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



 
SMALL BUSINESSES AND PPACA: IF THEY LIKE THEIR COVERAGE, CAN THEY KEEP 
                                  IT?

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

                                HEARING

                               before the

               SUBCOMMITTEE ON HEALTHCARE AND TECHNOLOGY

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             JULY 28, 2011

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 112-029
              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
                      CHUCK FLEISCHMANN, Tennessee
                         JEFF LANDRY, Louisiana
                   JAIME HERRERA BEUTLER, Washington
                          ALLEN WEST, Florida
                     RENEE ELLMERS, North Carolina
                          JOE WALSH, Illinois
                       LOU BARLETTA, Pennsylvania
                        RICHARD HANNA, New York
               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
                         GARY PETERS, Michigan
                          BILL OWENS, New York
                      BILL KEATING, Massachusetts

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


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Hon. Renee Ellmers...............................................     1
Hon. Cedric Richmond.............................................     2

                               WITNESSES

Mr. Steven B. Larsen, Deputy Administrator and Director, Center 
  for Consumer Information and Insurance Oversight, Centers for 
  Medicare and Medicaid Services, Washington, DC.................     4
Dr. Douglas Holtz-Eakin, President, American Action Forum, 
  Washington, DC.................................................    10
Mr. Brian Vaughn, President, Nearly Famous, Inc., Douglas, GA....    13
Mr. William Dennis, Jr., Senior Research Fellow, National 
  Federation of Independent Business, Washington, DC.............    15
Mr. Timothy Stoltzfus Jost, Robert Willett Family Professor of 
  Law, Washington and Lee, University College of Law, Lexington, 
  VA.............................................................    16

                                APPENDIX

Prepared Statements:
    Mr. Steven B. Larsen, Deputy Administrator and Director, 
      Center for Consumer Information and Insurance Oversight, 
      Centers for Medicare and Medicaid Services, Washington, DC.    31
    Dr. Douglas Holtz-Eakin, President, American Action Forum, 
      Washington, DC.............................................    40
    Mr. William Dennis, Jr., Senior Research Fellow, National 
      Federation of Independent Business, Washington, DC.........    55
    Mr. Brian Vaughn, President, Nearly Famous, Inc., Douglas, GA    57
    Mr. Timothy Stoltzfus Jost, Robert Willett Family Professor 
      of Law, Washington and Lee, University College of Law, 
      Lexington, VA..............................................    67
Questions for the Record:
    Chairwoman Ellmers Questions for Larsen......................    78
    Chairwoman Ellmers Questions for Jost........................    81
Answers for the Record:
    Larsen Answers for Ellmers...................................    83
    Jost Answers for Ellmers.....................................    95
Additional Materials for the Record:
    ``Health Reform's Grandfathering Rules Likely to Raise 
      Costs,'' by Judith Messina; Bloomberg News.................   102
    ``Small-Business Health Care Tax Credits Are Having a 
      Miniscule Impact,'' by Salley Pipes; Forbes................   104
    ``Healthcare Law Could Leave Families with High Insurance 
      Costs,'' by Julian Pecquet; The Hill.......................   106
    Associated Builders and Contractors, Inc. Letter for the 
      Record.....................................................   108
    American Bankers Association Letter for the Record...........   110


SMALL BUSINESSES AND PPACA: IF THEY LIKE THEIR COVERAGE, CAN THEY KEEP 
                                  IT?

                              ----------                              


                        THURSDAY, JULY 28, 2011

                  House of Representatives,
         Subcommittee on Healthcare and Technology,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:05 a.m., in 
room 2360, Rayburn House Office Building, Hon. Renee Ellmers 
(chairwoman of the Subcommittee) presiding.
    Present: Representatives Ellmers, King, Richmond, and 
Altmire.
    Also Present: Representative Kingston.
    Chairwoman Ellmers. All right. We are going to go ahead and 
get started. Good morning to everyone, and I call the hearing 
to order.
    I want to thank the witnesses on both panels. We will have 
two panels today who are testifying, and we certainly 
appreciate their attendance and participation in this important 
Subcommittee hearing.
    Although the health care law won't be fully implemented 
until 2014, businesses are already feeling the effects. A study 
released this week by the National Federation of Independent 
Business found that small firms are worried that the law could 
lead to higher taxes, more administrative burdens, and bigger 
budget deficits without lowering costs or making Americans 
healthier.
    Under the law, many small business owners will be required 
to offer coverage to their employees or pay a penalty. And the 
small business tax credit that has been touted to offset the 
cost of health insurance is, in reality, a temporary and a 
narrow one, where the full credit applies only to the smallest 
of businesses.
    If your firm has more than 25 employees, you are one of the 
23 million self-employed, you qualify for no credit whatsoever.
    We have heard small businesses are concerned that 
regulatory requirements on insurers, such as the medical loss 
ratio, may drive some carriers out of the market, resulting in 
fewer options and premium hikes. Small firms are uncertain 
about whether they will be able to continue offering coverage; 
if so, at what cost; and if not, what their penalties will be 
and what the coverage will cost taxpayers.
    This is all while our economy is still very fragile, an 
economy that is adding fewer jobs than forecast, and still has 
a high unemployment rate. In this environment, it is not 
surprising that small business owners continue to be hesitant 
to create jobs, expand or invest. And there are more 
regulations ahead.
    During the health care debate, one of the most repeated 
assurances was that if you like your current health care 
coverage, you would be able to keep it. However, for a number 
of reasons, a small business may be driven out of its current 
plan.
    The Department of Health and Human Services predicts that 
over half of all employers and up to 80 percent of small firms 
may relinquish grandfather status by 2013. This means that 
small business owners and workers may be forced to switch to 
higher-priced plans or drop insurance altogether.
    Although the goal of the health care law may have been to 
make health care insurance more accessible, its taxes, 
mandates, regulations, and administrative burdens are causing 
many small businesses, our best job creators, to postpone 
hiring and expanding.
    Again, I thank the witnesses who are here with us today for 
participating. I look forward to hearing their input on how we 
can help to reduce the impact of some of the health care law's 
uncertainty, mandates, regulations and requirements for our 
small businesses.
    I now yield to Ranking Member Richmond for his opening 
statement.
    Mr. Richmond. Thank you, Madam Chairwoman. Thank you for 
yielding.
    Today's hearing will focus on the health insurance 
landscape for small businesses since the passage of the health 
care bill.
    Currently, employers are the principal source of health 
insurance in the United States, providing benefits for more 
than 158 million people. Given the role of business in 
providing insurance, two questions have been raised about the 
Affordable Care Act. First, will small firms be able to keep 
existing health plans and, equally important, how will the 
Affordable Care Act affect small firms' decision to offer 
coverage? These are the questions we will address today.
    Small businesses face numerous challenges when choosing a 
health plan. This includes making tough choices about coverage, 
benefits, which physician should be part of the insurer's 
network and what co-pays should apply to services.
    Yet with all these challenges, cost remains the greatest 
barrier to coverage. According to one report, over the last 
decade health insurance premiums have increased 113 percent.
    The Affordable Care Act was enacted to lower costs and 
create more quality health care choices. Still, the legislation 
has not been without its critics. Some have argued that small 
firms will not only lose their ability to keep their plan, but 
most will drop coverage altogether. We will hear from the 
administration and witnesses on both of these issues.
    One, on the matter of retaining current health plans, CMS 
has issued regulations outlining how firms can maintain so-
called grandfather status. The regulation provides latitude for 
firms to provide changes because of rising prices. It also 
clarifies for firms what they need to do to keep their plan 
despite ACA changes.
    While protecting small businesses' ability to retain plans 
is important, the reality is many firms will make changes. 
Historically, small firms change plans due to rising prices or 
different benefit needs. Now, small firms will be afforded 
better service and choice when choosing a new plan.
    The Affordable Care Act not only creates new incentives but 
maintains laws that encourage employers to purchase insurance. 
Most notably, the employer-provided benefits remain tax free 
and employees can still pay premiums on a pretax basis. And 
since 2010, small firms have been eligible for a new health 
insurance tax credit.
    One of my constituents, Ms. Verna Williams, owner of Nola 
Health Care LLC, provides a great example of how firms are 
using this successfully. She owns a private health clinic in 
New Orleans and was able to avail herself of the new tax 
credits. Now, all 12 of her employees have health care 
coverage, and she said she was very pleased with the new health 
care legislation and its benefits for her employees.
    In addition to the incentives, insurance reforms are 
already on the books that benefit small firms. No longer can 
insurance companies discriminate based on preexisting 
conditions or raise premiums without adequate justification.
    Again, starting in 2014, private health insurance exchanges 
will create a virtual market for buying insurance. Exchanges 
will provide another option and enhance competition, something 
lacking in the small-group market.
    With all these changes, what will all of these changes mean 
for small businesses? One study predicted that employer-
sponsored insurance could shrink by over 20 percent. However, 
others, such as those by the RAND Corporation and the Robert 
Wood Johnson Foundation, found that small firms would increase 
coverage.
    This hearing will give members of the Committee the 
opportunity to discuss the Affordable Care Act and its 
implementation. Ensuring that small firms can keep their plan, 
while making coverage more affordable, is critical.
    I want to thank Director Larsen and the witnesses that have 
taken time out of their busy schedules to be here today. I look 
forward to hearing from you all.
    With that, I yield back, Madam Chair.
    Chairwoman Ellmers. Thank you, Mr. Richmond.
    Chairwoman Ellmers. As you can see, some of our other 
Committee members have not arrived yet, but I will state for 
the record that if they have any opening statements they can 
submit that for the record.
    I would like to take a moment just to explain the timing 
the lights. You will have 5 minutes to deliver your testimony. 
The lights will start out as green. When you have 1 minute 
remaining, the light will turn yellow. Finally, it will turn 
red at the end of your 5, minutes and I ask you to try to 
adhere to your 5-minute time limit.
    You have the button there to push to speak into the 
microphone.
    Our first witness is Mr. Steve Larsen, who is director of 
the Center for Consumer Information and Insurance Oversight, or 
the CCIIO, with the Centers for Medicare and Medicaid Services. 
Prior to his current position, Mr. Larsen served as director of 
the Division of Insurance Oversight at CCIIO.
    Welcome, Mr. Larsen. You will have 5 minutes to present 
your testimony. Thank you.

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

    Mr. Larsen. Good morning, Chairwoman Ellmers and Ranking 
Member Richmond and members of the Subcommittee. Thank you for 
the opportunity to discuss how the Affordable Care Act is 
improving the affordability, the accessibility, and the quality 
of health insurance available to small businesses and their 
employees.
    Providing and maintaining health insurance coverage for 
employees has been a challenge for small businesses for many 
years. States have struggled for decades, really, to improve 
their small-group health insurance market, and I know this from 
my many years of experience as insurance commissioner in the 
State of Maryland.
    Small businesses pay significantly more than large firms 
for the same health insurance policies. Some estimates put that 
at about 18 percent more. There are a number of reasons for 
this. Small businesses lack the purchasing power that large 
employers have, administrative costs for insurers in handling 
small businesses are much higher than for large businesses. 
Small businesses often don't have the human resources staff to 
navigate through the difficult process of choosing between 
health plans.
    Prices for insurance for small businesses can be more 
volatile, due to the smaller risk pool, compared to large 
businesses, and employees in small businesses are subject to 
medical underwriting in many States. So this means that the 
rates that small businesses are charged can spike if just a 
single employee becomes very ill. The Affordable Care Act 
addresses these challenges in the market and helps close the 
gap between small- and large businesses' ability to offer 
health insurance to their employees.
    First, starting in 2014, small businesses will be able to 
reduce administrative costs and pool their buying power by 
purchasing insurance through the exchanges. The exchanges are 
State-based, competitive marketplaces for buying private health 
insurance. Small businesses will be able to buy health 
insurance through a part of the exchange called the SHOP.
    SHOPs will give small businesses and their employees many 
of the advantages of large employers that large employers have 
today, such as more choice, more competition, and more clout in 
the marketplace. These SHOP exchanges are a one-stop shop where 
small businesses and their employees will be able to easily 
compare health plans, get answers to questions, and then enroll 
in high-quality health plans that meet their needs.
    Health plans that participate in the State exchanges will 
compete for business on the basis of price and quality, and 
this type of market competition has the power to drive 
improvement in both plan quality and affordability.
    We recently issued draft regulations which will provide 
States the flexibility to provide small employers with a range 
of options on how the employers offer coverage to their 
employees. For example, a small business participating in the 
SHOP exchange may choose a level of coverage and a level of 
contribution towards that coverage, and then employees will 
choose among the health plans available on the exchange within 
that level of coverage offered by their employer. Or, employers 
may provide to their employees a broader range of options, such 
as shopping for any level of coverage among competing health 
plans.
    Under the proposed regulations, the employer would write a 
single check to the SHOP, reducing administrative burdens. The 
SHOP, as a premium aggregator, would handle the administrative 
functions that can burden the small business owner. SHOPs will 
simplify the employee decisionmaking process by providing side-
by-side comparisons of health plans' premiums, benefits, and 
cost sharing. Not only will the Affordable Care Act benefit 
small employers by enabling them to pool their buying power, it 
will also protect them from premium spikes caused by an 
employee's illness.
    Beginning in 2014, the ACA prohibits new health plans from 
rating on the basis of health status or claims history. In 
addition, the law limits how much insurers can increase rates 
based on employees' ages. These new rating limitations will 
help make small businesses' health insurance rates fairer, more 
predictable, and easier to understand.
    In addition, limits on health plans' medical loss ratios 
will also save small businesses money, as insurers that fail to 
meet the MLR standard will provide rebates.
    Finally, the law established a small business tax credit 
that is making health coverage more affordable for small 
businesses. The tax credit is designed to encourage both small 
businesses and tax-exempt organizations to offer health 
insurance coverage to their employees for the first time or to 
maintain coverage that they already offer.
    Small businesses are already benefiting from the Affordable 
Care Act and those benefits will expand dramatically as the ACA 
continues to take effect.
    Thank you for the opportunity to appear before you today to 
discuss the Affordable Care Act's critical provisions to 
support small businesses' ability to offer health insurance to 
their employees.
    Chairwoman Ellmers. Thank you, Mr. Larsen.
    Chairwoman Ellmers. And I will begin the questioning.
    Generally, grandfathering should allow you to keep the 
coverage you had when the health reform law was enacted, with 
some exceptions. The June 17, 2010, and November 17, 2010, 
rules on grandfathering list several changes that disqualify a 
plan from being grandfathered.
    The rules seem to leave open whether other changes will be 
disqualified, and leave open the possibility of additional 
administrative guidance, to explain how plans must comply to 
continue to be grandfathered, I am wondering how can small 
businesses count on grandfathering if the guidance is vague and 
the rules may change as we go along?
    Mr. Larsen. Sure. Well, as you point out, we put out the 
initial interim final rule back last summer, which laid out 
kind of broad categories in which small businesses and health 
insurers have flexibility to alter some provisions of their 
health coverage, but not so much that it really changes the 
fundamental nature of the coverage.
    We received and have reviewed various comments on many 
aspects of that regulation. We did, in fact, amend the interim 
final rule to provide actually more flexibility to businesses 
and small businesses to maintain their existing coverage by 
allowing them to, for example, switch carriers. If they wanted 
to switch carriers, if they thought they could get a better 
deal.
    So, in fact, although we have amended the initial guidance 
that we put out last summer, we have done so in a way that 
really provides more flexibility to small businesses and to the 
health insurance issuers that provide that coverage.
    Chairwoman Ellmers. I have another question for you at this 
time. Small businesses are concerned about the possible 
mandates in the health care law's minimal essential benefits 
package. Because many new services, treatments, are likely to 
be required, the cost of premium is also likely to increase.
    What can you tell us about the Institute of Medicine's 
forthcoming recommendations on the essential benefits package?
    Mr. Larsen. Well, I can't tell you much about what they are 
going to say. We haven't received their recommendation. But if 
I could just summarize the process that we will follow, and I 
would add that we are, I think like you, very aware and tuned 
into the need to make sure that the package of essential health 
benefits is an affordable package.
    There is kind of a multistep process that we are following 
at HHS. The first step was that the Department of Labor 
performed a survey of employers to gauge what were the typical 
benefits that are offered in employer-sponsored coverage today, 
and we have got that survey. That has been published.
    The Secretary also, as you point out, did ask the Institute 
of Medicine to recommend to us methodologies or ways to think 
about how we should define the package of essential health 
benefits. But I do want to be clear, because I know there has 
been some confusion on this. The IOM is not the body that will 
be charged with defining what that list is. That is left to the 
HHS, and we will do that. And I think we have announced 
previously that our objective is to have that guidance out 
sometime this fall. We know there is a lot of interest in that, 
both in the States and among businesses and among insurers, so 
we are hoping to get that guidance out this fall.
    Chairwoman Ellmers. So basically you do anticipate that 
there will be additional administrative guidance on the 
grandfathering?
    Mr. Larsen. Well, on the essential health benefits, yes. On 
the grandfathering, I can't speak to that at this point. I 
don't think we are anticipating anything, but we continue to 
review these, and as they need to be tweaked and improved, if 
that need arose, then we would look at that as an opportunity.
    Chairwoman Ellmers. Okay. I now yield to Congressman 
Altmire for his questions.
    Mr. Altmire. Thank you, Madam Chair.
    Director Larsen, thank you for being here. Economists, like 
Dr. Holtz-Eakin, who we are going to hear from shortly, have 
predicted that the employer mandate will lead to dramatic 
declines in employer-sponsored coverage, as you well know.
    In your view, will most small firms drop their coverage or 
simply pay the penalty? And what do you expect they will--do 
you expect that they will continue providing health care to 
their workers? What do you expect the outcome will be?
    Mr. Larsen. We do expect small employers to continue to 
offer employer-based coverage. It is really a cornerstone of 
our economic system, of our employer-based insurance system.
    If you look at a number--and I know there are a number of 
different studies out there, but if you look at, for example, 
the RAND analysis or the Urban Institute--there are those two--
for example, I think predicted significant increases in the 
offer rate, not decreases but increases.
    For example, RAND predicted that you would see an increase 
for very small businesses. I think, for example, less than 
nine, nine or less employees, from about 50 percent today to 
about 70 percent in the future under the ACA, and its numbers 
were similar for The Urban Institute.
    Mr. Altmire. And regarding the medical loss ratio in 
particular, as you know, the ACA requires insurance companies 
to spend at least 80 percent of their premiums they collect on 
medical care. What will this mean for small firms and how will 
it affect the cost of coverage, in your view?
    Mr. Larsen. The medical loss ratio provision of the ACA is 
a very important provision and helpful provision to small 
businesses and individuals because it applies to individual 
purchasers as well. It helps to provide value to small 
businesses when they are paying their insurance premiums by 
ensuring that issuers are not spending inordinate amounts on 
administrative expenses. So it drives efficiency in the issuers 
for the insurance company, and that creates value for the 
premium dollars that small businesses are paying.
    Mr. Altmire. Now the companies would argue that it doesn't 
just drive efficiency, they might dispute that on its face, but 
they also would say that it is going to drive small insurers 
out of the health insurance market entirely.
    Do you have a response for that?
    Mr. Larsen. We don't think that is the case and we haven't 
seen that. I guess I would also hasten to add that the 
Affordable Care Act specifically provides States and the 
Secretary with the flexibility to address, at least in the 
individual market, the medical loss ratio provisions.
    In the small-group market, in fact, many States already had 
in place medical loss ratio targets. I think there were around 
10 that were already at 80 percent. There were a handful that 
had less than that, so that was already present in the 
marketplace, and many insurers were already used to pricing to 
an 80 percent level.
    Mr. Altmire. Do you envision CMS playing a role in and 
ensuring competition in the market? Were you given that 
authority under the law and are you going to----
    Mr. Larsen. Well, I mean, when we get to the exchanges in 
2014, competition is kind of the cornerstone of what we are 
trying to accomplish in the exchanges. And we will be working 
actively with the States as they set up their State exchanges. 
And to the extent that we are operating a federally facilitated 
exchange, we will do everything we can to make sure that there 
is competition among insurers. The exchanges are all about 
competition among private carriers to the benefit of, you know, 
small businesses and individuals.
    Mr. Altmire. And last question, Madam Chair. Since 2010, 
eligible small firms have had the ability to obtain a health 
care tax credit. And according to the NFIB information provided 
to this Committee, 1.1 million small businesses are eligible 
for either a partial or full credit. And while I realize the 
IRS administers that credit, does CMS have any estimates on 
employers taking advantage of the credit and how it has lowered 
their costs?
    Mr. Larsen. Yes, I know that there are varying estimates 
about both the eligibility rate and the uptake rate, and some 
of it is survey-based. We are currently working with our 
colleagues over at Treasury and IRS to get an estimate on what 
that is. I apologize I don't have it for you here today, but we 
hope to get that soon.
    Mr. Altmire. Great. Thank you.
    Chairwoman Ellmers. Thank you. I have a couple more 
questions for you, Mr. Larsen.
    Small business owners have told us the new law and its 
regulations are vague, and we mentioned that already, and they 
don't know what is required of them. For example, many aren't 
sure if the employer mandate applies if they have employees who 
are working 30 hours a week or less.
    If they currently offer insurance to the individual 
employee, they aren't certain if the new law requires them to 
also cover the employee's family. How are the small business 
employers, who don't have the benefit of large administrative 
staffs or outside benefit counselors to advise them, to be 
expected to comply with the complicated law and its numerous 
regulations? Can you clarify just some of that for us?
    Mr. Larsen. Yes, and that is a very important question. I 
think some of the surveys that have done--and although we don't 
necessarily agree with many of the points that came out in the 
NFIB report or the McKinsey report, I think one thing that 
comes through clearly in those is that there still remain a lot 
of questions among small business owners. Either they don't 
understand the law, or they don't feel they have enough 
information. And I think that is an important point that we 
have to take note of, that between now and 2014 we have to 
continue our efforts to reach out to small businesses and 
educate them.
    There are some tools that will be available, for example, 
in the exchanges. There is a role of these entities called 
``navigators,'' which are going to help people understand the 
health care law, understand how to access the exchanges. But 
there is more work to be done there, and I think there has been 
confusion, some misinformation, and I think it is something 
that we definitely need to focus on between now and 2014.
    Chairwoman Ellmers. New regulations require insurers to 
spend 80 to 85 percent of premiums on direct care for patients 
rather than administrative costs. These requirements may be 
difficult for small insurers to meet, driving them out of the 
market, limiting consumer choice, and raising the cost of 
insurance and, as the market decreases, that is always that 
risk.
    How can small insurers compete when they don't have the 
resources or economies of scale to do so?
    Mr. Larsen. Well, we are certainly sensitive to the need to 
maintain competition.
    Ultimately, the Affordable Care Act provides some 
flexibility in the individual market, but less flexibility to 
modify the MLR standard in the small-group market. However, 
again, I think as I mentioned earlier, there were already 
existing in many States a medical loss ratio standard at or 
about the standards set out in the ACA, and I think that 
provided a benchmark from which carriers, you know, could 
launch from.
    Chairwoman Ellmers. Interestingly enough, very recently, in 
fact last Friday, The Hill newspaper had a front page article 
titled, ``Health Care Law Could Leave Families with Higher 
Costs.''
    The article describes the debate over what the story terms 
a major provision of the health care reform law, which provides 
that if a worker has employer-based coverage that is affordable 
for the employee only, the family is expected to take the 
employer coverage even if it is unaffordable.
    Is this the correct interpretation and can you clarify some 
of that for us?
    Mr. Larsen. We are actually looking at that very issue, 
which is the interpretation of the application of the tax 
credit to the individual, to the family, and who qualifies at 
what point? When an employer makes an offer, is that binding on 
the dependence of the family members of the employee?
    We are anticipating in future guidance to clarify this and 
a number of issues relating to the application of the tax 
credit and how it works. You know, we put out a first--kind of 
a wave of guidance just a couple of weeks ago on the exchanges. 
And the next phase of that, which will deal with eligibility 
and enrollment and the application of the tax credit, hopefully 
will clarify some of those issues.
    Chairwoman Ellmers. And then I have one last question. This 
also addresses one of the issues that Mr. Altmire referred to.
    The tax credit may apply temporarily and narrowly if the 
business has fewer than 25 full-time or equivalent employees 
making an average annual wage of $50,000 or less. But what 
about every other small business? What advantages do they have 
as far as a tax credit?
    Mr. Larsen. Well, you are correct in that the tax credit 
was targeted towards the smallest of the small businesses with, 
you know, under nine getting the maximum credit, and you can 
get up to 25, depending on what the wages are that you pay your 
small business.
    You know, one of the reasons why it was targeted, because 
those were the small businesses that had the lowest offer 
rates. As you move up to, say, employers with 50 employees, you 
have offer rates, offer rates of insurance coverage that can be 
in the 80 to 90 percent rate.
    So the tax credits were targeted towards that segment of 
the market that was most in need of help in terms of getting 
the offer.
    There are still many benefits, as I mentioned, in the 
Affordable Care Act for businesses that are larger than 25, the 
rating restrictions are very important. Small businesses, and I 
know this from my own experience, in many States small 
businesses get rated up if they have sicker members. And so 
that practice is going to go away. It is going to create a lot 
of fairness and benefit.
    And then the general benefits of the exchange, much lower 
administrative costs. The CBO found that as well for--and that 
applies to all small businesses, not only just those under 25 
employees.
    Chairwoman Ellmers. So you do see some possible changes or 
flexibility in the whole----
    Mr. Larsen. Well, there are benefits to small businesses. 
But you are right, the tax credit is targeted to the smaller 
small businesses because, again, it was concluded those are the 
ones that have the lowest rates of insurance coverage for their 
employees.
    Chairwoman Ellmers. Thank you, Mr. Larsen. I just would 
like to ask if Mr. Altmire has any additional questions. Okay.
    Well, Mr. Larsen, I thank you for joining us today to 
answer our questions and providing your insight on these 
issues. We will continue to closely follow them and want to 
work with you and help ensure that small businesses have 
flexibility and choices in their health care coverage 
decisions.
    I want to suggest that Mr. Larsen ask a member of his staff 
to remain here during the testimony of the second panel. And 
would you please identify--and I believe we have already 
spoken, so, thank you, perfect, wonderful.
    And, thank you again, Mr. Larsen, for your time.
    Mr. Larsen. Great, thank you.
    Chairwoman Ellmers. I truly appreciate it.
    Chairwoman Ellmers. And now I would like the second panel 
to come forward.
    Wonderful. Let's go ahead and get started. Thank you so 
much for coming today to be with us for this Subcommittee 
hearing.
    Our first witness is Dr. Douglas Holtz-Eakin. Dr. Holtz-
Eakin is president of the American Action Forum. He served as a 
commissioner of the congressionally chartered Financial Crisis 
Inquiry Commission from 2009 to 2011, and director of the 
Congressional Budget Office from 2003 to 2005. Dr. Holtz-Eakin 
received his B.A. in mathematics and economics from Denison 
University and his Ph.D. in economics from Princeton. Welcome, 
Dr. Holtz-Eakin, and you have 5 minutes to present your 
testimony.

 STATEMENTS OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION 
  FORUM, WASHINGTON, DC; WILLIAM DENNIS, JR., SENIOR RESEARCH 
     FELLOW, NATIONAL FEDERATION OF INDEPENDENT BUSINESS, 
 WASHINGTON, DC; BRIAN VAUGHN, PRESIDENT, NEARLY FAMOUS, INC., 
DOUGLAS, GA, TESTIFYING ON BEHALF OF THE UNITED STATES CHAMBER 
OF COMMERCE; AND TIMOTHY STOLTZFUS JOST, ROBERT WILLETT FAMILY 
PROFESSOR OF LAW, WASHINGTON AND LEE UNIVERSITY COLLEGE OF LAW, 
                         LEXINGTON, KY

                STATEMENT OF DOUGLAS HOLTZ-EAKIN

    Mr. Holtz-Eakin. Well, thank you, Chairwoman Ellmers and 
Acting Ranking Member Altmire. I appreciate the chance to be 
here to talk about the Affordable Care Act's small businesses 
and employer-sponsored insurance. And you have my written 
testimony which I submit for the record.
    Let me just make a couple of points. The first point, and I 
think the overriding one, is that ultimately the ability of 
small businesses to offer insurance is contingent on the health 
of those businesses and their ability to grow. And the 
Affordable Care Act contains many provisions that I think are 
detrimental to the abilities of small businesses to prosper and 
grow.
    There are taxes, the 3.8 percent investment tax that is 
going to be a direct hit on small businesses.
    There are a large number of mandates and penalties, and the 
regulatory implementation I think is daunting to any small 
business. We are in an environment where in 2010 we had a 
record number of Federal Register pages. That was prior to the 
implementation of the Affordable Care Act and Dodd-Frank and a 
whole bunch of other things. So this adds to the regulatory 
burden.
    And even some of the so-called help, the tax credit in 
particular, is structured in a way that penalizes growth. If 
you had workers, if you pay higher wages, even this temporary 
tax credit gets scaled back and it is ultimately a penalty 
against those who succeed. And so the structure of the ACA is 
not one that I would call good economic policy to promote 
growth, especially on small businesses.
    The second is that the Affordable Care Act is actually 
going to raise insurance costs. There is now consensus that it 
fails to bend the health care cost curve, which is the 
fundamental driving force underneath the premiums, and small 
businesses will suffer from that.
    It has $500 billion in new taxes. Many of them are taxes 
that are going to go directly to the premium bottom line. My 
testimony outlines the impact of the so-called premium tax on 
health insurers. There is medical device taxes. All of these 
are higher costs in the food chain that lead to higher premiums 
that is going to hurt the ability of a small business to 
continue to offer insurance and lead many of them to elect to 
drop their coverage and/or never offer it to begin with.
    The third point, I guess, is this issue that Mr. Altmire 
mentioned with the previous witness, and that is the question 
of the incentives for employers to drop coverage and send their 
employees to the exchanges.
    And there have now been a number of studies, as was 
mentioned, one that I did with Cameron Smith, my colleague, 
that looked at the pure financial incentives for employers and 
employees to mutually agree that it would be in their financial 
interest to provide the insurance through the exchanges. And we 
concluded that up to 35 million American workers would benefit 
from this arrangement, and that their employers would agree 
that they should go off the exchanges. The only loser in that 
is the taxpayer who has to pick up an enormous tab.
    A recent paper by Cornell Professor Richard Burkhauser and 
colleagues comes to roughly the same conclusion. I am aware 
there are other studies that say that, no, that won't happen. 
Their leading argument appears to be that, well, it won't 
happen because we have always offered insurance. But in the 
face of a dramatic policy change, I don't see why that is a 
compelling argument.
    We are now seeing the leading edge of evidence. We have 
survey evidence from McKinsey, from PriceWaterhouseCoopers, and 
I will let Mr. Dennis speak for the National Federation of 
Independent Business, suggesting that in fact this financial 
impact is not only real, it will be pursued by businesses.
    And so I think this is a serious concern because the 
subsidies are enormously generous. We are talking about $7,000 
for someone making $59,000 in income in 2014. This is well over 
10 percent of their income. It would be financially irrational 
for employees and employers to ignore that kind of money.
    And if it is true that many pursue this, budgetary cost of 
the insurance subsidies through the exchange is going to 
explode. It could easily be double what was in the original 
bill. We are all well aware of the financial problems that face 
the United States Government. And to have this come in much 
more expensive than was budgeted, I think, is an extreme 
danger.
    Which brings me back to my first point which is, in the 
end, it is going to be the environment for small businesses to 
grow and prosper that is crucial. There is nothing about 
sailing directly toward a debt crisis that is good economic 
policy or beneficial for the small business community at the 
heart of our debt problems, our explosive entitlements.
    And my view is that the Affordable Care Act has a whole 
series of upward risks on the budgetary side that make the 
possibility of that crisis much higher, and, as a result, have 
to be viewed as a threat not just to the economy, but to small 
businesses in particular, and certainly to their ability to 
continue to offer insurance to their employees.
    And I understand the sentiments behind the Affordable Care 
Act, but I think on balance its structure is one that hurts the 
small business community and doesn't aid it in the end. Thank 
you.
    Chairwoman Ellmers. Thank you for your comments. And we do 
have your testimony, as we do all of our panelists.
    I now yield to Representative Kingston from Georgia for the 
purpose of introducing his constituent as a witness.
    Mr. Kingston. Thank you, Madam Chair. It is a great honor 
to be with you on this dais, you and Mr. Altmire, a good friend 
of mine from Pennsylvania. And I appreciate all the hard work 
that you do on this Subcommittee to try to promote jobs in this 
tough economic environment. I appreciate the panel for being 
here.
    I have a hard deadline at 11 o'clock with another Committee 
on which I serve, so I am going to be leaving shortly before 
then. But I wanted to say hello and introduce my constituent, 
Brian Vaughn. He is no stranger to the struggles of an 
entrepreneur. He has been with the Burger King franchise 
operation since 1980 and kind of came up through the corporate 
structure, working in Florida and in Georgia, and then in the 
1990s took the plunge to become a franchisee himself; and, 
since that period of time, has bought out his partner and been 
on his own with his wife--I am not sure if Cindy is here--but 
knows the importance of keeping employees happy by offering a 
good compensation package, including a good benefit package, 
worker safety, a good environment to work in, and has many 
employees who have been with him on the management side for 
over 10 years, which is remarkable.
    He has four stores in three different cities and also knows 
what it is like to compete in this environment and to get the 
customers back in when it is very hard on their pocketbooks in 
today's economy, but knows all the challenges that small 
business people face, really: labor, environmental regulations, 
safety regulations, franchise regulations. I think he has been 
through it all, but has done it successfully.
    So I am very proud to have him as a constituent and as an 
example of an entrepreneur. And I wanted to point out also, one 
of his jobs before he became an entrepreneur was to recruit 
entrepreneurs. So he looked at it, and did not have to take 
that plunge, yet he made it anyhow.
    So I am proud to have Brian Vaughn here today and I look 
forward to his testimony.
    Mr. Vaughn. Thank you.
    Chairwoman Ellmers. Go ahead.

                   STATEMENT OF BRIAN VAUGHN

    Mr. Vaughn. Chairwoman Ellmers, Congressman Altmire, and 
distinguished members of the Subcommittee, thank you for 
inviting me to testify before you today on how the new health 
care law will impact my business and my employees.
    As the Congressman stated, by name is Brian Vaughn and I 
own Nearly Famous, Incorporated, which consists of four Burger 
King restaurants in Georgia, and I am happy to be here today on 
behalf of the U.S. Chamber of Commerce. I am also a proud 
member of the National Franchisee Association and have served 
on their board of directors for 3 years.
    Nothing I say here today reflects the position or opinions 
of my franchise or Burger King Corporation. You know, when 
people think of Burger King, they think of a big international 
corporation. Even though the sign on the door says Burger King, 
my four restaurants are small family-owned and -run businesses.
    I began working as a Burger King assistant manager in 1980, 
as the Congressman said, earning $14,000 a year. After working 
my way up, I partnered in 1993 with Francis Lott to open our 
own four Burger King restaurants in Georgia. In 2001 I bought 
out my partner's interests and today I operate these four 
restaurants with my wife, Cindy.
    At our four restaurants, we are proud to have created 182 
jobs. We have 59 full-time employees and 123 part-time 
employees; 14 of our full-time employees are managers, for we 
currently pay 100 percent of their health care premiums at an 
annual cost of nearly $56,000. We also pay for term life, 
short-term disability, vision, and dental insurance. My wife 
and I participate in this very same plan.
    For our other employees, we offer a value mini-med plan at 
a cost of between $106 and $165 per month. Currently only 19 of 
the more than 100 part-time employees have elected to 
participate. Many employees choose to keep the wages they earn 
to help pay for their day-to-day living expenses rather than 
use a portion of their wages to pay for the coverage.
    As the president of my company, I also have to decide how 
much of the company's income can be used to pay for wages and 
benefits and how much has to be used to cover the expensive 
daily operations. There is only so much money, and, first and 
foremost, we all have to cover our daily expenses.
    Washington, it seems, really doesn't understand this. A lot 
of noise was made last fall about the types of plans that I 
offer my employees. Under the health reform law, Washington has 
decreed that these so-called limited benefit plans are not 
acceptable. Despite repeated promises that if you like your 
plan you can keep it, the law has outlawed these plans, 
beginning in 2014.
    I understand that for many, a more comprehensive plan seems 
critical; and, by comparison, these limited benefit plans are 
slim. However, it is important to acknowledge reality. These 
plans are less expensive and allow my team members to choose to 
take more of their wages home and use a smaller amount of their 
wages to pay for some coverage.
    Prior to health care reform, I had the flexibility to hire 
more workers, pay them a wage and offer them access to this 
moderate coverage. Now I am being told by Washington that I 
have to offer all my full-time employees Washington-defined 
health coverage or pay a penalty. Because of the cost of 
offering this prescribed coverage and the size of the penalty, 
I will have no choice but to restructure my workforce in a way 
that protects me from losing everything I have worked for.
    What does this mean? Well, given the law and the unfinished 
regulations, and I mean unfinished regulations, it is hard to 
say. I have no idea. Prior to the law's enactment, my goal had 
been to hire fewer people for more hours. It is easier to 
retain employees that work full time.
    However, now that the law is passed, I have to consider 
options other than what makes practical business sense. Now, 
because of what Washington has mandated, it may make more sense 
for me to hire more people for fewer hours at a time when 
millions of Americans are out of work. Is this really the right 
incentive?
    This is not what I want to do, and it is not what is best 
for my employees, but in order to survive and be able to pay 
the employees that I have to, it is what we will have to do.
    While I have not read the entire law, and I am not able to 
follow the regulations--which are being issued at record speed, 
mind you--I am trying to figure out how to protect the company 
that I have spent my entire life building. It is ironic that 
the law touted as the Patient Protection and Affordable Care 
Act neither protects patients nor makes health care affordable. 
Instead it is a law of broken promises under which no one will 
be able to keep the health care they have. Even if they like 
it, it is a law which incents companies to scale back their 
workforces and reduce the benefits offered to their valued 
employees.
    In conclusion, I understand that given the existing 
political realities, Washington, D.C., a total repeal of the 
health care law by Congress is an unlikely proposition, at 
least for now.
    However, I am hopeful that Congress will repair or 
eliminate the more onerous burden, such as the employer 
mandate. These provisions saddle businesses with new 
requirements that actually encourage us not to expand our 
business and, astoundingly, discourage us from creating jobs.
    The bottom line is that your decisions can help or hinder 
this. The laws you create can either give small businesses 
greater confidence and certainty to grow and generate new jobs 
or just do the opposite. Regrettably, this new health care law 
is already doing the latter, and Congress must take the action 
to rectify it.
    Again, thank you again for this opportunity, and I look 
forward to your questions.
    Chairwoman Ellmers. Thank you, Mr. Vaughn. I will just tell 
you that my very first job at age 16 was with Burger King back 
in Madison Heights, Michigan, back in 1980.
    Mr. Vaughn. Thank you.
    Chairwoman Ellmers. Thank you again for your testimony.
    Chairwoman Ellmers. I would like to introduce Mr. William 
Dennis. Mr. Dennis is senior research fellow at the National 
Federation of Independent Business. He has directed the NFIB's 
research foundation since 1976.
    Welcome. And you have 5 minutes to present your testimony. 
Thank you.

                  STATEMENT OF WILLIAM DENNIS

    Mr. Dennis. Thank you, Madam Chairman, Mr. Altmire, and 
Representative King.
    Last week NFIB released a study called ``Small Business and 
Health Insurance: One Year After Enactment of PPACA.''
    I would like to focus my remarks on the results of that 
study, since it is quite current and relevant to what we are 
talking about today.
    First of all, we surveyed only people, small employers that 
had 50 or fewer employees. It was a nationally random sample, 
not just the NFIB members. There will be probably some randomly 
in there, but this was a national random sample. The survey was 
conducted in late April and in May of this year. So, while it 
wasn't done yesterday, it is current enough so that I think we 
can say it is the state of what we know today.
    The findings are really quite simple. The first is that we 
are in this period of declining offer rates by this group of 
firms. There are 42 percent that now offer, which continues the 
down trend over the last 10 years at least. MEPS just produced 
a 39 percent estimate, which is lower, and so the NFIB survey 
really does capture the trend.
    Something else that you should understand is that nothing 
has happened in the last year and nothing is projected to 
happen in the next year. People who had offered before tend to 
offer now and expect to offer in the future. And, those who do 
not or have not offered didn't pick it up this year, and they 
don't plan to in the future. So we expect this down trend to 
continue.
    Twenty percent with insurance do expect major changes in 
that insurance. Virtually all those changes are not to the 
benefit of the employee. Since enactment of PPACA, one in 8, 12 
percent, of small employers have either lost their specific 
plan or been told they will lose their specific plan.
    Of those who claim to be familiar with the law or have some 
familiarity with its contents--by very large margins, 
overwhelming margins, particularly those who insure--think it 
will not reduce the cost of health insurance. It will not 
reduce administrative burdens, will increase taxes, and will 
add to the deficit. They do agree more people will be covered, 
although they are not quite sure whether that is going to yield 
better benefit or yield greater health outcomes.
    Let's just look at the tax credit. We estimate using some 
new data that we recently collected that out of the 5,228,000 
small employers with under 25 employees, an estimated 245,000 
will be able to take advantage of the full credit, and 1.165 
million will be able to take advantage of the partial credit. 
That is not how many will. Fewer will probably take advantage 
of that in part because of awareness. Those numbers are the 
maximum that will take part.
    Now, beyond that, there is the whole incentive effect. How 
many will the credit incent? One of the ideas behind this is 
just not to provide a windfall, to have people do what they are 
already doing, but to provide an incentive for people to 
purchase it.
    We calculate that only about 2 percent have an incentive 
based on the full credit, though more than that have an 
incentive based on the partial credit.
    The survey also explored the reaction of these small 
business owners, if low-income people start to leave for the 
exchanges. About 21 percent said they would seriously explore 
looking at whether or not they are going to drop their health 
insurance for everybody. Another 26 percent said that they also 
would do that, but were less certain.
    So there clearly are pressures that would lead folks in 
that direction. Once competition actually sets in, firms 
continue to churn, new firms enter without health insurance, we 
are going to see real market pressures, not to--not only not to 
add for those who don't have it, but to drop it for those who 
do.
    Thank you.
    Chairwoman Ellmers. Thank you, Mr. Dennis.
    Chairwoman Ellmers. I now would like to yield to Mr. 
Altmire to introduce your witness.
    Mr. Altmire. Thank you, Madam Chair. And it is my pleasure 
to introduce Professor Timothy Jost. Professor Jost teaches at 
the Washington and Lee University College of Law. He is co-
author of a casebook health law used widely throughout the 
United States in teaching health law.
    Professor Jost is the author of numerous articles on health 
care regulations and comparative health care law and policy. He 
is also consumer representative to the National Association of 
Insurance Commissioners. Professor Jost earned his J.D. from 
the University of Chicago School of Law, cum laude. Welcome, 
Professor Jost.

              STATEMENT OF TIMOTHY STOLTZFUS JOST

    Mr. Jost. Thank you very much and thank you, Ranking Member 
Ellmers and Congressman Altmire and Congressman King.
    The title of today's hearing is: ``Small Business and 
PPACA: If They Like Their Coverage, Can They Keep It?''
    This is a variation of one of the commitments made by the 
Affordable Care Act, realized in section 1251, that if you like 
your plan you can keep it. But, notice, the ACA's commitment is 
to individuals, not to employers.
    It is not if you currently have insurance through your job, 
you are stuck with that insurance, no matter how it changes. It 
is if you the employee, or individual enrollee, like your 
coverage, you can keep it. In fact, most privately insured 
Americans do have insurance through their jobs and regulations 
adopted last summer by Labor, Treasury, and Health and Human 
Services, give employers considerable flexibility to change 
their plans without losing grandfather status.
    Employers can change their formularies, providers, 
networks, and even insurers or plan administrators. They can 
increase deductibles, out-of-pocket limits, and copayments not 
only to keep up with medical inflation, but also up to 15 
percent more. They can also reduce their own contributions to 
premiums by as much as 5 percent. They can add new employees 
and new dependents.
    Of course, if the plan changes too much, it ceases to be 
the plan it was. It is probably no longer the plan the enrollee 
liked, and grandfather status is lost. The Department has 
projected that 15 to 33 percent of plans would lose 
grandfathered status in 2011.
    Private surveys cited by Mercer and Hewlett in submitted 
testimony predict higher levels, although they also noted that 
many employers do not really view loss of grandfathered status 
as a major problem, and some said they wanted to comply with 
the new law as soon as possible.
    The NFIB survey released last week surprisingly did not 
reflect widespread loss of grandfathered status. The NFIB 
reports that 90 percent of small businesses intending to make 
significant changes in their plan have not lost their plan.
    It does report that 12 percent of employers have had their 
plan terminated or been told that it will be not available in 
the near future. This number is consistent with churn in 
insurance coverage observed in earlier years, and I believe I 
cited a 2008 NBER report which showed this kind of turnover in 
the early 2000s. Plans are always coming and going in the 
small-group market.
    NFIB also reported that 20 percent of employers anticipated 
significant changes in their plans over the next 12 months, but 
last year and the year before changes in benefits, cost 
sharing, and premiums, as reported in the annual Kaiser HRET 
report, were at even greater levels. This is a bad time in the 
economy, as we all know, and things are changing.
    Another and very important question is whether employers 
will continue to offer coverage after the ACA is fully 
implemented. A number of studies have addressed this question. 
Their predictions range at the extreme, from those of Dr. 
Holtz-Eakin, who predicted that ESI would shrink by 22 percent, 
and the McKinsey survey, which claims that 9 percent of 
employers will definitely drop coverage, to those of the RAND 
Corporation which estimated that coverage would, in fact, grow 
by 8.7 percent.
    But most studies, including studies by Booz, Lewin, Urban, 
Mercer, Towers-Watson, and most importantly the CBO, predict 
that coverage will not change dramatically once the ACA is 
implemented. In fact, all of the reasons employers offer 
insurance now will continue to exist after health care reform 
goes into effect.
    Most importantly, employee benefits are exempt from Federal 
and State income taxes and payroll taxes. In Virginia, where I 
live, employees taxed at the alternative minimum tax marginal 
rate of 28 percent receive a subsidy of over $0.49 on every 
dollar for the coverage that they receive through their 
employer.
    The average American covered by ESI has an income of 423 
percent of the Federal poverty level and would not be eligible 
for any of the premium subsidies under the Affordable Care Act.
    Employers who drop health insurance would have to 
dramatically increase after-tax cash compensation for their 
higher-income employees to cover this loss of tax subsidy, and 
the law prohibits them from dropping benefits from their lower-
wage employees but keeping them for their higher-wage 
employees.
    Health benefits also continue to be one of the most highly 
valued forms of compensation and also help insure a healthy and 
productive workforce. After 2014, employees are even more 
likely to demand health insurance at work because of the 
individual mandate; and large employers--not small employers--
but large employers, will face a penalty if they don't offer 
insurance.
    In Massachusetts, which adopted similar reforms in 2006, 
employer offer rates grew from 70 to 76 percent. There is every 
reason to believe the ACA will not dramatically change the 
scope of employer coverage in the United States.
    Thank you.
    Chairwoman Ellmers. Thank you, Mr. Jost.
    I will begin the questioning, and my questions are directed 
to each member of the panel.
    Health care reform was supposed to make health care more 
accessible and affordable. Do you think the new law does 
anything to help reduce the cost of health care? And I will 
start with Mr. Jost.
    Mr. Jost. Yes, and one example of that is the medical loss 
ratios, which has already been discussed. I follow the medical 
loss ratios very closely. I was very much involved in their 
drafting through the National Association of Insurance 
Commissioners.
    One of the things that people are beginning to notice is 
that growth in health care costs has been dropping in the last 
couple of years. There is another report on that out this 
morning.
    At the same time, in the very recent past, insurance 
profits have been growing very, very rapidly; and people who 
follow the insurance industry closely are saying that, if 
insurers have to spend 80 percent of their premiums on health 
care costs and costs are dropping, premiums can't continue to 
rise. They are going to come down.
    And we already saw that in Connecticut, where one insurer 
dropped its rates by 10 percent. We are starting to see it in 
other States.
    I think, in fact, that the MLR is going to have a dramatic 
affect in reducing the cost of health insurance for employers 
and individuals over the next couple of years.
    And if I could just add quickly, one question that was 
asked earlier was, will it drive small insurers out of the 
market? I have read all of the State adjustment requests that 
have gone final. In only one State have any insurers left since 
the law went into affect. As Mr. Larsen said, people are 
talking about it. It isn't happening.
    Thank you.
    Chairwoman Ellmers. Mr. Vaughn.
    Mr. Vaughn. Well, I certainly would have no way of knowing, 
a nonacademic. I am a business person. But let me just give you 
a few numbers so you can understand my situation.
    If you take 2010 and my small business--I am a Subchapter S 
Corporation. So, at the end of the year, the bottom line of my 
company was $319,000. The way this plan exists now, if I took 
this plan and I insured all of my employees the way it is 
designed, it would cost me $307,000, which leaves me $12,000.
    Now, understand I am taxed personally on the net income of 
my company. But do I take that money? Absolutely not. What I 
do, I have to turn that money around and reinvest in the 
building, buy new equipment, and those sort of things. $12,000 
does not even leave me enough to pay my taxes, let alone 
reinvest in my business.
    The other piece of this is I am not likely to pay a 
penalty. Why would I do that? Because I am not really helping 
anyone. The penalty would cost as much as the insurance I am 
providing now. So if this thing continues on the path it is, I 
can tell you right now that I will do everything I can to avoid 
paying the penalty. I will probably more than likely drop 
coverage, and what it will do to the cost of insurance I have 
no idea.
    Thank you.
    Chairwoman Ellmers. Mr. Dennis.
    Mr. Dennis. It is really important to remember is when we 
started this thing, small businesses were very much in the 
forefront of calling for reform of health care. The reason was 
cost. Cost increases drove us. This morning, I believe I opened 
the Journal--the Wall Street Journal--and saw a study from the 
Social Security Administration which projected that, under 
PPACA, costs would rise faster than they would otherwise. It 
wasn't a great deal, but it was indeed faster. That is the 
first point.
    The second is we have had some lower rates recently than we 
have seen over the past several years. It has been attributed 
in some quarters to the new law. What we see, is that this 
recovery is very different from the last five recoveries. 
Relative demand for various services has been much slower than 
average; and health care has been one of them. Whether it is 
people not having money or being more parsimonious with the 
money they have, I don't know. But, still, the whole thing is 
that this is a very abnormal period.
    And then we start to look at everything that is inherent in 
PPACA. You are going to have minimum benefits. While we don't 
know what is going to be in the minimum benefit package, 
clearly, as Mr. Vaughn's example shows, there is going to be a 
whole series of folks who are either going to have to add a lot 
more benefits or do something else.
    Then we have all types of expensive things that we haven't 
even talked about which don't necessarily directly affect 
smaller firms. Things like the CLASS Act for example. Then we 
have, of course, a whole lot of new folks coming on. So all 
this together is going to drive costs higher, I am afraid.
    Chairwoman Ellmers. Thank you, Mr. Dennis.
    Dr. Holtz-Eakin.
    Mr. Holtz-Eakin. I would largely concur. In analyzing the 
bill as it passed and became the law, the CMS actuary, the 
administration's own actuary, concluded that it would raise, 
not lower, national health expenditure. If the national health 
expenditure bill is larger, the insurance that covers that bill 
has to be larger. There is no way around that. When the CBO put 
out its new long-term budget projections, it found that, after 
passage of the law, things went up, not down.
    The law contains two new entitlement spending programs. The 
CBO estimates they grow at 8 percent a year as far as the eye 
can see. There is no evidence of bending the cost curve 
anywhere to be found in those kinds of numbers.
    And so if you dial the clock back to the beginning of the 
debate, there were two criteria by which any health care reform 
should be judged: the ability to cover more Americans with 
affordable and quality insurance, and the capacity to deliver 
those services with lower costs and higher quality. And the 
Affordable Care Act flunks the latter, which is ultimately the 
fundamental driver of the insurance costs in the United States. 
And so things like the MLR are mere fiddles at the edges of a 
tidal wave of health care spending. Unless we get the tidal 
wave under control, the premiums go up.
    Chairwoman Ellmers. Thank you.
    I have one more question for you. Do you think the health 
care law's mandates and taxes, along with the numerous 
regulations that are being issued, make it less likely that 
small businesses will hire more workers and expand their 
companies?
    And again I will start with Mr. Jost.
    Mr. Jost. Well, the small businesses, there is some 
incentives and disincentives. There are benefits under the law 
that small businesses get and that large businesses don't get, 
and there are some benefits that large businesses get that are 
not available to small businesses.
    For example, small businesses need to cover the essential 
benefits package. It is not clear to me that that is going to 
be a major expense. Because in fact what happens is that State 
mandates are going to go away. It is not at all clear the 
Federal essential package is going to cost more than State 
mandates, but that is something that small businesses need to 
cover that large businesses do not need to.
    On the other hand, large businesses need to pay the penalty 
if they do not cover their employees; and small businesses 
don't.
    I come from a family that started a small business about 20 
years ago, that my brother-in-law started by borrowing money 
from the rest of us in the family, and it is today a $300 
million publicly traded company, and its product is a household 
name. They didn't worry about am I going get this benefit or 
lose this benefit if I grow a little bigger. They tried to help 
out their employees, they tried to help out their customers and 
sell a good product.
    I think that is the way American businesses work, and I 
think that under this law it is going to continue to work that 
way. It is just that employees and individuals are going to 
have better health care coverage.
    Chairwoman Ellmers. Mr. Vaughn.
    Mr. Vaughn. Well, I can start out by saying that 
overregulation is killing small business.
    Let's go back to minimum wage. I have already scaled down 
my staff, and I am running as, frankly, as lean as I can 
possibly run right now and make a living. The reality is there 
are going to be virtually no full-time jobs in this industry. I 
can tell you the way it will work in my company is only my 
management staff will be full time. Everyone else will work 29 
hours a week or less. And it is just that simple. We cannot 
afford this thing.
    Chairwoman Ellmers. Thank you, Mr. Vaughn.
    Mr. Dennis.
    Mr. Dennis. Well, right now, immediately, the overwhelming 
issue is uncertainty. We have absolutely no idea what is going 
on, and I think everybody would agree on that. I don't think 
that is a very controversial statement. Nonetheless, that has 
an enormous impact on what you are willing to do in terms of 
hire and invest; and we are seeing that very clearly within the 
small business population.
    We do this monthly survey, as we have been doing since 
1973, and it is constantly showing that small businesses are 
much more pessimistic and feel much less--how can I say--
favorable towards the economy than do larger folks. That is 
borne out by--their sentiment is borne out by a whole series of 
measures, including some that are contained in a recent Federal 
Reserve of New York paper that is just out. But that is the 
immediate thing.
    Longer term, you have the whole issue of cost and taxes; 
and they go together. And what does that have to do? All that 
means is, if the government has it, then you don't have it, and 
you have less available to do that. And so the question is you 
can't invest if you don't have it.
    And then we have the interesting issue of growth and does 
the 50 divide mean anything. And for some firms it clearly 
will. It won't just mean do I go over 50 or not, whether I hold 
back a little bit from 50 for fear that I am going to be hung 
up on that whole thing. There will be a lot of firms who are 
growth firms that, as Mr. Jost used as an example of his 
brother-in-law, that will just go blowing right on by. They are 
going to be high-growth firms, and they are not going to pay 
attention to anything. But it is going to have an impact on a 
whole lot of small firms.
    Chairwoman Ellmers. Dr. Holtz-Eakin.
    Mr. Holtz-Eakin. Well, I guess I would echo the firm level 
recognition of the regulatory costs that Mr. Vaughn mentioned. 
I think I would echo the uncertainty in the firm level growth 
incentives that Mr. Dennis highlighted.
    But if you step back and take a look at the basic 
architecture of the Affordable Care Act, it says let us spend a 
trillion dollars over the next 10 years and finance that by 
raising $500 billion on new taxes and much of it on inputs into 
what will be paid for by insurance, and thus make insurance 
more expensive, and let's finance the rest by cutting $500 
billion roughly out of Medicare, something the CMS actuary said 
is simply economically unrealistic and would mean the closure 
of a large number of hospitals and failure to serve those 
beneficiaries.
    So I would probably take that with a grain of salt.
    What you have in the end then is higher taxes, much larger 
deficits, in a recovery that is utterly unsatisfying. And I 
cannot conclude that that will be beneficial for the hiring 
practices of small businesses.
    Chairwoman Ellmers. Thank you, Dr. Holtz-Eakin.
    I yield to Mr. Altmire for questions.
    Mr. Altmire. Thank you, and I am glad that our panel 
brought up the subject of taxes and the burden that it places 
on small business.
    I wanted to ask Mr. Dennis and Mr. Vaughn, as you are 
aware, currently health benefits for employees is non-taxable; 
and some proposals have recommended requiring employees for the 
first time ever to pay taxes on health care benefits. And I was 
wondering from Mr. Dennis, how would a fundamental change like 
that impact a small business' decision to offer health care to 
its workers?
    Mr. Dennis. Well, the question is really equity. Right now, 
we have a system where if I am an employer and I contribute 
$1,000 or $5,000 to help my employee buy their own insurance on 
the market, whether it is through the exchange or whatever, 
there is no tax exclusion for the employee. If an employer pays 
for it, there is an exclusion. That clearly is inequitable. In 
the long term that is going to hurt smaller firms, and their 
ability to contribute.
    You are not asking about the inequity, though. You are 
asking about whether or not the exclusion itself is important. 
The exclusion does lower the amount that you have to pay up 
front. Long term, it encourages more people to use more 
services. And more services means higher costs, and long term 
we just can't have that. We have to start being more 
parsimonious on many of these things.
    Mr. Altmire. So you are in support of that policy change to 
tax----
    Mr. Dennis. We would be in support of making it equitable. 
I am not sure that our organization has taken a position on 
whether or not they would be in favor of eliminating or curbing 
the tax exclusion.
    Mr. Altmire. Thank you.
    Mr. Vaughn, as a business owner, how would your employees 
react if they had to pay taxes on the health care benefits that 
you provide?
    Mr. Vaughn. Well, that is a hypothetical; and I apologize 
for really not having an answer to that. I can't predict how 
they would react.
    But there is something really important here that I don't 
want to get lost. Let's define what is a small employer and 
what is a large employer? The method that is being used right 
now--and, frankly, I can't understand it--and what is a full-
time employee and what is a part-time employee, I can't 
understand that either.
    There was a study done recently by the University of 
Tennessee funded by the likes of Burger King, McDonald's, and 
different ones to determine what would be the best way to 
determine what a small business is and what can they afford.
    Have you heard about profit per employee? As opposed to 
this very drawn out, sort of complicated formula for figuring 
these things out, it is a real simple formula. It is how much 
money do I make net, divided by number of employees. Guess what 
it is in my industry? $1,300. If I paid the penalty, the 
penalty is $2,000. Is that equitable? Does that make sense?
    I have got to tell you, there are other industries, whether 
it is financial or insurance industries, they are $10,000 plus 
per employee, profit per employee.
    So my position is this. This thing has to be repealed. I 
mean, it has to be repealed. If it is not repealed, at the very 
least the regulatory aspect of it should be changed to a system 
like profit per employee.
    Again, I apologize for not answering directly. I really 
don't know how they would react.
    Mr. Altmire. Are you concerned to hear that that is a 
proposal? If your representative came and sat down before you 
and said, hey, here is something I am thinking about 
supporting, taxing your employees' health care benefits, you 
wouldn't----
    Mr. Vaughn. Of course, I would be concerned about that. I 
am for lower taxes for anyone. Yes, absolutely.
    Mr. Altmire. Mr. Jost, do you want to comment on what type 
of fundamental change like that, what the impact would be on 
the health market?
    Mr. Jost. I think it would destroy our employment-based 
health insurance system in this country. We have a long 
tradition in the United States that actually has been very 
successful in providing health insurance to people through 
their jobs. We are now trying to get beyond that to reach those 
people who are not covered through that, and that is what the 
Affordable Care Act is going to do. But to pull the rug out 
from under employment-sponsored health insurance by removing 
the tax deductions and exclusions would destroy it and would 
throw our health care system into chaos.
    Mr. Altmire. Dr. Holtz-Eakin, do you want to comment on 
that? I am going to move on to a different question, but you 
look like you might have something to say.
    Mr. Holtz-Eakin. There are really two aspects that I think 
bear mentioning. One is, it figures prominently in this 
discussion about how many employers will drop coverage under 
the Affordable Care Act. Because the basic horse race is 
between the pile of cash being put out in the exchanges for 
low-wage workers, where there is a clear net advantage for the 
employer to drop coverage, pay the penalty, give the employee a 
raise, let them go use their after-tax wages, plus a subsidy, 
and get insurance.
    And another Federal subsidy, which is nontaxation of 
employer-sponsored insurance which benefits high-wage workers. 
And those who conclude that there will not be a big employer 
drop are counting on the fact that that tax subsidy for high-
wage workers will dominate. Employers will continue to use it 
to pay the high-wage workers, and nondiscrimination rules will 
keep everyone in.
    I think that is an optimistic fantasy, quite frankly. Be 
quite aware that, in the end, all you are doing is a horse race 
between two Federal bribes; and one of them is going to win. We 
will see how it plays out, but it is costing the Treasury 
either way.
    The second thing is, most people who talk about changing 
the tax treatment of employer-sponsored insurance are looking 
at revenue-neutral tax reforms that broaden the base and thus 
bring in subsidized consumption like health insurance in 
exchange for lower tax rates. And I think that is a very 
different question than simply saying do you want to go tax 
health insurance. It is about having a tax system that is fair 
across low- and high-wage workers and provides greater growth 
incentives because marginal rates are lower.
    Mr. Altmire. Last question. I wanted to give you the chance 
to answer that because I thought I knew what you were going to 
say.
    Mr. Holtz-Eakin. It was a shocking question.
    Mr. Altmire. The question I wanted to ask you--and you are 
not here to pontificate about politics or to speculate about 
what the Congress is going to do or should do certainly, but 
you bring great credibility to the debate based upon your 
background and your involvement in the past. So I ask just out 
of interest, given where we are. This is the law. The bill has 
passed. It is the law. The Supreme Court may or may not rule, 
absent knowing what is going to happen there. Repeal has failed 
in the current political environment. We don't know what the 
future holds there.
    To the degree you are comfortable assessing it, what would 
you suggest the Congress do as far as tweaking the current law, 
assuming this is a fact, this is going to continue, or continue 
to push repeal even though it doesn't look like it is a viable 
option?
    Mr. Holtz-Eakin. Wow, can I have 5 hours instead of 5 
minutes?
    Briefly, I think you can point to a couple of things. There 
are some provisions of the law that I think have universally 
garnered some suspicion--I will use that word. And I think the 
CLASS Act is the first among those and probably should go away 
as something that is ill-designed and dangerous to the American 
taxpayer.
    The second would be, in the array of coverage expansions, 
the heavy reliance on an unreformed Medicaid program I think 
many people find problematic. We know Medicaid beneficiaries 
have much more difficulty finding primary care physicians and 
seeing specialists. To simply put more Americans into a 
substandard health care system is problematic, and I have a 
concern that there is just too much money on the table in 
exchanges. I won't relitigate that. So in terms of the coverage 
expansion pieces, I think you have to look at all that.
    I won't say a lot about the regulatory initiatives. I think 
making them cleaner and getting the rulemaking done in a 
fashion that doesn't leave the business community so perplexed 
can be entirely beneficial.
    On the delivery system reforms I think there are two very 
big concerns. One would be the role of the Independent Payment 
Advisory Board, which, as structured, appears inevitably to be 
led to near-term provider reductions as opposed to quality 
improvements or other things that everyone thinks would be 
desirable. Just can't get there. It is given 1-year targets. It 
is going to go slash reimbursements probably on the most 
innovative and, thus, the most expensive new therapies. That is 
detrimental for health care. I would worry a lot about that, 
quite frankly.
    And the ACOs appear to be a recipe for industry 
concentration, not better care.
    So, you know, across all of these things I think there is 
work to be done in improving the delivery system, improving the 
financing of the coverage expansions, and making sure that this 
thing hangs together budgetarily, about which I have deep 
concerns.
    Mr. Altmire. This is really the last question. Are there 
things in the bill that you think are worthwhile in isolation 
that should be kept?
    Mr. Holtz-Eakin. I have always been a proponent of 
exchange-like entities--forget the label attached to them. 
Better ability to shop, compare, and pursue health insurance 
has always been--I think every economist would like that, and I 
certainly do. So the design of those and exchange rulemaking I 
think is a critical moment in the life of this law.
    Mr. Altmire. Thank you all for being here.
    Chairwoman Ellmers. I now would like to recognize Mr. King 
for his questions.
    Mr. King. Thank you, Madam Chair.
    I thank all the witnesses for being here to testify and 
regret my schedule did not allow me to hear it all in depth. So 
I hope I don't duplicate anything that has been raised here 
before this panel.
    First, I think I need to make a statement as to anybody who 
wonders where I stand on this issue. I look at it from a whole 
number of different perspectives.
    I just don't think it is arguable whether this is 
sustainable economically or whether it will improve our health 
care or whether it will avoid eventually rationing or whether 
it will reduce research and development. I think those things 
all we understand--at least I think I do--thoroughly, that we 
are not going to see better health care at a cheaper price that 
is more accessible or more available. You will see different 
people who have access perhaps, but it is perhaps a shift 
within the population. I don't think it changes anything beyond 
that.
    So I have spent my life--my working life as a small 
businessman. I started a construction business out in 1975, and 
we provided--not on the first day, because I didn't have any 
employees the first day--but over a period of time as we began 
to accumulate employees, I took on a responsibility to 
voluntarily provide them health insurance.
    And I have watched this debate be shifted here in this 
country so that the word health care and health insurance, 
those two words, have been conflated into the same meaning in 
the minds of many people that are advocates of this policy that 
is before us today. I think it was dishonest, I think it was 
disingenuous, and I think it was willful, a strategic effort to 
try to blur the definitions.
    I remember our then-Governor of Iowa, Governor Culver, 
coming to this Capitol and our delegation meeting and saying 
40,000 kids in Iowa don't have health care. I don't know how 
many times I had to ask him what that meant before I could get 
through to him that health care and health insurance were two 
different things.
    I will make the point that I don't believe an employer 
has--if they choose to accept a responsibility to provide 
health insurance for their employees, that is a competitive 
position in the marketplace, but it is not a moral obligation 
for the employer. To hire good people and keep good people is 
the motive.
    When the Federal Government decides to impose an employer 
mandate, then that sets another standard; and in the minds of 
people now they think it is an entitlement that goes with a 
job. I think that is a mistake. I think it saps some of our 
vitality.
    I wanted to take this down to the constitutional aspect of 
it, just noticing we had a law professor here, Mr. Jost. That 
is the part that grates on me the worst. We can talk about 
policy all day long. I have drawn my conclusions on that. And I 
have also drawn them on the constitutional side of this.
    But I just take it down to the individual mandate rather 
than the employer mandate side of this and ask this question, 
if the Federal Government can constitutionally commandeer a 
portion of a person's paycheck or a portion of the revenue of 
an employer, for that matter, if they can commandeer that and 
assign it to a government-produced or a government-approved 
product, which is premiums for health insurance that is 
approved by the Federal Government, then what limitation would 
there be on the commandeering of that revenue stream beyond 
health care? Is there a constitutional line here I don't 
understand? Or could it also be for a car, an appliance, buying 
certain types of health food, or a membership in a health 
clinic--excuse me, perhaps a gymnasium? Is there a 
constitutional line beyond that?
    If the Supreme Court rules in favor and upholds this bill, 
this Act, this law of the land, as Mr. Altmire referred I 
believe, if they do that, what then can the rest of the workers 
and the employers in America look forward to being 
commandeered? Where is the line?
    Mr. Jost. Again, I only have 5 minutes, rather than 5 
hours, probably less than that. I would refer you to the 
excellent opinion on this topic written by Judge Sutton of the 
Sixth District, a very well-known, conservative judge, who has 
in fact been prominently mentioned as a Supreme Court potential 
nominee. And what Judge Sutton said and what the other Federal 
judges, several Federal judges, the majority of the Federal 
judges who have considered this question have said in favor of 
the constitutionality of the statute, and where I believe the 
Supreme Court will come down, is under that Article 1 of the 
Constitution, Congress has the authority to regulate commerce.
    Under earlier decisions, Congress must regulate economic 
decisions. It cannot regulate noneconomic conduct. But what 
Judge Sutton and what the other judges have found is that the 
health care marketplace and the health insurance marketplace 
are interstate commerce. In fact, it is the largest sector of 
our economy.
    Mr. King. Excuse me, Mr. Jost. If an individual doesn't 
engage in purchasing health insurance, then they are not 
engaging in interstate commerce with the purchase of health 
insurance. And if you expand the argument to utilizing health 
care services, if an individual is born and dies in a State and 
doesn't cross a State line and doesn't use medical of any 
kind--and that happens; it has always happened, every 
generation--how is it that they are engaging de facto in 
interstate commerce?
    Mr. Jost. Well, what Judge Sutton said is, on its face, the 
statute is constitutional. As applied, there may be some 
situation where somebody may come forward and said, I never 
used health care in my life. I will never use health care in my 
life. I can prove it. The law should not apply to me. He said, 
that might be a different case. We will cross that bridge when 
we come to it.
    Mr. King. We have come to it, actually. Because the 
Constitution has got to apply to everybody.
    Mr. Jost. Right, but a statute--the first question is, has 
Congress written a statute that is facially constitutional? 
Could it be constitutional as applied to some people? And as 
applied to 99.99999 percent of the population, people use 
health care.
    Mr. King. The statute presumes that everyone does use 
health care, and it presumes that health insurance is an 
obligation that is a component of health care. And if it 
presumes that everyone is utilizing, then the constitutional 
rights of those who do not are directly then incorporated into 
that. So they don't have their constitutional rights unless 
they assert them. We have to pass legislation that 
constitutionally protects everyone. That is the point I would 
make.
    I went way past my time. I am sorry, but I appreciate the 
indulgence, and I yield back the balance of my time.
    Chairwoman Ellmers. Thank you. That was a very interesting 
exchange, so I appreciate the line of questioning. Those are 
definitely some of those issues as we move forward that really 
does need to be discussed. So even though we went over, that 
was--I can say it is all right.
    Do you have any other questions at this time?
    And, Mr. Altmire, do you have any?
    I have a couple of more questions I would like to ask, 
starting with Dr. Holtz-Eakin.
    You have said in the health care law it is a threat to the 
health care of--excuse me, the health of small businesses, and 
the mandates and penalties are a financial burden. Do you think 
small firms disproportionately affected by the various 
mandates, penalties, and taxes in the law, will this affect 
their ability to increase employee wages, purchase new 
equipment, and hire new workers?
    Mr. Holtz-Eakin. Absolutely. If you think of the smallest 
of the small businesses, the proponents of the law like to say, 
well, look they get the credit, and they are exempt from the 
mandate, and so it is all going to be good.
    But the reality is they will face the upward premium 
pressures that inevitably come from the benefit mandates that 
have already begun to be implemented and which are driving 
premiums up. The taxes that will be imposed on insurers, 
medical device companies, and others will which inevitably 
drive--in my written testimony, I walk through the arithmetic 
of this. This is $5,000 for a family over the next 10 years, 
real big impacts on the cost of health insurance.
    Every time those premiums go up, they come up at the 
expense of wages. There is no way around that. So even for 
those who are ostensibly spared the greatest regulatory burden, 
the greatest compliance cost burden, and even where temporarily 
helped, although I am not a fan of the structure of that 
credit, it is available. I think it is, on balance, a bad deal.
    Chairwoman Ellmers. Thank you.
    Mr. Vaughn, I have a question for you. You currently have 
30 full-time employees; is that correct? And a number of part-
time employees. So 30 full time and a number of part time. With 
the employer mandate in the health care law, is it likely that 
you will create any additional full-time positions?
    Mr. Vaughn. As I mentioned earlier, it is not likely. It is 
likely that I will cut to fewer full-time positions.
    It is interesting about what Mr. Larsen said earlier, the 
tax credit--look, I am not going to participate in this 
certainly without tax-preferred dollars. He talked about--what 
was it--nine employees or less or some ridiculous number, and 
those are the only people who are going to get a tax credit. So 
this thing is extreme.
    Mr. Jost said earlier that the large firms, they are not 
worried about it. It is probably not even on their radar 
screen. That is just the cost of doing business for them. But, 
again, it is clearly in my case going to create more part-time 
jobs and, frankly, people more dependent on the government, and 
I will be cutting even more jobs.
    Chairwoman Ellmers. Do you feel you may have to cut wages 
also, especially now, of course, with--you know, we have 
minimum wage. But as far as potential increases in wages, do 
you think you may have to draw back on that as well?
    Mr. Vaughn. I think so.
    Someone mentioned earlier wages should be--absolutely 
should be a function of competition in the market. And I think 
that those of us that are in this business, we are all pretty 
much in the same situation. We are in a pennies business, and 
our margins--literally, we said this thing about Burger King, 
and people look at us as very wealthy and very rich. Out of a 
dollar, we keep less than a dime at the end of the day. And so 
there is just no way we can afford this. Absolutely not.
    Chairwoman Ellmers. Thank you, Mr. Vaughn.
    And my last question--I have two questions, actually, for 
Professor Jost. If the forthcoming mandated minimum essential 
benefit package requires employers to offer a base amount of 
coverage, the package will undoubtedly exceed the coverage that 
small the businesses currently offer. Aren't the premiums 
likely to increase for the employer or the individual or both?
    Mr. Jost. I would like to refer to a study that was 
published last month by the Urban Institute in which they 
projected that the firms for small employers, average employer 
contribution per person covered would in fact decrease by 7.4 
percent after the Affordable Care Act was fully implemented.
    The reason for that is the exchanges. Right now, small 
employers have to deal with individual insurance companies, and 
they don't have the economies of scale large employers do. They 
often have risk pools that are less favorable than large 
employers, and they are on their own. Even if they get a good 
rate this year, they could be cancelled next year or they could 
get a higher rate next year.
    In the exchanges, their business is going to be pooled with 
the business of all of the other small employers, and there is 
going to be lots of competition in the exchanges. There are 
going to be national insurers as well as the domestic insurers, 
maybe some of these new cooperatives that they are going to be 
talking about today. And so the projection is that, in fact, 
costs will go down.
    Now with respect to the essential benefits package in 
particular, I had always assumed that small businesses provide 
less rich benefits than large businesses. I tried to check on 
that the other day and found out if you look at the national 
compensation survey the benefits are pretty much comparable and 
cover the same things. The reason again is because of the State 
mandates that require in many States employers to cover a lot 
of the same benefits of shared employers.
    Also the essential benefits package only covers benefits. 
It doesn't prescribe cost sharing. Right now, a lot of the gain 
is in trying to increase cost sharing in various ways. That is 
probably one of the reasons why health care costs are going 
down, because employees have more skin in the game. And I think 
that under the essential benefits package, number one, it isn't 
going to change that much what benefits employers are going to 
have to offer; and, number two, they will still have the 
ability to do considerable adjustment in the cost sharing to 
try to save costs.
    Chairwoman Ellmers. Can you just describe to me the 
difference--you mentioned national insurers and domestic 
insurers. Can you identify for us what you mean by that?
    Mr. Jost. Yes. Under the Affordable Care Act, the Office of 
Personnel Management is supposed to come up with two national--
at least two, maybe more--national multi-State insurance plans 
that will be available in every State. It will be like the 
insurance you have, Congresswoman, through the Federal 
employees health benefit package where you have a choice of 
national insurers as well as local HMOs or other small carriers 
at the State level. And that is going to introduce more 
competition into the insurance market.
    Again, I have been looking at all of these adjustment 
requests as they come through, and what you see is that in many 
States you have what you see in my market, where you have one 
insurer with 85 percent of the market. Well, they set the 
price. Nobody else really can compete with them. But we are 
doing to see a number of insurers competing, and competition 
brings down prices.
    Chairwoman Ellmers. And so can you describe to me then the 
domestic insurer?
    Mr. Jost. Well, by that, I meant insurers that are already 
there, that are licensed in the State.
    Chairwoman Ellmers. And when you describe the national, are 
those private insurance companies or would that be the 
government plan?
    Mr. Jost. No, they have to be private insurance companies. 
They have to be a company licensed in the State.
    Chairwoman Ellmers. Okay. Well, thank you all so much for 
your participation.
    I had asked--if you did have another question, I am more 
than willing--we will definitely approach that.
    This Subcommittee will continue to closely follow the 
issues related to this implementation of the health care laws. 
It is very, very important that we stay on top of this as it 
moves forward, especially since things seem to be evolving as 
we go along.
    I ask unanimous consent that three articles be submitted 
for the hearing record: an article from Crain's New York 
business dated June 23rd, 2011, entitled Health Reforms: 
Grandfathering Rules Likely to Raise Costs; an article from 
Forbes dated July 4th, 2011, entitled Health Care Tax Credits 
are Having a Minuscule Impact; and an article from The Hill, 
which I had mentioned earlier, dated July 21st, 2011, entitled 
Health Care Law Could Leave Families with High Health Care 
Costs.
    Without objection, so ordered.
    All those in favor, signify by saying aye. All those 
opposing, signify by saying nay. The ayes have it. The request 
is agreed to.
    Chairwoman Ellmers. And I ask unanimous consent that 
members have 5 legislative days to submit statements and 
supporting materials for the record.
    Without objection, so ordered.
    This hearing is now adjourned. Thank you so much.
    [Whereupon, at 11:40 a.m., the Subcommittee was adjourned.] 

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