[Senate Hearing 112-859]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 112-859

                  HEALTH REFORM AND HEALTH INSURANCE 
             PREMIUMS: EMPOWERING STATES TO SERVE CONSUMERS

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

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING HEALTH REFORM AND HEALTH INSURANCE PREMIUMS, FOCUSING ON 
                  EMPOWERING STATES TO SERVE CONSUMERS

                               __________

                             AUGUST 2, 2011

                               __________

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





[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




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


                  U.S. GOVERNMENT PRINTING OFFICE

87-118 PDF                WASHINGTON : 2014
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2250  Mail: Stop SSOP, Washington, DC 
20402-0001














          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

BARBARA A. MIKULSKI, Maryland       MICHAEL B. ENZI, Wyoming
JEFF BINGAMAN, New Mexico           LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington            RICHARD BURR, North Carolina
BERNARD SANDERS (I), Vermont        JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, JR., Pennsylvania  RAND PAUL, Kentucky
KAY R. HAGAN, North Carolina        ORRIN G. HATCH, Utah
JEFF MERKLEY, Oregon                JOHN McCAIN, Arizona
AL FRANKEN, Minnesota               PAT ROBERTS, Kansas
MICHAEL F. BENNET, Colorado         LISA MURKOWSKI, Alaska
SHELDON WHITEHOUSE, Rhode Island    MARK KIRK, Illinois
RICHARD BLUMENTHAL, Connecticut     

                    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

                        TUESDAY, AUGUST 2, 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
Feinstein, Hon. Dianne, a U.S. Senator from the State of 
  California.....................................................     4
Franken, Hon. Al, a U.S. Senator from the State of Minnesota.....    17
Murkowski, Hon. Lisa, a U.S. Senator from the State of Alaska....    19
Blumenthal, Hon. Richard, a U.S. Senator from the State of 
  Connecticut....................................................    20
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......    22
    Prepared statement...........................................    25
Hagan, Hon. Kay R., a U.S. Senator from the State of North 
  Carolina.......................................................    25
Merkley, Hon. Jeff, a U.S. Senator from the State of Oregon......    28

                            Witness--Panel I

Larsen, Steve, Director, Center for Consumer Information and 
  Insurance Oversight, Centers for Medicare and Medicaid 
  Services, Baltimore, MD........................................     9
    Prepared statement...........................................    11

                           Witness--Panel II

Dicken, John, Director of Health Care, Government Accountability 
  Office, Washington, DC.........................................    29
    Prepared statement...........................................    30
Miller, Teresa, Administrator, Oregon Insurance Division, Salem, 
  OR.............................................................    33
    Prepared statement...........................................    35
Withrow, Daniel C., President, CSS Distribution Group, Inc., 
  Louisville, KY.................................................    39
    Prepared statement, on behalf of the U.S. Chamber of Commerce    41

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Health Affairs--At the Intersection of Health, Health Care 
      and Policy.................................................    56
Response to questions of Senator Harkin by Steve Larsen..........    69

                                 (iii)


 
   HEALTH REFORM AND HEALTH INSURANCE PREMIUMS: EMPOWERING STATES TO 
                            SERVE CONSUMERS

                              ----------                              


                        TUESDAY, AUGUST 2, 2011

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:03 a.m. in 
Room 430, Dirksen Senate Office Building, Hon. Tom Harkin, 
chairman of the committee, presiding.
    Present: Senators Harkin, Hagan, Merkley, Franken, 
Blumenthal, Enzi, Hatch, and Murkowski.
    Also Present: Senator Feinstein.

                  Opening Statement of Senator Harkin

    The Chairman. The Committee on Health, Education, Labor, 
and Pensions will come to order. This morning our hearing is on 
Health Reform and Health Insurance Premiums: Empowering States 
to Serve Consumers.
    In the decade before the Affordable Care Act was passed, 
relentlessly increasing health insurance premiums imposed a 
heavy tax on families and small businesses. Over those 10 
years, premiums for family, employer-sponsored coverage more 
than doubled. Small businesses simply couldn't afford it 
anymore and began dropping coverage. Congress had to act, and 
we did. In passing the Affordable Care Act, we enacted reforms 
to tame this runaway premium growth. Today's hearing will 
explore how those reforms are already protecting consumers.
    It's basic economics that one of the surest ways to bring 
down prices is through open and tough competition. For the 
first time in our history, health reform applies this basic 
principle to the health insurance market. In 2014, Americans in 
every State will be able to buy health insurance in a one-stop 
shop called an insurance exchange. Small businesses will be 
able to shop there also. Just a couple of weeks ago, the 
Administration released guidance that gives States great 
flexibility in designing the exchange to suit the unique needs 
of their citizens.
    The exchange will bring transparency and competition to 
markets which in many areas of the country have become stagnant 
and non-competitive, with high prices to show for it. From 1998 
to 2006, just the consolidation of insurance markets alone 
accounted for overall premium increases of about $34 billion 
each year, equivalent to a $200 annual rate hike per person. 
That's due to a lack of competition.
    If insurers have to compete on price, rates will come down. 
Indeed, the non-partisan Congressional Budget Office projects 
that premiums in the small group market will be as much as 2 
percent lower in 2016, about $350 less per family, in a market 
where premiums have increased 5 percent or more annually since 
2005.
    Employer spending on premiums is estimated to decrease by 
almost 4 percent, about $20 billion in this year's dollars. By 
2019, businesses will save approximately $2,000 per family they 
insure. And by 2014, families buying in the individual market 
could save an estimated $2,300 a year if they buy health 
insurance in a new affordable insurance exchange.
    Now, health reform also gives State insurance regulators 
unprecedented new resources to fight for consumers. The law 
allocates $250 million in grants for this purpose, almost $50 
million of which has been awarded to 45 States and the District 
of Columbia.
    We are releasing a report today from the Government 
Accountability Office that I requested, along with Senator 
Feinstein, which demonstrates the extraordinary work State 
regulators have done using these grant funds. These 
improvements, enabled by Federal grants, will empower States to 
rigorously enforce health reform's rate review requirements. As 
of September the 1st of this year, just next month, regulators 
will review proposed rate increases of more than 10 percent in 
the individual and small group markets. The insurer must 
publicly disclose and justify the rate increase, and if the 
regulator finds that the increase is unreasonable, the findings 
will be publicly posted.
    Finally, health reform's medical loss ratio provision is a 
powerful deterrent against confiscatory premium increases, 
requiring insurers to provide fair value in return for 
consumers' premiums. Specifically, the law requires insurers to 
return to consumers 80 cents of each premium dollar in the 
individual and small group market, and 85 cents on the dollar 
in the large group market.
    If insurers fail to return these amounts to consumers, 
either as payments for health care services or investments in 
quality of care, the company has to make up the difference in 
cash. It's estimated that next year, when rebates are due, 5 
million Americans will receive between roughly $160 and $300 
per person. Even those who don't receive rebates will benefit, 
since insurers will have to control premiums to stay above the 
threshold.
    Some have argued that insurers can't meet these 
requirements, that holding them accountable would cripple their 
businesses. Insurers have been reporting their quarterly 
earnings over the last few days. Let's take a look at that.
    For the second quarter of this year, United Health Group's 
net earnings, net earnings, before taxes, were $1.9 billion. 
That's for the quarter. That's not a year. That's for one 
quarter. And its net profit for that quarter was more than $1.2 
billion just for that quarter.
    Executives issued this announcement, and I want to quote 
from it.

          ``In the first half of 2011, the number of people 
        United Health Care serves with medical benefits grew by 
        1.2 million, on top of nearly 1 million people added 
        over the course of 2010. This six-quarter addition of 
        2.2 million more people, almost entirely through 
        organic means, places this among the strongest growth 
        periods for our company.''

    I think that United Health Care can muddle through a rate 
review.
    I'll just close with a letter I received from an Iowa 
constituent who just received notification of a 19 percent rate 
increase by United Health Care. She writes,

          ``I am a self-employed professional with no pre-
        existing conditions. I now will pay $276 per month with 
        a $5,000 deductible. I changed from a $2,500 deductible 
        last year when the premiums were just getting too 
        costly. At least this hasn't been a repeat of 2008, 
        when my premium was increased twice that year. That was 
        a 48 percent premium increase in 1 year.''

    So I believe these reforms are long overdue. I'm glad our 
witnesses have agreed to discuss them. I'll thank them for 
coming to Washington today, looking forward to their testimony.
    With that, I'll yield to Senator Enzi.

                       Statement of Senator Enzi

    Senator Enzi. Thank you. Thank you, Mr. Chairman.
    Today's hearing is to examine how the government can better 
regulate health insurance premiums. This is an unfortunate but 
entirely predictable response to the passage of the new health 
care law. As many of my colleagues and I predicted, the new 
health law is already driving up health insurance premiums. So 
now the authors of the law are attempting to shift the blame. 
The authors of the new health care law do not want to 
acknowledge the reason premiums are going up is because of the 
law they enacted. They would much rather point their fingers at 
the insurance companies and lay all the blame for these 
increased premiums on them.
    Unfortunately, this story line ignores the basic facts. 
Insurance premiums are going up because health care costs are 
going up, and health care costs are going up, at least in part, 
because of the new health care law. Don't take my word for it. 
The Administration's chief actuary at the Centers for Medicare 
and Medicaid Services released a report last week that said 
that insurance premiums are estimated to increase by 9.4 
percent in 2014. According to the actuary, this increase was 
4.4 percent higher than would have otherwise been as a result 
of the new health care law.
    This result should come as no surprise to anyone. More than 
2 years ago, the Congressional Budget Office told us that the 
new health care law was going to increase premiums for 
individuals and families by 10 to 13 percent. This equals a 
$2,100 increase for families. These results were confirmed by 
several private studies which all projected even higher premium 
increases.
    We're also seeing the validation of those statements in the 
insurance market. The Wall Street Journal reported last 
September that several insurers had already requested premium 
increases between 1 and 9 percent specifically to pay for the 
cost of the new benefits required under the new law. Rather 
than confronting the reality they created by enacting the new 
health care law, it appears that its authors now want to find a 
scapegoat that can take the blame for these increasing 
insurance premiums. Unfortunately, blaming the insurance 
companies for these premium increases will do nothing to 
address the problems that are driving up the costs of health 
insurance.
    Giving States or the Federal Government the authority to 
deny premium increases will do nothing to address the expensive 
new benefit mandates, billions of dollars in taxes on drugs and 
medical devices, and unsustainable cuts to Medicare payments, 
which are all part of the new health care law and which all 
drive up the private sector health care costs. Anyone who 
thinks that insurers will not pass these costs along to 
individuals and small businesses in the form of higher premiums 
is deluding themselves. As a former business owner myself, I 
can assure you no business can sell their product below their 
cost for very long. To think they can simply because the 
government mandates it is a recipe for disaster.
    Rather than wasting our time on another hearing that tries 
to shift the blame for the entirely predictable results of the 
new health care law, we should instead be focusing on how to 
address the causes of these premium increases. We need to 
examine how the specific provisions in the new law are 
increasing premiums and determine how to replace those 
provisions with measures that could actually lower costs for 
individuals and small business. We also need to enact several 
provisions that will actually lower health care costs, help 
employers, and allow Americans to keep the plans they want 
rather than being forced to buy the plan that a government 
bureaucrat thinks best meets their needs or apply for waivers.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Enzi.
    First we'd like to welcome our colleague, Senator Feinstein 
from California, chair of the Intelligence Committee, who does 
such a superb job there of keeping us advised as to terrorist 
threats and what's going on. We thank you very much for your 
service as chair of that committee.
    Senator Feinstein. Thank you.
    The Chairman. Senator Feinstein also was very active in the 
passage of the Affordable Care Act. She did a lot of work on 
that, and one area in which Senator Feinstein had done a lot of 
work was in this whole area of rate reviews and making sure 
that consumers have information, good information. Senator 
Feinstein and I together asked the GAO to do a report on State 
Rate Review Activity. We're releasing that today. Senator 
Feinstein has long championed consumer protections and insurer 
accountability.

    [Note: The report referred to may be found at 
www.docstoc.com/docs/152435280/GAO-Private-Health-Insurance-
State-Oversight-of-Premium.]

    .So I thank Senator Feinstein for coming here today and for 
her great work in this area. I see you do have a prepared 
statement. It will be made a part of the record in its 
entirety, and you can proceed as you so desire.

                     Statement of Senator Feinstein

    Senator Feinstein. Thank you very much, Mr. Chairman, and 
Senator Enzi, Senator Franken, Senator Murkowski.
    I have, for a number of years now, been concerned about the 
affordability of health insurance. And, of course, as you look 
at health insurance around the world, you see that no country 
has the size of large, for-profit medical insurance companies 
that the United States of America does.
    If you go further, you see that since 1999 the average 
premium for family coverage has risen 131 percent, while 
medical inflation, which should guide this, rose just 31 
percent. Two years ago, in 2009, 57 percent of people 
attempting to purchase insurance in the individual market found 
it difficult or impossible to afford coverage. Now, that's 
before the health care plan.
    While the cost of health insurance continues to rise for 
individuals, insurance companies, particularly the 10 large 
for-profit companies, enjoy unprecedented profits. In the first 
quarter of this year, 2011, the five largest for-profit health 
insurance companies recorded a net profit, in a quarter, of 
$3.9 billion. That's an average 16 percent increase from the 
same quarter the year before.
    CEO pay for the 10 largest for-profit health insurance 
companies was $228.1 million in 2009, up from $85.5 million the 
year before, 2008. This is a 167 percent raise in just 1 year, 
and this doesn't include the tens of millions of more dollars 
in exercised stock options, and means that these CEOs received 
nearly a billion dollars in total compensation, dollars--and 
here's the key--that could have been used to provide health 
benefits. I mean, this raises the question to me as to whether 
America's health insurance should be controlled by for-profit 
companies rather than by non-profit companies.
    And here's the rub: At the same time these insurance 
companies were reducing the amount they spend on actual medical 
care, the GAO report shows State insurance practices now vary 
widely, even within different markets in the same State. To me, 
the GAO report shows just how fractured the health insurance 
market continues to be and how consumers are not uniformly 
protected from egregious rate increases.
    I believe that what should be standardized is the authority 
to block or modify unjustified, unreasonable premium rate 
increases. I strongly believe that each State insurance 
commissioner or regulator should not only be able to look at 
insurance rate filings and evaluate them thoroughly prior to 
implementation, which this GAO report dealt with, but that he 
or she should also possess the authority to block or modify 
those rates that are egregious.
    To evaluate the rates and have no authority to reduce or 
stop those found to be unjustified makes the State insurance 
commissioner simply a paper tiger. The Department of Health and 
Human Services reports that as of December 2010, less than half 
of States and territories had the legal authority to reject 
excessive rates. The Kaiser Family Foundation reports in at 
least 17 States, including my own, California, State regulators 
do not possess the authority to block or modify premium rates 
prior to implementation.
    The health reform law actually takes critical first steps 
to help control premium increases and ensures that companies 
spend more on medical care, not profits. The grants provided to 
States to improve rate review processes have helped ensure more 
information is available about all rate increases.
    However, the health reform law does not grant explicit 
authority to modify or block egregious rate increases. This is 
a loophole, which is why during health reform I introduced 
legislation to authorize the Secretary of Health and Human 
Services to block or modify unjustified premium increases in 
States where the regulator does not have that authority.
    The Health Insurance Rate Review Act of 2011 is pending in 
this house, and a like bill is also pending in the House of 
Representatives. These bills create a Federal fallback rate 
review process that grants the Secretary of Health and Human 
Services authority to block or modify rate increases that are 
excessive, unjustified, or unfairly discriminatory in those 
States where there is not appropriate authority. This 
legislation is a simple, commonsense solution, and we almost 
got it included in the bill, but we did not.
    And so since then, what's happening is these big for-profit 
companies are raising rates wherever they can, sometimes once a 
year, sometimes twice a year, and sometimes three times a year. 
In 2010, I received over 1,700 letters from constituents 
pleading with me to help them with their skyrocketing insurance 
rates. Now, in California, the State insurance commissioner has 
reviewed some filings. They disapproved 14. They were withdrawn 
or negotiated to lower rates. So 6 percent were modified. I 
suspect that if California regulators had an appropriate legal 
authority, many more than 14 rate filings would have been 
modified or withdrawn in 2010.
    Let me give you an example of why the review of rate 
filings is not sufficient, and why I believe authority to block 
or modify is necessary. Just about everyone I think is familiar 
with the increases that Anthem Blue Cross was set to impose in 
February 2010, as much as 39 percent for 800,000 policyholders 
in California. And in California, I should say, a couple of 
these companies essentially control the major medical insurance 
markets. So that as you spoke, Mr. Chairman, there isn't the 
competitive competition that there might be otherwise.
    And Anthem was not an aberration. Insurance companies in 
California have continued to propose 30, 40, and even 80 
percent cumulative premium increases. We have a very strong 
insurance commissioner. We have a bill pending. His name is 
David Jones. He's been successful in getting some of these big 
companies to reduce or cancel their premium increases. 
Recently, a number of insurance companies were set to impose 
premium increases in my State, some as much as 80 percent 
cumulatively. Commissioner Jones requested a delay of these 
increases until he had a chance to review them, and the 
insurance companies complied.
    After review and pressure from him, Anthem Blue Cross 
agreed to scale back planned rate hikes from 16.4 percent to 
9.1 percent for 600,000 individual policies in the Department 
of Insurance, and to delay implementation of these hikes. But 
here's the catch. Anthem Blue Cross also serves individual 
policyholders through the Department of Managed Health Care in 
California. For over 120,000 Californians that receive their 
Blue Cross insurance through this department, rates rose an 
average of 16 percent on May 1 of this year. The Department of 
Managed Health Care deemed these increases unreasonable, but 
they don't have the authority to block them. This means that 
the same companies scaled back rates for some individual 
policyholders but not others, and I don't think that makes 
sense.
    Now, on page 43 of the GAO report, in the appendix are 
general comments of the Department of Health and Human Services 
on the Government Accountability Office's draft report, which 
is this report. What they say is,

          ``For too long, insurance companies in many States 
        have increased health insurance premiums with little 
        oversight, transparency, or public accountability. 
        Health insurance premiums have doubled, on average, 
        over the last 10 years, much faster than wages and 
        inflation, putting coverage out of reach for millions 
        of Americans.
          ``As recently as December 2010, fewer than half of 
        the States and territories had the legal authority to 
        reject a proposed increase if the increase was 
        excessive, lacked justification, or failed to meet 
        other State standards. Additionally, many States that 
        had authority lacked the resources needed to exercise 
        it meaningfully. This lack of authority and resources 
        for States has contributed to unjustified premium 
        increases.''

    And then it announces,

          ``Starting in September of this year, 2011, HHS is 
        requiring that all non-grandfathered insurers seeking 
        rate increases of 10 percent or more in the individual 
        and small group markets publicly disclose the proposed 
        increases and their justification for them. Disclosing 
        proposed increases along with the insurer's 
        justification sheds light on industry pricing practices 
        that some experts believe have led to unnecessarily 
        high rates.
          ``This transparency in the health insurance market 
        will help promote competition, encourage insurers to 
        work toward controlling health care costs, and 
        discourage insurers from charging unjustified 
        premiums.''

    Then it goes on to talk about the Affordable Care Act.
    I think this is a major step forward, Mr. Chairman. We 
worked with the health department to try to get them rate 
review authority as part of the bill. We failed. The lobbying 
by the big insurance companies obviously was intense, but I 
think suffice it to say we have a problem that's out of 
control, and we have a lot of people suffering for it, and we 
have a reduction in the number of people covered by this 
insurance because people can no longer afford the premiums.
    Now, whether they're doing this just because they know in 
2014 the health insurance law goes into play, and therefore 
they want to recover as much as they can before that, or simply 
because they're going to raise rates as best they can to flush 
up that bottom line, I think it's just as simple as that.
    Let me conclude with this. A man by the name of T.S. Reid 
wrote a book about health care all over the Nation. Probably 
members of this committee have read it. And he concludes that 
no nation on earth has really been able to reform health 
insurance with a large for-profit insurance industry. That may 
continue to be a problem. But I just want to thank you for 
watching this carefully, because our people have to be able to 
afford to be covered.
    I wish we could get this rate review through. I thank you 
for your support of it, and I wish the other side of the 
aisle--and Ranking Member Enzi has always been fair. We've 
worked together on other matters. But this one really cries out 
for watching and for taking action to see that premium rates 
are truly justified.
    I thank you for the opportunity to testify.
    The Chairman. Senator Feinstein, thank you very much for a 
very eloquent presentation. I'd just say that I quoted a 
constituent of mine who had written in about her increases. One 
might just ask, well, why doesn't she just shop around and buy 
something else? Two companies have over 80 percent of all of 
the market in Iowa, and in some places in Iowa only one 
company, United Health Care. There are no other options. It's 
called monopoly.
    Senator Feinstein. In the Los Angeles metropolitan area, 
too, one company dominates, and it's a 16-million person 
market, huge.
    The Chairman. Yes. Thank you very much.
    Senator Enzi. That's why I was pushing for the small 
business health plans so the associations could group together 
and possibly form their own insurance company to increase it. 
But by having those groups we would have had some people who 
would have been on a par with the insurance companies for doing 
any of the negotiating, and I think that would have brought 
down prices.
    And, yes, I read that book, but I think the author missed 
Switzerland.
    Senator Feinstein. No, he was in Switzerland.
    The Chairman. He did Switzerland.
    Senator Feinstein. I'll send you the chapter.
    Senator Enzi. OK.
    Senator Feinstein. He was in Switzerland, and he found the 
care pretty good there.
    Senator Franken. I read the book. In Switzerland, he 
interviewed--they had a battle there several years ago to 
regulate the insurance companies, and the conservatives fought 
it, but now they're very happy with it. He interviewed a 
conservative and said, ``since this reform, has any Swiss 
citizen gone bankrupt because of a health care issue,'' and as 
you know, in this country, about 50 percent of bankruptcies, or 
more, are in some part caused by health care challenges. And he 
asked, ``has anyone in Switzerland since these reforms gone 
bankrupt,'' and he said, ``no, that would be a shame, that 
would be a disgrace.'' And, you know, they've made these 
reforms in Switzerland.
    The Chairman. Senator Feinstein, thank you very much. I 
know you have other obligations. Thank you very much for being 
here, appreciate it.
    Now we'll welcome our panel, Steve Larsen, just Steve 
Larsen on the first panel. Mr. Larsen is director of the Center 
for Consumer Information and Insurance Oversight within the 
Centers for Medicare and Medicaid Services. He comes with a 
distinguished insurance background, has held a number of senior 
positions with Amerigroup, a managed health care company, spent 
6 years as a Maryland insurance commissioner. We last saw Mr. 
Larsen here in March, when he shared his expertise on the 
implementation of health insurance exchanges.
    Mr. Larsen, we welcome you back to the committee. Your 
statement will be made a part of the record in its entirety, 
and if you could sum it up in--the clock says 5, but if it goes 
to 7, that would be fine--5 to 7 minutes, we'd sure appreciate 
it.

   STATEMENT OF STEVE LARSEN, DIRECTOR, CENTER FOR CONSUMER 
 INFORMATION AND INSURANCE OVERSIGHT, CENTERS FOR MEDICARE AND 
                MEDICAID SERVICES, BALTIMORE, MD

    Mr. Larsen. Thank you very much, Chairman Harkin and 
Ranking Member Enzi, and members of the committee. Thank you 
for the opportunity today to discuss the positive impact of the 
Affordable Care Act on the affordability of health insurance 
premiums for American families and businesses, including small 
businesses.
    The Affordable Care Act reforms the health insurance market 
for the benefit of health care consumers, both individuals and 
businesses. One important goal of the reforms in the Affordable 
Care Act is to make sure that people and businesses receive 
value for their health insurance premium dollars. The need for 
this focus is clear. Over the last 10 years, health insurance 
premiums have risen dramatically, and these increases in health 
care costs outpace the rise in medical costs and the rise in 
wages during the same period.
    We know that this is not only a burden on individuals, who 
often have seen their rates increase 20 percent a year or more, 
but on small businesses as well. The rate at which small 
businesses are offering coverage to their employees has dropped 
in the last decade.
    The Affordable Care Act helps to make health insurance 
coverage more affordable in three key ways. First, it provides 
States with unprecedented resources to strengthen the existing 
processes that they have in place today to review proposed rate 
increases by insurance companies. I know from my experience as 
an insurance commissioner for 6 years how important the process 
of bringing an independent review of proposed rate increases 
can be for consumers.
    But although the rate review process is important, we also 
know that the resources and expertise for rate reviews varies 
significantly across the States. The Affordable Care Act 
provides $250 million in grants to assist the States and 
territories in enhancing their health insurance rate review 
processes. Since enactment of the bill, $48 million has been 
awarded to 42 States, the District of Columbia, and the 
territories. In February, the availability of approximately 
$200 million more in additional grant funding was announced to 
support the continuation of these efforts.
    The grants are already having a major impact on State rate 
review processes. As of June 2011, 18 States had proposed 
legislation to increase their ability to review rates, 25 
States had hired additional staff to review rates, 37 were 
engaged in rate review contract activity, 33 States were 
enhancing their IT capabilities, and 35 States were working to 
enhance their consumer transparency and provide education to 
consumers on the rate review process.
    The second important tool that the ACA provides to ensure 
that consumers receive value for their premium dollars are the 
rate review provisions, which we've heard about. As Senator 
Feinstein indicated, and you did, Mr. Chairman, beginning in 
September, insurers seeking rate increases of 10 percent or 
more for most plans in the individual and small group market 
are required to publicly disclose the proposed increases and 
provide basic information to consumers about the reasons for 
the increase. These increases will then be reviewed by States 
that have an effective rate review process, or by CMS as a 
backstop to determine whether these rates are unreasonable.
    We recently concluded an evaluation of State review 
processes and found that almost all States will have an 
effective rate review process and will be reviewing rate 
increases beginning on September 1st. Many States, as I said, 
enhanced their existing processes in order to meet the 
standards for an effective rate review and drew on grant funds 
as part of that process.
    We know effective rate review works. Rhode Island's 
insurance commissioner was able to use its rate review 
authority to reduce a proposed increase by a major insurer in 
that State by 6 percent, and I think actually today there was a 
blurb that he had reduced a proposed increase by United Health 
Care. Nearly 30,000 consumers in North Dakota faced a proposed 
increase of 23 percent on their premiums that were reduced to 
14 percent, and I think we'll hear about some of the great 
review activity that the State of Oregon has done.
    Finally, to ensure consumers receive value for their 
premium dollars, the ACA established minimum standards for 
spending by health insurance issuers on clinical services, 
medical costs, and quality improvement activities for their 
members, known as the medical loss ratio or MLR provisions. The 
new MLR protections effective this year require that insurers 
spend at least 80 percent or 85 percent, depending on the 
market, of premium dollars on actual health care services and 
quality improvement efforts rather than on administrative 
expenses. Insurance companies that don't meet the standards 
will be required to provide rebates to their customers.
    Recognizing State flexibility, the law allows for a 
temporary adjustment in the individual market MLR standard if a 
State requests it and demonstrates to HHS that the 80 percent 
MLR standard may destabilize its individual health insurance 
market. We're already seeing indications that the MLR and rate 
review provisions are benefitting consumers. We know from the 
States that insurance companies are pricing to the 80 percent 
standard for the benefit of consumers and have announced that 
they will moderate future increases in order to meet the 80 
percent standard.
    States play a critical role in the implementation of the 
Affordable Care Act, and we've worked actively with governors, 
with insurance commissioners, Medicaid directors, and State 
stakeholders to implement these programs. It's been our 
priority to work collaboratively with our State partners as the 
provisions of the Affordable Care Act go into effect.
    So in conclusion, the Affordable Care Act includes a 
variety of provisions designed to promote accountability, 
affordability, quality, and accessibility in the health care 
system for all Americans, and to make sure the health insurance 
market is more consumer friendly, transparent, and responsive.
    Thank you for the opportunity to testify today, and I look 
forward to answering questions that you might have.
    [The prepared statement of Mr. Larsen follows:]
                   Prepared Statement of Steve Larsen
    Chairman Harkin, Ranking Member Enzi, and members of the committee, 
thank you for the opportunity to discuss steps the Affordable Care Act 
takes to help make health insurance premiums more affordable for 
American families and businesses.
    The Affordable Care Act reforms the health insurance market in a 
way that puts American consumers back in charge of their health 
coverage and care, ensuring they receive value for their premium 
dollars. Further, by focusing greater attention on justifications for 
insurance rate increases at the State and Federal level, we are already 
seeing positive results.
    The need for these actions is clear. Over the past 10 years, health 
insurance premiums have risen dramatically. According to a 2010 survey 
of employee benefits, premiums for average family coverage are up 114 
percent and worker contributions are up 147 percent when compared to 
2000.\1\ Further, these increases in premiums outpace the rise in 
medical costs and wages during the same period. As a result, families 
and businesses saw many of their gains in earnings wiped away by the 
increased cost of insurance.
---------------------------------------------------------------------------
    \1\ http://ehbs.kff.org/pdf/2010/8085.pdf.
---------------------------------------------------------------------------
                       making coverage affordable
    The Affordable Care Act helps make coverage more affordable by 
providing States with unprecedented resources to improve how States 
review proposed health insurance premium increases and hold insurance 
companies accountable for unjustified premiums increases. These 
resources for States to strengthen their insurance premium review 
procedures work in tandem with other policies in the Affordable Care 
Act to create a powerful tool to help keep health insurance premiums 
more affordable. These policies include:

     Review of Insurance Rates brings an unprecedented level of 
scrutiny and transparency to health insurance rate increases. The 
Affordable Care Act ensures that, in any State, large proposed 
increases will be evaluated by experts to make sure they are based on 
reasonable cost assumptions and solid evidence. Additionally, insurance 
companies must provide easy to understand information to their 
customers about their reasons for significant rate increases, as well 
as publicly justify and post on their Web site any unreasonable rate 
increases. These steps will allow consumers to know why they are paying 
the rates that they are.
     Affordable Insurance Exchanges can, beginning in 2014 
exclude health plans that show a pattern of unjustified premium 
increases.

    These new provisions will help moderate premium hikes and provide 
those who buy insurance with greater value for their premium dollar. 
For example, consumers in North Carolina are already feeling the 
benefits of the Affordable Care Act, as Blue Cross and Blue Shield of 
North Carolina refunded $155.8 million to 215,000 customers, in 
response to provisions in the law.
             partnering with states on rate review policies
    States play a critical role in the implementation of the Affordable 
Care Act. Since enactment, we have worked actively with Governors, 
insurance commissioners, Medicaid directors, and other stakeholders to 
implement programs to help consumers and businesses. It has been our 
priority to work collaboratively with our State partners as the 
provisions of the Affordable Care Act go into effect.
    In recognition that States are the principal regulators of the 
private insurance market, the Affordable Care Act empowers and supports 
States to review unreasonable rate increases within their State, while 
CMS serves as a back-up to review rates only if a State lacks the 
authority or resources to do so. The Affordable Care Act provides $250 
million in grants to assist States and Territories enhance their health 
insurance rate review process. Since enactment, $48 million has been 
awarded to 42 States, the District of Columbia, and the 5 Territories. 
In February, the availability of approximately $202 million in 
additional grant funding was announced to support the continuation of 
such efforts. The applications for the additional grant funding are due 
on August 15, 2011, with awards planned for the end of fiscal year 
2011.
    The Government Accountability Office (GAO) report Private Health 
Insurance: State Oversight of Premium Rates shows that State insurance 
departments are already making good use of the rate review grants. In 
response to a survey conducted by GAO, 41 respondents from States that 
have been awarded rate review grants reported that they are making 
changes to enhance their health insurance premium oversight activities. 
States are using these grant funds to support rate review by hiring new 
actuarial staff, engaging in consumer transparency initiatives and 
developing improved information technology infrastructure to collect 
and analyze more robust rate filing data.
    Specific examples of how States are improving their rate review 
processes with grant funds include:

     Tennessee is expanding the scope of rate review to small 
and large group policies and granting the Department of Commerce and 
Insurance prior approval authority and the authority to disapprove 
rates.
     New York is standardizing rate filing applications and 
expanding the information collected across all product types when 
reviewing rates.
     Kentucky created a new consumer-friendly Web site with 
Frequently Asked Questions (FAQs) on the rate review process and an 
email box to collect consumer comments. Kentucky also hired six new 
full-time employees to assist with reviewing rates.
     Utah surpassed their goal of reviewing 50 percent of 
individual and small group rate filings by reviewing 100 percent of all 
submitted rate filings with the assistance of grant resources.

    The Affordable Care Act establishes additional protections from 
unreasonable insurance rate increases. Starting September 1, 2011, 
insurers seeking rate increases of 10 percent or more for non-
grandfathered plans in the individual and small group markets are 
required to publicly disclose the proposed increases and the 
justification for them. Such increases will be reviewed by either State 
or Federal experts to determine whether they are unreasonable. States 
with effective rate review systems will conduct the reviews, but if a 
State lacks the resources or authority to conduct actuarial reviews, 
HHS will serve as a backup. Starting September 1, 2012, the 10 percent 
threshold will be replaced with a State-specific threshold, using data 
that reflect insurance and health care cost trends particular to that 
State. For those States in which a State-specific threshold is not 
established by that time, the 10 percent threshold will continue to 
apply. If an issuer wishes to implement an unreasonable rate, it will 
have to publish a justification for that increase on its Web site and 
on www.Healthcare.gov.
    After reviewing and considering more than 60 stakeholder comments, 
CMS issued a final rate review regulation (CMS-9999-FC) on May 19, 
2011. The final rule makes certain that potentially unreasonable health 
insurance premium increases will be thoroughly reviewed, and ensures 
that consumers will have access to clear information about those 
increases. This analysis is expected to help moderate premium hikes and 
provide those who buy insurance with greater value for their premium 
dollar. Additionally, insurance companies must provide easy to 
understand information to their customers about their reasons for 
significant rate increases, as well as publicly justify and post on 
their Web site any unreasonable rate increases. These steps will allow 
consumers to better understand why their premiums are increasing.
    The regulation (CMS-9999--FC) finalizes the proposed rule (OCIIO-
9999-P) that was issued on December 23, 2010. The final rule includes 
several additions to the proposed rule that reflect feedback received 
through the comment process. For example, the final rule includes a 
requirement that States and CMS provide an opportunity for public input 
in the evaluation of rate increases subject to review. This will 
strengthen the consumer transparency aspects of the new rule. The 
change from a 10 percent threshold in 2011 to a State-specific 
threshold in 2012 was also based on public input. CMS will work with 
States to develop State-specific thresholds that reflect the insurance 
and health care cost trends in each State. In the final rule, due to 
comments received from State regulators and other stakeholders on the 
proposed rule, we requested further comment from the public on applying 
the rate review rule to individual and small group coverage sold 
through associations.
                         impact of rate review
    CMS is committed to supporting the States as the primary regulator 
of the private health insurance market. This new system has already 
begun to help States strengthen or create rate review processes. As of 
May 2011, 18 States had proposed legislation to increase their ability 
to review premium rates, 25 States had hired additional staff to review 
rates, and 34 were engaged in rate review contract activity. In 
addition, 33 States were enhancing their IT capacity for rate review 
and 34 States were working to enhance consumer transparency and provide 
consumer education on the rate review process.
    The rate review regulation establishes the criteria for determining 
whether or not a State has an effective rate review program. HHS worked 
closely with State regulators to determine if a State has an effective 
program based on the criteria set forth in the regulation and has 
notified the States of the Department's initial determinations. I am 
pleased that 40 States and the District of Columbia will be reviewing 
rates in all markets. This result serves to preserve the historic role 
of the States in regulating health insurance markets.
    Experience shows that rate review helps to lower the cost of 
coverage for people and employers. Recent examples include:

     Rhode Island's Insurance Commissioner was able to use its 
rate review authority to reduce a proposed increase by a major insurer 
in that State by 6 percentage points--lowering a proposed increase of 
7.9 percent to 1.9 percent.\2\
---------------------------------------------------------------------------
    \2\ http://wrnihealthcareblog.wordpress.com/2011/03/09/koller-
slashes-bcbs-proposed-rate-increase/.
---------------------------------------------------------------------------
     Californians were saved from a third rate increase in less 
than a year when a California carrier withdrew its proposed increase 
after it drew scrutiny from the State Insurance Commissioner. The three 
rate increases would have totaled as much as 87 percent for some 
policyholders.\3\
---------------------------------------------------------------------------
    \3\ http://www.insurance.ca.gov/0400-news/0100-press-releases/2011/
release040-11.cfm.
---------------------------------------------------------------------------
     Nearly 30,000 North Dakotans saw a proposed increase of 
23.7 percent cut to 14 percent after public outcry drew attention to 
it.\4\
---------------------------------------------------------------------------
    \4\ http://www.inforum.com/event/article/id/314397/.
---------------------------------------------------------------------------
     In Connecticut, one insurer requested an increase of 20 
percent. The Insurance Department rejected this increase as excessive, 
and because of the law in Connecticut, it cannot go into effect.\5\
---------------------------------------------------------------------------
    \5\ http://www.hartfordbusiness.com/news15875.html.
---------------------------------------------------------------------------
     About 59,000 individual insurance customers were protected 
from significantly higher premiums when the Oregon Insurance Division 
rejected a 22.1 percent premium increase in favor of a lower, 12.8 
percent increase.\6\
---------------------------------------------------------------------------
    \6\ http://www.oregonhealthrates.org/?pg=public_hearing.html.

    These examples demonstrate the impact that transparency and 
scrutiny can have to make health insurance premiums affordable for all 
Americans.
                    transparency and accountability
    As we have implemented these new programs and processes, we have 
pursued them in an open and transparent manner. CMS has published 
extensive information on our rulemaking and other decisions on the Web 
site www.CCIIO.CMS.gov and on the consumer-oriented www.HealthCare.gov 
to ensure that information is widely available for public input and 
understanding.
    For example, the Affordable Care Act requires the Secretary, in 
conjunction with the States, to develop a process for the review and 
disclosure of unreasonable rates. The implementation process began with 
a Request for Comment published on April 14, 2010, and continued with a 
proposed rule, published on December 23, 2010. HHS reviewed all public 
comments and issued a final rule on May 19, 2011, with a 60-day comment 
period related to association coverage.
    The process for seeking public input continues after the issuance 
of regulations. Based on comments and questions HHS, Labor, and the 
Treasury have received on regulations issued to date, we have provided 
additional interpretive guidance to affected parties on regulations 
relating to grandfathering, medical loss ratio, PCIP, ERRP, internal 
and external appeals, and provisions relating to annual limits on 
health plan coverage. We continue to work with stakeholders to 
implement the Affordable Care Act and to provide additional clarity.
                               conclusion
    The Affordable Care Act includes a wide variety of provisions 
designed to promote accountability, affordability, quality and 
accessibility in the health care system for all Americans, and to make 
the health insurance market more consumer-friendly and transparent. The 
law is working to make coverage more affordable by holding insurers 
accountable for the premiums they charge consumers.

    The Chairman. Mr. Larsen, thank you very much for summing 
that up. And as I said, your statement will be made a part of 
the record in its entirety.
    We'll start a round of 5-minute questions.
    Mr. Larsen, I mentioned in my opening statement that 
several insurance companies have reported their second-quarter 
earnings over the past week. All indications are that the 
industry is doing very well. After their first-quarter earnings 
report this spring, when the medical loss ratio requirement was 
first in effect, United Health Group's share price shot up 10 
percent to a 3-year high; Humana's share similarly jumped 7 
percent after the first quarter.
    The chart I have up there basically illustrates the growth 
trend across the insurance industry. Humana made almost $1.8 
billion in profits last year, up about $700 million from the 
year before; so from about $1.1, $1.2 to $1.8 billion in 1 
year. Aetna continued to grow steadily, up to almost $1.8 
billion also in profits. As I mentioned, United Health Care is 
growing at a gargantuan rate. Their net profits last year were 
$4.6 billion. Just last week, United Health Care announced 
quarterly profits of $1.27 billion for one quarter, up 13 
percent from the same period last year. Its shares have risen 
44 percent this year, 44 percent. And the Standard & Poor's 
index for large health insurance overall has climbed at a 40 
percent rate in 1 year.
    So it's no mystery, I think, what's feeding this. If you 
look at the growth and the profits, that's on the left side, on 
the right side is the premiums, family premiums. Those two 
lines just about parallel each other. As the premiums go up, 
profits go up.
    So given these numbers, Mr. Larsen, what is your 
perspective on the ability of insurance companies to remain 
viable in the health reform area?
    Now, we've heard that a lot of these numbers have gone up. 
Certainly premiums have gone up. Some people may say, well, if 
we hadn't passed the Affordable Care Act, that wouldn't be 
going up. I don't know whether or not that is because, as 
Senator Feinstein has alluded to, are they trying to get in 
before the exchanges go into effect in 2014, get their prices 
up as high as possible, or is this just simply market forces 
saying, ``hey, if we can make more profit, make more profit,'' 
without anybody regulating or guiding it?
    How does the Affordable Care Act, through provisions like 
the medical loss ratio and the review of insurance rates, begin 
to change the insurance market so that more premium dollars are 
returned to consumers rather than just to company profits? Can 
you elaborate on that, please?
    Mr. Larsen. Thank you. I think both provisions will help 
between now and 2014, certainly. I know with respect to some of 
the major companies that have reported in some cases record 
profits, in some cases their stock is trading at an all-time 
high, I know some of the Wall Street analysts have indicated 
that medical trends have been moderating somewhat, but the 
premiums haven't lowered at the same rate of the trends. So 
essentially some of the companies are benefitting from the 
spread between their premiums and moderating medical trends.
    The MLR standard particularly helps that because it forces 
the companies to look down the road, and if they don't want to 
pay rebates to consumers, they're going to have to moderate 
their rate increases. In fact, we've seen and heard, both from 
the States and I think from public reports, that companies are 
now going to be pricing to 80 percent, and that means they're 
going to have to moderate the rate at which their premiums are 
increasing and track more closely to what actual medical cost 
trends are.
    The Chairman. I think, if I'm not mistaken, is your office 
preparing for a second round of rate review grants? And if so, 
how do you see these building on the first ones? Can you just 
tell us maybe what some of the criteria for that would be?
    Mr. Larsen. We are. There was a first round of grants that 
we issued that was about $1 million per State that really just 
laid the foundation for the States. I think, as was mentioned 
earlier in Senator Feinstein's testimony, I think it's in the 
GAO report, a huge variation among the States, and particularly 
on the resources that the States have to perform this review.
    So the second round of grants will enhance the work that's 
been done so far. Again, the first round is the building 
blocks. It helped get a lot of States to a basic level, but I 
think the next round is really going to improve the capability 
of the States between now and 2014.
    The Chairman. I have one more question I'd like to ask, but 
I see my time is basically up. So I'll ask it maybe in the next 
round, Mr. Larsen.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    Some folks in the Administration are still having a problem 
understanding the CBO scoring that the new health care law 
would increase insurance premiums. CBO said the average premium 
would be 27 to 30 percent higher because Americans would be 
forced to obtain a greater amount of coverage mainly because of 
more mandated benefits. But they also said that the average 
premiums would be 7 to 10 percent lower because of greater 
administrative efficiencies, and the average premiums would be 
7 to 10 percent lower because of healthier people getting 
coverage.
    If I subtract 27 minus 7 minus 7, I come up with 13 percent 
increase. So would you agree that CBO said the new health care 
law will increase premiums by about 13 percent?
    Mr. Larsen. As you point out, there were a number of moving 
parts in the CBO analysis, and they did analysis for both the 
individual small group and large group markets. So with respect 
to the small group market, there were factors that could lead 
to increases and factors that they thought would lead to 
decreases. So, for example, in the small group market I think 
it was a wash or to the good for the small group market, 
particularly because of the efficiencies that small businesses 
are going to get. And again, I think it was similar for the 
large group market as well.
    And I think with respect to the individual market, I don't 
recall exactly. Again, as you point out, there were moving 
parts. Certain aspects of it, by improving the risk pool and 
getting more healthy people into the risk pool, that was going 
to improve the overall experience of the individual market, and 
then there were some additional benefits that would move in the 
other direction.
    So I don't recall the exact pluses and minuses that were in 
the CBO report, but I think we certainly took the view when we 
put out some of our regulations that the impact was going to be 
in potentially small numbers, but when you add in the 
preventive care and other benefits that you get, that it was 
going to be a benefit for health care consumers.
    Senator Enzi. The Congressional Research Service confirms 
that all new plans will be forced to have essential health 
benefit packages that are dictated by the Secretary. It's also 
interesting to me that Secretary Sebelius used to be an 
insurance commissioner, and she didn't use her authority to 
change the rates. She kept a merger from happening once but 
never changed the rates.
    Now, on a different question, apparently HHS prohibited the 
Institute of Medicine from considering cost implications when 
they drafted the recommendations that will mandate women's 
clinical preventive services that insurers must provide for 
free. To the extent that the Federal Government will now be 
subsidizing many insurance plans, if these mandates increase 
costs, won't that increase the Federal deficit? And why did HHS 
prohibit the Institute of Medicine from considering the cost of 
these new mandates?
    Mr. Larsen. The IOM recommendations with respect to women's 
preventive services, those apply only in the private insurance 
market. So I'm not sure what you mean by the Federal Government 
subsidizing it.
    But with respect to your second question, the statute with 
respect to all of the preventive services that non-
grandfathered plans are required to provide are not applied 
with respect to cost/benefit analysis. So we didn't, I don't 
think, prohibit IOM. It wasn't part of the legislative charge 
or the charge. They had a panel of medical experts that looked 
at the efficacy of these various preventive services and found 
that they were effective, and that's why IOM presumably 
recommended them to HRSA and the Secretary.
    Senator Enzi. I have several questions, too, about the way 
that children-only policies are, but I have somebody that's 
really worked on this. Senator Murkowski has done a lot of work 
on that, and I'll let her handle those questions and any others 
she's interested in.
    The Department of Health and Human Services will write a 
$250 million check for the grants for these rate reviews that 
you were mentioning. Forty-six States have already gotten 
funding. How many of these State recipients claimed more 
stringent rate review policies would lead to decreased overall 
health care spending in their State? Does merely reviewing a 
rate increase result in lower health care costs?
    Mr. Larsen. We absolutely think that there is huge value in 
reviewing rates, in bringing transparency and sunshine to the 
rate review process, and I think some of these examples that 
we've cited earlier--you know, not every State, as was pointed 
out, has prior approval authority. But simply reviewing and 
bringing to light the underlying issues associated with a rate 
increase can have the effect of having insurance companies go 
back and sharpen their pencils and revisit the proposed rate 
increases.
    So we think review alone is a very powerful tool. 
Obviously, many States have a prior approval authority, which 
provides even more protection to consumers. But we think the 
baseline of review is a good place to start.
    Senator Enzi. Thank you. My time has expired.
    The Chairman. Thank you, Senator Enzi.
    I have in order of arrival Senator Franken, Senator 
Murkowski, and Senator Blumenthal.
    Senator Franken.

                      Statement of Senator Franken

    Senator Franken.  Thank you, Mr. Chairman.
    Thank you, Mr. Larsen, for your testimony. Mr. Larsen, 
experts agree that rising health care costs in our country are 
unsustainable for the Federal Government, for States, and for 
consumers. During the health reform debate, I looked to 
Minnesota for ideas to bend the health care cost curve, and it 
struck me that our insurers were offering high-value products 
in Minnesota, where most of the dollars they took in premiums 
were going directly to health care services, but it wasn't that 
way everywhere.
    In some States, the so-called medical loss ratio for 
individual and small group policies was as low as 60 percent, 
50 percent, or even 40 percent, meaning that insurers were 
spending only 40 percent of their dollars from premiums on 
health care services.
    Based on Minnesota's experience, I introduced a bill that 
was ultimately included in the health reform requiring insurers 
to spend at least 80 in the small group and individual markets 
and 85 percent of insurance premiums on actual health care 
services in the large group market.
    During a hearing before this committee in March, you 
testified that you had already seen premiums go down due to 
MLR. Can you walk us through some of the examples of how you've 
seen the MLR provision help to moderate premium increases?
    Mr. Larsen. The couple of ones that I can cite off the top 
of my head. First, in the process of reviewing requests from 
the States to adjust the MLR standard between now and 2014, 
there's a process. You know, if some States are starting at 50 
and it's a heavy lift to get there, to 80 percent in a year, so 
States can submit a request to adjust those. And we have quite 
a bit of back and forth with the States in that process, and 
what we've learned is that many States who were at much lower 
than 80 percent are now pricing to 80.
    What that means is, when I say pricing to 80 percent, is 
that they have to make sure that they are not charging so much 
to their consumers that they're continuing to generate that 
lower loss ratio. So what that results in practically speaking 
is a moderation of the rate increases that they otherwise would 
have gotten. So that's one thing we've seen.
    And then also a number of the publicly traded companies 
have announced that rather than paying rebates, they will 
moderate their pricing, and then I think Coventry indicated 
they would do that. I think we heard Wellpoint was going to be 
looking at shaving some of their administrative expenses and 
trying to be more efficient. So across the markets, we are 
seeing that happen.
    Senator Franken.  Aetna in Connecticut, I understand, is--
--
    Mr. Larsen. Yes. That was a perfect example.
    Senator Franken [continuing]. Lowering their premium, on 
average, 10 percent.
    Mr. Larsen. Right.
    Senator Franken.  OK. Mr. Larsen, CCIIO----
    Mr. Larsen. CCIIO?
    Senator Franken.  Yes. CCIIO has already granted MLR 
waivers to five States to phase in the requirements on insurers 
in the individual market. I'm extremely concerned that these 
waivers are being granted without sufficient evidence that 
these States would truly see a disruption of their insurance 
market without such a waiver. In a recent waiver that CCIIO 
granted in Nevada, it was clear that the State did not make its 
case. In fact, it appeared that CCIIO relied on information 
that wasn't even included in the application to make its 
decision, and out of the six waiver applications that have been 
decided, only one has been rejected.
    I wrote a letter to Secretary Sebelius 2 months ago 
expressing my concern about the number of waivers being 
approved. Since then I have not received a response, and two 
more waivers have been approved.
    First of all, can I expect a response to that letter, and 
when? And second, can you address the concern that CCIIO is 
willing to give waivers to nearly any State that applies, even 
if they do not provide necessary data? Approximately how much 
money will consumers lose in the States where insurers are 
granted waivers that don't have to spend even just 80 percent 
of insurance premiums on actual health care services?
    Mr. Larsen. Thank you. And first, let me personally 
apologize to you for not getting a prompt response back. I will 
make sure that you get that as soon as I get back to the 
office.
    Senator Franken.  Thank you.
    Mr. Larsen. With respect to the six requests for 
adjustments that we've gotten, we take that review process very 
seriously, and it's a very in-depth process. If you've had or 
your staff had the opportunity to look at the letters that we 
send back and forth, there's a record that's developed. It's an 
extensive record. We have denied one, and of the others that we 
have approved, I can tell you that we modified every request 
that has come in. We have not granted the request as it came in 
the door.
    Ultimately it's a balancing act, right? We want the 
consumers to make sure they get the benefit of the 80 percent 
provision. Some States have a number of smaller companies that 
in some cases are kind of on the edge of making money or not 
making money, and these are the ones that we're most concerned 
about leaving the market. And if there aren't other options 
available to individuals in the market, we don't want them--if 
the company were to leave, and some of them have said they 
would leave--they don't always explicitly threaten they're 
going to leave, but sometimes they tell the commissioner, 
``look, if we have to hit that 80 percent in 1 year, we may 
have to leave the market.''
    So we try and reach a balance in doing that, and I think 
the decisions that we've rendered where we've not granted what 
the insurance commissioner requested, tried to get as close as 
we can to 80 percent as quickly as we can, I think that's 
reflected in our decisions, and we support the MLR provision. 
We think it's incredibly important, and we'll continue to look 
at these very closely.
    Senator Franken.  Thank you, and I look forward to a 
response to my letter.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Franken.
    Senator Murkowski.

                     Statement of Senator Murkowski

    Senator Murkowski.  Thank you, Mr. Chairman.
    Senator Enzi, you mentioned the child-only policies and 
that as an issue. I thank you for your leadership on this 
aspect of health care and the study that you have conducted, 
along with your staff.
    Alaska is one of these 17 States now that has been impacted 
in really a very, very harsh way. We currently have no child-
only policies since the Affordable Care Act went into effect. 
It's not only been harmful to my State, but as I look around 
the dais here, Minnesota now does not have one, Connecticut 
does not have one, and Wyoming does not have these child-only 
policies. And I think it's fair to say this is harmful to these 
States where we don't have any coverage. We've got to deal with 
this.
    I've been working on legislation that would allow parents 
and grandparents in my State and any other State to purchase 
child-only policies across State lines to ensure that we're not 
leaving any of these children behind. The legislation would 
also require the Department of Health and Human Services to 
issue a uniform annual enrollment period of at least 45 days.
    Mr. Larsen, I appreciate your testimony here today. A 
couple of questions for you, and these relate to the news 
stories that describe the burden that this provision has on 
these 17 States. The main concerns are that the child-only 
policies do not have uniform open enrollment policies so 
parents can sign their kids up for insurance on the way to the 
emergency room, and then this adverse selection prompts 
carriers to exit the child-only market. I think it goes without 
saying that as a direct result of this policy, what we're 
seeing is our Nation's children are put in a very difficult 
position.
    Now, we can talk about who is at fault here, whether it's 
the insurers or whatnot. I'm not here to defend the insurers. 
But the question to you this morning would be what other 
options are out there to these children in the 17 States 
currently? Maybe there will be more. What other options exist 
when there's only one insurer that's writing child-only 
policies left in the market, and what is the Administration 
doing to help get children access to insurance?
    Mr. Larsen. Thank you. And we certainly share your concern 
about what has happened, and it's been disappointing, frankly, 
to see the reaction of the insurers who--we've given them a 
number of tools that they can use to manage the risk. They can 
charge higher rates. They can have their own open enrollment 
periods. We've given them almost every option to insure both 
the sick and the healthy kids, and I think it's clear that they 
ultimately didn't want to insure the sick kids. So they've 
decided to not participate in some of the markets.
    I want to make clear that this doesn't affect kids that are 
currently covered. They've stopped issuing new policies.
    And I think there are a number of options available in the 
States. First of all, as you point out, States have employed 
different tools. Some have passed legislation requiring that if 
you're in the individual market, you also have to cover child-
only policies. We know under the ACA, and this is new, that 
kids now have coverage through their parents' policies up to 
age 26. So to the extent that there's parental coverage, you 
have access to that under the new provision under the ACA.
    We've also made some changes to the PECIP program, the Pre-
existing Condition Insurance Program that operates across the 
States to, No. 1, lower premiums so that they're more 
affordable; and No. 2, to make it easier for kids to get into 
the PECIP program. We've allowed insurers to screen kids for 
availability in other programs like PECIP, like the CHIP 
program. So when you put all of these provisions together, we 
think there are many avenues for access for kids, and then 
there are tools available for the States and the issuers like 
open enrollment periods, and we encourage that.
    Senator Murkowski.  Is the Administration planning on 
issuing guidance that defines a uniform open enrollment period?
    Mr. Larsen. We haven't yet, in part because we have seen--
--
    Senator Murkowski.  Do you think, though, that it makes 
sense to do so?
    Mr. Larsen. We can. I mean, our preference, frankly, is for 
the States to design a State-based solution, and that's why 
many States have enacted open enrollment periods.
    Senator Murkowski.  Right. But in a State like Alaska, 
where we don't have anybody there, 16 others don't have anybody 
there, we're really caught in a bind. And, of course, Alaska's 
population is low enough that we're not very attractive to too 
many insurers coming into the market in the first place. So 
when we lose those that will write the child-only policies, 
we're stuck.
    So my proposal to allow for purchasing across State lines 
is one avenue. But I think we recognize that even with the 
expansion of Medicaid and the SCHIP, the fact of the matter is 
you're going to have a lot of children whose parents won't 
qualify for either of those programs, so we've got a real gap 
here. And I appreciate the fact that the Administration 
recognizes that, but you've got to be working with us so that 
we can find these solutions so we don't leave these kids 
hanging, as I believe that we are.
    Mr. Larsen. We can certainly look harder at that as an 
option. Again, I think our initial preference is, because 
States were taking action, not to override what the States were 
doing. But if we're at the point where States have done as much 
as we can, then we can certainly look at kind of a backstop 
open enrollment provision for States that, for whatever reason, 
still have an issue for these kids.
    Senator Murkowski.  Mr. Chairman, my time is expired. I do 
have another question on the flexibility that's granted to 
States, but maybe we'll do that in a second round. Thank you.
    The Chairman. Thank you very much.
    Senator Blumenthal.

                    Statement of Senator Blumenthal

    Senator Blumenthal.  Thank you, Mr. Chairman. I want to 
thank the Chairman for having this hearing on a very important 
topic.
    And thank you, Mr. Larsen, for your continuing work on this 
very complex and profoundly important issue.
    I know a little bit about it from the standpoint of a State 
official, having served as attorney general in Connecticut, 
having actually participated in a number of hearings on rate 
review issues, hearings that were not required under 
Connecticut law. One of the weaknesses of Connecticut law is 
that hearings are not required. Rates can go into effect 
without prior approval, and despite your citing an example in 
Connecticut and, I agree, a very encouraging example of one 
insurance proposal being cut as a result of, in effect, public 
notice and attention being focused on that proposed increase of 
20 percent, there are still more examples of rates going up 
than rate proposals being cut. And I venture to say that's true 
across the country.
    So let me begin with a question based on my experience. 
Would you agree that prior approval or disapproval is a very 
important feature of effective rate review?
    Mr. Larsen. If I can answer it this way, we define 
effective rate review in the context of the provisions that 
were in the ACA, which is truly a review process. If the 
question is in the spectrum of activities that kind of fully 
protect consumers, at one end you've got States that had file 
and use, use and file, where rates could go into effect really 
without any review, and then you've got a review process and 
public disclosure and public input, and then kind of at the 
other end of the spectrum is prior approval, certainly the 
prior approval provisions and the protections that Senator 
Feinstein indicated provide the maximum level of protection to 
consumers that the commissioner can modify or deny a rate 
increase.
    Senator Blumenthal.  In my personal view, without being 
excessively critical of my own State, I believe that our rate 
review system should absolutely be strengthened by providing 
more transparency and accountability, including the opportunity 
for citizens to participate and for prior approval by the 
insurance commissioner after that kind of process, and a right 
of appeal, which many States lack as well. Would you agree that 
that right is also an important feature of accountability?
    Mr. Larsen. I think those are all important features of a 
full and fair rate process, public input and the right to 
appeal.
    Senator Blumenthal.  Aside from the grants that you can 
provide, and thank you for benefitting Connecticut with a grant 
among the other States that you've done, what more can the 
Administration do, do you think, to encourage more accountable 
and effective review systems across the country given its 
present authority?
    Mr. Larsen. We're certainly in the process of granting, 
making and administering the grants. I mean, we have a lot of 
back and forth with the staffs of the insurance departments, 
and hopefully we can play a role in kind of cross-pollinating 
ideas from different States. We get asked that question a lot, 
and so we can certainly provide more technical expertise, let 
States know what the activities are in other States. We're 
working with the NEIC in that regard as well.
    In terms of as we evaluate the progress that States are 
making in executing on their grant plan, we certainly want to 
hold them to standards and make sure they're doing what they 
said they were going to do to get the grant. I think that's an 
important part of maintaining an effective rate review process.
    Senator Blumenthal.  Would you say that the industry could 
do more in perhaps encouraging that kind of review, especially 
companies in the industry, and unquestionably there are some, 
who want a responsible and accountable system?
    Mr. Larsen. It's been my experience the industry is usually 
kind of wary of the rate review process.
    Senator Blumenthal.  Wary is a euphemism.
    Mr. Larsen. Not weary, but wary, yes, or maybe both.
    Senator Blumenthal.  Or maybe both. But certainly they can 
be encouraged to play a more----
    Mr. Larsen. I think if they felt that it was a fair 
process, which I think it should be, can be, and is, but I 
think they have to feel that it's a fair process to engage in 
it as well.
    Senator Blumenthal.  Would they feel, do you think, and 
would you feel--two separate questions, I suppose--that a 
fairer process would be one administered at the Federal level 
that might be applied more uniformly nationwide?
    Mr. Larsen. You know, I don't know how to answer that. I 
think that most--my experience was most companies want, and we 
want, for the reviews to be conducted at the local level by the 
local State insurance commissioner who is more familiar with 
the market, and where people are situated that are covered by 
the policies. So it's not our objective to have a large Federal 
involvement in the rate review process. It's our objective to 
have that performed at the State level, and we're only 
performing what I described as a backstop function. Only where 
States can't get to an effective rate review point will we be 
doing the reviews.
    Senator Blumenthal.  Thank you. My time has expired, but I 
would welcome a continuing dialogue or conversation on this 
issue. Thank you very much.
    Mr. Larsen. Thank you.
    The Chairman. Thank you, Senator Blumenthal.
    Senator Hatch.

                       Statement of Senator Hatch

    Senator Hatch.  Thank you, Mr. Chairman. Thank you for 
having this hearing to discuss the rising cost of health care 
in this country and how the health law has so far failed to 
deliver its promise to reduce premiums for individuals, 
families, and businesses.
    CMS just recently published their annual National Health 
Expenditures report that shows that as a result of the health 
law, premiums will increase by 9.4 percent in 2014, and I would 
like to ask for unanimous consent that my opening statement be 
included in the hearing record, along with the health affairs 
article written by the CMS Office of the Actuary on National 
Health Care Spending.

    [The article referred to may be found in Additional 
Material.]

    The Chairman. So ordered.
    Senator Hatch.  Thank you, sir.
    Welcome, Mr. Larsen. Appreciate the work you're doing and 
trying to do there at CMS.
    CMS recently published its annual National Health 
Expenditures report for 2010. The report found that the health 
insurance premiums will increase by 9.4 percent in 2014 as a 
result of the President's health law.
    In your testimony you discuss two tools, as I view it, that 
the Administration is using to decrease the rate of premium 
increases. However, the central premise or promise of the law 
was that it would reduce premiums, not reduce the rate of 
growth in premiums.
    Now, in the light of the new report issued by your agency, 
how can the law keep its central promise of reducing premiums 
by $2,500?
    Mr. Larsen. First, my understanding of the NHE report was 
it showed that the rate of health care spending for last year 
was at the lowest that it had been in many, many years. In 
fact, the rate was moderating, and I think that's a significant 
point.
    I apologize. I'm not able to speak, I guess, to the 
estimates by the CMS actuary. I know that--I guess it's the 
difference between what rates would have been with or without 
the ACA. But, I mean, we continue to believe that the 
Affordable Care Act is going to moderate, significantly, 
premiums. Now, how it's going to do that in the different 
markets depends. Certainly with respect to health insurance 
exchanges, I know that for the small businesses, they're going 
to have opportunities that they don't have today, and they're 
going to get efficiencies through the exchanges that they don't 
have today.
    So we continue to believe that the tools that are available 
in the ACA are going to help moderate--
    Senator Hatch.  The CMS National Health Expenditures report 
also found that prescription drug spending will increase by 
10.7 percent in 2014, which is 5.1 percent higher than without 
the health law; physician and clinical services will increase 
by 8.9 percent in 2014, which is 3.1 percent higher than 
without the health law; and hospital spending will increase by 
7.2 percent in 2014, which is 1 percent higher than without the 
health law.
    Now, this report shows that the President's health law did 
not reduce the cost of health care in the long run and instead 
will bend the cost curve in the wrong direction. Do you agree 
with your own chief actuary that the cost of health care 
continues to rise and that the tools under the President's 
health law will not bend the cost curve downward in the long 
run?
    Mr. Larsen. I don't agree, but I have to admit that I 
haven't reviewed the CMS actuary's estimates. But I do know 
that the--
    Senator Hatch.  All right, that's fair. In your written 
testimony you said that, ``States are the principal regulators 
of the private insurance market.'' Now, how does the rate 
review program established under the President's health law 
respect the States' role as principal regulator of the law if 
the law requires the Federal Government to conduct rate review 
in States without a Federally approved process for reviewing 
rates?
    Mr. Larsen. That's an important question, and I think we 
touched on it a little bit in the prior exchange. Our 
objective, and I think we've largely reached that, is for the 
States to be the primary reviewer. So we just completed an 
evaluation of all the States and the level of effectiveness 
that they have, and I think we found that only seven States so 
far were not effective, meaning that the vast majority of 
States are effective. And even those ones that aren't, at any 
point they can come back to us and say, ``look, we've got some 
kind of authority to review rates,'' because that's usually the 
biggest barrier. Some States don't have an existing State law, 
and a lot of States passed legislation this year.
    But the vast majority are effective reviewers, and we will 
do everything we can to support the small number of States that 
are left to get them there.
    Senator Hatch.  OK. Now, you have an entire section in your 
testimony focusing on transparency and accountability. However, 
there are a number of areas where the Administration, in my 
opinion, has fallen short on both. For example, the preventive 
benefits that were mandated for coverage by August 1 of next 
year will not receive a public comment period. I sent a letter 
to the Secretary asking that she fully consider the impact of 
these benefit mandates and urged her to provide a comment 
period. However, none was provided.
    Now, can you please tell me why the Administration is 
seemingly transparent in their implementation process for some 
programs but not all?
    Mr. Larsen. When we issued the initial interim final rule 
on preventive services last year, we did get comments on 
various aspects of preventive services and what should be 
included and the cost and things like that. So we took those 
comments into account when we just issued the latest decision 
with regard to women's preventive services.
    So we do feel like we took comment. We responded to the 
comment. Nonetheless, I think in the amended interim final rule 
that we just put out, we have an initial comment period, and if 
we get comments that indicate that we should revisit the 
policies that we just announced, then we will do that.
    Senator Hatch.  Mr. Chairman, I have to leave, but can I 
ask just one other question? I think if it hasn't been asked, 
it should be asked. And that is, do you believe that a majority 
of the employers will be incentivized to stop providing health 
insurance as a result of the employer mandate and penalties 
under the law?
    Mr. Larsen. We think that employers will continue to offer. 
And, in fact, the rate of offers by particularly small 
businesses will increase between now and certainly when the 
exchanges are online in 2014.
    Senator Hatch.  You actually believe that?
    Mr. Larsen. Yes.
    Senator Hatch.  OK.
    Mr. Larsen. And I think that there are a number of studies 
from Rand and the Urban Institute that also make that 
projection.
    Senator Hatch.  OK. If you could submit those to the 
committee, I'd like to read them.
    Mr. Larsen. OK.
    Senator Hatch.  Thank you so much.
    Thanks, Mr. Chairman.
    [The prepared statement of Senator Hatch follows:]

                  Prepared Statement of Senator Hatch

    Mr. Chairman, I want to thank you for the opportunity to 
comment on the well-documented increases in health insurance 
premiums in the last year and their relationship to the 
President's health care law. Although the President promised to 
reduce premiums for all Americans by $2,500, a report published 
last week by the Centers for Medicare and Medicaid Services 
shows that premiums will increase by 9.4 percent in 2014. The 
impact of these increases will be catastrophic for American 
families forced to purchase insurance by the individual 
mandate, and for taxpayers who will have to foot the bill for 
the health law's subsidies for these inflated premiums.
    In fact, the annual report by CMS on national health 
expenditures for 2010 found that by 2020, once the President's 
health law is fully implemented, $1 in $5 of the American 
economy will be spent on health care. The health share of the 
gross domestic product (GDP) will increase from 17.6 percent in 
2009 to 19.8 percent in 2020. The report also found that the 
President's health law doubles the size of entitlements to $2.3 
trillion by 2020; increases prescription drug spending by 10.7 
percent in 2014; increases physician and clinical services by 
8.9 percent in 2014; and increases hospital spending by 7.2 
percent in 2014.
    It is safe to say that in the history of ill-conceived 
Federal lawmaking, no law has failed as magnificently and 
predictably as the President's misguided and misleading effort 
at health care reform. The central promise of the White House's 
partisan health law was that it would reduce health care costs, 
but unfortunately, as the report by CMS shows, this law is only 
making things worse. By implementing further price controls, 
Federal mandates, and tax increases on health products, the 
Administration is only exacerbating the high cost of health 
care for individuals, families and businesses.
    Estimates from the Congressional Budget Office show that 
premium increases, as a result of the new law, could be as high 
as 27 percent to 30 percent in the individual market. I will 
continue to work to repeal the President's health law to ensure 
that these premium increases are not fully realized. The 
Administration should take heed of the recent report by CMS 
which demonstrates the true impact of the President's health 
law on insurance premiums. Only by first coming to grips with 
the fact that the health care law is bending the cost curve 
upward, will we be able to prevent the law's costly mandates 
from being implemented and further hindering access to health 
insurance for all Americans.

    The Chairman. Thank you, Senator Hatch.
    Senator Hagan.

                       Statement of Senator Hagan

    Senator Hagan.  Thank you, Mr. Chairman.
    Mr. Larsen, thank you for your testimony. I appreciate the 
work that your office is doing, and I do hear from my 
constituents on a regular basis about how frustrated and 
concerned they are that their insurance premiums obviously 
continue to rise.
    In your experience, can you tell me what are the top three 
reasons that health insurance insurers continue to have such 
large increases in rates?
    Mr. Larsen. There are a number of different reasons. I 
mean, the insurance companies would indicate that they are 
simply passing along health care costs that they see. Health 
care costs are driven by kind of a unit cost, how much they're 
paying for a doctor visit or a hospital stay, and then how many 
of these services they're delivering. So there are a number of 
different reasons why costs increase, and I think one of the 
things that this provision, this rate review provision is going 
to get at is bringing transparency to exactly why rates are 
going up.
    I think there's not always a good answer to your question, 
and I think there's a lot of confusion, and that's I think--I 
may not be answering your question, but I think that's the real 
benefit of this provision, is for the first time we're going to 
have a uniform disclosure form about what it is that's driving 
these rate increases, and then we can have a discussion about 
why they're going up.
    Senator Hagan.  As a follow-up, the 10 percent threshold 
that you mentioned in your testimony, is that a good benchmark 
for the percentage increases we should expect to see in the 
future? Or should we perhaps expect further reductions in 
premium increases? In other words, when States set their own 
specific thresholds starting in 2012, do you expect that the 
threshold will be greater or less than 10 percent?
    Mr. Larsen. That's going to vary by State, and I think that 
raises a good point. The 10 percent was a starting point. We 
looked at a number of medical trend indices and landed on 10 
percent. We thought that was the best one to start with. It is 
a national number, but we all know that markets, insurance 
markets are very local, and the rate of increase in one State 
can be a lot different in another. Cost factors are different. 
So the 10 percent may turn into a 12 percent in one State and a 
9 percent in another State depending on local factors.
    Senator Hagan.  I hear from constituents all the time, 
particularly small businesses in North Carolina, and they too 
are frustrated because their premiums obviously continue to 
increase. Under these new regulations, will there be an 
opportunity for consumers to file requests for reviews of 
premium increases either with you in your office or their State 
insurance commissioner?
    Mr. Larsen. The way it's structured now, the consumers 
don't have the ability, I guess, to ask for a review formally. 
We did add into the final rule that we issued an explicit 
provision that requires States to have public input in some 
way, because many States had no public input into the process.
    The reviews are actually triggered by simply a rate being 
filed that's over the 10 percent. So the reviews don't depend 
on whether someone asks for them. They're kind of automatic 
based on that trigger. But we did, as I say, add in that 
provision for explicit public input into the process.
    Senator Hagan.  Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Hagan.
    I thought about your question about why are these increases 
going up, and before you arrived I talked about letters I had 
received from my own constituents on this. And I don't know 
what it's like in North Carolina, but in Iowa, when you have 
two carriers that have over 80 percent of the market, and in 
some areas of my State only one carrier, this is a monopoly 
practice--why are the rates going up? Because they can. I used 
that chart there to show the increase in the profits that these 
companies are making, and then you look at the increase in the 
premiums and they just about match.
    So that's why rate review is so important. Both rate review 
and medical loss ratio that we put into this are so important 
to try to get on top of this. And as Mr. Larsen said, the 
transparency, at least getting the information out there of 
what's happening, because a lot of times we just don't know. 
There's kind of like a cloud out there. We can't really know 
what's driving those costs.
    We do know that from 1999 to about the middle of this last 
decade, insurance costs went up about 131 percent, but the 
medical inflation was only 31 percent, so 100 percent more than 
the medical rate of inflation. So some of these companies are 
doing quite well.
    Mr. Merkley, did you have any questions for Mr. Larsen?
    Senator Merkley. Thank you, Mr. Chairman. I'm going to pass 
so we can go on to the next panel.
    The Chairman. OK. Mr. Larsen, thank you very much for being 
here again for the second time.
    Oh, I'm sorry. Senator Murkowski.
    Senator Murkowski.  May I just ask a very, very quick 
question? This follows on the discussion earlier about the 
flexibility to the States.
    Ten States were told at the end of June that they have 
insufficient rate review authority--you mentioned that as 
well--and that they might be taking them over. HHS is taking 
them over in September if they don't get it fixed.
    You also mentioned the fact that several of these States 
lack that authority to fix it, and unfortunately, it's my 
understanding many of these States don't have legislators that 
are currently in session. In Alaska, we passed a law this year 
to address this, the rate review structure. It goes into effect 
January 2012. But what is going to happen is that HHS is still 
going to step in for this period between September and the date 
that it goes into enactment, and I really have to question how 
this promotes States' flexibility.
    You've got a State that lacked the authority. We passed the 
law to gain it. It doesn't quite mesh with the requirements 
under the law, and so we've got a 3-month period where you all 
step in. Does this really promote the flexibility that we're 
hoping for? It just doesn't seem like it works to me.
    Mr. Larsen. I think you put it well when you said it 
doesn't quite mesh. We're kind of caught in the switches 
between the September 1 date in the regulation and the date 
that your law takes effect. I can certainly go back and talk to 
our staff. I mean, the one thing we wanted to make sure is that 
somehow or another the consumers in the State of Alaska were 
going to get the benefit of the law, and my understanding was 
that until the law took effect for the markets that are 
involved in Alaska, that the insurance department there didn't 
have the authority to actually get all the information to do 
the reviews.
    So the challenge for us is, like I said, we would prefer 
for the States to do it.
    Senator Murkowski.  And we would as well.
    Mr. Larsen. Right.
    Senator Murkowski.  We'd like to work with you on this to 
see if there's some way. It just seems highly inefficient and 
goes against the goals here for you to have a 3-month----
    Mr. Larsen. Yes. I mean, our challenge would be if there 
were--if you couldn't do it and we didn't step in, and then 
you're going to have companies who are going to be raising 
rates typically for January. So this is the period of the year 
when they're looking for increases, and the rates aren't 
getting reviewed, and then probably you and HHS and others are 
going to get asked, well, how come these rates aren't getting 
reviewed? We thought we were supposed to get that.
    So I think we have the same goal, and if there's a way to 
get there----
    Senator Murkowski. Alaska's situation is probably unique, 
but it does also bring up the issue for these other States 
that, again, lack the authority. Their legislatures are not in 
session to do anything about it, and you're just kind of hung 
in there. I'd like to know that perhaps we can be working with 
you so that we provide for the information that we're all 
hoping for without some really serious inefficiencies within 
the system.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Thank you, Mr. Larsen, for being here again.
    Mr. Larsen. Thank you.
    The Chairman. We'll call our next panel. Our next panel 
will have three witnesses.
    Mr. John Dicken, Director for Health Care Issues at the 
U.S. Government Accountability Office, where he directs GAO's 
evaluations of private health insurance, long-term care 
insurance, and prescription drug pricing issues.
    We have Daniel Withrow. Mr. Withrow is president of the CSS 
Distribution Group, an international packaging company 
headquartered in Kentucky, and his testimony covers the U.S. 
Chamber of Commerce.
    I will yield to Senator Merkley for purposes of the third 
introduction.

                      Statement of Senator Merkley

    Senator Merkley. Thank you, Mr. Chairman. It's my pleasure 
to introduce Teresa Miller, Oregon's Insurance Division 
administrator. I commend her for her stellar work leading 
Oregon's Department of Consumer and Business Services Insurance 
Division.
    She joined the Division in 2008, bringing a background in 
legislative and policy issues, previously having worked as 
legislative director for former Oregon governor Ted Kulongoski. 
As insurance administrator, she oversees a staff of 100 and an 
annual budget of $10 million. In addition to regulating health 
insurance rates in the small group and individual markets, the 
Division protects consumers by licensing insurance companies 
and agents, making sure insurers are financially sound, 
reviewing policies for consumer protections, and investigating 
potential violations of insurance law.
    She has done a superb job of bringing diverse parties to 
the table and of taking Oregon forward based on a strong rate 
review statute which preceded Congress' passage of the 
Affordable Care Act.
    Delighted you're here to share your insights. Welcome.
    The Chairman. Thank you, Senator Merkley.
    And welcome, Ms. Miller.
    We'll start with Mr. Dicken and then go across. Your 
statements will all be made a part of the record in their 
entirety. If you could sum up in 5 to 7 minutes, we would 
appreciate that.
    Mr. Dicken, welcome and please proceed.

 STATEMENT OF JOHN DICKEN, DIRECTOR OF HEALTH CARE, GOVERNMENT 
             ACCOUNTABILITY OFFICE, WASHINGTON, DC

    Mr. Dicken. Thank you. Mr. Chairman, Ranking Member Enzi, 
and members of the committee, I am pleased to be here today to 
discuss the State oversight of health insurance premiums. As 
the cost of health insurance coverage continues to rise, 
policymakers have raised questions about the extent to which 
these increases in health insurance premiums are justified and 
could adversely affect consumers.
    While oversight of private health insurance, including 
premium rates, is primarily a State responsibility, the 2010 
Patient Protection and Affordable Care Act established a role 
for HHS. The Act requires the Secretary of HHS to work with 
States to establish a process for the annual review of 
unreasonable premium increases. In addition, the Act requires 
the Secretary to award grants to assist States in their review 
practices.
    My statement highlights key findings from a report 
requested by Chairman Harkin and Senator Feinstein that GAO is 
releasing today. This report describes State oversight of 
health insurance premium rates in 2010 and changes that States 
that received HHS rate review grants have begun making to 
enhance their oversight. For this report, we surveyed officials 
from the insurance departments of all 50 States and the 
District of Columbia. We also conducted interviews with 
insurance department officials and other experts, and reviewed 
the States' rate review grant applications submitted to HHS.
    In brief, we found that oversight of health insurance 
premium rates varied among States in 2010. While 48 of the 50 
State officials who responded to our survey reported that they 
reviewed rate filings in 2010, the practices reported by State 
insurance officials varied in three key areas.
    First, there was variation in terms of the timing of rate 
filing reviews. Specifically, respondents from 38 States 
reported that all reviewed rate filings were reviewed before 
the rates took effect, while other respondents reported 
reviewing at least some rate filings after they went into 
effect.
    Second, there is variation in the types of information 
respondents reported reviewing. While nearly all survey 
respondents reported reviewing information such as trends in 
medical costs and services, fewer than half of respondents 
reported reviewing carriers' capital levels. Some survey 
respondents also reported conducting comprehensive reviews of 
rate filings, while others reported reviewing little 
information or conducting cursory reviews.
    A third area of variation was in opportunities for consumer 
involvement in rate reviews. Fourteen survey respondents 
reported providing consumers with opportunities to be involved 
in premium rate oversight such as participation in rate review 
hearings or public comment periods. However, most respondents 
reported that their State did not provide opportunities for 
consumer involvement.
    Not only States' practices but also the outcomes of States' 
reviews of rate filings varied among States in 2010. 
Specifically, survey respondents from five States reported that 
over half of the rate filings they reviewed in 2010 were 
disapproved, withdrawn, or resulted in rates lower than 
originally proposed. In contrast, State survey respondents from 
19 States reported these outcomes occurred from their rate 
reviews in less than 10 percent of the time.
    Let me close by discussing how States have begun using rate 
review grants provided by HHS. Our survey found that 41 
respondents reported their States have begun making changes to 
enhance their State's abilities to oversee health insurance 
premium rates. For example, about half of these respondents 
reported taking steps to either review their existing rate 
review processes or develop new processes. Some States also 
reported that they were changing information that carriers are 
required to submit with rate filings, incorporating additional 
data or analyses in rate filings, or taking steps to involve 
consumers in the rate review process.
    In addition, over two-thirds reportedly have begun to 
increase their capacity to oversee premium rates. These 
capacity enhancements included hiring staff or outside 
actuaries, and improving the information technology systems 
used to collect and analyze rate filing data.
    Finally, more than a third reported that their States have 
taken steps such as introducing or passing legislation in order 
to obtain additional legislative authority for overseeing 
health insurance premium rates.
    Mr. Chairman, this concludes my statement. I will look 
forward to answering any questions you or other members of the 
committee may have.
    [The prepared statement of Mr. Dicken follows:]
                   Prepared Statement of John Dicken
                                summary
    My statement will highlight key findings from a report requested by 
Chairman Harkin and Senator Feinstein that describes State oversight of 
health insurance premium rates in 2010 and changes that States that 
received HHS rate review grants have begun making to enhance their 
oversight of health insurance premium rates. For that report, we 
surveyed officials from the insurance departments of all 50 States and 
the District of Columbia, and received responses from all but one 
State. We also interviewed other State and Federal officials and 
experts and reviewed applications for HHS rate review grants.
    We found that oversight of health insurance premium rates--
primarily reviewing and approving or disapproving rate filings 
submitted by carriers--varied across States in 2010. While nearly all--
48 out of 50--of the State officials who responded to our survey 
reported that they reviewed rate filings in 2010, the practices 
reported by State insurance officials varied in terms of the timing of 
rate filing reviews, the information considered in reviews, and 
opportunities for consumer involvement in rate reviews. Specifically, 
respondents from 38 States reported that all rate filings reviewed were 
reviewed before the rates took effect, while other respondents reported 
reviewing at least some rate filings after they went into effect. 
Survey respondents also varied in the types of information they 
reported reviewing. While nearly all survey respondents reported 
reviewing information such as trends in medical costs and services, 
fewer than half of respondents reported reviewing carrier capital 
levels compared with State minimums. Some survey respondents also 
reported conducting comprehensive reviews of rate filings, while others 
reported reviewing little information or conducting cursory reviews. In 
addition, while 14 survey respondents reported providing consumers with 
opportunities to be involved in premium rate oversight, such as 
participation in rate review hearings or public comment periods, most 
did not. Finally, the outcomes of States' reviews of rate filings 
varied across States in 2010. Specifically, survey respondents from 5 
States reported that over 50 percent of the rate filings they reviewed 
in 2010 were disapproved, withdrawn, or resulted in rates lower than 
originally proposed, while survey respondents from 19 States reported 
that these outcomes occurred from their rate reviews less than 10 
percent of the time.
    Our survey of State insurance department officials found that 41 
respondents from States that were awarded HHS rate review grants 
reported that they have begun making changes in order to enhance their 
States' abilities to oversee health insurance premium rates. For 
example, about half of these respondents reported taking steps to 
either review their existing rate review processes or develop new 
processes. Other States reported that they were changing information 
that carriers are required to submit with rate filings, incorporating 
additional data or analyses in rate filings, or taking steps to involve 
consumers in the rate review process. In addition, over two-thirds 
reported that they have begun to make changes to increase their 
capacity to oversee premium rates, including hiring staff or outside 
actuaries, and improving the information technology systems used to 
collect and analyze rate filing data. Finally, more than a third 
reported that their States have taken steps--such as introducing or 
passing legislation--in order to obtain additional legislative 
authority for overseeing health insurance premium rates.
                                 ______
                                 
    Chairman Harkin, Ranking Member Enzi, and members of the committee, 
I am pleased to be here today to discuss State oversight of health 
insurance premium rates in 2010 and changes that States that received 
Department of Health and Human Services (HHS) rate review grants have 
begun making to enhance their oversight of premium rates. In 2009, 
about 173 million nonelderly Americans, about 65 percent of the U.S. 
population under the age of 65, had private health insurance coverage, 
either through individually purchased or employer-based private health 
plans. The cost of this health insurance coverage continues to rise. In 
a 2010 survey, over three-quarters of U.S. consumers with individually 
purchased private health plans reported health insurance premium 
increases. Of those reporting increases, the average premium increase 
was 20 percent.\1\ A separate survey found that premiums for employer-
based coverage more than doubled from 2000 to 2010.\2\ Policymakers 
have raised questions about the extent to which these increases in 
health insurance premiums are justified and could adversely affect 
consumers.
---------------------------------------------------------------------------
    \1\ The Kaiser Family Foundation, ``Survey of People Who Purchase 
Their Own Insurance,'' (Menlo Park, CA, June 2010).
    \2\ The Kaiser Family Foundation and Health Research & Education 
Trust, ``Employer Health Benefits 2010 Annual Survey,'' (Menlo Park, 
CA, September 2010).
---------------------------------------------------------------------------
    Oversight of the private health insurance industry is primarily the 
responsibility of individual States.\3\ This includes oversight of 
health insurance premium rates, which are actuarial estimates of the 
cost of providing coverage over a period of time to policyholders and 
enrollees in a health plan.\4\ While oversight of private health 
insurance, including premium rates, is primarily a State 
responsibility, the 2010 Patient Protection and Affordable Care Act 
(PPACA) established a role for HHS by requiring the Secretary to work 
with States to establish a process for the annual review of 
unreasonable premium increases.\5\ In addition, PPACA required the 
Secretary to carry out a program to award grants to assist States in 
their review practices.\6\ Since the enactment of PPACA, Members of 
Congress and others have continued to raise questions about rising 
health insurance premium rates and States' practices for overseeing 
them.
---------------------------------------------------------------------------
    \3\ See Law of Mar. 9, 1945, ch. 20, 59 Stat. 33 (codified, as 
amended, at 15 U.S.C. ch. 20) (popularly known as the McCarran-Ferguson 
Act). The McCarran-Ferguson Act provides States with the authority to 
regulate the business of insurance, without interference from Federal 
regulation, unless Federal law specifically provides otherwise. 
Therefore, States are primarily responsible for overseeing private 
health insurance premium rates in the individual and group markets in 
their States. Through laws and regulations, States establish standards 
governing health insurance premium rates and define State insurance 
departments' authority to enforce these standards. In general, the 
standards are used to help ensure that premium rates are adequate, not 
excessive, reasonable in relation to the benefits provided, and not 
unfairly discriminatory.
    \4\ To determine rates for a specific insurance product, carriers 
estimate future claims costs in connection with the product and then 
the revenue needed to pay anticipated claims and nonclaims expenses, 
such as administrative expenses. Premium rates are usually filed as a 
formula that describes how to calculate a premium for each person or 
family covered, based on information such as geographic location, 
underwriting class, coverage and copayments, age, gender, and number of 
dependents.
    \5\ Pub. L. 111-148 1003, 10101(i), 124 Stat. 119, 139, 891 
(adding and amending 2794 to the Public Health Service Act (PHSA)).
    \6\ Pub. L. 111-148 1003, 124 Stat. 139, 140, 891 (adding and 
amending PHSA 2794 (a)(1) and (c).
---------------------------------------------------------------------------
    My statement will highlight key findings from a report we are 
publicly releasing today that describes State oversight of health 
insurance premium rates in 2010 and changes that States that received 
HHS rate review grants have begun making to enhance their oversight of 
health insurance premium rates.\7\ For that report, we surveyed 
officials from the insurance departments \8\ of all 50 States and the 
District of Columbia (collectively referred to as ``states''). We 
received responses from all but one State.\9\ In order to obtain more 
detailed information about State oversight of health insurance premium 
rates in 2010, we also conducted interviews with insurance department 
officials from five selected States.\10\ Additionally, we interviewed 
other experts and officials from relevant organizations, including the 
Center for Consumer Information and Insurance Oversight within the 
Centers for Medicare & Medicaid Services, the National Association of 
Insurance Commissioners (NAIC), the American Academy of Actuaries, 
America's Health Insurance Plans, two large carriers based on their 
number of covered lives,\11\ NAIC consumer representatives (individuals 
who represent consumer interests at meetings with NAIC), and various 
advocacy groups such as Families USA and Consumers Union. We also 
reviewed portions of the States' Cycle I rate review grant applications 
submitted to HHS and other relevant HHS documents. Our work was 
performed from September 2010 through July 2011 in accordance with 
generally accepted government auditing standards.
---------------------------------------------------------------------------
    \7\ GAO, Private Health Insurance: State Oversight of Premium 
Rates, GAO-11-701 (Washington, DC: July 29, 2011).
    \8\ For the purposes of this report, we refer to the entities 
responsible for the oversight of premium rates as insurance 
departments, even though the entity responsible for oversight of 
premium rates in each State was not always called the Department of 
Insurance. For example, in Minnesota, the Department of Commerce is 
responsible for the oversight of health insurance premium rates.
    \9\ Officials from the Indiana Department of Insurance declined to 
complete our survey. In addition, not all States responded to each 
question in the survey. We conducted the survey from February 25, 2011 
through April 4, 2011, collecting information primarily on State 
practices for overseeing premium rates in calendar year 2010.
    \10\ We selected these States--California, Illinois, Maine, 
Michigan, and Texas--based on differences among the five States in 
terms of their (1) State insurance departments' authority to oversee 
premium rates, (2) proposed changes to their existing practices for 
overseeing premium rates, (3) size, and (4) geographic location.
    \11\ A carrier is generally an entity--either an insurer or managed 
health care plan--that bears the risk for and administers a range of 
health benefit offerings.
---------------------------------------------------------------------------
    In brief, we found that oversight of health insurance premium 
rates-- primarily reviewing and approving or disapproving rate filings 
submitted by carriers--varied across States in 2010. While nearly all--
48 out of 50--of the State officials who responded to our survey 
reported that they reviewed rate filings in 2010, the practices 
reported by State insurance officials varied in terms of the timing of 
rate filing reviews, the information considered in reviews, and 
opportunities for consumer involvement in rate reviews. Specifically, 
respondents from 38 States reported that all rate filings reviewed were 
reviewed before the rates took effect, while other respondents reported 
reviewing at least some rate filings after they went into effect. 
Survey respondents also varied in the types of information they 
reported reviewing. While nearly all survey respondents reported 
reviewing information such as trends in medical costs and services, 
fewer than half of respondents reported reviewing carrier capital 
levels compared with State minimums. Some survey respondents also 
reported conducting comprehensive reviews of rate filings, while others 
reported reviewing little information or conducting cursory reviews. In 
addition, while 14 survey respondents reported providing consumers with 
opportunities to be involved in premium rate oversight, such as 
participation in rate review hearings or public comment periods, most 
did not. Finally, the outcomes of States' reviews of rate filings 
varied across States in 2010. Specifically, survey respondents from 5 
States reported that over 50 percent of the rate filings they reviewed 
in 2010 were disapproved, withdrawn, or resulted in rates lower than 
originally proposed, while survey respondents from 19 States reported 
that these outcomes occurred from their rate reviews less than 10 
percent of the time.
    Our survey of State insurance department officials found that 41 
respondents from States that were awarded HHS rate review grants 
reported that they have begun making changes in order to enhance their 
States' abilities to oversee health insurance premium rates. For 
example, about half of these respondents reported taking steps to 
either review their existing rate review processes or develop new 
processes. Other States reported that they were changing information 
that carriers are required to submit with rate filings, incorporating 
additional data or analyses in rate filings, or taking steps to involve 
consumers in the rate review process. In addition, over two-thirds 
reported that they have begun to make changes to increase their 
capacity to oversee premium rates, including hiring staff or outside 
actuaries, and improving the information technology systems used to 
collect and analyze rate filing data. Finally, more than a third 
reported that their States have taken steps--such as introducing or 
passing legislation--in order to obtain additional legislative 
authority for overseeing health insurance premium rates.
    Chairman Harkin, Ranking Member Enzi, this concludes my prepared 
remarks. I would be pleased to respond to any questions you or other 
members of the committee may have at this time.

    The Chairman. Thank you very much, Mr. Dicken, and thanks 
for getting the report out in a timely manner.
    Now, Ms. Miller, please proceed.

  STATEMENT OF TERESA MILLER, ADMINISTRATOR, OREGON INSURANCE 
                      DIVISION, SALEM, OR

    Ms. Miller. Good morning. Chairman Harkin, Ranking Member 
Enzi, and distinguished members of the committee. For the 
record, my name is Teresa Miller, and I'm the administrator of 
the Oregon Insurance Division of the Department of Consumer and 
Business Services, and I'm honored to be here today and 
appreciate the opportunity to talk to you about how Federal 
grants available through the Affordable Care Act are improving 
our health insurance rate review process in Oregon.
    Oregon has worked very hard over the last 4 years to 
strengthen our State rate review law and open our process. 
Because of these efforts, Oregon's rate review process is one 
of the most transparent in the country and is supported by a 
strong rate review statute.
    As we've continued to improve our process, the Federal rate 
review grants have allowed us to hire the staff necessary to 
conduct more in-depth reviews of rate filings and have provided 
the funds necessary to solicit meaningful public comments.
    In my written testimony I've included more detail about the 
key features of our rate review process. But just briefly, 
those include: posting all documents contained in a rate filing 
in their entirety upon submission on our Web site; emailing 
policyholders who signed up to be notified of rate filings; 
opening a 30-day public comment period; and issuing a plain-
language summary of our decision, and then emailing 
policyholders with a link to that decision.
    I want to focus my remarks this morning on the improvements 
that we've made to our process with Federal grant dollars. 
First, the funding that we've received as part of the Cycle 1 
rate review grant allowed us to solicit more detailed and 
meaningful public comments. I mentioned that we have a 30-day 
public comment period. Initially, that public comment period 
attracted few comments, and those who did comment generally 
simply said that they couldn't afford their rising premiums, 
but they didn't address the statutory factors that we review as 
we review rate filings.
    So this is why we used $100,000 of our Cycle 1 grant to 
contract with a consumer advocacy group to weigh in on behalf 
of consumers. This group used the funding we provided to hire 
an actuary and has been providing very detailed analyses 
focused on the factors contained in our statute.
    Unlike many States, Oregon has a competitive health 
insurance market. We have seven Oregon-based insurers who 
actively compete in the small group and individual markets that 
we regulate. Because of our competitive process, we review 
approximately 40 rate requests a year in these markets.
    The first round of Federal grants enabled us to add an 
actuary to our staff, and we're proposing to add another 
actuary in our next grant cycle. This will allow us to dig even 
deeper in rate filings to address issues brought up by the 
consumer advocacy group and to hold public hearings so that 
those who want to watch or participate in our process can see 
the scrutiny firsthand that we provide with regard to these 
rate requests.
    Federal grant dollars have also allowed us to communicate 
better with consumers about rate filings. We created a new Web 
page devoted to health insurance rates, with a search engine 
that allows consumers to more easily find a rate filing, as 
well as information about how we review health insurance rate 
filings. We used grant dollars to create a 7-minute animated 
story about health insurance costs that breaks down the premium 
dollar and describes how we review health insurance rates. We 
also used Federal dollars to conduct a public hearing on a 
recent filing.
    So how have consumers benefitted from the improvements that 
we've made? Aside from the transparency efforts that help 
educate consumers about what's driving health insurance costs 
and give them opportunities to weigh in on requests, the 
changes that we've made have saved consumers money. In the year 
that followed the strengthening of our State's rate review law, 
we lowered insurance company requests 50 percent of the time, 
saving consumers more than $25 million, or just under $10 per 
person on a monthly insurance premium. Of course, that doesn't 
solve the affordability of health insurance, but every 
percentage point of a rate request matters to us because it 
matters to consumers.
    At the same time, we understand that we must control health 
care costs to stabilize insurance rates. That brings me to the 
study that we're conducting with first-year grant funds. 
Ultimately, the key to stabilizing health insurance costs is 
controlling medical costs. In Oregon, considering all insurance 
markets, an average of 89 cents of every premium dollar goes to 
pay health care costs. To try to tackle health care costs, we 
used $150,000 to contract with an actuarial firm for a study. 
The study, which will wrap up in the fall, is exploring whether 
there are opportunities within our current rate review process 
to control the growth of health care costs or improve the 
health care delivery system.
    As I mentioned earlier, we're applying for a second round 
of grant money to hire another health actuary and to allow us 
to conduct public hearings for most of our rate requests. In 
conducting a public hearing on a recent rate filing, it became 
clear that even with one of the most open processes in the 
country, consumers are unaware of the scrutiny we apply to rate 
filings. I am proud of the work that we do, and I want 
Oregonians to see the rigor of our reviews.
    The Federal grant funding available through the Affordable 
Care Act is helping States improve the review of health 
insurance rates. It is giving States like Oregon the resources 
needed to solicit detailed and meaningful consumer input, 
conduct more in-depth reviews of rate filings to prevent 
excessive increases, and improve rate filing information 
available to consumers.
    In Oregon, the next frontier in rate review is finding ways 
to help lower medical costs so that we can make insurance more 
affordable for consumers. Thank you for the opportunity to 
share Oregon's experience and for the funding that enables us 
to strive for continued improvement.
    I'd be happy to answer any questions.
    [The prepared statement of Ms. Miller follows:]
                  Prepared Statement of Teresa Miller
                                summary
    Over the past 4 years, Oregon has strengthened its rate review law 
and opened up its process. Today, we have one of the most transparent 
reviews in the country, supported by a strong rate review statute. As 
we have improved our process, Federal rate review grants provided staff 
to conduct more in-depth reviews of rate increases and funds to solicit 
meaningful public comment.

    Key features of our rate review process

     Post to Web site all rate filing documents.
     Email policyholders who sign up to be notified of rate 
filings.
     Open 30-day public comment period.
     Consumer advocacy group begins its review of the rate 
request.
     Division review looks at actual and projected claims 
costs, a company's past history of rate changes and its financial 
strength, enrollment trends, premiums, administrative costs by line of 
business, and a company's overall profitability as opposed to just its 
performance in one line of business. Division can consider factors such 
as investment income, surplus and cost containment/quality improvement 
efforts.
     Issue a plain language summary of our decision.
     Email policyholders with a link to our decision.

    Improvements we have made with Federal grant dollars

     Advocacy group: We used $100,000 of our cycle 1 grant to 
contract with a consumer advocacy group to weigh in on behalf of 
consumers. This group used the funds to hire an actuary and offer 
detailed analyses.
     In-depth reviews: We hired an actuary and market analyst, 
among others, so that we can conduct more in-depth reviews of the 
approximately 50 rate requests we evaluate annually. We propose to add 
a second actuary in the next grant cycle, doubling the number of our 
health actuaries from two to four. This will allow us to pursue any 
issues raised by the consumer group and to hold more public hearings.
     Enhance communications: We created a new web page 
(www.oregon
healthrates.org) devoted to health insurance rates with search engines 
that allow consumers to more easily find a rate filing along with other 
information about how we review health insurance rates.
     Study: Ultimately, the key to stabilizing health insurance 
costs is controlling medical costs. We used $150,000 to contract with 
an actuarial firm to find ways to use rate review to control the growth 
of health care costs or improve the health care delivery system. The 
results of the study are due this fall.

    Improvements we propose to make with future grant dollars

     Continue existing staff and consumer group funding from 
cycle 1.
     Incorporate public hearings into most rate requests.
     In addition to another health actuary, establish a health 
insurance rate liaison to explain our process and to provide rate 
information to consumers.
     Hire a health reform/exchange coordinator to assist with 
Federal and State reform efforts that impact our rate review process.

                                 ______
                                 
                              introduction
    Good morning Chairman Harkin, Ranking Member Enzi, and 
distinguished members of the committee. My name is Teresa Miller, and I 
am the administrator of the Oregon Insurance Division of the Department 
of Consumer and Business Services. I am honored to be here today and 
appreciate the opportunity to explain how Federal grants are improving 
our health insurance rate review process in Oregon.
    Over the past 4 years, Oregon has transformed its review of rate 
requests, making it more transparent, rigorous, and inclusive. Our 
process is as open as any in the country and it is backed by a strong 
rate review statute. As we strengthened our State law and opened our 
process, Federal grants available through the Affordable Care Act 
provided additional staff to conduct more in-depth reviews of rate 
increases and funds to solicit meaningful public comment. In addition 
to giving the Oregon Insurance Division the ability to prevent 
excessive rate increases, Oregon's rate review allows us to engage 
consumers and educate them about the factors that lead to rising health 
insurance costs.
    I would like to give you some background on rate review in Oregon 
and the improvements we have made--and plan to make--with grants 
available under the Affordable Care Act.
                         rate review in oregon
    Oregon, unlike many States, has a competitive health insurance 
market. Seven Oregon-based insurers actively compete in the small group 
and individual markets that we regulate. Insurers in these markets must 
submit rates and have them approved by the State before they take 
effect.
    The Oregon Insurance Division reviews rates to ensure they are 
reasonable in relation to the benefits provided. During our review, we 
look at the cost of medical care and prescription drugs, the company's 
past history of rate changes, the financial strength of the company, 
actual and projected claims costs, enrollment trends, premiums, 
administrative costs, and profit. Oregon's own health reform law passed 
in 2009 expanded the factors we can consider in evaluating a rate 
request. It gives us, for example, explicit authority to consider 
factors such as an insurer's investment income, surplus, and efforts to 
control costs and improve quality.
    Perhaps most significantly, we may also consider an insurer's 
overall profitability rather than just the profitability of a 
particular line of insurance. Finally, insurers must separately report 
and justify changes in administrative expenses by line of business and 
must provide more detail about what they spend on salaries, 
commissions, marketing, advertising, and other administrative expenses.
    In addition to strengthening our authority, we also have taken many 
steps in recent years to make our process more transparent. For 
example, we have added the following elements:

     We post rate filings for individual, portability, and 
small-employer plans on the Insurance Division Web site once they are 
deemed complete. All information is public.
     A required feature of the filing by the insurer is a 
plain-language summary highlighting the insurer's request along with a 
5-year history of rate increases for that line of insurance.
     The posting of the filing triggers a 30-day public comment 
period. We send an email to policyholders who sign up for email 
notification when their company files a rate request. Any comments 
consumers make are posted to the Web site.
     We contract with a consumer group, using Federal grant 
money, to comment on key rate requests on behalf of consumers.
     We must issue a decision within 10 days of the close of 
the public comment period--meaning we have 40 days to complete most of 
the work.
     Because every rate change is based on a unique set of 
facts, we file a plain-language summary on the Web site listing key 
factors underlying each rate filing decision.
     Finally, we send policyholders an email with a link to the 
decision.

    Let me explain how this process works in the context of a rate 
filing. This past spring, Regence BlueCross BlueShield of Oregon, the 
largest carrier in the markets we regulate, requested a 22.1 percent 
rate increase. This affected about 59,000 people with individual health 
plans, the State's single-largest group of individual health plan 
policyholders.
    Once our intake coordinator (hired with new Federal grant funding) 
verified the filing was complete, we posted all the company's documents 
on our Web site, notified consumers that Regence had filed for a rate 
increase, and launched the 30-day public comment period.
    At the same time, a consumer watchdog group that we contract with 
using Federal grant funds began its analysis of the request. In 
addition to reviewing the filing with its own actuary, this group 
generated an additional 800 public comments as part of its outreach.
    Finally, because of the size of the proposed increase and number of 
policyholders affected, I scheduled the division's first public hearing 
in at least 20 years. We used Federal grant funds to help pay the 
hearing costs. At the hearing, which was attended by more than 150 
people, the company outlined its request, the division posed questions 
to the insurer, and the consumer group outlined its concerns.
    In this case, our actuaries questioned the company's assumptions 
about future medical costs and the costs of new benefits required by 
Federal reform. Our authority to take into account an insurer's surplus 
and overall profitability were also key factors.
    Of course, we analyzed the company's medical loss ratio--that is 
how much of the premium dollar goes to health care costs as opposed to 
administration and profit. In Oregon's competitive market, most or all 
of our large health insurers already meet the new Federal requirement 
to spend at least 80 percent of premium dollars on medical costs.
    The division ultimately approved a 12.8 percent rate increase 
instead of the 22.1 percent requested. The division's decision to 
significantly reduce the rate increase was based on a desire to stem a 
recent history of enrollment losses in these particular plans and to 
spur greater stability in rates going forward. And, it was done with 
the knowledge that Regence is financially sound with substantial 
surplus, which could help offset any losses incurred from these plans.
    Once the decision was made, our grant-funded project coordinator 
drafted a brief, plain-language explanation of our decision as well as 
a detailed response to the consumer group's comments. We posted these 
online and sent an email link to consumers.
                   aca grants to improve rate review
    Federal grants have proved essential for us to conduct these 
detailed reviews and to solicit meaningful public comments. Here are 
some examples of how we have spent Federal grant dollars to date.
    Public input: When we instituted a 30-day public comment period, we 
initially attracted few public comments. After all, the bulk of rate 
filing materials remain highly technical. Those who did comment 
generally said they could not afford rising premiums but did not 
address the factors we must consider by law in weighing rate requests. 
That is why we used $100,000 of our cycle 1 grant to contract with a 
consumer advocacy group to weigh in on behalf of consumers. This 
group's detailed analyses have been extremely helpful. Oregon State 
Public Interest Research Group (OSPIRG) keeps us on our toes and 
reminds us of the questions consumers want answered.
    In-depth review: Because Oregon has a competitive health insurance 
market, we review approximately 50 rate requests a year. The first 
round of Federal grants enabled us to add an actuary to our staff, and 
we propose to add another one in the next grant cycle. This would 
double the number of our health actuaries, from two to four. This 
enables us to do a more in-depth analysis, to pursue any issues raised 
by the consumer group, and to hold more public hearings so that those 
who want to watch or participate can see the scrutiny we give these 
requests.
    Additionally, the grant funds pay for a market analyst who tracks 
insurers' administrative costs by line of business and for staff to 
process filings, manage the grants and write the explanations of our 
rate decisions.
    These additional staff members are key to making decisions within 
the required 40 days from the time a filing is deemed complete. Meeting 
this deadline became increasingly difficult as we added steps to open 
up our process and as we required more information from insurers 
through our strengthened rate review law.
    Our strengthened law and additional staff have resulted in cost 
savings for consumers. In the year that followed the strengthening of 
our State's rate review law, we lowered insurance company rate requests 
50 percent of the time. The size of the reduction averaged 4 percentage 
points--for example a company would request a 16 percent rate increase 
and we would grant a 12 percent increase. That saves consumers just 
under $10 a month. Of course, that does not solve the problem of 
affordability, but every percentage point of a rate request matters to 
us. At the same time, we understand we must control health care costs 
to stabilize insurance rates.
    Communications: Although insurance company rate request documents 
have been public for several years, they have been difficult for 
consumers to find on our Web site. With the Federal grant, we were able 
to create a new web page devoted to health insurance rates featuring a 
search engine that allows consumers to more easily find a rate filing, 
a 7-minute animated video explaining why health insurance costs so 
much, and other information about how we review health insurance rates. 
I have attached a screenshot of this page. On the day we issued the 
Regence decision, we had 500 hits on this page. We also used some money 
to conduct the Regence public hearing, which was instructive for a 
variety of reasons. The Oregonians who attended appreciated the 
opportunity to have their voice heard as well as watching us question 
the company about the request.
    Study on how rate review could help lower medical costs: 
Ultimately, the key to stabilizing health insurance costs is 
controlling medical costs. In Oregon, considering all insurance 
markets, an average of 89 cents of every premium dollar goes to pay for 
health care. To explore how we might be able to affect health care 
costs in rate review, we used $150,000 of our first-year Federal grant 
to contract with an actuarial firm to conduct a study. The study 
results are due this fall, and may result in legislation. One idea we 
are exploring is to deny rate requests if the insurer reimburses 
providers for specified medical errors that should never happen. With 
Oregon's competitive insurance market, providers in more rural parts of 
the State often have an upper hand in contract negotiations. One of the 
goals of this study is to identify ways of leveling the playing field 
between insurers and providers by, for example, requiring all insurers 
to include certain provisions aimed at controlling costs in their 
contracts with providers.



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                         future grant proposals
    In conducting the recent public hearing in Oregon, it became clear 
that even with one of the most open processes in the country, consumers 
are unaware of the scrutiny we apply to rate requests. I'm proud of our 
work and want Oregonians to see the rigor of our reviews, so we plan to 
apply for additional Federal grant money to incorporate public hearings 
into most individual and small group rate requests.
    We anticipate approximately 20 public hearings a year and would 
expand funding to the consumer group so it could provide comments and 
participate. During the proposed hearings, our actuaries and a 
contracted consumer advocacy group would pose questions to insurance 
company actuaries--covering issues that we might otherwise call or 
email about. At the conclusion, we would open the meeting to public 
comment. We are including money in the grant for technology that would 
allow people to watch the hearings from their computers--live or later 
at their convenience. By fall, we also hope to begin posting all the 
actuarial correspondence between the division and insurers. While this 
correspondence is public record, it currently is not readily accessible 
to the public.
    In addition to the public hearings, we will propose using grant 
money to hire another health actuary to scrutinize rate requests and 
participate in public hearings and a health insurance rate liaison to 
explain our process and to provide rate information to consumers. We 
also will propose a health reform/exchange coordinator to assist with 
Federal and State reform efforts that impact our rate review process. 
In Oregon, the Health Insurance Exchange is governed by a public 
corporation, and much of the planning rests with this corporation and a 
separate State agency charged with coordinating and implementing State 
health care reform. We work closely with the Exchange and this agency 
and will continue to do so as the Exchange in Oregon becomes 
operational. For example, we will review health plans offered through 
the Exchange to ensure that they meet the standards established by the 
State Exchange and the Affordable Care Act.
    Finally, we will continue improvements to our web and print 
publications designed to better educate consumers about rate review, 
including the key factors that drive health insurance rates.
                               conclusion
    Federal grants to improve States' review of health insurance rates 
are essential to educating the public and preventing excessive rates. 
In Oregon, the next step in rate review is finding ways to help lower 
medical costs so that we can truly make health insurance affordable to 
consumers. Thank you for this opportunity to share Oregon's experience 
and for the funding that enables us to strive for continued 
improvement. I'm happy to answer your questions.
                               References
     Oregon's rate review web page: www.oregonhealthrates.org.
     Example of a decision summary: http://
www.oregonhealthrates.org/files/decision.pdf.
     Insurance Division response to OSPIRG analysis: http://
www.oregonhealthrates
.org/files/dcbs_response_ospirg.pdf.
     Grant page: http://insurance.oregon.gov/consumer/federal-
health-reform/rate-review-grant.html.
     Oregon's administrative rules on rate review (836-053-
0471): http://arcweb.sos
.state.or.us/rules/OARS_800/OAR_836/836_053.html.

    The Chairman. Thank you very much, Ms. Miller.
    Mr. Withrow, please proceed.

  STATEMENT OF DANIEL C. WITHROW, PRESIDENT, CSS DISTRIBUTION 
                  GROUP, INC., LOUISVILLE, KY

    Mr. Withrow. Chairman Harkin, Ranking Member Enzi, and 
Senator Franken, Senator Merkley, thank you for inviting me 
today to testify on health care, the efforts to empower the 
States.
    My name is Dan Withrow. I'm president of CSS Distribution 
Group, headquartered in Louisville, KY. Behind me sits my 
beautiful daughter, Hallie Grace Withrow. And I apologize. I 
might be a bit nervous because I'm testifying in front of my 
biggest fan.
    I'm honored to be here, and thank you for your service to 
the United States.
    In 2006, after working in the packaging and distribution 
industry for decades, my wife and I borrowed nearly $1 million 
from friends, banks, credit card companies, to open CSS 
Distribution Group. At our company, we approach everything with 
a challenge of building trust and partnerships by doing the 
right things right. We've worked hard to grow our company, but 
to date, CSS has not made a net profit. Although we projected 
this year would be a breakout year, it's now hard to see how 
new regulations will impact our business. We did reduce our 
workforce from 16 to 10 full-time employees in order to retain 
as much flexibility as possible, and we're paying our full-time 
employees overtime instead of hiring new employees. We're 
trying to hedge our bets.
    One element of our business that continues to be 
unpredictable is the cost of health care coverage, and we've 
offered our employees health care coverage ever since we opened 
our doors. As a small business, our employees are like family 
to us. So for the past 5 years, we have offered all employees a 
choice between PPOs and HSA health savings accounts. At this 
time, half of our employees take up the offering, three 
participate in our HDHP, two are enrolled in the PPO. Of the 
employees that do not participate, three are covered under 
their spouse's plan, one has elected to purchase a less 
expensive, more basic plan, and that leaves one more, and 
that's my wife.
    While I'm committed to offering coverage to all my 
employees, the premium increases that we have seen and those 
that we continue to see are beyond what we can afford, and even 
more worrisome, it's beyond what my employees can afford. Each 
year we have seen at least 30 percent premium increases, except 
the summer after the health reform law was passed. Last summer, 
after the enactment of the Patient Protection and Affordable 
Care Act, we were quoted an increase of over 42 percent.
    I've tried everything that I know to do to mitigate the 
increases, and the only way I've been able to moderately 
curtail these increases is by restructuring the plans, 
increasing deductibles, revising co-payments and drug tiering 
formulary. These changes have helped reduce the premiums, but 
they really do nothing to impact the out-of-pocket costs that 
we all have to pay for.
    These year-over-year increases, in my opinion, cannot be 
blamed on my plan or the insurance industry at large. I believe 
health care costs are what's driving this, not the insurance 
companies. Each year I spend between 30 and 45 days researching 
other plans and insurance options. I'm in the middle of that 
research right now. Despite my repeated efforts, I have not 
been able to find any other options that I can offer to my 
employees at lower premiums and, unfortunately, I'm an optimist 
at heart, I don't think this will change.
    The reason premiums are increasing is because the cost of 
coverage is increasing. It's pretty simple economics. 
Additionally, plans are now required to cover a laundry list of 
services, many at no cost to the enrollee or the participant. 
The thing is, merely requiring a review of premium increases, 
in my opinion, will not stop that from happening. Restructuring 
the insurance market while also mandating plans cover an 
exhaustive list of benefits will also not reduce the cost of 
coverage.
    It's really simple. If you want more, it's going to cost 
more. A product cannot be sold for less than it costs to create 
or offer. This business principle applies to the pallets that I 
sell or the coverage for health care services that my plan 
provides.
    In conclusion, I know this may not be what you want to 
hear, but the new health care law has made it more difficult 
for small business to compete than you may realize. I hope what 
I've shared today is helpful and urge you to repeal the costly 
parts of the law. On behalf of thousands and thousands of 
business men and women in America, please listen to our 
concerns.
    Thank you for allowing me to testify, and I look forward to 
taking your questions.
    [The prepared statement of Mr. Withrow follows:]
         Prepared Statement of Daniel C. Withrow, on Behalf of 
                     the U.S. Chamber of Commerce*
                                summary
    My name is Dan Withrow. I am the president of CSS Distribution 
Group, Inc. headquartered in Louisville, KY and I am honored to speak 
with you on behalf of the U.S. Chamber of Commerce. I hope that my 
testimony and remarks will help further explain the burdens that the 
new health care law places on the ability of businesses, including 
small ones like mine, to compete, grow and create jobs. Despite efforts 
to expand coverage options and curtail dramatic health insurance 
premium increases, the law in fact is having a negative impact on our 
ability to continue to offer our employees health care benefits.
---------------------------------------------------------------------------
    * The U.S. Chamber of Commerce is the world's largest business 
federation, representing the interests of more than 3 million 
businesses of all sizes, sectors, and regions, as well as State and 
local chambers and industry associations.
    More than 96 percent of the Chamber's members are small businesses 
with 100 or fewer employees, 70 percent of which have 10 or fewer 
employees. Yet, virtually all of the Nation's largest companies are 
also active members. We are particularly cognizant of the problems of 
smaller businesses, as well as issues facing the business community at 
large.
    Besides representing a cross-section of the American business 
community in terms of number of employees, the Chamber represents a 
wide management spectrum by type of business and location. Each major 
classification of American business--manufacturing, retailing, 
services, construction, wholesaling, and finance--is represented. Also, 
the Chamber has substantial membership in all 50 States.
    The Chamber's international reach is substantial as well. It 
believes that global interdependence provides an opportunity, not a 
threat. In addition to the U.S. Chamber of Commerce's 115 American 
Chambers of Commerce abroad, an increasing number of members are 
engaged in the export and import of both goods and services and have 
ongoing investment activities. The Chamber favors strengthened 
international competitiveness and opposes artificial United States and 
foreign barriers to international business.
    Positions on national issues are developed by a cross-section of 
Chamber members serving on committees, subcommittees, and task forces. 
More than 1,000 business people participate in this process.
---------------------------------------------------------------------------
    While our customers are large, oftentimes multinational, 
businesses, CSS is a small, privately owned business. While our 
business has grown in terms of sales and customers and we've been able 
to give back in our community, we unfortunately recently had to reduce 
our number of employees. Because of the overall uncertainty brought on 
by the economic downturn and the rising costs of health insurance, we 
went from 16 to 10 employees in 2010. For the first 4 years of 
operation, CSS did not make a net profit. This year is supposed to be 
our breakout year; we had hoped that it would be the first time we will 
realize a net profit. Despite a positive projection, we cannot really 
be sure what all the new regulations will actually bring. In fact, in 
order to retain as much flexibility as possible, we are paying our 
full-time employees overtime instead of hiring any new employees.
    Skyrocketing premiums continue to harm our ability to offer 
coverage, even now--16 months after the passage of the health reform 
law. Even when we first began our company and had to borrow nearly $1 
million from friends, banks and credit card companies to open our 
doors, we offered health care coverage to our employees. The premium 
increases that we have seen, and those we continue to see, are beyond 
what I can afford and even more worrisome, it is beyond what my 
employees can afford too. These increases cannot be blamed on my plan 
or the insurance industry at large. Each year, I have researched other 
plans and insurance options. Despite my repeated efforts, I have not 
been able to find any other options that can offer coverage to my 
employees at lower premiums.
    While I understand that in 2014 there may be new marketplaces 
called exchanges where my employees may be able to purchase coverage, I 
am not sure how they will work or what coverage in the exchanges will 
look like and cost. I do not want to leave my employees in the lurch; 
they are all valued team members and I want to have some security that 
they are going to get affordable and appropriate coverage.
    I'm here today to share with you the real effect the law is having 
on me and other small businesses. I hope what I've shared today is 
helpful and urge you to repeal the most costly parts of the law, such 
as the employer mandate. This employer mandate truly prevents us from 
expanding our businesses and hiring more people--in other words 
creating new real jobs.
                                 ______
                                 
    Chairman Harkin, Ranking Member Enzi, and distinguished members of 
the committee, thank you for inviting me to testify before you today on 
health reform and efforts to empower States to serve consumers. I hope 
that my testimony and remarks will help further explain the burdens 
that the new health care law places on the ability of businesses, 
including small ones like mine, to compete, grow and create jobs. 
Despite efforts to expand coverage options and curtail dramatic health 
insurance premium increases, the law, in fact, is having a negative 
impact on our ability to continue to offer our employees health care 
benefits.
    My name is Dan Withrow. I am president of CSS Distribution Group, 
Inc., headquartered in Louisville, KY and I am here today with my 
oldest daughter, Hallie Grace Withrow. I am honored to speak with you 
today on behalf of the U.S. Chamber of Commerce. The U.S. Chamber of 
Commerce is the world's largest business federation, representing the 
interests of more than 3 million businesses and organizations of every 
size, sector, and region. As you might know, more than 96 percent of 
the Chamber's members are small businesses with 100 or fewer employees 
and 70 percent of which have 10 or fewer employees, just like mine.
                           company background
    A Certified Woman-Owned Enterprise by the Women's Business 
Enterprise National Council (WBENC), CSS Distribution Group aims to 
maximize our customers' packaging and shipping efficiency throughout a 
nationwide network of locations. Our national network helps our clients 
leverage their buying power by essentially creating one national supply 
chain. By allowing our clients to purchase collectively for all of 
their locations across the country, we can save our clients millions of 
dollars and positively impact their bottom line. For example, one of 
our customers has 43 warehouse locations across the country. In the 
past, each of the 43 facilities individually bought pallets and 
shipping materials from a different supplier, making it virtually 
impossible for the customer to track company-wide costs, payments, etc. 
CSS has helped this customer save significantly by serving as one 
supplier for all of their facilities. This has streamlined the system 
and saved on average 7-10 percent per facility for our customer.
    Helping companies reduce their costs is one of our top priorities 
and we approach every challenge with the goal of ``Building Trust and 
Partnerships by Doing the Right Things Right.'' Our distribution super 
center is located in Louisville; and, by utilizing strategic partners 
across the country, we are able to ensure timely, superior customer 
service without incurring a large overhead. Whether it's sourcing 
shipping pallets or providing custom automated packaging, we strive to 
fulfill our customers' needs and help to move their goods economically 
and proficiently through the global supply chain.
    While our customers are large, oftentimes multinational, 
businesses, CSS is a small, privately owned business. While we have 
grown to serving 20 customers and anticipate doing $18.5 million in 
sales this year, we started with just one customer, a strong desire to 
succeed and a willingness to work hard and take risks. I've spent 25 
years in the packaging industry and my wife, Mindy, has 15 years of 
equal experience in the packaging industry. In 2006, we partnered with 
a friend and investor to borrow $500,000 and set up a $250,000 line of 
credit from a bank to pursue our dream of starting and owning our own 
company. In June of that year, we launched our company and we have 
never looked back.
    The success we have had in growing our business has not gone 
unnoticed. Last year, CSS Distribution Group ranked #55 on Inc. 
Magazine's ``Inc. 500'' which celebrates the fastest growing privately 
held companies in the United States, and my wife Mindy was ranked #5 on 
the ``Inc. 5000,'' as one of the top women entrepreneurs. While we 
appreciate the accolades, we have not forgotten the community we call 
home. I am proud to serve on Mayor Jerry Abramson's High Impact 
Program, a public-private partnership designed to help Louisville's 
fast-growth and innovative companies overcome obstacles that might 
impede their progress. I am also active in Greater Louisville Inc., the 
Metro Chamber of Commerce and the region's leading business 
organization. I have also just recently been assigned to Kentucky 
Governor Beshear's ``Business One Stop Portal Focus Group'' and we are 
leaving Washington after my testimony so that I can attend our first 
meeting in Frankfort, KY tomorrow.
    CSS is a supporter of our local swim team, the Hillcrest 
Hurricanes. My wife serves on the team's board and is an active member 
of the local PTA and a volunteer at our children's school, Goshen 
Elementary. CSS also supports the Girl Scouts, annually buying Girl 
Scout cookies and sending them to members of our Armed Forces serving 
our Nation overseas. Additionally, CSS is a good steward of the 
environment through our green practices. We have four beautiful 
children and certainly care about the health of the planet we leave for 
them. CSS sells more than 2 million pallets a year and by reducing the 
amount of wood a pallet has in it and recycling old pallets we are able 
to save trees and reduce our carbon footprint.
    While our business has grown in terms of sales and customers and 
we've been able to give back in our community, we unfortunately 
recently had to reduce our number of employees. Because of the overall 
uncertainty brought on by the economic downturn and the rising costs of 
health insurance, we went from 16 to 10 employees in 2010. This was not 
an easy decision. Our employees are like family; but for the health and 
future stability of our business, it was necessary.
    For the first 4 years of operation, CSS did not make a net profit. 
This year is supposed to be our breakout year; we had hoped that it 
would be the first time we will realize a net profit. Despite a 
positive projection, we cannot really be sure what all the new 
regulations will actually bring. In fact in order to retain as much 
flexibility as possible, we are paying our full-time employees overtime 
instead of hiring any new employees. We are trying to hedge our bets as 
best we can because it seems every time we take a step forward, we get 
hit in the face and are forced to take two steps back. One of the 
things already pushing us backwards despite our projections is the 
health care law. At a time when we may finally become profitable, we 
are still struggling to offer health care coverage to our employees. 
Skyrocketing premiums continue to harm our ability to offer coverage, 
even now--16 months after the passage of the health reform law.
           health care: my experience with premium increases
    Even when we first began our company and had to borrow nearly $1 
million from friends, banks and credit card companies to open our 
doors, we offered health care coverage to our employees. We are a small 
business and our employees are like family to us--so for the past 5 
years, we have offered our employees a choice between coverage through 
a Preferred Provider Organization (PPO) or a High Deductible Health 
Plan (HDHP) with a Health Savings Account. At this time, half of our 
employees take up this offering--with three participating in the HDHP, 
and two enrolled in the PPO. Of our employees that do not participate, 
three of them are covered under their spouse's plan and one has elected 
to purchase a less expensive more basic plan on her own.
    While I am committed to offering coverage to my employees, it is 
becoming more and more challenging to continue to provide our employees 
coverage. The premium increases that we have seen, and those we 
continue to see, are beyond what I can afford and even more worrisome, 
it is beyond what my employees can afford too.
    Each year, when it comes time to renew our coverage we have seen at 
least 30 percent premium increases--with the exception of the summer 
after the health reform law was passed. Last summer, after the 
enactment of the Patient Protection and Affordable Care Act, we had 
increases of 42.2 percent and 42.4 percent in our PPO and HDHP plans 
respectively. Unfortunately, for me, the law is not making health care 
affordable. As with every other year when we have been quoted insurance 
with increases, I spent between 30 to 45 days researching other 
options. I have tried everything I know to do to try to mitigate these 
increases.
    Last year, when facing the highest premium increase for our company 
ever, we had to agree to an increase in the PPO's deductible by $1,500 
(from $1,500 to $3,000). Additionally, all of our co-payments were 
raised across the board. For office visits, the copayments increased 
from $25 to $50 for in-network providers, and from $30 to $60 for out-
of-network providers. For urgent-care visits, copayments increased from 
$50 to $75. We revised the pharmacy drug tier formula from 3 levels to 
4 levels, which meant that some drugs would cost $150, even after the 
deductible had been met. So instead of our PPO premiums jumping up 
$1,080/month, we were able to reduce the premium jump to $743/month. 
These changes amounted to an annual savings of $4,044. While these 
changes brought the overall monthly increase to 26.7 percent, down from 
42.2 percent, it still raised our out-of-pocket expenses--which are 
nearly impossible to measure year over year.
    Similarly, we had to restructure our HDHP plan in 2010. While 
previously our HDHP had covered prescription drugs at 100 percent once 
the deductible is met, we changed to a tiered drug formulary where 
prescriptions cost either $10, $30, $50, or $150, even after the 
deductible is met. We increased the maximum out-of-pocket expenses from 
$2,500 to $3,500 for individual coverage and from $5,000 to $7,000 for 
family coverage. These changes to the HDHP allowed us to reduce the 
premium increase from 42.4 percent to 26.5 percent. So instead of our 
premiums jumping up $768.75/month, we were able to cut the premium jump 
to $483.45/month. These changes amount to an annual savings of 
$3,423.60.
                           health care--why?
    One thing that I want to make perfectly clear in talking about 
these year-over-year increases which have continued despite the passage 
of health reform, these increases cannot be blamed on my plan or the 
insurance industry at large. Each year, I have researched other plans 
and insurance options. Despite my repeated efforts, I have not been 
able to find any other options that can offer coverage to my employees 
at lower premiums. While we continue to uphold our motto when it comes 
to our employees and ``build trust and partnerships by doing the right 
things right,'' we are struggling with how to continue to offer our 
team health insurance.
    So is there someone or something to blame? Really, the only thing 
to ``blame'' is the increasing health care costs which the law 
regrettably does very little to curtail. Merely requiring a review of 
premium increases will not stop them from increasing. In fact, the law 
in many ways will increase costs and drive premiums up. By requiring 
all plans to cover a laundry list of services, many of which have to be 
covered 100 percent with no copayment or cost born by the enrollee/
participant, the law eliminates the ability to mitigate premium 
increases. It is really simple economics and simple business, if you 
want more, it will cost more. This applies to pallets that I sell, or 
coverage for health care services that my plan covers.
                       health care--so, what now?
    So where does this leave me, as an employer committed to offering 
health coverage and ``doing the right things right? '' Honestly, I 
don't know. Because of the plan design changes that I have made over 
the years, the plans that I offer my employees are not grandfathered 
plans. As a result, my plan will have to comply with the full list of 
new mandates and requirements including the new internal claims and 
appeals and external review process, among other things. Many of these 
new requirements add an additional layer of administrative and 
procedural requirements, which will increase the cost of coverage just 
as mandating coverage of additional services will. Because of the size 
of my payroll, I am not eligible for the small business tax credit and 
will therefore not receive any help in paying for my employees' 
coverage. Since I am not deemed a ``large employer'' under the law, I 
will not be penalized if I stop offering coverage to my employees. The 
law has put me, a practical businessman, in a very strange place. 
Despite the law's premium rate review, the cost of coverage is 
continuing to increase--and most likely will continue to do so--by 
amounts neither I, nor my employees can absorb. While I understand that 
in 2014 there may be new marketplaces called exchanges where my 
employees may be able to purchase coverage, I am not sure how they will 
work or what coverage in the exchanges will look like and cost. I do 
not want to leave my employees in the lurch; they are all valued team 
members and I want to have some security that they are going to get 
affordable and appropriate coverage. How do I continue ``Doing the 
Right Things Right''--now?
                               conclusion
    By nature I'm an optimist. I always have been, but given the 
fragile state of our economy and a lot of uncertainty coming from 
Washington, I'm more worried about our future than ever before. Right 
now, our company cannot afford to expand or hire more people. I want 
to, but I'm just not certain what the Federal Government's going to do 
next week, next month, or next year--let alone by 2014. This may not be 
what you want to hear, but this new health care law has made it much 
more difficult for small businesses to compete than you may realize.
    I'm here today to share with you the real effect the law is having 
on me and other small businesses. I hope what I've shared today is 
helpful and urge you to repeal the most costly parts of the law, such 
as the employer mandate. This employer mandate truly prevents us from 
expanding our businesses and hiring more people--in other words 
creating new real jobs.
    On behalf of the thousands and thousands of small business men and 
women in America, please listen to our concerns. The bottom line is 
that the decisions you make will either hurt us or help us. I'm very 
concerned that our new health care law may end up significantly hurting 
business and our country.
    Thank you for this opportunity to testify, and I look forward to 
your questions.

    The Chairman. Thank you very much, Mr. Withrow.
    We'll start a series of 5-minute questions.
    Ms. Miller, I'll start with you. I was reading your 
testimony last night, and you're talking about what you did. 
You used $100,000 to make a contract with a consumer advocacy 
group to weigh in on behalf of consumers. The Oregon State 
Public Interest Research Group, as you said, keeps us on our 
toes and reminds us of the questions consumers want answered.
    You also made a contract with an actuarial firm. Quite 
frankly, I don't know of any other insurance commissioner in 
the entire country that would do something like that. I applaud 
you for that. Not many insurance commissioners want to contract 
with a consumer advocacy group like the PIRGs, who usually are 
a thorn in your side. But I compliment you for that because I 
think, as you mentioned, that gives you input from consumers 
and what they want. So I think you have shown some great 
leadership there.
    One of the other things you mentioned is you were looking 
at different ideas on how you can affect health care costs, and 
you mentioned in your testimony, you said one idea we are 
exploring is to deny rate requests if the insurer reimburses 
providers for specified medical errors that should never 
happen. I find that very intriguing. Can you flush that out a 
little bit more for me?
    Ms. Miller. Mr. Chairman, thank you for the question. It 
really gets down to the contracts that insurers enter into with 
providers. And when I reach out and talk to the insurers in 
Oregon, one of the things I heard for years was that they have 
a difficult time negotiating with providers, particularly the 
hospitals, and getting all the provisions in the contract that 
they would like to see in the contract, and they raised this as 
a specific issue and said we would really like to include a 
provision in our contract with hospitals that essentially says 
if a never event happens, if you amputate the wrong arm, if 
something happens that we can all agree should never happen, 
who should bear the brunt of that expense? Should policyholders 
pay it? Should it come out of the provider?
    And what I heard from our carriers is that they had a very 
difficult time getting providers to agree to those sorts of 
provisions. I understand that today it's more common for those 
provisions to be included in contracts, but that's one of the 
ways--again, we're studying this because I don't know exactly 
how we get at these underlying costs. But I think as State 
regulators, we may have an interesting opportunity to get at 
these costs.
    And so trying to look at, can we influence that insurer-
provider contracting process, that might be an interesting 
place to look. So I hope that's helpful.
    The Chairman. That's very helpful. Are you looking at 
things like re-admission rates, for example, in hospitals? Now, 
we know there are some hospitals in this country that are doing 
a great job in keeping the re-admission rates extremely low. 
Other hospitals don't. But then when you have all these re-
admission rates time and time again, who bears it? Should 
policyholders bear that, or not? So I hope you're also looking 
at re-admission rates, too, since you're looking at never-
should-happen events.
    Ms. Miller. Mr. Chairman, part of what we asked the actuary 
who is looking into this and performing this study is let's 
look at everything. I don't want anything to be off the table, 
because if there's a way for us to address health care costs 
and make a dent in those costs, I think we want to do it. So I 
think everything is on the table for that study.
    The Chairman. I compliment you for what you've done. I 
think you set a very high standard for insurance commissioners 
around the country.
    Ms. Miller. Thank you.
    The Chairman. Mr. Withrow, welcome again. Is that Haley or 
Hallie?
    Mr. Withrow. It's Hallie Grace.
    The Chairman. Hallie.
    Mr. Withrow. Hallie Grace.
    The Chairman. All right, Hallie Grace. Welcome. Are you 
enjoying Washington?
    You know one thing I can tell, you're having a great 
summer. You look like you've been swimming, right? Thanks for 
coming.
    Mr. Withrow, you said something in your testimony about the 
health insurance exchanges, which will be up in 2014. Since I 
come from a State that has a lot of small businesses and I met 
with them on this issue many, many times, in 2014 when the 
insurance exchanges come up, because of the number of employees 
you have, you'll be then able to go to an exchange, and you'll 
have more competition, more people competing for covering you, 
and it will be open, it will be transparent. Won't that help 
you in terms of both your premiums and the quality and 
coverage?
    Mr. Withrow. I really don't know. Senator Harkin, thank you 
for the question. Because there's no definitive information 
about exchanges at this point that I can read about, I can't 
really comment on what the exchanges will do for me. I've done 
my best to try to research that, and even working through the 
Chamber of Commerce it's difficult to find that information.
    The Chairman. States are setting up the exchanges now. I 
don't know where Kentucky is right now on that, but States are 
in the process of setting up those exchanges right now. But I 
think the law basically sets out how those exchanges are to 
operate. Again, I don't know Kentucky. I can only tell you that 
in our State, where we have two insurance carriers that have 80 
percent of the market, there's not much competition, and 
there's not much transparency. So that when the exchanges come 
up, a lot of small businesses that have a few employees will be 
able to go on them.
    Let me also ask you, right now small businesses can get a 
tax credit for the purchases of their--for what they put in for 
their employees, right? Up to 50 employees, and you don't have 
50 employees.
    Mr. Withrow. No, sir.
    The Chairman. Are you taking advantage of the tax credit?
    Mr. Withrow. No, sir. We pay our employees too well, so we 
don't qualify for the tax credit.
    The Chairman. Oh, you're over the $50,000----
    Mr. Withrow. Yes, correct.
    The Chairman [continuing]. Cutoff on that. So you don't get 
the tax credit. But you will be able to shop on the exchange.
    Mr. Withrow. According to the law, yes. I just--we try to 
plan business in 1- and 2-year increments, and not having 
information on it, it's very difficult to plan for it.
    The Chairman. I think my time has run out. Thank you very 
much, Mr. Withrow.
    Mr. Withrow. Thank you.
    The Chairman. Senator Enzi.
    Senator Enzi. I think we're still short about five rules 
yet on the exchanges for the States to even begin working on 
it. So I don't think there's much out there that any of us can 
comment on exchanges yet.
    But, Mr. Dicken, I want to thank you for the work that GAO 
does. It's a tremendous help, and I appreciate the reports that 
have come out.
    In looking at the States' authority to review rates, did 
any of the States provide evidence that because of the rate 
review process burden or the review results, that any of the 
companies have pulled out of the market in that State? Is there 
any evidence to suggest that the rate review policies for 
States will decrease the number of policies available to 
consumers, or at least decrease the types of policies available 
for consumers?
    Mr. Dicken. Thank you, Senator Enzi. We did not 
specifically ask as part of our survey as to whether there were 
any changes in the market share or carriers in the market. 
Certainly your point is very fair. We have looked in the past 
at the market shares of carriers in the small group market, and 
many States only have one carrier that may represent half of 
the market or more. Many States, I think 23 States had five or 
fewer carriers that were representing 90 percent of the market. 
So we did not examine to what extent carriers may have either 
increased or decreased their role in the market as part of 
these rate reviews.
    Senator Enzi. Thank you. I still think the small business 
health plans would have increased the number of companies that 
were out there participating, and I'm hoping that this health 
care reform does, too.
    Ms. Miller, congratulations on hiring an actuarial firm. 
The only thing better is an accounting firm.
    [Laughter.]
    So I assume that the actuary was used to determine the rate 
that you allow Regents to pursue, Regents company.
    Ms. Miller. Senator Enzi, just to be clear, we have 
actuaries on staff that do the review of our rate filings. The 
study that I mentioned, we hired an actuarial firm to conduct 
that study, which is really a separate study from our rate 
review process, just to clarify. So we have actuaries on staff. 
We added an additional actuary to deal with workload issues 
with the Federal grant funds in addition to hiring an actuarial 
firm, if that makes sense.
    Senator Enzi. OK. Concentrating a little bit here on the 
Regents company, if they're selling a product for less than 
what the people pay, that wouldn't be a sustainable business 
model. So if their costs are higher than the actuarial charts 
apparently say, how long do you think Regents will be able to 
take in less premiums than they pay providers in the medical 
claims? Do you have an adjustment for that?
    Ms. Miller. Senator Enzi, when we consider surplus and an 
insurer's overall profitability as part of the rate filing 
process, we do so very carefully, and we understand that long-
term, products need to be priced appropriately.
    So, with that said, in the Regents case, we reduced the 
initial request, which was a 22.1 percent request, to a 12.8 
percent increase, and there were additional concerns that 
caused us to have them dip or potentially dip into their 
surplus. The company's enrollment in their individual plans has 
been a concern for us and was actually a concern pointed to by 
the consumer advocacy group.
    Their plans have dropped from enrollment of about 100,000 
members in 2007 to less than 60,000 members today. So the key 
concern here was that if we had approved a 22.1 percent 
increase, that would result in further enrollment losses. 
Typically your healthiest people are leaving, and that would 
drive up claims, resulting in the future in even higher 
increases down the road. So part of what we were trying to do 
in the Regents case, by potentially having them dip into 
surplus, was to try to stem those enrollment losses.
    Senator Enzi. Thank you.
    Mr. Withrow, I thank you for bringing your daughter on this 
experience to Washington. I did that when my kids were young, 
and they have a lot of memories from it.
    But getting back to the insurance, though, did you know 
that in 2014 the small businesses will not be able to buy 
health insurance plans that have deductibles that are more than 
$2,000 for individual plans or $4,000 for family plans? So do 
you think this new requirement will increase your premiums?
    Mr. Withrow. Senator, thanks for the question. No, I did 
not know, but I can tell you from the work that I've done in 
the last 30 days that the only way that we can stem the 
increasing cost is by raising deductibles. So if we have a cap 
of $2,000 and $4,000, then our monthly premiums should rise.
    Senator Enzi. My time has expired.
    The Chairman. Thank you, Senator Enzi.
    Senator Franken.
    Senator Franken.  Thank you, Mr. Chairman.
    First of all, I can assure the Ranking Member that 
Minnesota is hard at work in setting up its exchange even 
though the final rule isn't out, and I know that many States 
are as well. My former legislative assistant, Lauren Gilchrist, 
is now deputy commissioner of health in Minnesota, and I keep 
in touch with her, and she's very, very hard at work setting up 
that exchange. So the fact that the final rules aren't in 
really hasn't slowed that down.
    Senator Enzi. Is the information out to the businesses, 
though, on that exchange?
    Senator Franken.  I think it's available. Certainly that is 
available, but I can't speak to that. But what you said was 
that you don't know if they are working on it, and I just want 
to assure you that they are.
    Mr. Withrow, in your testimony--first of all, you have a 
beautiful daughter.
    Hallie, you don't have to stand up again.
    [Laughter.]
    You can stay there.
    You at one point in your testimony said there was a laundry 
list, and then I can't remember what you said, of new medical 
procedures or care that are required.
    Mr. Withrow. Right, the lifetime maximum that children who 
are 26 years old, the insurance companies having to cover for 
anyone that does not get insurance because of a pre-existing 
condition. Those benefits are what I was referring to as were 
adding cost to the system. As we add cost to the system, 
premiums are going to rise, in my opinion.
    Senator Franken.  OK. And that's anyone that has a pre-
existing condition, any adult?
    Mr. Withrow. What I know of the law----
    Senator Franken.  I mean, I don't think that's part of the 
law now. I think that kicks in in 2014.
    Mr. Withrow. Right, right. I'm not sure I understand the 
question that you're asking.
    Senator Franken.  You enumerated what you said were the 
requirements that increased the cost, and you stated one that I 
don't think exists now.
    Mr. Withrow. Then I stand corrected.
    Senator Franken.  OK. And you're representing the Chamber 
of Commerce here.
    Mr. Withrow. Yes.
    Senator Franken.  OK. I just think it's very important that 
we just----
    Mr. Withrow. Absolutely.
    Senator Franken [continuing.] When you testify in front of 
the Senate, that you be accurate. I think that's very 
important.
    Are you aware of what the medical loss ratio is?
    Mr. Withrow. No, I'm not. I sell pallets. I'm not an 
insurance person.
    Senator Franken.  OK. The medical loss ratio is part of the 
law. In Oregon, for example, Ms. Miller, the medical loss ratio 
is about 89 percent. Is that it? OK. And the medical loss ratio 
is the percentage of premiums that are paid into a health 
insurance company that must be actual health care. So it's 85 
percent for the large group market because of this law. There 
was no law before. And it's 80 percent for individual and small 
groups, and small groups have typically been much, much 
smaller.
    And when you're on the exchange, you'll be in a much larger 
group, and the medical loss ratio will be 85 and above, which 
means that 85 percent of all premiums will have to be spent on 
actual health care, not on administrative costs and not on 
advertising or marketing, and not on CEO salaries, et cetera. 
And that's why in certain markets already we're seeing--in 
Connecticut, Aetna, we're seeing them cut premiums by 10 
percent on an average.
    Is that right, Ms. Miller? Do you think that medical loss 
ratio is going to bring down health care costs or the cost of 
premiums?
    Ms. Miller. Senator Franken, in just speaking for Oregon, 
since we have such high medical loss ratios, I don't think that 
medical loss ratio will make a big difference in Oregon, but 
I'm not as familiar with other States and what's happening in 
other States in terms of medical loss ratios. It certainly 
could have an impact in other States.
    Senator Franken.  Minnesota has an over 90 percent medical 
loss ratio. That's because Oregon and Minnesota are high-value 
States. And part of actually one thing that I believe is going 
to bring down the bend in the cost curve is that we're going to 
increase the value of health care, that we're going to reward, 
incentivize States that have high-value care.
    My time is up, but I did want to point out that earlier 
Senator Hatch said that the purpose of health care reform was 
not to reduce the rate of growth of premiums but to reduce 
premiums, and I don't think that's the case.
    And sometimes I hear that from opponents of health reform 
who say, like, ``well, premiums went up, and we were told 
they'd go down.'' Well, no. We didn't say that premiums would 
go down. We said that the rate of growth of premiums would go 
down. That at least was the goal, and whether that's been 
achieved everywhere, we will have to see if that's the case. 
But I just wanted to clarify the goal.
    And I also wanted to clarify because Senator Murkowski from 
Alaska was talking about children-only plans, because children 
now do have pre-existing conditions covered. If you have pre-
existing, you're allowed to get care. And in Minnesota, while 
we don't have a children-only plan, that's being taken care of 
by State plans, and that is the reason for an individual 
mandate, that everyone will have to get care. That's the whole 
purpose of the individual mandate, is so that we cover people 
with pre-existing conditions.
    So I just wanted to clarify a couple of things, and I 
apologize for going over my time, Mr. Chairman.
    The Chairman. Excuse me. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair.
    It's a pleasure to have you all testifying today.
    It was in 2007 that the Oregon legislature passed a bill 
that made the health insurance rate filing process public, and 
then in 2009 they expanded on that by creating more protocols 
for interaction with the public. And it was in June, Ms. 
Miller, that you hosted this public testimony on the rate 
increase, and I believe that was the first public testimony on 
a rate increase in 20 years.
    Were you required to do that by the law, or you just said 
this would be an interesting experiment?
    Ms. Miller. Senator Merkley, this was the first time in 
about 20 years that we conducted a public hearing on a rate 
filing. We, of course, have had the public comment period so 
people could comment for a couple of years, but this was the 
first public hearing, and we were not required by law to do 
that.
    Senator Merkley. So if I recall, you were a little 
skeptical about how that would unfold. And how did it unfold? 
Was it valuable?
    Ms. Miller. Senator Merkley, I have to say, it was--I 
didn't know what to expect going into the hearing. I didn't 
know if consumers would find the experience helpful or 
valuable, and I didn't know how the company would react to it. 
And I have to say, I found it to be--and I think everyone who 
attended found it to be a very valuable experience. I heard 
from consumers that they so appreciated the opportunity to be 
heard and to come and testify and make their views known and 
have somebody listen to them.
    We also had a lot of comments about--the way we structured 
the hearing, we had the company present the rate filing. I 
asked the company about 10 questions, and then we had the 
consumer advocacy group that we contract with present their 
thoughts on the filing, and then we took comments from the 
public. And we got comments from people as they were leaving--
they left comment cards and whatnot--that said things like I 
have a lot more confidence in the work that the Oregon 
Insurance Division does having witnessed this hearing. That 
meant a lot to me because I know behind closed doors that we 
are doing an excellent job of scrutinizing rate filings, but if 
people don't have an opportunity to see that, they don't 
necessarily know that and they don't have the confidence in our 
process. But I certainly do, and have for years.
    I think it was a very valuable experience, and the company 
I think also found it to be a valuable experience.
    Senator Merkley. I think it's just absolutely terrific. 
Part of this process was to create a plain-language strategy so 
the public could actually understand the documents before them. 
Could you just share a little bit about that?
    Ms. Miller. Senator Merkley, I will tell you that over the 
last 3 years that I have been at the department, I think our 
single greatest challenge has been to try to find a way to take 
what otherwise is a very technical process that historically 
has been actuaries speaking to actuaries, our department 
actuaries speaking to the company actuary, to try to take that 
process and turn it into something that you and I can 
understand and the public can understand has been one of our 
biggest challenges, and it's why we did take some of our grant 
funding, as I mentioned, and created the animated story of the 
health insurance premium.
    We've tried to do everything we can to make this more 
easily understandable. We spend a lot of time and staff time 
developing our plain-language decision summaries because we 
want people--that's our way of holding ourselves accountable. 
But we want people to understand why their rates are going up 
and why we approve the rate we approve.
    Senator Merkley. Could you bring that expertise to bear on 
our legislative language?
    [Laughter.]
    I want to switch to the health insurance exchange. You've 
set up a public corporation, the Health Insurance Exchange 
Corporation, and are hard at work designing the elements of 
that. How is that going?
    Ms. Miller. In terms of developing the exchange, I will 
tell you Rocky King is the--I think his title is administrator 
or interim executive director, whatever it is, and I will tell 
you they are just starting to do things like try to find office 
locations. Some of the things they're doing right now are very 
basic in terms of setting up a corporation.
    So I would say it's a little bit slow only because there 
are things that we don't necessarily think of that they've had 
to focus on, like finding buildings, figuring out where their 
office is going to be located, getting workers comp coverage 
for their employees.
    Senator Merkley. So in general, the vision of the exchange, 
which is to have all the policies in one computer site where a 
consumer can compare them to see what features would best fit 
their family and so forth, is that resonating? Is there a lot 
of interest in that, a lot of support for it, or do people see 
that as unnecessary?
    Ms. Miller. Senator Merkley, I think especially in a market 
like Oregon, if you go to healthcare.gov now and you look at 
all of your options, the last time I did it for an individual 
like myself, I think there were 77 options that came up, and 
sometimes I think too many options is difficult for consumers 
in terms of figuring out which is the best plan for them.
    So I think the exchange, I think particularly in Oregon 
there's a lot of excitement because it will make it easier for 
people to compare plans. We have so many options today, but 
they're not necessarily plans that are easy to compare.
    Senator Merkley. Good. So I just have one last request. My 
colleague from Minnesota likes to point out that Oregon has a 
medical loss ratio of only 89 percent, while Minnesota is at 90 
percent. Can you do something about that so that I don't have 
to continue to hear this?
    [Laughter.]
    Ms. Miller. Senator Merkley, we will work on that.
    Senator Merkley. Thank you very much. Thank you, Mr. Chair.
    Senator Franken.  It's 91 percent in Minnesota.
    [Laughter.]
    The Chairman [Inaudible]. I'll submit those to you in 
writing.
    Senator Franken.  May I just thank Mr. Withrow for coming 
here and bringing your family, and for having a small business. 
I love pallets. I do.
    [Laughter.]
    Palletizing things, that's a great thing. I've been on a 
USO tour where they palletize everything on the back of that 
plane, and I love pallets. So it's a good business.
    The Chairman. In fact, a friend of mine and a former 
colleague of mine who is in Minnesota by the name of Richard 
Nolan, a former congressman, went into the pallet business.
    Senator Franken.  You've got to put stuff on pallets. I 
mean, if you go to any factory, they're putting stuff on 
pallets. Food, all food, goes on pallets.
    Mr. Withrow. Senator Franken, would you mind if I clarified 
something I said earlier?
    Senator Franken.  Yes.
    Mr. Withrow. And I'll never forget it again.
    Senator Franken.  OK.
    Mr. Withrow. The areas that I mentioned, the additional 
cost, is what's concerning me, but also the preventive costs, 
and also the addition that's added by the Health and Human 
Services Secretary Sebelius that added additional cost on 
women's lactose, lactician--excuse me--breastfeeding, and also 
birth control. Those additional costs is what I was referencing 
when I said there's additional cost here that I think is really 
going to hurt us from a small business perspective on the 
exchanges. So I appreciate correcting what I had said before.
    Senator Franken.  I think that when you attribute the--and 
I don't know what's going on in Kentucky, but when you 
attribute the cost going up because of provisions that are in 
the Affordable Care Act that have not kicked in, I just think 
that, you know, as you say, you're a small businessman who pays 
attention to his business, and you obviously care about your 
employees, and you're obviously doing what we need Americans to 
be doing, which is working to build businesses and working to 
create economic opportunity for people. You pay your employees 
too much to qualify for the tax credit, so I credit you on 
that.
    But so you're not, I think, you're not expected to know 
every detail of the law, which is over 2,000 pages long.
    Mr. Withrow. It just speaks to the confusion of it.
    Senator Franken.  Thank you.
    The Chairman. Senator Enzi.
    Senator Enzi. Some of those provisions have already gone 
into effect, including the prevention provisions.
    Senator Franken.  Some have. But I'm saying that some that 
were mentioned as having gone into effect haven't, and I just 
wanted to make that clear.
    The Chairman. Thank you all very much. The record will stay 
open for 10 days for further submissions or questions.
    Senator Merkley.
    Senator Merkley. Can I insert one last question? I wanted 
to follow up on your lactation point, Mr. Withrow, because that 
was something I was very much involved in in Oregon. I 
championed companies providing this basic work and the 
flexibility for women to express milk. And here in the Senate, 
Dr. Coburn from Oklahoma partnered with me on the Senate side 
because it was basically no cost. In fact, actually, it turned 
out from the experiment in Oregon that they had much less 
absenteeism and a much higher esprit de corps among women who 
were returning to work after childbearing because it helped 
relieve that stress over whether they're doing the right thing 
by their child or not.
    So you mentioned the cost associated with lactation, and 
I'm not sure what costs you were referring to.
    Mr. Withrow. I'm talking specifically about the coaches, 
the breast pump rentals. I mean, having had four kids, I 
certainly know the costs that we had to pay in order to either 
buy or rent breast pumps, and also birth control. Those costs 
are what concern me because we just seem to be adding more and 
more to the ticket of benefits, and as we add benefits, 
typically in business, you add benefits, the more you add, the 
more it's going to cost. So it concerns me from a small 
business perspective that we seem to keep adding more and more 
to the party.
    Senator Merkley. Yes. My understanding, and I could be 
wrong, but my belief is that those features that you referred 
to actually are not a mandate in the law. Those are not 
required. Many companies are putting them in because they have 
a very strong appeal to the customer. But that's a market 
decision, not a mandate decision.
    I'll check on that and close the loop with you.
    Mr. Withrow. Would it be to everyone? Is it something that 
has to be part of the entire mandate that everyone has to have 
that available, or could it----
    Senator Merkley. No, no. That's my point. It's my 
understanding that those services are not mandated, that that 
is an insurance company decision. But let me check on that and 
close the loop for you.
    Mr. Withrow. OK, OK.
    Senator Enzi. Actually, everyone has to pay for all of 
those for free, and they are mandated benefits.
    The Chairman. As long as everyone is weighing in, I guess 
the Chairman will weigh in on this.
    [Laughter.]
    Being the basic author of the prevention section of the 
health care bill, I would just say it again, that we keep 
paying and paying and paying and paying to fix, to mend, to 
cure, to patch. We spend precious little on prevention. That's 
the one failure, the one big failure of our health care system 
in America, that we've not put enough into prevention, about 4 
cents, less than 4 cents of every dollar goes into prevention. 
And your mother was right, an ounce of prevention is worth a 
pound of cure.
    And so as we're making this shift, we are putting more out 
there for preventive services, and in some cases they do cost a 
little bit more. They're added on. But every single study I 
have ever seen indicates that the amount that you have put into 
proven preventive services, approved by the U.S. Preventive 
Services Task Force, pay off huge amounts in the future in 
terms of cutting health care expenditures to patch and mend and 
fix later on.
    So we want to do more in preventive health care, a lot 
more. A lot of companies, are stepping up to the bar. Some have 
preceded this with prevention. We were just talking about 
Safeway that did a great job on this in the past, and it was 
one of those companies that we looked at in how you devise 
preventive health services and interventions.
    Also, as the former chair at one time of the national 
breast feeding coalition, it's been a lifelong goal of mine to 
change society's attitudes in this country on breast feeding. 
It should be available easily. We all know from pediatricians 
that the first months of a child's life is enhanced 
immeasurably by mother's milk. There's no substitute for it 
anywhere.
    Now, again, some people can. I understand that there have 
to be replacements in infant formula and stuff, but we should 
make it as easy as possible for every mother to be able to 
nurse her child, as easily as possible, in the workplace, in 
traveling, no matter where. It ought to be the norm, not the 
exception that we do this.
    I don't know your business from anything, Mr. Withrow, or 
any other businesses here. But I have seen small businesses 
that really go out of their way to provide time, to provide 
whatever modicum of support they can give to women and young 
women who are in their childbearing years to be able to nurse 
their children. To those I say God bless you, keep doing more, 
and I hope all businesses will do that, and I hope we do that 
on the government level, both Federal, State, and local 
governments. This is one of the best things we can do for the 
health of this country.
    Mr. Merkley.
    Senator Merkley. Thank you, Mr. Chair. It was very 
interesting in Oregon that we had an exemption for any company 
that applied and said it's just not feasible to provide privacy 
and flexibility in break time in our setting. So we assumed 
that a number of companies would take advantage of that 
situation, and what actually transpired was that not a single 
Oregon company has asked for that exemption. Some have explored 
it and basically tried to understand what's required of them 
and how can they make it fit, and they've gotten advice on how 
other companies have tackled it, and I think it really is a 
testimony to the fact that when people pause, they realize what 
profound value it is for women to be able to express milk. 
There is no substitute for it for the child, and it's not only 
good for the child's health, it's tremendous for the mother's 
health.
    We had testimony in this very committee from Dr. Coburn, 
who said, when I first introduced that amendment, ``Senator 
Merkley hasn't begun to say all the advantages to it.'' So I 
think it was a tremendous step.
    The Chairman. I think we'd better close now before we're 
accused of practicing pediatric medicine without a license 
here.
    [Laughter.]
    Thank you all very much. The committee will stand 
adjourned.
    Mr. Withrow. Thank you.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

 Health Affairs--At the Intersection of Health, Health Care and Policy

 (By Sean P. Keehan, Andrea M. Sisko, Christopher J. Truffer, John A. 
  Poisal, Gigi A. Cuckler, Andrew J. Madison, Joseph M. Lizonitz and 
                           Sheila D. Smith) *

 National Health Spending Projections Through 2020: Economic Recovery 
                and Reform Drive Faster Spending Growth
    Abstract: In 2010, U.S. health spending is estimated to have grown 
at a historic low of 3.9 percent, due in part to the effects of the 
recently ended recession. In 2014, national health spending growth is 
expected to reach 8.3 percent when major coverage expansions from the 
Affordable Care Act of 2010 begin. The expanded Medicaid and private 
insurance coverage are expected to increase demand for health care 
significantly, particularly for prescription drugs and physician and 
clinical services. Robust growth in Medicare enrollment, expanded 
Medicaid coverage, and premium and cost-sharing subsidies for exchange 
plans are projected to increase the Federal Government share of health 
spending from 27 percent in 2009 to 31 percent by 2020. This article 
provides perspective on how the Nation's health care dollar will be 
spent over the coming decade as the health sector moves quickly toward 
its new paradigm of expanded insurance coverage.
---------------------------------------------------------------------------
    * The opinions expressed here are the authors' and not necessarily 
those of the Centers for Medicare and Medicaid Services. The authors 
thank Richard Foster, Stephen Heffler, John Shatto, Kent Clemens, 
Liming Cai, Tristan Cope, and Cathy Curtis. [Published online July 28, 
2011].
     The online version of this article, along with updated 
information and services, is available at: http://
content.healthaffairs.org/content/early/2011/07/27/
hlthaff.2011.0662.full.html.
    For Reprints, Links & Permissions: http://healthaffairs.org/
1340_reprints.php.
    E-mail Alerts : http://content.healthaffairs.org/subscriptions/
etoc.dtl.
    To Subscribe: http://content.healthaffairs.org/subscriptions/
online.shtml.
---------------------------------------------------------------------------
    National health spending is expected to grow 5.8 percent per year 
for the period 2010 through 2020, 1.1 percentage points faster than the 
expected average annual rise in gross domestic product. As a result, 
the health share of the gross domestic product is projected to increase 
from 17.6 percent in 2009 to 19.8 percent by 2020.\1\ During this 
period, we expect that the Affordable Care Act of 2010 will reduce the 
number of uninsured people by nearly 30 million, lead to prescription 
drugs and physician services accounting for a greater share of health 
spending than would have been the case otherwise, and contribute to an 
increase in the government-sponsored (Federal, State, and local) share 
of health spending to just under 50 percent by 2020.
    In this article we review some highlights of overall projected 
spending trends in several time periods; summarize our methods and 
assumptions; then provide an outlook for major health industry sectors, 
payers, and sponsors. In so doing, we provide perspective on how the 
Nation's health care dollar will be spent over the coming decade as the 
health sector moves quickly toward its new paradigm of expanded 
insurance coverage.
                                  2010
    National health spending is estimated to have reached $2.6 trillion 
in 2010, reflecting a growth rate of 3.9 percent over the previous 
year, which is slightly slower than the previous historic low growth 
rate of 4.0 percent in 2009 (Exhibits 1 and 2).\2\ Growth in nominal 
gross domestic product (that is, not adjusted for inflation) 
accelerated to 3.8 percent in 2010 from--1.7 percent in 2009.\3\ 
Because the rate of economic growth has accelerated and the projected 
rate of growth of health spending is similar, the health share of gross 
domestic product is projected to remain unchanged in 2010 at 17.6 
percent. This is in contrast to the period from 2008 to 2009, when the 
health share of gross domestic product rose by 1 percentage point.
    The continued low rate of estimated growth in national health 
spending in 2010 reflects two major factors. First, Medicare spending 
growth is estimated to have been lower as the rate of growth in 
payments to private plans under the Medicare Advantage program slowed 
in 2010. Second, the continuing impact of losses in employment and 
health insurance coverage associated with the recession helped to limit 
growth in private spending. Private health insurance spending growth is 
estimated to have been just 2.6 percent in 2010 as the number of people 
enrolled in private plans fell by roughly 5 million. Moreover, out-of-
pocket spending climbed just 1.8 percent (after 0.4 percent growth in 
2009) as many people continued to restrain their use of health care 
goods and services.

  Exhibit 1.--National Health Expenditures (NHE), Aggregate and Per Capita Amounts, and Share of Gross Domestic Product (GDP), Selected Calendar Years
                                                                         2008-20
--------------------------------------------------------------------------------------------------------------------------------------------------------
                    Spending category                        2008        2009        2010        2011        2012        2013        2014        2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
NHE, billions...........................................    $2,391.4    $2,486.3    $2,584.2    $2,708.4    $2,823.9    $2,980.4    $3,227.4    $4,638.4
  Health Consumption Expenditures.......................     2,234.2     2,330.1     2,424.3     2,540.8     2,646.9     2,792.6     3,027.6     4,337.7
    Personal health care................................     1,997.2     2,089.9     2,166.6     2,266.9     2,354.8     2,481.6     2,680.0     3,840.7
      Hospital care.....................................       722.1       759.1       794.3       831.4       873.1       919.1       985.2     1,410.4
      Professional services.............................       652.2       674.9       690.4       718.0       728.3       768.0       834.2     1,164.2
        Physician and clinical services.................       486.5       505.9       517.8       538.4       542.9       573.5       624.3       867.7
        Other professional services.....................        63.4        66.8        70.2        74.0        75.8        79.7        88.2       128.7
        Dental services.................................       102.3       102.2       102.4       105.7       109.6       114.7       121.7       167.9
      Other health, residential, and personal care \1\..       113.3       122.6       130.7       137.6       147.4       158.4       170.8       271.5
      Home health care \2\..............................        62.1        68.3        71.9        75.7        80.2        85.7        92.0       136.1
      Nursing care facilities and continuing care              132.8       137.0       140.6       145.6       150.7       157.3       164.5       218.4
       retirement communities \2\ \3\...................
      Retail outlet sales of medical products...........       314.7       328.0       338.7       358.7       375.1       393.1       433.4       640.1
        Prescription drugs..............................       237.2       249.9       258.6       275.7       290.2       305.3       337.9       512.6
        Durable medical equipment.......................        35.1        34.9        35.7        37.0        37.5        38.7        41.2        55.0
        Other nondurable medical products...............        42.3        43.3        44.4        46.0        47.3        49.1        54.2        72.4
    Government administration \4\.......................        29.2        29.8        32.8        35.6        38.6        42.1        48.3        71.5
    Net cost of health insurance \5\....................       134.8       133.2       144.0       152.1       162.2       171.9       195.8       271.0
    Government public health activities.................        72.9        77.2        81.0        86.2        91.3        97.1       103.5       154.4
  Investment............................................       157.2       156.2       159.9       167.6       176.9       187.8       199.9       300.7
    Research \6\........................................        43.2        45.3        49.9        53.3        56.7        60.3        64.1        93.0
    Structures and equipment............................       114.0       110.9       110.0       114.3       120.3       127.4       135.8       207.7
Population (millions)...................................       304.8       307.5       310.3       313.2       316.0       318.8       321.6       338.4
NHE per capita..........................................    $7,845.0    $8,086.5    $8,327.3    $8,648.5    $8,936.8    $9,348.8   $10,035.2   $13,708.8
GDP, billions of dollars................................   $14,369.1   $14,119.0   $14,659.6   $15,334.4   $16,071.0   $16,891.1   $17,803.8   $23,388.4
NHE as percent of GDP...................................        16.6        17.6        17.6        17.7        17.6        17.6        18.1        19.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of
  Economic Analysis; and U.S. Bureau of the Census.
Notes: Numbers may not add to totals due to rounding. Data from 2010 to 2020 are projections.
\1\ Includes spending for residential care facilities (North American Industry Classification Codes (NAICSI 623210 and 623220), ambulance providers
  (NAICS 621910), medical care delivered in nontraditional settings (such as community centers, senior citizens centers, schools, and military field
  stations), and expenditures for Home and Community Waiver programs under Medicaid.
\2\ Includes freestanding facilities only. Additional services of this type provided in hospital-based facilities are counted as hospital care.
\3\ Includes care provided in nursing care facilities (NAICS 6231), continuing care retirement communities (623314 State and local government nursing
  facilities, and nursing facilities operated by the Department of Veterans Affairs.
\4\ Includes all administrative costs (Federal, State, and local employees' salaries; contracted employees including fiscal intermediaries; rent and
  building costs; computer systems and programs; other materials and supplies; and other miscellaneous expenses) associated with insuring individuals
  enrolled in the following public health insurance programs: Medicare, Medicaid, Children's Health Insurance Program, Department of Defense, Department
  of Veterans Affairs, Indian Health Service, workers' compensation, maternal and child health, vocational rehabilitation, Substance Abuse and Mental
  Health Services Administration, and other Federal programs.
\5\ Net cost of health insurance is calculated as the difference between calendar year premiums earned and benefits paid for private health insurance.
  This includes administrative costs, and in some cases, additions to reserves; rate credits and dividends; premium taxes; and plan profits or losses.
  Also included in this category is the difference between premiums earned and benefits paid for the private health insurance companies that insure the
  enrollees of the following public programs: Medicare, Medicaid, Children's Health Insurance Program, and workers' compensation (health portion only).
\6\ Research and development spending of drug companies and other manufacturers and providers of medical equipment and supplies are excluded from
  ``research expenditures'' but are included in the expenditure class in which the product fails.


 Exhibit 2.--National Health Expenditures (NHE), Average Annual Growth From Prior Year Shown, Selected Calendar
                                                  Years 2008-20
----------------------------------------------------------------------------------------------------------------
                                    2008      2009      2010      2011      2012      2013      2014      2020
        Spending category            [In       [In       [In       [In       [In       [In       [In       [In
                                  percent]  percent]  percent]  percent]  percent]  percent]  percent]  percent]
----------------------------------------------------------------------------------------------------------------
NHE, billions...................       7.1       4.0       3.9       4.8       4.3       5.5       8.3       6.2
  Health Consumption                   7.1       4.3       4.0       4.8       4.2       5.5       8.4       6.2
   Expenditures.................
    Personal health care (PHC)..       7.0       4.6       3.7       4.6       3.9       5.4       8.0       6.2
      Hospital care.............       7.2       5.1       4.6       4.7       5.0       5.3       7.2       6.2
      Professional services.....       6.7       3.5       2.3       4.0       1.4       5.4       8.6       5.7
        Physician and clinical         6.7       4.0       2.4       4.0       0.8       5.6       8.9       5.6
         services...............
        Other professional             7.0       5.3       5.0       5.5       2.4       5.2      10.7       6.5
         services...............
        Dental services.........       6.5      -0.1       0.2       3.2       3.7       4.7       6.1       5.5
      Other health, residential,       7.2       8.3       6.6       5.3       7.1       7.5       7.8       8.0
       and personal care \1\....
      Home health care \2\......       8.5      10.0       5.3       5.3       6.1       6.8       7.3       6.8
      Nursing care facilities          5.7       3.1       2.6       3.5       3.5       4.4       4.6       4.8
       and continuing care
       retirement communities
       \2\ \3\..................
      Retail outlet sales of           7.4       4.2       3.3       5.9       4.6       4.8      10.2       6.7
       medical products.........
        Prescription drugs......       8.8       5.3       3.5       6.6       5.3       5.2      10.7       7.2
        Durable medical                4.3      -0.8       2.3       3.8       1.4       3.0       6.5       5.0
         equipment..............
        Other nondurable medical       3.7       2.2       2.7       3.6       2.9       3.7      10.4       4.9
         products...............
  Government administration \4\.       7.0       2.0       9.9       8.7       8.4       9.0      14.6       6.8
  Net cost of health insurance         9.8      ^1.2       8.1       5.6       6.6       6.0      13.9       5.6
   \5\..........................
  Government public health             6.8       5.9       4.8       6.5       6.0       6.3       6.6       6.9
   activities...................
Investment......................       7.3      ^0.6       2.4       4.8       5.6       6.1       6.5       7.0
  Research \6\..................       6.8       4.8      10.1       6.8       6.3       6.5       6.3       6.4
  Structures and equipment......       7.5      ^2.7      ^0.8       3.9       5.2       6.0       6.5       7.3
Population (millions)...........       1.0       0.9       0.9       0.9       0.9       0.9       0.9       0.8
NHE per capita..................       6.1       3.1       3.0       3.9       3.3       4.6       7.3       5.3
GDP, billions of dollars........       4.7      ^1.7       3.8       4.6       4.8       5.1       5.4      4.7
----------------------------------------------------------------------------------------------------------------
Sources: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group;
  U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Bureau of the Census.
Notes: 2008 shows average annual growth, 2000-08; data from 2010 to 2020 are projections; percent changes are
  calculated from unrounded data.
\1\ Includes expenditures for residential care facilities (North American Industry Classification Codes (NAICS)
  623210 and 623220), ambulance providers [NAICS 621910, medical care delivered in nontraditional settings (such
  as community centers, senior citizens centers, schools, and military field stations), and expenditures for
  Home and Community Waiver programs under Medicaid.
\2\ Includes freestanding facilities only. Additional services of this type provided in hospital-based
  facilities are counted as hospital care.
\3\ Includes care provided in nursing care facilities (NAICS 6231), continuing care retirement communities
  (623311), State and local government nursing facilities, and nursing facilities operated by the Department of
  Veterans' Affairs.
\4\ Includes all administrative costs (Federal, State, and local employees' salaries; contracted employees
  including fiscal intermediaries; rent and building costs; computer systems and programs; other materials and
  supplies; and other miscellaneous expenses) associated with insuring individuals enrolled in the following
  public health insurance programs: Medicare, Medicaid, Children's Health Insurance Program, Department of
  Defense, Department of Veterans' Affairs, Indian Health Service, workers' compensation, maternal and child
  health, vocational rehabilitation, Substance Abuse and Mental Health Services administration, and other
  Federal programs.
\5\ Net cost of health insurance is calculated as the difference between calendar year premiums earned and
  benefits paid for private health insurance. This includes administrative costs, and in some cases, additions
  to reserves; rate credits and dividends; premium taxes; and plan profits or losses. Also included in this
  category is the difference between premiums earned and benefits paid for the private health insurance
  companies that insure the enrollees of the following public programs: Medicare, Medicaid, Children's Health
  Insurance Program, and workers' compensation (health portion only).
\6\ Research and development expenditures of drug companies and other manufacturers and providers of medical
  equipment and supplies are excluded from ``research expenditures'' but are included in the expenditure class
  in which the product falls.

                                2011-13
    For the period 2011-13, national health spending is projected to 
increase more rapidly than the preceding 2 years, averaging 4.9 
percent. Underlying this projection is expected faster growth in 
private health insurance spending (reaching 4.8 percent in 2013), 
related to anticipated gains in employer-sponsored health insurance 
enrollment. Out-of-pocket spending is also projected to grow faster 
through 2013, averaging 3.2 percent growth in this period. The 
accelerated growth in out-of-pocket spending is driven by increases in 
disposable personal incomes during economic recovery and expansion, 
which in turn leads to greater use of more medical services. The 
projection is also based on an expectation that many employers will 
continue the recent trend of offering health insurance plans that 
require higher cost sharing, also leading to higher out-of-pocket 
spending.\4\
    During the period 2011-13, the immediate reforms prescribed by the 
Affordable Care Act will continue to be implemented, including two 
programs that expand access to insurance coverage to specific 
populations. The Pre-Existing Condition Insurance Plan program (for 
those who have had difficulty acquiring individual coverage because of 
their medical conditions) and the expansion of dependent coverage to 
eligible people under age 26 are projected to provide coverage to 1.6 
million people in 2013. The impact of these reforms on overall health 
spending levels, however, is projected to be minor during this period 
(averaging 0.1 percent higher).
    Medicare spending growth through 2013 most notably reflects the 
effect of a 29.4 percent scheduled physician payment rate reduction, 
effective January 1, 2012. This rate reduction is mandated by 
Medicare's sustainable growth rate formula, which determines the rates 
that Medicare pays for services under the physician fee schedule. 
Accordingly, Medicare spending growth is projected to decelerate 
sharply in 2012 to 1.7 percent, down from 5.9 percent in 2011. Under 
the alternative Medicare projection scenario in which physician payment 
rate increases are based on growth in the Medicare Economic Index,\5\ 
Medicare spending growth is projected to accelerate to 6.6 percent in 
2012.
                                  2014
    In 2014, the Affordable Care Act will greatly expand access to 
insurance coverage, mainly through Medicaid and new State health 
insurance exchanges which will facilitate the purchase of insurance. 
The result will be an estimated 22.9 million newly insured people, some 
of whom will be covered through employer-sponsored insurance. The 
associated increases in Medicaid spending (20.3 percent) and private 
health insurance spending (9.4 percent) for this newly insured 
population are anticipated to contribute to a significant acceleration 
in the national health spending growth rate in 2014 (8.3 percent, 
compared to 5.5 percent in 2013) (Exhibit 3). Correspondingly, out-of-
pocket spending is projected to decline by 1.3 percent as the number of 
people with insurance coverage increases and many services formerly 
paid for out-of-pocket are now covered by insurance.\6\



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Spending growth for major health care services and goods in 2014 is 
expected to be higher than in previous years as the effects of expanded 
coverage more than offset the Medicare savings provisions found in the 
Affordable Care Act. (These Medicare savings include a slowing in the 
rate of growth of payments to hospitals, for example.) Notably, because 
many of the newly insured will be younger and healthier, on average, 
compared to the existing Medicaid and private insurance populations, 
they are expected to use physician services and prescription drugs to a 
greater extent than hospital or other more intensive services.
    Prescription drug spending growth is projected to be 10.7 percent 
in 2014, or 5.1 percentage points higher than in the absence of the 
Affordable Care Act. The higher growth rate stems from the fact that 
the newly insured are expected to consume more prescriptions because of 
substantially lower out-of-pocket requirements for prescription drugs 
(Exhibit 4). Spending growth for physician and clinical services is 
projected to be 8.9 percent (3.1 percentage points higher than in the 
absence of the Affordable Care Act) in 2014, driven by an expected 
increase in office visits. Hospital spending is projected to grow 7.2 
percent or 1.0 percentage point higher than it would have without the 
passage of the Affordable Care Act.



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                                2015-20
    For 2015-20, national health spending growth is projected to 
average 6.2 percent per year. During this period, some large employers 
with low-wage employees are expected to discontinue offering health 
insurance to their workers and instead pay the penalty mandated in the 
Affordable Care Act. Of the workers losing employer-based coverage, 
many are expected to obtain insurance coverage through the State 
exchanges, while others would enroll in Medicaid (and some would become 
uninsured). Also, the Affordable Care Act mandates an excise tax on 
high-cost insurance plans starting in 2018; costs of employer-sponsored 
health insurance plans that exceed $10,200 for an individual employee 
or $27,500 for dependent coverage will be subject to a 40 percent tax. 
Consequently, many plans that exceed the taxable threshold are expected 
to provide enrollees incentives to enroll in plans with lower premiums 
and higher cost-sharing requirements. The effect is likely to be a 
slowdown in the growth of health services, health insurance premiums, 
and health spending overall. As a result, in our projection both 
premiums and the use of health services are expected to grow more 
slowly in 2018 than in the absence of this provision.
                         model and assumptions
    These projections are generated within a ``current-law'' framework 
that incorporates actuarial and econometric modeling techniques, as 
well as judgments about future events and trends that influence health 
spending. The projections use the economic and demographic assumptions 
from the 2011 Medicare Trustees Report, which are updated to reflect 
the latest macroeconomic data.\7\
    Consistent with the trustees report methodology, the Medicare 
projections are estimated under two scenarios: current law (where 
growth in physician payment rates is based on the sustainable growth 
rate formula) and an alternative scenario (where growth in physician 
payment rates is based on growth in the Medicare Economic Index).\5\ 
\7\ \8\ The Centers for Medicare and Medicaid Services' Office of the 
Actuary health reform model and other actuarial cost estimates were 
used to determine the full effect of reform on national health spending 
and to assign the impact of reform among categories for goods and 
services.\9\
    The projections presented in this article differ somewhat from past 
projections. Specifically, they incorporate data and classification 
changes made in a recent National Health Expenditure Accounts 
comprehensive revision, in addition to incorporating new and revised 
source data and refinements to our models.\10\ \11\ In addition, this 
article features health spending projections by sponsor or source of 
financing, as well as the typical projections by payer and service.
    These projections remain subject to substantial uncertainty given 
the variable nature of future economic trends and a lack of historical 
experience for many Affordable Care Act health system reforms. 
Moreover, ``supply-side'' impacts of the Affordable Care Act, such as 
changes in provider behavior in reaction to an influx of newly insured 
patients, remain highly uncertain and are not estimated at this 
time.\12\
                 outlook for medical services and goods
    The Affordable Care Act is expected to exert varying effects on 
spending trends for medical services and goods. For the three largest 
sectors (hospital services, physician and clinical services, and 
prescription drugs), total spending is projected to be higher when the 
major expansions of this law are implemented in 2014. However, the 
magnitude of the impact on their respective growth rates is expected to 
be different. The increased demand in response to expanded insurance 
coverage for physician services and pharmaceuticals is anticipated to 
be higher than that of hospital services. One reason is that insurance 
expansions can typically lead to more efficient use of health care 
services (that is, more preventive care), which would increase office 
visits and prescription drugs, and could lead to less reliance on 
hospital care.\3\ As a result, the projected share of national health 
spending in 2020 accounted for by physicians (19 percent) and 
prescription drugs (11 percent) is higher than it would have been in 
the absence of the Affordable Care Act, and the hospital share (30 
percent) is lower.
    Hospital Care. Hospital spending growth is estimated to have slowed 
by half a percentage point to 4.6 percent in 2010 and to have reached 
$794.3 billion (Exhibits 1 and 2). Growth in private health insurance 
spending on hospital care is estimated to have remained relatively low 
at 2.1 percent in 2010 (compared to 2.7 percent in 2009), reflecting 
the impact of the recent recession and a continued decline in service 
use.\14\ Largely as a result of a 3.4-percent reduction to Medicare's 
private health plan payments, growth in Medicare spending on hospital 
care is estimated to have slowed in 2010 to 4.0 percent, from 5.9 
percent in 2009.\7\
    For 2011 through 2013, growth in hospital spending is projected to 
accelerate, reaching 5.3 percent by 2013. With expected gains in 
employment, a rebound in projected private health insurance enrollment 
is also expected. As a result, private health insurance hospital 
spending is projected to be 4.2 percent in 2013. Medicare hospital 
spending growth is projected to grow faster in each year, reaching 6.4 
percent in 2013. This trend mainly reflects faster growth in Medicare 
enrollment as the baby boom generation reaches age 65, offsetting much 
slower growth in per person spending due to the savings provisions in 
the Affordable Care Act. These provisions include reduced fee-for-
service provider payment updates and lower payments to private plans.
    In 2014, overall hospital spending growth is projected to 
accelerate to 7.2 percent, which is 1.0 percentage point and $8.6 
billion higher than projected in the absence of health reform (Exhibit 
4). This growth rate reflects the net impact of increased service use 
associated with the coverage expansions under Medicaid and private 
insurance. These impacts are partially offset by lower Medicare payment 
rate increases for hospitals mandated by the Affordable Care Act, which 
result in Medicare hospital spending growth of 6.7 percent in 2014, 1.8 
percentage points slower than projected had the Affordable Care Act not 
become law.
    Hospital spending is projected to grow 6.2 percent per year during 
the period 2015-20. By 2020, Medicare hospital spending growth is 
projected to reach 7.3 percent (up from 5.1 percent in 2015), while 
private health insurance spending is projected to slow to 5.8 percent. 
This trend largely reflects the net result of the baby boom enrollment 
shift from private health insurance coverage to Medicare and is not 
related to coverage expansions in the Affordable Care Act.
    Physician and Clinical Services. Spending growth for physician and 
clinical services is estimated to have slowed from 4.0 percent in 2009 
to a historically low rate of 2.4 percent in 2010, and to have reached 
$517.8 billion (Exhibits 1 and 2). This trend is driven by recession-
related declines in physician visits, as many consumers delayed health 
care to reduce expenses, and in part, by a less severe flu season than 
in the previous year, 2009.\15\ \16\ Private health insurance spending 
growth is estimated to have slowed to only 0.9 percent in 2010 (from 
1.9 percent in 2009) in response to elevated unemployment and increased 
cost sharing in employer-based plans.\14\ After rebounding temporarily 
in 2011 to 4.0 percent, spending growth for physician and clinical 
services is projected to slow to 0.8 percent in 2012 largely due to the 
29.4-percent Medicare physician payment rate reduction that is mandated 
by Medicare's sustainable growth rate formula. Under the alternative 
Medicare projection scenario, total physician and clinical spending 
growth would be 4.5 percent in 2012. This scenario is more fully 
described in the ``Model and Assumptions'' section.
    By 2014, spending growth for physician and clinical services is 
projected to accelerate 3.3 percentage points to 8.9 percent, which is 
3.1 percentage points and $17.8 billion higher than projected in the 
absence of reform (Exhibit 4). Given the demographic and health profile 
of the populations expected to gain insurance through Medicaid or the 
exchanges--generally expected to be younger, healthier, and requiring 
less acute care than those currently insured--the newly insured are 
anticipated to devote a higher proportion of their total health 
spending to physician and clinical services.\13\
    Overall, spending growth for physician and clinical services is 
projected to average 5.6 percent for the period 2015-20. Medicaid 
spending growth for these services (averaging 7.4 percent) is driven by 
enrollment growth and, in part, by the projected higher proportion of 
new enrollees' benefits going toward these services. Medicare spending 
growth for physician and clinical services, averaging 5.7 percent, is 
driven by higher enrollment in tandem with somewhat suppressed growth 
in payment levels. This growth rate is expected to slightly outpace 
that of private health insurance (averaging 5.1 percent) as more people 
shift into Medicare from private insurance.
    Prescription Drugs. Prescription drug spending is estimated to have 
grown 3.5 percent in 2010, down from 5.3 percent in 2009, and totaled 
$258.6 billion (Exhibits 1 and 2). This deceleration resulted from 
continued slow growth in the use of drugs and the ongoing change in the 
mix of drugs purchased. Through tiered copays and other mechanisms, 
health plans have continued to shift medication use toward less-costly 
generic drugs. Thus, the generic dispensing rate is projected to have 
increased to 69 percent in 2010, up from 66 percent in 2009.\2\
    For the period 2011-13, prescription drug spending growth is 
projected to be faster than in 2010, averaging 5.7 percent as economic 
conditions improve. Offsetting this faster growth somewhat, 6 of the 
top 50 brand-name drugs (based on 2010 retail sales) are scheduled to 
lose patent protection in 2011, which is projected to affect growth the 
most in 2012 as lower-priced generic versions of these drugs become 
available for a full 12 months.\17\ \18\
    In 2014, growth in prescription drug spending is expected to 
increase sharply to 10.7 percent, which is 5.1 percentage points and 
$15.8 billion higher than projected in the absence of the Affordable 
Care Act (Exhibit 4). This acceleration is driven mainly by the 
expectation of a substantial increase in the use of drugs by the newly 
insured portion of the population.\19\
    From 2015 through 2020, prescription drug spending growth is 
expected to average 7.2 percent. This reflects, in part, a projected 
leveling off of the dispensing rate for generic drugs, resulting in 
slightly higher drug price growth, and higher spending for new drugs 
due to an expected increase in the Food and Drug Administration's 
approvals for new molecular entities and therapeutic biologics during 
this period.\20\
                           outlook for payers
    Medicare. Growth in Medicare spending (including spending for fee-
for-service providers, private health plans, and administrative costs) 
is estimated to have slowed from 7.9 percent in 2009 to 4.5 percent in 
2010, and to have reached $525.0 billion (Exhibit 5). This deceleration 
reflects slower growth across most of Medicare's service categories due 
in part to an across-the-board reduction of 3.4 percent in Medicare's 
payments to private health plans.\7\ In 2011, Medicare spending growth 
is projected to increase 5.9 percent before slowing to 1.7 percent in 
2012, as a result of the 29.4-percent reduction in physician payment 
rates scheduled in current law.\21\ Under the alternative Medicare 
projection scenario, projected 2012 Medicare spending growth will 
accelerate to 6.6 percent.
    Average annual Medicare spending growth is anticipated to be 6.3 
percent for 2013 through 2020. This rate is the net result of, on the 
one hand, increasing enrollment that will drive up spending, and on the 
other hand, provisions of the Affordable Care Act that call for reduced 
fee-for-service provider payment updates and lower payments to private 
plans.\7\ By 2020, Medicare's share of national health spending is 
expected to remain at 20 percent (unchanged from 2009). This, too, is 
the net result of different forces: on the one hand, increases in 
enrollment from the baby boom generation; on the other, the non-
Medicare coverage expansions that will cause spending to rise for other 
payers, lower Medicare payment updates, and other Medicare savings 
provisions in the Affordable Care Act.
    Medicaid. Medicaid spending (Federal and State combined) is 
estimated to have grown 7.2 percent in 2010, down from 9.0 percent in 
2009, and to have accounted for $400.7 billion (Exhibit 5). The 
slowdown in Medicaid spending growth was primarily driven by slower 
enrollment growth (6.0 percent in 2010 compared to 7.4 percent in 2009) 
following the end of the recession.\22\ Medicaid spending per enrollee 
is estimated to have grown slowly in 2010 (1.1 percent). This slow rate 
of growth was due to projected faster enrollment growth of 
beneficiaries with relatively lower health care costs (mainly children 
and adults under age 65) than other Medicaid beneficiaries. Further 
projected improvements in the economy are expected to result in slower 
enrollment growth in Medicaid during 2011-13, leading to a slight 
deceleration in spending growth (averaging 6.8 percent).\4\

Exhibit 5.--National Health Expenditures (NHE), Amounts And Average Annual Growth From Previous Year Shown, By Source of Funds,  Selected Calendar Years
                                                                         2008-20
--------------------------------------------------------------------------------------------------------------------------------------------------------
                 Source of funds                    2008 \1\       2009         2010         2011         2012         2013         2014         2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
NHE ($ in billions).............................   $2,391.4     $2,486.3     $2,584.2     $2,708.4     $2,823.9     $2,980.4     $3,227.4     $4,638.4
  Health consumption expenditures...............    2,234.2      2,330.1      2,424.3      2,540.8      2,646.9      2,792.6      3,027.6      4,337.7
    Out-of-pocket...............................      298.2        299.3        304.9        312.1        322.0        334.6        330.3        443.8
    Health insurance............................    1,681.8      1,767.4      1,847.5      1,942.8      2,023.9      2,139.9      2,371.3      3,411.4
      Private health insurance..................      790.6        801.2        822.3        850.3        884.4        926.9      1,013.7      1,402.0
      Medicare..................................      465.7        502.3        525.0        556.1        565.6        599.5        636.8        922.0
      Medicaid..................................      343.1        373.9        400.7        428.1        456.8        487.8        586.8        908.1
        Federal.................................      202.4        247.0        270.9        261.5        264.5        284.5        366.0        561.1
        State and Local.........................      140.7        127.0        129.9        166.6        192.3        203.3        220.8        347.0
      Other health insurance programs \2\.......       82.4         90.0         99.5        108.3        117.1        125.7        134.0        179.4
    Other third-party payers and programs and         254.1        263.3        271.9        285.8        300.9        318.1        326.0        482.4
     public health activity \3\.................
  Investment....................................      157.2        156.2        159.9        167.6        176.9        187.8        199.9        300.7
Average Annual Growth From Prior Year Shown:
NHE (In percent)................................        7.1%         4.0%         3.9%         4.8%         4.3%         5.5%         8.3%         6.2%
  Health consumption expenditures...............        7.1          4.3          4.0          4.8          4.2          5.5          8.4          6.2
    Out-of-pocket...............................        5.0          0.4          1.8          2.4          3.2          3.9         (1.3)         5.0
    Health insurance............................        7.8          5.1          4.5          5.2          4.2          5.7         10.8          6.2
      Private health insurance..................        7.1          1.3          2.6          3.4          4.0          4.8          9.4          5.6
      Medicare..................................        9.6          7.9          4.5          5.9          1.7          6.0          6.2          6.4
      Medicaid..................................        6.9          9.0          7.2          6.8          6.7          6.8         20.3          7.5
        Federal.................................        7.1         22.0          9.7         (3.5)         1.2          7.6         28.7          7.4
        State and local.........................        6.7         (9.8)         2.3         28.3         15.4          5.7          8.6          7.8
      Other health insurance programs \2\.......       11.0          9.2         10.6          8.9          8.1          7.3          6.6          5.0
    Other third-party payers and programs and           5.3          3.6          3.3          5.1          5.3          5.7          2.5          6.8
     public health activity \3\.................
  Investment....................................        7.3         (0.6)         2.4          4.8          5.6          6.1          6.5          7.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source. Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group.
Notes. Numbers may not add to totals due to rounding. Percentage change is calculated from unrounded data. Data from 2010 to 2020 are projections.
\1\ Average annual growth, 2000-08.
\2\ Includes Children's Health Insurance Program (Titles XIX and XXI), Department of Defense, and Department of Veterans Affairs.
\3\ Includes worksite health care, other private revenues, Indian Health Service, workers' compensation, general assistance, maternal and child health,
  vocational rehabilitation, other Federal programs, Substance Abuse and Mental Health Services Administration, other State and local programs, and
  school health.

    In 2014, Medicaid spending is projected to increase substantially 
(20.3 percent) as a result of the expansion in Medicaid eligibility 
under the Affordable Care Act. Enrollment (75.6 million) is projected 
to be about one-third higher than in 2013 as eligibility is extended to 
all persons under age 65 in families with incomes at or below 138 
percent of the Federal poverty level. The transition into the program 
for those newly eligible is expected to take about 3 years, 
contributing to projected Medicaid spending growth of 7.5 percent in 
2015 and 8.5 percent in 2016. By 2020, Medicaid is projected to account 
for nearly 20 percent of national health spending (from 15 percent in 
2009).
    Private Health Insurance. Growth in private health insurance 
premiums is estimated to have accelerated, but remained low, reaching 
2.6 percent in 2010 (up from 1.3 percent in 2009) and accounted for 
$822.3 billion (Exhibit 5). A drop of 5.1 million in the number of 
people enrolled in private health insurance was the major reason for 
this slow growth. Additionally, because growth in the use of services 
was slower than was anticipated when premiums were originally set, the 
net cost of insurance, or the difference between premiums collected and 
benefits paid, grew significantly in 2010 at 8.7 percent.\23\
    Also in 2010, private health insurance benefit payments totaled an 
estimated $725.5 billion, representing an increase of just 1.9 percent 
(down from 2.8 percent in 2009). This historically low rate of growth 
was influenced by the same factors that contributed to the relatively 
low premium growth, namely the drop in the number of private health 
insurance enrollees, as well as slowing growth in the use of some 
services (such as elective hospital procedures and physician 
visits).\14\ \16\
    For 2011-13, private health insurance enrollment is projected to 
increase by 4.0 million as employment levels increase and more 
individuals are covered by employer-sponsored insurance due, in part, 
to the Affordable Care Act. Notably, growth in benefits per enrollee is 
expected to fall from 4.7 percent in 2010 to below 3 percent in 2011 
due, in part, to the Affordable Care Act's expansion of coverage to 
relatively less-expensive benefits for children under age 26 who can 
join their parents' policies.
    In 2014, growth in private health insurance premiums is expected to 
accelerate to 9.4 percent, 4.4 percentage points higher than in the 
absence of health reform, as an estimated 13.9 million people obtain 
coverage through exchange plans. At that time, private health insurance 
is anticipated to account for roughly 31 percent of national health 
spending, or about the same share as was expected without enactment of 
the Affordable Care Act.
    For 2015-20, growth in private health insurance premiums is 
expected to slow somewhat and average 5.6 percent annually. Underlying 
this expectation is that some employers of low-wage workers will stop 
offering health coverage (and many of their employees will move to the 
exchange plans, while others move into Medicaid or become uninsured). 
Also, as discussed earlier, in 2018, the excise tax on high-cost 
employer-based insurance plans will take effect, placing further 
downward pressure on health insurance premiums.
    Out-of-Pocket Spending. Out-of-pocket spending is estimated to have 
grown 1.8 percent in 2010, up from 0.4 percent in 2009, and to have 
reached $304.9 billion (Exhibit 5).\24\ The low growth in out-of-pocket 
health spending was influenced by job losses and the corresponding loss 
of employer-sponsored insurance, as well as employers' willingness to 
increase deductibles and/or copayments.\4\ For 2011-13, growth in out-
of-pocket spending is projected to accelerate, reaching 3.9 percent in 
2013, partly due to faster growth in disposable personal income that 
leads to more consumption of medical care.
    In 2014, out-of-pocket spending is projected to decline 1.3 
percent, largely as a result of the uninsured attaining health coverage 
through Medicaid or health insurance exchange plans. In addition, cost 
sharing for exchange plan enrollees in families with incomes at or 
below 250 percent of the Federal poverty level is subsidized, thereby 
reducing their out-of-pocket spending at the point-of-service.\25\ Out-
of-pocket spending growth is anticipated to reach a projection-period 
high of 6.6 percent in 2018. This outcome is expected as enrollment 
shifts to higher cost-sharing employer-sponsored insurance due to the 
existence of the new excise tax on high-cost insurance plans.
    Although cost sharing is expected to increase throughout the 
projection period, the out-of-pocket share of national health 
expenditures is projected to fall from 12 percent in 2009 to 9.6 
percent in 2020 (the projected out-of-pocket share in 2020 would be 
10.5 percent had the Affordable Care Act not been enacted).
                          outlook for sponsors
    In contrast to the preceding analysis of national health 
expenditures by payer, our sponsor analysis focuses on the financing of 
health care. In 2010, health spending financed by governments (Federal 
and State) is estimated to have grown 7.2 percent (reaching $1.2 
trillion) while spending by businesses, households, and other private 
sources is expected to have risen 1.4 percent (reaching $1.4 trillion) 
(Exhibit 6). The effects of the recession, as well as increased Federal 
matching rates to States for Medicaid, are estimated to have influenced 
the shift of health care financing toward the Federal Government. For 
2010, the Federal Government's share of national health spending is 
estimated to have increased by just over 1 percentage point, to 29 
percent, with State and local governments maintaining their 16-percent 
share (see online Appendix).\26\
    For 2011-13, government outlays (averaging 5.2 percent growth) are 
projected to roughly maintain a 45-percent share of total health 
spending. The Federal Government share of health spending is projected 
to decline to 27 percent by 2013, partly due to the expiration of 
temporary increases in the Federal share of Medicaid and the slowdown 
in Medicare expenditure growth related to the sustainable growth rate 
formula-based reduction in physician payment rates. Reflecting faster 
projected economic growth, spending growth financed through private 
businesses and households is expected to increase during this period 
(averaging 4.6 percent).

 Exhibit 6.--National Health Expenditures (NHE), Amounts and Average Annual Growth From Previous Year Shown, By
                                Type of Sponsor, Selected Calendar Years 2010-20
----------------------------------------------------------------------------------------------------------------
                                                   Expenditures (billions)                   Percent change
           Type of sponsor            --------------------------------------------------------------------------
                                          2010        2013        2014        2020     2011-13    2014   2015-20
----------------------------------------------------------------------------------------------------------------
NHE..................................    $2,584.2    $2,980.4    $3,227.4    $4,638.4      4.9      8.3      6.2
  Business, households and other          1,423.4     1,628.9     1,707.2     2,356.5      4.6      4.8      5.5
   private...........................
    Private business.................       518.8       595.3       635.6       820.5      4.7      6.8      4.3
      Employer contributions to             394.9       452.5       485.6       622.8      4.6      7.3      4.2
       private health insurance
       premiums \1\..................
      Other \2\......................       123.8       142.8       150.1       197.8      4.9      5.1      4.7
    Household........................       727.7       828.0       854.2     1,205.3      4.4      3.2      5.9
      Household private health              257.5       291.7       306.3       439.1      4.2      5.0      6.2
       insurance premiums \3\........
      Medicare payroll taxes and            165.3       201.6       217.6       322.4      6.8      7.9      6.8
       premiums \4\..................
      Out-of-pocket health spending..       304.9       334.6       330.3       443.8      3.2     -1.3      5,0
    Other private revenues \5\.......       176.9       205.6       217.3       330.7      5.1      5.7      7.2
  Government.........................     1,160.8     1,351.5     1,520.2     2,281.9      5.2     12.5      7.0
    Federal Government...............       741.6       816.1       950.8     1,445.2      3.2     16.5      7.2
      Employer contributions to              28.8        32.6        34.0        43.4      4.3      4.3      4.1
       private health insurance
       premiums......................
      Employer payroll taxes paid to          4.0         4.1         4.2         5.3      0.3      3.9      3.8
       Medicare hospital insurance
       trust fund....................
      Medicare \6\...................       249.6       266.5       283.5       425.7      2.2      6.4      7.0
      Medicaid \7\...................       280.1       292.3       374.2       574.1      1.4     28.0      7.4
      Other programs \8\.............       179.1       220.7       254.9       396.7      7.2     15.5      7.7
    State and local government.......       419.2       535.4       569.4       836.8      8.5      6.4      6.6
      Employer contributions to             131.2       143.2       150.8       214.5      3.0      5.3      6.1
       private health insurance
       premiums \1\..................
      Employer payroll taxes paid to         11.4        13.0        13.8        18.4      4.6      5.8      4.9
       Medicare hospital insurance
       trust fund....................
      Medicaid.......................       133.9       209.4       227.3       357.3     16.1      8.5      7.8
      Other programs \9\.............       142.7       169.8       177.5       246.5      6.0      4.6      5.6
----------------------------------------------------------------------------------------------------------------
Source. Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group.
Note: Numbers may not add to totals due to rounding. Percentage change is calculated from unrounded data.
\1\ Includes premiums paid on behalf of employees.
\2\ Includes employer Medicare hospital insurance payroll taxes, one-half self-employment payroll taxes,
  temporary disability insurance, workers' compensation, and worksite health care.
\3\ Includes household contributions to employer-sponsored health insurance, health insurance purchased through
  Exchanges, and other private health insurance.
\4\ Includes employee and self-employment payroll taxes and premiums paid to Medicare hospital insurance and
  supplementary medical insurance trust funds.
\5\ Includes health-related philanthropic support, nonoperating revenue, investment income, and privately funded
  structures and equipment.
\6\ Includes trust fund interest income, Federal general revenue contributions to Medicare less the net change
  in the trust fund balance, and payments for the Retiree Drug Subsidy. Excludes Medicare hospital insurance
  trust fund payroll taxes and premiums, Medicare supplementary medical insurance premiums, State phase-down
  payments, Medicaid buy-ins, and taxation of benefits.
\7\ Includes Medicaid buy-ins for the dually eligible Medicare premiums.
\8\ Includes maternal and child health, Children's Health Insurance Program (Titles XIX and XXI), vocational
  rehabilitation, Substance Abuse and Mental Health Services Administration, Indian Health Service, Federal
  workers' compensation, other Federal programs, public health activities, Department of Defense, Department of
  Veterans Affairs, research, structures and equipment, and exchange premium and cost-sharing subsidies.
\9\ Includes State phase-down payments, maternal and child health, public and general assistance, Children's
  Health Insurance Program (Titles XIX and XXI), vocational rehabilitation, other State and local programs,
  public health activities, research, and structures and equipment.

    As the major coverage expansions of the Affordable Care Act are 
implemented in 2014, health care financing is anticipated to further 
shift toward governments. In 2014, the Federal share of national health 
spending is projected to rise 2 percentage points to 29 percent, 
primarily a result of premium and cost-sharing subsidies for exchange 
coverage and a 100-percent Federal match rate for Medicaid coverage 
expansion costs. In contrast, households' share of expenditures is 
projected to decrease to 26 percent, from 28 percent in 2013, due 
mostly to net lower out-of-pocket spending for those who gain coverage.
    By 2020, government health care spending is projected to be 49 
percent of national health spending, up from 47 percent in 2014, 
reaching a total of $2.3 trillion; it is expected that the Federal 
Government will pay almost two-thirds of this amount. During this 
period, projected increases in the government's share of health care 
financing is largely associated with the robust projected Medicare 
enrollment growth, the Medicaid expansion, and Federal costs associated 
with the exchange premium and cost-sharing subsidies (but offset 
somewhat by the lower Medicare expenditures resulting from Affordable 
Care Act provisions). As the government share of spending rises, the 
projected share for private businesses declines (from 20 percent in 
2014 to 18 percent by 2020), and the share for households remains at 26 
percent.
                               conclusion
    This article provides an analysis of projected health care spending 
by sector, payer, and sponsor inclusive of the effects of the 
Affordable Care Act. Average annual growth in national health spending 
is expected to be 0.1 percentage point higher (5.8 percent) under 
current law compared to projected average growth prior to the passage 
of the Affordable Care Act (5.7 percent) for 2010 through 2020. 
Simultaneously, by 2020, nearly 30 million Americans are expected to 
gain health insurance coverage as a result of the Affordable Care Act.
    The largest impact on the growth of health spending is expected to 
occur in 2014, when the major coverage expansions begin. There is 
projected to be a proportionately larger impact on physician and 
clinical services and on prescription drug spending growth relative to 
other services and goods, as those who gain coverage are likely to be 
relatively young and healthy and to use less intensive care than the 
populations currently enrolled in Medicaid and private health 
insurance.
    Combined with the entry of the baby boomers into Medicare and 
Medicaid, the impact of the Affordable Care Act--stemming from the 
expansion of Medicaid, subsidies associated with exchanges, and 
administrative costs associated with implementing and operating the 
various provisions--is projected to increase Federal, State, and local 
governments' estimated share of total health spending to near 50 
percent in 2020. At the same time, households and private businesses 
are anticipated to pay for a smaller portion of the Nation's health 
bill than they would have without the Affordable Care Act, but still 
will face a growing burden on their respective limited resources.
                                 Notes
    1. Under the alternative Medicare projection scenario in which 
physician payment increases are based on growth in the Medicare 
Economic Index, national health spending would grow 6.0 percent per 
year over the projection period, resulting in a health share of gross 
domestic product of 20.1 percent. For more information on the Medicare 
projection scenarios, see the ``Model And Assumptions'' section of this 
article.
    2. Martin A, Lassman D, Whittle L, Catlin A. Recession contributes 
to slowest annual rate of increase in health spending in five decades. 
Health Aff (Millwood). 2011;30(1): 11-22.
    3. For comparing national health spending and gross domestic 
product, nominal levels and growth rates are used. Gross domestic 
product is often measured in real, inflation-adjusted terms; real gross 
domestic product growth was ^2.6 percent in 2009 and 2.9 percent in 
2010.
    4. Claxton G, DiJulio B, Whitmore H, Pickreign J. Health benefits 
in 2010: premiums rise modestly, workers pay more toward coverage. 
Health Aff (Millwood). 2010;29(10): 1942-50.
    5. The Medicare Economic Index is a price index that measures the 
price changes of the inputs physicians require in order to provide 
services.
    6. Other things being equal, the availability of coverage would 
cause a sizable decrease in out-of-pocket costs for affected 
individuals. The new coverage, however, typically induces greater use 
of health care services, thereby increasing out-of- pocket costs in 
many instances.
    7. Boards of Trustees. 2011 annual report of the boards of trustees 
of the Federal Hospital Insurance and Federal Supplementary Medical 
Insurance Trust Funds [Internet]. Baltimore (MD):CMS; 2011 May [cited 
2011 May 13]. Available from: http://www.cms.hhs.gov/ReportsTrustFunds/
downloads/tr2011.pdf.
    8. The full effects that a 29.4-percent reduction in physician 
reimbursement would have are difficult to predict. No secondary effects 
of the reduction in physician payment rates are modeled in these 
projections. For more information, see Clemens MK, Shatto JD. Projected 
Medicare expenditures under an illustrative scenario with alternative 
payment updates to Medicare providers [Internet]. Baltimore (MD): 
Centers for Medicare and Medicaid Services; 2011 May [cited 2011 May 
13]. Available from: http://www.cms.gov/ReportsTrustFunds/downloads/
2011TRAlternative Scenario.pdf.
    9. Sisko AM, Truffer CJ, Keehan SP, Poisal JA. National health 
expenditure projections: the impact of reform through 2019. Health Aff 
(Millwood). 2010;29(10):
1933-41.
    10. Centers for Medicare and Medicaid Services. Summary of national 
health expenditure account 2009 comprehensive revisions [Internet]. 
Baltimore (MD): CMS; 2011 Jan [cited 2011 Jun 27]. Available from: 
http://www.cms.gov/National
HealthExpendData/downloads/benchmark2009.pdf.
    11. Centers for Medicare and Medicaid Services. Accuracy analysis 
of the short-term (11 year) national health expenditure projections 
[Internet]. Baltimore (MD): CMS; [cited 2011 Jun 28]. Available from: 
http://www.cms.gov/National
HealthExpendData/downloads/ProjectionAccuracy.pdf
    12. Foster RS. Estimated financial effects of the ``Patient 
Protection and Affordable Care Act,'' as amended [Internet]. Baltimore 
(MD): Centers for Medicare and Medicaid Services; 2010 Apr 22 [cited 
2010 Dec 1]. Available from: http://www.cms.gov/ActuarialStudies/
Downloads/PPACA_2010-04-22.pdf.
    13. Buchmueller T, Grumbach K, Kronick R, Kahn J. The effect of 
health insurance on medical care utilization and implications for 
insurance expansion: a review of the literature. Med Care Res Rev. 
2005;62(1):3-30.
    14. Boorady C, Giacobbe R, Santangelo G, Carter C. Making sense of 
the utilization downtrend. New York (NY): Credit Suisse; 2010.
    15. Centers for Disease Control and Prevention. Morbidity and 
Mortality Weekly Report (MMWR): Update: influenza activity--United 
States, 2010-11 season, and composition of the 2011-12 influenza 
vaccine [Internet]. Atlanta (GA): CDC; [cited 2011 Jun 8]. Available 
from: http://www.cdc.gov/mmwr/preview/mmwrhtml/mm
6021a5.htm.
    16. Johnson A, Rockoff J, Mathews A. Americans cut back on visits 
to doctor. Wall Street Journal. 29 July 2010.
    17. Carollo K. Lipitor among top drugs coming off patent. ABC News, 
9. March 2011 [cited 2011 Jul 11]. Available from http://
abcnews.go.com/Health/top-selling-drugs-coming-off-patent-paving-
cheaper/story?id=13048629.
    18. SDI/Verispan. 2010 top 200 branded drugs by retail dollars 
[Internet]. Drug Topics; 14 June 2011 [cited 2011 Jul 11]. Available 
from: http://drugtopics
.modernmedicine.com/drugtopics/data/articlestandard//drugtopics/252011/
727252/article.pdf.
    19. Smith L. Pharma's reform bounce: how big a boost will $80 
billion buy? [Internet]. Rockville (MD): The RPM Report; 21 Sep 2009 
[cited 2011 Jul 6]. Available from: http://therpmreport.com/Free/
db79ab7c1c40-4fe6-bb90-9b3ee1f65b9b.aspx.
    20. Medco. 2011 drug trend report: healthcare 2020. Franklin Lakes 
(NJ); Medco;2011.
    21. As Medicare's private health plan payment rates and spending 
are affected by changes in Medicare's fee-for-service payment rates, 
the decrease in physician payment rates in 2012 under current law would 
also result in slower growth in Medicare private health plan payments 
across most service categories.
    22. Kaiser Commission on Medicaid and the Uninsured. Medicaid 
matters: understanding Medicaid's role in our health care system. Menlo 
Park (CA): Kaiser Family Foundation; [cited 4 Mar 2011]. Available 
from: http://www.kff.org/medicaid/upload/8165.pdf.
    23. Abelson R. Health insurers making record profits as many 
postpone care. New York Times. 13 May 2011.
    24. Out-of-pocket spending consists of direct spending by consumers 
for health care goods and services including coinsurance and 
deductibles; enrollee premiums for private health insurance and 
Medicare are not within this funding category.
    25. Kaiser Family Foundation. Focus on health reform. Explaining 
health care reform: questions about health insurance subsidies. Menlo 
Park (CA): KFF; 2010 Apr [cited 2011 Jul 6]. Available from: http://
www.kff.org/healthreform/upload/7962-02.pdf.
    26. To access the Appendix, click on the Appendix link in the box 
to the right of the article online.
        Response to Questions of Senator Harkin by Steve Larsen
    Question 1. A recent report released by the CMS Office of the 
Actuary found a 3.9 percent growth in national health spending in 
2010--an historic low. Further, overall Medicare cost growth dropped 
from 7.9 to 4.5 percent between 2009 and 2010. The report projects that 
average annual growth in national health spending is expected to be 0.1 
percentage point higher under the Affordable Care Act for 2010 to 2020, 
but that, by 2020, 30 million Americans will gain health insurance as a 
result of this law.
    Many critics of the ACA highlight the report's finding that ``in 
2014, growth in private health insurance premiums is expected to 
accelerate to 9.4 percent'' to argue that the ACA will cause insurance 
premiums to rise. However, the report draws no such conclusion--the 
projected increase in 2014 is in total expenditures for private 
insurance premiums, not in premium rates. Indeed, the report explicitly 
links this expenditure increase to the significant expansion of 
coverage in 2014.
    In addition, the nonpartisan Congressional Budget Office estimated 
that under the new law, health insurance premiums in the individual and 
group markets will decrease. CBO found that by 2016, premiums per 
person for those receiving subsidies in the individual market could 
decrease by up to 56 percent; by 2 percent in the small group market; 
and by 3 percent in the large group market.
    Can you please clarify the CMS Actuary's projections about 
expenditures for health insurance premiums in its July report?
    Answer 1. In a report issued in July 2011, the CMS Office of the 
Actuary estimated that the coverage expansions included in the 
Affordable Care Act will result in an estimated 22.9 million newly 
insured Americans by 2014 and about 30 million over the next decade. 
Covered primarily through Affordable Insurance Exchanges and Medicaid, 
the newly insured population is, as expected, projected to contribute 
to increased national health spending in 2014, including the estimated 
9.4 percent increase in private health insurance spending. This is not 
an estimate for the projected increase in the cost of private health 
insurance premiums.
    The CMS actuary also estimates that in 2014, out-of-pocket spending 
will decline by 1.3 percent as the number of people with insurance 
coverage increases and many services formerly paid for out-of-pocket 
are now covered by insurance.
    Most importantly, however, the CMS actuary also projects that the 
rate of growth in per capita health care spending will begin to slow 
down after 2014 as a result of the Affordable Care Act, producing only 
a 0.1 percent difference in the growth of national health expenditures 
over the coming decade.

    Question 2. Additionally, can you explain the implications of these 
findings in relation to CBO's estimates of premiums under ACA?
    Answer 2. The CMS actuary estimated that in 2014, the aggregate 
amount of spending on private health insurance premiums would increase 
by 9.4 percent due to increases in the insured population, inflation, 
and small real increases in average premiums. Since more Americans will 
be insured, more people will be paying private insurance premiums, 
which will cause the aggregate amount of spending on private health 
insurance premiums to increase. With respect to premiums paid, the 
actuary predicts a modest 5 percent increase in household private 
insurance premiums in 2014, up only 0.1 percentage point from 2013, and 
the Actuary does not attribute this increase to the Affordable Care 
Act.\1\
---------------------------------------------------------------------------
    \1\ National Health Expenditure Projections 2010-20, Table 16: 
https://www.cms.gov/nationalhealthexpenddata/downloads/proj2010.pdf.
---------------------------------------------------------------------------
    In a letter to Senator Bayh dated November 30, 2009,\2\ the 
Congressional Budget Office (CBO) provided an estimate of the 
Affordable Care Act's impact on average premiums paid. CBO estimated 
that the Affordable Care Act will lower average premiums for comparable 
plans in the individual market due in part to the improved health of 
the risk pool and by eliminating administrative costs such as medical 
underwriting. In total, the average premium in the individual market 
for the same amount of coverage will decrease between 7 and 10 percent 
due to better risk pooling and another 7 to 10 percent decrease through 
competition and administrative simplifications after the Affordable 
Care Act takes effect. CBO also estimated that the effect of the 
Affordable Care Act for the average small group market premium varies 
from a 1 percent increase to a 2 percent decrease. Estimates of the 
effect on large group market premiums range from no impact to a 3 
percent decrease in average premium.
---------------------------------------------------------------------------
    \2\ http://www.cbo.gov/ftpdocs/107xx/doc10781/11-30-Premiums.pdf.

    [Whereupon, at 12:15 p.m., the hearing was adjourned.]

                             


