[Senate Hearing 111-1137]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 111-1137




                                 OF THE

                          LABOR, AND PENSIONS

                          UNITED STATES SENATE


                             SECOND SESSION




                             APRIL 20, 2010


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                       TOM HARKIN, Iowa, Chairman

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

                      Daniel Smith, Staff Director

                  Pamela Smith, Deputy Staff Director

     Frank Macchiarola, Republican Staff Director and Chief Counsel


                            C O N T E N T S



                        TUESDAY, APRIL 20, 2010

Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Alexander, Hon. Lamar, a U.S. Senator from the State of Tennessee     2
Feinstein, Hon. Dianne, a U.S. Senator from the State of 
  California.....................................................     4
    Prepared statement...........................................     6
Menke, Phyllis J., City Clerk, City of Fonda, IA.................     9
    Prepared statement...........................................    10
McRaith, Michael T., Director, Illinois Department of Insurance, 
  Springfield, IL................................................    13
    Prepared statement...........................................    15
Ignagni, Karen, President and CEO, America's Health Insurance 
  Plans, Washington, DC..........................................    20
    Prepared statement...........................................    21
Turner, Grace-Marie, President, Galen Institute, Alexander, VA...    35
    Prepared statement...........................................    37
Casey, Hon. Robert P., Jr., a U.S. Senator from the State of 
  Pennsylvania...................................................    52
Coburn, Hon. Tom, a U.S. Senator from the State of Oklahoma......    54
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    59
Hagan, Hon. Kay R., a U.S. Senator from the State of North 
  Carolina.......................................................    61
Reed, Hon. Jack, a U.S. Senator from the State of Rhode Island...    65
Murray, Hon. Patty, a U.S. Senator from the State of Washington..    68

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Senator Enzi.................................................    77
    Galen Institute, letter......................................    78




                        TUESDAY, APRIL 20, 2010

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:34 a.m. in room 
SD-430, Dirksen Senate Office Building, Hon. Tom Harkin, 
chairman of the committee, presiding.
    Present: Senators Harkin, Murray, Reed, Casey, Hagan, 
Franken, Alexander, and Coburn.
    Also Present: Senator Feinstein.

                  Opening Statement of Senator Harkin

    The Chairman. The Committee on Health, Education, Labor, 
and Pensions will come to order.
    We're holding our first hearing on health care since 
President Obama signed into law the historic Patient Protection 
and Affordable Care Act. This committee will be an active 
participant in implementation and oversight of that law. As we 
all know, health reform is not complete with the signing of a 
bill, and we are fully committed to ensuring a smooth and 
successful implementation.
    A major goal of health reform is to bring down the cost of 
health care and to reduce health insurance premiums. According 
to the independent Congressional Budget Office, reform will 
lower premiums by 14 to 20 percent for Americans buying 
insurance on their own. Now, those significant premium savings 
are the result of bringing everyone into the insurance pool, as 
well as administrative savings from larger purchasing pools and 
prohibiting medical underwriting for health status and 
preexisting conditions. And, of course, the Affordable Care Act 
includes an array of reforms to reward quality and value, which 
will reduce health care costs over the long-term.
    But, today our focus is not on health reform and its impact 
on premiums. Today, our focus is on current market conditions 
and ensuring that premiums are justified, that working 
families' hard-earned dollars are going toward premiums that 
truly reflect the cost of health care. What we're talking about 
is protecting consumers from insurance companies jacking up 
premiums simply because they can. Protections must be in place 
to ensure that insurance companies do not take advantage of 
current market conditions before health reform fundamentally 
changes the way they do business in 2014.
    The Affordable Care Act includes a requirement, effective 
in 2011, that insurance companies spend at least 80 percent of 
premium revenue on actual health care. This reform will provide 
an important check on unjustified premiums, and the CBO has 
said that it will, in fact, lower premiums.
    In addition, the act establishes a process for the annual 
review of premium increases prior to their use and for public 
disclosure of how premium rates are determined.
    While all of this will benefit consumers tremendously, and 
very soon, we can and should do more. Currently, about 22 
States in the individual market and 27 States in the small-
group market do not require a review of premiums before they go 
into effect. This is a gaping hole in our regulatory system; 
it's unacceptable. All consumers and small businesses are 
entitled to a rigorous and objective review of premiums to 
ensure that they are reasonable. And if that review determines 
that premiums are unjustified, that insurance companies are 
just trying to run up profits, corrective action must be taken.
    Rate review authority is not a panacea for reducing health 
care costs. We all know that premiums are rising because health 
care costs are rising. That is why the reforms in the 
Affordable Care Act aimed at containing costs are so important. 
But, according to the National Association for Insurance 
Commissioners, and I quote, ``Rate review can help keep 
insurers focused on constraining the growth of these costs.'' 
The NAIC has also stated that, ``Rate review authority is an 
important tool for regulators, and can help keep insurance 
companies honest.'' That is why, just this past Sunday, on the 
front page of the New York Times, there was an article about 
how New York's insurance companies are vigorously fighting the 
Governor's proposal to reinstate prior approval of premiums.
    I want to commend Senator Feinstein for her extraordinary 
leadership on this issue. Her proposal became an important 
provision in President Obama's health reform plan. 
Unfortunately, because of procedural rules, it could not be 
included in the final health reform package. But, make no 
mistake, we are redoubling our efforts, and we are committed to 
ensuring that unjustified premiums are corrected in every 
    I recognize Senator Alexander for an opening statement.

                     Statement of Senator Alexander

    Senator Alexander. Thanks, Mr. Chairman.
    Senator Feinstein, it's good to see you.
    The difference of opinion in the health care debate was 
about, What is the best way to reduce premiums so more 
Americans can afford it? Fundamentally, the mistake in the 
health care law was a decision by the majority, who passed the 
law, to expand health care coverage rather than to focus on 
reducing health care costs so that more people could afford to 
buy insurance. In other words, we are aiming at the wrong 
    I'm afraid this proposal by Senator Feinstein does the same 
thing. In Tennessee, we'd say it's barking up the wrong tree. 
Health insurance companies' profits--and half of them are 
nonprofit--equal about 2 days of the cost of health care 
spending in the United States. So, even if we were to take away 
all the profits of the so-called ``greedy insurance 
companies,'' that would still leave 363 days a year when our 
health care delivery system costs are expanding at a rate that 
our country cannot afford. So, again, we're focusing on a tiny 
part of the problem--health care insurance company profits--and 
ignoring the health care delivery system which is breaking the 
backs of American families, American businesses, and the 
American government.
    It's worse than that. The new health care law actually 
increases premiums. I had a little discussion with the 
President about that in, I hope, a respectful way at our health 
care summit. I read the Congressional Budget Office report a 
little differently than the Chairman does. It says that--in the 
letter that was issued at the end of November--that the new law 
will increase premiums for individual Americans, people who buy 
insurance on their own, by 10 to 13 percent, on average. And 
it, naturally, would do that, because the new law has something 
in it called the ``minimum credible coverage,'' which says that 
if you buy an insurance premium in the individual market--if 
you buy on your own, which up to 32 percent of Americans will 
be doing under the new law--you have to have a certain kind of 
coverage. Senator Collins, who's a former insurance 
commissioner in Maine, says that, in her State, that means that 
87 percent of the policies will cost more under the new law 
than they do today. Now, it is true that about half, or maybe 
60 percent, of those people would get subsidies paid for by 
taxpayers to reduce the cost. But, even the remaining 40 
percent or 50 percent will pay more. So, the minimum credible 
coverage provision of the law raises premiums. So does shifting 
the cost of 16 or 18 million new people into the Medicaid plans 
raise premiums, because doctors can't afford to see them at the 
costs they're reimbursed, and those costs are shifted onto 
those with private insurance. The new taxes will tend to raise 
premiums. Also, the new rating system will keep my premium 
lower at my age, but raise it for my sons and my daughters.
    Basically, we passed a new health care law which raises 
premiums. And now we're considering another law which seeks to 
say to health insurance companies--half of them nonprofit--
``We're going to take a look at your profits and that will 
solve the problem.'' The real problem is the health care 
delivery system. And the real way to reduce premiums is to 
focus on reducing costs.
    I look forward to hearing from Senator Feinstein, my 
colleague on the Appropriations Committee, who I greatly 
respect and work with. Just because I have such great respect 
for her doesn't mean I have to like every single bill that she 
offers up. And so, I'll have some questions about it. And I 
will be looking to see whether this proposal, instead, will 
lead us toward more shortages, more price controls, and 
eventually toward a system where only the government offers 
Americans insurance.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Alexander.
    Dianne Feinstein was elected to the U.S. Senate by the 
State of California in 1992. Among her many accomplishments in 
the 111th Congress, Senator Feinstein assumed the chairmanship 
of the Senate Select Committee on Intelligence, where she 
oversees the Nation's 16 intelligence agencies. A member of the 
Senate Judiciary Committee and, as Senator Alexander said, on 
the Senate Appropriations Committee, where we all serve, she 
chairs the Subcommittee on Interior Environment and Related 
Agencies on Appropriations. Senator Feinstein also serves on 
the Senate Rules and Administration Committee, which she 
chaired during the 110th Congress.
    Senator Feinstein, along with Senators Boxer, WhiteHouse, 
Reid, and Sanders, introduced S. 3078 to provide for the 
establishment of a health insurance rate authority to establish 
limits on premium rating and other purposes.
    So, I welcome Senator Feinstein to the committee. I look 
forward to hearing from you about your bill. And, Senator 
Feinstein, again, welcome. And please proceed as you so desire.

                     Statement of Senator Feinstein

    Senator Feinstein. Well, thank you very much, Mr. Chairman.
    I thank you for your comments. I happen to be strongly in 
agreement with them. I very much appreciate your having this 
    Senator Alexander, I've enjoyed working with you on 
Interior Appropriations. It won't surprise you that I, 
respectfully, disagree.
    I don't know any large country that has tried to cover 
people, across the spectrum, that's been able to do it with 
such a heavy preponderance of for-profit medical insurance. 
Some countries do have a for-profit system, but not to the 
extent that we have. And as I began to look into this, I found 
that, early on, the companies were able to get a bill passed 
which enabled them to merge and acquire, through an antitrust 
exemption. Now, the only other entity that has an antitrust 
exemption, to the best of my knowledge, is major league 
    And so, with this antitrust exemption, these companies 
began to merge and acquire companies. This is very true in my 
State, California. In the city of Los Angeles, two companies 
control 51 percent of the premiums. Well, as they control the 
market share, obviously, they are able to raise premiums.
    You are correct, Mr. Chairman, President Obama did put this 
bill in the reconciliation bill. A point of order would rest 
against it, according to the parliamentarian, because it was 
more policy than budget reduction. And so, this is the only 
recourse that remains.
    Here's what I have found: This industry is extraordinarily 
large in profit-taking for the kind of industry it is. The five 
largest for-profit companies saw profits go up some 56 percent 
from 2008 to 2009. That's from 7.7 billion to 12.1 billion. 
During this period of time, premiums are going up for people. 
WellPoint, the corporate parent of Anthem Blue Cross, earned a 
$4.7-billion profit in 2009. The CEO received a $3.1-million 
salary in total compensation in 2009. That was a 51 percent 
    Well, these increases came; it may have been from a 
different profit center, but what then happened is, WellPoint 
indicated, and has indicated, that, beginning on May 1, 
insurance premiums for 800,000 Californians--single policies--
will go up to 39 percent, which, with the average, as I 
understand it, being a 25 percent increase.
    At a time when California has 12.7 percent unemployment--
almost 2.5 million people out of work--over the last 2 years, 2 
million people have left the insured and become uninsured. So, 
these premiums drive people out of insurance, and we have 
received a tremendous number of complaints, with human stories 
that I won't go into here. But, ``How can I afford it?'' You 
know, ``I have three children. How can I afford a 39-percent 
increase on my premium?''
    I think this is completely backwards. I think, if you make 
money from one profit center--the point of health insurance is 
to help people. It shouldn't be to become JPMorgan. And 
therefore, you ought to offset a profit from one center with 
the other, and have some sensitivity as to how you raise 
premiums, the timelines with which you raise premiums, and the 
size with which you raise premiums.
    Now, they're not the only one. Blue Cross/Blue Shield of 
Michigan requested a 56 percent increase in individual market 
plans in 2009. Regency Blue Cross/Blue Shield of Oregon 
requested a 20-percent premium increase. Three plans in Rhode 
Island requested increases ranging from 13 to 16 percent. And 
Anthem requested a 24 percent increase for plans in the 
individual market in Connecticut.
    Regulators, however, approved only a 16.5 percent increase. 
So, there was an increase--there was an indication of where 
there was a State regulator that was able to review it and say, 
``No, we don't find that justified. We do find a 16.5 percent 
increase justified.'' But, again, this is during a period of 
enormous profit-taking.
    Now, as you said, insurance commissioners in some States 
have this authority already, and they would keep it. 
Commissioners have the authority for some insurance markets and 
not others. In about 20 States, including California, companies 
are not required to receive approval for rate increases before 
they take effect. This legislation simply creates a Federal 
fallback, allowing the Secretary to conduct reviews of 
potentially unreasonable rates in States where the insurance 
commissioner does not already have the authority or capability 
to do so. The Secretary would review potentially unreasonable 
premium increases and take corrective action. This could 
include blocking an increase or providing rebates to consumers. 
Under this proposal, the Secretary will work with the National 
Association of Insurance Commissioners to implement the rate 
review process and identify States that have the authority and 
capability to review rates.
    States already doing this work should continue. This 
legislation would not interrupt them. However, consumers in 
States like California and Illinois deserve protections from 
unfair rate hikes.
    The proposal would also create a rate authority, a seven-
member advisory board, to assist the Secretary with these 
responsibilities. A wide range of interests would be 
represented, including consumers, the insurance industry, 
medical practitioners, and other experts.
    I think the proposal strikes the right balance, because 
there is an enormous loophole prior to the opening of the 
exchanges in 2014. And I suspect, once we get past May 1, you 
are going to see other companies raise rates with dispatch.
    There is no need for Federal involvement in States with 
insurance commissioners that are protecting consumers. So, the 
legislation I've introduced simply provides Federal protection 
for consumers who are currently at the mercy of large for-
profit health insurance companies whose top priority, candidly, 
is their bottom line.
    You know, in California, we have a Public Utilities 
Commission. And the reason we have it is because electricity is 
found to be necessary for life. And therefore, the utilities 
are regulated. Pacific Gas & Electric, Southern California 
Edison, Semper--big utilities go before the Commission when 
they want a rate increase. They may get it. They may get some 
of it. They may not get it. Most of the time, they either get 
it, or get a part of it. But, there is a process to review 
these rates.
    I think, at a time when the economy is what it is in our 
country, and we want to encourage people to have private 
insurance, that insurance has to be affordable. And premiums 
have to go up on a rate that people can endure and pay. To have 
rates of 40 percent or 50 percent or 30 percent in a given 
time, and then tell the individual, ``In the middle of next 
year, we may have to raise your rate again,'' that is a major 
discouraging factor to a family gaining health insurance.
    So, I'm not going to go on and on, but I believe this issue 
passionately. If I had my druthers, I truly believe medical 
insurance should be nonprofit. But, it is for-profit. And there 
is a very large part of the premium dollar that goes for 
administrative expenses rather than medical care. The health 
care reform bill reduces that to 15 percent, and I think that's 
good news.
    To have an industry that really doesn't have the moral 
compass to understand what people are going through, when 
they're making enormous profits at the same time, I find 
extraordinarily difficult to endure.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Senator Feinstein follows:]

                Prepared Statement of Senator Feinstein

    I would like to thank Chairman Harkin, Ranking Member Enzi 
and members of the committee for inviting me here today to 
address what I believe to be a missing piece of health care 
reform: the ability to block unreasonable premium increases.
    Without further legislative action, I am concerned that 
health insurance companies will continue to do what they have 
done for far too long: put their profits ahead of people.
    Premium increases are forcing Americans to choose between 
keeping health care coverage and making their mortgage 
payments, all while big national insurance companies enjoy 
increasing profits.

                           ANTHEM/BLUE CROSS

    Everyone by now is familiar with the increases that Anthem/
Blue Cross of California is seeking to impose on 800,000 
Californians. Rates will go up, on average, 25 percent and as 
much as 39 percent for some consumers.
    I find this unbelievable. Imagine the typical family, or 
individual, trying to find the money to pay another 39 percent 
for health care coverage--especially during these difficult 
economic times, with so much uncertainty.
    Meanwhile, the health insurance company is doing better 
than ever.

     WellPoint, the corporate parent of Anthem/Blue 
Cross, earned a $4.7 billion profit in 2009.
     The CEO of Wellpoint received $13.1 million in 
total compensation in 2009, which was a 51 percent increase.

    This is completely backwards. A CEO is rewarded for 
business decisions that result in huge increases for customers. 
This is completely wrong. It is unacceptable, and it must not 
    The actions of Anthem in California have received a great 
deal of attention, but in reality, they are not all that 
unique. According to a report compiled by the U.S. Department 
of Health and Human Services:

     Blue Cross/Blue Shield of Michigan requested a 56 
percent increase in individual market plans in 2009.
     Regency Blue Cross Blue Shield of Oregon requested 
a 20 percent premium increase.
     Three plans in Rhode Island requested increases 
ranging from 13 percent to 16 percent.
     Anthem requested a 24 percent increase for plans 
in the individual market in Connecticut. Regulators approved 
only a 16.5 percent increase.

    Like Wellpoint, these companies are also enjoying financial 
growth. Even last year--a time of enormous economic distress 
for average Americans--was a good year for the health insurance 
industry. According to Health Care for America Now!, the five 
largest health insurers (WellPoint, UnitedHealth, Humana, 
Cigna, Aetna) saw profits increase 56 percent from 2008 to 
2009, from $7.7 billion to $12.1 billion. Only Aetna saw their 
profits decrease.
    Yet we see these continued premium increases. We can expect 
this trend to continue, especially until 2014, when newly 
created exchanges will give customers new tools to compare 
plans, and force companies to be more competitive.

                         SUMMARY OF LEGISLATION

    The solution, I believe, is legislation to give the 
Secretary of Health and Human Services the authority to block 
premium or other rate increases that are unreasonable.
    In many States, insurance commissioners already have this 
authority. In some States, commissioners have this authority 
for some insurance markets and not others. And in about 20 
States, including California, companies are not required to 
receive approval for rate increases before they take effect.
    My legislation simply creates a Federal fallback, allowing 
the Secretary to conduct reviews of potentially unreasonable 
rates in States where the Insurance Commissioner does not 
already have the authority or capability to do so.
    The Secretary would review potentially unreasonable premium 
increases and take corrective action. This could include 
blocking an increase, or providing rebates to consumers.
    Under this proposal, the Secretary will work with the 
National Association of Insurance Commissioners to implement 
the rate review process, and identify States that have the 
authority and capability to review rates.
    States already doing this work should continue--this 
legislation would not interrupt them. However, consumers in 
States like California and Illinois deserve protections from 
unfair rate hikes.
    The proposal would also create a Rate Authority, a 7-member 
advisory body to assist the Secretary with these 
responsibilities. A wide range of interests would be 
represented, including consumers, the insurance industry, 
medical practitioners, and other experts.
    This proposal strikes the right balance. There is no need 
for Federal involvement in States with insurance commissioners 
that are protecting consumers. The legislation I have 
introduced simply provides Federal protection for consumers who 
are currently at the mercy of large health insurance companies 
whose top priority is their bottom line.

                             UTILITY MODEL

    Health insurance should be no different than utilities. 
Water and power are essential for life. So they are heavily 
regulated and rate increases must be approved.
    Health insurance is also vital for life. It too should be 
strictly regulated so that people can afford this basic need.


    I would like to thank the committee for holding this 
hearing. I urge you to consider and approve this legislation as 
quickly as possible.
    It is a reasonable, measured proposal that will give all 
consumers, not just those in certain States, protection from 
unfair health insurance rate increases.

    The Chairman. Well, thank you very much, Senator, for your 
eloquent statement and for your leadership on this issue.
    We have a panel coming up here afterward that I'm sure 
we're going to get into a lot of these issues with. I know you 
have your own committee that----
    Senator Feinstein. I do.
    The Chairman [continuing]. You have to go to, so. And I 
thank you very, very much----
    Senator Feinstein. Thank you.
    The Chairman [continuing]. For being here, and for your 
leadership on this. And we'll see how this committee reacts and 
what we're going to do on this bill.
    Senator Feinstein. Thank you very much.
    The Chairman. Thank you very much, Senator Feinstein. Thank 
you. Thank you.
    Now I'd like to call up our panel. Phyllis Menke, city 
clerk, city of Fonda, IA; Michael McRaith, director of the 
Illinois Department of Insurance; Karen Ignagni, president and 
CEO of America's Health Insurance Plans; and Grace-Marie 
Turner, president of the Galen Institute, of Alexandria, VA.
    We'll go in that order.
    Again, all of your statements will be made a part of the 
record in their entirety. I will ask you if you could kind of 
sum it up in 5 minutes--5, 10, 15, 20--if you could sum it up 
in 5 minutes, or 6. When it gets around 7, I might get a little 
nervous. But, around 5 minutes, I'd sure appreciate. And then, 
we can get into questions and answers.
    We'll start in the order in which I recognized people. 
First of all, Phyllis Menke is the city clerk and chief 
financial officer for the city of Fonda, has been for 25 years, 
also serves on the board of directors for Pocahontas County 
Economic Development Commission and the Pocahontas County 
Tourism Commission. Phyllis Menke--again, the city of Fonda is 
a small community of 648 people in northwest Iowa. And she 
contacted our office, and I thought that her points were 
something that needed to be brought out, in terms of what 
happens to small towns and communities that don't have a large 
    So, we'll start off with you, Phyllis. And again, thank you 
for being here. Thanks for getting in touch with our office. 
And, as I said, your statement will be made a part of the 
record. If you could sum it up in 5 or 6 minutes or so, I'd 
sure appreciate it.

                       CITY OF FONDA, IA

    Ms. Menke. Thank you, Senator Harkin and the other members 
of the committee. This is truly an honor, for me to be here.
    As Senator Harkin said, Fonda is a small community of about 
648 people. We're located in northwest Iowa.
    We have three employees that get insurance that's paid by 
the city. And we've had a policy for about 20 years. The first 
policy that the city had was a $250 deductible. I don't have 
the records; I can't tell you what that cost back then. But, if 
we fast-forward to 2005, the city purchased a Wellmark Blue 
Cross/Blue Shield policy. Our deductible is now $1,500, and 
it's a cost-split of 90/20, and each of the employees have a 
$6,000 out-of-pocket maximum. And this is still a pretty good 
policy. It's not as good as the $250 deductible we had, but 
it's a pretty good policy. Our cost was $705 per month.
    In 2006, Blue Cross/Blue Shield notified us that our 
premiums were increasing 32.18 percent. The city went out for 
bids. The bids came back very high. So, we increased our 
deductible to $2,000. We increased the cost-split from a 90/10 
to an 80/20.

    In 2007, our premiums increased by 18.4 percent, our 
deductible went to a $3,000 deductible.
    In 2008, our premiums were 13.33 percent increased. We made 
no change.
    In 2009, our premiums increased 10.35 percent. Again, we 
made no change.

    In September 2009, the city was notified by Blue Cross/Blue 
Shield that our premiums were increasing by 29.47 percent. The 
cost of our policy would go $1,265 per person per month.
    So, for the months of October, November, and December, I 
struggled, trying to find health insurance for the three full-
time employees. I learned more about HSAs, HRAs, and group 
health insurance policies than I ever wanted to know. We went 
out for bids. They came back as high, or higher, than Blue 
Cross/Blue Shield. The city is no longer able to afford to 
offer its employees group health insurance.
    So, the city council, after much discussion and research, 
decided that the employees should get their own individual 
policies. The city council or the city would reimburse the 
    We've been with Blue Cross/Blue Shield for many years. We 
filed individual applications with them. I'll use myself as an 
example. But, my policy came back, that was going to have two 
preexisting-condition riders on it; and my husband, and I 
quote, ``At this time, we regret to inform you that, due to 
multiple medical conditions, we are unable to accept John Menke 
for coverage, based on our review of your application 
information.'' But, they did appreciate my interest.
    I don't know if any of you can relate to how I felt at 
receiving this letter that I'd been--you know, from the company 
that I'd been insured with for years, but it didn't feel good.
    The only option left was that the city employees applied 
for what was called a ``Blue Transition policy.'' It's a higher 
premium cost, but there's no preexisting conditions to it. We 
have a $2,500 deductible. A family is required to meet three 
deductibles where, before, we only had to meet two. The cost 
for myself was $751, which was quite a savings from the group 
health policy that the city had before, which would have been 
$1,265. So, the city officially canceled our group health 
policy with Blue Cross/Blue Shield, effective December 31.
    Now, if the city of Fonda had the same insurance policy 
that we had back in 2005, the cost for that would be $1,631 a 
month. That's a 131 percent increase in 5 years, which is a 26 
percent average per-year increase.
    Going back to the Blue Transition policy that we got. We 
received notification from Blue Cross/Blue Shield that our 
policy rates were going up 25 percent, effective April 1. The 
Governor of the State of Iowa stepped in and demanded an 
independent review of those increases, even though Iowa is one 
of the States that has an insurance division that regulates our 
insurance rates. Anyway, that independent review, nothing 
changed in that.
    Iowa also has what's called an ``Iowa Governmental 
Healthcare Plan,'' and it is for governmental agencies to pool 
their employees together. I think this is a great idea, except 
for that you have to bring 50 employees to that pool. So, it 
doesn't help any of the small towns in the State of Iowa. And 
there are a lot of them in Iowa.
    I believe that Blue Cross/Blue Shield monopolizes the 
insurance in Iowa, Illinois, Nebraska, and pretty much across 
the country. They are building a new $250-million office in Des 
Moines. So, I know that they are not broke.
    And I agree with Senator Alexander, it's not just the 
insurance companies; it's the cost of health care, too. So, I 
think it's a two-pronged sword there. But, something needs to 
be done. And progress is being made. I thank the Congress for 
    I want to thank you for having me here today.
    [The prepared statement of Ms. Menke follows:]
                 Prepared Statement of Phyllis J. Menke
    Dear Honorable Sirs and Madams: This testimony is in regards to 
Health Care Insurance.
    The city of Fonda is a small community of 648, located in northwest 
Iowa. The city has provided its 3 full-time employees with group health 
insurance for many years. The premiums kept increasing, year after 
year, sometimes at an increase of 30 percent. In an effort to contain 
costs the city has had to change insurance companies, raise the 
deductible four different times, they went from a 90/10 percent to an 
80/20 percent cost split, they began to self-insure a portion of the 
deductible and they have discontinued offering dental insurance. The 
city has been with Wellmark BCBS of Iowa for many years.

     Twenty-two years ago the city began offering the employees 
Group Health Insurance. It was a Wellmark Blue Cross Blue Shield 
policy. The deductible was $250. The city of Fonda paid 100 percent of 
the premium and continues to do so, only differently.

    Fast forward to 2005 . . .

     2005 we had a Wellmark BCBS policy. Our deductible is 
$1,500, the cost split is 90/10, we have a $6,000 out-of-pocket maximum 
ad our co-pay is $15. This is still a pretty good policy. The cost for 
family coverage was $705.07 per month per employee.
     2006 we are notified our premiums are increasing by 32.18 
percent. The city went out for bids. We stayed with BCBS but increased 
our deductible to $2,000, went to a 80/20 cost split, increased our co-
pay to $20 and our out-of-pocket maximum went to $8,000.
     2007 we are notified our premiums are increasing by 18.40 
percent. The city increases our deductible to $3,000, our co-pay goes 
to $25 and our out-of-pocket maximum in now $12,000.
     2008 we are notified our premiums are increasing by 13.33 
percent. The city makes no changes to our coverage.
     2009 we are notified our premiums are increasing by 10.35 
percent. For the second year, the city makes no changes to our 
     2010 in September 2009, we received our notice of renewal 
rates for 2010, our premiums are increasing by 29.47 percent. The cost 
would be $1,265.76 per month per employee. So for the months of 
October, November and December I struggled with trying to find 
reasonably priced, decent insurance coverage for the city's employees. 
The city went out for bids, and the bids that came back were as high as 
or higher than the Wellmark BCBS rates. The city could no longer afford 
to offer its employees a decent group health insurance policy; in order 
to keep costs down we would have to raise the deductible again and that 
was determined to be unacceptable. The city will be canceling our group 
health insurance policy effective 12-31-2009.
     If the city of Fonda had the same insurance today that we 
had in 2005 it would cost $1,631.44 per month per employee. That 
accounts for a 131 percent increase in premiums over the last 5 years 
and averages 26.2 percent per year. $58,732 a year for the city to 
provide health insurance for three employees for this policy.

    After much research and discussion, the result was that the 
employees would need to provide their own insurance coverage and the 
city would reimburse them. The employees went through the process of 
completing applications for coverage.
    I will use myself as an example, but this was also true for the 
other two employees. I applied for health insurance coverage with 
Wellmark. Based on my medical history, they issued an amendment(s)/
rider that exclude certain conditions from my health benefit coverage. 
Wellmark would not cover nor provide benefits in connection with any 
medical treatment, or medications for and I quote:

     0205: Non-cancerous tumors or growths, including any treatment, 
operation, or complications thereof. This includes International 
Classification of Disease (IDC-9) codes 210.00-229.99

     1006: Structural conditions of the female reproductive system, 
including treatment, operation, or complications thereof. This includes 
International Classification of Disease (IDC-9) codes 617.00-629.99
    In addition to the riders they were placing on me, they notified me 
and I quote:

          ``At this time, we regret to inform you that due to multiple 
        medical conditions, we are unable to accept John M Menke for 
        coverage based on our review of your application information.''

    They went on to say that ``they appreciated my interest in Wellmark 
BCBS of Iowa.''
    I don't know if any of you can relate to how I felt at receiving 
this letter from the company that the city had insured with for years.
    Iowa has a group called the Iowa Governmental Health Care Plan. 
I.G.H.C.P. is a Benefits Trust for Shared Risk Pooling among Public 
Employers in the State of Iowa. It allows entities to enter into the 
trust based on claims experience, plan design and demographics. The 
entities are then pooled at renewal, using total claims experience to 
develop renewal percentages. This is a GREAT idea! However, an entity 
must have a minimum of 50 employees to bring into this group plan. It 
does not help the small cities in the State of Iowa, only the larger 
cities and they already have a large employee base that offsets their 
experience rating. I.G.H.C.P. should be available to all Iowa 
government agencies, regardless of their size.
    The only option left, and I repeat the ONLY option, was for the 
employees to apply and accept a Blue Transitions policy. It has a 
$2,500 deductible, a family is required to meet three deductibles, and 
it is an 80/20 percent split. The policies went into effect on 01-01-
2010. The cost for myself and my husband (age 54 and 59) was $751.85 
per month. We received notice from Wellmark BCBS on February 20 that 
effective 04-01-2010 our premium is going up 25 percent to $937.55. So 
were the other employee's insurance costs. Could someone please explain 
this to me? Our policies haven't even been in effect for 2 months when 
we receive these types of increases.
    I sent a letter to the Iowa Insurance Division Commissioner asking 
them this question and have attached a copy of their response. 
(Attachment A.) In summary BCBS initially asked for a 31 percent 
increase for Blue Transition policies. The Iowa Insurance Division was 
able to negotiate it down to 25 percent. Governor Chet Culver stepped 
in and asked for an independent study of the BCBS rate increases. The 
study has been completed and the increases were determined to be 
justified. The new rates go into effect May 1.
    Wellmark BCBS monopolizes the insurance in Iowa, Illinois, 
Nebraska, etc. BCBS is building a new $30-million office building in 
Des Moines so they are not broke. Every hospital in a 120-mile radius 
of Fonda has recently constructed major additions to their building; 
Des Moines just finished building a brand new hospital. The hospitals 
are not broke. Health care costs have skyrocketed. U.S. citizens can 
purchase their prescriptions cheaper from pharmacies in Canada, Mexico 
and India.
    I am one of the lucky ones, I have insurance, my employer covers 
the cost and I am for the most part pretty healthy. Fonda's former 
Mayor does not have health insurance and hasn't for 32 years. His 
employer's did not provide it and he has health issues that prevent him 
from getting any standard insurance policy. He would have to get a 
``High Risk'' policy and he is not able to afford it.
    This testimony is long, too long, but I hope that you can feel my 
frustration and the frustration of small cities and businesses in Iowa 
and around the country that are trying to do the right thing and 
provide insurance for their employees. I hope you understand the 
frustration of working class people trying to provide their families 
affordable insurance.
    Something needs to be done; progress is being made and I thank you 
for that.
                              Attachment A
From: Jeshani, Yasmin [IID] 

Subject: RE: Small group rate increase--TEXT

To: ``[email protected]'' 

Date: Tuesday, March 2, 2010, 3:33 PM

    Dear Ms. Menke:

    1. Small group rates are not regulated like the individual market, 
however, carriers have to maintain compliance with the rating bands in 
chapter 513C of the Iowa Code. Small group law limits the variability 
of rates between groups which essentially forces the groups with the 
best experience to provide a little subsidization to the groups with 
the worst experience. You may view chapter 513C of the Iowa Code at the 
Iowa legislature's Web site at www.legis.state.ia.us.
    2. The Blue Transitions policy is an individual policy and is 
subject to the individual rating laws of Iowa. Most of Wellmark's 
individual major medical policies are anniversary rated on April 1 of 
each year. Since major medical policies are normally adjusted annually 
to account for changes in utilization and underlying costs, Wellmark 
annually files for increases in December of each year for all of their 
individual policies. The company's proposal for Blue Transitions was 
nearly 31 percent, however, we negotiated that proposal down to 25 
percent by getting them to agree to a high loss ratio target for that 
business. The loss ratios on Blue Transitions was significantly higher 
than what the law calls for so the company was clearly in compliance 
with the proposal. Your rate for Blue Transitions should be good until 
April 1, 2011. Basically anybody that purchased Blue Transitions in 
Dec./Jan. would be getting a notice in February that their rates are 
going up; just the luck of timing. The rates did not go up just because 
you purchased the policy.

    We regret that medical costs are continuing to steadily increase. 
This is a result of increasing claims (more office visits, 
prescriptions and surgeries) and the increasing costs for these 
services. Rate increases are not based on your particular use of 
services, but on the services used by all members of a pool or group of 
policies. One individual may have only physicals and vaccinations, but 
others in the same pool may have had heart attacks, strokes, or other 
major surgery. It is the total claims of the entire pool of insureds 
that will determine whether the rate increase for the entire pool is 
approved. Medical claims presented to insurance companies are 
surpassing inflation, cost-of-living, or wage rates.
    Wellmark has documented loss ratios of over 90 percent for calendar 
years 2008 and 2009. This means over 90 cents of every dollar of 
premium paid has gone to pay claims. In some pools, Wellmark has paid 
out more in claims than it received in premiums. When costs for rent, 
salaries, commissions, taxes, legal, accounting, etc. are included 
Wellmark is losing money on these policies. Ultimately, any business 
will fail if it operates at a loss. A rate increase was essential for 
Wellmark to continue to stay open and pay future claims.
    We want you to know that the Division thoroughly reviewed 
Wellmark's individual proposals and that it was our belief that the 
company was in compliance with the applicable individual rating laws. 
We fully understand the health care and insurance crisis in this 
country. We also fully sympathize with Iowa's citizens in dealing with 
these hardships.
                                            Yasmin Jeshani,
                                          Market Regulation Bureau,
                                           Iowa Insurance Division.
    The Chairman. Thank you very much, Phyllis.
    And I might just add a parenthetical note, myself. Wellmark 
Blue Cross/Blue Shield and United Healthcare have 80 percent of 
the market in Iowa----
    Ms. Menke. Yes.
    The Chairman [continuing]. Between the two of them. Eighty 
    Now we'll turn to Mr. McRaith--Mike McRaith--director of 
the Illinois Department of Insurance. Before that, he worked 15 
years in private practice as an attorney in Chicago. Director 
McRaith represented national and regional financial 
institutions, including insurers in finance-related litigation. 
He serves as president of the board of directors for the 
Illinois Comprehensive Health Insurance Plan, a high-risk 
health insurance pool. He supervises the State senior health 
insurance program and has actively participated in developing, 
drafting, and advocating for statewide and national health 
insurance modernization. Mr. McRaith serves on the executive 
committee of the board of directors for the AIDS Foundation of 
Chicago and board of directors for the American Foundation for 
Suicide Prevention, Chicago Chapter. So, very active in many, 
many areas of health care.
    Mr. McRaith, welcome, again. Your statement will be made 
part of the record. If you could sum it up in 5 minutes or so, 
I'd appreciate it.


    Mr. McRaith. Chairman Harkin, Senator Alexander, Senator 
Franken, thank you for the invitation to join you this morning.
    I'm Michael McRaith, director of insurance in Illinois, 
and, in that capacity, I speak today.
    Thank you for your attention to unjustified health 
insurance premium increases in the Feinstein-Schakowsky bill.
    To be sure, Illinois families will see landmark 
improvements in health insurance performance, accountability, 
and transparency, due to the Patient Protection and Affordable 
Care Act. Illinois families are now denied health insurance for 
any reason other than race, color, religion, or national 
origin. One woman was denied health insurance for herself and 
three children--all healthy--because she attended grief 
counseling after her husband died of a heart attack. For that 
widowed mother, even grief was a preexisting condition. An NAIC 
survey revealed that Illinois has more rescissions than any 
other State, almost 50 percent more than California. One 
insurer rescinded coverage for a teenaged girl whose parents 
failed to disclose, on the family application, that she had a 
congenital deformity; she had braces. Women are charged as much 
as 57 percent more than a man, independent of maternity 
benefits. An individual renewing a policy pays a penalty, 
moving the healthy into cheaper policies, sending the sick into 
the premium death spiral. Small businesses, hoping to retain 
skilled employees, cannot offer health insurance, because of 
premium volatility. The talented, entrepreneurial, and 
ambitious forego dreams of self-employment in order to retain 
health care for themselves or a dependent.
    January 2014 will not come soon enough for families and 
businesses in our State. With much mythology and reports of 
health-insurer profits, the justification for rate increases 
merely substantiated the impetus for reform.
    In Illinois, health insurers are not required to provide 
actuarial justification for rate changes. We receive percentage 
rate changes for the individual market. Exhibit B to my written 
testimony is the department report of base-rate increases from 
2005 to the present. The report illustrates that dramatic rate 
increases in Illinois began long before 2009. For our small 
business market--2 to 50 employees--this is the entirety of a 
rate filing. We know neither the dollar amounts charged to 
small groups nor the percent increase annually. For large 
groups, we do not receive any information at all.
    Twenty-seven States have rate approval authority for the 
individual market. Twenty-two States have that authority for 
the small-group market. With an entirely for-profit health 
insurance industry, Illinois has zero authority to deny any 
rate, except if a company's pricing is too low. For property 
and casualty insurance, in the absence of hurricanes and major 
earthquakes, Illinois neither has nor needs rate approval 
    But, health insurance differs. Our dysfunctional health 
insurance market stifles economic growth and life quality. 
Small employers face rate increases of 30 to more than 50 
percent if only one or two employees are sick or injured, while 
employers who grow beyond 50 employees lose the guaranteed 
offer and protection of the small-group laws.
    With reforms like loss-ratio standards, elimination of 
lifetime caps, and coverage for children with preexisting 
conditions, our department needs additional tools. We are 
concerned that families may be priced up and out by less 
responsible insurers, in anticipation of 2014. We welcome 
Feinstein-Schakowsky and its deference to the States.
    To be clear, Illinois unequivocally supports State-based 
insurance regulation. The bill would not preempt those States 
with existing rate approval authority, but may incentivize 
States like Illinois to adopt rate approval suitable for that 
State. Feinstein-Schakowsky would enhance Illinois' market 
efficiency. Illinois families and businesses would know that 
hard-earned premium dollars are used for health care.
    Health insurance rate regulation ought not be viewed in an 
ideological or academic vacuum. We are not talking about the 
regulation of an investment product. For Illinois, rate review 
will promote access to care, financial security for our 
families, our brothers and sisters, spouses fighting cancer, 
our partners with bipolar disorder, our children diagnosed with 
    Thank you for your attention. I look forward to your 
    [The prepared statement of Mr. McRaith follows:]
                Prepared Statement of Michael T. McRaith
    I am the Director of the Illinois Department of Insurance (the 
``Department''), and I speak today in that capacity. Consumer 
protection has been, is and will remain priority one for State 
insurance officials.
    Insurance regulators regulate and control for a health insurer's 
capital to assure solvency but do not restrict the accumulation of 
capital, thereby rendering standard notions of insurer 
``profitability'' as unreliable.
    The Department's only authority to regulate health insurance 
premiums is to assure the rates charged by a health insurer are not 
    The Illinois health insurance marketplace is dysfunctional.
    In Illinois, health insurance premium increases are not required to 
be actuarially justified.
    In Illinois, ``base rates,'' while illustrative, are not 
comprehensive. Other factors greatly increase a premium beyond a base 
    Beginning in 2005, individual market base rate increases routinely 
exceed 30 percent. The Department does not even receive information 
regarding rate increases for non-HMO groups.
    Health insurance rate regulation will improve the performance, 
transparency and accountability of the health insurance market for 
employers and families in Illinois.
    The State of Illinois, Governor Quinn, and the Department, strongly 
support State-based insurance regulation.
    Feinstein-Schakowsky (S. 3078/H.R. 4757) warrants the support of 
the Department.
    Chairman Harkin, Ranking Member Enzi, and distinguished members of 
the committee, thank you for the invitation to talk with you about the 
need for regulatory approval of health insurance premium changes. My 
name is Michael McRaith. I am the Director of the Illinois Department 
of Insurance, and I speak today in that capacity.
    As regulators of the insurance sector, State insurance officials 
have a demonstrable record of successful consumer protection and 
industry oversight. Consumer protection has been, is and will remain 
priority one for State insurance officials. Each day our 
responsibilities focus on ensuring the insurance safety net remains 
available when individuals, families and businesses are in need. We 
advocate for insurance consumers and objectively regulate the U.S. 
insurance market, relying upon the strength of local, accountable 
oversight and national collaboration.
    With continually modernized financial solvency regulation, State 
insurance regulators supervise the world's most competitive insurance 
markets. Twenty-eight (28) of the world's fifty (50) largest insurance 
markets are individual States within our Nation. By gross premium 
volume, Illinois is the 16th largest jurisdiction in the world. As a 
whole, the U.S. insurance market surpasses the combined size of the 
second, third and fourth next largest markets. The insurance markets in 
California, New York and Florida are each larger than the markets in 
India, Ireland or South Africa.
    Insurance regulators monitor, examine and verify the financial 
status of insurance companies. For example, insurance regulators not 
only restrict the types of assets in which an insurer can invest but, 
also, restrict how much an insurer can invest in any one type of asset. 
With respect to capital sufficiency, regulators measure insurers based 
on the nationally uniform standard of ``risk-based capital'' (or 
    \1\ Risk-based capital levels are confidential and not available to 
the public. To calculate an RBC, regulators compare an insurer's Total 
Adjusted Capital (the actual amount of capital and surplus) to its 
Authorized Control Level Risk-Based Capital (the minimum levels of 
capital for an insurer with the subject insurer's characteristics).
    RBC measures an insurer's financial strength by testing actual 
capital levels and includes an analysis of the line of insurance, size 
of insurer, the insurer's appetite for risk, and other factors. For 
health insurers, regulatory intervention occurs, as a matter of law, if 
the risk-based capital level is 200 percent or less. Since regulators 
do not limit or control how much capital a health insurer can 
accumulate, standard notions of health insurer ``profitability'' are 
    To the extent that the Department currently has authority to 
regulate health insurance rates, that authority is limited to assuring 
the solvency of the insurer or, rather, to assuring that rates charged 
by the health insurer are not too low.
               the ``illinois model'' of rate regulation
    Illinois proudly, and appropriately, embraces the ``Illinois 
model'' for rate regulation in the life and property and casualty lines 
of insurance. Where many States require prior approval by the insurance 
regulator before an insurer's use of a proposed rate, Illinois allows 
competition and a dynamic marketplace to generate prices for commonly 
required insurance--like auto and homeowner.
    The ``Illinois model,'' as often cited by proponents for 
deregulation of insurance markets, does not repose rate approval 
authority in the Department, or any other State agency, for any line of 
insurance other than Medicare Supplement, long-term care, the auto and 
home residual markets, and the worker compensation assigned risk pool. 
Until recently, Illinois law required prior approval on medical 
malpractice liability insurance rates if a proposed increase exceeded 
six percent (6 percent).\2\
    \2\ See Abigaile Lebron, a minor, et al., v. Gottlieb Memorial 
Hospital, et al., Nos. 105741, 105745 (Ill. Feb 4, 2010).
    For property and casualty insurance, Illinois has an exceptionally 
competitive market. More companies offer auto, homeowner and worker 
compensation insurance in Illinois than in any other State. Despite 
exceptional demographic and geographic diversity, Illinois has rates 
average among all States, and insurer profitability for personal lines 
is typically in the middle third of all States. Participation in the 
auto and homeowner insurance residual markets is nominal.\3\
    \3\ As a percentage of the total insurance premiums, the residual 
market for auto was 1.10 percent and for home .26 percent.
    For property and casualty insurance, the ``Illinois model,'' while 
not entirely beyond reproach, performs well for Illinois families, 
businesses and insurers. In contrast, the absence of prior approval 
rate regulation for health insurance exacerbates the dysfunction in a 
health insurance marketplace that fails to perform efficiently or 
effectively for Illinois' businesses and families.
    In Illinois, individuals and families can be denied insurance for 
any reason other than ``race, color, religion or national origin.'' 215 
ILCS 5/424. In at least one instance, one applicant was denied 
insurance for herself and her three healthy children because she 
attended grief counseling after her young husband died.
    A recent survey by the National Association of Insurance 
Commissioners (NAIC) revealed that Illinois has more rescissions by 
volume than any State in the entire country--almost 50 percent more 
than California. See Exhibit A.\4\ In at least one instance, an insurer 
attempted to rescind a teenager's coverage on her family policy because 
her parents failed to disclose her congenital deformity--she wore 
    \4\ Exhibit A may be found at http://insurance.illinois.gov/hiric/
    Illinois law does not limit the rate variance between genders, the 
price impact of health status, the price impact of age, or the impact 
of any one rating factor on renewal. If a woman and man are of the same 
age, live in the same house, have the same health status, and see 
doctors in the same hospital, the woman can be charged as much as 57 
percent more than the man--independent of maternity benefits.
    Unlike the property and casualty insurance market--in which every 
willing buyer receives an offer--Illinois families are denied offers of 
coverage, or denied coverage at an affordable price. Illinois' 
dysfunctional health insurance market serves too few families because 
willing buyers do not even receive an offer.
    Small employers offering health insurance to employees nearly 
always experience explosive rate volatility because, even though rates 
are subject to ``bands,'' or variance limits, at the time of issuance, 
the Illinois small group rate bands are among the Nation's broadest. 
For this reason, small employers in Illinois, even with only one 
injured or ailing employee, can experience rate increases in excess of 
50 percent on renewal.
    Exclusive of Medicare and long-term care, health insurers in 
Illinois collect more than $15b in premiums. Illinois is one of three 
States (with Utah and Louisiana) that fund the payment of high-risk 
pool health care claims with direct general revenue fund, or taxpayer 
support.\5\ For the right to reject people who are or might become 
sick, the Illinois health insurance industry pays only an assessment to 
fund the HIPAA-compliant high-risk pool which, in 2009, totaled 
    \5\ In 2009, the Utah general revenue fund contributed $9.3m and 
the Louisiana general revenue fund contributed $2m. In Illinois, 
taxpayers contributed $28.9m to support the high-risk pool.
        illinois--current oversight of health insurance premiums
    Illinois law does not require that either individual or group plan 
rate increases must be actuarially justified.
                        individual major medical
    As provided in Illinois law, individual market premiums are 
effective when the insurer submits a ``classification of risks and the 
premium rates pertaining thereto have been filed with the Director.'' 
215 ILCS 5/355. Consequently, the Department receives an individual 
major medical rate increase filing, notifies the insurer that the 
filing has been received, and the insurer may then rely upon and use 
that rate change.
                    health maintenance organizations
    Health Maintenance Organizations (HMO) comprise a small and 
shrinking percentage of Illinois' commercially insured, with some 
estimates as low as 15 percent of all covered lives. HMO's must file 
with the Department ``schedules of base rates to be used,'' 50 Ill. 
Admin.Code 5421.60, and submit to the ``Director, prior to use, a 
notice of any change in rate methodology[.]'' 215 ILCS 125/4-12. As 
with individual major medical insurance, even though HMOs submit rate-
related information, the Department does not have authority to approve 
or deny any HMO rate change.
                      small employer groups (2-50)
    For non-HMO small group plans--by far the largest share of the 
Illinois small group market--insurers are not required to file with the 
Department the amount of a base rate or the percentage change of a base 
rate from year-to-year. In fact, insurers are only required to file 
annually ``an actuarial certification certifying that the carrier is in 
compliance'' with the Illinois Small Employer Health Insurance Rating 
Act, or ``SEHIRA.'' 215 ILCS 93/30.
    The broad rate bands in SEHIRA provide health insurers with 
expansive latitude to price a small employer. While small employers 
enrolled in the first year pay premiums dependent upon health status of 
employees, the renewal years bring profound rate volatility due not 
only to employee health status (up to 15 percent) but also a lack of 
limitation on the base rate increases. 215 ILCS 93/25(3)(A) and (B). In 
Illinois, a small group ``base rate'' is the lowest rate charged to a 
small employer. Small employer premiums can also increase, without 
limitation, due to ``case characteristics,'' otherwise known as age, 
gender and geography. 215 ILCS 93/25(C).
                      large employer groups (50+)
    Illinois law is silent on rate oversight for employers with more 
than 50 employees. In fact, unlike employer groups of 50 or fewer, 
health insurers can--and do--deny applications from employers with more 
than 50 employees.
                   ``base rates''--only one indicator
    Base rate information can be illustrative but is far from 
conclusive. For example, Illinois policyholders can be charged more 
than the base rate due to health status, geography, gender and age. For 
individual major medical policies, the Department does not receive 
information regarding the percentage of covered lives who pay more than 
the base rate versus those who pay less than the base rate, or how much 
those covered lives pay.
                            renewal penalty
    In addition, some health insurers in Illinois offering individual 
health coverage impose a renewal penalty of 3-5 percent. Since 
individual policies are ``guaranteed renewable,'' only those who have 
filed claims in the preceding year will renew because, of course, 
failure to renew will result in outright denial of that person's 
coverage, or an exclusion rider. The renewal penalty, therefore, 
incentivizes the healthy insured to move to a less expensive block of 
the insurer's business, promoting risk segregation that leads to the 
proverbial ``death spiral.'' Illinois law does not limit rate increases 
for any individual major medical health insurance block of business.
   illinois individual major medical health policy rate filing report
    With the public discussion leading to the March 21, 2010, U.S. 
House of Representatives vote on the Patient Protection and Affordable 
Care Act (the ``PPACA''), the Department posted on its Web site 
(Insurance.Illinois.gov) a report of individual market health insurance 
premium increases, the ``Individual Major Medical Health Policy Rate 
Filing Report'' (the ``Report''). Since the initial Report, the 
Department has expanded the retrospective to include all individual 
market filings since January 2005. See Exhibit B.\6\
    \6\ Exhibit B may be found at http://insurance.gov/Reports/
    The Report illustrates that Illinois families and individuals 
covered or seeking coverage in the major medical marketplace have 
experienced dramatic base rate increases into 2010 and beginning at 
least in 2005. Base rate increases have frequently exceeded 30 percent 
since at least January 2005.
       health insurance rate regulation--a necessary step forward
    Rate approval authority, vested with the Department, would improve 
the performance, transparency and accountability of the health 
insurance market for employers and families. With an entirely for-
profit health insurance industry, Illinois is uniquely well-positioned 
to benefit from an additional regulatory tool such as rate regulation 
for health insurers and HMOs.
    Rate regulation need not be a punitive or contentious exercise. 
Consistent with the priorities of Illinois Governor Pat Quinn, the 
Department pursues the regulatory mission in a professional, direct and 
collaborative manner, an approach that will continue through all phases 
of PPACA implementation.
    Consistent with the Department's core mission to protect the 
solvency of the insurance industry, rate regulation complements the 
insurance reforms of PPACA. For example, effective September 23, 2010, 
insurers will be required to report medical loss ratios, and minimum 
medical loss ratios are required for plan years beginning January 1, 
2011. See PPACA section 1001.
    Even now, the U.S. Department of Health and Human Services and the 
States are working to establish a process for the annual review of 
unreasonable premium increases. See PPACA section 1003. In that same 
section, insurers are required to post on company Web sites ``a 
justification for an unreasonable premium increase prior to 
implementation of the increase.''
    With other reforms effective September 23, 2010, including the 
removal of lifetime limits and coverage for children with pre-existing 
conditions, the Department has heightened concerns about health insurer 
solvency. With heightened concern, the Department also needs sharper 
tools and more opportunities to learn about the rate-making strategies 
of health insurers.
    In addition, less responsible insurers may opt to increase premiums 
dramatically, and unnecessarily, in anticipation of the comprehensive 
reforms effective January 1, 2014. Health insurer rate regulation, 
therefore, is essential to prevent both inadequate and excessive 
    Even without the improvements from PPACA, health insurance 
consumers in Illinois would benefit from health insurance rate 
regulation. Most Illinois families scrape and save to pay premiums with 
hard-earned dollars. Small businesses, trying to retain skilled 
employees to facilitate growth, spend income earned through dreams, 
sweat and dedication just to offer meaningful health insurance to those 
employees. Illinois families and businesses, trying to obtain financial 
security with the purchase of health insurance, are entitled to know 
that those premiums are reasonable, fair, and not an insurer's 
exploitation of an overly passive or archaic regulatory ideology.
                feinstein-schakowsky (s. 3078/h.r. 4757)
    To be clear, the Department, reflecting the priorities of Governor 
Quinn, supports State-based insurance regulation. Insurance regulation 
at a State level affords consumers access to direct, prompt, meaningful 
interaction with regulators who understand the communities in which we 
live, the markets in which we buy, the insurers from whom we buy, and 
the producers who aid in our purchase of insurance. This reality is 
apparent in every line of insurance, but especially visible with health 
    State regulators approve health insurance policies sold in each 
State, the provider networks offered by insurers, the provider 
communities in areas as diverse as Chicago and down-state Marion, and 
the relative impact of one change versus an ``unintended consequence.'' 
For that reason, the Feinstein-Schakowsky bill, which would establish 
the ``Health Insurance Rate Authority,'' warrants the support of the 
    Congress, in passing Feinstein-Schakowsky, would provide a Federal 
``tools'' approach to health insurance rate oversight. In effect, a 
Federal ``tools'' law imposes on the States an obligation to act. 
Failure to act would result in Federal preemption. This approach has 
been previously used for insurance purposes, including for Medicare 
Supplement guidelines, the Health Insurance Portability and 
Accountability Act, and Gramm-Leach-Bliley. In addition to differing 
regulations for rate approval, States have different health insurance 
markets: some are predominantly non-profit, some almost evenly split 
between for- and non-profit, some more for-profit, some have medical 
loss ratio standards and some do not.
    For those States that have rate oversight authority--27 currently 
have some form of health-related rate approval authority--Feinstein-
Schakowsky would be supplementary and not a new or lower level of 
authority. For those States that do not have health insurance rate 
regulation--of which Illinois is one--Feinstein-Schakowsky would 
provide an impetus.
    In short, Feinstein-Schakowsky vests the States with discretion 
about whether and how to regulate rates. For those States that do not 
opt to supervise proposed rates, the families and businesses of those 
States will have the opportunity for Federal oversight.
    The funding available to States to support the enhanced rate 
regulatory authority, or some portion of $250 million, would bolster 
the Department's efforts to afford Illinois families and businesses 
better health insurance performance and accountability. At a minimum, 
rate regulation will assure Illinois' families and businesses that 
hard-earned premium dollars are used primarily for health care.
    Not every State seeks health insurance rate approval authority. For 
Illinois, with our dysfunctional health insurance market and with the 
enactment of PPACA, rate approval authority will enhance the 
performance, transparency and accountability of the health insurance 
our families and businesses strive to purchase. While regulation for 
the sake of regulation does not comprise an end worth pursuing, 
increased efficiency of health insurance products will improve the 
quality of life for Illinois' families and the prospects for growth of 
Illinois' small businesses.
    We welcome the interest of Congress and this committee in this 
important question of consumer protection. As the entire country moves 
forward with implementation of health insurance reform, we pledge to 
share our experience and expertise with Congress and to work with the 
members and staff of this committee.
    Regulation of all financial sectors must allow for evolution to 
facilitate but monitor innovation and efficiency. Here, as we work 
toward affordable and accessible health insurance coverage for all 
families and businesses, the Department seeks additional rate approval 
tools with which to limit, if not eliminate, the potential abuses of 
inadequate or excessive rate changes.
    After all, health insurance differs from other personal lines of 
insurance: we can choose the car we drive and we can choose our home. 
We do not choose breast or prostate cancer. We do not choose a heart 
attack. We do not choose autism.
    Thank you for the opportunity to testify. I look forward to your 

    The Chairman. Great. Thank you very much for an eloquent 
    Now we turn to Karen Ignagni, president and CEO of 
America's Health Insurance Plans. No stranger to this 
committee, Karen's been here many times in the past and worked 
with us on all the health care bill for the last couple of 
years. So, a very distinguished background.
    And, Karen, again, your statement will be made a part of 
the record, please proceed.


    Ms. Ignagni. Thank you, Mr. Chairman. Thank you for the 
opportunity--Senator Alexander, Senator Franken--thank you, on 
behalf of all of our members.
    I think the first thing that's important to say is to let 
all of you know that our members are working very, very hard to 
implement the current program. And I think, as evidenced by the 
announcements that have been made over the last couple of days, 
we're working to find opportunities where we can help to 
maintain continuity of care. In particular, over the recent 
days, the announcements related to folks on parents' coverage 
who would otherwise transition off before September. And you'll 
hear more from our members about that.
    Second, I think it's very important, in listening to Mrs. 
Menke's testimony, that I convey, on behalf of our members--
they are fully cognizant of the burden of rising health care 
premiums on families and on small businesses and large 
businesses. And, in fact, that's what our advocacy in health 
care reform had been all about. We were very, very concerned, 
as we saw costs exploding. And there's been, now, tremendous 
evidence of that being documented in the press and in research 
studies, that we were very concerned that not enough was being 
done in that area.
    Health plan premiums are a symptom, not a cause, of the 
problem. And according to government data, just to level-set, 
we're 4 percent of national health care expenditures --the 
profits of our industry, according to Fortune magazine, that 
does a very deep dive of profits in all the sectors, in 2008 
were roughly 2 percent; in 2009 were about 3.2. That's where we 
are, relative to other stakeholders in the health care sectors 
that have three and four times those levels, just to level-set.
    Our health plan profits in the legislation have been 
capped. Administrative costs are capped. And all parts of our 
businesses and operations have been regulated. We provided a 
chart to illustrate that in our testimony so you could see the 
full gamut of the regulation.
    But, I think the concerning issue that's relevant today is 
that Federal and State data have shown that premium increases 
are being driven by the growth in the underlying costs of 
health care services and the utilization of these services. And 
new spending projections by CMS has found that health care as a 
percentage of gross domestic product had the largest 1-year 
increase on record. The only way premiums will be brought under 
control is for the country to more directly take on these 
    We think Massachusetts is a cautionary tale. 
Notwithstanding an in depth report by Attorney General Martha 
Coakley that documented why costs were rising because of the 
increases in the cost of care, the strategy being pursued there 
is to arbitrarily cap premiums without any linkage to the 
factors that are driving them. We're very concerned that that 
will create insolvency, volatility for consumers, 
unpredictability. Indeed, in New York, that had previously had 
prior approval, they had to rescind that, and they changed that 
legislation, because the market was in a State where the 
businesses were becoming insolvent.
    We believe there are new provisions in the legislation that 
will increase costs and oversight, and they're important to 
take into account today. The new legislation creates an annual 
review of unreasonable premium increases. It requires 
justification of rates and provides financial support through 
grants for States to help carry out these functions. Those are 
important changes, which we believe will help create more 
consistency across the country.
    So, we're delighted to be here. We look forward to 
participating in the discussion. And, Mr. Chairman, we hope 
that this will begin a process of enlarging the conversation. 
We want to do our share. We're here to participate. We want to 
come with solutions, and we're committed to that.
    Thank you very much.
    [The prepared statement of Ms. Ignagni follows:]
                  Prepared Statement of Karen Ignagni
                            i. introduction
    Chairman Harkin, Ranking Member Enzi, and members of the committee, 
I am Karen Ignagni, CEO of America's Health Insurance Plans (AHIP), 
which is the national association representing approximately 1,300 
health insurance plans that provide coverage to more than 200 million 
Americans. Our members offer a broad range of health insurance products 
in the commercial marketplace and also have demonstrated a strong 
commitment to participation in public programs.
    We appreciate this opportunity to testify on issues affecting the 
affordability of health insurance coverage. Our written testimony 
addresses the following issues:

     What our community is doing to create a bridge to a more 
modernized health care system;
     How premiums relate to costs;
     How premiums are evaluated at the State level;
     What is changed by the new law;
     Principles for a workable system; and
     Unmet challenges.

    We hope this information will be helpful to the committee and we 
look forward to working with you to address the factors that are 
causing premiums to increase.
ii. what our community is doing to create a bridge to a more modernized 
                           health care system
    Our community is strongly committed to the successful 
implementation of the ``Patient Protection and Affordable Care Act'' 
(PPACA), and we already have begun taking important steps to lay the 
foundation of a health care system that rewards value, not volume. 
Health plans are pioneering new initiatives for improving patient care, 
enhancing quality, and helping enrollees receive the highest possible 
value for their health care dollars.
Administration Simplification
    Health insurance plans have recognized the importance of working 
with clinicians and hospitals to reduce the complexities of 
administrative transactions and improve patient care. Our primary goal 
for administrative simplification has been to improve the ease with 
which health care providers electronically connect with health 
insurance plans to exchange administrative and clinical information, 
and simplify the system for consumers.
    Through a partnership with the Council for Affordable Quality 
Healthcare (CAQH), our members are participating in an initiative, 
known as CORE, that is focused on developing a single set of operating 
rules to expand and enhance the standards for administrative 
transactions in the health care industry. The goal of these rules is to 
streamline and automate the claims payment cycle by encouraging 
interoperability between health plans and providers. This goal is being 
achieved through a phased approach that results in a reduction in 
administrative costs and time.
    The CORE collaboration started in 2005 and approximately 115 
entities are now participating. Participants include health insurance 
plans, providers and provider groups, health IT companies, standard 
setting organizations, Federal and State agencies, and other health 
industry trade associations.
    Once the CORE initiative is fully implemented, the operating rules 
will enable all administrative transactions to be performed 
electronically. All parties will be able to exchange information in a 
consistent, predictable manner--ensuring that clinicians have the 
information they need on any patient, covered by any insurance, when 
they need it. This is comparable to the standards work that was done to 
allow banks to offer ATMs to consumers. This initiative also lays the 
groundwork that will enable the administrative simplification 
provisions of the new law to work.
Physician Portals
    Building on the development of common standards, AHIP and the Blue 
Cross and Blue Shield Association (BCBSA) are working with our members 
in New Jersey and Ohio where State-based initiatives have been launched 
to simplify the flow of information between health plans and 
physicians' offices. These initiatives allow physicians to use a single 
web portal to conduct electronic transactions with all of the health 
insurance plans that insure their patients, helping them to streamline 
and fully automate key office tasks. The lessons learned from these 
initiatives, including feedback from physicians, will be applied to 
future administrative simplification efforts as health insurance plans 
work to help physicians improve customer service for their patients and 
reduce personnel and billing costs for medical practices. Savings 
potentially could reach hundreds of billions of dollars as the entire 
health care system achieves efficiencies through similar moves to 
automation and consistent business practices. For consumers, the 
operating rules and the physician portal will enable the seamless 
exchange of health information without the hassles of clipboards and 
repetitive requests for information.
Payment Reforms
    Health insurance plans also have implemented innovative payment 
models to reward quality and promote evidence-based health care using 
clinical guidelines that are equivalent in some respects to aviation 
protocols. When properly applied, evidence-based clinical guidelines 
allow doctors to do what they were trained to do while reducing the 
chance of under-treatment, over-treatment, and mistreatment. A 2006 New 
England Journal of Medicine article reported that at least half of the 
Nation's health insurance plans, representing 80 percent of all 
enrollees, included some pay-for-performance incentives in their 
provider contracts. For patients, this progress means greater safety 
and improved outcomes. For providers, it means being recognized and 
rewarded for practicing to the highest professional standards.
    Health insurance plans are committed to engaging physicians, 
hospitals, and other health care professionals in the design and 
implementation of payment reforms. Our members also are working with 
various stakeholders to make performance measurement more consistent. 
We urge the committee and policymakers to assess these efforts and 
consider building upon the PPACA initiatives to ensure a system-wide 
approach to delivery reform.
    Reducing Preventable Hospital Admissions, Re-admissions, and 
Emergency Room Visits
    Reducing preventable hospital admissions, overall re-admissions, 
and emergency room visits has become an important national priority for 
both quality improvement and cost control. Health plans are advancing 
this goal through a variety of initiatives that transform patient 
experiences with care. These include:
     Information and support programs for patients 
transitioning from hospital to home;
     Medical home innovations that expand patients' access to 
primary care and support primary care physicians with multidisciplinary 
teams of medical, behavioral health, and social service professionals;
     Case management to help patients at high risk of 
hospitalization access all of the medical, behavioral health, and 
social services they need;
     Home medical visits for patients who have difficulty 
reaching the doctor's office;
     Programs to help frequent emergency room users connect 
with quality care on an ongoing basis; and
     Initiatives to align end-of-life treatment plans with 
patients' preferences.

    While implementing these initiatives, our members have demonstrated 
that effective care is about personal connections. Personal phone calls 
from nurses, social workers, or case managers to check on patients' 
needs following hospitalization help patients overcome barriers to 
following care plans, avoid medication errors, and significantly reduce 
potentially avoidable hospital admissions, re-admissions, and emergency 
room visits. In addition, patients face tremendous challenges in taking 
medications correctly, and these challenges have created an important 
new analytical and teaching role for pharmacists in the health care 
    Research findings demonstrate that these innovative strategies are 
working to help keep patients out of the hospital and avoid potentially 
harmful complications. In December 2009, AHIP released the second in a 
series of working papers,\1\ comparing patterns of care among patients 
enrolled in two large, multi-state Medicare Advantage HMO plans and in 
Medicare's traditional fee-for-service (FFS) program. The preliminary 
results from this study are consistent with the results gathered in an 
earlier eight-company AHIP study \2\ of smaller and regional Medicare 
Advantage plans. Based on the simple average of all 18 areas studied in 
all 10 companies, the risk-adjusted comparisons indicate that these 
plans improved health care for their enrollees by:
    \1\ AHIP Center for Policy and Research, Working Paper: Comparisons 
of Utilization in Two Large Multi-State Medicare Advantage HMOs and 
Medicare Fee-for-Service in the Same Service Areas, December 2009.
    \2\ AHIP Center for Policy and Research, A Preliminary Comparison 
of Utilization Measures Among Diabetes and Heart Disease Patients in 
Eight Regional Medicare Advantage Plans and Medicare Fee-for-Service in 
the Same Service Areas (revised September 2009). See also, AHIP Center 
for Policy and Research, Reductions in Hospital Days, Re-Admissions, 
and Potentially Avoidable Admissions Among Medicare Advantage Enrollees 
in California and Nevada, (revised October 2009).

     reducing emergency room visits by 24 percent;
     reducing hospital re-admissions by 39 percent;
     reducing certain potentially avoidable hospital admissions 
by 10 percent; and
     reducing inpatient hospital days by 20 percent.

    By reducing the need for avoidable hospitalizations and emergency 
room care, health insurance plans are not only improving the health and 
well-being of their enrollees--but also achieving greater efficiencies 
and cost savings.
    Recognizing that these preliminary findings demonstrate dramatic 
improvements relative to FFS coverage, we are seeking verification of 
these results through additional research using different data sources 
and risk adjustment mechanisms. We also should note that our research 
found that outpatient visits were roughly the same for Medicare 
Advantage and FFS enrollees and that physician visits for Medicare 
Advantage enrollees were substantially higher.
                   iii. how premiums relate to costs
    As the committee conducts its review of why premium costs are 
increasing, the chart below illustrates how Americans are covered 
today. The major focus of the health reform debate has been the 
individual health insurance market, which accounts for 7 percent of the 
insured population in the United States (or 18 million people).

    The individual market has unique challenges, including the fact 
that participation will continue to be voluntary until the individual 
coverage requirement takes effect in 2014. As a result, the risk of 
adverse selection is much higher in the individual market than in other 
markets. Indeed, with the recession, a number of individuals purchasing 
coverage in the individual market have dropped coverage.
    In the small group market, a different type of adverse selection 
has occurred, with layoffs generally affecting individuals most 
recently hired, small groups have become older and sicker which has 
been a factor in premium increases for this market segment. Rising 
costs, along with other factors explained below, are driving premiums 
in all markets.
    When the cost of health care services increases, the cost of 
providing health benefits also rises. The Federal Government's data on 
national health expenditures (see chart below) indicate that over the 
past 20 years (1989-2009) health benefit costs have increased by an 
average of 7.2 percent annually and premium increases likewise have 
averaged 7.1 percent annually. This trend clearly demonstrates the 
importance of addressing underlying medical costs through measures that 
achieve system-wide cost containment.

    Furthermore, the chart below shows that the administrative costs of 
health plans increased much less than spending on prescription drugs, 
physician services, hospitals, and other health expenditures from 2000-
9. In fact, last year, the percentage of premiums that went toward 
administrative costs and profits declined for the sixth consecutive 
year--from 13.67 percent in 2003 to 11.15 percent in 2009.

    Additionally, as we examine issues surrounding health insurance 
premiums and medical costs, it is important to look at recent history, 
particularly the decade of the 1990s when premium growth was well below 
historical trend and stable for several years, contributing toward 
economic growth and growth in coverage. We know from this experience 
that health plans can hold down premiums when they are able to use care 
management tools to reward the delivery of high quality, appropriate 
and efficient care.
    In today's health care system, we face new challenges--most 
notably, rapid increases in the unit price of medical services--that 
are contributing to higher health care costs. In fact, according to the 
2008 National Health Expenditures (NHE) report issued in January 2010, 
price increases constituted two-thirds of the year-over-year increase 
in health spending. Specifically, of the 4.6 percent annual increase in 
personal health expenditures reported in 2008, price accounted for 3.1 
percentage points, while 1.5 percentage points was driven by non-price 
factors. The NHE report also indicated that for 2008, health insurance 
premiums increased at 3.1 percent, approximately one-third below the 
increase in total health spending.\3\
    \3\ Health Affairs, Health Spending Growth at Historic Low in 2008, 
    Further evidence of the changing impact of price increases on 
premium rates can be found in a February 2010 article \4\ published on-
line by Health Affairs. In this article, authors Paul Ginsburg and 
Robert Berenson (both with the Center for Studying Health System 
Change) noted that ``providers' growing market power to negotiate 
higher payment rates from private insurers is the `elephant in the 
room' that is rarely mentioned.'' To that end, the authors note that in 
some cases payment rates to hospitals and physician groups approach or 
exceed 200 percent of the amount paid by Medicare. This concern is 
reinforced by the following examples of unsustainable cost increases we 
have uncovered through AHIP research and discussions with our members:
    \4\ Health Affairs, Unchecked Provider Clout In California 
Foreshadows Challenges To Health Reform, by Robert Berenson, Paul 
Ginsburg, and Nicole Kemper, February 2010.

     One AHIP member operating in a large State reported facing 
hospital rate increases ranging between 7 percent and 90 percent, with 
the average request at 29 percent.
     Another AHIP member reported that a ``must have'' hospital 
was demanding a 40 percent increase in payment and insisting on 
contractual terms that would prohibit the plan from sharing the 
facility's quality information with consumers.
     Another AHIP member reported that a hospital in suburban 
New Jersey--the only hospital in its community--is demanding that 
health plans pay an extra 15-16 percent to compensate for Medicaid and 
Medicare payments that are rising by 4-5 percent less than the 
hospital's costs.
     A hospital in the Northeast charges health insurance plans 
50 percent more than it charges the plan owned by its own hospital 
     Charges for a colonoscopy vary widely among three 
hospitals in a 20-mile radius in California--with no apparent linkage 
to quality--with the minimum typical price ranging between $2,192 and 
$3,786 and the maximum typical price ranging between $2,590 and 
    \5\ Based on data from Anthem Care Comparison Tool.
     An August 2009 AHIP survey \6\ of out-of-network fees 
found that a patient in Arizona was charged $72,000 for lower back 
spinal fusion when Medicare's fee was only $1,683; and for total hip 
replacement surgery, a patient was charged $45,601 when Medicare's fee 
was only $1,431. A patient in California was charged $15,870 for 
cataract surgery when Medicare only pays $638.
    \6\ AHIP, The Value of Provider Networks and the Role of Out-of-
Network Charges in Rising Health Care Costs: A Survey of Charges Billed 
by Out-of-Network Physicians, August 2009.

    In the face of these exploding costs, our members are deploying the 
next generation of medical management tools to promote a high-value 
health care system, including:

     Targeting disease management services to enrollees who 
stand to benefit the most from pro-active interventions;
     Working with primary care physicians to expand patient-
centered medical homes that promote care coordination and 
accountability for clinical outcomes;
     Providing incentives to promote the use of decision-
support tools and health information technology;
     Providing quality improvement reports for physicians to 
monitor their progress in managing disease;
     Offering personalized risk assessments and wellness 
     Encouraging electronic prescribing and consumer safety 
     Providing peer-to-peer comparisons to demonstrate the 
appropriate use of health care services across specialists and manage 
the use of high-cost imaging services.

    Many of the quality programs and innovative initiatives being 
implemented in various markets across the country by the private sector 
would improve the delivery of care and patient outcomes in a more 
timely and efficient manner if public programs were part of the local 
initiatives. Expanding these programs to encompass the full health care 
system--both public and private payers--is an important step toward 
identifying gaps in care, pursuing opportunities for improvement, and 
evaluating innovations so adoption can occur more broadly.
    While our members are taking aggressive steps to address the cost 
crisis, a discussion of premiums needs to look at all components of 
expenditures. The chart shown below, based on annual national health 
expenditure data published by the Centers for Medicare & Medicaid 
Services (CMS), indicates that the costs associated with health 
insurance--including plan profits and administrative costs--account for 
only 4 percent of all national health expenditures. The other 96 
percent of costs can be attributed to hospitals, physicians, 
pharmaceuticals, home health care, and other components of health care 

How Are Premiums Built?
    Health care costs are impacted by a number of direct cost drivers 

    Factors Affecting Premiums

     Price per service.
     Utilization of services.
     Adverse selection.
     New medical technology.
     State insurance taxes and fees.
     Assessments for high-risk pools.
     Regulatory compliance.
     Aging of the population.
     Unhealthy lifestyles.

     The price per service (as discussed in detail above) is 
the cost charged by medical providers, such as doctors, hospital and 
pharmacies, for a particular service. The amount providers charge 
varies greatly, according to the provider's location, how the group is 
structured and organized, and how many other providers are located 
nearby. Lack of competition and shortages of health care providers are 
significant factors in a number of markets where consolidation among 
hospitals and other providers is increasing costs and health plans are 
facing higher rate increases from hospitals and medical groups with 
dominant positions.
     The utilization of services refers to the amount of 
medical services that are used. Increased utilization drives costs 
     Adverse selection is what occurs when less healthy 
individuals stay in the market while healthy individuals and families 
drop coverage. Moreover, at a time when many small businesses are 
financially strained because of the weak economy, our members are 
observing that some companies with young, healthy workforces have 
stopped offering coverage. Another related trend is that as it becomes 
more difficult for employers to continue offering coverage, some are 
forced to reduce the portion of the premium they cover and increase 
employee cost-sharing. In response to these decisions, more employees--
usually those with below average health costs--are declining to 
participate. The net impact of these developments is that some 
employers may find it less viable to offer coverage or costs may rise 
as the remaining risk pool is more heavily weighted with older, less 
healthy persons, resulting in higher average costs per enrollee for 
those who maintain coverage.
     Cost shifting occurs, from public programs to private 
payers, as a result of reimbursement rates that Medicare and Medicaid 
pay to hospitals and physicians, which often fail to cover the cost of 
providing health services. According to a December 2008 Milliman 
study,\7\ an average family of four already pays a hidden tax of more 
than $1,700 annually on their premiums because Medicare and Medicaid 
significantly underpay hospitals and physicians, compared to their 
actual costs of delivering medical care. To offset these inadequate 
payments, providers pass on higher costs to individuals, families and 
employers in the private sector. Additional cost-shifting results from 
uncompensated care provided to the uninsured. According to a May 2009 
Families USA study,\8\ the cost-shift associated with uncompensated 
care adds more than $1,000 annually to family premiums.
    \7\ Milliman, Hospital & Physician Cost Shift: Payment Level 
Comparison of Medicare, Medicaid and Commercial Payers, December 2008.
    \8\ Families USA, Hidden Health Tax: Americans Pay A Premium, May 
     State fees and taxes, assessments for high-risk pool 
programs, and the costs of complying with regulatory requirements also 
contribute to the cost of health insurance coverage. As we discuss 
below, the ``Patient Protection and Affordable Care Act'' includes a 
number of provisions that regardless of their public policy merit will 
ultimately increase the cost of coverage.
           iv. how are premiums evaluated at the state level
    States generally have the authority to examine and regulate rates, 
either through a specific grant of authority or through their authority 
to regulate unfair practices. This authority meets States' obligation 
to assure that not only are consumers charged fair premiums, but also 
that insurers remain solvent and are able to pay future claims.
    Rates must be adequate to cover the costs of medical care utilized 
by insured members, and administration of health insurance services 
(enrollment, customer service, claims processing, care management and 
quality review, etc.). Additionally, rates must be adequate to assure 
that health plans remain solvent to meet the promises of paying claims, 
and meeting customers' expectations by having adequate reserves on hand 
to meet those obligations.
    Insurance regulators want premiums to be:

     Financially sound--able to pay claims and costs, and allow 
insurers to remain solvent;
     Fair and reasonable--in relation to the benefits offered, 
thus ensuring value for consumers; and
     In compliance with the rules--incorporate States' consumer 
protections embodied in States' rating rules and standards.

    Before offering any product to consumers, virtually every State 
requires the policy form and the related rate structure to be filed 
prior to sale. These requirements apply to both individual and small 
group health insurance policies. The vast majority of States regulate 
small group rates by way of requiring an actuarial certification that 
the insurer is in compliance with the rate band requirements that are 
the law in most States. And every insurance department has the 
authority to conduct market conduct exams to assure compliance.
    Health insurance premiums tend to be more actively monitored than 
other lines of insurance. The majority of States have some form of 
``file and use'' standards for health insurance premiums for rate 
changes. What this means is that insurers must file rates prior to use, 
with approval deemed after the expiration of the review timeframe 
(generally 30 to 60 days), to allow the regulators time to discuss 
questions or concerns they have about the filing--which includes 
actuarial and trend data supporting the requested rate change--with the 
    Prior approval States are challenged to meet timeframes of review, 
often taking significantly more time than the timeframes for ``file and 
use'' rates--sometimes taking more than a year to finalize review of 
rates. This is exacerbated by the States' own financial challenges--
budget cuts throughout the Nation have reduced State government budgets 
and staff. The National Association of Insurance Commissioners has 
noted \9\ that prior approval ``can be a very labor intensive and 
expensive process'' because it adds costs and delays to the system, 
which creates unintended consequences for consumers. We also have seen 
an increasingly political approach taken in these reviews with efforts 
to cap rate increases, without taking into account all of the factors 
that premium rates reflect.
    \9\ Letter from NAIC CEO Dr. Terri M. Vaughan to Chairman John 
Dingell, February 23, 2010.
    Capping rates only delays the increase needed and compounds the 
subsequent increases. Regulators who establish artificial caps on 
premium rates that do not reflect the underlying components place 
health plans in jeopardy of weakened financial conditions, creating 
larger fluctuations in premiums and needless volatility for consumers.
                   v. what changes under the new law
    The debate leading up to passage of health care reform ultimately 
became framed as a need for insurance market reform and greater 
regulation of health plans, creating legislation disproportionately 
focused on health plans, which make up only 4 percent of national 
health expenditures, and doing little to address the underlying drivers 
of health care costs, which have a substantial affect on premium 
    The extent of this new regulation is illustrated in the chart on 
the following page. As the illustration demonstrates, the new 
legislation affects every part of health plan operations, will add new 
layers of regulation on top of the regulatory framework that already 
exists at the Federal and State levels. A second chart appended to our 
statement illustrates the full impact of this point. What is necessary 
now is not further legislation aimed at only 4 percent of the health 
care system, but broader consideration of the other 96 percent.
    The point of these charts is to illustrate how the new law has 
capped health plan administrative costs and profits and regulated every 
part of health plan operations. In addition, the medical loss ratio 
(MLR) provision called for in the new law already serves as a direct 
form of rate regulation. While great care is required in implementing 
this provision in order to avoid significant disruptions in coverage 
and instability, particularly in the individual market, during the 
period prior to the creation of the exchanges, the MLR provision needs 
to be viewed in tandem with the new premium review provisions also in 
the law.

    The new law requires the HHS Secretary and the States to work 
together to establish a process for the annual review of ``unreasonable 
increases'' in premiums and requires public justification and 
disclosure prior to the implementation of the increase. In addition, 
the legislation establishes a grant program that will provide the 
States the assistance they need to implement these requirements.
    Implementation will require that these terms be defined, with the 
opportunity to do so in a way that ensures a consistent standard of 
review throughout the country, takes into consideration all of the 
factors that drive premiums and must be considered in order for rates 
to be considered actuarially sound, and provides transparency on all of 
these factors to improve public confidence in the process. Advancing 
the principle of transparency should also entail steps to focus similar 
attention to the rates in other health care sectors. As noted above, 
virtually all States have the authority to examine rate increases to 
ensure that they are actuarially justified, and implementation of the 
grant program along with the requirement that all States conduct an 
annual review in conjunction with the Secretary will work to ensure 
that there is a rate review process across the country.
    The net effect of these provisions is that health plan spending as 
it relates to administrative costs and profits is capped, and that 
``unreasonable increases in premiums'' will be reviewed annually, with 
the important caveat that the term ``unreasonable increase'' needs to 
be clearly defined in relation to actuarial soundness lest this 
standard encourage an arbitrary process of review that diverts 
attention from the real issues driving health care costs.
    Looking further down the road, the new premium tax and the high-
value health plan tax will further increase the cost of coverage in 
future years.
Cautionary Tales From Massachusetts and California
    Massachusetts and California provide high profile examples of a 
public discussion about insurance rates entirely delinked from an 
examination of the factors driving these rates.
    In the case of Massachusetts, a comprehensive and in-depth report 
from Attorney General Martha Coakley recently reported two findings: 
that the market leverage of providers was leading to higher prices, 
without any noticeable difference in quality; and that increases in the 
price of health care services had caused most of the increase in health 
care costs--not utilization.
    Nonetheless, State regulators have placed arbitrary caps on premium 
increases without taking these factors into account. By focusing just 
on regulating premiums, the policymakers in Massachusetts are missing 
an opportunity to bring increases in underlying medical costs under 
control. Thus, even if policymakers force premiums down through 
legislative action, individuals, families and employers, as the Boston 
Globe correctly notes, will still ``confront ballooning levels of 
reimbursements for providers.''
    The situation of provider consolidation leading to higher premiums 
is not unique to Massachusetts. In fact, the Health Affairs article we 
mentioned earlier, authored by Robert Berenson and Paul Ginsburg, 
analyzes the affect of providers' growing market power and using this 
power to negotiate higher payment rates from private insurers in 
California. Berenson and Ginsburg cautioned that ``provider dominance 
could offset some or all of the potential of reforms to lower premiums 
through increased efficiency in delivery.'' While there has been 
considerable discussion of specific premium increases proposed in 
California, there has been little national discussion about the 
implications of the findings in the Health Affairs article and how 
these factors might be a root cause of the reported increases.
    Capping premium increases without looking at the underlying 
components is similar to capping the prices automakers can charge 
consumers, while allowing the steel, rubber, and technology 
manufacturers to charge the automakers whatever they want. This will 
lead to financial instability throughout the system. What has occurred 
in Massachusetts is a politicization of processes related to premium 
review and approval, creating benchmarks for review that do not reflect 
the underlying cost drivers. Setting arbitrary caps on premiums does 
nothing to cure the root causes of health care price increases, 
according to a 2004 study \10\ done for the California HealthCare 
Foundation. Similarly, a February 2010 Milliman report \11\ makes the 
point that ``simplistically limiting premium rate increases to some 
predetermined inflation index fails to recognize the fundamental 
elements involved in setting health insurance rates, and would likely 
have severe consequences within a short period of time.'' These serious 
consequences involve significant long term risks for health plan 
solvency, competition in the market, and the availability of coverage 
    \10\ California HealthCare Foundation, Should California Regulate 
Health Insurance Premiums?, March 2004.
    \11\ Milliman, The Difficulty of Legislating Premium Rate 
Increases, by Jonathon Shreve, February 2010.
                  vi. principles for a workable system
    States Are the Appropriate Venue for Review: The expertise and 
resources for considering rates lies at the State level and State 
standards and processes are at the core of the country's regulatory 
system for safeguarding solvency as explained above. As such, the new 
health care reform law recognizes that States properly serve as the 
primary regulators for health plan activities, subject to new and 
consistent Federal standards impacting a wide range of activities, 
including annual rate review.
    States are responsible for establishing solvency requirements for 
health plans to operate across the country and have long developed and 
maintained an underlying system and structure of regulation that has 
helped to protect the public--even in the face of extremely challenging 
economic times--from significant incidences of health plan insolvency. 
Indeed, one of the most important protections States provide consumers 
is to ensure that health plans maintain financial stability to ensure 
that beneficiaries can receive benefits. Health plan solvency also is 
important to providers, who rely on insurers having the financial 
wherewithal to pay claims.
    Separating financial solvency from rate review, as would occur if 
rate review occurred principally at the Federal level, would create a 
significant risk of financial instability. At the same time, Federal 
rate review would do nothing to address the underlying factors driving 
health care costs.
    Actuarial Soundness: It is essential to maintain and protect the 
critical link between the creation of premiums and ``actuarial 
soundness,'' that is, the development of rates that are reasonable in 
relation to the benefits provided and that ensure solvency, taking into 
account factors such as the underlying medical costs and trends facing 
a particular health plan, adverse selection, benefit plan changes, and 
demographic changes in the population covered. We are committed to 
working with the NAIC to ensure that actuarial certifications that 
accompany rate filings are required to be prepared in accordance with 
generally accepted actuarial principles, that the components of rate 
increases are clearly presented, and that States undertake a review of 
underlying cost trends and provider consolidation.
    Transparency: To increase public confidence, information should be 
disclosed about rates and their composition, without undermining 
competition, and we are taking the steps described below to support 
this objective. Parallel requirements should be imposed on other health 
care sectors with respect to their rates and associated underlying 
components that highlight both the utilization and unit cost-
related elements of those charges.
    The new law adds to an existing regulatory structure that places 
primary enforcement authority with the States, but that gives the 
Federal Government the authority to step in if a State is not 
substantially enforcing Federal standards. How these new provisions are 
implemented will be an important determinant of whether new regulations 
and requirements improve confidence with respect to the operation of 
health plans without increasing costs, reducing choices, or creating 
solvency issues throughout the system. The real question, therefore, is 
not whether additional legislation is needed to further address the 
operation of 4 percent of the health care sector as a percentage of 
total spending, but whether policymakers will now broaden their focus 
to address sectors accounting for the remaining 96 percent of our 
health care system.
    Allowing Implementation to Proceed: There are significant 
provisions in the ``Patient Protection and Affordable Care Act'' that 
should be given time to be implemented and evaluated.
                additional steps health plans are taking
    Following a meeting between Secretary Sebelius, the President, NAIC 
leadership, and the CEOs of five health plans, the Secretary on March 8 
addressed a letter to the company representatives asking them to make 
information on rates and rate increases transparent. She requested that 
these companies publicly display information regarding, among other 

     the drivers of rate increases;
     the number of individuals impacted by rate increases;
     the estimates on medical costs and utilization increases 
and the assumptions behind them;
     explanations of what the companies are doing to control 
premium increases; and
     medical loss ratio information for each premium increase.

    The companies all agreed to accept the challenge to make 
information regarding premiums, cost drivers and premium increases 
transparent in a way that would be meaningful and understandable both 
to health plan enrollees and to policymakers, and to work with the NAIC 
as they do so. A detailed template is under development for explaining 
the factors that go into premiums, the factors that go into premium 
increases, and the steps companies are taking to control costs and 
increase quality. To ensure that this information is complete and 
informative, we are working with company actuaries from a broad array 
of health plans of all sizes and models as well as the insurance 
                         vii. unmet challenges
    To succeed on a long-term basis, health reform ultimately must 
include bolder steps to achieve system-wide cost containment. We 
believe this can be achieved with a more comprehensive effort to reduce 
the rate of increase in costs, better alignment of public and private 
sector payment reform efforts, and broader medical malpractice reform. 
Perhaps most important, we believe that efforts to reduce costs are 
complementary to our Nation's effort to improve quality as policymakers 
attempt to drive greater value in the delivery of care. Focusing only 
on premiums and not the components that are driving premiums makes 
little sense.
    In California, a similar effort was made to cap prices charged by 
energy distributors and ignore supplier costs, leading to ``brownouts'' 
and reduced service for consumers. Health plan enrollees may face a 
similar outcome if Congress attempts to reduce the soaring costs of 
medical care by regulating premiums. The current situation in 
Massachusetts offers important lessons about the significant disruption 
that can occur if a premium review process disregards the linkage 
between the components driving premiums and the premiums themselves.
                            viii. conclusion
    Thank you for this opportunity to testify. Our members remain 
strongly committed to working with the committee to ensure the 
successful implementation of the new health reform law, while also 
working to slow the growth of underlying medical costs to make health 
insurance more affordable.

    The Chairman. Thank you very much, Karen. And thanks for 
being here, and for your testimony. We'll certainly get into a 
    And last, we have Grace-Marie Turner, president of the 
Galen Institute, a public-policy research organization that she 
founded in 1995 to promote an informed debate over free-market 
ideas for health reform. Grace-Marie is a founder and 
facilitator of the Health Policy Consensus Group, and serves as 
a forum for analysis for market-oriented think-tanks around the 
country to analyze and develop policy recommendations. She 
served as executive director of the National Commission on 
Economic Growth and Tax Reform in the mid-1990s; for 12 years, 
president of Arnett & Co., a health-policy analysis and 
communications firm.
    So, Ms. Turner, welcome again. Your statement will be made 
a part of the record. Please proceed.


    Ms. Turner. Chairman Harkin, thank you very much. Senator 
Alexander, Senator Franken.
    I do bring my entrepreneurial spirit to my policy work, as 
well, thank you very much.
    Grace-Marie Turner, president of the Galen Institute. We 
are based in Alexandria and are a think-tank devoted to free-
market ideas in health reform.
    In my testimony today, I will talk about the proposal under 
consideration to give the Federal Government authority to 
review health insurance premiums and use the example of 
Massachusetts as evidence that I'm concerned that this proposal 
is not going to work.
    In addition, I will highlight some of the progress that's 
being made through innovation and care delivery, to show that a 
truly competitive free market can indeed work to bring prices 
down. I think that part of the reason we don't have lower 
health insurance premiums is because there is so little 
competition in States like yours and others. I was just in 
Alabama. One carrier controls 87 percent of the market. So, 
it's very difficult to have true competition.
    States have decades of experience in regulating health 
insurance markets. And I'm very concerned about proposals that 
would give the Federal Government authority, because it has 
very little experience in this field.
    The National Association of Health Insurance--of Insurance 
Commissioners concluded that Federal control over rate 
authority could be ineffective and could actually cause harm. 
It said, in a letter to Congress, that,

          ``Providing the Federal Government with authority to 
        override State regulatory determinations on rates, 
        while insolvency regulation remains at the State level, 
        risks uncoordinated financial regulation that would 
        greatly increase the risk of insurer insolvency without 
        providing additional protection to consumers.''

Further, they said, ``This Federal rate review authority can do 
nothing to reduce claims expenses, which are the biggest 
component of the premium dollar.''
    I'm concerned that this proposal would be like trying to 
tighten the lid on a pressure-cooker while the heat's being 
turned up. The Congressional Budget Office has said that, in 
the individual health insurance market, there will be a steady 
increase in health insurance premiums, and that they will go up 
by $2,100 by the year 2016, over and above the rate that they 
would have otherwise increased. So, that means that families 
would be paying $15,200 for insurance in 2016 with this new 
legislation, and $13,100 otherwise.
    Several provisions in the health reform law that take 
effect this year are sure to increase health insurance premiums 
in the short term, including the removal of lifetime and annual 
health insurance caps, expanded dependent coverage, and 100 
percent coverage for preventive care. Not that these are not 
all helpful to some consumers, but I think it's important to 
recognize they are going to increase costs.
    In addition, coming forward, there are $20 billion in taxes 
on medical devices, $60 billion in taxes on health plans, $27 
billion in taxes on drug companies, more expensive federally 
mandated benefit packages, and higher premiums for young 
people, in order to try to lower premiums for older people. So, 
it's not just overall rate increases, it's what individual 
people are going to be experiencing.
    Massachusetts' experience shows that reforms similar to 
those enacted by the Congress, and, in fact, signed into law 4 
weeks ago today, show that costs will continue to be a problem 
in the future. I believe Massachusetts really is a harbinger 
for the future.
    For example, the State's individual mandate is having the 
effect of increasing health insurance premiums in the 
individual and small-group market. The Boston Globe reported 
that some people are taking advantage of the guaranteed-issue 
provisions in the law. It said that thousands of the consumers 
are gaming Massachusetts' 2006 health insurance law by buying 
insurance when they need it to cover pricey medical care and 
then dropping it after they have had their treatment. The 
typical monthly premium for these short-term members was $400, 
but their average claims exceeded $2,200.
    In a complaint filed against the State last week, the major 
health insurers in Massachusetts say they could, collectively, 
lose more than $100 million this year. And these are all 
nonprofit companies. They say these losses will deplete their 
individual revenues, weaken their financial stability, and, in 
some instances, threaten near-term solvency. So, the impact of 
these premium caps in Massachusetts could, in fact, have the 
result of forcing many companies out of the market, which is 
the exact opposite of what we need, to induce more competition.
    Many of the problems, I believe, facing this country 
involving health costs could be addressed by encouraging more 
competition and empowering consumers to have greater control 
and authority over their health insurance decisions, including 
long-term care of health--long-term ownership, to get away from 
the problems of moving in and out of markets and preexisting 
    I have a chart--and I will conclude with this--on page 9 of 
my testimony that I think shows that employers are really 
having quite a good deal of success in lowering their health 
insurance costs. The total health-benefit cost increases per 
employee over the last, now, 5 years have been between 5 and 6 
percent. And it shows what employers can do in this relatively 
lightly regulated ERISA market, where they can have control 
over the kind of benefits that their employees receive, 
coordinated-care efforts, being able to induce their employees 
to be partners in managing health care costs. I'm concerned 
that the legislation that puts more Federal control, takes more 
control away from consumers, moves in the wrong direction.
    Thank you very much.
    [The prepared statement of Ms. Turner follows:]
                Prepared Statement of Grace-Marie Turner
                           executive summary
    The proposal under consideration today to give the Federal 
Government authority to review health insurance premiums and to impose 
penalties if they are deemed ``unreasonable'' is unlikely to succeed in 
lowering health insurance costs.
    The National Association of Insurance Commissioners concludes this 
policy would be ineffective and could actually cause harm, saying in a 
letter to Congress: ``Providing the Federal Government with authority 
to override State regulatory determinations on rates while solvency 
regulation remains at the State level risks uncoordinated financial 
regulation that would greatly increase the risk of insurer insolvency 
without providing additional protection for consumers.'' Further, this 
Federal rate review ``can do nothing to reduce claims expenses, which 
are the biggest component of the premium dollar.''
    The Congressional Budget Office says health insurance premiums will 
continue their steady upward climb and that they will accelerate faster 
in the individual market as a result of the Patient Protection and 
Affordable Care Act of 2010. It found that families purchasing 
insurance in this market would see a premium increase of an additional 
$2,100 in the year 2016. That means those families would be paying 
$15,200 in 2016 for health insurance as a result of passage of health 
reform, and $13,100 otherwise.
    Several provisions in the health reform law that take effect this 
year are sure to increase health insurance premiums in the short term, 
including removal of lifetime and annual limits on health insurance, 
expanded dependent coverage, and 100 percent coverage of preventive 
    Massachusetts' experience with reforms similar to those enacted at 
the Federal level shows that costs will continue to be a problem in the 
future. For example, the State's individual mandate is having the 
effect of increasing health insurance prices in the individual and 
small group market. The Boston Globe reports that some people are 
taking advantage of the guaranteed issue provisions:

          ``Thousands of consumers are gaming Massachusetts' 2006 
        health insurance law by buying insurance when they need to 
        cover pricey medical care, such as fertility treatments and 
        knee surgery, and then swiftly dropping coverage, a practice 
        that insurance executives say is driving up costs for other 
        people and small businesses. The typical monthly premium for 
        these short-term members was $400, but their average claims 
        exceeded $2,200 per month.''

    Many of the problems the country is facing involving health costs 
could be addressed by encouraging much more competition and empowering 
consumers to have greater control over decisions involving their care 
and coverage. In a truly competitive market for insurance where 
consumers have more power over spending decisions, price transparency 
and a larger choice of options would drive out insurers who price their 
products exorbitantly.
    Thank you, Chairman Harkin, Ranking Member Enzi, Sen. Alexander, 
and members of the committee for the opportunity to testify today on 
the issue of health insurance rate authority and premium costs. My name 
is Grace-Marie Turner, and I am president and founder of the Galen 
Institute, a non-profit research organization based in Alexandria, VA, 
devoted to advancing an informed debate over market-based health reform 
    In my testimony, I will discuss the proposal under consideration 
today to give the Federal Government authority to review health 
insurance premiums and to impose penalties if they are deemed 
``unreasonable.'' I will use the example of Massachusetts' health 
reform initiative as evidence that this approach is unlikely to 
    In addition, I will highlight some of the progress that is being 
made through innovations in care delivery, in creative benefit 
offerings, and in lowering the cost of insurance and medical care to 
show that the competitive market can respond to the demands of 
consumers for better quality coverage and care at more affordable 
                        change is indeed needed
    American consumers and businesses have been saying for years that 
the cost of health insurance and health care is a top concern. However, 
I do not believe that the approach taken in the Patient Protection and 
Affordable Care Act of 2010 (PPACA) will contain health costs, and 
evidence shows it likely will exacerbate them. In addition, I believe 
PPACA will be hugely disruptive to the individual and small and large 
group health insurance markets as well as to the overall economy and 
the Federal budget.
    The fact that this hearing has been called today, I think, supports 
the concern that the legislation fails to address the central issue of 
rising health costs.
    Just in the few weeks since its enactment, we already are seeing 
evidence of the flaws in this legislation regarding the lack of clarity 
involving coverage for younger people with pre-existing conditions and 
the ambiguity over coverage for members of Congress and staff, for 
example. These are likely only harbingers of the many, many problems we 
are likely to see as a result of enactment of this seeping legislation 
that centralizes control over our huge and extraordinarily complex 
health sector.
    I am not an authority on the entire law and believe that very few 
people are at this point, but I would like to address today the 
legislation you are considering to give the Federal Government 
authority to establish limits on health insurance premium increases. I 
believe that this proposed legislation would take the wrong approach by 
imposing more top-down, government regulatory power. It also would give 
the Federal Government power to regulate a sector of the economy in 
which it has little or no experience or capability.
                  dangers of dual regulatory authority
    In 47 States and the District of Columbia, insurers are required to 
file individual market premiums with State regulators. Twenty-eight of 
them require prior approval before carriers can increase their rates. 
States have decades of experience in regulating these markets and are 
able to consider the many forces in their individual States that may 
impact premium costs. Federal regulators would have much less ability 
to recognize these differences among States and would therefore be much 
more likely to inflict damage on health insurance markets.
    Health insurers must collect premiums sufficient to pay claims as 
well as to maintain capital reserves to meet solvency requirements so 
the company will be able to continue to pay claims. Rate reviews must 
consider these and other factors when reviewing overall premium prices.
    Capping premiums without recognizing the forces that are driving up 
costs would be like tightening the lid on a pressure cooker while the 
heat is being turned up. The National Association of Insurance 
Commissioners \1\ (NAIC) writes that ``the single most significant 
contributor to rising health insurance premiums has clearly been the 
continued growth of health care spending in the United States.'' The 
NAIC cites advances in medical technology, multiple treatments 
available to treat diseases, and the growing reliance on 
subspecialists, as well as obesity and smoking that lead to health 
conditions requiring expensive and long-term treatment. In addition, 
the individual market is subject to much higher risk of adverse 
selection because people are more likely to seek insurance if they 
anticipate needing expensive medical care.
    \1\ Therese M. Vaughan, CEO, National Association of Insurance 
Commissioners, letter to The Honorable John Dingell, February 23, 2010.
    The NAIC concludes:

          ``Providing the Federal Government with authority to override 
        State regulatory determinations on rates while solvency 
        regulation remains at the State level risks uncoordinated 
        financial regulation that would greatly increase the risk of 
        insurer insolvency without providing additional protection for 

    Further, this Federal rate review ``can do nothing to reduce claims 
expenses, which are the biggest component of the premium dollar.''
                   health costs will continue to rise
    The Congressional Budget Office says health insurance premiums will 
continue their steady upward climb in its analysis of the Senate 
legislation.\2\ Families purchasing insurance in the individual market 
would see an increase of an additional $2,100 in the year 2016, over 
and above increases they already will be facing as health insurance 
premiums continue to rise faster than the rate of general inflation.
    \2\ Congressional Budget Office, ``An Analysis of Health Insurance 
Premiums Under the Patient Protection and Affordable Care Act,'' Letter 
to the Honorable Evan Bayh, November 30, 2009, at http://www.cbo.gov/
    That means these families will be paying $15,200 in 2016 for health 
insurance under the new law, and $13,100 otherwise. Families who get 
health insurance through small businesses will be paying $19,200 in 6 
years, and those working for large firms, $20,100. 
PricewaterhouseCoopers released a study, commissioned by America's 
Health Insurance Plans, which showed the cost of a family plan in 2019 
would be $4,000 a year higher under the reform law than otherwise.\3\ 
While the insurance coverage will be more generous, citizens will have 
many fewer options to select more modest coverage that they may prefer 
and that likely would be more affordable.
    \3\ PricewaterhouseCoopers, ``Potential Impact of Health Reform on 
the Cost of Private Health Insurance Coverage,'' October 2009, at 
    The Patient Protection and Affordable Care Act of 2010 provides 
subsidies that will help to make this coverage more affordable for 
some. But the Congressional Budget Office estimates that only 17 
million people will be getting subsidized insurance through the State-
based exchanges in 2016. However, there are as many as 130 million 
people in the income categories eligible for this subsidized coverage--
between 133 and 400 percent of the Federal poverty line.\4\
    \4\ James Capretta of the Ethics and Public Policy Center writes in 
Kaiser Health News, April 8, 2010:

    ``The risk of cost overruns is even higher at the Federal level 
than in Massachusetts. The Congressional Budget Office projects just 17 
million people will be getting subsidized insurance through the State-
based exchanges in 2016. But the population with incomes between 100 
and 400 percent of the Federal poverty line--roughly the group targeted 
for subsidized coverage--is more like 130 million people. CBO assumes 
the vast majority of low- and moderate-wage families will stay in job-
based plans with no additional Federal help. But what if they are 
wrong? Employers are already looking for ways to shed as much of their 
health care bill as they possibly can onto taxpayers. If 30 or even 50 
million Americans end up in the exchanges, Federal costs will soar.''
    As a result, the great majority of Americans will be subject to the 
mandate to purchase generous and expensive health insurance but only a 
relative few will qualify for Federal subsidies through the exchanges 
to help them afford the premiums. If tens of millions more do get 
coverage through the exchange, generally because they have lost their 
employer coverage or their employers do not provide health insurance, 
the cost of providing subsidies would soar, driving the Federal budget 
deficits even higher.
            impact of ppaca on the cost of health insurance
    Whether the premiums are paid directly by individuals or by 
taxpayers in the form of subsidies, rising health costs affect us all.
    Numerous provisions in PPACA will put upward pressure on health 
insurance premiums, such as the new taxes on drug companies, device 
makers, and insurers. When they take effect, these and many other new 
fees and taxes will be passed along to consumers in the form of higher 
premiums or reduced services or access to care.
    Four health reform provisions that take effect this year are sure 
to increase health insurance premiums in the short term.\5\
    \5\ Steve Davis, ``Four key health reform provisions that will 
affect health insurers this year,'' April 5, 2010. AIS's Health 
Business Daily.

    1. Removal of lifetime and annual limits on health insurance: 
Beginning with plan years after Sept. 23, health plans no longer will 
be allowed to place lifetime limits on new or existing group health 
plans or individual products. They also will be prohibited from setting 
annual dollar limits on coverage for ``essential benefits'' as defined 
by the Secretary of Health and Human Services. The added cost of these 
added claims will have to be built into premiums for all policyholders, 
but it will have secondary effects of causing some employees to lose 
coverage if their employers cannot afford the higher premiums 
associated with the no-limit coverage. Self-funded plans will need to 
purchase additional reinsurance coverage.
    2. Dependent coverage: Health insurers will be required to allow 
members to extend coverage to their adult children up to age 26. While 
this could bring more young and healthy people into the insurance pool, 
it also has a potential for adverse selection. Privately-purchased 
health insurance for young people is generally inexpensive; those who 
have trouble buying coverage in the individual or small group market 
and who are more likely to take advantage of this new mandate are 
likely to have higher health risks and therefore higher health costs. 
Insurers and employers also will be barred from rejecting children 
under 19 with pre-existing conditions. Insurers are working to 
determine the actuarial cost and will be adjusting premiums 
    3. Preventive care: Newly-written policies will be required to 
cover not-yet-determined preventive services at no cost to the 
policyholder. This simply means that co-payments and other cost-sharing 
will now be built into premium costs, causing them to go up.
    4. Medical loss ratios: Beginning on January 1, 2011, health 
insurers will be required to report on the proportion of their premium 
dollars spent on direct medical care versus administrative costs. If 
Federal regulators decide that wellness, care coordination, and 
consumer education programs are considered administrative costs rather 
than actual care delivery, for example, insurers could be forced to 
drop programs that actually help reduce costs, as I explain on page 8 
of my testimony.
    It should be noted that the government is on shaky ground in 
excessively tight regulation of private health insurance by tightening 
these loss ratios. The CBO has concluded \6\ that excessive regulation 
of insurance would mean that premiums paid for private health insurance 
would have to be reflected in the Federal budget.
    \6\ Congressional Budget Office, ``The Budgetary Treatment of 
Proposals to Change the Nation's Health Insurance System,'' May 2009.

    Other cost drivers are yet to come. For example, under PPACA, the 
Secretary of the Department of Health and Human Services will have 
authority to determine what benefits must be covered in the generous 
health insurance policies mandated by the Federal Government. 
Massachusetts' experience shows that mandating generous benefits will 
increase the costs of health insurance and that political attempts to 
force premiums down will likely fail.
                       lessons from massachusetts
    One of the promises of Massachusetts' 2006 health reform law was 
that getting everyone covered would force costs down, but that is far 
from being realized. One third of State residents polled by Harvard 
researchers in a study published in ``Health Affairs'' in 2008 said 
that their health costs had gone up as a result of the 2006 reforms. A 
typical family of four today faces total annual health costs of nearly 
$13,788, the highest in the country. Per capita spending is 27 percent 
higher than the national average.\7\
    \7\ Robert J. Blendon, Tami Buhr, Tara Sussman, and John M. Benson, 
``Massachusetts Health Reform: A Public Perspective From Debate Through 
Implementation,'' Health Affairs 27, no. 6, October 28, 2008, at http:/
    The State's stubbornly high health costs are partly the result of 
government regulations that stifle competition in the insurance market 
and mandate what services health insurance must cover. A 2008 study by 
the Massachusetts Division of Health Care Finance and Policy found that 
the State's most expensive insurance mandates cost patients more than 
$1 billion between July 2004 and July 2005. The Massachusetts health 
reform law left all of them in place.
    Further, insurance companies in Massachusetts are required to sell 
policies to people, even if they wait until they are sick to buy 
coverage. The current structure and fines associated with the 
individual mandate in PPACA are likely to lead to this same 
    In addition, there is growing evidence that many people in the Bay 
State are taking advantage of the guaranteed issue provisions in the 
law. They are purchasing health insurance when they need surgery or 
other expensive medical care, then drop it a few months later.
    The Boston Globe reported this month,\8\ ``Thousands of consumers 
are gaming Massachusetts' 2006 health insurance law by buying insurance 
when they need to cover pricey medical care, such as fertility 
treatments and knee surgery, and then swiftly dropping coverage, a 
practice that insurance executives say is driving up costs for other 
people and small businesses.
    \8\ Kay Lazar, ``Short-term customers boosting health costs,'' 
Boston Globe, April 4, 2010. http://www.boston.com/news/local/
    ``The typical monthly premium for these short-term members was 
$400, but their average claims exceeded $2,200 per month. The previous 
year, the company's data show it had even more high-spending, short-
term members. Over those 2 years, the figures suggest the price tag ran 
into the millions.
    ``Other insurers could not produce such detailed information for 
short-term customers but said they have witnessed a similar pattern. 
And, they said, the phenomenon is likely to be repeated on a grander 
scale when the new national health care law begins requiring most 
people to have insurance in 2014, unless Federal regulators craft 
regulations to avoid the pitfall.
    `` `These consumers come in and get their service, and then they 
leave because current regulations allow them to do it,' said Todd 
Bailey, vice president of underwriting at Fallon Community Health Plan, 
the State's fourth-largest insurer.
    ``The problem is, it is less expensive for consumers--especially 
young and healthy people--to pay the monthly penalty of as much as $93 
imposed under the State law for not having insurance, than to buy the 
coverage year-round. This is also the case under the Federal health 
care overhaul legislation signed by the president, insurers say,'' The 
Globe reported.
    The individual mandate in PPACA likely will lead to the same gaming 
of the health insurance market that we see in Massachusetts, with 
people signing up for health insurance when they need it and paying the 
much-less-expensive fine otherwise. This creates adverse selection and 
will lead to higher and higher premiums for those who remain in the 
    In Massachusetts, faced with soaring medical expenses, Gov. Deval 
Patrick wants to cap insurance rate increases for those in the 
individual and small group market at 4.8 percent, not the 8 percent to 
32 percent increases the companies have requested for the coming 
premium year.
    Last week, two of the State's biggest health insurers were 
threatened with fines of as much as $5,000 a day, plus another $1,000 
for each consumer who was unable to buy insurance at approved rates 
from the insurer, if they did not comply with the governor's directive.
    How long will these non-profit insurers be able to stay in business 
if the government forces them to continue to pay benefits that exceed 
the premiums they are allowed to collect? Three of the four major 
health insurers in Massachusetts showed operating losses for 2009. If 
their rates are capped, they say they'll be forced to cut payments to 
health providers, putting further pressure on doctors and fragile 
    In their complaint filed against the State last week, the major 
health insurers in Massachusetts say they could collectively lose more 
than $100 million--``losses that will deplete their individual 
reserves, weaken their financial stability, and in some instances 
threaten their near-term solvency.''
    And the law's distortions don't extend just to health insurance: 
Some Massachusetts safety-net hospitals that treat a disproportionate 
number of lower-income and uninsured patients are threatening 
bankruptcy. They still are treating a large number of people without 
health insurance, but the payments they receive for uncompensated care 
have been cut under the reform deal.
                       private sector innovation
    Many of the problems the country is facing involving health costs 
could be addressed by encouraging much more competition and empowering 
consumers to have greater control over decisions involving their care 
and coverage. In a truly competitive market for insurance where 
consumers had more power over spending decisions, price transparency 
and a larger choice of options would drive out insurers who price their 
products exorbitantly.
    Unfortunately, the lack of competition in health insurance in many 
States limits the options for coverage, over-regulation drives up 
costs, and our structure of financing health insurance gives consumers 
little power to make choices.
    While health care is different than other sectors of our economy 
and requires special consideration, there are many areas where 
consumers can and want to have more control over their health care 
choices. The evidence I will describe below shows that competition 
could work if we were truly to engage consumers as partners in getting 
better value for their health care dollars. The private sector has 
demonstrated that it can get health costs under control, particularly 
where companies have provided new structures to allow consumers to 
become engaged.
Employer Innovations
    Many leading employers are working to get better value for spending 
on health care and health insurance for their employees in order to 
shape their health insurance offerings to fit their resources and 
workforces. A few examples:

     Safeway chief executive Steve Burd has become an 
evangelist for wellness incentives in the company's health insurance 
arrangements. In the first year after these plans were introduced, the 
company's health costs went down 11 percent. ``If you design a health 
care plan that rewards good behavior, you will drive costs down,'' he 
said.\9\ The company shared its cost savings with employees, cutting 
their costs by 25 percent or more. Safeway introduced a program called 
Healthy Measures that encourages employees to get health assessments 
and provides support and incentives for responsible health behaviors. 
Safeway also covers the full cost of recommended preventive care.\10\
    \9\ Victoria Colliver, ``Preventive health plan may prevent cost 
increases,''  San Francisco Chronicle, February 11, 2007, at http://
    Scott Shreeve, ``Safeway uses incentives and transparency to 
improve employee health,'' The Health Care Blog, October 29, 2008, at 
    \10\ Ibid.
     Target offers its employees a range of health insurance 
choices. One Health Savings Account option costs them as little as $20 
a month, and Target contributes $400 a year to health spending accounts 
for individuals and $800 for families.\11\ ``We've seen, and national 
research supports, that team members make more cost-conscious decisions 
when they participate in a consumer-based plan,'' according to John 
Mulligan, Target's vice president for pay and benefits. ``These plans 
engage our team members in a decisionmaking process that gives them 
greater ownership and control of their health care dollars.'' The 
company offers its 360,000 employees Decision Guides to help them 
compare price and quality and estimate their costs, plus access to 
wellness programs, a nurse hotline, and other support tools.\12\
    \11\ ``Target Offers Employees Health Savings, Reimbursement 
Accounts, Plans to Eliminate Traditional Health Plans, USA,'' Medical 
News Today, May 18, 2006, at http://www.medicalnewstoday.com/articles/
    \12\ ``Thought Leaders: John Mulligan, Vice President, Pay & 
Benefits, Target Corporation,'' hub Magazine, Summer 2008, at http://
     Wal-Mart offers dozens of health plan options to its 
employees, one with premiums as low as $5 a month. For this, employees 
receive a $100 health care credit, more than 2,400 generic drugs 
available for $4 a month, and major medical coverage with no lifetime 
maximum that starts at $2,000--basically the moment they step into a 
hospital. Employees can choose to pay higher premiums for lower 
deductibles and more comprehensive coverage.\13\ For $62 a month, 
employees can choose a $500 deductible policy with a $100 health care 
credit and no lifetime maximum on their insurance coverage.
    \13\ ``Wal-Mart Announces Improvements to 2008 Health Benefits 
Package,'' Wal-Mart Stores, Inc., September 18, 2007, at http://
     Whole Foods' CEO John Mackey toured the country talking to 
employees about health benefits options. Afterward, employees voted to 
switch to new account-based health plans with higher-deductible 
insurance coverage. Whole Foods deposits up to $1,800 a year into a 
spending account for each employee, with Mackey pointing out that this 
is not charity but part of the employee's compensation package. If they 
don't spend the money on medical care, it rolls over and the company 
adds more the next year. Some workers have as much as $8,000 in their 
accounts.\14\ Whole Foods saves money and still covers 100 percent of 
its employees' health insurance premiums.
    \14\ John Stossel, ``Control Your Own Health Care,'' 
RealClearPolitics, October 3, 2007, at http://
    ``Whole Foods Market Benefits,'' Whole Foods Market, at http://

    These companies and many others have worked extraordinarily hard to 
find the delicate balance between getting health costs under control 
and continuing to provide coverage that satisfies their workers. There 
simply is no way that a benefit or cost structure dictated by 
Washington could achieve these same results. Maintaining ERISA 
protection is crucial to allowing companies to continue to innovate.

    As this chart shows, employers held cost growth to 5.5 percent in 
2009, the lowest increase in a decade. The use of wellness and health 
management programs increased as large employers found these tools to 
be very helpful in holding health costs down.\15\ It is crucially 
important that implementation of the new health reform legislation 
provide incentives for employers and health plans to continue these 
innovative approaches to controlling health costs.
    \15\ ``In a tough year, employers hold the line on health benefit 
cost increases,'' Mercer LLC, November 18, 2009, at http://
New Health Care Financing Options
    Several new private sector health coverage options are available to 
companies and individuals such as Health Savings Accounts (HSAs) and 
Health Reimbursement Arrangements (HRAs).
    HSAs permit individuals to combine health insurance with a tax-free 
health spending and savings account. The account is used to pay for 
routine health care expenses, such as doctor's visits, for services not 
covered by insurance, and to create a cushion to pay premiums in lean 
economic times. The high-deductible insurance policy covers larger 
medical expenses such as hospitalization and surgeries. Federal law 
also allows the insurance contract to cover preventive care, such as 
cancer screenings.
    Eight million Americans had health insurance that qualifies holders 
to open HSAs as of January 2009.\16\
    \16\ ``January 2009 Census Shows 8 Million People Covered by HSA/
High-Deductible Health Plans,'' America's Health Insurance Plans, May 
2009, at http://www.ahipresearch.org/pdfs/2009hsacensus.pdf.
    The older sisters of HSAs, Health Reimbursement Arrangements, were 
created via a regulatory interpretation in 2002 to give employers more 
flexibility in structuring health coverage for their workers. HRAs 
operate much like HSAs, but can be offered only through the workplace. 
They are generally account-based plans accompanied by health insurance. 
While the money in HSAs is truly portable to the employee or individual 
holder, access to HRA funds is generally restricted after an employee 
leaves a company. But HRAs give employers more flexibility in shaping 
their benefit packages, including providing incentives for prevention 
and wellness activities.
    Both products are helping to make health insurance more affordable 
and are helping companies lower their health costs. Health insurance 
premiums generally are lower than average because deductibles are 
higher, and the savings on premiums can help fund the HSA or HRA that 
people can use to pay for routine health expenses.
    Companies that have introduced health plans with new incentives for 
consumers to be engaged as partners in managing health costs generally 
have seen lower-than-average health cost increases. Annual premium 
increases for employment-based coverage averaged about 6 percent for 
the last 3 years, down from double digits earlier in the decade.\17\ 
The most impressive results have come from consumer-directed plans such 
as HSAs and HRAs.
    \17\ Total U.S. health benefit cost rose by 6.1 percent in 2007. 
``Mercer National Survey of Employer-Sponsored Health Plans,'' Mercer 
LLC, November 19, 2007, at http://www.mercer.com/
    Enrollment in consumer-directed health plans (CDHP) grew to an 
estimated 23 million people in 2009, up from 18 million people in 
2008--a 27 percent increase. This finding was reported by the American 
Association of Preferred Provider Organizations and was based upon 
research from Mercer's 2009 National Survey of Employer Sponsored 
Health Plans. Small employers led CDHP adoption in 2009, accounting for 
most of the growth among all employers.\18\
    \18\ American Association of Preferred Provider Organizations 
(AAPPO), ``2010 Survey of Consumer-Directed Health Plans,'' April 14, 
2010, at http://www.aappo.org/fncDownload
    Deloitte's Center for Health Solutions found that cost of consumer-
directed health plans (CDHPs) increased by only 2.6 percent in 2006 
among the 152 major companies it surveyed. This is about a third the 
rate of increase for traditional plans.\19\
    \19\ ``Reducing Corporate Health Care Costs: 2006 Survey,'' Human 
Capital Practice of Deloitte Consulting LLP and the Deloitte Center for 
Health Solutions, 2006, at http://www.deloitte.com/dtt/cda/doc/content/

Lower Costs of Insurance Coverage
    Consumer-directed health products have helped to moderate health 
cost increases overall.

     UnitedHealthcare found that employer health benefit costs 
were more than 15 percent lower in 2007 for its HRAs than for 
traditional PPO plans. Importantly, 85 percent of the cost savings were 
attributable to lower utilization costs, such as avoiding 
hospitalizations and greater use of generic drugs--and not from cost 
shifting to employees.\20\
    \20\ Meredith Baratz and Todd Berkley, ``Consumerism in Health: A 
Conversation with Galen Institute and the Consensus Group,'' 
UnitedHealthcare, January 7, 2009.
     A Mercer study found that consumer-directed health plans 
delivered substantially lower costs per employee than either PPOs or 
HMOs in 2008. CDHP medical plans averaged $6,207 per employee, compared 
to $7,768 for HMOs and $7,815 for PPOs.\21\
    \21\ ``Mercer National Survey of Employer-Sponsored Health Plans,'' 
Mercer LLC, November 19, 2008, at http://www.mercer.com/
     In addition, health insurance that people purchase in the 
individual market is often more affordable than employment-based 
coverage. eHealthInsurance, the largest online broker for individually-
purchased and small-group health insurance, found that the average 
yearly health insurance premium in 2009 was $1,968 for individuals and 
$4,656 for a family.\22\
    \22\ ``Costs 2010 Spring Cost Report for Individual and Family 
Policy Holders,'' eHealth, Inc., March 30, 2010, at http://
Other Benefits
    In addition to moderating cost increases, HSAs also are providing 
new options for the uninsured. Up to 43 percent of those enrolling in 
HSA-qualifying health insurance were previously uninsured, showing that 
uninsured Americans in particular have been looking for an affordable 
alternative to traditional health insurance, according to Assurant 
Health.\23\ Assurant Health's most recent data show that they have 
broad appeal:
    \23\ ``Quick Facts: Health Savings Accounts,'' Assurant Health, at 
    Maureen E. Sullivan, ``Health Plan Initiatives, Trends and Research 
in Consumer-Driven Care,'' BlueCross BlueShield Association, October 
20, 2008, at http://www.bcbs.com/news/bluetvradio/consumerdriven2008/.

     66 percent of HSA purchasers are families with children
     63 percent of HSA purchasers are over age 40
     52 percent of all HSA purchasers have high school or 
technical school training as their highest level of education
     30 percent of HSA purchasers have family incomes of less 
than $50,000

    UnitedHealthcare found, based upon a survey of 300,000 HSA owners, 
that the average account holder had household incomes of $55,500, and 
25 percent of those with an HSA had incomes of less than $39,000.\24\ 
Changes in Federal law in 2006 allowing employers to make larger 
deposits for lower-income workers also are apparently succeeding, since 
UnitedHealthcare found that they were more likely to have employer 
contributions in their HSAs than higher-income HSA holders.
    \24\ Meredith Baratz and Todd Berkley, ``Consumerism in Health: A 
Conversation with Galen Institute and the Consensus Group,'' 
UnitedHealthcare, January 7, 2009.
Other Private Insurance Options
    Many other employers are offering innovative programs to help their 
employees get and stay healthier and spend health care dollars wisely. 
They are offering incentive programs to encourage employees to get 
health assessments to detect problems early and health coaching to help 
those with chronic illnesses better manage their care. These companies 
generally work in partnership with health plans to design the consumer-
based products, manage the finances, educate employees about using 
them, and provide wellness programs and support for employees with 
chronic conditions. Price transparency is an important element in their 
    For example, in 2005, Aetna launched a program that offers a range 
of consumer-support tools to help patients find physicians, compare 
costs and quality, and get personalized information about medical 
conditions and treatment. Its personalized search engine provides 
health information tailored to patients' individual needs.\25\
    \25\ ``Aetna and Healthline Networks Announce First Ever 
Personalized Health and Health Benefits Search Engine--Aetna 
SmartSource,'' Aetna Inc., March 12, 2008, at http://www.aetna.com/
    The results show this patient engagement works. Aetna is following 
health care claims and utilization of 1.6 million members of its Aetna 
HealthFund consumer-directed plans. Four years of evidence show 
sustained savings, more patient engagement in managing health, and 
greater utilization of preventive services. Employers who offered an 
Aetna HealthFund plan lowered their health care spending trend and 
saved money through all 4 years with the plan, across all Aetna 
products they offered.\26\
    \26\ ``Aetna Research Identifies Four Keys to Success for Consumer-
Directed Health Plans,'' Aetna Inc., January 31, 2008, at http://
    Aetna studied its members to identify the keys to successful 
implementation and found the keys were greater spending on preventive 
care, including wellness programs, focusing on employee communication 
and education, and carefully structuring benefits packages with 
appropriate levels of employee responsibility.\27\
    \27\ Ibid.
    Many companies are offering turnkey solutions to health plans and 
employers. U.S. Preventive Medicine, for example, offers employers 
packages of services they can tailor to fit the needs of their 
workforces for preventive care services.\28\
    \28\ U.S. Preventive Medicine, http://www.uspreventivemedicine.com/

    In addition, a galaxy of Web sites has evolved to offer everything 
from treatment information to diet advice. EverydayHealth has just 
surpassed WebMD as the most-visited site for medical information, and 
new sites appear every day to help patients find the best doctors, the 
lowest cost medicines, and the most cost-effective diagnostics.
Lower Drug Costs
    Competition, primarily from greater use of generic drugs, helped to 
moderate prescription drug spending. Drug prices increased 2.5 percent 
in 2008, compared to 1.4 percent in 2007. This is slower than the 4.1 
percent average annual rate of growth between 1997 and 2007 and less 
than the overall rate of medical inflation.\29\ Part of the reason is 
increased use of lower-cost generic drugs, but private competition over 
drug pricing in the Medicare Part D program also contributed. And 
retail establishments also have engaged in private price wars. In 2006, 
Wal-Mart began offering 30-day supplies of several hundred generic 
drugs for just $4. Competitors quickly followed suit, with some even 
offering to fill prescriptions for antibiotics for free.
    \29\ Micah Hartman, Anne Martin, Olivia Nuccio, Aaron Catlin, 
``Health Spending Growth At A Historic Low in 2008,'' Health Affairs 
Web Exclusive, January 5, 2010, at http://content.healthaffairs.org/
    There also has been active engagement by pharmaceutical companies 
in creating programs for low-income and uninsured people to obtain 
their products at little or no cost. Pharmaceutical companies have made 
significant investments to develop, expand, and promote patient 
assistance programs like Together Rx Access, Pfizer Helpful Answers, 
Partnership for Prescription Assistance, and many others. New private 
partnerships, like the Asheville Project and the Ten Cities Challenge, 
also have been created to help patients with chronic illnesses, 
including diabetes, get the medicines and counseling they need to 
manage their diseases.\30\
    \30\ Grace-Marie Turner, ``Gold Standard,'' Health Policy Matters 
Newsletter, Galen Institute, March 14, 2008, at http://www.galen.org/
    Carole W. Cranor, Barry A. Bunting, and Dale B. Christensen, ``The 
Asheville Project: Long-Term Clinical and Economic Outcomes of a 
Community Pharmacy Diabetes Care Program,'' Journal of the American 
Pharmaceutical Association, Volt. 43, No. 2, March/April 2003, at 
    Toni Fera, Benjamin M. Bluml, William M. Ellis, Cynthia W. 
Schaller, and Daniel G. Garrett, ``The Diabetes Ten City Challenge: 
Interim Clinical and Humanistic Outcomes of a Multisite Community 
Pharmacy Diabetes Care Program,'' Journal of the American 
Pharmaceutical Association, Volt. 28, No. 2, March/April 2008, at 
Care Delivery
    Private health care firms have responded to consumer demand for 
more convenient, accessible medical care. For example:

     TelaDoc offers its customers telephone consultations with 
physicians from wherever they are, anytime of day, 365 days a year. The 
average patient gets a call returned by a doctor in less than 40 
minutes, and the cost per call is just $35--a fraction of the cost of 
an emergency room visit. TelaDoc physicians also use electronic 
prescribing to minimize errors and keep a record of patients' 
    \31\ TelaDoc, http://www.teladoc.com.
     There also has been an increase in the number of low-cost 
walk-in medical clinics like RediClinic, Take Care, and MinuteClinic. 
There are now more than 1,180 retail clinics nationwide.\32\ They are 
usually located in malls or chain stores and are typically staffed by 
nurse practitioners working in conjunction with local doctors and 
hospitals to diagnose and treat common illnesses. They are open 7 days 
a week, before and after work, and prices are a fraction of emergency 
room charges.
    \32\ ``The Retail Clinic Market in 2009,'' Merchant Medicine, at 
    These clinics use Mayo Clinic and Cleveland Clinic protocols to 
diagnose and treat a range of routine health problems, from allergies 
and bronchitis to poison ivy, ear and bladder infections, and strep 
throat, usually for a fraction of the cost of hospital emergency rooms. 
Wal-Mart found that about half of the people visiting its in-store 
clinics were uninsured and did not have other sources of care. Wal-Mart 
partners with local hospitals and doctors' groups to create the clinics 
in many areas, but it insists that all of them create electronic health 
records for every patient that are accessible at any other clinic in 
the chain.
     Specialty hospitals owned by physicians are showing the 
value of focused care in delivering high-quality, efficient care with 
greater patient satisfaction and better health outcomes.
     Physician practices also are innovating to become more 
consumer-friendly. Some are freeing up an hour or more a day for same-
day appointments. Others are working with employers to staff on-site 
clinics so employees can see a doctor without taking time off work.
     Hospitals are experimenting with new ways to ease crowding 
in their emergency rooms, visited by an estimated 119 million patients 
in 2006. There are more than 8,000 walk-in urgent care facilities 
nationwide staffed by practicing physicians. Inova Health System and 
Shady Grove Adventist in the Washington, DC, area and dozens of other 
hospitals nationwide are opening free-standing emergency facilities to 
treat everything from lacerations to heart attacks and gunshot wounds. 
Patients are seen faster, and if they need to be admitted, they are 
transported by ambulance to nearby hospitals.\33\
    \33\ ``ER Care, Stat!,'' Sandra G. Boodman, The Washington Post, 
September 16, 2008.
     A growing number of physicians are experimenting with 
innovative medical practice design,\34\ including direct medical 
practices. Physicians, generally internists or family practitioners, 
contract directly with their patients to offer a medical home, 
providing medical care, consultation, and coordination with specialists 
for a fixed fee. The fees range from $60 to $15,000 in some practices, 
but generally cost about $1,500 a year.\35\ Other physicians are 
bypassing insurance and simply posting prices for medical services. 
They find they can charge patients much less because they save on the 
administrative overhead of insurance billing.
    \34\ Society for Innovative Medical Practice Design at http://
    \35\ David Albenberg, MD, ``Concierge Medicine: The Pitfalls and 
the Pendulum,'' Fall 2008, at http://pri-med.com/DigitalAssets/
     Health Advocate, a Pennsylvania-based company, helps 
consumers find the right doctor for their ailments, work with insurance 
companies on coverage, and manage other administrative headaches. This 
service helps consumers, via call centers, who are being given more 
responsibility to navigate the world of health care and health 
    \36\ Mike Stobbe, ``Booming Business Helps Patients Navigate 
Medicine,'' Associated Press, July 25, 2008.
                           unfinished agendas
    I commend you and the many other members of Congress for working 
toward the goal of expanding access to health coverage for the 
uninsured, modernizing our health care delivery system, and trying to 
provide relief for private and public payers to rising health costs.
    The challenges are enormous. Millions of Baby Boomers are aging 
into Medicare, putting new pressures on the system. The costs of public 
programs threaten to squeeze out other public services provided by 
Federal and State governments. Millions of people continue to lose 
their health insurance when they lose or change jobs (and I believe the 
coverage of many workers is actually threatened by PPACA.) But the cost 
of health care and insurance coverage continue to be at the center of 
the health reform debate. I think the evidence shows that private 
sector initiatives and genuine competition offer the best hope of 
helping consumers and taxpayers with health costs.
The Path Forward
    Addressing the needs of 300 million Americans for better quality 
care at more affordable prices requires modernizing our health sector 
to become more efficient and innovative. It is not possible to expect 
that one piece of legislation could be written carefully enough to 
accommodate these needs and also continue to provide a platform for 
future innovation to enhance the quality of medical care in the future.
    The medical profession is moving toward patient-centered medicine, 
with micro-targeting of treatments tailored to the individual genetic 
code of individual patients. Advances in medical science demand that 
progress must continue without being blocked by regulatory obstacles 
and restrictive payment systems. This continued innovation is vital to 
progress in health care.
    While we face major problems with cost and access to coverage, the 
evidence shows that careful reform which respects the diverse needs of 
our population is crucial. As the examples I have offered here show, 
competition can work in public and private programs and force the 
system to be more responsive to consumers. By properly structuring 
incentives and creating a climate friendly to this innovation, Congress 
could put us on a path to uniquely American health care solutions. As I 
believe the evidence shows, competition works, even in health care, and 
offers the best solution for the future.

    The Chairman. Thank you very much, Ms. Turner.
    Thank you all very much for being here and for your 
    We'll start a round of 5-minute questions.
    First, Ms. Menke, thank you for telling us your story. I do 
feel your frustration. I just listened to Ms. Turner talk about 
employers, how they're keeping their rates down. That might be 
OK, but that doesn't answer your problem, and the problem of so 
many small towns in my State, our State, that don't have 50 or 
100 or more employees.
    The State insurance commissioner in Iowa, as you said, 
modified your premium increase from 31 percent to 25 percent. 
We have that authority under State law. I assume you agree, 
that's probably a pretty good thing to have, considering your 
    Ms. Menke. Yes, I absolutely do think it's a good thing to 
have. I'm glad that Iowa had that. And I would support other 
States having an insurance commission or insurance division 
that would regulate insurance premiums.
    The Chairman. I just want to point out one thing. You 
mentioned they were found to be justified, after an independent 
review. So, I started looking into that; had my staff look into 
it. And the independent review was done by INS. I'm not certain 
where INS is from. But, I was reading here, from a press 
statement here--INS Consultants, a Philadelphia actuary. They 
found the insurance division's rate review process acceptable 
and reasonable using INS's methodology. But, as was pointed out 
in a newspaper article, it said that, while INS is technically 
independent, there's no way the firm would contradict and 
embarrass the agency which hired the firm. If INS were to 
contradict the insurance division, it would likely not be hired 
in the future by the Iowa insurance division or any other 
insurance regulator. So, you wonder about that independence. 
And I wonder about that, myself, in terms of these rate 
    You know, with your story, I've heard so much across the 
State of Iowa. And, as I pointed out, two companies have 80 
percent market share. So, when you went out for bids to find 
another company, you said they all came in considerably higher.
    Ms. Menke. Right.
    The Chairman. And I'd point out that your insurance rates 
went up 131 percent in 5 years. Medical inflation over that 
same time would have been about 50 percent, maybe, something 
like that, if you figure about 10 percent per year. So, again, 
that's what raises the questions about just how much is being 
taken out by profits and other things in these companies. And 
as was pointed out by Senator Feinstein, a lot of these 
companies have bought other companies, and now we're in these 
huge, huge for-profit companies--insurance companies in the 
country that, basically, in many States--Illinois, Mr. 
McRaith--they really don't have that kind of rate review.
    In 2014, we'll have a big change in that. Anticipating that 
change, would you think there's a potential for insurance 
companies to charge unjustified premium increases before then, 
Mr. McRaith?
    Ms. Menke. Well, I believe that Blue Cross/Blue Shield did 
hedge their bets by going for these increases now.
    The Chairman. Yes.
    Ms. Menke. And I read that same article that you did, about 
the independent reviewer, so yes.
    The Chairman. Mr. McRaith, what do you think? Do you think 
there's a possibility that insurance companies, anticipating 
that 2014, would be out there trying to game the system?
    Mr. McRaith. Well, Mr. Chairman, first of all, let me 
assure you that the insurance commissioner in Iowa, Susan Voss, 
is an exceptionally talented regulator. I'm sure that conflict 
of interest is not one she would ever reconcile against the 
    In terms of the companies and potential for abuse between 
now and 2014, I do think there's a distinct possibility that 
less responsible companies are going to attempt to price out 
people who might be sick or injured, or might become sick or 
injured between now and 2014. We have seen some evidence that 
in Illinois already. Although we had dramatic, explosive rate 
increases over the last couple years, small groups, with just 
one or two sick employees, have seen rate increases of 50 
percent or more. Those are unprecedented levels for us.
    The Chairman. Ms. Ignagni, before my time runs out, as 
Commissioner McRaith said, he has no idea what premium rates 
are for small businesses in his State. I was kind of shocked 
when I heard that. I understand the health plans that you 
represent have agreed to provide more transparency----
    Ms. Ignagni. Yes, sir.
    The Chairman [continuing]. For premium rates. As you know, 
the Affordable Care Act provides for public disclosure of how 
premium rates are determined. But, this requirement only 
applies to new health plans, not existing ones. So, in the 
interest of transparency, do the health plans you represent 
support a legislative change to ensure that this requirement 
for public disclosure applies to existing health plans, as 
    Ms. Ignagni. We are working with the NAIC and individual 
insurance commissioners, and are in the process, now, of 
reaching out to consumers, to undergo a very comprehensive--as 
we said in our testimony, you're quite right--transparency 
effort. And that means information on Web sites. And we're 
working with the NAIC, in terms of how the actuarial 
justifications can be done in consistent ways across the 
country. We believe it's important for consumers and businesses 
to have a line of sight into what is going on, and we think 
that that will spark, in fact, a broader discussion about how 
we deal with this issue and the underlying costs that are 
fueling the premiums.
    The Chairman. So, you're not prepared, right now, to say 
whether or not this should apply to existing plans.
    Ms. Ignagni. I think, that, Senator, we have--every page of 
the legislation, as you know--virtually every page--affects our 
members in a variety of ways. And we submitted a chart which 
shows the full breadth of that. I think the first thing to do 
is to let the department, which is now moving very quickly to 
develop the standards that will be required in all States. We 
think that that's an important change, and we think that it 
will provide the kind of transparency that's necessary so that 
folks can get their hands around what's going on. We think that 
will draw them to the underlying factors that are--that is, in 
fact, fueling the growth in premium.
    The Chairman. I've gone over my time.
    Senator Alexander.
    Senator Alexander. Thanks, Mr. Chairman.
    And thanks, to all the witnesses, for coming.
    Ms. Menke, the story of those increases is really 
terrifying, I'm sure, for many, many Americans who've suffered 
the same thing.
    Let me suggest a couple of solutions that have been talked 
about here in the Congress. One, you alluded to. There's the 
idea of a small business health insurance plan, which generally 
would say that small businesses, including a small town--you 
might join up with other smaller entities, and, by creating a 
larger pool, you might be able to offer insurance to your 
employees at a more reasonable or lower cost. Would that be 
helpful in your case, do you think?
    Ms. Menke. Yes, it would be.
    Senator Alexander. Another idea was to broaden the ability 
of individuals in Iowa or Tennessee to shop across State lines 
for insurance, so they might compare prices and maybe have more 
choices. Do you think that might be helpful in your case?
    Ms. Menke. I don't know the answer to that, but the more 
competition that's out there, I think, the more competitive the 
prices would be.
    Senator Alexander. Thank you very much.
    Both of those ideas were offered and rejected by Republican 
Senators in the health care debate. And, in fact, the health 
care bill makes it--law makes it more difficult for people to 
shop across State lines.
    Ms. Ignagni.
    Ms. Ignagni. Yes, sir.
    Senator Alexander. I'm told by staff that they called Iowa 
Blue Cross/Blue Shield, who said that the Blue Cross Transition 
policy, that had such high rates, that Ms. Menke talked about, 
pays $1.81 in claims for every dollar they collect in premiums. 
How can an insurance company afford to do that?
    Ms. Ignagni. Well, you can't maintain your operations if 
that continues.
    Senator Alexander. So, what do you do?
    Ms. Ignagni. Well, you have to increase rates.
    Senator Alexander. Or?
    Ms. Ignagni. Or you go out of business. And then consumers 
lose choices. And it's a tremendously disruptive situation.
    Senator Alexander. I'm a little confused, too, by some of 
the talk. What percent of Americans are covered by insurance 
companies that are not for-profit?
    Ms. Ignagni. About 50 percent, sir.
    Senator Alexander. About half.
    Well, so, those companies don't have profits?
    Ms. Ignagni. No, you can't--if--you have to be in black to 
be in business----
    Senator Alexander. Yes.
    Ms. Ignagni [continuing]. Versus the red.
    Senator Alexander. Well, what if you're----
    Ms. Ignagni. Any for-profit----
    Senator Alexander. What happens to the money that puts you 
into the black? Where does that go? Does that go to some greedy 
    Ms. Ignagni. No. Well----
    Senator Alexander. Well, I mean, that's the insinuation.
    Ms. Ignagni. As level-setting, we have, on average now, 
last year, 3.2 percent average profits.
    Senator Alexander. But, what happens to the black? I mean, 
where does the money go? It goes to salaries, right?
    Ms. Ignagni. It goes to salaries and administrative 
    Senator Alexander. Could it go to reserves?
    Ms. Ignagni. It goes to reserves.
    Quite a lot of those administrative operations are designed 
to improve health care. Disease management, for example.
    Senator Alexander. Can it be used to reduce premiums or 
otherwise for the benefit of the members?
    Ms. Ignagni. Yes.
    Senator Alexander. All right. So, when Senator Feinstein 
says that, in Michigan, Blue Cross/Blue Shield raised prices at 
a heavy rate--Blue Cross/Blue Shield is not for-profit. Is that 
not right?
    Ms. Ignagni. Yes, it is. And, in fact, I know about that 
situation. They paid out a $1.50 for every dollar they took in, 
roughly, in their individual product.
    Senator Alexander. OK. And in Iowa, the Blue Cross/Blue 
Shield, is that not-for-profit?
    Ms. Ignagni. It's a not-for-profit plan, yes, sir.
    Senator Alexander. So, what we're talking about is 
pretending that we're going to control the rising cost of 
premiums by taking away profits from companies, half of which 
don't make profits, because they're not-for-profit.
    Ms. Ignagni. Well, I think there's been tremendous amount 
of misinformation in the debate. And I think this is an 
important opportunity to really shine a spotlight on the real 
    Senator Alexander. What happens, then, under the Feinstein 
bill, with insolvency? If I remember from my days as Governor, 
the State's responsible, is it not, for determining whether an 
insurance company might go broke? And if it goes broke, then, 
if I have its insurance, I don't get paid.
    Ms. Ignagni. Yes.
    Senator Alexander. But, under this bill, the Federal 
Government might decide what the premium might be. So, the 
Federal Government might put an insurance company out of 
business. That would be all right, I suppose. But, it wouldn't 
be all right for all the people who had premiums with that 
insurance company, because they might not get paid.
    Ms. Ignagni. I think Commissioner McRaith said this very 
well. I think it's dangerous to separate review of rates from 
solvency. You have to keep them together, and we think the 
State is the best place to do that. They're closer to the 
ground, and the insurance commissioners do a very good job.
    Senator Alexander. Commissioner McRaith, this is my last 
question; my time is up--but, what should we do, on this 
legislation, with the solvency question--should the solvency 
issue be separated from the decision about what the premium 
rates should be? I can foresee, under the bill, the possibility 
that you might decide that a rate is reasonable, but the 
Federal Secretary might overrule you and decide it's 
unreasonable, putting an Illinois company--making it insolvent 
and perhaps having customers lose their insurance. Do you see 
any concern there?
    Mr. McRaith. Senator, solvency is the first priority for 
insurance regulators in every State. The Massachusetts example, 
I think, is extremely misleading. All of those companies, even 
with the decline of those proposed rates, would remain 
financially strong.
    We do share the concern about the solvency priority and 
that protection for consumers. There's nothing in the bill, as 
I read it, that says the Secretary can overrule a decision by a 
State insurance regulator, regarding a rate approval or denial.
    Senator Alexander. But, doesn't it say, if the rate 
increase is unreasonable, the Secretary may review it, and your 
decision might be unreasonable, in the Secretary's opinion.
    Mr. McRaith. What it says is that the Secretary shall defer 
to those States that have rate approval or denial authority. In 
many cases, as you know, States have that authority.
    Tennessee is a great example, where you have the--among the 
lowest rates for small groups and in the individual market, as 
well; some would argue, because of that rate approval 
authority. So, the concern about solvency is important. 
Secretary Sebelius, of course, as a former insurance 
commissioner, understands that. We're confident we can work, as 
States, independently, to protect consumers from the 
possibility of an insolvency.
    Senator Alexander. Thank you, Mr. Chairman.
    Mr. McRaith. Thank you.
    The Chairman. Senator Casey.

                       Statement of Senator Casey

    Senator Casey. Mr. Chairman, thank you very much. And I 
know that I missed some of the testimony. I wanted to review a 
couple of questions, which may plow through some ground you've 
already covered, but I wanted to make sure that we explored 
some aspects of the issue itself, but also the legislation that 
Senator Feinstein has introduced.
    I guess I wanted to begin with Ms. Ignagni. With regard to 
the bill itself, that she spoke about today, and that I know 
you and others have provided commentary and testimony. I guess, 
I'm not sure I understand. Let me just get--for the record, you 
don't support the Feinstein----
    Ms. Ignagni. No, sir.
    Senator Casey [continuing]. Legislation. OK.
    And I know it's a, I guess, about a 12-page bill. It is not 
all that complicated, but having a health insurance rate 
authority in place, I think, makes a good bit of sense.
    But, I wanted to ask you, in particular with regard to the 
corrective action section of the bill, where the Secretary or 
the relevant State insurance commissioner would review a 
proposed increase and then review the justifications for a rate 
increase and then make a determination about the reasonableness 
of that. Why don't you support that part of the bill?
    Ms. Ignagni. A number of States, as you know, Senator, have 
the ability to do that--the overwhelming majority, No. 1. No. 
2, in the legislation already--not the Feinstein legislation, 
but the existing legislation that was just passed--there are 
three changes, four actually, that we think are very important, 
and it explains why we believe what we do.
    First, in the legislation for the first time, profits and 
administrative costs are capped through MLR provisions. Two, 
    Senator Casey. Medical loss----
    Ms. Ignagni [continuing]. Medical loss ratio--I'm sorry.
    Also, No. 2, there's a new process where there will be 
guidelines, developed by the Secretary, that the States will 
implement, to assess the reasonableness of rates.
    Senator Casey. Right.
    Ms. Ignagni. No. 3, there will be requirements about 
actuarial justification. And, No. 4, there will be requirements 
that the States receive resources to help with the person power 
necessary to support all that.
    We think it's important to, one, let all of this proceed. 
It's going to proceed very, very quickly. We think it will 
provide the kind of public discussion that is important that 
will really shed light on the overall issues of rising health 
care costs. So, we've been very concerned about the prospect of 
new legislation in a context where, just a month ago, 
legislation was passed, number one, and where, in 
Massachusetts--I want to go back to that--we're very concerned 
about what's going on there.
    Commissioner McRaith made the point that no plan would be 
close to insolvency. That, in fact, isn't correct in 
Massachusetts. There are a couple plans there that are very 
concerned about the impact of the arbitrary cap that's now been 
imposed. It has nothing to do with underlying costs.
    Senator Casey. OK. I just want to make sure I understand 
your position on this part of the bill. Let me ask you, 
hypothetically: Absent these changes that we just passed a 
couple weeks ago--would you be opposed to this policy, absent 
those changes?
    Ms. Ignagni. I think, absent those changes, we'd really 
have to assess--thoughtfully assess your question. But, with 
the changes, I think it's a different environment.
    Senator Casey. So, you----
    Ms. Ignagni. And we think the changes should be allowed to 
work, to see where we are. And we hope that there will be more 
of a discussion in States----
    Senator Casey. So, you----
    Ms. Ignagni [continuing]. About the underlying----
    Senator Casey [continuing]. Agree with the policy behind 
this section of the bill, you just don't think it's necessary. 
You think the changes in place now will be sufficient.
    Ms. Ignagni. We think the changes that are in place, 
coupled with what is already going on at the State level across 
the country, will allow the kind of discussion that you're 
looking for.
    Senator Casey. But, here's the problem for a lot of 
Americans. They feel as if they have no control, or no ability 
to impact the control, of rising costs. And, second, it seems 
like every time they pick up the paper, there's a health care 
executive who's making a lot of money--millions and millions, 
if not tens of millions. And they scratch their head and say, 
``My rates went up, and this person's making a lot of money.'' 
I mean, do you understand that basic problem that people have?
    Ms. Ignagni. Yes, most definitely. And I understand, also, 
that people are frustrated about the symptom, which is 
premiums. That's what they see. They see a bill. But, that's a 
reflection of the underlying--it's not just cost, it's 
utilization, as you know. It's adverse selection.
    Senator Casey. Yes.
    Ms. Ignagni. It's a range of other factors.
    Senator Casey. What I can't understand is, Why has your 
industry, for years, so aggressively--spending lots of money 
doing it, not just using your voice, but using your dollars--to 
oppose efforts to do just what you and I have just had a 
discussion about? I mean, why did we need legislation to say 
that you can only spend a certain percentage of your overall 
dollar on administration? Why did we need to even put these in 
place? Why couldn't you do it on your own? Why couldn't you be 
more transparent about profits and about pay--about what these 
executives have been paid? Why did we have to legislate at all, 
and why do we even have to have a discussion about additional 
legislative remedies?
    Ms. Ignagni. Senator, I think this is a very fair question, 
and let me give you a very frank answer, in the spirit of your 
question. What I think is important for the country, as we talk 
about health care costs, is assessment of profits all the way 
down the line. Fortune magazine says, on average, we have 3.2 
percent--on average. In the pharmaceutical industry, it's 25 
percent. In the device industry, it's 11 percent. And we can go 
on and on about different stakeholder groups. This is not to 
castigate those groups, but just to say that, unfortunately, 
we've had an entire debate about health care insurance reform 
about the insurance industry, which is 4 percent of health care 
expenditures, and not enough about the other 96, which is, in 
fact, driving the premiums where they are.
    The recent articles today in the Wall Street Journal, 
Sacramento Bee over the weekend, article after article, talking 
about rising health care costs. Politically, it's difficult to 
take that on. I understand that. But, in terms of getting our 
hands around where we're going as a country, we need to take 
the next step. So, we're happy to be very--we want to 
participate. We've offered a number of remedies. Our industry 
stood in the front of the line, saying that we have to have 
insurance market reforms. We strongly supported that. 
Administrative simplification requirements, we strongly 
supported that. But, the next step is important to get our 
hands around rising health care costs.
    Senator Casey. I know I'm way over time. I'll stop. But, 
it's my sense you've been pretty reluctant to join these 
reforms. But, maybe we've made some progress.
    Thank you.
    The Chairman. Senator Coburn.

                      Statement of Senator Coburn

    Senator Coburn. Thank you, Mr. Chairman.
    I'd like to put into the record the article from the 
Sacramento Bee, because I think it raises an issue which the 
health care bill missed.
    [The information referred to follows:]

                  [The Sacramento Bee, April 18, 2010]

    California's Higher Hospital Costs Add to Health Insurance Hikes

                          ([email protected])

    This report is part of an ongoing series examining the factors 
driving up the cost of health care.
    Behind every public uproar are some hidden facts. Here's one about 
rising health insurance rates in California: Sharp jumps in hospital 
costs are a big part of the story.
    A Bee analysis of financial data from 300 hospitals statewide shows 
they collected $25 billion from insurance companies between September 
2008 and October 2009--an increase of more than a third since 2005.
    Hospitals are charging insurance companies, and by extension their 
customers, billions of dollars for expenses not directly related to 
care. These include new hospital wings, new technology and services for 
the uninsured.
    Some providers, including Sutter Health in Sacramento, have 
negotiated reimbursement rates with ``markups'' more than double what 
it costs them to provide services.
    ``It's become en vogue to crucify the insurance companies. . . . 
It's the hospitals that hold insurance companies hostage,'' said Will 
Fox, a principal and consulting actuary for Milliman, a Seattle-based 
firm that has extensive experience studying hospital finances in 
California. Fox has done work for insurance companies, government 
agencies and business groups.
    Hospitals say their charges to insurers are justified and 
necessary. But their byzantine pricing policies make it difficult to 
understand why costs are rising so quickly.
    Under State law, hospitals have to report the total amount of money 
they spend to provide services to insured patients each year, how much 
they bill insurance companies and how much they wind up collecting.
    Based on those numbers, The Bee found that California hospitals 
charged insurers an average of 53 percent more than what they told the 
State it cost them to provide services. In 2005, the gap was 40 
    For this story, The Bee obtained data submitted to the Office of 
Statewide Health Planning and Development by hospitals across 
California between October 2008 and September 2009, the latest 
available period.
                       insured carry heavy burden
    Rising hospital costs reflect billions of dollars in spending on 
items that don't directly relate to caring for individual patients with 
insurance, but are nonetheless charged to their insurance companies. 
These costs get passed along in the form of higher premiums.
    For example, hospitals charge insurance companies to recoup lost 
profits from meager Medi-Cal reimbursements and to provide care to the 
poor and uninsured.
    The cost of caring for the uninsured and covering unpaid debts has 
risen substantially in recent years as the economic downturn leaves 
more people without income or coverage.
    California hospitals are also facing costs of at least $110 billion 
for construction to comply with State earthquake safety codes.
    No one doubts the economic strains hospitals are under, said David 
Hopkins, director of quality measurement at the Pacific Business Group 
on Health. The group is a coalition of some of the State's largest 
employers, including the University of California, Wells Fargo and 
    Still, Hopkins is not entirely sympathetic.
    ``They're collecting and making all this money for other reasons--
and because they can,'' he said.
    Hospitals in the Sacramento area, for example, have expanded 
considerably in recent years. New wings, investment in medical 
technology and expansion of services may give hospitals a competitive 
edge on their rivals, but also add to their costs.
    Rising salaries for nurses, pharmacists, imaging professionals, as 
well as compensation for administrators and staff, are some of the 
variables that go into a hospital's cost equation.
    The prices insurance companies pay to hospitals result from intense 
negotiations, with providers pushing for the highest prices for their 
services and health plans pushing for deep discounts.
    In northern California, most hospitals now belong to large chains 
with the market power to largely dictate prices, according to 
researchers hired by the California HealthCare Foundation.
    According to The Bee's analysis, Sutter hospitals have obtained 
better reimbursement rates from insurance companies than any other 
provider in the region.
    As one of the region's largest systems, Sutter Health is a ``must 
have'' provider in an insurer's network because of its reputation among 
consumers, said William Sandberg, executive director of the Sierra 
Sacramento Valley Medical Society. Sutter Health leverages that power 
during negotiations, he said.
                    hospitals' price-cost gap varies
    Sutter Medical Center, for instance, received about $420 million in 
payments for medical services from insurers between October 2008 and 
September 2009--127 percent more than it spent to provide those 
services, The Bee found.
    At the other end of the spectrum is Kindred Hospital in Folsom, a 
small 39-bed facility that belongs to a national chain. It charged 
insurance companies 35 percent over cost.
    Catholic Healthcare West, which operates the chain of Mercy 
hospitals in the Sacramento area, charged insurance companies anywhere 
from 40 percent to 80 percent above cost at its various capital 
hospitals, according to The Bee's analysis.
    The UC Davis Medical Center received payments from insurers that 
were 57 percent above the hospital's costs. As with many other teaching 
hospitals, UCD's operating costs are significantly higher than those of 
Sutter or Mercy.
    Sutter Health has faced scrutiny for its pricing practices before. 
Five years ago, CalPERS, the State's largest buyer of health services, 
forced one of its key insurers to drop 13 Sutter Health hospitals from 
its stable of providers because CalPERS deemed the Sutter facilities 
too expensive.
    Sutter officials did not offer a direct rebuttal to Bee's findings 
about its pricing rates, but said the nonprofit health system, based in 
Sacramento, should not be judged on price alone.
    Patrick Fry, the health system's chief executive officer, said the 
CalPERS action proves Sutter doesn't have the kind of market-
controlling clout some of its critics describe.
    Consumers, he said, should also consider value.
    ``When you go to a clothing store, do you know how much it cost to 
make? We buy things because we think the price is fair,'' Fry said.
    Bill Gleason, a spokesman for Sutter Health, said the hospital 
system has kept price increases for insurance companies in the 
``single-digits'' in recent years, but declined to elaborate.
    ``That's hugely important because of certain allegations by health 
plans who are pointing their fingers at health care providers,'' 
Gleason said.
    He contrasted the ``single-digit'' rise in Sutter prices to the 39 
percent increase in premiums announced earlier this year by Anthem Blue 
Cross on thousands of Californians with individual policies. The Blue 
Cross rate hike ignited a national debate over the rising cost of 
health care.
    Gleason said the high quality of services provided at Sutter Health 
facilities saves on costs in the long run by reducing expensive follow-
up care.
    ``We still have work to do to make our services even more 
affordable to patients, and we think we're making good progress,'' 
Gleason said.
                 rising costs ``a mystery'' to experts
    Researchers for the California HealthCare Foundation call rising 
hospital costs ``something of a mystery.''
    Writing in the February issue of Health Affairs, a policy journal, 
researchers for the foundation said expenses for hospital care rose an 
average of 10.6 percent a year from 1999 to 2005, far outpacing 
    Insurers and hospitals negotiate discounted rates, and hospitals 
have different price structures for each insurance network they decide 
to join.
    In some cases, hospitals have blocked efforts to shed more light on 
their pricing policies. Revealing the information, they say, could 
reduce competition in the industry.
    Jan Emerson, a spokeswoman for the California Hospital Association, 
said hospitals are up front with their costs, as required by law. She 
noted that hospitals must provide a price quote to anyone who asks, and 
file menus of procedures and prices with the State.
    ``The health plans are trying to shift the blame because they are 
under attack,'' Emerson said. ``It's outrageous that they are trying to 
shift blame. They should be looking at themselves.''
    Still, the State's accountability requirements for hospitals have 
been criticized as weak by some business groups, consumer advocates and 
others. The prices filed with the State, for instance, rarely reflect 
what consumers actually pay.
    While existing law doesn't prohibit insurers from disclosing cost 
information, some hospitals explicitly prevent insurers from releasing 
    Sutter Health, for example, does not allow Aetna to publicize its 
negotiated prices with Sutter hospitals on the insurer's Web site. 
Aetna said the information would allow subscribers to comparison shop.
    Cedars-Sinai hospital in Los Angeles, considered one of the State's 
priciest because of its popularity with the rich and famous, was the 
only other California hospital to prohibit use of its pricing data on 
Aetna's Web site, the insurer said.
    Last year, the California Medical Association and the California 
Hospital Association helped defeat Senate bill 196, which was aimed at 
giving consumers access to more information. The bill would have barred 
hospitals and doctors from refusing to allow insurers to reveal their 
pricing information to subscribers.
    The legislation was supported by consumer groups and the insurance 
industry. They resurrected the issue last month in a new bill, Assembly 
bill 2389. The Assembly Health Committee plans to hear it in May.

    Senator Coburn. The reason why we need another bill is 
because we don't have competition in the health care industry, 
and we're still not going to have it, after the reform bill 
that we've just passed. And this report shows that the average 
California hospital charges 53 percent more than it costs to 
care for the patients that they care for. So, when you talk 
about costs--the insurance industry--there's no question, 
there's been abuses and that they're not my friend when I'm 
practicing medicine, because they're not any different than the 
government bureaucrat that's getting ready to get in between me 
and my patient, as well.
    But, we continue to treat the symptoms, and not the 
disease. The disease is cost. We did nothing in the new health 
law about $250 billion worth of medical tests that nobody 
needs, but we were going to continue to order them in this 
country, because the trial lawyers are so strong. We did 
nothing about the fraud and waste, essentially coming to $150 
billion a year, of which all is paid for through insurance 
    If we don't attack the real problem, and if we refuse to 
use competitive markets--in the State of Oklahoma, we have an 
insurance commissioner, and she does a great job for our State, 
but she can't lower the costs. All she can do is control the 
rate premiums to where there is a viable insurance product 
being offered in our State.
    I believe there are 30 States that have rate review. Is 
that correct?
    Mr. McRaith. That's right. In the individual market, it's--
depending on how you interpret it--27 to 30 States.
    Senator Coburn. Thirty States. What would keep the other 
States from having individual rate review in their States?
    Mr. McRaith. It's a function of State law.
    Senator Coburn. Right. So, we're going to say--a State has 
chosen not to do that, so we're going to say that they're going 
to have to do that, and then--if they don't do it well enough, 
then we, in Washington, are going to sit down and say, ``We 
don't agree with what you've done.''
    Mr. McRaith. Well, I think the concerns about solvency that 
were raised here today are--illustrate exactly why the States 
will take action. States do not want to segregate or separate 
solvency concerns from rate review. And for that reason, if 
this bill were to pass--and it would be an improvement for the 
State of Illinois--it's my expectation that States would pass 
rate approval authority to retain the connection between 
solvency and rate review.
    Senator Coburn. But, they can do that already. They can 
    Mr. McRaith. That's right.
    Senator Coburn. They can do that already. And they have 
chosen not to do that. Yet, we're going to sit and tell them, 
``You have to.'' I mean, you know, it's pretty arrogant on our 
part, to say, to Illinois, ``You're not doing it right, and 
here--you're going to have to do it. And if you don't do it, 
we're going to do it for you.'' I mean, that's, in essence, 
what we're saying. And we're fixing the symptom.
    There's no question there's abuse in the insurance 
industry. There's no question there's excess salaries in the 
insurance industry. But, that's not fixing the problem. That is 
a symptom of the problem. The problem, as Ms. Menke finds, is 
that the costs aren't controlled, and therefore, experience and 
ratings come about to cover that loss ratio.
    And so, with the adverse selection that's getting ready to 
come, in the next few years with the bill that the President 
has signed, those problems are going to get worse if we don't 
attack costs. So, why wouldn't we want to attack costs, rather 
than attack regulation of insurance firms?
    Mr. McRaith. Senator, if that is true, the rate review 
process will only substantiate that as true. The rate review 
process, in fact, will be an opportunity to learn to gather 
information. What we know is, in fact, health insurer profits 
are significantly greater than 3.2 percent.
    We do know, also, on that same list prepared by Forbes, 
public utilities were ranked 12th. Public utilities are the 
most highly regulated industry in the country. So, it's not 
rate regulation that has an effect on viability or 
profitability. We're confident that the rate review process 
will further inform the public discussion and policymakers like 
    Senator Coburn. And the total profits in the insurance 
industry last year were?
    Mr. McRaith. I think it depends on who you ask, and----
    Senator Coburn. Well----
    Mr. McRaith. That's the reason why the----
    Senator Coburn [continuing]. Give me the range. Give me the 
    Mr. McRaith. It's in the billions of dollars, to give you 
an answer.
    Senator Coburn. OK. And the total----
    Mr. McRaith. Because the definition of ``profit''----
    Senator Coburn [continuing]. Waste--the cost of health 
    Mr. McRaith. Is unclear.
    Senator Coburn. According to Thompson Reuters, the total 
wasted dollars in health care is $700 billion. We're working on 
the wrong problem. The problem is costs. And we're looking out 
here at this little symptom of the costs, and we're saying, 
``That's excessive.'' And I don't know whether it is or not; I 
don't know the inside workings of insurance companies. But, 
what I know is, we can do all we want out here; until we go fix 
the costs, we're not going to address the problem.
    Ms. Turner, what's an alternative to what's been offered 
today that we have before in the Feinstein bill? What's another 
way of getting at the same problem?
    Ms. Turner. Well, it's a really different view of the 
world. And I think an opportunity has been missed to really 
engage an army of consumers in evaluating the best value for 
the health care dollar. If you had transparency of where those 
costs go, consumers could--and consumers had power to make 
decisions, which they don't now--we do not have a properly 
functioning market in the health sector--then you could have 
flexibility of offerings, you could have competition, and you 
could have transparency of price, leading consumers to find 
those companies that say, ``You know, this one is really giving 
me the best value for the dollar. They're not paying their CEO 
an exorbitant amount. They do a good job of making sure fraud 
and abuse are monitored. They're giving me good value for my 
dollar.'' But, consumers don't have that authority. And I, 
frankly, think that's one of their great frustrations. And I'm 
concerned that this is going to perpetuate that--
    Senator Coburn. And there's no connection with the purchase 
of health care and the payment.
    Ms. Turner. Exactly.
    Senator Coburn. So, we don't----
    Ms. Turner. That's right.
    Senator Coburn. I'm over time, Mr. Chairman. Thank you. 
Pardon me for going over.
    The Chairman. I know Senator Franken has a committee he's 
got to get to, and he's been here a long time, so I recognize 
Senator Franken.

                      Statement of Senator Franken

    Senator Franken. Well, thank you, Mr. Chairman.
    I'm proud that over 90 percent of insured Minnesotans get 
their coverage from a nonprofit health insurer. The average 
medical loss ratio of those companies in Minnesota is about 91 
    I'm also pleased to have worked successfully with Senator 
Rockefeller to author the medical loss ratio provisions that 
are included in the health reform law and are inspired by 
Minnesota law. And I think that, along with these rate reviews 
that Senator Feinstein is proposing, minimum loss ratio is an 
important element in holding health insurance companies 
    From 2000 to 2007, American families saw their premiums 
almost double. During that time, we saw more than 6 million 
Americans become uninsured. And during that time, insurance 
company profits rose 428 percent. That's not good for 
    Ms. Turner, I read your testimony last night, and I 
appreciate your description of Safeway, which does a good job, 
their policy to provide wellness incentives and preventive care 
for their employees. You mentioned that this brings down costs. 
So, how does that do that?
    Ms. Turner. Companies have found, in a number of ways, that 
they can engage employees with incentives to get health 
assessments so they can find out in advance if they're pre-
diabetic or if they may have--be at risk of heart disease. And 
then, in use--
    Senator Franken. That's like preventive care, then.
    Ms. Turner. Preventive care. And also, it allows 
coordinated care for people who are diabetic, so that they can 
have more tools to help manage their disease.
    They also provide incentives for people to get preventive 
care--screening tests. And those kinds of incentives----
    Senator Franken. You write in it that they're provided 
    Ms. Turner. They find that there's value for the dollar to 
provide those, free. But, of course, they're built in. I mean, 
it's part of the compensation.
    Senator Franken.  But, that's what I find interesting. 
Because, in your testimony, you write that that's a great cost-
saver--providing preventive medicine, free. But, also in your 
testimony, you say that--in the health reform law, you list 
coverage of preventive care as a factor that will result in 
increased premiums. So, this is actually kind of puzzling to 
me, because it seems to me that what you describe when a 
private corporation provides preventive care, free, it's an 
innovation--a cost-saving innovation, but that when we write 
that into the bill, that suddenly it's a burden. So, the same 
thing, providing--I mean, to me, I had to laugh. I am sorry, 
because it seemed like a bias, almost. A bias against the 
Federal Government doing something. The Federal Government does 
something, it's bad, and it's good if private innovation does 
    Ms. Ignagni, I wanted to talk to you. You wrote in here--
you have a thing that says that, in California, a similar 
effort was made to cap prices charged by energy distributors 
and ignore supplier costs, leading to brownouts and reduced 
service for consumers. What year was that?
    Ms. Ignagni. That was back in the 1990s, sir. I'll have to 
go back and check.
    Senator Franken. Are you aware that there was manipulation 
during that period.
    Ms. Ignagni. Yes, sir.
    Senator Franken. And that the cause of these brownouts and 
the extra charges to the State of California was not caused by 
regulation, but was caused by companies like Enron ripping 
Granny off?
    Ms. Ignagni. I am well aware of the Enron situation, sir. 
I'm also well aware of discussions that have been going on in 
California about lessons, with respect to arbitrary caps, and 
not taking into account, in the true sense of the word, 
supplier costs. It would be sort of--what we're seeing in 
Massachusetts, for example, is that there has been an arbitrary 
standard chosen. This is what's of significant concern. That 
relates to the medical----
    Senator Franken. Well, but the example you cited, actually, 
was a case--not of over-regulation--but a case of exploitation, 
deliberately cutting off supply of electricity to drive up the 
price. So, actually, your example is almost a perfect example 
of why we need regulation, not why we were suffering from too 
much regulation.
    I'm sorry, and I apologize, because I only have so much 
    In a recent report from the Senate Commerce Committee, we 
see that the medical loss ratio for Anthem, of Maine, is 95 
percent in the individual market, while just across the border, 
in Anthem, in New Hampshire, the loss ratio is 63 percent for 
the same product. Now, this amazes me, that you could literally 
step across the border and the efficiency of your health plan 
would decrease by 32 percent. Do you think that's fair and that 
something else may be going on there?
    Ms. Ignagni. Yes, I do, sir, in fact. I think that a year-
to-year analysis of loss ratios actually indicates that there 
are significant costs that go into the first-, second-, and 
third-year transaction costs in the individual market. First, 
broker compensation: it's the highest, as you know, in the 
first year. Second, all of the costs that go into assessing an 
    Senator Franken. And what year----
    Ms. Ignagni [continuing]. This will all go----
    Senator Franken [continuing]. What year is Massachusetts--
    Ms. Ignagni [continuing]. In 2014.
    Senator Franken [continuing]. Is New Hampshire in?
    Ms. Ignagni. Pardon?
    Senator Franken. What year was New Hampshire in?
    Ms. Ignagni. I have to go back and look at Senator 
Rockefeller's report, but I'll be happy to do that. But, 
usually, when you see those very low costs, they are reflective 
of first, second, and third year of----
    Senator Franken. Low costs or low ratio?
    Ms. Ignagni. Low ratios. I'm sorry. I mis-spoke.
    Senator Franken. OK.
    Ms. Ignagni. Low ratios. They're reflective of the earlier 
years of an individual, which is why the NAIC proposals, and 
why the NAIC practices, is to look at the entire life of a 
policy, as opposed to those first several years. I do think the 
individual loss ratio is an important issue, that I know we're 
talking to the committee about. Small companies, in particular 
in the individual market, very reliant on brokers, are going to 
find very, very difficult--not in 2014, but between now and 
2014, because they have no other distribution mechanism to 
actually meet those 80-percent requirements. And so, it's--we 
think it's a serious concern that is quite legitimate, because 
there's no other distribution now. In 2014, there'll be the 
exchanges, and that will be a very different marketplace than 
it is now. But, if we want to preserve competition, we think, 
respectfully, that that should be looked at very carefully.
    Senator Franken. OK. Thank you.
    Ms. Ignagni. Thank you, sir.
    Senator Franken. I am certainly out of time.
    Thank you, Mr. Chairman.
    The Chairman. Senator Hagan.

                       Statement of Senator Hagan

    Senator Hagan. Thank you, Mr. Chairman. Thank you for 
holding this hearing today.
    I wanted to talk a little bit more about transparency, and 
I know Senator Coburn had mentioned it in some of the 
discussion--where we were talking about the actual health care 
costs and the transparency or nontransparency of it. With 
health insurers arguing that the rising health care costs and 
increased utilization is driving up premiums, and patient 
advocacy groups saying that the health insurers' profits are 
too large, it's clear that the only way to get at the truth 
here is, I think, to increase the transparency, particularly 
the transparency of health care costs and the transparency of 
what health insurers and customers are paying for health care 
    I've been advocating for increased transparency throughout 
this debate on health care reform, and I'm pleased that our 
final bill contains some language to improve our understanding 
of health care cost and help better inform customers about 
their out-of-network cost. But, I think more needs to be done. 
And I think consumers and businesses need to know what they are 
getting, and for what price.
    I know--in California--I think, Ms. Ignagni, you talked 
about this in your written testimony, too--that there's been 
studies--I believe Safeway did a study----
    Ms. Ignagni. Yes.
    Senator Hagan [continuing]. Of colonoscopies in the San 
Francisco Bay area, and they found variation in ranges from 
800-and-some-odd dollars to over $8,000 for that procedure, and 
then gallbladder surgeries in that same region ranging from 
about $4,200 all the way up to $21,000. And the problem is, as 
a consumer, nobody knows what it is that they're paying for.
    So, I'd be interested to hear what you have to say--any of 
you--on this issue and any thoughts that you might have for 
actually improving price and health care transparency.
    Ms. Ignagni. Senator, I think, actually--and we've worked 
very closely with the insurance commissioners, and I'm sure 
Commissioner McRaith wants to say something about this--it's 
become evident, in their activities, that there needs to be the 
kind of transparency that you're talking about.
    We're very supportive of this. We've done a very large 
survey about out-of-network charges. And it's shocking to see 
the wide variation in charges across the country. I'd be 
delighted to provide that for the record.
    Ms. Ignagni. We think that there's important necessity for 
capturing more data. There is a provision in the legislation, 
where States will be collecting these kinds of data. And we 
think that's very, very important for both the legislature, as 
well as advocates and all entities within a State, because you 
have to take a State-by-State look, as you know, at what is 
going on, and we think that's an important provision. It's been 
a little-noticed provision, but I think it's an important part 
of the legislation, to provide that kind of consumer sense that 
they have a better tracking system than they do now on what 
providers are actually charging.
    Ms. Turner. Can I say, also--I think that, in order for the 
transparency to be effective, that consumers really need to 
have an incentive and the ability to make decisions based upon 
the information they have. If they feel that, ``Well, it'll be 
interesting to know what that test is.'' But, as long as 
somebody else is paying for it--to Senator Coburn's point--then 
there's no incentive for them to change their behavior and to 
seek that $4,500 treatment, rather than the $21,000. So, I 
think that getting to the point of consumer incentives and 
giving them the power and the ability to seek out that more 
affordable care is really a crucial part of reform.
    Senator Hagan. But, Mr. McRaith, some States are saying 
that this is proprietary information--not States--some 
insurance companies are saying that's proprietary information. 
Can you shed light on that issue? And with--Ms. Ignagni, would 
the insurance companies be willing to work together to make 
this more transparent?
    Mr. McRaith. Senator, first of all, one of the great 
realities and incessant conflicts in many States around the 
country and in Illinois is the conflict between providers and 
payers. And it's interesting to hear the payers talk about the 
increase in cost, and we're not dealing with increased costs. 
Provider reimbursement rates, if you talk to the providers, 
have declined. Obstetricians used to be paid $3,000 per birth. 
They're now paid less than $2,000 per birth. So, the question 
is, Where is that savings being passed on to consumers? Our 
discussion today about rate approval and denial--rate review 
authority enhances that information, enhances the transparency. 
One of the kind of perverse realities of transparency, though, 
is: I'm not sure any of us would choose the cheapest doctor. 
I'm not sure, if we had a child who needed surgery, we want to 
send that child to the doctor who charges the least. So, that's 
going to be an interesting point--data point for us to track as 
we move forward.
    I did want to emphasize, again, rate review is not 
necessarily a punitive tool. It is an informative tool, at a 
minimum, to help policymakers like you understand where our 
health care dollar is being spent.
    Senator Hagan. Actually, I had a neurosurgeon from North 
Carolina tell me that he needed a hip replacement. And, as a 
physician, he was looking for, obviously, quality care, but 
wanted to know what it would cost and contacted numerous 
physicians and couldn't get a good feel. So, it's not so much, 
you know, the cheapest. I think we obviously want quality, but 
I think people would go to the cheapest, knowing, too, that 
there was quality product--
    Mr. McRaith. That's right. I agree with that, completely, 
    Senator Hagan. Ms. Ignagni, what about cooperation within 
the industry? And the proprietary point.
    Ms. Ignagni. Two points. No. 1, the Secretary asked our 
industry to work together to undertake a very comprehensive 
transparency initiative, which we are well on the way with in--
we've been conferring with the NAIC, and we're going to be, 
actually, very close to wrapping up that project. So, I think 
people will find that not only responsible, but a useful 
exercise, for health plans to be posting on their Web sites the 
kind of detailed information that's important for consumers to 
    No. 2, we've been talking, with a range of health care 
provider groups across the country, about how to do 
transparency in a better way, so that consumers can get the 
kind of information that you're talking about. We think the 
data systems that were added to the legislation--the data 
centers--that that's a very good start. We think we can add to 
that, and rather than give you a specific ``how'' right now, I 
will tell you, we are conferring with a range of health care 
clinician groups, and we'll have something to say--more to say 
about this in the future. But, I think there's a lot we can all 
do together to be responsible and provide that kind of look 
that you're inviting us to comment on. You're right about it.
    Senator Hagan. Thank you.
    Looks like my time has run out. Thank you, Mr. Chairman.
    The Chairman. Thank you. I've just got this in--9:02 a.m., 
``United Health First Quarter Profit Climbs.'' I'm interested 
in that, since they're one of the two in Iowa that control most 
of the market.

          ``United health insurer, United Health Group, 
        Incorporated, raised its 2010 profit outlook, Tuesday, 
        and reported better-than-expected first-quarter 
        earnings. The Minnetonka, Minnesota, insurer said it 
        now anticipates a 2010 profit of 3.15 to 3.35 per 
        share, up from the 2.90 to 3.10 share it projected 
        earlier this year. The largest publicly traded health 
        insurer, based on revenues, said it earned $1.19 
        billion, or $1.03 per share, for the 3 months that 
        ended March 31. That's better than the $984 million, or 
        81 cents per share, reported a year ago. Revenue 
        climbed 5 percent, to $23.19 billion, from $22 

    Well, again, that just came in.
    Ms. Ignagni. And sir, I'd be happy to submit for the 
record, the question that Dr. Coburn asked about aggregate 
profits in the industry. It's about $12 to $15 billion, and 
we're spending $2.5 trillion. So, if you took all of the 
profits away--I believe it was Senator Alexander that made the 
point earlier--it's about 2 days of health care expenditures. 
We'll be happy to submit all of that, plus the other 
industries, for the record.
    Ms. Ignagni. I, of course, hadn't seen the United 
announcement, because we were here.
    Mr. McRaith. Mr. Chairman, I've heard the discussion about 
health insurer profits, and I think there's some clarity that 
should be added to this discussion. We regulate insurance 
companies at the low end of their capital levels. We do not 
regulate what is too much capital or surplus. A company can 
decide that, ``surplus is not profit.'' So, when a company 
tells you that it makes 2.2 percent profit, what it's telling 
you is a discretionary decision that's been made about how to 
report that number. It is not a reflection of capital received 
or the financial strength of that individual company, 
    Ms. Menke. I have a question.
    The Chairman. I'm trying to get to Senator Reed, but go 
ahead, Ms. Menke, I'm sorry.
    Ms. Menke. I have a friend that does not have insurance, 
but the provider that he went to reduced his cost by 40 
percent, versus someone that did have insurance. And I know 
Blue Cross/Blue Shield, if you're a provider, you have to sign 
a contract, or you have to enter in a contract with Blue Cross/
Blue Shield, right? And then you accept the rates that they 
will pay you----
    Ms. Ignagni. Yes.
    Ms. Menke [continuing]. As a provider. So, for a person 
that doesn't have insurance--goes to that same provider--my 
insurance company is billed $100 and he was billed $60. I don't 
understand that.
    Ms. Ignagni. Senator, do you want me to say--I think that a 
number of physicians are just very aware of the hardship, now, 
in our country, with the recession, and I think they're trying 
to do their part. And that is probably what explains that. A 
physician, knowing that an individual doesn't have any 
coverage, is trying to do his or her part to help out. I think 
that's a very noble thing, and I admire that.
    The Chairman. But, isn't that also part of the cost-
shifting that's going on, too?
    Ms. Ignagni. Yes, sir, it is. It is part of the cost-
shifting. There are two kinds of cost-shifting. One is 
uncompensated care. But, not to say that that physician 
wouldn't necessarily do that. I mean, we just don't know, until 
we see, at the end of the year--we can see trends. The other is 
the underfunding that a physician or hospital will receive from 
Medicare or Medicaid, because they're not paying 100 percent of 
the cost. So, you're quite right about that.
    The Chairman. Thank you.
    Senator Reed. I know Senator Reed has to go.

                       Statement of Senator Reed

    Senator Reed. Thank you very much, Mr. Chairman.
    Mr. McRaith, you have the opportunity to view the filings 
of those insurance companies. In terms of the calculation of 
what they spend on medical care, that they submit to you as a 
regulator, and consequently profit in reserves, is that the 
same thing they show Wall Street, in your view?
    Mr. McRaith. I think that the financial statements we 
receive are different, often, from--and contain different 
information from the--I think it's a 10(k) that gets filed, 
quarterly, with the SEC.
    Senator Reed. So, at least it is possible that they could 
come in to you, or to HHS, with the claim that they're 
committing 80-plus percent to medical care, and then turn 
around and go to the investment community and say that their 
profits are 30 percent; i.e., they've got two books.
    Mr. McRaith. In fact, we've seen, historically, that 
publicly traded insurers will say, to stock analysts, they 
intend to continue to deliver value to shareholders by holding 
the line on claims payment and increasing premiums above 
medical inflation. Publicly traded companies, as you well know, 
Senator, have fiduciary duties to their shareholders.
    Senator Reed. No, I agree with that point. But, I think, 
going forward, we have to be careful not only about reviewing 
the ratings, but we also have to be very careful about having a 
consistent set of reports between regulators and financial 
statements, because otherwise they're going to be making, you 
know, 30 percent profit, yet they're spending 90 percent on 
health care cost.
    Mr. McRaith. Well, I think again, what's important--not to 
repeat myself--is that the rate review process is not 
necessarily some punitive contentious exercise.
    Senator Reed. Right.
    Mr. McRaith. I think you're absolutely right; it can be an 
informative tool for policymakers, like yourself and State 
legislatures, to understand what is happening in the health 
insurance marketplace. Does it need to be refined?
    Senator Reed. Ms. Ignagni, when you talk about aggregate 
profits of the health care industry, do you measure that across 
the board, or just for-profit health providers?
    Ms. Ignagni. Actually, Fortune magazine, Senator, measures 
it. We don't do it ourselves.
    Senator Reed. Well, what's the base?
    Ms. Ignagni. It's the for-profits, which is why I said to 
the Chairman that the base for the for-profits is 12, and 
that's why I told the Senator that it was 12 to 15. With the 
not-for-profits put in, it's roughly 15 in the industry total.
    Senator Reed. All right.
    Mr. McRaith, do you have a calculation of what the return 
on equity would be--or which profits, as you point out, could 
be a little disingenuous, because you can have as--Blue Cross 
of Rhode Island has $400 million in reserves, and yet, they 
don't make a profit. But, they keep piling up the reserves.
    Mr. McRaith. And that is a concern. I know of one Blue 
Cross plan in another State--major State--where it was 
technically a nonprofit but had accumulated so much excess 
surplus that the insurance commissioner entered an order 
requiring it to either lower premiums or return money to 
policyholders. The required capital levels--surplus levels for 
an insurance company--a health insurance company--are somewhere 
above 200 percent. Insolvency, though, doesn't arrive until 70 
percent. These companies are often above 600 percent of risk-
based capital, which, for us, is the sign of a strong company, 
but it also is a sign that profitability, maybe, is more than 
the 2.2 percent some would lead you to believe.
    Ms. Ignagni. Senator, may I just add, for the record--I'd 
be delighted to give you a longer answer; I know there's no 
time right now--but, I would note that with the discussion, in 
the middle of health reform, about insurance company profits, 
that once the data were provided and articles were written 
about how low they were, relative to the rest of the sectors, 
that some groups actually started talking about return on 
equity, because the data was very clear, the profits were low 
compared to pharmaceuticals, compared to device, etc, etc. I 
think that is, as you know, a reflection of, How you do on the 
investing of your reserves, which you have to keep capital--
make sure that you're able to pay claims if something that you 
can't foresee today--H1N1, etc.--happens. But, I did note that 
there was a shifting of focus from the issue of profits, once 
the data were reported, and they were found to be very, very 
low, relative to the other sectors, to this issue of return on 
    But, I'd be delighted to provide that information.
    Senator Reed. Fine. Profit is one measure, but return on 
equity is another measure. You can compare them to as--not only 
device makers and other parts, but you can--you know, if you 
compare them to manufacturing sector, insurance is doing pretty 
good, I think. So, it's all the point at which you're 
    Ms. Ignagni. And, Senator, this is our whole--the focus of 
our testimony is to send a strong message that we want to not 
only participate in the conversation, we want to help the 
committee assess what's really going on and how to address the 
issues--it's very difficult, politically, to take on--which is 
the rising cost of health care. There hasn't been a real 
appetite to take that on in a significant way that would--
    Senator Reed. How has the industry taken on the rising 
    Ms. Ignagni. Actually, there's a number of things that 
we've been doing. First, we made a strong commitment, in the 
context of health reform, to do administrative simplification. 
We have developed the language and the standards to allow that 
to proceed. That will allow doctors and hospitals to spend more 
time with patients. Millions of dollars have been invested to 
accomplish that, just the big banks, with ATM technology. And 
now we're bringing out portals, in New Jersey and Ohio, to test 
how to deliver the administrative simplification to physicians 
in a very simple way, so every physician can contact every 
health plan in one very simple Internet connection. That's one 
set of things.
    A whole range of other things that we're doing about 
hospital re-admissions. We have data now, government data, that 
shows that we are doing a much better job than the traditional 
Medicare program, for example, on hospital re-admissions, which 
people are very concerned about. That's about coordinating----
    Senator Reed My time has expired, but how do you respond to 
Mr. McRaith's point, that publicly-traded health care companies 
essentially described to Wall Street their strategies, denying 
claims and raising premiums above the cost of inflation? That 
doesn't seem to be a cost-saving strategy.
    Ms. Ignagni. Sir, I don't--our members are organized to 
provide the highest quality care for the lowest price, to 
consumers and to business purchasers. Our members are very, 
very clear, both about their fiduciary responsibilities, their 
issues, with respect to maintaining solvency and maintaining 
responsibility for consumers. I don't know----
    Senator Reed. So, they have no responsibility to their 
    Ms. Ignagni. I said that they have fiduciary 
responsibility. They have responsibilities, with respect to 
solvency, because we don't want hundreds of AIGs around the 
country that would be--that would increase significant 
volatility and create a situation that would be untenable. We 
found that situation----
    Senator Reed. But, what's their primary responsibility? 
Their fiduciary responsibility is to their shareholders.
    Ms. Ignagni. Their primary responsibility is to--in a going 
concern is, whether you're for-profit or not-for-profit--to do 
the job that you have been asked to do by people who purchase 
your product. The people who purchase our products are 
consumers and businesses, and they expect that you're going to 
offer coverage to them. That's job one, to actually provide 
that. A part of that, also, is maintaining a going concern, 
whether you're for-profit or not-for-profit. So, all of these 
issues are very important, and we take them very seriously.
    Senator Reed. So, there's no distinction between a for-
profit insurance company and a not-for-profit insurance company 
in the way they operate.
    Ms. Ignagni. Both types of insurance companies have to have 
a profit, to be able to maintain operations, as you know. And I 
think that, unfortunately, we're having a discussion about 
profits that are----
    Senator Reed. Well, frankly----
    Ms. Ignagni [continuing]. Relatively small----
    Senator Reed [continuing]. We're having a discussion about 
firms that go to the Street and say, ``Our strategy is, we're 
going to deny claims and raise premiums above medical 
    Ms. Ignagni. Sir, I thought I had said this, and I 
apologize if I didn't say it, but I don't know of any company 
that has gone to Wall Street that says that it is in business 
to deny claims.
    Senator Reed. Mr. McRaith, do you have any----
    Mr. McRaith. I'd be happy to--well, let me, first of all, 
be clear----
    Senator Reed. Sure.
    Mr. McRaith. In no way--going forward----
    Senator Reed. You're not, in any way, insinuating the 
operations of these companies----
    Mr. McRaith. No. No, but, to be clear, there are companies, 
operating in States around the country, that have loss ratios 
of 50 percent; in some cases, less. All I would submit is that, 
if what Ms. Ignagni is saying is true--and I have no reason to 
doubt her, of course--then rate review will only enhance that 
and support that position.
    I do want to clarify, AIG was not an insurance company 
problem. By the way, I know, Senator Reed, you're familiar with 
that discussion.
    Senator Reed. Yes.
    Mr. McRaith. But, on the health insurance side, there are 
companies that have submitted, to stock analysts and others, 
exactly that statement. They will deliver value by holding the 
line on claims and increasing premiums above the medical 
    Senator Reed. Well, I've got to yield my time. But, it 
seems to me that----
    The Chairman. Move on.
    Senator Reed. I'll move on. But, everything I hear from 
doctors, hospitals, and everything else is, insurance companies 
deny claims and raise premiums.
    So, thank you.
    The Chairman. Thanks, Senator.
    Senator Murray, thank you for your patience.

                      Statement of Senator Murray

    Senator Murray. Sure. Thank you very much, Mr. Chairman, 
for having this hearing.
    You know, when we were debating health care reform, 
thousands and thousands of my constituents wrote to me about 
their health care stories. And I remember one in particular, a 
guy by the name of Mark Peters. He owned a small technology 
company in Port Townsend, WA, my home State. And he told me 
that he offered health insurance to cover his employees. He was 
doing the right thing. He wanted to keep doing that, but he'd 
just received a letter from his insurance company raising his 
rates by 25 percent, and he just said that, ``My business 
cannot sustain increases like that. No business can.''
    And the gall that rubs everybody is, at the same time as 
working families and people like Mark are struggling with these 
rising health care costs in this recession, the five largest 
health insurance companies took in a combined profit of 12.2 
billion, which was up 50 percent--56 percent--over 2008.
    In your testimony, Mr. McRaith, you talk about how the 
Illinois Department of Insurance can regulate health insurance 
premiums if the rates that are charged by health insurance are 
not adequate for what they're paying out. But, in this time 
when Americans are finding it so hard to pay for coverage, 
there seems to be no one determining if premiums being charged 
will result in extreme profit for the insurer, at the cost of 
those who desperately need coverage. So, I think that's really 
where the rub is, and it's kind of where the conversation has 
been going, whether or not we can regulate that. And I think 
it's a really important debate to be having.
    We've gone over that, but, Mr. McRaith, I do want to ask 
you a question, because you also talk about how State insurance 
regulators and insurance commissioners have been regulating 
insurance companies for years, and a lot of people believe that 
States have better knowledge on their individual situations and 
are well-equipped to handle the rate regulation at the State 
level. But, having said that, there really is a large spectrum 
of premium increases requested to be approved throughout the 
country--some 13 percent increase, some 56 percent in another. 
And I wanted to ask you if you believe there's a role for the 
Federal Government to standardize base regulations across 
    Mr. McRaith. I think that the State regulators, working 
with industry, working with HHS and others, can and will 
develop appropriate standards for all of the issues--loss 
ratio, expectations, premium rate reviews, the definition of an 
``unreasonable rate increase.''
    I do want to clarify: Some of this conversation implies 
outright hostility between the industry and the regulators. And 
the truth is that we, I think, are very much in partnership in 
trying to implement the reform in a responsible and 
professional way, as you would like us to do.
    But, I don't think that we need the Federal Government to 
set a standard. I believe the States can develop and implement 
the standard.
    Senator Murray. OK. I want to come back to a question 
Senator Franken asked, and that is, on this committee, we have 
heard, over and over again, that prevention is not only good 
health policy, it's good economic policy. Private companies, 
like Safeway--Ms. Turner, you were talking about--have driven 
down health care costs by encouraging employees to focus on 
preventive care. And we know it's important. We know that if we 
want to lower the cost of health care--and Senator Harkin's 
been a champion on this--we have to focus people on getting 
insurance coverage for preventive services. And, really, the 
impetus behind requiring coverage of preventive services was to 
encourage people to see their physician before they got so sick 
that their problems were very grave and very expensive, 
resulting in more expensive care.
    I'm going to ask you, Ms. Turner, If we want to make sure 
all Americans can access preventive services, why shouldn't we 
require coverage of those services?
    Ms. Turner. Thank you, Senator Murray, very much for your 
    Preventive services aren't free. Obviously, somebody is 
going to pay for them.
    Senator Murray. Right.
    Ms. Turner. So, employers have made the decision--and many 
employers have--to build those into the cost of their benefit 
programs. It is a longer-term investment, in most cases. Very 
seldom do you get a short-term return from preventive care 
services, especially chronic care management. The problem with 
having the government get involved in this is that the benefits 
are often longer term, but the costs are more visible in the 
short term. And that's where, I think, intrusion into rate 
authority--you know, whether or not these are built into the 
costs--absolutely, they're valuable--but, I want people to make 
those decisions themselves about the value of the preventive 
care. Do they want to pay out-of-pocket? Do they want to have 
that built into the cost of their premium? You find, actually, 
with consumer-directed plans, when consumers have more 
visibility of the costs of their overall health plan, as well 
as the costs of those preventive services, that they actually 
increase the use of preventive services. So, consumers do this 
on their own, when given the authority to do that.
    Senator Murray. I would say that a lot of the testimony 
that we've had, and a lot of the discussion we've had, is 
exactly the opposite, that people don't get preventive 
coverage. If it's an out-of-pocket expense, they wait too long, 
and they end up being a lot more expensive, which costs 
everybody, in the long run. There is some long-term 
preventive--diabetes coverage, that you mentioned. But, there's 
some short-term preventive care that saves dollars in the short 
term, as well. And having insurance companies cover that 
preventive care, it seems to me that the insurance companies 
will save money. Certainly, our hospitals and doctors, and 
certainly all of us who are paying premiums, will have lower 
costs by covering preventive care.
    Ms. Turner. Well, I will send you the studies by McKinsey 
and others that have shown that engaging consumers as active 
partners really does incentivize them to get preventive care, 
assuming that you arrange the finances in a way that makes this 
work for them. And that is possible, and that's why many 
companies have succeeded with these programs.
    But, I think that simply adding the cost of a mammogram--
the full cost--to a health insurance policy, where, before, the 
person was going to pay some part of that copayment, that cost 
then simply gets built into the cost of the insurance premium. 
And those aggregate costs then, over time, will increase the 
cost of health insurance, with everything else and all the 
other mandates that are included.
    Also, employers now are making their own decisions about 
what they want to be included in that preventive package. And 
when those decisions are being made on a political basis, many 
more things actually wind up getting included.
    Senator Murray. I'll let Senator Harkin debate with you, 
    But, I'm for people having personal responsibility. I think 
that's an extremely important part of health care coverage. 
But, I also think a lot of families today make decisions based 
on whether or not they have coverage. And if it's a matter of 
going to see a doctor, or not, because it's not covered, 
they'll choose not to, because money's too tight right now. So, 
having that insurance cover that allows them to make a cheaper 
choice for all of us, in the long run. And that's just how I 
see it.
    Senator Harkin.
    The Chairman. Just a couple things, then I'll turn to 
Senator Alexander for any last things that he has.
    Senator Alexander, on your point, earlier, about going 
across States lines. I've never had a problem with going across 
State lines. In fact, we built into the health care plan--the 
bill that we have--the ability for regional compacts for States 
to act together. The only difference is that if somebody wants 
to come into Iowa to sell a health insurance product, I want 
them to clear it with the Iowa State Insurance Commissioner, to 
meet the standards of the State, so there's not this kind of 
race-to-the-bottom. So, I don't mind going across State lines, 
as long as there are some standards that the States agree upon. 
And that's what we put in the health care bill, that, as long 
as the States agree upon it, fine. I don't have any problem 
with that.
    Second--and I said this to Senator Coburn when he left. I 
think, to a large extent, he's right about the fact. I think 
Ms. Ignagni said that, too. We're going after some of the 
symptoms, here. But, sometimes, I said to him, if a patient 
came to you, and said, ``I've got a lot of problems,'' the 
doctor might say, ``Well, what's your symptoms?'' And if you 
said, ``Well, I don't know. Guess,'' you'd say, ``Well, how can 
I treat you if don't know your symptoms?''
    That's getting to what Mr. McRaith is saying, that all 
we're trying to do here is to get transparency and to take a 
look at this. Yes, maybe it's the symptoms, but what does this 
mean? Perhaps the better we understand and know how the 
insurance companies are adjusting their rates, and how much is 
going to profits and how much is going to actual medical loss 
ratio, we'll get a better handle on the underlying problems.
    Sorry that you have to be on the firing line, Ms. Ignagni, 
but that's where--you know, the rubber hits the road, is when 
people buy their health insurance policies. And when businesses 
and when--Ms. Menke, when it comes to her small town, I mean, 
that's what they see. They don't have any contact with the 
device manufacturer or what's happening to the pharmaceutical 
companies and things like that, but they do with the insurance 
    So, I think it's very important for us to have this 
openness and to have that kind of review so that we can better 
understand it. That's all we're talking about, here, is to 
better understand it. And that way to maybe better understand 
the whole system.
    Third, it was mentioned that the Iowa program, Wellmark, is 
a nonprofit. It's actually a for-profit company. It's an 
interesting for-profit company; it's a for-profit mutual 
company. And that's how they classify themselves.
    Ms. Ignagni. Actually, sir, they're a not-for-profit Blue 
plan, but they pay taxes, as all Blue Cross/Blue Shield plans 
pay taxes. They aren't mutual----
    The Chairman. Well, I just asked my staff to check with 
them, and they said--they, themselves, said that they were a 
for-profit company. They're listed as a for-profit mutual 
company. Not a stockholding company. But, they are a for-profit 
that returns the profits to their shareholders--well, what's 
    Ms. Ignagni. No, they don't have----
    The Chairman [continuing]. Policyholders.
    Ms. Ignagni [continuing]. Shareholders, actually, sir.
    The Chairman. Policyholders.
    Ms. Ignagni. Yes. It is organized as a mutual. They do pay 
taxes. All the Blue Cross/Blue Shield plans pay taxes. But, 
it's different than an investor-owned company, there's no 
doubt, which has shareholders, etc. So, that's very different 
structure, financially.
    The Chairman. Well, it is a different structure, I can 
guarantee you, but they just list themselves as a for-profit.
    On prevention, I have to take issue with Ms. Turner. We 
have a plethora of information that's come in to us, studies 
done, that the payback is not that long. The Trust for 
America's Health did quite an extensive survey on this, and 
found that certain investments--I don't have the data in front 
of me--pay back as early as 12 months--in the next year--in 
terms of certain intervention and prevention programs. So, 
there are short-term benefits. I think Steve Burg would also 
tell you that from Safeway and also--what's the other one--
Pitney Bowes, they found that they had immediate savings within 
the next year or 2, right after that. So, it's not necessarily 
a long-term payback thing.
    The other thing that I'd just say, is that on this 
prevention--is that, like a lot of things, we have studies that 
show that for mammograms, if you have a copay or deductible, 
even as low as $10, it decreases the number of women over age 
40, by 8 to 10 percent, who seek a mammogram. It's just one of 
those things, you know, ``Well, if I'm feeling good and I've 
got a lot of bills to pay and times are tough--I feel OK, I 
don't need that.''
    Ms. Turner. Well, the companies that have actually had the 
best success with getting utilization of preventive services 
are the ones that have created account-based consumer-directed 
plans, where they have insurance coverage, but for a higher 
deductible. And then they put those premium savings into an 
account that the employee then has control over. And so, it 
encourages them not only to seek better value for their care, 
but there's, really, a wonderful quote in this McKinsey study 
asking people, ``Why do you use this preventive service?'' And 
they said, ``You know, I figured out that if I take better care 
of myself, I will save money in the long run.'' But, they 
provide the resources for people to do that by basically 
rearranging the premium dollars.
    The Chairman. Well, I'd like to see that study, because I 
have other studies that show that health savings accounts are 
just the opposite. People bill the money--put the money in the 
health savings accounts. They don't want to spend it when they 
feel good. They say, I've got to save that in case--when I 
really get sick. And so, they don't go in for early types of 
diagnosis and prevention, because they don't want to spend that 
money, because they feel good.
    Ms. Turner. Well, I'll be happy to send you these studies. 
But, it's really important, in the structuring of the plan, to 
build those incentives in for people to both have the 
resources, the information, and the ability to make the 
decisions to take care of themselves.
    The Chairman. Well, in our health reform bill, we built 
that in by doing away with co-pays and deductibles for certain 
preventative measures. That's a kind of incentive--I hope, 
    Mr. McRaith. Mr. Chairman, just to illustrate your point, 
many of--if not all--Ms. Ignagni's members or AHIPs members 
agreed to waive the administration cost for the H1N1 
immunization, a great public service. We think, in Illinois at 
least, that's one reason why the infection rate was more 
contained and compressed than many people had predicted. It was 
the lack of a copay or charge for patients to receive that 
vaccine--or that immunization.
    Ms. Ignagni. And, Senator, Mr. McRaith is right about that. 
We worked with the Department on that. We thought it was an 
important intervention. We also are very supportive of this 
concept of ``essential benefits,'' including prevention. You 
and your staff worked very hard on that and we think that makes 
a great deal of sense, because----
    The Chairman. And I want to thank you for working with us 
on that.
    Ms. Ignagni [continuing]. And, for the reasons Commissioner 
McRaith said, that the data show, as Grace-Marie indicated, 
that we see very significant results, from a positive 
perspective--both the cost reduction, as well as quality 
improvement--when people do get into the system as early as 
possible. That's the reason that we're seeing, in the Medicare 
Advantage arena, for example, reductions in re-admissions, 
because of this full-bore health care coordination. One part of 
it is early intervention.
    The Chairman. Senator Alexander.
    Senator Alexander. Thanks, Mr. Chairman. And thanks for 
having the hearing.
    I think the witnesses have been very helpful, and I thank 
each of you for coming and being so forthright with your 
positions. And I know I've learned a lot from you, and I thank 
you for that.
    Mr. Chairman, Senator Enzi and other members would like to 
submit statements and questions for the record, if we could do 
that after the hearing is over.
    Senator Alexander. Thank you. Thank you very much.
    And just to summarize some of what my concerns are, I was 
thinking, as I was listening, this reminds me of the earmark 
debate. Senator Harkin and I are both on the Appropriations 
Committee, and every now and then somebody shows up and says, 
``OK, we're going to solve the Federal budget problem by 
getting rid of earmarks,'' which are specific appropriations 
that Members of Congress request, and then have to be approved 
through Congress. And some people say, ``Well, there have been 
some abuses, and this is the problem.''
    The problem we will say, is that among other things, it's 
only about 1 percent of the spending, and it won't really do 
anything about the deficit.
    That's the problem with this debate, and really with the 
new health care law. The new health care law, its fundamental 
mistake is to expand the health care delivery system that's 
already too expensive, and not focus on reducing cost. And what 
this hearing, as well-intentioned as it does, and Senator 
Feinstein's bill, is, it focuses on just a tiny piece of the 
health care issue, and doesn't really do anything about 
reducing health care costs. I mean, we've heard testimony today 
that the profits of insurance companies amount to about 2 days 
of the health care spending of the United States. Well, what 
are we going to do about the health care spending for the other 
363 days? That's why we have big increases in premiums. And if 
we want smaller increases in premiums, or lower increases in 
premiums, or lower premiums, then we need to work together to 
try to find ways to reduce costs.
    Senator Harkin and I have both talked about buying 
insurance across State lines, and I think our comments reflect 
different points of view we have. He said that he would be for 
that, but only if you met certain standards. Well, if I'm 
telling you what the right standard is, then the policy is not 
likely to be any cheaper. It might be more expensive, such as 
in the health care law, which has the minimum credible coverage 
provision, which, in effect, raises the cost of individual 
policies by 10 to 13 percent more than they otherwise would 
raise, according to the Congressional Budget Office.
    Now, it is true that a number of people have subsidies to 
help them pay for that, but that's only 50 or 60 percent of the 
people. That's paid for by tax dollars. And the others have 
higher policies.
    So, I would hope that, at some point, we could get to the 
rest of the issue; as Paul Harvey would say, ``the rest of the 
story.'' Whatever insurance companies are doing right or wrong, 
that's 1 or 2 percent of the problem, in terms of their 
profits. What if we took it all away? We'd still have 98 
percent of the problem, which is the health care delivery 
    And then, second, as a former Governor, I resist the idea 
of Washington telling Illinois or Tennessee what to do about 
this. I mean, Tennessee has decided it wants to regulate 
insurance premium increases. Fine. Illinois has decided it 
doesn't. I don't think we should be telling Illinois it should 
or shouldn't. So, to me, this is another Washington takeover of 
responsibility, and it's a focus on the wrong problem. It's 
barking up the wrong tree.
    But, I think it's been very helpful to have the hearing, 
and I appreciate the chance to attend and participate.
    The Chairman. Senator Alexander, thank you very much.
    Anybody have any closing comments they wanted to say, 
before we leave here?
    Ms. Ignagni. Senator, I would say that if the committee is 
interested in a specific set of proposals that could help bring 
costs under control, we'd be delighted to provide some ideas 
about that.
    The Chairman. Well, we're always open for that.
    Ms. Ignagni. Because that is what's driving premiums, in 
addition to all the issues now in the economy with adverse 
selection, which affects both the individual market, as well as 
small employers, as you know.
    The Chairman. I still want to know the answer to the 
question I asked you earlier about bringing that transparency 
stuff to existing plans, rather than just new plans, and I 
don't know if I got a clear answer on that.
    Ms. Ignagni. And we'll provide a very detailed response for 
the record, if that would be of use.
    The Chairman. That would be fine.
    Ms. Ignagni. Thank you, sir.
    The Chairman. Fine.
    Mr. McRaith. Mr. Chairman, first of all, thank you for the 
opportunity to appear before the committee.
    I did want to emphasize that we, in Illinois and through 
the NAIC, intend to implement national health reform in a 
professional and responsible, collaborative manner. We'll work 
with AHIP and other groups, consumer advocacy groups, and we'll 
get it done. We have an obligation to the country and to our 
individual States to do that.
    Ms. Ignagni. And sir, my commitment to that, we are working 
with the NAIC and the insurance commissioners. We will continue 
that work. I think you'll be pleased in seeing the direction of 
that work.
    The Chairman. Thank you, Ms. Ignagni.
    Ms. Menke. I also want to thank you for having us here.
    The Chairman. Yes.
    Ms. Menke. Earlier today, I thought I heard that, in Iowa, 
Blue Cross/Blue Shield recorded $1.15 for every dollar of 
premium. In the letter that I have from the Insurance 
Commissioner, it said 90 cents from every dollar went out. So, 
I wanted to make that correction.
    Ms. Ignagni. I think that was the broad loss ratio. We 
would be happy to provide, for the record, some very detailed--
on the specific product, I think it was $1.80 paid out for 
every dollar taken in. But, we would be delighted to provide 
that information for the record.
    The Chairman. Thank you.
    Ms. Turner. Senator, thank you, again, for this hearing. I 
really appreciate your engagement in this important issue. I 
think that, going forward, it will be important--looking at the 
symptoms rather than causes issue--to continue to track the tax 
increases that were built into health costs, and how those do 
impact premiums over the long-term, not only in the short term, 
with some of the changes that go into effect this year; but 
many of the taxes on the industry itself, as a driver of health 
insurance premiums. I think it's just really going to be 
important to watch that, because consumers will be impacted 
    The Chairman. Thank----
    Mr. McRaith. I'm very sorry, Mr. Chairman, but it occurs to 
me one thing I'd recommend or suggest to include in the record 
is some of the Massachusetts materials. There's been a lot of 
discussion about that today. There are actuaries that I think 
support the position I express, which is, these are not 
threatening the solvency of the companies. It's been a point of 
contention. I'd like to suggest that be included in the record.
    The Chairman. I appreciate that. We have looked at it very 
closely, and we're very much aware of the different viewpoints 
and contentions that have been made about the Massachusetts 
    I request unanimous consent to keep the record open for 10 
days so Senators can submit statements and questions for the 
    Again, thank you all very much for being here. I thought it 
was a very enlightening session. Thank you.
    Ms. Ignagni. Thank you.
    Mr. McRaith. Thank you.
    Ms. Turner. Thank you.
    The Chairman. The committee will stand adjourned.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

                   Prepared Statement of Senator Enzi

    Mr. Chairman, today's hearing is supposed to explore how to 
provide ``protection from unjustified premiums.''
    Unfortunately, just weeks ago, Congress passed and the 
President signed a massive new law that will impose unjustified 
premium increases on millions of Americans. We know the new law 
will actually drive up premiums--according to the Congressional 
Budget Office estimates, average premiums for families will go 
up by $2,100 because of the new law. This represents a 10 to 13 
percent increase in premiums, because of the new law.
    No one should be able to claim that this is any surprise. 
The Joint Committee on Taxation has repeatedly told us that the 
taxes in the new law will be passed on to consumers in the form 
of higher premiums.
    This means the $60 billion new tax on health plans, the $20 
billion new tax on medical devices (including hearing aids, 
crutches, pacemakers, insulin pumps for kids, etc.) and the $27 
billion new tax on prescription drugs will all ultimately be 
passed on to consumers. All of these new taxes will drive up 
the cost of health care in this country and result in higher 
insurance premiums.
    Yet, we are here today examining how to protect consumers 
against unjustified premiums. This seems to be another classic 
congressional effort to close that barn door, long after the 
horse has already bolted.
    If protecting consumers from unjustified premium increases 
is such a high priority, why was it not addressed anywhere in 
the 2,800 pages of new health insurance reform law? Senator 
Feinstein introduced the bill which is the subject of today's 
hearing on March 4, 2010, and the President advocated for 
creation of a health insurance rate authority as part of the 
proposal he published on February 22, 2010--a full month before 
the health care reform bill was signed into law. Why then was 
this proposal not included among the 2,800 pages of new law?
    Unfortunately, the new law was never about lowering health 
insurance premiums--despite comments to the contrary from its 
supporters. A dozen studies and reports, published months ago, 
confirmed that the ultimate effect of this bill would be to 
increase health care costs and premiums. I suspect this will 
likely be the first of many hearings in which Members of 
Congress express their outrage over events that anyone with 
even a basic understanding of simple economics could have 
    I regret that we have ended up where we are today. I wanted 
to pass a bill that focused on decreasing the overall cost of 
health care--because you can't decrease the cost of premiums 
without decreasing the cost of health care. We know American 
families can't afford to pay ever increasing health insurance 
premiums. Small businesses can't afford premiums that increase 
twice as fast as inflation.
    Three years ago, I proposed a bill that would have actually 
driven down health care costs for the Federal Government and 
small businesses. In 2006 I tried to pass a bill that CBO said 
would slash premiums for small businesses by 3 to 6 percent. 
The bill would have allowed small businesses to pool their 
purchasing power and cross State lines to buy less expensive 
    Unfortunately, the bill was filibustered and as a result, 
we were not able to give America's small businesses the cost 
relief they desperately needed.
    President Obama said premiums for American families would 
decrease by $2,500 if we enacted health care reform. He said 
the status quo is unacceptable. Yet CBO has said the new law 
will INCREASE premiums for families buying coverage by $2,100 a 
year. History will show that he and the supporters of the new 
law spent $2.5 trillion to enact legislation that will actually 
drive up health insurance premiums for many Americans.
    We can and should do better. I intend to focus on ways to 
eliminate the provisions in this new law that will increase 
costs and in their place enact reforms that will actually make 
insurance more affordable, both for consumers and the Federal 

                                   Galen Institute,
                                      Alexandria, VA 22320,
                                                    April 30, 2010.
Hon. Tom Harkin, Chairman,
Committee on Health, Education, Labor, & Pensions,
428 Dirksen Senate Office Building,
Washington, DC 20510.

    Dear Mr. Chairman: Thank you again for the opportunity to testify 
before your committee last week during your hearing on ``Protection 
from Unjustified Premiums.'' I very much appreciated being able to 
discuss our concerns about Senator Feinstein's proposal to give the 
Federal Government authority to review health insurance premiums and 
impose penalties if they are deemed ``unreasonable.'' I also was 
pleased to have a chance to talk about the many successful innovations 
in the private sector that are demonstrating success in holding down 
health costs and insurance premiums.
    In this letter, I want to follow up on our discussion concerning 
preventive care. I don't think there is any question that preventive 
care, wellness programs, and early diagnosis and treatment are valuable 
and that our system needs to move much more in this direction than in 
continuing to pay more and more to treat people after they become 
acutely ill.
    But preventive care costs money, too. If health plans provide 
coverage for 100 percent of the costs of colonoscopies and mammograms, 
for example, the added expense will be built into the cost of the 
premium. This increase in costs will be passed along to the consumer or 
the employer in the form of higher premiums.
    I want to emphasize that I believe that investments in preventive 
care are valuable and humane. They save lives and can enhance 
productivity by treating patients early so they can get back to their 
jobs and families. But even the Congressional Budget Office questions 
whether preventive care will lead to savings for our health sector.
    In an August 7, 2009, letter \1\ CBO Director Douglas Elmendorf 
    \1\ Douglas W. Elmendorf, ``The Budgetary Effects of Expanding 
Governmental Support for Preventive Care and Wellness Services,'' 
Letter to the Honorable Nathan Deal, August 7, 2009, at http://

          Although different types of preventive care have different 
        effects on spending, the evidence suggests that for most 
        preventive services, expanded utilization leads to higher, not 
        lower, medical spending overall.
          That result may seem counterintuitive. For example, many 
        observers point to cases in which a simple medical test, if 
        given early enough, can reveal a condition that is treatable at 
        a fraction of the cost of treating that same illness after it 
        has progressed. In such cases, an ounce of prevention improves 
        health and reduces spending--for that individual. But when 
        analyzing the effects of preventive care on total spending for 
        health care, it is important to recognize that doctors do not 
        know beforehand which patients are going to develop costly 
        illnesses. To avert one case of acute illness, it is usually 
        necessary to provide preventive care to many patients, most of 
        whom would not have suffered that illness anyway.

    He continues:

          Researchers who have examined the effects of preventive care 
        generally find that the added costs of widespread use of 
        preventive services tend to exceed the savings from averted 
        illness. An article published last year in the New England 
        Journal of Medicine provides a good summary of the available 
        evidence on how preventive care affects costs. After reviewing 
        hundreds of previous studies of preventive care, the authors 
        report that slightly fewer than 20 percent of the services that 
        were examined save money, while the rest add to costs.

    According to a recent column by Dr. Charles Krauthammer, ``A study 
in the journal Circulation found that for cardiovascular diseases and 
diabetes, `if all the recommended prevention activities were applied 
with 100 percent success,' the prevention would cost almost 10 times as 
much as the savings, increasing the country's total medical bill by 162 
    Preventive care is most likely to be successful when it is 
integrated into coordinated care programs that engage patients as 
partners in their health spending and health care.
    Several studies from health plans that provide these coordinated 
care settings have demonstrated positive results.
    Aetna does an annual study \2\ of members in its HealthFund 
consumer-directed plans. The study of 2 million members shows that 
members with a Health Savings Account (HSA) had more than 15 percent 
lower primary care physician use for non-routine visits and more than 
10 percent lower overall medical costs than members in a preferred 
provider plan.
    \2\ ``Aetna HealthFund Consistently Delivering Meaningful Savings 
and Engaged Members,'' Aetna Inc., April 1, 2010, at http://
    The HealthFund plans employ a number of tools to allow patients to 
become more active partners in managing their health care and health 
costs, including HSAs and Health Reimbursement Arrangements (HRAs). 
They also have an incentive to get the best value for their health care 
dollars and to seek out information on quality and price. The Aetna 
study found that:

     HSA members are more involved in their health care: They 
are two and a half times more likely to use online tools and three 
times more likely to take a health assessment than their PPO 
     For full replacement HRA and HSA plans, employers saved 
$118 million per 10,000 members over 5 years.
     Members in Aetna HealthFund plans spent more on preventive 
care and accessed higher levels of screenings for breast and cervical 
cancer as compared to members in traditional PPO plans; visited the 
emergency room less than their PPO counterparts; used the prescription 
drugs necessary to treat chronic conditions such as diabetes and heart 
failure at rates similar to PPO members; and used generic drugs at 
higher rates than members in a PPO plan.

    These savings came from an integrated health plan that doesn't 
simply tack on preventive care to traditional health policies but 
rather provides a battery of tools for consumers to become engaged in 
managing their health, including joining smoking cessation programs, 
exercise and weight loss plans, and other preventive and wellness 
    Safeway's Steve Burd is, as I wrote in my testimony, an evangelist 
for wellness programs, saying ``If you design a health care plan that 
rewards good behavior, you will drive costs down.'' \3\ Safeway covers 
the cost of recommended preventive care under its Healthy Measures 
program and then goes on to provide support programs and incentives for 
healthy behaviors. The operable issue is that the preventive care is 
part of an integrated system of care that includes incentives for 
healthy behavior.
    \3\ Victoria Colliver, ``Preventive health plan may prevent cost 
increases,'' San Francisco Chronicle, February 11, 2007, at http://
    I mentioned during the hearing a study by McKinsey \4\ analyzing 
the early impact of consumer-directed health plans. McKinsey surveyed 
more than 2,500 adult Americans with widely varying types of commercial 
health coverage. The study included more than 1,000 consumers with 
employer-based, full-replacement CDHPs, as well as a control group of 
traditionally insured consumers in 2005 and found that in CDHC plans:
    \4\ ``Consumer-Directed Health Plan Report--Early Evidence is 
Promising,'' McKinsey & Company, June 2005, at http://mckinsey.com/

     Consumers were more attentive to wellness and prevention: 
They were 25 percent more likely to engage in healthy behaviors and 30 
percent more likely to get an annual physical. Why? Fifty-one percent 
of CDHC consumers agreed ``If I catch an issue early, I will save money 
in the long run.''
     Consumers are more attentive to cost control and to 
behavior changes that could result in better health outcomes and cost 
savings over the long term. CDHC consumers were more likely to perform 
independent research to identify treatment options, for example, even 
when insurance was paying, and they were 20 percent more likely to 
comply with treatment regimens for chronic conditions.
     CDHC consumers were more value-conscious: They were 50 
percent more likely to ask about costs and three times more likely to 
have chosen a less extensive, less expensive treatment option. They 
also were much more likely to visit an urgent care center than a 
hospital emergency room.

    Prevention can be valuable and can produce savings, but to save 
money, it must be part of an integrated health program. Smoking 
cessation medications are most successful if integrated into 
educational and support programs. Some companies provide diabetics with 
supplies and medications at no cost if they make monthly visits to care 
coordinators who can detect early signs of the progression of their 
illness. Treatment must go beyond providing the medicines to include 
treatment for secondary issues such as pain and cardiovascular disease 
in a system of care. Cholesterol-lowering drugs are most likely to be 
effective when they are combined with a program of diet and exercise. 
Many private employers and health plans provide incentives for this 
integrated, coordinated care.
    My concern with the Patient Protection and Affordable Care Act is 
that many of these programs will be lost as employers focus more on 
following the rules set by Washington than in continuing to develop and 
enhance programs with demonstrated success in coordinated and 
integrated care, including prevention. Just tacking screening tests 
onto an insurance policy will not get us to the goal of a more 
efficient health sector that engages patients as partners in managing 
their health care.
    You indicated that the hearing record would be kept open for 10 
days, and I hope that these comments could be included in the record.
    I would very much welcome the opportunity to continue this 
discussion with you, and thank you again for the opportunity to 
                                        Grace-Marie Turner.

    [Whereupon, at 11:40 a.m., the hearing was adjourned.]