[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
   CUTTING THE RED TAPE: SAVING JOBS FROM PPACA'S HARMFUL REGULATIONS

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

                                HEARING

                               BEFORE THE

                         SUBCOMMITTEE ON HEALTH

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 15, 2011

                               __________

                           Serial No. 112-85





      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov



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                    COMMITTEE ON ENERGY AND COMMERCE

                          FRED UPTON, Michigan
                                 Chairman

JOE BARTON, Texas                    HENRY A. WAXMAN, California
  Chairman Emeritus                    Ranking Member
CLIFF STEARNS, Florida               JOHN D. DINGELL, Michigan
ED WHITFIELD, Kentucky                 Chairman Emeritus
JOHN SHIMKUS, Illinois               EDWARD J. MARKEY, Massachusetts
JOSEPH R. PITTS, Pennsylvania        EDOLPHUS TOWNS, New York
MARY BONO MACK, California           FRANK PALLONE, Jr., New Jersey
GREG WALDEN, Oregon                  BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska                  ANNA G. ESHOO, California
MIKE ROGERS, Michigan                ELIOT L. ENGEL, New York
SUE WILKINS MYRICK, North Carolina   GENE GREEN, Texas
  Vice Chairman                      DIANA DeGETTE, Colorado
JOHN SULLIVAN, Oklahoma              LOIS CAPPS, California
TIM MURPHY, Pennsylvania             MICHAEL F. DOYLE, Pennsylvania
MICHAEL C. BURGESS, Texas            JANICE D. SCHAKOWSKY, Illinois
MARSHA BLACKBURN, Tennessee          CHARLES A. GONZALEZ, Texas
BRIAN P. BILBRAY, California         JAY INSLEE, Washington
CHARLES F. BASS, New Hampshire       TAMMY BALDWIN, Wisconsin
PHIL GINGREY, Georgia                MIKE ROSS, Arkansas
STEVE SCALISE, Louisiana             JIM MATHESON, Utah
ROBERT E. LATTA, Ohio                G.K. BUTTERFIELD, North Carolina
CATHY McMORRIS RODGERS, Washington   JOHN BARROW, Georgia
GREGG HARPER, Mississippi            DORIS O. MATSUI, California
LEONARD LANCE, New Jersey            DONNA M. CHRISTENSEN, Virgin 
BILL CASSIDY, Louisiana              Islands
BRETT GUTHRIE, Kentucky              KATHY CASTOR, Florida
PETE OLSON, Texas
DAVID B. McKINLEY, West Virginia
CORY GARDNER, Colorado
MIKE POMPEO, Kansas
ADAM KINZINGER, Illinois
H. MORGAN GRIFFITH, Virginia

                                 7_____

                         Subcommittee on Health

                     JOSEPH R. PITTS, Pennsylvania
                                 Chairman
MICHAEL C. BURGESS, Texas            FRANK PALLONE, Jr., New Jersey
  Vice Chairman                        Ranking Member
ED WHITFIELD, Kentucky               JOHN D. DINGELL, Michigan
JOHN SHIMKUS, Illinois               EDOLPHUS TOWNS, New York
MIKE ROGERS, Michigan                ELIOT L. ENGEL, New York
SUE WILKINS MYRICK, North Carolina   LOIS CAPPS, California
TIM MURPHY, Pennsylvania             JANICE D. SCHAKOWSKY, Illinois
MARSHA BLACKBURN, Tennessee          CHARLES A. GONZALEZ, Texas
PHIL GINGREY, Georgia                TAMMY BALDWIN, Wisconsin
ROBERT E. LATTA, Ohio                MIKE ROSS, Arkansas
CATHY McMORRIS RODGERS, Washington   JIM MATHESON, Utah
LEONARD LANCE, New Jersey            HENRY A. WAXMAN, California (ex 
BILL CASSIDY, Louisiana                  officio)
BRETT GUTHRIE, Kentucky
JOE BARTON, Texas
FRED UPTON, Michigan (ex officio)

                                  (ii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Joseph R. Pitts, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................     1
Prepared statement...............................................     4
Hon. Frank Pallone Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................     8
Hon. Janice D. Schakowsky, a Representative in Congress from the 
  State of Illinois, opening statement...........................     8
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, opening statement..............................     9
Hon. John Shimkus, a Representative in Congress from the State of 
  Illinois, opening statement....................................    10
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, opening statement.................................    11
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, prepared statement......................................   124

                               Witnesses

Steven B. Larsen, Deputy Administrator and Director, Center for 
  Consumer Information and Insurance Oversight, Centers for 
  Medicare and Medicaid Services, Department of Health and Human 
  Services.......................................................    12
    Prepared statement...........................................    15
    Answers to submitted questions...............................   126
Edmund F. Haislmaier, Senior Research Fellow, Center for Health 
  Policy Studies, The Heritage Foundation........................    48
    Prepared statement...........................................    51
Grace-Marie Turner, President, Galen Institute...................    58
    Prepared statement...........................................    60
Janet Trautwein, Chief Executive Officer, National Association of 
  Health Underwriters............................................    72
    Prepared statement...........................................    74
Wendell Blaine Potter, Senior Policy Analyst, The Center for 
  Public Integrity...............................................    86
    Prepared statement...........................................    88
Lynn Bates Quincy, Senior Policy Analyst, Consumers Union........   100
    Prepared statement...........................................   102

                           Submitted Material

Letter, dated September 15, 2011, from Health Care for America 
  Now et al. to subcommittee leadership, submitted by Mr. Pallone    35
Letter, dated September 14, 2011, from HIV Health Care Access 
  Working Group to subcommittee leadership, submitted by Mr. 
  Pallone........................................................    38
Letter, dated September 14, 2011, from Shereen Arent, Executive 
  Vice President, Government Affairs and Advocacy, American 
  Diabetes Association, to subcommittee leadership, submitted by 
  Mr. Pallone....................................................    40
Letter, dated September 14, 2011, from Kelly Conklin and Jim 
  Houser, Main Street Alliance Steering Committee, to 
  subcommittee leadership and members, submitted by Mr. Pallone..    41
Letter, dated September 14, 2011, from Charles M. Loveless, 
  Director of Legislation, AFSCME, to subcommittee members, 
  submitted by Mr. Dingell.......................................    83
Statement, undated, of Hon. Tom Price, a Representative in 
  Congress from the State of Georgia, submitted by Mr. Dingell...    84


   CUTTING THE RED TAPE: SAVING JOBS FROM PPACA'S HARMFUL REGULATIONS

                              ----------                              


                      THURSDAY, SEPTEMBER 15, 2011

                  House of Representatives,
                            Subcommittee on Health,
                          Committee on Energy and Commerce,
                                                Washington, DC.----
    The subcommittee met, pursuant to call, at 11:17 a.m., in 
room 2322 of the Rayburn House Office Building, Hon. Joe Pitts 
(chairman of the subcommittee) presiding.
    Members present: Representatives Pitts, Burgess, Shimkus, 
Rogers, Murphy, Gingrey, Latta, Lance, Cassidy, Guthrie, 
Pallone, Dingell, and Schakowsky.
    Staff present: Howard Cohen, Chief Counsel, Health; Paul 
Edattel, Professional Staff Member, Health; Julie Goon, Health 
Policy Advisor; Kirby Howard, Legislative Clerk; Debbee Keller, 
Press Secretary; Ryan Long, Chief Counsel; Carly McWilliams, 
Legislative Clerk; Andrew Powaleny, Press Assistant; Heidi 
Stirrup, Health Policy Coordinator; Phil Barnett, Democratic 
Staff Director; Alli Corr, Democratic Policy Analyst; Tim 
Gronniger, Democratic Senior Professional Staff Member; Ruth 
Katz, Democratic Chief Public Health Counsel; and Purvee Kempf, 
Democratic Senior Counsel.
    Mr. Pitts. The subcommittee will come to order. The chair 
recognizes himself for 5 minutes for an opening statement.

OPENING STATEMENT OF HON. JOSEPH R. PITTS, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    ``If you like your current plan, you will be able to keep 
it.'' Let me repeat that: ``If you like your plan, you will be 
able to keep it.'' That was a remark by President Obama at the 
White House on July 21, 2009. Another quote: ``If you like your 
insurance plan, you will keep it. No one will be able to take 
that away from you. It hasn't happened yet. It won't happen in 
the future.'' President Obama in April of 2010. Despite these 
claims, repeated claims, it has become abundantly clear that 
the ``if you like it, you can keep it'' promise to the American 
people has been broken.
    By the Administration's own estimates, 49 to 80 percent of 
the small-employer plans, 34 to 64 percent of large-employer 
plans, and 40 to 67 percent of individual insurance coverage 
will not be grandfathered by the end of 2013.
    A May 2011 PricewaterhouseCoopers survey of employers also 
echoes the Administration's warnings. Of note, 51 percent of 
the employers surveyed did not expect to maintain grandfathered 
health status, meaning their employees would forfeit their 
current coverage and pay higher premiums due to the health care 
law's mandates on their new coverage. Because grandfathered 
plans are subject to many of PPACA's requirements, employers 
today are forced to pay more to keep their current 
grandfathered plans, shop for more expensive plans, or drop 
coverage for their employees altogether.
    The discussion draft before us today simply prevents the 
Administration from implementing its June 17 interim final rule 
and it prevents the Administration from imposing any standards 
or requirements as a result of PPACA on grandfathered health 
plans. That way, consumers who really do like the coverage they 
have, really get to keep it.
    As for the medical loss ratio, Section 1001 of PPACA 
requires health plans to spend 80 percent for plans in the 
individual and group market and 85 percent for large group 
plans of premium revenue on medical care, beginning this year. 
Plans that fail to meet these thresholds are required to rebate 
the difference to their consumers.
    Supporters of this section claim the medical loss ratio 
regulation was designed to protect consumers from unscrupulous 
insurance companies. However, it actually contains perverse 
incentives for insurance companies to ignore waste and fraud, 
which drives up premiums and copayments for consumers. Under 
the regulation, investments in fraud detection, and even 
quality improvement and care coordination, fall under 
administrative expenses, which can only make up 20 percent of a 
plan's spending. Plans struggling to make the 80 to 85 percent 
threshold for medical costs often can't risk these activities, 
which could save consumers money and provide them with a higher 
quality of care, for fear of being penalized and having to pay 
rebates. Even worse, if a plan does identify fraud, cutting 
those fraudulent payments and activities actually reduces their 
amount of spending on medical costs, making it even harder for 
them to reach the 80 or 85 percent threshold.
    Consumers, not HHS and government bureaucrats, should be 
deciding what health care spending is appropriate and what 
health care spending is not appropriate for their plans. Plans 
should be able to invest in waste, fraud, and abuse detection 
without worrying if that spending puts them in violation of a 
government regulation. And consumers should be free to select 
those plans that share their priorities, not the government's.
    Again, while the medical loss ratio has been billed as a 
tool to protect consumers from insurance companies, many States 
are clamoring for waivers to exempt their citizens from these 
protections. The Secretary of HHS is empowered to grant MLR 
waivers to States that can prove that meeting the 80 to 85 
percent thresholds will destabilize its insurance market.
    Currently, HHS has granted MLR waivers to five states: 
Maine, New Hampshire, Nevada, Kentucky and Iowa. With these 
waivers, consumers in these States are now protected from one 
of the health care law's key consumer protections. Residents of 
North Dakota and Delaware are not as lucky. HHS rejected their 
waivers. Nine more states--Florida, Georgia, Louisiana, Kansas, 
Indiana, Michigan, Texas, Oklahoma and North Carolina--have 
determined that their insurance markets will be destabilized by 
having to comply with the MLR regulation and have applied for 
waivers. They are still waiting to hear back.
    The MLR regulation is also costing jobs at a time when 
unemployment remains stubbornly above 9 percent. HHS's interim 
final rule on MLR includes health insurance agent and broker 
commissions in the administrative costs category. Many plans, 
desperate to meet the 80 to 85 percent threshold, simply cannot 
afford to use brokers and agents as they once did. One estimate 
from the National Association of Health Underwriters suggests 
that more than 20 percent of agents will have to downsize their 
businesses as a direct result of this calculation.
    I strongly support H.R. 2077, introduced by Dr. Tom Price 
and Rep. Cathy McMorris Rodgers, which repeals the section of 
the Public Health Service Act dealing with MLR requirements, 
which was added by the new health care law, and I would urge my 
colleagues to support.
    Finally, I would like to thank all of our witnesses for 
being here today and yield back my time.
    [The prepared statement of Mr. Pitts follows:]

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    Mr. Pitts. I now recognize the ranking member of the 
subcommittee, Mr. Pallone, for 5 minutes.

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Pallone. Thank you, Mr. Chairman.
    I am extremely disappointed in today's hearing topic 
because for too long, too many hardworking Americans paid the 
price for policies that handed free rein to insurance 
companies, and so Democrats did something about it. We passed 
the health reform law that gives hardworking families the 
security they deserve. But here we are once again as 
Congressional Republicans introduce new piecemeal repeal 
legislation to take these protections away. The result of such 
legislation is putting insurance companies, not patients, back 
in control.
    The two bills under discussion today support what I have 
been saying all year long. If the Republicans had their way, 
insurance companies would have free rein to drop someone's 
coverage unexpectedly when they are in an accident or become 
sick because of a simple mistake on an application. If the 
Republicans had their way, over 1.2 million young adults would 
lose their insurance coverage through their parents' health 
plan as their children worked to launch their careers. And if 
the Republicans had their way, insurance companies would once 
again be allowed to deny health coverage to a breast cancer 
patient who was in remission but now needs to restart her chemo 
and to put an annual cap on the amount of care she will have 
access to, or even worse, a lifetime limit on her health 
coverage so in a desperate time of need she has to choose 
between bankruptcy and getting lifesaving care. If the 
Republicans had their way, insurance companies would once again 
have the ability to freely raise patients' premiums, likely by 
double digits, and have no restraints or accountability on what 
proportion of these premium dollars are spent on health care 
services.
    Now, I am going to stand silent while the repeal 
Republicans work to rescind the Patient's Bill of Rights and 
leave tens of millions of Americans at the mercy of the 
insurance companies. Enough is enough. Let us move on to the 
real priorities of the American people, and that is jobs, jobs, 
jobs, jobs.
    I thank you, Mr. Chairman. I would like to yield to time 
that I have left to the gentlewoman from Illinois, Ms. 
Schakowsky.

       OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A 
     REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS

    Ms. Schakowsky. I thank the ranking member very much for 
yielding to me.
    Well, here we are again, and what we are witnessing once 
again today is an effort by the Republicans to do the bidding 
of the insurance companies at the expense of ordinary 
consumers.
    The idea of a medical loss ratio says that we are just not 
going to let the insurance companies charge whatever they want. 
That legislation, that rule, the medical loss ratio, holds 
insurance companies accountable and ensures that health care 
consumers receive the services for which they are already 
paying top dollar. By law, insurance companies have to spend at 
least 80 percent of their premium dollars on medical care and 
health quality improvement as opposed to administrative costs, 
marketing, executive salaries and bonuses.
    I am so glad that we are going to hear from somebody who 
has had years of experience in the insurance industry and knows 
all the games that are played in order to extract as much money 
as they can from sickness in the United States of America.
    This hearing is also going to focus on legislation to 
repeal the grandfathered health plan regulation, and doing so 
basic consumer protections like ending lifetime coverage limits 
and rescission of coverage will be undermined and employer-
sponsored health insurance plans, plans that cover 160 million 
people. So now we are not just talking about public plans, we 
are going to reach into those private plans and tell these 
employers what they can do and offer to their consumers.
    It is just incredible to me the number of things that the 
Energy and Commerce Committee has to do in order to make life 
better for people out there who are really suffering right now 
under this economy. You know, you lose your job, you lose your 
health care many times, so people are trying to figure out how 
their kids are going to get health care. Our legislation said 
that preexisting conditions for children will not be a reason 
to exclude children from health care. We said if your child has 
a terrible life-threatening disease that may cost a lot of 
money, that those lifetime caps are going to be removed, and 
here we sit today saying no, no, no, this is not fair to the 
poor insurance companies, those poor insurance companies who 
have been making record profits. I think this is utterly 
outrageous that we should be spending our time doing that when 
the American people are looking to us at this moment for help.
    Thank you. I yield back.
    Mr. Pitts. The chair thanks the gentlelady and recognizes 
the vice chairman of the subcommittee, Dr. Burgess, for 5 
minutes.

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE 
              IN CONGRESS FROM THE STATE OF TEXAS

    Mr. Burgess. I thank the chairman for the recognition and I 
do thank our panelists for being here today. Director Larsen, 
you have been kind enough to come talk to me in my office in 
the time between our last hearing, and I appreciate the 
information that you have provided. As you will find out today, 
perhaps there are a few more things that we would like to know, 
and I know that you will provide them.
    Grace-Marie Turner, it is always good to see you again.
    I have to say, we talked about doing the bidding of 
insurance companies. Exhibit A, the Affordable Care Act, why 
cannot we get the information from the White House from the six 
groups that met down there in May of 2009 that discussed how we 
were going to carve up things in health care, insurance 
companies to be sure, doctors, hospitals, pharma, medical 
device manufacturers and the unions. So what was up with that? 
The President came out of that meeting and said we saved $2 
trillion for health care. Two trillion dollars for health care, 
but there are no minutes, there are no emails. There is not 
even an envelope with a scratch on the back about what this $2 
trillion represented, and we are to believe that?
    Now, yesterday in the Subcommittee on Oversight and 
Investigations, we had a big hearing on Solyndra and how 
Solyndra was given a loan guarantee from the Department of 
Energy which had all of the appearances of being something that 
was a rush job and done improperly. Well, if you want to talk 
about something that is a rush job and done improperly, see the 
Affordable Care Act. Insurance companies have prospered since 
the Affordable Care Act passed. Go back and look at the 
earnings statements from the big companies from March of 2010 
when this thing was passed. The insurance companies got the 
individual mandate. They got everything they asked for in this 
bill. Thank you, Democrats, for that. And now we are left to 
deal with the consequences of this.
    We are concerned about jobs. The President came and talked 
on the House Floor about jobs last week. I am grateful that he 
came with his ideas. The fact remains that unemployment stands 
at over 9 percent and doesn't appear to be budging.
    Now, is there a reason for this? Is partly the reason 
because since 2008 the government has spent $54 billion on 
regulatory agencies and they are growing at 16 percent--the 
only true growth industry in this country is federal 
regulation--or that the government regulatory system is the 
third largest employer in the Nation or because complying with 
federal rules and regulations costs $1.75 trillion per year? Is 
it because the Affordable Care Act and the effect that its 
regulations are having on our Nation's employers?
    From over-regulation to burdensome requirements to perverse 
incentives that will drive up health spending, this thing 
levies unreasonable demands on employers, manufacturers and 
providers. Discourage hiring? You bet. Encourages employers to 
drop their insurance apparently, oh, yes, and in the bargain we 
are going to punish physicians and tax the industry out of 
America.
    Today we are going to look at two of these requirements in 
some depth but honestly, the list is much, much longer, and we 
are going to hear from some of those folks who are on the 
ground dealing with this, but I am afraid we may be too late. 
This law has proven to be unworkable and to stifle economic 
growth. Every day we have got another announcement about 
another rule going into effect, and far too many are coming out 
as interim final rules, and what does that mean? That means we 
have short-circuited the public input part of that process. So 
if we are serious about getting America back to work, the first 
step should be to loosen our stranglehold imposed by this law.
    Thank you, Mr. Chairman, and----
    Mr. Shimkus. Would you yield?
    Mr. Burgess. Yes, I would be happy to yield to the 
gentleman from Illinois.

  OPENING STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Shimkus. Thank you from my colleagues, and I am going 
to take this minute just to do a plug on a bill that we just 
dropped yesterday, which was the Medicare common access card. 
We all know there is Medicare fraud. Part of this debate is, 
how do you stop fraud in billing. In Medicare, we know there is 
great fraud. What the Medicare common access card, which I have 
a copy of one, it is just using an ID card like the military 
does. It is a double identification system with a chip in the 
card and then a password. To date, in the DOD, these cards are 
out. Twenty million of these cards have been out. There has 
been not a single instance of fraud. And so if you really want 
to make sure that the person who is supposed to receive the 
service is identified and properly billed for it, then I would 
encourage all my colleagues on both sides to look at the bill 
dropped.
    On the Senate side, Senators Kirk, Wyden and Rubio expect 
bipartisan support, and I would imagine it would have support 
across the spectrum from both conservatives and liberals if we 
want to get a national way to make sure we have secure billing.
    With that, thank you, Mr. Chairman.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the ranking member emeritus, Mr. Dingell, for 5 minutes for an 
opening statement.

OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Dingell. Mr. Chairman, I thank you for your courtesy 
and I thank you for recognizing me.
    Today's hearing, Mr. Chairman, is yet another unfortunate 
attempt by my colleagues on the other side of the aisle to roll 
back the Patient's Bill of Rights, which is included in the 
Affordable Care Act. There has been continuing opposition to 
both proposals and attempts to destroy it in every possible way 
including by delay and outright repeal in whole or in part.
    The bills before us today would strip historic reforms that 
protect consumers and it is going to leave us in a situation 
where the things that we have done to ensure and protect the 
rights of the American public are stripped away in a most 
unfortunate way. The intent of the medical loss requirement is 
to ensure that consumers know that money coming out of their 
paychecks each month for health care is going to go for quality 
care, not to line the pockets of the insurance companies. This 
provision is going to benefit countless Americans. It is going 
to, according to HHS estimates, see to it that nearly 75 
million people are in health plans that will be subject to new 
requirements and up to 9 million Americans will be eligible for 
rebates next year. Costs to the government that we pay for 
health care will go down because of the things under attack in 
this committee today. The requirements that we are making are 
safe, effective and achievable.
    The same is true here also of the grandfathered health plan 
regulation. Preventing enforcement of this regulation allows 
abhorrent and false claims to be made by the other side for no 
reason other than political rancor. We cannot allow the public 
to be misled this way. Even worse, preventing the grandfathered 
health plan rule to move forward would be to remove a trigger 
for health plans to lose grandfather status if they cut 
benefits, increase co-payments or premiums, or make changes in 
annual limits.
    These two bills are a direct and unfortunate assault on the 
sick, the elderly and the disabled who deserve protection and 
assurance that they will have the care they need when they are 
wheeled into an emergency room, and sadly, it will let the 
insurers spend consumers' hard-earned dollars with no 
accountability. These things are bad from the standpoint of the 
public, the consuming public. They are also bad from the 
standpoint of the taxpayers because the loss of these 
provisions is going to run up the cost of Medicare, Medicaid, 
government retirement plans, and it is also going to run up the 
cost of plans which are held by private industry for the 
benefit of their employees, and the situation is going to 
impact on ordinary citizens who buy their own insurance because 
they have no one to assure their protection against the abuses 
which the legislation before the committee would strip the 
consumers of protection in their enactment.
    I urge my colleagues to defeat this legislation, to not let 
it out of the committee, and to have an honest exposition of 
the abuses we are attacking. This committee will recall that we 
have worked long and hard to get a national health insurance 
proposal enacted into law. It isn't what any one of us would 
want but it is good enough to do the job that we have need of.
    It is unfortunate that this legislation is also a part of 
an ongoing attempt by my Republican colleagues to do away with 
government regulation. I am not one who is sitting here to tell 
you that this regulation is all good. That would not be true. 
But the hard fact of the matter is, what we are striking at 
today is not just health care but it is part of a pattern which 
will destroy regulation to protect people from bad foods, bad 
drugs, to protect people from fraud in the securities industry, 
to see to it that consumers receive protection through the 
Consumer Product Safety Commission, and a wide array of other 
programs that are necessary to protect American consumers.
    The idea is not to eliminate regulation but to eliminate 
bad, unfortunate and wasteful regulation rather than just 
striking out broadcast to destroy regulation and to strip the 
American public of the protections that they need for their 
safety, for their health, for their financial and economic 
well-being.
    I thank you for the time, Mr. Chairman.
    Mr. Pitts. The chair thanks the gentleman.
    That concludes the members' opening statements. We will 
call panel one to the table. Our first panel is Steve Larsen, 
Director of the Center for Consumer Information and Insurance 
Oversight with the Centers for Medicare and Medicaid Services. 
Welcome, Mr. Larsen. If you can summarize, your written 
testimony will be made part of the record, and you have 5 
minutes.

    STATEMENT OF STEVEN B. LARSEN, DEPUTY ADMINISTRATOR AND 
    DIRECTOR, CENTER FOR CONSUMER INFORMATION AND INSURANCE 
    OVERSIGHT, CENTERS FOR MEDICARE AND MEDICAID SERVICES, 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Larsen. Thank you, Chairman Pitts, Ranking Member 
Pallone and members of the subcommittee, and thank you for the 
opportunity to discuss the benefits of the medical loss ratio 
and grandfathering provisions of the Affordable Care Act.
    The ACA expands access to affordable, quality health 
insurance coverage to over 30 million Americans and strengthens 
consumer protections to ensure that individuals have coverage 
when they need it most. The ACA addresses many longstanding 
problems in the private health insurance market for both 
individuals and for small businesses.
    Since enactment of the ACA, HHS with the Departments of 
Labor and Treasury have already implemented many of the private 
insurance market reforms including prohibiting insurance 
companies from imposing lifetime dollar limits on coverage, 
rescinding coverage absent fraud, and enabling many young 
people to stay on their parents' health plans up to age 26.
    The MLR provision in the Affordable Care Act reforms the 
health insurance market so that Americans receive value for 
their premium dollars. This provision requires that spending by 
health insurance companies on clinical services for members and 
spending on activities that improve quality for their members 
account for 80 percent of the premium dollars for the 
individual and small group market and 85 percent for the large 
group market. This ensures that premiums that consumers pay are 
not used for excessive administrative expenses. Because 
insurance companies whose coverage does not meet the applicable 
MLR standard will provide rebates to their customers, insurers 
are incentivized to operate efficiently, provide value pricing 
and invest in activities that improve the health status of the 
people they cover. The provision also adds transparency to the 
marketplace by allowing all consumers to see how their premium 
dollars are being spent.
    Consumers will begin receiving rebates in 2012 from plans 
that don't meet the standard in 2011. However, we are already 
seeing indications that the MLR provision is causing insurance 
companies to more carefully evaluate their need for increases, 
slowing the rate of premium growth. Insurers that have not met 
these standards have announced to Wall Street and in many cases 
advised State regulators that they are now setting prices to 
meet these new standards. One large insurer will reportedly be 
dropping rates for nearly 10,000 customers in Connecticut by 
between 5 and 20 percent. The GAO also found that issuers were 
moderate rate increases because of this rule. Repealing this 
provision will be a step backward for consumers.
    Regarding grandfathered health plans, while the ACA 
requires all health plans to provide important new benefits to 
consumers, under the law, plans that were in existence in March 
of 2010 are grandfathered and exempt from some of the new 
requirements in the ACA. For example, grandfathered plans not 
subject to provisions that require health plans to provide 
preventive services with no cost sharing are not subject to the 
new appeals provisions, and premiums for these plans are not 
subject to the rate review provisions of the ACA. However, 
grandfathered plans still must eliminate all lifetime benefit 
limits, extent dependant coverage to most children under age 
26, and follow other consumers protections including the MLR 
provisions.
    The grandfathered plans interim final rule is intended to 
preserve the ability of Americans to keep the coverage that 
they had when the ACA was passed. However, if the terms of that 
coverage are changed significantly, the plan could end up as a 
very different plan than the one that was in effect in March of 
2010, perhaps with much higher coinsurance, deductibles or with 
fewer benefits, but if this modified coverage is still 
considered to be grandfathered coverage, it also would not 
provide some of the key consumer protections that we just 
talked about.
    The grandfather rule avoids this undesirable result by 
balancing the interests of health care consumers with those of 
employers. It does this by giving employers the feedback the 
flexibility to modify existing benefits to accommodate changing 
conditions without the loss of grandfather status while also 
guaranteeing Americans access to important consumer protections 
if the coverage changes significantly.
    Examples of the flexibility that employers have include the 
ability to make changes to different types of cost-sharing 
provisions such as copays and deductibles, to vary premiums, 
and to make modest changes to the levels of employer 
contributions. Importantly, health plans and employers have the 
choice of continuing the coverage that was in place on March 
23rd or making changes beyond the areas outlined in the 
regulation.
    Also, based on the feedback we have received through out 
process and from formal comments in response to the interim 
final rule, HHS and Departments of Labor and Treasury issued an 
amendment to the amendment to the grandfathering rule in 
November of 2010. The amended final rule allows employers to 
change carriers and keep their grandfathered status, again, 
providing even more flexibility to businesses and insurance 
companies in the implementation of this provision.
    In conclusion, we are proud of all that we have 
accomplished over the last year and a half and look forward to 
2014 when more Americans will have access to affordable and 
comprehensive health insurance plans and all of the consumers 
protections in the ACA will apply.
    Thanks for the opportunity to appear before you, and I look 
forward to answering your questions.
    [The prepared statement of Mr. Larsen follows:]

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    Mr. Pitts. The chair thanks the gentleman. We will now 
begin the questioning and recognize myself for 5 minutes for 
that purpose.
    Mr. Larsen, we have heard testimony from health insurance 
brokers that the Administration's MLR regulation is already 
leading to job loss and income reduction for agents. According 
to a National Association of Health Underwriters survey, agents 
are seeing income losses of 20 to 50 percent. Additionally, 21 
percent of agents have downsized their business in response to 
the MLR regulation alone. Earlier this summer, with 
unemployment at a staggering 9.1 percent, you told us HHS would 
not rescind or suspend the MLR regulation under the President's 
Executive Order on Regulatory Review. With unemployment still 
at 9.1 percent, has the Administration reconsidered its 
decision to continue with the medical loss ratio regulation 
despite massive job loss among the broker community?
    Mr. Larsen. We have spent a substantial amount of time 
looking at this impact on agents and brokers. We know, for 
example, that the National Association of Insurance 
Commissioners on other issues related to the MLR standard took 
a pretty close look at the impact on agents and brokers of the 
MLR provision. Ultimately, as you may know, the NEIC declined 
to take further action in terms of recommendations or 
endorsements of changes to the MLR provision whether it is 
repealing it or other modifications. As I remember, the work 
that the NEIC did, they found there was really a spectrum of 
activity, that there was certainly some issuers that had 
decided to lower commissions. It wasn't always clear whether 
that was a direct result. Some issuers in fact had increased. 
There wasn't a clear trend across all markets in all States 
regarding responses by issuers on the agent and broker issue. 
So I think it is certainly the case that in some instances 
insurers have limited their commissions to brokers. We are 
concerned about that and we will continue look at it. At this 
point the NEIC declined to take any action on that, and I think 
we have limited legal ability to do so as well.
    Mr. Pitts. Well, you have the ability to review 
regulations. Are you going to review the regs?
    Mr. Larsen. Well, we have been reviewing them in the 
context of the data that has been available to us, and we have 
looked at and certainly spoken with NAHU and looked at their 
survey, and I think the challenge is balancing the impact of, 
you know, major changes to the MLR standard, which will deprive 
a lot of consumers and businesses with rebates with some of the 
impacts that agents and broker communities have expressed.
    Mr. Pitts. Recently, the Administration announced that it 
would use brokers and agents to help enroll individuals in 
PPACA's high-risk pools. This action was taken in response to 
the low enrollment in the program so far. If the Administration 
believes it is necessary to enlist the help of brokers to 
enroll Americans in a government program created by PPACA, why 
is HHS punishing the agent community and their customers in the 
private insurance space through the MLR rule? Shouldn't we be 
encouraging rather than hurting jobs in the private sector?
    Mr. Larsen. Well, first of all, we certainly support the 
role of agents and brokers in connection with the PESA program. 
We were very pleased to be able to provide payments or 
commissions to them on the PESA program. We certainly don't 
view the MLR rule as punishing agents and brokers. Frankly, it 
is many of the insurance companies that are taking this action. 
There is a very wide range in commissions that companies pay, 
and it is very possible that some of the companies are 
exploiting the MLR provision to lower agents' and brokers' 
commissions when they may not need to be doing that. I am not 
sure there is any clear data on that, but we support the role 
of agents and brokers both now and in 2014 in the exchanges, 
and we look forward to working with them to see if there is a 
way to get us through that period between now and then.
    Mr. Pitts. Now, if a small business uses a broker to assist 
it in finding the best health plan for its particular unique 
circumstances, then the commission paid to the broker will 
count towards the administrative cost of the plan and thus 
could lower the plan's medical loss ratio percentage? Yes or 
no.
    Mr. Larsen. If I understand your question, yes, commissions 
are considered part of the administrative expense.
    Mr. Pitts. If a large company has its own human resource 
department that researches the type of health plan that it will 
purchase from an insurer for its employees, will the costs of 
the work done by the H.R. department be calculated in the 
administrative costs of the health plan? Yes or no.
    Mr. Larsen. No.
    Mr. Pitts. It seems these rules are written in a way to 
disadvantage small employers. It also seems as if these rules 
will direct people into these new exchange plans. If a small 
business wants to use a broker or an agent because their 
employees don't want to be dumped into the exchange, they 
should be able to without federal rules that tilt the playing 
field to government entities.
    My time has expired and I yield now to the ranking member 
for 5 minutes for questions.
    Mr. Pallone. Thank you, Mr. Chairman.
    Mr. Larsen, the Republicans are portraying the discussion 
draft as a means for Americans who like their health coverage 
to keep it, and in fact I think this legislation is much 
broader. The real intention, I think, is to eliminate the 
insurance reforms enacted by the Affordable Care Act and put 
insurance companies, not patients, back in control, and I just 
wanted to point out just a few of the consequences of this 
legislation becoming law. One is, over 1.2 million young adults 
would lose their insurance coverage because plans would no 
longer be required to cover them until age 26. Over 165 million 
Americans with private insurance coverage would be vulnerable 
again to having lifetime limits placed on how much insurance 
companies will spend on their health care. Fifteen point nine 
million people in the United States would be at risk of losing 
their insurance because rescissions would once again be legal, 
and 41 million Americans would lose guaranteed coverage for 
preventive services like mammograms and flu shots without cost 
sharing. Up to 43 million people in small business health plans 
would lose their medical loss ratio and rate review 
protections, which would allow insurers to charge them high 
prices for low-value plans.
    Now, Mr. Larsen, would it be accurate to say that this 
legislation is yet another attempt and way to repeal health 
reform?
    Mr. Larsen. The discussion draft that I have seen certainly 
would do more than modify the grandfathering rule but in fact 
repeals the applicability of all the protections that you just 
enumerated from any of the plans that were in place at that 
time.
    Mr. Pallone. And does the Republican legislation allow 
patients to keep their insurance if they like it as claimed by 
Republicans or are insurers really in charge allowed to cut 
benefits, you know, increase cost sharing and make other 
changes?
    Mr. Larsen. It doesn't, and that is the whole point of the 
rule. The rule provides employers some flexibility to make 
changes, but in the absence of the rule, employers and health 
plans could rewrite the entire plan, cut out benefits, remove 
protections. The plan would look very different. It would not 
look like the same coverage.
    Mr. Pallone. Now, the Republicans have repeatedly claimed 
that the grandfathering rule issued by HHS will result in tens 
of millions of people losing their health care. Is it accurate 
to say, as some are, that the grandfathering rule will result 
in people with employer-sponsored coverage being denied or 
losing their health insurance coverage because of HHS or 
because of the Affordable Care Act?
    Mr. Larsen. Yes, because the provisions that now apply to 
grandfathered plans include options for people to get better 
coverage, so if you are removing that, you are going to have 
people that don't have coverage that would have had it if the 
bill weren't in place.
    Mr. Pallone. And so where would Republicans get the idea 
that tens of millions of people are losing their health care? 
Where is this coming from?
    Mr. Larsen. I don't know exactly where that is coming from.
    Mr. Pallone. OK. I mean, it just appears to me as another 
case where the Republicans are inventing problems allegedly 
caused by the Affordable Care Act, and even if plans do lose 
grandfathered status, that doesn't mean a person loses their 
health insurance. In fact, they gain some consumer protections 
like rights to external appears and coverage of preventative 
services, and in any case, these requirements will not be 
prohibitive for employer plans because they usually already 
meet the rules. One employer benefits consultant notes, and I 
quote, that ``large companies realize that they already comply 
with many of the requirements of non-grandfathered plans so the 
changes they will need to make aren't likely to add a 
significant cost or administrative burden.'' I mean, I just--to 
me, this is just a lot of nonsense. It is just another way to 
repeal patient protections, and everything that the Republicans 
are saying is going to happen, in fact, it is just the 
opposite.
    Let me just ask you one more thing. I have got another 
minute here. Under the Republican legislation, grandfathered 
health plans would not have to report or openly justify premium 
increases. Have you seen an impact from rate review on premiums 
in any States in which it has been implemented so far, and is 
rate review going to be an impossibly onerous burden for 
insurance companies to meet?
    Mr. Larsen. Well, like the MLR provision, we know that the 
rate review provisions are having impacts now. There are 
beneficial impacts. They are lowering rates. We know that rate 
review, the process works to lower rates in States, and I think 
we have cited in other hearings and our materials where 
commissioners have looked at rates and concluded that there 
were improper assumptions or excessive requests that have been 
scaled back and saved people, you know, millions of dollars in 
premiums. So that is a very important provision.
    Mr. Pallone. I mean, it just seems to me that, you know, 
the patient protections, the regulations on insurance companies 
that are consumer protections, they are all working. They are 
all having a very positive impact. There is absolutely no 
reason not to let the insurance companies continue down that 
path to protect a consumer. It is not that onerous. And now we 
are just going to say let us throw it all out and let the 
insurance companies do whatever their please, which makes no 
sense.
    Thank you, Mr. Chairman.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the vice chairman of the committee, Dr. Burgess, for 5 minutes 
for questions.
    Mr. Burgess. Thank you, Mr. Chairman, and again, Dr. 
Larsen, let me thank you for your willingness to provide our 
office with information. We have gotten some things answered. 
There are some things that are still outstanding, and I suspect 
there will be some new questions that come up as a result of 
our interaction today, and I would just like to have your 
commitment to continue to work together to get answers to those 
questions.
    Mr. Larsen. Yes, sir. I know that we provided an initial 
response to you since our last meeting, and we are working 
quickly to get the rest of those to you.
    Mr. Burgess. Let me ask you a quick yes or no question. 
States have rate review authority and they had that prior to 
the passage of the Affordable Care Act. Is that correct?
    Mr. Larsen. Some did, some didn't.
    Mr. Burgess. Now, in response to a question that Mr. 
Pallone asked, you said you didn't know where the figures came 
from about people who would lose their plans under 
grandfathered status. So June 17, 2010, Department of Health 
and Human Services issued an interim final rule imposing 
additional restrictions that health plans must comply with in 
order to protect their grandfathered status. The Administration 
issued an amendment to the interim final rule 17 November 2010. 
By the Administration's own estimates, 49 to 80 percent of the 
small employer plans, 34 to 64 percent of large employer plans 
and 40 to 67 percent of individual insurance coverage will not 
be grandfathered by the end of 2013, so that is from which 
those figures come, and we will be glad to provide you the 
places for those citations so you can familiarize----
    Mr. Larsen. Perhaps I misunderstood. I thought that the 
question was, was there a claim that people were going to lose 
their coverage. The answer is no. Those statistics relate to 
the projected----
    Mr. Burgess. Remember, the big selling point on the 
Affordable Care Act was, if you like what you have, you can 
keep it.
    Mr. Larsen. Sure.
    Mr. Burgess. And if people like what they have, they may 
not able to keep it. I think that is a fair statement. Is that 
not right?
    Mr. Larsen. Well----
    Mr. Burgess. Yes is the answer to the question. Let us move 
on.
    Are you familiar with the Texas benefit pool?
    Mr. Larsen. Say that again.
    Mr. Burgess. The Texas benefit pool. It is not the high-
risk pool, but this is a benefit pool for relatively small 
jurisdictions like small towns, and there are a number of small 
towns in Texas, to be able to pool together to purchase health 
insurance for their municipal employees that otherwise--and 
these are frequently cities that have significantly less than 
50 employees under their jurisdiction. So 40,000 beneficiaries 
in 750 different political subdivisions and 90 percent of these 
numbers have 50 or fewer employees. Under the Affordable Care 
Act as currently written, they will go out of business. They 
cannot be a grandfathered plan. They cannot survive as a health 
plan in the exchanges because of the tight definitions, so it 
looks like they have got nowhere to go, and this is the 
solution that the State of Texas created to a problem well over 
30 years ago. It has worked and it is providing lower-cost 
health care today but it is going to end up costing the Federal 
Government more because you will need higher subsidies for low-
income workers and higher-priced plans.
    So is there a--how do we say we are promoting State 
flexibility when in my State it will force lower-cost 
alternative municipal employees to go out of business and drive 
those employees into a one-size-fits-all exchange structure 
which will increase federal spending even more?
    Mr. Larsen. Well, I have to confess, I am not familiar with 
the entity that you just referred to. We would be happy to work 
with you to determine, you know, how it fits into the exchange 
structure in 2014.
    Mr. Burgess. All right. We will get you some more 
information on that, and I have got a number of others, and 
clearly I am going to run out of time.
    As you know, I have been fascinated by your center or 
office or whatever we are calling it since I first learned of 
it a little over a year ago, and what began as the Office of 
Consumer Information and Insurance Oversight last summer is now 
the Center for Consumer Information and Insurance Oversight and 
it is now under the direction of the Centers for Medicare and 
Medicaid Services and not a standalone agency within the 
agency. Have I basically given a recapitulation of your brief 
history correctly?
    Mr. Larsen. Yes.
    Mr. Burgess. But also nowhere in here is your agency or 
center authorized. It was not mentioned specifically in statute 
in the Affordable Care Act, so it was a mystery to many of us 
when we first learned about it in August of last year that you 
were up and running and office space off the Hill and hiring 
employees, and I remember talking to your predecessor about 
well, why in the world could you--you know, surely these are 
functions that are already being performed at HHS, why not 
just--you are duplicating abilities, and I was informed that 
that is not the case because for the first time the federal 
government is going to regulate the entire private insurance 
market in the country, which historically has been a function 
of the States. Is that correct?
    Mr. Larsen. The original office, OCIO, yes, was set up to 
implement the new provisions relating to the private health 
insurance market.
    Mr. Burgess. And we have a new agency or a new office or 
center----
    Mr. Larsen. Center.
    Mr. Burgess [continuing]. Not authorized under statute. You 
have spent now, according to figures you provided me through 
the end of August, almost $3 billion, $3.2 billion in 
implementation funds, correct?
    Mr. Larsen. Well, much of that, as you know, as I think you 
know, are the reimbursements under various programs but we 
haven't----
    Mr. Burgess. It is fascinating that this could occur----
    Mr. Larsen. But we haven't spent that money on the 
operations of----
    Mr. Burgess [continuing]. Under the statute and Congress 
not be aware of it. I mean, so I welcome your presence here 
today. I think it is good we are finally having this dialog and 
this oversight, but it troubles me that it occurred the way it 
did. It was seemingly something that was under the radar 
screen.
    Thank you, Mr. Chairman, for your indulgence. I will yield 
back.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the Ranking Member Emeritus, Mr. Dingell, for 5 minutes for 
questions.
    Mr. Dingell. Mr. Chairman, I thank you for your courtesy.
    Director Larsen, yes or no questions. Is it true that prior 
to the Affordable Care Act, MLR standards and/or reporting 
requirements varied widely from State to State? Yes or no.
    Mr. Larsen. True.
    Mr. Dingell. Is it also true that 34 States prior to ACA 
had a minimum MLR standard or reporting requirements for 
certain markets? Yes or no.
    Mr. Larsen. I think that is right, yes.
    Mr. Dingell. As you know, ACA sets a minimum federal MLR 
standard. As a former State insurance commissioner, do you 
believe that this will simplify regulatory compliance for 
insurance companies? Yes or no.
    Mr. Larsen. Yes.
    Mr. Dingell. Further, do you believe that minimum MLR 
requirements will encourage greater transparency and 
understanding in insurance spending for consumers? Yes or no.
    Mr. Larsen. Yes, I do.
    Mr. Dingell. Under the Affordable Care Act, the National 
Association of Insurance Commissioners was tasked with coming 
up with definitions and calculation for MLR requirements. Were 
the recommendations from the National Association of Insurance 
Commissioners taken into consideration prior to the interim 
final vote? Yes or no.
    Mr. Larsen. Yes. In fact we adopted them all.
    Mr. Dingell. As a matter of fact, you adopted them all. 
That is right, isn't it?
    Mr. Larsen. Yes, sir.
    Mr. Dingell. Is it correct that the NAIC recommendations 
were unanimously approved by the insurance commissioners from 
all 50 States and the District of Columbia?
    Mr. Larsen. Yes, that is correct.
    Mr. Dingell. So you had vast unanimity on this matter, did 
you not?
    Mr. Larsen. Yes.
    Mr. Dingell. Now, did you separately consult with the 
States, the public and other stakeholders prior to issuing the 
rule? Yes or no.
    Mr. Larsen. We accepted the public input process that the 
NAIC conducted and then we have since taken comments and plan 
to look at further modifications to the MLR standard.
    Mr. Dingell. Now, one item that has gotten much attention 
recently is the ability of the States to apply for an 
adjustment under MLR requirements. The Affordable Care Act 
allows the Secretary to adjust the MLR standard for the 
individual market in a State if it is found that the standard 
may destabilize the individual market. Is that correct?
    Mr. Larsen. Yes.
    Mr. Dingell. And have you had applications for this kind of 
waiver and have you granted such waivers?
    Mr. Larsen. We have had a number of applications. I think 
that we have granted five of the ones that we have reviewed so 
far.
    Mr. Dingell. Now, is this adjustment meant to help to 
transition the State and the insurance plans will have to make 
to comply with the new federal minimum MLR standards?
    Mr. Larsen. Yes, sir, that is exactly what it does.
    Mr. Dingell. How many States have requested adjustments so 
far?
    Mr. Larsen. I think it is about 13.
    Mr. Dingell. Of this number, how many States have received 
adjustments?
    Mr. Larsen. Five of the ones, but we haven't finished 
reviewing many of them. Their applications are not complete yet 
from the States.
    Mr. Dingell. Has anybody been turned down?
    Mr. Larsen. Yes, two States.
    Mr. Dingell. In whole or in part?
    Mr. Larsen. In whole.
    Mr. Dingell. This temporary adjustment then maintains the 
intent of MLR requirements which is to ensure that the majority 
of premium dollars are spent on medical claims and activities 
to improve health quality. Is that right or wrong?
    Mr. Larsen. Correct.
    Mr. Dingell. As a former insurance commissioner, do you 
believe that the MLR requirement will help the American 
consumer get more value out of their health plans? Yes or no.
    Mr. Larsen. Yes.
    Mr. Dingell. Now, under the MLR requirement, we are already 
starting to see insurance companies either slow or decrease the 
growth in premiums. Is that right?
    Mr. Larsen. Yes.
    Mr. Dingell. Do you believe that the repealing of the MLR 
requirements will harm or hamper or impede this progress?
    Mr. Larsen. It is a step backward, yes.
    Mr. Dingell. All right. Now, let us take a little look. 
Some of the things which will be adversely affected here that 
we are concerned with are things like insurance for young 
adults to 26, prohibition of rescission of insurance, 
prohibition of annual and lifetime limits, prohibition of 
preexisting-condition discrimination--I want to note 
particularly that one--no cost sharing for preventive benefits, 
patient's choice of providers, protecting small businesses, 
giving them new rights, protecting patients from medical 
bankruptcy, and right to appeal from insurance company denials. 
All of those new rights will be adversely affected by this 
legislation. Is that correct?
    Mr. Larsen. Yes.
    Mr. Dingell. And the rights will be taken away from the 
consumers. Is that right?
    Mr. Larsen. Yes.
    Mr. Dingell. Thank you, Mr. Chairman. Bad piece of 
legislation. I hope everybody is noting it.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the gentleman from New Jersey, Mr. Lance, for 5 minutes for 
questions.
    Mr. Lance. Thank you, Mr. Chairman.
    Good afternoon. Very good to be with you. There obviously 
remains significant interest in Congress about antifraud 
efforts in Medicare and Medicaid on a bipartisan basis. In 
fact, you stated that fighting fraud in Medicare was a key goal 
of the Administration when you came before the committee in 
May, and we all agree with you on that.
    As I understand the MLR regulation, there is an exclusion 
of health plan investments and initiatives to prevent fraud 
from those activities that improve health care quality. It 
seems to me that this creates a perverse incentive to tackle 
fraud on the pay-and-chase side rather than the prevention 
side, and I believe CMS is stepping away from the pay-and-chase 
model. Could you give us your views on why we may be choosing 
to penalize measures to combat fraud and abuse in the MLR rule?
    Mr. Larsen. So the way that the MLR rule treats fraud is, 
it allows certain fraud recovery expenses to be included but 
not all of them, and that was essentially the middle ground 
that the NAIC reached when they looked at this issue and 
balanced the desire to, you know, encourage companies to invest 
in fraud prevention recovery versus the statutory language. I 
will say, though, that I don't think that we agree with the 
conclusion that this creates a disincentive for investment in 
fraud because to the extent that insurers invest in fraud 
prevention and fraud recovery and lower their underlying 
expenses, they are going to be in a position to lower their 
premiums and have a competitive advantage compared to other 
companies that don't make those types of investments. So even 
though it is not fully recoverable in the MLR formula, we don't 
agree that that creates a disincentive for plans to engage in 
activities that they should do that is helpful for their 
efficiency as well.
    Mr. Lance. Why not go all the way and permit it and not 
have a middle ground?
    Mr. Larsen. Well, again, the statutory language that we are 
dealing with talks about two categories, categories related to 
clinical services like paying doctors and hospitals, and then 
quality-improving activities, and again, I think the NAIC and 
we came to kind of a middle ground on this issue but thought 
that it would be really stretching the envelope to include a 
wider range of expenditures relating to fraud prevention.
    Mr. Lance. Thank you. I obviously respectfully disagree and 
I hope that you might examine that again.
    HHS has issued interim final rules implementing PPACA 
without first issuing proposed rules and receiving comment. 
From my perspective, HHS is acting on an ad hoc basis with no 
clear standards. What is your protocol for deciding when HHS 
will issue a rule on an interim final rule without first 
issuing a proposed rule?
    Mr. Larsen. Well, in the case of implementing the ACA, 
there were a number of interim final rules, or IFRs, that we 
issued in June right after the bill passed, and those were 
largely a function of the pressing time frame that was facing 
us to get regulations in place so that businesses and 
individuals had guidance as to how the law would be 
implementing. In areas where we have had a longer lead time to 
implement the law, we have done proposed rulemaking. So, for 
example, on the rate review reg, we did a proposed rule and 
then we finalized that rule recently, so it has largely in the 
case of ACA been a function of meeting the statutory deadlines, 
and of course, after we issue the IFR, we always take comments 
and some case like the grandfathering reg we went back and have 
amended them.
    Mr. Lance. When will you be replacing the interim final 
rules such as final rules such as the grandfathering and MLR 
rule?
    Mr. Larsen. So we continue to evaluate the comments that we 
have gotten in. I can't provide you with a specific timeline 
for that at this point but we continually evaluate the status 
of the interim rules to determine----
    Mr. Lance. Do you think it might be by the end of the year, 
Mr. Larsen?
    Mr. Larsen. If I could get back to you on that?
    Mr. Lance. Certainly, through the distinguished chairman.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the gentleman from Louisiana, Dr. Cassidy, for 5 minutes for 
questions.
    Mr. Cassidy. Hello, Mr. Larsen. Now, just to be clear, if 
somebody has a high-deductible health plan with an HSA, the 
contribution to the HSA is not included, so they pay out $2,000 
out of their HSA, that is not included in terms of the claims 
payment history of the insurance company, correct?
    Mr. Larsen. I think that is right.
    Mr. Cassidy. That is my understanding. Now, it seems like 
there is a clear prejudice here because the insurance company 
has fixed costs. They have rent, they have utilities, they have 
whatever. So that the high-deductible health care plan, 95 
percent of people who have these have less than $5,000 per 
annum expenses and their deductible may be $5,000. The 
insurance company has an absolute amount less dollars because 
of the 15 percent MLR, correct? If you will, this is a clear 
prejudice against a plan which encourages the person to be most 
cost-aware and which studies show gives a nice balance of the 
customer, if you will, the patient, looking for value. Is that 
easily acknowledged?
    Mr. Larsen. I know that is one of the perceived benefits, 
yes.
    Mr. Cassidy. That is a perceived benefit of the plan?
    Mr. Larsen. Yes.
    Mr. Cassidy. And studies would show that it is true. Now, 
that said, this MLR is clearly prejudiced against such plans. 
They have fewer absolute dollars with which to pay their 
administrative fixed costs relative to a gold star plan which, 
you know, my gosh, if you charge $10,000 for a policy versus 
$2,000, in absolute dollars there is a lot less. Fair 
statement?
    Mr. Larsen. Right.
    Mr. Cassidy. So why would we have a policy which is 
prejudicing against the purchase or the delivery of a plan 
which studies show give you a more cost-effective purchase of 
health insurance?
    Mr. Larsen. It is a question we can go back, to be honest 
with you, the issue about the applicability of this to the 
higher-deductible plans hasn't come on my radar screen, so I 
would be happy to go back and look at that.
    Mr. Cassidy. I have to say that surprises me, since we see 
the uptake of HSAs with high-deductible health care plans as 
increasing dramatically, and again, this is a clear prejudice 
towards higher-cost plans because a higher-cost plan at a 15 
percent MLR has more absolute dollars for the insurance company 
to play with. Again, that is not disputable, is it?
    Mr. Larsen. So we can go back and look at that, as I said. 
We have--you know, there is a number of issues that are kind of 
front and center on MLR and there are some provisions we may 
have to modify before the end of the year, so I would be happy 
to look at that.
    Mr. Cassidy. Yes. When you say ``look at'', I just don't 
know what that means. Does that mean that you can see that 
there is a problem here or that well, we will look at it? Do 
you see what I am saying?
    Mr. Larsen. Yes, I think it means that I would like to, you 
know, sit down and get a better understanding of how the MLR 
provision applies. Again, and it may just be me, we haven't 
heard a lot about this, at least I haven't. You know, I 
confess, it doesn't mean that my staff has not. So ``look at 
it'' means understand it and see if we need to respond to it.
    Mr. Cassidy. The second thing is, so you are at least open 
to having a different set of rules for high-deductible health 
care plans?
    Mr. Larsen. Pardon me?
    Mr. Cassidy. Are you open or is it possible to have a 
different set of rules for catastrophic plans?
    Mr. Larsen. I don't know whether the statute would allow 
that or not, so----
    Mr. Cassidy. If the statute does not, would you think it 
would be a reasonable thing to correct that, pass another law, 
perhaps?
    Mr. Larsen. I hesitate to say without having a better sense 
of what I am talking about.
    Mr. Cassidy. That is a fair statement.
    The other thing that disturbs is that the pattern of usage 
by the person with the HSA will greatly influence how this 
applies. If you have a group of people, each with $2,000 HSAs, 
and each uses $2,000, you never enter into a claim, but if one 
person has $10,000 and everybody else has zero, you have got 
five people in the group, everybody else has zero but one has 
$10,000, and clearly there are going to be claims paid, you are 
more likely to be able to hit the MLR requirement even though 
the claims history for the group is no different. Fair 
statement?
    Mr. Larsen. Sounds like it.
    Mr. Cassidy. Yes. So I have to admit that this kind of 
bill, which everybody is endorsing over there as sacrosanct 
gives me great pause just as I think about it.
    I have a little bit of time left. My insurance company--
clearly a criticism of our system is that it is a sickness 
treatment system, not a wellness-promoting system. There is an 
insurance company back home, Baton Rouge, Louisiana, which goes 
into a small employer and institutes wellness programs, and in 
so doing, they actually decrease utilization. They have 
outcomes data that shows this. But apparently this would be 
included in the MLR. They say they are going to have to 
eliminate the wellness program because it will--granted, claims 
history is down, which in and of itself decreases their 
absolute dollars, but a portion of their administrative costs 
is getting the folks over 50 to take an aspirin a day. So 
again, this seems like we are prejudicing against----
    Mr. Larsen. Well, I have to confess that I don't understand 
because that activity at least that you are describing would 
sound like it would be a quality-improving activity. We lay out 
the categories in the--the statute actually lays out the 
categories for improving health care outcomes, lowering 
hospital readmissions, prevention, wellness. Those are all part 
of the permissible types of expenses. So I am not clear why in 
the situation you are describing there is a disincentive to do 
that. It sounds like it would be the opposite.
    Mr. Cassidy. I am out of time, so let me pursue that and we 
will get back to you.
    Mr. Larsen. OK.
    Mr. Cassidy. Thank you.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the gentleman from Georgia, Dr. Gingrey, for 5 minutes of 
questions.
    Mr. Gingrey. Mr. Chairman, thank you.
    I am going to shift gears just a little bit. I want to talk 
about the CLASS Act. According to an article that ran in the 
Atlanta Journal Constitution yesterday, ``Even as leading 
Democrats offered assurances to the contrary, government 
experts repeatedly warned that a new long-term care insurance 
plan could go belly up, saddling taxpayers with another 
unfunded benefit program, according to emails disclosed by 
Congressional investigators,'' and that is a quote. Mr. Larsen, 
that quote was based on a joint report produced in part by 
Energy and Commerce Committee Republicans that sheds a bright 
light on the suspicious inner workings of Congressional 
Democrats and the White House as a push for Obamacare. The 
report finds that after repeated warnings from the CMS Chief 
Actuary and others about the insolvency of the CLASS program. 
HHS and Senate Democrats effectively cut the actuary out of the 
process and turned to CBO to give them the numbers they needed, 
only those numbers were wrong. Eighteen months after CBO 
pronounced the CLASS Act solvent, Secretary Sebelius finally 
admitted to the world what we all knew, that the CLASS Act was 
in fact insolvent. As of today, CBO has failed to make public 
the economic model cited in the report that deemed this program 
solvent. Even worse, CBO staff now says they do not have the 
capacity to analyze the CLASS Act's long-term solvency.
    Mr. Larsen, I believe that the economic modeling used to 
sell PPACA, the Patient Protection and Affordable Care Act, to 
the American people needs to be thoroughly reviewed from top to 
bottom.
    Further, I would once again call on this Congress to pass 
H.R. 1173. That is a simple bill that my good friend, Dr. 
Charles Bustani from Louisiana, and I have introduced to repeal 
the CLASS Act. The CLASS Act is just another example of how bad 
policy can threaten the financial health of this great Nation. 
What say you, Director Larsen?
    Mr. Larsen. Well, I will have to say that I will take your 
comments back to HHS. The CLASS Act does not fall under the 
area that I have responsibility for, and I have to confess, I 
have not kept up with the current situation with the CLASS act, 
so I would be happy to share your concerns, but I can't 
respond----
    Mr. Gingrey. Fair enough. Fair enough, and I do appreciate 
the fact that you will take that back and continue to discuss 
because clearly it is insolvent and it is a real cost driver.
    Let me follow up on Dr. Burgess's question for a minute. 
The President promised the American people that if you are 
among the hundreds of millions of Americans who already have 
health insurance through your job, Medicare, Medicaid or the 
VA, nothing in this plan will require you or your employer to 
change the coverage or the doctor you have. Let me repeat, 
nothing in our plan requires you to change what you have. Now, 
that is pretty much a direct quote from the President. Do you 
agree with the President that nothing in the Patient Protection 
and Affordable Care Act will make the hundreds of millions of 
Americans who already have health insurance through their job 
to change the insurance that they have today?
    Mr. Larsen. That is the point of the grandfathering 
provision, and I think that is what our regulation permits, 
which is for people to continue to keep the coverage that they 
have.
    Mr. Gingrey. Well, you know, let me express a concern, Mr. 
Larsen, that I have and maybe turn it into a question, and it 
is not just me as a physician member of the committee and of 
the Congress, having too many, 26 years, 31 years clinical 
practice of medicine. But, you know, it just seems to me that 
the way this bill was set up with expansion of Medicaid up to 
133 percent of the federal poverty level, so you force more and 
more of the uninsured on to the States that have to balance 
their budgets and costs them additional billions of dollars. 
You at the same time--not, you, but the bill--even though you 
are talking about the grandfathered provision and all that, it 
really concerns us as you have heard from committee members on 
this side of the aisle and MLR and why we feel like that that 
was just another reason why so many of these employers that 
cover American workers are going to drop their health coverage 
unless of course it is provided through a union contract. So 
you basically force a bigger volume of people onto the 
exchanges and you avoid a lot of the premium support because 
you push the nearly poor into Medicaid and therefore you make 
this program work by virtue of volume. Health insurers like 
that, of course, and require individuals to purchase health 
insurance even if they don't want it is all part of that 
scheme, and you ultimately end up with Medicare from cradle to 
grave, and that is a legitimate concern.
    I know I have run out of time, but if the chairman will 
indulge me, what say you in regard to those concerns?
    Mr. Larsen. Well, you covered a lot of ground, but a couple 
comments. One, the ACA expands coverage through a number of 
different mechanisms, certainly through a Medicaid expansion, 
which by the way the newly eligibles are covered at 100 percent 
match through, I think----
    Mr. Gingrey. For 2 years, yes.
    Mr. Larsen. For I think longer than that. And then, yes, we 
rely on private market solutions in order to expand coverage 
for those that are not eligible for Medicaid. There is a 
premium subsidy for folks between the 100 and 400 percent of 
poverty but those policies are provided in the exchanges 
through private issuers, and I think all the studies show that 
that is going to resolve in a significant expansion of coverage 
for non-Medicaid individuals as well.
    Mr. Gingrey. Mr. Chairman, thank you, and Mr. Larsen, thank 
you.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the ranking member.
    Mr. Pallone. Mr. Chairman, I would just ask unanimous 
consent to enter four letters into the record: a group letter 
from nearly 50 organizations, HIV Health Care Access Working 
Group letter, American Diabetes Association letter, and a Main 
Street Alliance letter, and these are in opposition to the 
draft, and I believe you have them.
    Mr. Pitts. We have them. Without objection, so ordered.
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    Mr. Pitts. The chair now recognizes the gentlelady from 
Illinois, Ms. Schakowsky, for 5 minutes for questions.
    Ms. Schakowsky. Thank you, Mr. Chairman.
    I just wanted to correct one item that I think was mistaken 
that was mentioned in questioning. Between July of 2010 and 
July of 2011, a number of insurance agents and brokers actually 
went up by 5,500 people. So we were hearing about the growing 
unemployment. In fact, that number is actually increased. This 
is according to the Insurance Information Institute, and so we 
are seeing about a .9 percent increase in employment, and given 
the facts today, not bad, not great, but not bad and going in 
the right direction.
    In 2010, Mr. Larsen, United Health, WellPoint, Humana, 
Cigna and Aetna made combined profits of $11.7 billion by 
reducing the share of premiums being spent on the shrinking 
membership in private health plans. Through the recession and 
its aftermath from 2008 to 2010, their combined profits 
increased 51 percent. In 2009, the total private membership to 
these five companies was reduced by 2.7 million people and 
another 839,000 in 2010. That was just 2009. In 2010, another 
839,000 at a time when 50.7 million people were already 
uninsured. So profits went up. The number of people that they 
actually served went down. Despite this decrease in membership, 
in 2010 the five insurers collected $7.7 billion more in 
premiums than in 2009. However, the medical loss ratio for four 
of the five companies decreased from 2009 to 2010.
    So clearly, the money generated by rising premiums was not 
being used for medical or patient care, my point. Health 
insurers are making enormous profits at the expense of their 
customers, and this is not an isolated example. Insurers claim 
that these profits are not large relative to the size of their 
business, but what I see is nearly $12 billion in profits while 
hardworking families have been asked to pay more and more in 
premiums.
    So where does profit fit into the medical loss ratio and 
does a lower medical loss ratio allow insurers to still make a 
decent profit?
    Mr. Larsen. The answer is yes, that they do still. These 
standards still clearly allow issuers and insurance companies 
to make a very fair, reasonable rate of return in profit. The 
profit is part of the broad administrative expense, so 
everything that isn't paying doctors' bills or investing in 
quality is part of the administrative expense. So it is 
profits, salaries, commissions, overhead, you know, rent all of 
that is part of the administrative expense.
    Ms. Schakowsky. And when insurance companies talk about 
their profits, they have already subtracted those things, have 
they not?
    Mr. Larsen. Well, I think they are part of the other mix. I 
guess the point I am trying to make is that there is a lot of 
latitude for the insurers, say, in the individual and small 
group market. They still have 20 percent of the premiums to 
devote to all of the things that I just enumerated including 
profits and so they have the flexibility to modify their 
business model to lower rates in order to hit the MLR standard, 
and it still leaves a lot of room for them to make reasonable 
profits.
    Ms. Schakowsky. So what I have taken from this panel is 
that a number of insurance companies actually are meeting this 
medical loss ratio standard that you have set. Some have 
actually lowered premiums, making it easier for consumers, that 
the number of insurance agents and brokers, which I just 
learned, has actually gone up, and that insurance companies are 
doing great and that they can well afford to meet this sensible 
and modest standard. That is my summary. Am I wrong on any of 
those points?
    Mr. Larsen. I agree.
    Ms. Schakowsky. Thank you.
    I yield back.
    Mr. Pitts. The chair thanks the gentlelady and now 
recognizes the gentleman from Illinois, Mr. Shimkus, for 5 
minutes.
    Mr. Shimkus. Thank you, Mr. Chairman, and welcome, Mr. 
Larsen. Sorry about being in and out of the hearing room. They 
brought meetings down into the side room so I have kind of been 
in the area but I hope I don't ask questions that have already 
been asked. I was going to follow up on what the chairman 
initially asked but he stole my great questions, so I will move 
to a couple other things, and some of this is kind of like Dr. 
Gingrey and just maybe messages to send back to HHS and the 
like.
    This is a great committee, especially on our side. We have 
got practitioners, so I like sitting in. I am not one. I am a 
receiver of their benefits but you have got Dr. Cassidy, you 
have got Dr. Burgess, you have Dr. Gingrey, and no one really 
debates their compassion and concern for the health care system 
because that is their livelihood, so I do enjoy sitting in and 
listening to them as they try to make sense of how we can best 
care for our citizens.
    Is there any internal memos going around HHS as to 
different agencies as far as if the Select Joint Committee does 
not meet their goal? You know, the defense budget is number one 
in discretionary budget. Number two and the biggest cost of the 
national government is HHS. Have you received word as to your 
office as if there is a sequestration, what that might do, and 
is there some analysis going on as to how that may affect the 
rollout of the Patient Protection and Affordable Care Act?
    Mr. Larsen. I suspect there are but, you know, I am really 
focused on the day-to-day implementation of the provisions like 
the things that we are talking about today, so----
    Mr. Shimkus. So they haven't talked to you about that?
    Mr. Larsen. They have not come and talked to me about it.
    Mr. Shimkus. And obviously, you know, that is my concern. I 
did support the legislation but my really concern was for the 
committee that the savings is on provider payments and the 
hospital payments, physician payments. As we know, Medicare 
pays 70 cents on the dollar. Medicaid spends 60 cents on the 
dollar. I have great concerns.
    The other direction I would like to go is on the medical 
loss ratio. We are not a good arbiter on fighting waste, fraud 
and abuse, and do you not believe there is any credible support 
that the ability of the insurance companies to fight waste, 
fraud and abuse should be part of the medical loss ratio? 
Obviously, that is why we passed this legislation on the 
Medicare card. We are terrible.
    Mr. Larsen. A component of it is, up to--they can include 
the amount of expenditures of recovery based on what they 
recover, and again, that was the balancing that the NAIC 
achieved when they looked at this issue. They spent a lot of 
time looking at this, getting input from different groups. We 
adopted that balance. So there a component there but I 
previously testified, we don't agree with the idea that not 
including everything is a disincentive to those expenditures. 
We just don't----
    Mr. Shimkus. Let me go quickly. I am going to run out of 
time. And to my friend from Illinois, I just had the insurance 
and financial brokers in yesterday. They weren't there telling 
me that times are good. They were in the office telling me 
times are bad, and part of it is because of this piece of 
legislation that is now the land of the land.
    And finally, a question on--we did delegate policymaking 
responsibilities to the National Association of Insurance 
Commissioners, but HHS said the association followed a thorough 
and transparent process in which the views of regulators and 
stakeholders were discussed, analyzed, addressed and documented 
in numerous open forums. Were HHS comments documented, posted 
on the Internet with everyone else's?
    Mr. Larsen. You mean the comments that we provided to NAIC 
during their process?
    Mr. Shimkus. Right.
    Mr. Larsen. Well, I don't know that we actually provided 
kind of formal. We monitored their process so we were aware of 
what they were doing.
    Mr. Shimkus. Did you attempt to influence their work 
product in any way?
    Mr. Larsen. I don't recall providing written comments to 
them on any of their issues, so we would listen in to their 
phone calls, but that was largely a delegation to the NAIC, and 
we would talk to their staff from to time.
    Mr. Shimkus. And I will finish with this. In October 2010, 
at the NAIC meeting, over a dozen commissioners proposed that 
NAIC's official MLR submission to HHS remove agent commissions 
from the MLR calculation. The votes were there to pass an 
amendment but it was never called. I understand you were in 
that room that day. Could you tell us exactly what discussions 
you and anyone else at HHS had with the NAIC members and staff 
regarding agent commissions and MLR at the meeting in October 
2010?
    Mr. Larsen. Yes. We went down as members of our staff have 
been to all the NAIC meetings. They are a close partner of ours 
in the process, so were there to observe the process. We were 
not there to lobby----
    Mr. Shimkus. So your testimony would be, you didn't 
influence it?
    Mr. Larsen. No.
    Mr. Shimkus. OK. Thank you.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the gentleman from Kentucky, Mr. Guthrie, for 5 minutes for 
questions.
    Mr. Guthrie. Thank you, Mr. Larsen, for coming. I do 
appreciate it.
    I just want to kind of go a little different path about the 
rebates. Now the rebates are sent back to the employers. And my 
line of questioning with this, the other day I was back in our 
work period, and everywhere we go it seems like we walk in--I 
know the President says there is a headwind on the economy but 
I am telling you, I went to one of the smallest banks in 
Kentucky, the smallest in my district, for sure. They said let 
me introduce you to my new employee, that is our new compliance 
officer, he doesn't make any loans, doesn't create anything, 
all he does is make sure we comply with the new law that came 
down. And so in this, we do things here in Washington that 
sound simple. For instance, we are going to rebate back to the 
employer if the MLR is breached. And so then I can see myself 
walking into a company, wanting to talk about how we are going 
to compete with China, Brazil, whatever, and they say let me 
talk to my HR person that just got back from a briefing and 
asking questions like if the breach moves forward and an 
employer-sponsored plan isn't corrected, the plan can either 
pay the employer or the employee. They can pay either employer 
or employee, correct?
    Mr. Larsen. They can do what, sir?
    Mr. Guthrie. If the health insurance company, if they 
breach the MLR, can rebate, the rebate can go to the employer 
or employee?
    Mr. Larsen. Well, right, but this is a tricky issue. What 
we said in the reg, and we are looking at possibly changing 
this----
    Mr. Guthrie. But if it goes to the employee, then the 
employee is responsible for writing a check back to the 
employer for the----
    Mr. Larsen. The scenario is, so the employee contributes to 
the health care premium.
    Mr. Guthrie. Like 20 percent. Right.
    Mr. Larsen. So you have got basically two people paying 
combined the premium to the company, and so if there is rebate, 
yes, we have to figure out, how does the rebate get back to the 
people that paid it, and we understand that concern. In fact, 
in the proposed rule, we proposed that the insurance company 
have the obligation to make sure that everyone got the right 
money and----
    Mr. Guthrie. So the employer is going to have to send it to 
the insurance company?
    Mr. Larsen. And we said you can enter into an agreement 
with an employer to kind of discharge your obligation. The 
insurance companies have said that is tricky, we are not sure 
how that is going to work.
    Mr. Guthrie. Yes, that is a problem. They are out here 
trying to make it work when it sounds simple.
    Mr. Larsen. So we----
    Mr. Guthrie. But then so the money comes back to the 
employer or the employee, it is now taxable income, correct?
    Mr. Larsen. That I am not sure about.
    Mr. Guthrie. I think it would have to be, because your 
premium dollars are pre-tax income, so they would have to go 
back and fix the payroll taxes, correct? If that is true. I 
know that is not your area of expertise.
    Mr. Larsen. Assuming that is true.
    Mr. Guthrie. Assuming that is true. Assuming that is also 
true, then at the end of the year the employer is going to have 
to update W-2 forms and redistribute them out to all their 
employees. So, I mean, it sounds simple, but we hear it 
everywhere everything that is going on in this town. You go to 
an employer in Kentucky--I haven't had this one yet because it 
is not implemented but that is what they are saying. It is 
reminiscent of the 1099, which created an uproar. And that is 
the problem that we are seeing is, we can design something that 
sounds simple on paper, and all of a sudden who does the check 
go to. That is what they will be asking us. Do I have to take 
out payroll taxes, if have to pay payroll taxes, I have to 
update the W-2 forms. Does the income go on this year or does 
it go on next year?
    Mr. Larsen. Well, we will work with folks as we are in the 
middle of discussions now to try and figure out how we can make 
it work. We don't want to lose sight of the purpose, which is, 
if folks are in the position to get a rebate, it means that 
they overpaid.
    Mr. Guthrie. Well, I agree.
    Mr. Larsen. They are entitled to get money back, so----
    Mr. Guthrie. And then you have to say, do I have to pay--do 
I have to do an amended tax forms. I mean, it just continues.
    Mr. Larsen. So we want to keep it simple but we don't want 
to lose sight of the fact that we want them to get the value 
for their premium dollar, and if they overpaid, we want to make 
sure that they get the money back in their pocket.
    Mr. Guthrie. We do hope it is simple. It needs to be 
simple.
    I want to yield to my friend from Louisiana the rest of my 
time.
    Mr. Cassidy. Thank you.
    Mr. Larsen, briefly reflecting on your remarks, I am struck 
that you all have not considered HSAs. And so I just pulled 
some statistics. I think I have heard in the past that all new 
hires in GM's executive corps have HSAs. I just pulled up 
something. In Lynchburg, Virginia, all the county all has HSAs. 
I then just pulled up something which from American Health 
Insurance Plans which speaks about how 11.4 million Americans 
now have HSAs, which increased 14 percent in the last year, 26 
percent of the growth in the large groups but 15 percent in the 
individual market. I have to ask you, why have not you 
considered HSAs? Because it seems that that is the emerging 
market.
    Mr. Larsen. Well, when you say ``consider it'', meaning 
consider it as a problem in the context of the medical loss 
ratio regulation, correct?
    Mr. Cassidy. Correct.
    Mr. Larsen. And all I am saying to you is, that that has 
not come on our radar screen, at least mine, maybe other folks 
in the agency, as an issue that we need to address in terms of 
the imbalance.
    Mr. Cassidy. Now, to me, that reflects either--and no 
offense, but since to me it just seems so apparent that if you 
have plan which is more parsimonious or at least in terms of 
how much do I have to pay for it, not as much, and this in 
absolute dollars which we are on opposite sides of the issue on 
this bill but we can both agree----
    Mr. Larsen. I mean, I am not sure the NAIC flagged this for 
us either, so I am not at all adverse to looking at it. You 
know, we have got a lot to do to implement this law and when 
issues are brought to our attention, we take them seriously and 
we will look at it and, you know, we have looked at other 
issues. We amended the grandfathering rule based on comments we 
got. We are looking at possible other tweaks to the MLR rule 
that we have announced previously--I am not making news here--
you know, how we are going to deal with the mini meds going 
forward and things like that. So we will certainly put this on 
the list.
    Mr. Cassidy. Thank you.
    Mr. Pitts. The chair thanks the gentleman, and that 
concludes the questioning for Mr. Larsen. Thank you very much, 
Mr. Larsen, for your testimony and your willingness to answer 
questions and to work with us.
    Mr. Larsen. Thank you.
    Mr. Pitts. We will call now panel two, and our second panel 
consists of five witnesses. Our first witness is Mr. Edmund 
Haislmaier, Senior Research Fellow in Health Policy at the 
Heritage Foundation. Next is Ms. Grace-Marie Turner, the 
President of the Galen Institute. Our third witness is Ms. 
Janet Trautwein, who is the CEO of the National Association of 
Health Underwriters. Our fourth witness is Mr. Wendell Potter, 
Senior Analyst at the Center for Public Integrity. And finally, 
Ms. Lynn Quincy, Senior Policy Analyst for the Consumers Union.
    So we will begin at my left and go down the line. Mr. 
Haislmaier, you may begin your testimony. We ask you to 
summarize your written testimony in 5 minutes and your written 
testimony will be made a matter of the record.

  STATEMENTS OF EDMUND F. HAISLMAIER, SENIOR RESEARCH FELLOW, 
  CENTER FOR HEALTH POLICY STUDIES, THE HERITAGE FOUNDATION; 
     GRACE-MARIE TURNER, PRESIDENT, GALEN INSTITUTE; JANET 
  TRAUTWEIN, CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF 
   HEALTH UNDERWRITERS; WENDELL BLAINE POTTER, SENIOR POLICY 
   ANALYST, THE CENTER FOR PUBLIC INTEGRITY; AND LYNN BATES 
         QUINCY, SENIOR POLICY ANALYST, CONSUMERS UNION

               STATEMENT OF EDMUND F. HAISLMAIER

    Mr. Haislmaier. Thank you, Mr. Chairman and members of the 
committee for inviting me to testify today. A few points that I 
will make out of my written testimony.
    I have pointed out in that testimony that there are a 
number of problems, some of which have already been discussed, 
with the medical loss ratio regulations. The discussion has 
already addressed in the previous panel what I see as one of 
the biggest problems, which is the disincentive for insurers to 
spend money on preventing fraud and abuse. Mr. Larsen pointed 
out that there are some provisions that allow insurers to get 
some credit for that. That is true. I cover that in my 
testimony.
    The problem that I would point out here is really one of 
statute. It is not the fault or the NAIC or Mr. Larsen's 
office. The problem is the statute was badly written and this 
was not accounted for when they wrote the statute. It is one of 
many problems. What Mr. Cassidy was pointing about HSAs is 
another problem, and the problem with rebates and how they are 
paid is another problem. These are things that Congress simply 
did not consider when they drafted the statute, and in my 
reading of the statute, I am afraid that NAIC and Mr. Larsen 
and HHS really have limited ability because of the constraints 
of the statute to actually fix what are very real problems, and 
that is why, Mr. Chairman, I am encouraged that you are having 
a hearing on this because it really is Congress that needs to 
fix the problems that they have created here.
    Mr. Larsen made the observation, and it is a correct one, 
in my view, and I didn't touch on it in my testimony so I would 
like to expound on it for a minute, that even though the MLR 
provisions disincentivize insurers to pay attention to fraud 
and abuse, he doesn't think that that will be a problem because 
an insurer that neglects those activities will result in having 
higher claims costs and higher premiums and thus be 
competitively disadvantaged, and I would say that he is 
economically correct if you assume--and this is the big 
``if''--that you still have a robust competitive insurance 
market.
    Unfortunately, as I outline in my testimony and have in 
other things that I have written, this provision in combination 
with a number of other provisions such as the rate review and 
some of the benefit mandates will lead to a dramatic reduction 
in the number of carriers and thus when you move toward an 
oligopolistic market, if you have only got two or three big 
carriers, then everybody has an incentive to just say well, we 
will ignore it and we will just, you know, pass through the 
costs and pad our profits, particularly since they will be 
operating in a market where many of their customers will be 
subsidized by the government under other provisions of PPACA. 
So while in the short term I think Mr. Larsen's economic 
analysis is correct, in the long term I think this is a very 
serious problem.
    Let me make two other--let me make an observation about the 
effects of the medical loss ratio that has not been brought up 
this morning in my oral remarks, and it is covered in the 
testimony that I submitted for the record. One of the big 
problems with this medical loss ratio or minimum loss ratio 
standard is it effectively constrains the amount of capital 
that an insurer can accumulate from their premium after paying 
claims and administrative expenses, and that is going to lead, 
in my view, to a number of insurers simply exiting the market, 
particularly smaller ones. I discussed that in the testimony. 
It will very dramatically prevent or hinder new insurers from 
being created because it is not possible for an insurer to run 
a loss and then recoup it in the initial startup phase anymore. 
So the first thing that this does is kill off any new insurers 
entering the market.
    Parenthetically, I would say--I didn't cover this in my 
written testimony--but on another subject we have another 
provision of PPACA that is trying to create new co-op insurers. 
This actually works against doing that. There are a lot of 
things that work against doing that.
    And then finally, and I think most perversely from the 
perspective of proponents of this legislation, it severely 
disadvantages nonprofit insurers relative to for-profit 
insurers because nonprofit insurers, if you look at a market 
where you want to consolidate to the point that you are too big 
to fail, which is I think where insurers are going to go in 
with PPACA, nonprofit insurers don't have the wherewithal to do 
it. They can't raise the capital other than what they retain 
from premiums whereas for-profit insurers can go into the 
equity market, issue shares and buy up the nonprofits.
    So when I look down the road and say well, what does the 
world look like in 15 years or 10 years, if you stay on this 
course, it looks like maybe three national insurance companies, 
all for profit, doing everything, and they are really going to 
function like Medicare fiscal intermediaries where they just 
pay the claims and don't care and leave it to the government to 
worry about the legitimacy and the cost of it. That I think is 
very debilitating, and I think is the single biggest reason why 
Congress should repeal this set of provisions.
    Thank you for your time. I will be happy to answer 
questions.
    [The prepared statement of Mr. Haislmaier follows:]

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    Mr. Pitts. The chair thanks the gentleman.
    We are voting on the floor at this time, so we will try to 
get through another presentation, and if it is all right with 
the ranking member, we will break and come back. Is that OK?
    Mr. Pallone. Yes.
    Mr. Pitts. We have two votes, unfortunately, so we are 
going to have to go.
    Ms. Turner, you are recognized for 5 minutes.

                STATEMENT OF GRACE-MARIE TURNER

    Ms. Turner. I will be quick. Thank you, Mr. Chairman. Thank 
you, Mr. Pallone and members of the committee.
    Many employers said that the assurances that their health 
plans would be grandfathered was a key reason that they 
supported the legislation, yet independent surveys and the 
Administration's own estimates, as we have heard today, 
indicate that most employers will not be able to maintain their 
grandfathered status and therefore I would argue that the rules 
that were designed to do that therefore are failing and are not 
achieving their goal. The grandfathering rules really boxed 
employers into a corner. They can't make changes other than 
minor modifications to their health plans to keep costs down 
without being forced to comply with expensive regulations that 
increase their health care costs.
    Health costs are directly related to creation of jobs, as 
we have talked about a lot today. Higher health care costs put 
additional pressure on the employer's bottom line and increase 
the cost of hiring new workers. This is bad for the economy and 
bad for unemployed workers. Employers do work very hard to find 
the balance between keeping of cost of health insurance down 
and also offering benefits that employees want and need. Part 
of the way that they are able to do that is by seeking bids 
from competing insurers and adjusting benefits structures on 
the margin.
    But under the grandfathering rules, employers are now very 
limited in what they can do to change benefits. That also means 
they are limited in what they can do to keep costs down. Many 
people argue that the ACA's restrictions are needed to keep 
employers from cutting benefits or imposing higher health costs 
on their employees, and also providing these additional 
consumer protections. But employers or really employees are 
really the ones who are ultimately paying the price for these 
higher health care costs since coverage is part of their 
compensation.
    A recent Rand study found that most of the pay increases 
that employees have received over the last 10 years have been 
consumed by health costs. The study found that the typical 
family had just $95 a month in real dollars more for non-health 
spending in 2009 than it did in 1999. In contrast, the authors 
say that the growth rate of health insurance has simply kept 
pace with the regular cost increase general inflation. The 
family would have had an additional $5,400 a year to spend. So 
employees are really the ones paying the price for higher 
health care costs. Therefore, it is in the interest of both to 
keep health care costs down, and the grandfathering regulations 
issued by HHS restrict their ability to do that.
    There are many problems that need to be solved in our 
health sector but it is important to follow the medical dictum 
to first do no harm in making changes.
    The chairman mentioned that legislation is being drafted to 
reverse the interim final rule, and the Administration itself 
recognizes that companies need relief from burdensome and 
expensive regulations that impact their competitiveness and 
their ability to generate revenues to create new jobs, and 
withdrawing the grandfathering regulations would be a very good 
place to start to achieve those goals.
    Thank you, Mr. Chairman. I look forward to questions.
    [The prepared statement of Ms. Turner follows:]

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    Mr. Pitts. Ms. Trautwein, you are recognized for 5 minutes.

                  STATEMENT OF JANET TRAUTWEIN

    Ms. Trautwein. Thank you, Chairman and Ranking Member 
Pallone. I appreciate this very much.
    As you know, the leadership of this committee invited me 
here this past June to talk about the desperate economic 
situation that the ACA's medical loss ratio regulation has 
created for the half-million health insurance agents and 
brokers nationwide. Unfortunately, I do not have a positive 
update for the committee today. The economic outlook for many 
health insurance brokers and agents, and I would emphasize 
health insurance agents, which are different from general-
purpose agents. The MLR specifically applies to those who work 
in the health insurance arena. The market continues to be 
bleak. As health insurance companies renew and revise their 
agent and broker contracts, it is clear that the financial 
situation for many of these people, many of whom are business 
owners themselves, is getting worse.
    Clearly, this problem started when the MLR regulation was 
issued in December of 2010. It is very well documented that 
that is when the problem occurred. That regulation mandated 
that health insurance carriers, as you know, treat independent 
agent and broker compensation as a part of health plan 
administrative costs in spite of the fact that independent 
agents and brokers are not employed by health insurance 
carriers. They do run their own businesses, hire their own 
employees, pay all of their own office expenses including 
professional liability insurance. Each agent decides on their 
own which health insurance carriers he or she will represent 
and then they are retained by individual consumers and 
employers to assist them with their health insurance needs.
    Issuance of the HHS regulation on MLR, which categorized 
agent commissions as an insurer administrative expense, 
triggered, as I said, an immediate response for many health 
insurance companies and immediate reduction in agent 
compensation.
    In May 2011, a national actuarial study conducted by the 
NAIC taskforce--the professional--not the whole NAIC but the 
professional health insurers advisors taskforce that was 
assigned to address this problem regarding producer 
compensation said that in 2011, a significant number of 
companies have reduced commission levels, particularly in the 
individual market, and this was reinforced by the most recent 
report from the GAO private health insurance early experiences 
implementing new medical loss ratio requirements which states, 
``Almost all of the insurers we interviewed were reducing 
broker commissions and making adjustments to premiums in 
response to the MLR requirements.'' These insurers said that 
they decreased or planned to decrease commissions to brokers in 
an effort to increase their MLRs. As a result of these cuts, 
brokers serving individuals and the small business community, 
as has been said earlier, have seen their overall revenues 
slashed by 20 to 50 percent. This means that fewer of them are 
able to stay in business. It also means that those who are able 
to survive are being forced to make service cuts and are no 
longer able to provide the counseling and level of advocacy 
support to their clients that they have in the past.
    Now, it may seem to you that what agents and brokers do is 
simple. You may think that all they do is fill out a form and 
sign people up for insurance, and some of you may even think it 
is as easy as buying an airline ticket, but there is so much 
more than that. They meet with each client and determine their 
specific needs covering everything from which doctors they use 
to their preferences for financial risk. They have candid 
conversations with people who are struggling to afford coverage 
and help them find ways to stay insured. With employers, they 
also discuss issues such as the savings that can be achieved 
through wellness and disease management programs and the 
characteristics of a particular company's workforce, discussing 
options for structuring their coverage.
    This dire situation is why we are looking at all possible 
solutions, whether they are regulatory or legislative, to 
address the problem. This problem needs to be addressed both 
quickly and in a way that is politically viable, and there is a 
solution that we believe meets both of these requirements. We 
believe that if agent commissions, since they are not really an 
insurer expense, removed from what is currently defined as 
premium for MLR calculation purposes, either through a 
legislative act or regulatory action, that it would 
significantly improve the situation that exists today.
    I am sure that you all are aware of H.R. 1206, which now 
has 120 bipartisan cosponsors, 24 members of this committee. It 
is authored by Mike Rogers and Congressman Barrow, and we 
definitely appreciate them having done this. We endorse this as 
well as do all other national agent professional associations 
as well as, I said, the NAIC broker taskforce, and I will stop 
there.
    [The prepared statement of Ms. Trautwein follows:]

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    Mr. Pitts. The chair thanks the gentlelady.
    We are going to recess at this point. We have got about 4 
minutes left. I want to thank the witnesses for their patience. 
We have two votes. We will be right back to reconvene after the 
second vote. The subcommittee is now in recess.
    [Recess.]
    Mr. Pitts. The subcommittee will come to order. The 
chairman recognizes Ranking Member Emeritus Mr. Dingell for a 
unanimous consent request.
    Mr. Dingell. Mr. Chairman, I have a unanimous consent 
request that a letter signed by Charles M. Loveless, Director 
of Legislation for AFSCME, be inserted into the record, and 
also that a statement from Representative Tom Price of Georgia 
be inserted into the record at this point.
    Mr. Pitts. Without objection, so ordered.
    Mr. Dingell. Thank you, Mr. Chairman.
    [The information follows:]

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    Mr. Pitts. Thank you.
    We will go back to the panel. Mr. Potter, you are 
recognized for 5 minutes for testimony summarization.

               STATEMENT OF WENDELL BLAINE POTTER

    Mr. Potter. Mr. Chairman and members of the committee, 
thank you for this opportunity to be here today. My name is 
Wendell Potter. I am Senior Analyst at the Center for Public 
Integrity and former head of corporate communications at Cigna 
Corporation. The views that I express today are not necessarily 
those of either employer.
    For 20 years, I worked as a senior executive at health 
insurance companies. During that time, I saw how these 
companies confused their customers and dumped the sick to 
satisfy their Wall Street investors. The top priority of for-
profit companies is to drive up the value of their stock. The 
stock price of the big for-profit insurers fluctuates based on 
their quarterly reports. Investors and Wall Street analysts 
look for two key figures: earnings per share, which is common 
to all companies, and the medical loss ratio, or MLR, which is 
unique to the health insurance industry. As you know, the MLR 
is the ratio between what an insurer actually pays out in 
claims and what it has leftover to cover executive pay, 
underwriting, lobbying, sales, marketing, public relations, 
other administrative expenses and of course profits.
    Within the executive offices, there is a single-minded 
focus on being able to show investors and analysts that the 
insurer made more money during the previous quarter than a year 
earlier and that the portion of each policyholder's premium 
devoted to covering medical expenses was less than it was a 
year earlier. Insurers almost always see sharp declines in 
their stock prices when they disclose that they spent more 
money on medical care than investors expected. I remember 
vividly when Aetna's stock price fell more than 20 percent on 
the day that it admitted that its first-quarter MLR had 
increased from 77.9 percent to 79.4 percent.
    Studies done by the accounting firm PricewaterhouseCoopers 
have shown how successful insurers have been in meeting Wall 
Street's MLR expectations. One such study found that the 
average MLR in the insurance industry has fallen from 
approximately 95 percent in 1993 to around 80 percent today. 
That translates into a difference of several billion dollars in 
favor of insurance companies' shareholders and executives and 
at the expense of health care providers and their patients.
    The provision of the Affordable Care Act that requires 
insurers to spend at least 80 percent of what we pay in 
premiums on our health care is one of the most important 
provisions of the law and one that must be preserved. Some have 
suggested that if the entire MLR provision is not repealed, 
Congress should at least exempt insurance agent and broker 
commissions from the calculation, and a bill introduced by 
Representative Rogers would take that a step further by 
excusing all sales commissions including payments to salaried 
sales staff from the formula. To make it even easier for 
insurers to meet the law's requirements by exempting broker 
commissions is precisely the wrong thing to do.
    It is important to note that even before the passage of the 
Affordable Care Act, insurers were planning to take steps to 
reduce broker commissions anyway, which they viewed already as 
too high. A recent filing from the State of North Carolina 
revealed that Coventry had reduced its commissions on first-
year policies from 27 percent to 14 percent and that Cigna had 
cut first-year commissions from 20 percent to 12 percent. My 
question to brokers is this: did you really deserve 27 percent 
of your client's premiums?
    Another point: Insurers are not being forced by the MLR 
provision to reduce commissions. There are other levers on the 
administrative side or through reducing premiums. Basically, 
insurance companies have been choosing to reduce commissions to 
protect profits. I doubt you have heard of an insurers who have 
reduced the salaries of their CEOs and other top executives to 
meet the MLR requirements. You haven't, and you won't.
    Another thing to keep in mind as you consider legislation 
to exempt commissions from the MLR equation is that even if it 
were to be enacted, it is not likely to be of much help to 
agents and brokers now or in the future. Insurers will not 
restore the commission reductions they have already made. 
Exempting commissions would only help insurers by making it 
easier for them to comply with the MLR provisions.
    The proposed changes to the grandfathering provision are 
similarly misguided. By denying the Department of Health and 
Human Services the ability to enforce insurance reforms on 
current plans, the bill would take away important consumer 
protections including the prohibition on lifetime limits and a 
ban on rescissions, a practice that lets insurers take away 
your coverage midyear, usually after you have gotten sick. It 
would also prohibit enforcement of the rule that allows young 
people to stay on their parents' insurance plans until age 26. 
This week's census figures show that this provision has already 
helped half a million young people get insurance. Why would 
Congress take away their coverage? HHS carved out reasonable 
limits on what plans could be grandfathered. A plan can 
maintain its grandfathered status until it changes its benefits 
or raises its costs too much. This proposal would remove those 
limits so every plan is grandfathered forever. This means that 
people will be locked into the plans that don't have the 
protections they are entitled to under the ACA like preventive 
medicines without copayments.
    A final point: If you pass the bill to repeal the 
grandfathering provision, you will be guaranteeing that 
millions of Americans will absolutely be facing the loss of the 
coverage they have. If my insurer is able to cut my benefits 
and hike my premiums and deductibles, actions that in the 
industry are referred to as ``benefit buy-downs'', that means 
that I will not have the same coverage I had or was happy with.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Potter follows:]

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    Mr. Pitts. The chair thanks the gentleman and now 
recognizes Ms. Quincy for 5 minutes for her opening statement.

                 STATEMENT OF LYNN BATES QUINCY

    Ms. Quincy. Thank you for having me here today.
    My name is Lynn Quincy, and I am the Senior Health Policy 
Analyst at Consumers Union, which is the independent nonprofit 
publisher of Consumer Reports magazine, and our mission is to 
provide consumers with unbiased information about good 
services, health and personal finance.
    I am here to discuss the changes, the proposed changes to 
the grandfathered regulations and medical loss rules called for 
by the Patient Protection and Affordable Care Act, and I am 
here to ask the committee to take a holistic look at the impact 
of the proposed legislation and to holistically look at its 
impact on consumers.
    The proposed legislation addressing grandfathered plans 
would undermine the Affordable Care Act's consumer protections 
in two ways. It broadens the definitions of plans that qualify 
as a grandfathered plan and it calls for a blanket exemption of 
these plans from all Affordable Care Act requirements. If 
enacted, this proposal would leave many consumers worse off. 
You have heard many examples today already about, for example, 
the impact on adult children up to age 26 or the current 
requirement that plans all present a uniform health insurance 
disclosure form to consumers so that they can better understand 
their health plan features. If enacted, this proposal would 
create a bifurcated market. In 2014, consumers wouldn't have 
the security of knowing that all their health insurance choices 
provide a minimum level of coverage and have understandable and 
uniform caps on out-of-pocket spending. Instead, anyone with 
access to a grandfathered plan would have to learn two 
insurance markets: the one featuring the new consumer 
protections and the one in which none of the Affordable Care 
Act provisions apply.
    The proposal expands the definition of what constitutes a 
grandfathered plan, stripping away all requirements for 
maintaining reasonably similar cost-sharing levels, and let us 
be clear about what we are talking about here when we discuss 
an employer's ability to lower cost. What we are really 
referring to is employers' ability to shift costs onto 
employees, and believe me, that is not what consumers want. The 
things that are driving health care premium increases, you have 
to look in other areas besides these new provisions and the 
MLR, and there is nothing more serious that this committee 
should be doing. I just returned from Wyoming, where a broker 
described a 10-person dental office that just received a 56 
percent premium increase, and he speculated that it was due to 
the fact that someone in that 10-person group had contracted 
Grave's disease. These are the problems that you need to be 
addressing.
    We regularly hear from consumers about their health 
coverage, and I would like to assure this subcommittee that we 
have not heard a single consumer clamoring to keep their health 
plan as cost sharing rises over 18 percent a year, the 
approximate limit at which they might have to give up their 
grandfathering status.
    We also oppose legislation that would repeal the medical 
loss ratio provisions. These provisions are working to improve 
value for consumers as you have already heard today. Placing a 
floor under health insurers, MLR is not new. Roughly a third of 
States have enacted rules that require plans to spend a certain 
percentage of their premium dollar on medical care, and that 
provides us with significant credible experience about how MLR 
regulations affect consumer and brokers, and as you have 
already heard, there is early evidence that the federal rule is 
working to improve value to consumers to address those rising 
premiums that are of such great concern.
    We note that that the evidence with respect to overall 
broker compensation is mixed. You have already heard about the 
NAIC study and the fact that they declined to support 
legislation that would carve brokers' commissions out of the 
MLR.
    Today's MLR rules provide needed transparency. Steve Larsen 
talked about this. And this is really important. I think this 
would appeal to both sides of the aisle as we move forward. We 
need to understand what goes into those rising premiums so we 
can better understand how to clamp down on them to help 
consumers.
    Finally, today's MLR rule is not a blunt instrument as the 
proposed legislation would be. It provides targeted, evidenced-
based relief to States. They can apply for an adjustment, as we 
have all discussed, and some of the States that have applied 
for adjustments like Maine already have an oligopoly that has 
nothing to with the proposed MLR rule. There are structural 
problems in the insurance market, to be sure, but I am not 
really expecting the MLR rule to contribute greatly to those 
problems.
    My written comments go into greater detail about the 
benefits of our grandfathered rules and MLR rules as they exist 
today.
    Thank you for the opportunity to speak to you.
    [The prepared statement of Ms. Quincy follows:]

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    Mr. Pitts. The chair thanks the gentlelady. Thanks to all 
the witnesses for their patience. We will now begin the 
questioning from the members, and I will begin by recognizing 
myself for 5 minutes for that purpose.
    Ms. Trautwein, some argue that insurance agents add no 
value to the system are simply overhead in the system that can 
be eliminated at the stroke of a pen or regulation. Can you 
elaborate on the role agents play in our health care system?
    Ms. Trautwein. Absolutely. Well, first of all, it is true 
that agents do help people secure health insurance coverage. 
They counsel their clients on the appropriate types of 
coverage, what is available in the market, what they can 
afford, both individuals and businesses. But where their jobs 
really kick in is after that coverage has been placed because 
if there is a claims issue, if there is a billing issue, if 
there is a question about a regulation, and I can tell you 
right now, our members are very busy advising businesses in 
that area, any of those things go through the broker. In fact, 
I saw a recent study from SHRM, which mainly serves larger 
businesses, that the primary place that they are getting their 
information about health reform comes from their broker. And so 
things like that, advice on compliance, on regulations, taking 
care of clients, and I mentioned this during the last hearing, 
but this issue of taking care of claims is significant. When I 
was a broker some 20 years ago, I never, ever had any of 
clients have the need to go to the appellate process through 
their insurer because we were able to address it quickly, and 
that is what our members and other brokers do every day.
    Mr. Pitts. Thank you.
    Ms. Turner, can you explain how the grandfathering rule 
diverts the resources of employers towards more expensive 
health coverage and away from capital investment, wage 
increases and job creation?
    Ms. Turner. Well, as I have mentioned in my testimony, if 
employers are not able to stay within the grandfathering 
provisions and they are required to provide a number of other 
consumer protection such as no out-of-pocket costs to employees 
for preventive care, for example, this is going to increase the 
cost of health insurance and so that is why I feel there is 
really sort of a catch-22 for employers, that they find that 
they need to make changes in order to keep their costs down, 
but if they make those changes, then they are subject to 
another list of rules through PPACA. And these do divert 
capital and I think it really is important, as Ms. Quincy was 
saying, we really do need to take a holistic look, that 
employers--and I have been a small business owner for 30 years 
or running small businesses for 30 years, you don't look at 
things in silos. You look at the bottom line, and if health 
care costs are rising, then you are going to have to figure out 
what can you do on the other side, and sometimes you don't hire 
that extra worker or you don't buy that new piece of equipment. 
So it really does impede employers' ability to make the right 
decisions for their business.
    Mr. Pitts. Thank you.
    Mr. Haislmaier, in December of 2009, the Congressional 
Budget Office released a paper stating that a legislative 
proposal to set an MLR of 90 percent would make health 
insurance an ``essentially governmental program'' in 
combination with PPACA's other provisions. Do you believe that 
a slightly lower MLR of 85 percent like the one included in 
PPACA will give the federal government functional control of 
private health insurance in America?
    Mr. Haislmaier. I don't know that the percentage makes as 
much difference as the structure of the regulatory design. As I 
pointed out in this regulation for minimum loss ratios but also 
coupled with the other regulations, the additional benefit 
requirements, the rate reviews, etc., do shift the industry to 
a regulated utility model. In fact, it is interesting that 
President Clinton's health advisor, Sara Rosenbaum, who, you 
know, is well known in this area, wrote a piece in defense of 
the individual mandate that essentially argued that well, yes, 
the individual mandate--she was--I am not, you know, talking 
about the legal question about the individual mandate but she 
basically made the point in that piece, I think it was for the 
Journal of the American Medical Association or New England 
Journal, that this design in PPACA turns insurers into a 
regulated public utility, and I agree with her on that. What 
didn't discuss is the economics of a regulated public utility 
and the economics are in that world, as a competitor, you 
either want to be, you know, too big to fail. You want to be 
one of the last two or three left that yes, you are going to be 
regulated but they can never put you out of business because 
they need you to be in business or otherwise people don't get 
the service. That is why people scream about, you know, power 
companies that we had this with the storms but they never 
actually drive them out of business. Well, once you get to that 
kind of a world, you don't care what the costs are, you just 
pass them through because your customers have no other choice, 
and that is the world we are headed to with these regulations. 
So yes, I see that happening.
    Mr. Pitts. Thank you. My time is expired. The chair 
recognizes the Ranking Member Emeritus, Mr. Dingell, for 5 
minutes for questions.
    Mr. Dingell. First, I would like to compliment you, Ms. 
Quincy and Mr. Potter, for your very fine statements. Thank 
you.
    This question is to Mr. Potter. The law requires health 
insurance companies to pay rebates if they spend fewer than 80 
to 85 percent of their customers' dollars on health care and 
quality improvement activity. The Department of Health and 
Human Services estimates that the new minimum MLR law will 
result in consumer rebates to as many as 9 million people, up 
to 1.4 billion in the 2011 plan year and up to 1.49 billion in 
the 2011-2013 plan years. Agents and brokers are heavily 
lobbying for special exemption for being included into the 
medical loss ratio calculation. The fact is, some agents and 
brokers are really providing valuable and helpful services, and 
I have to agree with that statement. But they, like other costs 
within the insurance products, they should compete and keep 
costs competitively low as possible for consumers. At a time 
when everybody is being asked to tighten their belts and find 
and create efficiencies, asking for an exemption from these 
pressures, particularly at the expense of consumer pocketbooks, 
is not something that I think the consumers will take kindly 
to.
    Mr. Potter, would you please talk to us about the dangers 
of exempting agent and broker commissions from the medical loss 
ratio calculations and what types of commissions that they have 
been getting over the past years?
    Mr. Potter. Thank you, Congressman. Yes, if they are 
exempted, it will be, as I said in my testimony, really a gift 
to the insurance industry because it will give them just one 
more way that they can meet regulations that they could already 
be meeting if they were to reduce benefits, reduce premiums, or 
if they reduced spending in many other areas of spending. 
McKinsey and Company did a study a few years ago showing where 
most of these companies' administrative costs really are, and 
they are in underwriting, they are in sales and marketing and 
things of that nature. So my own salary, for example, was an 
administrative expense. In fact, I was talking to someone in 
France not long ago who said my job was unknown in the French 
system, and I can understand that.
    But there are a lot of other places where cuts can be made, 
and yes, I agree with you, I think agents and brokers have 
indeed provided in many cases good value to the people they 
serve but they do get their income from insurers and they have 
been paid handsomely, and I think that they should be expected 
to give up some--you know, to sacrifice just as much as 
everybody else.
    Mr. Dingell. Thank you. I have a bunch of questions, and I 
apologize. I don't mean to curtail your testimony.
    Ms. Quincy, Consumers Union expanding the consumer 
protections indicates that this has had a negligible impact on 
premiums. My colleagues on the Republican side claim that this 
is an enormous burden to health plans and employers and use 
that as a rationale for repealing key elements of the Patient's 
Bill of Rights for many people. First, and these are yes or no, 
if you can please, do you agree that the new consumer 
protections are imposing a huge burden on health plans and 
employers, or not?
    Ms. Quincy. I do not.
    Mr. Dingell. OK. Do you have any estimates or examples of 
how much these provisions would cost?
    Ms. Quincy. Yes. I would like to refer the committee to my 
written testimony, if I can find the page. We provided, I 
think, three or four sources that cited some actuarial 
estimates about what the cost of the various consumer 
protections are, and--I think have to go one page further to 
get there. Here we go.
    So in the written testimony, I talk about the fact that 
federal agencies have estimated that ending annual lifetime 
limits will increase group premiums by about a half of 1 
percent and will increase non-group premiums by less than 1 
percent. Prohibiting preexisting exclusions for children is 
estimated to have a negligible impact on premiums. A recent 
Anthem Blue Cross Blue Shield filing for the individual market 
in Connecticut shows that the new protections from unjust 
rescissions have had no impact on premiums, and ending lifetime 
limits has also benefited consumers without raising costs, and 
for the sources for those statements, I refer you to the 
written testimony.
    Mr. Dingell. Thank you.
    Now, Mr. Potter, very quickly, can you discuss insurance 
company practices with regard to individuals whose preexisting 
conditions prior to the passage of the Affordable Care Act and 
what can we expect since the passage of these new protections? 
In other words, what it is going to do to costs, what is it 
going to do for consumers, what is it going to do to industry?
    Mr. Potter. Insurance companies for many years have refused 
to sell coverage to people with preexisting conditions, and it 
is something that continues to go on right now, except for 
children. That already has gone into effect. A Chattanooga 
newspaper recently disclosed that Blue Cross and Blue Shield 
Tennessee, a nonprofit, supposedly, refused to sell coverage to 
about one-third of applicants, largely because of preexisting 
conditions. It is the leading reason why we have now more than 
50 million Americans without coverage, and it doesn't matter 
whether you are rich or poor.
    Mr. Dingell. You just don't get insurance if you have a 
preexisting condition.
    Mr. Potter. Exactly. If you have a preexisting condition, 
you are just out of luck, even if you were born with that 
preexisting condition.
    Mr. Dingell. Now, I guess my time is expired, Mr. Chairman. 
Thank you.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the vice chairman, Dr. Burgess, for 5 minutes for questions.
    Mr. Burgess. Thank you, Mr. Chairman.
    You know, I have done a lot of thinking this summer about 
the summer of 2009 when we all went home after this committee 
passed H.R. 3200, which was the House version of the health 
care bill. That version has died a natural death and Harry 
Reid's version is the one that was signed into law by the 
President. But the things I remember being asked at those town 
halls, and they were difficult and they were loud and they were 
long and they were hot, but those town halls, people said first 
off, don't do anything that is going to mess up the system that 
exists and works for arguably, 60, 65, 70 percent of us. We 
didn't do that. We screwed it up. Witness the large number of 
waivers that are in effect now and people concerned about 
issues like grandfathering. And the other thing they asked, and 
they were really clear on this, was can you do something to 
help us with cost because we are concerned about the cost of 
health insurance.
    And then I looked around the country. The one place where 
really cost had been addressed in a very effective way was the 
State of Indiana and Governor Mitch Daniels with his Healthy 
Indiana plan, and for the life of me, I don't know why we did 
not subpoena him and bring him to this committee and chain him 
to the chair until he spilled the beans as to how he was able 
to hold health care costs for his State employees down by 11 
percent over the previous 2 years.
    So Ms. Turner, you are familiar with Governor Daniels' 
plan. Can you very briefly encapsulate what is embodied in 
that?
    Ms. Turner. Well, Governor Daniels and particularly the 
Healthy Indiana plan, but he also has incentivized State 
employees to enroll in consumer-directed plans, and what he has 
recognized is that if you engage consumers as partners and 
really giving them more information so they have the ability to 
make decisions and to use better information to make better 
decisions, that they really will become partners in helping to 
manage costs, and we have seen it across the board.
    I have a section in my testimony when I talk about a new 
study by the National Business Group on Health and it found 
that companies that offered account-based health plans, whether 
health savings accounts or health reimbursement arrangements, 
had costs that were $900 lower on average for individuals and 
$2,885 lower for families. So the reason that the number of 
employees that have joined these plans is rising is because 
they really do help to hold down costs and employees become 
partners. They are more likely actually to use preventive 
services when they have a health savings account than they are 
in regular insurance because, as one said, I realized that if I 
take better care of myself, I will save money in the long run. 
So they provide the right kind of incentives and transparency 
and give employees an incentive to be partners in managing 
costs.
    Mr. Burgess. Now, as I understand for Governor Daniels' 
plan for State employees, he actually funds the health savings 
account that is associated with that high-deductible plan. Is 
that understanding basically correct?
    Ms. Turner. Yes, and they put money into the health savings 
account and with the Medicaid expansion, their Healthy Indiana 
plan, both the State and the individuals share in funding that 
account so they really do have a stake.
    Mr. Burgess. And of course, the phrase I have heard 
associated with that is something magic happens when people 
spend their own money for health care, even if it wasn't their 
own money in the first place.
    But perhaps Mr. Haislmaier and Ms. Turner, you can talk 
about how the MLR regs affect consumer-directed health plans 
and perhaps the one place we should have gone that we didn't go 
in the health care law. What is the future ahead for consumer-
directed health care under the MLR?
    Mr. Haislmaier. Well, this is one of the areas where as 
your colleague, Representative Cassidy, pointed out, there are 
some problems with the way the statute was drafted because it 
didn't take into account the fact that if you have a consumer-
directed plan where of the total spending that the individual 
is doing, more of it is going directly from the individual to 
the provider and less through the insurer, then the insurer for 
that portion that they are handling is going to have, by 
necessity, higher administrative costs and are going to be 
penalized for that product design. So it is correct that it 
will favor product designs that are more comprehensive, meaning 
that more of the total spending goes through the insurer's 
hands.
    There are other places that practitioners in this area have 
encountered. I remember this from a former colleague who was a 
Democratic insurance commissioner and saying that one of the 
problems that they ran into is they are running into things 
like when you have overseas employees and you provide them 
medical care, if you want to send somebody to be an oil worker 
in Nigeria or something, you know, you are not only going to 
have to pay them well but you are going to have to make sure--
they are going to be worried about, well, hey, you are sending 
me off to work on an oil platform in some Third World country, 
what happens if something happens to me medically. Well, these 
are not administratively cheap plans to run because you are 
going to have to airlift them out of there, you are going to 
have to do this all other stuff. So under the MLR, those plans 
are disadvantaged. The other thing--I mean, you just keep 
compounding this. This fellow was pointing out to me, he is in 
insurance law practice no, was another client where it was a 
church that had missionaries who aren't employees but they are 
providing them with health benefits, so how does that get 
handled. So you have got a lot of problems in this.
    You know, I could just make one point because I think it is 
really important to understand that disclosing, as I said in 
the testimony, this information is fine, OK. If you want to put 
this information out, States already have the data to do that, 
and I think States should put it out and let the consumer say, 
you know, this is one more piece of comparative information. It 
is only when you set a standard that says well, you have to do 
this, you have to do this minimum, that you create these 
problems.
    So I would present to you a hypothetical, and let us just 
think about this, if you will indulge me. We have two--let us 
take two insurance plans, two situations. We will call them A 
and B, OK? Under both scenarios, the plans cover the same 
benefits, OK, so there is not a difference in lesser benefits 
or more benefits. Under both scenarios, you are going to pay 
about a thousand bucks for out-of-pocket deductible and copays. 
Plan A charges $5,000 and has an 80 percent medical loss ratio, 
meaning $1,000 is retained and $4,000 goes to paying claims. 
Plan B charges $4,000 and has a 75 percent ratio, meaning they 
keep $1,000 and $3,000 goes to claims. Which is the better buy? 
Do you buy the plan with the higher loss ratio but $1,000 lower 
premium or do you buy the plan with the lower loss--I am 
sorry--the better loss ratio under this scenario but is $5,000 
more expensive? You see, those are the kinds of decisions a 
consumer has to make. As a piece of information, that is fine, 
but when you say everybody has to fit into this box, you have a 
problem.
    Mr. Burgess. Thank you, Mr. Chairman. I will yield back.
    Mr. Pitts. The chair thanks the gentleman and recognizes 
the gentleman from Louisiana, Dr. Cassidy, for 5 minutes of 
questioning.
    Mr. Cassidy. Mr. Potter, if I have been smiling at you the 
whole time, it is nothing inappropriate. I am reading Harry 
Potter to my 10-year-old right now, so we spent 15 minutes on 
the phone last night. She would be disappointed you don't have 
a scar on your head.
    You know, I read your testimony. It is very compelling. But 
you could want to remove power from insurance companies and not 
necessarily be for the ACA. That is a fair statement. And one 
of the reasons why I like consumer-driven health care is 
because it truly moves the locus of power from a bureaucrat, 
whether it is Washington, D.C., or elsewhere, to the consumer. 
You are the numbers guy. You are the fellow who used to help an 
insurance company look at things. Looking at your testimony--
and your testimony was almost an insurance company as an 
organic organism which is going to move to maximize profits. 
Let us take Mr. Haislmaier's assertation. This MLR seems to 
reward companies that sell higher-priced policies because your 
15 percent of a higher-priced policy is a greater absolute 
amount than 15 percent of a lower-priced policy, and again, the 
consumer-driven health care plan, you don't start paying claims 
until someone is paid their HSA and their out of pocket and 
then you move into it. So just your thoughts on that. I mean, 
again, looking at your testimony, it seems that--I would draw 
from that that they would react in such a way as to preserve 
their profit margin, which means that they would be prejudiced 
towards a higher-priced policy.
    Mr. Potter. You have to consider the cost of insurance, 
including the cost of what you have to pay out of pocket. If 
you just keep premiums in isolation, then it skews what is 
really the obligation of the person who has that policy. 
Another point too is that----
    Mr. Cassidy. No, but I don't follow how that answers my 
question, and no offense, but I don't see--again, my 
assertation is that if you artificially restrict MLR and not 
account for the absolute, as Mr. Haislmaier's example, we have 
a cheaper policy, $4,000, but if it is a thousand bucks for 
administrative costs, that is 25 percent MLR. We are prejudiced 
against that policy towards one which is $5,000 and now meets 
this artificial MLR requirement. Would you disagree with the 
example he just gave?
    Mr. Potter. I would.
    Mr. Cassidy. I don't follow why.
    Mr. Potter. Because again, you have to consider the value 
that the person has in the policy. If you are paying a certain 
premium, yes, there is no doubt, the account-based plans 
typically have a lower premium but there is great cost shifting 
from the employee or the insurer to the----
    Mr. Cassidy. Now, there is a Kaiser Family Foundation study 
either there or CRS or GAO, I forget which, which shows that 
those who have consumer-driven health care plans with an HSA 
have $500 extra out of pocket relative to a traditional policy, 
but because their premiums are 25 to 30 percent cheaper, net 
they are $2,000 ahead. So they also found that those patients 
with HSA and a high deductible accessed preventive services as 
frequently as do those who have a traditional policy. They also 
found that 50 percent of those in this particular survey--I am 
remembering, so I may have it a little wrong--were previously 
uninsured, costs lower by 25 to 30 percent. Previously 
uninsured people now have the ability to purchase insurance and 
they are accessing preventive services as frequently as those 
who have traditional policies. That sounds like a good value to 
me.
    Mr. Potter. It is for some people but some of the other 
studies you might have seen too show that many people who are 
in these kinds of accounts don't have the money to meet that 
deductible. A lot of employers are benevolent and they do 
provide some money to pay that deductible. People who are in 
the individual market like my son don't have that ability. He 
had to buy--he was forced to buy a high-deductible plan----
    Mr. Cassidy. How old is your son?
    Mr. Potter. He is 28.
    Mr. Cassidy. Now, reasonably speaking, a 28-year-old 
without a chronic medical condition made a wise financial 
decision, correct?
    Mr. Potter. Here is what happened. He was told that he 
would have to be moved out of his plan, which had a $500 
deductible, to one that had a $5,000 deductible or his premium 
would go up 67 percent, and my son has asthma and so yes, he is 
going to be paying quite a bit out of his own pocket. He 
doesn't have a very----
    Mr. Cassidy. But what was his savings on his insurance 
policy? Because net, if he paying $3,000 less----
    Mr. Potter. Two dollars and 12 cents a month was his 
savings, but he is facing a deductible that is 10 times as 
much.
    Mr. Cassidy. No, I am sorry. That is $2,000 relative to his 
previous savings but it is more than $2.20 to what his premium 
would be. I guess that is my point.
    Mr. Potter. The math is that by moving out of the plan that 
he was in to the one that he moved into, yes, his premiums were 
about the same, actually maybe $2 less, but his deductible, his 
total out-of-pocket expenses over the year is considerably 
more.
    Mr. Cassidy. I guess I am a little confused, because if he 
had stayed in his previous policy, his premiums would have been 
substantially more.
    Mr. Potter. That was not available to him. He was forced 
out of that plan, just as I was a few years ago, Congressman. I 
worked at Cigna for quite a few years, and I had a plan that I 
liked. It was a PPO. Cigna decided, didn't ask me, Cigna 
decided that it would move me and every other employee out of 
the PPO or the HMOs into an account-based plan. For me and for 
the CEO and for the executive board of GE, that is perfectly 
fine, but most of the employees of Cigna make far, far less 
than----
    Mr. Cassidy. We are almost out of time and we are about to 
start getting the clunk on us, but let me just respond again. 
The Kaiser Family Foundation study suggested that most people 
with HSAs have modest incomes, $75,000 or less, and that their 
out-of-pocket, their global costs decrease over the year by a 
couple thousand dollars, and again, they are accessing 
preventive services as well. I would be interested if you have 
data which shows--and this will have to be an off-the-record 
answer--that shows there is any difference in incomes, because 
people point to the anecdotes but I don't find that there is 
any data on difference in outcomes.
    Mr. Potter. Yes, you are right. We could take a look at 
that more closely, but I think people who are healthier do 
gravitate toward these plans.
    Mr. Cassidy. I think the data shows that even people now 
who are not as healthy or doing as well----
    Mr. Potter. Because they are being forced into these plans 
against their own----
    Mr. Cassidy. No, but I am talking about outcomes and their 
pocketbook.
    Anyway, I think we are out of time. Thank you.
    Mr. Burgess. [Presiding] The gentleman's time has expired. 
The chair recognizes the Chairman Emeritus for a follow-up.
    Mr. Dingell. You are most kind, Mr. Chairman. Thank you.
    This goes to Mr. Potter and Ms. Quincy. Our colleagues on 
the other side of the aisle are portraying the discussion draft 
as a means for Americans who like their health coverage to keep 
it. In fact, the legislation is much broader. The real 
intention appears to be to eliminate the insurance reforms 
enacted by the Affordable Care Act and to put insurance 
companies, not patients, back into control. Would it be 
accurate to say that this legislation is another way to repeal 
health reform, and am I correct in my first assumption? Yes or 
no.
    Mr. Potter. Yes.
    Mr. Dingell. Ms. Quincy?
    Ms. Quincy. It would greatly undermine the various 
provisions of the Affordable Care Act that are expected to work 
together.
    Mr. Dingell. Good. Now, does the legislation that we are 
discussing here allow patients to keep their insurance if they 
like it, as claimed by my Republican colleagues, or are the 
insurers really in charge of being allowed to cut benefits, 
increase cost sharing and make other changes? Which is the 
case?
    Ms. Quincy. If the discussion draft were enacted, it would 
permit tremendous latitude with respect to self-insured 
employer plans and insurers to make changes in benefits, some 
of which would certainly include cost shifting to employees.
    Mr. Dingell. Mr. Potter?
    Mr. Potter. Absolutely. As I said in my testimony, if you 
pass the repeal, the grandfathering, you can absolutely 
guarantee that people who have coverage now, their coverage 
will change significantly in the near future, if not the long 
term.
    Mr. Dingell. Now, as I understand this, what we are 
essentially doing is setting up two categories of insurance 
carriers. The first category would be those who are 
grandfathered. The grandfathered plans would be able to do most 
anything they want and achieve strong competitive advantage 
over the latecomers, who would not have that privilege. Am I 
correct?
    Mr. Potter. Yes.
    Mr. Dingell. Is that right, Ms. Quincy?
    Ms. Quincy. Yes.
    Mr. Dingell. And that would lead then to very significant 
advantages to the first category and a strong discouragement to 
the second category going into this business. Is that right?
    Ms. Quincy. Well, my greatest fear would be the 
segmentation of risks since this hugely different--since two 
different insurance markets exist side by side. I think that is 
the greatest danger.
    Mr. Dingell. And you would tend to see all the bad business 
being shoved into the second category that weren't 
grandfathered. Is that right?
    Ms. Quincy. Yes.
    Mr. Potter. Yes. You are correct.
    Mr. Dingell. Now, if you have got a plan that is 
grandfathered, it would then be able to charge lower prices for 
its product and give less benefits at the same time. Isn't that 
right?
    Ms. Quincy. Yes.
    Mr. Potter. Yes.
    Mr. Dingell. Let us raise one of the more problematic 
issues with this legislation. Consumers in grandfathered health 
plans including those that have raised premiums, cut benefits 
or increased cost sharing would not have any federally 
guaranteed rights to internal and external appeals. Is that 
right?
    Ms. Quincy. Yes.
    Mr. Potter. That is correct.
    Mr. Dingell. So they could kick them all around the block 
and they couldn't complain. All right. This creates an 
environment then where insurers, not health professionals, will 
be making treatment decisions without opportunity for outside 
review bottomed only on the situation where some green eye-
shaded actuary in an insurance company would be defining what 
treatments the guy could get. Is that right?
    Ms. Quincy. Particularly in self-insured plans.
    Mr. Dingell. OK. Now, my Republicans have said all along 
that the Affordable Care Act is turning the doctor-patient 
relationship into a patient-government relationship. First of 
all, is that true? Yes or no.
    Ms. Quincy. I am sorry. The question, does that interfere 
with that doctor-patient relationship when you can't have----
    Mr. Dingell. Yes. Does this bill interfere with the doctor-
patient relationship? I am talking about the Affordable Care 
Act. Does it interfere with the doctor-patient relationship?
    Ms. Quincy. I think that you could say that, because around 
50 percent of----
    Mr. Dingell. All it really does, Ms. Quincy, is to define 
the rights of the patient and within that new definitions the 
patients and the doctors decide what they want to do, and one 
of the noteworthy things is that the medical profession 
supported this particular thing after years of having 
complained about the need to protect us against interference in 
that relationship. Is that right?
    Mr. Potter. Yes, Congressman.
    Mr. Dingell. I am going to ask unanimous consent to ask one 
more question, Mr. Chairman.
    Mr. Burgess. Seeing no objection, the gentleman is given an 
additional minute, but I caution you about statements about the 
AMA. I am a member. I yield to the gentleman.
    Mr. Dingell. I am not a member, but I am a good friend of 
the AMA, and all I am doing is defining what it is they had to 
say and do.
    Mr. Burgess. I appreciate you doing that. We are going to 
have an opportunity to talk about that a great deal more in the 
future.
    Mr. Dingell. And I say this with great respect for my 
friend from Texas.
    Now, what I want to know is, is it important that we give 
guaranteed internal and external appeals rights to the patients 
who would have benefits under the plan and were being treated 
in a way they didn't like by the insurance company?
    Ms. Quincy. It is critically important. A GAO report shows 
that roughly 50 percent of coverage decisions that are disputed 
using the appeals process are reversed, so that means a mistake 
was made by the insurance company. So it is a critically 
important right.
    Mr. Dingell. Mr. Potter?
    Mr. Potter. It is, and it is an essential benefit of the 
Patient's Bill of Rights that Congress considered many years 
ago, and it is about time the Congress enacted it.
    Mr. Dingell. Mr. Chairman, I thank you for your kindness.
    Mr. Burgess. I thank the chairman emeritus for his walk 
down memory line. I need to remind the chairman emeritus that 
it was an amendment that he and I put into H.R. 3200 that would 
enshrine the rights of internal and external review. The 
Speaker of the House stripped that provision out of the bill 
that went from this committee on July 30th to the House Floor 
to vote on November 9, 2009. The Senate did provide some 
coverage but it was pretty watered down and nowhere near as 
expansive as the brilliant amendment offered by the chairman 
emeritus and the vice chair, and it was a shame because Texas 
has led the way on this.
    Mr. Dingell. If the gentleman would yield?
    Mr. Burgess. Yes, I would be happy to yield.
    Mr. Dingell. My good friend is just indicating how well we 
have worked together.
    Mr. Burgess. There you go.
    Mr. Dingell. And the fine consequences of that kind of 
effort. I am here to say, I am anxious to work with the 
gentleman if he will stop pushing this kind of nonsense 
legislation. If we work together, we can come up with something 
much better.
    Mr. Burgess. It was our opponents on the Senate that 
prevented us carrying the day on that as well as the Speaker's 
office and the White House probably had some interference, but 
nevertheless, we are where we are.
    Let me just ask you, Mr. Potter. I think you testified or 
provided in your written testimony that Congress has exempted 
all taxes from the MLR calculation. Is that correct?
    Mr. Potter. I don't think it is in my written testimony, 
but there is much that has been exempted in the MLR 
calculation. That is correct.
    Mr. Burgess. But by regulation, working the MLR regulation 
at HHS, they decided to sort of pick and choose which taxes are 
exempt from the calculation. Do you feel that that is 
inconsistent with the intent of the law?
    Mr. Potter. I think that the statute was pretty clear that 
certain taxes are exempt from the equation. I can't tell you 
which ones in particular would qualify for that. That was the 
intent of Congress, as I understand it.
    Mr. Burgess. I don't have the page number, but in your 
testimony, the statement is, ``In addition, Congress exempted 
all taxes from the MLR calculation, a huge artificial boost to 
insurers' MLRs.''
    Mr. Potter. Exempting taxes is a boost to MLRs.
    Mr. Burgess. Well, again, the impression given that all 
taxes, but HHS did not see it that way.
    Ms. Trautwein, let me just ask you, one of the things that 
concerns a lot of us, and there are obviously a lot of things 
that concern us in the Affordable Care Act, but the cost is a 
big one, and we had estimates of costs all over the place but I 
think no one now believes those figures that were originally 
delivered to us by the CBO and even the Chief Actuary for CMS 
has said the cost is going to be some $450 billion over 10 
years higher than what was advertised in March of 2010, and in 
fact, those numbers are probably higher still, and the 
difficulty is, of course, the CBO having to estimate how many 
people would leave their employer-sponsored insurance or how 
many employers would drop employer-sponsored insurance and push 
their employees into the exchange.
    So do you think that the number of people ending up in the 
exchange will be greater than currently estimated? Has your 
organization done any looking at this?
    Ms. Trautwein. Well, thank you very much for this question. 
I am very glad you asked that. This is actually one of our 
primary concerns, not so much whether they end up in the 
exchange or somewhere else. We are very worried about what we 
are seeing in terms of some employer decision-making process. 
So if we calculated the cost of this legislation being whatever 
the final number was modified three times over by CBO or 
whomever, if that is all based on some assumptions that frankly 
we are very worried are not correct. What we are seeing is many 
employers saying look, the burden is too heavy, and I have 
talked to them personally. This is not anecdotal. Now, if too 
many of them do this, of course, all the estimates that we made 
relative to the cost of providing subsidies for a group of 
people that did not have employer-sponsored coverage is going 
to mushroom dramatically. And so what we are thinking is that 
many of them are not going to be providing coverage far more 
than were estimated to be dropped in the additional 
calculations, and this is based on massive input from our 
members and their clients.
    Mr. Burgess. I want to thank everyone for attending. That 
appears to be the conclusion of all the questions, and I want 
to thank the witnesses for participating in today's hearing. I 
thank them for their indulgence while the floor did votes.
    I remind the members that they have 10 business days to 
submit questions for the record, and I ask the witnesses to 
respond promptly to these questions. Members should submit 
their questions by the close of business on September 29th.
    The subcommittee hearing stands adjourned.
    [Whereupon, at 2:21 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

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