the bills that Speaker
Pelosi, Leader Reid and President Obama are pushing through
Congress will do little to address spiraling health care costs.
And will actually increase the insurance premiums most
Americans pay for their health care. Even worse these increases
in premiums will come at a time of rising unemployment.
The 2,000 page House bill and the 1,500 page Senate Finance
bill and the 1,000 page HELP bill will drive up costs. They'll
increase taxes and they'll expand the size of government. The
nonpartisan Congressional Budget Office, the Administration's
own official actuaries, the National Association State
Insurance Commissioners and at least six other private studies
have all reported that the Democrat leadership bills will drive
up costs.
Actuaries at the consulting firm, Oliver Wyman, which did
one of the studies, estimated these bills will increase
premiums for small businesses by at least 20 percent. WellPoint
which is the largest BlueCross/BlueShield plan in the Nation
looked at their actual claims experience in 14 States in which
they operate, and concluded premiums for healthier, small
businesses will increase in all 14 States and in Nevada by as
much as 108 percent.
Even the Congressional Budget Office has said, ``Premiums
in the new insurance exchanges would tend to be higher than the
average premiums in the current law individual market.'' When
the 85 percent of Americans who already have health insurance
hear the term health care reform they want Washington to do
something that lowers the cost of their insurance premiums.
Unfortunately the bills that Congress has developed will do the
exact opposite.
Our economy can't take the higher taxes, higher
unemployment and higher mandates these bills impose. Taken
together the new taxes, mandates and regulations will
cumulatively increase health insurance premiums for millions of
Americans who currently have health insurance. These higher
taxes, higher premiums and higher costs are not the change that
American people voted for.
Unemployment is higher than it's been in decades. The
housing market is in distress. And more and more middle class
Americans are feeling squeezed by irresponsible decisions being
made here in Washington.
We all agree the health insurance market is broken and
needs to be fixed. Everyone who wants health insurance should
be able to get it. And they shouldn't have to spend all of
their hard earned savings to get it. No American should be
denied health insurance because they have cancer, diabetes or
some other pre-existing condition. No one should be denied
health insurance, period.
These reforms are very important and long overdue. We also
need to enact common sense reform, similar to the reforms I
advocated in 2006 with the small business health plans. And
then in 2007 and 2008 with my Ten Steps to Transform Health
Care in America which is on my Web site.
I look forward to hearing from our witnesses about the
impact of these bills. I also hope that this information will
encourage my colleagues to go back to the drawing board to
develop bipartisan health care solutions that will actually
reduce costs and make health insurance more affordable for
small businesses. I thank the Chairman.
[The prepared statement of Senator Enzi follows:]
Prepared Statement of Senator Enzi
Mr. Chairman, the status quo in health care is
unacceptable. Health care costs are skyrocketing, insurance
premiums are increasing, and too many small businesses can no
longer afford to offer health insurance to their workers.
While I agree that we need to change our current system,
the approach reflected in the current health reform bills is
the wrong answer. I object to the current health care reform
bills, not because I support the status quo, but because the
bills do nothing to address the problems of increasing costs
and premiums. These bills will not reduce health care costs and
will actually increase insurance premiums for most Americans.
I have fought for years to enact common sense reforms that
will help slow health care cost growth and make the insurance
market work better for small businesses. Before I entered
politics, my wife and I ran a small business. We know firsthand
how hard it is to meet payroll and provide meaningful benefits
to employees. I understand how the current insurance market
fails to meet the needs of many small businesses.
That is why I have fought for real reforms that will
actually help small businesses. In 2006, I introduced a small
business health plans bill that would have saved the taxpayers
about a billion dollars and would have provided health
insurance to almost a million people. The bill would have made
common sense reforms to the insurance market and given more
leverage to small businesses to help them negotiate lower
insurance premiums.
The insurance industry, working closely with many of my
Democratic colleagues, fought to defeat my bill. Unfortunately,
they were successful, and 43 Senators voted to block our
efforts to get the Senate to pass these reforms.
Since 2006, little has changed in the insurance
marketplace. Health care costs and premiums continue to spiral
upwards. The Kaiser Family Foundation reports that costs for
small businesses with less than 200 employees rose by 4.7
percent from 2006 to 2007, 2.2 percent from 2007 to 2008, 5
percent from 2008 to 2009, and they are expected to rise next
year.
Small businesses cannot continue to sustain these types of
price increases. They need and want reform, and Congress should
deliver reform. Congress should pass a bill that decreases the
cost of health care and reduces insurance premiums.
Unfortunately, the bills Speaker Pelosi, Senator Reid, and
President Obama are pushing through Congress will do nothing to
address spiraling health care costs and will actually increase
the insurance premiums most Americans pay for their health
care. Even worse, increases in premiums will come at a time of
rising unemployment.
The 2,000-page Pelosi bill and the 1,500-page Senate
Finance bill will drive up costs, increase taxes, and expand
the size of government. The non-partisan Congressional Budget
Office, the Administration's own official actuaries, the
National Association of State Insurance Commissioners and at
least six other private studies have all reported that the
Democrat Leadership bills will drive up costs.
Actuaries at the consulting firm, Oliver Wyman, which did
one of the studies, estimated these bills will increase
premiums for small business by at least 20 percent. WeIlpoint,
the largest Blue Cross Blue Shield plan in the Nation, looked
at their actual claims experiences in the 14 States in which
they operate, and concluded premiums for healthier small
businesses will increase in all 14 States--in Nevada by as much
as 108 percent.
Even the Congressional Budget Office has said: ``premiums
in the new insurance exchanges would tend to be higher than the
average premiums in the current-law individual market.''
When the 85 percent of Americans who already have health
insurance hear the term ``health care reform'', they want
Washington to do something that lowers the cost of their health
insurance premiums. Unfortunately, the bills that Congress has
developed will do the exact opposite.
Our economy can't take the higher taxes, higher
unemployment, and higher mandates these bills impose. Taken
together, the new taxes, mandates and regulations in these
bills will cumulatively increase health insurance premiums for
millions of Americans who currently have health insurance.
These higher taxes, higher premiums, and higher costs are
not the ``change'' the American people voted for. Unemployment
is higher than it's been in decades, the housing market is in
distress, and more and more middle class Americans are feeling
squeezed by irresponsible decisions being made here in
Washington.
We all agree the health insurance market is broken and
needs to be fixed. Everyone who wants health insurance should
be able to get it, and they shouldn't have to spend all of
their hard-earned savings to get it. No American should be
denied health insurance because they have cancer, diabetes, or
some other pre-existing condition. No one should be denied
health insurance, period.
These reforms are very important and long over-due. We also
need to enact common sense reforms similar to the reforms I
advocated for in 2006 with small business health plans and then
in 2007 and 2008 with my plan, ``Ten Steps to Transform Health
Care in America''.
I look forward to hearing from our witnesses about the
impact of these bills. I also hope this information will
encourage my colleagues to go back to the drawing board to
develop bipartisan healthcare solutions that will actually
reduce costs and make health insurance more affordable for
small businesses.
The Chairman. Thank you very much, Senator Enzi. Other
statements will be made a part of the record.
I say to all of our witnesses, your statements will be made
a part of the record in their entirety. We will go from right
to left. Senator Specter wanted to introduce Mr. Rowen. I will
honor that after our first witness.
I'd ask each of you to summarize your statements in 5
minutes or so. I don't hold fast to 5 minutes. If it goes over
a little bit, fine. But once it starts getting near 7 minutes,
I will start picking up the gavel.
But if you can keep it around that because we'd like to
have a general discussion with most of you. I read all of your
testimonies last evening.
We'll start on my right, first with Mr. Art Cullen. Art
Cullen is the editor and part owner of the Storm Lake Times, a
twice weekly newspaper of 3,300 in Storm Lake, IA. Art is a
native of Storm Lake, graduated from St. Mary's High School,
the University of St. Thomas in St. Paul, MN.
He's been a reporter and editor at the Algona Upper Des
Moines in Algona, IA. Managing editor of the Daily Tribune in
Ames, IA. News editor of the Mason City Globe Gazette. In 1990
Art returned to Storm Lake and with his older brother, John,
launched the Times in their hometown. Art and his wife,
Delores, who also works at the Times, have four children.
A few weeks ago, I had my weekly press call. We were
talking about the Health Care bill. Mr. Cullen was telling me
about his situation. And I thought that just really typified
what a lot of small businesses are going through. So I asked
him if he would appear here today to share with us what's
happening out in a small town in Western Iowa.
Mr. Cullen, welcome and please proceed.
STATEMENT OF ART CULLEN, EDITOR, THE STORM LAKE TIMES, STORM
LAKE, IA
Mr. Cullen. My name is Art Cullen.
Thank you, Senator. Indeed what's going on in Western Iowa
is it's cold and windy. And it's beautiful here today. Thank
you for inviting me.
As you noted my brother founded the Storm Light Times in
1990. And at the time he was working in public relations for a
local college, Buena Vista University. And he had a very nice
health care plan there.
But he missed the newspaper business terribly. And the
existing newspaper in our town was lousy. So he wanted to start
a good newspaper. And so we did.
We offered health insurance to our employees. If John said
he had to do it today, he would stick with his TIAACREF pension
plan and health insurance that he had at the college. And he'd
view this, speaking for him, as a real impediment to starting a
business in health insurance. If you've got good health
insurance you're not going to want to go out on a limb and
start a competing newspaper in your hometown.
I'd also note that I have two children in college. They're
both getting their own health insurance. My daughter is getting
hers through a very generous financial aid package at Drake
University in Des Moines.
I have twin sons at home who are enrolled in the SCHIP
program because we can't make enough money in a $10-an-hour
economy in Western Iowa at a local newspaper. So my kids get
SCHIP. I wish I could get SCHIP.
We had our sales manager, great worker, Mike Diercks is his
name. And he just works like a dog. And he had to have a kidney
transplant. And our insurance rates went up 100 percent in 2
years between 2004 and 2005.
Since 1992 our individual plan was $169. Now it's 626.
That's a 270 percent increase. According to the Minneapolis Fed
the rate of inflation during that same period was 65 percent.
So our rates went up 270 percent versus the cost of living
increase in the upper Midwest of 65 percent.
So I'm not sure if I heard Senator Enzi right. But he was
saying something about 2 percent and 1 percent. Steve Hamilton,
a local lawyer with three lawyers and about a dozen staff
support, their bills are going up 20 percent this year. They're
on Wellmark BlueCross/BlueShield.
We haven't been notified of our rate increase yet. But
given double digit percentage increases every single year,
including 59 percent 1 year, 28 percent in 2006, 15 percent in
2007, 11 percent last year and we expect our rates to go up,
probably, if they say 11 then we believe it will be 22.
[Laughter.]
And that basically summarizes my remarks other than I have
two other things to say.
One is I know that Senator Harkin has been working very
hard on preventative measures. He talks about it at every
single one of those conference calls, I can assure you. And I'd
have to spend $3,000 out-of-pocket to get a colonoscopy.
I'm 52, getting old. And I can't afford it because we have
a $5,000 deductible. And anything that's done at a hospital
comes out of my pocket. And so a colonoscopy is done at the
hospital as are mammographies. Neither of which would be
covered under our deductible. So we have to drive to Sioux City
or Fort Dodge which are more than an hour away to get simple,
preventative measures done.
We have a cancer patient in our office, colon cancer. And
if she got a shot at our local hospital, the Buena Vista County
Hospital, it would cost her $2,500. If she drives to Sioux
City, where it's done in a clinical setting, it would cost her
$25. But she drives right past the Buena Vista County Hospital
and drives all the way to Sioux City to get that shot because
it's not covered under our health insurance plan. That's a
deductible.
So you know, I could go on with horror stories for an hour.
But, I only have four words for Senator Al Franken and that is,
Joe Mauer for Governor. I have 3 seconds left.
The Chairman. Who?
Mr. Cullen. Joe Mauer.
[Laughter.]
[The prepared statement of Mr. Cullen follows:]
Prepared Statement of Art Cullen
threat to small business
My brother, John, founded The Storm Lake Times in June 1990 to make
a difference in the community that reared us. He did not start the
hometown newspaper to administer a health insurance plan and cover its
escalating costs.
He started the newspaper with a small inheritance from our mother
and an extra mortgage on his house. John believed that every employee
should have health insurance and provided it. The Times paid the
employee cost, and the employee was responsible for the family share.
Back then, the family package was about $200 per month. Now it is more
than $900 per month, with greatly decreased benefits.
The Times has grown from no circulation to about 3,300 paid
circulation, twice a week, with 12 employees. We have our own press and
production facilities.
The Storm Lake Times now pays nearly $50,000 per year for health
insurance coverage. That's almost as much as we pay for newsprint.
Were it not for such high insurance costs we could add more
employees and help to grow our local economy, plus publish an even
better newspaper.
Our rates doubled when one employee, previously bankrupted by
medical bills, had a kidney transplant in 2005. Rates have gone up by
double digits every year since. We cannot switch insurers because of
employees with pre-existing conditions (cancer, diabetes, back
surgery). And even if we could get around pre-existing conditions, one
health insurance company controls about 85 percent of the local market.
To cope with increasing costs, we have accepted a $5,000 deductible
on services provided by a hospital. Therefore, a cancer patient who
needs to have a shot has a choice: have the shot done in Storm Lake at
the hospital and pay $2,500 out-of-pocket, or drive to Sioux City and
pay $25 for the same shot from the same doctor--in a clinic, and not a
hospital. The same problem arises for many routine preventative types
of tests--mammography and colonoscopy immediately come to mind. Each
would be covered by health insurance if offered at a clinic. If offered
by Buena Vista Regional Medical Center, a colonoscopy would cost about
$3,000 out-of-pocket.
(Buena Vista County has the highest rate of fatal colorectal cancer
in Iowa, possibly because of low screening to catch it early.)
Health reform will help small rural critical access hospitals like
ours. Rather than having all that money flowing to Sioux City an hour
away, we would have our services performed right here in Storm Lake. It
would be a revenue boon for rural hospitals.
Wellmark, the leading insurer in Iowa, already announced an 11
percent rate increase next year for State employees--a far larger and
more stable pool than ours. We anticipate that our rates will rise at
least that much. We cannot ``pass the cost'' to consumers through
subscription or advertising rate increases. Extra costs will come out
of our business' bottom line, or out of our employees' pockets.
Buena Vista County has an average household income of $36,000 per
year. The cost of most insurance plans--Cadillac by no means, more like
a Hyundai--offered locally thus accounts for about a third of that
household income. Hence, housing and health insurance costs consume
about two-thirds of a working family's income in our rural,
agricultural economy.
We need more insurance competition in the rural marketplace by
knocking down State cartels. We need fair compensation for rural
physicians, who are losing ground to their urban and specialist peers
as costs ratchet down on providers. It's tough enough to recruit local
doctors without discounting their pay. We need to maintain federally
subsidized Community Health Centers, an important front door to the
health care system for workers in the meatpacking industry, which
dominates our local economy. We need to be able to switch health
insurance companies or agents, which we currently cannot. We need to
provide mechanisms under which the insured can get low-cost
preventative tests such as mammographies or colonoscopies. We need to
know that a single health catastrophe will not bankrupt us and bring
down everything we have worked for over the past 20 years.
We want to invest in our business, and thus in our community with a
thriving local newspaper that brings a community together. Rising
health care expenses represent a significant bar to that dream.
Thank you.
The Chairman. Ok. Fine.
[Laughter.]
And now for purposes of introduction of our next witness, I
turn to Senator Specter.
Statement of Senator Specter
Senator Specter. Thank you, Mr. Chairman. I'm pleased to
introduce Mr. Walter Rowen from Lancaster, PA. He has a company
which employs 35 people, a glass company. Been in business for
100 years and was faced with an increase in premiums of 128
percent.
I had hoped we would have his insurance company to come in
because as we take a look at the issues on our legislation it
would be my hope that we could find out whether the New York
Times report was correct that the insurance companies are
responding to Wall Street to raise their rates to show profits
before there is legislation. And a number of companies were
invited. And they all declined. But I'm not going to mention
them publicly because I haven't gone into the reasons.
But it seems to me, Mr. Chairman, that these witnesses are
fine. But I appreciated your statement that you'd like to
question the insurance companies about the rising costs. And my
suggestion would be subject to the Chair, that subpoenas would
be a good idea to bring them in.
Why are they being raised 100 and some percent? What is the
reason for it? We hear a lot about Wall Street greed. Well we
ought to find out.
This is a good start, Mr. Chairman. I thank you and the
Ranking Member for this hearing. And I hope we will proceed it
with some tough subpoenas to get some hard facts. So we can
expose wrong doing, if there is wrong doing, profiteering and
take appropriate corrective legislative action.
Welcome, Mr. Rowen.
STATEMENT OF WALTER ROWEN, PRESIDENT, SUSQUEHANNA GLASS
COMPANY, COLUMBIA, PA
Mr. Rowen. Thank you for that introduction, Senator
Specter.
And Senator Harkin, Mr. Chairman and distinguished members
of the committee, thank you for inviting me to testify before
you today on the rising costs of health care insurance for
small businesses.
Senator Specter was slightly wrong. My business will be 100
years old in 2 months.
[Laughter.]
Senator Specter. That's the closest I've been in a long
time.
[Laughter.]
Mr. Rowen. I do own a family business. But I run my
business like a family. For at least 40 years we have been
offering health insurance coverage to our full-time employees.
We employ about 35 people of which between 20 and 24 normally
participate in our health insurance plan.
Many of my employees have worked for me for between 15 and
30, 35 years. In these difficult economic times I know all of
you would agree that small businesses like mine, companies that
keep employees for years because we treat them with decency and
provide fair benefits should be encouraged, if not rewarded for
our policies. Providing health insurance coverage to those
employees who want and need it is one of those polices we
believe in and hope we can continue.
Unfortunately over the past several years, securing
affordable health insurance has become increasingly difficult.
From the years 2006, 2007, and 2008, we faced premium increases
if we had not changed our policies of 22, 24 and 10 percent. In
order to deal with these increases we constantly shopped for
new carriers and changed our policies primarily by adding
deductibles to the plan and then steadily each year increasing
those deductibles in order to keep the costs of the premiums in
line.
When we went to a deductible for the last 3 years the
company fully funded that for our employees through an HRA
policy. So we were paying the deductibles for our employees.
However whatever problems we had in the last 3 to 4 years paled
in comparison to this year.
Our initial cost increase from our insurer, if we kept the
same policy, with the same deductibles, was quoted at 128
percent increase. When we shopped around the best we could find
was a policy that increased our premiums by 43 percent. But
this policy now carried a higher deductible than the previous
year. The total amount of the increase in premiums alone to our
company was a staggering $40,000 annually.
We were suddenly faced with a terrible dilemma. How do we
divide up the added costs between the company and our
employees? We decided the company would absorb all of the
premium increase. But the trade off was we could no longer pay
for our employees deductibles. Our costs to increase the policy
was $22,000.
We will still beat last year's deductibles. Just to be
clear, we paid in the neighborhood of $18,000. Now the real
burden, unfortunately, of the deductible falls on our employees
who will be at risk for a $2,000 individual, $4,000 family
deductible. This will potentially put some of our employees, if
they need to use their health insurance to any extent, at a
financial risk that they will not be able to handle.
In talking to our insurance agent, the broker report they
received from last year's carrier indicated that the huge
premium increase was justified due to the changes in three
areas.
First, there was a demographic or age change in my group.
And as I've told you I've had people that have work for me for
30 and 35 years. Our average age of employee that is carried by
our policy went from 45 to 49. And they claimed that created an
11 percent increase of our policy.
There were pricing trends within both our industry and our,
I believe, geographical area that impacted the policy by
somewhere around 21 percent.
But then the big one was the assessed risk of our group,
our 20, 22 people because of some potential changes in their
health created a 70 percent increase to our policy. Although
this doesn't quite add up to 128 percent these were the risk
areas and their relative percentages that were used to justify
the 128 percent increase. When you look at my company as an
insurance group it is abundantly clear that we will always
struggle to get fair and affordable health insurance rates
unless we can become part of a much larger insurance group or
pool.
To me there are really two separate issues that are
interconnected when you talk about health care reform.
The first is how do you create a better health insurance
system that will provide affordable coverage to people? It's an
insurance question.
The second is how do you start to control the spiraling
costs of health care to the American population?
I am here today simply to bring my personal experience as a
small business man as it relates to the insurance issue. How
can we create a better insurance system to spread the risk for
individuals of small businesses? To me creating a large, robust
health insurance exchange that crosses State lines is a good
first step toward distributing the risk.
Requiring all individuals to have some form of health
insurance, enacting reasonable tort reform and putting in place
some accountability by the consumer, my employees, when getting
health care also is required to create a good solution.
What has surprised me as a small business owner is how long
it has taken for any real work on health insurance reform to
take place. As my insurance history shows we have been living
with dramatically rising health insurance costs for the last 4
to 5 years which is evidenced by the current system is
unsustainable. This year's increases are now proof that that
system is absolutely broken. And without reform small
businesses and the foundation upon which our economic system is
founded is in real jeopardy.
I applaud this committee's efforts to it finally enacting
health reform. And again, thank you for allowing me to share
with you my company's history. Thank you.
[The prepared statement of Mr. Rowen follows:]
Prepared Statement of Walter Rowen
Mr. Chairman, distinguished members of this committee, thank you
for inviting me to testify before you today on the rising costs of
Health Insurance for small businesses.
In 2 months, my company, Susquehanna Glass will be celebrating its
100th Year in business. For at least the last 30 years, we have been
offering health insurance coverage to our full-time employees. We
employ about 35 people, and 20-24 of them normally participate in the
plan.
I own a family business, but I run my business like a family. Many
of my employees have worked for me more than 15 years, a few more than
30. In these difficult economic times, I know all of you would agree
that small businesses like mine, companies that keep employees for
years because we treat them with decency and provide fair benefits,
should be encouraged if not rewarded for our policies. Providing health
insurance coverage to those employees who want and need it is one of
those policies we still believe in and hope to continue.
Unfortunately, over the past several years, securing affordable
health insurance has become increasingly difficult. From 2006-2008, we
faced premium increases of 22 percent, 24 percent and 10 percent. In
order to deal with these huge increases, we constantly shopped for new
carriers and changed our policy, primarily by adding a deductible
component to the plan and then steadily increasing the deductible
amount. When we went to a deductible, the company fully funded an HRA
for the employees for the last 3 years.
However, whatever problems we had in previous years paled in
comparison to this year's problems. Our initial cost increase from our
insurer was quoted at 128 percent. When we shopped around, the best we
could find was a policy that increased our premiums by about 43
percent, but this policy now carries an even higher deductible than
last year. The total amount of the increase in premiums alone is a
staggering $40,000. We were suddenly faced with a terrible dilemma, how
do we divide up the added costs between the company and our employees?
We decided the company would absorb all the premium increase, but the
tradeoff was we could no longer pay for our employee's deductibles. We
will be paying $22,000 more without paying deductibles than our total
spending last year when we paid all deductibles. But the real burden
now falls on our employees who will be at risk for a $2,000 individual,
$4,000 family deductible. This will potentially put some of our
employees, if they need to use their health insurance to any extent, at
a financial risk they will not be able to handle!
In talking to our insurance agent, the Broker Report they received
from last years carrier indicated the huge premium increase was
justified due to changes in three areas:
1. Demographic or Age change. The average age of our enrollee went
from 45 to 49 years: 11.32 percent.
2. Pricing Trends for our industry: 21.09 percent.
3. Assessed Risk of our group: 70.29 percent.
Although this doesn't add up to 128 percent, these were the risk
areas and their relative percentages used to justify the rate increase.
When you look at my company as an insurance group, it is abundantly
clear that we will always struggle to get fair and affordable health
insurance rates unless we can become part of a much larger insurance
group.
To me, there are really two separate but interconnected issues
involved in ``Health Care Reform.''
1. How do you create a better Health insurance system that will
provide affordable coverage to more people?
2. How can you start to control the spiraling cost of health care
to the American population?
I am here today to simply bring to you my personal experience as a
small businessman as it relates to the insurance issue. How can we
create a better insurance system to spread the risk for individuals and
small businesses? To me, creating a large, robust health insurance
exchange that crosses State lines is a good first step toward
distributing the risk. Requiring all individuals to have some form of
health insurance, enacting reasonable tort reform and putting in place
some accountability by the consumer when getting health care are also
required if a good solution is to be found.
What has disappointed me as a small business owner is how long it
has taken for any real work on health insurance reform to take place.
As my insurance history shows, we have been living with dramatically
rising health insurance costs for the last 4-5 years, which is evidence
that the current system is unsustainable. This year's increases are now
proof that the system is absolutely broken and without reform, small
business and the foundation upon which our economic system is founded
is in real jeopardy. I applaud this committee's efforts toward finally
enacting Health Care Reform.
Again, thank you for allowing me this opportunity to share with you
my company's story.
The Chairman. Well thank you very much, Mr. Rowan for that
statement and thank you for being here today.
Next we'll go to Commissioner Sandy Praeger who was elected
as Kansas' 24th Commissioner of Insurance in 2002, re-elected
in 2006. Commissioner Praeger is responsible for regulating all
insurance sold in Kansas and overseeing the nearly 1,700
insurance companies and 90,000 agent licenses to do business in
the State. Commissioner Praeger is the immediate past President
of the National Association of Insurance Commissioners. She
serves as Chair of the Health Insurance and Managed Care
Committee, Vice Chair of the International Insurance Relations
Committee, Member of the Executive Committee for International
Associations of Insurance Supervisors and a member of other
NAIC Committees.
So, Commissioner Praeger, again, your statement will be
made a part of the record in its entirety.
Senator Roberts. Mr. Chairman.
The Chairman. Please proceed.
Senator Roberts. Would it be appropriate that I give my
glowing remarks on behalf of our Commissioner now or do you
want to wait until you shut me down after 4 minutes?
The Chairman. I think you better give them now.
Senator Roberts. Alright.
[Laughter.]
Statement of Senator Roberts
Senator Roberts. Well, I want to truly recognize my home
State insurance commissioner. It's not like insurance companies
don't have oversight. They certainly do in Kansas. And they can
do it in several ways, those who would increase premiums too
much or those whose premiums would be so low that they would
not benefit the company in terms of keeping in business.
Sandy, and the reason I call her Sandy is that she's a good
personal friend and has done an outstanding job. She's been an
invaluable resource to me, my staff, I know other Members in
the Congress. And I'm always very proud to have her address
this panel.
She has contributed significantly to efforts to educate.
And I really think it's important to educate the American
public about health care reform, something I wish all of Kansas
should be grateful for. Kansas, like everybody else have the
right to know, but they also have the right to be educated by
professionals who can discern in regards to what the real
effects, maybe even the law of unintended effects might mean in
this exercise that we are now going through along the lines
that Senator Enzi has already testified.
So I want to thank you Sandy, so much. And thank you for
your contributions to our State and our country. And thank you,
Mr. Chairman.
The Chairman. Thank you very much, Senator Roberts.
Commissioner Praeger, welcome. Please proceed.
STATEMENT OF SANDY PRAEGER, COMMISSIONER, KANSAS DEPARTMENT OF
INSURANCE, TOPEKA, KS
Ms. Praeger. Thank you. And thank you, Senator Roberts. I
appreciate that.
Chairman Harkin, Ranking Member Enzi and distinguished
members of the committee, I really appreciate the opportunity
for being here. Thank you for holding this hearing on a very
important subject of the rising health care costs for small
businesses. As has been said, I am Sandy Praeger. I'm the
elected Commissioner for the State of Kansas and Chair of the
National Association of Insurance Commissioners, Health
Insurance and Managed Care Committee. And I'm testifying today
on behalf of the NAIC.
The affordability of health insurance coverage to small
businesses is a critically important component of health
reform. With lower profit margins small businesses have a much
more difficult time affording insurance coverage than their
larger competitors. Adding to the problem small businesses
continue to face significant premium increases while inflation
remains low and the economy slowly recovers. Even with reforms
State regulators share the concern of the members of this
committee that small businesses could see higher and higher
premiums in the coming years.
In preparation for today's hearing the NAIC completed an
informal survey of several States requesting information on
recent rate filings in the small group market. Let me just give
a sample of what requests the commissioners are receiving from
these small group carriers.
Washington State received requests ranging from 9 to 20
percent.
Maryland received rate increase requests from its largest
carriers averaging 15 to 16 percent.
New Mexico has received a request to decrease rates by 1
percent and another to raise rates by 9 percent.
Ohio has received a rate increase request ranging from 10
to 15 percent.
And in my home State of Kansas we've received requests
ranging from low single digits to 13 percent.
Of course an increase in the base premiums is only half the
story for small businesses. In most States carriers are allowed
to vary premiums charged to small businesses based on a variety
of characteristics such as average age, health status, group
size and on and on. If a single employee in a small business
and particularly in a very small business, a micro business,
should have significant change in their health status then the
premium increase could be as high as an additional 15 percent
on top of the base premium increase. If a company's work force
decreases significantly and/or its average age rises the
increase is compounded and the result can be what we've heard
about already.
It must be noted however, that when State regulators review
rates they not only must determine whether they're excessive or
appropriate, but also whether they're sufficient, as Senator
Roberts pointed out. One of the most important protections
insurance commissioners provide consumers is the assurance that
the insurance company will have the resources to pay claims
when they are incurred. If a State regulator chooses to deny
appropriate rates and place the company in financial distress
consumers may be happy in the short term, but certainly not in
the future.
So this, I know, begs the question are the rate increases
being requested by carriers in the small group market
appropriate or excessive? So for insight we asked the States
what justifications the companies gave for their rate
increases. And the answers were fairly consistent.
The No. 1 driver of higher premiums is medical cost trends,
probably no surprise. In most States medical cost inflation is
far outstripping general inflation. Companies are also seeing
significant increases in utilization.
Some attribute this to the uncertainty that some have about
their jobs and future coverage and in COBRA coverage which has
always had a far higher medical loss ratio. Some carriers also
point to small employers with healthier employees leaving the
pool while others cite new Federal and State benefit mandates.
All of these were reported in our survey.
For the most part State insurance departments with
authority to review the rates have agreed with the actuarial
analysis provided by the companies and have approved the rates.
However this is not true in every case.
Connecticut, for example, determined that the poor claims
experience a company was using to justify a 35 percent increase
was an anomaly and denied the rate increase.
Rhode Island asked companies to resubmit their requests in
6 months or significantly reduce their request. And most of the
companies chose to return in 6 months.
In my State of Kansas we're negotiating with a company
right now to minimize the impact of a rate increase on renewals
in the individual market, but allow it for new sales.
States have negotiated lower rates, rejected assumptions
and threatened public hearings in their efforts to ensure
carriers are not raising premiums unnecessarily. Most States
also impose a minimum loss ratio to ensure premiums are not
excessive compared to claims paid. In the end though the
reality is that the cost of health care and the utilization of
that health care are rising rapidly and insurance companies
have little ability to address these issues.
Insurance is simply a tool to finance the underlying cost
of health care. So unless spending is brought under control
State and Federal reforms will shift the financial burden from
one group to another, but not really solve the underlying
problem. The challenge moving forward will be to overhaul the
delivery system to promote prevention, quality and results-
based care, to encourage healthy lifestyles, to eliminate waste
and fraud in the system, providing insurers with the tools they
need to truly manage care while protecting consumers and
providers from some of the abuses seen in the past will also
help bring about much-needed control to the system.
We also need to reform the rating system eliminating the
factors that allow for unpredictable and unaffordable rate
spikes and create greater stability for small businesses. Some
reforms are included in the Health Reform bills passed by this
committee and the Senate Finance Committee and are supported by
the NAIC. The rates being approved by State regulators are
allowed under current law, but that doesn't mean they're
acceptable.
The laws do need to change. I know the committee is well
aware of these facts. And NAIC pledges its expertise to assist
in any way it can to help bend the curve in the future and
create a more equitable marketplace for small businesses.
And again, thank you for the opportunity to be here today.
[The prepared statement of Ms. Praeger follows:]
Prepared Statement of Sandy Praeger
Good afternoon Chairman Harkin, Ranking Member Enzi, and
distinguished members of the committee. Thank you for holding this
hearing on the very important subject of increasing health costs for
small businesses and for the invitation to testify today. My name is
Sandy Praeger and I am the elected Insurance Commissioner for the State
of Kansas and Chair of the National Association of Insurance
Commissioners' (NAIC) Health Insurance and Managed Care Committee. I am
testifying today on behalf of the NAIC, which represents the chief
insurance regulators from the 50 States, the District of Columbia and
five U.S. territories, whose primary objectives are to protect
consumers and promote healthy insurance markets.
problems in the small group market
The affordability of health insurance coverage to small businesses
is a critically important component of health reform. With lower profit
margins, small businesses have a much more difficult time affording
insurance coverage than their larger competitors. As a result, only 59
percent of businesses with between 2 and 199 employees offered coverage
to their employees. Among the smallest employers, those with between 3
and 9 employees, only 45 percent offered coverage.\1\ For this reason,
28.7 percent of workers in firms with fewer than 100 employees went
uninsured in 2006.\2\ The recent economic downturn has only made
matters worse.
---------------------------------------------------------------------------
\1\ Kaiser Family Foundation and Health Research & Educational
Trust, 2007.
\2\ EBRI, October 2007.
---------------------------------------------------------------------------
Adding to the problem, small businesses continue to face
significant premium increases, even while inflation remains low and the
economy slowly recovers. As efforts continue to reform the health
insurance marketplace, State regulators share the concern of the
members of this committee that small businesses could see higher and
higher premiums in the coming years. Determining whether and why the
rates are rising is the focus of this hearing.
In preparation for today's hearing, the NAIC completed an informal
survey of several States requesting information on recent rate filings
in the small group market. As reported in the New York Times, States
are receiving requests for premium increases in the small group market
that far exceed general inflation--but not in every State, not from
every company, and not without some justification in most cases.
To give a sample of what requests commissioners are receiving from
small group carriers: Washington has received requests ranging from 9
percent to 20 percent; Maryland has received rate increase requests
from its largest carriers averaging 15 percent to 16 percent; New
Mexico has received a request to decrease rates by 1.2 percent and
another to raise rates 9 percent; Ohio has received rate increase
request of 10 percent to 15 percent; and in my home State of Kansas, we
have received requests ranging from low single digits to 13 percent.
The vast difference in filings depends greatly on the company's
current situation. For example, a new company in New Hampshire was
relying heavily on consultant data to set its current premiums that
proved unrealistic, so they are requesting what amounts to a 30 percent
increase in rates to match their experience. Meanwhile, a few companies
are asking for a decrease. In Maryland, the high-deductible plans tied
to Health Savings Accounts are asking for significant increases of 19
percent to 25 percent.
Of course, an increase in the base premium is only half the story
for small businesses. In most States, carriers are allowed to vary
premiums charged to small businesses based on a variety of
characteristics, such as, average age, health status, claims
experience, industry, etc. If a single employee in a small business,
and particularly in a micro-business, should have a significant change
in their health status, then the premium increase could be as high as
an additional 15 percent onto the base premium increase. This is why
the commissioners take seriously their responsibility to review rates
and ensure that base premiums are appropriate, and why we support
reforms that will make small employer coverage more stable.
It must be noted, however, that when State regulators review rates
they not only must determine whether they are excessive or appropriate,
but also whether they are sufficient. One of the most important
protections insurance commissioners provide consumers is the assurance
that the insurance company will have the resources to pay claims when
they are incurred. If a State regulator chooses to deny appropriate
rates and place the company in financial distress, consumers may be
happy in the short term, but certainly not in the future.
So, this begs the question, Are the rate increases being requested
by the carriers in the small group market appropriate or excessive? To
retrieve some insight we asked the States what justifications the
companies gave for their rate increases. The answers were fairly
consistent.
The No. 1 driver of the higher premiums is medical cost trends. In
most States medical costs are increasing by about 10 percent per year--
far out-stripping general inflation. Companies are also seeing
significant increases in utilization--some attribute this to the
uncertainty some have about their jobs and future coverage--and in
COBRA coverage, which always has had far higher medical loss ratios.
Some carriers also point to small employers with healthier employees
dropping coverage, impacting the health of the pool, while other cite
new Federal and State benefit mandates.
For the most part, State insurance departments with authority to
review the rates have agreed with the actuarial analysis provided by
the companies and have approved the rates. However, this is not true in
every case. Connecticut, for example, determined that the poor claims
experience a company was using to justify a 35 percent increase was an
anomaly and denied the rate increase. Rhode Island asked companies to
resubmit their requests in 6 months or significantly reduce their
request--most of the companies chose to return in 6 months. In my State
of Kansas we are preparing to deny a rate increase for renewals, but
allow it for new sales.
States have negotiated lower rates, rejected assumptions, and
threatened public hearings in their efforts to ensure carriers are not
raising premiums unnecessarily. Most States also impose a minimum loss
ratio to ensure premiums are not excessive compared to claims paid. In
the end, though, the reality is that the cost of health care and the
utilization of that health care are rising rapidly, and insurance
companies have little ability to address these issues. Therefore, rates
will continue to rise.
Insurance is simply a tool to finance the underlying cost of health
care, so unless spending is brought under control, all State and
Federal reforms will shift the financial burden from one group to
another, but not solve the underlying problem. The challenge moving
forward will be to overhaul the delivery system to promote prevention,
quality, and results-based care, to encourage healthy lifestyles, and
to eliminate waste and fraud in the system. Providing insurers with the
tools they need to truly manage care, while protecting consumers and
providers from some of the abuses seen in the past, would also help
bring much-needed controls to the system. I know that the committee is
well aware of this fact and the NAIC pledges its expertise to assist in
any way it can to help ``bend the curve'' in the future. To that end,
we encourage you to grant States continued flexibility to experiment
and find solutions that work.
moving forward
Insurance Commissioners recognize the magnitude and importance of
the problem and have been working hard to ensure that affordable
coverage is available to small businesses in their States. 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 \3\ 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. In
addition, most States have limited the extent to which changes in a
business's claims experience can result in premium increases above and
beyond the increases for all of an insurer's small group policies that
result from medical inflation.
---------------------------------------------------------------------------
\3\ 42 U.S.C. 300gg-12.
---------------------------------------------------------------------------
In addition to requiring insurers to pool their small group risk,
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. As always, States are the laboratories for innovative
ideas.
Despite our best efforts, however, we have come to recognize that
this is a problem that the States alone cannot solve. The difficulties
in the small group market, as in the individual market, are ultimately
the result of medical spending that has outstripped the ability of most
Americans to pay for it. Coupled with a voluntary insurance market
where the healthiest tend to be the first to drop coverage, the high
spending has resulted in volatile insurance markets with high risks of
adverse selection. That is why we strongly support the adoption of
Federal legislation that will help the States address this issue.
Over the years, the NAIC and individual State Insurance
Commissioners have worked closely with this committee and individual
Senators, to develop legislation to make coverage more affordable in
the small group market. In 2006, we worked closely with Senators
Michael Enzi and Ben Nelson to develop the Health Insurance Marketplace
Modernization Act (S. 1955). More recently, we have worked closely with
Senators Durbin, Lincoln, Snowe, and Coleman to develop the Small
Business Health Options Program (SHOP) Act. While we have not agreed
with every provision of these proposals, we have worked very hard to
provide unbiased, nonpartisan advice to Senators on both sides of the
aisle in order to develop legislation that will work for America's
small businesses and their employees.
In the current push to enact comprehensive health care reform, the
NAIC has attempted to work in this same spirit of State-Federal
cooperation to help Congress draft legislation that will help all
Americans purchase health coverage that is currently out of reach for
millions of us and will make the health care system safer, more
reliable, and more equitable.
The NAIC applauds the hard work of both the HELP and Finance
Committees to enact long-overdue reforms. As adopted by the committees,
the bills would extend guaranteed issue protections to the non-group
health insurance market, eliminate pre-existing condition exclusions
and annual and lifetime limits, and end the practice of rating policies
based upon gender and health. In addition, they would initiate the
creation of State-based health insurance exchanges that could
streamline the process of purchasing coverage and make meaningful
comparisons of health insurance plans much easier. We are very pleased
to see that both committee-passed bills preserve State licensing,
solvency, consumer protection, and market conduct review laws and
regulations and maintain State oversight of health insurers.
However, State insurance regulators remain deeply concerned about
adverse selection. While we strongly support making coverage available
to everyone, we warn that implementing such a reform without an
effective individual mandate, coupled with sufficient subsidies, will
lead to severe adverse selection that could increase premiums further
for individuals and small businesses. Simply, if a young or healthy
person can choose to stay out of the pool and pay a minimal penalty,
with the promise that he or she can purchase coverage without penalty
when needed, then the insurance pool will be adversely affected. And,
the tighter the rating rules, the more premiums for the young and
healthy participants will be impacted, and the more an individual
mandate and higher subsides are necessary to keep them in the pool. We
do not believe the committee-passed mandates and subsidy structures
will be effective enough and fear that the resulting adverse selection
could undermine the overall reform effort.
conclusion
Congress and the Nation have a critical opportunity to enact and
implement comprehensive health insurance reforms that will dramatically
improve the access to and affordability of, health coverage for small
businesses and individuals. State regulators believe strongly that such
reforms are far overdue and we offer our assistance to ensure passage,
and implementation, of these reforms as soon as possible. However, we
share the concern of this committee that those reforms may not have
their full impact for several years, and that premiums will continue to
rise in the interim.
More immediate transitional steps may be necessary to significantly
reduce premiums in the coming years. Subsidies, reinsurance, funding
for high-risk pools, reducing cost-shifting from Federal programs and
the uninsured, are a few things that could be considered. State
regulators and the NAIC offer our assistance to the committee as
options are debated.
Again, thank you for holding this hearing, and for inviting me to
testify here today. I look forward to your questions.
The Chairman. Thank you very much, Commissioner Praeger for
being here again before this committee.
Now I want to turn to Mr. Holtz-Eakin, who is a Manhattan
Institute fellow, President of DHE Consulting, and most
recently served as Director of Domestic and Economic Policy for
the John McCain Presidential campaign.
He's also been senior fellow at the Peter G. Peterson
Institute for International Economics and Director of the
Maurice R. Greenberg Center for Geo Economic Studies and the
Paul Volker Chair in International Economics at the Council on
Foreign Relations. Prior to that Dr. Holtz-Eakin served as the
sixth Director of the Congressional Budget Office where he was
appointed for a 4-year term beginning February 4, 2003. Also
served for 18 months as Chief Economist for the President's
Council of Economic Advisors.
Prior to that a Trustee Professor for Economics at the
Maxwell School at Syracuse University. And served as Chairman
of the Department of Economics and Associate Director of the
Center for Policy Research. So certainly no stranger to us up
here.
Welcome back, Mr. Holtz-Eakin. And your statement will be
made a part of the record. Please proceed.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, DHE CONSUTLTING,
LLC, AND FELLOW MANHATTAN INSTITUTE, ARLINGTON, VA
Mr. Holtz-Eakin. Thank you, Mr. Chairman, Ranking Member
Enzi, members of the committee. It's a pleasure to be here
today. I believe it's broadly understood that small business
and entrepreneurs are crucial to the economy. That they employ
half of America's workers. That they produce about half of
America's output.
As a result they're about the third largest economy on this
planet. And that they've created about 70 percent of the net
new jobs over the past three decades. And one would hope then
that in the policy process commensurate attention will be paid
to the burdens and incentives for small businesses and
entrepreneurs.
I think it's equally well understood that the recent trends
in health insurance costs show a troubling pattern of burden to
be placed on this crucial sector of the economy particularly
when we have such weakness overall in job creation and growth.
So the most important issue that faces this committee and the
Senate as a whole is how to go forward. And does pending
legislation help this sector of the economy?
And the sad reality is that it hurts more than it helps.
The most important thing about legislation in the Senate is
that it does not bend the cost curve, the rising trend where
health spending per person exceeds income per capita for
decades on end in the United States. The House produced a bill
in which new spending for health entitlements grew at 8 percent
a year as far as the eye could see.
CBO Director Doug Elmendorf was asked to reply as to
whether this legislation bent the cost curve. He said
definitively, no.
The Senate Finance Committee produced legislation in which
a new health spending entitlement program grows at 8 percent as
far as the eye can see. These bills do not bend the cost curve.
CMS Actuary Richard Foster has said they've actually bent
it in the wrong direction and made things worse.
And given that higher health costs inevitably lead to
higher health insurance premiums these bills will not help the
basic problem facing the small businesses on this panel. I
think it's also true that at this point in time these are
budgetarily dangerous bills. The CBO's analysis of the most
recent Administration budget projects that over the next 10
years we will triple the national debt.
We will never run a deficit below 4 percent of GDP when
it's widely accepted that 3 percent is the line of safety. We
will arrive in 2019 after the economy is fully recovered.
Receipts have risen to an above average 19 percent of GDP and
have a deficit of $1 trillion, $800 billion of which would be
interest on previous borrowing.
At this point in time it would be a step decisively in the
wrong direction to set up a large new entitlement program which
is paid for only through the most transparent of budget
gimmicks. And that is exactly what the bills in the House and
the Senate do. These will be burdens on future generations.
They will send the message to the international capital markets
that the United States is not serious about fixing its fiscal
problems. And they will create an economic climate against
which not even the best of these entrepreneurs can climb. It
will be such headwinds they will inevitably be dragged down.
More narrowly the bills are front loaded with bad news for
the costs of health insurance. They contain higher taxes on
insurance policies which will be shifted forward onto the
purchasers of those policies especially those who are not self
insured which would be the small business community. They
contain higher taxes on insurance companies which in the same
way will end up in the premiums that people pay.
They contain higher fees which are in effect excise taxes
on pharmaceutical companies, on medical device makers and on
insurance companies again. In each case the analysis shows
quite clearly that you're going to shift these costs forward.
These are costs that insurance will have to cover. And we're
going to see higher premiums as a result.
And finally there are medical or insurance market reforms
guaranteed issue, community rating, which when combined with
weak mandates are going to push premiums up. Now to date
there's been a lot of displeasure over the messenger, the
insurance companies who pointed this out. But that doesn't mean
the logic is wrong. And we have seen the joint community on
taxation, the CMS actuary, the CBO and the National Association
of Insurance Commissioners embrace the fundamental analysis.
The only question is how big this problem will be.
And so we've got bills which are front loaded with trouble.
For people who have insurance, the majority of Americans, it
will raise the premiums that they pay. The bills themselves
will create a very unpleasant economic climate in which they
will operate.
And those fundamental forces, I believe, outweigh the small
bits of good news. Tax credits which last for 2 years in the
House which are less generous than the HELP Committee and the
Senate Finance version. And sort of one time improvements and
load factors and other things that cannot possibly outweigh the
inexorable upward trend in health care costs which these bills
do not bend, but in the end push ever upward.
I thank you. And look forward to answering your questions.
[The prepared statement of Mr. Holtz-Eakin follows:]
Prepared Statement of Douglas Holtz-Eakin
summary
The United States faces three important problems: health care costs
too much, insurance costs continue to rise rapidly, and consumers
receive too little for their money in quality of care and insurance.
These pressing issues should be the focus of health care reform.
Unfortunately proposals under consideration do not ameliorate these
pressures. Instead, they fail to bend the cost curve (or bend it the
wrong way) and raise the costs of insurance for the majority of
Americans who have insurance.
Fees imposed on the medical sector will result in families paying
$200 billion in higher premiums.
Taxes imposed on health insurance will add another $200 billion to
premiums.
Higher premiums will cut into the growth of wages and, for the
lowest-wage workers, opportunities for employment.
Insurance market reforms will not decrease costs, but rather will
raise average premiums.
The proposals under consideration will set up large new entitlement
spending programs that will likely exacerbate an already-dangerous
budgetary outlook. Small business owners will be placed at risk along
with the rest of the economy.
______
Chairman Harkin, Ranking Member Enzi, and members of the committee
I am pleased to have the opportunity to appear before you today to
discuss the important issue of health insurance costs and small
businesses in America.
the importance of small business
Small businesses and entrepreneurs are at the heart of the U.S.
economy, although there is no single way to quantify their
contribution. According to the National Federation of Independent
Businesses, there were almost 29 million Federal income tax returns
filed in 2004 with business income on them. Similarly, there were 16
million self-employed and working in their own businesses. Ninety-nine
percent of employing businesses are ``small'' under prevailing
definitions. Sixty percent of all businesses that employ people other
than the owners have 1 to 4 employees; another 20 percent have 5 to 9
employees; and yet another 10 percent have 10 to 19 employees.
Businesses employing fewer than 100 people (excluding the self-employed
who employ no one but themselves) constitute 96 percent of all
employers.
A large concern should be the impact of policy choices on
individuals, as these are the nascent entrepreneurs that are our next
business leaders. Roughly 10 percent of adults are interested in
starting a business. My own research indicates that these entrepreneurs
are sensitive to taxes and other aspects of the policy environment.
Finally, it is now well recognized that small business provides
about 55 percent of all jobs in the private sector. Small business has
created about two-thirds of the net new jobs in the United States,
where ``net'' means the number of jobs created minus the number of jobs
lost. In the process, these businesses also produce about one-half of
the private-sector GDP in the United States.
small businesses and health insurance
Small businesses display a lesser ability to provide health
insurance benefits for their workers (see table):
Percentage of Firms Offering Health Insurance Benefits by Firm Size and
Industry, 2008
------------------------------------------------------------------------
Percentage of Firms Offering
Health Benefits (In percent)
------------------------------------------------------------------------
Firm Size:
3-9 workers........................ 49
10-24 workers...................... 78
25-49 workers...................... 90
50-199 workers..................... 94
200-999 workers.................... 99
1,000-4,999 workers................ 100
5,000 or more workers.............. 100
All Small Firms (3-199 workers).... 62
All Large Firms (200 or more 99
workers)..........................
Industry:
Agriculture/Mining/Construction.... 67
Manufacturing...................... 73
Transportation/Communications/ 89
Utilities.........................
Wholesale.......................... 74
Retail............................. 40
Finance............................ 81
Service............................ 58
State/Local Government............. 97
Health Care........................ 71
All Firms............................ 63
------------------------------------------------------------------------
Source: Kaiser Family Foundation, Employer Health Benefits 2008;
excerpted from Exhibit 2.3, p. 37.
For those who manage to provide benefits, however, the challenge is
getting greater. Small businesses and entrepreneurs have faced rising
costs of health insurance premiums in recent years, as evidenced by the
table below.
Average Annual and Growth in Premiums for Covered Workers with Family
Coverage, by Firm Size, 1999-2009
------------------------------------------------------------------------
All Small
Firms (3- Percent
199 Change
Workers)
------------------------------------------------------------------------
1999.............................................. $5,683
2000.............................................. $6,521 14.7
2001.............................................. $6,959 6.7
2002*............................................. $7,781 11.8
2003.............................................. $8,946 15.0
2004.............................................. $9,737 8.8
2005*............................................. $10,587 8.7
2006.............................................. $11,306 6.8
2007.............................................. $11,835 4.7
2008*............................................. $12,091 2.2
2009*............................................. $12,696 5.0
------------------------------------------------------------------------
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-
2009.
These rising costs of insurance place pressure on firms to reduce
costs in other areas of operations, reduce cash wages, and impede their
ability to invest and expand.
the desirability of comprehensive health care reform
These recent experiences in rising health insurance premiums
highlight the need for effective reforms of U.S. health care. There are
three major problems. First, health care costs too much. In 1970,
national health expenditures were $1,300 per person and consumed 7
cents of every national dollar--7 percent of GDP. For the past three
decades, health-care spending per person has grown roughly 2 percentage
points faster every year than income per capita. That is, in the race
between costs and resources, costs have been winning. The result is
that health-care spending now exceeds 17 cents of every national
dollar--and will rise to 20 percent by the end of next decade. Within
the Federal budget, the rising cost of Medicare and Medicaid threatens
a tsunami of red ink in the decades to come.
A dominant characteristic of health care in the United States is
its fragmentation and focus on acute-care episodes. This system feeds
the growth in spending per capita above and beyond that due to the
factors outlined above. The Medicare program itself is important in
this regard. It has programs for ``hospital'' (Part A), for ``doctors''
(Part B), for ``insurance companies'' (Part C), and for ``drug
companies'' (Part D). These compartmentalized programs are dedicated to
ensuring that various providers receive their payments in a fee-for-
service system. Doctors and hospitals are paid for services provided to
patients; and the more they do, the more they are paid. This system is
focused on payments to providers, not on the health of families. This
system is not centered on quality of care and gives scant regard to
coordinating the decisions of the various medical providers, and it
does not reward appropriate preventive care. Importantly, because it is
such a dominant payer, Medicare reimbursement policies drive many of
the inefficient practices in American medicine.
It is hardly surprising that a medical system focused on paying for
acute-care episodes has spawned a reward to the innovation, adoption,
diffusion, and utilization of new technologies for these episodes.
Because the system is not oriented toward quality outcomes--
particularly, paying for quality outcomes--a key feature of rising
health-care spending is that it has not generated improved outcomes:
the United States spends a greater fraction of its income on health
care but does not have comparably superior longevity or health quality.
The trends are most pronounced in Medicare, but the same broad
characteristics prevail for the private system serving those younger
than 65. Also, in both cases (but again larger for Medicare) in the
United States, there are large regional differences in spending that do
not lead to apparent differences in the quality of outcomes.
Second, because health care is becoming more expensive, the cost of
health insurance is skyrocketing. Over the last decade, insurance costs
have increased by 120 percent--three times the growth of inflation and
four times the growth of wages. With higher costs has come reduced
insurance coverage. It is important to solve the first problem--rising
costs--before committing to large-scale coverage expansions. Dealing
with the problems in the wrong order will be prohibitively expensive
and will likely cause the reform effort to unwind.
Finally, health insurance and health-care systems underperform. A
job loss typically also means loss of health insurance; workers would
be better served by more portable options. Insurance companies would
have better incentives if faced with life-cycle costs for a
policyholder. Similarly, high spending has not yielded comparably high
outcomes for infant mortality, longevity, or treatment of chronic
disease. The delivery system can be greatly improved.
senate legislation and health care reform
It is useful to examine proposed legislation before the Senate in
light of the need for reform. Unfortunately, I believe that the
existing efforts fall far short of what is needed and, in some
instances, take unfortunate steps in the wrong direction.
Proposals to date do not ``bend the cost curve.'' The most
important first steps in health care reform are delivery system reforms
that maintain or improve quality and reduce the pace at which health
care spending grows. Rapid health care spending growth is the root
cause of rising insurance costs. Rapid health care spending growth is a
key part of the dangerous U.S. fiscal outlook. The existing proposals
do not address this problem. Indeed, to the extent that they impact
cost growth, they make the problem worse.
House legislation put forth earlier this year created a new health
entitlement spending program that the Congressional Budget Office
projected would grow 8 percent annually for the foreseeable future. CBO
Director Douglas Elmendorf responded directly and negatively to
questions about whether it (or HELP Committee legislation) would ``bend
the cost curve.'' Similarly, Health and Human Services Actuary Richard
Foster concluded that the legislation would raise national health
expenditures--exactly the opposite of the desired result. In sum,
creating a new entitlement spending program that grows at 8 percent
annually is not bending the cost curve.
The Senate Finance Committee legislation creates a new health
entitlement spending program that grows at 8 percent annually for the
foreseeable future. It, also, does not bend the cost curve.
Proposals endanger the budget and risk broader economic stress. The
Federal budget has entered dangerous territory. Under the
Administration's proposals (as analyzed by the CBO), debt relative to
GDP will rise from roughly 40 percent in 2008 to over 80 percent in
2019; at which time it will be spiraling north. Deficits will not fall
below 4 percent of GDP during the next 10 years. In 2019, the Federal
Government will borrow roughly $1 trillion dollars with nearly $800
billion necessary merely to pay interest on previous borrowing.
This outlook is not merely the residue of the financial crisis and
recession, which have demanded tremendous resources in the near term.
Instead, they reflect conscious policy choices that persist long after
the financial crisis is assumed to be resolved and the economy restored
to health.
International financial markets have long been presented with a
U.S. fiscal picture that does not add up over the long term. Successive
versions of the CBO's Long-Term Budget Outlook volume have documented
the basic facts: spending that is on track to consume an ever-larger
share of GDP and tax revenues that could never grow to match. These
most recent policy decisions simply accelerate dramatically the
underlying problems.
Analysts have long worried about the potential fallout of this
budgetary outlook. At what point do rating agencies downgrade the
United States. When do lenders price additional risk and charge higher
interest rates to Federal borrowing. How quickly will international
investors flee the dollar for a new reserve currency? If so, how will
the resulting higher interest rates, diminished dollar, higher
inflation, and economic distress manifest itself?
To date, one explanation of why these events have yet to transpire
is that the same financial market analysts who understand the weak
state of the U.S. books also believe that they will be rectified before
serious distress arrives. Put bluntly, the United States is relying on
the faith of others in its ability to undertake serious budgetary
reforms.
A large new spending program that grows at 8 percent a year--faster
than the economy will grow; faster than tax revenues will grow--is a
dramatic statement to financial markets that the Federal Government
does not understand that it must get its fiscal house in order. It is a
statement that it is content to make things worse. It would be a risky
move at a dangerous time.
Small businesses are a powerful economic force in the United
States. However, they would find themselves swimming against even
greater tides of higher borrowing costs, rising prices, and an economic
slump. As in the current recession, many would be unable to hire,
forced to lay off workers, or even shutter their operations. I believe
it is a disservice to this important piece of the fabric of our economy
to pursue legislation that puts their foundations at risk.
The current proposals will raise costs for the majority of
Americans who have insurance. As noted earlier, if anything these
proposals bend the cost curve in the wrong direction. Since health care
spending is the ultimate driver of health insurance costs, this is a
step in the wrong direction for those who have insurance. In addition,
some specific policies will directly raise the cost of insurance.
Fees. A notable feature of the America's Healthy Future Act is a
total of $13 billion in annual fees on health insurance companies ($6.7
billion), medical device manufacturers ($4 billion) and pharmaceutical
companies ($2.3 billion). In substance, these fees are the economic
equivalent of excise taxes whose burden will be shifted forward onto
consumers. Due to the non-deductibility of these fees, the impact will
be magnified, with the end result being $200 billion of higher premium
costs over the next 10 years.
To see this, begin with the annual fee that applies to any U.S.
health insurance provider. The aggregate annual fee for all U.S. health
insurance providers is $6.7 billion, with the total fee apportioned
among the providers based on relative market share. The fees would not
be deductible for income tax purposes and would take effect in calendar
year 2010.
The fee is tantamount to an excise tax on health insurance. For any
company, as it sells more insurance policies it will incur a greater
market share, and thus a greater share of the $6.7 billion. That is,
with each policy sold, the total tax liability rises; precisely the
structure of an excise tax. As such, it is important to understand the
difference between the statutory incidence of the excise tax--the legal
responsibility to remit the tax to the Treasury--and the economic
incidence--the loss in real income as a result of the tax.
Insurance companies will have to send in the tax payments, so the
statutory incidence is obvious. However, a basic lesson of tax policy
is that people pay taxes; firms do not. Accordingly, the economic
burden of the $6.7 billion tax must be borne by individuals. Which
individuals bear the economic cost?
The imposition of a tax will upset the cost structure of the
insurance companies, raising costs per policy and reducing net income
(or exacerbating losses). Some might argue that the firms will ``eat
the tax''--that is simply accept the reduction in net income. For a
short time, this may well be the case. Unfortunately, to make no
changes whatsoever is tantamount to promising shareholders a
permanently lower (risk-adjusted) rate of return. Because insurance
companies compete for investor dollars in competitive, global capital
markets, they will be unable to both offer a permanently lower return
and raise the equity capital necessary to service their policyholders.
Interestingly, a similar logic applies to not-for-profit insurers,
who rely on retaining earnings as reserves to augment their capital
base. Bearing the burden of the tax means lower access to these
reserves and diminished capital.
Accordingly, firms will seek to restructure in an attempt to
restore profitability, with the main opportunity lying in the area of
labor compensation costs. To the extent possible, firms will either
reduce compensation growth, squeeze labor expansion plans (or even lay
off workers), or both. Again, however, insurance firms will find their
responses constrained by the realities of the market environment.
Cutting back compensation is an invitation for the best-skilled workers
to depart the insurance industry. Layoffs and labor squeezes make it
difficult to attract the inputs to firm growth.
In short, there are sharp limits on the ability of firms to shift
the effective burden of excise taxes onto either shareholders (capital)
or employees (labor). Moreover, their ability to do so diminishes over
time as capital and labor seek out better market opportunities.
The Congressional Budget Office and Joint Committee on Taxation
revenue estimating conventions recognize these economic realities.
Specifically, they apply a 25 percent ``offset'' to the estimated gross
receipts of any excise tax. In terms of the discussion above, the
convention recognizes the incentives to attempt to shift some of the
burden of the tax in the form of lower dividends, capital gains, and
wages. To the extent this happens, receipts of income-based taxes will
fall; hence the need for an offset to the gross receipts of the excise
tax.
There are three additional points about the 25 percent offset.
First, while it recognizes the economic incentives to shift the burden
of excise taxes, it is only a rough approximation to the case-by-case
reality. Depending on the nature of the market setting, more or less of
the tax may be shifted to taxable wages or profits and those resources
may be taxed at either higher or lower rates.
The more important aspect of the offset is that it is not 100
percent. That is, the non-partisan consensus-based revenue estimators
have concluded that the vast majority of the burden of excise taxes
will not be borne by shareholders or workers. Who, then, bears the
burden--consumers.
If competitive conditions make it impossible for insurers to absorb
the economic burden of the tax, they will have no choice but to build
the new, higher costs into the pricing structure of policies. In this
way, the economic burden of the tax is shifted to the purchasers of
health insurance. In particular, the more competitive are markets for
equity capital and hired labor, the greater the fraction of the burden
that will be borne by consumers.
This phenomenon leads to the third aspect of the 25 percent offset.
If health insurance is more costly, firms will be forced to offset this
higher cost by lowering the other aspects of compensation--namely cash
wages. Lower cash wages throughout the economy are an important burden
to workers, and provide a second avenue for reduced personal income tax
receipts.
This line of reasoning is sometimes met with skepticism, and
countered with the notion that consumers will simply be unwilling to
accept a higher price. Evidence suggests that this is not true, but
suppose the counter-argument is taken at face value. To the extent that
firms accept a lower rate of return, they will be unable to attract
capital. Similarly, to the extent they reduce employment in response to
the tax (or cut wages and lose skilled employees to better
opportunities), they will again suffer in their ability to raise their
scale of operations. In short, for firms that attempt to adjust
entirely on the cost side will be unable to maintain their operations
at a competitive level, and will lose market share or even depart the
industry entirely. For health insurance markets as a whole, this
reduces competition. The bottom line for consumers is the same: higher
prices.
The argument thus far suggests that $1 of fees would show up as $1
of higher health insurance premiums. Unfortunately, the Senate has
chosen to make the fees non-deductible for purposes of computing income
taxes.
This non-standard tax treatment matters a lot. If a firm passes
along $1 in higher prices and cannot deduct the cost (fee), it will pay
another $0.35 in taxes. Accordingly the impact on the firm is $0.65 in
net revenue minus the $1 fee. Bottom line: a loss of $0.35. (The
problem gets worse when you consider that the $1 of additional premium
is also subject to premium taxes and in some cases a State income tax.)
To break even, the firm will have to raise prices by $1/(1-0.35) or
$1.54. If it does this, the after-tax revenue is the full $1 needed to
offset the fee. This has dramatic implications for the overall impact
of $6.7 billion in health insurance company fees. Instead of imposing a
burden of $67 billion in higher premiums over the next decade, the
impact will likely be over $100 billion in additional costs on holders
of insurance policies.
In sum, the health insurance fee will likely, quickly and nearly
completely, be incorporated into higher insurance premiums at a greater
than dollar-for-dollar rate. The same considerations apply to fees on
pharmaceutical companies and medical device manufacturers. The economic
impact of these fees are similar in character; the fees will likely
result in higher costs for these products and services, which will in
turn have to be covered by higher health insurance premiums.
These fees mean that American families, workers and small
businesses will pay as much as $200b in higher premium costs for their
existing health insurance policies. My personal estimate is that
roughly 90 percent of this burden will be borne by those making under
$200,000 per year--including small businesses and entrepreneurs.
Taxes. The Senate Finance Committee legislation also imposes a 40
percent excise tax on issuers of ``Cadillac'' plans (over $21,000 for a
family; $8,000 for an individual). As with the fees discussed above,
this tax will surely be passed to holders of insurance adding an
additional $200 billion in premium costs over the next decade. Again, a
fraction over 80 percent will be borne by those making less than
$200,000.
It should be noted that this excise tax represents the notable
feature of the proposed legislation that could contribute to bending
the cost curve. I am among those who have argued that capping the open-
ended tax subsidy to health insurance is a sensible part of
comprehensive reform. Unfortunately, the inclusion of this provision
appears to be a case of ``too-little, too-late.'' The cost curve has
not been bent and the resulting higher premiums will not be offset by a
generally improved health care cost climate.
Insurance Market Reform. Finally, proposed legislation would
include insurance market reforms--guaranteed issues, community rating/
rating bands, restrictions on rating factors--that would raise
insurance premiums on average.
I believe it is non-controversial that the combination of
guaranteed issue and community rating would raise average premiums.
Guaranteed issue invites the most costly of the uninsured to get
insurance and community rating ensures that they will be charged less
than their share of the increased costs. The remainder of the insurance
pool--existing policyholders--must bear the additional cost. This is
straightforward.
What apparently has been controversial is that insurance companies
have been the carriers of this message. I urge Members to look past the
industry's obvious self interest and recognize that there are now a
handful of increasingly detailed and careful studies documenting the
forces for higher premiums--often double-digit percentage rises in
costs. In addition, it is useful to note that non-partisan analysts
such as the CBO, JCT, CMS, and NAIC have recognized these forces, even
if they have not yet done a comparable analysis of the impact on
premiums.
A second issue in this area is the role of mandates. For some, a
mandate ``solves'' the problem with these insurance reforms by forcing
healthier, low-costs individuals into the insurance pool, where they
would pay far more than their share of the health care costs.
While opinions vary, I believe this is a mistake. Forcing
individuals to participate in a system that is already broken and will
be getting more expensive is not reform. Guaranteeing insurance
companies additional business without commensurate efforts on their
part in the areas of pricing, quality of service, and product
innovation is at odds with the basic recipe for economic success. I
would urge Congress to instead undertake genuine, effective reforms
that address the cost of care. These reforms would translate into lower
insurance costs and greater take-up of insurance in the United States.
Thank you. I look forward to answering any questions you may have.
The Chairman. Right on the mark. Thank you very much, Mr.
Holtz-Eakin. And thank you for being here.
Next we'll turn to Ms. Karen Bender, principal and
consulting actuary in the Oliver Wyman Actuarial Consulting
practice, works out of the Milwaukee office. Ms. Bender has
over 35 years of experience in the health insurance market in
general, has focused extensively on the small group market
throughout her entire career. Twenty of these years were spent
working for insurance organizations and the last 15 years spent
as a consultant.
Her clients include government agencies, insurance
companies, HMOs, provider groups and industry associations, has
participated in many research projects surrounding health
reforms over the years, has co-authored numerous papers, and is
a frequent speaker at professional meetings.
Ms. Bender, welcome to the committee. Please proceed.
STATEMENT OF KAREN BENDER, FCA, ASA, MAAA, ACTUARY, OLIVER
WYMAN, MILWAUKEE, WI
Ms. Bender. Thank you for giving me the opportunity to
testify today on the potential impact of health reform
legislation on the small business community. My testimony is
going to focus on three major areas.
First the challenges that are facing the small employer
market pertaining to premiums.
Second, the need to bend the cost curve to make coverage
more affordable to everyone.
And third, a review of proposed policy changes that will
impact small employers.
The first point I will discuss is the challenges that are
facing the small group market.
Historically small employers had two main challenges in
obtaining health insurance, access and affordability. The
access issue was primarily resolved in the 1990s via HIPAA.
Federal legislation which required guarantee issue and
guarantee renewability for small employers.
Similarly the States passed laws to address affordability
issues for high cost employers by limiting the extent to which
these groups premiums could vary based upon their health
status. It also limited, as the Commissioner has previously
indicated, the annual increase that can be charged to any
single employer group because of change in health status which
we often refer to as morbidity.
While these reforms make coverage more accessible to high
cost firms. There is no doubt that they probably exerted upward
pressure to all small employers to the total small employer
market. Now I'm not going to defend the actions of the carrier
to increase the small employer's premium by 70 percent in a
single year due to a change in morbidity.
I would note that this is not permissible in 47 States and
is also not permissible to the Blue plans in Pennsylvania. So
it is definitely, and thank goodness, the exception rather than
the rule. Nonetheless affordability does remain a central
challenge for small employers given that health care costs
continue to rise at a rate much higher than inflation.
However, a recent Kaiser Family Foundation report shows
escalating premiums are not limited to small employers. This is
an issue for large employers and individuals as well as small
employers.
The second point I'm going to talk about is the need to
bend the cost curve to make coverage more affordable for
everyone. If we want to bend the cost curve for health
insurance premium we need to bend the cost curve on health--on
medical costs. Recent premium increases in the small group
market are primarily driven by increases in the cost of medical
care.
While the reform bills before Congress do take steps to try
to bend the cost curve. This is likely a long-term endeavor. In
order to be effective, insurance reforms must be coupled with
concurrent effective changes in how medical care is delivered,
liability reforms to reduce defensive medical costs, and
efforts to improve wellness and health lifestyles if we are to
make small employer coverage more affordable and coverage
affordable in general.
My last point that I'm going to talk about is a review of
proposed policy changes that will impact small employers. Last
month Oliver Wyman released a report commissioned by the
BlueCross/BlueShield Association on the impact of the Senate
Finance Committee's recently approved health reform
legislation. This legislation included what we believe is a
weak individual mandate.
Now our analysis concluded the following.
First, average premiums for small employers will increase.
And the increase will be up to 19 percent higher by year 5 of
the reform. And this is above and beyond medical inflation.
Second, overall the number of small employers offering
coverage will decrease. And as a result of that the number of
members enrolled in small groups will decline by $2.5 million.
Tax credits will help firms with low-wage workers. However,
many small employers will not see these savings from the
premium tax credits because they won't qualify and will face
the full cost of any premium increases.
And finally, exchanges can provide value in helping small
employers shop for coverage. But based upon my experience with
State purchasing arrangements and what we used to call HIPEX it
is unlikely that these exchanges will provide significant
premium savings.
Once again, I want to thank you for giving me this
opportunity to talk to you today.
[The prepared statement of Ms. Bender follows:]
Prepared Statement of Karen Bender, FCA, ASA, MAAA
summary
My testimony addresses three key issues:
Challenges facing the small employer market.
Traditionally, small employers faced two major challenges in purchasing
health insurance: access and affordability. During the 1990s, the
States and the Federal Government enacted reforms to ensure access
(guaranteed issue and renewability) for all small employers. Similarly,
the States passed laws to address affordability for high-cost firms by
limiting the extent to which small employer premiums could vary based
on factors such as health status.
Nonetheless, affordability remains the central challenge for small
employers given that health care costs continue to grow at a rate much
higher than inflation. However, as a recent Kaiser Family Foundation
report shows, escalating premiums are not limited to small employers.
In fact, average family premiums for covered workers in small firms
have grown more slowly than those in large firms since 2004.
The need to ``bend the cost curve'' to make coverage more
affordable for everyone. To address the fundamental reason why small
employer costs have increased over the past decade--growth in medical
expenses--we must find a way to ``bend the cost curve'' in our health
care system. While the reform bills before Congress do take steps to
try to bend the cost curve, this is likely a long-term endeavor.
Insurance reforms must be coupled with concurrent effective changes in
how medical care is delivered, liability reform to reduce defensive
medicine costs, and efforts to improve wellness and healthy lifestyles
if we are to make small employer coverage more affordable.
A review of proposed policy changes that will impact small
employers. Last month, Oliver Wyman released a report commissioned by
the BlueCross/BlueShield Association on the impact of the Senate
Finance Committee's recently approved health reform legislation, which
included a weak individual mandate. Our analysis concluded that fewer
small employers would offer coverage due to higher premiums,
notwithstanding new small employer subsidies.
Average premiums for small employers will increase.
As a result of the new modified community rating reforms and
higher minimum benefit requirements, small employers purchasing
policies in the reformed market will experience premiums that
are up to 19 percent higher in Year 5 of reform (not including
medical inflation). Proposed rating requirements will cause
premiums to increase for low-cost small firms, causing some of
them to exit the insurance pool and increasing overall costs.
About 9.5 million small group employees who have coverage today
will stay covered under the ``grand fathered'' block in the
initial post-reform years, but will face premium increases when
the grandfathering phases out.
Overall, the number of small employers offering
coverage will decline. After accounting for small employer tax
credits, we estimate that 2.5 million fewer members will be
insured through small employer policies as a result of premium
increases, exchanges, and other factors.
Tax credits will help firms with low-wage workers.
The bills before Congress should be commended for including tax
credits to help small firms with low-wage workers purchase
health insurance. While these tax credits may increase coverage
among those firms that are eligible, many small employers will
not see savings from premium tax credits and would face the
full cost of any premium increases.
Exchanges can provide value in helping small
employers shop for coverage. Based on my previous research on
State purchasing arrangements, it is unlikely that exchanges
will provide significant premium savings if they adopt a
similar model where they negotiate with a limited number of
health plans. However, exchanges can provide value by providing
small employers with a new source of information on product
options and prices.
______
introduction
Thank you for the opportunity to testify today on the potential
impact of health reform legislation on the small business community.
I am testifying today on behalf of Oliver Wyman Actuarial
Consulting. I am a credentialed actuary who has specialized in small
employer health insurance issues for more than 35 years. My comments
today are based on my experience in actually working for and advising
health plans, State governments and other clients on the implications
of proposed public policy changes at the State and Federal level.
The focus of today's hearing--increasing health costs facing small
business--underscores the need for reforms that expand coverage and
improve affordability for small employers. With those goals in mind, my
testimony today addresses the following issues:
The challenges facing the small employer market, including
a discussion of the factors that contribute to small employer premiums,
and how those premiums are set;
The need to ``bend the cost curve'' to make coverage more
affordable for everyone; and
A review of proposed policy changes that will impact small
employers: specifically, insurance reforms, health insurance exchanges,
and proposed taxes on insurance premiums.
challenges facing the small employer health insurance market
Research has consistently shown that a significant percentage of
uninsured workers are either self-employed or working for firms with
fewer than 100 employees. To understand the challenges that small
employers face when purchasing health insurance, it is important to
understand how this market functions and how it is regulated.
Traditionally, small employers faced two major challenges in
purchasing health insurance: access and affordability. The issue of
access has been addressed as a result of a combination of the enactment
of State small employer health insurance reform laws in the 1990s and
by HIPAA at the Federal level. Today, State and Federal law requires
insurers to offer coverage to all small businesses (2-50 workers)
regardless of their employees' health status. In all 50 States, small
businesses cannot have their coverage turned down or cancelled if their
employees become sick. Thus, small employers that can afford coverage
are guaranteed access to coverage today.
The premiums that insurers charge small employers are now highly
regulated. In all but three States (Hawaii, Pennsylvania and
Virginia),\1\ State laws limit the extent to which premiums can vary
for individual small employers based on a variety of factors, including
health status or claims experience. States typically prohibit health
plans from charging premiums to small employers with high-cost workers
that are no more than 25 percent-35 percent higher than the midpoint
rates. States also limit rate increases at renewal due to changes in
morbidity to no more than 10-15 percent if one or more employees become
seriously ill during the year. Furthermore, a minority of States do not
allow health status to be used at all in setting initial or renewal
rates.
---------------------------------------------------------------------------
\1\ In Pennsylvania, BlueCross/BlueShield companies and health
maintenance organizations are subject to strict rate limitations in the
small group market. However, these regulations do not apply to other
insurers. In Virginia, rating rules apply to certain standardized
policies. However, most small employers purchase other policies not
subject to these rules.
---------------------------------------------------------------------------
These reforms spread the medical costs of all small employers more
evenly to generate more affordable premiums for employers with less-
healthy members by requiring that small group experience be pooled
together. However, this results in higher premiums for the employers
with healthier members than otherwise would be justified based on
actuarially supported risk classifications. Conversely, the employers
with members that consume greater health care resources are enjoying
lower premiums than they would absent the existing rating regulations.
These groups are being subsidized by the first group, those employers
whose premiums are artificially higher due to reforms. In order for the
small employer pool to stay viable and generate sufficient premiums to
fund claims and expenses, it is critical that enough of the lower-cost
groups providing the subsidies remain. Otherwise, overall premiums for
all participating employers increase.
These State rules are designed to improve access and fairness for
small employers. This is an important objective, but these reforms may
actually increase the average cost of health insurance. As an actuary
with substantial experience in the small employer market, I have seen
that some of the smallest employers make rational economic decisions
about when to purchase insurance by taking advantage of these rules.
The smallest firms make decisions much like individual purchasers. The
National Association of Insurance Commissioners' (NAIC) rating manual
states that ``Individuals and small groups tend to select against an
insurer when purchasing medical coverage. The purchaser generally knows
the needs for insurance for each employee in very small groups and can
select coverage in line with those individuals' needs.'' \2\ This
explains to some extent why small employer coverage can be more costly
than coverage for other employers. In an environment where small
employers can purchase any level of coverage at any time, there is an
incentive to purchase the lowest level until such time they are aware
of the need for medical services and then purchase increased coverage
on a guaranteed issue basis.
---------------------------------------------------------------------------
\2\ NAIC: Guidance Manual in the Evaluation of Rating Manuals and
Filings Concerning Small Employer and Individual Health Insurance,
2003.
---------------------------------------------------------------------------
Affordability is the central remaining challenge in the small
employer market today. Since 1999, average health insurance premiums
for family coverage for small employers have more than doubled from
$5,683 to $13,375 in 2009, according to the 2009 Kaiser Family
Foundation/HRET employer health benefits survey. As health care cost
increases continue to outpace inflation, small firms have found it more
and more difficult to provide or maintain coverage.
However, as the Kaiser Family Foundation report demonstrates,
escalating premiums are not limited to small employers. In fact,
average family premiums for covered workers in small firms have grown
more slowly than those in large firms since 2004 (30 percent in small
firms vs. 36 percent in large firms) and since 1999 (123 percent in
small firms vs. 134 percent in large firms), according to the same
survey. These premium increases are due to substantial growth in the
underlying cost of medical care that impact premiums for all
employers--large and small.
The causes for premium increases are due to many factors,
including:
The price of medical services. Price reflects the payment
rates that health insurers negotiate with hospitals, physicians,
pharmacies and other health care providers. Price also includes the
increasing cost of purchasing prescription drugs, durable medical
equipment, and other items. It is important to realize that insurers
use their bargaining leverage to obtain the same price discounts for
all of their customers--large employers, small employers, and
individuals, so small employer and individuals do have access to the
same provider reimbursement levels as large employers.
Utilization. Utilization refers to the volume of medical
goods and services that people use. Medical advances are continuously
being introduced to improve care and outcomes. For example, a decade
ago few people received a knee or hip replacement. Today, the
procedures are commonplace. As new treatments are developed,
manufacturers and providers advertise these new options, and consumers
increasingly seek more care and have higher expectations regarding
outcomes.
Intensity. Intensity is when a treatment or procedure is
replaced by a more expensive treatment. For example, magnetic resonance
images (MRIs) are frequently used instead of less expensive X-rays,
thereby increasing costs.
Aging of the population. As we get older, we have greater
health care needs and there is a greater demand for services. While
this has the greatest impact on the Medicare program, it also impacts
the under 65 population as well.
Government actions. Many Federal and State Government
actions also add to costs. These include mandated benefit levels,
premium taxes, and regulatory requirements. Cost-shifting from
government programs that provide below-cost reimbursement to providers
also increase premiums for small employers. According to a recent
report by Milliman, Inc., annual health care spending for an average
family of four is nearly $1,800 higher than it would be if Medicare and
Medicaid paid hospitals and physicians rates that were comparable to
those paid by private plans. Expansion of the number of people on
Medicaid and reductions in Medicare reimbursement may exacerbate this
cost-shifting. Cost-shifting from the uninsured is similarly
problematic.
Personal behavior. Health care costs are also influenced
by personal behaviors such as poor diet and nutrition, lack of
exercise, alcohol and substance abuse, smoking, avoidable injuries, and
failure to obtain proper vaccines or follow prescribed medication
regiments.
According to the Congressional Budget Office (CBO), the bulk of
rising health care costs over the past four decades can be attributed
to our Nation's use of medical services made possible by technological
advances (2008). In fact, CBO found that approximately one-half of all
growth in health care spending during this time is associated with the
emergence of new medical technologies and services and their adoption
and widespread diffusion by the U.S. healthcare system.
ii. bending the cost curve
To address the fundamental reason why small employer health
insurance cost have increased over the past decade--growth in medical
expenses--we must find a way to ``bend the cost curve'' in our health
care system. Policymakers, researchers, and industry experts alike have
acknowledged that our current system includes misaligned incentives
that drive increased health care costs, without regard to quality of
care or outcomes. One result is unwarranted variation in medical
practice that cannot be explained by patient demographics or severity
of illness. This variation can be due to the underuse of tests and
treatment known to be effective, the overuse of tests and treatments
that may not have significant clinical value, and the misuse of tests
and treatments that contribute to medical errors. The use of tests
solely for the purpose of defending against the possibility of a
lawsuit, commonly referred to as defensive medicine, also exerts upward
pressure on health care costs.
To truly bend the cost curve, we must change processes and
incentives in our current health care system to advance the best
possible care, not just drive the use of more services. Properly
aligned incentives can reinforce the adoption of evidence-based
practice standards, which will facilitate the availability of
transparent quality information for consumers to make informed choices
about their care.
The bills before Congress do take steps to bend the cost curve over
the long term. However, more emphasis must be put on changing the way
that medical care is practiced to bring spending under control while
improving quality for all. Insurance reform must be coupled with
effective changes in how medical care is paid for, liability reform to
reduce defensive medicine costs, and efforts to improve wellness and
healthy lifestyles if we are to bend the cost curve in a substantial
way.
iii. proposed policy changes that will impact small employers
Insurance Reforms
The key health reform bills before Congress include significant
reforms to health insurance industry practices in the small group
market. Last month, Oliver Wyman released a report commissioned by the
BlueCross BlueShield Association on the impact of the Senate Finance
Committee's recently approved health reform legislation on the
individual and small employer health insurance markets. While the
report did not specifically address this committee's reform
legislation, its findings are still instructive. Our analysis concluded
that under such reforms, small employers will face higher premiums, and
that these higher premiums, coupled with a weak individual mandate will
result in fewer small employers offering coverage.
All of the health care reform bills before Congress compress the
rating factors that health insurers will be permitted to use in pricing
products for small employers. The Senate Finance Committee bill would
prohibit the use of health status in pricing products for small
employers, limit the use of age to a 4:1 band, eliminate rating based
on gender, restrict the use of group size as a rating factor, and limit
use of family composition. Rate reform in the small employer market
would be phased in over a 5-year period.
The rating reforms in the Senate Finance Committee bills will
compress rates for firms with younger, healthier workers and firms with
older, sicker workers. As a result, some younger and healthier firms
will experience increases in premiums and older, sicker firms will
experience rate decreases. The purchase of group insurance is a two-
phase process. First, the employer must view the purchase as being of
economical value and elect to offer insurance. The employer generally
contributes a portion of the premium, requiring the employee to
contribute the balance. So the second purchase is by the individual
employee who must decide if his/her monetary contribution is of
economic value. This is often referenced as the ``take up rate.''
As a result of the proposed premium compressions, groups with
lower-than-average risks who today are enjoying lower than average
premiums, may not perceive as much economic value in purchasing health
insurance after reforms. The more restrictive the rating rules, the
greater the subsidies required from the healthier groups, which means
the higher the premium compared to current levels and the less
attractive health insurance is for the exact market segment critical to
creating a viable pool. While it is true that the higher cost groups
will enjoy lower premiums, groups in the small employer market are not
distributed equally between low-cost and high-cost entities. The
distribution of employer groups by morbidity levels does not follow a
bell-shaped curve. Rather, the distribution is skewed toward lower-cost
groups, meaning that there are more employers that enjoy premium
discounts than employers that pay higher rates. Therefore, the
elimination of morbidity as a rating factor will cause a greater number
of employers to experience premium increases than will enjoy premium
reductions. Rate compression will cause some lower cost firms to drop
health insurance coverage and/or cause some employees currently
purchasing health insurance to no longer participate, causing the
average morbidity to increase, and therefore raise costs for all firms
that continue to provide insurance (and their participating employees).
The absence of a strong individual mandate coupled with guaranteed
issue with no pre-existing limitation will only exacerbate the
incentive for individual employees who are lower cost to defer the
purchase of insurance until they are aware of a health condition that
will necessitate access to services that they can reasonably expect
will cost more than the monthly premiums.
The Senate Finance Committee bill also includes certain minimum
benefit requirements that apply to small employer coverage. The
legislation would establish four defined levels of coverage, with the
lowest level ``Bronze'' plan required to have an actuarial value of at
least 65 percent. New coverage sold to small employers must provide
certain minimum benefits, including some categories of services that
are less commonly purchased among small employers today. New coverage
would include specified limits on out-of-pocket costs and no annual and
lifetime caps. Based on a review of products commonly purchased by
small employers today, we expect that coverage for small employers
would be 3 percent more expensive as a result of the minimum actuarial
value requirements on average. However, many small employers buy
coverage that is significantly below-cost the required actuarial value
levels and would face much higher increases when they replace their
current coverage.
We estimate that small employers purchasing new policies in the
reformed market will experience premiums that are up to 19 percent
higher 5 years after reforms become more effective than they are today,
not including the impact of medical inflation. While some smaller, low-
wage firms will be eligible for tax credits that may offset the cost of
these changes, the majority of firms that continue to provide health
insurance will face higher premiums directly as a result of the
proposed reforms. The government will also see its share of the costs
for these reforms increase by having to provide higher subsidies per
covered individual because of these higher premiums.
The legislation contains ``grandfathering'' provisions which allow
currently insured small employers to keep the benefits they have today.
Our model estimates that about 9.5 million small group employees (out
of a total of 28 million small group employees) who have coverage today
will stay covered under the ``grand fathered'' block in the initial
post-reform years. These firms will avoid some of the cost increases as
a result of reforms, but will face premium increases when the
grandfathering phases-out. We can expect the firms whose grand fathered
premiums are less than the post-reform premiums to remain under these
plans until such time as these premiums are equal to or greater than
the post-reform premiums due to the phase in, since groups whose
premiums are higher will have economic incentives to purchase in the
new post-reforms pools and take advantage of the lower rates.
The Senate Finance Committee bill will also create health insurance
exchanges that will provide an alternative source of subsidized
insurance coverage for employees of firms that chose to terminate
health insurance coverage. The bill does not compel small employers to
provide health benefits and exempts them from the ``free rider''
assessment that applies to larger firms that do not offer coverage. The
combination of the exchange and new insurance rules that apply to the
individual health insurance market may make it easier for small firms
to drop coverage when faced with premium increases because they will
know that their employees can obtain coverage--in some cases subsidized
by the government--through the exchanges.
The absence of an effective individual mandate will also contribute
to a reduction in the number of workers who obtain insurance in the
small employer market. The individual mandate in the bill approved by
the Senate Finance Committee was severely weakened. It does not include
any penalty for individuals who do not purchase insurance in the first
year of reform and then phases in nominal penalties that reach a
maximum of only $750 per adult in 2017--15 percent of their expected
premium. As a result, fewer low-cost individuals are likely to opt into
employer coverage than would otherwise have done so if a strong
individual coverage requirement were included in the legislation.
However, high-cost individuals will have enhanced economic incentives
to join, because their premiums may be significantly lower than current
levels and/or benefits may be significantly richer. These are the
individuals whose premiums do not totally fund claims. This combination
of economic incentives--encouragement of higher cost individuals to
join at premium levels less than sufficient to fund claims and the
unintended economic encouragement of low-cost individuals to defer
coverage until services are required, exerts significant upward
pressure on premiums in the post-reform individual market.
The bills before Congress should be commended for including tax
credits to help small firms with low-wage workers purchase health
insurance. Small firms with low-wage workers have the lowest coverage
rates of any segment of the employer sponsored health insurance market.
While these tax credits may increase coverage among those firms that
are eligible, many small employers will not see savings from premium
tax credits and would face the full cost of the premium increases they
are likely to experience as a result of health care reform.
Overall, the number of small employers offering coverage is likely
to decline after reform. We estimate that even accounting for small
employer tax credits, premium increases in the small group market will
result in 2.5 million fewer members being insured through small
employer policies 5 years after reforms become effective. These losses
would have been higher had the legislation not included small employer
tax credits.
Exchanges
The key health bills under consideration would establish health
insurance exchanges that would be open to both individuals and small
employers. Some proponents of these exchanges believe that they could
lower the cost of health insurance by reducing administrative costs,
``pooling'' small employers to gain economies of scale similar to
larger employers, and spurring competition among health plans.
As the author of several reports on State purchasing cooperatives
and other purchasing arrangements for small employers, I have studied
health insurance cooperatives extensively, and have found little
evidence that previous models have reduced premiums and have in fact
identified some situations where their presence actually resulted in
higher administrative costs. However, if properly structured, an
exchange could potentially reduce distribution costs and increase
competition by making it easier for consumers to compare products,
although the savings would likely be limited by a number of factors I
describe below.
While pooling of risks is an essential function of insurance,
assembling many small groups or individuals into an exchange ``pool''
will not automatically reduce costs. While some think that health
insurance costs can be lowered if purchased in bulk, like commodities
or consumer goods, the economic and actuarial realities affecting the
cost of health insurance are fundamentally different.
There are significant differences between a pool of many small
employer groups and a large employer pool. For example, a single
employer with 999 employees is not the same as 333 groups with 3
employees each. Similarly, an exchange will not be one big pool, like a
large employer, but rather a collection of many small firms that must
each be serviced separately and each of which are making insurance
decisions separately. Insurers participating in an exchange will retain
all of the health insurance risk of the groups they enroll; thus, the
pooling of risk actually occurs at the insurer level, not at the level
of the exchange. I have made these distinctions at several Capitol Hill
briefings on behalf of the American Academy of Actuaries.
Exchanges will also have limited ability to reduce administrative
costs. Many of the non-subsidy related functions they will perform will
duplicate functions performed by the State insurance department, health
plans, or insurance agents or brokers. When an exchange takes on
enrollment functions, insurers must continue their own enrollment
functions to assure appropriate services, claims payment, etc. Thus,
while an exchange may assume certain administrative functions, it may
not eliminate these functions or their related costs. While it has been
argued that exchanges would save money by eliminating costs related to
underwriting, any reduction in this area will be a function of changes
in insurance rating and underwriting rules and not due to the exchange.
Moreover, the costs attributed to underwriting are likely in the range
of 1 percent of premiums in the small employer market.
One area where an exchange can provide value is in helping small
employers shop for coverage and providing information on competing
plans. Exchanges proposed by current health reform bills would provide
small employers with information on prices and other important plan
features on all health plans in the market.
New Taxes
The Finance Committee bill includes a number of fees and taxes on
the health industry to help finance the proposal. These include a $6.7
billion annual assessment on insurers, as well as assessments on device
and drug manufacturers that are likely to be included in the prices
that insurers and their members pay. The bill also imposes an excise
tax on high-cost benefit plans offered in the employer marketplace.
Our recent analysis did not include the impact of these fees and
taxes on cost and coverage in the individual and small employer
markets. However, it is important to note that the $6.7 billion annual
insurer fee is likely to disproportionately impact individuals and
small employers. Insurers will have little choice but to pass these
fees on to their customers in light of statutory reserve limits. Larger
employers that self-fund their benefits are not subject to the insurer
assessment. Thus, the design of the insurer fee provision is likely to
cause more employers to self-fund, causing small employers and
individuals to shoulder an increasing burden from these fees over time.
Few small employers may have benefit costs that exceed the
threshold for the excise tax on high-cost benefit plans today. However,
because premiums have historically grown at a rate that exceeds the
indexing formula in the bill (growth in CPI + 1 percent), more small
employer plans are likely to become subject to the tax on high-cost
plans over time.
Some have argued that the high-cost plan tax will cause small
employers to purchase less expensive benefit plans to avoid the tax,
thereby mitigating its impact. However, factors such as the worsening
of the overall cost of the small employer pool after rating reforms,
geographic cost differences (which may push plans in certain areas into
the tax sooner than others), and the restrictions on benefit plan
design in the bill may limit behavioral responses to avoid the tax.
conclusion
Small employers are likely to judge the success of health care
reform based on whether it improves affordability in the marketplace.
While proposed insurance reforms may reduce costs for some firms, they
will tend to increase costs in the aggregate by encouraging firms with
low morbidity to exit the market in response to premium increases. The
imposition of insurer fees and other assessments will also erode
affordability.
As Congress considers health care reform proposals, it must
carefully evaluate provisions of legislation that may have unintended
impacts that result in increased premiums for small employers. Adequate
rating flexibility will be important to assuring a balanced risk pool
participates in the insurance pool to assure overall affordability.
Congress should also consider the impact of assessments and fees that
may disproportionately impact small employers and reduce affordability.
Thank you for the opportunity to testify today on the important
subject of assuring affordable health insurance for small businesses.
The Chairman. Well, Ms. Bender, thank you very much. Thank
you for being here and for your testimony.
Now we'll turn to Dr. Jonathan Gruber, Professor of
Economics at the Massachusetts Institute of Technology where he
has taught since 1992. He's also Director of the Health Care
Program at the National Bureau of Economic Research. Dr. Gruber
received his BS in Economics from MIT and his Ph.D. in
Economics from Harvard.
He was also 1 of 15 scientists nationwide to receive the
Presidential Faculty Fellow Award from the National Science
Foundation in 1995. He also received the Kenneth Arrow Award
for the best paper in Health Economics. Dr. Gruber was elected
to the Institute of Medicine in 2005.
And in 2006, he received the American Society of Health
Economists Inaugural Medal for the Best Health Economist in the
Nation aged 40 and under. Dr. Gruber's research focuses on the
areas of public finance and health economics, published more
than 125 research articles, edited six research volumes and is
the author of Public Finance in Public Policy, an undergraduate
text. He was also, I am told, a key architect of the
Massachusetts ambitious health reform effort and became an
inaugural member of the Health Connector Board the main
implementing body for that effort.
Dr. Gruber, welcome back to the committee. Thank you for
being here. Your testimony will be made a part of the record in
its entirety and please proceed.
STATEMENT OF JONATHAN GRUBER, PROFESSOR OF ECONOMICS,
MASSACHUSETTS INSTITUTE OF TECHNOLOGY, DEPARTMENT OF ECONOMICS,
CAMBRIDGE, MA
Dr. Gruber. Thank you, Senator, for the kind introduction.
And thanks for inviting me to testify today.
The House and the Senate stand on the verge of passing the
most comprehensive health reform legislation in decades. And
let me be clear and I'll try to make clear in my 5 minutes,
this legislation is a clear winner for small businesses in
America.
What I want to do in my testimony is talk about the
problems faced by small businesses in America.
Why they're solved by this legislation.
And why Christensen's legislation really missed the mark.
I want to highlight four problems today.
The first is what I call entrepreneur deterrence. That is
individuals who are afraid to start new small businesses
because of the high and variable costs of health insurance.
Consider the 50-year-old engineer at a large firm who has a
great idea for a startup, who has a wife who is a cancer
survivor, and is afraid of giving up his quality health
insurance at that firm to start a new business. That individual
may not go start that new business and society loses from not
having that source of dynamic job growth. Economic studies have
confirmed the importance of this phenomenon suggesting, that as
much, that reduction that individuals are reduced in their
transitions of self employment by as much as a third because of
fear of losing health insurance.
The second impediment is high loading factors. Small
businesses pay as much as 20 percent more than large businesses
for the same insurance products because of high broker
commissions, administrative costs and the resource expend by
insurance companies to make sure that they're not getting the
sick employees and giving away the healthy ones.
The third problem is unpredictable premiums. One survey
that was done, we've heard a lot of data today. But one survey
that was done in 2008 found that 28 percent of small firms
reported a premium increase of 20 percent or more.
If small firms don't know whether the costs of insurance is
going to go down by 1 percent or up by 20 percent next year,
they can't provide health insurance. That's too uncertain an
environment for them to do that.
And then finally a key issue is the limited choices faced
by employees in small businesses. Only 12 percent of firms with
fewer than 200 employees offer their employees a choice of more
than one insurance plan in contrast to 43 percent of firms with
more than 5,000 employees.
How does reform help these problems?
Well, first of all, reform will help through reformed
insurance markets with an individual mandate. Insurance markets
will be reformed so that prices depend only on enrollee age and
not health. And the pre-existing conditions cannot be excluded
from coverage.
This resolves the entrepreneur deterrence effect because
the engineer will now be free to be certain that he can get
insurance for his wife if he wants to start that new company.
It mitigates the enormous year to year swings in premiums
because they're in a more predictable insurance environment.
And prices fall because individuals are brought in to buy
health insurance both healthy and sick and so insurers can be
sure that they'll get a good distribution of risk when they
offer that insurance.
Second, these bills introduce insurance exchanges as a
medium for purchasing insurance. This will further address many
of these problems. Small businesses will now be able to
directly enroll their employees into the kind of marketplace
that's enjoyed only by large businesses today.
This will substantially mitigate the 20 percent excess
loading factors. They won't have to use brokers necessarily
which is 4 to 11 percent of costs. Insurance companies will not
be expending enormous resources trying to pick out just the
healthiest firms because they'll be enrolling everybody for
this exchange. So it will be a huge reduction in costs, as well
as a huge improvement in the set of choices available to
employees at small businesses whom instead of only facing one
choice will now have a number of choices.
Finally, it's been mentioned about a small business tax
credit which will reimburse up to 50 percent of the cost of
health insurance for small businesses, offsetting their costs.
I also want to spend a minute debunking the claims that
reform will hurt small businesses. For example, some people
have claimed that insurance reform will raise costs. That
ignores the fact that there's going to be an individual mandate
that's going to help improve the risk of health pools and lower
health care costs.
Some have claimed the benefit mandates will raise the costs
of health insurance, in particular the level of minimum
credible coverage that's put in these bills. The level of
coverage that's in the Senate Finance Committee--for example,
that's the minimum--is less generous than only about 10 percent
of firms offer today. So very few firms will be forced to buy
up.
Some have claimed that excise taxes will raise the costs
faced by small businesses. But here the CBO has spoken. And CBO
has reported that these excise fees in the Senate Finance bill
will raise premiums by less than 1 percent. So that's really a
red herring.
And then finally, we can--there's lots of studies that have
talked about the effect on premiums. But we have authoritative
evidence from the Congressional Budget Office. They've not
spoken on small groups.
We're still waiting for that. But they have spoken on the
premium effect for the individual/nongroup market. And unlike
reports by Oliver Wyman and others which suggest that premiums
in the nongroup market will go up by 50 percent or more.
The Congressional Budget Office estimates that under these
exchanges premium in the nongroup market will fall by 30
percent by 2016 because of reform. So while we don't have
numbers for small businesses, it's clear where it's going for
individuals.
Let me conclude with some modeling results. I have a model
that has been widely used by members on both sides of the aisle
to look at analyzing various policies they want to consider.
And I've used this model to analyze the effect of the status
quo of no reform verses the alternative the Senate Finance
Committee bill.
What I found is that the Senate Finance Committee bill will
imply an enormous reduction in the health insurance spending of
small firms. I estimate that in 2019, absent reform, small
businesses will spend about $300 billion a year on insurance
premiums. I estimate that with this reform that number will
fall by 25 percent to about $225 billion a year. That has real
consequences for small businesses and their employees. I
estimate that by 2019 workers in small businesses will see
their take home pay increase by $30 billion a year because of
these reforms. And about 80,000 jobs will be saved in the small
business sector.
So, in conclusion, let me highlight that small businesses
have little to fear and much to gain under health reform. A
reform market with efficient exchanges will both lower health
insurance costs and offer the premium stability that is so
critical to those who want to start new small businesses. And
employees will be free to move from job to job and to start the
business without fear of getting their coverage stripped away
should they get sick and with having a larger array of choices.
Thank you very much.
[The prepared statement of Dr. Gruber follows:]
Prepared Statement of Jonathan Gruber
The health reform legislation making its way through both Houses of
Congress currently will benefit many different groups in society. One
of the major winners from this legislation will be small businesses and
their employees. Small businesses suffer in our current insurance
system from high and unpredictable insurance prices; premiums can rise
rapidly with little notice. The reformed system envisioned by Senate
and House legislation would provide a more predictable and less
expensive environment in which small businesses could purchase quality
health insurance. This will promote small business formation and growth
by removing this enormous source of uncertainty. Moreover, the
legislation would allow small business employees to benefit from the
broad range of choices now unavailable to them. In this testimony I
will describe in more detail the gains to small businesses and their
employees.
small business health insurance today
Small businesses and their employees face four major impediments in
the employment-based system of health insurance in the United States.
Entrepreneur Deterrence
First, individuals are afraid to start small businesses, or to join
new businesses, because of a fear of losing health insurance. Consider
the 50-year-old engineer at a large firm who has a great idea for a new
start-up company, but also has a wife who is a cancer survivor who now
benefits from the high quality insurance at that large firm. This
engineer may be unwilling to start that new company because of fear of
being unable to obtain insurance coverage--or to obtain it only with
pre-
existing conditions exclusions that would exclude coverage for his
wife's cancer. As a result, the engineer will not start the new
company, reducing a dynamic source of job growth for the United States.
Economic studies have confirmed the role of job lock in dissuading
entrepreneurship. A number of studies over the past 15 years have shown
that those who have access to health insurance outside their employment
setting are more likely to start new businesses. For example, one
recent study found that not having spousal insurance available,
relative to those who do have such insurance, lowers the rate of
transition to self-employment by 18-34 percent.\1\ That same study as
well as another recent study find that the reduction in the price of
insurance for the self-employed led to a significant rise in
transitions to self-employment, with the latter study finding that tax
subsidies to the self-employed raised the probability of entering self-
employment by 24 percent and reduced the rate of exit from self-
employment by 16 percent.\2\
---------------------------------------------------------------------------
\1\ Gumus, Gulcin, and Tracy Regan (2009). ``Self-Employment and
the Role of Health Insurance,'' Working Paper, University of Miami.
\2\ Heim, Bradley and Ithai Lurie (2009). ``The Effect of Health
Insurance Premium Subsidies on Entry Into and Exit from Self-
Employment,'' mimeo, U.S. Department of the Treasury.
---------------------------------------------------------------------------
High Loading
The second major impediment faced by small businesses is the much
higher loading factors that they must pay on their insurance, leading
to higher costs and less purchase of coverage. Data on this point are
hard to come by, but the best available data suggest that smallest
firms pay as much as 20 percent more than large firms for the same
insurance coverage.\3\ These higher loads result from broker
commissions (which can run from 4 to 11 percent of premiums), other
fixed costs of administering and selling insurance that raise, per
person, premiums more for smaller firms, and from resources expended by
insurance companies in today's environment to try to screen and avoid
the sickest firms.
---------------------------------------------------------------------------
\3\ Chu, Rose and Gordon Trapnell (2003). ``Study of the
Administrative Costs and Actuarial Values of Small Health Plans,''
Small Business Research Summary #224, SBA Office of Advocacy,
Washington, DC.
---------------------------------------------------------------------------
Unpredictable Premiums
The third impediment is the unpredictable nature of those costs,
which makes it difficult for small businesses to commit to offering
insurance to their employees. For example, one survey found that in
2008, 28 percent of small firms reported a premium increase of 20
percent or more.\4\ If small firms can anticipate the rate of premium
increase, they can account for that in any business growth planning in
deciding whether they can afford to offer health insurance. But if they
cannot know whether costs will go up by 5 percent or 30 percent the
next year, they will shy away from providing insurance in the first
place.
---------------------------------------------------------------------------
\4\ National Small Business Association (2009). ``Health Care
Survey of Small Businesses.''
---------------------------------------------------------------------------
Limited Choice
Most small firms in the United States do not offer their employees
a choice of health plans: only 12 percent of firms with fewer than 200
employees allow their employees two plans to choose from, and only 1
percent of firms in that size range offer three or more choices. In
contrast, among firms of over 5,000 or more employees, 43 percent offer
two choices and another 29 percent offer three or more choices.\5\ This
reflects the fact that insurers do not want to insure small firms with
segmented risk pools, and the higher administrative costs of small
firms that want to offer an array of health plan choices.
---------------------------------------------------------------------------
\5\ Data from the Kaiser Family Foundation available at http://
ehbs.kff.org/?page=charts&id=
2&sn=19&ch=1048.
---------------------------------------------------------------------------
how does reform help?
The types of reforms now making their way through Congress would
help with all four of these major impediments to small businesses,
through several key features.
Reformed Insurance Markets With Individual Mandate
Insurance markets will be reformed so that prices depend only on
enrollee age and not health, and so that pre-existing conditions cannot
be excluded from coverage. This resolves the entrepreneur deterrence
effect because the engineer will now be certain that he can get
insurance to cover his wife's cancer if necessary, freeing him up to
start that new business. This legislation therefore removes an
important deterrent to business formation and growth that will increase
the productivity of the U.S. workforce.
Insurance market reforms also mitigate the enormous year-to-year
swings in insurance premiums that are so common for small businesses
and interfere with their ability to offer insurance. Moreover, the
individual mandate ensures that prices in these new exchanges will be
low because there will be a mix of both healthy and less healthy
enrollees. This will allow insurance companies to issue insurance at
the same cost, removing the need for screening on health and its
associated administrative load.
The Exchange as a Medium of Insurance Purchase
Many of these problems will be addressed further through the
ability of small businesses to use the new exchange as a medium for
insurance purchase. Small businesses will be able to directly enroll
their employees into a marketplace that provides a wide variety of
choices over plan design and insurance company. This will substantially
mitigate the high loading costs facing small businesses today because
they will not be required to use brokers, because they will not face
the administrative burdens imposed by focusing on their particular
group for insurance sale, and because there will not be resources
wasted on health screening. As noted earlier, small businesses pay up
to 20 percent more for insurance today. There is no reason that figure
couldn't be cut substantially in an exchange environment.
Moreover, the exchange will provide small business employees with
the wide variety of choices that large businesses now provide their
employees. This will make it more attractive for small businesses to
offer coverage by making it more appealing to their employees. And it
will allow small business employees to choose the plan that most
appeals to them, rather than being forced into the plan that suits
their employer's preferences.
Small Business Tax Credit
Health insurance is expensive in the United States, and even under
these reform bills that will not change right away. As a result, all of
the legislative proposals include a sizeable tax credit to help our
Nation's smallest businesses afford coverage. This credit will offset
up to 50 percent of the premium cost for the smallest and lowest wage
businesses that are having the most trouble providing coverage today.
does reform hurt?
Those who argue that reform will hurt small businesses rely on
several arguments, all of which are either incorrect or overstated.
Insurance Reform Will Raise Costs
The first claim that is made is that insurance reform will raise
costs to small businesses--particularly if there is not a strong
mandate in place. In a generic sense, this statement is true--market
reform without a mandate can raise premiums. We have seen in a number
of States that imposing community rating on the non-group market
without a mandate has caused a spike in premiums. But this has not
proven to be a major problem to date in the small group market, where
State reforms to market rating in the early 1990s did not much increase
premiums.\6\
---------------------------------------------------------------------------
\6\ Simon, Kosali (2005). ``Adverse Selection in Health Insurance
Markets? Evidence from State Small Group Health Insurance Reforms''
Journal of Public Economics, 89, 1865-1877.
---------------------------------------------------------------------------
Moreover, there is a very strong mandate in place in legislation
proposed by HELP and the House--and a reasonably strong mandate in the
SFC legislation as well. This will offset any rate shock from community
rating by bringing younger and healthier workers into the risk pool.
Finally, the grandfathering provisions in these proposals will protect
any small firms that would potentially suffer a rate shock from reform.
Benefit Mandates Will Raise the Cost of Insurance
While the details differ, the legislative proposals before Congress
would add a series of requirements to ensure that insurance is
providing real protection to consumers. Most notably, they would impose
a ``minimum actuarial value'' that would require coverage at a certain
level of benefits by small businesses. Yet the minimum actuarial
contemplated by the Senate legislation, which would require that
insurance cover 65 percent of expected medical costs, are not onerous
relative to coverage among today's small businesses. Recent analysis by
the Engelberg Center for Health Care Reform at the Brookings
Institution finds that fewer than 10 percent of small firms in the
United States today offer benefits packages less generous than this
level.
The plans would also impose other restrictions on insurance
coverage, such as no annual or lifetime limits and mandated preventive
care. But once again these are not burdensome mandates for the vast
majority of small firms. For those small firms who would have to change
their benefits packages to meet the mandate, they can simply adjust
other aspects of the package to stay at similar premium level.
Excise Taxes and Fees Will Raise Costs
These legislative proposals would impose a set of excise charges on
both medical providers and the insurance industry. The final form of
these excise charges is currently under debate. But to the extent they
follow the form of the Senate Finance Committee proposal evaluated by
CBO on September 22d, they will have a trivial effect on premiums; CBO
reports that the excise fees will add up to less than 1 percent of
insurance premiums.\7\
---------------------------------------------------------------------------
\7\ Letter from CBO Director Douglas Elmendorf to Senate Finance
Committee Chairman Max Baucus on September 22, 2009.
---------------------------------------------------------------------------
Employer Responsibility Requirements Will Hurt Small Business
The legislation being considered would include some financial
consequences for businesses that do not offer insurance coverage. But
these assessments would not hit the smallest businesses. The free rider
assessment in the Senate Finance Committee bill, for example, would
apply only to firms above 50 employees. Even past that point, the
requirement would be quite modest, at most $400 per full-time employee.
This is only about a 1 percent rise in the cost of compensation.
objective evidence that reform will lower premiums
Reports sponsored by the insurance industry have argued that reform
will lead to higher premiums for small firms.\8\ Unfortunately, I am
aware of no objective party which has presented an analysis of the
impact of reform on small business premiums. But there is some guidance
as to the validity of existing analyses from CBO analysis of the impact
of reform on the non-group market. The same reports that claim that
reform will dramatically increase small group premiums have made the
claim even more strongly with respect to non-group premiums, with
estimated increases from reform of 50 percent or more. But the
objective CBO analysis shows that these claims are clearly wrong--
reform will lower, not increase, non-group insurance costs.
---------------------------------------------------------------------------
\8\ Oliver Wyman, ``Insurance Reforms Must Include a Strong
Individual Mandate and Other Key Provisions to Ensure Affordability'';
PriceWaterhouseCoopers, ``Potential Impact of Health Reform on the Cost
of Private Health Insurance Coverage.''
---------------------------------------------------------------------------
In their September 22d letter, the Congressional Budget Office
reported that they estimated the cost of an individual low-cost
``silver'' plan in the exchange to be $4,700 in 2016 (this was later
updated to $5,000). This is a plan with an ``actuarial value''
(roughly, the share of expenses for a given population covered by
insurance) of 70 percent. In the same letter, the CBO projected that,
absent reform, the cost of an individual policy in the non-group market
would be $6,000 for a plan with an actuarial value of 60 percent. This
implies that the same plan that cost $6,000 without reform would cost
$4,300 with reform, or almost 30 percent less.
The CBO has not reported many of the details of their analysis,
such as the age distribution of individuals in the non-group market or
in the exchange. So these data do not provide a strictly apples-to-
apples comparison of premiums for the same individual in the exchange
and in the no-reform non-group market. Moreover, CBO's conclusion may
change as legislation moves forward. But the key point is that, as of
now, the most authoritative objective voice in this debate suggests
that reform will significantly reduce, not increase, non-group
premiums. This is in stark contrast to the critical reports from the
insurance industry--and suggests a potential bias to their conclusions
for small firms as well.
the prospects for small businesses with and without reform:
modeling results
I recently provided background research for a study by the Small
Business Majority of the impacts of reform options on small
businesses.\9\ I have undertaken similar calculations for this
testimony for the Senate Finance legislation. These results draw on the
Gruber Microsimulation Model (GMSIM), which has been widely used for
policy analysis at both the State and Federal level. This model
parallels the type of model used by the Congressional Budget Office in
their analyses of health reform proposals.
---------------------------------------------------------------------------
\9\ Small Business Majority (2009). ``The Economic Impact of Health
Reform on Small Businesses,'' June 11, 2009.
---------------------------------------------------------------------------
I have used this model to project two scenarios for small
businesses (with fewer than 100 employees): no reform (the ``status
quo'') and the Senate Finance Legislation (``reform''). I
conservatively assume that in both scenarios the underlying premium
growth rate for small businesses will be 6 percent/year, which is below
the recent trends, and which gives no credit to the reform for lowering
the rate of health insurance cost growth. I do assume that reform
lowers costs to small businesses by 5 percent on average through the
set of policies I described above.
My modeling results show an enormous reduction in small business
spending through health care reform. I estimate that in 2019, absent
reform, small businesses will spend roughly $290 billion/year in health
insurance premiums. Under reform, I see that number falling by about 25
percent to $225 billion/year.
This lower spending has real consequences for small businesses and
their workers. I estimate that under reform, workers in small
businesses will see an increase in their take-home pay of almost $30
billion/year, and that reform would save about 80,000 jobs in the small
business sector by 2019.
These are only estimates based on a highly uncertain future. But
the assumptions about cost growth in the small business sector are
conservative so the gains could be even larger.
conclusion
As this testimony makes clear, small business has little to fear,
and much to gain, from health reform. A reformed insurance market with
efficient exchanges will offer both lower health insurance costs and
more premium stability for small firms. And employees will be free to
move from job to job and start new small businesses, as well as to
benefit from a much greater choice of health care plans in the small
businesses in which they work.
The Chairman. Dr. Gruber, thank you very much for your
testimony, for being here. And we'll now start a round of 5-
minute questions.
First I'll start with you, Mr. Cullen. You stated that
under your policy routine preventative care such as a
colonoscopy would cost about $3,000 out-of-pocket in the local
hospital. In fact we have figures that show that in Iowa 36
percent of men who are aged 50 have never had a colorectal
cancer screening.
The Senate legislation that we are anticipating bringing up
will require coverage of recommended preventative care with no
charge at all. Do you think that this might reduce the high
rate of fatal colorectal cancer in Buena Vista County that you
mentioned in your testimony and the rest of Iowa?
Mr. Cullen. Yes, for the benefit of others in this room who
haven't seen the written testimony, Buena Vista County has the
highest rate of colorectal fatalities in the State of Iowa. And
they believe it's because of a lack of screening, according to
the University of Iowa epidemiologists. So I could hope that
more screening would prevent these fatalities, but I'm not a
doctor. I don't know.
One point I would like to make and it's not directly in
response to your question. That is, I don't know where it's
written that the Storm Light Times is required to provide
insurance to its employees. It seems to me like our function is
to put out a newspaper.
And we don't want to be health care plan administrators. We
don't want to be dealing with our employee's bills. Did you
send that bill back to the hospital? Did you do this? Did you
do that? That should be for health insurance companies to do.
So I would ask the Senate to get health care off the backs
of small businesses. And I would think that preventative care,
as you're talking about would reduce incidence. But again, I'm
not an epidemiologist.
The Chairman. Well, I think all the figures that we have,
from NIH and CDC and everyone else, shows that colorectal
cancer can be one of the most fatal. It can also be one of the
most curable if it's detected earlier in that screening.
That is one of the preventative measures recommended by the
U.S. Preventive Services Task Force.
Mr. Cullen. May I add, Senator, that the woman who works
next to me, our Associate Editor, Tina Donath, who has worked
for us for about 15 years, I think, is suffering from colon
cancer right now. And she's the one who needed the $2,500 shot.
And she had never had screening because our insurance didn't
cover it.
The Chairman. Yes, well, I think that's the point.
Mr. Cullen. She's also about 60, I believe.
The Chairman. One other thing. I remember when you were
telling me about your insurance and what was happening. And I
said, well, why don't you get another carrier?
Mr. Cullen. Hah.
The Chairman. And what was your response?
Mr. Cullen. Well we can either have BlueCross or BlueCross.
The Chairman. So you only have one carrier?
Mr. Cullen. Yes, we can't go anywhere. And with a kidney
transplant, colon cancer, my wife just had back surgery and I'm
apparently insane. Nobody would take us.
[Laughter.]
The Chairman. That's what caught me was the fact that I----
Mr. Cullen. That I'm insane?
[Laughter.]
The Chairman. No.
Mr. Cullen. Good.
The Chairman. Mr. Rowen, you discussed a report you
received from your insurance company explaining its offer of a
128 percent premium increase. Do you think the full 128 percent
increase can be explained by the factors the company cited?
Mr. Rowen. That's almost impossible for me to get a handle
on. One of the reasons is we don't have access to all the
health records of our employees. We're a small family business.
So we know everybody. We, if somebody is having major surgery,
we know about it.
I can tell you that there were no major surgeries. There
was no major, major procedures from last year. What I don't
know is if any of our employees have had some procedures that
would indicate some type of major surgery is pending in the
next year.
So I have no way of knowing that. I do know that our
average age has increased somewhat. But our employees are
stable. It's the same group of people that has been in the
plan, essentially the same group of people, for the last 4 or 5
years.
The Chairman. Do you think that a requirement to have
health insurance is important in making the health insurance
pool as big as possible?
Mr. Rowen. I do believe that, yes. I know for a fact that,
by example, there are a fair amount of younger people, when
they come into our company, who choose not to buy health
insurance. Our policy right now, I think our latest one is
something like $350 a month for the employee of which we share.
But it is expensive.
A lot of young people choose not to participate because
there's a risk. I mean, they choose not to. If it was quite a
bit less expensive for them, I think they would.
The Chairman. Thank you very much, Mr. Rowen.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman. I want to thank
everybody for their testimony. That's been very helpful.
I know in the 5 minutes we have we won't get to ask
questions of everybody or even all of the questions we'd like
to ask of anybody. So I hope that all of you will agree to
doing some written answers to some of the things. And some of
which might be a little more technical. But I do appreciate
what you shared with us.
Mr. Rowen, you mentioned that you've been contributing to
the health savings accounts for your employees. And I assume
those are the kind that the money that's not spent can roll
over next year or is that----
Mr. Rowen. That's not exactly true, Senator, because I
don't think we set up specific HRA policies. Essentially what
we were doing was that the company was reimbursing our
employees for the full cost of whatever deductible they
incurred. We did it a couple different ways in the 3 years that
we were doing it.
It wasn't as if our employees were putting or that the
company was putting funds into an account we drew down from.
All that we did was take, in any given year--we said that if
our health insurance is going to increase by say 20 percent.
That's going to cost us X amount of dollars.
So, instead of increasing, we increased the deductible,
took that at-risk money and put it toward paying those
deductibles and most of the time that worked out for us.
Senator Enzi. OK, I appreciate that. I've always encouraged
people to take a look at the regular health savings account and
if that helps in some small businesses.
Commissioner Praeger, you mentioned that a part of your job
is to see that the minimum loss ratio is available to
companies. And you have some capability, I understand, on how
much they can increase premiums. Are there some other tools
that you need to be able to do the job that would help keep
down health care costs?
Ms. Praeger. Well, Senator, getting rid of pre-existing
condition exclusions would go a long way toward assisting
people in getting affordable coverage. But we know coupled with
that you need to have everyone in the pool so the young healthy
folks are buying as well and sharing in the risk with others.
We don't have specifically in Kansas the tools that--I
don't have the authority to just deny a rate increase because I
think it's too much. If the company can demonstrate that it's
based on medical trend, the base amount and then the other
factors age, the demographic status of the company, the various
other health statistics, we really--most State's hands are tied
in terms of determining that the rate can't be administered.
Senator Enzi. Thank you. Thank you. Question for Mr. Holtz-
Eakin.
Dr. Gruber, in his testimony said that CBO has said excise
taxes in the bills will have a trivial impact on premiums. I
wasn't aware that CBO had done a comprehensive analysis of how
that bill will increase premiums. Is that your understanding?
Mr. Holtz-Eakin. That is right for the three major bills,
the Senate Finance bill, the HELP bill and the blended bill in
the House. There's been no comprehensive analysis from CBO on
the impact on group, small group and individual premiums.
Senator Enzi. And formally having done that kind of work, I
think you said that these bills could increase premiums by $200
billion. Do you think that the impact of the excise taxes in
the Finance bill will have a significant impact on premiums?
Mr. Holtz-Eakin. Yes, I do. I think the analysis of both
the Cadillac excise tax and the de facto excise taxes on
medical devices and other medical providers are going to raise
premiums.
Senator Enzi. And I've always concluded that that would be
passed on to the workers. I'd be interested in whether that's
your opinion as well. And how many families making less than
$100,000 a year do you think will wind up paying that tax?
Mr. Holtz-Eakin. Well we know from the work that's been
done so far by the Joint Committee that about half will be paid
by those making less than $100,000. And that some of the impact
will be to shift people to lower wages and, you know, the
incidence occurs that way.
Senator Enzi. I thank you. And Ms. Bender, you wrote in
your testimony that groups in the small employer market are not
distributed equally between low-cost and high-cost entities.
Under the bills before Congress does this mean that while some
high-cost groups could see slightly lower premiums and the
majority of small businesses would see their premiums go up?
Ms. Bender. That's exactly correct. What we call the
distribution of small groups by morbidity is skewed meaning
that currently more small employers are enjoying discounts than
those that are facing surcharges. So when you eliminate the
morbidity rating factor it will benefit some. And it will
benefit the higher cost employers. But there's going to be many
more small employers who receive increases than those who enjoy
lower rates.
Senator Enzi. Thank you and my time is up. I will submit
some other questions to you. You've been a very helpful panel.
Thank you.
The Chairman. I intend to have another round after we
finish this one.
Senator Merkley.
Statement of Senator Merkley
Senator Merkley. Thank you very much, Mr. Chair. And thank
you to the panel for your testimony.
Mr. Cullen, I wanted to start with you. I gathered from
your testimony that your rates doubled because an employee had
a kidney transplant in 2005.
Mr. Cullen. Certainly coincidental.
Senator Merkley. And that certainly is exactly what happens
with small employers where the health of every individual is
analyzed by the insurance companies. So would it benefit your
company to be able to join a pool of hundreds of thousands of
individuals so that you're not being rated just by the risks in
your small group of employees?
Mr. Cullen. You know it sounds attractive. But I honestly
don't know. I don't know if it will be the same screwball
insurance companies we're dealing with now.
Senator Merkley. OK.
[Laughter.]
Thank you. Well, your point does show.
Mr. Cullen. I've grown jaded and cynical on the topic. And
I don't know that it will help. I hope it will.
But my point is pretty to the point. And that is get it off
our backs. If that means a public option, fine. If that means
an insurance exchange of some sort, fine. But give us a way to
get out from underneath this albatross.
It's become expected that small businesses will provide
insurance even if they can't afford it. And we cannot afford
it. Ours is a $10-an-hour economy. I'm telling you. It's a meat
packing town. It's a tough town.
Senator Roberts knows full well about how these economies
are structured. And there are a lot of people in Storm Lake
running around without insurance or woefully underinsured like
myself.
Senator Merkley. And the additional amounts you've had to
pay for health coverage I assume either take away from hiring
additional employees or being able to pay your existing
employees' rates.
Mr. Cullen. Because of health care increases we did not
give anybody pay increases this year. And I would also note
that our economy is a lot better off than the rest of the
country. Our unemployment rate is just below 6 percent. The
meat packing plants are running strong as I'm sure they are in
Kansas and Minnesota as well.
And so we've been doing fairly well. But we cannot give a
raise this year because it's all been eaten up by health care
costs. And we would like to hire another employee and we can't.
It's costing us 50 grand a year. We spend as much on health
insurance as we do on newsprint.
Senator Merkley. Yes. Well, Mr. Rowen, let me turn to you
and your small company. You note you have increases over the
last 3 years, 2006 through 2008, 22 percent, 24 percent, 10
percent. And initial cost increases this year, as quoted, at
128 percent.
Mr. Rowen. That's correct.
Senator Merkley. I'm trying to picture you opening that
letter or that e-mail and falling flat on the floor.
Mr. Rowen. Yes, I had a real bump on my head from that one,
I can tell you.
Senator Merkley. I would imagine. So do you feel like if we
are able to set up exchanges where every small business can
join a pool of hundreds of thousands of others and not be rated
just on its immediate employees and not just be kind of at the
mercy of the higher premiums charged to the smallest companies,
do you think that would benefit your company?
Mr. Rowen. Well, again, I'm not a health insurance expert,
but what I do know is what I've been told. What my experience
has been is when the insurance industry says that the average
rate increases have been in the 10 percent range and then every
small business I know is looking at 25 and 35 percent
increases. There's something happening to small businesses.
The only thing I can conclude is that our pools are too
small. And then when I look at the broker report that we
received this year for the justification of the 128 percent, it
was a 70 percent portion that was allocated toward the health
of the future situation of our small group. So I can't conclude
anything other than what you just said which is if we could be
in a bigger pool our rates should be lower.
Senator Merkley. Have health care expenses had direct
impacts on your ability to hire additional employees or to pay
your employees more?
Mr. Rowen. I think most small businesses hire employees
because their business is doing well. And they lay off people
or cut back because their business is not doing well. I've
never been a believer that we hire because there's a better tax
situation or that there are better government benefits that
come to us.
When the economy does well, we do well. And when we do
well, we hire more people. It is absolutely true, though, that
if my expenses--something say in health care--or my expenses go
up than I am not passing on increased wages to my employees.
That is absolutely, directly true.
Senator Merkley. Thank you. Thank you. Do I have time or am
I--I'm out?
Thank you very much. And thank you, Mr. Chair.
The Chairman. Thank you.
Senator McCain.
Statement of Senator McCain
Senator McCain. Thank you, Mr. Chairman. I thank the
witnesses. Dr. Gruber and Mr. Holtz-Eakin obviously present
starkly different views of this legislation. So maybe beginning
with you, Mr. Gruber, you could give us a minute or two on your
disagreement with Mr. Holtz-Eakin. And then I'd like to have
him respond and then if whatever time is remaining.
Dr. Gruber. All right. Well, that will be fun. So basically
I think there are lots of theoretical disagreements about what
insurance market reform will do? How effective exchanges will
be in lowering costs? I think that's really just the difference
in perspective.
I think we should try to stick with the facts which is what
CBO has told us. What they have said explicitly. They haven't,
Doug is right. CBO has yet to tell us the answer we'd like for
this hearing which is what will reforms do to small group
premiums.
They've told us two things.
First of all they said the excise fees will raise premiums
by less than 1 percent. They called out that one element. And
they said that one element will raise premiums by less than 1
percent. That's in CBO letter.
Second they've said for nongroup plans, not for small
groups unfortunately, but for nongroups, premiums will be about
25 to 30 percent lower in 2016 than they would be without this
reform. Those are the facts----
Senator McCain. All right. Why do you disagree with Dr.
Holtz-Eakin that the curve will not be bent up or down?
Dr. Gruber. I think, you know, Doug raised an excellent
point about ultimately we really need to bend this curve. I
think this legislation starts us down that path. But I don't
think this legislation by itself, fundamentally, is going to
bend the curve.
I think it starts us down that path. And I think the
alternative is--what's the alternative? The alternative is
doing nothing like we've done for 50 years and the curve
continuing upward.
Senator McCain. OK. Could I? I'd like to go back and forth
one time in my 5 minutes.
Dr. Gruber. OK. You bet.
Senator McCain. Go ahead.
Mr. Holtz-Eakin. So I think the fundamental disagreements
are No. 1, a lot of John's analysis relies on an individual
mandate that's very strong. And that's not what we've got. The
Senate Finance Committee mandate got it completely.
I mean there's no penalty the first year. It's $400 the
second year, $750 max. Anybody looking at this is going to pay
the penalty and not buy insurance. House is similar.
So the sort of dynamics that come out of a world with
guaranteed issue community rating and no mandate are the
reality of these bills. And the theory of a strong mandate is
missing.
The second thing is a lot of what would be benefited from
exchanges and things, loading factors, things like that are
one-time events. So suppose exchanges get rid of the 20 percent
increase in loading factors in the small group market? Well at
80 percent a year growth, 3 years down the line that benefit
will be gone and we're stuck with the same growth in costs, the
same rising premiums and we're having another hearing in this
room.
So the bills don't solve the problem.
Senator McCain. Mr. Gruber.
Dr. Gruber. I think Doug's got an excellent point. I think
the point is you have to contrast it with what would happen
without the bill. It is truth that 3 years later that gross 8
percent premiums will be up. But they'll still be 20 percent
lower than they would be without the bill.
I think you can't compare it to the ideal which is, ``gee,
it would be great if premiums didn't grow.'' Just because this
bill won't solve all the problems doesn't mean it won't take us
a long way toward solving some of the problems that we face. I
think holding it to the standard of saying, ``unless this bill
ends cost growth it's not worth passing,'' is just the wrong
standard to have.
Mr. Holtz-Eakin. And I think the Congress set out this year
to do fundamental health care reform which had two pieces. One
is enhanced coverage. But the second was deliver quality care
in America for lower cost. That's an achievable goal.
These bills don't do it. So to say that it's this or
nothing, misses the point. Let's enact a genuine reform that
changes the delivery system, slows the growth in costs, takes
pressure off rising insurance premiums and delivers on the
promise of health care reform.
There's no reason to say it's this or nothing. Let's do
something good. You could extend protections to individuals who
already had employer coverage by simply saying they don't have
to be on COBRA until it's exhausted.
That's a simple reform. Doesn't take 3,000 pages. It
doesn't cost a million dollars a page. Let's do things like
that.
Senator McCain. Am I out of time?
Mr. Gruber.
Dr. Gruber. Yes, I think that, you know, Doug and I just
have a fundamental disagreement about whether we should
accomplish what we can accomplish or whether we should let the
perfect be the enemy of the good. I agree. I'd love to have a
bill which would end cost growth inflation in America with
health care costs. We've tried for 50 years and never gotten
it.
This is a bill which will cover the uninsured and which
will lower the cost that individuals have to pay for health
insurance and small groups have to pay for health insurance. I
don't think we should because it won't achieve some, I believe,
unachievable goal right now and we should kill the bill.
Mr. Holtz-Eakin. I would say again this bill is dangerous
to our economy. We are literally asking the Chinese to have
forbearance against our fiscal malpractice. This sends the
message that they will own a greater ability to control our
future.
That is exactly the wrong thing to do at this time. It is
larger than health care. It is about the track on which this
Federal Government budget is going.
We cannot, because we're worried about the history of
health care reform, do something which is fiscal malpractice at
this moment. That is a mistake.
Dr. Gruber. But I guess I don't see how you can call it
fiscal malpractice when this bill is paid for the first 10
years.
Mr. Holtz-Eakin. It's not.
Dr. Gruber. And the CBO reports that will lower the deficit
over the second 10 years as well.
Mr. Holtz-Eakin. Mr. Chairman, I apologize for
interrupting. But I hope at some point in this hearing there is
a fair discussion of whether this budget balances or not. This
does not, over any horizon, really balance the budget.
Senator McCain. Mr. Chairman, you've been more than
generous with the time. I think it's an excellent exchange. And
it's been very helpful. And I appreciate all the witnesses
being here--thank you, Mr. Chairman.
Dr. Gruber. In my experience he likes fights.
[Laughter.]
The Chairman. Senator Franken.
Statement of Senator Franken
Senator Franken. Last week I met Linda Batterson from
Bloomington, MN. She's got three daughters. She owns her own
business. And her husband, Bud is a realtor.
The Batterson's have some relatively minor health problems,
asthma, allergies, back problems. But even so their only health
care option is Minnesota's high risk pool. And this year
they're paying nearly $21,000 for health care. Neither the
Batterson's business nor their family can sustain the cost.
Now in your testimony, Mr. Holtz-Eakin, states--and this is
in the written testimony. And I think we just saw a discussion
about this. But in your written testimony you say there's
noncontroversial agreement that health reform will raise
average premiums for families like the Battersons.
I'd like to ask Mr. Gruber, I think it's actually on the
face, evident, that there is controversy, isn't there?
Just the fact that you disagree would be kind of
controversial, wouldn't it?
Dr. Gruber. Yes. Doug and I are actually friends despite
the exchange. And there's clearly disagreement about that. I
think once again, in the face of disagreement economists need
to turn to empirical evidence. And the best evidence we have at
this point is what the Congressional Budget Office has said.
Senator Franken. But to put in your testimony that it's
noncontroversial agreement is not accurate. And I wonder why
I'm reading this kind of testimony.
Ms. Praeger.
Mr. Holtz-Eakin. May I respond?
Senator Franken. I only have a little bit of time. Maybe on
the next round, ok. It just seems that it's controversial to
me.
Ms. Praeger, Dr. Gruber talked about what he called
entrepreneur deterrents which is job lock, right?
Ms. Praeger. Right.
Senator Franken. Ok. Andrea Merkle spoke to a joint session
of Congress today. She's the Chancellor of Germany. She was
born in East Germany.
She said that while she was a kid people would smuggle in
books and movies about America, from America. And she said in
her speech that what most inspired her about those books and
about those American movies was the American dream.
I met with a constituent who wants to do a small business
as bad as anything. His wife has got cystic fibrosis. So she
has a pre-existing condition. So he can't form a small
business.
We're deferring the American dream for these folks until we
get rid of pre-existing conditions. How would health care
reform, that we're talking about now, help make the American
dream alive for people like this constituent of mine?
Ms. Praeger. Well, I think you've articulated that in your
question, Senator. I think I do believe there probably is some
entrepreneurial job lock. There's job lock in folks moving from
company to company and not sure that the new company will offer
the same level of benefits because those are----
Senator Franken. But if you have a pre-existing condition--
one of the things that this health care reform would do, is say
that an insurance company can't charge you more because you
have pre-existing conditions. So then you can start a business
knowing that because your wife or your kid or you have a pre-
existing condition you're not going to be charged more for it,
right?
Ms. Praeger. Right. Correct.
Senator Franken. So that's a benefit of this reform. And
yet when Mr. Holtz-Eakin talked about the meager benefits of
this health care reform he didn't mention that at all. And he
didn't mention eliminating the annual caps or the lifetime
caps.
And it seems to me that if--ok, so, that's valuable. That's
really valuable. And my question to you is, if we're spending 8
percent more, as he said, CBO said on--I'm not sure, is that
the current plan or is that a plan that's an old plan. Is that
from an old plan?
Mr. Holtz-Eakin. Both the current proposals in the House
and Senate would have new spending programs to----
Senator Franken. But that's not an 8 percent increase in
premiums, is it?
Mr. Holtz-Eakin. No, it's the new spending.
Senator Franken. Yes, but you kind of imply that it was an
8 percent, that it was a growth in the premiums. Now if you're
insuring so many more people. If you're insuring 30 million
more people, which is 10 percent of our population, it seems to
me that an 8 percent growth is pretty good considering what we
have now.
When you were economic advisor to the President, to Bush,
during those years, how much did premiums go up?
Mr. Holtz-Eakin. I don't know exactly. But they certainly
were rising far too fast.
Senator Franken. They were, I think, during your time going
up 15, 16 percent. And you were the economic--so I just want to
make this clear that I think there are tremendous benefits to
health care reform that weren't mentioned when you were talking
about what you kind of call the meager benefits.
I'm out of time. I'm sorry, sir. Sorry, Mr. Chairman. Thank
you. And thank you for calling this hearing. I know we'll have
another round. I'll try--I'm sorry, to get you to respond.
Thank you.
[The prepared statement of Senator Franken follows:]
Prepared Statement of Senator Franken
Thank you, Mr. Chairman. I appreciate the opportunity to
participate in today's hearing, which touches on a topic that
is crucial to the economic health and the public health of my
State and our country. As others have already mentioned, small
businesses are the engine of our economy. We have more than
120,000 small business owners in Minnesota and another 390,000
Minnesotans who are self-employed. These are people who make
our State a great place to live, and they're the reason we're a
hub for innovation and creativity.
The problem we're facing today is that our current health
system is stifling small businesses in this country. I hear
from Minnesotans all the time who want to strike out on their
own and start a new business. But they're scared. They're not
scared that their idea isn't worthy, or that they won't be able
to get the capital they need to get started. They're scared
that they won't be able to afford health care for their
workers, or their own family.
And their fear isn't unfounded. Last Wednesday, at my
weekly breakfast with Minnesotans, I met Linda Batterson.
Linda's got three daughters. She owns her own business and her
husband, Budd, is a realtor. They're an active family, but like
most people, they've got a few health problems. He has back
injuries, she's been in a car crash, and their daughters have
allergies and asthma.
The Battersons' only health care option is Minnesota's high
risk pool, also known as the ``insurance of last resort''
because it's so expensive. The Battersons are paying nearly
$21,000 for health care this year. That's $21,000--and these
costs keep going up. Neither the Battersons' businesses, nor
their family, can sustain these costs.
We are an entrepreneurial society. But right now, we're
putting small businesses at a serious disadvantage and stifling
this entrepreneurial spirit. Right now, if you're self-
employed, or have a small number of workers, you don't have any
leverage with insurance companies, so you pay higher costs.
But with national health reform, we have the opportunity to
make a real difference in the lives of millions of small
business owners and their workers. After health reform, small
businesses and self-employed individuals will be able to come
together and leverage this power in the ``exchange.''
The exchange will be a new marketplace where small
businesses can shop for affordable coverage and compare plans.
There will be no annual and lifetime caps, so families like the
Battersons won't be at risk of losing their business. Small
businesses will also be eligible for tax credits so they can
purchase more affordable insurance for their workers. In
Minnesota alone, there will be more than 72,000 businesses
eligible for these credits. Health reform will put small
business owners on a level playing field--able to offer
affordable coverage so they can attract the most qualified
workers.
As our witnesses will describe today, small businesses are
the foundation of a healthy economy. We must pass health reform
this year so that small business owners and aspiring
entrepreneurs can focus on innovation, and stop worrying about
health care.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Coburn.
Statement of Senator Coburn
Senator Coburn. Thank you, Mr. Chairman. I apologize to not
being here to hear all of your testimony. I want to go back to
Mr. Doug Holtz-Eakin.
Is it not true that one of the reasons why CBO says this
bill is deficit neutral is because it assumes a 25 percent cut
to doctors under the SGR?
Mr. Holtz-Eakin. That's correct.
Senator Coburn. And it never assumes that that will be
repaired?
Mr. Holtz-Eakin. That's correct.
Senator Coburn. Ok. That's No. 1. It also assumes that
those cuts will be maintained.
Mr. Holtz-Eakin. Yes.
Senator Coburn. Alright. In your experience at CBO have you
ever seen that those cuts would be maintained under the history
of Congress since SGR was developed?
Mr. Holtz-Eakin. No.
Senator Coburn. Never has happened, has it?
Mr. Holtz-Eakin. No.
Senator Coburn. So the first thing we know is the CBO is
highly inaccurate in its estimate. Do you know of any other
time that CBO got spending right on health care, within 15
percent?
Mr. Holtz-Eakin. They're either too high or----
Senator Coburn. One time in the history of CBO?
Mr. Holtz-Eakin. They're usually too high or they're
usually too low. They've only been too high on the drug bill.
Senator Coburn. Yes. And why were they too high? Because
they failed to consider what market forces would do when we
competitively bid the purchases of drugs.
CBO also, I'd note for the record, just revised its
estimated savings for medical malpractice caps. They were off
by a factor of 10.
Look, we all know what the problem is. We don't have true
indemnification in this country. We haven't spread the risk
among everybody. And the fight is about how you get that done.
I want to go to Dr. Gruber for a moment. You've been very
involved in the Massachusetts experiment in health care. I
would like for you to tell me whether my facts are wrong. I'm
going to read some facts and then I'd like you to comment on
them.
First, the Commonwealth Fund reports Massachusetts premiums
for an average family was the highest in the Nation, almost
$1,500 higher than the national average. And that health
insurance premiums have risen significantly faster than the
national average.
Second, 8 in 10 people remaining uninsured in Massachusetts
find cost to be the most significant impediment to purchasing
insurance.
Third, the Boston Globe reports that of the individuals
covered since the 2006 change, four out of five citizens of
Massachusetts depend on taxpayer subsidies for their coverage.
Fourth, emergency department outpatient visits increased by
8 percent from 2005 to 2008, increased by 2 million people.
Fifth, overall only half the primary care doctors are
accepting new patients. The average wait by a new patient for
an appointment with an intern has rose to 52 days in 2007.
That's up from 33 days in 2006.
So, the question is, since the majority of these bills in
Congress envision many of the same grade in insurance changes
as Massachusetts, can you truly predict that Americans would
not see some of these same troubling dynamics under the reforms
that are in front of us?
Dr. Gruber. Thank you. Thank you, Senator for bringing up
the case of Massachusetts because I think in many ways it can
serve as a model. Let me, you know, you certainly picked a
particular set of facts and let me----
Senator Coburn. Well, I'd like for you to answer those
facts and then make any comments.
Dr. Gruber. Great. Perfect.
So the first fact. Massachusetts has very high health
insurance costs. We always have. We did before this reform. We
do after this reform.
The reform in Massachusetts was even less about bending the
cost curve than these bills are. These bills have a number of
things in them to set up comparative effectiveness commissions
to try accountable care organizations. In Massachusetts we
completely punted on cost control. It was unapologetically a
bill about coverage.
That said, we do know that for individuals buying health
insurance on their own premiums have fallen by 50 percent
relative to the rest of the Nation since 2006.
Senator Coburn. And what percentage of that is the people
in Massachusetts that are purchasing insurance on their own?
Dr. Gruber. Basically what we see is of--this has come to
your second fact. The increase has actually been half public
and half private in health insurance coverage.
Senator Coburn. But what percentage of the people in
Massachusetts that are purchasing----
Dr. Gruber. Right.
Senator Coburn [continuing]. Insurance, what is the
percentage of people in Massachusetts that are singularly
purchasing insurance that have benefited from that decline
verses the----
Dr. Gruber. From that decline it's about 80,000 people.
Senator Coburn. Out of how many people insured?
Dr. Gruber. Out of how many people insured, maybe 4
million. So it's, you know, on the order of half of 1.5
percent.
Senator Coburn. So 2 percent.
Dr. Gruber. So basically----
Senator Coburn. So 2 percent of the people had a decline
while 98 percent had an increase?
Dr. Gruber. No. Once again, sir, in terms of the firms,
large firms and small firms, they were not affected by our
health care reform. There was nothing in our health care reform
that affected them. We left them alone. There was not an
employer responsibility component effectively.
This was just about reforming the nongroup market, making
nongroup health insurance more affordable and covering the
uninsured. And for that population, the one we try to touch
with our law we saw an enormous reduction in premiums.
Senator Coburn. Well, why did they just recently throw
30,000 legal aliens out of the plan?
Dr. Gruber. We recently had to throw 30,000 people off our
plan who were called aliens with special status. With a State
fiscal crisis, which is a drop in 25 percent in State tax
revenues, calling for across the board cuts in every program in
the State. The legislature decided that our program, one of the
biggest in the State--the way to cut it was to throw these
people off because they were purely State-funded instead of
shared between the Federal and State Government.
Senator Coburn. Ok. How about the wait for an internist?
Dr. Gruber. The wait for an internist has actually not gone
up. It's very high. But it was actually high beforehand. If you
look at the studies----
Senator Coburn. It's actually gone up, according to my
statistics. I'd be happy to give you the reference. It's gone
up from 33 days in 2006 to 52 days.
Dr. Gruber. If you actually--I notice how you're referring.
If you look at the set of doctors in that study overall, some
categories have gone up, some categories have gone down.
Senator Coburn. But I specifically meant for internists?
Dr. Gruber. Specifically for internists that does show them
going up. And it shows those other specialties going down.
Other studies show no change.
Senator Coburn. Whoa, whoa, whoa. Internist is not a
specialty. They're a primary care doctor.
Dr. Gruber. Right.
Senator Coburn. So the wait for primary care doctors has
gone up 24 days, 23 days in Massachusetts in 1 year, in 1 year,
under the Massachusetts plan. I would put forward to you that
care delayed, is care denied.
Because if, in fact, you can't get into a doctor for 52
days and you have a condition that is time dependent, then what
you in fact have done, you've increased it. I know that the
access to specialists is probably better under that because you
probably have less utilization. And that's one of the reasons
you're seeing a slowdown in primary care, why you're seeing an
increase in primary is because you're decreasing utilization of
subspecialists.
So tell me why you would see, as an economist, that this
would have resulted in this kind of an increase in delay?
What's the factor behind that?
Dr. Gruber. Once again, Senator, there's been two studies
both financed by and supported by physician's organizations.
One found no change. Yours found the 19-day change over a 2-
year period.
The reason for that is because we've insured 430,000 new
people in the State of Massachusetts, about a 5 percent
increase in the base of uninsured in the State and given
existing set of primary care arrangements that is going to put
more pressure on the primary care system. That's why as far,
I'm not an expert in this area, but I know legislation
addresses primary care shortages. But the thing--emphasizes
that's a problem today. Under one study it got worse in
Massachusetts on another study it didn't.
But I agree, if we're going to cover 30 million new people
in America, we are going to have to try to increase use of
primary care access. I completely agree with that.
Senator Coburn. Do you think that's the reason why we saw
the emergency room visits go up as well?
Dr. Gruber. The emergency room visits did not fall. I don't
know if that's on the rising. And that's partly because we've
been slow in changing people's pattern of use of care.
Senator Coburn. Alright. I went way over my time. Mr.
Chairman, I'm sorry. Thank you.
The Chairman. Senator Bennet.
Statement of Senator Bennet
Senator Bennet. Thank you, Mr. Chairman. Thank you for
holding the hearing and the panel, thanks very much for being
here.
To our small business people everything that you've said
are things that I've heard in Colorado over the last months as
people have, even before this recession started, grappled with
the question of how to cover people in what are often family
businesses. People have relationships with one another. And
desperately would like to provide insurance.
Mr. Rowen, one of the things that struck me in your answer
to the Chairman's question was that you said you really didn't
know why the premium was going up by 128 percent. Is that
right?
Mr. Rowen. What I meant, if I said that, was that I didn't
know based on the current pool of people that we insure, based
upon what their history was, utilizing health insurance doctors
over the previous year. And knowing to a limited degree what
they might be facing in the next year, why that overall
understanding interpreted to 128 percent increase or why I
interpreted it to a 70 percent increase in the health risk of
our pool itself.
Senator Bennet. Were you able to get other bids on the
policy that might have explained what the deferential was?
Mr. Rowen. Well we were----
Senator Bennet. Or suggested the reason why?
Mr. Rowen. Over the last, say, 10 years, we've probably had
eight different health care carriers. I think we've only had 2
years where we were able to carry the same carrier for the
second year. So what has happened to us is that absolutely
every year, virtually, we go out and try to rebid our health
care.
This year we were able to. We ended up with a policy that
essentially is costing us about 43 percent increase rather than
the 128 percent increase. I think part of it was that the
health insurance, which is the policy that we had last year,
knew what our group was.
I don't know that our group went through the audit process.
I think they simply just took our age group and everything and
gave us a new policy.
Senator Bennet. I've had people in Colorado refer to it as
a game of musical chairs that rolls around once a year when
people have to rebid this. And my hope is that we're going to
have a much more transparent marketplace for small businesses
going forward than the one we have.
Mr. Rowen. We did have underwriting though with our rebid
and the 43 percent. And it was under it by the new insurance
company.
Senator Bennet. Thank you.
Mr. Holtz-Eakin, I wondered. You had a list of things that
you said would be real reform that we should make sure we
attend to. And on that list you talked about the reform of the
delivery system.
I do believe that the most important thing we should be
doing here is figuring out how to lower costs for everybody no
matter, or at least reduce the rise in cost no matter where you
come down on various other choices here that's what's
strangling our working families and small businesses in the
country and defeating coverage. And I wonder if you could just,
on that subject alone--the delivery system--in your view, what
is it that you'd like to see that's not in the legislation?
And then I'm going to ask Dr. Gruber the same question.
Mr. Holtz-Eakin. I'd like to see that be a primary focus of
the legislation so that when these reforms are undertaken the
Congress looks to see if they work. If they do, we will see
Medicare/Medicaid rise more slowly. Resources will be freed up
in the Federal and in the State budgets, quite frankly.
And coverage expansions can be followed along in a fiscally
responsible fashion. So one is simply sequencing.
The second is what do you do? I would urge you to do things
that are in bills, but do them more aggressively. One of the
primary drivers of bad medicine and expensive care in America
is the Medicare payment system which has four siloed payments
to make sure that hospitals get their money, doctors get their
money, insurance companies get their money and drug companies
get their money and the beneficiaries know we're in there.
There's no coordination. There's no emphasis on paying for
quality outcomes or making sure people are well to begin with.
The Federal Government pays half America's health care bills.
And that system drives a lot of bad medicine.
We pay doctors more to do more. We pay hospitals, fix them
out because they do less. Doctors practice in hospitals. It's
utterly schizophrenic.
Senator Bennet. Right.
Mr. Holtz-Eakin. So I would start there. I know you're
running out of time.
Senator Bennet. I'm sorry. And I am. I wanted Dr. Gruber,
who I think made an interesting point that you No. 1, don't
want to let the perfect be the enemy of the good here. But if,
in your judgment, you are looking for improvements in the parts
of the bills that deal with delivery system reform, what would
you be looking for?
Dr. Gruber. I mean, I think that what Doug's laid out is
exactly right. And there's a lot of people out there that know
that that's what we need to do. The promise is not a lot of
people out there are willing to put that in legislative
language.
And the issue is, basically, if we wait for that to be in
legislative language we won't get reform. Basically, what we
have now is a reform that will do what we can do today. And I
think actually does a lot of things that starts us down the
road toward those reforms.
There are pilots of the kind of cannibal-care organizations
Doug advocates and I think are very smart. There's a
comparative effectiveness institute to study what works and
what doesn't. There is sort of a Med PAC on steroids committee
to try to take a look at our physician reimbursements.
I agree with Doug. I'd like to go further. I just haven't
seen those ideas on paper to go further. I don't believe we
should kill this bill which CBO says is deficit improving over
the next 20 years because those ideas haven't yet been written
down.
Senator Bennet. Thank you, Mr. Chairman.
The Chairman [off mic]. Thank you.
Mr. Roberts.
Senator Roberts. Thank you, Mr. Chairman. I belong to that
special fraternity; if you look in the bios it says Roberts,
Journalist, that is an unemployed newspaper man.
Mr. Cullen. It's a high fallutin word.
Senator Roberts. It's a high fallutin word. You're right,
Art.
You don't look insane to me?
[Laughter.]
Mr. Cullen. I certainly feel it.
Senator Roberts. Well, you're wearing a nice coat and that
bow tie matches. And you look a lot like Sam Clemons. And you
know, he's got the bottom of the point.
Mr. Cullen. If only I could write like him.
Senator Roberts. My time, not yours.
Mr. Cullen. Alright.
[Laughter.]
Don't knock the bow tie. My wife made it, alright?
Senator Roberts. There you go.
Mr. Cullen. Thanks. It's lovely.
Senator Roberts. I need her and don't tell my wife.
[Laughter.]
Your brother John, founded the Storm Lake Times in June
1990 to make a difference in the community. That regardless, he
didn't start the hometown newspaper to administer health
insurance plans and cover its escalating costs. Amen, to that.
In 1856, John Wesley Roberts came to Kansas. He had a flat
bed press, a team of oxen, a Bible and a six gun. And he was
fighting for the cause between Kansas being a free State or a
slave State. I don't think he even considered health insurance.
And if he did, he didn't think it was an entitlement. He
thought he probably ought to provide it or just put it in the
cash drawer in case somebody needed it.
Well times have changed. I'm struck between the testimony
because as Senator Enzi pointed out right at the start, in a
letter to Chairman Baucus, the CBO has stated that the premiums
in the new insurance exchanges would tend to be higher than the
average premiums in the current market.
Now we've got other nonpartisan entities, the Joint
Committee on Taxation to the CMS Office to the Actuary of the
National Association of Insurance Commissioners have all come
to the same conclusion. The Health Care Reform bills, as
currently before Congress, will actually result in higher
premiums and higher cost for small businesses and individuals.
This is additional to the cost that we are going through now.
So I have a question for Ms. Bender, who helped author the
Oliver Wyman Actuarial firms premium impact study which is the
only study, as I understand it so far, to try to estimate the
impact on premiums at the State level, i.e. small business. And
my question for Ms. Bender is--as compared to the current law--
will the Health Care Reform bills currently before Congress
likely make insurance premiums for small business like Kansas
more or less expensive? We're in cluster four. I think we're
No. 2 in less regulation which probably tells you a lot and
also the work of Sandy Praeger.
Ms. Bender. The short answer is yes.
Senator Roberts. I'm sorry?
Ms. Bender. The short answer is yes. It will make it more,
for small employers in the type of State that Kansas is that
has implemented what we call the NAAC model.
Senator Roberts. I like the short answer.
Ms. Bender. OK. Yes. It will.
[Laughter.]
Senator Roberts. The estimates project that Kansas small
businesses could see increased premiums all the way up to 28
percent over 10 years. As you are aware both the HELP and
Finance Committee bills provide limited tax credits for small
businesses to help them provide coverage for their employees.
But they are very limited.
The HELP Committee bill provides credits on a sliding scale
to small businesses with 50 or fewer employees with an average
wage of no more than $50,000.
While the Finance Committee bill limits its credits to
small business with 25 or fewer employees with an average wage
of no more than $40,000.
Kansas has a lot of small businesses, 60,000 in fact,
probably 10,000 under Iowa there. But at any rate a major
driver of the Kansas economy. But under these health care
reform bills I believe most small businesses in Kansas will be
saddled with a higher premium cost, possibly without having the
benefit of the tax credits.
Ms. Bender, have you estimated what percentage of small
businesses will be able to take advantage of these credits?
Ms. Bender. We did, as you indicated, by clusters so we
can--I can state what it is for the cluster that you're in, of
which Kansas is in, which is about 11 percent. Now it could
vary with any----
Senator Roberts. Eleven percent?
Ms. Bender. Eleven percent.
Senator Roberts. Eleven percent on the tax credits and yet
most people are testifying that the costs go up. Well how much
more affordable will these credits really make the premiums?
And how many years will they be available?
Ms. Bender. I'm sorry?
Senator Roberts. I said how much more affordable will these
credits really make premiums? And how many years will they be
available?
Ms. Bender. The premium credits, I'd have to look at the
technicalities of all the bills. But I think they go from 25
percent to 50 percent.
Senator Roberts. Yes, that's correct.
Ms. Bender. And I believe now some of the bills like are
from 2 years, 3 years.
Senator Roberts. It's 2 to 3 years, right. That's so we
just hope for the best after that. They will not cover 100
percent or a substantial percentage of the premium cost for
many businesses who do qualify. Their credits are only for 2 to
3 years as I've indicated and as you had stated.
Could the wage limitations adversely affect workers
earnings by creating a disincentive to raise wages?
Ms. Bender. Yes, it could. I mean, we didn't say this in
our report. And we did not model this in our report. I don't
want to lead anyone to believe that this was part of our
report.
I want to clarify that. But it could almost put a purpose
incentive in order to keep the tax credit, that you might want
to keep your eligibility for the tax credit, that you would
want to keep your average employee wage below whatever the
trigger point is.
Senator Roberts. I'm about a minute over, Mr. Chairman.
Thank you.
The Chairman. Thank you, Senator Roberts.
Senator Specter.
Senator Specter. Thank you, Mr. Chairman for scheduling the
hearing. And I thank the witnesses.
Mr. Rowan, the New York Times featured your situation in
the article 9 days ago. And the Times points out that the high
rates are--no question the insurers are under pressure from
Wall Street and the threat of an overhaul may be part of the
reason. And one of the expert brokers said that he was
mystified by the size of the increases.
Now you've testified by a number of factors, demographics,
price trends, excess risks of the group. Would you like to see
your insurance company, by the way they declined to come in
along with the other insurance companies contacted by the
committee with excuses. Would you like to see them come in and
produce their books and justify their reason for the 128
percent increase that they asked you for?
Mr. Rowen. As I testified earlier everything that I can see
relative to the history that I know about my employees and our
health care usage in no way gives us the sense that 128 percent
increase would seem to be appropriate.
Senator Specter. Commissioner Praeger, I understand that
you have some views on the subject as to the rise in premiums
occasioned by the likelihood of some legislation to be enacted
soon.
Ms. Praeger. We, through our surveys that we've done and
talking with other commissioners around the country, we know
that, and this is, stating the obvious. Health insurance
premiums are going up. I think they are the result of probably
several factors.
But most of----
Senator Specter. Do you think the likelihood of legislation
is a factor?
Ms. Praeger. There may be some companies that are trying to
get out ahead of the curve. But I do think health care costs
are probably the big driver. We would look, I mean part of our
review is we do have the authority--if we think a rate that is
coming into us is excessive, we do have the ability to deny it.
Senator Specter. When you testified that they asked for
increases based on medical trends based on demographics, that
you really can't challenge them.
Ms. Praeger. Right.
Senator Specter. If you had evidence at the same time that
the rates were being increased because Wall Street is putting
pressure on insurance companies for more profits in
anticipation of legislation. Would that give you a little bit
more----
Ms. Praeger. I would be----
Senator Specter. Excuse me, the question is not finished.
Would that give you a little more basis for saying no rate
increases?
Ms. Praeger [continuing]. We would call that company in.
And we would look very closely at what was driving their--what
was their motivation behind that rate increase.
Senator Specter. Would you like to see this committee get
to the bottom of that question with use of the subpoena power?
Ms. Praeger. Yes.
Senator Specter. Well, that's a good, concise answer. The
issue of regulation is very uneven. Pennsylvania and Hawaii for
example are the only two States that do not have a review for
small market insurance plans. And in my State there are no
rating restrictions for health insurance plans at all.
And it may be that the States ought to be looking at more
regulation to have more authority. One of the issues which the
Congress is considering is to repeal the McCarran-Ferguson Act
to eliminate the added trust exemption and another proposition
looking for the possibility of insurance companies doing
business in more than one State. I'd like your view as to
whether you think McCarran-Ferguson has outlived its usefulness
and be good to have more weapons available for people who
collude to raise rates.
Ms. Praeger. Well, Senator, I've heard the discussion about
McCarran-Ferguson. And we, as regulators, don't believe we've
seen collusion among companies. But certainly having some
additional tools in terms of the kinds of information----
Senator Specter. You don't see the collusion, but are you
equipped to investigate for it?
Ms. Praeger. Yes, we can now.
Senator Specter. Have you?
Ms. Praeger. And we would not. I mean, if we had evidence
that companies were coming together and colluding to set rates
we would. We have the authority now to stop that practice. And
we would take action.
Senator Specter. Thank you very much. Thank you, Mr.
Chairman.
The Chairman. Thank you, Senator Specter. If it's alright,
I'll begin my second round. I'm sorry that Mr. Coburn had to
leave but regarding his exchange with you, Dr. Gruber, I think
one thing I would like to point out is that in our bill we
include a strong workforce title.
We all know that we lack primary care practitioners
throughout this country whether they're physicians or PAs or
nurse practitioners. We lack a number of community health
centers that we need more of in this country also. Now
Massachusetts doesn't have the ability by itself to do that. We
do.
Obviously, it's going to take some time. But we do have a
strong program in the bill--scholarship programs to get more
people through and primary care to address rural areas and
places that have a lack of primary care people, programs to
train more faculty members so we can get more nurses and nurse
practitioners. Again, this is going to help, I hope, address
that waiting period to see doctors. But that's something that
Massachusetts didn't have. And that's something that we're
doing in our bill.
Ms. Bender, the findings in your testimony, if I'm not
mistaken came from a report that was paid for by the BlueCross/
BlueShield Association. Is that true?
Ms. Bender. That's true.
The Chairman. In the interest of transparency would you be
willing to share with this committee the underlying data on
which you base the study so that it can be independently
analyzed by objective actuaries and economists? Would you be
willing to share with us the underlying data and provide that
to this committee?
Ms. Bender. That data is considered proprietary by each of
the companies that were willing to participate in the study.
That was one of the conditions, where we signed confidentiality
agreements with each of them. In fact, I don't even have the
data.
The Chairman. So what you're asking this committee to do
then is just take the word of BlueCross/BlueShield that the
data are reliable and sound. Is that what you're asking us to
do?
Ms. Bender. No. I guess I'm asking you to take the word of
credentialed actuary that they would, that the modeling that we
have done is in conformance to----
The Chairman. But how can we rely on something when the
data is kept secret? We need the data. We've got to look at it.
All the studies that Dr. Gruber does, they're out there. We
can look at it. We can take apart every little bit.
Why should we just take their word for it?
Ms. Bender. I don't believe that, as we've heard here from
others, that our study is necessarily inconsistent with other
ones that have been done. But the data that we based it on is
considered proprietary and----
The Chairman. Well, I'm sorry. I won't accept it until we
can have the data analyzed.
In your written testimony you state that the small group
market is highly regulated. There was a little bit of exchange
going on with Commissioner Praeger about that. Could you please
explain to Mr. Cullen and Mr. Rowen how current regulations are
working well for them and their employees?
Ms. Bender. As I said in my opening statement, I'm not
going to defend the actions that occurred in Pennsylvania. And
unfortunately Pennsylvania is one of the minority States that
does not have enabling legislation to allow and prevent exactly
those kinds of abuses. And I certainly am not going to defend
that.
The Chairman. Well, obviously they're not well regulated
when they can have those kinds of price spikes.
Dr. Holtz-Eakin, in your testimony you state that we should
look to the insurance industry studies since CBO has not done
an analysis of the impact of reform on premiums. Well, I looked
it up. In fact, it has.
CBO estimated that a single policy in the current
individual market will cost $6,000 in 2016. By contrast, CBO
estimated that a policy in an exchange, like we're setting up,
will cost only $4,700 in 2016. And the exchange policy would be
even more generous. That means that the reform will save at
least $1,300 even before the tax credits.
So my question is this. Should our standard be the CBO, the
agency you used to head, and not the studies bought and paid
for by the insurance industry?
Mr. Holtz-Eakin. I certainly would prefer to have the CBO
do a comprehensive analysis on each of the market groups, small
group, individual, in the context of the reform bills that are
currently before the Congress. That is information that I think
is central to this debate. And as I said in my written
testimony I don't think you should view industry paid studies
with anything but the appropriate skepticism. I mean, there's
an obvious self interest there.
The point is simply that those in the National Association
of Insurance Commissioners, the Joint Committee, CMS Actuaries,
CBO, myself, agree on the fundamental logic of what goes on if
you have these kinds of reforms in the absence of a strong
mandate. And the question now is how big will they be? I
encourage you to get the CBO to answer that question.
The Chairman. Well, the CBO did.
Mr. Holtz-Eakin. They didn't answer the question for the
bills currently in front of the Congress what would be the
comprehensive impacts of all the provisions on those three
different markets because the individual and small group
markets often don't move the same way. I think that's very
important for people to understand and for the CBO to analyze.
The Chairman. Mr. Gruber.
Dr. Gruber. I think that Doug is absolutely right. The CBO
has not opined on the effect on small group premiums. What the
CBO has done is given us some guidance to the reliability to
the industry studies because the CBO has said for nongroup
markets where industry studies have said premiums will go up by
50 percent or more. CBO says they'll go down exactly you've
cited the facts there.
So I think Doug is absolutely right. And I think we're in
absolute agreement. We hope that CBO will come out and talk
about each market.
CBO is pretty busy now with a lot of stuff. So I think we
have to rely on what they've given us so far.
The Chairman. Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman. Going back to Ms.
Bender, the data that was evaluated for that study, wouldn't
that involve medical claims information?
Ms. Bender. Oh, definitely.
Senator Enzi. And isn't it true that public disclosure of
claims data would violate privacy protections in HIPPA?
Ms. Bender. Well, you know, I am not an attorney. So I will
defer that to the attorneys.
Senator Enzi. Ok.
Ms. Bender. There could be some cause of concern. But I
can't legally speak about that.
Senator Enzi. Well that's usually why somebody hires
another firm to go into this and sign this privacy information.
One of the biggest concerns for me, as I travel Wyoming and
other parts of the country, is that we have given people the
impression that with this Health Care Reform that they're not
only going to have their costs go down. I'm surprised at how
many people think it's going to be free.
I mean I have businessmen come up to me and say, ``Well
when this Health Care Reform goes into effect I'm going to have
a lot more money to spend because I'm not going to have to pay
those insurance things.'' It's incredible to me that
businessmen would do that. But that's an impression that we, as
Congress, have given. And it's really, really wrong.
There are parts of this--Senator Franken mentioned the
lifetime caps being lifted and the pre-existing conditions. It
seems to me like the insurers are going to charge a higher
price premiums to cover those costs of benefits. Ms. Praeger,
would you think that that would be the case?
Ms. Praeger. Well, if we can get rid of--they'll be
charging based on currently as the bills stand, an age rating
of somewhere between 2 to 1 or 4 to 1, depending on which of
the bills you're looking at and some geography. But other than
that, the rating will have to and the premium charge will have
to be pretty consistent. That's where you get into some of the
issues with the small group market because some younger,
healthier groups will pay more. And older, sicker groups will
pay less.
And the thought is over time, there will be rate stability
that will come into play so you won't have experiences like Mr.
Rowen had where a couple of people getting sick in a small
group can really dramatically impact the rates. So they'll be
some rate stability. And I think that will be a good thing.
Senator Enzi. I'm familiar with how that works because my
own small businesses had been through the trials and
tribulations that Mr. Rowen has been through with wanting to
provide insurance and seeing the prices go up and up and up
because we have a small group, because some of the people are
older in that group. The rating would effect that a little bit.
But a lot of how that would affect it is that the price for the
younger ones is going to go up.
The older ones have come down, the younger ones will go up.
So it, I guess, encourages you to hire older, sicker people.
[Laughter.]
Mr. Rowen. Unfortunately now we have an encouragement to
hire younger, healthy people.
Senator Enzi. Absolutely. And you have to look at the
potential of some costs from fines for not providing under the
HELP bill, it's 60 percent of the insurance for your employees.
And then there's a fine that kicks in after you have 25
employees.
So one of the things that concerns me is this bill is so
comprehensive.
It doesn't just bite off small business and solve some
small business problems.
It doesn't bite off the individual market and solve the
individual.
It doesn't bite off Medicare and solve Medicare problems.
That piece alone would give seniors a little bit more
confidence that what we were doing was actually going to help
them out instead of being all nervous about what's going to
happen.
But as I've spent time on the HELP Committee and as I spent
time on the gang of six and as I spent time going through the
Finance Committee the biggest thing was the number of ``Oh,
wow, is that really how it works,'' that we had to do because
we were biting off so much. And I think that's a problem that
CBO has as well, which is trying to take a look at so much. And
under the HELP bill there's 214 references where we weren't
willing to go into the details. So we just said, don't worry,
the Secretary of Health and Human Services will cover that.
I don't know if the Secretary can cover 214 areas of doing
regulation all at the same time, even if she had until 2013 to
do it, when a lot of this kicks in. So again, I really
appreciate all of the information that you shared with us today
on the small business health plans. I think if those went in
where people could group together across State lines so that
they could have these bigger pools, that it would bring down
the cost significantly.
Again, what I rely on of that is the Ohio experience
because they came to me. They wanted to make sure that they
weren't going to be excluded from any kind of a small business
health plan. They found some significant benefits.
The piece that we didn't have worked out was the mandate
piece. Every disease group out there is interested in making
sure that their--all the tests, as well as any treatments are
covered under every mandate that you can think of. And the
number of mandates varies from Wyoming with I think, 23
mandates to some States that have 1,200 mandates that these
small businesses have to pay the insurance on.
We had a way of working that out, but we never were able to
get to that amendment. And I ask the Ohio folks, ``how do the
mandates work?'' They said, ``Well, it's mandates. But we've
been able to save enough money that we don't just cover those.
We've added ones that the State doesn't even require,'' which I
thought was very admirable.
I do hope that somewhere in the legislation we'll take a
look at the small business health plans. There's a slight
version of it in the co-ops. That, of course, gets government
funded. And none of these small business health plans had to be
government funded.
So, I don't think that started with my time.
[Laughter.]
I think it just continued on from your time, I hope. So,
but at any rate, I'll submit some questions that I need a
little bit more specific information on than what you might
have with you or that would be interesting.
I was at a hearing once with every living accountant with
the FCC, Head Accountant at the FCC. And I was asking him
accounting questions because I'm the only accountant in the
Senate. And my staff was watching on television and laughing
because behind each person there's a wedge of people that are
on TV and they're all asleep.
So I'll submit them in writing. Appreciate your answers.
The Chairman. Sorry about the clock.
Senator Franken.
Senator Franken. Thank you, Mr. Chairman. And I think
that's a good strategy. I'm going to submit some questions in
writing too because I have to go to the floor and deliver a
speech pretty soon.
Ms. Praeger, we all know that small businesses that try to
do the right thing and provide health care for their workers
are sharing a big part of the burden or shouldering a big
burden now. So it's really no surprise that a lot of small
businesses have questions about how this bill will affect them.
And I was recently in touch with Jennifer Brigham, President of
the Minnesota Chapter of the National Association of Women
Business Owners. And Jennifer had gotten these questions from
her fellow small business owners on what health care would mean
to them.
We know that this Health Reform bill will invest
unprecedented resources in small businesses so that they can
affordably cover their workers. And do it with less
administrative burden. But since small businesses don't have
big human resources departments how can we make sure that
they're able to access the new resources to help them and their
workers?
Ms. Praeger. Senator, I think the exchange really can
provide that function. It will take on some of the
administrative burden. I think Mr. Cullen mentioned that.
It is frustrating for the small businesses. Large companies
have built in human resource departments that can negotiate. A
small business is, you know, lucky to find one company that is
willing to write them especially if they have an older, sicker
workforce.
I think the exchange is an opportunity for companies to put
their products on a side-by-side comparison. And that small
business owner will have an opportunity to go to that exchange
and make some good comparisons.
Senator Franken. So, and the exchange will allow you to be
covered or be part of a larger risk group and spread the risk
over?
Ms. Praeger. Well, no. The exchange--you're still buying
for your individual company. But if you get rid of some of
these rating restrictions that are currently in place, everyone
will be rated on the same characteristics. So you, in a sense,
have that benefit.
You'll no longer be rated higher because of the age. Well,
except for the age rating that is currently in the proposals.
But you won't be rated higher based on the other.
Senator Franken. It won't be as far a spread, right.
Ms. Praeger. And health status and all of the other rating
factors, so that being able to buy in a larger pool is really
much less important.
Senator Franken. Mr. Holtz-Eakin, I have to agree with you
completely on the need to bring down, well to deliver health
care in a more efficient way. I don't think any of us are
arguing this. Now when I heard both you and Mr. Gruber talk
about this I didn't hear any reference to the value index that
Senator Cantwell presented in the Finance Committee.
Minnesota is a State that I think gets a little over $6,000
per Medicare patient compared to Texas that gets something like
$8,000 to $10,000 or something. We actually get punished for
delivering high quality care at a low cost. So it seems to me
that this is something that neither of you mentioned, but is
really important.
I'm hoping that it ends up in the final bill because what
this will basically do is change Medicare reimbursements and
change them to reflect the value which is the quality over the
cost that plans are giving. For example, there was the famous
article in the New Yorker where Mayo does it for a third of the
cost that McAllen, TX does. Now McAllen has a different
demographic, but El Paso is the same demographic as McAllen and
is doing it at almost just about half the cost. I just want to
make sure that everyone understands that this is actually in a
bill. And it's in this bill.
I don't think that it's wrong to try to do both things at
the same time which is make sure that people get covered.
Make sure that people with pre-existing conditions can
start a new business.
Make sure that people don't go bankrupt if they get sick.
At the same time attack the way we deliver health care in
this country so that we do it more efficiently and reward good
care and penalize bad care and couldn't have agreed with you
more. I will submit some written questions. I'm sorry that my
time has run out. But, I want to thank all of you for being
here today.
The Chairman. Ms. Bender, I'm told that if you de-identify
the data that that will meet the HIPAA requirements. So why
can't we get the data and de-identify it?
Ms. Bender. I don't think that the issue of keeping the
data confidential was necessarily associated with HIPPA. I said
I am not a HIPPA lawyer. In order for us to obtain the data we
had to sign confidentiality agreements with all the different
companies. There is proprietary data included in this regarding
rating and that would be very advantageous to competitors.
Let me emphasize that, the strength of the data is that
it's based upon real groups. That is very important and
critical when we're trying to model the impacts of proposed
legislation to really look at what is going to happen to real,
live groups.
The Chairman. Well, Ms. Bender, I hope you excuse me, but I
am simply going to be highly skeptical of any findings that
come out and we can't have transparency on the data. I'm sorry,
I'd just be highly, highly skeptical. That leads to another
point of course. And that is transparency, you know.
Again, I'd ask Commissioner Praeger. I haven't asked you a
question, but should there be a little bit more transparency in
the provisions of how insurance companies arrive at premiums?
How they base those premiums? And what the data is that they
use on which they maybe implement premium increases? Should
that all be transparent?
Ms. Praeger. I think any information that can help
purchasers of health insurance make a good decision is valuable
information. So I, perhaps through the exchanges, that will be
a way of making more of that information available and
transparent so that people can make good, informed decisions.
If we want a robust marketplace you have to have people
competing on good information.
The Chairman. I'd like to know from insurance companies, I
mean, how much of this is for meeting Wall Street's needs for
profits? How much to meet new buildings? How much to meet CEO
pay and all the other kinds of stuff, administrative costs? I'd
like to know, why.
What goes into those factors that raise those premiums? I
think which raises another point that I hadn't gone over with
any of you.
We haven't talked about the public option that would be
available to all small businesses in this country and the self
employed. And what that might do for competition. And what that
might do to help people like Mr. Cullen or Mr. Rowen. They may
want to take it, but they may not. But at least it may be an
option.
And I just wondered if any of you have any views on that?
Mr. Cullen. We need it. We need the public option, period.
The Chairman. Alright.
Mr. Cullen. Because then that will get health insurance and
all that administration and all that stuff off our backs. We
can go say, look to all our good employees we can, with
complete piece of mind, say here's the solution to all these
problems that we list.
The Chairman. Commissioner Praeger.
Ms. Praeger. As long as the public option competes fairly
in the marketplace and I think the bills, at least two of them,
do allow for a level playing field negotiating for rates,
charging premiums sufficient to pay claims, having solvency
standards that are the same. It would add another element of
competition. But I think it's important that it's fair
competition and that it not be using the Federal Government as
a backstop, especially in terms of premium rates and solvency
standards.
The Chairman. Right.
Mr. Holtz-Eakin, you said in your testimony, I believe it
is noncontroversial that the combination of guaranteed issue
and community rating would raise average premiums--well, but
for the individual mandate.
Are you for or against the individual mandate? I'm just
curious.
Mr. Holtz-Eakin. I personally don't favor the individual
mandate. It's one of the more difficult calls that people make
in this area. I understand those who, having gone down the
route of guarantee issue and community rating, feel they have
to have that mandate to make sure you don't get the spiral that
I believe is non-controversial in the absence of it.
The bottom line is I don't believe we should guarantee the
insurance existence in America business by making me buy their
product. I want them to earn my business. And so, I would
prefer to not have an individual mandate, but to have reforms
that force insurers to compete on the basis of price, quality
of product and service to consumers, as they do elsewhere. I
don't see that in the current marketplace, not too wild about
what I see out there. And I'm certainly not in favor of having
them guarantee my business by fiat.
If I could say about the public option, I believe, you
know, there's lots of politics. And let's just acknowledge
that. But from a substantive point of view the public option is
a red herring.
If it does Medicare reimbursements, it's a bad thing
because Medicare reimbursements are a problem in our health
care system. And spreading them more widely will only spread
that problem.
If it is something that competes on a level playing field
with private insurers, genuinely, and that's hard to construct,
I would argue. It raises the question, why don't we have
genuine competition now? We should be looking at what is wrong
with our insurance markets that doesn't generate sufficient
competition because if there's not good competition, adding
another noncompetitive level playing field isn't going to help.
So I'm sympathetic to the idea that people should have good
choices. I'm sympathetic to the fact there should be strong
competition. I'm unconvinced the public option brings anything
to the table in that regard.
The Chairman. I have a response to that, but I see Mr.
Gruber also has a response.
Dr. Gruber. Well, actually in some sense, I want to agree
with what Doug is saying in the following sense which is I
think for the public option to really have the biggest effect,
we need to set up an exchange that's strong. I think what's
ironic about the current debate is people talk about the public
option providing competition. But they don't talk, as Doug
mentioned, about setting up a competitive environment which
allows the public competition to maximize its potential.
That's why, based on our experience in Massachusetts, I
believe we need strong exchanges that can selectively contract
with private insurers and the public option to provide real
competition among insurers to provide products to individuals
and not just a yellow book exchange where anybody can sign up.
And I think in some sense I'm surprised that issue hasn't been
raised more. We need strong exchanges to make a public option
really realize its potential.
The Chairman. Well I would respond to both of you that we
do have in our bill very strong exchanges either State or
regional. They can form regional exchanges which have a lot of
authority and will have power. And I believe that will be in
the final bill.
But the idea of a public option is that since we have it in
our bill, in the HELP bill, we had it not based on Medicare.
But we had it based on the Secretary negotiating reimbursements
and rates.
As the Secretary then figures out how to set premiums, the
Secretary doesn't have to take into account paying a CEO $12
million a year. They don't have to take into account responding
to Wall Street's demands for profits to answer its
shareholders. The Secretary doesn't have to respond to the
needs for new buildings and nice accoutrements and all of that
that goes into all of the administrative overhead.
So that provides, I think, pretty darn good competition.
Yes, sir?
Mr. Holtz-Eakin. And I hear you at that. And I, you know, I
can visualize a world where that might occur. But in the world
that I've experienced working with the Congress it's also true
that that same public option is going to hear from the hospital
that didn't get their business and was given to another
hospital in the local area.
My experience in Congress is, that will matter. And the
administrator of that public option will have to be responsive
to that and split the book between the two hospitals, thereby
limiting their ability to negotiate effectively. And in a
million other ways I am concerned that the public option will
be subject to the same kinds of pressures that have riddled
Medicare with special carve outs and favors and have diminished
its ability to be a health insurance product.
So there's a world that I can write down on paper and you
and I can sketch out where effective competition is enhanced.
But there's also a serious downside risk that that public
option will be handicapped in its mission by the dynamics of
regular politics.
The Chairman. Well, I suppose that's always a danger
looking down the road and saying that we're going to respond to
all these different needs and stuff. But I think if we
structured it correctly and we have these strong exchanges and
we make the system more transparent which I keep harping on,
then we can find out those hospitals that aren't very
effective, that aren't very cost-effective.
The last thing I would just say is that I think, Ms. Bender
you and I agree on this. You talked a lot in your statement
about wellness and prevention. You talked about that. And I
think you're right on target right there.
CBO, now this is where I disagree with CBO. They can't give
us a score on it on savings. They say it just costs money.
So I said to them why don't you talk to Pitney Bowes. Why
don't you talk to Safeway? Why don't you talk to a lot of
private businesses out there that have implemented good, solid,
preventative wellness programs and their bottom line is they
save money. They can prove it.
But CBO won't look at that. The more that we put into
prevention, up front prevention and coverage, the better. And
that's why in our bill we have no co-pays and no deductibles
for screenings, annual physicals, vaccinations, things like
that. No co-pays for deductibles for anything that the U.S.
Preventive Services Task Force says is rated an A or a B
because we want to incentivize people to take advantage of
that.
And then we have a trust fund that we're going to have, I
hope, a lot of money in that will go to encourage more
prevention and more wellness programs. Tax breaks for small
businesses to be able to have wellness and prevention programs.
You can talk all you want about bending the cost curve.
There's only one way you're going to bend the cost curve. And
that's getting ahead of it. By keeping people healthy in the
first place and cutting down on the number of doctor's visits,
the number of hospitalizations in this country.
Other countries have done it. It's not a secret. Other
countries have done that. Do it much better than we do.
I'm going on too long. I know you've got to go. And you've
been very kind to be here this long. And I'll stop with Mr.
Rowen.
Mr. Rowen. If I could say one final thing when you talk
about cost prevention or cost, trying to keep the costs down,
one of the things we believe about our company and our
employees is that although we're very, very concerned that with
a $2,000 and $4,000 deductible some of our people are not going
to be able to make it through the year.
The flip side of that is that our experience showed that as
we paid the full deductible for our employees the usage
increased every year.
The Chairman. Sure.
Mr. Rowen. Which meant that more and more people were
seeking health, you know, going to the doctors, but not
necessarily for the right things. So we believe that you need
to have some participation by all users in the cost system. If
you just give somebody a complete, free ride, yes, they will go
to prevention which is the good side of it. But they
potentially will also go to overuse.
The Chairman. Well, the co-pay--when I mentioned about no
co-pays and deductibles it's only for prevention.
Mr. Rowen. I understand that. And I think some of those
areas are very appropriate. Absolutely.
The Chairman. Obviously I agree. People ought to have some
skin in the game. Absolutely.
Anybody else have any views or thoughts or suggestions or
comments before I close this up?
Commissioner.
Ms. Praeger. I would just like to say I applaud the work
that's been done. I think it's still, there's still a lot of
work to do. I do believe it is about health care costs.
And while reforming the market is going to help. And I know
you understand that. It is about changing the incentives from a
system that pays for volume verses value and quantity verses
quality.
The Chairman. Yes.
Ms. Praeger. Every chance I get I want to mention that
because I think that's a key element to really changing the
health care system in this country.
The Chairman. I thank you for that. As someone once said,
if you reimburse on the basis of quantity, you get quantity. If
you reimburse on the basis of quality, you'll get quality. And
that's where I think we've got to be headed.
Ok, Mr. Cullen, since you're my constituent, I'll close
with you.
Mr. Cullen. I appreciate that. Well, everybody here is
talking about being fair to the insurance companies. When have
they been fair to us? And why do we have to provide a level
playing field when they've obviously, by our rate history been
screwing us for the last 20 years?
Why do we have to be fair to them? It just incenses me when
people talk that way. These people are legal thieves with anti-
trust protection and we want to treat them with kid gloves. It
drives me nuts. And that's all I've got to say.
The Chairman. Well, on that note, I will request that the
record remain open for 10 days for submission of statements for
the record. I thank you all very much for being here and being
so patient in answering our questions.
The committee will stand adjourned.
[Additional material follows.]
ADDITIONAL MATERIAL
Prepared Statement of Senator Dodd
I'd like to thank our distinguished Chairman for convening
this hearing, and our witnesses for joining us.
Some have argued that, with our economy still hurting, it's
the wrong time to tackle health care reform. I hope today's
discussion can serve as proof positive that there has never
been a more urgent time to reform our broken health care
system.
Small businesses are the best job creators we have. When
our economy finally begins to pick up momentum again and gets
back on the track towards prosperity, it will be small
businesses driving the locomotive. If you're concerned about
unemployment, and in my State of Connecticut we are extremely
concerned about unemployment, then freeing small businesses to
grow and expand is a critical priority. In fact, from 2004 to
2005, small businesses created 100 percent of Connecticut's net
new jobs.
We will hear it in living color from our witnesses today--
but the black and white facts make it clear that rising health
care costs are disproportionately burdening small businesses.
On average, small businesses pay as much as 18 percent more
than larger businesses for the exact same health insurance
policy. Administrative costs are three to four times as high.
In Connecticut, the variance in premiums among businesses with
10 or fewer employees is so great that one might pay up to four
times as much as another, similar firm of the same size. As a
result, fewer and fewer businesses are able to offer health
insurance to their employees, with nearly three in four small
businesses that forgo benefits doing so because it just costs
too much.
Someone who works at a small business is 50 percent more
likely to lose job-based coverage than an employee at a larger
business. And young adults, who are more likely to be employees
of small businesses, are being hit extra hard. One in four
young adults at a small business lost their employer-based
coverage in the last 2 years.
Small businesses have special relationships with their
employees. They're like family. Sometimes they ARE family. And
good-guy employers are being forced to choose between laying
off workers and cutting benefits.
One constituent of mine is self-employed and has a small
group policy. He was told that his premiums will be going up 21
percent for the exact same policy--but with higher deductibles.
He'll be paying more for less. That's life as a small business
owner.
Health care reform is one of the most important things we
can do for small business.
By creating health insurance exchanges, small businesses
will be able to pool together, increasing competition and
cutting premiums--according to the Congressional Budget Office,
by as much as 25 to 30 percent. It will also cut administrative
costs by making it easier for employers and employees to shop
for the plan that works best for them.
On top of those savings, health care reform will include a
generous tax credit for 3.6 million small businesses to make it
easier to cover their employees. In Connecticut, up to 37,611
small businesses would be potentially eligible for the small
business tax credits in health reform.
We'll also outlaw insurance discrimination based on health
status, so that small businesses won't see their premiums
jacked up if just one employee gets sick.
And by expanding insurance coverage to every American,
we'll eliminate the ``hidden tax'' of more than $1,000 that
everyone pays to cover the cost of caring for the uninsured.
All of these steps will allow small businesses to put their
money where it belongs--creating jobs and growing our economy--
rather than wasting it on an inefficient and unfair health care
system.
If you're an employee of a small business, reform will help
you, too.
If you have insurance through your job, that insurance will
be more stable--insurance you can be sure of. It'll cost less,
too, because you'll be able to comparison shop to get the right
deal for your family.
And even if you lose that job, or change your job, or move
to another State, or retire, you'll still be able to find
affordable insurance.
If you're a young adult, you'll be able to stay on your
parents' insurance until you turn 26, giving your family even
more choice and security.
And no matter who you are or where you work, no insurance
company will ever be able to cut off your coverage or deny it
to you altogether because of a pre-existing condition.
There are more than 37,000 small businesses in my home
State of Connecticut. I am counting on them to lead the charge
to create more jobs and grow our economy. And they are counting
on us to pass health care reform this year so that they can do
so without being strangled by the skyrocketing cost of health
care.
Thank you.
Prepared Statement of Senator Burr
Good morning. I want to thank Chairman Harkin for chairing
this morning's hearing. I also want to thank each of our
witnesses for traveling to be with us today to discuss the
importance of lowering health care costs for small businesses
and Americans across North Carolina and our Nation. I hope this
morning's roundtable hearing can be a frank and honest
discussion about meaningful solutions to ensure self-employed
Americans and small businesses across our country have access
to quality and affordable health care.
As I have said many times before, I agree that we need
meaningful health care reform. I was proud to join Senator Tom
Coburn earlier this year to introduce the Patients' Choice Act,
comprehensive legislation to fundamentally reform our
healthcare system. The status quo is unsustainable and,
unfortunately, nobody knows this better than the small business
men and women across our Nation that have felt the brunt of
rising health care costs for far too long. For over 20 years,
small businesses have cited health insurance costs as their No.
1 concern. A recent survey by the National Small Business
Association found that 67 percent of small businesses surveyed
expect premium increases of more than 10 percent in the coming
year. This survey only reaffirms what each of us knows all too
well from meeting with constituents across our States: for
years individuals and small businesses have demanded reforms
that will drive health costs down and make health insurance
more affordable. Unfortunately, I fear that Congress is pursing
the wrong reforms that will actually drive up health care
costs. My concerns have only been reinforced by the
Congressional Budget Office, the Joint Committee on Taxation,
the Centers for Medicare and Medicaid Services Office of the
Actuary, and the National Association of Insurance
Commissioners' recent conclusions that the Democrats' bills
will drive costs up.
Over the past week we have learned that the Majority
intends to pursue government-run health care in both the Senate
and the House. As I have said before, I believe there is a
better way forward that avoids this one-size-fits-all approach
and offers real solutions to advance the goal of making health
insurance more accessible and affordable. The Patients' Choice
Act puts affordable coverage and choice within reach for all
Americans regardless of their income or employment by providing
tax credits to individuals and families to purchase the health
insurance that fits their needs and the needs of their
families. Under our bill, Americans are empowered with
flexibility to move or change jobs without risking losing their
health care. Our bill also creates State Health Insurance
Exchanges that give Americans a one-stop marketplace to compare
different health insurance policies and the ability to select
the one that meets their unique health needs.
Small businesses are our Nation's economic engine. We need
to pursue policies that help these entrepreneurs thrive,
including legislation that will actually make health care more
affordable and accessible. Pursuing misguided policies that
lower worker wages, eliminate jobs, and make the tough economic
environment even worse are not the solution. I look forward to
continuing to work with my colleagues on health reform to
ensure that individuals and small businesses across North
Carolina and our Nation have access to quality and affordable
health care.
I thank the Chair.
Response to Questions of Senator Enzi and Senator Coburn
by Sandy Praeger
senator enzi
Question 1. Ms. Praeger, what is the primary factor driving premium
increases for small employers? Are insurers simply trying to increase
their profits in anticipation of health care reform, as some Democrats
have suggested?
Answer 1. According to our survey of the States, the primary factor
driving premium increases is medical trend. This includes medical
inflation, increased utilization, increased risk of the pool and other
factors. States have not seen major changes in medical loss ratios,
which means roughly the same amount of premium is going to medical
costs. There is no indication at this point that profits are rising due
to the increase premiums.
Question 2. Ms. Praeger, what do you think the impact of an
exchange will be on the small employer market? Will some firms drop
coverage entirely given that their employees could obtain subsidies
through the exchange?
Answer 2. The experience in States that have developed purchasing
cooperatives in the small group market in the past is that they
increase choice and provide more comparative information to small
businesses. However, they have not been effective in reducing premiums
or significantly increasing the number of small employers offering
insurance. Of course, past State efforts (except Massachusetts) have
not included an individual market cooperative through which subsidies
are available. This could create an opportunity for small employers to
forego providing health benefits altogether. However, it is also true
that it would provide a real opportunity for small businesses to
provide a cash subsidy for individuals to purchase their own coverage.
While this would provide a greater degree of choice to individual small
business employees, Senators should also bear in mind that such an
arrangement would mean that each employee would be charged a different
premium based upon their characteristics and choice of insurer and
plan.
Question 3. The Senate HELP Committee-passed health care reform
bill includes a government-run health insurance plan that would be
offered through the State exchanges. What State laws would not apply to
the government-run plan? Who would enforce consumer protections and
assist consumers who choose the government-run plan?
Answer 3. According to the language adopted by the HELP Committee,
the government plan would be required to comply with State consumer
protections and meet solvency standards that are consistent with State
laws. However, since the plan is not licensed in the States, the States
would have no authority to enforce any laws. Enforcement would be the
sole responsibility of the Federal officials. Consumers would be
required to file complaints and submit questions to the Federal agency,
much like Medicare and Medicare Advantage plans, or ERISA self-insured
plans.
Question 4. What do you think the impact of the bills before
Congress would be on small employer premiums in States that have
adopted reforms recommended by the NAIC in the past?
Answer 4. Most States currently allow rating based on health
status, within rating bands, and actuarially justified rating based on
age, geography, industry, class of business, and other factors. The
modified community rate rules envisioned in the current congressional
proposals would increase premiums for those small businesses with
relatively healthy and young employees, and decrease premiums for those
with relatively sick and older employees. The grandfathering
provisions, along with subsidies, could help limit premium shock, but
rates will increase for some small businesses.
On the positive side, the new rules will also limit rate increases
for individual employers in the future. Under current rules, a negative
change in health status, average age, or gender mix, combined with
medical trend, can result in annual premium increases of over 100
percent. Removing many of these factors, and limiting age rating, will
limit such increases in the future.
Question 5. Do you see anything in the bills that could cause
premiums for small employers to decline by the 25 percent that Dr.
Gruber suggests?
Answer 5. No, we see no justification for such a prediction. We
foresee no influx of healthy groups into the marketplace or significant
cost containment that would result in overall premiums decreasing by
such an amount.
senator coburn
Question 6. The majority's health bills would (a) impose federally
defined minimal benefit packages, (b) dictate that every American
purchase health insurance or be taxed, (c) tax companies to provide
health insurance, (d) tax insurers, (e) tax insurance plans, and tax
medical devices.
Wouldn't Federal mandates which define health insurance, determine
the essential benefit package, make coverage determinations and set
rating rules effectively neuter the roles of State Insurance
Commissioners and State Legislatures?
Answer 6. The legislation under consideration would preserve State
consumer protections and benefit mandates (though a State may be
required to reimburse the Federal Government for subsidies that are
attributable to State mandates beyond the essential benefits package),
and require all plans--other than the government plan--to be licensed
in the States and meet State solvency standards. However, the
legislation does impose minimum standards for State access and rating
rules which would require State legislatures and governors to modify
State laws or face preemption.
Question 7. Oklahoma's Insurance Commissioner, a Democrat, Kim
Holland, said: ``I think we need to focus on those things that are
broken and leave alone those things that are working in our State-based
regulatory system . . . State regulators across the board are on the
ground in their States responding immediately when consumers call.''
What is the National Association of Insurance Commissioners doing
to promote better State regulation which will lower costs to consumers?
Answer 7. The NAIC continues to develop model regulations and
``best practices'' guidelines to help States implement regulations that
protect consumers but do not place unnecessary and costly burdens on
carriers. For example, the NAIC has developed a uniform rate and form
filing process that is used by most States and has developed uniform
models for external review that we are hopeful States will adopt,
reducing administrative costs to multi-state carriers. In addition,
States coordinate market conduct reviews and solvency regulation
through the NAIC to enhance State effectiveness and curtail costs.
Question 8. You mentioned in your testimony that medical costs are
the primary factor driving premium increases for small employers.
What has been your experience with insurers--are they really just
trying to increase their profits in anticipation of health care reform?
Answer 8. That has not been my experience or the experience of the
other States surveyed by the NAIC. Some rate increases have been
challenged by commissioners and some have been reduced. However, for
the most part, rate increases are consistent with medical trend and
medical loss ratios remain consistent.
Question 9. What do you think the impact of an exchange--as
currently proposed by the majority's bills in Congress--will be on the
small employer market?
Will some firms drop coverage entirely given that their employees
could obtain subsidies through the exchange?
Answer 9. The existence of an individual market exchange, combined
with the new access and rating rules and the subsidies, could create an
opportunity for small employers to forego a health benefit altogether.
However, it is also true that it could provide a real opportunity for
small businesses to provide a cash subsidy for individuals to purchase
their own coverage. Competitively, there will remain a desire on the
part of small businesses to provide some assistance, especially if
there is a real individual mandate. More small employers may, however,
decide not to be the direct conduit of coverage, preferring to just
provide subsidies.
Question 10. If consumers in a State with numerous State mandates
or constrictive rating rules like Massachusetts or New York were
allowed to purchase health insurance in States with relatively few
mandates like Oklahoma or Wyoming, would their health insurance costs
be significantly lower?
Answer 10. Young and healthy individuals could find cheaper
coverage. However, if they need medical assistance there may be no
network for them to access and nobody to help them if they have a
complaint. And, when their age or health status change, their rates
would skyrocket and they would be forced back into their own market,
which would be devastated by the loss of healthy and young
participants.
Question 11. If every American had a generous tax credit which
could only be used for purchasing health insurance and/or medical care,
and a State could develop and utilize auto-enrollment mechanisms to
enroll Americans in a State pool of some kind (allowing for an
individual op-out provision)--what do you estimate the impact of such
an arrangement would be on covering the uninsured?
Answer 11. It would be effective, but could also be very costly if
the sick and aged are placed in a separate pool with a government plan,
like high-risk pools. It could also result in adverse selection and
inferior care and coverage for those who are most at risk. We would
need more information on this proposal to determine the total impact.
Question 12. What is your estimate as to the single greatest factor
which plays the largest role in Americans choosing to not purchase
health insurance? Cost, pre-existing conditions, or the opportunity to
purchase coverage?
Answer 12. Most surveys point to cost of coverage as the primary
reason a person does not purchase coverage. This is particularly the
case for those who have no subsidy from the government or an employer
and for the young and healthy, who place less value on health insurance
coverage. Of course, if the person waits until they are sick to decide
that coverage is now affordable it may be too late as they may be
excluded due to a pre-existing condition.
Question 13. What is NAIC's position on using auto-enrollment and
risk adjustment mechanisms at a State level--potentially with a high
risk pool or a reinsurance mechanism--to create and manage a stable
risk pool?
Answer 13. The NAIC has taken no position on such proposals.
Response to Questions of Senator Franken and Senator Coburn
by Douglas Holtz-Eakin
senator franken
Question 1. As I mentioned at the hearing, your written testimony
stated that there is ``non-controversial'' agreement that premiums
would go up under the Senate health reform bill. However, Dr. Gruber
testified that, for small businesses, premiums would go down under
health reform. This seems to suggest that there is some controversy on
this issue. At the hearing, time limitations did not permit you to
provide a response to this seeming contradiction of your testimony.
Please provide a response to this comment.
Answer 1. My testimony says ``I believe it is non-controversial
that the combination of guaranteed issue and community rating would
raise average premiums.'' My concern is that the Senate bill comes
close to this situation because of the extremely weak enforcement of
the individual mandate.
In contrast, Dr. Gruber stated that he felt that the mandate was
strong, which clearly leads him to a different analysis. I respectfully
cannot agree that a mandate with no penalty in the first year and a
maximum penalty of $750 is ``strong.''
His testimony seems to rely as well on an incomplete reading of a
CBO letter. He says:
``In their September 22d letter, the Congressional Budget
Office reported that they estimated the cost of an individual
low-cost `silver' plan in the exchange to be $4,700 in 2016
(this was later updated to $5,000). This is a plan with an
`actuarial value' (roughly, the share of expenses for a given
population covered by insurance) of 70 percent. In the same
letter, the CBO projected that, absent reform, the cost of an
individual policy in the non-group market would be $6,000 for a
plan with an actuarial value of 60 percent. This implies that
the same plan that cost $6,000 without reform would cost $4,300
with reform, or almost 30 percent less.''
However, in the very same CBO table it indicates that family
premiums will be substantially higher after reform--about 30 percent
higher ($11,000 under current law, but $14,700 under proposed reforms).
It strikes me as difficult to come to the generic conclusion that
premiums are lower. Moreover, CBO cautioned that they hadn't estimated
the all of the different factors that would impact on premiums:
``In light of those complexities, quantifying the net effects
of the Chairman's proposal on the amounts paid by individuals
and families to obtain health care is very difficult. CBO has
not modeled all of those factors and is unable to quantify them
or calculate the net effects at this time.''
Most significantly, CBO did not estimate the impact of guaranteed
issue and modified community rating, two of the key factors that
potentially lead to higher premiums.
Question 2. In your testimony, you asserted that the excise tax on
insurance companies will be passed on to the consumer in increased
premiums. However, you did not mention the Congressional Budget figures
that estimate insurance companies will receive approximately 30 million
new customers under health reform. Please comment on whether the
revenue from these new beneficiaries (much of it paid by taxpayers in
the form of Federal subsidies) could offset the excise tax for
insurance companies in such a way that they will not pass the tax on to
consumers?
Answer 2. Adding additional customers (which I believe total only
15 million under Senator Reid's version) does not change the basic
insights. It will still be the case that the additional costs must
ultimately be borne by workers at the affected companies, the
shareholders of the companies, or the customers of the companies. As I
noted in my testimony (and the Joint Committee on Taxation supports),
there is good reason to believe that it will be less feasible to shift
the excises to workers and shareholders. Accordingly, one would expect
it to be shifted to consumers, albeit spread across a larger customer
base.
Question 3. Do you anticipate any benefit for small businesses from
participation in the exchange? If so, can you please provide an
assessment of the potential benefits and drawbacks of the exchange for
small businesses?
Answer 3. Properly designed exchanges offer the potential for
improved price transparency, easier comparison shopping, cross-state
purchases and pooling, and stronger competition. That is, exchanges
could provide small employers with information on their health
insurance coverage options; provide a mechanism for consumers to
compare, choose, and enroll into a health insurance policy that meets
their unique needs; provide a State-established uniform online
application for all insurers; and provide real-time estimated and final
premium quotes.
Question 4. As you know, Americans who are over 50 years of age,
women and those with pre-existing conditions pay more for health
insurance on the small group and individual market. Do you believe that
a small business that employs a higher proportion of older workers and/
or women should pay more for their health insurance?
Answer 4. I believe that comprehensive health care reform should
include genuine reforms of the delivery system so as to lower the pace
of health spending growth, with corresponding reduction in the upward
pace of premiums for those in the small group market and others. In
addition, reforms to improve competition among insurers, broaden risk
pools, and strengthen high-risk pools could serve to further reduce
premiums among these groups.
senator coburn
Question 5. Many small business owners may question how raising
taxes and cutting budgets to generate a trillion dollars and then
spending a trillion dollars is budget neutral. Yet, this is exactly
what CBO has said about the Baucus bill. As a former CBO Director, can
you help us understand the assumptions behind CBO's estimate that the
Baucus bill will be deficit neutral, as well as your personal
perspective on the validity of those assumptions?
Answer 5. The key to understanding the CBO estimate is that they
are required to estimate the Federal budgetary (and only the Federal
budgetary) impact of the legislation as written. Thus, for example, the
CBO must take at face value the Baucus bill provision that permits the
sustainable growth rate mechanism to cut physician reimbursements in
Medicare by over 20 percent. It must take at face value provisions that
cut other providers by over $400 billion. It must do its calculations
within the conventional budget framework in which up-front tax
increases are permitted to offset out-year spending to reach balance
over the 10-year window. In short, CBO must accept at face value the
wide array of budget gimmicks that are used to deliver the appearance
budget balance in the Baucus bill.
As a corollary, CBO is not permitted to anticipate the actions of a
future Congress. However, after years of working with and for the
Congress I believe it is beyond implausible that Medicare physicians
will experience the proposed cut. As I write this answer, the House has
already passed a deficit-financed bill of over $200 billion to avoid
the cut. The Senate will likely do the same. It is equally unlikely
that the $400 billion in other provider cuts will come to fruition.
There are not substantive changes in delivery systems for business
models that would permit such cuts, so Congress will inevitably reverse
them.
My judgment is that the Baucus bill will significantly worsen a
fiscal situation that is already dangerously dark.
Question 6. Some would point to subsidies in the Senate Baucus bill
as the key to offset for rising costs. Yet, in your written testimony,
you said that Senate proposals ``do not `bend the cost curve' '' and
``will raise costs for the majority of Americans who have insurance.''
Are you saying that premium costs and Federal expenditures will
increase--despite subsidies?
Answer 6. Yes. It is the judgment of the CBO and the CMS Actuary
Richard Foster that the House bill did not ``bend the cost curve.'' Mr.
Foster's analysis actually suggests it was bent up (worse). The Senate
bill's entitlement spending growth (8 percent annually for 20 years in
CBO's judgment) is identical to the House. The Senate bill, too, does
not on balance bend the cost curve.
If health care costs continue to rise, there will be unremitting
upward pressure on premiums. A decade of growth at an 8 percent rate
will increase a $14,000 policy to $30,224. The scale of these increases
will vastly outweigh any subsidies contemplated by the Senate.
Question 7. Are the majority's health bills financially sustainable
in the short or long term? Why, or why not?
Answer 7. No. They create two new entitlement spending programs
(the coverage subsidies and the CLASS Act) financed largely by debt
issuance. This burden would add to the existing shortfalls in Social
Security and Medicare and the legacy of the financial bailout and
stimulus efforts. At a time when every effort should be made to
reassure international capital markets regarding the budget outlook,
these bills send the immediate signal that the United States is willing
to move further out of balance and raises the ultimate costs of getting
our house in order.
Question 8. There are now six different independent studies which
show the Democrats' health bills will increase premium costs to
Americans. What amount of time, and what other information, would CBO
need to make its own assessment about increasing premiums?
Answer 8. I am unable to judge the time or resources that would
provide CBO with the capacity to draw a judgment on this issue.
However, as a general practice CBO takes advantage of the broad
research literature in developing its basis for estimates, including
supplementary information such as the impact on premiums. There is an
increasing number of studies showing that the proposed legislation
would raise premiums, which will presumably assist CBO in this valuable
effort.
Question 9. You said in your written testimony that there are
``sharp limits on the ability of [companies] to shift the effective
burden of excise taxes onto either shareholders or employees.'' You
also said that ``firms will reduce compensation growth, squeeze labor
expansion plans, or even lay off workers, or [all three].'' When
unemployment is over 10 percent, can you elaborate on what you think
the job impacts of the current health bills in Congress would be for
small businesses?
Answer 9. The bills under consideration in Congress share certain
features. First, through the combination of industry fees, taxes, and
insurance market reforms, they will place upward pressure on insurance
premiums. This increase in labor costs will force cutbacks in the offer
of insurance, other compensation, the number of employees, or some
combination of all three.
Second, some legislation imposes employer mandates requiring the
provision of insurance. Provisions of this type raise costs and
restrict the ability of firms to adjust compensation packages, with
detrimental impacts on the number of jobs.
Third, both the House and the Senate envision partial financing
through a surtax on incomes or payrolls above a particular threshold.
In both cases, the threshold is not indexed for inflation. Thus, over
time both bills would subject an increasing number of small businesses
and entrepreneurs (many of whom are organized as pass-thru entities) to
higher taxes, leading to fewer jobs.
Fourth, none of the bills under consideration reduce the growth of
national health care spending; indeed, it may even rise. Thus, there
will be continued cost pressures that will harm the ability of small
businesses to expand hiring.
Finally, by expanding the already-significant budget deficits in
the next decade, the bills raise the probability of significantly
higher interest rates. The upward movement in borrowing costs would
harm the ability of small businesses to grow and expand.
Question 10. As a former director of the Congressional Budget
Office and student of congressional budgetary history, how likely do
you think it is that the proposed package of taxes and cuts in the
majority's health bills hold together as a coherent whole, and thus not
add a single dime to the deficits.
Answer 10. I have no faith at all that these bills are deficit-
neutral in either the near-term or the longer-term. The shared fiction
that doctors will receive a double-digit reduction in their Medicare
reimbursements is an immediate indictment of their near-term deficit
neutrality. The bills simply exclude inconvenient spending that will
total at least $250 billion over the next 10 years. Over the longer
terms, the bills rely on reducing the growth of traditional Medicare by
25 percent (from 8 percent annual growth to 6 percent annual growth) by
the stroke of a pen. There are no reforms present that will support
this lower growth of spending and the long-term deficit will be
increased.
Question 11. What is your professional estimate of the reasonable
likelihood of what the majority's health bills will do to Americans'
premiums?
Answer 11. I expect premiums to increase markedly compared to the
path under current law. Depending on the source of insurance--employer-
provided, small-group, or individual market--and the age of the
purchasers, there will be double-digit increases that may be as much as
20 to 30 percent.
Question 12. What is your professional estimate of the relative
incentive the majority's health bills would give for relatively healthy
Americans without chronic/ongoing conditions to drop coverage and only
purchase health insurance when they are already sick or injured?
Answer 12. The incentives will be overwhelmingly in favor of this
strategy. The combination of guaranteed issue and modified community
rating ensures immediate access to insurance upon onset of a serious
medical condition. Prior to that, individuals can choose to pay the
modest fine (maximum of $750 in the Senate) instead of purchasing
thousands of dollars of insurance.
Response to Questions of Senator Enzi and Senator Coburn
by Karen Bender
senator enzi
Question 1. Ms. Bender, the Senate Finance legislation requires
small employers to only offer plans that have deductibles of less than
$2,000 for individuals and $4,000 for families. I regrettably note that
Mr. Rowan would have to buy a more expensive plan to meet this new
requirement. Additionally, I am curious, of the employers who currently
offer more than one plan, do you know how many employees pick plans
with deductibles higher than $2,000 or $4,000 for family coverage? Do
you have a sense of how this new requirement will impact prices for
insurance premiums?
Answer 1. The deductible limitations would limit the availability
of more affordable coverage with higher deductibles for small
employers. Based on data from a survey from America's Health Insurance
Plans (AHIP), over 20 percent of the coverage sold in the small
employer market in 2008 already had a deductible of $2,000 or above.
Limiting the deductible at this level will only increase cost for small
employers purchasing higher deductible plans. Generally in the small
group market, employees are not offered more than one plan. The
exception is when a federally qualified high deductible plan (HDHP) is
offered. Then, (according to same AHIP survey referenced in the
preceding paragraph) about one-third of employers offered another plan.
When an HDHP was offered along side a more traditional plan, over 40
percent of employees in the small employer groups elected the HDHP.
Sixty-nine percent of those electing HDHPs had deductibles equal to or
exceeding $2,000 deductible for single coverage.\1\
---------------------------------------------------------------------------
\1\ AHIP Small Group Health Insurance in 2008, AHIP Centers for
Policy Research, March 2009. http://www.ahipresearch.org/pdfs/
smallgroupsurvey.pdf. Accessed November 20, 2009.
---------------------------------------------------------------------------
Another survey by AHIP that focuses only on federally qualified
HDHPs shows that there are over 2.4 million lives enrolled in small
employer HDHP products as of January 2009 and that the deductibles for
the best selling plans were slightly greater than $2,000 for single
coverage and slightly under $4,000 for family coverage.\2\ These two
surveys show that there are currently many employees of small employers
and their dependents enrolled in these types of plans. Further more,
the same AHIP HDHP survey shows that enrollment in the small employer
HDHP market had increased by 34 percent between 2008 and 2009.
---------------------------------------------------------------------------
\2\ AHIP, January 2009 Census Shows 8 Million People Covered by
HSAs/High-Deductible Health Plans, AHIP Centers for Policy Research,
May 2009. http://www.ahipresearch.org/pdfs/2009hsacensus.pdf. Accessed
November 22, 2009.
---------------------------------------------------------------------------
Based upon our proprietary rating model using national average
premiums, this deductible would not meet the minimum actuarial value of
0.65. The actual value will vary by carrier and geography. Premium
increases in the 5 percent to 10 percent range to meet the standard
under the Senate Finance bill would not be unexpected.
Question 2. Ms. Bender, what are the advantages and disadvantages
of an exchange for small employers? Can the exchange substantially
lower costs?
Answer 2. The creation of an exchange is not likely to lower health
insurance costs for small employers. There have been numerous studies
researching the premium levels for State purchasing groups that are
similar to exchanges, including the health insurance purchasing
corporations (HIPCs) popular in the mid-1990s through mid-2000s,
including a paper I co-authored in 2008.\3\
---------------------------------------------------------------------------
\3\ Karen Bender, FCA, ASA, MAAA and Beth Fritchen FSA, MAAA,
``Government-Sponsored Health Insurance Purchasing Arrangements: Do
They Reduce Costs or Expand Coverage of Individuals and Small
Employers?'' 2008. http://www.blueadvocacy.org/uploads/health-
insurance-purchasing-arrangements-report.pdf.
---------------------------------------------------------------------------
More than a dozen States have enacted State-sponsored purchasing
entities, generally referred to as Health Insurance Purchasing
Cooperatives (HIPCS) during the 1990s. These HIPCs contracted with
multiple insurers to offer benefit plans to employees of small
employers. The HIPCs performed a number of administrative functions,
such as contracting with insurers, marketing, and enrollment. It is
well-established that HIPCs failed to offer premiums lower than
premiums employers could obtain outside of the purchasing
arrangement.\4\
---------------------------------------------------------------------------
\4\ Long and Marquis, 1999; Long and Marquis, 2001; Wicks, et al.,
2000; Yegian, et al., 2000.
---------------------------------------------------------------------------
Most of these purchasing arrangements never achieved a significant
market presence because they failed to offer better rates, the key
factor influencing purchasing decisions in the price-sensitive small
employer market. For example, one study found that among employers that
offered coverage in three States, only 2 percent to 6 percent of
eligible employers purchased coverage through a purchasing pool.\5\ As
a result, most government-sponsored HIPCs were disbanded.
---------------------------------------------------------------------------
\5\ Long and Marquis, 2001.
---------------------------------------------------------------------------
The Massachusetts Connector has served as a model for health reform
in Washington. However, little is known about the impact on small
employers premiums because small employers are just now being enrolled
in the Connector under a small pilot. Premiums for individuals have
increased 16 percent for unsubsidized plans offered in the bronze
coverage tier inside the Connector since 1997, according to the
Massachusetts Division of Health Care Finance and Policy. The
Massachusetts reforms, in total, were actually likely to increase the
premiums for small employers as a result of a provision that required
the costly Massachusetts individual market to be pooled with the less
expensive small employer market.
There are several reasons why purchasing pools have failed to lower
premiums: inability to lower aggregate administrative costs; inability
to lower provider reimbursement levels; and inability to expand pooling
of risk. One area where an exchange can provide value is in helping
small employers shop for coverage and providing information on
competing plans. Exchanges proposed by current health reform bills
would provide small employers with information on prices and other
important plan features on all health plans in the market. However, if
an exchange is set up in a regulatory fashion, as in the proposed
Senate bill, it will be unlikely to stimulate market competition or
reduce costs for small employers.
Question 3. Ms. Bender, will an exchange provide the same economies
of scale that major U.S. corporations enjoy when purchasing health
insurance?
Answer 3. No, an exchange--as a collection of many independent
small employers and individual purchasers--will never be able to
achieve economies of scale similar to major corporations today. One of
the underlying assumptions behind various purchasing arrangements is
that bringing many small groups together to purchase health insurance
will increase their purchasing power, giving them the same ability to
negotiate lower health insurance premiums that large employer groups
enjoy. However, there are significant differences between a pool of
many small employer groups and a large employer pool.
The American Academy of Actuaries stated this principle well: ``A
single employer with 999 employees is not the same as 333 groups with 3
employees each.'' \6\ The NAIC used the following analogy: grouping
many small employers does not create the equivalent of a large employer
any more than grouping three 12-year-olds creates a 36-year-old.\7\
---------------------------------------------------------------------------
\6\ Bender, Karen, et al., ``Wading Through Medical Insurance
Pools: A Primer.'' American Academy of Actuaries Issue Brief, American
Academy of Actuaries, September 2006.
\7\ Testimony of Joel Ario, Acting Commissioner of Insurance,
Commonwealth of Pennsylvania, representing the National Association of
Insurance Commissions before the U.S. Senate Committee on Finance on
``Small Business Health Insurance: Building a Gateway to Coverage.''
October 25, 2007.
---------------------------------------------------------------------------
An insurance company is still going to have to bill the 333
individual groups of 3 as opposed to generating a single bill for a
group of 999. While the employer with 999 may offer two or three
benefit options, the benefit portfolio for small groups as a whole is
very broad, to meet the various needs of a very diverse market. Thus
there are many more products to maintain, forms to file, more products
for customer service associates to learn, more products to be
adjudicated, etc. Also, in some States, health plans are required to
submit rate filings for small groups, which requires time and
resources. This is not necessary for large groups. So the economies of
scale will always be different for small employers as long as there are
many product options and no employer mandate.
Moreover, the large employer acts as the ``glue'' that holds the
group together. Small employer groups are some of the most price-
sensitive purchasers of health insurance. As such, these groups tend to
move in and out of small group pools, by either switching carriers or
dropping insurance, on a regular basis. This ability to enter and exit
the insurance market makes the pool less cohesive than large group
pools, which makes the small group market one of the most volatile
health insurance markets. Since none of the Senate bills apply any
penalty for a small employer for not offering coverage, this ability to
enter and exit the insurance pool still remains.
Generally, the smaller the group, the higher the claims per member,
because smaller groups tend to behave more like individuals. That is,
among the smallest groups, those who have a greater need for health
insurance (because of a known health risk) are more likely to purchase
coverage while those with the lowest expected need for health insurance
are less likely to obtain coverage. As such, the risk of adverse
selection is very high in the small employer market.
Since States require pooling of risk in the small employer market,
higher-risk or less healthy groups enjoy some level of premium
subsidies from groups with lower-than-average health care costs.
However, healthier groups with lower-than-average risks may not
perceive an economic value in health insurance because they are
required to provide subsidies to these higher-risk groups. The more
restrictive the rating rules, the greater the subsidies required from
the healthier groups, and the less attractive health insurance is for
the exact market segment critical to creating a viable pool, the
healthy groups.
In order for any pool to be viable in the long run it must be self-
supporting. Therefore, there must be enough healthy individuals to
subsidize the medical costs associated with less-healthy individuals.
This is generally not a problem for the large employer since the
``glue'' holding the pool together is independent of health insurance
decisions. However, this is not the case for the 333 independent small
groups in our previous example. Therefore, it is critical to have
rating flexibility to ensure there are sufficient numbers of healthy
groups to provide subsidies for the sicker groups.
Question 4. Most States today permit health plans to vary premiums
based on the characteristics of each small employer with certain
limitations. Some have suggested that using community rating, which is
required in a smaller number of States today, would lower costs for
small employers. Based on your experience, which States have more
affordable premiums for small employers, those with community rating or
those without?
Answer 4. Community rating will increase average premiums for small
employers. In 2008 there were 12 States that did not allow for any
variation in small group rates for morbidity \8\: Colorado,
Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New Jersey,
New York, Oregon, Rhode Island, Vermont and Washington.
---------------------------------------------------------------------------
\8\ National Association of Health Underwriters, State Level
Individual and Small Group Market Health Insurance Reforms. February
2009. http://www.nahu.org/legislative/charts/
market_reforms_chart_state.pdf. Accessed November 20, 2009.
---------------------------------------------------------------------------
According to the AHIP study of small employer premiums for 2008,
the following States had the highest small employer premiums in the
country&A\9\: Alaska, Massachusetts, Rhode Island, New Hampshire,
Maryland, Wyoming, West Virginia, New York, New Jersey, Utah. Of these
top 10, 6 States do not allow any variation in premium for morbidity.
So half of the States that do not allow any variation for morbidity are
in the top 10 when it comes to premium levels. This would appear to
support the theory that allowing for variation in premium levels for
morbidity results in lower average premiums for the market in any given
area.
---------------------------------------------------------------------------
\9\ Small Group Health Insurance in 2008.
---------------------------------------------------------------------------
These results are consistent with a 2001 U.S. General Accounting
Office (GAO) study which found that even after adjusting for geographic
cost differences, average annual premiums for fully insured small
employer plans were about 6 percent higher for single coverage and
about 7 percent higher for family coverage in States that prohibited
premium variation in the small employer market due to health status.
This same study found that these differences were not attributable to a
greater concentration of higher-risked groups in those States that
disallowed health status.\10\
---------------------------------------------------------------------------
\10\ U.S. General Accounting Office, ``Private Health Insurance
Small Employers Continue to Face Challenges in Providing Coverage.''
U.S. General Accounting Office. October 2001. http://www.gao.gov/
new.items/d028.pdf.
Question 5. Can you explain why the data Oliver Wyman used in its
analysis cannot be made public?
Answer 5. Oliver Wyman is unable to disclose the data used in the
study because it is owned by the BlueCross/BlueShield companies that
contributed it for that purpose and Oliver Wyman is bound by
confidentiality commitments. Furthermore, the data is commercially
valuable and contains sensitive competitive information about premiums,
claims, and demographics that is proprietary to these companies. In our
experience with actuarial studies, insurers typically retain their
ownership rights and the underlying data is kept confidential by those
involved, even when such work is performed under contract with State
insurance departments.
As an independent firm, one of the important roles that Oliver
Wyman performed in this study was determining whether the data is
credible and representative--which we believe it is. The study's
database has information on 6 million insured members in the individual
and small-employer markets, almost one-eighth of all members covered by
all insurers in the individual and small employer markets. The database
includes information from 12 States and covers four distinct geographic
rating rule clusters. Data from at least two States were included for
each geographic rating cluster. Overall, we believe that these data are
representative, or even conservative, relative to the benefit plans and
rating practices of the rest of the health insurance industry.
We also note that the use of actual policyholder data is a unique,
distinguishing feature of our study--in contrast to other health reform
models that lack access to such real-world information and instead use
population survey data to create artificial individual and small
employer purchasers for their economic simulations.
Question 6. Ms. Bender according to the Oliver Wyman study, what
will happen to small group premiums if the current health reform bills
are enacted?
Answer 6. Our study of the Senate Finance bill shows that the
average increase, before any consideration of medical trend will be 19
percent, of which 16 percent is attributable to changing rating and
underwriting rules and 3 percent is attributable to increasing the
minimum actuarial value of the policies being purchased.
senator coburn
Question 7. Senator Harkin expressed concern that the data and/or
methodology of the Oliver Wyman analysis referenced in your
congressional testimony. Did the proprietary insurance data or the
study's methodology differ significantly from the majority of other
studies Oliver Wyman and other actuarial firms have conducted? If so,
how? If not, please explain.
Answer 7. The best way of measuring the impacts on small group
premiums attributable to the proposed reforms is to use a database
comprised of actual small groups that are currently purchasing
insurance. Given the scope of the proposed reforms, detailed rating
criteria on a group level needed to be available in order to measure
the impact on premiums of either modifying or eliminating certain
rating factors. Any study that does not consider actual small groups
and insurance rating factors could significantly understate the upward
pressure on premiums that will result from insurance reform.
I have the advantage of years of experience in the small employer
health market. I remember in the 1990s, when health reforms were being
seriously considered at the national level as well as among the States.
Many studies were done using ``simulated groups.'' By ``simulated
groups'' I mean that data for a large group population would be used to
randomly assign members to simulate groups of various sizes. These
studies consistently understated the ``tails'' at each end of the risk
spectrum when compared to actual small group experience. In retrospect,
this should not be surprising since these simulated groups were formed
using random assignment techniques. In the real world, groups are not
formed randomly. Selection is very real. Also, in the small group
market, the distribution of groups by morbidity (i.e., aggregate health
status of the group's insured members) is not the bell shape curve most
of us are familiar with through our experience with basic statistics.
In the real world, the distribution of groups by morbidity is skewed
toward healthier groups, which means in those States that currently
provide for premiums to vary from the midpoint rate due to morbidity,
there are more groups enjoying discounts from the midpoint rate than
groups paying surcharges. Any modeling that does not reflect these
types of distributions will be, in my opinion, fatally flawed.
There is wide variation among the States regarding the amount that
small group rates can vary from a midpoint rate which in turn, drives
differences in the distribution of groups by morbidity. Any study that
does not consider these differences at some level, could significantly
understate the upward pressure on premiums that will result from
insurance reform.
So while the data that Oliver Wyman used to model the impacts of
the proposed reforms is proprietary, we strongly believe that the
advantages of being able to start with real, live groups and having
access to the underlying rating factors that are currently being used
to develop existing premiums and therefore being able to directly
measure the impact of eliminating/modifying these rating factors, far
outweigh any disadvantages of not being able to release to the public
the actual underlying database.
Question 8. The Senate Finance legislation requires small employers
to only offer plans that have deductibles of less than $2,000 for
individuals and $4,000 for families. This would effectively eliminate
HSAs and Walter Rowan (glassblower business owner, witness) would have
to buy a more expensive plan to meet this new requirement. I am
curious, of the employers who currently offer more than one plan, do
you know how many employees pick plans with deductibles higher than
$2,000 or $4,000 for family coverage? Do you have a sense of how this
new requirement will impact prices for insurance premiums?
Answer 8. The deductible limitations would limit the availability
of more affordable coverage with higher deductibles for small
employers. Based on data from a survey from America's Health Insurance
Plans (AHIP), over 20 percent of the coverage sold in the small
employer market in 2008 already had a deductible of $2,000 or above.
Limiting the deductible at this level will only increase the cost for
small employers purchasing higher deductible plans. Generally in the
small group market, employees are not offered more than one plan. The
exception is when a federally qualified high deductible plan (HDHP) is
offered. Then, according to America's Health Insurance Plans (AHIP),
about one-third of employers offered another plan. When an HDHP was
offered along side a more traditional plan, over 40 percent of
employees in the small employer groups elected the HDHP. Sixty-nine
percent of those electing HDHPs had deductibles equal to or exceeding
$2,000 deductible for single coverage.
Question 9. What are the advantages and disadvantages of an
exchange, as currently proposed in the majority's legislation, for
small employers? Will the exchange substantially lower costs? Will an
exchange provide the same economies of scale that major U.S.
corporations enjoy when purchasing health insurance?
Answer 9. The creation of an exchange is not likely to lower health
insurance costs for small employers. There have been numerous studies
researching the premium levels for State purchasing groups that are
similar to exchanges, including the health insurance purchasing
corporations (HIPCs) popular in the mid-1990s through mid-2000s
including a paper I co-authored in 2008.\11\ More than a dozen States
have enacted State-sponsored purchasing entities, generally referred to
as Health Insurance Purchasing Cooperatives (HIPCS) during the 1990s.
These HIPCs contracted with multiple insurers to offer benefit plans to
employees of small employers. The HIPCs performed a number of
administrative functions, such as contracting with insurers, marketing,
and enrollment. It is well-established that HIPCs failed to offer
premiums lower than premiums employers could obtain outside of the
purchasing arrangement.\12\
---------------------------------------------------------------------------
\11\ Karen Bender, FCA, ASA, MAAA and Beth Fritchen FSA, MAAA,
``Government-Sponsored Health Insurance Purchasing Arrangements: Do
They Reduce Costs or Expand Coverage of Individuals and Small
Employers? '' 2008. http://www.blueadvocacy.org/uploads/health-
insurance-purchasing-arrangements-report.pdf.
\12\ Long and Marquis, 1999; Long and Marquis, 2001; Wicks, et al.,
2000; Yegian, et al., 2000.
Question 10. For more than 20 years, small-business owners have
listed health costs as their No. 1 concern. But leading ``reform''
bills would make things worse. In fact, the head of the National
Federation of Independent Business, Dan Danner, said the reform bill's
huge cost ``will ultimately come out of small business owners' pockets
and prohibit them from growing, investing in their business and hiring
new employees.'' As an expert with 35 years of experience in the health
care industry, experience as an actuary, and someone who has studied
these issues closely, do you think this is an accurate statement?
Answer 10. As a health actuary, my expertise is focused on the
impacts health care reforms will have on health insurance premiums. Our
modeling shows that the average increase on small employer premiums
will be 19 percent, before consideration of trend. [Please remember
this is an average increase. Some employers will experience higher
increases and some will experience lower increases as well as potential
decreases.] We could not identify anything in the various Senate bills
that would have any material downward pressure on trend. On the
contrary, we could identify several factors that could have the
opposite effect. However, we have not included any of these in our
modeling to date. Obviously, if premiums increase at this magnitude and
then are further compounded by trend increases, the cost will have to
ultimately be paid by small businesses, since the premium subsidies are
only temporary. If the subsidies are extended, then the cost of the
bill will exert upward pressure on the country's deficit, which has not
been incorporated into the scoring of the bill. While I cannot assert
as a health actuary whether or not the additional premiums will
prohibit small employers from growing, investing in their businesses
and hiring new employees, it seems like only common sense that if funds
that otherwise would be available for innovation, growth and expansion
are being diverted to fund health premiums, then there will be less
innovation, growth and expanded employment.
Response to Questions of Senator Enzi and Senator Coburn
by Jonathan Gruber
senator enzi
Question 1. In your testimony, you state that small business costs
would decline relative to what they would be in 2016. However, this
appears to be based on an assumption that medical cost inflation would
be more than cut in half--from an assumed 9 percent to 4 percent--in
the first year after reform. Both CBO and the CMS office of the actuary
have been skeptical of the ability of current reform proposals to bend
the ``curve'' of national health expenditures. What assumptions did you
include in your analysis that led to your conclusion on medical cost
inflation which appears to differ significantly from the statements of
both the CBO and the CMS actuary?
Answer 1. My analysis is conservative in that I assume no impacts
on health care cost growth. I simply assumed that in the first year
after reform there would be a 5 percent savings for small firms as a
result of the efficiencies of purchasing through the exchange in a
reformed market. That has the effect of making growth rates 4 percent
rather than 9 percent in that year, but really it isn't a growth rate
assumption--it is just an assumption about savings levels.
Question 2. You assert that small employers could save 25 percent
based on CBO data. However, an examination of CBO reports indicates
that CBO has NOT suggested reform will reduce premiums. To the
contrary, the same CBO letter of September 22d referenced in your
testimony states that premiums in the new insurance exchanges would
tend to be higher than the average premiums in the current-law
individual market. Isn't it correct that CBO has not issued a
comprehensive report on premiums and the selective use of certain
quotes does not reflect CBO's full view on premiums which may be
impacted by many different factors?
Answer 2. I never asserted in my testimony that small employers
would save 25 percent. I simply pointed out that the CBO analysis
implies that the cost of an insurance plan in the exchange would be 25
percent lower than the average cost of a plan in the non-group market
with the same actuarial value.
The CBO letter does not say that premiums would tend to be higher
in the non-group market--that is a misleading citation of just one
point of several where they discuss forces that would tend to move the
nongroup premium up or down. They don't draw a bottom line conclusion,
but they do provide numbers that allow one to do so, as I did in my
testimony. But it is true that CBO has not issued a comprehensive
report on non-group premiums, nor have they spoken at all about the
impact on group premiums.
Question 3a. Your testimony before the Senate HELP Committee
stated,
``In their September 22d letter, the Congressional Budget
Office reported that they estimated the cost of an individual
low-cost `silver' plan in the exchange to be $4,700 in 2016
(this was later updated to $5,000). This is a plan with an
`actuarial value' of 70 percent. In the same letter, the CBO
projected that, absent reform, the cost of an individual policy
in the non-group market would be $6,000 for a plan with an
actuarial value of 60 percent. This implies that the same plan
that cost $6,000 without reform would cost $4,300 with reform,
or almost 30 percent less.''
'Can you please explain your conclusion that a plan that costs
$6,000 without reform would cost $4,300 with reform? Does the plan you
assume will cost $4,300 meet all of the requirements mandated in
Senator Baucus' bill?
Answer 3a. I simply used the fact that the $5,000 estimate refers
to a silver plan, which has an AV of 0.7. To compare to a 0.6 non-group
plan costing $6,000, I multiply the $5,000 by (0.6/0.7) to get $4,300.
Question 3b. CBO has not estimated the cost of a bronze plan. Have
you estimated the cost of a bronze plan? If so, what is your estimate?
Answer 3b. I have not estimated the cost of a bronze plan but I
assume it would be the $5,000 silver premium multiplied by (0.65/0.7),
or $4,640.
Question 3c. Additionally, can you confirm what CBO stated in the
same letter that the cost for a family purchasing coverage in the non-
group market in 2016 will be $11,000 without reform and $14,700 with
reform? Can you confirm this is a 34 percent increase in the cost of
coverage for a family if the Baucus bill becomes law?
Answer 3c. This is not a valid comparison because the types of
families in the non-group market and the exchange must be dramatically
different--otherwise it is implausible that a family premium could be
less than twice the single premium. CBO hasn't spoken clearly to this,
but I assume families in the non-group market are mostly couples, while
in the exchange it would be a mix of couples and families with
children.
Question 4. Dr. Gruber, your testimony mentions ``there is a very
strong mandate in place in legislation proposed by HELP and the House--
and a reasonably strong mandate in the SFC legislation, as well.'' Can
you please explain what you mean by a ``reasonably strong mandate?'' Do
you think the SFC legislation will bring enough younger and healthier
workers into the risk pool?
Answer 4. The strength of a mandate is related to two features: the
strictness of the penalty and the ability of individuals to be exempt
from the mandate. The House has a stronger mandate because there
exemption level is higher (12 percent of income rather than 8 percent
of income in SFC) and the penalties are larger. Nevertheless, even the
SFC mandate will have a real impact on individual behavior and bring
millions of young healthy consumers into the exchange.
senator coburn
Question 5. Today the average family of four pays an additional
$1,800 each year in health premiums, due to the cost-shift from
Medicare and Medicaid, according to a 2008 Milliman study. Since the
majority's health bills in Congress envision hundreds of billions of
Medicare cuts during a decade when the population of Medicare is
projected to increase by a third (from 45 million to 65 million), and
roughly half of the uninsured are put in Medicaid, what do you project
will be the increased cost shifts which will burden the average
American family with higher costs?
Answer 5. I am not familiar with the Milliman study and so cannot
validate that result. But it is not proper to discuss cost shifting
without also considering the reduced cost shifting that will result
from less hospital spending on the uninsured. Hospital uncompensated
care amounts to more than $40 billion/year, and that would be greatly
reduced under either the Senate or House legislation. I do not know on
net whether there will be an increase or decrease in cost shifting
under this legislation, or the magnitude of those shifts.
Question 6. What clause or article in the Constitution gives the
Federal Government the right to legally require that all Americans have
health insurance?
Answer 6. I am not a constitutional scholar so I don't have a basis
for answering this question.
Question 7. Do you believe that an individual mandate for health
insurance is analogous to requiring drivers to carry auto insurance?
Answer 7. In many ways it is analogous, as it is a government
requirement designed to improve the functioning of insurance markets.
In other ways, it is not, because the product and the population
mandated are quite different. In addition, all of the bills under
consideration have some exemption mechanism from the mandate, whereas
this is not true for auto insurance.
Question 8. You have been very involved in Massachusetts'
experiment in health care. You acknowledged at the hearing that
Massachusetts has experienced an increase in waiting times to see
physicians--primary care and specialists. The 2009 Massachusetts
Medical Society Physician Workforce Study and numerous Boston Globe
reports confirm this. Since the majority's bills in Congress envision
many similar rating and insurance ``reforms'' as Massachusetts, can you
predict that Americans would not see increased waiting times to see a
physician under the majority's reforms?
Answer 8. The change in waiting times in Massachusetts has varied
by type of provider. Using the 2009 report and comparing pre-reform
(2005) to the most recent data (2009), we find that waiting times have
fallen for internal medicine, gastroenterology and orthopedic surgery,
and risen for ob/gyn. It is unclear whether the reaction would be the
same nationwide--I imagine it would vary by market conditions
initially. But I agree that boosting primary care should be an
important goal of reform.
Question 9. You said last September (07/31/08) before the Finance
Committee:
``The tax exclusion of employer expenditures from individual
taxation . . . is a regressive entitlement, since higher income
families with higher tax rates get a bigger tax break . . .
this tax subsidy makes health insurance, which is bought with
tax-sheltered dollars, artificially cheap relative to other
goods bought with taxed dollars, leading to over-insurance for
most Americans.''
Are you convinced that the bills being considered in Congress
effectively transform and improve this regressive tax system?
Answer 9. The bill before the Senate takes the most important step
of the past 60 years to deal with this problem, which is to impose an
offsetting tax on high cost insurance plans. Your question highlights
that this ``Cadillac tax'' is not in fact a tax but just an offset to
the existing tax bias in our system.
Question 10. Your testimony focuses heavily on your interpretation
of CBO's analysis of premium costs. What is your estimation of the
cumulative additional tax increases and cost-shifts which individual
Americans and American families would experience under the bills?
Answer 10. I have not estimated these.
Question 11. A National Journal article on October 24th says:
``One worried expert is Jonathan Gruber, a Massachusetts
Institute of Technology health economist frequently consulted
by Democrats. Gruber has calculated that the Schumer-Snowe
approach will reduce the number of uninsured people the bill
covers by about 3 million--and raise premiums for those it does
cover by 10 percent. `You'll lose the 35-year-old who doesn't
go to the doctor,' Gruber frets.''
The individual mandate in the Senate Finance Committee bill is
significantly weaker than in the House bill. What impact will a weaker
individual mandate have on younger, healthier Americans leaving the
market?
Answer 11. The strength of a mandate is related to two features:
the strictness of the penalty and the ability of individuals to be
exempt from the mandate. The House has a stronger mandate because their
exemption level is higher (12 percent of income rather than 8 percent
of income in SFC) and the penalties are larger. Nevertheless, even the
SFC mandate will have a real impact on individual behavior and bring
millions of young healthy consumers into the exchange.
Question 12. Massachusetts does not have a public plan/full-blown
State-run government health insurance company. In their score of the
House bill, CBO said that the government plan would ``typically have
premiums that are somewhat higher than the average premiums for the
private plans in the exchanges.'' Do you think a public plan is
necessary for real health reform?
Answer 12. I do not believe that a public plan is necessary for
real health reform, but it can be an important part of reform if
designed and implemented appropriately.
Question 13. What is your professional estimate of the reasonable
likelihood of what the majority's health bills will do to Americans'
premiums?
Answer 13. I think it is most likely that the Senate bill will
lower the premiums paid by Americans for their health insurance.
Question 14. What is your professional estimate of the relative
incentive the majority's health bills would give for relatively healthy
Americans without chronic/ongoing conditions to drop coverage and only
purchase health insurance when they are already sick or injured?
Answer 14. I don't see the incentives for this behavior being very
strong. First of all, the Senate bill includes an annual open
enrollment period, so individuals could not simply purchase insurance
when they are sick. Second, the bills include an individual mandate
penalty which will penalize those who wait to buy insurance.
Question 15. Six independent studies and four government studies
have each reported that the majority's health bills will increase
premium costs. Do you disagree with these studies? If so, why? Will
premiums increase under any of the majority's bills proposed thus far?
Answer 15. I am not aware of all these studies. The only ones of
which I am aware that suggest the Democratic health care bills will
raise costs are those funded by the insurance industry, and therefore I
would not treat them as fully independent. The only objective evidence
of which I am aware is the CBO analysis that shows that premiums in the
exchange will be lower than they would be in the non-group market
absent reform.
[Whereupon, at 5:10 p.m. the hearing was adjourned.]