[Senate Hearing 113-500]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 113-500

                  DELIVERING BETTER HEALTH CARE VALUE
                  TO CONSUMERS: THE FIRST THREE YEARS
                       OF THE MEDICAL LOSS RATIO

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

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 21, 2014

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation


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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California            JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida                 ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington           ROY BLUNT, Missouri
MARK PRYOR, Arkansas                 MARCO RUBIO, Florida
CLAIRE McCASKILL, Missouri           KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota             DEAN HELLER, Nevada
MARK BEGICH, Alaska                  DAN COATS, Indiana
RICHARD BLUMENTHAL, Connecticut      TIM SCOTT, South Carolina
BRIAN SCHATZ, Hawaii                 TED CRUZ, Texas
EDWARD MARKEY, Massachusetts         DEB FISCHER, Nebraska
CORY BOOKER, New Jersey              RON JOHNSON, Wisconsin
JOHN E. WALSH, Montana
                    Ellen L. Doneski, Staff Director
                     John Williams, General Counsel
              David Schwietert, Republican Staff Director
              Nick Rossi, Republican Deputy Staff Director
   Rebecca Seidel, Republican General Counsel and Chief Investigator
   
   
   
   
   
   
   
   
   
   
   
   
   
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 21, 2014.....................................     1
Statement of Senator Rockefeller.................................     1
    Report from the Office of Oversight and Investigations 
      Majority Staff dated May 21, 2014 entitled ``Delivering 
      Consumers Better Health Care Value for their Premium 
      Dollars: the Success Story of the Minimum Medical Loss 
      Ratio Law''................................................     3
Statement of Senator Thune.......................................    24
Prepared statement of John Ralston, Hampton, Virginia............    27
Statement of Senator Klobuchar...................................    36
Statement of Senator Johnson.....................................    51
Statement of Senator Scott.......................................    54

                               Witnesses

Wendell Potter, Analyst, Center for Public Integrity and former 
  Health Insurance Executive.....................................    28
    Prepared statement...........................................    30
Mark A. Hall, Professor of Law and Public Health, Wake Forest 
  University.....................................................    32
    Prepared statement...........................................    34
Katherine Fernandez, Houston, Texas..............................    36
    Prepared statement...........................................    38
Grace-Marie Turner, President, Galen Institute...................    42
    Prepared statement...........................................    43

                                Appendix

Article dated May 12, 2014 from KMOV.com Staff entitled 
  ``Whistleblower: ACA contractor in Wentzville pays employees to 
  do nothing''...................................................    67
Article dated May 11, 2014 from Politico by Jennifer Haberkorn 
  and Kyle Cheney entitled ``$474M for 4 failed Obamacare 
  exchanges''....................................................    67

 
                  DELIVERING BETTER HEALTH CARE VALUE
                  TO CONSUMERS: THE FIRST THREE YEARS
                       OF THE MEDICAL LOSS RATIO

                              ----------                              


                        WEDNESDAY, MAY 21, 2014

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:53 p.m. in room 
SD-253, Russell Senate Office Building, Hon. John D. 
Rockefeller IV, presiding.

       OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 
                U.S. SENATOR FROM WEST VIRGINIA

    The Chairman. Welcome, all. This committee hearing comes to 
order. So today, and the Ranking Member does not have to sort 
of hear this statement, but I will just give it. He can put 
plugs in his ears. Today's hearing is about an Obama success 
story.
    Senator Thune. Go ahead. Proceed.
    The Chairman. It is about a consumer protection provision 
in the law, which is already existing in one way or another in 
34 states, so it is not exactly a new idea. They all have 
different standards, so you cannot get anything going 
nationally. But it is a consumer protection provision in the 
law that has already saved consumers billions of dollars. Now, 
in South Dakota that is not a lot of money, but in West 
Virginia, that is big time.
    Whether you call it the MLR Law or the 80/20 rule that is 
responsible for hundreds of thousands of rebate checks, 
including one to my dear sister, that American families and 
small businesses have been receiving from their health 
insurance companies for the past 2 years. That is not something 
that you see every day, an insurance company giving a premium 
dollar back to its customers.
    I understand there are people in this country--probably not 
in this room, but potentially--who find it hard to concede that 
anything good has or will come from the Affordable Care Act. 
But I think it is pretty clear at this point that this piece of 
law is working, and it is on the way. It is not yet everything 
we hope for because there have to be more adjustments. That is 
in the nature of really, really important bills. But it is 
working, and people are beginning to understand that.
    Now, to understand why we have this law, you have to 
remember that the commercial health insurance market worked 
before we passed the ACA. It was a market whose rules were 
rigged against consumers. Insurers could purge sick people from 
those rolls--I had many examples of that from my own experience 
in West Virginia--and deny coverage to people with what they 
call preexisting conditions.
    In the old health insurance marketplace, it was very 
difficult for consumers to compare products or choose plans 
because the insurers would not give us clear information about 
coverage and about costs. The Commerce Committee's work back in 
2009 played a key role in exposing yet another problem with the 
health insurance market. Many of the policies health insurance 
companies were selling to families and businesses, they just 
were not giving any good value.
    We used the industry's own data to make this point. We 
looked at the percentage of every premium dollar health 
insurance was spending on healthcare versus the percentage they 
were spending on administration, commissions, dividends, and 
other non-healthcare related items. In the health insurance 
industry, this measurement is called medical ratio.
    What we found back in 2009 was a mixed bag. In some 
markets, insurers were efficiently spending 90 cents or more of 
each premium dollar on patient care. Let that be understood. 
Some were doing it right. But in other markets, especially the 
market for the individual health insurance, the numbers were 
shockingly low. Some insurance companies were pocketing as much 
as 50 cents on every premium dollar.
    We also found that large national insurers selling the same 
products across states provided consumers in some states 
substantially lower value for their premium dollars than in 
other states. When we talked to industry experts, like Wendell 
Potter, who is seated before me and Senator John Thune, we 
learned that the big for-profit insurance companies carefully 
tracked their MLRs and worked relentlessly to lower them. Their 
thinking was pretty simple: the less they spend on healthcare, 
the more they had for their shareholders. It was a zero sum 
game that pitted patients against profits. And the patients 
were not winning.
    To counter this strong incentive to provide less care to 
their consumers, we told the health insurance companies that 
they needed to spend at least 80 cents of each premium dollar 
on their consumers' healthcare, which would be measured, which 
would be understood and tracked at HHS, 85 percent in the large 
group market. If they spent less than 80 percent on patient 
care, they had to rebate a proportion of the premium payments 
back to their customers.
    This was not a crazy, made-up idea in Washington. Thirty-
four states already had minimum medical loss ratio laws on the 
books. But because the requirements varied from state to state, 
health insurance companies could still sell low value products 
in many markets. And we have to do this nationally. We have to 
make sure that it is fair for everybody.
    As always happens when you propose a pro-consumer reform 
like this, the industry went berserk and predicted dire 
consequences. Oh, boy, did they do that. A coalition of health 
insurance companies, agents, and broker groups, and industry 
friendly insurance commissioners fought this law at every step 
of the way. And I have to insert here, Senator Klobuchar, that 
West Virginia at the time had this wonderful person called Jane 
Cline, who is chairing the National Association of Insurance 
Commissioners. And she, along with Wendell Potter and others, 
helped block this effort to undo what we had done.
    I will not take time now to detail how much time and money 
the opponents of the MLR law spent trying to kill it, but my 
staff has prepared a report on this legislative history of the 
MLR law, which I now ask unanimous consent to place in the 
record of this hearing.
    [The information referred to follows:]

           Committee on Commerce, Science, and Transportation

         Office of Oversight and Investigations--Majority Staff

    Delivering Consumers Better Health Care Value for their Premium 
    Dollars: the Success Story of the Minimum Medical Loss Ratio Law

          Staff Report for Chairman Rockefeller--May 21, 2014

                           Table of Contents
Executive Summary
I. The Value of Medical Loss Ratio Requirements

        A. The Role of the MLR

        B. The Affordable Care Act's Medical Loss Ratio Requirements

        C. The ACA MLR Provisions Have Benefited Consumers and Small 
        Businesses

                1. Insurers Have Rebated Hundreds of Millions of 
                Dollars to Consumers and Small Businesses

                2. Improved Insurer Efficiencies Have Resulted in 
                Additional Savings for Consumers and Small Businesses

                3. Minimum National MLR Standard Means Reduced State-
                by-State Subsidization

                4. MLR Requirements Have Promoted Transparency
II. A History of the ACA MLR 

        A. The Health Reform Debate and MLR

                1. June 2009: Commerce Committee Hearing

                2. August 2009: Chairman Rockefeller's Letters to 
                Insurance Company Executives

                3. September-October 2009: Senate Committee on Finance 
                Markup of Health Reform Legislation

                4. November 2009: Letter from Chairman Rockefeller to 
                CIGNA

                5. December 2009: Senate Passage of Health Reform 
                Legislation with MLR Provisions

        B. Implementation of the Affordable Care Act MLR Provisions

                1. Elements of the MLR Formula

                2. NAIC Implementation Process

                        a. AApril 15, 2010, Committee Majority Staff 
                        Report

                        b. May 7, 2010, Letters from Chairman 
                        Rockefeller to Secretary Sebelius and NAIC 
                        Commissioner Cline

                        c. July 20, 2010, Letter from Chairman 
                        Rockefeller to Commissioner Cline

                        d. October 14, 2010, Letter from Chairman 
                        Rockefeller to the NAIC

                3. HHS Rulemaking Process

                        a. Activities That Improve Health Care Quality

                        b. Agent and Broker Fees
                4. 2011: Additional NAIC Review Regarding Excluding 
                Agent and Broker Commissions

                        a. March, 15, 2011, Letter from Chairman 
                        Rockefeller to Commissioner Susan E. Voss

                        b. Spring 2011 NAIC Meeting Austin, Texas

                        c. May 24, 2011, Committee Majority Staff 
                        Report on 2010 MLR Rebates

                        d. November 21, 2011, Letter from Chairman 
                        Rockefeller to Commissioner Kevin McCarty

                        e. NAIC Endorses Modified McCarty Resolution
III. Conclusion
Exhibits
Exhibit A: Correspondence of Chairman Rockefeller
Exhibit B: Committee Majority Staff Reports
                                 ______
                                 
Executive Summary
    One of the important new consumer protections in the 2010 
Affordable Care Act (ACA) is the provision that gives health insurance 
companies a strong financial incentive to reduce their administrative 
costs and spend a larger part of each premium dollar on high-quality 
health care for their policyholders.
    Using a financial metric already very familiar to insurance 
carriers and state regulators--the ``medical loss ratio'' (MLR)--the 
law encourages health insurance companies to spend at least 80 percent 
of their individual and small group policyholders' premiums on medical 
care or on improving the quality of their care; for large group 
policies, the target level is 85 percent. The purpose of this law is to 
counteract health insurance companies' strong financial incentive to 
maximize profits, even at the expense of their customer's health care. 
Companies whose spending on health care-related expenses falls below 
these ``minimum MLR'' levels are required to pay rebates to their 
policyholders.
    The law also contains important reporting and transparency 
provisions. For the first time, it requires health insurance companies 
to publicly report--by market segment and by state--how much of each 
insurance premium dollar they are spending on health care versus other 
expenditures such as marketing, agent and broker commissions, overhead, 
and profits. Hearings and investigations conducted by Chairman 
Rockefeller in the Commerce Committee in 2009 established a very clear 
record that health insurance companies were not voluntarily providing 
American consumers the segment and state-level information they needed 
to make informed choices about buying health care. These reporting 
provisions give consumers and policymakers unprecedented amounts of 
information about the value of the health insurance products sold in 
their communities.
    During the consideration and implementation of the ACA, health 
insurance companies and groups representing health insurance agents and 
brokers aggressively opposed the MLR language, which has come to be 
known as the ``80/20 rule.'' They predicted that the law would harm 
patients by discouraging investment and innovation, and by reducing 
health insurance information and the product choices available to 
consumers. After enactment of the ACA, the health insurance industry 
also heavily lobbied Congress, the Department of Health and Human 
Services (HHS), and the National Association of Insurance Commissioners 
(NAIC) to make adjustments to address these concerns.
    During a sometimes contentious implementation process, Chairman 
Rockefeller and other consumer advocates urged regulators to reject 
industry proposals that were inconsistent with Congress's intent and 
reduced the law's potential benefits for consumers. In particular, 
consumer advocates fought back a last-ditch effort in 2011 to remove 
agent and broker fees from the denominator of the MLR formula--a 
seemingly technical change that would have resulted in increased 
payments to brokers and agents at the expense of dollars being spent on 
customers' health care and costing consumers hundreds of millions of 
dollars in lost rebates.
    Industry's dire predictions have not materialized, and two years of 
data shows that the law has worked as the authors of the law intended. 
Under the new minimum MLR requirements, health insurance companies--
especially those selling products in the individual market--have 
increased the value of their products by offering plans that pay more 
for health services instead of other expenditures. Since ACA enactment, 
minimum MLRs have risen across all market segments. The table below 
represents this aggregated rise in MLRs by market segment, for the six 
largest for-profit health insurers.

         Publicly Traded Health Insurance MLR, 2012 versus 2011
------------------------------------------------------------------------
                                                 2011     2012    Change
------------------------------------------------------------------------
Individual                                       77.8%    81.2%    336bp
------------------------------------------------------------------------
Small Group                                      77.2%    77.7%     50bp
------------------------------------------------------------------------
Large Group                                      84.0%    85.2%    115bp
------------------------------------------------------------------------

    Consumers have benefited from these improvements in several ways:

   Rebates. Millions of American consumers and businesses have 
        received $1.6 billion in rebate checks from their health 
        insurance companies because the insurers' coverage fell below 
        the 80 and 85 percent MLR thresholds. This figure does not 
        include 2013 rebates, which will be announced later in 2014.

   Other Consumer Savings. Millions more have benefited from 
        the changes health insurers have been making to avoid paying 
        rebates. For example, reports issued by the non-partisan 
        Commonwealth Fund have found that, in the first two years of 
        the MLR requirements, insurers reduced overhead by a total of 
        $1.75 billion--changes that ultimately reduce the cost of 
        insurance to consumers and the government.

   Reduced State-by-State Subsidization. Prior to the ACA, 
        health insurers could offer similar health plans in different 
        states but with vastly different MLRs, and companies could make 
        greater profits from plans offered in states that had limited 
        or no MLR requirements. The ACA's new national minimum MLR 
        requirements incentivize health insurers to provide 
        policyholders appropriate value for their premium dollars--no 
        matter what the consumer's state of residence.

   Increased Transparency. A new trove of data regarding 
        insurance plan performance is now available to help academics, 
        health policy experts, financial analysts, and others 
        understand how the market is working and where improvements are 
        most necessary.
I. The Value of Medical Loss Ratio Requirements
A. The Role of the MLR
    Consumers purchase health insurance for access to emergency and 
preventative medical services and to protect against the financial 
risks associated with a traumatic medical event. Health insurers 
collect premiums from policyholders and use those funds to pay for 
member health care claims, as well as administer benefit coverage, 
market health insurance products, and pay dividends to investors. The 
medical loss ratio (MLR) is the proportion of health care premium 
dollars paid by consumers that is ultimately spent by insurers on 
health care costs, versus insurers' other expenses. For example, an 
insurer with an 80 percent MLR spends 80 percent of its policyholders' 
premiums on medical care, while the remaining 20 percent goes to 
expenses that do not directly benefit consumers, such as executive 
bonuses, advertising costs, agent commissions, and profits.
    The MLR is a measure that provides different functions for 
different constituencies. For consumers, the MLR provides a means of 
evaluating health plans competing for consumer business. The MLR 
assists potential purchasers of insurance in assessing whether an 
insurer is spending an appropriate portion of premiums on consumer 
medical services. From a consumer's perspective, a higher MLR is an 
indication of a health insurer spending more premium dollars on 
services that have greater potential consumer benefits.
    For investors in health insurance companies, on the other hand, the 
MLR provides a measure of an insurer's potential profitability. From an 
investor's perspective, a decrease in the MLR signals reduction in 
expenditures on medical costs, and with an adequate control of other 
indirect medical costs, the possibility for an increase in profit.
    For both consumers and investors, segmenting MLR information by 
insurance market type--individual, small group, and large group--
provides additional transparency into the insurance market.\1\ As noted 
by Mark Hall, Professor of Law and Public Health at Wake Forest 
University, the different insurance markets are ``as distinct in their 
economic and legal characteristics as are mobile homes, condominiums, 
and single-family homes.'' \2\ MLRs can also vary dramatically based on 
product type; for instance, in the past MLRs typically have been higher 
in larger group markets than in the individual market.\3\ In contrast, 
plans marketed as ``limited benefit'' or ``mini-med'' typically held 
lower MLRs than more comprehensive individual health insurance 
plans.\4\
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    \1\ American consumers are insured either through their employer, a 
private health plan, Medicaid, Medicare, the Children's Health 
Insurance Program (CHIP), the Veteran's Administration, or uninsured. 
The Henry J. Kaiser Family Foundation, Health Insurance Coverage of the 
Total Population (accessed May 12, 2014) (online at http://kff.org/
other/state-indicator/total-population/). In 2012, 78.5 million 
consumers were in fully insured plans regulated by the MLR provision. 
Carl McDonald and Sahil Choudhry, Citi, Managed Care: Nothing is More 
Creative Than a Brilliant Mind with a Purpose, at 4 (Apr. 8, 2014). A 
fully insured plan is one where the employer contracts with another 
organization to assume financial responsibility for the enrollees' 
medical claims and for all incurred administrative costs. Bureau of 
Labor Statistics, Definitions of Health Insurance Terms (online at 
http://www.bls.gov/ncs/ebs/sp/healthterms.pdf).
    \2\ Mark A. Hall, HIPPA's Small-Group Access Laws: Win, Loss, or 
Draw?, Cato Journal, at 72 (Spring/Summer 2002).
    \3\ Senate Committee on Commerce, Science, and Transportation, 
Majority Staff Report on Implementing Health Insurance Reform: New 
Medical Loss Ratio Information for Policymakers and Consumers (Apr. 15, 
2010). Exhibit A includes this report in addition to all other Commerce 
Committee majority staff reports concerning the MLR, in chronological 
order, beginning in 2010.
    \4\ Timothy Jost, Implementing Health Reform: Fine-Tuning the 
Medical Loss Ratio Rules, Health Affairs Blog (Dec. 3, 2011) (online at 
http://healthaffairs.org/blog/2011/12/03/implementing-health-reform-
fine-tuning-the-medical-loss-ratio-rules/).
---------------------------------------------------------------------------
    Health insurers have historically resisted making disclosures of 
their MLRs or the information relevant to calculating the insurer's 
MLR. Prior to the Affordable Care Act (ACA), whether an insurer's MLR 
data was publicly available depended on state regulation. Some states 
collected and made MLR information available for insurance shoppers, 
but many did not.\5\ In addition, MLR data provided by health insurers 
to investors was not routinely made available by market segment.\6\
---------------------------------------------------------------------------
    \5\ See Letter from Chairman John D. Rockefeller to H. Edward 
Hanway, Chairman and Chief Executive Officer, CIGNA, at 11 (Nov. 2, 
2009). Exhibit B includes this letter in addition to all other 
correspondence by Chairman Rockefeller concerning the MLR, in 
chronological order, beginning in 2009.
    \6\ Id.
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B. The Affordable Care Act's Medical Loss Ratio Requirements
    The ACA \7\ includes MLR requirements designed to improve the value 
consumers receive for their health insurance payments and promote 
transparency in the health insurance market. Under the ACA, individual 
and small group insurance plans must achieve an 80 percent MLR, while 
large group plans must achieve 85 percent.\8\ The ACA also requires 
that each insurer publicly disclose its MLR data, including premium 
income and expenditures on medical claims, broken down by market and 
state.\9\ The provision applies to all types of health insurers that 
offer fully funded health plans, including non-profit and for-profit 
health insurers and health management organizations (HMOs).\10\ 
Grandfathered health insurance plans are not excluded from the 
requirement.\11\
---------------------------------------------------------------------------
    \7\ Sec. 2718 of Title XXVII, Part A of the Public Health Service 
Act, as added by Sec. 10101(a) of Title X of the Patient Protection and 
Affordable Care Act, Pub. L. 111-148 (2010) (hereafter ``PPACA MLR 
provision'').
    \8\ 45 C.F.R. Sec. 158.210 (2011).
    \9\ 45 C.F.R. Sec. Sec. 158.110-120 (2011).
    \10\ 45 C.F.R. Sec. 158.101 (2011). Self-funded plans (i.e., where 
the employer or other plan sponsor pays the cost of health benefits 
from its own assets) are not considered insurers and are therefore not 
subject to the MLR provision. The MLR standard does not apply even when 
an insurer administers the self-funded plan on behalf of an employer or 
other sponsor. The Henry J. Kaiser Family Foundation, Explaining Health 
Care Reform: Medical Loss Ratio (MLR) (Feb. 2012) (online at http://
kff.org/health-reform/fact-sheet/explaining-health-care-reform-medical-
loss-ratio-mlr/).
    \11\ 45 C.F.R. Sec. 158.102 (2011). Grandfathered plans are those 
that were in existence on or before March 23, 2010, and whose plan 
design has stayed basically the same. They can enroll people after that 
date and still maintain their grandfathered status, meaning that they 
are not subject to requirements established by the ACA. Kaiser Health 
News, FAQ Grandfathered Health Plans (Nov. 13, 2013) (online at http://
www.kaiserhealthnews.org/stories/2012/december/17/grandfathered-plans-
faq.aspx).
---------------------------------------------------------------------------
    Under the ACA, a health insurer is required to provide its 
policyholders with rebates if the insurer does not meet the minimum 
MLR. Rebates are calculated based on an insurer's MLR in a market 
segment of a given state. Thus, while an insurer could exceed the 
minimum MLR in a state's large group market, it could still owe rebates 
to consumers if it fails to meet the MLR for the individual or small 
group market in that state. The distribution of rebates depends on the 
circumstances of the plan. Those consumers who are in the individual 
market receive rebates directly from the insurer either in the form of 
a check or as a reduction in future premiums.\12\ In the group market, 
rebates are provided to the employer, who must use the rebate for the 
benefit of its covered employees.\13\
---------------------------------------------------------------------------
    \12\ 45 C.F.R. Sec. 158.241 (2011).
    \13\ 45 C.F.R. Sec. 158.242 (2011).
---------------------------------------------------------------------------
C. The ACA MLR Provisions Have Benefited Consumers and Small Businesses
    The ACA's MLR provisions already have created billions in savings 
to consumers and small businesses by providing nearly $1.6 billion in 
rebates and incentivizing insurers to reduce unnecessary health insurer 
administrative costs and maintain lower premium rates.\14\ Further, the 
reporting requirements of the MLR provisions promote increased insurer 
transparency and accountability by ensuring that consumers and small 
businesses have information they can use to measure plan performance 
and inform insurance shopping decisions. These requirements also 
provide for a rich source of data that assists experts in analyzing and 
better understanding the health insurance market.
---------------------------------------------------------------------------
    \14\ Cynthia Cox, Gary Claxton and Larry Levitt, The Henry J. 
Kaiser Family Foundation, Beyond Rebates: How Much are Consumers Saving 
from the ACA's Medical Loss Ratio Provision? (June 2013) (online at 
http://kff.org/health-reform/perspective/beyond-rebates-how-much-are-
consumers-saving-from-the-acas-medical-loss-ratio-provision/).
---------------------------------------------------------------------------
1. Insurers Have Rebated Hundreds of Millions of Dollars to Consumers 
        and Small Businesses

    To date under the ACA, consumers and businesses have received 
nearly $1.6 billion in rebates from insurers whose MLRs exceeded the 
ACA thresholds.\15\ This includes:
---------------------------------------------------------------------------
    \15\ United States Department of Health and Human Services, 80/20 
Rule Delivers More Value to Consumers in 2012 (June 2013) (hereafter 
``80/20 Rule Delivers More Value to Consumers'').

   $591 million in total rebates paid to consumers in the 
---------------------------------------------------------------------------
        individual market;

   $493 million in total rebates paid to consumers in the small 
        group market; and

   $512 million in total rebates paid to consumers in the large 
        group market.\16\
---------------------------------------------------------------------------
    \16\ Id.

    In 2012, 13.1 million Americans received an average rebate of $137 
per family for a total of $1.1 billion in rebates;\17\ in 2013, 8.5 
million Americans received an average rebate of $100 per family for a 
total of $500 million in rebates.\18\ As discussed below, this decrease 
between 2012 and 2013 in rebates paid to consumers means that more 
insurers were meeting the threshold MLRs required by the ACA, and that 
ultimately more premium dollars were being spent by insurers on health 
care expenses.
---------------------------------------------------------------------------
    \17\ United States Department of Health and Human Services, The 80/
20 Rule: How Insurers Spend Your Health Insurance Premiums (Feb. 2013).
    \18\ 80/20 Rule Delivers More Value to Consumers, supra n.15.
---------------------------------------------------------------------------
2. Improved Insurer Efficiencies Have Resulted in Additional Savings 
        for Consumers and Small Businesses

    Rebates represent only a portion of the savings consumers 
experience from the MLR. By setting a minimum percentage of 
expenditures for medical care and quality improvement, the MLR 
requirements limit what an insurer may expend on overhead, which 
includes administrative costs and profits. Thus, once the minimum MLR 
is reached, an insurer has incentive to reduce administrative costs in 
order to increase profits.\19\
---------------------------------------------------------------------------
    \19\ Administrative expenses consist of general and administrative 
expenses, commissions and advertising expenses, profit and 
contingencies, and various other expenses that do not directly fund 
medical care. Centers for Medicare and Medicaid Services (CMS), Medical 
Loss Ratio (MLR) Annual Reporting Form Filing Instructions for the 2013 
MLR Reporting Year (Mar. 26, 2014).
---------------------------------------------------------------------------
    For example, the Commonwealth Fund, a non-partisan research 
organization, has issued several reports analyzing 2010-2012 insurer 
data regarding administrative expenditures. According to these 
analyses, the reduction in insurer overhead--and ``ultimately, the cost 
of insurance to consumers and the government''--was $1.4 billion 
between 2011 and 2012 and $350 million between 2010 and 2011.\20\ These 
reports cite implementation of the MLR rule as a substantial factor 
driving insurer overhead reductions.\21\
---------------------------------------------------------------------------
    \20\ Michael J. McCue and Mark A. Hall, The Commonwealth Fund, 
Realizing Health Reform's Potential--The Federal Medical Loss Ratio 
Rule: Implications for Consumer in Year 2 (May 14, 2014); Michael J. 
McCue and Mark A. Hall, The Commonwealth Fund, Insurers' Responses to 
Regulation of Medical Loss Ratios, at 7 (Dec. 2012). The 2012 report 
also cites other factors in addition to the MLR rule including 
competitive and state regulatory factors, which may drive insurers' 
pricing decisions and operational strategies. Id. at 3.
    \21\ Michael J. McCue and Mark A. Hall, The Commonwealth Fund, 
Realizing Health Reform's Potential--The Federal Medical Loss Ratio 
Rule: Implications for Consumer in Year 2 (May 14, 2014); Michael J. 
McCue and Mark A. Hall, The Commonwealth Fund, Insurers' Responses to 
Regulation of Medical Loss Ratios, at 7 (Dec. 2012).
---------------------------------------------------------------------------
    In June 2013, HHS released an additional study of insurer data from 
2011 and 2012 reporting that administrative costs as a percentage of 
consumer health insurance premiums decreased slightly from 2011 to 
2012.\22\ The chart below depicts this trend across the various 
markets.
---------------------------------------------------------------------------
    \22\ 80/20 Rule Delivers More Value to Consumers, supra n.15.
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
---------------------------------------------------------------------------
    Source: HHS

    Experts at The Henry L. Kaiser Family Foundation, a non-partisan 
health research organization, also have found that, beyond receiving 
rebates, consumers are receiving better value for their premium dollars 
as health insurers across all three market segments achieve compliance 
with the new MLR requirements.\23\ And in a separate analysis, HHS 
estimated what consumer premiums in 2012 would have been if MLRs of 
health insurers had remained at 2011 levels, finding that Americans 
saved $3.4 billion on their premiums in 2012 as insurance companies 
improved efficiencies.\24\
---------------------------------------------------------------------------
    \23\ Cynthia Cox, Gary Claxton and Larry Levitt, The Henry J. 
Kaiser Family Foundation, Beyond Rebates: How Much are Consumers Saving 
from the ACA's Medical Loss Ratio Provision? (June 2013) (online at 
http://kff.org/health-reform/perspective/beyond-rebates-how-much-are-
consumers-saving-from-the-acas-medical-loss-ratio-provision/).
    \24\ 80/20 Rule Delivers More Value to Consumers, supra n.15.
---------------------------------------------------------------------------
3. Minimum National MLR Standard Means Reduced State-by-State 
        Subsidization

    Prior to the establishment of national minimum MLR levels, MLR 
requirements varied from state to state. Under this patchwork of state 
laws, health insurers could in effect subsidize their efforts to meet 
the high MLRs mandated in some states by spending low percentages of 
consumer premium dollars on medical care in other states that lacked 
meaningful MLR requirements. For instance, in 2009, WellPoint's small 
group health insurance product in New Hampshire had an MLR of 87.9 
percent but a similar product in Virginia had an MLR of 66.6 
percent.\25\ By setting a national floor regarding insurer expenditures 
on medical care, the ACA's MLR requirement incentivizes insurers to 
provide consumers a high value for their premium dollar--regardless of 
the state in which a consumer may reside.
---------------------------------------------------------------------------
    \25\ Senate Committee on Commerce, Science, and Transportation, 
Majority Staff Report on Implementing Health Insurance Reform: New 
Medical Loss Ratio Information for Policymakers and Consumers, at 6 
(Apr. 15, 2010).
---------------------------------------------------------------------------
    A recent analysis by Carl McDonald, a leading health insurance 
industry analyst with Citi, demonstrates the substantial gains 
consumers have experienced since establishment of the nationwide 
MLR.\26\ Over the course of the last two years, publicly traded health 
insurers have seen their MLRs rise across the board. The six largest 
publicly traded health insurers--Aetna, CIGNA, Health Net, Humana, 
UnitedHealth Group, and WellPoint--operate in state markets across the 
country. In 2011, these publicly traded health insurance companies met 
the MLR on an aggregated level in only 4 out of 18 market segments. In 
2012, the insurers met the minimum MLR requirements in 10 out of 18 
market segments.
---------------------------------------------------------------------------
    \26\ Carl McDonald and Sahil Choudhry, Citi, Managed Care: Nothing 
is More Creative Than a Brilliant Mind with a Purpose (Apr. 8, 2014).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Source: Citi
4. MLR Requirements Have Promoted Transparency

    For years before the passage of the ACA, consumers paying a monthly 
medical insurance premium saw their premiums increase annually but had 
no window into how their health insurance plans were spending premium 
dollars. The MLR provisions of the ACA promote transparency in the 
health insurance marketplace by requiring that insurance companies 
publicly disclose how they spend consumers' premiums dollars. This 
national reporting requirement means consumers can access data that was 
previously unreported or available only to state insurance regulators.
    Under the ACA, all health insurers are now required to report to 
HHS aggregated state-level financial data including income from 
premiums and expenditures on health care claims, quality improvement, 
taxes, licensing, and regulatory fees.\27\ Health insurers report their 
MLRs at the state level, across all plans, and in each market segment 
in which they operate. HHS then makes this data publicly available on 
its website.\28\ This data helps consumers gauge the value they are 
receiving for their premium dollars. In addition, policy experts, 
financial market participants, regulators, and other researchers now 
have access to robust insurer data to assess health insurance market 
activity.
---------------------------------------------------------------------------
    \27\ 45 C.F.R. Sec. 158.120 (2011).
    \28\ Centers for Medicare & Medicaid Services, The Center for 
Consumer Information and Insurance Oversight--Medical Loss Ratio Data 
and System Resources Home Page (online at http://www.cms.gov/CCIIO/
Resources/Data-Resources/mlr.html).
---------------------------------------------------------------------------
    A case in point is comments of a financial analyst who recently 
used the new MLR data to evaluate commercial risk issues, noting:

        The data set in this report is quite versatile. . . . [T]he 
        data provides specific details on the states where plans could 
        have too much overlap and run into antitrust issues. And just 
        recently, we were able to analyze the plans that could benefit 
        the most from favorable weather based on where they have the 
        most risk enrollees.\29\
---------------------------------------------------------------------------
    \29\ Carl McDonald and Sahil Choudhry, Citi, Managed Care: Nothing 
is More Creative Than a Brilliant Mind with a Purpose, at 4 (Apr. 8, 
2014).
---------------------------------------------------------------------------
II. A History of the ACA MLR
    From the outset of Senator Rockefeller's tenure as Chairman of the 
Senate Committee on Commerce, Science, and Transportation (``the 
Committee''), Senator Rockefeller and the Committee have closely 
scrutinized the health insurance industry's business practices and 
their impact on consumers. Throughout the health reform debate, the 
Committee held a series of hearings examining the many obstacles 
consumers faced when they attempted to make informed purchasing 
decisions in the health insurance market. The hearings demonstrated 
that one of the greatest difficulties consumers faced was getting clear 
and accurate information about health insurance products. The Committee 
also examined several abusive health insurance practices that focused 
on how insurers would often take advantage of policyholders while in 
the pursuit of higher profits.\30\
---------------------------------------------------------------------------
    \30\ As Chairman of the Senate Committee on Commerce, Science, and 
Transportation, Senator Rockefeller has examined the consumer 
perspective in the American health insurance market. See Senate 
Committee on Commerce, Science, and Transportation, Hearings on Part I: 
Deceptive Health Insurance Industry Practices--Are Consumers Getting 
What They Paid For? (Mar. 26, 2009); Senate Committee on Commerce, 
Science, and Transportation, Hearings on Part II: Deceptive Health 
Insurance Industry Practices--Are Consumers Getting What They Paid For? 
(Mar. 31, 2009); Senate Committee on Commerce, Science, and 
Transportation, Hearings on Competition in the Health Care Marketplace 
(July 16, 2009); Senate Committee on Commerce, Science, and 
Transportation, Hearings on Are Mini Med Policies Really Health 
Insurance? (Dec. 1, 2010); Senate Committee on Commerce, Science, and 
Transportation, Staff Report on Underpayments to Consumers by the 
Health Insurance Industry (June 24, 2009)
---------------------------------------------------------------------------
    In 2009, during the development of health insurance reform 
legislation, the Committee's investigations and oversight work 
regarding the health insurance industry provided impetus for the MLR 
requirements that ultimately were included in the ACA. Following 
enactment of the ACA, Chairman Rockefeller continued vigilant oversight 
of MLR implementation to make sure consumers and small businesses 
receive appropriate value for their premiums, and have the information 
they need to make informed decisions about health plans for themselves 
and their families. Following is a chronicle of these efforts.
A. The Health Reform Debate and the MLR
1. June 2009: Commerce Committee Hearing

    On June 24, 2009, the Commerce Committee held a hearing titled 
``Consumer Choices and Transparency in the Health Insurance Industry'' 
to examine obstacles American consumers face when attempting to obtain 
clear and accurate information about their health insurance coverage. 
At that hearing, one of the witnesses, former CIGNA executive Wendell 
Potter, argued that health insurers had strong incentives to minimize 
the amount spent on actual medical care in order to promote greater 
company profits.
    Drawing on experiences from his over 20-year career as a senior 
health insurance industry executive, Mr. Potter testified about the 
pressure health insurance companies felt from Wall Street to keep 
medical loss ratios low:

        I have seen an insurer's stock price fall 20 percent or more in 
        a single day after executives disclosed that the company had to 
        spend a slightly higher percentage of premiums on medical 
        claims during the quarter than it did during a previous period. 
        The smoking gun was the company's first-quarter medical loss 
        ratio, which had increased from 77.9 percent to 79.4 percent a 
        year later.\31\
---------------------------------------------------------------------------
    \31\ Senate Committee on Commerce, Science, and Transportation, 
Testimony of Wendell Potter, Consumer Choices and Transparency in the 
Health Insurance Industry, 111th Cong. (June 24, 2009) (S. Rept. 111-
344) at 8.

    Mr. Potter also asserted that health insurers used techniques to 
trim their MLRs including dumping and purging sick policyholders to 
reduce the number of expensive policy holders needing expensive 
care.\32\ Further, Mr. Potter highlighted a 2008 PricewaterhouseCoopers 
study showing how successful the health insurance industry had become 
in charging more for health insurance while paying a decreasing share 
on actual medical care:
---------------------------------------------------------------------------
    \32\ Id.

        The accounting firm found that the collective medical-loss 
        ratios of the seven largest for-profit insurers fell from an 
        average of 85.3 percent in 1998 to 81.6 percent in 2008. That 
        translates into a difference of several billion dollars in 
        favor of insurance company shareholders and executives at the 
        expense of health care providers and their patients.\33\
---------------------------------------------------------------------------
    \33\ Id. at 9.
---------------------------------------------------------------------------
2. August 2009: Chairman Rockefeller's Letters to Insurance Company 
        Executives

    Following the June 2009 Committee hearing, Chairman Rockefeller 
wrote to 15 of the largest health insurance companies to further 
examine MLRs in the individual, small, and large group markets, and how 
the health insurance industry collects, uses, and publicizes MLR 
information. These companies collectively controlled more than half of 
the Nation's fully insured marketplace.\34\ The letters sought 
information on how the companies spent their policyholders' premium 
dollars, noting that while the MLR is a key tool for understanding the 
health insurance market, ``insurance companies do not appear to readily 
disclose this information to consumers and businesses.'' \35\
---------------------------------------------------------------------------
    \34\ A fully insured plan is one where the employer contracts with 
another organization to assume financial responsibility for the 
enrollees' medical claims and for all incurred administrative costs. 
Bureau of Labor Statistics, Definitions of Health Insurance Terms 
(online at http://www.bls.gov/ncs/ebs/sp/healthterms.pdf).
    \35\ Letter from Chairman John D. Rockefeller to Stephen J. 
Hemsley, President and Chief Executive Officer, UnitedHealth Group, at 
1 (Aug. 21, 2009).
---------------------------------------------------------------------------
3. September-October 2009: Senate Committee on Finance Markup of Health 

        Reform Legislation

    As the Committee was seeking MLR information from health insurers, 
from late September through early October 2009, the Senate Finance 
Committee, on which Senator Rockefeller serves as the Chair of the 
Subcommittee on Health, began consideration of health reform law 
legislation.\36\ At the time of this legislative markup, Chairman 
Rockefeller had received incomplete responses to his August letters to 
health insurers requesting MLR information.
---------------------------------------------------------------------------
    \36\ Shailagh Murray and Lori Montgomery, Lines Drawn as Senate 
Panel Begins Debating Health Bill, Washington Post (Sept. 23, 2009) 
(online at http://www.washingtonpost.com/wp-dyn/content/article/2009/
09/22/AR2009092201548.html). This measure, the ``America's Healthy 
Future Act,'' ultimately introduced as S. 1796, was one of two major 
bills being considered by the Senate as part of health reform. The 
second, the ``Affordable Health Choices Act,'' S.1679, was reported out 
of the Committee on Health, Education, Labor, and Pensions on September 
17, 2009.
---------------------------------------------------------------------------
    Noting recalcitrance among insurers in providing transparency on 
consumer premium expenditures, Chairman Rockefeller proposed an 
amendment establishing an 85 percent MLR for insurers that participate 
in the health markets--or ``exchanges''--established under the Act.\37\ 
This amendment was based on freestanding legislation introduced in the 
Senate Committee on Health, Education, Labor, and Pensions the same 
week by Senator Franken, and cosponsored by Sens. Rockefeller, 
Whitehouse, Sanders, Begich, Stabenow, and Leahy.\38\ During the Senate 
Finance Committee markup, Senator Rockefeller explained the rationale 
for establishing minimum national MLR requirements:
---------------------------------------------------------------------------
    \37\ Senate Committee on Finance, Results of Executive Session, 
America's Health Future Act of 2009 (Sept. 22, 2009) (online at http://
www.finance.senate.gov/legislation/details/?id=61f4fb98-a3d0-d85c-d33f-
f2c598e1d138).
    \38\ S. 1730, 111th Cong. (2009).

        That would seem to me to be a reasonable and fair requirement 
        for a health insurance company whose business in public life is 
        to provide health insurance with premiums that go back and 
        forth. But regardless of what those premiums might be, the 
        majority of the premiums, the majority of what they make is 
        spent on medical care for the people that they are in business 
        to insure.\39\
---------------------------------------------------------------------------
    \39\ Senate Committee on Finance, Continuation of the Open 
Executive Sessions to Consider an Original Bill Providing for Health 
Care Reform, at 195, 111th Cong. (Oct. 1, 2009).

    Ultimately, the amendment was pulled from consideration since the 
Congressional Budget Office (CBO) had not yet provided an evaluation of 
its cost.\40\
---------------------------------------------------------------------------
    \40\ Id. at 219.Ce ine at (nk doesn'tee on Health, Education, 
Labor, and Pensions ffordable Care Acte comprehensive plans..''
---------------------------------------------------------------------------
4. November 2009: Letter from Chairman Rockefeller to CIGNA

    While many health insurers that were either not-for-profit or that 
operated primarily in just one state provided Chairman Rockefeller 
complete responses to his August 2009 request for MLR data, many for-
profit health insurers did not. Seeking further understanding of 
expenditures within this market, the Commerce Committee obtained MLR 
filing data for 2008 and 2009 submitted by the 15 largest for-profit 
health insurers to the National Association of Insurance Commissioners 
(NAIC)\41\ pursuant to various state requirements.\42\ Committee 
majority staff examined this data in conjunction with data publicly 
filed with the Securities and Exchange Commission (SEC) over the same 
time period.
---------------------------------------------------------------------------
    \41\ NAIC is the U.S. standard-setting and regulatory support 
organization created and governed by the chief insurance regulators 
from the 50 states, the District of Columbia and five U.S. territories. 
Through the NAIC, state insurance regulators establish standards and 
best practices, conduct peer review, and coordinate their regulatory 
oversight. National Association of Insurance Commissioners, About the 
NAIC (online at http://www.naic.org/index_about.htm).
    \42\ State Insurance Commissioners require health insurers to file 
detailed financial disclosures with the NAIC for solvency purposes. As 
part of these filings, information pertaining to a plan's pre ACA MLR 
was available.
---------------------------------------------------------------------------
    This review found a discrepancy between the MLR information the 
insurance industry provided to consumers and policy makers versus the 
MLR information provided to investors during the health reform debate. 
Specifically, in December 2008, America's Health Insurance Plans (AHIP) 
issued a report showing an industry-wide MLR of 87 percent in 2008.\43\ 
Based on the findings of this report, AHIP created the below figure 
showing that 87 cents out of every 100 is spent on medical care leaving 
13 cents for non-medical expenses and profit.
---------------------------------------------------------------------------
    \43\ PricewaterhouseCoopers, The Factors Fueling Rising Health Care 
Costs 2008, Prepared for AHIP, at 2 (Dec. 2008).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    However, SEC filings of the six largest publicly-traded health 
insurers (including CIGNA) showed that none of the health insurers 
achieved the 87 percent MLR that the AHIP report cited. In these SEC 
filings, which are public documents but are targeted to investors and 
potential investors who are interested in a company's profitability, 
the companies' reported 2008 MLRs ranged from 81.5 percent to a high of 
84.8 percent.\44\
---------------------------------------------------------------------------
    \44\ Letter from Chairman John D. Rockefeller to H. Edward Hanway, 
Chairman and Chief Executive Officer, CIGNA, at 7 (Nov. 2, 2009).
---------------------------------------------------------------------------
    When multiplied across the $70 billion health insurers collected in 
premiums in 2008 alone, these discrepancies in MLR percentages amounted 
to billions of dollars.\45\ Chairman Rockefeller discussed concerns 
raised by this analysis in a November 2, 2009, letter to the chief 
executive officer of CIGNA,\46\ and CIGNA subsequently refiled its 
policy exhibits with the NAIC to correct the inaccurate information 
identified by Chairman Rockefeller.
---------------------------------------------------------------------------
    \45\ Id.
    \46\ Id. at 15.
---------------------------------------------------------------------------
5. December 2009: Senate Passage of Health Reform Legislation with MLR 
        Provisions

    In November 2009, the full Senate took up debate of health reform 
legislation. Senator Rockefeller successfully pressed for inclusion in 
the leadership amendment package MLR language similar to what he had 
proposed in the Senate Finance Committee health reform markup and to 
what Senator Franken had introduced in his stand-alone bill. The 
amendment established a minimum MLR of 80 percent for the individual 
and small group health insurance segments, and 85 percent for the large 
group segment.
    The decision to establish minimum medical loss ratios at these 
levels was guided by the CBO's determination that the majority of 
insurers were already providing benefits to their customers at or above 
these levels.\47\
---------------------------------------------------------------------------
    \47\ Congressional Budget Office, Budgetary Treatment of Proposals 
to Regulate Medical Loss Ratios (Dec. 13, 2009).
---------------------------------------------------------------------------
    During Senate floor consideration of the leadership amendment 
package, Senator Bill Nelson from Florida spoke to the legislative 
intent of the proposed MLR language. Sharing his experiences as a past 
state insurance commissioner of Florida, Senator Nelson stated:

        For 6 years, I got to see what insurance companies will do. I 
        can tell you. Instead of 85 percent and 80 percent that we are 
        going to require in this bill of every insurance premium dollar 
        they pay out in medical care. I can tell you that some of the 
        insurance companies I regulated back in the State of Florida 
        were down in the sixties. A lot of that was going into big-time 
        administrative offices, all kinds of jets, all kinds of padded 
        expense accounts. . . .

        We need to ensure that the policyholder's premiums and the 
        Federal subsidies that are going into the purchase of private 
        health insurance on the exchange are used for actual medical 
        care and not for wasteful administrative spending and marketing 
        and profits. If we don't do this kind of thing, regulating 
        insurance companies, they are going to take advantage. They are 
        going to take advantage of making more money at the expense of 
        patient care.\48\
---------------------------------------------------------------------------
    \48\ Statement of Senator Bill Nelson, Congressional Record, 
S13626-13628 (Dec. 20, 2009).

    The Senate passed the MLR amendment on December 22, 2009,\49\ and 
passed the bill containing this amendment on December 24, 2009.\50\ The 
MLR provisions remained in the final version enacted by Congress after 
the Senate and House resolved differences between their versions of the 
bill.\51\
---------------------------------------------------------------------------
    \49\ The leadership amendment, S. Amdt. 3276, was introduced on 
December 19, 2009. See Congressional Record, S13491-92. The amendment 
passed 60-39 on December 22, 2009. See Congressional Record, S13716.
    \50\ U.S. Senate, Roll Call Vote on H.R. 3590 (Dec. 24, 2009) (60 
yeas, 39 nays).
    \51\ The House of Representatives agreed to Senate amendments to 
the health reform bill on March 21, 2010 by a vote of 219-212. U.S. 
House of Representatives, Roll Call Vote on H.R. 4872 (Mar. 21, 2010) 
(219 yeas, 212 nays).
---------------------------------------------------------------------------
B. Implementation of the Affordable Care Act MLR Provisions
1. Elements of the MLR Formula

    Prior to passage of the ACA, the MLR was a calculation that served 
mainly to provide the shareholders of for-profit health insurance 
companies with some indication of how much profit the insurer was 
making. Under the pre-ACA--or ``traditional''--MLR definition, the 
numerator consisted of the company's expenditures for health care 
claims and the denominator consisted of the company's total premium 
intake. The ACA MLR definition differs from the traditional MLR 
calculation in several ways: (1) it allows a category of expenses 
considered to involve ``quality improvement'' to be counted in the 
numerator; and (2) it allows for a reduction in the denominator 
reflecting taxes and fees.\52\ The figure below demonstrates the 
difference between a ``traditional'' MLR and the ACA's MLR.
---------------------------------------------------------------------------
    \52\ Under the ACA, Federal and state taxes are subtracted from the 
total amount of premium revenue in the denominator of the MLR ratio. 
The contours of what constitutes ``federal and state taxes,'' however, 
were left to the rulemaking process. In the NAIC process, Federal taxes 
were defined as ``all Federal taxes and assessments allocated to health 
insurance coverage reported under section 2718 of the PHS Act, 
excluding Federal income taxes on investment income and capital 
gains.'' HHS adopted this definition in the interim and final rules, 
noting that investment income and capital gains taxes ``are not taxes 
based on premium revenues, and thus should not be used to adjust 
premium revenues.'' Department of Health and Human Services, Health 
Insurance Issuers Implementing Medical Loss Ratio (MLR) Requirements 
Under the Patient Protection and Affordable Care Act, 75 Fed. Reg. 
74878 (Dec. 1, 2010) (interim final rule).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

---------------------------------------------------------------------------
    Source: Mark Farrah Associates

    The ACA provided that NAIC would develop the new definitions and 
methodologies that health insurance companies and regulators would use 
for purposes of determining compliance with the ACA's minimum MLR 
requirements.\53\ The Secretary of the Department of Health and Human 
Services (HHS) was then tasked with certifying, by December 31, 2010, 
the MLR definitions and methodologies developed by the NAIC.\54\
---------------------------------------------------------------------------
    \53\ PPACA MLR provision, supra n. 7, at 2718(c).
    \54\ Id.
---------------------------------------------------------------------------
2. NAIC Implementation Process

    The NAIC set up two working groups of state insurance commissioners 
to develop the definitions and methodologies required under the ACA's 
MLR provisions. One group focused on devising a form for insurers to 
use to report the components of the MLR; the other was responsible for 
developing the definitions to be used in the MLR reports.\55\ Key terms 
that required definition in this process included ``quality improvement 
activities,'' the category of costs the ACA's MLR formula allows to be 
included as part of an insurer's medical costs.\56\ As part of its 
implementation process, the NAIC allowed for participation by 
interested stakeholders, including insurance company representatives 
and consumer advocates, providing opportunities to join conference 
calls and offer written comments.
---------------------------------------------------------------------------
    \55\ Timothy Jost, Implementing Health Reform: Medical Loss Ratios, 
Health Affairs Blog (Nov. 23, 2010) (online at http://
healthaffairs.org/blog/2010/11/23/implementing-health-reform-medical-
loss-ratios/).
    \56\ Department of Health and Human Services, Health Insurance 
Issuers Implementing Medical Loss Ratio (MLR) Requirements Under the 
Patient Protection and Affordable Care Act, 75 Fed. Reg. 74875 (Dec. 1, 
2010) (interim final rule).
---------------------------------------------------------------------------
    As the NAIC began the process of determining MLR definitions, 
consumer advocates and others became concerned that health insurers 
would work to dilute the MLR in two ways: (1) health insurers might 
attempt to reclassify certain administrative expenses as medical 
expenses or use an overly broad definition of ``quality improvement 
expense'' that could mask expenses that were actually administrative in 
nature; and (2) that national aggregation--as opposed to state-level 
aggregation--of MLR data would allow companies to avoid having to pay 
rebates to health insurance consumers in states with low MLRs as long 
as they maintain their MLR above the national level.
    Chairman Rockefeller monitored the NAIC implementation process and 
when appropriate, engaged with the NAIC to push back against efforts by 
the insurance industry that would have diluted intended consumer 
benefits of the MLR.
a. April 15, 2010 Committee Majority Staff Report

    On April 15, 2010, Chairman Rockefeller released a Commerce 
Committee majority staff report titled ``Implementing Health Insurance 
Reform: New Medical Loss Ratio Information for Policymakers and 
Consumers'' (``April 2010 report'') to provide background on pre-ACA 
insurer MLRs. The report analyzed the insurance industry's regulatory 
filings with the NAIC in 2008 and 2009 as well as insurer responses to 
the Chairman's August 2009 letter inquiries, and examined the 
importance of segmenting the MLRs by individual, small and large group 
segments. The report also highlighted the importance of establishing 
clear limits on the definition of what constitutes a ``quality 
improvement'' cost to prevent insurers from manipulating the new MLR 
formula to the detriment of consumers.\57\
---------------------------------------------------------------------------
    \57\ Senate Committee on Commerce, Science, and Transportation, 
Majority Staff Report on Implementing Health Insurance Reform: New 
Medical Loss Ratio Information for Policymakers and Consumers, at 5 
(Apr. 15, 2010).
---------------------------------------------------------------------------
    The April 2010 report's analysis of 2008 and 2009 regulatory 
filings with the NAIC showed that although many health insurers across 
the country were already meeting the minimum MLRs set forth in the ACA, 
the largest for-profit health insurers spent a much smaller portion of 
premium dollars on medical care in the individual market as compared to 
the larger group markets.\58\ According to this analysis, the largest 
for-profit insurers used about 15 cents out of every large group 
premium dollar for non-medical expenses while using more than 26 cents 
out of every premium dollar for non-medical expenses in the individual 
market.\59\ Leading insurer WellPoint provided a case in point. While 
WellPoint told its investors in 2009 that its overall MLR was 82.6 
percent, its individual and small group market insurance products had 
MLRs of 74.9 percent and 81.2 percent.\60\ The table below demonstrates 
the discrepancies between individual and group plan MLRs discussed in 
the report.
---------------------------------------------------------------------------
    \58\ Id. at 3.
    \59\ Id. at 3-4.
    \60\ Id. at 3.

----------------------------------------------------------------------------------------------------------------
                                                     Individual            Small Group           Large Group
                                               -----------------------------------------------------------------
                                                   2009       2008       2009       2008       2009       2008
----------------------------------------------------------------------------------------------------------------
Aetna                                              75.7%      73.9%      84.2%      82.0%      87.2%      82.0%
----------------------------------------------------------------------------------------------------------------
CIGNA                                              88.1%      86.9%      92.1%         --      85.2%      37.2%
----------------------------------------------------------------------------------------------------------------
Coventry                                           71.9%      65.8%      78.2%      79.1%      86.0%      82.7%
----------------------------------------------------------------------------------------------------------------
Humana                                             68.1%      71.9%      80.0%      77.2%      88.2%      82.4%
----------------------------------------------------------------------------------------------------------------
UnitedHealth                                       70.5%      70.3%      81.1%      78.7%      83.3%      83.5%
----------------------------------------------------------------------------------------------------------------
WellPoint                                          74.9%      73.1%      81.2%      79.0%      84.9%      85.2%
----------------------------------------------------------------------------------------------------------------
TOTAL                                              73.6%      72.5%      81.2%      79.7%      85.1%      83.9%
----------------------------------------------------------------------------------------------------------------

    The April 2010 report also examined data of six large, state-based 
subsidiaries of WellPoint to assess the expected impact of new MLR 
requirements at the state level. As shown in the following chart, this 
data showed substantial variation between states:

----------------------------------------------------------------------------------------------------------------
                                                          Individual          Small Group         Large Group
                                                            Segment             Segment             Segment
----------------------------------------------------------------------------------------------------------------
Anthem Health Plans of NH                                         62.9%               87.9%               88.4%
----------------------------------------------------------------------------------------------------------------
Anthem Health Plans of VA                                         72.1%               66.6%               79.4%
----------------------------------------------------------------------------------------------------------------
Rocky Mountain Hospital & Medical                                 74.1%               79.9%               83.1%
----------------------------------------------------------------------------------------------------------------
Blue Cross Blue Shield of GA                                      75.5%               78.0%               86.0%
----------------------------------------------------------------------------------------------------------------
Anthem Health Plans of KY                                         79.4%               80.9%               82.0%
----------------------------------------------------------------------------------------------------------------
Anthem Health Plans of ME                                         95.2%               86.9%               89.5%
----------------------------------------------------------------------------------------------------------------

    The April 2010 report further raised concerns about how insurers 
would approach accounting under the new MLR requirements. A separate 
report issued in the same time frame by health care industry analyst 
Carl McDonald of Oppenheimer & Co. had highlighted the financial 
incentive for health insurance companies to shift expenditures from the 
category of administrative costs to the category of medical costs,\61\ 
suggesting that companies would seek to ``MLR shift'' their costs from 
administrative to medical by 5 percent, or 500 basis points.\62\ 
Pointing to this analysis, the Committee majority staff's April 2010 
report asserted that a stricter definition of ``quality improvement 
expenses'' would limit the ability of health insurers to ``MLR shift'' 
and strongly recommended that regulators ``remain vigilant and focused 
on ensuring that consumers get the benefit of the new federally 
mandated medical loss ratios.'' \63\
---------------------------------------------------------------------------
    \61\ See Id. at 6 citing to Carl McDonald and James Naklicki, 
Oppenheimer & Co. Inc. Equity Research Industry Update, The Average 
Person Thinks He Isn't--Minimum Medical Loss Ratio Analysis (Apr. 8, 
2010).
    \62\ Id.
    \63\ Id. at 7.
---------------------------------------------------------------------------
b. May 7, 2010, Letters from Chairman Rockefeller to Secretary Sebelius 
        and NAIC Commissioner Cline

    As the NAIC continued its deliberations, Chairman Rockefeller wrote 
to HHS Secretary Kathleen Sebelius and NAIC Commissioner Jane Cline, 
then the President of the NAIC, to express his deep concern that the 
health insurance industry was ``mounting an all-out effort'' to weaken 
the MLR. In this letter he reminded policymakers that the intent of the 
MLR was to make sure that ``most of consumers' health insurance 
premiums dollars should be going to pay for patient care, not for 
insurers' administrative costs and profits.'' \64\
---------------------------------------------------------------------------
    \64\ Letter from Chairman John D. Rockefeller to Kathleen Sebelius, 
Secretary, Department of Health and Human Services (May 7, 2010); 
Letter from Chairman John D. Rockefeller to Commissioner Jane Cline, 
President, National Association of Insurance Commissioners (May 7, 
2010).
---------------------------------------------------------------------------
    Specifically, the Chairman highlighted the importance of requiring 
MLR reports on a state-by-state and market-by-market basis, as opposed 
to allowing insurers to report aggregate nationwide MLRs, to make sure 
consumers in a given state have appropriate information to evaluate 
their insurance options.\65\
---------------------------------------------------------------------------
    \65\ Id. at 3-4. The letters cited data discussed in the April 2010 
report showing variation between market segments and within market 
segments.
---------------------------------------------------------------------------
    These letters also reiterated the concern that insurers have strong 
financial incentives to ``MLR shift'' administrative expenses to the 
medical side, and argued that cost containment data reported to NAIC in 
2009 should be viewed as a reference point in assessing insurer 
predictions about their quality improvement expenditures. Committee 
staff analysis of this cost containment data showed that insurers 
invested an average of just 1.15 percent of their premium dollars on 
cost containment activities. While noting that cost containment 
expenses did not precisely overlap with activities that improve health 
quality, the Chairman argued that the low cost containment expenditures 
provide grounds for reviewing ``with skepticism'' proposals that would 
``allow insurers to claim that they will spend significantly higher 
portions of premium dollars on quality improvement in the year 2011 
than they are currently spending on cost containment.'' \66\
---------------------------------------------------------------------------
    \66\ Id. at 7.
---------------------------------------------------------------------------
c. July 20, 2010, Letter from Chairman Rockefeller to Commissioner 
        Cline

    On July 20, 2010, Chairman Rockefeller wrote NAIC Commissioner Jane 
Cline to express concern about mounting evidence of vast imbalances in 
resources of health insurers versus consumer advocates as they made 
their case in the NAIC process.\67\ In this letter, he also addressed 
key issues yet to be decided by the NAIC, including the final 
definition of ``quality improvement expenses.'' \68\ At this time, 
major insurers were arguing against the use of evidence-based standards 
in defining this term.
---------------------------------------------------------------------------
    \67\ Letter from Chairman John D. Rockefeller to Commissioner Jane 
Cline, President, National Association of Insurance Commissioners, at 2 
(July 20, 2010).
    \68\ Id. at 3-6.
---------------------------------------------------------------------------
    In a June 2010 letter, Blue Cross Blue Shield Association (BCBSA) 
complained to the NAIC that requiring evidence-based standards in the 
definitions of ``quality improvement expenses'' would present 
``unnecessary barriers and unreasonable high standards'' for 
insurers.\69\ UnitedHealthcare Group made a similar point in a letter 
to the NAIC in a letter providing edits to a draft set of definitions, 
displayed below, that the NAIC had circulated for comment.\70\
---------------------------------------------------------------------------
    \69\ Id. at 5.
    \70\ Id.
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    In his letter to Commissioner Cline, Chairman Rockefeller argued 
that an evidence-based approach best reflected the law's intent to 
``improve the safety, timeliness and effectiveness of the care patients 
receive,'' \71\ and that without such an approach, health insurance 
companies could claim any expense they labeled as improving patient 
quality as a ``quality improvement expense.'' The Chairman cited the 
following examples of expenditures that insurers were claiming 
constituted ``quality improvements'' but that appeared to have 
questionable impact on improving the quality of care a policyholder 
could expect to experience:\72\
---------------------------------------------------------------------------
    \71\ Id. at 3.
    \72\ Id. at 4.

   The money health insurance companies spend processing and 
---------------------------------------------------------------------------
        paying claims;

   The money health insurance companies spend creating and 
        maintaining their provider networks;

   The money health insurers spend updating their information 
        technology systems to code medical conditions and process 
        claims payments;

   The money health insurance companies spend to protect 
        against fraud and other threats to the integrity of their 
        payment systems; and

   The money health insurance companies use to conduct 
        ``utilization review'' of paid claims to detect payments the 
        companies deem inappropriate and retroactively deny them.\73\
---------------------------------------------------------------------------
    \73\ Id.

    The NAIC working group tasked with devising the definition of 
``quality improving expenses'' ultimately insisted that ``quality 
improvement expenses'' should be evidenced based, should ``advance the 
delivery of patient-centered care,'' and should be ``capable of being 
objectively measured.'' \74\
---------------------------------------------------------------------------
    \74\ The NAIC's definition of ``quality improving expenses'' was 
ultimately adopted by HHS. See Centers for Medicare and Medicaid 
Services (CMS), Medical Loss Ratio (MLR) Annual Reporting Form Filing 
Instructions for the 2013 MLR Reporting Year, at 14-15, 31 (Mar. 26, 
2014).
---------------------------------------------------------------------------
d. October 14, 2010, Letter from Chairman Rockefeller to the NAIC

    In early October 2010, as the NAIC neared the end of its 
deliberations on the MLR definitions and methodologies, the health 
insurance industry sought to re-open the debate regarding state versus 
national level aggregation for health insurance company MLRs. Chairman 
Rockefeller addressed this argument in an October 14, 2010 letter to 
Commissioner Cline, urging the NAIC to maintain its ``pro-consumer 
perspective and to reject the health insurance industry's last-minute 
attempt to erode the good work of the [NAIC].'' \75\ This lobbying 
effort by the health insurance industry ultimately failed and the NAIC 
moved to have its final recommendations sent to the Secretary of HHS.
---------------------------------------------------------------------------
    \75\ Letter from Chairman John D. Rockefeller to Commissioner Jane 
Cline, President, National Association of Insurance Commissioners, at 2 
(Oct. 14, 2010).
---------------------------------------------------------------------------
    These NAIC recommendations largely reflected Chairman Rockefeller's 
input on key issues of requiring a thorough and thoughtful definition 
of ``quality improvement expenses,'' and the requirement that health 
insurance plans report their MLR performance at the state level.
3. HHS Rulemaking Process
    On October 27, 2010, the NAIC provided its final recommendations to 
the Secretary of HHS, as directed by Public Health Service Act Section 
2718(c).\76\ HHS began its implementation process by publishing an 
interim final rule (IFR) in the Federal Register on December 1, 2010, 
with request for public comment. The IFR adopted the NAIC 
recommendations in full,\77\ and ultimately, HHS adopted a final rule 
on December 7, 2011.\78\
---------------------------------------------------------------------------
    \76\ Letter from the National Association of Insurance 
Commissioners to Kathleen Sebelius, Secretary, Department of Health and 
Human Services (Oct. 27, 2010).
    \77\ Department of Health and Human Services, Medical Loss Ratio 
Requirement Under the Patient Protection and Affordable Care Act, 76 
Fed. Reg. 76590 (Dec. 7, 2011) (final rule).
    \78\ Id. at 76574.
---------------------------------------------------------------------------
    While many stakeholder disagreements were resolved in the NAIC 
process, stakeholders continued to vigorously debate a number of key 
issues during the HHS rulemaking process, including the issue of how to 
properly classify ``quality improvement expenses.'' The rulemaking also 
explored how expenses associated with health insurance agent and broker 
commission fees were to be accounted.
a. Activities That Improve Health Care Quality

    Insurers and other interest groups argued that a broad definition 
of ``quality improvement expenses'' would allow for future innovations. 
Consumer advocates and provider groups, on the other hand, wanted HHS 
to more concretely define such expenses to prevent health insurers from 
essentially nullifying the purpose of the minimum MLR by allowing 
administrative expenses to be deemed ``quality improvements.'' \79\
---------------------------------------------------------------------------
    \79\ Department of Health and Human Services, Medical Loss Ratio 
Requirement Under the Patient Protection and Affordable Care Act, 75 
Fed. Reg. 74876 (Dec. 1, 2010) (interim final rule).
---------------------------------------------------------------------------
    The final rule ultimately adopted the approach taken by the NAIC, 
which provides that a quality improvement activity is one designed to 
improve health quality and increase the likelihood of desired health 
outcomes in ways that can be objectively measured, is directed toward 
individual enrollees or incurred for the benefit of specified segments 
of enrollees, and is grounded in evidence-based medicine or some other 
widely accepted criteria.\80\ The rule also specifies insurer 
activities that do not qualify as quality improvement expenses. These 
include activities primarily designed to control costs, fraud 
prevention activities, customer service hotlines addressing non-
clinical member questions, and maintenance of a claims adjudication 
system, among others.\81\
---------------------------------------------------------------------------
    \80\ Id. at 74875.
    \81\ Id. at 74875-76.
---------------------------------------------------------------------------
b. Agent and Broker Fees

    The IFR included a section of expenses it called ``other non-claims 
costs'' to be calculated as non-medical administrative costs. HHS 
defined these costs as ``expenditures that are not used to adjust 
premiums, incurred claims, or activities that improve quality care.'' 
\82\ The NAIC included agent and broker fees in this section, and HHS 
adopted that approach in the IFR. However, because the NAIC had raised 
concern over the potential impact on the industry from excluding agent 
and broker fees from the calculation of medical costs, HHS sought 
comment on this issue.
---------------------------------------------------------------------------
    \82\ Id. at 74877.
---------------------------------------------------------------------------
    In elements of the fully insured health insurance market, insurance 
agents and brokers serve as the marketing and sales conduit through 
which an individual or small business would purchase a health insurance 
product. Agents and brokers who sell health insurance typically had 
been paid on a commission model, meaning as compensation for their 
services, they received a percentage of the health insurance 
policyholder's premiums dollars. Insurance agents and brokers believed 
that keeping their commissions in the MLR calculation of ``other non-
claims costs'' would lead to reduced commissions, as health insurance 
plans sought to reduce administrative expenses in order to meet the 
ACA's MLR requirements.\83\
---------------------------------------------------------------------------
    \83\ Letter from Ken A. Crerar, President, Council of Insurance 
Agents & Brokers, President, to the Office of Consumer Information and 
Insurance Oversight (Jan. 31, 2011).
---------------------------------------------------------------------------
    During the comment period, stakeholders addressed the issue of how 
to classify agent and broker fees. The Council of Insurance Agents & 
Brokers wrote that agents and brokers provide critical services in the 
group health insurance market, such as administering benefit programs, 
assisting with Federal and state legal compliance, and advising on 
mitigating rising costs.\84\ The National Association of Health 
Underwriters said that the fees should not be considered administrative 
costs, as they are passed-through fees rather than insurer revenue.\85\ 
The U.S. Chamber of Commerce argued that ``agents and brokers serve a 
critical role in the health care marketplace by aiding consumers and 
employers in determining the health plan that best suits their needs at 
a premium they can afford.'' \86\
---------------------------------------------------------------------------
    \84\ Id. at 2-3.
    \85\ Letter from Janet Trautwein, Executive Vice President and 
Chief Executive Officer, National Association of Health Underwriters, 
to Kathleen Sebelius, Secretary, Department of Health and Human 
Services, at 2 (Jan. 28, 2011).
    \86\ Letter from Randel K. Johnson, Senior Vice President of Labor, 
Immigration, & Employee Benefits, and Katie Mahoney, Director of Health 
Care Regulations, U.S. Chamber of Commerce, to the Office of Consumer 
Information and Insurance Oversight, at 7 (Jan. 31, 2011).
---------------------------------------------------------------------------
    Other stakeholders expressed support for maintaining agent and 
broker fees as non-claims costs. AARP called for caution with respect 
to changes in the treatment of such fees as they relate to the MLR. It 
urged that changes should ``be based on objective evidence with the 
burden of proof on the issuers to justify such fees as anything other 
than a non-claims cost.'' \87\ The American Medical Association also 
supported treating broker fees and commissions as non-claims costs, 
arguing that these are ``quintessential administrative costs'' that 
``do not constitute the provision of medical services or the provision 
of services to improve the quality of those medical services.'' \88\
---------------------------------------------------------------------------
    \87\ Letter from David Certner, Legislative Counsel and Legislative 
Policy Director, AARP, to the Center for Consumer Information and 
Insurance Oversight, at 3 (Jan. 31, 2011).
    \88\ Letter from Dr. Michael D. Maves, Executive Vice President and 
Chief Executive Officer, American Medical Association, to Kathleen 
Sebelius, Secretary, Department of Health and Human Services, at 2 
(Jan. 31, 2011).
---------------------------------------------------------------------------
    Finally, consumer groups expressed concern that ``some insurers 
have already stated that they intend to collect commissions from 
enrollees on behalf of brokers and agents but to not count the amounts 
collected as premium revenue or administrative expenses.'' \89\ These 
groups therefore urged HHS to support the IFR approach to agent and 
broker costs and to vigilantly enforce the IFR provisions.
---------------------------------------------------------------------------
    \89\ Letter from Health Care for America Now to the Office of 
Consumer Information and Insurance Oversight, at 3.
---------------------------------------------------------------------------
    The final rule made no changes to the treatment of agent and broker 
fees. As such, they were defined as costs to be included in the non-
claims cost portion of the MLR.
4. 2011: Additional NAIC Review Regarding Excluding Agent and Broker 
        Commissions
    The 2010 mid-term elections brought substantial changes to the 
composition of Congress and state governments, bringing in a number of 
new members of Congress and state governors who opposed the ACA. The 
composition of the NAIC also saw substantial change, including the 
election of four new commissioners.\90\ In addition, at this time 
Florida Insurance Commissioner Kevin McCarty was designated NAIC 
President-elect, for a term beginning in 2012.\91\ Throughout the 
course of 2011, the NAIC saw renewed efforts by the health insurance 
industry and its allies at the state and Federal level to roll back key 
provisions of the ACA including the MLR.
---------------------------------------------------------------------------
    \90\ Chad Hemenway, Hello. My Name Is. . ., National Underwriter 
Property & Casualty (Dec. 20, 2010) (online at http://
www.propertycasualty360.com/2010/12/20/9-hello-my-name-is).
    \91\ Sean P. Carr, NAIC Picks New Leaders in Wake of Electoral 
Defeat, A.M. Best Newswire (Dec. 15, 2010) (online at http://
insurancenewsnet.com/oarticle/2010/12/15/naic-picks-new-leaders-in-
wake-of-electoral-defeat-a-240090.html#.U3UZvcfBre8).
---------------------------------------------------------------------------
    One of the issues that received attention during this period was 
the earlier NAIC and HHS decision to exclude agent and broker fees from 
the determination of medical expenses under the MLR formula. Throughout 
2011, Chairman Rockefeller monitored the NAIC's reconsideration of 
whether agent and broker commissions should be exempted from the MLR 
calculation, and engaged where appropriate with the NAIC on this issue.
a. March 15, 2011, Letter from Chairman Rockefeller to Commissioner 
        Susan E. Voss

    As the debate regarding the treatment of health insurance agent and 
broker commissions gathered momentum, the NAIC's Professional Health 
Insurance Advisors Task Force took up the issue.\92\ This task force 
was charged with monitoring the impact of the ACA on health insurance 
agents and brokers, as well as the health insurance consumers and the 
insurance market they serve.\93\ Commissioner McCarty led the task 
force and on March 3, 2011, in advance of NAIC's planned spring meeting 
in Austin, Texas, he released draft Federal legislation for public 
comment. The McCarty Proposal would have excluded agent and broker 
commissions from the MLR calculation.\94\
---------------------------------------------------------------------------
    \92\ National Association of Insurance Commissioners, Professional 
Health Insurance Advisors (D) Task Force, (accessed May 6, 2014) 
(online at http://www.naic.org/committees_
d_health_advisors_tf.htm).
    \93\ Id.
    \94\ H.R. 1206, 112th Cong. (2012).
---------------------------------------------------------------------------
    Chairman Rockefeller on March 15, 2011, wrote to Commissioner Susan 
E. Voss, then the President of the NAIC, regarding these renewed 
attempts to dilute the MLR.\95\ This letter highlighted how the NAIC 
had established a collaborative environment throughout the 2010 MLR 
implementation process,\96\ and noted that the McCarty proposal was 
``the same proposal that NAHU [the National Association of Health 
Underwriters] and other agent and broker groups unsuccessfully offered 
during the NAIC's 2010 deliberations.'' \97\ The letter urged NAIC 
members to carefully consider how the McCarty proposal could 
potentially undermine the expected consumer benefits inherent in the 
ACA's MLR provision.\98\
---------------------------------------------------------------------------
    \95\ Letter from Chairman John D. Rockefeller to Susan E. Voss, 
President, National Association of Insurance Commissioners (Mar. 15, 
2011).
    \96\ Id. at 2.
    \97\ Id.
    \98\ Id. at 3-10.
---------------------------------------------------------------------------
    Specifically, the Chairman's letter pointed out that the ACA's MLR 
provision was developed and drafted after extensive analysis of the 
medical loss ratio data submitted by health insurance companies to the 
NAIC as part of their regular regulatory regime, and both Congress and 
the Congressional Budget Office relied on data that included in 
``premiums earned'' any and all payments a health insurance company 
made to an agent or broker related to the sale of a health insurance 
policy.\99\ Chairman Rockefeller argued that excluding agent and broker 
commissions from the MLR calculation would not only be inconsistent 
with the health insurance industry's own accounting practices and 
standards, but would also deprive millions of consumers and business 
from the rebates and lower premiums they could expect from the MLR 
provision.\100\
---------------------------------------------------------------------------
    \99\ Id. at 3. Included within the instructions for regulatory 
filings, the NAIC provided to health insurers the following definition 
of ``written premium'': the contractually determined amount charged by 
the reporting entity [the health insurance company] to the policyholder 
for the effective period of the contract based on the expectation of 
risk, policy benefits, and expenses association with the coverage 
provided by the terms of the contract. Id. at 4.
    \100\ Id. at 4.
---------------------------------------------------------------------------
    To illustrate how making any changes to agent and broker 
commissions would have a negative impact on consumers, the letter used 
data from Maine's request for a MLR waiver.\101\ At the time, this kind 
of detailed data on agent and broker commissions in the individual and 
group markets was not widely available, but Mega Life & Health 
Insurance Company (Mega), one of Maine's three major health insurers, 
was required to disclose it as part of the MLR waiver process. The 
figure below shows how Mega used its policyholder's premium dollars.
---------------------------------------------------------------------------
    \101\ Id. at 6. The ACA allows the Secretary of Health and Human 
Services to adjust MLR standards for a state if the state can 
demonstrate that requiring insurers to meet the 80 percent threshold 
could destabilize the individual market, resulting in fewer choices for 
consumers. A total of 17 states (ME, NH, NV, KY, FL, GA, ND, IA, LA, 
KS, DE, IN, MI, TX, OK, NC, WI) have applied for MLR adjustments. 
Centers for Medicare and Medicaid Services, State Requests for MLR 
Adjustment (online at http://www.cms.gov/CCIIO/Programs-and-
Initiatives/Health-Insurance-Market-Reforms/
state_mlr_adj_requests.html).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    In its filing, Mega showed that it used 68 cents out of every 
dollar on medical expenses and used the remaining 32 cents for 
administrative costs and profit.\102\ Of the 32 cents spent on 
nonmedical expenses, a full third was spent on paying commissions to 
agents and brokers.\103\ Had Mega been subject to the ACA's MLR 
provision--with medical premiums of approximately $25 million dollars 
and a medical loss ratio of 68 percent--it would have owed its almost 
14,000 Maine customers a $3 million rebate or about $218 per 
customer.\104\ In contrast, under the McCarty proposal, Mega's $3 
million rebate would have decreased to $1 million, denying consumers 66 
percent percent of their rebate. According to Chairman Rockefeller, 
this meant ``money that was intended to give consumers relief from the 
high cost of health care would instead be converted into additional 
revenue for agents, brokers, and health insurance companies.'' \105\
---------------------------------------------------------------------------
    \102\ Letter from Chairman John D. Rockefeller to Susan E. Voss, 
President, National Association of Insurance Commissioners, at 6-7 
(Mar. 15, 2011).
    \103\ Id. at 7.
    \104\ Id.
    \105\ Id. at 8.
---------------------------------------------------------------------------
    The Chairman's final point was to note that agents and brokers 
earned more revenue when policyholders paid higher premiums and that 
any reforms like the MLR that sought to decrease what consumers paid in 
health premiums would also result in decreased income for agents and 
brokers. With insurance premiums rising at an average annual rate of 6-
7 percent over the preceding 10 years, the commission of an insurance 
agent or broker (in absolute dollars) had roughly doubled.\106\ As 
health insurance companies began the process of reviewing their 
administrative costs in order to be compliant with the ACA's MLR 
provision any reductions in health insurance premiums increases would 
invariably feel like a cut to agents and brokers.\107\
---------------------------------------------------------------------------
    \106\ Id. at 8-9. The figure applies a 10 percent commission to the 
average annual premiums for individual health insurance coverage, as 
presented in, The Kaiser Family Foundation and Health Research & 
Education Trust, Employer Health Benefits: 2010 Annual Survey (Sep. 2, 
2010) (online at http://ehbs.kff.org/pdf/2010/8085.pdf).
    \107\ Letter from Chairman John D. Rockefeller to Susan E. Voss, 
President, National Association of Insurance Commissioners, at 9 (Mar. 
15, 2011).
---------------------------------------------------------------------------
    The letter concluded by noting that millions of previously 
uninsured Americans were soon to be eligible to purchase affordable, 
comprehensive health care coverage. Although these plans would be 
offered at lower profit margins, insurance companies, agents, and 
brokers could expect to see higher sales volume.\108\
---------------------------------------------------------------------------
    \108\ Id. at 11.
---------------------------------------------------------------------------
b. Spring 2011 NAIC Meeting Austin, Texas

    In late March 2011, many of the Nation's insurance commissioners 
met in Austin, Texas for the NAIC's Spring national meeting. The 
McCarty proposal was part of the meeting agenda, and at this point 
encompassed an endorsement of proposed congressional legislation, H.R. 
1206, which provided for exclusion of agent and broker fees from the 
calculation of administrative costs under the MLR formula.\109\
---------------------------------------------------------------------------
    \109\ H.R. 1206, the ``Access to Professional Health Insurance 
Advisors Act of 2011'' (112th Congress).
---------------------------------------------------------------------------
    Preceding the meeting, in addition to Chairman Rockefeller's 
letter, many consumer advocates also voiced concerns regarding the 
speed with which the NAIC was moving. Ultimately acknowledging these 
concerns, the NAIC's Professional Health Insurance Advisors Task Force 
delayed endorsing the McCarty Proposal and instead agreed to further 
study the issue through its Health and Managed Care Committee.\110\ 
After several weeks of data gathering, the Health and Managed Care 
Committee delivered its final report (``May Report'') to the NAIC on 
May 26, 2011.\111\
---------------------------------------------------------------------------
    \110\ Arthur D. Postal, NAIC Panel Seeks More Info Before Backing 
Agent MLR Exemption, Consumer Watchdog (Mar. 28, 2011).
    \111\ National Association of Insurance Commissioners, Report of 
the Health Care Reform Actuarial (B) Working Group to the Health 
Insurance and Managed Care (B) Committee on Referral from the 
Professional Health Insurance Advisors (EX) Task Force Regarding 
Producer Compensation in the PPACA Medical Loss Ratio Calculation (May 
26, 2011).
---------------------------------------------------------------------------
c. May 24, 2011, Committee Majority Staff Report on 2010 MLR Rebates

    On May 24, 2011, Chairman Rockefeller issued a Senate Commerce 
Committee majority staff report (``May 2011 Commerce Committee 
Report''), marking the first time that estimated savings from the ACA's 
MLR provision had been quantified using the health insurance companies' 
own data. Based on preliminary data gathered by the NAIC, the report 
showed that consumers nationwide would have received almost $2 billion 
in rebates from their health insurance companies if the MLR provision 
had been in place for the 2010 reporting year.\112\ It also found that 
more than half of consumers in the individual market would have 
received rebates in 2010.
---------------------------------------------------------------------------
    \112\ Senate Committee on Commerce, Science, and Transportation, 
Majority Staff Report on Consumer Health Insurance Savings Under the 
Medical Loss Ratio Law, at 1 (May 24, 2011).
---------------------------------------------------------------------------
    The May 2011 Commerce Committee Report also showed that removing 
agent and broker commissions from the MLR calculation would result in 
reduced rebates to consumers by more than 60 percent or nearly $1.1 
billion.\113\ The below table represents the impact of removing agent 
and broker commissions from the MLR calculation in each market:
---------------------------------------------------------------------------
    \113\ Id.

------------------------------------------------------------------------
         Estimated Consumer  Rebate     Estimated Consumer Rebate When
Market    Under Current  MLR Law ($    Commissions are Excluded from MLR
                  millions)                Calculation ($ millions)
------------------------------------------------------------------------
Indivi                          $978                                $401
 dual
------------------------------------------------------------------------
Small                           $447                                $146
 Group
------------------------------------------------------------------------
Large                           $526                                $215
 Group
------------------------------------------------------------------------
Total                         $1,951                                $762
------------------------------------------------------------------------

    According to the NAIC data reviewed in the majority staff report, 
if agent and broker commissions had been removed from the MLR 
calculation in 2010, consumer's rebates would have reduced from $1.95 
billion to $762 million.\114\ The report also provided a detailed 
state-by-state breakdown of the rebates consumers would have lost.
---------------------------------------------------------------------------
    \114\ Id. at 4.
---------------------------------------------------------------------------
    The NAIC's Health Insurance Advisors Task Force, using information 
gathered by the Health and Managed Care Committee, would eventually 
vote on June 30, 2011, to endorse the proposal to support H.R. 1206, 
moving consideration to a plenary group of insurance commissioners. On 
July 12, 2011, Commissioner McCarty brought the H.R. 1206 support 
proposal before all 50 insurance commissioners for a vote. After 
California Commissioner Dave Jones and several other commissioners 
expressed opposition to H.R 1206, the NAIC ultimately did not hold a 
plenary vote on the proposal.\115\ Although tabled for a time, the 
McCarty proposal would reappear at the NAIC's 2011 Fall National 
Meeting in Washington D.C.
---------------------------------------------------------------------------
    \115\ Arthur D. Postal, PPACA: NAIC Ices Agent Comp MLR Exclusion 
Effort, LifeHealthPro (July 12, 2011) (online at http://
www.lifehealthpro.com/2011/07/12/ppaca-naic-ices-agent-comp-mlr-
exclusion-effort).
---------------------------------------------------------------------------
d. November 21, 2011, Letter from Chairman Rockefeller to Commissioner 
        Kevin McCarty

    Just prior to the NAIC's Fall 2011 meeting, Chairman Rockefeller 
wrote to Commissioner McCarty reiterating that removal of agent and 
broker commissions from the MLR calculation would be contrary to 
congressional intent. The Chairman's letter pointed out that the NAIC's 
own report found that ``a significant number of companies have not 
reduced commissions in 2011.'' \116\ Further, based on review of new 
data HHS had obtained from states submitting MLR waiver requests, the 
letter analyzed the negative impact removing agent and broker 
commissions would have in a number of states. The letter noted that 
while Kentucky, Georgia, and Delaware all claimed that the MLR was 
causing significant disruptions within their agent and broker 
communities, ``[t]o date, HHS has not yet found any convincing evidence 
that `consumers may be unable to access agents and brokers' under the 
minimum [MLR] law.'' \117\ In fact, in Kentucky, agent and broker 
commissions had actually increased; Georgia saw no decreases; and only 
one of nine insurers in Delaware decreased commissions.\118\
---------------------------------------------------------------------------
    \116\ Letter from Chairman John D. Rockefeller to Kevin McCarty, 
President-Elect, National Association of Insurance Commissioners, at 2 
(Nov. 21, 2011).
    \117\ Id. at 3.
    \118\ Id. at 3-4.
---------------------------------------------------------------------------
    Chairman Rockefeller stressed that while the early effects of the 
law had shown that consumers continued to enjoy access to the services 
of agents and brokers, any changes to the MLR's treatment of agent and 
broker commissions would have a negative impact on consumers. Using 
information from the NAIC's May Report, the letter discussed the impact 
removing agent and broker commission would have for Florida's health 
insurance consumers. The below chart demonstrates this distinction:

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    If agent and broker commissions were eliminated from the MLR, 
Florida consumers would have lost $142 million or over 60 percent of 
the estimated $200 million they would have received in rebates if the 
law had been in effect in 2010. Under the McCarty proposal, consumers 
would have lost not just hundreds of millions of dollars in annual 
rebates, but ``health insurance companies [would] lose the incentive 
the current law gives them to run their businesses more efficiently and 
deliver a better value to their customers at a lower cost.'' \119\ The 
Chairman emphasized his strong support of the agent and broker 
community, and at the same time reiterated that any changes to the MLR 
could not diminish the value of the expected consumer benefits.
---------------------------------------------------------------------------
    \119\ Id. at 5.
---------------------------------------------------------------------------
e. NAIC Endorses Modified McCarty Resolution

    On November 22, 2011, Commissioner McCarty introduced a modified 
agents and brokers resolution before a plenary of NAIC insurance 
commissioners. Instead of fully endorsing H.R. 1206, the resolution 
urged HHS to exempt agent and broker commissions from the MLR 
calculation and for HHS to place a hold on MLR implementation in order 
for state waiver requests to be filed. The resolution passed 26-20 
after a 90-minute debate--and two unsuccessful attempts by insurance 
commissioners to modify the resolutions language.\120\ Many insurance 
commissioners expressed concerns with the resolution. Commissioner 
Sandy Praeger, a Republican from Kansas, voiced concern about the 
future credibility of the NAIC saying, ``we [NAIC] were written into 
the [PPACA] law because we were trusted as experts on this. We are 
going so far here as to put our credibility in jeopardy.'' \121\
---------------------------------------------------------------------------
    \120\ Elizabeth D. Festa, NAIC Narrowly Passes Resolution Urging 
HHS to Exempt Agent Commissions from PPACA Standard, LifeHealthPro 
(Nov. 22, 2011) (online at http://www.life
healthpro.com/2011/11/22/naic-narrowly-passes-resolution-urging-hhs-to-
exem?page=3).
    \121\ Id.
---------------------------------------------------------------------------
    Ultimately H.R. 1206, although reported out of the House Energy and 
Commerce Committee, failed to secure a vote on the House floor and died 
at the end of the 112th Congressional session.\122\
---------------------------------------------------------------------------
    \122\ H.R. 1206, 112th Cong. (2012).
---------------------------------------------------------------------------
III. Conclusion
    Prior to health reform, for-profit health insurers carefully 
tracked their medical loss ratios and worked to lower them. A low MLR 
was a signal to investors that an insurer was spending less on health 
care and had more potential money for shareholders. The inclusion of 
minimum MLR requirements in health reform changed this dynamic. By 
setting a floor on health insurer expenditures of premium dollars for 
consumer medical care, the law prevents for-profit insurers from 
relentlessly cutting medical expenditures to boost profits.
    Today, the medical loss ratio provisions of the health reform law 
have already proved to be a significant success story for American 
consumers. In the four years since enactment of health reform, 
individuals and small businesses across the country have seen billions 
of dollars of savings due to the MLR requirements, including $1.6 
billion in rebates and hundreds of millions of more due to improved 
insurer efficiencies. At the same time the MLR public reporting 
requirements have opened a new window into the operations of the 
insurance industry, helping consumers compare and choose products, and 
providing new data to help policy experts, financial analysts, and 
others evaluate industry trends.
    Looking forward, the MLR requirements will serve as permanent 
incentives for the insurance industry to operate with efficiency and 
transparency, and to make sure consumers receive appropriate value for 
their premium dollars.

    The Chairman. Now, that the dust has settled and the data 
is in, it is hard to see what all the fuss was about. Health 
insurers who have not met the 80 percent threshold have cut 
rebate checks totaling almost $2 billion to their customers. 
That is very good news. But the even better news is what people 
do not think of, and that is that the law forced insurance 
companies to review their operations and reduce their non-
healthcare related costs, and they are doing that. Rebate 
amounts are, therefore, dropping, and there is a very simple 
reason for that, because health insurance companies increased 
their efficiency and the quality of their products. That cost 
cutting, by the way, has saved consumers hundreds of millions 
of dollars more.
    The minimum medical loss ratio is a very simple idea, but 
it appears to have had a powerful and very positive effect on 
the health insurance market. Consumers are getting a better 
deal than they were getting 5 years. I look forward to talking 
about how and why this worked in the commercial market, and 
whether we can apply it to other parts of our healthcare 
sectors, such as Medicaid managed care.
    And that is the end of me, and I now present to you my good 
friend and distinguished Ranking Member, John Thune, whose 
brother is about to be here.
    Senator Thune. He is here. Right there.
    The Chairman. And so, you are Bob. Bob, I want to tell you, 
begging sufferance from membership, that you have a superb 
brother. He may be younger than you. And you gone into a 
profession which he indicates that your mother probably prefers 
that he had gone into. But I would argue that because I would 
say he is a superb legislator and a superb senator. I am a 
Democrat, he is a Republican. It makes absolutely no difference 
whatsoever. We get a lot done together. So the Thune family, 
wherever they are at this very moment, should be very proud of 
both of you.

                 STATEMENT OF HON. JOHN THUNE, 
                 U.S. SENATOR FROM SOUTH DAKOTA

    Senator Thune. Thank you, Mr. Chairman. My gosh. How can I 
not say good things about Obamacare now after you do that? I 
appreciate that. It is nice to have my brother here. He is 
older, by 15 years. He still has all his hair, which is 
something that some of us who are losing are a little chagrined 
about.
    The Chairman. I would not worry.
    Senator Thune. Thank you. But I appreciate you having the 
hearing, Mr. Chairman, and your diligent work on one particular 
issue of the healthcare law, which I think you have given a 
tremendous amount of attention to. And I know we are going to 
talk a lot about that and hear from our panelists here today. I 
want to talk, too, in the broader context about the Affordable 
Care Act.
    But as we do think about the law and its impact across the 
country, I want to underscore a quote from a constituent of 
mine, Dale, who wrote to me saying, and I quote, ``I feel the 
Federal Government has stolen over $5,000 [per year] from me.'' 
He is referring to the significant premium increase, as well as 
a jump in his deductible, under Obamacare.
    Another constituent from South Dakota, Roxanne, received a 
quote of $400 more per month, or $4,000 more per year, under 
Obamacare than her current health insurance plan. With two kids 
to get through college, Roxanne and her husband cannot afford a 
total monthly health insurance payment that is more than their 
mortgage payment on a monthly basis. So she wrote to me and 
said, and I quote, ``Please do something about this. There has 
to be a better way.''
    So those are just a couple of the continuing frustrations 
that I hear from people in South Dakota when it comes to some 
of the negative impacts of the Affordable Care Act, otherwise 
known as Obamacare. Now, thankfully Dale and Roxanne believe in 
a representative democracy that laws can be changed or 
repealed, so they along with many others have shared their 
stories about the damaging impacts of this law.
    The idea of the medical loss ratio provision in the 
Affordable Care Act, which has been championed, as I said, by 
the Chairman, requires insurers to spend the majority of 
premium dollars on efforts to improve healthcare quality, and 
it places a cap on administrative costs. Consumers can benefit 
under this provision by gaining greater transparency as to how 
insurers spend premium dollars, and in some cases, getting a 
rebate from insurers that miss the MLR target.
    In 2012, the average rebate per family in South Dakota was 
$70 for the approximately 700 million individuals who received 
a rebate, or just about $5 a month. This is also roughly the 
same amount of the previous year's average rebate in my home 
state. Now, I know there are other states that have had 
different experiences, have seen higher rebates than South 
Dakota, but I think it is important to keep the issue in 
perspective: approximately 500 million, in MLR rebates were 
paid out nationwide in 2012, a figure that is likely to decline 
for 2013.
    At the same time, recent news accounts show that nearly the 
same amount was squandered on the failed health exchanges in 
just four states, and hundreds of millions have been wasted on 
contractors who have been paid to sit idle in Obamacare 
processing centers. It is hard to see this as a net gain for 
consumers and taxpayers.
    I appreciate the Chairman's dedication to protecting 
consumers and the MLR provision. It is well intentioned. We all 
want quality healthcare and affordable insurance premiums, but 
I worry that the MLR provision and the healthcare law as a 
whole are having negative consequences on insured individuals 
and the many Americans who are frustrated that promises about 
how the legislation was going to work have proven to be untrue.
    The intent of the MLR is to help contain spending on health 
insurance, which is a laudable goal. But some experts believe 
that the MLR could actually increase the cost of premiums and 
narrow the competition in the marketplace. I am also concerned 
that the MLR regulation put forth by HHS can undermine efforts 
by insurers to prevent fraud and abuse, including efforts to 
prevent the delivery of inappropriate or unnecessary services 
that may harm consumers.
    Even if the MLR could be implemented without those 
consequences, we cannot ignore the law's larger negative 
impact. How do consumers benefit when the cost of other 
Obamacare provisions exceed any potential benefits that they 
would get from the MLR. As just one example, according to a 
summation compiled by the House Ways and Means Committee 
regarding estimates from the non-partisan Joint Committee on 
Taxation and the CBO, tax increases from Obamacare are 
estimated to total $1 trillion over 10 years. Some of those 
costs are going to be passed on directly to consumers, 
including my constituents in South Dakota and many other 
Americans.
    Taken as a whole, Obamacare continues to wreak havoc on our 
economy and on job creation. More and more Americans are losing 
their existing healthcare, and as a result of the employer 
mandate, businesses are cutting hours to reduce the number of 
full-time employees on their books. Ultimately, the 
Congressional Budget Office estimates that due to the decline 
in hours worked, Obamacare will result in losses equal to two 
and a half million fewer full-time workers.
    I want to reiterate what Roxanne wrote to me--``There has 
to be a better way.'' Consumers should get appropriate value 
for their premium dollars on health insurance, and the MLR is a 
well-intentioned attempt at achieving that. But when one steps 
back to look at the larger picture, it is increasingly evident 
that the many problematic costs in regulations associated with 
the healthcare law will almost certainly frustrate that 
purpose.
    Mr. Chairman, I want to thank you again for holding this 
hearing. I look forward to hearing from our witnesses on this 
particular subject. And again, credit your hard work on this 
element of Obamacare, and wish that I could speak more 
favorably about other elements of the bill.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Thune. Incidentally, does 
everybody have a copy of this? Do you? OK. Because this is just 
like anything else. I mean, this is like the Intelligence 
Committee when we are going after the intelligence community, 
you write reports. But you always include a lot of reference 
notes, in other words, because if you have reference notes, 
that means that you can go right back to the person, or to the 
e-mail, or to the telephone call, whatever. In other words, it 
talks about the accuracy of the report.
    Before I begin--no. First, we are going to do it properly. 
We are going to go to Mr. Wendell Potter. Any time you do that, 
you are doing something useful and good for the country. And 
Wendell and I sort of fell into a great friendship when he had 
the unbelievable courage to step forward and for the first to 
open the chest cavity of insurance company practices and did so 
forthrightly, has written books on it, always in a very even 
voice without undue attacks or anything else. He just tells it 
as he sees it.
    So Wendell Potter is an Analyst for the Center for Public 
Integrity and a former Health Insurance Executive for Cigna. 
Mr. Mark Hall, Professor of Law, from Wake Forest, and Mr. Jack 
Ralston. I am going to say something about him because he could 
not come. Ms. Katherine Fernandez of Houston, Texas. That is 
you. And Mrs. Grace-Marie Turner, President of the Galen 
Institute.
    Can I just, Wendell, before you start, say that what John 
Ralston was going to say, we will make a part of the record 
obviously.
    [The information referred to follows:]

         Prepared Statement of John Ralston, Hampton, Virginia
    Chairman Rockefeller, Ranking Member Thune, and members of the 
Committee. I want to thank you for inviting me here today. My name is 
John Ralston, and I'm President of Bihrle Applied Research located in 
Hampton, Virginia. The costs of healthcare have had a significant 
impact on the financial well-being of my company. I greatly appreciate 
the opportunity to present my perspective.
    Bihrle Applied Research is a technology company located in the 
Hampton Roads area of Virginia that is involved in the aircraft 
testing, flight control and simulation development aspects of both 
civil and military aviation. We've been in business for over 40 years 
and have worked with most of the world's major and minor aircraft 
manufacturers, as well as a majority of the world's governmental 
authorities associated with aviation. We have a talented and motivated 
staff, and finding and keeping these sorts of people require, among 
other things, a health care plan that is at least competitive with 
other major companies. Being a small company of 26 engineers and 
software developers means that we have limited and somewhat more 
expensive choices in this regard. In the earlier years of the company's 
history, our health coverage consisted of an expensive plan from a 
major provider that had high deductibles, such that most of our people 
rarely received any contribution from the provider for any of their 
health care. Obviously, this was unpopular and after becoming 
president, I examined our options in more detail. We were able to find 
a PPO plan with the MAMSI health insurance company that had $10 copays 
for most doctor visits and drugs, and while the selection of plan 
doctors was adequate, they also paid 80 percent of off-plan visits. We 
also added, for the first time in the company history, a very limited 
dental plan, one that provided limited coverage for dentist visits, 
fillings and x-rays, but nothing for more serious dental work. This was 
a significant upgrade in the Bihrle Applied Research's healthcare at 
the time, and was very nearly the same cost as our previous plan, with 
the company at the time paying the entire cost of the healthcare. This 
health insurance company was eventually bought by United Healthcare, 
and over the years the cost for family coverage has gradually increased 
from approximately $370 permonth in the late 1990s to over $2,000 per 
month today. Heath care of the employees is essentially our largest 
expense besides salaries, over $300,000 per year for a staff of 26, 
essentially equivalent to the company's total tax bill. As the costs 
have escalated over the years, we've introduced a number of options for 
the employees including the company fully paying for an HMO plan and 
allowing employees to pay the difference for varying levels of PPO 
plans. Since everyone has eventually opted for the PPO plans, our 
current approach pays 85 percent of the total cost for the least of two 
PPO plans. Most employees select the highest plan and pay the monthly 
difference.
    Because of the dominance of health care costs in the company's 
finances, we watched the progress of the ACA with concern as to the 
impacts on coverage and cost. At the outset of the program, the first 
thing that we noticed was no significant change in the rate of increase 
of the program cost. Obviously, for the cost per family to go from $368 
per month to over $2,000 per month, there had been double digit 
percentages of increase nearly every year since we first established 
the program. At this point, the increases, while still objectionable, 
have stayed consistent with previous years; with 2013 percent increase 
dropping slightly. The most welcome effect has been the impact of the 
Medical Loss Ratio component of the ACA which, for us, has resulted in 
refunds of $5,000 and $6,000 over the last two years. With the 
availability of this rebate, the decision was made to use this money to 
improve the coverage of the dental plan. This rebate obviously did not 
cover the complete amount of the increase, but was enough that the 
remaining contribution for the company was acceptable. The upgraded 
dental policy now covers more serious dental work and surgery, 
including, root canals, crown and implants. In the past two years, this 
coverage has been of significant benefit to many of the company 
employees, my self included, where I personally was able to save over 
$2500 on a recent implant. The overall satisfaction with the company's 
health coverage is the highest it has ever been in my 33 year history 
with the company.
    The epilogue to this story is that we remain hopeful that we will 
continue getting the rebate, primarily because we have a healthy staff 
that is conscious of their health, so our overall claims have been 
relatively low. Health maintenance is something the company encourages 
by allowing employees flexible hours for exercise time during the 
workday, as well as other support for gym memberships. Nevertheless, 
healthcare costs continue to escalate, and at some point we may have to 
transfer more cost to the employees. We are hopeful that the rate of 
increase will continue to slow. The fact remains that health care is 
effectively our largest non-salary cost, and when we compare the total 
of our tax and health care costs, we are still at a disadvantage to 
European competitors, with their higher taxes, but absence of company 
funded health care costs.

    The Chairman. But when he got into this, I think he was a 
little skeptical at first. But he said that since this thing 
went into effect, the percent increase in the cost of coverage 
for his employees declined slightly in 2013 from previous 
years. The company received medical loss ratio refunds of 
$5,000 to $6,000 over the last 2 years. This rebate money he 
put to work improving the dental plan that the company 
provides, which Mr. Ralston said has been of significant 
benefit to many of the company's employees. So he is pleased.
    And I am pleased to introduce Wendell Potter.

    STATEMENT OF WENDELL POTTER, ANALYST, CENTER FOR PUBLIC 
             INTEGRITY AND FORMER HEALTH INSURANCE 
                           EXECUTIVE

    Mr. Potter. Mr. Chairman, Ranking Member Thune, and members 
of the Committee, thank you for the opportunity to be here this 
afternoon. I also want to thank you, Mr. Chairman, for your 
tireless efforts to ensure that the Affordable Care Act 
contains language to address what had been a steady decrease in 
the medical loss ratio over more than a decade. As a result of 
the MLR provision in the law, Americans with private health 
insurance have saved billions of dollars that otherwise would 
have gone to unnecessary overhead and excess profits.
    It has been almost 5 years since I first appeared before 
this committee and spoke about the medical loss ratio, which 
was then an obscure term that was known by few other than 
insurance company executives, Wall Street financial analysts, 
and shareholders. As I said then, the average family had almost 
no understanding of how influential Wall Street has become and 
the decisions made by insurance company executives about how 
much of policyholders' premiums would actually be used to pay 
for medical care.
    I noted that financial analysts and shareholders of 
publicly-traded health insurers are as interested in a medical 
loss ratio as they are in earnings per share. To win the favor 
of influential analysts, executives of four private insurers 
had to demonstrate during every quarter every quarterly 
earnings call that their companies made more during the most 
recent quarter than a year earlier, and that the portion of the 
premium going to pay for medical care, or the MLR, was 
declining. If they had to acknowledge that the company had to 
spend a slightly higher percentage of premiums on medical 
claims than anticipated, they knew that some of their investors 
would be disappointed enough to sell their shares, which would 
inevitably result in a drop in the stock price and the value of 
the company.
    During my last 10 years as an industry executive, one of my 
main responsibilities was to handle financial communications to 
the media. In preparing for quarterly earnings reports, the 
first numbers that I looked for were the earnings per share in 
the medical loss ratio. I could predict with some certainty 
whether the company's stock price would go up or down the day 
we announced quarterly earnings by looking at just those 
numbers. I once saw a competitor's stock price drop 20 
percent--20 percent--in a single day when the company reported 
that its MLR for the quarter had increased by just one and a 
half percent.
    In my previous testimony, I detailed some of the actions 
insurers took to reduce the chances that analysts and investors 
would be disappointed, including dumping policyholders when 
they got sick. By requiring insurers to spend at least 80 
percent of what policyholders pay in premiums on medical claims 
or to improve the quality of care they receive, as the 
Affordable Care Act does, the influence of Wall Street has been 
reduced.
    As you know, a primary goal of the MLR requirements in the 
ACA was to help consumers realize fuller value of their health 
insurance payments. Since those requirements went into effect 
in 2011, that goal has indeed been realized.
    Consumers benefit from the MLR requirements in two 
significant ways. First, insurers are now operating more cost 
efficiently to stay in compliance with the law. As a result, 
many policyholders are paying lower premiums than they would 
have been charged otherwise. Second, if an insurer fails to 
comply and spends less than 80 percent on medical care or 85 
percent in the large group market, it has to issue rebates to 
its policyholders.
    Individuals and families who are not able to get coverage 
through an employer have seen the greatest benefit. According 
to the Kaiser Family Foundation, the average MLR in the 
individual market increases from 78 percent in 2010 to 83 
percent in 2012. Researchers at the Foundation estimated that 
had it not been for the MLR requirements in the ACA, premiums 
in the individual market would have been almost $900 million 
higher in 2011, and nearly $2 billion higher in 2012.
    As you may know, I had the privilege of serving as a 
consumer representative to the National Association of 
Insurance Commissioners when that organization was working in 
2010 to draft the MLR regulations. The insurance industry 
flooded the Commissioners with comment letters as part of an 
intense lobbying effort to persuade the NAIC to give insurers 
broad latitude to comply with the law. They argued that many of 
the activities they had always categorized as administrative in 
nature should be counted among quality improvement expenses.
    Despite being outspent and out-lobbied by what could be 
considered an order of magnitude, the NAIC's consumer 
representatives were successful in pushing back against the 
industry. Most of the industry's requests were rejected by the 
Commissioners as being unreasonable and contrary to the intent 
of the law.
    The MLR requirements ensure that consumers can now have 
greater confidence in knowing that most of what they pay in 
premiums will be used to pay for medical care or to improve the 
quality of care, and that no more than 20 percent of their 
premiums will go to unnecessary overhead or to reward insurance 
company executives and shareholders. Overall, the 80/20 rule 
has had a positive impact on the pocketbooks of millions of 
consumers, and it will continue to help ensure that Americans 
can realize the full value of their health insurance payments.
    Thank you.
    [The prepared statement of Mr. Potter follows:]

         Prepared Statement of Wendell Potter, Philadelphia, PA
    Mr. Chairman, Ranking Member Thune and members of the Committee, 
thank you for the opportunity to be here this afternoon.
    I also want to thank you, Mr. Chairman, for your tireless efforts 
to ensure that the Affordable Care Act contained language to address 
what had been a steady decrease in the medical loss ratio (MLR) over 
more than a decade. As a result of the MLR provision in the law, 
Americans with private health insurance have saved billions of dollars 
that otherwise would have gone to unnecessary overhead and excess 
profits.
    It has been almost five years since I first appeared before this 
committee and spoke about the medical loss ratio, which was then an 
obscure term known by few other than insurance company executives, Wall 
Street financial analysts and shareholders. As I said then, the average 
family had almost no understanding of how influential Wall Street had 
become in the decisions made by insurance company executives about how 
much of policyholders' premiums would actually be used to pay medical 
claims.
    I noted that financial analysts and shareholders of publicly traded 
health insurers are as interested in the medical loss ratio as they are 
in earnings per share. To win the favor of influential analysts, 
executives of for-profit insurers had to demonstrate during every 
quarterly earnings call that their companies made more money during the 
most recent quarter than a year earlier and that the portion of the 
premium going to pay medical claims--the MLR--was declining. If they 
had to acknowledge that the company had to spend a slightly higher 
percentage of premiums on medical claims than anticipated, they knew 
that some of their investors would be disappointed enough to sell their 
shares, which would inevitably result in a drop in the stock price and 
the value of the company.
    During my last 10 years as an industry executive, one of my main 
responsibilities was to handle financial communications to the media. 
In preparing for quarterly earnings reports, the first numbers I looked 
for were the earnings per share and the medical loss ratio. I could 
predict with some certainty whether the company's stock price would go 
up or down the day we announced quarterly earnings by looking at just 
those two numbers. I once saw a competitor's stock price drop 20 
percent in a single day when the company reported that its MLR for the 
quarter had increased by just one and a half percent.
    A study conducted by PriceWaterhouseCoopers in 2008 showed how 
successful executives at publicly traded companies had been in reducing 
the percentage of premium revenue on medical care. The accounting firm 
found that the medical loss ratios of the seven largest for-profit 
insurers fell from an average of 85.3 percent in 1998 to 81.6 percent 
in 2008. By reducing the MLR 3.7 percent over those years, the 
insurance companies avoided paying out billions of dollars for medical 
care and were able to use that money to reward executives and 
shareholders--at the obvious expense of their policyholders.
    In my previous testimony, I detailed some of the actions insurers 
took to reduce the chances that analysts and investors would be 
disappointed, including dumping policyholders when they got sick. By 
requiring insurers to spend at least 80 percent of what policyholders 
pay in premiums on medical claims or to improve the quality of care 
they receive, as the Affordable Care Act does, the influence of Wall 
Street has been reduced.
    As you know, a primary goal of the MLR requirements in the ACA was 
to help consumers realize fuller value of their health insurance 
payments. Since those requirements went into effect in 2011, that goal 
has indeed been realized.
    Consumers benefit from the MLR requirements in two significant 
ways. First, insurers are now operating more cost-efficiently to stay 
in compliance with the law. As a result, many policyholders are paying 
lower premiums than they would have been charged otherwise. Second, if 
an insurer fails to comply and spends less than 80 percent on medical 
care--or 85 percent in the large group market--it has to issue rebates 
to its policyholders.
    Individuals and families who are not able to get coverage through 
an employer have seen the greatest benefit. According to the Kaiser 
Family Foundation, the average MLR in the individual market increased 
from 78 percent in 2010 to 83 percent in 2012. Researchers at the 
Foundation estimated that had it not been for the MLR requirements in 
the ACA, premiums in the individual market would have been $856 million 
higher in 2011 and $1.9 billion higher in 2012.
    During my two decades in the insurance industry, my colleagues and 
I never tired of saying that steps needed to be taken to remove costs 
from the U.S. health care system. Although the industry spent 
considerable time and resources lobbying against the MLR requirements--
and later to try to shape the regulations pertaining to the 
requirements--the 80/20 rule, as it is often called, has done what the 
industry said was needed. During the first two years that the rule has 
been in effect, according to a report published earlier this month by 
the Commonwealth Fund, at least $3 billion in costs were removed from 
our health care system, with American consumers being the beneficiary.
    Approximately half of those savings were in the form or rebates: 
$1.1 billion in 2011 and $513 million in 2012. Insurers sent out fewer 
rebate checks in 2012 than in 2011 because most of them quickly 
implemented the changes necessary to stay in compliance with the law. 
Had the MLR requirement been in effect in 2010, by the way, consumers 
across all the market segments would have received close to $2 billion 
in rebates, according to the Commonwealth Fund. Imagine how much 
consumers would have saved if the requirement had been in effect during 
earlier years.
    The other way consumers have benefited is the reduction in overhead 
in the insurance industry. The Commonwealth Fund calculated that $1.75 
billion in overhead was eliminated during the first two years alone. 
Most of those savings came in 2012 as health insurers continued to 
reduce their administrative and sales costs, such as brokers' fees, 
without increasing their profit margins.
    It's important to note that although broker commissions decreased 
by almost $300 million across all market segments in 2012, that 
represented only about 3.5 percent of total broker expense that year.
    As you may know, I had the privilege of serving as a consumer 
representative to the National Association of Insurance Commissioners 
when that organization was working in 2010 to draft the MLR 
regulations. The insurance industry flooded the commissioners with 
comment letters as part of an intense lobbying effort to persuade the 
NAIC to give insurers broad latitude to comply with the law. They 
argued that many of the activities they had always categorized as 
administrative in nature--such as their spending to reduce fraud and to 
meet accreditation requirements--should be counted among quality 
improvement expenses. And lobbyists for insurers and brokers joined 
forces in an intense campaign to get broker fees exempted from the MLR 
equation. Despite being outspent and out-lobbied by what could be 
considered an order of magnitude, the NAIC's consumer representatives 
were successful in pushing back against the industry. Most of the 
industry's requests were rejected by the commissioners as being 
unreasonable and contrary to the intent of the law.
    It's worth noting that some critics predicted that the MLR 
requirements would result in a mass exodus of insurers from the 
marketplace. That has not happened. In fact, insurers have continued to 
do quite well financially since the MLR rules went into effect. 
According to an analysis by the Commonwealth Fund, insurers' total 
profits for all markets have declined by only 0.1 percent of premiums.
    Another benefit of the MLR requirements to consumers as well as to 
policymakers and regulators is the enhanced transparency they have 
brought to the insurance industry. We now have much better insights 
into how insurers spend the premiums they collect from policyholders as 
a result of the additional reporting requirements.
    We have learned, for example, that nonprofit insurers have done a 
much better job of complying with the 80/20 rule than their for-profit 
competitors. As Commonwealth Fund researchers noted in a report last 
year, publicly traded insurers appear to aim their pricing closer to 
the minimum loss ratio, no doubt because that is what Wall Street 
demands they do. Their adjusted MLR marketwide has been ``virtually 
identical'' to the 80 percent limit.
    The researchers found that only eight percent of nonprofit insurers 
owed a rebate in the individual market in 2011 compared with 47 percent 
of for-profit insurers. Additionally, the average amount of the rebates 
owed by the nonprofits were considerably lower than those owed by the 
for-profits.
    Still, all consumers, whether enrolled in a plan operated by a 
nonprofit or for-profit company, continue to benefit from what has 
become one of the most important cost-saving provisions of the 
Affordable Care Act.
    The MLR requirements ensure that consumers can now have greater 
confidence in knowing that most of what they pay in premiums will be 
used to pay for medical care or improve the quality of that care, and 
that no more than 20 percent of their premiums will go to unnecessary 
overhead or to reward insurance company executives and shareholders.
    Overall, the 80/20 rule has had a very positive impact on the 
pocketbooks of millions of consumers, and it will continue to help 
ensure that Americans can realize the full value of their health 
insurance payments.
    Thank you.

    The Chairman. Thank you, sir, very much.
    Mr. Mark Hall, Professor of Law, Wake Forest University.

STATEMENT OF MARK A. HALL, PROFESSOR OF LAW AND PUBLIC HEALTH, 
                     WAKE FOREST UNIVERSITY

    Mr. Hall. Chairman Rockefeller, Ranking Member Thune, and 
distinguished members of this committee, it is a true honor to 
speak before you about the work that Dr. Michael McCue and I 
have done, who is with us here from Virginia Commonwealth 
University, over the last few years analyzing data regarding 
the medical loss ratio and reported in a series of publications 
issued by the Commonwealth Fund, and published with Health 
Affairs.
    I will briefly make three sets of remarks, the first 
speaking to the primary consumer benefits from the 80/20 rule, 
amplifying some of what Mr. Potter said. Second, talking about 
some of the secondary beneficiaries or potential drawbacks of 
the rule, and third, thinking very briefly about possibilities 
for expanding or improving the rule.
    I think one of the remarkable things about the Federal MLR 
rule is this transformation of the MLR from a measure of keen 
consumer interest that Mr. Potter described under which a lower 
medical loss ratio was better. The whole concept of medical 
loss emphasizes that from an investor's point of view, it was a 
bad thing to pay medical claims. And now, the MLR has been 
turned 180 degrees in the other direction, viewing it as an 
indicator of consumer value in which a higher MLR is better for 
consumers because this means that the premium dollars are being 
used more effectively to provide benefits, and perhaps it 
should be renamed the medical benefit ratio instead of the 
medical loss ratio to signify this remarkable transformation of 
the indicator of consumer value rather than a potential for 
investor profits.
    Now, that said, it is not the perfect measure of all things 
of consumer value. There are certainly things--aspects of 
administrative expenses that bring consumer value, such as some 
part of administrative expenses go to attempting to lower 
claims cost and, therefore, producing lower premiums. Also 
paying some of the sales costs helps to educate consumers in 
terms of their options and help them make the best choices. And 
these things count on the negative side of the equation.
    This is not to mean that they provide no value, but that 
the key value that people look for in insurance is providing 
and paying for medical care. And so, it is not the perfect 
measure or the sole measure for consumer value, but it is 
certainly a very good measure, and one that has been brought 
much more to prominence as a result of this Federal rule.
    Obviously the direct rebates are the most direct indicator 
of consumer value, and the $1.6 billion that has been awarded 
over the first 2 years is quite substantial. This year's 
rebates will not be announced until August, I believe, and we 
will see whether the numbers continue at that level or drop 
down. But as the Chairman noted, the fact that the rebates may 
diminish does not undercut the second set of direct consumer 
benefits from the MLR rule, which is simply that under the 
spotlight of regulatory oversight, insurers are induced to make 
their products more efficient by reducing their administrative 
costs and profits, their non-medical overhead.
    And that reduction so far has been at least as significant 
as the rebates. The work Dr. McCue and I have done indicates 
something like one and three-quarter billion dollars reduction 
in non-medical overhead over the first two years. Others have 
indicated as much as a $3 billion reduction in overhead.
    And it is not simply the size of these numbers, but the 
fact that--I use the analogy that it is like a dieter who loses 
weight. You have the benefit of that during the first year, but 
it is the sort of consumer gift that keeps on giving. As long 
as those reduced, sort of leaner, products, leaner overhead, 
remains in place year after year, consumers receive the benefit 
of that even if it does not grow larger.
    Now, considering some of the possible drawbacks, as the 
Chairman noted, a vast set of dire consequences were predicted, 
but these really have not been experienced at all. To the 
contrary, the insurance industry looks quite strong judged by 
the stock market. Stock prices have gone up considerably more 
than the market wide averages since the MLR rule went into 
effect, reflecting not only the lack of its harming the 
industry, but also the Affordable Care Act as a whole.
    Nor have we seen this exodus of insurers that was predicted 
from the regulated market. The notion that their profits might 
be regulated led a number of insurers to say, you know, we are 
going to leave the market. There has been some contraction, but 
it is more or less in line with the contraction we have seen in 
the industry as a whole over the last few years. And we still 
have roughly 500 insurers in each significant market segment 
throughout the country. And insurers in particular are entering 
the individual market, which is the market that was the most 
directly affected by the MLR rule, so certainly no indication 
there of any harms.
    Regarding potential changes to the rule, from where I sit 
the rule seems to be working well. It could obviously always be 
improved or tweaked in various ways. But the one area that is 
not addressed by the MLR rule is Medicaid managed care 
companies, private insurers that provide through Medicaid. And 
states do have some oversight of the MLRs for Medicaid managed 
care companies, but as the situation was before, the Federal 
rule for commercial insurers, as the Chairman noted, the rules 
are not uniform, and they are not comprehensive across the 
country.
    So that is an area where I do not have a position staked 
out, but it is certainly worth more investigation for whether 
perhaps some of the benefits, not just in terms of setting a 
minimum, but also standardization and transparency all 
following the same rule and all being sort of clear what the 
rule is and how well it is being met, I think are benefits--
secondary benefits that we have seen that could well extend to 
other areas of healthcare spending.
    So thank you for your time, and I would be happy to answer 
questions.
    [The prepared statement of Mr. Hall follows:]

Prepared Statement of Mark A. Hall, Professor of Law and Public Health, 
   Wake Forest University and Michael J. McCue, Professor of Health 
            Administration, Virginia Commonwealth University
    Chairman Rockefeller, Ranking Member Thune, and distinguished 
Members of the Committee, thank you for the opportunity to testify 
today about the Federal regulation of health insurers' medical loss 
ratios (MLRs). This is a topic that my colleague, Dr. Michael McCue at 
Virginia Commonwealth, and I have studied in depth for the past two 
years as reported in a series of publications with the Commonwealth 
Fund.\1\
---------------------------------------------------------------------------
    \1\ M. J. McCue and M. A. Hall, The Federal Medical Loss Ratio 
Rule: Implications for Consumers in Year 2, The Commonwealth Fund, May 
2014
    M. McCue, M. Hall, and X. Liu, ``Impact of Medical Loss Regulation 
on the Financial Performance of Health Insurers,'' Health Affairs, 
Sept. 2013 32(9):1546-51.
    Mark A. Hall and Michael J. McCue, Insurers' Medical Loss Ratios 
and Quality Improvement Spending in 2011, The Commonwealth Fund, March 
2013.
    M. J. McCue and M. A. Hall, Insurers' Responses to Regulation of 
Medical Loss Ratios, The Commonwealth Fund, December 2012.
---------------------------------------------------------------------------
    I will divide my remarks into three parts: (1) the primary consumer 
benefits from the Affordable Care Act's (ACA's) MLR rule; (2) secondary 
benefits or harms from this rule; and (3) opportunities for expanding 
or improving the rule.
Direct Consumer Benefits
    Traditionally, the MLR has been used mainly as an indicator of 
financial strength. For investors or lenders, a lower MLR is more 
favorable because it signals the potential for higher profits. The 
ACA's MLR rule has reversed this directional field--focusing on the MLR 
as a measure of consumer value. For consumers, a higher MLR is more 
favorable because this means that a greater portion of the premium 
dollar is going to pay for medical treatment and quality improvement 
activities rather than for sales expenses, administrative overhead, or 
profits. The MLR is not a perfect measure for consumer value; some 
portion of administrative expense is used to reduce medical costs, 
which can bring consumer value by reducing total premium costs. No 
performance measure is perfect. But, despite its limitations, the MLR 
is a very useful measure of efficiency and consumer value.
    Under the ACA, the most direct consumer benefit from a minimum 
medical loss ratio is to require health insurers to rebate to consumer 
any amounts by which they fall short of the minimum. Thus, in the 
individual or small group markets, where the minimum MLR is 80 percent, 
if an individual insurer spends only 75 percent of its premium dollars 
on medical claims and quality improvement expenses in a year, it must 
rebate five percent of its premiums to subscribers after year-end 
accounting. The minimum MLR for large groups is 85 percent, reflecting 
the greater economies of scale in that market segment.
    The ACA's MLR rule took effect in 2011. For that year, health 
insurers rebated $1.1 billion to consumers. In 2012, rebates dropped in 
half, to $513 million, indicating greater compliance with the minimum 
MLRs. Rebates for 2013 will be determined by August of this year.
    Consumer benefits from MLR regulation are not restricted to 
rebates, however. To avoid having to pay rebates, insurers can increase 
their MLRs by reducing overhead expenses and profits. Doing that makes 
insurance a better value for consumers. In fact, insurers have done 
just this in the first two years under the ACA's MLR rule.\2\ In 2011, 
the first year under the MLR rule, health insurers reduced overall 
profits and administrative costs by $350 million. Changes in financial 
performance were most apparent in the individual market, where the 
median medical loss ratio increased by 5.5 percentage points from 2010 
to 2011. The median administrative cost ratio declined by 2.6 
percentage points, and the median operating margin declined by 1.3 
percentage points. Within the individual market, such changes were most 
notable among for-profit insurers. These insurers raised their median 
medical loss ratio from 72 percent in 2010 to 79 percent in 2011--much 
closer to the required minimum level. In 2012, insurers continued to 
reduce their administrative and sales costs and their profit margins, 
by $1.4 billion overall.
---------------------------------------------------------------------------
    \2\ It is not accurate to attribute all such changes to the MLR 
rule, but the closer in time that overhead reductions are to the new 
MLR rule, the more likely the rule played a major role in encouraging 
any increase in health insurers' efficiency.
---------------------------------------------------------------------------
    It is not known exactly how much of the reduced overhead these two 
years can be attributed to the new MLR regulation rather than market 
competition. But, it seems reasonable to estimate that, in the first 
two years under this regulation, total consumer benefits related to the 
MLR regulation--both in rebates and reduced overhead--amounted to over 
$3 billion. It is also important to note that, unlike rebates that are 
paid in a single year, a one-year reduction in overhead pays consumer 
dividends year after year, as long as the reduction is maintained. 
Therefore, even if MLR rebates diminish even further, consumers will 
still continue to receive the benefits of reduced overhead year after 
year, relative to what it would have been without the improvement in 
the MLR.
Secondary Benefits or Harms
    Another important benefit of the Federal MLR rule is simply the 
transparency and standardization it provides for those who study or 
observe health insurers' financial performance and consumer value. 
Prior to the ACA, insurers did not consistently report their MLRs in 
all states, and the MLR was reported as a fairly coarse measure. As a 
result of the ACA's new Federal rule, MLRs are now adjusted for 
relevant factors such as insurers' size and types of products. Also, 
all health insurers now must consistently report their MLR and rebate 
data to CMS's Center for Consumer Information & Insurance Oversight 
(CCIIO). This agency releases to the public a detailed database about 
insurers' medical and non-medical expenses, and its personnel have been 
extremely responsive in providing information to assist our research.
    The Federal MLR data source provides more transparency to consumers 
and permits more comprehensive and fine-grained analyses by public 
policy researchers. For instance, we now know for the first time how 
much insurers report spending on five types of quality improvement 
activities. And, we can analyze how different types of insurers 
(nonprofit, investor-owned, provider-sponsored) differ in their various 
financial measures.
    Some analysts initially predicted that Federal regulation of MRLs 
would cause financial distress, perhaps severe, in the health insurance 
industry. To the contrary, there is no convincing evidence so far that 
the MLR rule has weakened the insurance industry. The individual market 
has become somewhat less profitable, operating at a 1 to 2 percent 
loss, but the group markets continue to generate operating profits in 
the range of 3 to 4 percent of premiums (before taxes and not 
considering earnings from investments and other lines of business). The 
industry's financial strength is confirmed by the stock market, where 
health insurers' stock prices have increased substantially more than 
marketwide averages since the ACA was enacted.\3\
---------------------------------------------------------------------------
    \3\ Pradip Sigdyal & Giovanny Moreano, Surging Health Care Index 
Sets Another Record, CNBC (Apr. 2, 2013), www.cnbc.com/id/100538665; 
Anna Bernasek, The Dawn Of Obamacare Hasn't Hurt Insurers' Stocks, N.Y. 
TIMES, Oct. 27, 2013, at BU7, http://www.nytimes.com/2013/10/27/
business/insurers-stocks-unhurt-by-the-dawn-of-obamacare.html.
---------------------------------------------------------------------------
    Also, the MLR regulation has not caused anything like the exodus of 
insurers that was prophesized by some. Between 2011 and 2012, there was 
been a small reduction in the number of active insurers, consistent 
with the marketwide consolidation that was ongoing prior to the ACA. 
But still, throughout the country there were roughly 500 insurers with 
at least 1,000 members in each market segment (individual, small-group, 
and large-group).
Future Considerations
    The ACA's MLR rule applies to commercial health insurance. A 
separate provision in the ACA also sets a minimum of 85 percent for 
private plans sold through Medicare (Medicare Advantage and Medicare 
Part D). There is no Federal rule, however, for the MLRs of private 
managed care organizations (MCOs) that provide coverage under Medicaid. 
About a dozen states set their own Medicaid standards, however, and 
others consider MLRs when they negotiate Medicaid payment rates with 
private managed care plans.\4\
---------------------------------------------------------------------------
    \4\ Kaiser Family Foundation, Medicaid MCOs and Medical Loss Ratio 
(MLR) Requirements (April 2012), http://kff.org/medicaid/fact-sheet/
medicaid-mcos-and-medical-loss-ratio-mlr/.
---------------------------------------------------------------------------
    In view of the substantial expansion of Medicaid that the Federal 
government is funding through the ACA, this Committee might want to 
consider whether the current state-based system of MLR oversight for 
Medicaid plans is functioning optimally. Dr. McCue and I have not done 
an extensive analysis of MLRs for Medicaid MCOs. However, our initial 
review of NAIC and other state data from 2011 indicates that, 
nationwide, the median MLR among Medicaid MCOs is about 87 percent. Of 
211 such plans, 75 of them (35 percent) reported MLRs below 85 percent, 
and 30 (or 14 percent) reported MLRs below 80 percent.
    In addition to bringing the bottom of this distribution up to a 
level considered acceptable, another potential benefit of a Federal MLR 
rule for Medicaid could be greater uniformity in how Medicaid MCOs 
measure and report their MLRs. One issue on which states vary is the 
extent to which Medicaid MCOs may count care management/coordination 
expenses as medical costs vs. administrative overhead. Also, it is not 
clear how states do (or should) account for Medicaid MCOs that 
subcontract with other organizations or provider groups on a capitated 
basis. Subcapitation occurs with some frequency, but when it does, it 
is not clear to us whether the entire capitated amount should count as 
a medical expense, or instead wither the sub-contractor's own 
administrative expenses and profits count toward the ``parent'' MCO's 
non-medical overhead (by reducing how much of its capitation payment 
counts as ``medical'').
    A Federal rule would standardize these accounting and reporting 
conventions. A uniform rule would also provide the opportunity for 
collective deliberation over which of various accounting approaches is 
superior. On the other hand, states vary in the extent to which their 
Medicaid MCO programs cover different populations with diverse health 
care needs, such as children, disabled adults and the elderly. Also, 
states differ in how they develop capitation rates for these different 
populations. This variation may make it more difficult to adopt a 
single metric that applies nationally.
    Thank you for this opportunity to testify. I will be happy to 
answer any questions.

    The Chairman. Thank you very, very much. And Senator Thune 
has given me permission to call--this out of order, and, 
therefore, I apologize, but it is worth it because it is 
Senator Amy Klobuchar. She wants to talk about 30 seconds. She 
has to go to a very important meeting.

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. I just want to thank you, Mr. Chairman, 
for holding this hearing, and echo what Senator Thune said 
about your leadership and what this has meant. I can tell you 
in my state, we actually were an early state, a long history, 
as many of our witnesses know, in leading the way in 
healthcare, and the issue of medical loss ratio is no 
different.
    Beginning in 1993, we required insurers to spend a minimum 
amount of premium dollars on healthcare and quality for 
consumers. I think we all know that was not happening in every 
State, and that is why this was so important. We basically had 
a patchwork system.
    So far under this new rule, Minnesotans have received--
people and businesses have received about $10 million in 
rebates. And I just want to thank you for the work on this, 
even for a state like ours that was ahead of our time and 
continues to like to see more of a focus on delivery system 
reform even beyond the medical loss ratio in terms of high 
quality, low cost care. This is a major part of it, and I want 
to thank you for your work.
    The Chairman. Thank you, Senator Klobuchar. In honesty, I 
have to be fair. Senator Johnson, if you have anything. No? OK.
    Then Ms. Katherine Fernandez of Houston, Texas.

        STATEMENT OF KATHERINE FERNANDEZ, HOUSTON, TEXAS

    Ms. Fernandez. Chairman Rockefeller, Ranking Member Thune, 
and members of the Committee, thank you for inviting me to 
speak today. My husband, Louis, and I have been self-employed 
for nearly 33 years in Houston in various aspects of 
residential construction. We grew from a trim carpentry company 
in 1981 to a full-service remodeling company which was active 
until 2003. Now, we have two businesses, My Design Team which 
we founded in 2003 and my Cabinet Source which we founded in 
2010. We have two children, Michael, aged 29, who is a grad 
student, and Sarah, who is 24 and a sign language interpreter.
    Evaluating, qualifying for, paying for, and keeping health 
insurance took a lot of time because we did not qualify for 
group health insurance plans. I felt like I was gambling with 
our future. What health crisis would occur, and what could we 
afford to spend for insurance when there were compelling 
medical expenses which did not apply to our deductibles. 
Michael and Louis both had preexisting conditions, which meant 
their plans had exclusion clauses.
    There were lean years in the 1990s when we had no insurance 
and relied on public clinics, charities, and home remedies. I 
was resourceful and carefully apportioned our medical spending 
to make every penny count. And my mom says she remembers that 
we just did not go to the doctor.
    After that, I juggled two or three health plans at a time, 
balancing cost and risk. Insurance companies sent biannual 
notices increasing rates and offering choices of higher 
deductibles with reduced coverage and lower cost. Hours were 
spent fretting about what we could afford, and I worried about 
the chances we were taking. If more than one person got sick, 
could we pay two or three deductibles? Could we afford 
necessary healthcare not covered by insurance? It was like 
walking a tight rope with no net.
    Between 2000 and 2003, we had two policies, and the 
insurance cost increased about 165 percent. From 2004 to 2005, 
despite adjusting the coverage and deductibles, the costs rose 
yet again over 30 percent. Mike went to college, and I bought a 
low cost student health insurance plan for him. In 2006, Louis 
stayed on our original plan, while Sarah and I moved to a less 
expensive one. We kept the three plans despite combined 
increases of 45 percent until 2009 when Mike graduated from U 
of H and got a Presidential fellowship for grad school at 
Columbia, and it included health insurance. It was a relief.
    The Affordable Care Act became law in 2009, and I was 
elated. No more preexisting condition clauses, and we could not 
be dropped by insurance with no reason. No lifetime limits on 
coverage was great, and there would be preventative care with 
no co-pay. Insurance companies had to refund some of what we 
paid if they did not spend enough. What reasonable ideas.
    In 2010, Sarah was on a student plan, and I had a low cost 
HSA eligible plan. Louis kept his original plan, but with an 
increased deductible. The cost still rose about 25 percent by 
the end of 2011. In 2012, I moved Louis to an HSA plan, and we 
upped the deductible so our coverage would cost less than 
before. Then the cost of my policy actually decreased in April 
from $316 to $310 a month. I was amazed, and I credited the 
ACA.
    Fortunately, Sarah was still on her student plan because in 
April 2012 she became very sick and spent six days in the 
emergency room and hospital. For the first time ever, we met 
our insurance deductibles.
    Letters from the insurance companies in July 2012 told us 
there would be an ACA medical loss ratio rebate for our 2011 
insurance. The three checks added up to $794.82. I could hardly 
believe it. Our insurance cost just over $10,400 in 2011, and 
that refund was for 7.6 percent of the amount. I used the money 
to pay the next month's insurance bills.
    Sarah graduated from Lamar College in May 2013 and was 
hired as a sign language interpreter. In July she proudly 
bought her own health insurance, so Louis and I were down to 
two HSA eligible plans. In July 2013, the insurance companies 
sent medical loss ratio payments for 2012. This time the three 
checks added up to $228.51. It was less than the next month's 
insurance, but was 2.6 percent of the $8,642 we spent on 
insurance in 2012.
    Last year, our plans cost over $8,800, so I hope we will 
get medical loss ratio refunds again. Even more, I hope the 
insurance company cost estimates become more accurate so the 
money stays in the wallets of consumers like where it can do 
some good.
    During the past 14 years, we have paid over $100,000 for 
health insurance. These were bare bone plans with high 
deductibles, not gold policies. Between 2000 and 2010, we spent 
about $72,000. If the 7.6 percent medical loss ratio refund for 
2011 is an indicator, we overpaid about $5,500 during those 11 
years, about $500 per year. Truly the ACA medical loss ratio 
provision was long overdue.
    In December of this past year, I braved the health 
insurance marketplace and spent hours researching policies and 
more time trying to get the website to work. For the first time 
since 2005, my husband and I are on the same health plan, a 
silver plan PPO, and it feels pretty good.
    The ACA medical loss ratio provision makes our healthcare 
dollars work better for us. Buying insurance is not as 
complicated and less of a gamble because the companies must 
return what they do not spend for healthcare, and basic 
preventative care is covered, too.
    Thank you for giving me the opportunity to share my story, 
and I will be happy to answer any questions you might have.
    [The prepared statement of Ms. Fernandez follows:]

                  Prepared Statement of Katy Fernandez
    Chairman Rockefeller, Ranking Member Thune, and members of the 
Committee,

    Thank you for inviting me to speak today. I am Katy Fernandez. My 
husband Louis and I have been self-employed for nearly 33 years in 
Houston in various aspects of residential construction. We started with 
a trim carpentry company in 1981, which grew into a full service 
remodeling company, which was active between 1988 and 2003. We 
currently own two businesses: My Design Team (founded in 2003) and My 
Cabinet Source (founded in 2010). Our children are Michael, age 29, a 
grad student; and Sarah, age 24, a sign language interpreter.
    Evaluating, qualifying for, paying for, and keeping health 
insurance took a lot of my time since we didn't qualify for group 
health plans. I tried to determine the best way to handle health care 
for our family and felt like I was gambling with our future--how could 
I predict what health crises would occur, and what we could afford to 
spend on health insurance when there were compelling medical expenses 
\1\ which didn't apply to our deductibles. Michael \2\ and Louis \3\ 
both had pre-existing conditions, which meant the plans we could get 
had exclusion clauses.
---------------------------------------------------------------------------
    \1\ Including chiropractic, acupuncture, orthopedic braces, dental 
care and glasses.
    \2\ From birth, Mike had a benign muscle weakness and insurance 
explicitly excluded everything related to this. As a teenager, he 
developed scoliosis, which led to additional exclusion clauses.
    \3\ Louis contracted chronic Lyme disease, which was not diagnosed 
for many years because the various symptoms didn't look like they were 
related. After it was diagnosed, he couldn't change policies due to 
this ``pre-existing condition''.
---------------------------------------------------------------------------
    There were lean years in the 1990s where we had no insurance and 
relied on public clinics, charities,\4\ and home remedies. I was 
resourceful, and carefully apportioned our medical spending to make 
every penny count.
---------------------------------------------------------------------------
    \4\ MDA and Shriners
---------------------------------------------------------------------------
    After that, I juggled two or three health plans at a time, 
balancing expenses and risk. Insurance companies sent biannual notices 
increasing rates, and offering ``choices'' of higher deductibles with 
less coverage at reduced cost. I spent hours fretting what we could 
afford, and worried about the chances we were taking. If more than one 
person got sick--could we pay two or three deductibles? Could we afford 
health care not covered by insurance if we were paying so much for 
insurance? It was like walking a tightrope with no net.
    Between 2000 and 2003, we had two policies, and the insurance cost 
increased about 165 percent. In 2004-2005, I adjusted coverage and 
deductibles, yet the cost of this new arrangement rose over 30 percent 
during those two years. Mike went to college and I bought a student 
insurance plan to save a little money. In 2006, Louis stayed on the 
original plan, while Sarah and I moved to a lower cost one. We kept 
these three plans, despite combined increases of 45 percent, until 
2009, when Michael graduated from UH and received a Presidential 
Fellowship which included health insurance at Columbia. What a relief.
    The Affordable Care Act became law in 2009, and I was elated. No 
more pre-existing condition clauses and we couldn't be dropped by 
insurance for no reason. Lifting lifetime limits on coverage was great, 
and there would be preventative care with no copay. Insurance companies 
had to refund some of what we paid, if they didn't spend enough. What 
reasonable ideas.
    In 2010, Sarah had a student plan and I had a low cost HSA eligible 
plan. We kept the Louis' original plan, and increased the deductible. 
The cost still rose about 25 percent by the end of 2011.
    In 2012, I moved Louis to an HSA Plan and upped our deductibles, so 
our coverage cost less than before. When the cost of my policy 
decreased from $316 a month to $310 in April, I was amazed! I credited 
the ACA.
    I kept Sarah on the student plan. This was fortunate, because she 
became very sick in April, 2012, and spent six days in the emergency 
room and hospital. For the first time ever, we met an insurance 
deductible.
    In July 2012, letters came from the insurance companies notifying 
us of rebates required by the ACA Medical Loss Ratio for plans bought 
in 2011. The three checks added up to $794.82.\5\ I could hardly 
believe it. Insurance cost just over $10,400 in 2011 and that refund 
was for 7.6 percent of the amount. I used the money to pay the next 
month's insurance bills, of $721. 83.
---------------------------------------------------------------------------
    \5\ 2011 Rebates: Sarah's Assurant policy was $69.90, Louis' BCBS 
was $372.99; Katy's BCBS was $351.93.
---------------------------------------------------------------------------
    After Sarah graduated from Lamar College in May, 2013, she was 
hired as a sign language interpreter. In July, she proudly bought her 
own health insurance, so Louis and I were down to two HSA eligible 
plans.
    In July, the insurance companies sent ACA Medical Loss Ratio 
payments for 2012. This time the three checks added up to $228.51.\6\ 
It was less than the next month's insurance, but did amount to 2.6 
percent of the $8642 we spent on insurance in 2012.
---------------------------------------------------------------------------
    \6\ 2012 Rebates: Sarah's Assurant policy was $70.87; Louis' BCBS 
was $75.22; Katy's BCBS was $82.42.
---------------------------------------------------------------------------
    Last year, our plans cost over $8,800, so I hope we'll get Medical 
Loss Ratio refunds again. Even more, I hope the insurance company cost 
estimates become more accurate, so that more money stays in the wallets 
of consumers like me, where it can do some good.
    I figured out that over the past fourteen years we paid for just 
over $100,000 for health insurance.\7\ These were bare bones plans with 
high deductibles, not ``gold'' policies. Between 2000 and 2010, we 
spent about $72,000. If the 7.6 percent Medical Loss Ratio refund for 
2011 is an indicator, we overpaid about $5,500 over those eleven years, 
about $500 per year. Truly, the ACA Medical Loss Ratio provision was 
long overdue.
---------------------------------------------------------------------------
    \7\ Fernandez Family insurance plans, monthly payments, and price 
changes from 2000-2013

    August 2000-April 2001
    Louis, Katy, and Sarah: BlueCross Blue Shield (BCBS) Family Plan, 
$252/month
    Michael: BlueCross BlueShield (BCBS) Individual Plan, $39/month

    May 2001-October 2001
    Louis, Katy, and Sarah: BCBS Family Plan, $268/month (+$16)
    Michael: BCBS Individual Plan, $42/month (+3)

    November 2001-April 2002
    Louis, Katy, and Sarah: BCBS Family Plan, $349/month (+$81)
    Michael: BCBS Individual Plan, $55/month (+13)

    May 2002-November 2002
    Louis, Katy, and Sarah: BCBS Family Plan, $389/month (+$40)
    Michael: BCBS Individual Plan, $61/month (+$6)

    December 2002-August 2003
    Louis, Katy, and Sarah: BCBS Family Plan, $499/month (+$110)
    Michael: BCBS Individual Plan, $79/month (+$18)

    September 2003-November 2003
    Louis, Katy, and Sarah: BCBS Family Plan, $523/month (+$24)
    Michael: BCBS Individual Plan, $79/month (+$0)

    December 2003
    Louis, Katy, and Sarah: BCBS Family Plan, $669/month (+$146)
    Michael: BCBS Individual Plan, $101/month (+$22)

    January 2004-July 2004
    Louis, Katy, and Sarah (New Plan): BCBS Family Plan, $550/month (-
$119)
    Michael: BCBS Individual Plan, $101/month (+$0)

    August 2004-November 2004
    Louis, Katy, and Sarah: BCBS Family Plan, $550/month (+$0)
    Michael: BCBS Individual Plan, $133/month (+$32)

    December 2004-May 2005
    Louis, Katy, and Sarah: BCBS Family Plan, $596/month (+$46)
    Michael: BCBS Individual Plan, $155/month (+$22)

    June 2005-July 2005
    Louis, Katy, and Sarah: BCBS Family Plan, $635/month (+$39)
    Michael: BCBS Individual Plan, $155/month (+$0)

    Aug 2005-November 2005
    Louis, Katy, and Sarah: BCBS Family Plan, $635/month (+$0)
    Michael (New Plan): United American Ins. Co., $126/month (-$29)

    December 2005
    Louis, Katy, and Sarah: BCBS Family Plan, $721/month (+$86)
    Michael: United American Ins. Co., $126/month

    January 2006-June 2006
    Louis (New Plan): BCBS Individual Plan $291/month
    Katy and Sarah (New Plan): Unicare High Ded. Family Plan, $154/
month
    Michael: United American Ins. Co., $126/month (+$0)

    July 2006-December 2006
    Louis: BCBS Individual Plan $291/month (+$0)
    Katy and Sarah: Unicare High Ded. Family Plan, $154/month (+$0)
    Michael: United American Ins. Co., $143/month (+$17)

    January 2007-March 2007
    Louis: BCBS Individual Plan $322/month (+$31)
    Katy and Sarah: Unicare High Ded. Family Plan, $161/month (+$7)
    Michael: United American Ins. Co., $153/month (+$10)

    April 2007-September 2007
    Louis: BCBS Individual Plan $322/month (+$0)
    Katy and Sarah: Unicare High Ded. Family Plan, $169/month (+$8)
    Michael: United American Ins. Co., $153/month

    October 2007-December 2007
    Louis: BCBS Individual Plan $322/month (+$0)
    Katy and Sarah: Unicare High Ded. Family Plan, $195/month (+$26)
    Michael: United American Ins. Co., $153/month

    January 2008-March 2008
    Louis: BCBS Individual Plan $363/month (+$41)
    Katy and Sarah: Unicare High Ded. Family Plan, $195/month (+$0)
    Michael: United American Ins. Co., $153/month (+$0)

    April 2008-August 2008
    Louis: BCBS Individual Plan $363/month (+$0)
    Katy and Sarah: Unicare High Ded. Family Plan, $211/month (+$16)
    Michael: United American Ins. Co., $153/month

    September 2008-November 2008
    Louis: BCBS Individual Plan $363/month (+$0)
    Katy and Sarah: Unicare High Ded. Family Plan, $264/month (+$53)
    Michael: United American Ins. Co., $153/month (+$0)

    December 2008-August 2009
    Louis: BCBS Individual Plan $375/month (+$12)
    Katy and Sarah: Unicare High Ded. Family Plan, $264/month (+$0)
    Michael: United American Ins. Co., $153/month (+$0)

    September 2009-November 2009
    Louis: BCBS Individual Plan $375/month (+$0)
    Katy and Sarah: Unicare High Ded. Family Plan, $324/month (+$60)

    December 2009-February 2010
    Louis (New Plan): BCBS Individual Plan $323/month (-$52)
    Katy and Sarah (New Plan): Unicare High Ded. Family Plan, $300/
month (-$24)

    March 2010-November 2010
    Louis: BCBS Individual Plan $323/month (+$0)
    Katy (New Plan): BCBS HSA Individual Plan, $326/month
    Sarah (New Plan): Assurant Student, $98/month

    December 2010-February 2011
    Louis: BCBS Individual Plan $360/month (+$37)
    Katy: BCBS HSA Individual Plan, $344/month (+$22)
    Sarah: Assurant Student, $98/month

    March 2011-November 2011
    Louis: BCBS Individual Plan $360/month (+$0)
    Katy: BCBS HSA Individual Plan, $344/month (+$0)
    Sarah: Assurant Student, $109/month (+$11)

    December 2011
    Louis: BCBS Individual Plan $415/month (+$55)
    Katy: BCBS HSA Individual Plan, $344/month (+$0)
    Sarah: Assurant Student, $109/month (+$0)

    January 2012-March 2012
    Louis (New Plan): BCBS HSA Individual Plan $283/month (-$132)
    Katy (New Plan): BCBS HSA Individual Plan, $316/month (-$28)
    Sarah: Assurant Student, $109/month

    April 2012-December 2012
    Louis: BCBS HSA Individual Plan $283/month (+$0)
    Katy: BCBS HSA Individual Plan, $310/month (-$6)
    Sarah: Assurant Student, $129/month (+$20)

    January 2013-June 2013
    Louis: BCBS HSA Individual Plan $298/month (+$15)
    Katy: BCBS HSA Individual Plan, $312/month (+$2)
    Sarah: Assurant Student, $109/month

    July 2013-November 2013
    Louis: BCBS HSA Individual Plan $283/month
    Katy: BCBS HSA Individual Plan, $312/month

    December 2013
    Louis: BCBS HSA Individual Plan $362/month (+$79)
    Katy: BCBS HSA Individual Plan, $343/month (+$31)
    Sarah, Mike, Katy, and Louis in 2012

    In December, I braved the Health Insurance Marketplace and spent 
hours determining the best policy for us, and more time trying to get 
the website to work. For the first time, since 2005, my husband and I 
are on the same health plan, a Silver Plan Cigna PPO, and that feels 
good.
    The ACA Medical Loss Ratio provision makes our health care dollars 
work better for us. Buying insurance is less complicated and less of a 
gamble because the companies must return what they don't spend for 
health care and basic preventative care is covered, too.
    Thank you for giving me the opportunity to share my story. I'll be 
happy to answer any questions you might have.

    The Chairman. Thank you, Ms. Fernandez. That was 
extraordinarily direct and sincere testimony. You could sort of 
feel the pain as you were talking.
    Ms. Fernandez. It was painful.
    The Chairman. Yes. Ms. Grace-Marie Turner, President of 
Galen Institute. Welcome.

          STATEMENT OF GRACE-MARIE TURNER, PRESIDENT, 
                        GALEN INSTITUTE

    Ms. Turner. Thank you, Chairman Rockefeller, Ranking Member 
Thune, Senator Johnson, for the opportunity to testify today. 
Not only am I President of the Galen Institute, I also served 
last year as a member of the Long Term Care Commission, and I 
want to thank you, Senator Rockefeller, and your hard-working 
staff. The Commission would not have been able to get started 
without your hard work. And I really appreciate your leadership 
and commitment.
    And also, I want to thank you for a hearing that you 
participated in, I believe a Subcommittee hearing, on July 16, 
2009 entitled, ``Competition in the Healthcare Marketplace.'' 
It was a bipartisan hearing in which there was agreement that 
innovation and consumer choice are so important to those on 
both sides of the aisle. And I felt it was so important that 
the Galen Institute subsequently organized a series of annual 
conferences on the value of innovation in healthcare. We 
brought people who are doing things like creating the operating 
rooms of the future and developing new technologies for 
biomedical research to really help policymakers see the value 
of reinforcing innovation. And I thank you for your inspiration 
for that series of conferences.
    So I do not think there is any disagreement that we share 
the goal of today's hearing on delivering better healthcare and 
better value to consumers. But I am concerned that some 
provisions of the ACA may actually be working against that 
goal. I explain in more detail in my written testimony, but 
just to highlight some key points.
    First, higher taxes and fees. Higher taxes on insurance are 
passed along to consumers in the form of higher premiums. While 
it is too soon to know what the premiums will be for 2015, some 
consumers may experience some premium reductions, but many 
others are going to see premium increases. And since they were 
expecting a $2,500 reduction in premiums per family, even any 
small increase is more than they had been expecting.
    The 20 new and higher taxes in the health law on things 
like drugs, medical devices, and health insurance are actually 
increasing premiums. According to the American Academy of 
Actuaries, they said, ``In general, insurers pass along the fee 
to enrollees through an increase in the premium.'' A tax on 
health insurance alone will add between $350 and $400 a year to 
premiums in 2016 for a family. And as Senator Thune said, with 
nearly a trillion dollars in new taxes, ultimately they do get 
passed along to the consumer. I am worried that these 
additional costs are going to counteract any efficiencies that 
come from the medical loss ratio provision.
    Number two, lack of competition. Premiums for health 
insurance vary across states as you in your work have certainly 
demonstrated. An article last week in the New York Times 
explains that a lack of competition is the key reason that 
people see such premium differences. For example, a 27-year-old 
enrollee in Jackson, Mississippi, may have to pay $336 a month 
for health insurance for a silver plan, but that same young 
person in Tucson only would pay $138 a month for a similar 
plan.
    The reason, according to research that I cite in my 
testimony, is a lack of competition among insurers. There are 
only two insurers in Mississippi, but eight offering plans in 
Tucson. If all plans that are operating in those states were to 
participate in the exchanges, premiums across the board would 
be 11 percent lower. So competition and more participation in 
the market I think is crucial to getting premiums down and 
protecting consumers.
    Third, limiting options for small employers. Small 
employers, many of them, have looked to health savings accounts 
and other consumer-directed plans to help provide health 
insurance to their employees, and also to help keep their costs 
down. As Mr. Fernandez was explaining, health savings accounts 
have been attractive to many small businesses. But there is a 
provision in the medical loss ratio regulation that actually 
works against HSAs. The money that a person spends on routine 
medical costs out of that account does not count as a medical 
expenditure toward the medical loss ratio provision. So they 
are disadvantaged in being able to use those consumer-directed 
accounts--money they have set aside to pay for routine medical 
costs. The medical loss ratio provision works against those 
with HSAs.
    Then finally, the need for investment in a better system. 
In some ways, health plans actually have less incentive to seek 
out fraud and abuse. For example, the MLR makes it more 
difficult for plans to spend money on fraud detection because 
that spending comes out of their administrative calculation. 
And also, if they invest in a new delivery system but it does 
not fit within the very tight constraints of what is defined as 
quality improvement in the law, then plans are again penalized. 
This has the impact of impeding innovation and creativity in 
trying to get better value for customers.
    So finally, I believe that the ACA does need to be amended 
and changed going forward, and I look forward to the 
opportunity to work with you on this common goal of producing 
value, innovation, and protecting consumers. Thank you, Mr. 
Chairman.
    [The prepared statement of Ms. Turner follows:]

  Prepared Statement of Grace-Marie Turner, President, Galen Institute
    Chairman Rockefeller, Ranking Member Thune, and members of the 
Committee, thank you for the opportunity to testify today on 
``Delivering Better Health Care Value to Consumers: The First Three 
Years of the Medical Loss Ratio.''
    My name is Grace-Marie Turner, and I am president of the Galen 
Institute, a non-profit research organization focusing on patient-
centered health policy reform. I served as an appointee to the Medicaid 
Commission from 2005-2006, as a member of the Advisory Board of the 
Agency for Healthcare Research and Quality, and as a congressional 
appointee to the Long Term Care Commission in 2013.
    The Long Term Care Commission, as you know, was created as a result 
of the repeal of the Community Living Assistance Services and Supports 
Act (CLASS Act), repeal legislation that Ranking Member Thune sponsored 
and which was enacted after the administration was unable to find a 
viable path forward for implementation of the program. I want to thank 
you, Chairman Rockefeller, for your leadership and the hard work of 
your staff in kick-starting the work of the commission. I believe that 
we produced, in our 100-day sprint to complete our work, a valuable 
report that gained bi-partisan support for a wide range of important 
recommendations.\1\
    In addition, Mr. Chairman, I want to thank you for the hearing on 
July 16, 2009, on ``Competition in the Healthcare Marketplace'' before 
the Subcommittee on Consumer Protection, Product Safety, and Insurance 
which Sen. Pryor chaired and which you attended.\2\ I found the hearing 
to be extremely valuable in showing the broad bi-partisan support for 
competition and innovation in the health sector. As a direct result, we 
have subsequently sponsored at the Galen Institute a series of major 
annual conferences on ``The Value of Innovation in Health Care.'' We 
invite speakers from around the country to describe their work on 
health care innovation before policymakers in Washington, from 
presentations about the operating room of the future, to the latest 
biomedical research technologies, and transformative consumer solutions 
such as Walmart's $4 generic drugs program.
Consumer protections
    I don't think there would be any disagreement on either side of the 
aisle about the goal of today's hearing, entitled ``Delivering Better 
Health Care Value to Consumers.'' Consumer protection and transparency 
are crucial goals of health reform. To make sure that consumers can 
know the amount of premium dollars being spent on medical care versus 
administrative expenses, the ACA specifies the medical loss ratio (MLR) 
which health plans must meet. Plans participating in the individual and 
small group markets must spend at least 80 percent of premium dollars 
on medical costs and those in the large group market, 85 percent. Those 
who fail to meet the percentages must provide rebates to consumers.
    Consumers and businesses already have received rebates from health 
insurance companies that failed to meet the MLR requirements. Certainly 
they appreciate receiving these checks, but I think it is important to 
look at the larger issue of consumer protections to see if the law is 
meeting these goals.
    While it is too soon to know what premium increases will be in 
2015, it is fairly certain that most consumers will see at least modest 
increases but others are likely to see significant hikes. Given that 
consumers were promised they would save an average of $2,500 a year on 
premiums for a family if the ACA were enacted, they are looking for 
relief. I believe it is important to look at other factors that are 
keeping premiums high.
Higher taxes and fees
    The American Academy of Actuaries details in a May 2014 report the 
major drivers behind expected 2015 premium increases.\3\ ``The majority 
of premium dollars goes to medical claims, which reflect unit costs 
(e.g., the price for a given health care service), utilization, the mix 
and intensity of services, and plan design.'' Further, the report 
explains, ``Premiums must cover administrative costs, including those 
related to product development, enrollment, claims processing, and 
regulatory compliance. They also must cover taxes, assessments, and 
fees, as well as profit (or, for not-for-profit insurers, a 
contribution to surplus).''
    The report discusses the increase in the health insurer fee, which 
collects about $8 billion a year from health insurers this year, 
increasing to $14.3 billion in 2018 and more than $100 billion over ten 
years.\4\ ``In general, insurers pass along the fee to enrollees 
through an increase in the premium,'' the actuaries write. The tax on 
health insurance alone will add $350 to $400 to a family's health 
insurance premiums in 2016.\5\
    Other taxes and fees in the health law also will be passed along to 
consumers. These include taxes on medical devices and drugs, new fees 
to administer health insurance exchanges, and reinsurance fees to help 
offset higher-cost patients in the individual market.
    These additional costs directly resulting from the law will be much 
larger than any health insurance efficiencies under the MLR.
Lack of competition
    Premiums for health insurance vary greatly across the states. A 
recent report in The New York Times explains that lack of competition 
is a key reason.\6\ For example, a 27 year old enrollee in Jackson, 
Mississippi, pays $336 a month for the second cheapest silver plan on 
the federally run exchange in the state. That's more than twice what 
the same person in Nashville would pay--$154--and more than the $138 a 
young person in Tucson would pay for the same policy.
    A crucial reason for the price differences: Lack of competition 
among insurers. There are only two insurers in the market in 
Mississippi. In Nashville's exchange, four insurance companies compete. 
In Tucson, eight companies are vying for the 27 year old's business. 
More competition leads to lower prices.
    Premiums in the exchanges are 11 percent higher than they would be 
if all of the insurers participating in a market in each state had 
participated in the exchange, according to research soon to be 
published by economists Leemore Dafny and Christopher Ody from 
Northwestern University and Jonathan Gruber of the Massachusetts 
Institute of Technology. Greater competition not only would save 
consumers money in lower premiums but it also would save taxpayers 
money if they didn't have to subsidize the higher cost of insurance in 
these areas with little competition.
    When hospitals know that only a few health plans are competing, 
they have much less incentive to negotiate discount prices. That 
manifests in higher premiums because insurers can't drive as hard a 
bargain to reduce costs. The end result of less competition among 
health plans is higher costs for consumers.
    I include in the appendix to my testimony a list of health 
insurance companies that announced they were exiting the market over a 
period of 20 months after the law was passed. They are leaving for a 
variety of reasons. Some companies decided that they could not viably 
compete in the exchanges, others were overburdened with onerous state 
regulations, and others left the health insurance market because of 
concerns about the ACA's costs and regulations.
    Consumers need more, not less, competition, both from existing as 
well as new innovative companies, in order to contain premium costs.
Limiting options for small employers
    The MLR rules also discriminate against high-deductible health 
plans, which are especially popular among small businesses with slim 
profit margins. These businesses want to offer health insurance to 
their workers but often cannot afford the generous plans that larger 
companies offer. Health Savings Accounts (HSAs) and other consumer-
directed plans allow companies to provide an affordable alternative to 
their workers. HSAs provide consumers with a spending account to pay 
for routine health care expenses as well as good catastrophic coverage 
to cover major costs.
    However, the MLR regulations only include in the medical cost ratio 
those payments made directly by insurers toward medical expenses. 
Health care costs paid by individuals from their spending accounts 
don't qualify, making it hard for these plans to meet the 80 percent 
MLR test. In other words, HHS rules mean that if an individual pays 
directly for a health care service to meet the deductible, the 
expenditure does not count toward the MLR ratio, even though the full 
amount is actually a payment for medical services.
    As of January, 2013 about 15.5 million people were covered by HSA 
plans. The average deductible for small group HSA plans ranged from 
$2,820 to $2,957 in 2011, according to the latest figures available 
from the industry group America's Health Insurance Plans. Only about 5 
percent of HSA policies have claims above the deductible.\7\
    Therefore, one of the tools that small businesses have found to be 
most valuable in helping them offer affordable coverage is 
significantly constrained by the MLR rule.
Investing in a better system
    Certainly consumers want to see the great majority of their premium 
dollars going to medical care. But the complex systems still being 
developed to implement the ACA require a major investment in new 
technology, both on the part of government and health plans.
    Because of the serious problems with healthcare.gov and with many 
state websites, health plans received inaccurate information about 
enrollees and were forced to complete applications manually. This 
process was time consuming and extremely costly. In addition, the 
``back end'' of the website to process information for payment is not 
yet built and when it is, it will require companies to build new 
interfaces to connect with the exchange computers--again adding to 
administrative cost. No one wants this, but it is a necessary 
investment for the system to work. There are also administrative costs 
associated with the detailed reporting required of the companies to 
comply with the MLR.
    In addition, the final MLR rules released on December 2, 2011, 
rejected insurers' requests that the health expenditure side of the MLR 
equation include anti-fraud efforts. That means the new MLR rules 
constrain the ability of health plans to fight fraud because that 
spending now must count toward their administrative expenses. If health 
plans spend too much protecting policyholders from fraud, the plans 
will be penalized and forced to send rebates to the policyholders. This 
has the unfortunate result that health insurance companies actually 
have a disincentive to fight fraud and protect policyholders' premium 
dollars.
    The National Association of Insurance Commissioners also had 
petitioned HHS to exclude broker fees from the administrative portion 
of the calculation. That request also was rejected by HHS regulators. 
This means agents and brokers, many of whom function as valued outside 
human resources departments for many small and medium-sized employers, 
will have trouble getting compensated for their work. The brokers help 
individuals and employers to find the policies that meet their needs, 
negotiate terms, benefits, and premium costs with insurers, and then 
help navigate the claims process for the client. With limited 
commissions, individuals and small businesses will not have access to 
these services and will have to fend for themselves.
    The National Association of Insurance and Financial Advisers said 
it was disappointed that the final regulations did not permit insurers 
to exclude agent and broker fees from administrative expenses.\8\
Transparency
    A shared goal of health reform is to promote transparency. Several 
insurers are developing a collaborative effort to provide consumers 
with more transparent information about prices. For example, Aetna, 
Humana, and UnitedHealth are working with a new nonprofit research 
organization called the Health Care Cost Institute to develop and 
provide consumers ``free access to an online tool that will offer 
consumers the most comprehensive information about the price and 
quality of health care services.'' Other health plans could soon join 
Aetna, Humana and UnitedHealth in the effort.
    Many companies also are working hard on delivery system reform and 
investing in initiatives to improve the quality of care, but 
establishing these initiatives requires an upfront investment that must 
come out of their administrative expense allocation, affecting their 
MLR calculation. The ACA regulations, however, are very restrictive in 
what is allowed for these developmental costs to be excluded from the 
MLR, and this impedes their incentive to innovate.
    Given the right incentives and more flexibility to respond to 
consumer demands, the industry could develop new consumer-friendly 
initiatives to increase quality and transparency. Giving consumers more 
choices, transparency in costs and benefits, and the ability to select 
from among meaningfully different health plans are keys to developing a 
more responsive system.
Conclusion
    While we certainly share the goal of protecting consumers to assure 
that they get better value in health care and health coverage, I am 
concerned that provisions of the ACA actually work against that goal. 
Higher taxes and fees on health insurance are passed along to consumers 
in the form of higher premiums. A lack of competition among insurers in 
states means there is little incentive for hospitals and other 
providers to negotiate lower rates, again driving up the cost of 
premiums. The ACA has the unintended result of interfering with one of 
the health insurance options that has been popular with small business 
by not counting spending on medical care from Health Savings Accounts 
as medical expenditures for purposes of the MLR calculation. And other 
provisions also produce unintended consequences, such as giving health 
insurers less incentive to fight fraud and making it more difficult for 
insurers and brokers to be there to assist individuals and small 
businesses with insurance decisions and claims.
    I believe the ACA must be modified going forward. I look forward to 
the opportunity to work with you on the shared goal of getting 
consumers the best value for their health care dollars. Thank you for 
the opportunity to testify today, and I look forward to your questions.
                                Appendix
Health plans have left markets \9\
    Health insurance carriers began leaving markets soon after the ACA 
was enacted. They are leaving for a variety of reasons. Some companies 
decided that they could not viably compete in the exchanges, others 
were overburdened with onerous state regulations, and others left the 
health insurance market because of concerns about new costs and 
regulations.
    If there are fewer insurance companies offering coverage, consumers 
and employers are limited in their choices. This also means they are 
limited in their options to shop among competing plans to find the one 
that offers the best value for the best price. In addition, the 
insurance carriers themselves have less negotiating power with 
providers if there are fewer insurers in a market.
    The end result is that there is less competition in the health 
insurance market in many states and that means higher costs for 
consumers.
    Here is a list that we compiled in 2011 as examples of carriers 
leaving the private health insurance market.
    In New York, Empire BlueCross BlueShield said it will drop in the 
spring of 2012 health insurance plans covering about 20,000 businesses 
in the state. Mark Wagar, president and CEO of Empire, said that the 
company will eliminate seven of the 13 group plans it currently offers 
to businesses that have two to 50 employees. The move is expected to 
have a great and potentially ``catastrophic'' impact on small 
businesses in New York, according to James L. Newhouse, president of 
Newhouse Financial and Insurance Brokers in Rye Brook, NY.\10\ This 
loss of competition inevitably will lead to higher prices and fewer 
choices for businesses and their employees.
    In Colorado, World Insurance Company/American Republic Insurance 
Company announced in October 2011 that it is leaving the individual 
market, citing the company's inability to comply with insurance 
regulations.\11\ Also in Colorado, Aetna will stop selling new health 
insurance to small groups in the state and is moving existing clients 
off its plans this year, affecting 1,200 companies and 5,200 employees 
and their dependents.\12\ Aetna also has pulled out of Colorado's 
individual market because of concerns about its ability to compete 
there, dropping 22,000 members.\13\ It also has dropped out of the 
small-group market in Michigan and several other states.
    In Indiana, nearly 10 percent of the state's health insurance 
carriers have withdrawn from the market because they are unable to 
comply with the Federal medical loss ratio requirement. Indiana was 
hoping to bring the companies back by asking the Department of Health 
and Human Services for a waiver from the rule, but Washington refused 
in late November 2011 to grant the waiver.
    In Iowa, 13 plans have left the health insurance market since June 
of 2010, citing regulatory concerns.\14\
    In New Mexico, four insurers--National Health Insurance, Aetna, 
John Alden, and Principle--stopped offering insurance to individuals or 
to small businesses--drying up the market and driving out 
competition.\15\
    In Virginia, shortly after the health law was enacted in 2010, a 
new Virginia-based company, nHealth, announced it was closing its 
doors, saying that the regulatory burdens posed by the health law made 
it impossible to gain investor support to continue operating.\16\
    The American Enterprise Group announced in October 2011 that it 
would stop offering non-group health insurance in more than 20 
states.\17\ As a result, 35,000 people will lose the health coverage 
they have now. The company cited regulatory burdens, including the 
medical loss ratio requirements, in explaining its decision to leave 
the markets. This means less competition in these 20 states, resulting 
in higher prices for consumers in many cases.
    Principal Financial Group, based in Iowa, announced in 2010 that it 
would stop selling health insurance, impacting 840,000 people who 
receive their insurance through employers served by the company. The 
company assessed its ability to compete in the new environment created 
by the ACA and concluded its best course was to stop selling health 
insurance policies.\18\
    Another 42,000 employees of small and midsize employers learned in 
January 2011 they were losing their health coverage with Guardian Life 
Insurance Co. of America. The company announced it was leaving the 
group medical insurance market (and it had reached an agreement with 
UnitedHealthcare to renew coverage for Guardian clients).\19\ Guardian 
began withdrawing from the medical insurance market in specific states 
more than a decade ago, and says it would be leaving the market with or 
without the ACA.
    Cigna announced that it is no longer offering health insurance 
coverage to small businesses in 16 states and the District of Columbia, 
California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kansas, 
Missouri, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, 
South Carolina, Texas, Virginia, and Washington, D.C.\20\
    These announcements that carriers are leaving markets accelerates a 
trend that the American Medical Association says leaves four out of 
five metropolitan areas in the United States without a competitive 
health insurance market.\21\ The report found that in about half of the 
metropolitan markets, at least one health insurer had a commercial 
market share of 50 percent or more. In 24 states, the two largest 
health insurers had a combined commercial market share of 70 percent or 
more.
    This is a negative and destructive trend, leaving fewer carriers to 
serve these markets and giving small businesses and the insurance 
agents who serve them less leverage to negotiate better benefits and 
lower rates among competing companies.
Endnotes
    \1\ ``Report to the Congress,'' Commission on Long Term Care, 
September 30, 2013, http://ltccommission.lmp01.lucidus.net/wp-content/
uploads/2013/12/Commission-on-Long-Term-Care
-Final-Report-9-26-13.pdf.
    \2\ ``Competition in the Healthcare Marketplace,'' Hearing before 
the Subcommittee on Consumer Protection, Product Safety, and Insurance 
of the Committee on Commerce, Science, and Transportation, United 
States Senate, One Hundred Eleventh, First Session, July 16, 2009, 
http://www.gpo.gov/fdsys/pkg/CHRG-111shrg54498/pdf/CHRG-
111shrg54498.pdf.
    \3\ ``Drivers of 2015 Health Insurance Premium Changes,'' American 
Academy of Actuaries, May 2014, http://actuary.org/files/
2015_Premium_Drivers_FINAL_051414.pdf.
    \4\ ``PPACA Health Insurer Annual Fee Guidance Issued,'' Towers 
Watson, March 2013, http://www.towerswatson.com/en-US/Insights/
Newsletters/Americas/health-care-reform-bulletin/2013
/PPACA-Health-Insurer-Annual-Fee-Guidance-Issued.
    \5\ Letter from Joint Committee on Taxation to Senator Jon Kyl, 
June 3, 2011, http://www.ahipcoverage.com/wp-content/uploads/2011/11/
Premium-Tax-JCT-Letter-to-Kyl-060311-2
.pdf.
    \6\ Eduardo Porter, ``One Reason Health Insurance Premiums Vary So 
Much,'' The New York Times, May 15, 2014, http://www.nytimes.com/2014/
05/16/upshot/why-health-insurance-premiums-vary-so-much.html.
    \7\ David Hogberg, ``ObamaCare Rule May Bar HSAs, Low-Cost Health 
Plans,'' Investor's Business Daily, December 7, 2011, http://
news.investors.com/Article/594079/201112071853/obama
care-rule-hits-hsa-high-deductible-plans.htm.
    \8\ ``NAIFA President Robert Miller Comments on HHS Final MLR 
Rule,'' National Association of Insurance and Financial Advisors, 
December 2, 2011, www.naifablog.com/2011/12/hhs-final-mlr-rule.html.
    \9\ Grace-Marie Turner, ``Testimony before the U.S. House of 
Representatives Committee on Small Business Subcommittee on 
Investigations, Oversight and Regulations, Hearing on New Medical Loss 
Ratios: Increasing Health Care Value or Just Eliminating Jobs?'' 
December 15, 2011, http://www.galen.org/assets/
Turner_MLR_Testimony.pdf.
    \10\ John Golden, ``Insurer to drop small-business health plans,'' 
Westfair Online, November 11, 2011, http://westfaironline.com/2011/
17248-insurer-to-drop-small-business-health-plans/.
    \11\ Letter from American Enterprise Group Inc. to Indiana 
Insurance Commissioner Steve Robertson, October 20, 2011, http://
cciio.cms.gov/programs/marketreforms/mlr/states/indiana/
in_american_enterprise_letter.pdf.
    \12\ Michael Booth, ``Aetna to drop small groups in Colorado,'' The 
Denver Post, September 29, 2010, www.denverpost.com/business/
ci_16199735.
    \13\ ``Aetna Drops Individuals in Colorado,'' United Press 
International, February 1, 2011, www.upi.com/Business_News/2011/02/01/
Aetna-drops-individuals-in-Colorado/UPI-5825129
6591876/.
    \14\ Adam Belz, ``Iowa insurer exits some individual health 
policies,'' The Des Moines Register, October 20, 2011.
    \15\ Trip Jennings, ``Health insurance companies drop NM policies 
for individuals, small groups,'' The New Mexico Independent, October 
26, 2010, http://newmexicoindependent.com/65802/health-insurance-
companies-drop-nm-policies-for-individuals-small-groups.
    \16\ James A. Slabaugh, nHealth letter to nHealth agents, June 2, 
2010, www.richmond
bizsense.com/images/nhealthletter.pdf.
    \17\ Adam Belz, ``Iowa insurer exits some individual health 
policies,'' The Des Moines Register, October 20, 2011.
    \18\ Reed Abelson, ``Insurer Cuts Health Plan as New Law Takes 
Hold,'' The New York Times, September 30, 2010, www.nytimes.com/2010/
10/01/health/policy/01insure.html.
    \19\ Jerry Geisel, ``Guardian to Exit Group Medical Insurance 
Market,'' Business Insurance, January 27, 2011, 
www.businessinsurance.com/article/20110127/BENEFITS02/110129919.
    \20\ Cigna Corporation, ``Annual Report Pursuant to Section 13 or 
15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended 
December 31, 2010,'' www.cigna.com/about_us/investor_relations/
sec_filings/4Q2010/cigna10k20101231.html.
    \21\ David W. Emmons, Ph.D., Josee R. Guardado, Ph.D., and Carol K. 
Kane, Ph.D., Competition in Health Insurance: A Comprehensive Study of 
U.S. Markets, 2011 Update, American Medical Association, https://
catalog.ama-assn.org/Catalog/product/product_detail.jsp?productId=prod
1940016.

    The Chairman. Thank you very, very much. Let me just start 
by asking Wendell Potter, you raised an interesting point. And 
if one looks across the scope of the Affordable Care Act, there 
are adjustments that have been made. There are adjustments that 
need to be made.
    But I am struck by a dichotomy. On the one hand, you are 
saying that the medical loss ratio may have the effect of 
reducing the ability of insurance companies to back innovation 
or do innovation, whatever. And on the other hand, as Wendell 
has said and as I also believe, that the reception on Wall 
Street for insurance companies has been more positive even than 
it was before the medical loss ratio came in.
    How does one work with those two arguments?
    Mr. Potter. Well, thank you, Senator. You are exactly 
correct. Since the law was passed, health insurers have done 
quite well financially.
    The Chairman. But she is making a point, though.
    Mr. Potter. I am sorry?
    The Chairman. She is saying, and you can speak for 
yourself, Ms. Turner, she is saying that innovation is being 
discouraged or potentially could be discouraged.
    Mr. Potter. But I do not think that is the case, Senator. I 
think innovation will continue to take place. You have to keep 
in mind that there is still a very competitive marketplace 
there, and companies have to be---- have to answer to their 
major customers. Most of the big insurance companies have 
corporate customers that demand innovation, that demand that 
they spend resources on fraud and abuse activities.
    On that score in particular, I know that big companies in 
years past would spend enormous amounts of money on fraud and 
abuse detection technology. I remember during my years at 
Cigna, my staff disseminated a press release about the money 
that Cigna had invested with IBM on its fraud and abuse 
management system.
    And insurers will always be spending money on that because 
it will be demanded by their customers that they do.
    That will not go away. And much of the investment already 
has been made, and it is important that they continue, and they 
will continue that.
    In other ways, their profits have continued to go up. Their 
revenues continue to go up partly, and, in fact, significantly, 
because of the Affordable Care Act they are getting more 
revenues that they are able to convert to profits. And they are 
paying their executives very generously. In fact, the CEO of 
Aetna, according to the proxies, just within the last few weeks 
was paid $30 million. The increases are continuing to go up.
    Part of this can be addressed by just reallocation of some 
of the resources on the administrative side. When I was at 
Cigna, for example, we had--we spent a quarter of a million 
dollars for a meeting on a single day for a few hours for an 
investor in New York. So there is a lot of money that is not 
being spent prudently.
    And those are premium dollars, to the money can be 
reallocated, as we are seeing that already happening. They are 
reallocating some resources. Even the for-profits are realizing 
that they can indeed meet the minimum standards of the medical 
loss ratio and operate quite well, thank you. Thank you, 
Senator.
    The Chairman. OK. Thank you. Let me go onto Senator Thune.
    Senator Thune. Thank you, Mr. Chairman. And, Ms. Turner, in 
my statement, I quoted a couple of letters from constituents I 
had received about Obamacare. And I think, as I said, outside 
of Washington you hear these concerns where people are 
experiencing higher premiums, higher deductibles, canceled 
coverages, and that sort of thing, which is, I think, 
compounded by an expectation that there were going to be lower 
premiums in many cases.
    And I am wondering maybe if you could share your thoughts 
about those price increases, and perhaps put into perspective 
whether or not the benefit that they derive from the MLR 
provision is exceeded by the cost of these other increases that 
are occurring with regard to deductibles, and premiums, and 
that sort of thing. Could you put that into context?
    Ms. Turner. Well, thank you, Senator. I have an example in 
my testimony about the health insurance tax costing the average 
family $350 to $400 a year. I do worry that that one tax alone 
counteracts much more than the savings that a family might get 
from their--that most families would receive from their medical 
loss ratio rebates.
    But there are so many other provisions in the law that are 
driving up the costs of premiums. I think all of us have been 
hearing many complaints from consumers about the fact that the 
mandated benefits package is so rich. Yes, we never know what 
health crisis we are going to face, but many people feel that 
the benefits that they are paying are far outside what they 
need and would use. And they also feel that the deductibles are 
too high. Also having preventative care be a so-called ``free 
benefit'' means that the cost of that care must be built into 
the premium itself.
    So there are a lot of provisions of this law that keep 
consumers from being able to make their own choices about what 
kind of health insurance policy works for them and what kind of 
policy they can afford. And I also believe that if consumers 
had more choices in a less-constrained market, that would put 
pressure on the insurance industry to make sure that they do 
provide value.
    Senator Thune. Professor Hall, there is a lot of interest 
in Congress in preventing fraud in Medicare and Medicaid. And 
the government is seeking to move beyond what is referred to as 
pay-and-chase model of recouping fraudulent claims after the 
fact. In fact, our colleague, Senator Nelson, just introduced a 
bipartisan bill to improve Medicare's fraud prevention.
    And the question I have with regard to that as it pertains 
to the MLR rules, which allow fraud recovery expenses to be 
treated as medical claims, so there is effectively a 
disincentive for insurers to invest in fraud prevention 
activities, which concerns me as some fraud obviously affects 
patient care.
    So could you discuss how the current rule helps or hurts 
fraud prevention?
    Mr. Hall. Excellent question, Senator. I have not studied 
the nuances of that in great detail. I do know that the general 
spending on fraud is only a fraction of a percent, so whatever 
effect the rule has, the fraud issue is just a very small 
sliver of the total pie.
    I do believe that the issue was given very thorough 
consideration, not only by HHS, but also by NAIC. And with a 
lot of these sort of issues of definition and line drawing that 
had to be confronted, I think one thing the rule brought to 
light was just good data about what is happening, and a really 
sort of thoughtful consideration from all viewpoints as to what 
the best resolution would be.
    So I do not if it is the perfect resolution, but I do think 
that the issue is, as you noted, to treat fraud recovery in a 
more favorable way, but perhaps fraud investigation as an 
administrative cost is--I do not know if it is a compromise, 
but it says there is a line and we define what is on which side 
of the line.
    And within that, there is broad leeway for insurers to do 
what they think is best in their best interests and their 
policyholders' interests. To say that you can spend 15 or 20 
percent of the premium dollars on administrative costs leaves 
an awful lot of room to decide how much of that should go 
toward sales, toward profits, and toward fraud recovery.
    Senator Thune. Ms. Turner, would you want to add anything 
to that? It seems, to me at least, it is better to stop fraud 
when it occurs rather than to attempt to recoup money that has 
already been appropriately paid. I mean, does that not 
ultimately benefit patients?
    Ms. Turner. Absolutely. And I think that when you do look 
at the incentives, if a company is paying out a dollar that is 
not actually for legitimate medical care, if it just pays the 
dollar, then it counts as a medical expenditure even it is not 
appropriate. But if they go after the dollar and try to get it 
back, then the cost of detecting the inappropriate billing 
counts against their administrative expenses. So I do think 
that the incentives really do work at cross purposes.
    And one of the things that really constrains companies is 
figuring out how to do this juggling act with all of the other 
costs of regulatory compliance, taxes, setting up networks, and 
getting physicians and hospitals enrolled in their plans. They 
just may not have the investment capacity as Mr. Potter 
indicated they did before the medical loss rule went into 
effect.
    Senator Thune. Mr. Chairman, my time is up.
    The Chairman. Thank you very much. Senator Johnson?

                STATEMENT OF HON. RON JOHNSON, 
                  U.S. SENATOR FROM WISCONSIN

    Senator Johnson. Thank you, Mr. Chairman. Yes, I will be 
the first to admit here that almost everything here in 
government is well intentioned, but there are some very serious 
negative unintended consequences.
    According to the Manhattan Institute for Policy Research, 
in the State of Wisconsin, a 27-year-old male after the 
Affordable Care Act, their premiums now are 124 percent higher 
than they were than pre-patient protection Affordable Care Act. 
A 27-year-old female is experiencing 77.6 percent higher 
premiums. So that is certainly part of the collateral damage 
that we are seeing as I am getting e-mails, as Senator Thune 
talked about.
    Just a couple of quotes from real people telling the truth, 
not telling lies. ``You need to understand how cheated we feel. 
This is not right. I cannot afford this.'' By the way, that 
individual's premium went from $550 per month to almost $1,600 
per month. ``Please help. Sir, I'm begging for your help. I'm 
very feeling very upset and stressed.'' That came from a couple 
with cancer. ``The law is hurting us. Be our voice. I guess we 
are collateral damage. We are scared.''
    These are statements from e-mails, hundreds that we have 
received from real Americans, from real Wisconsinites. And I 
realize there are plenty of people who are also being 
advantaged by the Affordable Care Act, but it is because their 
care is being subsidized either through higher premiums or 
direct subsidies from government that are going to be paid for 
our kids and grandkids because, you know, we are still running 
deficits.
    Mr. Potter, you used the word ``excess profits.'' Can you 
define ``excess profits?'' What is an acceptable level of 
profit in a commercial enterprise?
    Mr. Potter. I do not think there is an acceptable level of 
profits. I think it depends on what your--you might have an 
opinion and----
    Senator Johnson. Well, do you think profit is OK because, I 
mean--do you expect people to engage in commercial activity? Do 
you expect people to put their capital at risk and not ever 
have any chance for making a profit?
    Mr. Potter. Well, Senator, keep in mind in this country we 
still have many, many non-profit health insurance companies. We 
did for many years, and they worked quite well. And so, there 
are some companies that have decided that they want to be in 
this business to make money. That is their ultimate objective. 
Then you have another insurance companies that that is not 
their sole objective.
    Senator Johnson. I understand, but you actually have a 
concept that somebody can make too much money, but you are not 
willing to say what that would be.
    Mr. Potter. Sir, I do not think that is what I intended to 
say at all.
    Senator Johnson. There is a chart on page 11 of the 
majority report, a study apparently done by the Health--what is 
it, the American Health Insurance Plans. And apparently this 
was a group that tried to quantify how much money was spent and 
in what areas of healthcare. Apparently it was inaccurate it 
seems like from the majority's standpoint. But what they showed 
was about a 3 percent profit rate. Was that pretty much your 
experience when you were working in the healthcare industry?
    Mr. Potter. No. You can get that number when you add in the 
non-profit health insurance companies to the equation. And I 
know America's Health Insurance Plans quite well from having 
been in the industry for quite a long time.
    Senator Johnson. So I am asking you, what would be the 
average profit rate for a for-profit insurance company?
    Mr. Potter. It varies. It can be five, six, seven percent, 
and that could be significant. You could also look at the 
return on equity, which is also pretty high. But let me look at 
it from this perspective.
    Senator Johnson. I just want to try and drill down some 
numbers. So you are talking after-tax profit rate somewhere, 
five, six, 7 percent, and you are probably thinking that is 
excessive.
    Mr. Potter. I think it is pretty significant. You have to 
keep in mind what these companies have done in the past to make 
sure that they are earning that. They refuse to----
    Senator Johnson. I am running out of time. I need to go 
to----
    The Chairman. I will give you more time, but let him answer 
the question.
    Senator Johnson. You will give me more time?
    Mr. Potter. Yes, for many years, insurance companies 
engaged in practices that enabled them make whatever profits 
they made, such as refusing to sell coverage to people at all 
because of preexisting conditions who are charging them so much 
that they could not afford to buy coverage.
    It is why, Senator, we had about 50 million people who 
could not get coverage. And, yes, there are some people now who 
are probably paying more for their coverage, but before the 
Affordable Care Act, there were many millions more who could 
not afford coverage.
    Senator Johnson. You are not--again, I have a line of 
questioning, and you are not answering the question. I want to 
go to, I guess it was Professor Hall. I think you said that the 
rebates totaled $1.6 billion?
    Mr. Hall. Yes, Senator.
    Senator Johnson. Ms. Turner you were talking about that the 
fees, the insurance fees totaled $8 billion to $14 billion.
    Ms. Turner. We are focused here today on the medical loss 
ratio. But the average consumers are not looking at this law in 
a silo. They are looking at their overall cost experience. And 
if their premiums are going up because of so many other 
provisions of the law, then their own experience is that their 
health insurance is costing them a lot more.
    Senator Johnson. Yes. I just want to bring that into 
perspective. So rebates are $1.6 billion, but the government is 
collecting $8 to $14 billion from those exact same insurance 
companies.
    Ms. Turner. In the same year.
    Mr. Potter. Do we have the same timeframe?
    Ms. Turner. Yes. Well, it is basically--it is about $8 
billion, I think, in the first year for the health insurance 
tax alone. That does not count the medical device tax, or the 
drug tax, or others that I did not quantify in my testimony. 
But, yes, just that one tax is several times more than the 
medical loss ratio savings.
    Senator Johnson. If you could indulge me one further 
question. I come from the private sector, so I actually have a 
great deal of respect for the power and quite actually the 
brutality of financial competition. And from my standpoint, in 
running a business, an after-tax profit of five percent is not 
particularly a really high profit business.
    So my question is, if these are excess profits or we have 
not delivered good value to customers, where is the breakdown 
in the marketplace? Why is that? Because truthfully when you 
have a lot of competitors, they are fighting for business, and 
with a 5 percent after-tax profit rate, that to me seems like 
there is a fair amount of competition. So where was the 
breakdown? Could it be because we had state markets and limited 
competition between States? What drove that?
    Ms. Turner. Are you asking me, Senator?
    Senator Johnson. Sorry. Whoever would like to answer, I am 
fine with that.
    Ms. Turner. Absolutely. State regulation has really impeded 
competition, and, in fact, has driven out many companies. I 
have a list in my testimony of companies across the country 
that basically have left the health insurance market, and a lot 
of them have left because the rules and regulations are 
becoming so onerous. Many are moving into other types of 
insurance and are leaving the health insurance business 
altogether.
    So it is rules and regulation. It is the lack of 
competition. It is the difficulty and the expense of putting 
together networks to make sure that plans can provide services 
and that people have access to physicians and hospitals, all 
while still trying to keep their premiums low. It's very 
difficult.
    Mr. Hall. And if I could give my response as well, I think 
with respect to competition and this rule, I think it is a more 
nuanced story in a sense that for the most part, the 80/20 rule 
confirmed what the markets were giving us. It pretty much was 
set according to the prevailing medical loss ratios, and that 
is why there has not been a major dislocation. To the extent 
that if some companies were below that level, perhaps there 
just was not good information or there were pockets of the 
market that were not as competitive as they could be.
    With respect to profits, you know, typically you think five 
percent is an OK profit, but you have to understand that a lot 
of what the premium is, is giving money to the insurers that 
they then pay back to my doctors. And so, if you pay 5 percent 
to your bank to hold your money and give it back to you later 
or to your mutual fund, you would say that was outrageous. So I 
am not saying the insurance company is the same as that, but it 
is somewhat different than selling, you know, a commodity that 
has to be manufactured with a lot of risk. It falls somewhere 
in between.
    And so, the general consensus is a two to three percent 
profit is sufficient to be financially healthy in the insurance 
industry.
    The Chairman. Thank you, Senator. Senator Scott?

                 STATEMENT OF HON. TIM SCOTT, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator Scott. Thank you, sir. I would say to Mr. Hall's 
comments and directly to Senator Johnson's comments, it 
questions the whole notion of trying to figure out how much 
profit is enough profit, and for someone to say they can tell 
you what it is, they cannot, number one. Number two, having 
spent a couple of years in the insurance industry on the 
property and casualty side, the reality of it is that the two, 
or three, or four, or five, or six, or seven percent profit 
that you see can be eliminated by any catastrophic occurrence 
that occurs.
    The challenge with health insurance is a little different 
than the property and casualty business because the reality of 
it is that based on the adverse risk selection, you find 
yourselves in harm's way. And so, I think we have learned, and 
what we will continue to learn over the next several years, is 
a new definition of ``adverse risk selection.'' And companies 
are going to have to adjust their premiums in order to satisfy 
this thirst for us to have mandatory health insurance on 
everyone.
    Said differently, the unintended consequences are that you 
will see that your premiums are increasing, your deductibles 
are increasing, your out-of-pocket expenses are increasing. The 
only things that are not really increasing are the number of 
doctors in your network. So if you are looking for in-network 
doctors consistently throughout the exchanges, you will find 
that there are fewer, not more. If you are looking for 
hospitals to go to, fewer, not more.
    So the real challenge is if you have a specialist or a need 
for a specialist, visit some of the cancer centers and see 
which ones are in and which ones are out. Look at the teaching 
hospitals and see which ones are in, see which ones are out.
    The other aspect that I would suggest is that when you look 
at the premiums paid versus the claims paid, the real benefit 
for the insurance industry has been their ability to create a 
return on the investment based on how they use those premiums 
before they pay them out. So ultimately, the actual profit is 
generated by equity position and other assets that provides 
real opportunity for them to continue to provide the coverages 
that are necessary for us to see people insured.
    Mr. Potter suggested that there were 45 or 50 million 
Americans who did not have health insurance because they were 
unable to get it because of preexisting conditions and other 
areas as--other issues as well. The fact of the matter 
unfortunately is by the year 2024, according to the non-
partisan CBO--we like to call it non-partisan when we like what 
they have to say, although I think they lean a little left--
suggests that we will see 31 million Americans still without 
insurance.
    So what we have said is that we are going to spend between 
$1.5 trillion to upwards of $2 trillion to provide health 
insurance to about 10 or 12 more million Americans at a cost 
that is a couple of trillion dollars higher and perhaps destroy 
the best delivery system of health insurance we have ever seen 
in the world.
    With that said, having sold health insurance back in the 
90s before I woke up and realized, hey, I can do something else 
besides this because this is getting complicated. Now I thank 
God that I had the good fortune to get into the property and 
casualty business because people who have to do this for a 
living every day with this new MLR are being run out of 
business. And what I mean by that, Ms. Turner, is that agents 
are no longer en vogue.
    So we have consumers making decisions on their own or with 
the help of a navigator. Now, I am sure that a navigator, being 
defined as 40 hours of good training, perhaps knows a little 
bit about health insurance, but not much more than the 
consumer. And that is one of the great challenges that we face.
    So the MLR's unintended consequence is the elimination of a 
professional that comes into your house, sits down with your 
family, understands your health situation and challenges, and 
makes good decisions with you. That is unfortunately being 
eliminated every single day going forward.
    I would suggest that what Mr. Thune has said previously and 
what I am receiving from my constituents, Mr. Turner, some of 
my constituents from Clover, South Carolina are seeing their 
premiums go from $330 a month to $525 a month.
    I do like the notion that we are going to celebrate the 
concept of a rebate. This rebate comes in the form of cash 
coming home until they realize that even if they applied their 
rebate to their higher premiums, the rebates pales in 
comparison to what they had before there was a concept called 
the MLR, which is unfortunate.
    I just cannot figure out how we justify these higher rates 
by suggesting that we have more people insured. It is just 
inconsistent with the facts that we will see play out, I 
believe, overall. We may see more people with an insurance 
card, i.e., having access to health insurance or health care. 
But when the capacity because of the doctors and the hospitals 
and the specialists are being constricted, the definition of 
access may have to change.
    So I am seeing my time is running out because the lights 
are changing colors, but let me ask Ms. Turner one question. It 
seems to me that an insurer may actually have a perverse 
incentive to get an MLR rate that is acceptable, but may drive 
costs later. So my question is this. It seems to me that an 
insurer who has actually some success in bending the cost curve 
in the delivery system of medical care will have a greater 
challenge in meeting their MLR. If an insurer manages to spend 
less on medical care through negotiating better rates with 
providers, that would be exactly what we want, of course. But 
at that point, the ratio of medical expenses to the company's 
fixed administrative costs is suddenly off. So it seems that 
the MLR actually rewards less efficient delivery of medical 
care. Thoughts?
    Ms. Turner. That is absolutely right. And, of course, the 
converse is true as well. If a company winds up paying moure 
out in medical costs, that means their base can be higher for 
their medical loss ratio administrative calculation. But the 
consumer is certainly disadvantaged. So absolutely, Senator.
    And to your other points, emergency room physicians 
recently released a report saying that they are seeing a 
dramatic increase in the number of people showing up for care 
at hospital emergency rooms even though the Affordable Care Act 
was designed to make sure people did not have to go to 
emergency rooms, especially for routine care.
    And to your point about agents, the agents and brokers 
really are like external H.R. departments for many small 
businesses.
    Senator Scott. Absolutely.
    Ms. Turner. And they are enormously beneficial, not only in 
helping people and business owners wade through the 
complexities of finding the right policies, but also in helping 
them when they have claims and when they have challenges. And 
it is really, I think, very detrimental to consumers when 
agents are not available to help them and to help small 
business owners who now have to navigate this complex space on 
their own.
    Senator Scott. Thank you, ma'am. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Scott. There is sort of a 
fascination to me of the rhythms of discussing the Affordable 
Care Act. First of all, if you call it the ``Affordable Care 
Act,'' that means you must be an optimist with no moorings. On 
the other hand, if you call it Obamacare, you are just a good, 
solid American citizen who does not like the President or 
whatever.
    But you see it time and time again when new legislation is 
introduced, and particularly when it is far reaching beyond the 
medical loss ratio, but the whole medical loss ratio and the 
whole Affordable Care Act. That, you know, a while ago 
everybody was spending all of their time on the computer 
system, which was all botched up, and that seems to have gotten 
better. You do not hear very much about that.
    So then, and this is typical in so much legislation, that 
if something is working, and is settled law, and is accepted by 
the Nation, and people are signing up, and the exchanges are, 
you know, in Oregon not working quite so well, but they are 
going to go to the Federal model, are working, and people can 
stay on their parents' until they are 26 years old, and getting 
rid of lifetime limits, annual limits. I mean, you do not hear 
Ms. Turner discussing that kind of thing or Senator Johnson 
discussing that kind of thing because that does not fit a 
mindset.
    But it is the old business of if you want to nail 
something, you read a couple of e-mails that you have gotten.
    And I have never used that technique, but I do remember the 
e-mails and conversations and situations that I was involved in 
before the Affordable Care Act was passed and before medical 
loss ratio was passed, and there were tragedies.
    I mean, I remember--Ms. Turner, this may not move you, but 
it moved me--a 10-year-old boy who had cancer in Charleston, 
West Virginia, and he was dying from that cancer. And I met 
with him and his family, and his annual limits, which then 
existed, had run out. And he had--they had spent a million 
dollars, and there was nothing more that would be allowed to be 
spent.
    And that does not exist anymore. All kinds of--preexisting 
conditions was huge. Huge. And you refer to costs going up, and 
Senator Johnson refers to costs going up, and then I am 
thinking about what I am reading in the newspapers and reading 
in professional papers is that overall the cost of healthcare 
is going down. Now, at some point, if the cost of healthcare is 
going down, but the costs are going up to individuals broadly 
on such a scale, then the first could not possibly be true.
    So again, it is the question of if you want to pierce 
something or to put in a bad light, pull out an e-mail or use 
some example because you may be--that e-mail is probably 
correct. It is from a real person expressing, you know, real 
frustrations. But again, I go back to my world, which is not as 
wealthy as Wisconsin, but southern West Virginia or West 
Virginia as a whole, and I look at Ms. Fernandez there and 
listening to her story. And that is what I have heard. That is 
what I have heard. I mean, I did not get into the business of--
and Al Franken actually helped on this a lot.
    I did not get into the business of the medical loss ratio, 
you know, which was sort of everybody was excited about the 
public option, and Wendell and I have discussed this before. 
The public option was a terrific idea, I guess, but the point 
is we could not get any votes for it in the Finance Committee. 
So you can keep on saying, like all the TV reporters did, this 
is a terrific idea, and the press was saying, and if you are 
not for medical--for the public option, you cannot be serious 
about healthcare reform. Well, that might have been true except 
the fact we could not get any votes for it to get it out of the 
Finance Committee much less get it on the floor of the Senate.
    So then we came to the medical loss ratio, which seemed to 
make sense, and on a bipartisan basis was passed. And I think 
it is very important to take a long view at what is going on 
here, and I will be able to dig up some e-mails that make part 
of the Affordable Care Act that does not look good, especially 
from people who have their mind that they do not want it to 
work because they do not like the President. Maybe he is the 
wrong color, something of that sort. I have seen a lot of that, 
and I know a lot of that to be true. It is not something you 
are meant to talk about in public, but it is something I am 
talking about in public because that is very true.
    People associate a piece of legislation. Their leader in 
the Senate has committed at the beginning of the President's 
term to block every piece of legislation that the President 
puts forward. And they have done that with this exception and a 
few other exceptions. And I find that--I find that disingenuous 
behavior.
    So, Mr. Potter, if the insurance company--I mean, maybe the 
ideas are mixed on what are excessive profits, but if, as you 
and Mr. Hall said, if there are profits, and if people are 
signing up now in very exciting numbers, and if the polls show 
that people overwhelmingly want this healthcare system to work 
as opposed to the last healthcare system. I mean, if we wanted 
to have a discussion about the last healthcare system, we would 
be here for 4 hours listening to me.
    But, you know, it is a--the prospect of finding something 
that works for people where they have choice, where they have--
make their own decisions, there are going to be--there will be 
some consequences. I mean, in some cases there will be fewer 
doctors and that is why there is a lot of money in the 
Affordable Care Act to specifically encourage primary care 
doctors to get into the business. That is why I think there is 
$10 billion in the Affordable Care Act to open up a thousand 
more rural health clinics so that people in rural areas can get 
to rural health clinics.
    I mean, to me the concept of trying to nickel and dime and 
use convenient political arguments against a very, very major 
piece of legislation, which happily is working and will be 
working better all the time to the extent that in 10 years Ms. 
Turner is going to be telling herself, why was I complaining? 
Why was I complaining? It did not seem good at the time, but it 
seems everywhere I look people are getting satisfied.
    Will we make more tweaks to the law? Will Sylvia Mathews 
Burwell, if confirmed by the Senate, will she continue to make 
some more tweaks? She will have to because anything this big 
has to be tweaked because there always improvements that can be 
made. But to me, the basic factor--I have obviously run over my 
time--no, actually my time setter who works for me has just 
suddenly I have 2 minutes and 50 seconds, Senator Johnson. It 
is good to be Chair.
    Senator Johnson. You are the Chairman.
    The Chairman. That is it is working and if rather than 
waiting for the clouds to deliver thunderbolts of lightning and 
doom and misery, actually things are seeming to be turning 
around, then realistically you do not ask for perfection on 
every day in every way. You assume there are some consequences. 
There will be some irregularities. Things will vary from state 
to state, and you will always begin to come up with examples.
    I mean, this example of waste, fraud, and abuse I have 
heard on every single subject that has ever existed. And the 
fact is, as Mr. Hall said, I think it is actually less than 
one-half of 1 percent.
    And that is pretty amazing. So I would just raise a protest 
in the way in America that we approach problems. If something 
is done by the other side, so to speak, then attack, attack. Do 
not think about what Ms. Fernandez has been through. And I am 
saying do think about what Ms. Fernandez has been through, and 
that is the point. That is why a bill had to be changed. That 
is why the existing healthcare system where insurance companies 
were making off like bandits and cutting people off----
    The whole concept of rescission. I do not know if Ms. 
Turner knows what rescission means, but it is where somebody is 
paying their premiums and they have a disease which the 
insurance company decides is going to be very expensive. And 
so, the law says no more rescission. End of rescission, and 
that is absolutely fantastic news for hundreds of thousands of 
people. But you do not hear that talked about that very much 
because the word ``rescission'' is not understood very much. 
But I daresay that Mr. Fernandez understands it real well, and 
I daresay that Mr. Ralston understands it.
    So again, it is the question of when you approach major 
legislation that affects people's lives, is it important to be 
fair, and is it important to--for me to understand that 
everything that is not working as well as it should, but it is 
a good bill, and it is working, and people are signing on very 
fast. And, you know, West Virginia amazed me by instead of 
going to 133 percent of Medicaid expansion went to 138 percent. 
And then I looked at--I am going to sign a letter with some 
other Senators to all the Governors who refuse to get Medicaid 
into the Medicaid expansion because I think it is 
unconscionable.
    I have not heard any talk about that around here. I mean, 
in Texas I think it is several million people are without 
health insurance because of that fact. Well, why do I not hear 
about that? That is what Medicaid expansion is for, and all 
that means is that 20 Governors have to change their minds and 
stiffen their political spines, and do what is right. Virginia 
struggling is struggling with now. We will see what happens on 
that.
    But I do think that when you are dealing with major 
legislation, it is important to be fair, and it is important to 
see the bad and the good, to balance them, and to decide 
whether you are going to try to move this cart forward or you 
are going to try and stop it. And I am not favor of trying to 
stop it. Nobody is going to stop it. It is the law, and it will 
work.
    I do not think that was a question, but I enjoyed myself. 
But do you understand that, Wendell?
    Mr. Potter. I do, Senator.
    The Chairman. It is so frustrating. When you live through 
what healthcare was in southern West Virginia and all of West 
Virginia, what people did not have, people were terrified of 
going to a doctor. People could not get to a doctor. And when I 
went to West Virginia as a Vista volunteer as an untrained 
social worker in 1964, it was only because there was a rural 
healthcare facility right across the stream in another county 
that we could go to. And, yes, there were plenty of people in 
the waiting room then, and there are more people now. And part 
of the reason is because people want healthcare. When people 
want healthcare, that is a good sign. It means they are going 
to be aggressive about it and look to exchanges and have a 
positive attitude, which I think is what pulls us through in 
America. Anybody want to respond to that?
    Mr. Potter. Senator, if I might start, I think--I 
appreciate what you were saying because so often we have lost 
sight of what the world was like before the passage of the 
Affordable Care Act and why we needed to have it in the first 
place. We forget that between 1998 and 2008, the average 
premium for a family went up 131 percent, and deductibles were 
going up as well, too. And the percentage of the premium that 
workers were paying was increasing as well, too. That is not a 
statistic that is cited very often these days. But we have 
forgotten what it was like and why so many people were priced 
out of the market before the Affordable Care Act.
    Since my testimony 5 years ago, I was inundated with phone 
calls and e-mails from people who thought that I might be able 
to help them deal with problems with their insurance companies. 
And until the law was passed, there was really nothing that I 
could do. I could not help people get coverage if they had had 
a preexisting condition. I could not help people who were 
deemed uninsurable until the law passed.
    And as you may know, Senator, one of the reasons that I 
decided to do what I did was going to a health fair not too far 
from West Virginia in Wise County, Virginia. I was down there 
to visit family. And I went to this healthcare exposition that 
was being held at a county fairgrounds, and I saw people who 
could have been my relatives, who could have been people I grew 
up with, could have been me if my circumstances had not been 
slightly different.
    And they were standing in these long, long lines waiting to 
get care that was being provided, Senator, in barns and animal 
stalls by doctors and nurses who were volunteering their time. 
And it was just stunning to me.
    I realize at that moment that what I was doing for a career 
was making it necessary for people that I could have grown up 
with and could have been related to get care that way. That is 
what had happened. That is what had happened to our so-called 
healthcare system. And that was just one community.
    And the people who were putting that exposition together, 
they call them expositions, have been doing this all over the 
country because it is not just a problem in Wise County, 
Virginia. It is everywhere in this country. I left my job 
because I could not, in good conscience, continue doing that.
    And, Senator, also insurance companies make a lot of money. 
They really do. And when you are talking about percentages, it 
may seem to be relatively small. But just the five largest 
health insurers last year made about $12 billion profits, just 
five companies. We have got about 1,300 insurance companies. 
They make a ton of money.
    The taxes on--the so-called new tax on insurers, they do 
not have to pass that along. They have a lot of resources. They 
do not have to. They just decided they want to do that, and 
they can do that. They conceivably could absorb those and still 
make considerable money.
    Also they are getting a lot of new customers. There was no 
incentive before the Affordable Care Act for these companies to 
reform this system themselves. It had to be from the outside. 
We have seen that for many years because of the way their 
practices were going, they were excluding more and more people. 
And we had an aging population. We were going to see more and 
more people falling into the ranks of the uninsured because of 
preexisting conditions. They do not have to pass that along.
    And also, underwriting costs. They do not have to spend as 
much money on some things that they spent enormous amounts of 
money on in the past, such as underwriting that can be 
reallocated to and are being reallocated in certain ways to 
make sure that premiums are reasonable.
    I have talked to many people, Senator, who have told me 
that their premiums are much less. And a lot of people, in 
fact, a majority of people who are buying coverage through the 
exchanges are paying less than they thought they would. They 
are getting subsidies that are helping them. So a lot of people 
are better off. Some people have told me, Senator, that they 
are alive today and they are confident of it because of the 
Affordable Care Act, and I believe it.
    The Chairman. Senator Johnson, do you want to close her out 
here?
    Senator Johnson. Oh, I absolutely do, Mr. Chairman. It was 
regrettable, and I would say it was offensive--seeing as I am 
the only one in the room really talking about opposition, that 
you would play the race card, that you would say opposition to 
Obamacare necessarily must stream from some inherent racism. 
Very offensive.
    But listen, my opposition to my healthcare has nothing to 
do with the race of President Obama. My opposition to this 
healthcare law, by the way, which was passed on a 100 percent 
totally partisan basis. You talk about a major piece of 
legislation. The way it used to work in this country is 
something this major would normally be done in a bipartisan 
fashion where you would actually accommodate the other person's 
views. That is not what happened with this law.
    The Chairman. Senator, there was no accommodation? There 
was no accommodation?
    Senator Johnson. It was passed on a purely partisan basis. 
But my objection to the healthcare law is, first of all, if you 
do not know my story, my daughter was saved by this healthcare 
system that was supposedly so terrible. My daughter was born 
with a congenital heart defect. Her aorta and pulmonary artery 
were reversed, first day of life. One of those greedy doctors 
that President Obama said would take out a set of tonsils or 
cutoff a foot because of the fee schedule, came in at 1:30 in 
the morning and saved her life. Eight months later when her 
heart was the size of a small plum and after 7 hours of open 
heart surgery, a team of dedicated professionals in a fabulous 
healthcare system that we have rebaffled the upper chamber of 
her heart. She's now 31 years old. Now, she's a nurse 
practitioner.
    The reason my story has a happy ending is because my wife 
and I had the freedom, and that is the problem with Obamacare. 
It is the greatest assault on our freedom in my lifetime. We 
had the freedom to call up Boston Children's and Chicago 
Children's. And by the way, we just had a standard healthcare 
plan. I had the same healthcare that every one of the people 
that worked with me had. Nothing special about it. We were able 
to access those miracles because of our healthcare system.
    And we did not have to totally remake America's healthcare 
system to take care and provide the social safety net that we 
all agree on. I agree with President Obama, no American should 
go bankrupt because they get ill, but we did not have to pass 
this monstrosity. We could have done it using high risk pools. 
Now, in the State of Wisconsin, those are obsolete. They are 
gone. The couple with cancer I was talking about, they could 
afford their high risk pool insurance. Not anymore. They lost 
it. It is gone because of Obamacare.
    So sure, there are some people that have been advantaged by 
Obamacare. I admitted that. But they are advantaged by it 
because taxpayers are subsidizing them. And by the way, not 
really taxpayers. The debt on our kids and grandkids will pay 
for those subsidies. Or they are being subsidized by 27-year-
old men and women in Wisconsin who are paying 124 percent 
higher premiums. That is why some people are advantaged because 
somebody else is being disadvantaged.
    I objected to Obamacare because of the loss of freedom. I 
objected to it because I understand that when you actually pay 
for it by reducing payments to providers, you are going to have 
fewer providers. You are going to have less access.
    You will have rationing. The medical device tax, what has 
that resulted in? We are not really investing in developing 
medical devices for manufacturers anymore because it is too 
expensive. A 2.3 percent tax on gross sales, those companies 
are moving overseas. They will stop innovating. We will not see 
the types of miracles that we could have had if we had not 
destroyed that type of innovation.
    So I did not object to this because of the race of the 
President. I objected to this because it is an assault on our 
freedom. And, Mr. Chairman, I have to admit, I have a great 
deal of respect for you, but I am the only one in the room, and 
I found it very offensive that you would basically imply that I 
am a racist because I opposed this healthcare law. That is 
outrageous.
    And again, there are so many problems with--Ms. Turner, I 
actually have a question for you because Senator Scott brought 
it up. I have heard, and I do not have it--I am not going to 
quote a figure because I get PolitiFact checked all the time. I 
have heard of an alarming number of insurance agents that will 
lose their jobs because of this. Have you heard--do you know of 
any studies about that?
    Ms. Turner. I do not believe there have been any studies 
yet, but in California, for example, there have some reports in 
the Los Angeles Times and elsewhere about how hard agents 
worked to help enroll people in the coverage, and yet it is 
questionable whether or not they are going to be able to be 
paid. And many of them, their office costs are fixed, too. They 
may wind up not being able to continue to support these new 
enrolees.
    And I do want to echo what you said about the overall goal 
of the law. Senator I believe in the goals of getting coverage 
to everybody and protecting freedom in this wonderful society 
we live is an absolutely important goal. But the question is, 
how do we do it?
    Senator Johnson. And let me just conclude on how this thing 
was sold to the American people. It was a consumer fraud, a 
massive consumer fraud. This President looked at the American 
people and told them a boldfaced lie. If you like your health 
plan, you can keep it, period. If you like your doctor, you can 
keep it, period. Because of this wonderful law, the average 
cost of a family plan was supposed to decline by $2,500. It 
hasn't. It has increased by $2,500.
    So the e-mails I am getting, and by the way, they are not, 
as Senator Harry Reid said, coming from a bunch of liars. These 
are coming from real Wisconsinites. They are writing about 150 
to one. Yes, we are getting e-mails from people that have been 
advantaged by Obamacare. But 150 for every one that has been 
advantaged has been disadvantaged, and those are real people, 
and those are real stories.
    So again, thank you, Mr. Chairman.
    The Chairman. I can only conclude that what you in your 
heart deeply want for the American people is to go back to the 
healthcare system that we had and to have a totally free 
enterprise, let the insurance----
    Senator Johnson. No, you are assuming the wrong thing, Mr. 
Chairman.
    The Chairman. Well, I am saying----
    Senator Johnson. You have implied that I am a racist.
    The Chairman. I have not implied that you are a racist.
    Senator Johnson. Now, you are saying you want me to go back 
to a failed healthcare system. You are just incorrect.
    The Chairman. That is very, very silly on your part. You 
are evidently satisfied with a lot of people not having health 
insurance so long as you----
    Senator Johnson. I am not. Quit making those assumptions. 
Quit saying I am satisfied with that. I am not. There was 
another way of doing this. I am happy to discuss it with you. I 
would have been happy to engage in the debate and pass a good 
healthcare law. As a matter of fact, I am the one pushing a 
bill, If You Like Your Healthcare Plan, You Can Keep It Act. I 
do not have any Democratic sponsors on that.
    I am also working with Republican colleagues on Preserving 
Freedom of Choice in Healthcare to preserve freedom of choice 
in healthcare. What a concept, huh? So, no, please do not 
assume--do not make implications of what I am thinking and what 
I would really support. You have no idea.
    The Chairman. I actually do, and, you know, God help you.
    Senator Johnson. No, Senator, God help you for implying I 
am a racist because I opposed this healthcare----
    The Chairman. I did not imply that you are a racist.
    Senator Johnson. Let us play back the tape.
    The Chairman. We can do that, but we are not going to. You 
have lost temper. I understand that.
    Senator Johnson. I was called a racist. I think most people 
would----
    The Chairman. You were not called a racist.
    Senator Johnson. I would think most people would lose their 
temper, Mr. Chairman.
    The Chairman. You were not called a racist. However, you 
have done everything you can to block progress. The law is the 
law. Every Republican voted against it against one or two. I 
think--did Olympia Snowe vote for it? She wanted to, but I 
think she was told that if she did she would lose her position 
on the Commerce Committee, so she did not.
    It is a very partisan thing, and I regret that, but that is 
what the Republicans have decided to do, to block everything 
the President puts forward. And that is not very helpful to 
America.
    I want to thank all four of you for your patience in 
listening to strong feelings, and what was important is that 
you had strong feelings. And I am particularly looking at you, 
Ms. Fernandez, because I think you are a classic story and a 
classic case. And you are not involved in all the folderol that 
we have gotten involved in here.
    Ms. Fernandez. May I say something?
    The Chairman. Please.
    Ms. Fernandez. Rationing was there before. My healthcare 
and my family's healthcare has been rationed from the moment my 
son was born with a preexisting condition. There has not been 
freedom of choice for our healthcare because not all policies 
were available to us. Once my son was diagnosed, or not 
actually diagnosed. They just said he has got some sort of 
condition, the healthcare policies we were eligible for or we 
could find that covered him, specifically excluded all muscular 
and skeletal issues.
    That is not health insurance. There is no way that is 
health insurance. If he broke a leg, it would not have been 
covered. It is ridiculous to talk about health insurance only 
from the perspective of health insurance company profits. 
People do not buy health insurance in order to ensure that 
health insurance companies get huge profits. They buy health 
insurance to help them cover their medical expenses, both 
expected and unexpected.
    That is not a minor thing. It is a major thing. And people 
who like the Affordable Care Act often call it Obamacare 
because it is kind of a friendly sounding name, too. So it is 
not just pejorative. It is often affirming, and I think that is 
important.
    The problem with health insurance the way it has been is 
that it was purely a gamble, and it was rigged. And I am tired 
of a rigged system. I am tired of money being made, huge 
profits off of misfortune, and that is what this has been for 
me. My family has struggled for years to try to make sure that 
we are all taken care of, and I have avoided having necessary 
medical testing purely because the cost of it was too high, and 
it would not be covered for health insurance. And also, I was 
terrified that if something was found, that my insurance was 
dropped. The whole system was rigged.
    When you are self-employed, when your insurance is bought 
on the individual market, the whole system was flawed, and 
deeply flawed. I think the Affordable Care Act is a step in the 
right direction. I do not think it goes far enough to protect 
consumers, but I think it is way better than the system we had 
before. And I am not an insurance person. I am not somebody who 
studies things from all sorts of different perspectives how 
profits should be or anything like that. I am a person. I am a 
family member. I am a business owner. I am somebody who has 
tried for years to navigate a system, and this was before the 
Affordable Care Act, that simply did not work. And it did not 
work for a lot of people.
    So thank you for letting me speak.
    The Chairman. Sort of a good place to declare the hearing 
adjourned. Thank you for that.
    [Whereupon, at 4:32 p.m., the hearing was adjourned.]
                            A P P E N D I X

The following two articles were submitted for the record by Senator 
        Thune:

   Whistleblower: ACA contractor in Wentzville pays employees to do 
                                nothing

                           by KMOV.com Staff

KMOV.com

Posted on May 12, 2014 at 10:44 PM

Updated Thursday, May 15 at 1:13 PM

    (KMOV.com)--Employees at an Affordable Care Act processing center 
in Wentzville with a contract worth $1.2 billion are getting paid to do 
nothing but sit at their computers, a whistleblower tells News 4.
    The facility is operated by Serco, which is owned by a British 
company awarded $1.2 billion partially to hire workers to handle paper 
applications for coverage under the new healthcare law.
    A worker tells News 4 weeks can pass without employees receiving 
even a single application to process. Employees reportedly spend their 
days staring at their computers.
    ``They're told to sit at their computers and hit the refresh button 
every 10 minutes, no more than every 10 minutes,'' the employee said. 
``They're monitored, to hopefully look for an application.''
    The Centers for Medicaid and Medicare services told News 4 in a 
statement that ``Serco is committed to making sure Federal funds are 
spent appropriately, and the number of Serco staff is reviewed on a 
regular basis.''
                                 ______
                                 

                  Politico--May 11, 2014 07:04 AM EDT

                 $474M for 4 failed Obamacare exchanges

                 By: Jennifer Haberkorn and Kyle Cheney

    Nearly half a billion dollars in Federal money has been spent 
developing four state Obamacare exchanges that are now in shambles--and 
the final price tag for salvaging them may go sharply higher.
    Each of the states--Massachusetts, Oregon, Nevada and Maryland--
embraced Obamacare, and each underperformed. All have come under 
scathing criticism and now face months of uncertainty as they rush to 
rebuild their systems or transition to the Federal exchange.
    The Federal Government is caught between writing still more 
exorbitant checks to give them a second chance at creating viable 
exchanges of their own or, for a lesser although not inexpensive sum, 
adding still more states to HealthCare.gov. The Federal system is 
already serving 36 states, far more than originally anticipated.
    As for the contractors involved, which have borne most of the blame 
for the exchange debacles, a few continue to insist that fixes are 
possible. Others are braced for possible legal action or waiting to 
hear if now-tainted contracts will be terminated.
    The $474 million spent by these four states includes the cost that 
officials have publicly detailed to date. It climbs further if states 
like Minnesota and Hawaii, which have suffered similarly dysfunctional 
exchanges, are added.
    Their totals are just a fraction of the $4.698 billion that the 
nonpartisan Kaiser Family Foundation calculates the Federal government 
has approved for states since 2011 to help them determine whether to 
create their own exchanges and to assist in doing so. Still, the amount 
of money that now appears wasted is prompting calls for far greater 
accountability.
    Where has that funding left the four most troubled states?
    Nevada, for one, is still trying to figure out its future. Oregon 
has decided to switch to HealthCare.gov. Maryland wants to fix its own 
exchange, maybe by incorporating what worked in Connecticut. 
Massachusetts actually wants to do both--build a portal from scratch 
while planning a move to the Federal exchange as a backup.
    Massachusetts' dual-track approach could require more than $120 
million on top of the $170 million it already has been awarded. That 
cost is nearly twice as much as if the state were to simply bail on its 
Connector, but officials seem to be banking in part on the Obama 
administration's greater interest in helping the Massachusetts 
exchange--the once-pioneering model for Obamacare--survive.
    Josh Archambault, a senior fellow with the right-leaning Foundation 
for Government Accountability, argued that the state's efforts to 
salvage its exchange are just a face-saving exercise.
    ``Instead of a quixotic sprint to rebuild the whole site in five 
months, state officials should instead pivot quickly to utilize the 
Federal exchange, saving taxpayers tens of millions of dollars in the 
process,'' he said.
    State officials have warned that most of what is left of their 
initial Federal award may be needed to end their contract with CGI, the 
vendor that built the Connector. They acknowledged Thursday they have 
no guarantees of additional Federal funding.
    ``You have two choices,'' Rep. Stephen Lynch (D-Mass.) said last 
week. ``One is to expend even greater amounts of money on something 
that had limited success thus far or going to the Federal exchange. . . 
. There's simplicity in that, and I think that may be where some within 
the commonwealth would like to go.''
    By contrast, Oregon has already opted to give up on its website and 
use HealthCare.gov. The colossal failure of Cover Oregon--which so far 
has cost $248 million in Federal money--has prompted a probe by the 
General Accountability Office. The state's congressional delegation is 
taking keen interest.
    ``The next step is the Federal investigation . . . and I'm anxious 
to get those results,'' said Democratic Sen. Ron Wyden.
    But Democratic Rep. Peter DeFazio has also called for litigation 
against Oracle, the vendor that was supposed to set up the site. What 
it has been paid is ``ill-gotten gain on the part of Oracle, and we 
should sue to get the taxpayer money back,'' DeFazio said Thursday.
    Only 14 states and the District of Columbia developed their own 
health insurance exchanges for individuals to buy coverage under 
Obamacare, a far different scenario than the law's authors envisioned.
    Nevada, the only Republican-led state to run an individual exchange 
this year, expects to decide on the future of its struggling Nevada 
Health Link in the next several weeks. An outside report concluded that 
salvaging the major flaws in the exchange would be a huge feat. The 
system has spent $51 million of the approximately $90 million in 
Federal grants that were authorized, according to a spokesman.
    ``The report seems overwhelming to me,'' Lynn Etkins, Vice 
Chairwoman of the Health Link board, said last week. ``And I really am 
not hearing anything that all of these issues are going to be resolved 
well before open enrollment so testing can be done.''
    Senate Majority Leader Harry Reid blames Xerox, which constructed 
the exchange, for the many problems his state's system has had. 
``They're the ones that should be held accountable,'' he said Tuesday.
    The company, however, maintains that a fix is possible. ``While the 
list may, in fact, look daunting . . . when you get under the covers 
and start to look at the outputs in terms of the progress that we've 
made over the last several months, I am actually less daunted,'' David 
Hamilton, a Xerox official working with the state, told Etkins and 
other board members at their recent meeting.
    Maryland is a state that aspired to be another national model but 
ended up spending $118 million in Federal funds on a fatally crippled 
exchange. It is in the process of trying to transition to the 
technology used by Connecticut's system. It's still unclear whether the 
move will meet Federal approval. If not, Maryland would default to 
HealthCare.gov.
    ``There's got to be oversight on how public monies are spent,'' 
said Sen. Ben Cardin (D-Md.). ``But I'm not trying to say who is 
responsible yet. I've heard the state many times talk about the private 
contractors--so they've got to be part of the mix.''
    Rep. John Delaney (D-Md.) is a strong supporter of Obamacare but 
has been calling on the state to go to the Federal exchange since 
December. He says the move to the Connecticut exchange is a ``political 
cover-up'' and charges that officials have not been transparent about 
Maryland Health Connection or its repairs.
    ``If you stumble, you have a particular obligation to be upfront,'' 
Delaney said.

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