[Senate Hearing 112-780]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-780
 
                     HEALTH INSURANCE EXCHANGES AND

        ONGOING STATE IMPLEMENTATION OF THE AFFORDABLE CARE ACT
=======================================================================


                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,

                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING HEALTH INSURANCE EXCHANGES AND ONGOING STATE IMPLEMENTATION 

         OF THE ``PATIENT PROTECTION AND AFFORDABLE CARE ACT''

                               __________

                             MARCH 17, 2011

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


      Available via the World Wide Web: http://www.gpo.gov/fdsys/





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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

BARBARA A. MIKULSKI, Maryland
JEFF BINGAMAN, New Mexico
PATTY MURRAY, Washington
BERNARD SANDERS (I), Vermont
ROBERT P. CASEY, JR., Pennsylvania
KAY R. HAGAN, North Carolina
JEFF MERKLEY, Oregon
AL FRANKEN, Minnesota
MICHAEL F. BENNET, Colorado
SHELDON WHITEHOUSE, Rhode Island
RICHARD BLUMENTHAL, Connecticut

                                     MICHAEL B. ENZI, Wyoming
                                     LAMAR ALEXANDER, Tennessee
                                     RICHARD BURR, North Carolina
                                     JOHNNY ISAKSON, Georgia
                                     RAND PAUL, Kentucky
                                     ORRIN G. HATCH, Utah
                                     JOHN McCAIN, Arizona
                                     PAT ROBERTS, Kansas
                                     LISA MURKOWSKI, Alaska
                                     MARK KIRK, Illinois
                                       

                    Daniel E. Smith, Staff Director

                  Pamela Smith, Deputy Staff Director

     Frank Macchiarola, Republican Staff Director and Chief Counsel

                                  (ii)



                            C O N T E N T S

                               __________

                               STATEMENTS

                        THURSDAY, MARCH 17, 2011

                                                                   Page

                           Committee Members

Harkin, Hon. Tom, Chairman, Committee on Health, Education, 
  Labor, and Pensions, opening statement.........................     1
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, 
  opening statement..............................................     3
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     4
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    14
Bennet, Hon. Michael F., a U.S. Senator from the State of 
  Colorado.......................................................    16
Burr, Hon. Richard, a U.S. Senator from the State of North 
  Carolina.......................................................    18
Merkley, Hon. Jeff, a U.S. Senator from the State of Oregon......    20
Mikulski, Hon. Barbara A., a U.S. Senator from the State of 
  Maryland.......................................................    22
Alexander, Hon. Lamar, a U.S. Senator from the State of Tennessee    22
Blumenthal, Hon. Richard, a U.S. Senator from the State of 
  Connecticut....................................................    53

                            Witness--Panel I

Larsen, Steven B., J.D., Deputy Administrator and Director, 
  Center for Consumer Information and Insurance Oversight, (CCIIO 
  Centers for Medicare & Medicaid Services (CMS))................     5
    Prepared statement...........................................     7

                          Witnesses--Panel II

Praeger, Sandy, Kansas Insurance Commissioner, Lawrence, KS......    25
    Prepared statement...........................................    27
Sharfstein, Joshua M., M.D., Secretary, Maryland Department of 
  Health and Mental Hygiene, Baltimore, MD.......................    32
    Prepared statement...........................................    35
Clark, Hon. David, Utah State Representative.....................    39
    Prepared statement...........................................    44

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Hon. Gary R. Herbert, Governor, State of Utah................    66
    American Academy of Family Physicians........................    77
    Letters:
        Hon. Kathleen Sebelius from Governor Gary R. Herbert.....    83
        Committee on Defining and Revising an Essential Health 
          Benefits Package for Qualified Health Plans, IOM, from 
          James A. Dunnigan, Utah House of Representatives.......    84

                                 (iii)



                   HEALTH INSURANCE EXCHANGES AND


                    ONGOING STATE IMPLEMENTATION OF 
                        THE AFFORDABLE CARE ACT

                              ----------                              


                        THURSDAY, MARCH 17, 2011

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m. in Room 
SD-430, Dirksen Senate Office Building, Hon. Tom Harkin, 
chairman of the committee, presiding.
    Present: Senators Harkin, Mikulski, Merkley, Franken, 
Bennet, Blumenthal, Enzi, Burr, Alexander, and Hatch.

                  Opening Statement of Senator Harkin

    The Chairman. Good morning. The committee on Health, 
Education, Labor, and Pensions will come to order.
    A year ago on March 23 President Obama signed into law what 
I believe will be remembered as the most forward thinking and 
humane reform of our health care system since Medicare.
    When the Affordable Care Act became law I said, and I 
quote: ``We have made America a more compassionate and more 
just society.''
    I believe this with even greater conviction a year later. 
Over the last year, States, in partnership with the Department 
of Health and Human Services, have moved ahead decisively to 
implement the law. The results have been striking.
    Since last fall, the law has protected consumers against 
the worst insurance company abuses and strengthened the 
coverage they already have. These protections are tremendously 
important to the physical and financial health of American 
families.
    As Emily Schlichting, a University of Nebraska student who 
suffers from a rare autoimmune condition, said at this 
committee's January hearing on this subject:

          ``I believe that allowing young people to stay under 
        their parent's insurance gives us new freedom to work 
        toward our goals without going uncovered. But even more 
        important than that is the fact that the Patient's Bill 
        of Rights makes it so that I cannot be denied insurance 
        simply because I have a disease I can't control. Young 
        people are the future of this country and we are the 
        most affected by reform. We're the generation that is 
        most uninsured. We need the Affordable Care Act because 
        it is literally an investment in the future of this 
        country.''

    That was Emily Schlichting, a University of Nebraska 
student.
    The law also makes an historic long-term down payment in 
prevention, wellness, and quality of care, provisions for which 
I fought very hard. The Prevention and Public Health Funds 
supports vital programs like the Communities Putting Prevention 
to Work Program, which, to cite just one example, has funded my 
State, Iowa's efforts to implement a plan to reduce tobacco use 
and improve public health.
    The new law makes vital investments in our Nation's health 
care workforce to ensure that the health needs of all 
Americans, rural, urban, old, and young will be met by a 
medical provider; for example, the State of North Carolina has 
received more than $9 million under this act to train and 
prepare the primary care workforce.
    The new law strengthens Medicare for future generations of 
seniors and engages the challenge of cost control by 
transforming the way we pay for health care rewarding quality 
rather than quantity. It brings new transparency and 
accountability to the health insurance market, giving States 
new resources to review premiums and deny unreasonable hikes.
    The State of Tennessee, for example, has received a $1 
million grant and is using it to expand and improve its rate 
review process.
    By controlling Federal health care costs and transforming 
how we deliver care, the Affordable Care Act, according to the 
Congressional Budget Office, reduces the deficit by $210 
billion the first decade and by more than $1 trillion in the 
second decade. That's according to CBO.
    At the heart of the new reform law is a long-overdue 
promise to all Americans: If you work hard, play by the rules 
and pay your fair share, you will never go to sleep worried 
that you can't afford to see a doctor or pay your family's 
medical bills.
    The Affordable Care Act will, for the first time, give 94 
percent of Americans access to affordable health coverage that 
can never be taken away.
    Now, the primary mechanism for these changes is a new 
insurance marketplace in every State called the exchange. 
Modeled on successful prior State efforts, the exchange is a 
one-stop shop for health coverage. It will provide access to 
coverage to millions of individuals and small businesses 
currently locked out of the market.
    Individuals with certain income limits and small businesses 
will receive tax credits to make premiums affordable; and 
people eligible for Medicaid will be enrolled automatically in 
the exchanges.
    Small businesses, whose premiums have increased 85 percent 
on average just in the last decade, will be able to give their 
employees unprecedented choices among plans.
    Overall, as I said, over 30 million Americans who would 
otherwise be insured, who would live with the oppressive fear 
of being one illness away from bankruptcy, or not knowing if 
they can afford a doctor's visit for their child, will have 
comprehensive, affordable insurance coverage, thanks to this 
law.
    This hearing will show that, as usual, the States are 
already way ahead of the debate in Washington, working full 
steam ahead to lay the foundations for the insurance exchanges. 
By providing funding and the legal authority to establish 
exchanges, the Affordable Care Act empowers States, more than 
ever before, to serve their citizens' unique needs.
    Far from being a top-down approach, the law gives States 
flexibility to determine which plans will be offered in the 
exchange. We have a good lineup of witnesses today to talk 
about these exchanges, what's happening in the States; and I 
look forward to their testimony today.
    I want to thank my Ranking Member, Senator Mike Enzi for 
all of his involvement in these efforts. And, I will now 
recognize him for his opening statement.

                   Opening Statement of Senator Enzi

    Senator Enzi. Thank you, Mr. Chairman. Today's hearing will 
look at insurance exchanges established by the new Health Care 
Law and the related requirement for States to set up these 
exchanges. Like several provisions in the new Health Care Law 
the idea of a health exchange started with a kernel of common 
sense and it attempted to address a real problem in the market.
    It's often difficult for consumers to be able to find the 
information they need to compare prices and understand the 
benefits offered by many insurers. By providing a place where 
consumers can compare prices and benefits, exchanges could 
provide valuable assistance to consumers and help them get 
lower prices for their insurance. That's what States like Utah 
have done in setting up their insurance exchanges.
    Exchanges, however, cannot fix the fundamental problems 
with the new Health Care Law. The new exchanges will still be 
required to offer only qualified health plans which comply with 
all of the new Federal mandates. That's Washington telling you 
the minimum amount of insurance that's good for you.
    Government bureaucrats will still determine all of the 
benefits that must be covered. They will also specify how much 
plans can charge in co-payments and deductibles.
    In short, bureaucrats will design the insurance plans that 
everyone must buy because the authors of the new law believe 
that government knows what's best for all of us.
    Exchanges will also offer health insurance to small 
employers. I believe that we should be doing everything that we 
can to help lower costs for small employers. Exchanges will not 
actually lower employer's costs, however, because of all of the 
provisions in the new law.
    We've already seen how the new law will apply, sweeping new 
mandates to most employer health care plans. According to the 
Administration's own estimates, up to 80 percent of small 
businesses will have to change their plans to comply with new 
requirements imposed by the law. The bottom line is that these 
changes will increase the cost of these plans to employers and 
their workers.
    Exchanges will also not be able to prevent health insurance 
premiums from increasing. During the debate on the new law, the 
Republicans predicted that the new mandates, taxes, and 
regulations would increase insurance premiums. We're just now 
beginning to see those predictions proven true.
    The New York Times recently reported that groups of more 
than 20 were experiencing premium increases of around 20 
percent while smaller groups were seeing increases of 40 to 60 
percent or more.
    Exchanges cannot fix the fundamental flaws in the new law. 
At its core the new law will mean that insurance premiums will 
increase, millions of Americans will lose the coverage they 
have, and American workers will see their jobs eliminated or 
their wages reduced as a direct consequence of the new law. We 
can and should do better.
    The Health Care Law needs to be repealed and replaced with 
provisions that will actually lower costs, help the employers 
and allow Americans to keep the plans they want rather than 
being forced to buy the plan the government bureaucrats thinks 
best fits their needs.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Enzi.
    Our first witness is Mr. Steve Larsen. I would like to ask 
him to come up to the witness table.
    Before I formally introduce Mr. Larsen, we're joined here 
today by one of our distinguished long-term members of this 
committee, Senator Hatch. I know he has other obligations that 
he has to do this morning, but he wanted to introduce a witness 
for the second panel which I will yield to him to do at this 
moment.
    Senator Hatch.

                       Statement of Senator Hatch

    Senator Hatch. Thank you so much, Mr. Chairman, and Senator 
Enzi as well, for allowing me to take a moment to introduce my 
good friend, Representative Dave Clark. As you all are aware, 
Utah has been a leader in developing innovative State-based 
approaches to reforming the health care system.
    But Dave's ideas would not have become a reality without 
the hard work of my good friend. And he's an excellent 
Legislator, and he's very dedicated and has done a terrific job 
in Utah. He first served as co-chair of the State's health 
system reform task force to develop ideas that reduce costs and 
provide a competitive marketplace for insurance companies to 
sell insurance to individuals and small businesses.
    To make these ideas a reality, Representative Clark, then 
serving as Utah's Speaker of the House, shepherded the 
legislation through the Utah House of Representatives.
    Once the law was passed, he worked tirelessly to ensure the 
exchange and other reforms were implemented as intended, and 
Utah became one of two States that had an exchange; 
Massachusetts being the other.
    As our State became an example to other States, 
Representative Clark offered his assistance to others, and was 
welcomed under various national platforms to teach others about 
our State's success.
    Today, I'm proud to welcome him a second time to the health 
care committee to share with us his views about the Utah 
exchange and how it fits into the requirements under the new 
overhaul law. I'm very concerned about the impact this law will 
have on Utah's ability to continue to implement health 
insurance reforms in a manner that fits within the State's 
goals.
    For example, if Utah were to apply to have their exchange 
certified today, Secretary Sebelius would have to deny their 
application because of the onerous and costly mandates the law 
places on State-based exchanges.
    The Utah exchange is a true free-enterprise marketplace, 
but unfortunately, the freedom it affords does not adhere to 
the President's health care agenda.
    I hope Representative Clark's insight and knowledge will 
help to persuade some of my colleagues that PPACA was short-
sighted in its one-size-fits-all approach.
    Representative Clark, I want to thank you for making the 
long trip back here and for joining us today. My colleagues 
welcome you and I welcome you, and we're eager to learn more 
about Utah's perspective on health reform; and I don't know of 
a better person in the country that would be able to explain 
that than you.
    So, I'm grateful to have you here.
    Forgive me for having to go to a markup, but I'm going to 
try and get back if I can. If I can't, I know you're going to 
let everybody know how important this is to Utah, and I think, 
to the Nation. Thanks so much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Hatch, very much.
    I'd like to start by welcoming Mr. Steve Larsen, director 
of the Center for Consumer Information and Insurance Oversight 
at the Centers for Medicare and Medicaid Services.
    In this capacity, Mr. Larsen is responsible for 
implementing many provisions of the Affordable Care Act, 
including insurance market reforms, the Medical Loss Ratio 
Provision and working with States to set up insurance 
exchanges. He has a distinguished insurance background. He has 
held a number of senior positions with AmeriGroup, a managed 
health care company, and has worked in the Medicaid Managed 
Care field.
    He's also a long-time public servant. He spent 6 years as 
Maryland's Insurance Commissioner and was a member of the 
State's Hospital Rate Setting Board.
    So, again, Mr. Larsen, thank you for joining us today, and 
your statement will be made a part of the record in its 
entirety. If you could sum it up in several minutes, we would 
be most appreciative.
    Director Larsen.

     STATEMENT OF DIRECTOR STEVEN B. LARSEN, J.D., DEPUTY 
ADMINISTRATOR AND DIRECTOR, CENTER FOR CONSUMER INFORMATION AND 
 INSURANCE OVERSIGHT, (CCIIO) CENTERS FOR MEDICARE & MEDICAID 
                         SERVICES (CMS)

    Mr. Larsen. Thank you, Chairman Harkin, Ranking Member 
Enzi, and members of the committee.
    Thank you for the chance to appear before you this morning, 
and, as you said, my full testimony has been submitted for the 
record.
    At this time last year Congress passed, and the President 
passed into law the Affordable Care Act which will expand 
coverage to over 30 million Americans and ensure individuals 
have coverage when they need it most.
    Just 1 year after the Affordable Care Act became law, 
people are enjoying, today, new protections and new coverage 
options.
    In 12 months we've implemented important, private market 
reforms, including eliminating pre-existing condition 
exclusions for children, prohibiting insurance companies from 
rescinding coverage just because a consumer may have made an 
error on the application form, ending lifetime dollar limits, 
and enabling many young people to stay on their parent's health 
plan up to age 26.
    In 2011 we estimate that more than 1.2 million young adults 
can maintain coverage through their parent's health plan 
because of this new policy. The Affordable Care Act also 
established new programs to expand and support coverage options 
as a bridge to 2014 when the exchanges are fully operational. 
These include the pre-existing condition insurance plan, the 
PCIP Plan, and the Early Retiree Reinsurance Program.
    Through the PCIP Plan thousands of Americans who were 
denied access to coverage before the ACA now have this valuable 
and needed coverage. Enrollment in the PCIP Program has 
increased by 50 percent in the last few months, and we expect 
it to grow.
    The Early Retiree Reinsurance Program provides much-needed 
financial relief for employers, and has benefited nearly 4.5 
million early retirees and their families, and more than 5,000 
employers, including many State and local governments, have 
been accepted into the program from all 50 States and the 
District.
    Another new program this year was the Consumer Assistance 
Program that's provided nearly $30 million in new resources to 
help States and territories establish or enhance consumer 
assistance offices.
    In this past year we've also made funds available to 
strengthen States and territories' ability to review proposed 
rate increases by private health insurance companies.
    And, starting this year, insurers must spend at least 80 to 
85 percent of premium dollars, depending on the market, on 
health care and quality improvement efforts for their policy 
holders. This will encourage efficiency and ensure policy 
holders receive value for their premiums.
    The NAIC worked for nearly 6 months to develop uniform 
definitions and methodologies; and their process was an 
excellent one that included extensive input from stake holders. 
And, we certified and adopted the NAIC recommendations.
    We've also provided States with the flexibility on the MLR 
provisions to apply for a multiyear adjustment to the extent 
that there was a risk that application of that standard would 
destabilize the individual market there. All of these new 
programs and protections serve as a bridge to 2014 when the 
State-based health insurance exchanges will improve access to 
affordable quality insurance options for Americans who 
previously had no health insurance or had inadequate coverage. 
The exchanges increase transparency, lower administrative 
costs, and will make purchasing health insurance coverage 
easier by providing families, individuals, and small businesses 
with one-stop shopping.
    Although the exchanges are not required to be operational 
until 2014, work is already underway across the country to 
conduct the necessary research and planning.
    Forty-nine States and DC, received exchange planning grants 
to help assess their needs and plan their exchanges.
    CCIIO has also awarded seven, what we call, early innovator 
grants to support States in developing an array of innovative 
models for the IT Systems for the exchanges.
    Our hope is that these States can help serve as a model for 
other States and encourage efficiency and avoid duplication of 
effort.
    The Affordable Care Act empowers States to implement the 
law in a way that accommodates their markets and their needs; 
and States are already taking their first steps toward 2014.
    As we celebrate our accomplishments in the past year while 
working toward the establishment of the exchanges in 2014, we 
are committed to working with the States, and the District, and 
the territories to make sure that they have the flexibility and 
support they need as we work together to give Americans more 
freedom in their health care choices.
    Thank you for the opportunity to discuss the work that 
CCIIO and HHS has been doing to implement the Affordable Care 
Act. And, I'd be happy to answer your questions.
    [The prepared statement of Mr. Larsen follows:]
              Prepared Statement of Steven B. Larsen, J.D.
    Chairman Harkin, Ranking Member Enzi, and members of the committee, 
thank you for the opportunity to discuss the Health Insurance Exchanges 
and the efforts to implement the Affordable Care Act. I serve as Deputy 
Administrator and Director of the Center for Consumer Information & 
Insurance Oversight (CCIIO) within the Centers for Medicare & Medicaid 
Services (CMS). Since taking on this role, I have been involved in 
CCIIO's implementation of many of the provisions of the Affordable Care 
Act, including overseeing private health insurance reforms, assisting 
States to implement Health Insurance Exchanges (Exchanges), and 
ensuring that consumers have access to information about their rights 
and coverage options. Prior to becoming the Director of CCIIO, I served 
as the Director of the Office of Oversight within CCIIO, which is 
charged with working with the States to ensure compliance with the new 
insurance market rules, such as the prohibitions on rescissions and 
pre-existing condition exclusions for children, as well as ensuring 
consumer value for premium payments through the medical loss ratio 
(MLR) standards and the enforcement of the new restrictions on annual 
dollar limits on benefits.
    As a former State Insurance Commissioner, I understand the key role 
that States play in the regulation of insurance and insurance markets. 
I have seen first-hand the importance of holding insurance companies 
accountable, and understand the need to make quality, affordable 
coverage more accessible to all health care consumers. I have also 
served as an executive in a for-profit, publicly traded managed care 
company, and understand the need for competitive and robust markets as 
well reasonable regulations. The Affordable Care Act appropriately 
balances these objectives.
    At this time last year, Congress passed and the President signed 
into law the Affordable Care Act, which expands access to affordable, 
quality coverage to over 30 million Americans and strengthens consumer 
protections to ensure individuals have coverage when they need it most. 
Immediate reforms include a critical foundation of patients' rights in 
the private health insurance market that help put Americans in charge 
of their own health care. Over the past year, we have already 
implemented historic private market reforms including eliminating pre-
existing condition exclusions of children, prohibiting insurance 
companies from rescinding coverage absent fraud or intentional 
misrepresentation of material fact and from imposing lifetime dollar 
limits on coverage, and enabling many dependent young adult children to 
stay on their parent's insurance plan up to age 26. The Affordable Care 
Act also established new programs to expand and support coverage 
options, including the Pre-Existing Condition Insurance Plan (PCIP) and 
the Early Retiree Reinsurance Program (ERRP).
    Beginning in 2014, State-based health insurance Exchanges will 
improve access to affordable, quality insurance options for Americans 
who previously had no health insurance coverage or inadequate coverage. 
The Exchanges will make purchasing private health insurance coverage 
easier by providing individuals, families, and small businesses with 
``one-stop shopping'' where they will be able to compare a range of 
plans. Eligible individuals will also have new premium tax credits and 
cost-sharing reductions available to them to make coverage more 
affordable. By increasing competition between insurance companies and 
allowing individuals and small businesses to band together to purchase 
insurance, Exchanges will help to lower health care costs for 
consumers.
    Although the Exchanges are not required to be operational until 
2014, work is already underway to conduct the necessary research and 
planning. More than $296 million in grants has been made available to 
States and Territories to plan their Exchanges. This funding includes 
``Early Innovator'' awards to support select States in developing an 
array of innovative models for the Exchanges' information technology 
systems as well as ``Planning and Establishment'' grants that provide 
resources for States and Territories to research and design the 
governance and operations of their Exchanges. Kansas, is one State that 
received a grant to develop IT infrastructure that will support health 
insurance Exchanges, not just in Kansas, but across the country. As a 
winner of an ``Early Innovator'' grant award, Kansas is creating state-
of-the-art information technology systems that will support a consumer-
friendly insurance marketplace. Other States that have received early 
innovator grants are represented on this committee, including Maryland 
and Oregon. In addition, Rhode Island, Vermont, and Connecticut are 
part of a multi-State consortium that also received funding. All of 
these States have committed to ensuring that the technology they 
develop is reusable and transferable to other States.
    The Affordable Care Act empowers States to implement the law in a 
way that respects their unique situation and needs. States are already 
taking their first steps toward 2014. For example, on September 30, 
2010, California enacted first-in-the-nation legislation to implement a 
health insurance Exchange under the Affordable Care Act. Additionally, 
Maryland's Health Reform Coordinating Council has already carried out 
research to understand the State's health insurance marketplace and 
health expenditures. Meanwhile, Colorado is holding regular community 
forums on issues around developing an Exchange, as well as conducting 
economic analyses of the State's health insurance market. CCIIO and 
States are well on their way toward giving consumers more control, 
quality choices, and better protections when buying insurance.
    Today, millions of Americans are already benefiting from the 
Affordable Care Act. Many parents across the country are able to 
protect their dependent young adult children by allowing them to stay 
on a parent's plan until they are 26 years old. We estimate that, in 
2011, more than 1.2 million young adults will be able to maintain 
insurance coverage through their parent's health plans because of this 
new policy. This is an important protection for these young adults and 
a huge relief for their parents.
    We estimate that more than 31 million Americans will benefit from 
the preventive services provision of the Affordable Care Act, which 
requires that important early detection services like mammograms and 
colonoscopies be available to Americans enrolling in new plans without 
expensive co-pays or deductibles. Furthermore, insurers are no longer 
permitted to rescind insurance policies simply because a consumer made 
an inadvertent error on a form. These changes are putting consumers 
back in charge of their health care and getting insurers out from 
between patients and their doctors.
    Consumers can also use an important new tool to gain access to an 
unprecedented amount of information about insurance options and public 
programs available to them by zip code. In 8 months, www.HealthCare.gov 
has had more than 4 million visitors and the number of insurance 
options listed continues to grow rapidly. Visitors can get information 
in plain English--and Spanish--about the coverage options available to 
them, their protections, and their rights as health care consumers.
    As mentioned previously, States play a crucial role in the 
implementation of the Affordable Care Act. Since enactment, we have 
worked actively with the Governors, insurance commissioners, Medicaid 
directors, and other stakeholders to implement programs that are 
helping consumers and businesses with coverage. It has been our 
priority to work collaboratively with our State partners as the 
provisions of the Affordable Care Act go into effect.
    States were critical to our efforts to write regulations 
implementing the new medical loss ratio provisions of the act. The 
National Association of Insurance Commissioners (NAIC) worked for 
nearly 6 months to develop uniform definitions and methodologies for 
calculating a MLR. Their process included significant input from the 
public, States, and other key stakeholders, and was approved 
unanimously by the NAIC Commissioners. HHS certified and adopted the 
NAIC recommendations and the reaction from consumers and insurers has 
been very positive. Starting this year, insurers must spend at least 80 
or 85 percent of premium dollars, depending on the market, on health 
care and quality improvement efforts instead of CEO bonuses, profits, 
or marketing. And those that do not meet this standard will be required 
to reduce their rates or provide rebates to their customers. In 
addition, the Department recognizes State flexibility. The law allows 
for a temporary adjustment to the individual market MLR standard if the 
State requests it and demonstrates that the 80 percent MLR standard may 
destabilize their individual insurance market.
    This MLR provision ensures consumers receive value for their 
premium dollars and encourages insurers to invest in the health of 
their policyholders, while maintaining insurance market stability. 
There are signs that this provision has already helped to moderate 
premium increases.
    Rising insurance costs have made it difficult for American 
employers to provide quality, affordable coverage for their workers and 
retirees while also remaining competitive in the global economy. The 
ERRP mentioned earlier serves as one bridge to the new Exchanges that 
will become available in 2014. Many Americans who retire before they 
are eligible for Medicare and without employer-sponsored insurance see 
their life savings disappear because of the high cost of insurance in 
the individual market. Millions more see their insurance disappear, 
leaving them vulnerable to high costs and poor quality care. The ERRP 
provides much-needed financial relief for employers so early retirees 
and their families can continue to have quality, affordable insurance. 
More than 5,000 employers--including many State and local governments--
have been accepted into the program from all 50 States and the District 
of Columbia.
    The Pre-Existing Condition Insurance Plan program is another bridge 
to 2014, when all Americans, regardless of health status, will have 
access to affordable coverage. PCIP provides a lifeline to uninsured 
Americans who private insurers have refused to insure because of a pre-
existing condition. These Americans can now receive health coverage 
without limitation on benefits or higher premiums because of their 
condition. Thousands of Americans who were locked out of accessible 
private insurance coverage before the passage of the law now have this 
valuable and needed coverage. I'm pleased that enrollment has increased 
by 50 percent in the last few months, and we expect it to grow. The 
Department is actively working with States, consumer groups, chronic 
disease organizations, health care providers, social workers, other 
Federal agencies, and the insurance industry to promote the program, 
including holding meetings with State officials, consumer groups, and 
others.
    As part of a comprehensive outreach strategy for PCIP, we have had 
regional meetings with local grassroots and provider organizations to 
get the word out about the PCIP & CAP programs. To date, eight regional 
launch meetings have been held with key referral sources and other 
local leaders in Jefferson City, MO, Providence, RI, New York, NY, 
Columbia, SC, Austin, TX, Cheyenne, WY, Sacramento, CA, and Wilmington, 
DE. Tomorrow we have another meeting scheduled in Indianapolis, IN.
    Consumer Assistance Program grants provided nearly $30 million in 
new resources to help States and Territories establish or enhance 
consumer assistance offices or ombudsman programs. States have been 
using grants to educate consumers about their health coverage options 
and new rights under the Affordable Care Act, and assist them in taking 
advantage of new protections. For example, North Carolina will use 
grant funds to expand the services they provide to consumers and create 
a new independent Consumer Assistance Program as well as interpretation 
and translation services to better help consumers obtain culturally and 
linguistically appropriate services and resources. Montana recently 
reported that as a result of the CAP grant, they are now able to assist 
non-Federal governmental health and church plan members with issues 
related to their coverage, including denial of covered benefits. The 
program has begun a consumer education and outreach tour to different 
communities, particularly in rural areas, to address questions, take 
complaints, and provide consumer guides.
    Finally, the Affordable Care Act should result in more protections 
from unreasonable rate increases. The law provides $250 million to 
strengthen States and Territories' ability to review proposals by 
private health insurance companies to raise their rates. Since 
enactment, $45 million has been distributed to 44 States and the 
District of Columbia, and, in February, $205 million in additional 
funding was made available to States, the District of Columbia, and 
Territories to continue such efforts. States are using these funds 
based on the needs in their States. Arkansas developed a ``Rate Review 
Center'' that will serve as a clearinghouse for information related to 
premium rate review. The Arkansas Insurance Department also introduced 
detailed legislation that would strengthen their authority to review 
rate increases and protect the State's insurance consumers. Colorado 
hired actuarial staff and implemented programs to increase transparency 
for consumers with its grant dollars. We are committed to continuing to 
work with States, the District of Columbia, and Territories, who are 
the primary regulator of insurance rates and solvency.
                    working with states towards 2014
    We understand the importance of State-based leadership and tailored 
policy execution during the implementation of the Affordable Care Act. 
That is why we keep an open dialogue between the Administration, 
Governors, and States to make sure they have the flexibility and 
support they need as we work together to give Americans more freedom in 
their health care choices. Building on this commitment, we, along with 
the Department of the Treasury, proposed new rules outlining the steps 
States may pursue in order to receive a State Innovation Waiver under 
the Affordable Care Act.
    State Innovation Waivers will give States the power and flexibility 
to innovate and find the health care solutions that work for them. 
These Waivers will allow States to implement policies that differ from 
the Affordable Care Act as long as the new policies cover as many 
people as affordably and comprehensively as the Affordable Care Act 
does, without increasing the deficit. Although current law doesn't 
allow these waivers to begin until 2017, the President supports 
legislation that would accelerate implementation of this policy to 
2014.
    For the past year, States and the Federal Government have worked 
together to reform the health insurance market through flexible 
policies designed to address States' unique situations, ensuring a 
smooth transition from last year's broken health insurance market to 
this year's improved market. That partnership will continue and 
strengthen as we work together towards 2014.
                             moving forward
    We are proud of all that we have accomplished over the past year 
and look forward to 2014 when Americans will have access to more 
affordable, comprehensive health insurance plans. In the meantime, I 
look forward to continuing to work on our bridge toward 2014, year 
after year, strengthening CCIIO's partnership with Congress, the 
States, consumers, and other stakeholders across the country. Thank you 
for the opportunity to discuss the work that CCIIO has been doing to 
implement the Affordable Care Act.

    The Chairman. Thank you very much, Director Larsen. And, 
we'll start a round of 5-minute questions.
    Director Larsen, am I correct that the Institute of 
Medicine is making recommendations on what should be included 
in the essential benefits package, and they're doing public 
hearings nationwide; is that true?
    Mr. Larsen. The Institute of Medicine is part of the 
process along with the surveys of employer benefits, yes sir.
    The Chairman. Also, I understand that the Federal 
Government is working with governors and States to get their 
input on the essential benefits package, and that this has not 
really been determined yet, has it?
    Mr. Larsen. No, it hasn't, and the process will be a very 
inclusive one to get a feedback from all the affected 
stakeholders.
    The Chairman. Again, how would you feel about a statement 
which said that this minimum benefits package would be overly 
burdensome on States?
    Mr. Larsen. Our objective is to work closely with the 
affected parties and the stakeholders. It hasn't been 
determined yet exactly what the essential benefits would be. 
And, again, it's the Secretary's goal to make sure that it's a 
package of benefits that will be right for the exchanges and 
the coverage that are offered under the exchanges.
    The Chairman. I know that my staff and I think staff from 
the Ranking Member's Office have also testified in front of the 
Institute of Medicine, to ensure that all viewpoints are being 
considered by the panel. The idea behind this was to go out to 
the States and get all their input; that's why we're working 
with the States, to find out what should be in an essential 
benefits package that basically most or all the States would 
agree with; that the Institute of Medicine and not a 
bureaucracy, but the Institute of Medicine would consider to be 
beneficial, would be the minimum benefits package, but that has 
not been determined yet, and you say we're casting a wide net 
to get all of the input that we possibly can before that is 
established.
    You noted in your testimony the different ways that this is 
going to benefit States. I'd like to focus on just one area, 
Mr. Larsen, and that is small business.
    They face very significant challenges in finding insurance 
options for their workers. I just met with some from Iowa the 
other day. They just don't have the negotiating leverage of big 
businesses; they're far less likely than large firms to offer 
health insurance to workers. Only 49 percent of firms with less 
than 10 workers offer coverage in 2008. That was down from 58 
percent just several years ago. In contrast, 99 percent of 
firms with more than 200 workers offered coverage.
    The small businesses also pay an average of 18 percent more 
for the same plan because they just don't have the purchasing 
power.
    How will the insurance exchanges relieve this burden on 
small business owners? What can small business people who 
employ 20, 30, 40 people, what can they look forward to in 
terms of this set of the exchanges; how will it benefit them?
    Mr. Larsen. One of the big advantages is that it is--that 
as you mentioned, that allows through the Exchanges that it be 
essentially the bargaining power of the small businesses to 
combine and become closer to what large employers experience 
today; and we know large employers have lower administrative 
expenses associated with their plans, and lower premiums; and 
so this brings small businesses much closer to that type of 
situation.
    The exchanges simplify the administrative processes; they 
bring more people in the insurance pool; they increase 
essentially, the bargaining power of small businesses; and 
then, of course, there are the enhanced tax credits for small 
businesses under 25 employees. So, the small group market has 
historically--and this has gone on for decades--has been broken 
and difficult to navigate; and this is a huge improvement from 
where we are today.
    The Chairman. Now, there are tax credits involved in this 
bill for small businesses; I think it starts at 35 percent, I 
think, and goes up to----
    Mr. Larsen. Fifty.
    The Chairman [continuing]. Fifty percent. And, so, a lot of 
these small businesses that are employing 10 or 11 or 12 
people, that are really mom and pop businesses in this country. 
I don't think many of them know that they have the tax credit 
available to them. That is a fact, though, isn't it?
    Mr. Larsen. It is; and we're going to continue to work on 
making sure that people are aware of that.
    The Chairman. Director Larsen, thank you very much, and 
I'll yield to Senator Enzi for questions.
    Senator Enzi. Thank you very much, Mr. Chairman.
    Mr. Larsen, when did the Department plan to issue the 
proposed rule on exchanges?
    Mr. Larsen. I think we've said colloquially that our goal 
is to get that out sometime this spring, and we are, I can tell 
you, working diligently trying to get that out so the States 
have as much notice as they need to get to continue their work.
    Senator Enzi. That will be a little difficult for them 
without the rule being in place.
    Now, if the State decides it's not going to impose the 
three-to-one age rating structures the new law requires, does 
that mean the State will be prohibited from establishing a 
recognized exchange?
    Mr. Larsen. Yes. We're still working through the exact 
mechanics of what will and won't be required of the State 
exchanges. Obviously, the statute lays out some minimum basic 
requirements.
    Senator Enzi. That makes it sound even tougher to get one 
of these done.
    Now, in the law there's this little-known provision that 
says that Massachusetts is going to be presumed to meet the 
standards listed.
    Will Utah or any other States be presumed to meet those 
standards?
    Mr. Larsen. I don't think that we've made a determination 
in about which particular exchanges would pass the presumption 
test; so we would look forward to working with States that have 
exchanges in place now, like Utah, Massachusetts.
    Senator Enzi. Materials on your Web site mention that 
States have to achieve certification of their exchanges.
    Can you elaborate a little bit on that?
    Mr. Larsen. The exchanges go into law, essentially on 
January 1, 2014; and so if you back up from that date, the 
statute provides that by January 2013 we would know whether 
States are ready to proceed with essentially their goals; so 
there is a certification qualification requirement that HHS 
will conduct in advance of January 2014.
    Senator Enzi. But, they have to do that so far--all their 
work without the rule.
    Does the Department support uniform initial open enrollment 
periods outside of the exchange that are the same as the 
uniform initial open enrollment periods inside the exchange?
    Mr. Larsen. Do we support the same open enrollment periods 
in and outside the exchange?
    Senator Enzi. Yes.
    Mr. Larsen. I'd have to answer by saying our goal is to 
provide as much flexibility to the States as we can. The way 
the States structure their rules in and outside the exchange is 
something that we hope that they can determine to the extent 
possible; so again, I don't think we've made a determination 
about exactly which insurance rules would have to apply inside 
the exchange and outside the exchange. But our goal, always, in 
all of these provisions that you're talking about is, to the 
extent that we can, provide a flexibility to the States to make 
those determinations.
    Senator Enzi. But we won't know until the regulations come 
out.
    Of these 90,000 children that the Department estimates will 
benefit from the new law, how many live in 1 of the 19 States 
where there are no carriers selling the new child only health 
plans so there won't be anything on the exchange; how can 
parents of these children consider terminating the children's 
existing policy if they live in 1 of the 19 States in which 
there are no new child policies available? How will that work?
    Mr. Larsen. If I'm understanding your question, there's 
issues today with respect to the availability in some States of 
that coverage, and then what happens in 2014.
    It's unfortunate, frankly, that so many carriers have 
declined to continue to offer these types of policies even 
though we've given them really, all the tools that they need to 
continue to offer child-only policies, including the ability to 
rate these policies up if they need to be rated up; the ability 
to run open enrollment periods, for example. We've given States 
maximum flexibility to try and keep those carriers in the 
market and the fact is that they--it appears that they just 
don't want to offer insurance to kids that are sick.
    That will change in 2014, and there will be coverage 
available to kids, because you won't be able to apply the pre-
existing condition exclusions.
    Senator Enzi. I think one of the difficulties, actuarially 
for the companies, is trying to figure out how much to charge 
for somebody that can purchase their insurance on the way to 
the emergency room.
    In insurance commissioner Praeger's testimony, she mentions 
her concerns with multi-State plans or, what I prefer to call, 
the government-run plans. She mentions that multi-State plans 
are allowed to operate under rules that are significantly 
different from those that govern their competitors. We're 
concerned that they could cherry-pick the best risks and that 
their enrollees could unwittingly be left without important 
consumer protections provided by State law. They must play by 
the same rules as other carriers that are similarly situated, 
or consumers could be harmed. That's her statement.
    Do you support requiring multi-State plans and consumer-
operated and oriented plans, the co-ops, to abide by all the 
same Federal and State rules all the other insurance companies 
have to abide by; and what actions will your department take to 
ensure that that's the case?
    Mr. Larsen. What I can say is, having spent 6 years 
regulating the companies in Maryland, I can share Commissioner 
Praeger's concern that we set up a system that has a level 
playing field and doesn't encourage adverse selection or in 
other ways disadvantage some of the market participants.
    As we move forward fashioning the particulars through their 
role-making process, I think that's certainly an area that we 
share her attention to and will work closely with the States to 
make sure that we set up the flexibility for them to deal with 
those types of issues.
    Senator Enzi. Have any of the entities or health plans been 
issued waivers exempting them from any of the requirements 
included in the PPACA other than the waivers that have been 
issued exempting plans from meeting the annual benefit limits; 
and does HHS intend to issue waivers exempting any entities 
from other requirements?
    Mr. Larsen. The statute and in the MLR provisions, for 
examples, specifically provide the Secretary with the authority 
to waive the MLR standards in a State, on a state-by-state 
basis if application of that standard would destabilize the 
individual market. For example, we do have, I think, four 
States that have applied. We recently announced that we granted 
the State of Maine's request for a multiyear adjustment in that 
particular market; and we're going to continue to review the 
applications that we have in now.
    And, when we put the reg out, we laid out exactly what the 
criteria would be for evaluating the waivers.
    Senator Enzi. This is the reg that's about to come out.
    I've used up all my time, but I have a whole host of other 
questions, but I'll submit those.
    The Chairman. Thank you. Thank you very much, Commissioner.
    Senator Franken.

                      Statement of Senator Franken

    Senator Franken. Thank you, Mr. Chairman.
    Thank you, Mr. Larsen.
    Mr. Larsen, experts have been talking about the massive 
inefficiencies in health insurance markets for a long time. 
When I looked at Minnesota's markets, as we were debating 
health reform, it struck me that insurers in Minnesota were 
offering high value products, where most of the premiums were 
going to actual health care; but it wasn't that way in every 
State, and in some States was as low as 50 percent for 
individual policies that were small group policies--40 percent 
or even 30 percent; and this calculation of how much goes to 
actual health care is called the medical loss ratio, as you 
know.
    Based on this championing the provision to require that at 
least 80 percent of premiums for individual and small groups, 
and 85 percent for large group markets go to actual health care 
and not marketing, not administrative costs, not profits or CEO 
salaries--and I think this is one of the most important things 
that we did to make insurance companies more accountable and 
transparent and require that they spend their premium dollars 
on actual health care services--and I was thrilled to see in 
your prepared testimony that you said, ``there are signs that 
this provision''--MLR--``has already helped to moderate premium 
increases.'' Can you walk us through some of the examples of 
how you've seen the MLR provision help to moderate premium 
increases?
    Mr. Larsen. Sure. I think there's a couple. First of all, 
at least one of the public companies, a major player in the 
marketplace, has announced repeatedly that they have been 
moderating the rate at which their rate increases would be 
proposed in light of the MLR targets.
    They have consciously made a decision that in order to hit 
the targets, they're going to have to slow the rate of the 
premium growth.
    We also know, based on conversations with insurance 
commissioners around the country, that companies are making 
rate filings based on hitting the targets, which means that 
they have to structure their rate filing to provide a higher 
level of benefits to their policy holders. We're seeing that 
play out across the country, and among larger and smaller 
companies, and we think that's great.
    Senator Franken. And, you expect going forward, that as 
insurers will have to pay rebates to customers if they don't 
meet the MLR requirements, that there will be----
    Mr. Larsen. They will, and there has been a lot of 
attention on the rebates. Our goal is actually not to get 
companies to have to pay rebates, and I think in the first 
fiscal round, there may be companies that are subject to 
rebates, but ultimately you want the premium to be fair in the 
first place.
    Senator Franken. OK, and so, basically, this means insurers 
will be forced to--going forward--to reduce their overheard 
costs.
    Mr. Larsen. I wouldn't say that they'll be incentivized to 
reduce their overhead costs.
    Senator Franken. OK, incentivized.
    I'm sorry.
    I understand that six States have submitted applications to 
HHS asking to be exempted from medical loss ratio requirements; 
these waivers or adjustments, as they're officially referred 
to, are only supposed to be granted in cases where the new 
requirements would, ``destabilize the health insurance 
market.''
    Now, I understand that for the States that have just a 
couple of major health plans, the waivers may be worth 
considering, like in Maine; and they have been done there.
    But, for most States, medical loss ratio will keep 
insurance companies from spending such a higher percentage of 
premium dollars on, again, administrative costs, marketing and 
profits. The MLR ratio is, I think, one of the most potent 
tools in health reform that could, in the long-term, help stem 
skyrocketing premium increases; so it's important that it not 
be watered down through unnecessary waivers, I believe.
    What criteria is HHS using to evaluate MLR waiver requests 
from States; and what is your process for reviewing these 
requests?
    Mr. Larsen. When we published the criteria for evaluation 
in the regulation in December and its a number of different 
issues, for example, is there a major insurance carrier that 
would potentially leave the market if the 80 percent were 
applied.
    And then the next question would be, how many people are 
associated with the potentially exiting carriers; the big 
market share or small market share. In the State of Maine, as 
you mentioned, it was unusual that the potentially departing 
carrier had over 35 percent of the market.
    Then, the question is, what other coverage options would be 
available to people if the carrier exited? And, so we look at 
whether there's a guaranteed issue in the State or a high-risk 
pool, or whether the commissioner has the ability to place this 
business with other carriers.
    We really walk through all of the regulatory criteria. It's 
a, I think, a rigorous but reasonable process, and we want to 
run it fairly and consistently; and what we know is every State 
is different. So, every State is going to have different 
considerations applied.
    Senator Franken. Thank you very much. Thank you, Mr. 
Chairman.
    The Chairman. Thank you, Senator Franken.
    Senator Bennet.

                      Statement of Senator Bennet

    Senator Bennet. Thank you, Mr. Chairman. I want to thank 
you very much for holding this hearing. I'm proud that in 
Colorado we've already had 11 hearings in our State to talk 
about how to set up the exchanges; and, in fact, just this 
week, or last week, the House Majority Leader in the State of 
Colorado is a Republican and the Democratic State Senator are 
pairing up to work on a bipartisan piece of legislation to 
begin to implement the exchanges. So, we care deeply about it.
    In an article we see in the Denver Post where a Republican 
legislator in our State said, ``most people viewed exchanges as 
the most free-market part of Obama Care,'' as she referred to 
it--I call it health care reform--but this part of the puzzle 
is getting a lot of high praise in our State, and I wonder, Mr. 
Larsen, first of all, whether that's an accurate 
characterization. Is this a free-market approach on the 
exchanges? You have a lot of experience both in the private and 
the public sector when it comes to health care reform.
    I wonder if you'd talk a little bit about the free-market 
qualities of this; and, also, the balance that needs to be 
struck between making sure we've got common-sense regulation, 
and a free market on the other hand.
    Mr. Larsen. I agree. I think it is very much a free market 
approach. Certainly the exchanges rely on the participation of 
the private insurers and co-ops as they get set up in those 
States. It is very much reliant on setting up a marketplace.
    And, one of the big advantages is the one-stop shopping 
transparency component. I mean, that's how marketplace works, 
when you know what your options are, and you can evaluate 
options and differences between options; and that's the core of 
what the exchange is.
    Senator Bennet. If you were in a town hall in my State and 
somebody were asking you, Mr. Larsen, what would this look like 
in 2014 if we had a fully functioning exchange versus what 
would it look like if we didn't have an exchange.
    I've got three little kids at home; and if I were a small 
business owner or somebody employed by a smaller business, what 
difference does all this make to me?
    Mr. Larsen. In so many other areas today, technology and 
the Internet has allowed us to have more accessible 
understandable choices, whether it's buying airplane tickets or 
trading stock; that technology and those choices have not 
expanded to health insurance markets.
    With an exchange you can go to one place, one site, enter 
basic information and get an array of choices, learn more about 
the plans, enroll, determine where you're eligible. That's what 
the future is. That's what the exchanges are going to do in 
2014.
    Senator Bennet. Then, what effect can that transparency 
have on costs, do you think?
    Mr. Larsen. I think that's one of the challenges today, 
that there is no real price transparency; it's very difficult. 
You can look at one plan, and you know what one plan is. So, 
when insurers know that they're going to have to stack their 
prices up against other plans in the marketplace, I think that 
everyone would agree that that can have a leveling effect and 
require plans to become more efficient.
    If they want to sell, they're going to have to compete on 
price, and on quality, which is going to be another component 
of the exchanges.
    Senator Bennet. As the States begin to set up functioning 
exchanges, if more than one State wanted to get together and 
provide that exchange together, would they be able to do that?
    Mr. Larsen. Yes, and our goal is, and will be always, to 
give the States the maximum flexibility; so there may be 
regions of the country where a regional exchange makes sense. 
And, if they can get together to do that, they should do that.
    Senator Bennet. The States themselves would decide, not the 
Federal Government, but the States would decide to come 
together, in those instances, you could have a marketplace that 
extended across State lines for insurance.
    Mr. Larsen. That's right.
    Senator Bennet. And, that's the purpose of the law; right?
    Mr. Larsen. That's right.
    Senator Bennet. I wanted also, feedback on the Chairman's 
question earlier--and maybe this is a little bit away from 
exchanges, but based on your experience as insurance 
commissioner and insurers, I continue to hear from the small 
businesses in my State that they are just being crushed by 
rising health care costs; and I wonder, while we have you here, 
if you would be willing to give us the benefit of your acquired 
wisdom of what we could do, and what you are already trying to 
do to bring these costs back in line, because it is strangling 
our ability to create jobs and keep our doors open.
    Mr. Larsen. It's a challenge today. It's been a challenge, 
really, for the last 20 years. I think that premiums for small 
businesses have been a challenge for a long time.
    One of the things the exchanges do, is they reduce the 
administrative costs significantly. I know--and I think the 
Chairman pointed this out--that if you look at the 
administrative costs for large groups versus small groups, 
versus individual groups, that it's low and it goes up higher 
with each, inversely proportional to the size.
    Exchanges at a minimum, have to lower the administrative 
costs associated with selling to small businesses.
    The ACA generally, has a number of provisions that are 
going to be kicking in, but will take time; and it should be 
fully functional by 2014 that help reduce costs, including 
patient safety initiatives, and getting more people in the 
insurance pool. The MLR standard that we talked about, 
incentivizes health plans to be more efficient and to spend 
more on quality, which actually reduces its costs for their 
policy holders.
    There's a number of provisions that are in play, but will 
take some time to get there, until 2014.
    Senator Bennet. My time is up, Mr. Chairman.
    Thank you again, for holding the hearing.
    The Chairman. Thank you very much, Senator Bennet.
    Senator Burr.

                       Statement of Senator Burr

    Senator Burr. Mr. Larsen, does the act reduce the cost of 
health care in America?
    Mr. Larsen. Yes, it does.
    Senator Burr. Why, then, does CBO have such a difficult 
time agreeing with you on that?
    Mr. Larsen. I think they opine that it didn't reduce the 
overall cost----
    Senator Burr. How about the actuary at CMS?
    Mr. Larsen. Mr. Foster.
    Senator Burr. Yes.
    Mr. Larsen. Yes. I'm not actually familiar with his most 
recent opinion.
    Senator Burr. It was my understanding that the IOM 
recommendations would go to the Secretary and she would use 
that as counsel to make the final determinations, but that it 
was her decision.
    And, I heard you answer Senator Harkin, and you agreed that 
IOM would be defining the essential health benefits package. 
Isn't it true the Secretary is going to define it?
    Mr. Larsen. Yes, and I apologize if I left the impression 
that IOM defines it. That's not right. In fact, there's kind of 
a multistage process associated with essential benefits.
    IOM is providing some advice that the Department of Labor 
is conducting a survey to determine what the typical benefits 
are that are provided in employer plans across the country.
    Senator Burr. If this plan's so good, why are so many 
people asking for waivers? We've got companies asking for 
waivers; we've got States asking for waivers. It seems like the 
odd man out is the entity that doesn't ask for a waiver by 
2014.
    Mr. Larsen. In fact if you look at the types of plans that 
are getting waivers, for example the annual limits waiver, it's 
gotten a lot of attention in the press. It's only a very small 
percentage of the market, about 2 percent employer-based----
    Senator Burr. Does that mean there's going to be no more 
waivers?
    Mr. Larsen. No, I'm not saying there aren't going to be any 
more waivers. I'm just saying it's a very, very small 
percentage----
    Senator Burr. Last week----
    Mr. Larsen [continuing]. Of mini-med policies.
    Senator Burr [continuing]. Last week the Administration 
issued proposed rules outlining the steps States might pursue 
in order to receive a State innovation waiver.
    Mr. Larsen. That's right.
    Senator Burr. Which is basically a waiver process for 
allowing policies that differ from the law, provided that the 
requirements of the law are met; is that an accurate depiction?
    Mr. Larsen. I would describe it this way: There are some 
basic provisions that need to be satisfied in order to 
qualify----
    Senator Burr. Let's talk about some of those.
    Mr. Larsen. OK.
    Senator Burr. Isn't it true that in order to apply for 
waivers, States must demonstrate that the State's plan will 
provide a coverage that is at least as comprehensive as the 
coverage that would have been provided under the Health Care 
Law, including the essential health benefit requirements which 
haven't even been determined yet?
    Mr. Larsen. That's right. One of the requirements is, in 
order to accomplish the objectives of the Affordable Care Act, 
if there's a different way to get there----
    Senator Burr. So, you can't make a determination as to 
their request for waiver, because we don't know what the 
essential health benefit is yet.
    Mr. Larsen. The proposed rule that we put out on the State 
innovation waiver is a proposed rule and----
    Senator Burr. So, we can't----
    Mr. Larsen [continuing]. The objective----
    Senator Burr [continuing]. Approve or deny those waivers 
even though we haven't set a definition for the essential 
health benefit?
    Mr. Larsen. I would answer this way: That we're not 
accepting applications for a waiver because that rule is a 
proposed rule. We want to get feedback from the States, 
frankly, about how that rule in its final form, should be 
constructed. So, the purpose of putting that rule out in the 
last week or two was, in fact, to display it and get a feedback 
from interested parties and stakeholders in States about how, 
exactly, that process should work.
    Senator Burr. Let's talk about feedback. You said you've 
done everything possible to allow insurers to continue to sell 
child-only plans. Now, I don't believe that's accurate.
    Insurance companies told me and told you what needed to be 
done to allow them to continue selling those plans, but you 
didn't do it.
    Insurers have said that if you impose a uniform, open 
enrollment period, they can start selling child-only plans 
tomorrow. Let me ask you: Will you implement that change?
    Mr. Larsen. We'd be happy to talk to the issuers that 
you're talking about. We've provided insurers the ability to 
set up open enrollment plans, and the States. Again, another 
example of State flexibility. If the State wants to set up an 
open enrollment plan, we urge them to do that. We hope that 
they will.
    That's really what counts, is that the State's going to set 
up.
    We're not necessarily saying that one size is going to fit 
everybody across the country, but if a State wants to set up an 
open enrollment plan period, we hope that they will, if they 
need to do that to keep the market open.
    Senator Burr. But, will you implement a uniform, open 
enrollment period?
    Mr. Larsen. We're certainly happy to talk to these issuers.
    Senator Burr. Is this the first time you've heard about 
that?
    Mr. Larsen. I've heard that they would like to hear the 
States set up open enrollment programs, we want the coverage to 
be available. We think there are lots of options out there. We 
think it's unfortunate that carriers have declined to insure 
sick kids; but nonetheless, we're happy to work with them if 
there's a way to make it work for them.
    Senator Burr. Thank you, Mr. Chairman,
    The Chairman. Senator Merkley.

                      Statement of Senator Merkley

    Senator Merkley. Thank you, Mr. Chair.
    And thank you for your testimony.
    I want to start with Mr. Larsen's comments that exchanges 
provide greater information to consumers; one-stop shopping 
where consumers will be able to compare a range of plans. It's 
my understanding that each entity is setting up their own 
structure, but are there certain qualities that you really 
expect to see? For example, will an individual, regardless of 
where they live in the country, be able to go to the local 
exchange and say, ``Well, out of these eight plans, I want to 
compare these two side-by-side,'' and the software will show 
how they differ in key features.
    Mr. Larsen. That's exactly the objective, to bring up the 
array of plans, and then you can--as you can today, on some 
sites--click two boxes and say, ``Compare these two plans; what 
are the benefits, what are the prices.''
    Senator Merkley. I found that very useful when I went to 
the Federal benefits plan, when I came into office. With two 
children, being able to compare them side-by-side was 
important. So, that is a required feature for each exchange? 
There could be different formats, so I assume that States are 
going to----
    Mr. Larsen. If I am understanding you, I don't think we 
want to be exactly prescriptive, but there is a provision that 
there be a comparison among the plans, so consumers have the 
ability; and we'll be working through exactly what that 
entails.
    Senator Merkley. One of the challenges in health care 
unlike, say in life insurance, is that a plan has to set up 
contracts with providers, a very complex undertaking. It's been 
anticipated that by making it easier to reach consumers through 
an exchange, it will encourage new companies to come into 
particular markets. Where there might be three providers, now, 
maybe we'll have five--maybe we'll have seven. Do you have a 
sense of whether that's likely to unfold and provide greater 
access and more choices to consumers? Do you expect exchanges 
to encourage more competition, attract more companies in a 
particular insurance market?
    Mr. Larsen. Yes, we do. And, I think that's exactly what a 
marketplace is. It's a place where sellers know that the buyers 
are going to be--and in this place when you have a single point 
of entry, essentially, for buyers, we hope and expect that 
there are going to be more sellers in that marketplace to 
respond to the critical mass of buyers coming in one place.
    Senator Merkley. What kind of evidence do we have, if any, 
or is it just too soon to see if that's really going to 
materialize as we're hoping?
    Mr. Larsen. I think we're progressing toward--I mean 
obviously, there's some States today that have exchanges that I 
think are both successful, and we can build on those successes; 
whether it's a Utah model or a Massachusetts model, improve 
upon them, learn from them. So, by the time we get to 2014 
we'll have really refined what the best practices are, but 
still give States the flexibility to meet their particular 
local circumstances.
    Senator Merkley. But for those States that have set up 
exchanges, did we see that impact? Can we cite statistics that 
more providers came into those markets?
    Mr. Larsen. Certainly we've seen, for example in the Utah 
exchange where there's been a progressively increasing number 
of small businesses that are accessing the exchange there. I'm 
sure the next witness can talk about, exactly the number of 
health plans that are participating, but I think it's been 
successful.
    Senator Merkley. I hold a town hall in every county in my 
State each year, 36 counties, and when I talk about the 
different features of the plan and then ask people if they 
think it's a step forward or a step backwards, people love the 
idea of the exchange. They like the idea of more competition, 
more choices, and being able to compare plans side-by-side. In 
many ways, it parallels what people were asking for, for a long 
time. It's more choices and the ability to compare plans that 
often State employees have in different areas, or Federal 
employees have.
    There's a deadline coming up at the end of 2012, kind of a 
milestone in setting up exchanges. Could you describe what 
States have to do to meet that milestone?
    Mr. Larsen. There's a number of provisions, and we are 
going to put the regulation out there very soon, meaning this 
spring, that will provide some additional guidance for the 
States, but if you back up from the date of January 2014 to 
January 2013 when we would want to know whether the exchange is 
ready to go live; and even then we would work with States. Our 
goal is ultimately, to do everything we can to make sure the 
State is ready, and that there's a State exchange. We want to 
be operating as few exchanges as possible, as HHS, and have the 
most number of States.
    So, back up from the January 2014, January 1, 2013, and 
then between now and January 2013 is where there's going to be 
ongoing activity as there is today in all States.
    Senator Merkley. So, I think one of the concrete goals was 
to have States pass enacting legislation. What happens if a 
State hasn't done it by then, but then does it in March of the 
following year?
    Mr. Larsen. March 2012?
    Senator Merkley. March 2013.
    Mr. Larsen. 2013? I can't say for sure in a particular 
circumstance what would happen. I could only tell you that our 
overriding objective will be to make sure that: a State wants 
to run an exchange and it is ready to run an exchange, and that 
they're going to run their exchange.
    We will work with the States to make sure that they can do 
that.
    Senator Merkley. Thank you. Working with the States in this 
matter is going to be critical to the success of the 
exchanges--a very valuable tool that will increase competition 
and make it easier for citizens to find a health care plan that 
suits their circumstances.
    Thank you.
    The Chairman. Thank you, Senator Merkley.
    I see the Senator from Utah has returned. I didn't know if 
Senator Hatch wanted to ask questions of this witness.
    Senator Hatch. No, I don't have any questions. Thanks, Mr. 
Chairman.
    The Chairman. Thanks, Senator Hatch.
    Senator Mikulski.

                     Statement of Senator Mikulski

    Senator Mikulski. Mr. Chairman, I'm going to waive my 
questions. They've actually been asked by Senators Burr, Bennet 
and Merkley. I thank you for that.
    I just want to note to the committee, this is a banner year 
for Maryland, and Mr. Larsen has served three Maryland 
Democratic governors. For Governor O'Malley, as Insurance 
Commissioner, Mr. Larsen was actually on the ground with the 
governor trying to provide expanded access to the people of 
Maryland, and also headed up our Public Service Commission.
    He's not like an egghead sitting over CMS; not that there's 
eggheads over at CMS, but I think the people of America feel 
that sometimes we govern from 35,000 feet, and our head is in a 
cloud and our feet are not on the ground. I believe that Mr. 
Larsen brings that expertise to advise not only CMS, but to 
work with the States.
    We're glad to have you. We noted your testimony and your 
questions and answers. And, later we'll be hearing from Dr. 
Josh Sharfstein, the head of the State of Maryland's Health 
Department.
    But, anyway, good to see you again, Steve.
    Mr. Larsen. Thank you, Senator.
    The Chairman. Senator Alexander.

                     Statement of Senator Alexander

    Senator Alexander. Thanks, Mr. Chairman.
    Dr. Larsen, thank you for being here. You mentioned that 
the Administration supports maximum flexibility for States. As 
a former governor, I welcome that attitude. Does that mean that 
you would support the request of a large number of the 
governors that we pass legislation that would give them 
flexibility in determining relief from the maintenance of 
effort provision in the health care law?
    Mr. Larsen. I have to defer on the Medicaid questions, 
because Medicaid is really not my area of expertise over at 
CMS, if that's OK.
    Senator Alexander. Medicaid is not your area of expertise?
    Mr. Larsen. No, sir.
    Senator Alexander. It's an important part of the law. Let 
me offer my own thought on that. We really set up two big 
cliffs over which States are going to fall; one is the stimulus 
legislation put a lot more money into Medicaid saying that runs 
out after a couple of years. It said that until the money ran 
out, there is a requirement that States not cut any spending 
continue. So, while States are going through this recession and 
having to reduce costs, they had to reduce everything else 
except Medicaid, so that raised college tuition and a variety 
of other things because of a Federal rule.
    Then, we have the unfunded mandate that's in the Health 
Care Law that our former governor, a Democrat, Governor 
Bredesen, has estimated will cost our State 1.1-plus billion 
dollars over 5 years.
    Now, what governors have asked--and these include governors 
of both parties, is basically that the States be given 
flexibility in this Maintenance of Effort Law; and Senator 
Hatch, who is here today, is leading an effort to develop 
legislation that would permit that to happen. And, I'm very 
hopeful the Administration will favorably consider that.
    Another area I would like to ask you about--we're talking 
about exchanges--I met a few months ago with the heads of the 
largest restaurant companies in America. They describe 
themselves as the second largest employer in America. They 
employ largely lower income people. They were talking about the 
effect of the Health Care Law upon their companies, and their 
employees; and I want to describe what they said and see if 
you've heard a similar thing.
    No. 1: They're going to reduce the number of employees 
based upon the costs that they anticipate from the Health Care 
Law. One, for example, said that he was operating his 
restaurants at an average of 90 employees, but as a result of 
the Health Care Law and his costs he was going to aim to reduce 
to 70. That's a loss of jobs.
    A second was, they were all--several were actively 
considering whether they would simply not continue to offer 
health care, because it would be cheaper for them to pay a 
penalty and allow their employees to go into exchanges.
    I'm wondering if in either of those two cases you've heard 
that from large employers, and if so, what you've done to deal 
with it.
    Mr. Larsen. Certainly when it comes to a lot of the 
restaurant owners and small businesses, I mean exchanges are 
going to be set up and hopefully work to their benefit, not to 
increase costs, but to lower costs.
    We'd be happy to meet with the folks that you met with. The 
exchanges are for their benefit in addition to those in the 
individual market; and so, it would be unfortunate if they had 
a perception that costs are going to increase under the 
exchanges, rather than become more affordable.
    Senator Alexander. You mean to their benefit because their 
employees might find health care in the exchanges; is that what 
you're saying?
    Mr. Larsen. Yes, for small businesses, you have tax credits 
available to them, and then you have the bargaining power of 
the exchanges for other, larger, if you will, small businesses.
    Senator Alexander. What we're talking about is large 
numbers of employees who have health care restaurant company 
who would be--who the restaurant company would simply say, 
``Well, sorry, it cost us too much now; plus there are these 
exchanges over here, so go on over to the exchange and get your 
health care.''
    And, wouldn't that contravene the President's assurance 
that Americans would be able to keep the health care they have 
if thousands of American businesses stop providing health care 
because they can allow their employees to go over to the 
exchanges and get the health care that they----
    Mr. Larsen. We certainly hope that that doesn't happen, and 
we're willing to work with those employers for that--to 
understand the advantages of maintaining an employer-based 
coverage system but allowing their employees to access coverage 
through the exchanges.
    Senator Alexander. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Alexander.
    And, Director Larsen, thank you very much for your 
appearance. Thanks for your brave work over at CMS.
    And we'll now move to our second panel.
    Mr. Larsen. Thank you very much.
    The Chairman. Our second panel, to begin with, I would 
welcome Kansas insurance commissioner Sandy Praeger. Now in her 
third term, Commissioner Praeger oversees implementation of the 
Affordable Care Act insurance reforms. Under her leadership 
Kansas was awarded an Early Innovator Grant to implement a 
State-run health insurance exchange. As the Kansas Insurance 
Commissioner, she's also an active member of the National 
Association of Insurance Commissioners. She served one term as 
the Association's president, and now chairs its Health 
Insurance and Managed Care Committee; and, I will yield to 
Senator Mikulski for an introduction.
    Senator Mikulski. Yes. I just want to bring to the 
committee's attention that we have another Marylander 
testifying today; Dr. Josh Sharfstein, who was appointed 
recently by Governor O'Malley as the Secretary of the Maryland 
Department of Health and Mental Hygiene. Dr. Sharfstein has a 
distinguished background. He worked on Capitol Hill with the 
Energy and Commerce Committee, which means he's battle tested 
and knows how Congress works. He headed up the Baltimore City 
Health Department where he really was quite an innovator, in 
terms of particularly improving the health outcomes of 
children, and was even named Public Official 
of the Year by Governing Magazine. The Obama administration 
tapped him to be the No. 2 person at FDA, ensuring the food 
safety and the safety of our pharmaceuticals in this country, 
but Maryland has always been his home--not only the home of his 
zip code, but the home of his heart brought him back.
    And, what we're going to hear today is someone who really 
started life as a pediatrician, and then through government and 
public policy, really looked at how we can provide health care 
for our most needy.
    We're very proud in Maryland that we receive 6.2 million 
from HHS as one of the seven States to actually get the health 
exchanges underway; and we'll be one of the States to lead the 
way in innovation.
    We'll look to Dr. Sharfstein to tell us how Maryland's 
doing and the lessons learned for perhaps the rest of the 
country for affordable, expanded access care.
    Thank you very much, Mr. Chairman.
    The Chairman. Thank you, Senator Mikulski. And, we welcome 
you, Dr. Sharfstein and Commissioner Praeger and our Speaker, 
Mr. Clark. Both Speaker Clark and Commissioner Praeger have 
testified before this committee before; and if you have Dr. 
Sharfstein, it was before my watch, and you're not that old.
    We welcome you all here to this committee.
    All of your statements will be made a part of the record in 
their entirety.
    And, we'll just go from left to right.
    We'll start with Ms. Praeger. And if you could just sum up 
your testimony in several minutes--the clock will be at 5, but 
if you go over a little bit, don't mind that. When it starts 
getting close to 10 minutes, I might get a little nervous, but 
if you go over a few minutes, that's no big deal.
    Ms. Praeger. Thank you.
    The Chairman. Commissioner Praeger, welcome.

  STATEMENT OF SANDY PRAEGER, KANSAS INSURANCE COMMISSIONER, 
                          LAWRENCE, KS

    Ms. Praeger. Thank you, Senator. Thank you, Mr. Chairman. I 
appreciate that, and I will try to respect the clock.
    But good morning to you and to Ranking Member Senator Enzi, 
and the distinguished members of the committee.
    My name is Sandy Praeger, and I appreciate this opportunity 
to testify on behalf of the NAIC; and I thank you for 
recognizing the important role played by State regulators and 
for ensuring that by implementing this law, we do have a seat 
at the table. Over the past year, one of the main focuses of my 
department and other State departments of insurance has been to 
lay the groundwork for implementation and enforcement of the 
immediate reforms that took effect for plan years beginning on 
or after September 23, 2010. While the Affordable Care Act 
defers to State regulation as a default position, in order to 
enforce these protections State regulators must be granted the 
authority to do so under State law. While some States have 
blanket language in their insurance codes requiring insurers to 
abide by all applicable Federal requirements and empowering 
regulators to enforce them, most do not.
    States have been reviewing their statutes to determine 
which changes they must make, particularly in the area of 
external appeals processes and rate review. Some States are 
taking a wait-and-see attitude pending the resolution of the 
legal challenges.
    While we at the State level have done our very best to 
ensure that implementation of these provisions is accompanied 
by as little disruption as possible, some challenges have 
arisen over the past year.
    Ensuring child-only coverages available in the State is one 
of them. Preserving State programs that require or encourage 
insurers to offer more limited benefit packages that are more 
affordable to certain populations--a few States do that. And, 
avoiding disruptions due to medical loss ratio--these have been 
all high priorities for State regulators. The majority of our 
current efforts are directed toward planning and establishment 
of State Health Insurance Exchanges. Kansas, along with 48 
other States, the District and U.S. territories, were awarded a 
$1 million Exchange Planning Grant, which we are currently 
using to conduct an analysis of our health insurance 
marketplace and the work that would be necessary to develop and 
operate an Exchange in our State. We are now beginning to apply 
for an Establishment Grant that will allow Kansas to begin 
extensive work to put the exchange into place.
    The State of Kansas was also fortunate to receive an Early 
Innovator Grant and the funds that we received under this grant 
will be used to develop the technology that enable a single 
door, an end-to-end solution by extending the new Kansas 
Medicaid and Children's Health Insurance Program, an 
eligibility system and integrating it with the Kansas Health 
Insurance Exchange.
    We will then make this technology available to other 
interested States; and we've already had some of those 
discussions.
    Most States are engaged in the process of developing 
legislation to authorize the creation of an Exchange and 
putting in place the administrative structure that will do the 
bulk of this Exchange implementation work. In order to guide 
this process, the NAIC has developed the American Health 
Benefit Exchange Model Act, which provides a basic framework 
for the States to use when developing their authorizing 
legislation. In establishing a State-based exchange, States 
face several key obstacles. Foremost among these is time. 
States are working hard to stay on target to allow consumers to 
purchase coverage by late 2013; and that will require becoming 
effective when the ball drops in Times Square for ringing in 
2014.
    Timely guidance from HHS, of course, is critical to this 
process, and to our success. In particular, guidance on the 
contents of the essential health benefits package, will be a 
crucial piece that will impact the availability and the 
affordability of coverage, and the cost of subsidies. And we 
need that guidance ASAP.
    States must make sure that they have sufficient resources 
to develop and establish Exchanges. Federal establishment 
grants are absolutely essential in this regard. States don't 
have an abundance of extra resources right now, as you all 
know.
    And, then finally, I'd like to briefly discuss some of the 
more general implementation challenges that we are working on.
    Adverse selection is a major concern in any health reform 
effort. Perhaps the largest open question regarding adverse 
selection will be the effectiveness of the individual mandate. 
If the healthier risk stays out of the market until they're 
sick, rates will rise.
    State regulators are also concerned that changes to the 
small group health plans--their grandfathered status could 
exacerbate the risk of adverse selection and complicate State 
enforcement of the law's market reforms.
    Another problem area could arise if multi-State plans and 
consumer operated and oriented plans, which will be sold 
alongside other plans in the Health Insurance Exchanges; if 
they are allowed to operate under rules that are significantly 
different from those that govern their competitors, again, 
potentially adverse selection. They must play by the same rules 
as the other carriers that are similarly situated or consumers 
could be harmed. Solvency issues are really important there.
    In addition, if large numbers of carriers exit the 
marketplace, particularly prior to 2014, competition will 
suffer and availability of coverage may become a concern.
    Thus far we have not seen empirical data indicating a major 
market exit, though we will remain watchful for problems that 
might arise.
    And, as I have noted in my previous testimony before this 
committee, the success of this entire enterprise depends upon 
bringing health care costs under control. Health insurance 
premiums are largely a reflection of the underlying cost of 
care and levels of utilization. While the Affordable Care Act 
contains numerous provisions designed to start moving the 
system toward lower costs and higher quality care, it is not 
yet clear to us how effective those measures will be. Again, I 
thank you for the opportunity to testify here today. I 
appreciate the committee's recognition of the States' crucial 
role in implementing this law and I reiterate our offer of 
assistance going forward, and I look forward to your questions.
    [The prepared statement of Ms. Praeger follows:]
                  Prepared Statement of Sandy Praeger
                                summary
    Over the past year, one of the main focuses of my department and 
other State departments of insurance has been to lay the groundwork for 
implementation and enforcement of the immediate reforms that took 
effect for plan years beginning on or after September 23, 2010. While 
some States have blanket language in their insurance codes requiring 
insurers to abide by all applicable Federal requirements and empowering 
regulators to enforce them, most do not. Early State efforts have been 
centered on the form review process, with regulators verifying that the 
forms meet all applicable requirements.
    As reforms have been implemented, some challenges have arisen. 
Ensuring child-only coverage is available in the State; preserving 
State programs that require or encourage insurers to offer more limited 
benefit packages that are more affordable to certain populations; and 
avoiding disruptions due to the medical loss ratio have been high 
priorities for State regulators.
    The majority of our current efforts are directed towards planning 
and establishment of State Health Insurance Exchanges. Most States are 
engaged in the process of developing legislation to authorize the 
creation of an Exchange. Despite the flexibility afforded States in the 
creation of Exchanges, significant challenges remain.
    Foremost among these is time. January 1, 2014 is less than 3 years 
away, and States must have made sufficient progress towards 
establishing an Exchange by January 2013 for the Secretary to certify 
that they will meet the deadline. In addition, the contents of the 
essential health benefits package will be a crucial piece of 
information and it may not be available until the end of this year. 
States must also make sure that they have sufficient resources to 
develop and establish Exchanges--Federal establishment grants are 
absolutely essential in this regard.
    One of the more daunting challenges that we will face in getting an 
Exchange up and running will be the development of critical information 
technology systems and infrastructure. Kansas has received an Early 
Innovator Grant to perform some of this work, and we look forward to 
sharing it with other States as they move forward in establishing their 
Exchanges.
    Adverse selection is a major concern in any health reform effort. 
Perhaps the largest open question regarding adverse selection will be 
the effectiveness of the individual mandate. There is also concern that 
the expansion of the small group market to include businesses with 51-
100.
    Another potential problem area could arise if Multi-State Plans or 
the Consumer Operated and Oriented Plans are allowed to operate under 
rules that are significantly different from those that govern their 
competitors.
    In addition, if large numbers of carriers exit the marketplace, 
particularly prior to 2014, competition will suffer and availability of 
coverage may become a concern.
    Finally, as I have noted in my previous testimony before this 
committee, the success of this entire enterprise depends upon bringing 
health care costs under control. It is not yet clear to us how 
effective these reforms will be in addressing this crucial issue.
                                 ______
                                 
                              introduction
    Good morning Chairman Harkin, Ranking Member Enzi, and 
distinguished members of the committee. My name is Sandy Praeger, and I 
am the elected Insurance Commissioner for the State of Kansas, chair of 
the Health Insurance and Managed Care Committee of the National 
Association of Insurance Commissioners (NAIC), and co-chair of the 
NAIC's Health Insurance Exchanges Subgroup. I thank you for holding 
this hearing on implementation of the Patient Protection and Affordable 
Care Act (PPACA) and for your invitation to appear today on behalf of 
the NAIC. The NAIC represents the chief insurance regulators of all 50 
States, the District of Columbia, and five U.S. territories, whose 
primary roles are protecting consumers and promoting vibrant and 
competitive insurance markets.
    The last time I appeared before this committee, on November 3, 
2009, health reform had not yet been enacted, and I offered the 
assistance of State regulators through the NAIC as you weighed and 
debated the difficult issues inherent in trying to achieve the goal of 
extending health insurance coverage to those with preexisting 
conditions while controlling costs and improving quality. Today, I 
would like to thank you for recognizing the important role played by 
State regulators and for ensuring that when it came to implementation 
of this law, we would have a seat at the table. I would also like to 
renew our offer of assistance, both to the Administration in 
implementing PPACA, and to this and other committees as you fulfill 
your oversight responsibilities.
                      state activities in year one
    Over the past year, one of the main focuses of my department and 
other State Departments of Insurance has been to lay the groundwork for 
implementation and enforcement of the immediate reforms that took 
effect for plan years beginning on or after September 23, 2010. These 
provisions include:

     Prohibition of lifetime benefit limits;
     Restrictions on annual benefit limits;
     Prohibition of rescissions;
     Coverage of preventive services without cost-sharing;
     Extension of dependent coverage up to age 26;
     Internal and external review;
     Prohibition of preexisting condition exclusions for 
children; and
     Disclosure of justifications for premium increases.

    While PPACA defers to State regulation as a default position, in 
order to enforce these protections State regulators must be granted the 
authority to do so under State law. While some States have blanket 
language in their insurance codes requiring insurers to abide by all 
applicable Federal requirements and empowering regulators to enforce 
them, most do not. Consequently, one of the first tasks facing the 
States after enactment of PPACA was securing this authority. In order 
to assist the States in this task, the NAIC developed model language 
for adoption by State legislatures that meets the Federal minimum 
standards and provides State regulators with the authority they need to 
enforce the provisions. Most States have been reviewing their statutes 
to determine which changes they must make, particularly with respect to 
the external appeals process and rate review requirements. Some States 
are taking a wait-and-see attitude pending resolution of the challenge 
to the constitutionality of the law.
    For enforcement purposes, early State efforts have been centered on 
the form review process. Health insurers are required to file the 
contract, or ``form,'' of each policy that they sell with State 
regulators, who then review the form to ensure that it meets all 
requirements of State law and regulation. As these forms are filed, 
regulators have been verifying that every policy sold in the State 
meets all applicable early implementation provisions. This process has 
been expedited through the use of a regulatory checklist, developed by 
the NAIC, that each insurer must complete identifying where in each 
policy the relevant language complying with PPACA is located. Even with 
this assistance, conducting the form review necessary to implement 
these provisions was a Herculean task for the dedicated regulators in 
my department and in those of every State around the country, as we 
worked to ensure that health insurance policies sold or renewed reflect 
the applicable provisions required by the law. In addition, State 
regulators are monitoring consumer complaints to ensure that insurers 
are living up to the amended terms of their policies and are providing 
the benefits that they have promised to policyholders, and taking 
action where necessary.
                    early implementation challenges
    While we at the State level have done our very best to ensure that 
implementation of these provisions is accompanied by as little 
disruption as possible, some unintended consequences have arisen over 
the past year, posing some challenges for regulators.
    The first of these challenges arose in response to the provision 
prohibiting the application of preexisting condition exclusions to 
children under the age of 19. Because preexisting condition exclusions 
were redefined to include denials of coverage, this provision has, in 
effect, required guaranteed issue of coverage for children. In 
response, some or all insurers in most States ceased new sales of 
individual market policies only to children, creating a situation where 
a parent whose employer does not offer family coverage is unable to 
purchase coverage for his or her children. In most cases, insurers 
continue to issue coverage to children as part of a family policy.
    States have attempted to deal with this issue in two ways. First, 
they have issued regulations creating open enrollment periods in an 
effort to limit the ability of consumers to wait until children become 
sick before purchasing coverage for them. On October 13, HHS issued 
guidance clarifying that--subject to State law--insurers could limit 
their sales of child-only individual market plans to these open-
enrollment periods. The second strategy that some States have adopted 
has been to require, through legislation, regulations, or sub-
regulatory guidance, that carriers in the individual market continue 
offering child-only coverage. These strategies have been met with 
varying degrees of success in different States. State regulators remain 
vigilant with respect to the availability of child-only coverage and 
will continue to search for ways to implement this provision in a way 
that minimizes disruption of the marketplace.
    A second challenge involves restrictions on annual limits. There 
was initially some concern among State policymakers that the law's 
restrictions against low annual limits on benefits might interfere with 
State programs that either require or encourage insurers to offer more 
limited benefit packages that are more affordable to Americans who are 
currently priced out of the insurance market. Until 2014, when 
subsidies are made available to those under 400 percent of the Federal 
poverty level, the loss of these programs could have the unintended 
consequence of increasing the numbers of the uninsured in those States. 
We were glad to see the creation of a process for States to apply for 
waivers that will allow these programs to continue until subsidies are 
available. Four States have applied for--and been granted--waivers for 
these types of programs.
    It is critically important, however, that we maintain an 
environment that promotes coordinated and collaborative enforcement of 
the annual limits provision. The information available to State 
regulators regarding annual limits waivers has so far been limited to 
the name of the insurer, the policy's effective date, and the number of 
affected enrollees. To effectively enforce this provision, however, we 
will need more granular information about the waivers that will tell us 
which policies sold by these insurers have been granted waivers, and 
look forward to working with HHS to resolve this issue.
    A third concern involves the Federal medical loss ratio (MLR) and 
rebate program. Many States have been working with HHS to pursue 
adjustments to the MLR requirements in their individual markets, as 
allowed under the law. Last week we were pleased to see that the State 
of Maine was granted a 2-year adjustment, with a possible third year 
extension, to the MLR for its individual market. While we understand 
the need for the review process to be grounded upon solid data, several 
States have expressed frustration over the amount and relevance of 
specific data requested as part of the application process. State 
Insurance Departments are already stretched by the implementation 
process, and gathering large amounts of data that are not readily 
available and that does not necessarily provide meaningful insight 
causes additional strain.
    A final issue is education of the public. In addition to the hard 
work that regulators have been engaged in to implement this legislation 
in a way that minimizes market disruptions, we have been engaged in an 
ongoing effort to educate the residents in the States about the changes 
that are going into place. Even before we started implementing this 
law, health insurance was a complicated and daunting topic for the vast 
majority of consumers. All States and territories have dedicated 
resources to educate and assist consumers and carriers as the law is 
implemented. Passage of PPACA and the subsequent implementation process 
have made consumer education all the more critical. Thirty-five States, 
the District of Columbia, and four U.S. territories have been awarded 
consumer assistance grants from HHS to educate consumers and to address 
their inquiries and complaints, though again, there has been some 
concern about the volume, type and relevance of the data required under 
the grant.
                         next steps for states
    The majority of our current efforts are directed towards planning 
and establishment of State Health Insurance Exchanges. Kansas, along 
with 48 other States, the District of Columbia, and all of the U.S. 
territories, were awarded a $1 million Exchange Planning Grant at the 
end of September, which we are using to conduct an analysis of our 
health insurance marketplace and the work that would be necessary to 
develop and operate an Exchange in our State. We are now beginning the 
process of preparing to apply for an Establishment Grant that will 
allow Kansas to begin doing more extensive work to actually put the 
Exchange into place.
    The State of Kansas was also fortunate to receive an Early 
Innovator Grant that will support some of the information technology 
work that must be done to get our Exchange up and running. Funds that 
we receive under this grant will be used to develop technology that 
will enable a single-door, end-to-end solution by extending the new 
Kansas Medicaid/CHIP eligibility system and integrating it with the 
Kansas Health Insurance Exchange. Under the terms of this grant, we 
will make this technology available to other interested States and are 
in preliminary discussions with the State of Missouri to partner on an 
Exchange and other aspects of this initiative. Depending on the 
interest of other States, we may also explore the possibility of 
creating a ``cloud'' solution for other States to have their own 
version of one or more of these healthcare applications.
    Most States are engaged in the process of developing legislation to 
authorize the creation of an Exchange and putting in place the 
administrative structure that will do the bulk of the Exchange 
implementation work. In order to guide this process, the NAIC has 
developed the American Health Benefit Exchange Model Act, which 
provides a basic framework for States to use when developing 
authorizing legislation. It was our goal in drafting this model to 
preserve the flexibility for each State to develop an Exchange that is 
tailored to its needs and preferences while meeting the minimum Federal 
guidelines. For this reason, while it identifies many of the areas 
where States may customize the model, it does not prescribe what a 
State should do. To fill the gap, State regulators, through the NAIC, 
are developing a series of white papers to provide State policymakers 
with additional information about some of these choices and associated 
issues. These papers will cover such topics as Exchange governance and 
financing; adverse selection threats; the importance of maintaining the 
role of agents, and exploring that in relation to the role of 
Navigators; additional Exchange functions; and interactions between the 
Exchange and a State's Medicaid and CHIP programs. We expect to 
finalize the first round of these papers by the end of this month.
    As I mentioned, there is a fair amount of flexibility in PPACA when 
it comes to Exchange development, something that we advocated while 
this law was developed. Taking advantage of this flexibility, the first 
question most States are first considering is what policy goals they 
would like their Exchange to accomplish. Many States are looking to 
create a transparent marketplace to simplify the process of purchasing 
insurance coverage while providing consumers with the information they 
need to make informed comparisons between various options. This is the 
so-called ``Utah model.'' Other States are considering using the 
Exchange to selectively contract with health insurance carriers in 
order to negotiate directly on behalf of consumers--the ``Massachusetts 
model.'' This decision will help determine many of the other questions 
that States must answer in establishing their Exchanges.
    There is also flexibility for States in the governance structure 
that they choose to establish. They have the option of housing the 
Exchange in an existing State agency (most likely the Insurance 
Department or Medicaid agency), a new agency, a quasi-governmental 
body, or a nonprofit entity established by the State. Each of these 
options has advantages and disadvantages associated with it, and one or 
another of them may be more appropriate to realize the specific policy 
goals set by the State.
    Finally, there are additional functions that a State may wish the 
Exchange to perform for consumers. Some States may wish to require 
insurers participating in the Exchange to provide additional 
information to consumers about various aspects of their operations or 
benefits, while others may want to leverage creation of the Exchange to 
create an all-payer claims database that will provide valuable data on 
patterns of coverage and health care utilization in the State. Still 
others may choose to require insurers to offer additional levels of 
coverage beyond the gold and silver plans required by PPACA as a 
condition of participation. It should be noted that States will have 
the option of adding new functions in future years; they do not need to 
be included by January 2014.
                  challenges in establishing exchanges
    Despite all of this flexibility, significant challenges remain. 
Foremost among these is time. January 1, 2014 is less than 3 years 
away, and States must have made sufficient progress towards 
establishing an Exchange by January 2013 for the Secretary to certify 
that they will meet the deadline. While that may seem like a lot of 
time, it is not, and States are working hard to stay on target to allow 
consumers to purchase coverage by late 2013 that will become effective 
when the ball drops in Times Square ringing in 2014. While we have 
received some guidance from HHS that has been useful in taking some 
initial steps, the sooner we receive more detailed regulatory guidance 
the easier our tasks will be. I understand that this will be 
forthcoming in the next few months, and our members look forward to 
receiving it.
    Guidance on the contents of the essential health benefits package, 
which will most likely be arriving in the first half of next year, will 
be a crucial piece of information for many States looking at benefit 
requirements for qualified health plans sold in the Exchanges. This 
information will be very important for carriers as they prepare to 
incorporate benefits into the coverage they sell and as they plan to 
offer coverage in the Exchanges. It will greatly impact premiums and 
the cost of subsidies.
    States must make sure that they have sufficient resources to 
develop and establish Exchanges. Federal establishment grants are 
absolutely essential in this regard. Without them, in our current 
fiscal climate, it is unlikely that we would be able to put these 
programs into place and would be forced to allow the Federal Government 
to operate them for us. We are working hard to be good stewards of the 
Federal funds we receive and to use them as efficiently as possible, 
but there will likely be some additional costs that States must cover 
on their own, and after 2014 each Exchange must be self-sustaining.
    One of the more daunting challenges that we will face in getting an 
Exchange up and running will be the development of critical information 
technology systems and infrastructure. These systems will have to 
interact with State Medicaid eligibility systems, many of which are 
decades old and will require a substantial investment to work with the 
newer Exchange systems, as well as Federal systems at the Departments 
of Health and Human Services, Treasury, Homeland Security, the Internal 
Revenue Service, and the Social Security Administration. As I mentioned 
earlier, Kansas has received an Early Innovator Grant to perform some 
of this work, and we look forward to sharing it with other States as 
they move forward in establishing their Exchanges.
                   general implementation challenges
    Finally, I would like to briefly discuss some of the more general 
implementation challenges that we are working on. Adverse selection is 
a major concern in any health reform effort. While Congress was 
attentive to this issue in designing PPACA, there are still some 
potential sources of adverse selection that we are watching very 
closely. Perhaps the largest open question regarding adverse selection 
will be the effectiveness of the individual mandate. There is also 
concern that the expansion of the small group market to include 
businesses with 51-100 employees could encourage a significant portion 
of these businesses to self-insure if they have a younger and healthier 
workforce and do not wish to subsidize businesses with older and sicker 
employees through an insurance risk pool. If their level of claims 
begins to rise, they could then return to the fully insured small group 
market in order to share this increased level of risk with others. This 
dynamic could cause the cost of coverage for small employers to rise.
    We are concerned that changes to the regulations governing a health 
insurance plan's grandfathered status could exacerbate the risk of 
adverse selection and complicate State enforcement of PPACA's market 
reforms. These changes will allow a group health plan to maintain its 
grandfathered status even though it has purchased a new health 
insurance policy. Again, we expect that businesses with younger and 
healthier workforces will disproportionately take advantage of this 
option, as the current rules are more advantageous to them than those 
that will take effect in 2014. Because PPACA prohibits grandfathered 
plans from being pooled together with non-grandfathered plans, this 
could exacerbate any adverse selection that occurs in the small group 
market. State regulators are concerned that allowing a group health 
plan to maintain its grandfathered status after purchasing new coverage 
will create a secondary market for grandfathered coverage that could 
encourage fraud and will make it difficult for State regulators to 
easily determine whether or not a plan is exempt from PPACA reforms.
    A third potential problem area could arise if Multi-State Plans, 
which will be sold alongside other plans in the Health Insurance 
Exchanges, are allowed to operate under rules that are significantly 
different from those that govern their competitors. If they are, we are 
concerned that they could cherry-pick the best risks and that their 
enrollees could unwittingly be left without important consumer 
protections provided by State law. We have had some initial discussions 
with the Office of Personnel Management, which is very much aware of 
this potential pitfall and is working to address it. We will, however, 
continue to watch this issue very closely. State regulators have 
testified before the Consumer Operated and Oriented Plan (CO-OP) 
Advisory Board against reducing solvency and consumer protection 
requirements on these new plans. They must play by the same rules as 
other carriers that are similarly situated or consumers could be 
harmed.
    Fourth, any time major changes to health insurance markets are 
implemented we watch carefully for market disruption and do our best to 
minimize that disruption. If large numbers of carriers exit the 
marketplace, particularly prior to 2014, competition will suffer and 
availability of coverage may become a concern. Thus far we have not 
seen empirical data indicating a major market exit, though we will 
remain watchful for problems that might arise.
    Finally, as I have noted in my previous testimony before this 
committee, the success of this entire enterprise depends upon bringing 
health care costs under control. Health insurance premiums are largely 
a reflection of the underlying cost of care and levels of utilization. 
While PPACA contains numerous provisions designed to start moving the 
system towards lower costs and higher quality care, it is not yet clear 
to us how effective those measures will be. Continued attention by this 
committee and policymakers at the local, State, and Federal levels will 
be necessary to tackle this formidable challenge.
    Thank you again for the opportunity to testify here today. I 
appreciate the committee's recognition of the States' crucial role in 
implementing this law and reiterate my offer of assistance going 
forward. I look forward to any questions you might have.

    The Chairman. Thank you very much, Ms. Praeger.
    Dr. Sharfstein.

 STATEMENT OF JOSHUA M. SHARFSTEIN, M.D., SECRETARY, MARYLAND 
     DEPARTMENT OF HEALTH AND MENTAL HYGIENE, BALTIMORE, MD

    Dr. Sharfstein. Good morning Chairman Harkin, Ranking 
Member Enzi, Senator Mikulski, Senator Hatch, Senator 
Alexander.
    Thank you for this opportunity to discuss Maryland's 
implementation of the Affordable Care Act.
    Our Governor, Martin O'Malley, has stated, with public and 
private innovation, Maryland is implementing the Affordable 
Care Act to strengthen coverage, improve health, and support 
our competitiveness in the global economy.
    In my testimony, I will provide some background on 
Maryland's health care and health insurance system, describe 
the State's implementation of the Affordable Care Act to date 
and the key reform efforts underway, and discuss the next steps 
for the Health Benefit Exchange in Maryland.
    To understand the impact of health care reform in Maryland, 
it is helpful to have a little bit of background of the State's 
health care system. Our system includes Insurance Regulatory 
Oversight, including review of rates where they are permitted. 
Our current review is not a public process and is not as robust 
as we would like it; and we're using a grant from the 
Affordable Care Act to make it more public and to strengthen 
it.
    We have a small business market that's community rated, 
which means that small businesses can get insurance based on 
factors such as age of their employees and not the health 
status of their employees.
    We have nearly 400,000 individuals working for more than 
47,000 small businesses in this market right now.
    Our individual market is not guaranteed issue. That means 
if somebody has pre-existing conditions they can be excluded 
from the individual market. We have about 160,000 Marylanders 
in the individual market.
    We gave a high-risk pool that was created in 2002. It has 
more than 20,000 Marylanders in it; and we have the Nation's 
only all-payer hospital rate setting system.
    Our State sets hospital rates so that all payers, public 
and private, pay the same fees at the same hospital. This has 
given us some unique opportunities I'll talk about later.
    In the last few years Maryland has expanded access to 
health care in several important ways and expanded access to 
dental care.
    Despite this progress, about 13 percent of Maryland 
residents remain uninsured, representing more than 700,000 
people. In addition, there are significant increases in the 
cost of coverage that threaten employer-based system of care.
    A Commonwealth Fund study found that the average premium 
for family coverage for private sector employers rose nearly 50 
percent from 2003 to 2009 in the State of Maryland.
    Let me switch to the implementation of the Affordable Care 
Act to date. A number of provisions have taken effect 
nationally and are having a tangible, positive impact in 
Maryland. These include allowing young adults to stay on their 
parents' insurance until age 26; seniors in Maryland are 
receiving additional assistance to close the donut hole, which 
is basically closed when you combine the Federal and the State 
assistance; children can access health insurance without being 
declined for pre-existing conditions--and we have two plans 
offering child-only policies in the State; insurers have to 
abide by the new medical loss ratio requirements; and small 
employers can access new tax credits for coverage. And just a 
couple days ago I was at a great press conference with small 
business leaders and insurance brokers, and we announced in 
Maryland that any small business can text with their phone the 
word health to 877877 and someone will call them back and talk 
to them about tax credits. We have a Web site and a radio 
campaign as well.
    In addition, we have received support, as I mentioned, to 
strengthen our high-risk pool and our review of insurance 
rates.
    In terms of other reform efforts in Maryland the morning 
after President Obama signed the Affordable Care Act into law, 
Governor O'Malley established a Health Care Reform Coordinating 
Council to oversee State implementation. This Council has held 
more than 30 public meetings and received hundreds of comments 
from physicians, hospitals, payers, unions, public and mental 
health advocates, brokers, patients, and lawmakers.
    As part of its work, the Council asked a nonpartisan 
healthcare think tank at the University of Maryland in 
Baltimore County to provide an independent analysis of reform's 
impact on our State budget. This analysis found that successful 
implementation will result in a net savings of about $853 
million to the Maryland State budget over the next 10 years.
    The analysis also found that after the first decade these 
savings begin to decline, underscoring the imperative that the 
State make progress on bending the cost curve.
    As part of its preparation implementation, the Council 
reviewed a number of innovative efforts already underway to 
control costs in Maryland. These are detailed in my testimony 
and I'm not going to go into detail; but I will say we have 
some terrific public, private initiatives on quality such as a 
hand hygiene initiative. We have an effort to reduce 
preventable hospital complications where the hospitals with the 
most complications pay money to the hospitals with the least. 
We rank them, and you can go to the Web site and see.
    We have some of the most interesting payment reform efforts 
where our goal is pay for value and not volume of hospital care 
using our all-payer rate system. We are establishing patients 
at our medical homes to incentivize efficient care. We're 
expanding health information technology with more than 400 
primary physicians already signed up in a State health 
information exchange underway.
    And, we're integrating the health care system in our public 
health planning to really focus on prevention.
    Each of these efforts will support effective implementation 
of the Affordable Care Act and the long-term sustainability of 
our health care system.
    Maryland has also set in motion key steps that will lead to 
a successful program for health benefit exchange for 
individuals and small businesses.
    Our goal is a transparent and competitive market.
    And, let me just say, we want the companies to compete to 
provide high quality cost-effective care to people in Maryland. 
We don't want them to compete against each other on who can cut 
out which benefits. We don't want families to have to decide or 
have to choose between my child's health condition and my mom's 
health condition.
    That's why the Essential Benefits Package is a very 
important part of reform. If there's not consistency in what's 
offered, then the plans will compete on the wrong things; they 
will compete on what they can offer, making horrible choices 
for families, instead of doing a good job to serve people who 
really need care.
    The Administration has introduced legislation in the 
State's General Assembly that lays the foundation for the 
development of the Exchange by establishing its governance 
structure and setting forth the core duties and functions 
mandated by the Affordable Care Act. When enacted, it will 
establish the Exchange as a public corporation, governed by a 
board with three State officials and six nongovernmental 
members.
    We have a number of key projects set out in legislation for 
the coming year, including analyzing a number of the tasks of 
the Exchange that are left to State discretion, including 
whether we should have one exchange or two for individual and 
small businesses; how we will hire navigators.
    The role of insurance producers play a critical role in our 
State. There are a lot of interesting things to be done this 
year. We will also, with our innovative grant, be developing 
some essential technical components of the Exchange.
    I'm going to conclude by saying that Maryland is 
implementing the Affordable Care Act.
    Recently, our Lt. Governor delivered a keynote address in 
which he said that we see this as a law--we see this law as an 
opportunity to change the face of our health care system, to 
better support the vitality and strength of our families, 
businesses, and communities, to expand wellness and prevention, 
to reduce hospital re-admissions and preventable complications, 
to expand health information technology, and to address health 
disparities and chronic disease.
    He concluded that Maryland intends to seize the moment and 
use the tools provided by the Affordable Care Act to build a 
better future for our State.
    Thank you, and I look forward to your questions.
    [The prepared statement of Dr. Sharfstein follows:]
            Prepared Statement of Joshua M. Sharfstein, M.D.
                                Summary
                               background
    Maryland's health care system includes an individual market, a 
small business market, a high-risk pool, insurance regulatory 
oversight, and a unique all-payer system for hospital rates. In recent 
years, the State has expanded access to health insurance through tax 
credits, public programs, and insurance changes.
    Nonetheless, about 13 percent of Maryland residents remain 
uninsured, and significant increases in the cost of coverage continue 
to threaten employer-based health insurance in the State.
    Maryland intends to use the tools provided by the Affordable Care 
Act to address challenges in access, cost, and quality.
               implementation of the affordable care act
    Maryland has seen the successful implementation of a number of 
Affordable Care Act provisions, including provisions benefiting young 
adults, seniors, children, and small businesses.
    The morning after President Obama signed the ACA into law, Governor 
Martin O'Malley established the Health Care Reform Coordinating 
Council. The Council has held more than 30 public meetings and received 
hundreds of comments from physicians, hospitals, payers, unions, public 
and mental health advocates, brokers, patients, and lawmakers.
    As part of its work, Council asked a non-partisan healthcare think 
tank to provide an independent analysis of reform's impact on our State 
budget. This analysis estimated that successful implementation will 
result in net savings of $853 million by 2020.
    The Council reviewed a number of innovative efforts already 
underway to control costs in Maryland, including implementing public-
private initiatives on quality, reducing preventable hospital 
complications, implementing payment reform, establishing patient-
centered medical homes, expanding health information technology, and 
integrating the health care system in public health planning. Each of 
these efforts will support effective implementation of the Affordable 
Care Act and the long-term sustainability of our health care system.
                      the health benefit exchange
    Maryland has set in motion key steps that will lead to a successful 
program for individuals and small businesses. The O'Malley 
Administration has introduced legislation in the State's General 
Assembly that lays the foundation for development of Maryland's 
Exchange by establishing its governance structure and setting forth the 
core duties and functions mandated by the Affordable Care Act. Maryland 
is also working to develop some of the essential technical components 
of the exchange.
                                 ______
                                 
          maryland's implementation of the affordable care act
    Good morning Chairman Harkin, Ranking Member Enzi and members of 
the committee. Thank you for this opportunity to discuss Maryland's 
implementation of the Affordable Care Act.
    Governor Martin O'Malley has stated,

          ``With public and private innovation, Maryland is 
        implementing the Affordable Care Act to strengthen coverage, 
        improve health, and support our competitiveness in the global 
        economy.''

    In my testimony, I will provide some background on Maryland's 
health care and health insurance system, describe the State's 
implementation of the Affordable Care Act to date and the key reform 
efforts underway, and discuss the next steps for Maryland's Health 
Benefit Exchange.
                     maryland's health care system
    To understand the impact of health care reform in Maryland, it is 
helpful to understand some important elements of the State's health 
care system. These include:

     Insurance Regulatory Oversight. When a carrier proposes to 
sell a health insurance policy in Maryland, the policy form and the 
proposed rates must first be filed with the Maryland Insurance 
Administration and then approved by the Insurance Commissioner. 
Although the standard varies slightly for nonprofit health service 
plans, HMOs and insurers, generally premium rates may not be excessive, 
inadequate or unfairly discriminatory.
     The small business market. In 1993, Maryland's small group 
market reforms required the Maryland Health Care Commission to develop 
a comprehensive, standardized set of benefits with cost sharing. Plans 
are guaranteed issue with community rating modified for age, family 
composition, and geographic location; riders may be purchased that 
increase the benefits or reduce the cost sharing. The State provides 
premium tax credits to small employers with fewer than 20 employees and 
average wage of less than $50,000 who have not offered insurance in the 
past year. Private third-party administrators work closely with 
insurers to offer additional benefits to small employers. The market 
now provides coverage to nearly 400,000 individuals working for more 
than 47,000 small businesses.\1\
---------------------------------------------------------------------------
    \1\ See http://mhcc.maryland.gov/smallgroup/smallemployer.html for 
additional information on Maryland's small group market.
---------------------------------------------------------------------------
     The individual market. Maryland's individual market is not 
guaranteed issue, so insurers are permitted to deny coverage to 
applicants with preexisting conditions. Approximately 160,000 
Marylanders obtain health insurance through this market.
     The high-risk pool. In 2002, Maryland established a high-
risk pool, the Maryland Health Insurance Plan (MHIP), funded by a 
hospital assessment. MHIP now covers approximately 20,000 residents who 
cannot obtain coverage through the individual market because of a 
preexisting medical condition. MHIP Plus provides additional premium 
subsidies for low income residents.\2\
---------------------------------------------------------------------------
    \2\ See http://www.marylandhealthinsuranceplan.state.md.us/ for 
more information on the Maryland Health Insurance Plan.
---------------------------------------------------------------------------
     The all-payer hospital rate setting system Maryland is the 
only State in the country that sets hospital rates so that all payers, 
public and private, pay the same fees at the same hospital. The 
independent Health Services Cost Review Commission determines the rates 
at each hospital based on how much uncompensated care the hospital 
provides, the local labor market, and other factors. This ``all-payer'' 
approach allows the State to create incentives for cost savings, rather 
than cost shifting. It is an important reason why the cost of a 
Maryland hospital admission has moved from 26 percent above the 
national average in 1976 to more than 3 percent below the national 
average by 2009.\3\
---------------------------------------------------------------------------
    \3\ See http://www.hscrc.state.md.us/ for more information on the 
Health Services Cost Review Commission.
---------------------------------------------------------------------------
    Maryland has also expanded access to health care in several 
different ways over the last 5 years. In July 2006, Maryland 
established a Medicaid waiver program that provides primary care access 
and prescription drug benefits to low-income individuals. In 2007, the 
State expanded Medicaid coverage to parents and strengthened the 
package of benefits in our waiver program. Maryland also allowed young, 
dependent adults up to age 25 to stay on their parents' insurance and 
took action to close the donut hole for seniors.
    After a young boy tragically died in Prince George's County from a 
tooth infection, Maryland took a number of steps to expand access to 
timely dental care. Significant improvement has followed, and last 
year, Maryland was one of just six States in the Nation to receive an A 
grade for oral health from the Pew Charitable Trusts.\4\
---------------------------------------------------------------------------
    \4\ Pew Charitable Trusts. The Cost of Delay: State Dental Policies 
Fail One in Five Children. February 2010. http://www.pewtrusts.org/
uploadedFiles/Cost_of_Delay_web.pdf.
---------------------------------------------------------------------------
    Despite this progress, approximately 13 percent of Maryland 
residents remain uninsured, representing more than 700,000 people.\5\ 
In addition, significant increases in the cost of coverage continue to 
threaten employer-based health insurance. A Commonwealth Fund report 
found that the average premium for family coverage offered by private 
sector employers in Maryland rose from $9,217 in 2003 to $13,833 in 
2009, an increase of 50 percent.\6\
---------------------------------------------------------------------------
    \5\ Maryland Health Care Commission. Coverage in Maryland through 
2009. January 2011. http://mhcc.maryland.gov/health_insurance/
insurance_coverage/insurance_report_2009_
20110120.pdf.
    \6\ The Commonwealth Fund. State Trends in Premiums and 
Deductibles, 2003-09. Dec. 2, 2010. http://www.commonwealthfund.org//
media/Files/Publications/Issue%20Brief/2010/Dec/
1456_Schoen_state_trends_premiums_deductibles_20032009_ib_v2.pdf.
---------------------------------------------------------------------------
    Maryland intends to use the tools provided by the Affordable Care 
Act to address challenges in access, cost, and quality.
           implementation of the affordable care act to date
    To date, a number of provisions of the Affordable Care Act have 
taken effect nationally and are having a tangible, positive impact on 
the health and well-being of Maryland citizens. These include:

     Young adults can stay on their parents' insurance until 
age 26;
     Seniors can receive additional assistance in closing the 
donut hole;
     Children can access health insurance without being 
declined for preexisting conditions;
     Insurers must abide by new medical loss ratio 
requirements, standardizing the amount of premium dollars that must be 
spent on health care;\7\ and
---------------------------------------------------------------------------
    \7\ Maryland's existing MLR for the commercial group market was 
similar to the standard in the Affordable Care Act, and the MLR for the 
individual market was less than the Affordable Care Act standard. 
Maryland did not request a waiver because the data did not support a 
conclusion that the new medical loss ratio target in Maryland would 
disrupt the individual market. To date, no carrier has indicated its 
intent to withdraw, and the acting Insurance Commissioner believes the 
market is adjusting to the new medical loss ratio.
---------------------------------------------------------------------------
     Small employers can access new tax credits for coverage.

    In addition, Maryland has received additional support under the 
Affordable Care Act to strengthen the review of insurance rates, 
provide additional support for MHIP, and implement public health 
programs to prevent illness.
                  reform efforts underway in maryland
    The morning after President Obama signed the ACA into law, Governor 
Martin O'Malley established the Health Care Reform Coordinating Council 
to oversee State implementation of the Affordable Care Act.
    Through the end of last year, the Council held more than 30 public 
meetings and received hundreds of comments from physicians, hospitals, 
payers, unions, public and mental health advocates, brokers, patients, 
and lawmakers. The Council presented a report in January with 16 
recommendations reflecting this public input. The recommendations cover 
the full range of topics critical to effective implementation of the 
ACA, such as entry into coverage, the safety net, and the health care 
workforce. The Council and a new Governor's Office of Health Care 
Reform will continue coordination and oversight of the State's 
implementation of these recommendations. I have attached this report to 
my testimony.
    As part of its work, Council asked a non-partisan healthcare think 
tank at the University of Maryland in Baltimore County to provide an 
independent analysis of reform's impact on our State budget. This 
analysis found that successful implementation will result in estimated 
net savings of $853 million over the next 10 years. The major 
components of Maryland's savings include an increase in Federal 
assistance for key populations, revenue from phasing out Maryland's 
high-risk pool, an increase in revenue from existing premium 
assessments on commercial insurance products, and partial reductions in 
State funding for safety net programs.
    The analysis also found that after the first decade, these savings 
begin to decline, underscoring the critical imperative that the State 
make progress on bending the cost curve.
    As part of its assessment in preparation for ACA implementation, 
the Council reviewed a number of innovative efforts already underway to 
control costs in Maryland. These include:
    Implementing public-private initiatives on quality. The Maryland 
Health Quality and Cost Council, a public-private partnership led by 
the Lt. Governor, has developed statewide initiatives on hand hygiene, 
blood wastage, hospital-acquired infections, and workplace health.\8\
---------------------------------------------------------------------------
    \8\ See http://dhmh.maryland.gov/mhqcc/ for more information on the 
Maryland Health Quality and Cost Council.
---------------------------------------------------------------------------
    Reducing preventable hospital complications. Maryland is using the 
only all-payer hospital rate system in the country to collect reliable 
data on every hospital admission, which it can then use to create 
payment incentives to reduce preventable complications. In fiscal year 
2010, the rate-setting Commission identified nearly 50,000 potentially 
preventable complications that cost our system approximately $522 
million. Ranking hospitals by rates of complications, the Commission 
then redistributed $4 million from the hospitals with more preventable 
complications to those that had fewer. Since this process began, rates 
of preventable complications have declined substantially across the 
board--approximately 12 percent from 2009 to 2010 for an annual cost 
savings of $62.5 million.\9\
---------------------------------------------------------------------------
    \9\ See http://www.hscrc.state.md.us/init_qi_MHAC.cfm for more 
information on efforts to reduce preventable complications in Maryland 
hospitals.
---------------------------------------------------------------------------
    Implementing payment reform. Maryland is also using the State's 
unique all-payer rate setting system to pay for value, rather than 
volume. For example, we are expanding the bundle of payments to 
hospitals to include both admissions and re-admissions over a 30-day 
period. Twenty five of the State's forty-six hospitals are choosing 
this payment structure, which will provide incentives to reduce 
unnecessary re-hospitalizations. An additional 10 community hospitals 
with annual revenues of approximately $1.4 billion have volunteered to 
operate under global budgets, which provide incentive to reduce 
unnecessary admissions, re-admissions, and emergency department visits. 
In response to this incentive, one hospital is expanding its outpatient 
program for diabetes by hiring another endocrinologist. Another is 
planning to create multidisciplinary teams to plan for discharge and 
post-discharge care. As hospitals innovate, we will capture their best 
practices and share them throughout our system.
    Establishing patient-centered medical homes. Maryland passed 
legislation in 2010 to create a pilot program involving multiple 
payers, 60 practices, more than 340 providers and 250,000 patients. 
Under the program, which is overseen by the Maryland Health Care 
Commission, primary care doctors receive extra funding to support 
comprehensive care for patients and share in the savings from better 
coordinated and higher quality care. The State's largest private 
insurer, CareFirst, is also launching a major medical home project 
across the State.
    Expanding health information technology. Maryland has established a 
Health Information Exchange to allow for the exchange of information 
between community providers and hospitals across the State. An 
independent nonprofit called the Chesapeake Regional Information System 
for our Patients (CRISP) is facilitating physicians' access to health 
information technology. More than 400 primary care doctors have already 
joined.
    Integrating the health care system in public health planning. 
Maryland is developing a State Health Improvement Plan around specific 
health outcomes. Critical to this plan will be efforts to prevent 
unnecessary illness and cost. Beginning this summer, regional planning 
will bring together public and private efforts to address key health 
challenges and disparities across the State.
    Each of these efforts will support effective implementation of the 
Affordable Care Act and the long-term sustainability of our health care 
system.
           next steps for maryland's health benefit exchange
    The Health Benefit Exchange provides a mechanism for organizing the 
health insurance marketplace to help consumers and small businesses 
shop for coverage in a way that permits easy comparison of available 
plan options based on price, benefits, and quality. It also provides 
access to Federal subsidies and tax credits. Maryland has set in motion 
key steps that will lead to a successful program for individuals and 
small businesses.
    The Administration has introduced legislation in the State's 
General Assembly that lays the foundation for development of Maryland's 
Exchange by establishing its governance structure and setting forth the 
core duties and functions mandated by the Affordable Care Act. When 
enacted, it will establish the Exchange as a public corporation, 
governed by a board with three State officials and six nongovernmental 
members. Over the next year, the Exchange will hire initial staff and 
analyze key strategic decisions for Maryland's Exchange, including 
whether to create a separate exchange for the small group market; 
whether to engage in selective contracting; and how to design the 
navigator program. The Exchange will also evaluate how to build upon 
existing resources in the State, including insurance producers, third 
party administrators, health care advocates, and other relevant 
entities, to execute the required functions of the Exchange. The 
Exchange will make recommendations on these issues and others by early 
2012.
    Last month, Maryland was awarded an Innovator Grant of $6.2 million 
to develop several of the essential technical components for the 
Exchange, including the automatic confirmation of income and 
citizenship eligibility. The goal is to develop a seamless portal for 
individuals, small businesses and others to access coverage. Our 
proposal is based upon a successful eligibility pilot program currently 
underway in the State, and our goal is to develop an IT solution that 
will be compatible with a wide range of legacy eligibility systems. 
States including Arizona, Indiana, California, West Virginia, and 
Oregon provided letters of support for this application and will be 
collaborating with us as this effort moves forward.
                               conclusion
    Maryland is implementing the Affordable Care Act. Recently, Lt. 
Governor Anthony Brown delivered a keynote address in which he stated 
that the law provides the

        ``opportunity to change the face of our health care system to 
        better support the vitality and strength of our families, 
        businesses, and communities . . . to expand wellness and 
        prevention . . . to reduce hospital re-admissions and 
        preventable complications . . . to expand health information 
        technology . . . and to address health disparities and chronic 
        disease.''

    He concluded: ``Maryland intends to seize the moment and use the 
tools provided by the Affordable Care Act to build a better future for 
our State.''

    The Chairman. Thank you, Dr. Sharfstein.
    Speaker Clark, welcome back to the committee. Please 
proceed.

              STATEMENT OF THE HON. DAVID CLARK, 
                   UTAH STATE REPRESENTATIVE

    Mr. Clark. Thank you very much, Senator Harkin, Senator 
Enzi and my own Senator, Senator Hatch, and other Honorable 
Members of the distinguished committee.
    Two years ago, I appeared before you to report how Utah's 
health reform efforts might inform the national health care 
debate. Since then, Utah has been moving forward to develop 
health insurance exchanges that is part of an overall strategy 
to inject elements of consumerism, information, choice, and 
accountability into health care, all with the goal of improving 
health status by increasing the availability of high-quality, 
affordable health insurance. I would like to report on these 
efforts and suggest some additional lessons that might be 
considered as implementation of the Affordable Care Act 
unfolds. As you know, Utah created the second of only two 
operating exchanges in the Nation.
    We are indebted to our friends in Massachusetts who created 
the first exchange and were willing to teach us from their 
experience. I commend Congress for attempting to learn from 
both States. I am confident, however, that there is still much 
to learn from all 50 States and the Federal Government's work 
to implement the ACA.
    We are moving into unchartered territory. Next week will 
mark 1 full year since the Affordable Care Act was signed into 
law. During the past week--excuse me--during the past year, 
States, led by officials from both sides of the aisle, have 
implored Members of Congress and the Administration to allow 
significant State flexibility on issues ranging from public 
programs to the State health insurance exchanges. Although the 
language of the ACA is quite prescriptive, it does not specify 
everything. My plea to you today is for help to ensure that as 
the ACA is implemented, that the U.S. Department of Health and 
Human Services uses a light touch and resists the temptation to 
fill too many of the missing details. Those missing details 
provide policy space for flexibility--State flexibility, the 
kind of flexibility that will allow an innovation so very 
necessary to accomplish the legislation's laudable, but complex 
goals. Urging States to experiment on competing approaches to 
solve the Nation's coverage problems, building on considerable 
State innovation already underway, is far more likely to lead 
to real improvement than the one-size-fits-all approach 
currently in the ACA.
    For instance, prior to the advent of PPACA, Utah undertook 
a number of efforts aimed at reforming the health care system 
to better respond to our State's unique business and 
demographic needs.
    As we gathered data to develop an accurate picture of our 
uninsured population, we found that most of our uninsured 
population were employed and most work for small businesses, 
many of which did not offer health insurance benefits. Like 
most States, the vast majority of Utah's businesses are small 
businesses, and only about 44 percent of those small businesses 
were offering health insurance coverage. In addition, a great 
number of the uninsured were the young immortals, those between 
the ages of 18 and 34, who are employed and generally in good 
health but who tend to view traditional health insurance 
coverage as either unnecessary or too costly. It was clear to 
us early on that in order to reduce the uninsured population we 
needed to find a way to make insurance coverage more accessible 
and attractive to small employers and employees of small 
business, and even to the so-called young immortals.
    To that end, we pursued changes in our insurance market 
that would provide more cost predictability for businesses, 
thereby creating an incentive for employers currently offering 
benefits to continue to do so, as well as creating a way for 
employees who are not offered insurance coverage to access 
group plans. As part of our health system reform efforts, 
Utah's small businesses now have an option of using a defined 
contribution model for their health benefit offerings.
    Health care, as a defined benefit, left businesses with 
unpredictable and ever-escalating costs. Through access to 
Utah's new defined contribution market, employers can manage 
and contain their health benefit expenditures. With the 
creation of the Utah Health Exchange, Utah employees also 
benefit from expanded access, choice, and control over their 
health care options.
    Rather than the traditional one-size-fits-all approach 
inherent in a defined benefit model, employees can now use the 
defined contribution model from their employers to shop for 
health insurance tailored to their individual needs and 
circumstances.
    After the planning phase of 2009, and the demonstration 
pilot phase in 2010, the Utah Health Exchange is now fully 
operational. It's worth noting that all groups participating in 
the pilot chose to renew coverage in the exchange in 2011. In 
addition, when the Utah Exchange was fully launched in 
September 2010, 31 additional employer groups enrolled for 
coverage effective January 1, 2010. Seventeen additional 
employer groups enrolled in February. We now have approximately 
83 employer groups that are getting coverage through the Utah 
Health Exchange, bringing the total number of individuals 
covered in the Utah Health Exchange to more than 2,500 in our 
first 4 months of effective coverage in full launch.
    We are now running a fully-functional exchange for the 
small employer market after a 15-month pilot and various 
adjustments. Since the pilot was opened at the end of last 
year, small employer group enrollment and employers of covered 
life has grown on an average of 43 percent per month.
    What does the Utah Health Exchange offer that hasn't been 
offered before? First, in the Exchange, employees 
participating--employers have an opportunity to select from the 
many health plans rather than just the one, two, or three that 
employers may have previously offered or perhaps not offered at 
all.
    Currently, we have over 100 insurance plans that are 
offered to small employers in the exchange.
    Second, the defined contribution arrangement. The Exchange 
allows health insurance benefits to provide through a defined 
contribution model rather than a defined benefit model, much as 
is now done in many of the retirement plans throughout the 
Nation.
    Employers participating in the Exchange will have to 
continue funding premiums at levels sufficient to meet existing 
employees' participation requirements.
    And third, we will continue to develop the Exchange, to 
incorporate some of the features required under ACA; 
availability of information necessary for consumers to evaluate 
the performance of insurers in their plans, and the links to 
public programs.
    The Exchange will allow consumers to aggregate premium 
contributions from multiple employers. This includes 
contributions from multiple employers of an individual and 
employers from multiple individuals within a household.
    Bear in mind that participation in the Utah exchange is 100 
percent voluntary both by the insurance carriers and the 
employers. It involved no new mandates, no new regulatory 
features, and no new assessments against carriers for funding 
purposes.
    Perhaps most significantly--let me stress--our figures 
indicate that 20 percent of the businesses participating in our 
defined contribution market through the Utah Health Exchange 
were not previously offering coverage; thus we can safely 
assume that many of these now covered through the exchange were 
previously counted among our uninsured population.
    An intrinsic flaw of the ACA is that it fails to unleash 
the potential of States to innovate in designing reforms that 
respond to their own unique circumstances.
    Recently, in a response to the unyielding call from States 
for increased flexibility, Senator Ron Wyden and Senator Scott 
Brown introduced Senate bill 3958, otherwise known as the 
Wyden-Brown. The bill would accelerate, from 2017 to 2014, the 
date when States will apply to the Secretary of Health and 
Human Services for a waiver as detailed in Section 1332 of the 
ACA.
    If successful, a State would remain eligible to receive 
Federal dollars that would otherwise go to premiums or co-
payment subsidies for plans in the insurance exchanges as well 
as tax credits for small businesses, but, instead, use that 
money to help fund alternative approaches to reaching coverage 
objectives within ACA.
    Under the provision, States would have to demonstrate to 
the Secretary that, under the State alternative, at least as 
many individuals would be covered as under ACA, that the 
coverage was at least as good as was required under the ACA, 
and affordable to individuals. In addition, the State proposed 
alternative would have to be budget-neutral for the Federal 
Government. While I applaud the efforts of Senators Wyden and 
Brown, I must point out that the bill is woefully insufficient 
in terms of granting States meaningful flexibility.
    First of all, let me be clear, States were never invited to 
the table to give input on health care reform as this 
legislation is being fleshed out. It is frankly difficult for 
me to imagine that HHS would reverse its course and grant 
waivers to enhance or repeal any number of ACA provisions under 
the current Administration.
    The Secretary has ultimate waiver authority and it's 
unrealistic, I think, to expect HHS to grant waivers for 
alternatives for which they disapprove.
    Second, States must still guarantee generous and expensive 
levels of benefits that go well beyond basic benefits. And 
since the Secretary defined what constitutes, ``at least as 
comprehensive'' is, a State has no guarantee that the waiver 
would be granted, even if plans for the State-proposed 
alternative have the same actuarial value as specified in the 
ACA.
    I think it's worth remembering that we are, indeed, the 
United States of America, and rarely in history have States 
been more united than they have been now in this message to 
Washington. One-way flexibility is, really, no flexibility at 
all.
    Congress and the Administration needs to pay more attention 
than just lip service to that flexibility.
    Third, States would be unable to include other health 
programs into their waiver request. For instance, provisions 
associated with Medicaid and the SCHIP would not be waived 
under Wyden-Brown; therefore, State-based alternatives to the 
enormous Medicaid expansion prescribed in ACA, a particular 
source of anguish for governors and legislators alike not 
addressed under Wyden-Brown bill.
    And, finally, Wyden-Brown pits theoretical success against 
actual achievement. Estimates are, at best, educated guesses; 
and even the most educated guesses can be off. For instance, 
the initial estimates from the Congressional Budget Office 
indicated the cost to States for the Medicaid expansion would 
be about $20 billion.
    Recently, however, the Joint Congressional Report prepared 
by the Senate Finance Committee and the Senate Energy and 
Commerce Committee estimated that to be six times higher, 
closer to $118 billion. We can only assume that the estimates 
regarding the number of people covered under the ACA and the 
level of affordability promises are not guaranteed, and thus, 
should not be used as a standard by which State alternatives 
are measured.
    The Wyden-Brown legislation falls short and thus not allow 
States sufficient flexibility to make meaningful changes, nor 
will it neutralize serious opposition for various parts of the 
ACA. To accomplish both through a waiver approach, the States 
must be allowed to include State-funded Federal programs such 
as Medicaid and SCHIP as part of the waiver.
    This would, of course, require Congress to grant States the 
option of exempting States from certain plans, including those 
proposing changes in Medicaid from certain statutory provisions 
of existing programs. It would also require----
    The Chairman. Mr. Speaker, I want to be respectful, but can 
we wrap it up?
    Mr. Clark. May I just have 2 minutes, and I promise to be 
done.
    Rather than trying to impose a national solution, Congress 
should give strong encouragement to the States to take the 
lead, allowing them to advance alternative proposals and 
renewed States that achieve the goal of improved health care 
coverage. That is not a partisan issue or an ideological 
debate; rather, it is about how best and most efficiently to 
serve the diverse populations and the different geographies 
that are about designing State-specific solutions to address 
State-specific challenges.
    In Utah, we have chosen a path of business consumer-
oriented health system reform which responds to Utah's needs, 
and we are making significant progress.
    Congress and the Administration should recognize this and 
remove the barriers to increase success for the States.
    To reiterate the point I wish to make today, that in order 
for true reform to occur the Federal Government must maximize 
the policy space available for innovation.
    Let me make an analogy in closing. Like successful 
gardening, successful innovation requires fertile soil. The 
fertile soil of innovation is mutual understanding and 
cooperation among the stakeholders, free of the weeds of 
restrictive regulations that choke new and untried ideas.
    It is the kind of soil that has to be cultivated and 
protected. It doesn't appear by itself. If Congress and HHS are 
not extremely careful, the seeds of Federal policymaking sown 
under the ACA will rather quickly fill in what little space is 
available left to States and choke the innovations that are 
envisioned by the ACA, and which history suggests are much more 
likely to occur only as a result of experimentation on the 
State level.
    These innovations include payment and delivery reform, 
innovations like episode of care payments, accountable care 
organizations, and etc.
    The Federal Government, like a wise gardener, should be 
patient and focus on developing the proper conditions for 
State-level innovation. It cannot force innovation to grow. 
Innovation takes cooperation, and cooperation takes time.
    Taking the gardening analogy a bit further, the ACA in 
recognition that the traditional heirloom varieties of health 
care delivery are no longer sufficient to meet the needs of our 
country. In their place must be developed new, hybrid varieties 
that will yield more outcomes at lower cost for people.
    Wisdom indicates that States will be given enough time to 
rise to the opportunities, and enough flexibility will 
experiment and will develop these hybrids.
    In closing, there are many issues related to the 
development of exchanges that must be addressed within the next 
2 years: Determination of essential benefits packages, 
establishing risk adjustment and other mechanisms to address 
the potential of adverse selection, standards for plan 
participation, determination of initial and ongoing individual 
eligibility, administration of subsidies, coordination with 
public coverage programs, governance, and etc.
    And each of these issues should be addressed with the idea 
that perhaps we won't get it 100 percent right the first time. 
We are moving into unchartered territory that requires the 
humility and restraint to allow one another space to 
incrementally innovate and learn from our experiences.
    If HHH rushes in, rather than allowing ACA to evolve over 
time with significant State experimentation and feedback, we 
run the very real risk that many of the misaligned financial 
incentives that account so much for inappropriate consumption 
today will be locked in further and will be that much more 
difficult to fix in the future.
    Thank you. I appreciate your patience. Thank you.
    [The prepared statement of Mr. Clark follows:]
            Prepared Statement of Representative David Clark
                                summary
    Prior to PPACA, in 2009-10, Utah created the Utah Health Exchange--
to make insurance coverage more accessible and attractive to small 
businesses and employees of small business. Utah small businesses can 
now manage and contain health benefit expenditures through a new 
defined contribution market, and Utah employees, many of whom were 
previously uninsured, now benefit from expanded access, choice, and 
control over their health care options.
    The Utah Health Exchange currently gives Utah small business 
employees more than 100 plan choices, all of which retain the pre-tax 
and guaranteed-issue advantages of traditional small group insurance. 
Demonstrated and piloted over 15 months in 2009-10 the Utah Health 
Exchange is now fully operational with approximately 83 employer groups 
getting coverage through the Utah Health Exchange. As of April 1, the 
total number of individuals covered in the Utah Health Exchange reached 
2,500 in the first 4 months of effective coverage. Since it was piloted 
last year, small employer groups enrollment and covered lives has grown 
on average by about 43 percent per month. Utah's exchange is 100 
percent voluntary by both the insurance carriers and the employers. 
Unlike PPACA, it involved no new mandates, no new regulatory features, 
and no new assessments against carriers for funding purposes.
    Because States were never invited to the table to give input on 
health care reform as that legislation was being fleshed out, an 
intrinsic flaw of the PPACA is that it fails to unleash the potential 
of States to innovate in designing reforms that respond to their own 
unique circumstances, like Utah's Health Exchange. In response to the 
unyielding call from States for increased flexibility, Senators Ron 
Wyden (D-OR) and Scott Brown (R-MA) have now introduced Senate bill 
3958, otherwise known as Wyden-Brown, that would accelerate, from 2017 
to 2014, the date when States may apply to the Secretary of Health and 
Human Services (HHS) for a waiver as detailed in section 1332 of the 
PPACA.
    The Wyden-Brown legislation falls short by not allowing States 
sufficient flexibility to make meaningful changes: (1) States must 
still guarantee a generous and expensive level of benefits that go well 
beyond basic benefits. (2) States have no guarantee a waiver would be 
granted, even if plans in the State-proposed alternative have the same 
actuarial value as those specified in the PPACA, since the Secretary 
defines what constitutes ``at least as comprehensive'' is. (3) The 
States would be unable to include other costly health programs into 
their waiver request. Therefore, State-based alternatives to the 
enormous Medicaid expansion prescribed under PPACA (a particular source 
of anguish for governors and legislators alike) could not be addressed 
under Wyden-Brown.
    In Utah, we have chosen a path of business- and consumer-oriented 
health system reform which responds to Utah's needs and we are making 
significant progress. Congress and the Obama administration should 
recognize this and remove the barriers to increase success for all 
States.
                                 ______
                                 
    Senator Harkin, Senator Enzi, and other Honorable Members of this 
distinguished committee.
    Two years ago, I appeared before you to report how Utah's health 
reform efforts might inform the national health care debate. Since 
then, Utah has been moving forward to develop a health insurance 
exchange that is part of an overall strategy to inject elements of 
consumerism--information, choice, and accountability--into health care, 
all with the goal of improving health status by increasing the 
availability of high-quality, affordable health insurance. I would like 
to report quickly on this effort and suggest some additional lessons 
you might consider as implementation of the Affordable Care Act 
unfolds.
    As you know, Utah created the second of only two operating 
exchanges in the Nation. We are indebted to our friends in 
Massachusetts who created the first exchange and were willing to teach 
us from their experience. I commend Congress for attempting to learn 
from both States. I am confident, however, that there is still much to 
learn as all 50 States and the Federal Government work to implement the 
ACA. We are moving into unchartered territory.
    Next week will mark 1 full year since the Patient Protection and 
Affordable Care Act (PPACA) was signed into law.\1\ During the past 
year, States, led by officials from both sides of the aisle, have 
implored Members of Congress and the Obama administration to allow 
significant State flexibility on issues ranging from public programs to 
State health insurance exchanges.
---------------------------------------------------------------------------
    \1\ The Patient Protection and Affordable Care Act (PPACA) was 
signed into law on March 23, 2010.
---------------------------------------------------------------------------
    Although the language of the ACA is quite prescriptive, it does not 
specify everything. My plea to you today is for help to ensure that as 
the ACA is implemented, the U.S. Department of Health and Human 
Services uses a light touch and resists the temptation to fill in too 
many of the missing details. Those missing details provide policy space 
for flexibility--the kind of flexibility that will allow for the 
iterative innovation so very necessary to accomplish the legislation's 
laudable, but complex goals.
    Urging States to experiment with competing approaches to solve the 
Nation's coverage problems, building on the considerable State 
innovation already under way, is far more likely to lead to real 
improvement than the one-size-fits-all approach represented by PPACA.
    For instance, prior to the advent of PPACA, Utah undertook a number 
of efforts aimed at reforming the health care system to better respond 
to our State's unique business and demographic needs. As we gathered 
data to develop an accurate picture of our uninsured population, we 
found that most of our uninsured population were employed and most work 
for small businesses, many of which did not offer health insurance 
benefits. Like most States, the vast majority of Utah's businesses are 
small businesses and, only about 44 percent of those small businesses 
were offering health insurance coverage. In addition, a great number of 
our uninsured were ``young immortals''--those between the ages of 18-34 
who are employed and in general good health but who tend to view 
traditional health insurance coverage to be either unnecessary or too 
costly.
    It was clear to us early on that, in order to reduce our uninsured 
population, we needed to find a way to make insurance coverage more 
accessible and attractive to small employers and employees of small 
business, even the so-called young immortals. To that end, we pursued 
changes to our insurance market that would provide more cost 
predictability for businesses, thereby creating an incentive for those 
employers currently offering benefits to continue doing so. As well as 
creating a way for employees who are not offered coverage to access 
group plans.
    As part of our health system reform efforts, Utah small businesses 
now have the option of using a defined contribution model for their 
health benefit offerings. A defined health benefit left businesses with 
unpredictable and ever-escalating costs. Through access to Utah's new 
defined contribution market, employers can manage and contain their 
health benefit expenditures. With the creation of the Utah Health 
Exchange, Utah employees also benefit from expanded access, choice, and 
control over their health care options. Rather than the traditional 
one-size-fits-all approach inherent in the defined benefit model, 
employees can now use the defined contribution from their employers to 
shop for health insurance tailored to their individual needs and 
circumstances. The Utah Health Exchange currently gives Utah small 
business employees more than 100 plan choices, all of which retain the 
pre-tax and guaranteed-issue advantages of traditional small group 
insurance.
    After the planning phase in 2009, the demonstration pilot phase in 
2010, the Utah Health Exchange is now fully operational. It is worth 
noting that all the groups who participated in the pilot chose to renew 
renewed coverage in the exchange for 2011. In addition, when the Utah 
Health Exchange was fully launched in September 2010, 31 additional 
employer groups enrolled for coverage effective January 1, 2010, 17 
additional employer groups enrolled for coverage beginning February 1, 
and approximately 83 employer groups were getting coverage through the 
Utah Health Exchange as of April 1, bringing the total number of 
individuals covered in the Utah Health Exchange to more than 2,500 in 
the first 4 months of effective coverage following the full launch. We 
are now running a fully functional exchange for the small employer 
market after a 15-month pilot and various adjustments. Since the pilot 
was opened at the end of last year to all small employer groups 
enrollment of employers and covered lives has grown on average by about 
43 percent per month.
    What does the Utah Health Exchange offer that hasn't been offered 
before?
    First, choice. In the Exchange, employees of participating 
employers have the opportunity to select from many health plans rather 
than the one, two, or three plans their employers may have previously 
offered or perhaps not offered at all. Currently, over 100 plans are 
offered to small employer groups in the Exchange.
    Second, a defined contribution arrangement. The Exchange allows 
health insurance benefits to be provided through a defined contribution 
model rather than a defined benefit model, much as is now done with 
many retirement benefits. Employers participating in the Exchange will 
have to continue funding premiums at levels sufficient to meet existing 
employee participation requirements.
    And third, as we continue to develop the Exchange, it will 
incorporate some of the features required under the ACA--availability 
of information necessary for consumers to evaluate the performance of 
insurers and their plans, and links to public programs.
    The Exchange will also allow consumers to aggregate premium 
contributions from multiple employers. This includes contributions from 
multiple employers of an individual and employers of multiple 
individuals within a household.
    Bear in mind that participation in Utah's exchange is 100 percent 
voluntary by both the insurance carriers and the employers. It involved 
no new mandates, no new regulatory features, and no new assessments 
against carriers for funding purposes. Perhaps most significantly, our 
figures indicate that 20 percent of businesses participating in our 
defined contribution market through the Utah Health Exchange were not 
previously offering coverage, thus we can safely assume that many of 
those now covered through the exchange were previously counted among 
our uninsured population
    An intrinsic flaw of the PPACA is that it fails to unleash the 
potential of States to innovate in designing reforms that respond to 
their own unique circumstances. Recently, in a response to the 
unyielding call from States for increased flexibility, Senators Ron 
Wyden (D-OR) and Scott Brown (R-MA) introduced Senate bill 3958, 
otherwise known as Wyden-Brown. That bill would accelerate, from 2017 
to 2014, the date when States may apply to the Secretary of Health and 
Human Services (HHS) for a waiver as detailed in Section 1332 of the 
PPACA. If successful, a State would remain eligible to receive Federal 
dollars that would otherwise go to premium and copayment subsidies for 
plans in the insurance exchanges as well as tax credits for small 
businesses but, instead, use that money to help fund alternative 
approaches to reaching the coverage objectives of the PPACA.
    Under this provision, the State would have to demonstrate to the 
Secretary that, under the State alternative, at least as many 
individuals would be covered as under PPACA, that the coverage was at 
least as good as that required under the PPACA, and as affordable for 
individuals. In addition, the State proposed alternative would have to 
be budget-neutral for the Federal Government.
    While I applaud the efforts of Senators Wyden and Brown, I must 
point out that the bill is woefully insufficient in terms of granting 
States meaningful flexibility.
    First of all, let me be clear, States were never invited to the 
table to give input on health care reform as that legislation was being 
fleshed out. Thus, assuming President Obama is re-elected in 2012, it 
is frankly difficult for me to imagine that HHS would reverse its 
course and grant waivers that, in essence, repeal a number of PPACA 
provisions the current Administration vigorously supports. The 
Secretary has ultimate waiver authority and it is unrealistic to expect 
HHS to grant waivers for alternatives of which they disapprove.
    Second, States must still guarantee a generous and expensive level 
of benefits that go well beyond basic benefits. And since the Secretary 
defines what constitutes ``at least as comprehensive'' is, a State has 
no guarantee a waiver would be granted, even if plans in the State-
proposed alternative have the same actuarial value as those specified 
in the PPACA. One way flexibility is, essentially, no flexibility at 
all. Bear in mind that States, unlike the Federal Government, must 
balance their budgets each year.
    Third, States would be unable to include other health programs into 
their waiver request. For instance, provisions associated with Medicaid 
and the State Children's Health Insurance Program (SCHIP) could not be 
waived under Wyden-Brown; therefore, State-based alternatives to the 
enormous Medicaid expansion prescribed under PPACA (a particular source 
of anguish for governors and legislators alike) could not be addressed 
under Wyden-Brown.
    Finally, Wyden-Brown pits theoretical success against actual 
achievement. Estimates are, at best, educated guesses; and even the 
most educated of guesses, can be off. For instance, initial estimates 
from the Congressional Budget Office indicated the cost to the States 
for the Medicaid expansion would be about $20 billion. Recently, 
however, a Joint Congressional Report prepared by the Senate Finance 
Committee and the House Energy and Commerce Committee \2\ estimated 
that cost at closer to $118 billion. We can only assume the estimates 
regarding the number of people covered under PPACA and the level of 
affordability promised are not guaranteed and thus, should not be used 
as a standard against which State alternatives are measured.
---------------------------------------------------------------------------
    \2\ Joint Congressional Report by Senate Finance Committee, Orrin 
Hatch (R-Utah), Ranking Member and House Energy and Commerce Committee, 
Fred Upton (R-Michigan), Chairman. Medicaid Expansion in the New Health 
law: Cost to the States. March 1, 2011. .
---------------------------------------------------------------------------
    The Wyden-Brown legislation falls short and thus will not allow 
States sufficient flexibility to make meaningful changes, nor will it 
neutralize serious State opposition to various parts of the PPACA. To 
accomplish both through a waiver approach, the States must be allowed 
to include State-Federal programs such as Medicaid and SCHIP as part of 
the waiver. This would, of course, require Congress to grant States the 
option of exempting State reform plans (including those proposing 
changes to Medicaid) from certain statutory provisions of existing 
programs. It would also require that HHS not be allowed to reject a 
waiver simply because it did not square with the partisan goals or 
ideological leanings of whatever administration happens to occupy the 
White House.
    Rather than trying to impose a national solution, Congress should 
give strong encouragement to the States to take the lead, allowing them 
to advance alternative proposals and reward States that achieve the 
goal of improved health care coverage. This is not a partisan issue or 
an ideological debate; rather, it is about how to best and most 
efficiently serve diverse populations and different geographies and 
about designing State-specific solutions to address State-specific 
challenges.
    In Utah, we have chosen a path of business- and consumer-oriented 
health system reform which responds to Utah's needs and we are making 
significant progress. Congress and the Obama administration should 
recognize this and remove the barriers to increase success for all 
States.
    To reiterate to the point I wish to make today--that in order for 
true reform to occur the Federal Government must maximize the policy 
space available for innovation, let me use an analogy.
    Like successful gardening, successful innovation requires fertile 
soil. The fertile soil of innovation is mutual understanding and 
cooperation among stakeholders, free of the weeds of restrictive 
regulations that choke new or untried ideas. This kind of soil has to 
be cultivated and protected, it doesn't appear by itself. If Congress 
and HHS are not extremely careful, the seeds of Federal policymaking 
sown under the ACA will rather quickly fill in what little policy space 
has been left to States and choke the innovations envisioned by the ACA 
and which history suggests are most likely to occur only as the result 
of experimentation at the State level. These innovations include 
payment and delivery reform innovations like episode of care payments, 
accountable care organizations, etc. The Federal Government, like a 
wise gardener, should be patient and focus on developing the proper 
conditions for State-level innovation. It cannot force innovation to 
grow. Innovation takes cooperation, and cooperation takes time.
    Taking the gardening analogy just a bit further, the ACA is 
recognition that the traditional, heirloom varieties of health care 
delivery are no longer sufficient for the needs of our country. In 
their place must be developed new, hybrid varieties that will yield 
better outcomes at lower cost to more people. Wisdom dictates that 
States be given enough time to rise to their opportunities, and enough 
flexibility to experiment in developing these hybrids.
    In closing, there are many issues related to the development of 
exchanges that must be addressed over the next 2 years--determination 
of essential benefits packages, establishing risk adjustment and other 
mechanisms to address the potential for adverse selection, standards 
for plan participation, determination of initial and ongoing individual 
eligibility, administration of subsidies, coordination with public 
coverage programs, governance, etc. Each of these issues should be 
addressed with the idea that we won't get it 100 percent right the 
first time. We are moving into unchartered territory that requires the 
humility and restraint to allow one another space to incrementally 
innovate and learn from our experiences. If HHS rushes to figure out 
too many details up front, rather than allowing ACA to evolve over time 
with significant State experimentation and feedback, we run the very 
real risk that many of the misaligned financial incentives that account 
for so much inappropriate consumption today will only be locked in 
further and will be that much more difficult to fix in the future.
    Thank you.

    The Chairman. Thank you, Speaker Clark for a 15-minute 
presentation. Thank you.
    Speaker Clark, I'll start with you. First of all, you have 
said in your statement that there were no State inputs into the 
development of the Affordable Care Act. On the other hand, you 
were here 2 years ago to testify on that.
    I also make the point that Senate and House Committees 
heard testimony from a total of 20 State representatives; there 
were 11 congressional hearings that included State 
representatives during the health reform preparation; so, 
Speaker Clark, you yourself testified here 2 years ago before 
we developed this legislation. As I said, we had a lot of State 
input into the development of this.
    I want to move ahead to the exchanges, though. I would 
congratulate you and Utah on setting up your exchange. It seems 
like, again, this was one of the ways that we believe in 
developing the Affordable Care Act that we could secure 
coverage for more people, and involve small businesses. You 
mentioned the number of small businesses had gone up--I forget 
the percentage--quite a bit, in your State. Is it not also true 
that this year, small businesses were given tax credits of the 
Affordable Care Act, to enroll their people in health insurance 
plans, and that's true in Utah, is it not?
    Mr. Clark. That is true.
    The Chairman. So, they got tax credits, and I can assume 
that also encouraged them to sign up on the exchange.
    Mr. Clark. I would support that statement.
    The Chairman. I thank you very much. Now, let me ask you 
one question, though: I'd like to know how--Utah got $1 million 
grant to expand and improve its exchange; what was that used 
for? How did you implement that, or how did Utah implement that 
money?
    Mr. Clark. We are still in the process of implementing 
that. Let me give you just a little genealogy: I mentioned in 
my opening remarks I'm very thankful for the partnership that 
Massachusetts shared--having their exchange up and running.
    We went back and they were very gracious to tell us what 
they would do again, if they had to do it over, and what they 
would never do again if they had to do it over, and it was very 
helpful in building our exchange.
    The diversity of how our exchange functions after that, 
though, are quite stark. They spent $25 million in creating and 
developing theirs; we spent $600,000 in developing and creating 
our particular exchange. Ours is actually more of a farmers' 
market entitled for people to bring their wares, and folks to 
come who are interested in purchasing.
    We've organized our market and used the money that we had 
here to get an online system that will have side-by-side 
comparisons of up to four plans; can go as detailed as folks 
like, in allowing businesses and employers to shop on that 
online farmers' market. We think that's important in bringing 
competitive forces available to that site.
    As I mentioned, there is no--in our $600,000 that we spent 
in creating our--there is no off-the-shelf exchange that you go 
buy. We had to create what we could, and not having much in the 
way of a type of checkbook that Massachusetts has from a State 
level, we had to try and do this a little bit on the cheap. We 
looked around to try and find innovative ways within the 
private market that would come and partner with us and put our 
exchange together.
    We found a company in Chicago to help do some of the 
organization and underwriting and the coordination of that. We 
found a company, actually, right in our Salt Lake Valley to 
help us with the financial portion of this; and were critical 
in putting those things together.
    The robustness of ours, as we begin to expand, we need to 
find--and that's what this $1 million is looking to do, is to 
try and help us organize from where we have our beginning 
stages to those next steps.
    The Chairman. That's what you're doing with the $1 million 
is expanding the exchanges?
    Mr. Clark. Yes. We've built our exchange under our--as I 
mentioned--with our own, and now this is trying to see what we 
can do to try and expand the program and make it more 
functional and operational.
    As we grow, we're going to need to do that.
    The Chairman. I wanted to get to Commissioner Praeger. I 
wanted to ask a question.
    You mentioned a number of insurance companies now in your 
exchange. Did Utah mandate any essential benefits package?
    Mr. Clark. We have a defined statute in essential benefit 
package, but we did not mandate that. What we did was require 
the insurance companies that want voluntarily to come to our 
exchange, and we have about 80 percent of the marketplace that 
comes to that. We've told them, we want you to bring your five 
most common plans that you offer. And, we did define three 
different tiers of plans. We modified this last legislative 
session into two that you must show on here so we have some 
actuarial comparisons that you can compare price to price to 
dollar amount.
    Beyond that, the companies have volunteered and brought 
well in excess of probably another 80 plans, plus, that they 
would like to sell on the exchange.
    The Chairman. But--again, the State did not mandate an 
essential benefits package for anyone coming on the exchange; 
is that right?
    Mr. Clark. No.
    The Chairman. No. I just wanted to make that clear. I did 
not know.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    Ms. Praeger, you mentioned a concern that I think is a very 
viable concern about the effect that the multi-State plans and 
the co-ops could have on driving business out of the State; do 
you think there is any possibility that those in-State 
companies--and what would be the effect if those in-State 
companies were given the same privilege as the multi-State 
plans and the co-ops?
    Ms. Praeger. Senator Enzi, as you know from the work you 
did several years ago--on looking at common, small-group plans 
across the States--it's very difficult to look at State 
legislatures and say we're going to standardize these plans, 
and, oh, by the way, the benefits that you've put in place may 
not be there because we want a level playing field.
    You need a level playing field. The plans, if they are 
going to be offered across the States, are going to end up 
States wanting to enter into compacts, interstate compacts, 
then they will have to come to the table; and the law allows 
for that kind of flexibility. They will have to come to the 
table and determine the level of benefits, but also the rest of 
the market rules.
    If you begin to segment the market and allow some plans to 
compete with one set of rules, and other plans to compete with 
another set of rules, you do get market segmentation which 
encourages adverse risk, which really could create problems.
    That's the way we've advocated level playing fields, same 
rules across the States.
    Senator Enzi. I wanted to be sure that was emphasized a 
little bit more. I think it's something that's been lost in the 
discussion.
    Now you also mentioned a big concern that if a large number 
of carriers exit the marketplace, particularly prior to 2014 
competition will suffer and availability of coverage will be a 
concern.
    Have you seen carriers leave the market place in Kansas or 
other States?
    Ms. Praeger. We have not yet. We, of course, just will 
continue to monitor that.
    The concern would be that if carriers do exit, and people 
lose their coverage, and right now, they have coverage, they 
can keep it, even if they have pre-existing conditions; with 
the guaranteed renewability, but if they lose their coverage 
and you don't have guaranteed issue, then they potentially 
would not have any place to go, except our State high-risk pool 
until 2014; and then we have a guaranteed issue and no pre-
existing condition exclusions.
    But we have not seen a problem, at least in my State yet, 
and I think nationally, so far we've not experienced dramatic 
changes in markets.
    Senator Enzi. That may change as we get this Federal 
benefits package.
    Mr. Clark, as Senator Harkin pointed out, you testified 2 
years ago before the new law was enacted; and based on what 
you've seen in the new law, do you think the authors of the law 
actually listened to what you said when you were here, and did 
that incorporate your views into the law?
    Mr. Clark. I'm frustrated.
    Senator Enzi. Thank you. I am too. I kept hearing the 
President say, if anybody had any ideas please give them to 
him. I've got a raft of ideas that I've had there, most of 
which don't show up in the law at all.
    Earlier, we heard testimony from Mr. Larsen that this 
exchange is going to be a free market. Is a free market 
something where people have to meet a minimum standard before 
they can be in it, or they can be in it and have asterisks to 
say that they're missing something?
    It seems to me like if you exclude people, you don't truly 
have a free market.
    Mr. Clark. I think that's a very accurate statement. I very 
much appreciate the guidance.
    While the rule has not been written, HHS has issued a 
guidance statement that said that both Utah and Massachusetts 
are kind of bookends of this process, and States should look at 
those. Our process, we elected very early on. Rather than 
having the State select winners and losers in the insurance 
program or the brokers that are selling, and which programs the 
State negotiates with, we would allow an existing system. 
Because we have high quality and fairly low costs in Utah, a 
system already working, that we would allow the market in the 
existing distribution systems just to be the model by which we 
would use regular market forces and not impose governmental 
forces in that market.
    Senator Enzi. Wyoming, of course, borders on Utah, and, a 
whole lot of people, particularly in southeastern Wyoming get 
their health care in Utah. Is there any provision where they 
can get their insurance through your exchange instead of 
through Wyoming?
    Mr. Clark. We have not ventured into crossing State lines 
yet in Utah, or exchanges. As I mentioned, we've used the old 
carpenter rule, you measure the board twice and cut once. We've 
tried to do this very demonstration I mentioned.
    We have a good system in the State of Utah. We didn't want 
to have an adverse impact of that.
    If I might just mention one thing about the essential 
benefit package, I do have some concerns while you're talking 
about market forces.
    The geography of the essential benefit packages and the 
Department of Labor doing a nationwide survey, if they 
aggregate all of those into those areas of us that have a good 
working system, I'm deeply concerned. There are 60 different 
mandates in the different States that are required of insurance 
companies. Not every single State has 60. Some are in the 
single digits; some are in the twenties and thirties in those 
mandates.
    As you begin looking at trying to find what the essential 
benefit package is and you work on averages, there are those of 
us that have low mandate States that feel like we're 
functioning well, we'll be required to raise up our essential 
benefits. Every time you have a mandate, you're going to add an 
additional cost to this program.
    We've asked, in the main testimony in front of the 
Institute of Health, to allow HHS to do a three-tier program. 
Do one state-by-state; determine what the essential benefits or 
the average plan is of each State, and then try and let that be 
the essential benefit for that State. If there are areas over 
and above, the HHS would like to be involved in, allow States 
optionally, based upon sound science, to accept each one of 
those mandates, still within the framework that the Federal 
Government says it would offer assistance for.
    And, then a third tier would be States from beyond that. 
Let States decide whether they want to pay that themselves and 
not be involved in looking at any additional subsidies for 
those mandates.
    Senator Enzi. Thank you. I've got some more questions that 
deal with mandates too, and I hope all of you--and I'm sorry, 
Mr. Sharfstein that I didn't get to questions. I have 
questions, and I'll be submitting those so we can get some----
    The Chairman. I intend to have another round. I have some 
more questions.
    Senator Enzi. I have to go to a meeting.
    The Chairman. Oh, I'm sorry.
    Senator Franken.
    Senator Franken. Thank you, Mr. Chairman.
    I'm sorry I wasn't here for your oral testimony. I read it 
last night. But, Senator Blumenthal and I were in a judiciary 
committee.
    Dr. Sharfstein, I know that efforts are underway in 
Maryland as they are in Minnesota and all over the country, to 
implement and oversee the medical loss ratio. As you oversee 
this process, how do you see the medical loss ratio bringing 
higher value care to residents of Maryland?
    Dr. Sharfstein. Thank you. Maryland has slightly different 
rules for medical loss ratio than the Federal rules, and I'm in 
the small group market, and talking to our acting insurance 
commissioner, she felt that they're pretty much equivalent to 
the Federal rules. So, it's a pretty smooth transition there 
without really much expected in that market.
    In the individual market the Federal rules are a little bit 
tighter, and so she's been monitoring this issue, and her view 
is that the companies are making the adjustment and that things 
are going well, that we'll have just an increased medical loss 
ratio in the individual insurance market, which means more of 
the premium dollar will be spent on medical care in Maryland.
    Senator Franken. So, that would, in your opinion, bring 
higher value care?
    Dr. Sharfstein. Correct.
    Senator Franken. I have a question for everyone, which is, 
the witness in the first panel talked about adverse selection.
    This is open to anyone. How do you avoid adverse selection 
if some policies in the exchanges don't all have the same basic 
essential benefits?
    Dr. Sharfstein. I'm happy to start with that. One of the 
things that I said earlier is that we want the plan in the 
exchange to compete on how to provide the best care in the most 
cost-effective way. We don't want them to compete on the basis 
of how to pluck off the healthier people or, which services to 
cover so the families have to decide between the condition the 
child has and the condition the mother has, for example.
    So, we think that having a standard of benefits is very 
important, for what I think we can describe as a fair playing 
field so that the competition is really happening on the right 
things.
    Senator Franken. Ms. Praeger.
    Ms. Praeger. Yes. And, I would agree. I think having a 
level set of benefits will have four benefit options, 
potentially. Two have to be offered; the other two are not 
required to be offered on the exchange, so that will help.
    But then there is also a provision that if a company gets 
adversely selected for whatever reason, and they end up with 
greater health care costs in their plan, there is a provision 
allowed for rules yet to be developed for risk adjustment. So, 
those companies with higher risk will get some sharing of 
resources from companies that have less risk.
    That also helps provide almost a community rating kind of a 
system, sort of modified by community rating, but it does allow 
for some risk sharing among the plans so that----
    Senator Franken. OK. Yes.
    Mr. Clark. There are two things we've done in the State of 
Utah to try and avoid that. One, there's still going to be a 
robust market outside the exchange, and there should be, so 
what you want to do is to make sure that the policies that are 
offered in the exchange are not different from those outside 
the exchange, so that one advantage is one over the other. 
There needs to be a commonality.
    That took prescribed legislation--we learned from 
experience, opening, that that isn't going to happen, that they 
will advantage one or the other, so we came back, through our 
experience.
    The second thing that we've done is that we had a risk 
adjuster board that is comprised of our insurance commissioner, 
some appointees from legislative side providing the officer 
appointments, and from the actual insurance companies that 
participate. They devise the rules by which that risk, if it 
does occur, how it will be distributed and how there is a true 
up after the end for financial consideration.
    Our risk adjuster board has already tried to perceive all 
of the problems--its the players in the market using the tools 
by which they minimize that risk in their regular markets using 
that inside the exchange itself; in the advent that they do 
find there is adverse selection.
    Senator Franken. Thank you. Thank you, Mr. Chairman.
    The Chairman. Senator Blumenthal.

                    Statement of Senator Blumenthal

    Senator Blumenthal. Thank you, Mr. Chairman. I want to 
express my appreciation to you for holding this hearing on this 
occasion, on the 1-year anniversary to the Health Care Reform 
Law.
    My first question--and I want to join in apologizing. We 
are often required to be in three places at one time, and can't 
possibly be, as I know you are required to be in a lot of 
places at one time. My apologies for being late, but, I did 
review your testimony.
    I would like to ask Dr. Sharfstein: In your testimony, your 
conclusion is that health care reform will result in estimated 
savings of about $853 million over the next 10 years in the 
State of Maryland.
    I wonder if you could provide some more details about this 
analysis, especially, more specifically, what provisions will 
provide the biggest cost savings and how they'll do it.
    Dr. Sharfstein. Sir, I can actually submit to the committee 
the independent analysis that reached that conclusion.
    Senator Blumenthal. That would be helpful.
    Dr. Sharfstein. It goes through a whole bunch of factors. 
It's a net savings. There's some things that increase cost and 
some things that decrease cost; and to give you an example, we 
have an uncompensated care system in Maryland, and you get 
savings because you no longer have to pay for uncompensated 
care.
    That's one example. But there are a whole range of factors.
    Senator Blumenthal. That must be a major one, judging by 
the costs of uncompensated care.
    Dr. Sharfstein. Yes. It depends from--this analysis isn't a 
cookie cutter from State to State.
    They looked a lot at the uniqueness of the Maryland system 
in developing the analysis.
    But it was an independent look. It's about a 23-page report 
with a whole financial model. Parts of the model that were sort 
of found consistent by the Urban Institute, who had a similar 
type of thing for the effect of health care reform among 
coverage in Maryland.
    Senator Blumenthal. Are there any other major categories 
where you have cost savings that you could give us now?
    Dr. Sharfstein. Sure. The savings include and enhance the 
MAT rate for the CHIP Program, the fact that we won't have the 
high-risk pool to pay for anymore; a rate stabilization offset 
in Medicaid; certain programs that we won't have to pay for in 
the State for people with breast and cervical cancer, because 
they'll be able to get insurance; and the senior prescription 
drug assistance program, our expenses will be down because the 
health care coverage covers more medications for seniors. So, 
there are a whole range of savings to the State.
    Having been a couple months on the job so far, I've met 
with people across the State and met with different groups 
involved in the health care, businesses, the Chamber of 
Commerce; people really see a lot of potential for this law. 
And, we're really focused in Maryland on accomplishing an 
effective implementation.
    Senator Blumenthal. May I ask the other witnesses--based on 
that sort of rough-cut summary of the areas where there will be 
savings in Maryland--whether similar savings would be realized 
in your States in those same categories?
    Ms. Praeger. I think those general categories, yes. The 
uncompensated care, the high-risk pools, which will no longer 
be needed, and there's a re-insurance mechanism to help 
transition those folks into private coverage--Medicaid match. 
The numbers would be different in Kansas versus Maryland, but 
those general categories, I think we would probably see savings 
as well.
    Mr. Clark. In Utah we started our health care system reform 
4 years ago, hoping to accomplish what those numbers are. I 
will tell you the numbers are elusive, and there are additions 
and there are subtractions as you go through that process. But, 
we are committed to try and find those that make sense.
    Senator Blumenthal. I have another area of questioning, 
which I'd like to raise and that concerns the enrollment in 
exchanges. Perhaps you could tell us, each of you, what is 
being done in your State to assure that consumers have the 
opportunity to receive the best plan, or to put it another way, 
to receive the best information to enable their choices to 
enroll in the best plan for them through the exchanges.
    Ms. Praeger. Kansas is one of the States, and I think most 
States, or many States, receive the grants to assist us with 
our consumer outreach, in developing an ombudsman office, which 
we've established in our department.
    We were given that flexibility. But I think it will be a 
very important component of implementing, especially 
implementing exchanges and getting the education out there. 
We'll have to work with a whole variety of entities.
    We've put together a steering committee to help our process 
and we have the State Chamber of Commerce involved; we have 
provider groups; we have consumer groups; we have a whole range 
of individuals that will help us fan out and get the 
information out. But, it will require a lot of coordination and 
a lot of partners.
    Dr. Sharfstein. I would just say, in Maryland there's 
legislation to establish the exchange, and part of that is a 
system of advisory committees, and the exchange would look to 
the business community, consumer advocates and others to help 
us think through what would be the most meaningful way for 
information to be presented in the exchange.
    There are a series of studies we'll have to do this year; 
and I'm sure that would be one of the topics covered. Our 
purpose is not going to be, I dream about the money that's 
going to be, it's going to be what matters to people in the 
world like that.
    Mr. Clark. All of the above, and the fact that we have a 
practical thing. We have an online site--Utah exchange, and 
folks can go online. It's about a 2-minute process for a 
business to sign up, for employees to go on and shop.
    We tried to make this very user-friendly. We're using the 
existing distribution systems of brokers and agents in the 
State of Utah to sell this. And, all of the things I've 
mentioned here about partnering up with the local business 
communities, chambers, United Way, all of that distribution 
system to try and do this as effectively as we can, because we 
don't have a lot of extra money. We don't have a marketing 
budget in this program.
    Senator Blumenthal. Thank you. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Blumenthal.
    Senator Hatch.
    Senator Hatch. Thank you, Mr. Chairman. I appreciate that. 
Representative Clark, I understand that my friend, the 
Chairman, made a point that you were invited to testify to 
provide input--in other words, the States' input. Little did 
the States know that when they were being invited to dinner by 
the White House on Obama Care, they were on the menu.
    Have they adopted any of the suggestions that you have 
made?
    Mr. Clark. I will say that the door has been mostly open 
when we've said these are things that we've experienced and 
want to learn, since the enactment of this with HHS, but we've 
seen not a lot of acceptance or flexibility in this process.
    My only hope and prayer is that----
    Senator Hatch. Did you say a lot of flexibility or a lot of 
inflexibility?
    Mr. Clark. We're asking for flexibility. We've not seen a 
lot.
    Senator Hatch. Yes, well, it's interesting because Utah 
seems like it's running pretty well in health care; and you 
think the exchange has great potential and gradually will 
continue to build in numbers?
    Mr. Clark. I do. We've just begun our full-scale launch at 
the beginning of this year, and we can anticipate that there 
will be, not just thousands, but tens of thousands by the end 
of the year, and exponentially over the next few years, as this 
information is shared and businesses are coming on line.
    What's most exciting is that 20 percent of the people that 
are currently in the exchange, their companies did not offer 
insurance prior to having this tool in the tool chest.
    Those are folks that we think have been uninsured, but they 
are effectively moving off the uninsured rolls.
    Senator Hatch. If I interpret your statement correctly, it 
is under the principles of federalism you have 50 States, and 
it would be good to have 50-state input; and, the 50 different 
States all have different demographics; all have different 
problems; all have different approaches if they were allowed to 
do this.
    Mr. Clark. Just in comparison, because of the two 
exchanges, one in Massachusetts and one in Utah, 70 percent of 
the lives in Massachusetts are insured under Fortune 500 
companies; larger risk of base models, that have an economy 
scale unprecedented that you don't see in our market.
    We have a dominance--Minnesota is the only other State that 
has more part-time employees as a percentage of their workforce 
than Utah.
    We are a State of small business; 80,000, two with 50 
employees, small businesses, and we don't have the economy of 
skill. We have a different demographic and a different need, 
and our small businesses need the tools to meet those on a 
cost-effective measure.
    We hope that the exchange has demonstrated it has that 
power to do that, and we'd like to be able to continue to go on 
the path.
    Senator Hatch. You mentioned these young people who feel 
like they're not going to have to worry about health care, and 
therefore--either it's too expensive for them or they just 
don't want to buy it. If you had your way and there was a way 
of taking care of them, how would you do that?
    Mr. Clark. One of the things you need to do is try and look 
at the cost associated with it. One of the things that the ACA 
does is a 3 to 1 ratio. That means that the most expensive is 
only three tiers between the most expensive and the cheapest. 
So, you're asking the young folks to pay more of the cost of 
those of us that are the older folks category in covering that 
health care.
    Instead of say, distributing that into a 5 to 1 ratio, you 
allow that process to have a more effective cost for those at 
the younger end of that, particularly, when financially, it's 
also sometimes an impediment for them at that level.
    The structure of this is looking adversely, I think, to 
bring the young immortals into the system.
    Senator Hatch. There might be some advantages in having a 
high deductible policy that are especially attuned to younger 
people who are basically healthy.
    Mr. Clark. I think very much so, to be able to have those 
as a tool in the tool chest is very important.
    It also brings, another important concept: Two things that 
we've done in the State of Utah is--everything that we've done, 
we've had a litmus test of two items. One of them is trying to 
put market forces into place, and the second one is to have the 
individual be more accountable for their own health care and 
health care costs.
    As long as I take my insurance from my employer, I have 
very little--if you think about it for a moment, all of your 
personal insurance, whether it be your auto insurance, your 
home insurance, if you have business insurance or life 
insurance, you own that insurance. The only insurance in your 
life you do not own is your health insurance. Somebody else 
owns it, and the incentive, according to that, are opposite of 
what they ought to be, to bring more individual accountability, 
whether it be through a health savings, high deductible plans, 
bringing--where I now have some say in the expenditure of those 
dollars, and had some accountability with those we think is 
bringing some of those market forces and individual 
accountability into the system and will improve it.
    Senator Hatch. You really believe that the current--the so-
called Affordable Care Act is going to be able to save money 
over the long run?
    Mr. Clark. I'm trying to race through a number of 
possibilities, and I'm more concerned about in the long run. 
We're already seeing what the first impacts of this is that the 
premiums are escalating at a higher rate than they were prior 
to this; so I'm not--well, it talks about predictable savings. 
Our experience right now on the ground is going in the opposite 
direction, and I don't see anything that's going to turn that 
ship around.
    Senator Hatch. Some of my colleagues blame the insurance 
companies for that.
    Mr. Clark. I think as you have companies that try and 
manage risk, as you put more risk into the system, they're 
going to try to price accordingly.
    Senator Hatch. Well, my time is up, Mr. Chairman.
    Thank you.
    The Chairman. Thank you, Senator Hatch.
    Senator Mikulski. Thank you, very much, Mr. Chairman.
    First of all, thanks to the entire panel. This was very 
informative, and very instructive.
    I have a question for Dr. Sharfstein. I have several for 
all of you, but in the interest of time----
    Dr. Sharfstein, let me go to the original idea of setting 
up exchanges, which was that it was going to be like a shopping 
mall so that small business people like my father (who was a 
small grocer, who didn't have access--he had to pay to buy 
insurance on the individual market)--that this was going to be 
like a shopping mall, where the good old people could go--small 
businesses, etc.--to see where they could get the best deal; 
and the best deal is defined either by price for them, or the 
best deal in terms of benefit package that suited the needs of 
their particular situation, or if you were an individual. So, 
if you were a sole proprietor like a florist, to a mid-sized 
business where you might own three dry cleaners.
    Could you tell us now, as you've worked now to get an 
exchange set up, do you believe that as we're moving ahead, 
setting these exchanges up, that the original intent is going 
to work out the way you think? Or do I have a wrong 
understanding of how these exchanges would work, which is 
essentially, it would be a gateway, a portal for people who 
couldn't negotiate on their own--for the small market people, 
to really get good deals or best deals, depending on how you 
define it, for yourself or your employees?
    Dr. Sharfstein. Thank you. I do think that it will work out 
in--much like you just described. I think if you think of it, 
the analogy would be, maybe before the Internet how it would be 
if you wanted to buy something, you might have to call around 
to a bunch of places, you wouldn't--if you drove out there, 
they might not have any, and it was just a huge amount of time 
and effort to maybe try and buy a piece of equipment.
    And, now on the Internet, you can go to sites and you can 
get the ratings; you can get the prices; you can very 
efficiently decide where the right place to buy something is.
    The goal is for an exchange to be very consumer-friendly. 
I've heard the phrase that it should delight the consumer. 
People should be on the Web site and really be able to navigate 
and to understand what the different plans are and how they 
compare against each other.
    So, that's very much our goal.
    Senator Mikulski. Ms. Praeger, do you feel the same?
    Ms. Praeger. I do. We probably couldn't have developed 
exchanges even 10 years ago. First of all, there wouldn't have 
been the confidence in purchasing on an Internet. There's the 
privacy issues that I think we've all grown accustomed to, 
going to the Internet to get information. I do believe that the 
exchange can be a good marketplace for people to get 
information, compare prices, compare quality of plans, and I 
think, perhaps for the first time, we'll have an individual 
market that can actually function, because you won't have pre-
existing condition exclusions in the individual market, which 
has made it virtually impossible for some people to buy 
coverage. They're either not offered it, or it's priced so high 
that it's not affordable.
    While there are many things that we want to continue to 
work with HHS on, in implementing, we certainly are grateful 
for the flexibility that States have in setting up their own 
exchange, and want to make sure that what we set up is easy for 
people to use and functions from an individual market 
standpoint as well as a small group.
    Senator Mikulski. The policy goal is a good one.
    Now, the Federal Government, Dr. Sharfstein, has given 
Maryland $6.2 million to set it up. What are you going to do 
with the money?
    Dr. Sharfstein. We have a $1 million planning grant, which 
we're going to use to hire some of the initial staff, do some 
of the assessments around the key technological and other 
issues in order to get the exchange started. We got a $6 
million grant to establish some of the technological building 
blocks of the exchange, particularly around verifying whether 
people are eligible for different subsidies or for Medicaid.
    We will be working with other States and a lot with the 
various components of Maryland State Government to move 
forward, both in the governance of the exchange and on the 
technical side.
    Senator Mikulski. Am I right to say that we're looking--you 
talked a lot about cost savings--at universal access to get rid 
of or eliminate the high-risk pool? But, one of the things I 
noted that you're going to move--and something so important to 
Senator Harkin and to me, to move from volume-based medicine to 
value-based.
    But, also you're implementing significant quality 
initiatives like the hand washing that came out of the famous 
Pronovost checklist and some of the recommendations from the 
Institute of Medicine.
    Did you feel that it's not only market forces that will be 
able to contain and even lower costs, but these other 
significant, what we would call, public health initiatives, 
like quality initiatives, and also more efficient and better 
management of chronic illness?
    Dr. Sharfstein. Absolutely, and Dr. Pronovost at Johns 
Hopkins----
    Senator Mikulski. In other words, the market and its 
disciplines, which are significant, are only one of the tools 
for cost containment in discipline.
    Dr. Sharfstein. Right. I think that's absolutely true. I 
view the Affordable Care Act as a set of tools for States that 
can combine with the State's own efforts. I don't think the 
Affordable Care Act gets the States off the hook. We have to do 
these kinds of public health initiatives.
    We have to figure out how to change the way that health 
care is paid for and change the incentives; we have to do 
quality initiatives like the ones that are going on, and with 
the Affordable Care Act, it gives us some extra tools to do 
that that are very helpful, and it also creates more of a 
system so we can apply the tools we have across the whole 
system and have the tools we already have be more effective.
    I think when I go around Maryland, one of my key messages 
is, we will succeed only insofar as we keep health care 
affordable, and the Affordable Care Act is an important set of 
tools for us, but we've got to keep moving forward on a whole 
bunch of other things to succeed.
    Senator Mikulski. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Mikulski.
    I must admit, I'm a little bit confused now. On the one 
hand, I've just heard from my friend, Senator Hatch--and he's 
been a friend of mine for 30-some years--say, Mr. Clark, 
something about the lack of flexibility; but then I read 
Commissioner Praeger's testimony and I read that there is a 
fair amount of flexibility.
    Commissioner Praeger, I'm just reading your testimony; you 
said there's a fair amount of flexibility when it comes to 
exchange development, something that we advocated when this law 
was being developed--I assume we being the National Association 
of Insurance Commissioners.
    Again, those are State people, so we did have input from 
the States.
    You said, taking advantage of flexibility--most State's 
first concern is what policy goals they would like their 
exchange to accomplish.
    You go on to say, many States are looking to create a 
transparent marketplace, to simplify the process of purchasing 
insurance coverage while providing consumers with the 
information they need to make informed comparisons between 
various options.
    This is the so-called Utah model.
    Other States are considering using the exchange to 
selectively contract with health insurance carriers in order to 
negotiate directly on behalf of consumers--the Massachusetts 
model.
    This decision will help determine many of the other 
questions the States must answer in establishing their 
exchanges. Then you go on to say, there's a whole flexibility 
for States in the governance structure, that they choose to 
establish; they can house it in the existing State agency, a 
new agency, a quasi-governmental body, a nonprofit established 
by the State.
    There's a lot of flexibility in how they're housed, the way 
they're run--and then you go on to list other ones.
    I had here the flexibility for State-run exchanges, just a 
list of them.
    States will determine which insurers are permitted to offer 
products in the exchanges; States can choose benefit rules that 
meet the needs of their citizens; consumer-driven health plans 
and health savings accounts will be available; States have 
discretion over Medicaid coverage; there's new funding to 
establish exchanges and modernize eligibility systems that's 
available. We talked about that. And, reliable, independent 
cost estimates are available.
    It seems to me that when you said, Commissioner Praeger, it 
provides great flexibility for States when it comes to building 
the insurance way, you said a fair amount of flexibility. They 
can make the exchanges a sort of Expedia.com that's open to all 
comers or States can give the exchange more power to negotiate, 
as I just mentioned.
    What are the factors that Kansas is considering in making 
this decision? You've got all this flexibility.
    What are you considering in Kansas?
    Ms. Praeger. We have a committee process that we've 
established through our department as the awardee of the 
Innovator Grant--the early Innovator Grant, and so we're 
seeking a lot of input on governance. This will be a 
legislative decision, but are we going to recommend that the 
governance be within an existing State agency, a new, stand-
alone State agency, a separate nonprofit?
    During this process we want to look at the pros and cons of 
those various approaches. Do we look more like a Utah model? Do 
we look more like a Massachusetts model? I think probably we 
will look more like a Utah model, where all plans that want to 
be on the exchange will be able to be on the exchange as long 
as they meet the minimum standards that will be required.
    I think another critical decision is going to be, do we 
have a market outside the exchange versus the one inside the 
exchange? Probably we will, but I think that's another decision 
point that we'll have to make; and if we do, then how do we 
make sure that the playing field is level?
    One of the key issues there is that the exchanges will be 
funded through transaction fees. That adds an additional fee, 
buying on the exchange; so how do you make sure that you have 
similar cost on plans outside the exchange so you don't create 
a disadvantage by that transaction fee on the exchange. So, 
there are lots of issues like that that we will sort through, 
seeking as much input as we can from as many folks as we can in 
Kansas to make it work for Kansans.
    The Chairman. But this is your decision, the State of 
Kansas makes those decisions.
    Ms. Praeger. Yes.
    The Chairman. We don't.
    Ms. Praeger. Yes.
    The Chairman. I just wanted to make that point, that I 
think there's a great deal of flexibility out there for the 
States to design and develop these.
    Now, Speaker Clark, when you testified before the committee 
in 2009--I looked over your testimony--you said that one of the 
obstacles to State flexibility and health reform was Federal 
restrictions on--and I quote from your testimony--``wellness 
initiatives or personal responsibility elements.''
    That hits home with me, because I have been one of the 
strongest advocates for years here on wellness and prevention. 
I've worked closely with Senator Hatch on that in the past. 
It's been one of my top legislative projects, and that was the 
part that I had worked on, on the Affordable Care Act.
    The Affordable Care Act includes programs that gives 
States, communities and employers the kind of flexibility that 
you mentioned, I believe. That act created the community 
transformation grant program which supports State and community 
initiatives that used evidence-based techniques to prevent 
heart attacks, throat cancer and other conditions by directly 
addressing behavior; like preventing tobacco use and preventing 
obesity.
    The act also authorizes a $200 million grant program to 
give employees of small businesses access to comprehensive 
workplace wellness programs. Now, the grants are available to 
employers of fewer than 100 employees who don't have the 
resources to create a program of their own.
    Studies have shown that workplace wellness programs can be 
anything from nutrition counseling, to smoking cessation, to 
in-house gyms. They typically cost about $20 to $200 per 
employee for small businesses, but they have a proven rate of 
return ranging from $2 to $10 for every dollar spent in the 
first 18 months.
    So, we have that in the bill.
    Again, Senator Hatch asked you, and you said you were 
frustrated. I suppose all of us are frustrated by some parts of 
the bill. There are some parts of the bill that frustrate me, 
too. It's like any piece of legislation that passes around 
here. I was Chairman of the Agriculture Committee for a long 
time and passed two agricultural bills. I often said, I don't 
like every bit of it, but that's what compromise is about. 
That's what trying to get together and trying to work things 
through to build a compromise is.
    You might be frustrated by some parts. I certainly hope the 
part on wellness and prevention--I hope you're not frustrated 
by that.
    And do those programs at least partially address your 
concerns?
    Mr. Clark. I think those are outstanding programs. In fact, 
I think the cheapest quality of health care is health in 
itself.
    I think the low-cost portion of that is to try to keep all 
of us healthy, and to try and devise programs that pay for 
quality outcomes, as I mentioned earlier, rather than just 
activities, I think is something we're all engaged in, and have 
some commonality with.
    I agree with that.
    The Chairman. I appreciate that, because we worked very 
hard to put a lot of wellness and prevention provisions in and 
to set up the prevention trust fund and everything, which is 
moving ahead quite aggressively now. Again, the whole idea was 
to, as you say, keep people healthy than to treat them later on 
when they've got chronic diseases and illnesses.
    Also, as Chairman of this committee, anytime that the 
accusation or the implication rears its head that somehow we 
did not take into account disparate views, and that somehow 
minority views were not accommodated, I only have to respond 
with facts.
    In this committee markup we met for 13 days for 56 hours; 
no amendment was ruled out of order. Anyone that had an 
amendment offered an amendment. There were 210 total Republican 
amendments offered in this committee on this bill. We either 
accepted or adopted through votes 161 of those amendments--161 
out of 197.
    Did we take them all? No, obviously not, but that's the 
legislative process. You're a legislator, Speaker Clark, and I 
have a great deal of respect for legislators, especially those 
who have been elected by their peers, to be Speaker--to be a 
leader.
    I'm not going to ask anyone to respond to this. I just 
wanted to make a statement that these are the facts. That is 
the data. And people didn't get what they wanted in the bill. I 
understand that.
    I didn't get what I wanted in the bill, either. There were 
some things I wanted in the bill. I happen to be a strong 
proponent of the public option. I didn't get it, did I? Such is 
life. But, that doesn't mean the whole bill is bad simply 
because I disagree with that. I think there's enough in the 
bill.
    I just wanted to make that point, that minority views were 
heard; amendments were adopted--not all of them, of course, but 
that's to be expected in any legislative process.
    Let's see, was there anything else we wanted to cover here.
    Do any of you have anything else that you wanted to add to 
the record that I might not have asked or anybody else didn't 
ask or bring up? Is there anything else, Commissioner Praeger?
    Ms. Praeger. I always try to--and I pointed it out in my 
testimony--I just think this is a step in the right direction 
in terms of getting everybody. It's not perfect, I think we all 
know that. There are still issues that are going to have to be 
resolved.
    The Chairman. That's right.
    Ms. Praeger. But really, the critical issue that needs to 
be developed, worked on going forward, and I know you know this 
too, is the ability to rein in health care costs, and I'm a 
firm believer that you can improve quality and lower costs; 
they go hand in hand.
    And, I think that when we take the ability for companies to 
manage risk or avoid risk by medical underwriting, we take that 
away, then the way they manage their profitability is by making 
sure the right care is delivered; because then they have a 
vested interest in providing the best quality care.
    The Chairman. I'm in agreement.
    Ms. Praeger. And, we've not had that in our health care 
system.
    The Chairman. That's exactly right, and I hope that's where 
we're headed.
    Ms. Praeger. I hope so, too.
    The Chairman. I also hope that you'll look at all of the 
prevention and wellness provisions we have in the bill, and put 
Kansas on the map in being a leader in that area, too.
    Ms. Praeger. Absolutely.
    The Chairman. Utah is doing it, and I would complement you 
on that, because I've known about the health system in Utah for 
a long time, and they've been very good on wellness and 
prevention for quite a while.
    Yes, Representative Clark.
    Mr. Clark. I will just briefly talk about--maybe I could 
just identify some of the frustration that we've talked about 
here.
    I accept everything that you've said and think that that 
portion of the bill is rightfully stepped. Here we have one of 
only two functioning exchanges, but one was a grandfather and 
one was excluded. That begins some frustration with this 
legislation, rather than accepting an already functioning 
exchange.
    Massachusetts is in and Utah has to prove its worth on the 
exchange.
    The next portion of this deals with the Medicaid 
requirements, and here we are in the State of Utah that's 
saying, ``all right, you're going to be mandated to have about 
50 percent increase in eligibility in your system.''
    I've been in the legislature 10 years. When I began my 
general fund portion for the entitlement programs under 
Medicaid in the State of Utah, it represented 9 percent of our 
budget. Today it represents 23 percent and growing.
    The Chairman. This is Medicaid?
    Mr. Clark. This is the Medicaid portion of it. It is 
growing at three times the rate of any other portion of our 
budget; and it's anticipated at the end of this decade that it 
will be, if not very close to or fully into the 40 percent of 
our overall general fund portion of our budget.
    That creates a lot of concern for us in trying to be able 
to manage this process. The portion of this we are not able to 
try, because of some of the mandates, and the requirements that 
come from the program, we're being forced in this process to 
spend much, much more money. I don't care to debate the value 
of whether covering more people with Medicaid is valuable or 
not; but just the fiscal responsibility and the frustration 
associated with that is fairly strong.
    I can go through half a dozen steps like that, but that's 
fairly frustrated down this path. We appreciate the openness 
and the invitation to come and talk about what things we think 
that we have done in Utah that are valuable. We are sharing 
those right now under our exchange with 22 other States.
    Now, the Senator from Colorado that was here earlier, I 
would love to have told him about the house member under the 
majority leadership that came over and spent time with me and 
in Utah, and from the executive office about what they are 
doing.
    Oklahoma today is considering legislation that is mirroring 
what Utah has done.
    There are a number of States, as we go across the country, 
that are electing portions of much like we did. We learned from 
Massachusetts. We didn't use a Massachusetts model, but we 
learned from there and we're happy to share our experiences and 
hopefully, save folks from making the same mistakes that, 
perhaps, we have made, but learning from what we've done right 
to make sure that they go down those paths to begin with.
    The Chairman. Thank you.
    Dr. Sharfstein.
    Dr. Sharfstein. Thank you. I first want to thank colleagues 
from Utah and Kansas. There's a lot that we're working on 
together to make this work.
    Governor O'Malley recently wrote that he thinks the 
Affordable Care Act--he thinks about how he hears the heartache 
of parents wondering whether they can afford essential medical 
care for themselves or their children; and he watches as rising 
costs erode the competitiveness of innovative companies and 
small businesses; and I think in Maryland we're trying to keep 
our eye on those prizes--getting care, essential care to people 
who need it, reducing the costs and improving our 
competitiveness.
    We believe the Affordable Care Act provides a very 
important set of tools to States that we can flexibly adapt our 
circumstances to accomplish those goals.
    The Chairman. Thank you very much.
    I just want to respond on one thing on Medicaid. My State 
of Iowa, also the same thing. All States have the same problem 
with Medicaid. The more I looked at it, in order to get 
Medicaid, you have to fall below a certain income threshold. If 
you look at the number of people who have fallen below the 
poverty line in the last 10, 15 years, you'll see what's 
happening in Medicaid. We've got more poor people in this 
country. That's what is driving Medicaid. We're not expanding 
it. The poor are expanding it, because they're falling below 
the poverty line.
    I suppose someone could say, ``well, maybe we ought to 
redraw the lines.'' I suppose if you wanted to, you could get 
rid of all the poor people in this country by saying that 
anybody that makes over $1,000 a year isn't poor. I don't know 
what you're accomplishing by doing that.
    We have established poverty guidelines that have been 
pretty consistent for all my time here, but they take into 
account how much you need for a family of four for food, 
clothing, housing, rent, transportation, that type of thing and 
then what's the basic you need--I think it's around $22,000 a 
year for a family of four. I'd like to see some of us live on 
that around here for a family of four.
    When I look at these Medicaid rolls, yes, they're going up, 
because we've got a lot of poor people. And, we've got a lot of 
people unemployed. I don't know what the unemployment figures 
are in the States. I don't know. But, we're not as bad as some 
States, but we do have a higher rate of unemployment than we've 
had in the past in Iowa; and that means more people on 
Medicaid.
    If somehow we can re-energize and re-invigorate the middle-
class in this country, get people making a little more money 
and put people back to work, Medicaid rolls will come down.
    When I hear about all the problems with Medicaid--and it is 
a burden--I'm not saying it's not a burden on State budgets. 
It's a burden on our Federal budget too, but that's just 
because we've got a lot of poor people.
    With that, I thank you all very much. If some of you came a 
great distance, I thank you for coming back again. I thought 
you added greatly to our deliberations here.
    I will just say one other thing: Commissioner Praeger said 
it very well. This is just my own personal view as the Chairman 
of this committee, I think we've made great strides in moving 
ahead on the Affordable Care Act. I believe efforts to repeal 
it are ill-advised, and trying to fight last year's or last 
couple years' battles. So, I personally am going to resist 
every effort to repeal this bill.
    What I will not resist, however, are attempts to change it 
or modify it, or make it work better. Anybody that's got 
suggestions on how to make this thing work so that we cover 30 
million people that are uninsured--make it work so that we do 
reduce the cost of health care, make it work so that we focus 
more on health and keeping people healthy rather than just 
treating them when they get sick--any kind of suggestion; how 
to make the exchanges work better, believe me, we're open, and 
we'll look at those, and like any law, I've said many times, 
that the Affordable Care Act is not the Ten Commandments 
written in stone for all eternity. It is a law. It's a law 
developed by imperfect human beings, but I think it's a law 
that moves us in the right direction; and as any law, it's open 
to change, and open to modification.
    I don't want anyone to think that this can't be changed. Of 
course it can be changed to make it work better, to meet the 
goals and the objectives that we've set out.
    I just wanted to make that very clear.
    Thank you all very much. The committee will stand 
adjourned, and the record will remain open for 10 days from 
today for statements and questions to be submitted into the 
record.
    Thank you all very much.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

     Prepared Statement of Gary R. Herbert, Governor, State of Utah
    Good morning. I am Gary R. Herbert, Governor of the State of Utah.
    I would like to thank Congressman Upton and the other members of 
the committee for your invitation to testify.
    Let me begin by stating that I am a firm believer in the principles 
of federalism embodied in the 10th amendment.
    States are not powerless agents of Federal authority. I believe 
that--as Governor of the great State of Utah--I should take every 
opportunity to assert the rightful authority of our State to advance 
Utah solutions to Utah problems.
    A balance of powers between the States and the Federal Government 
is not only right and proper, but essential if we are ever to find 
solutions to the complex problems we face.
    Justice Louis Brandeis famously described States as laboratories 
which can engage in ``. . . novel social and economic experiments 
without risk to the rest of the country.''
    In Utah, we began our health system reform efforts 5 years ago, 
long before the Patient Protection and Affordable Care Act arrived on 
the scene. The lessons we've learned in our novel experiments in health 
system reform can serve as a guide to other States as they begin their 
own reform efforts. In fact, we have already been contacted by 
officials in numerous other States asking us to share our experiences 
with them.
    The Federal Government has taken the opposite approach. The Federal 
Government decreed the one-size-fits-all law of the land, and has left 
to the States the details of how to shoehorn the Affordable Care Act's 
voluminous dictates and mandates into their agencies and budgets.
    The Governors who are responsible for so much of the implementation 
of the Affordable Care Act were never invited to the table when it was 
being proposed by the Obama administration or debated in Congress. I 
find that unconscionable.
    Utah has repeatedly demonstrated we can find Utah solutions to Utah 
problems, particularly in the area of health care. Our health system 
reform efforts have been targeted to respond to Utah's unique business 
and demographic needs.
    Unlike many other States, a majority of Utah's uninsured population 
are employed. Most work for small businesses which do not offer health 
insurance benefits. Over 80 percent of Utah's businesses are small 
businesses, and less than 50 percent of Utah small businesses were 
offering health insurance coverage as of 2009. In order to reduce our 
uninsured population, we needed to make insurance coverage accessible 
to our State's small employers.
    Utah also has the youngest population in the country. Many of our 
uninsured are so-called ``young immortals,'' persons between the ages 
of 18-34 who are generally healthy and employed but who have deemed 
traditional health insurance coverage to be either unnecessary or too 
expensive. In order to reduce our uninsured population, we also needed 
to expand choice in our small group market.
    In Utah, we have chosen a path of business- and consumer-oriented 
health system reform which responds to Utah's needs.
    Years ago, most U.S. businesses made the switch from a defined 
benefit to a defined contribution model for their employee retirement 
benefits offerings. Incidentally, Utah is leading the Nation by having 
moved our State employees toward a defined contribution retirement 
benefit, as well.
    As part of our health system reform efforts, Utah small businesses 
now have the option of using a defined contribution model for their 
health benefit offerings. A defined health benefit left businesses with 
unpredictable and ever-escalating costs. Through access to Utah's new 
defined contribution market, employers can manage and contain their 
health benefit expenditures.
    With the creation of the Utah Health Exchange, Utah employees also 
benefit from expanded access, choice, and control over their health 
care options. Rather than the traditional one-size-fits-all approach 
inherent in the defined benefit model, employees can now use the 
defined contribution from their employers to shop for health insurance 
tailored to their individual needs and circumstances. The Utah Health 
Exchange currently gives Utah small business employees more than 100 
plan choices, all of which retain the pre-tax and guaranteed-issue 
advantages of traditional small group insurance.
    After the planned pilot phase, the Utah Health Exchange is now 
fully operational. In just the first month, we have already helped more 
than 1,000 employees get health insurance they have chosen. Each month, 
enrollment continues to climb. Our figures show that 20 percent of 
businesses participating in our defined contribution market through the 
Utah Health Exchange are offering health benefits for the first time.
    We have used market principles to create a Utah solution to Utah's 
problems.
    Governor Patrick and I hold the distinction of presiding over the 
only States in the Nation with functional health insurance exchanges at 
this time.
    The Commonwealth Connector in Massachusetts was designed to serve a 
business community and citizen population vastly different from what we 
have in Utah. Hence, our exchanges are constructed in vastly different 
ways.
    The Federal Government simply should not be in the business of 
telling Utah, Massachusetts, Mississippi, or any other State how to run 
their current or future exchanges, or even force them to have an 
exchange.
    The Affordable Care Act not only mandates exchanges for every 
State, but it gives the States little leeway in constructing exchanges 
that work for diverse needs and populations. Worse, the Affordable Care 
Act feigns a posture of giving flexibility to the States, while it's 
requirement are, in reality, quite rigid.
    Just as Henry Ford offered his customers a choice of any color car 
they wanted as long as that color was black, the Affordable Care Act 
allows States flexibility in constructing their exchanges as long as 
they do it the way Washington tells them. Minimum Essential Benefit 
mandates, obligatory quality improvement activities for carriers, 
compulsory Federal subsidy determination mechanisms; these are just 
some of the examples of the lack of flexibility of the new national 
health care program.
    The next major problem in need of market forces is the State's 
Medicaid program. Medicaid is poised to wreak havoc on the State's 
budget for years to come, threatening our ability to fund critical 
services, such as transportation and education.
    Even before the Affordable Care Act, Medicaid was already a large 
and growing part of the Utah State budget. Medicaid's share of the 
overall general fund has been growing and is projected to grow even 
larger, creating real problems for the State. In the 1990s, it was as 
low as 9 percent. In Fiscal Year 2010 it was 18 percent. By fiscal year 
2020, it is estimated to exceed 30 percent, without federally mandated 
expansion.
    In this recession, Medicaid enrollment has skyrocketed. In December 
2007, enrollment stood at 158,267 individuals. In December 2010, 
enrollment stood at 230,812 individuals, a 46 percent increase in 3 
years.
    The Affordable Care Act accelerates growth in Medicaid and 
compounds the budget pressure. The act prohibits the normal State tools 
to control costs. It requires Maintenance of Effort, meaning the State 
must participate at federally dictated levels. The act limits cost-
sharing. The act confiscates State pharmacy savings.
    Perhaps worst of all, the Affordable Care Act dramatically expands 
Medicaid eligibility in 2014. Enrollment is projected to grow 
approximately 50 percent under the mandated expansion. The act only 
pays for part of new costs, meaning States must cover the rest. In 
Utah, these new costs are estimated to be as high as $1.2 billion over 
10 years.
    I have come to Washington to present solutions to help ease the 
burden on our State.
    First, I call on the Obama administration to support an expedited 
appeals process to the Supreme Court for the healthcare litigation 
which has been decided by the lower courts. Along with 28 of my fellow 
Governors, I have sent a letter to the President asking for his 
support.
    Second, I would ask that Congress exercise its authority to find 
legislative solutions to the onerous mandates imposed on the States by 
the Affordable Care Act.
    Third, we have proposed specific solutions for reform. This will 
require that the Center for Medicare & Medicaid Services (CMS) support 
the waiver requests that we have or will be submitting. Our message is 
simple: To have any hope of success, Utah needs flexibility to make 
this mandated model work in our unique State for our unique 
demographics and needs.
    Our reforms fall into four distinct areas: administrative 
simplification, provider incentives, patient accountability, and expand 
premium subsidy options.
    The first example is in the area of administrative simplification. 
CMS sent us a memo that essentially requires us to use paper to 
communicate with enrollees in the program. In our efforts to be more 
innovative and efficient, we developed an approach which uses 
electronic technology to communicate with our clients, reducing costs 
by as much as $6 million a year.
    If CMS allows Utah the flexibility we need to be efficient--in this 
one area alone--we estimate that all the States adopting this 
technology could save more than $600 million per year. This seems like 
a no-brainer. However, CMS has been slow to respond. Utah's simple 
request for this issue has been sitting with CMS since last July.
    The second example highlights the need to change incentives for 
providers. We are also trying to get waiver approval for a 
comprehensive reform to the way we reimburse providers for Medicaid 
services. We should pay for value, rather than volume.
    We are developing a home-grown solution to this problem. We want to 
contract with Accountable Care Organizations (ACOs) to move toward a 
more provider-based care model. These contracts will better align 
financial incentives for providers to keep people healthy instead of 
just providing services.
    If we are allowed to proceed, this model will be a tipping point 
for the Utah market, and we expect to shortly see private insurance 
companies follow suit, benefiting and strengthening our overall health 
care system.
    In conclusion, I emphasize again that real health care reform will 
rise from the States, not be imposed by the Federal Government.
    From the days of our pioneer forefathers, Utahns have been finding 
Utah solutions to Utah problems. I am here today to assert our right 
and responsibility to continue to do so.
                                 ______
                                 
        Addendum 1.--The Utah Health Exchange--A Brief Overview
    The overarching philosophy of Utah's approach to health reform is 
that the invisible hand of the marketplace, rather than the heavy hand 
of government is the most effective means whereby reform may take 
place. The Utah Health Exchange is part of Utah's overall health system 
reform effort and is designed to enhance consumer choice and the 
ability of the private sector to meet consumer needs.
    The Exchange formally opened in August 2009 for the individual/
family product market as well as a limited launch for the small group 
market. A full launch of the small group market and a pilot version for 
the large group market took place in September 2010.
                         what is the exchange?
    The exchange is an Internet-based information portal. It connects 
consumers to information they need to make an informed choice, and in 
many cases allows them to execute that choice electronically.
                      why do we need an exchange?
    Utah's approach to health system reform is to move toward a 
consumer-based system, where individuals are responsible for their 
health, health care, and health care financing. A major step in that 
direction is the development of a workable defined contribution system.
    The Exchange is a critical component in moving towards a consumer-
based system. For example, in order for a defined contribution system 
to function efficiently, consumers need a single shopping point where 
they can evaluate their options and execute an informed purchasing 
decision. For a consumer-based market to succeed, brokers, agents, 
employers, and individuals must have access to reliable information to 
allow consumers to make side-by-side comparisons of their options.
               what is the overall goal of the exchange?
    The overall goal of the Exchange is to serve as the technology 
backbone to enable the implementation of consumer-based health system 
reforms.
              how does the exchange accomplish that goal?
    To accomplish this goal, the Exchange has three core functions:

    1. Provide consumers with helpful information about their health 
care and health care financing.
    2. Provide a mechanism for consumers to compare and choose a health 
insurance policy that meets their families' needs.
    3. Provide a standardized electronic application and enrollment 
system.

           doesn't this exist already in the private sector?
    It could be argued that the information that a consumer needs 
exists in the present system, however, in Utah we are missing two key 
elements. In order for consumerism to really take hold, we need to 
create a system where the information is available in a standardized 
format that allows comparisons and is located at a single shopping 
point.
           why did utah choose to go with an exchange model?
    Utah's approach to health system reform relies on the fundamental 
principles of personal responsibility, private markets, and 
competition. To promote competition in the health care system, 
consumers need three things--accurate and relevant information, real 
choice, and the opportunity to benefit from making good choices. The 
exchange model enhances private competition in the health care system 
by providing all three elements of increased competition.
    In addition to the benefits to the consumer, the exchange model 
also offers relief to employers who will no longer need to bear the 
full burden of running a health plan for their employees.
                 what is unique about utah's approach?
    Utah's approach to developing an exchange is unique in that it 
builds on existing technology instead of starting from scratch. This 
allows the State to incorporate and build on private solutions. Utah's 
approach is also designed to support the existing roles of entities in 
the health system, including insurers, producers, and health care 
providers.
                 what is a defined contribution market?
    When it comes to employment-based health insurance, Utah recognizes 
that the traditional approach to purchasing a group plan is not 
consistent with our underlying philosophies of health system reform. In 
2009, Utah created a new defined contribution market for health 
insurance. In this market, employees choose their own insurance 
company, network, and benefit structure and employers simply decide how 
much to contribute toward the employee's policy. It is apparent that 
while this market greatly enhances consumer choice and competition 
among insurers, it is also a more complicated system with many more 
people needing information than in the traditional group market.
            what functions can the exchange actually do now?
    At present, the Exchange is ready and able to support the new 
defined contribution market for Utah's small employers. The Exchange 
serves as the technology backbone that makes such an innovative market 
possible. The Exchange has the capacity to handle employer enrollment, 
communicating information to insurers about risk, compiling and 
displaying price information to employees, executing the employees' 
enrollment in their choice of plan, and facilitating the collection and 
distribution of premiums. The end result is that employees have the 
necessary information and purchasing power to make an informed health 
insurance choice.
    In addition to supporting the defined contribution market, the 
exchange also supports consumer choice in the traditional individual 
market. In this regard, the primary role of the Exchange is to connect 
consumers with private companies that can help them identify and 
purchase the product they need. On the Exchange, consumers are given 
three options to shop for and buy a policy--use a private online 
shopping service, buy direct from a participating insurer, or search 
for an agent to get in-person assistance. Currently, there are four 
private online shopping services, five insurers and hundreds of agents 
available through the Exchange.
             where will the exchange take us in the future?
    It is important to remember that a robust Exchange will be more 
than just a place to ``apply for health insurance.'' While the initial 
focus of setting up the Exchange has been to establish a stable defined 
contribution market, this is just the first stepping stone in the 
process toward a consumer-oriented system.
    In order to facilitate consumer choice in the long run, it is clear 
that the Exchange must provide information that is relevant to not only 
health care financing but also quality and transparency of the health 
care system. The Exchange will also evolve into a tool for patients to 
make better decisions about their health and health care by providing 
access to information about cost and quality and health and wellness.
    The value of the Exchange is the sum of all its parts and each 
``part'' is essential to the long term success of the Exchange and to 
the success of Health System Reform.
         Addendum 2.--Medicaid Electronic Notification Proposal
    Program and Goals--The Department of Workforce Services (DWS) is an 
integrated, one-stop service delivery agency that administers workforce 
programs, labor exchange, unemployment insurance, and eligibility for 
multiple social service programs--Medicaid, CHIP, SNAP, TANF, and Child 
Care. Through administrative modernization, DWS expects to reduce 
administrative costs by $9.2 million over the next 18 months.
    Electronic Notification--The core of this effort is to move to a 
more automated, self-directed eligibility model using the new 
``myCase'' system. Under the proposed system, customers will have 
easier and real-time access to services and case information, cycle 
times for determination will decrease and result in greater program 
integrity. The administrative savings come from three cost centers: (1) 
Electronic correspondence--the cost of a paper-based notice is 
currently $.52, which could be virtually eliminated, (2) Staffing--a 
more automated system will allow more determinations per worker, and 
(3) Reduced telephony costs.
    Summary of myCase--myCase is an electronic customer interface 
launched in November 2010. Currently, it is being used by over 50,000 
customers and growing rapidly. Over 160,000 notices have been read 
online, with 2.5 million page views. Utah would like to be a national 
leader in the development of this eligibility model and its application 
to Medicaid.
    Federal Reaction--FNS (who oversees the Food Stamps program, SNAP) 
has been supportive at the national regional level. DWS appreciates 
their support with both system development and the potential need for 
support on additional waivers and policy interpretations. 
Unfortunately, we have struggled to get permission from CMS for full 
implementation of electronic correspondence for Medicaid clients.
                               timelines
     July 1, 2010 waiver request sent to FNS.
     July 12, 2010 electronic correspondence request letter 
sent to Department of Health (DOH) to be sent to the Regional CMS 
office.
     Received waiver approval from FNS--December 7, 2010.
     Received conditional support from CMS on December 14, 
2010. The condition of the support would require DWS to send a paper 
notification with all eligibility decisions (resulting in no cost 
savings).
     Drafted response for CMS as a rebuttal on the conditions. 
DOH received the DWS rebuttal and sent the response on to regional CMS 
office.
     December 17, 2010, DOH notified DWS that there should be 
no further action taken on the request until the CMS Office of General 
Counsel reviewed and made a decision.
     December 17, 2010--present, CMS (both the regional and 
national offices) have requested clarification and answers to 
questions, but there has been no word yet on a final decision from 
their Office of General Counsel.
     We have informed FNS that until we hear back from CMS, our 
electronic correspondence implementation is on hold.
     February 15, 2011--Representatives from DWS and DOH 
participated in a joint call with CMS regional and national officials 
to review progress, address concerns, and request an expedited 
decision.
     At present, there has still been no response on this 
issue.

    On February 26 we are slated to release new functionality into 
myCase. This latest release will include the electronic correspondence 
``opt in'' for customers. We've postponed the release date three times 
and postponing it again would impact our costs, training, and roll out 
of other critical functionality. Each month the release is postponed 
hampers Utah's ability to reduce costs and deliver quality services to 
our customers in a 24/7 online environment. Our timeline is aggressive 
and we need an efficient process to meet these milestones.
    We would like to work with CMS to quickly resolve the electronic 
correspondence issue and to develop a better process to expedite future 
potential waivers or permissions.
               Addendum 3.--Utah Medicaid Reform Proposal
    Rising Medicaid costs threaten the stability of the budget--In the 
1990s, Medicaid expenses accounted for 9 percent of Utah's State 
budget. Currently, they account for 18 percent of the State budget and 
are projected to be well over 30 percent within the next 10 years. 
Enrollment has increased 46 percent from December 2007 to December 
2010.
    Obamacare will just make this worse--In 2014, Utah Medicaid will be 
required to add another 100,000 people to the program, a 50 percent 
increase in enrollment. Enhanced Federal funding for this group will 
run out within 10 years, costing the State an additional $1.2 billion.
    Obamacare also takes away the key tools that States could have used 
to address the rising costs. It contains a maintenance-of-effort 
provision which prohibits us from rolling back some of the expansions 
to optional populations put in place during better economic times. It 
freezes cost-sharing arrangements with patients to the old levels, such 
as $3 co-pays for pharmacy and $6 for inappropriate use of the 
emergency room. It also confiscates all of the savings that we have 
generated through our preferred drug list program, costing us $6.3 
million a year starting in 2010.
    Proposed reforms--To get the costs under control and prevent a 
total collapse of the State budget, we have to change the way the 
program works. Utah is considering a proposal that would ``fix'' the 
bad incentives in Medicaid and restore some hope of cost control.
    The basics of the proposal are:

     Replace existing managed care contracts with Accountable 
Care Organization (ACO) contracts--Providers would be paid on a 
capitated basis in a way that brings the doctor and the patient into 
the mix (as opposed to the old HMO model where we pitted doctors 
against insurers.)
     Require contracted ACOs to meet performance standards, 
including using Medical Homes.
     Increase Patient Responsibility--Create a sliding scale 
copayment schedule for patients based on their income.
     Budget management strategy--Peg the growth in Medicaid 
payments to the growth in State revenues. Use a Medicaid Rainy Day fund 
in good years to save up for the bad years.
     Expanding the Premium Subsidy Option--Allow Medicaid 
clients the option of taking a subsidy to purchase insurance through 
work or the Utah Health Exchange instead of being on Medicaid.

    We may be able to do some of this under our existing waiver 
authority; however, we need the Federal Government to give us some 
additional flexibility in order to make these reforms successful. If we 
can test this model, there is a chance that we could provide insights 
that would help every State improve their Medicaid program, saving 
hundreds of billions of dollars in State budgets alone, not to mention 
the savings to the Federal Government.
    It's not just Medicaid--We are proposing reforms to our Medicaid 
program that are part of a larger effort to address problems with the 
system. Most insurers recognize the fundamental problem of paying for 
volume instead of value. If Medicaid takes the lead on changing the way 
providers are paid, private insurers will follow, lowering overall 
costs systemwide.
 Addendum 4.--The Utah Health Exchange: A Look in the Rearview Mirror 
                     (by Norman K. Thurston, Ph.D.)
    Preface--Governor Jon Huntsman, Jr. was inaugurated in 2005 and 
stated that one of his priorities was to make health insurance 
available to more Utahns. Dr. David Sundwall, the executive director of 
the State Health Department was tasked to find staff resources to 
create a solution and I was asked to work on this project to help 
inform stakeholders and frame the debate.
    Our first step was to organize a day-long health summit held at the 
University of Utah in May 2005. National experts were invited to inform 
policymakers and stakeholders about the latest national ideas on 
various health and insurance-related problems. The goal of the summit 
was to form a consensus on which direction the Governor should take. 
One of the presentations was on a plan for a new health care connector 
being negotiated in Massachusetts with a Republican governor and a 
Democratic legislature. We quickly realized that our approach would 
need to be different, but it might be possible to create a low-cost, 
Utah-based version that would focus on markets and private solutions 
and exclude the expansion of government programs.
    With the support of many staff, legislators and governors, we have 
designed a revolutionary approach to health system reform in Utah. In 
this document I intend to give a reflection on the development and 
implementation of the Utah Health Exchange, a critical component of our 
overall plan for health system reform. I hope to highlight both the 
thinking behind our approach and the lessons learned.
              genesis--identifying the underlying problem
    While the focus of health system reform in Utah has grown to 
include several critical areas that are intended to bring more value 
into the system, at the outset the goal was to decrease the number of 
people without health insurance.
    To help understand the problem, we analyzed detailed surveys of the 
uninsured and realized some commonalities. Most of the uninsured in 
Utah are in households with at least one working adult, who is often 
employed by a small business or if they are employed by a large 
business, they are part-time workers.
    That raised the next question. Why do so few small businesses offer 
health insurance? Estimates indicated that in 2005 less than 40 percent 
of small businesses in Utah were offering health insurance as a 
benefit. A study of businesses in Utah showed us that the No. 1 reason 
they choose not to offer a health benefit was the unpredictability of 
costs. Most small businesses are entrepreneurial and need to be able to 
project both revenues and costs in 3 to 5 years in order to make plans 
to achieve their profitability goals.
    To address these specific issues, we set out to create a new 
approach to the employee health benefit that would entice more 
employers to offer it and slow the decline in employers no longer 
offering coverage.
    Some of the critical aspects of the design of this new system 
include:

     Generate predictability of costs for the employer--Small 
employers need to be able to forecast with a fair degree of certainty 
what their labor costs will be. We needed a system that gives the 
employer the ability to predict costs more effectively than the current 
system allows.
     Preserve the tax benefit to both the employee and 
employer--The current tax code creates a huge disparity in treatment of 
health insurance that is purchased through an employer's group plan 
versus a policy purchased by an employee on their own. We needed to 
create a system that continues to allow both the employer and the 
employee to pay for health insurance with pre-tax dollars. This tax 
benefit could be as much as 45 percent of the cost of health insurance, 
considering State and Federal income tax, payroll tax, and the phase-
out of the earned income tax credit.
     Bringing the consumer back into the equation--One of the 
most powerful forces for change is an informed consumer. Traditionally, 
the employee has been excluded from critical conversations about 
benefits and prices for group health insurance. To bring competition, 
discipline, and innovation into the process, we need to give more of 
the control to the employee.
            changing the underlying health insurance markets
    With these preliminary goals in mind, the first key element in 
setting up the new system was to develop an entirely new health 
insurance market in the State of Utah. At the time, we had four main 
private-sector markets--individual/family market, small group market, 
large group commercial, and self-insured. Our intent was to create a 
new defined contribution market that is modeled after the defined 
contribution approach to retirement benefits. The defined contribution 
approach to retirement addressed the same problem that employers had 
with predictability regarding their retirement benefits.
    In this new market, employers would designate a contribution amount 
for each employee to use toward the purchase of health insurance. The 
employee would then be allowed to select from plans offered by 
participating insurers in the same way that they have control over how 
their defined retirement contributions are invested. In addition to 
giving the employer control over their benefit costs, this also has the 
advantage of giving the employee full control over their health plan. 
They can choose the plan that best suits their needs. The employee also 
now has skin in the game, in the sense that if they choose a more 
expensive plan, they pay the difference, but they also perceive the 
savings from choosing a less expensive plan.
    As soon as we started designing this new system, we recognized that 
the two biggest challenges in creating this new choice-oriented market 
would be the potential for adverse selection and the need for a 
technology tool to help consumers evaluate their options and make good 
choices.
    Adverse selection is primarily a problem for the carriers, so we 
brought them together and gave them an opportunity to identify a 
solution for potential selection issues.
    Their solution was to design and implement one or more risk 
adjustment mechanisms to ensure that the funds that flow to each 
carrier inside the Exchange more closely match the assignment of the 
risk. It turns out to be also a good move strategically. As we 
researched risk adjustment experiments, we found that in most cases 
where they failed, the blame was placed on the entity that developed 
the risk adjuster. It is easy for an insurer to walk away from a 
failing risk adjuster that is designed by someone else. It's a lot 
harder for them to make that case when they themselves have designed 
it. In our system, if the risk adjuster needs to be modified or 
updated, the carriers have the ability to make those changes.
    On the second issue, facilitating consumer choice, we looked to the 
consumer experience in other industries that have similar challenges. 
The easiest example to understand is the travel industry. Over the past 
20 years, consumers have been given a significantly greater opportunity 
to use the Internet to make travel plans and execute them online.
    We found that there are several private companies that have 
developed technologies to help consumers navigate the complex 
decisionmaking process and get the outcome that best meets their needs. 
In our presentations, we often pointed to Travelocity as being a prime 
example of a pioneer in the world of web-based consumer support. We set 
out to find a solution for employees choosing health plans that 
replicated the Travelocity service concept.
          using technology to facilitate health system reform
    As we contemplated moving forward with this new market, it became 
apparent that we would want to develop an Internet portal that could 
serve as the technology backbone for implementing health system reform 
in the State of Utah. This concept grew into the Utah Health 
Exchange.\1\
---------------------------------------------------------------------------
    \1\ It should be remembered that an Exchange is a technology 
solution that is designed to facilitate the underlying health system 
reforms. In national discussions, people occasionally ascribe 
additional roles for exchanges, including such things as operating 
public programs, regulating markets, or even negotiating with carriers. 
While any of those goals could be a part of a State's underlying health 
reform, they should be thought of separately from the technology 
component, which is the real Exchange.
---------------------------------------------------------------------------
    In addition to providing a web-based solution for the new defined 
contribution market, the portal could also provide technology solutions 
for other aspects of health system reform. Specifically, if we were 
going to the trouble of developing a consumer choice module for 
employees in the defined contribution market, we could also make that 
same functionality available to individuals buying policies on the open 
market or employers shopping for traditional group policies. Similarly, 
this would create a great opportunity and need for us to provide 
consumers with solid information on cost and quality. Eventually, this 
core portal could be expanded to support other aspects of health system 
reform.
    As we considered how to structure the portal, we decided to take a 
modular approach. Initial development would eventually concentrate on 
three modules:

    1. The Consumer Information Module;
    2. The Individual Market Shopping Tool; and
    3. The Defined Contribution Module.

    After taking a realistic assessment of our capabilities and limited 
staff resources we decided to focus on the most critical component of 
the portal first--providing a workable solution for small employers. 
Because of that, the Defined Contribution Module was given the highest 
priority.
    We set a goal of having something ready for a few employers to test 
by the fall of 2009. To make that happen as quickly as possible, we 
used an RFP process to identify existing private market technology 
solutions that could be applied to this module. Through that process, 
we found that the consumer comparison and choice technology that we 
needed already existed in the private market place.
    In the insurance industry, just like the travel industry, there are 
several firms that have already developed tools to support health plan 
choice that could be adapted to meet our goals and needs. At the end of 
the process, we awarded contracts to two private companies, bswift, and 
HealthEquity, to work together to form the core technology for Defined 
Contribution Module. The area of expertise of bswift's is in 
facilitating consumer choice and HealthEquity brings the tools needed 
to handle the flow of funds. As a bonus outcome from the RFP process we 
also identified ehealthinsurance.com as a partner for developing the 
Individual Market Shopping Tool.
    With these three private partners on board, in the summer of 2009, 
we launched the portal and christened it the Utah Health Exchange 
(often referred to as the UHE or the Exchange). In its initial form, 
the Exchange was launched with both the Defined Contribution Module and 
the Individual Shopping Module.
    Development of the Consumer Information Module has begun, but is 
still not ready for prime time. When it is complete, the Consumer 
Information Module will be a technology resource to provide consumers 
with more transparency about the entire health care system, including 
health care providers as well as insurers. It will be able to display 
information on cost and quality in a way that helps the consumer make 
decisions and choices.
                  the individual market shopping tool
    The Individual Market Shopping Tool is the easiest component of the 
Exchange to explain. Once word got out that ehealthinsurance.com would 
be our partner in this module, several other private entities with 
similar capabilities approached us with a desire to get involved. Since 
it was our purpose all along to foster competition in the private 
market, we had no justification to exclude any qualified partner.
    As it stands today, individuals coming to the Exchange to buy a 
policy can shop in three different ways:

    1. Online Comparison Shopping--They can choose one of five 
companies that offer side-by-side comparison shopping Web sites.
    2. Online Buy Direct Shopping--They can also buy direct from one of 
the five insurance company Web sites that offer individual policies for 
sale through the Internet.
    3. Find a Broker--The Exchange also has a tool that allows 
individuals to find a store-front insurance producer nearby where they 
can get help in person.

    It is important to note that the plans offered through this module 
are the same plans available through the individual market. Given that 
our individual market functions relatively well, there was no need for 
insurers or regulators to create new rules or restrictions on policies 
that could be offered.\2\
---------------------------------------------------------------------------
    \2\ I should note one exception--as part of the health reform 
legislation, we raised the bar for carriers to deny coverage in the 
individual market. Under the new rules, individuals under 225 percent 
of average risk cannot be denied coverage.
---------------------------------------------------------------------------
    While this adds significant value for consumers by facilitating 
their interaction with private partners, it is not a cure-all. Products 
purchased through this module do not have the tax advantages of 
employer-sponsored plans. In the Utah individual market, these plans 
are not guaranteed issue plans, so consumers can be denied coverage. In 
that case, they are informed of their eligibility to participate in the 
Federal or State high-risk pools.
    It's also critical to point out that these private partners do not 
charge the State for their services and did not receive any State 
development funds. They earn commissions just as they would through 
their normal line of business and do not increase the cost to 
consumers.
    While this solution works very well for our current needs, we have 
to consider that as it stands today, the Affordable Care Act also 
contains several provisions that will create a significant disruption 
in our individual market and our Exchange approach might need some 
additional functionality to meet guidelines. We are currently 
evaluating the impact on our market and developing a contingency plan.
                    the defined contribution module
    The Defined Contribution Module is the most well-known and 
publicized module of the Exchange. This module was launched with a very 
aggressive timeline. We needed to have small employer beta test up and 
running by late summer of 2009, with a full launch for small employers 
in the fall of 2010. We were also asked to conduct a pilot program for 
large groups in 2011 to see if we could be ready to handle all large 
groups by the fall of 2011.
    The limited launch that ran from the fall of 2009 through the full 
calendar year of 2010 resulted in a test group of 11 employers offering 
their employees a defined contribution health benefit. Having a 
relatively small number of participants was exactly what we needed to 
be able to test the technology and work out any bugs. We learned a lot 
in the process.
    We have identified seven essential functions that need to be in 
place for a Defined Contribution Module to work.

    1. Creation of Application Packets--The Exchange must be able to 
accept employer information electronically and create a basic 
application packet that can be sent to the insurance carriers for 
evaluation and acceptance. This packet needs to include employees' 
basic health information collected on an electronic version of the 
State's uniform health questionnaire.
    2. Risk Assessment/Underwriting/Rate Setting--Once the employer 
packet is approved for participation in a defined contribution plan, 
the technology must facilitate communication with the insurance 
carriers in the underwriting and rate setting process. Rates received 
from the carriers must be posted so that employers and employees see 
the correct prices based on their group's risk. (In Utah, we use the 
same underwriting rules as in the traditional small group market, plus 
or minus 30 percent rate bands.) Once the pricing information is 
loaded, employers have any opportunity to review the rates and set the 
defined contribution amounts for the employees.
    3. Employee Shopping and Choice--Employees must be given an 
opportunity to come into the system, evaluate their options, and make 
their plan choice. While every component is critical, this is the one 
that makes or breaks the effectiveness of the Exchange. Our goal is to 
provide the consumer with the tools they need to evaluate their options 
and make an informed choice. The current technology allows employees to 
filter or sort based on type of plan, benefits structure, insurance 
carrier, the inclusion of a particular provider, price, and other 
elements. This is critical, because with over 140 possible plan 
choices, it can be an overwhelming experience to evaluate so much 
information and make a good choice. It is our belief that this is where 
technology makes the biggest difference.
    4. Enrollment--Once the employee choices have all been executed, 
the technology must be able to create an enrollment file that documents 
which employees and dependents are enrolled in which plans. This 
information is then transmitted to the carriers so they can create 
accounts, print cards, and be ready to process and pay claims for their 
respective enrollees.
    5. Eligibility Reporting--The system also needs to have the 
capacity to enroll new hires and make changes at other times, such as 
special qualifying events or terminations and communicate those changes 
to the carrier and report current and accurate eligibility information 
to inform other processes in the system, such as financial payments.
    6. Financial Transactions--The system must make an accounting for 
the premium dollars. In this new market, there are more destinations 
for those dollars than in the traditional group plan. Most importantly, 
the premium dollars have to be risk-adjusted and forwarded to the 
corresponding carriers.
    7. Customer Service/Support--The last function to cover is a 
process for customer service and user support. Ideally, most employee 
needs would be served by their employer's producer, who would be fully 
aware of the functions of the Exchange and is licensed to make 
recommendations about plan choice. However, the Exchange needs to have 
the ability to provide information and support to all users. We are 
currently in the process of evaluating and redefining our approach to 
filling this role, but it is becoming apparent that this is more of a 
policy decision than a technology issue.

    As mentioned earlier, one of the critical elements to make this new 
defined contribution market work is the ability to apply an effective 
risk adjuster and our approach was to turn that over to the 
participating carriers. In statute, we created the Utah Defined 
Contribution Risk Adjuster Board as the formal process for that to 
happen. This board is composed of carrier representatives, government 
representatives, and a representative from the business community.
    The duty of the board is to develop a plan of operations governing 
the defined contribution market that addresses problems related to risk 
and protects the market from adverse selection. Since the details of 
the operation of this market are fairly dynamic as we continue to learn 
and adjust, I have left out many of the specifics. However, the current 
version of the plan of operations would have most of those details.
    Similarly, the staff operating the Exchange frequently needs input 
on difficult operational and implementation issues. To provide 
additional support in a less formal setting, the Utah Health Exchange 
Advisory Board was created, composed of representatives from insurers, 
producers, community organizations, and government.
    critical learning from the defined contribution module launches
    We used the learning from the limited launch to improve the 
technology in preparation for a full launch in the fall of 2010. We 
have also learned a few important things in this full launch that have 
required us to plan additional improvements.
    Perhaps the most important thing we have learned is that it is 
difficult to put together and manage all of the information needed in 
an employer application. In the traditional market, this is typically 
done by producers using a paper-based approach. When this is translated 
into an electronic format, there is still a tremendous need for the 
producer to be heavily involved in scrubbing the various components to 
ensure that everything is ready for submission.
    Here are some of the other current issues and learning points from 
the launches:

    1. Employee census--Businesses, especially small ones, are dynamic 
environments. During the course of a few weeks involved in processing 
the application, employees are hired, terminated, and become eligible 
or ineligible for benefits. The insurer has to know that they are 
basing their underwriting on the complete set of employees that are to 
be insured, yet this is a moving target. This is no different than what 
happens in the traditional small group market, but it is certainly 
something to take into account.
    2. Employer Support--At the end of the process, many employers want 
assurance that the prices their employees will see in the Exchange are 
competitive with rates in the traditional market. In Utah, by statute, 
the plans inside the Exchange cannot be priced higher than the same 
plans outside the Exchange. However, this can be difficult to verify. 
Due to the nature of the Exchange, it's not easy to perform an apples-
to-apples comparison with plans offered outside the Exchange. First of 
all, the exact plan that they may be considering outside the Exchange 
may not be one of the choices inside the Exchange. In addition, for 
reasons already mentioned about changing employee census, the rate 
quotes may not have been generated using the same employees. Finally, 
there is no way to predict what the employees will choose when given 
the choice.
    3. Retrospective Risk Adjustment--In addition to the prospective 
risk adjuster, carriers may wish to do some back-end or retrospective 
risk adjustment. One of the challenges will be that claims information 
for employees in any given group could be housed across multiple 
carriers who may not be excited about sharing that information with 
each other. Fortunately, all of our participating carriers are also 
required to submit data to our All Payer Claims Database (APCD). So 
there is a single data source that has access to all of the claims 
related to Exchange participants. It stands to reason that the APCD 
could be a very useful tool in conducting retrospective risk adjustment 
for groups insured through the Exchange.
    4. Engage Producers--The producers are the primary sales force for 
the defined contribution market. Rather than confronting and 
marginalizing them, it is better for everyone involved to engage them 
as early as possible in the process. An informed producer is likely to 
see how this new approach can benefit some or all of their existing 
clients as well as providing them a new sales tool to reach out to 
those small businesses that don't currently offer a benefit. Producers 
are also very helpful in guiding the development of the technology 
tools, ensuring that the process flows as intended, and watching out 
for errors or deviations in the system.
    5. Premium Parity--In order to avoid a scenario where the defined 
contribution market is overloaded with high-risk employers, it is 
essential that premiums for like products be the same inside and 
outside the Exchange. Initially, we did not have this requirement in 
the limited launch, and it became immediately apparent that this would 
be a problem. One of the specific areas of concern has to do with 
restrictions on renewal rates. In Utah, incumbent carriers face 
statutory limits on premium increases at renewal. When currently 
covered small employers look at the Exchange, carriers should not get a 
free pass to rate them up beyond these limits. In our current approach, 
if an employer is currently insured with a participating carrier, all 
carriers are restricted from assessing a risk factor higher than their 
renewal risk factor from their incumbent carrier.
    6. Engage Insurers--When all is said and done, the insurers have 
every incentive to make this work. It represents an opportunity to 
increase enrollment, which will reduce cost-shifting as well as 
providing additional premium. To the extent that there are concerns 
about risk, it is the insurers who have the proper motivation to 
address them. With this in mind, we have given a fair amount of 
latitude to the insurers to bring their expertise to the table to help 
in the design and development of the system.
    7. Private Solutions--We now realize that it was very effective for 
us to contract with companies that have existing technology solutions 
that could be applied to the needs of the Exchange. However, we have 
also learned that this partnership works best when the application of 
the technology is close to the core competency of the partner. It's 
better to engage additional partners whose core competencies meet the 
need at hand instead of trying to apply technologies beyond what they 
are intended to do.
    8. Do a Beta-test--Maybe this is the most obvious thing that we 
only thought about once we were into the process. It is essential to a 
successful development to continually test the system during 
development. A beta-test with real participants was very informative 
and made a huge impact on our eventual outcome.
                        counsel for other states
    Can this be done faster using Utah as a template? I am convinced 
that this is the case. Based on our experience, we know what 
legislative action is required, and we also know what critical 
functions need to be in place for the Defined Contribution Module to 
work. This isn't to say that it would take time to develop those 
functions, but we now know that most (if not all) of them are already 
developed in the private market. If States can be clear about their 
needs, it should be straightforward to build.
    What adaptations should States anticipate? It was not easy to 
develop the data interfaces and communications between the exchange 
tools and the insurers. While insurers that are participating in our 
Exchange understand how to deal with that now, new insurers will need 
some time to get up to speed.
    Prepared Statement of the American Academy of Family Physicians
    American Academy of Family Physicians (AAFP), representing 97,600 
members nationwide, is pleased to submit this statement for the record 
to the Senate HELP Committee regarding the first year of the Affordable 
Care Act (ACA). The AAFP supported this legislation for many reasons, 
not the least of which is its goal of achieving health coverage for 
nearly everyone in this country. In addition, the ACA implemented 
numerous strategies for improving health care delivery and making 
affordable, high-quality care more available.
                               background
    Members of the AAFP have a great deal of experience in delivering 
health care: family physicians treat one out of four patients in the 
United States. In fact, more than 215 million office visits are made to 
family physicians each year; 59 million more than any other medical 
specialty.
    Family medicine is dedicated to treating the whole person, 
providing preventive care, coordinating care for multiple illnesses, 
promoting mental health and supporting better health behavior. Because 
of their focus on prevention and care coordination, family physicians 
help prevent many illnesses, treat early those illnesses that do occur 
and, when necessary, refer patients to the right specialist and 
advocate for them in this fragmented and complex health care system.
    As the only medical specialty society devoted entirely to primary 
care, the AAFP is engaged in virtually all health care issues, 
including health care coverage, cost and quality, Medicare, Medicaid 
and CHIP, health information technology, funding for family medicine 
training, graduate medical education, the affordability, availability 
and safety of prescription drugs, primary care research and medical 
liability reform.
    Family physicians have long worked with policymakers from both 
sides of the political aisle to advance health care policies that 
promote primary care. We are committed to continuing this work with the 
112th Congress. Since Congress is focused on either repealing, 
replacing or maintaining the Affordable Care Act, below are our 
comprehensive comments regarding all aspects of the law. The first 
section will refer to issues under the jurisdiction of the committee, 
but we also will include portions that refer to other primary care 
issues in the health law.
             reliable, high quality and affordable coverage
    For over 20 years, AAFP has been working to broaden health 
insurance coverage as the first step toward assuring that everyone has 
timely and effective access to the health care services they need. As 
the Affordable Care Act evolved over the 2 years it was debated, we 
were encouraged that several of the provisions of our Health Care for 
All policy remained in the various drafts of the legislation. For 
example, we supported building on the current employer-based system of 
providing coverage, while improving the insurance market to create 
better access to coverage for small businesses and individuals who are 
neglected in the current market. In our view, this always has included 
protecting insured individuals from losing coverage or being singled 
out for premium increases due to changes in health status, so that 
families with insurance are able to keep it. As long as these broad 
insurance reforms are part of a private market, a requirement for 
personal responsibility is probably necessary to avoid the problem of 
individuals waiting to buy insurance until health care costs arise.
    As part of the personal responsibility requirements, we have 
recommended subsidies or other mechanisms that will help low-income or 
high-risk individuals with the cost of coverage. We have agreed that 
subsidies also should be available for small businesses to enable them 
to offer health insurance to their employees. Finally, we have 
supported the rights of all consumers to be provided with adequate and 
comparable information that will enable them to choose the health 
insurance product that best meets their needs. Each of these important 
reforms is included in the Affordable Care Act.
                high quality, efficient delivery system
    System reforms must empower physicians to improve health care 
quality and effectively use finite resources. Quality measurement 
programs simply cannot identify and penalize physicians and other 
providers whose results appear to fall below the top level of 
performance. Such programs will not yield the systemwide improvements 
needed to assure high-quality health care for all patients.
    The AAFP supports the ACA's Patient Centered Outcomes Research 
Institute for clinical comparative effectiveness research. The new 
institute will provide physicians and patients with useful information 
about various diagnostic tools and treatment options, and we strongly 
believe that such research will contribute to better individual health 
care decisions.
    Family physicians provide care to individuals throughout their 
lives, including patients with numerous chronic illnesses. As a result 
of this broad scope of practice, it is not surprising that our members 
deal constantly with gaps in medical knowledge. As practicing family 
physicians, our members may feel as though they spend more time 
``practicing in the gaps,'' than practicing medicine that is supported 
by randomized clinical trials.
    Given the complexities of clinical care and the multitude of 
treatment options available for many conditions, as a nation, we cannot 
expect, afford or in many cases ethically conduct, all the randomized 
clinical trials that would be needed to fill in the existing gaps in 
knowledge. As a result of this practical consideration, the AAFP is a 
strong supporter of ongoing development and support of comparative 
effectiveness research.
    The AAFP also supports efforts in the ACA to expand and accelerate 
the development of meaningful quality measures and reliable data 
sources to build an evidence base for high-quality care. Broad adoption 
of truly connected and interoperable health information systems will 
help achieve quality improvement goals, but we need to continue to 
invest to develop an infrastructure to support this plan. 
Infrastructure needs are particularly acute in smaller physician 
practices.
               increased focus on wellness and prevention
    The ACA created an important innovation in health care with the 
establishment of the Prevention and Public Health Trust Fund. The basic 
goal understanding of this fund is that improvements in the overall 
health status in the Nation will serve to rein in costs and improve 
productivity. This fund also is supplemented with an investment in 
research to fill gaps in knowledge about the most effective health 
promotion strategies. These sorts of public investments are needed in 
education, community projects, and other initiatives that promote 
healthy lifestyles. As decisions are made about this program, AAFP 
believes that special emphasis should be placed on collecting data and 
developing strategies to eliminate regional, racial, ethnic, and gender 
health disparities. In addition, public investments and insurance plans 
also should support early access to care for mental health and 
substance abuse disorders.
                         primary care workforce
    The ACA made a significant step toward effective understanding of 
our health care workforce requirements by establishing the National 
Health Care Workforce Commission to:

     Disseminate information on promising health care 
professional retention practices;
     Communicate information on policies and practices that 
impact recruitment, education and training, and retention of the health 
care workforce;
     Work with Federal, State and local agencies to review 
current and projected health care workforce supply and demand and make 
recommendations to Congress and the Administration regarding health 
care workforce priorities, goals and policies;
     Perform duties, including conducting reviews, making 
reports, making recommendations, conducting assessments and data 
collection and dissemination activities, related to the State Health 
Care Workforce Development Grant program; and
     Study effective methods for financing education and 
training for health care careers.

    Beginning in 2011, the Commission must submit to Congress and the 
Administration by October 1 of each year a report containing the 
results of reviews and recommendations concerning related policies. 
Beginning in 2011, the Commission must submit to Congress and the 
Administration by April 1 of each year a report that contains a review 
and recommendations related to at least one high priority area, which 
may include:

     Integrated health care workforce planning;
     Requirements for health care workers in the enhanced 
information technology and management workplace;
     Aligning Medicare and Medicaid graduate medical education 
policies with national workforce goals;
     Eliminating barriers to entering and staying in primary 
care; and
     Educating and training, projected demands and integration 
with the health delivery system of the nursing workforce, oral health 
care workforce, mental and behavioral health care workforce, allied 
health and public health care workforce; emergency medical service 
workforce capacity; and a comparison of the geographic distribution of 
health care providers with identified workforce needs of States and 
regions.

    To carry out its duties, the Commission is authorized to use 
existing information collected and assessed by its own staff or under 
arrangements, carry out or award grants or contracts for research and 
development where existing information is inadequate, and adopt 
procedures permitting interested parties to submit information for the 
Commission to use for reports and recommendations.
    The AAFP supports the establishment of this commission. It is clear 
that impartial and informed decisions on how to promote the needed 
health care workforce are imminent. This commission is necessary to 
provide unbiased, informed and appropriate data and recommendations for 
how the Federal Government can best allocate its physician-training 
resources to achieve the best results. To perform this long-needed 
function, the commission will need to be sufficiently funded.
      small physician practices and patient-centered medical homes
    While the ACA takes important steps to recognize the high value of 
primary care services and the critical role such services play in a 
high-functioning health system, we have some concerns that health 
reform might not accommodate privately owned small and medium physician 
practices.
    As many as 25 percent of family physicians serve their patients in 
either a solo or 2-physician practice. These practices flourish all 
over the country, in rural communities and in city neighborhoods. They 
provide up-to-date medical care and, with the use of information and 
communication systems, ensure that their patients find the community 
resources that will allow them to manage their chronic diseases, and 
prevent them in the first place.
    High-quality health care can be (and is being) delivered to 
patients, often in rural and underserved areas, by family physicians 
practicing alone or with a few other physician and health professional 
colleagues. Claims that health reform will (or must) lead to ``vertical 
organization of providers and accelerate physician employment by 
hospitals and aggregation into larger physician groups'' are without 
merit and contradicted by the experience of AAFP members.
    The Patient-Centered Medical Homes (PCMHs) and the Accountable Care 
Organizations (ACOs) are potential examples of these larger physician 
groups. However, AAFP believes that, properly constructed, an ACO can 
serve as a vehicle for disparate small physician groups to share some 
assets and support some community resources needed to coordinate care 
and help prevent disease. We believe that a PCMH need not be a large 
physician practice. Indeed, physicians in solo, small or medium-sized 
practices provide the important team-based primary care and preventive 
health services and chronic disease management called for in the health 
care reform law.
    As we implement the Affordable Care Act, it is important to keep in 
mind that we should transform the practice of health delivery to reduce 
duplication and fragmentation of service and focus on coordinating 
care. However, we should not eliminate the variety of practices that 
make health care delivery most effective in different settings. We will 
continue to need small and medium-sized practices and we should give 
these physicians the assistance they need to participate fully in our 
Nation's renewed emphasis on primary care. It is for these and other 
reasons that the AAFP is eager to review the proposed regulations from 
HHS to implement the shared savings program under the ACA.
                  payment and delivery system reforms
    We believe that the Affordable Care Act begins to make much-needed 
investments in value-based payment methodologies that improve chronic 
disease management and care coordination, including but not limited to 
the Patient Centered Medical Home. In addition, the ACA includes pilot 
tests of other innovative approaches creating joint incentives for 
providers to coordinate and improve care and achieve cost 
efficiencies--such as accountable care organizations, gain-sharing, and 
payment bundles--to assess their feasibility for widespread 
implementation. However, current regulatory restrictions and antitrust 
laws that inhibit physicians, particularly those in smaller practices, 
from pursuing clinical integration strategies aimed at quality 
improvement and care coordination need to be identified and remedied. 
We understand that HHS and the Justice Department are attempting to 
reconcile the ACA's cost-saving reforms that require collaboration with 
the restrictions of the antitrust laws and regulations. The AAFP has 
long called for this important and long overdue action.
                             reduced costs
    The ACA recognizes the importance of preventive health care and 
refocused health care delivery in containing costs. In addition, there 
are several other provisions that will help save money both for the 
health system and for individual patients and payors. These provisions 
recognize that both private and public health insurance programs must 
be sustainable and that steps need to be taken to control costs. For 
example, the goal of the Center for Innovation in CMS is to demonstrate 
cost savings to the system, while the provisions in the ACA ultimately 
eliminate the Medicare prescription drug ``doughnut hole,'' and reduce 
and eliminate cost sharing for preventive health services, helps save 
money for patients. The AAFP believes these provisions are crucial to 
the value of the ACA.
    The ACA includes a controversial and unusual feature called the 
Independent Payment Advisory Board (IPAB), which will recommend 
reductions in Medicare health system costs to meet specified targets. 
While the AAFP has some concern about the process for implementing IPAB 
recommendations, we have felt that if the Board were constructed to 
include at least one representative of primary care physicians and one 
consumer representative, then there would be potential to help reduce 
some of the mis-valued payment codes and other high system costs. In 
addition, we believe it is necessary to include a public comment period 
for the Board's recommendations before Congress is required to act and 
that the Board's review authority should extend to the entire range of 
health system entities, including hospitals that contribute to cost 
increases. Without re-thinking how the IPAB operates, the scope of its 
authority and how it is constructed, this likely will be a missed 
opportunity for health system improvement.
                            medicare payment
    There are two ACA provisions related to payment that are important, 
not simply because they pay primary care differently than specialty 
care but also because they begin to acknowledge and recognize the value 
that primary care brings to the health care system. Beginning January 
1, 2011, qualified primary care physicians--defined as those in family 
medicine, internal medicine, geriatric medicine and pediatric 
medicine--began receiving a 10-percent bonus for Medicare services.
    To qualify for the bonus, 60 percent of their Medicare allowed 
charges must be for primary care services as defined by evaluation and 
management (E/M) codes for office visits, nursing home visits and home 
visits. AAFP believes the 60-percent threshold is too high. As 
originally defined, the threshold would have had a particularly 
negative affect on rural primary care physicians because they are the 
ones who, by virtue of the fact that there are not as many specialist 
physicians nearby, provide more comprehensive care for their patients. 
This can skew the ratio of primary care to total services and would 
disqualify them for the bonus. Fortunately, the Centers for Medicare 
and Medicaid Services (CMS) through rulemaking, was able to make needed 
adjustments to mitigate the unintended consequence and up to 80 percent 
of family physicians will qualify for this bonus payment.
    AAFP is concerned that this is just a 5-year program, scheduled to 
end January 1, 2016, and that it applies only to payments for primary 
care services, not to all Medicare services that primary care 
physicians provide. We also believe that it needs to be significantly 
higher than 10 percent to achieve the goal of attracting sufficient 
numbers of medical students into primary care, as emphasized in the 
recent report of the Council of Graduate Medical Education (COGME). So 
we believe a lesson learned from year one is the recognition that this 
bonus must be increased and made permanent in order to have the desired 
effect. Nevertheless, it was important that ACA recognized that the 
current physician payment mechanism undervalues primary care and needs 
to be fixed.
                        medicaid payment parity
    The second payment program in the law also is a time-limited one. 
In 2013 and 2014, Medicaid payments for primary care and some 
preventive health care services will be increased in many States so 
that they are equal to Medicare payments. As a result, family 
physicians who care for Medicaid patients will, for 2 years, see 
significantly better payments in many States. This is another signal 
that primary care will ensure better health and better cost control.
    Medicaid provider payments are a frequent target of State-level 
budget cuts during an economic downturn, which is the same condition 
that drives increased demand in the program. Payments that not only 
have not kept pace with inflation, but have actually decreased 
substantially, have forced many physicians to close their practices to 
Medicaid patients. Family physicians have a strong commitment to 
serving the Nation's most vulnerable patients, but payment in Medicaid 
must be adequate to cover the cost of providing essential primary care 
services. Thus, this ACA provision for payment at least equal to 
Medicare's is an incredibly important signal to the health care 
community that provider payments are inadequate.
                    sustainable growth rate formula
    Another issue is the congressional decision not to include in the 
ACA a provision to resolve the problem with the sustainable growth rate 
formula that affects Medicare payments. Despite the modest bonus for 
primary care and the recognition throughout the law of the importance 
of and high value of primary care, our members are sobered by 
approaching 29.5 percent cut in Medicare reimbursement for all 
physicians scheduled to take effect January 1, 2012.
    AAFP urges Congress to act expeditiously to permanently fix this 
flawed Medicare payment formula. Among the approaches that could be 
considered is an intermediate-term (e.g., 3-year) patch that includes a 
positive differential payment of at least 1 percent for primary care 
services. Congress considered such a payment system as a replacement 
for the SGR early in the debate on health care reform, but it was 
dropped. We encourage consideration of a payment scheme that includes 
some mechanism to reduce the large and unproductive disparity in 
payment between primary care and other health care.
    We also eventually seek a permanent formula that incorporates 
lessons learned from other provisions of the ACA that begin to steer 
Medicare payment away from relying solely on traditional fee-for-
service by incorporating a blended payment system that supports care 
management and quality improvement, in addition to a reliable formula 
that supports the fee-for-service portion of the payment to physicians.
       misvalued codes under the medicare physician fee schedule
    Family physicians, and other primary care physicians and providers, 
have been concerned with how CMS determines specific payments for 
medical services. The AAFP appreciates the provision of the ACA that 
requires HHS to periodically identify physician services as being 
potentially mis-valued and make appropriate adjustments to the relative 
values of such services under the Medicare physician fee schedule. 
Codes would be identified based on certain factors, including codes 
with the fastest growth. Adjustments to mis-valued procedures would be 
subject to budget-neutrality requirements.
              medicaid maintenance of effort requirements
    The AAFP believes that all patients should have health care 
coverage through a primary care-based system built around the patient-
centered medical home. In the patient-centered medical home model, 
patients receive health care from a physician leading a medical team 
that coordinates the preventive, acute and chronic health care needs of 
patients. This comprehensive approach uses the best available evidence 
and most appropriate technology. The maintenance of efforts provisions 
contained in the Affordable Care Act require States to maintain 
eligibility levels for Medicaid and CHIP.
    Relaxing or eliminating the MOE provisions would move the U.S. 
health care system further from that goal. As written, the law's 
provisions allow States to trim enrollment of certain adult patients. 
In February 2011, the Centers for Medicare and Medicaid Services (CMS) 
issued a State Medicaid Director letter clearly outlining the 
application of the MOE provisions.
    The MOE provisions make cutting provider payments more attractive 
to State budget writers. A core reason for the maintenance of effort 
provisions is to preserve access. Family physicians, who are on the 
front lines of serving Medicaid patients, need to know the payment 
rates their practices receive are stable. To create business stability 
and certainty for family physicians, Congress should extend the MOE 
provision to include Medicaid payment rates.
    The goal of the MOE provisions is to protect the most vulnerable 
patients currently enrolled in Medicaid and CHIP: low-income pregnant 
women, children, the disabled and the elderly. Loosening maintenance of 
effort requirements for these populations will force them to seek more 
expensive, less efficient care through emergency departments--care for 
which the States and Federal Government ultimately pay for anyway. 
These provisions help America's most needy individuals get continuous, 
high-quality and more cost-efficient care. A recent study of Patient-
Centered Medical Home (PCMH) pilot programs from around the country 
demonstrated over 30 percent less ER use by patients with a PCMH versus 
the control group and a 50 percent reduction in overall cost growth.
                           medicaid and pcmh
    The Patient-Centered Medical Home model established in the 
legislation is incorporated into a new Medicaid State option that will 
help States implement and evaluate this model of coordinated care. 
While AAFP applauds the 90-percent match provided by the ACA to the 
States to assist in the establishment of this new Medicaid PCMH option, 
it does have a restriction that AAFP thinks is not helpful. The PCMH 
options will include only the so-called high-need patients, such as 
those with two or more chronic conditions. While the PCMH has 
demonstrated extraordinary results in both saving costs and improving 
health by preventing high-cost chronic conditions, restricting the 
number of patients in a practice who can be included in the PCMH is 
unfeasible.
    Providing different types of care for patients is impractical and 
possibly even unethical for any physician's practice. Limiting patient 
eligibility makes the cost of transformation for the practice much 
higher on a per-unit cost. Physicians are reluctant to invest in a 
total transformation of their practices into patient-centered medical 
homes for only a portion of their patient panel. Instead, they are 
going to become a patient-centered medical home for all of their 
patients. But if they are only eligible to receive enhanced payment for 
a small portion of their patients, then the PCMH does not meet the cost 
test, and it is unlikely that they will undergo this fairly costly and 
certainly time-consuming transformation.
               teaching health centers development grants
    The ACA directs the HHS Secretary to establish a grant program to 
support new or expanded primary care residency programs at teaching 
health centers and authorizes $25 million for fiscal year 2010, $50 
million for fiscal years 2011 and 2012. The law also provides $230 
million to cover the expenses of qualifying teaching health centers 
related to training primary care residents in certain expanded or new 
programs. This is a critically valuable provision that could help 
identify the residency programs that bring residents to non-hospital 
sites for training in primary care.
        state medical tort litigation alternatives demonstration
    The ACA authorizes $50 million in demonstration grants to States to 
test alternatives to civil tort litigation. These models will be 
required to emphasize patient safety, the disclosure of health care 
errors, and the early resolution of disputes. Patients will be able to 
opt-out of these alternatives at any time.
    HHS will provide technical assistance through guidance on non-
economic damages, including the consideration of individual facts and 
circumstances in determining appropriate payment, guidance on 
identifying avoidable injuries, and guidance on disclosure to patients 
of health care errors and adverse events.
    While the ACA included these demonstration grants, it does not 
completely nor adequately address the problems associated with medical 
liability in this country. The Help Efficient, Accessible, Low-cost, 
Timely Healthcare (HEALTH) Act (HR 5), introduced in the 112th 
Congress, includes significant reforms that will help repair our 
Nation's medical liability system, reduce the growth of health care 
costs, and preserve patients' access to medical care.
    Many experts agree that the current tort system in the United 
States leads to an increase in health care costs. The proven reforms 
contained in the HEALTH Act, including the $150,000 cap on non-economic 
damages, would help reduce costs, while ensuring that patients who have 
been injured due to negligence receive just compensation. This bill 
provides a balance of reforms by promoting speedier resolutions to 
disputes, maintaining access to courts, maximizing patient recovery of 
damage awards with unlimited compensation for economic damages, while 
limiting non-economic damages to a quarter million dollars. In 
addition, the HEALTH Act protects effective State medical liability 
reform laws.
    AAFP believes this reform is necessary to produce the comprehensive 
changes to our Nation's health care delivery system. It is time for 
this legislation which will repair the current litigious climate that 
continues to increase health care costs and compromise patients' access 
to care.
establishment of center for medicare and medicaid innovation within cms
    The law creates the Center for Medicare and Medicaid Innovation 
within CMS to research, develop, test, and expand innovative payment 
and service delivery models to reduce program expenditures while 
preserving or enhancing the quality of care furnished to individuals. 
This new Center is designed to experiment with the PCMH model and to 
use it more broadly as soon as it begins showing savings or improved 
quality. While the CMMI is still in its developmental stages, it is the 
AAFP's desire that the center will soon be able to begin meaningful and 
comprehensive implementation of the PCMH demonstrations. This Center is 
an extremely important tool to make our Nation's health care delivery 
more efficient and more effective. It is vital that this Center retain 
its flexibility and scope. The AAFP believes it has the potential for 
being a powerful force for evidence-based, effective health care 
delivery.
                                summary
    For more than 20 years, the AAFP has supported health care coverage 
for everyone. No one in this country should delay or forego needed care 
because of cost. Instead, we must:

     provide health care rather than focusing only on sick 
care--we must constrain total spending by helping patients avoid 
preventable illness, efficiently managing the care of people who have 
chronic illness and improving the quality of that care; and we must 
provide health care coverage to people who cannot afford it or who have 
been turned away due to pre-existing conditions;
     address the factors that drive up costs and lower quality: 
the fragmentation of care; the duplication of tests and services; and 
the disregard for chronic disease management, prevention and wellness 
care in favor of medical intervention; and
     build up the primary care physician workforce to meet the 
needs of everyone who needs care.

    The ACA makes important strides in these directions by advancing 
models such as the patient-centered medical home, in which a qualified 
physician's practice provides and coordinates continuous and 
comprehensive care and preventive services, and coordinates health 
services when illness requires a larger team. We look forward to 
working with you on these important provisions.
                                 ______
                                 
                            Office of the Governor,
                                             State of Utah,
                                                 December 22, 2010.
Hon. Kathleen Sebelius, Secretary,
U.S. Department of Health and Human Services,
Washington, DC 20201.

    Dear Secretary Sebelius: After considerable technical analysis and 
internal discussion among State leaders, we have decided that Utah will 
not submit an application for the Health Exchange Early Innovator 
Grant.
    As mentioned in the grant announcement, this funding opportunity 
was for ``States that lead the race to develop IT systems for State 
exchanges.'' It would seem this grant opportunity was custom-made for 
Utah, given our advanced progress in implementing a health exchange. 
Utah's exchange is the only functioning market-based health insurance 
exchange in the country. From a technical perspective, there is no 
other State as qualified as Utah. In addition, as the grant 
announcement suggests, Utah is very committed to pursuing a multi-State 
partnership with like-minded States in order to develop a solution that 
is modular and adaptable to the local conditions in each State.
    However, I am deeply concerned about the timing of the grant 
announcement and the deadline for grant submission because they 
seriously impede our ability to create multi-State partnerships. The 
grant announcement was made at the end of October, just a few days 
before 29 new governors were elected and the December 22, 2010 deadline 
effectively precludes any input from these new governors in the 
development of this proposal.
    It is my understanding that the deadline is not statutory, but was 
chosen arbitrarily. Several States, including Utah asked for 
flexibility on the deadline to allow us a better opportunity to 
organize a multi-State response. My staff spoke to several other States 
who were seriously interested in jointly pursuing a grant with Utah. 
However, they all withdrew because they saw the December 22 deadline as 
impossible for them to meet.
    As you are well aware, Utah was working on a State-designed 
solution for health system reform long before the election of the 
current Administration. Our efforts pre-date the provisions of the 
Affordable Care Act by several years. We are continuing the process of 
designing and implementing additional functionality in our current 
system. While it would definitely be helpful to have additional 
resources to implement these updates to our system and improve our 
exchange, the unrealistic timeline and its negative impact on States 
makes it impossible for us to develop the necessary relationships with 
other States. This issue was compounded by the fact that we could not 
get a firm answer from HHS staff as to what constituted a multi-State 
partnership under the terms of the grant.
    For the time being, Utah will continue to develop our exchange on 
our own timetable. If HHS sincerely wants to foster multi-State 
partnerships, States need much more flexibility in the funding process. 
I strongly encourage you to direct your staff to work with us and our 
partner States to develop a funding process and timeframe that is more 
realistic. At a bare minimum, the deadline for this grant application 
should be postponed until July 2011.
    Furthermore the current timeline for State-designed reforms to be 
implemented is unrealistic for most States. States trying to create 
exchanges will need at least an extra 3 years beyond the current 
January 2014 deadline to have a reasonable chance at developing a 
successful exchange. It is arbitrary and capricious to cut short those 
State efforts and replace them with a Federal solution without giving 
them a realistic opportunity to succeed.
    Thank you for your attention to these very important matters. 
Please feel free to contact me directly or you may contact members of 
my staff at 801-538-1000 if you would like to discuss this further.

            Sincerely,
                                           Gary R. Herbert,
                                                          Governor.
                                 ______
                                 
                            Utah State Legislature,
                                Salt Lake City, Utah 84114,
                                                  January 13, 2011.
Committee on Defining and Revising an Essential
Health Benefits Package for Qualified Health Plans,
Institute of Medicine of the National Academies.

Subject: State Perspectives on Essential Benefits

    Committee Chair Ball and members of the committee: Thank-you for 
inviting me to offer some thoughts today on the development of the 
essential benefits package under the Patient Protection and Affordable 
Care Act. My name is Jim Dunnigan. Since 2003, I have served as a 
member of the Utah House of Representatives. Over the past several 
years I have been actively involved in the debate and development of 
Utah health reform. I am also an insurance broker by profession and an 
active consumer of medical services. Today I wish to make several 
points that reflect my background and experience and that I believe are 
representative of the attitudes and opinions of many State legislators 
across this Nation, and their constituents. I am not before you today 
to debate the merits of the ACA or its proposed repeal, and so I will 
limit my comments to what I hope can be done to make implementation of 
the essential benefits package as smooth as possible.
                     i. preserve state flexibility
    My message today is that the Federal Secretary of Health and Human 
Services should implement the essential benefits provisions of the ACA 
in a way that preserves maximum flexibility in benefit design across 
States. I will explain how this could be done and then explain why this 
is so important.
    First, I don't think there's a question in anyone's mind that the 
scope of benefits offered in the essential benefits package will be a 
significant factor in the cost of qualified health plans that must be 
offered under the ACA, both inside and outside exchanges. Besides 
specifying general categories to be included in the package, the ACA 
states that, ``The Secretary shall ensure that the scope of the . . . 
benefits are equal to the scope of benefits provided under a typical 
employer plan. . . .'' The problem for States is that what's typical in 
one State may not be typical in another. For example, in addition to 
benefits already mandated by Congress, legislatures across this country 
have required plans within their States to incorporate to one degree or 
another some 60 additional benefits. Which benefits are included by 
each State is a matter of local politics and not necessarily a 
reflection of evidence-based value. To avoid imposing the political 
choices of each State on 49 others, the Secretary should allow what's 
``typical'' to be determined on a State-by-State basis. Or, in the case 
of a multi-State exchange, on a multi-State basis; and in the case of a 
sub-State exchange, on an exchange-level basis.
    To this end, I recommend that the IOM encourage, and the Secretary 
of Health and Human Services request, that the Department of Labor 
structure its ACA-
required survey of employer benefits in a way that allows a ``typical 
employer plan'' to be determined on a State-level basis, and in any 
cases where States are known to have very distinct regional differences 
in benefit offerings, on a sub-State basis. Failure to structure the 
Labor survey in this manner will almost certainly bias development of 
the essential benefits package toward a one-size-fits-all package that 
is less generous than typical employer plans in some States and more 
generous than typical employer plans in others.
    In this same spirit of flexibility and recognition of State 
differences, I recommend that the Secretary of Health and Human 
Services allow States, through their exchanges, to spell out the 
definitional details of the general benefit categories listed in 
section 1302. However, if in the end the Secretary believes she just 
can't leave the details up to the States, I recommend that she create a 
three-tier approach to essential benefits:

     Tier 1 benefits would be limited to those provided under a 
typical employer plan offered within the geographic boundaries of an 
exchange.
     Tier 2 benefits would be designated by the Secretary of 
Health and Human Services and would include benefits that go beyond 
what employers typically offer within the boundaries of the exchange. 
Ideally, these would be benefits with strong evidence about delivery 
and value. States would elect, on a State-by-State basis, whether to 
adopt Tier 2 benefits as part of an essential benefits package.
     Tier 3 benefits would include any other benefits a State 
may wish to include in the essential benefits package.

    Exchange subsidies for Tier 1 and Tier 2 benefits would be fully 
funded by the Federal Government. Subsidies for Tier 3 benefits would 
be funded by the respective States.
               ii. recognize the impact on state budgets
    I realize the IOM would like to gather specific evidence on the 
health and cost impacts of including or excluding particular services 
from an essential benefits package. I am not prepared to present that 
kind of information today, but would recommend that the Institute reach 
out to State insurance commissioners and health department directors 
across the country to learn what work has already been done at the 
State level. I am prepared, though, to discuss some of the impacts an 
essential benefits package--or perhaps 50 different essential benefits 
packages--could have on States.
    States are fiscal partners with the Federal Government. On average, 
we fund 43 percent of Medicaid. Each State Medicaid program is unique 
and reflects the fiscal capacity and political preferences of the 
sponsoring State. Under the ACA, new expansion populations in each 
State will be required to have coverage that includes essential 
benefits. The level of these benefits will have a direct impact on each 
State's budget. As the funding responsibility for the newly eligibles 
shifts from the Federal Government to the States (beginning in 2017), 
each State will have to either raise additional revenue, if it can, 
or--more likely--divert funding that would otherwise go to other 
important services like transportation, corrections, and education. 
This is not a new phenomenon. Medicaid has been competing with, and 
sometimes crowding out, other essential government services since its 
inception. But the degree to which legislatures will have to either 
raise new revenue or reduce funding for other essential services will 
depend in large measure on the definition of essential benefits.
    One additional concern about Medicaid is the impact over time the 
essential benefits package may have on other parts of Medicaid. Even if 
essential benefits start out leaner than benefits provided to 
nonexpansion populations, essential benefits will drive up the cost to 
States in traditional populations if, as the benefits are revised, they 
become the basis for increasing benefits to traditional populations.
    States also contribute significantly to the purchase of insurance 
for their own employees and the employees of State-funded entities, 
e.g., school districts and institutions of higher education. In my own 
State, we pick up 95 percent of the cost of a State employee's health 
plan. If an essential benefits package mandates that we now cover new 
benefits, those benefits will be a direct cost to the State. To 
respond, we must increase revenue (not likely, particularly in the 
current economic environment), decrease funding for State programs, or 
decrease employee compensation.
    One final concern related to State budgets: States realize that if 
employers who currently cover Medicaid-eligible employees stop offering 
coverage, those employees will end up on Medicaid. States will become 
liable for people previously covered in the private market. I don't 
think anyone really knows how much this will occur, but the likelihood 
increases to the extent essential benefits requirements exceed coverage 
already offered. And the benefit levels typically offered by employers 
are almost certain to be exceeded in some States if the Secretary 
establishes a national one-size-fits-all essential benefits package.
                            iii. conclusion
    All of this suggests that what is or is not considered an essential 
benefit under the ACA is of real significance to States. Essential 
benefits will drive the costs of at least a portion of the Medicaid 
program, public employee health plans, other plans funded by States, 
and private employer plans. For this reason, flexibility across States 
to minimize the imposition of significant additional plan costs is 
essential.
    In closing, I'd like to make one final observation.
    Utah is a low-cost, high-quality health care State. This is true 
even after adjusting for demographics. Other regions of the country, as 
was pointed out repeatedly during the Federal health care debate, have 
also achieved similar status. This has only been possible because of 
provider-developed innovations. We should avoid--as much as allowable 
under ACA--prescriptive directives about benefits, cost sharing, and 
other plan design features that would have the effect of suppressing 
such innovation and further locking in the misaligned financial 
incentives that account for so much of the overutilization, 
underutilization, and mis-utilization of health care that drives up 
costs in the current system.
    Thank you.
                                         James A. Dunnigan,
                                     Utah House of Representatives.








    [Whereupon, at 12:30 p.m., the hearing was adjourned.]

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