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



 
                        NEW MEDICAL LOSS RATIOS:
         INCREASING HEALTH CARE VALUE OR JUST ELIMINATING JOBS?

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

                                HEARING

                               before the

       SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                     HEARING HELD DECEMBER 15, 2011

                               __________



                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               


            Small Business Committee Document Number 112-049
              Available via the GPO Website: www.fdsys.gov



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                       ROSCOE BARTLETT, Maryland
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
                       ROBERT SCHILLING, Illinois

               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        MARK CRITZ, Pennsylvania
                      JASON ALTMIRE, Pennsylvania
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                     DAVID CICILLINE, Rhode Island
                       CEDRIC RICHMOND, Louisiana
                        JANICE HAHN, California
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts


                      2Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

Hon. Mike Coffman................................................     1
Hon. Kurt Schrader...............................................     2

                               WITNESSES

Mitchell West, Insurance Broker, HealthChoiceOne, Greenwood 
  Village, CO, Testifying on behalf of the National Association 
  of Health Underwriters.........................................     3
Gary Livengood, Principal, What a Stitch, LLC, Mt. Airy, MD......     5
Grace-Marie Turner, President, Galen Institute, Alexandria, VA...     7
Timothy Stoltzfus Jost, Robert Willett Family Professor of Law, 
  Washington and Lee University College of Law, Lexington, VA....     8

                                APPENDIX

Prepared Statements:
    Mitchell West, Insurance Broker, HealthChoiceOne, Greenwood 
      Village, CO, Testifying on behalf of the National 
      Association of Health Underwriters.........................    23
    Gary Livengood, Principal, What a Stitch, LLC, Mt. Airy, MD..    31
    Grace-Marie Turner, President, Galen Institute, Alexandria, 
      VA.........................................................    35
    Timothy Stoltzfus Jost, Robert Willett Family Professor of 
      Law, Washington and Lee University College of Law, 
      Lexington, VA..............................................    50
Questions for the Record:
    None
Answers for the Record:
    None
Additional Materials for the Record:
    National Association of Insurance Commissioners Statement for 
      the Record.................................................    57
    Communicating for America, Communicating for Agriculture, 
      Communicating for Seniors Statement for the Record.........    90
    United States Chamber of Commerce Statement for the Record...    92
    NAHU Broker Compensation Statement for the Record............    96


     NEW MEDICAL LOSS RATIOS: INCREASING HEALTH CARE VALUE OR JUST 
                           ELIMINATING JOBS?

                              ----------                              --
--------


                      THURSDAY, DECEMBER 15, 2011.

              House of Representatives,    
               Committee on Small Business,
                    Subcommittee on Investigations,
                 Oversight and Regulations, Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building. Hon. Mike Coffman 
[chairman of the Subcommittee] presiding.
    Present: Representatives Coffman, Bartlett, Landry, West, 
and Schrader.
    Chairman Coffman. Good morning. I call this hearing to 
order.
    I want to welcome our witnesses. We appreciate your 
participation and look forward to your testimony today.
    Under the Health Care Reform Law and its final rule, 
insurers must spend 80 percent of premium dollars for 
individual and small group policies on health claims. This 
medical loss ratio means the amount that can be spent on 
administrative expenses is limited to 20 percent. If an insurer 
fails to meet the minimum requirements it must issue rebates 
for the difference to its customers. Insurance agent 
commissions are counted as administrative cost under the HHS 
rule. The agents, often small business owners themselves, 
assess the unique health insurance needs of small firms, 
recommend appropriate coverage, and help to process claims.
    In several letters to the Department of Health and Human 
Services, the National Association of Insurance Commissioners 
(NAIC), the organization of state insurance commissioners which 
HHS entrusted with recommending the MLR formula, expressed 
concern about the adverse effects of the MLR on insurance 
producers, both agents and brokers. On November 27th of this 
year, NAIC endorsed 26-0, a formal resolution urging HHS to 
``take whatever immediate actions are available to the 
Department to mitigate the adverse effects the MLR rule is 
having on the ability of insurance producers to serve the 
demands and needs of customers and to more appropriately 
classify producer compensation in the final rule.'' 
Unfortunately, HHS did not include NAIC's recommendations in 
its rule, and agent and broker compensation remains a part of 
the administrative calculation.
    We want quality health care and affordable insurance 
premiums, but the MLR is likely to deter small insurers from 
entering the market and hasten the exit of established ones. 
Instead of protecting consumers, the MLR may dissuade insurers 
from making investments in anti-fraud, anti-waste customer 
service and transparency tools because they are considered 
administrative and those costs must be kept low. The MLR is an 
incentive for insurers to increase, not reduce, premiums 
because they will need to improve their medical ratio and forgo 
administrative tools that can ultimately save money. And as 
NAIC's resolution said, the MLR requirements ``have had 
profound, detrimental marketplace effects for insurance 
producers, agents, and brokers.''
    In a recent study on implementation of the new MLRs, the 
U.S. Government Accountability Office said that ``almost all of 
the insurers'' it interviewed had decreased or planned to 
decrease commissions to brokers or reduce their MLRs so they 
can avoid issuing rebates. The National Association of Health 
Underwriters reports that nearly three-quarters of agents have 
experienced reductions in their income because of MLRs, and 
more than a fifth have eliminated jobs at their agencies. 
Clearly, federal medical loss ratios are a bad idea for small 
business.
    I look forward to hearing from our witnesses today. I now 
yield to the ranking member for opening remarks. Mr. Schrader.
    [The information follows:]
    Mr. Schrader. Thank you, Mr. Chairman.
    I appreciate holding this hearing today. While I am not so 
sure that the medical loss ratio is all together in itself a 
bad piece of policy, I am concerned about its effect on our 
agents and our brokers. That was never our intent, I do not 
think, in passing the medical loss ratio. We are looking for 
feedback to see if the ratios that were instituted in the 
Affordable Care Act are actually real, and I think it is very, 
very important to have this hearing because the agents for 
small businesses are absolutely critical. There is no way in my 
small little veterinary practice I was able to delve into the 
pluses or minuses of the various insurance products that are 
out there. So these folks are absolutely essential, I think, to 
make sure that small businesses keep their health care costs 
down, which is the ultimate goal of the Affordable Care Act.
    So we want to really work with a group out here and see if 
we can modify some of the rules that are coming out and make 
sure that you guys are part of the benefit, not part of the 
problem going forward. So thank you all for coming here. And I 
yield back.
    [The information follows:]
    Chairman Coffman. Thank you.
    If Subcommittee members have an opening statement prepared, 
I ask that they submit that for the record.
    I would like to take a moment to explain the timing lights 
for our witnesses today. You will each have five minutes to 
deliver your testimony. The light will start out as green. When 
you have one minute remaining the light will turn yellow. 
Finally, it will turn red to signify that you are at the end of 
your time, five minutes. I ask that you try to adhere to the 
time limit.

STATEMENTS OF MITCH WEST, INSURANCE BROKER, HEALTH CHOICE ONE; 
  GARY LIVENGOOD, PRINCIPAL, WHAT A STITCH, LLC; GRACE-MARIE 
  TURNER, PRESIDENT, GALEN INSTITUTE; TIMOTHY STOLTZFUS JOST, 
  ROBERT WILLETT FAMILY PROFESSOR OF LAW, WASHINGTON AND LEE 
                   UNIVERSITY COLLEGE OF LAW

    Chairman Coffman. It is a pleasure for me to welcome our 
first witness, a fellow Coloradan and constituent, Mitchell 
West, to this Subcommittee. Mr. West is an independent 
insurance broker with Health Choice One in Greenwood Village, 
Colorado. He provides customized assessments of insurance 
products for small business clients and assists them with any 
claims. He holds a B.S. from the University of Southern 
California. He is testifying on behalf of the National 
Association of Health Underwriters. I must also mention that 
Mr. West and his wife, Jamie, have three children. Their son, 
Trenton, graduated with honors from the U.S. Air Force Academy 
and is currently stationed in Seattle, Washington. As a U.S. 
Marine Corps combat veteran, I commend your son for his service 
to our country. Mr. West.

                    STATEMENT OF MITCH WEST

    Mr. West. Chairman and Ranking Member, my name is Mitch 
West and I am an independent broker in Centennial, Colorado. 
And I believe I share the sentiments of 22,000 licensed agents 
in Colorado, as well as the over one million agents across the 
U.S.
    I am a small business owner. I have one full-time employee 
and this is typical of health insurance agents. I am glad for 
this opportunity to address what the MLR has meant to us as we 
have moved forward since its implementation this year. I have a 
bachelor's degree in biomedical engineering, followed by 
graduate course level work in industrial systems engineering, 
electrical engineering, and business administration.
    In 2002, I was thrown into a new environment. I was laid 
off as a result of the dot-com and telecom busts, and I had to 
find health insurance for my family and I had never been in 
that situation before. In spite of my background and all the 
training I had, I was inundated with information. I could not 
make sense of it. I could not discriminate between what was 
good, what would not be so good, and at that time it was only 
with the help of a professional agent that I was able to figure 
out what to do. And boy was I glad that I had assistance. I 
realized what the mistake was that I might have made if I had 
proceeded on my own.
    A couple of months later I began my career as a licensed 
agent and that recent experience was fresh in my mind. As I met 
with my clients I began to understand that they all had a 
common element. They had more misconceptions about health 
insurance than they had real facts, and they did not even know 
what questions to ask as they were seeking to figure out what 
would be best for themselves and their families.
    I have since worked with over 5,300 clients in 27 states 
and I have come to the realization that my primary job is to 
educate my clients. In my written testimony I listed 14 areas 
and topics which I consider to be essential in covering with my 
clients, and while this is a very time-consuming approach, I 
think it is essential and it is very much appreciated by my 
clients and it is why I have hundreds and hundreds of clients 
that have been with me for over eight years.
    None of these activities generate one penny of revenue for 
my business. My only source of income is the commission stream 
paid after the sale of health insurance policies and all of 
these commissions come through the insurance companies which I 
represent. As a direct result of MLR requirements effective 
January 1 this year, every insurance company I represent, 
without exception across the United States, severely reduced 
commission levels. My overhead expenses are unchanged for 2011, 
and in fact, they will go up next year. The net result to my 
practice has been a decrease to my bottom-line of 50 percent. 
You all have business experience. You can imagine the gravity 
of a 50 percent impact to your bottom-line as a small business.
    Many agents, especially those that were in the building 
phases of their practices, have simply exited the industry. 
They just could not make cash flow. Others have chosen to move 
into other areas of insurance where they can be more 
successful, and for the majority of remaining agents the 
current situation is not sustainable in the long run.
    Millions of Americans are in need of health insurance for a 
variety of reasons. Put yourself in their shoes. The health 
insurance environment has never been more complex and confusing 
and they have never been more in need of professional 
assistance. I cannot stay in business operating the way I used 
to, and so my time must be allocated differently. Pro bono 
work, I just cannot do it anymore. I will be forced to spend 
less time with all of my current clients and that inevitably 
means in the long run they will pay more for their insurance 
and gain lesser benefits. Insurance companies are also cutting 
staff for the same pressures and reasons that we are, so the 
double whammy of insurance agents being restricted and 
insurance companies cutting back on support staff is a negative 
impact on consumers in general.
    HHS was given sole responsibility for implementing and 
defining the MLR calculation, and they have the power to 
recognize these facts and make changes. Despite the best 
efforts of industry groups, consumer groups, the National 
Conference of Insurance Legislators, the National Association 
of Insurance Commissioner, and many members of Congress, HHS 
has been unwavering in their position and has chosen to not 
act. Therefore, the only solution is a legislative one, and it 
is needed immediately. Much damage has already been done to 
tens of thousands of agents and numerous consumers nationwide, 
the tide must be changed, and it must be changed before the 
agent community reaches a point of no return.
    I appreciate the opportunity to share these thoughts. MLR 
is an example of legislation which I think has resulted in 
unintended negative consequences to both small businesses and 
consumers, and members of Congress need to be aware of these 
facts and on the behalf of the American people to work with a 
sense of urgency to correct these issues.
    There is significantly more information in my written 
testimony which I hope will be helpful to the Committee. Thank 
you.
    [The statement of Mr. West follows:]
    Chairman Coffman. Thank you, Mr. West.
    I now yield to Mr. Bartlett to introduce Gary Livengood.
    Mr. Bartlett. Thank you very much. It is really my pleasure 
to introduce our next witness, Gary Westfall Livengood. He is a 
graduate of West Virginia Institute of Technology with post-
graduate training at the University of Maryland and University 
of Virginia. Mr. Livengood has a background which really is 
relevant to what we are discussing today. First of all, you 
started out as a journalist in the U.S. Army. Thank you, sir, 
for your service. You organized, developed, and directed all 
functions for claims offices in a 29 state region for Self-
Insured Rail Transportation Corporation. You directed the 
overall marketing and operational efforts for a 14 office 
company, one of the nation's largest investigative services 
companies. You had organizational responsibility for a 200-
member cost containment department within a large regional 
health maintenance organization really relevant to what we are 
talking about today. And now you are principal of What a Stitch 
for operational financial, as well as federal and state 
compliance responsibilities for an embroidery small business 
with 21 employees providing apparel enhancement for companies 
and individuals principally throughout the mid-Atlantic region. 
Thank you very much to Capitol Hill and our hearing.

                  STATEMENT OF GARY LIVENGOOD

    Mr. Livengood. Thank you, sir. And good morning.
    As was indicated, my name is Gary Livengood. I am a 
principal with What a Stitch, LLC, which is a small commercial 
embroidery business in Mount Airy, Maryland. I would like to 
thank the members of the Small Business Committee for the honor 
of testifying before you today about the health reform law.
    To tell you a little bit about me, after serving my country 
in Vietnam, I worked in a variety of operational positions from 
various industries for over 35 years. Then my wonderful wife, 
Louann, somehow got me to agree not to spend my retirement on 
the golf course like I planned, but rather on helping to grow 
her hobby into a business that now employs 21 people.
    We started What a Stitch in 2002 with one single head 
sewing machine. The company grew and grew, but then like 
business owners everywhere, 2008-2009 hit. We are very 
committed to maintaining the business and keeping the 
employees, so we dug very deeply into our personal savings just 
to keep the doors open and we were able to do that. Times still 
are not great for us but they are better than what they were. I 
wish I could say that even better times were ahead, but 
unfortunately, the future continues to look uncertain. I know 
the intent of the new health law was to help business owners 
like us, but thus far I do not see it. The new law weighs 
heavily on my mind anytime we are thinking about hiring new 
employees or what the future may bring for our small business. 
It has already put regulatory burdens on our company, and I 
suspect that there are more compliance issues that are going to 
be coming forward.
    Before we started What a Stitch, my wife was a director of 
human resources with Amtrak, and I spent my last 13 years as 
vice president of operations with United Health Care. Well, 
eventually with United Health Care. So we may be a little bit 
more conversant about the administration of group health 
insurance than your average day-to-day small business owner. 
Consequently, the day-to-day reliance on our health care agent, 
Paul Younkins, who is also the co-owner of Allied Resource 
Management, is not as extensive as many small business owners. 
But even with our experience, Louann and I just would not 
consider dropping the services of our agent. He is our 
insurance policy within an insurance policy. And so far our 
company has been very lucky. We have not had claims disaster or 
medical crises that required the full use of Paul's 
capabilities, but I know that Paul and some of these clients 
do. And other agents like Paul have far-reaching services to 
small businesses across the country.
    But I understand that our company could experience similar 
needs at any point in time. If and when that day comes, I am 
one employee and to have somebody that we know and can trust at 
no additional cost so that my wife and I will be--they will get 
the job done for us and my wife and I can concentrate on 
keeping the company profitable.
    Paul, on the other hand, is a businessman like me and he 
deserves to make a fair living. And when I pay our company's 
insurance premiums each month, it is clear that a portion of my 
check is really our agent's fee that is included in our tax 
bill for tax and convenience purposes.
    It is also obvious that our company's total insurance 
premium rate has nothing to do with the amount the agent gets 
paid. Our premium costs are driven by the costs of medical care 
in Maryland, as well as the age and the size of the group of 
our employees. Paul's fee is just a small percentage of 
whatever our insurance premium will be, and it is worth every 
penny.
    Unfortunately, it is my understanding that the new health 
reform law's medical loss ratio requirements are hurting Paul's 
business and similar business nationally. My company went 
through several years of declining revenues, so on a personal 
level I feel for Paul. But I worry about the impact that it is 
going to have. And if Paul needs to change the nature of his 
business and cannot afford to handle our account anymore, we 
may have to seriously consider just dropping our group 
coverage, saving the money that we put into our employees' 
premiums, and if the government takes over such benefits and 
administration, I am hard pressed to believe that we will 
continue to have the same kind of access to customer service 
that Paul currently provides.
    And I see my time is up, so I thank you for the honor of 
testifying before this Committee today.
    [The statement of Mr. Livengood follows:]
    Chairman Coffman. Thank you, Mr. Livengood. Thank you.
    Our next witness is Grace-Marie Turner. Ms. Turner is 
president of the Galen Institute of Public Policy Research 
Organization that she founded in 1995 to promote free market 
ideas for health reform. Earlier in her career she was 
executive director of the National Commission on Economic 
Growth and Tax Reform and served as president of Arnette and 
Company, a health policy analysis and consulting firm.
    Welcome. You have five minutes to present your testimony, 
Ms. Turner.

                STATEMENT OF GRACE-MARIE TURNER

    Ms. Turner. Thank you, Chairman Coffman. Thank you for 
holding this hearing. Thank you, Ranking Member Schrader, 
Congressmen Bartlett, West, Landry, and Tipton for this hearing 
today.
    I think it is tremendously important to look at the impact 
of this otherwise obscure and complex regulation on the real 
world of health agents, health costs, businesses, and job 
creation. The Affordable Care Act already is leading to a loss 
of affordable options in health insurance for small employers. 
It is leading to a loss of jobs inside and outside the health 
sector, and to higher health care costs that make hiring 
workers more difficult, especially for struggling small 
businesses. Large employers can self-insure and better insulate 
themselves from the early changes inflicted by the health law, 
but not so small businesses. They are more exposed to changes 
in the marketplace.
    And as I document in my testimony, many carriers already 
are leaving the market for individual and small group 
insurance. When fewer carriers offer insurance and when fewer 
options are available for coverage, small businesses are hit 
first and hardest. The percentage of small businesses offering 
health insurance has declined from 68 percent in the year 2000 
to 59 percent in 2011. The health law that so many small 
businesses had hoped would benefit them by lowering costs is 
instead harming their ability to continue to offer health 
insurance at all, at least partly because of early provisions 
in PPACA. Premiums in the job-based health insurance market 
rose in 2011 by an average of 9 percent, by $1,300 a year for a 
family to $15,000 a year for a policy. The medical loss ratio 
which mandates that health insurance carriers spend most of 
their money on premiums is contributing to dislocations in the 
small group and individual markets.
    A growing number of carriers are leaving these markets 
because of HHS inflexibility in interpreting the law. One of 
the tools that small businesses have found to be most valuable 
in helping them to afford coverage has been high deductible 
health plans. These plans are likely to be an early casualty of 
the MLR rules. They discriminate against high deductible plans 
because the MLR regulations only count payments made directly 
by insurers as medical expenses. That means that if an 
individual pays for a health care service to meet the 
deductible, the expenditure does not count toward the MLR even 
though the full amount is actually a payment for medical 
services. This interpretation by HHS is going to particularly 
disadvantage high deductible health savings accounts and other 
account-based plans that health insurers and small businesses 
have found to be most affordable.
    Companies that sell policies in the individual and small 
group market also have higher marketing costs and higher 
customer service expenses because they provide services and 
must sell policies one-on-one. They are really helping their 
clients to find the most affordable policies that they can for 
the resources they have. One of the perverse effects of the MLR 
rules likely will be higher health care costs. First, the rules 
are drying up competition and giving carriers little 
flexibility--giving the remaining carriers the opportunity to 
increase their premiums. Second, the HHS interpretation of the 
law for example says that costs in ferreting out fraud have to 
be considered as part of the administrative costs rather than 
as part of the overall costs or excluded from the total.
    The medical loss ratio regulations also are job killers, as 
is this whole law. The president of the Federal Reserve Board 
of Atlanta recently said, ``we frequently heard strong comments 
to the effect that my company will not hire a single additional 
worker until we know what health insurance costs are going to 
be.'' And as we have heard, the first line of impact is in the 
broker community where a survey found that at least 21 percent 
of independent brokers already have been forced to downsize 
their businesses or even close their doors.
    As you mentioned, Mr. Chairman, the National Association of 
Insurance Commissioners has adopted a resolution urging 
Congress to amend the Federal Health Law to protect broker 
commissions from the medical loss ratio rules so that they can 
continue to provide the valuable services that they provide.
    In conclusion, one of the most fervent promises that 
President Obama made to the American people when this law was 
ramping up toward passage was, ``if you like your health plan 
you can keep your health plan. Period. No one will take it away 
no matter what.'' Clearly before the law even takes effect we 
find that is not true. I detail in my testimony many states in 
which carriers are already leaving the market. This will impact 
small businesses first because the small group and individual 
markets are particularly difficult for carriers to meet this 
new test. As people are having their coverage disrupted, 
violating the promise that President Obama made, I am sure that 
the American people are going to look for other options, and I 
look forward to working with you and other members of the 
Committee to achieve the real goals of health reform. Thank 
you.
    [The statement of Ms. Turner follows:]
    Chairman Coffman. Thank you, Ms. Turner. Thank you Ranking 
Member Mr. Schrader, for an introduction of Mr. Jost.
    Mr. Schrader. Thank you, Mr. Chairman. It is my pleasure to 
introduce Professor Timothy Jost. Thank you for being here.
    Professor Jost teaches law at Washington and Lee University 
School of Law. He is co-author of a case book, Health Law. He 
is widely throughout the United States to teach health law. 
Professor Jost is the author of numerous articles on health 
care regulation and comparative health law and policy, and he 
is also a consumer representative to the National Insurance 
Association of Insurance Commissioners. Professor Jost earned 
his J.D. from the University of Chicago cum laude, very good, 
in 1975. I come from Illinois myself. So welcome, Professor 
Jost.

              STATEMENT OF TIMOTHY STOLTZFUS JOST

    Mr. Jost. Thank you very much. And thank you Chairman 
Coffman for the opportunity to speak today and Ranking Member 
Schrader and Committee members.
    Of all the Affordable Care Act health insurance reforms 
already in effect, the most beneficial for American small 
businesses is the minimum medical loss ratio requirement. The 
cost of health insurance is one of the largest and fastest 
growing items in the budgets of small businesses.
    Fortunately, the MLR is bringing relief. First, relief will 
be coming through rebates. A study conducted by the NAIC last 
spring found that 450 million, a half billion dollars, in 
rebates would have been paid to nearly 16 percent of American 
small businesses and 23 percent of all employees had the rule 
been in effect in 2010. This year, when the rebates are 
actually paid, the amounts may be larger.
    But the purpose of the MLR is not to generate rebates but 
rather to reduce premiums. The MLR produces a strong incentive 
for insurers to reduce their administrative costs and thus 
their premiums. But the real driver of insurance premiums is 
medical costs, and the most important benefit of the MLR is 
that as medical costs come down, premiums will be reduced 
accordingly. Medical cost inflation, in fact, has fallen 
precipitously in the last couple of years and as medical 
inflation declines the MLR will force insurers to pass the 
savings directly to consumers. Already last summer the GAO 
report that Chair Coffman mentioned said that the MLR was 
driving down premiums. Aetna in Connecticut recently dropped 
its premiums to small groups by 3.2 percent while Mountain 
State Blue Cross in West Virginia announced yesterday that 
small businesses like Mr. Livengood's will be getting an 
average reduction in premiums for December of $2,500 for each 
of 4,200 small businesses, a 75 percent reduction in their 
premiums. Jim Houser, a small businessman from Portland, 
Oregon, reports that his premiums went down 3 percent this year 
and he was told it was because of the MLR. Brian England's 
small business in Columbia, Maryland, saw his premiums go down 
6 percent because of the MLR.
    Some argue, however, that the MLR is destabilizing 
insurance markets, but as another recent GAO report found, most 
insurers were already at 80 percent before the rule went into 
effect. The HHS rule provides special treatment for new market 
entrants, for small plans, for high deductible plans, for 
limited benefit plans, and for expatriate plans. I would really 
encourage you to read the rule. It is very widely 
misunderstood. It allows insurers to exclude fraud recoveries 
and to claim credit for health quality improvement costs, 
including the full cost of ICD-10 conversions up to 0.3 percent 
of premiums, which for most will be their full cost. States 
also can request MLR adjustments if they believe that it is 
going to destabilize their insurance markets, but two-thirds of 
the states did not do so because they did not believe they 
would have problems.
    Ms. Turner's testimony includes a long list of insurers 
leaving particular markets. I read through all of the citations 
of her sources and virtually none of those withdrawals are due 
to the MLR requirement. As an example of this, Indiana in its 
request for an adjustment claimed that seven insurers were 
leaving the market. Four of those would not have had to pay 
rebates under the MLR rule because they were too small or 
because they already met the MLR. Two said they were leaving 
for business reasons. One had not even started selling policies 
in the state yet. None of them claimed that they were leaving 
the market because of the MLR.
    The most vociferous protests against the MLR requirements 
have come from agents and brokers, and I certainly understand 
the valuable services that they provide and their need for 
compensation. There is some evidence that insurers are cutting 
agent compensation, although the picture is complicated and, as 
the NAIC found, many insurers are not.
    But it is not at all clear that those cuts are to be blamed 
on the MLR. For example, in Colorado, every single health 
insurance provider met the 80 percent requirement before the 
MLR rule went into effect. So although I do not doubt that Mr. 
West's commissions have been cut, I do not think it is the 
fault of the MLR. Cuts in agent and broker commissions are 
occurring because of business decisions of insurance companies 
and they are blaming it on the MLR. If Congress took 
commissions out of the MLR tomorrow, insurers would probably 
not raise commissions; they would simply take the money for 
profit.
    Finally, Congress must consider what a legislative change 
would mean for the deficit. Employer-sponsored health benefits 
are heavily tax subsidized. As the MLR drives premiums down, 
tax subsidies will go down as well. If you add commissions to 
the administrative expenses insurers already charge small 
business, and that is what the Rogers Bill would do, you are 
increasing the cost of small businesses for doing business. You 
are increasing their premiums. But you are also increasing the 
federal budget deficit by billions of dollars. Any attempt to 
eliminate the MLR rule or to change it to allow insurers to 
keep spending unchecked can only raise costs for small 
businesses and indeed for all insured Americans. I encourage 
you to support small businesses by keeping a strong MLR.
    And let me just say, although I am a second over, that I 
was involved extensively in the NAIC's drafting of the MLR 
rule. I have followed it very closely and I would be very happy 
to talk to you about what the MLR rule actually says and does.
    So thank you very much for your time.
    [The statement of Mr. Jost follows:]
    Chairman Coffman. Thank you, Mr. Jost.
    Let me start out with a few questions. To Mr. West, first 
of all to you, the eight major health insurers in Colorado have 
reduced agent commissions as a direct result of the new MLRs. 
Would you elaborate on your situation and that in Colorado?
    Mr. West. Yes, I can.
    The average composite commission--and I am speaking from my 
book of business--approximately 1,200 active client folders 
serving a couple thousand people--the average commission 
reduction was about 47 percent on the individual insurance 
markets pre-January 1, 2011 to post-January 1, 2011. I am also 
licensed and have clients in 27 other states. Every insurance 
company in every state across the United States with which I am 
appointed and do business had similar reductions.
    And I can tell you that it was attributable to the MLR 
guidelines because insurance companies could not have met the 
guidelines and maintained previous commission levels. I mean, 
the math is just clear and very direct and obvious. So it was 
an instantaneous impact that took effect at the stroke of 
midnight New Year's Eve last year, and it affected every 
carrier that I work with.
    Chairman Coffman. Okay. With the new MLRs, you said you are 
forced to spend time selling other products to maintain your 
income. How does that affect your company and your small 
business clients?
    Mr. West. Well, it is forcing me out of supporting clients 
in the health insurance domain. Other areas for other types of 
health insurance products, financial services, of course, were 
not affected by the MLR. So I, like many of my associates, have 
been forced into those spaces in order to be able to keep my 
business alive. I still do active work with my current clients, 
but I also have to curtail my support for them. I cannot do all 
of the aftermarket support. I cannot help them with claims 
issues, problems with their policies. I also cannot be 
proactive as much as I would like to be in terms of 
professional development and staying abreast of changes so that 
I can, in the same manner as I did before, call them in advance 
of new impacts and changes and advise them how to adapt their 
coverage for best benefit. So I am just being forced, if you 
will, into a different business model. And it is my health 
insurance clients that are going to suffer as a result.
    Chairman Coffman. Okay. Let us see. Mr. Schrader.
    Mr. Schrader. Thank you, Mr. Chairman. Good testimony. I 
appreciate everyone taking the time out of your business 
schedules and trying to get our economy going by doing business 
to come here to Washington, D.C. and enlighten us a little bit 
on the MLR.
    I guess I would be interested in everyone's opinion, but 
Mr. Jost in particular, some of the other issues that have been 
discussed is that while the MLR takes into account fraud and 
going after fraud as a positive benefit and all, there is not a 
lot about prevention. It seems to me that a lot of insurance 
companies and agents are dissuaded from pursuing early 
intervention and prevention because they do not get the same 
benefit under law. Was that discussed at all during the NAIC 
hearings and such?
    Mr. Jost. Yes. And in fact, that is expressly accommodated 
in the rule. The statute allows the rule (the regulation that 
HHS was supposed to produce with the advice of the NAIC) to put 
into the numerator in calculating the MLR both health care 
costs and health care quality improvement costs. The NAIC spent 
a long time debating what quality improvement meant and decided 
that it did not include brokers' commissions but that it did 
include money that insurers spend on improving patient 
outcomes, protecting patient safety, preventing medical errors, 
and, specifically, prevention and wellness activities. And a 
lot of thought was put into that. The rule also supports IT 
conversions and ICD-10 conversions and accreditation costs 
attributable to quality.
    So in fact, wellness and prevention activities are 
explicitly countable in the numerator. They go into the 80 
percent; not into the 20 percent.
    Mr. Schrader. I would get those citations if possible. 
Obviously there is some misunderstanding about that.
    Just, I guess I would go to Mr. West on this. In terms of 
talking about how small businesses are harmed by, including the 
commission fees in the MLR and stuff, can you elaborate in ways 
that we might be able to get around that a little bit? What are 
some of the other options? I have signed onto some bills but I 
am curious your view as to ways we can alleviate some of the 
negative effects by including commissions in the MLR at this 
point.
    Mr. West. Well, the first and foremost impact is on the 
small businesses that are in that space, the health insurance 
agents, the people they hire, the businesses they run. As I 
said, it is immediately evident that if a business overnight 
suffers a 50 percent reduction in bottom-line, it cannot 
expand. I have chosen, for my employee, not to cut her salary 
50 percent. She would not be able to survive. So I have had to 
eat that out of my small business. So you can imagine if there 
are a million licensed agents across the United States, any 
significant percentage of an impact there translates into jobs 
and it ripples through the employees and support structures. I 
have about a 30 percent overheard rate in my business and that 
is paid out in terms of services and contract labor and there 
are all kinds of other trickle downs from the effects on my 
small business.
    The other effects to other small businesses, perhaps small 
businesses that I serve, have to do with the fact that it takes 
more time and effort to work with those clients as we try to 
solve their business needs and that time is just no longer 
available to spend with them. And there is no other place that 
they can turn in terms of gaining that professional support. 
And that can be critical in terms of optimizing coverage. 
Saving premium dollars in the long run can be very 
substantially impactful to those small businesses.
    So from my perspective, undoing that impact that was done 
(MLR) moves us back at least to the status quo before, in which 
people were willing to put in that time, develop their 
businesses, and work on behalf of those consumers and small 
clients that are the core of my business today.
    Mr. Schrader. Very good. Ms. Turner, Mr. Jost, I am curious 
as to what the potential remedy would be in your minds if we 
were to exclude commission from the basic MLRs. The goal really 
of the MLR was to improve efficiency. And I do not know--I 
would be curious about comments. I do not see how agents 
themselves are inefficient. They actually provide a pretty good 
service as Mr. West just testified to and just giving small 
business people that have no background--you guys have 
background--I have no background in health insurance. Well, I 
am a veterinarian but other than that I do not have a whole lot 
of experience. I can fix your horse but it would be nice to, 
you know, I just do not see agents' overhead--they are more of 
an informative. They keep my costs down because I do not have 
to spend or my office manager does not have to spend a lot of 
time on that.
    But I am also concerned about, with all due respect, not 
that this would ever happen, but insurance agents gaming, 
including commissions, and they slip some other costs in there 
that indeed would be part of the administrative overhead that 
we would like to see them try and get down on their own. So 
what is the sweet spot in any sort of solution going forward 
here?
    Ms. Turner. Well, I think--thank you for that question. I 
think that excluding broker commissions from the MLR 
calculation makes the most sense because they are not going to 
the insurance company. Yet the commissions count in the 
administrative cost calculation for the company. Of course, the 
insurance company would rather take the whole 20 percent for 
itself rather than pay brokers, even though they are providing, 
as you say, valuable services to their clients, not only in 
finding more affordable policies but often serving as external 
HR departments for small businesses and helping with complex 
claims, et cetera. So the costs are there. They will be borne 
by small businesses. They will be borne by companies that are 
going out of business. And they will be borne by businesses 
that have fewer options for affordable coverage, because they 
do not have the brokers to help them. So those are real costs. 
They are not going away.
    And whether or not they fit in with some artificial 
calculation that HHS has determined is really not the point. 
They are valuable and I think, therefore, should be excluded 
from the calculation entirely.
    Mr. Schrader. Yes. Mr. Jost.
    Mr. Jost. Yeah. The effect of the Rogers Bill, 1206, of 
excluding brokers' commissions from the calculation is not to 
give money directly to brokers; it is to increase the amount 
that insurance companies can keep. In other words, if the 
insurance company is now paying 10 percent and keeping 10 
percent for its administrative costs because it has a total of 
20 percent, it can now keep 30 percent. And it will undoubtedly 
raise premiums or cease reducing premiums to account for that. 
Now, it may share some of that money with the brokers. If 
insurers are paying 5 percent now, they can keep paying that--
and that is the average for insurance for small business 
commissions--they can keep that 5 percent but they now get 20 
percent on top of that and they are going to raise the premiums 
by that 5 percent. So the effect of the Rogers Bill is simply 
to raise premiums for small businesses. And hopefully insurers 
will share some of the extra profits they make with agents. And 
do not just trust me. Carl McDonald, Citibank's investment 
analyst, put out a report right after the NAIC had its vote and 
said this is a big deal for insurers. They are going to make a 
lot more profit and they may share some of it with brokers.
    The NAIC worked out a number of recommendations for 
legislation that would allow commissions to be passed through 
but then reduce the administrative costs for insurers 
correspondingly so that consumers would not be hurt. And if you 
feel that brokers need legislative relief, I would strongly 
encourage you to look at those alternatives rather than the 
Rogers Bill which simply increases premiums for small 
businesses and insureds and passes the money onto insurers in 
the hope they might share some.
    And let me just say one other thing. Although it is 
entitled the independent brokers' and agents' bill, the way 
that agent is defined would include employees of insurance 
companies who sell policies as well. And so insurers could pass 
all of their marketing costs on to consumers and to small 
businesses.
    Mr. Schrader. Very good. I would be interested in that at 
some point in time also.
    Mr. Jost. Sure.
    Mr. Schrader. Thank you, Mr. Chairman. I yield back.
    Chairman Coffman. Let me make one point and ask for any 
comment from any of the members of the panel. First of all, I 
want to say it is amazing to me intellectually how we have come 
to this conclusion, you know, whereby the federal government is 
enacting policies, assuming based on the commerce clause that 
it has jurisdiction in this particular area where we do not 
allow small businesses to purchase across state lines today and 
how that we can impose rules that, in fact, regulate 
commissions is extraordinary. I think how to bring down cost is 
to allow the market to work. And I think one of the problems 
with health insurance in the United States today is we have a 
regulatory regime that really I do not think fosters 
competition between insurance companies.
    And so one of the concerns that I have about this 
particular policy is I think that there is perhaps a perverse 
incentive built in that--and I remember having been a state 
legislator debating one day a particular mandate on a health 
insurance company that clearly would have raised costs on small 
businesses on their premiums and going down to the floor to 
debate the sponsor of the bill. And I said why is the public 
sector exempt from your particular mandate? And she said, well, 
because it costs too much.
    Well, you know, I mean, it is extraordinary but we keep 
putting these things on small business. Well, every time you do 
that obviously you create an increase in cost. But the 
beneficiary of the increase in cost under this regulatory 
framework is going to be the insurance carrier because it is 
one way I think that this is built in that the higher your 
premium costs the greater your profits not by competition. And 
so I think that this is inherently problematic but would any of 
you like to comment on that? Ms. Turner.
    Ms. Turner. I think that that is really a risk. Many 
factors go into the cost of health insurance, including care 
utilization. In a competitive market, if you have more 
competition, then administrative costs will get wrung out. But 
when you only have a few carriers left in the market because 
the competitors that have lower overhead actually have been 
shoved out, you are going to drive up health care costs. If a 
carrier is looking to maximize its 20 percent share of the MLR 
and it has less competition, then it is going to be able to 
raise the overall premium so that that 20 percent represents a 
larger number of dollars. And so I think the MLR rule will 
drive out competition--and hopefully I will have a chance to 
talk about some of the challenges to my testimony--allowing the 
few carriers that are left in a market to increase premiums and 
therefore maximize their share of that 20 percent. And with 
less competition, who is going to stop them from doing that?
    Mr. Jost. If I could respond briefly, the Affordable Care 
Act actually contains a number of provisions that will increase 
competition, and I readily admit that some insurance markets, 
many insurance markets are highly concentrated. One of the 
things it does, and this program is actively underway right 
now, is to introduce consumer cooperatives. We have those in a 
handful of states but there is seed money in the law for loans 
to establish consumer cooperatives and there is a lot of 
interest in that.
    Another thing the legislation does is to provide that the 
Office of Personnel Management is supposed to provide 
multistate plans in every state, just like it does in FEHBP, so 
that there will be at least two plans in every state that will 
be new--well, they will be multistate plans that will be 
available to establish competition with existing plans.
    Another thing the legislation does is that it actually does 
allow sale across state lines with some controls and not 
immediately but it does provide for that possibility. That is 
something state insurance commissioners are very concerned 
about because they then lose the ability to police what is 
happening in their states but with appropriate controls I think 
it is a good idea and it is in the Affordable Care Act.
    With respect to regulating the markets, I have one other 
response. And that is if you look at the actual medical loss 
ratio of companies, what you find is that the really big plans, 
the big Blue Cross plans, are there already. They have 85-90 
percent MLRs and have for a long time in most states. It is the 
small insurers that have high administrative costs but the 
legislation and the regulation takes account of that because 
smaller insurers actually have reduced MLRs and so do high 
deductible plans. The insurers have reduced MLRs, so they have 
an easier target to hit.
    So a lot of these problems have already been taken into 
account in the regulation.
    Chairman Coffman. More freedom might be a solution but are 
there any other comments? Yes, Mr. West.
    Mr. West. I checked with my assistant this morning before 
the hearing and there are 50 client folders on my desk right 
now. And these are clients that have all been affected by two 
major insurers in the state of Colorado exiting the entire 
market space. And there are a bunch of factors that go into 
that.
    But I am looking at a backlog here, a tremendous amount of 
work, to work with these clients to understand what to do next 
and how to save them from becoming uninsured, which is what 
they are staring at. Okay?
    I can tell you that my clients are mystified by what is 
going on just in general. We have seen in the state of Colorado 
in the past 18 months an average individual medical premium 
increase, if I average out all the plans over all the 
companies, of about 27 percent. And the customers do not 
understand why. And they are frosted, I guess, is the best way 
to say it.
    The one thing that they would be willing to pay for is my 
services. But I cannot collect fees for those services. It is 
for a bunch of regulatory reasons, which are different in every 
state and in every market that I work. We are prohibited from 
charging direct fees in some markets. If we were not 
prohibited, just the inefficiencies of the process of me having 
to negotiate fees and services with every client and collect 
and bill would be prohibitive. And so the direct impact of the 
MLR, which is easily accounted for and which resulted in this 
50 percent reduction in commissions, makes the entire situation 
untenable. Upon request I am happy to do a random sampling of 
my 1,200 clients. We can call them and ask them, but the last 
thing they want to do is see me provide less services to them. 
That may be the biggest value-added component they see in the 
entire process right now.
    Chairman Coffman. Thank you Mr. West. The other Mr. West 
from Florida.
    Mr. West of Florida. I think Mr. Bartlett plans to go 
before me.
    Chairman Coffman. Oh, Mr. Bartlett from Maryland, please.
    Mr. Bartlett. Thank you. You know, if you think about it, 
essentially all of our regulations are based on one of two 
premises. The first premise is that every employer, provider or 
manufacturer is inherently incompetent, evil, or greedy, and 
they are going to screw the employees and the consumers if we 
do not protect them with regulations. And the other premise is 
that every consumer is really incredibly naive and ignorant, 
and if we do not have a bunch of regulations to protect them, 
they are going to get taken advantage of and they are going to 
hurt themselves. And this regulation is no different. I know it 
was well intentioned and it was intended to reduce the cost of 
health care but I think it will do quite the opposite because 
there has to be a cost of compliance here and that can do 
nothing but drive up the cost of health care.
    If, in fact, insurers are making excessive profits because 
they are paying out too little of the premiums in health care, 
if we have an open competition, will not new insurers come into 
the market to share in these profits and therefore drive down 
the cost of health care? You know, our problem is that our 
regulations are preventing competition, and competition, I 
think, will do what this regulation is intended to do but 
cannot do because it will simply increase the cost of 
compliance and therefore, drive up the cost of health care. Why 
should we not reduce regulations and let the market drive down 
the cost of health care?
    Ms. Turner. Mr. Bartlett, you could not be more correct. In 
Virginia, across the river from your state, a company called 
nHealth announced right after the health law passed that it was 
closing its doors. This new, innovative, company offered 
primarily high deductible plans but because it saw this 
regulatory steamroller coming at it, it basically lost investor 
support. So people lost that opportunity for this new 
innovative company to provide those options. nHealth has 
basically left the individual market in Virginia, leaving about 
3,000 policyholders without other options.
    And you are so right about regulatory compliance when you 
look at this MLR regulation with pages and pages of rules about 
how insurers have to document their medical loss ratios. This 
costs them money to go through this administrative hassle to 
prove to HHS that they are going through the right 
administrative hoops. This is completely working against 
lowering costs and actually helping consumers--and you are so 
right. People have said health care is just too important to be 
left to consumers. Well, it is not. The market will respond if 
those options are available but they are being crushed by 
regulation.
    Mr. Jost. If I could respond briefly, I went to the 
University of Chicago so I believe in market competition to a 
point. World Insurance Company, one of the companies that is 
leaving Colorado, was fined $153,000 by the Colorado State 
Department of Insurance for a number of marketing problems, 
including the fact that it excluded coverage from skiing as a 
high risk activity. Well, in Colorado, a lot of people ski. And 
so I think that when a company is fined or is even barred from 
a market for regulatory purposes, sometimes it is a good thing 
and sometimes it helps consumers. Not everybody who wants to 
sell insurance should be allowed to do so.
    With respect to competition though in insurance markets, it 
is really complicated and health economists have studied this 
for years. Just an example of this, I heard the other day and I 
cannot substantiate this but I believe it is probably true, 
that in one of the states where a new cooperative was trying to 
form under this new law, one of the big insurers had gone 
around and told providers if you sign a contract with them we 
are going to terminate your contract with us.
    Mr. Bartlett. But if we had open competition and if we did 
not have regulations that kept new people from coming in, would 
not the marketplace take care of this?
    Mr. Jost. I do not believe so.
    Mr. Bartlett. You do not believe so?
    Mr. Jost. I think if we did that we would have basically 
about two or three national insurers in every state.
    Mr. Bartlett. Sir, that cannot be true if other people can 
come in. We are now going to have fewer and fewer insurers 
because your regulations are driving them out of the market and 
you are achieving exactly what you set out to avoid with your 
regulations. Thank you and I yield back, Mr. Chairman.
    Chairman Coffman. Mr. West of Florida.
    Mr. West of Florida. Thank you, Mr. Chairman and Mr. 
Ranking Member. And thanks to the panel members for being here 
today.
    You know, I am a simple soldier and I appreciate your son 
serving in the Air Force and I appreciate your service in 
Vietnam where my older brother served. And to me this seems 
like another example of we have to pass the bill to know what 
is in it because now we are all of a sudden seeing again the 
unintended circumstances. And I think that this once again 
represents a rule, a regulation, whatever you call it that is 
counterproductive to what established this country and made it 
great, and that is the free market and enterprise system. I 
mean, just the same with Dodd-Frank. We are finding out with 
Dodd-Frank we have more problems with our small community banks 
and their relationship with our small business owners. And the 
same thing with this here now with the Patient Protection 
Affordable Care Act, we find another provision that is causing 
more problems for our small business owners.
    So my initial question to Mr. West, Mr. Livengood, and Ms. 
Turner is what do you see as the most detrimental effect of 
this new MLR rule, regulation, whatever you call it within your 
respective lane?
    Mr. Livengood. I will go first. I am aware that it has 
become--caused an impact upon my agent's revenue stream and his 
ability to possibly attend to my needs as deeply as he did in 
the past because I rely upon my agent heavily. I have implicit 
confidence in his ability to perform. When I have issues that 
arise, and that is not often, but when I have issues that 
arise, I pick up the phone and say, Paul, you have a problem. 
And I tell him what the problem is. And then I hang up the 
phone and I know that that problem is going to get resolved 
expediently and to the best benefit that possibly could occur 
to me.
    So as I see him being concerned about do I want to still 
stay in this market or do I want to do something, that causes 
me great concern because if he were not performing, same as my 
CPA, my attorney, et cetera, et cetera, if they were not 
performing I have immense leverage. I can terminate the 
services. If we are dealing with some other entity, such as an 
insurance exchange, I think I have lost that leverage. But that 
is my observation and most immediate impact.
    Ms. Turner. Mr. West, I think that the biggest problem is 
just this ``Washington knows best'' attitude. I mean, states 
are the regulators for health insurance and they can solve 
problems. When a company may go against some regulation about 
whether or not a ski accident is a covered benefit, that is not 
a federal problem. And yet states have had to go through 
amazing paperwork burdens to petition Washington to exclude 
them from the medical loss ratio rule and to give them some 
relief.
    And HHS in its wisdom has told states like Indiana, ``I am 
sorry, we know best, not you.'' Mitch Daniels, governor of 
Indiana, said that denying Indiana the waiver from the MLR rule 
is going to lead to higher costs. This is working against 
personal freedom. He says, for example, that in Indiana they 
have a disproportionately high number of people with health 
savings accounts and therefore, because, again, of this obscure 
provision--the MLR rule, it is particularly difficult for 
Indiana to meet that test even though it is offering businesses 
in the state more affordable coverage.
    And to Mr.--Dr. Jost's comment earlier, a number of 
companies have said we are leaving not just because of the MLR 
but because of this burden of regulation of which the MLR is a 
part. The American Enterprise Group announced just this October 
that it is leaving the market in 20 states. The MLR is a big 
reason why. Aetna is leaving the market in many states, 
including Colorado, because it is saying that it cannot meet 
the test in the individual and small group markets. So you are 
losing the exact competition that you are talking about because 
states are asking Washington for relief from the MRL rule and 
Washington is telling them, ``no, we know better than you do 
what is right for your health insurance markets.'' I think it 
is that arrogance that is really the root of the problem.
    Mr. West. Congressman, I would use the case of World 
Insurance in Colorado as a perfect case study. World Insurance 
was a relatively small insurer that entered the state. They 
were very creative with their policy definitions and offered an 
extremely high value product. And that product was based on two 
premises. One, giving the consumer the ability to tailor their 
coverage to their needs. The fact that they define skiing as a 
high risk activity was not evil. It was not illegal. It was 
simply part of their product offering. Very interestingly 
enough, they also entered into a partnership with agents and 
they offered a higher than average commission rate to agents 
with the understanding that we, as agents, would represent the 
company to properly deliver that product to consumers. While 
there are a lot of skiers in Colorado, 95 percent of the 
residents in Colorado do not ski and they enjoyed the 
opportunity to knowingly select a plan that would not cover 
skiing injuries at a substantial premium discount. The direct 
result of the MLR calculation and many of the other factors 
inherent in the legislation was to deem those sorts of 
practices to be somehow wrong. And World Insurance has left the 
market space.
    I can tell you for a two-year period the World Insurance 
product was the one that I owned and that I recommended for the 
vast majority of my clients based on lowest premiums and best 
value delivery to those consumers under the appropriate 
circumstances. The moment that I learned from a client or we 
discussed the issue and he told me ``I am a skier,'' I would 
immediately say, ``Well, then we need to move to another 
product.'' Those choices have been all but eliminated from the 
marketplace now, and the result of the legislation is decreased 
competition. This company has left the space. Their highly 
effective, cost effective premiums are no longer available to 
my clients and I would tell you as a former customer of theirs, 
there was nothing wrong with the product they delivered.
    Mr. West of Florida. Thank you. Can I continue on, Mr. 
Chairman and Mr. Ranking Member?
    Chairman Coffman. Yes, please do.
    Mr. West of Florida. Professor Jost, I have a letter here 
you recently signed on to members of Congress about the medical 
loss ratio and later states in part that the NAIC unambiguously 
concluded that a year ago producers' commissions are an 
administrative cost. And you participated in the NAIC's fall of 
2010 meeting. As a matter of fact, I will read the statement 
out of the letter. ``As the NAIC itself concluded a year ago, 
after extensive deliberations producers' commissions are an 
unambiguous administrative cost. But at that 2010 meeting, the 
NAIC took no action on these brokers' commissions and in fact, 
since January 2010, they have been urging Congress and the HHS 
to accommodate brokers' commissions in the medical loss ratio.
    And I want to read from that NAIC report where it says, 
``In a recent letter to HHS Secretary Kathleen Sebelius, the 
NAIC reiterated the important role of insurance agents and 
brokers. Director Hudson stated that the NAIC encouraged 
Secretary Sebelius to recognize the essential role of insurance 
agents and brokers and to accommodate compensation arrangements 
in any MLR regulation that is promulgated. Director Hudson made 
a motion, seconded by Commissioner Sevigny, for the NAIC to 
appoint an executive committee level subgroup to work with HHS 
to accommodate agent and broker compensation in the MLR 
particularly during the transition to 2014. And the motion 
passed.''
    So my question is why would you sign on to a letter that 
actually contradicts what happened at this NAIC meeting?
    Mr. Jost. Thank you for an opportunity to comment on the 
NAIC's involvement in this issue because it is a complicated 
story but I will try to keep it brief.
    The NAIC's task under the statute was to come up with 
definitions, establish definitions and methodologies for 
implementing the statute. The statute does not permit either 
HHS or the NAIC to remove agents' and brokers' commissions from 
the denominator because it is not there. It allows taxes, 
regulatory fees, various other kinds of adjustments, not 
agents' and brokers' commissions. So the NAIC recognized that 
when it unanimously adopted the recommendation--I believe it 
was unanimous--on the NAIC rule last year. However, the NAIC is 
concerned about brokers and agents for the same reason we all 
are. They do provide valuable services to insured consumers. So 
they said if there is anything HHS can think of to do here that 
we did not, please do it. HHS could not think of anything to do 
that they could not because it read the rule, the statute, 
exactly the same way that they did. There is no other way to 
read the statute really.
    So the NAIC appointed this task force, executive level task 
force, to look further into the question because it was a 
question of great importance to them. The task force in turn 
asked the Health and Managed Care Committee to look into it and 
they asked the Health Actuarial Task Force to look into it and 
they wrote a very comprehensive report which I would really 
urge all of you to read. What that report found was----
    Mr. West of Florida. Let me--just for one minute. But when 
I read this letter, this letter makes me believe that the NAIC 
is supporting keeping this unambitious rule, this MLR as it is. 
That is what this letter says to me.
    Mr. Jost. That letter is from--I believe that letter is 
from consumer representatives to the NAIC. We do not speak for 
the NAIC. We speak for consumers to the NAIC. Let me just 
finish.
    Mr. West of Florida. So you are agreeing with something 
that obviously it seems that the NAIC did not say?
    Mr. Jost. The NAIC said in its initial finding that there 
is no--that the current law does not accommodate them. Anyway, 
there was a task force--I will make this quick. The task force 
report found, number one, that although some places agents' 
commissions were being cut, other places they were not. And 
number two, that in states that already had MLR rules like the 
federal rule, consumers were not having a hard time finding 
agents and brokers, but it did come up with, I believe, nine or 
12 alternatives for Congress to consider for changing the law 
if they wanted to reinstate agents' and brokers' commissions. 
That, then, has been a subject of debate within the NAIC since 
that time and just about two weeks ago, on November 22nd, the 
NAIC Plenary, all of the state insurance commissioners, voted 
26 to 20 with 5 abstentions, a very close vote for the NAIC 
which usually operates by consensus, and frankly, a political 
vote, voted to recommend to Congress that something be done for 
agents and brokers. And that is basically what it says.
    So it is in your lap but I would strongly urge you for the 
sake of small businesses, do not drive insurance premiums up 
when they are just coming down right now.
    Mr. West of Florida. Everything shows that insurance 
premiums are going up. I mean, even in my simple little 
southern, you know, understanding of math, it seems that they 
are going up, especially since January 2009.
    Thank you, Mr. Chairman. I yield back.
    Chairman Coffman. Thank you, Mr. West.
    Let me just raise one question, Mr. Jost. So the thesis 
behind the MLR rule is that by in effect regulating commissions 
and, if you will, by virtue of having them in the cap will 
benefit consumers. Is not that the principle? It will drive 
more benefit to consumers in terms of health care provider 
services. Is that not correct?
    Mr. Jost. The idea is that when consumers buy health 
insurance they are looking for insurance for medical care, not 
for paying a lot for profits and bureaucracy.
    Chairman Coffman. Sure. Because I remember being a state 
legislator, again going back in Colorado, where we were--I 
remember being at a debate one time where the issue was about 
consumers but from a trial lawyer point of view in personal 
injury cases. And then the question was should we, in fact, 
regulate the fees that lawyers can charge as a percentage of 
the case in order that more benefit go to the victim. But I 
think that at the end of the day the argument that won out was 
that the victims could, in fact, shop around for lawyers and 
get one potentially with perhaps a lower contingency fee. How 
do you separate those two?
    Mr. Jost. I think brokers and agents ought to be paid 
exactly the way lawyers and accountants and real estate brokers 
and everybody else is paid. They ought to negotiate a fee with 
their client and that should be their fee. The MLR then should 
be raised. Administrative costs should be reduced to recognize 
the fact that insurers are not now paying for that. But if 
somebody wants to pay a broker 20 percent of their premium, I 
think they should have that freedom. So I do not think Congress 
should tell them.
    Chairman Coffman. So what should be the cap then for trial 
lawyers in terms of their contingency fee? What cap should we 
impose on them so that we protect consumers, so that we protect 
the victims that they are representing? What cap should be 
imposed?
    Mr. Jost. That is not something I was prepared to testify 
to today.
    Chairman Coffman. Oh, but surely you have thought of that. 
You are a law school professor. Please.
    Mr. Jost. If you want me to talk about that, I can talk 
about that.
    Chairman Coffman. I would love to know what is 20 percent? 
Would 20 percent be a fair number?
    Mr. Jost. I cannot say. I would have to look at that more 
closely. I mean, the problem obviously is that lawyers who 
take----
    Chairman Coffman. Can you get back to me as to what a fair 
percentage would be, so you have had time to deliberate that? 
Because obviously what we want to do, I mean, if we are going 
to regulate everything, because we do not believe in freedom, 
because we do not believe that free market competition, which 
unfortunately we do not have today in the insurance industry 
because of regulation, that we ought to look in terms of--to 
follow this logic through to the plaintiff's bar and just say 
there ought to be a cap on contingencies so that the bulk of 
the money goes to the victim.
    Mr. Jost. You know, I do not have a problem with that and 
those laws exist in many states but I am not an expert on that.
    Chairman Coffman. Why not have a federal one?
    Mr. Jost. Well, I think that that is a problem that many 
states have addressed.
    Chairman Coffman. But should not we--I mean, if we are 
regulating something that is truly intrastate commerce because 
we do not allow small businesses and individuals to purchase 
across state lines, so if obviously the commerce clause is so 
expansive to warrant the rule that we are discussing today, 
then why does not the Congress of the United States have a rule 
affecting the plaintiff party in every state in the country?
    Mr. Jost. I think under the Commerce Clause, Congress could 
definitely do that and you would have to decide whether that is 
something that demands your attention. I think that Congress 
decided two years ago that insurance was, and in fact, since 
1946, it has been clear that Congress has the right to regulate 
insurance. In fact, since 1974, Congress has regulated 85 
percent of health care benefits through ERISA, and now they are 
extending that a little bit.
    But I am sorry, I just do not--I am not an expert on 
attorney fees.
    Chairman Coffman. Mr. Schrader, any further comments?
    Mr. Schrader. No, thank you, Mr. Chairman. I think we have 
covered it pretty well and the goal would be to find some way 
to take care of the insurance agents and yet keep the intent of 
reducing health care costs for Americans going forward.
    Chairman Coffman. Well, I want to thank you all so much for 
your testimony today. This Subcommittee will continue to 
closely follow the implementation of the health care law. I ask 
unanimous consent that members have five legislative days to 
submit statements and supporting materials for the record. Any 
objection? Without objection, so ordered. This Subcommittee is 
now adjourned.
    [Whereupon, at 11:20 a.m., the Subcommittee hearing was 
adjourned.]

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