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78–894 2002

SMALL BUSINESS ACCESS TO HEALTH CARE

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

WASHINGTON, DC, FEBRUARY 6, 2002

Serial No. 107–41

Printed for the use of the Committee on Small Business

(
(II)

COMMITTEE ON SMALL BUSINESS 

DONALD MANZULLO, Illinois, Chairman 

LARRY COMBEST, Texas 

JOEL HEFLEY, Colorado 

ROSCOE G. BARTLETT, Maryland 

FRANK A. LOBIONDO, New Jersey 

SUE W. KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

JOHN R. THUNE, South Dakota 

MICHAEL PENCE, Indiana 

MIKE FERGUSON, New Jersey 

DARRELL E. ISSA, California 

SAM GRAVES, Missouri 

EDWARD L. SCHROCK, Virginia 

FELIX J. GRUCCI, JR., New York 

W. TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

NYDIA M. VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

DANNY K. DAVIS, Illinois 

BILL PASCRELL, JR., New Jersey 

DONNA M. CHRISTENSEN, Virgin Islands 

ROBERT A. BRADY, Pennsylvania 

TOM UDALL, New Mexico 

STEPHANIE TUBBS JONES, Ohio 

CHARLES A. GONZALEZ, Texas 

DAVID D. PHELPS, Illinois 

GRACE F. NAPOLITANO, California 

BRIAN BAIRD, Washington 

MARK UDALL, Colorado 

JAMES R. LANGEVIN, Rhode Island 

MIKE ROSS, Arkansas 

BRAD CARSON, Oklahoma 

ANIBAL ACEVEDO-VILA ́ , Puerto Rico 

DOUG THOMAS, Staff Director 

PHIL ESKELAND, Deputy Staff Director 

MICHAEL DAY, Minority Staff Director
(III)

C O N T E N T S 

Page 

Hearing held on February 6, 2002 ......................................................................... 1

WITNESSES

Fletcher, Hon. Ernie, Member, U.S. House of Representatives ........................... 1

Smith, Elaine, President, E. Smith & Associates ................................................. 8

Arth, Raymond, President, Phoenix Products, Inc. ............................................... 11

Hughes, Robert, President, National Association for the Self-Employed ........... 13

Curtis, Rick, President, Institute for Health Policy Solutions ............................. 15

Trautwein, Janet, National Association of Health Underwriters ........................ 16

Lehnhard, Mary Nell, Senior Vice President for Policy, Blue Cross/Blue 

Shield .................................................................................................................... 18

APPENDIX

Opening statements: 

Manzullo, Hon. Donald .................................................................................... 33

Vela ́zquez, Hon. Nydia ..................................................................................... 35

Prepared statements: 

Fletcher, Hon. Ernie ......................................................................................... 37

Smith, Elaine .................................................................................................... 42

Arth, Raymond .................................................................................................. 48

Hughes, Robert ................................................................................................. 59

Curtis, Rick ....................................................................................................... 70

Trautwein, Janet .............................................................................................. 75

Lehnhard, Mary Nell ........................................................................................ 83

Additional Information: 

Statement of Associated Builders and Contractors ....................................... 104

Small Business Committee Press Release dated February 6, 2002 ............. 109

Letter to Chairman Manzullo from Dan Danner, National Federation 

of Independent Business .............................................................................. 110

(1)

HEARING ON SMALL BUSINESS ACCESS TO 

HEALTH CARE 

WEDNESDAY, FEBRUARY 6, 2002 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC. 

The Committee met, pursuant to call, at 10:05 a.m. in room 

2360, Rayburn House Office Building, Hon. Donald Manzullo, 

(chairman of the committee) presiding. 

Chairman MANZULLO. Good morning. We will call our Small 

Business meeting to order. Before any opening statements or anything, I want to move immediately to the testimony of Dr. Fletcher, 

who has three other Subcommittee hearings he has to attend. 

Congressman Dr. Fletcher, we look forward to your testimony. 

You are up. 

[Chairman Manzullo’s statement may be found in the appendix.] 

STATEMENT OF HON. ERNIE FLETCHER, A REPRESENTATIVE 

IN CONGRESS FROM THE STATE OF KENTUCKY 

Mr. FLETCHER. Thank you very much, Mr. Chairman. I want to 

thank the Chairman and the Ranking Member for providing me 

this opportunity to testify regarding the Small Business Health 

Fairness Act, which I filed back last May. 

Let me note that there are about 12 Members on this Committee 

that are co-sponsors of that bill, including the Chairman and the 

Ranking Member. Also, 18 Committee Members voted for the AHP 

amendment to the Patients’ Bill of Rights. As you know, this 

amendment passed the House and is included in the final House 

version. I want to thank you all for your support. 

America’s growing health care dilemma calls for immediate presidential and congressional action. We must address the fact that too 

many Americans lack health insurance. Experts estimate that at 

least 38 million Americans are currently without health insurance. 

Additionally, the recession and terrorist acts of September 11 

have increased the ranks of the uninsured by an estimate of one 

million people. The uninsured include some of the most vulnerable 

in our society—12 million children, 17 million low income Americans, seven million African-Americans, and 11 million Hispanics. 

Those without health coverage confront barriers that discourage 

preventive care and delay disease diagnosis. They are more likely 

to be hospitalized for avoidable conditions. In fact, last year nearly 

40 percent of the uninsured adults skipped recommended medical 

tests and treatments, and 20 percent did not get needed care for 

serious problems. Consequently, studies reveal that morbidity and 
2

mortality rates among the uninsured are substantially higher than 

those among individuals with health insurance. 

As double digit health premium increases and a weakened economy put more and more small business workers in jeopardy of losing their health benefits, we must turn our attention to the problem of the uninsured this year. I would like to stress that I believe 

we need to do it early this year. 

In light of the ongoing discussions between the President and the 

Senate regarding the Patients’ Bill of Rights, it is critical that the 

final bill take action on comprehensive small business health insurance reform. I feel strongly that this should include enactment of 

the Small Business Health Fairness Act of 2001, bipartisan legislation approved by the House as an amendment to the Patients’ Bill 

of Rights. 

I fear that the number of uninsured Americans will increase dramatically over the next few years if we do not act now. The Small 

Business Health Fairness Act would address this problem by creating new association health plans or AHPs for workers employed 

in small business, as well as the self-employed. This bill will provide working families employed by small businesses, which make 

up 60 percent of the uninsured, with more health benefits and 

more health plan choices. 

Lacking the bargaining power of large corporations, many of 

these businesses are priced out of the health insurance marketplace, reluctantly leaving their workers uncovered. AHPs address 

this problem by allowing small businesses to band together nationally into associations to provide health insurance at lower cost. 

Small businesses and the self-employed do not have the same advantages in the marketplace as the corporations and the larger 

union health plans. In fact, small employers now pay 18 percent 

more for coverage than large employers. Moreover, corporate and 

union health plans operating under one set of rules across state 

lines are able to take advantage of the economies of scale. 

As you may know, the three main arguments against AHP are, 

one, adverse selection or what is called cherry picking; two, inadequate solvency standards; and, three, inadequate oversight enforcement. Let me address these myths regarding AHPs. 

First, it is illegal for AHPs to deny coverage based on health status of any individual employer or employee under HIPAA. Cherry 

picking is possible only when sick or high risk people who will generate significant claims can be denied coverage. Of course, that 

does not happen under the way the AHP legislation is constructed. 

It is forbidden. 

Secondly, the bill contains strict requirements under which only 

bona fide professional and trade associations, which exist for substantial purposes other than providing health insurance must exist 

for at least three years, can sponsor at AHP. The bill strictly prohibits health plans that are set up only to offer health insurance 

or accept only good risks. 

Thirdly, to the extent that low and high risk industries can be 

identified, the bill only allows new self-funded AHPs in industries 

with average or above average risk profiles, thus preventing selffunded AHPs from forming in low risk industries. 
3

Fourthly, opponents’ allegations about adverse selection rest on 

the mistaken assumption that small businesses will only offer bare 

bones benefit packages through AHPs. However, small business 

owners and workers desire the same benefit packages as large 

business workers, and small businesses must offer comparable benefit options to attract and retain employees. 

Fifthly, adverse selection that currently exists in state markets 

will be greatly reduced when younger, healthier workers employed 

in small businesses who are now uninsured are able to obtain coverage that is affordable. 

This Act contains tough, new solvency provisions which will actually increase consumer protections for many small business workers. The DOL’s IG has testified before Congress that the new enforcement tools for regulators contained in this legislation will help 

reduce health insurance fraud. 

The bill gives federal and state authorities new and better enforcement tools to insure that coverage is secure and to prevent 

health insurance fraud. Only longstanding, bona fide associations 

meet the bill’s strict eligibility requirements and are independent 

of insurance companies. Tough, new solvency standards require 

claims reserves certified by a qualified actuary, minimum surplus 

reserves, both specific and aggregate stop loss insurance and indemnification insurance to insure that all claims are paid. 

A.H.P.s must register with the state in which they are domiciled. 

AHPs must abide by strict disclosure and actual reporting procedures, and the bill provides new criminal and civil penalties. Allegations that health coverage obtained through AHPs will be anything less than secure ignore these strong protections contained. 

A.H.P.s are fundamentally different, too, from MEWAs. Multiple 

employer welfare plans generally will not qualify as AHPs under 

the new certification process. AHPs will be regulated in a manner 

similar to how single employer and labor union pension and health 

plans are currently regulated. Thus, the bill does not require an entire new bureaucracy to insure that AHPs are properly regulated. 

The DOL already regulates association sponsored health plans 

for compliance with current federal laws governing group health 

plans. This bill strengthens solvency standards and certification 

rules to plans operated by qualifying bona fide trade and professional associations. 

D.O.L. is devoted to identifying, investigating and disbanding 

fraudulent MEWAs. This is the case for many state insurance departments as well. Since the bill provides new enforcement capabilities that will assist DOL and state insurance departments in 

identifying and shutting down fraudulent MEWAs and preventing 

new ones from getting started, resources can be redirected to the 

regulation of bona fide AHPs under new standards in the law. The 

bill provides that associations applying for certification as federally 

regulated AHPs must pay a $5,000 filing fee. This will generate resources to enhance enforcement. 

The bill allows the Secretary to consult with the states in regulating AHPs and provides that new self-insured AHPs be subject to 

the assessment of state premium taxes and equivalent assessments, thus providing resources that can be used for regulatory responsibility. 
4

D.O.L. also has enhanced criminal and civil enforcement powers 

currently not available to stop health insurance fraud by terminating bogus small employer and union health plans. Illegitimate 

entities will become criminal enterprises, and DOL will have a new 

cease and desist authority to curtail such activities. The DOL IG 

has stated that these are important and necessary in stopping 

health insurance fraud. 

It is only fair that we should level—— Chairman MANZULLO. Dr. Fletcher, I know your time is limited. 

I have you at eight minutes, but I want to leave some time for you 

and for some Members to ask you some questions. 

Mr. FLETCHER. Let me just conclude that I think it is very important to level the playing field, and I think it is critical that we pass 

this legislation this year. 

I appreciate the opportunity to testify. 

[Mr. Fletcher’s statement may be found in the appendix.] 

Chairman MANZULLO. Okay. I appreciate that. I have a couple of 

questions for the doctor. Does anybody else have any questions for 

Dr. Fletcher on his bill? 

Mr. PASCRELL. Yes. 

Chairman MANZULLO. Mr. Pascrell. 

I am sorry. Ms. Vela ́zquez, did you have any questions you wanted to ask of Dr. Fletcher? 

Ms. VELA ́ ZQUEZ. Sure. 

Chairman MANZULLO. Why don’t you go ahead?

Ms. VELA ́ ZQUEZ. I just would like to know if we could get the 

Speaker to bring this legislation to the Floor? 

Mr. FLETCHER. You know, we already have passed the legislation, but certainly I will be glad to work with you and any other 

Members to see if we can bring actually the Small Business Health 

Fairness Act to the Floor as an individual bill. 

Ms. VELA ́ ZQUEZ. Thank you. 

Chairman MANZULLO. Mr. Pascrell. 

Mr. PASCRELL. Thank you. Congressman, what would you say to 

the major criticism, since we seem to be moving towards some resolution on this hopefully? What would you say to the major criticism 

from the larger insurance companies? What is their major problem, 

in your eyes, about this? 

Mr. FLETCHER. I think first they were considering and many 

were looking at MEWAs and the problems. There was a failed 

MEWA in California and some other association plans there. 

We have strengthened several things that they had concerns 

about. First was if a patient has a problem, who picks up the phone 

when they call and ask? We certainly coordinated with the Commissioners of Insurance in the states that they can answer the 

phone. We provided funds to them to enhance enforcement so that 

there are some consumer protections. We also increased the requirements and reserves. The actual reporting actually on a quarterly basis is required. 

I think the insurance companies had very legitimate concerns 

about making sure that the individuals were protected. We also required stop loss insurance, which we did not previously, so I think 

we have answered most of their criticisms. 

Mr. PASCRELL. Thank you. 
5

Chairman MANZULLO. Mrs. Kelly. 

Mrs. KELLY. Thank you. I want to say that I strongly applaud 

your stand, Dr. Fletcher, on AHPs, and I strongly support your bill. 

I believe I am a co-sponsor of that bill. I think it is extremely important that we allow the AHPs to come into existence. 

In the past, since my father was a doctor, I have seen what has 

happened over the course of many years through the medical system. I have been involved in it myself. I think that we must, because I am also a small businesswoman. I think it is extremely important that we meet the challenge of insuring people and allowing 

more people to access insurance by doing the AHPs. 

I just simply want to make the statement that I applaud you for 

your stand, and I support you. 

Mr. FLETCHER. Thank you, Congresswoman Kelly. 

Chairman MANZULLO. Congresswoman Tubbs Jones, did you 

have any questions you wanted to ask of our colleague? 

Mrs. JONES. No, I do not. Thank you. 

Chairman MANZULLO. Okay. Dr. Fletcher, let me ask a real basic 

question that goes to the real definition of insurance. Why is it that 

large groups of people that want to form together, want to band together, in order to buy insurance are unable to do so other than 

the obvious answer of affordability? 

Mr. FLETCHER. Well, there are several things. Let me take the 

State of Kentucky as an example where we had a small individual 

market. 

What happened when there were certain regulations is without 

guaranteed issue we had a spiraling increase in cost of health care 

because without being able to bring large groups of people together 

which have different risk, you are not able to take advantage of 

economies of scale, of spreading the risk, and that is what insurance is about. 

Additionally, what the good union plans and large corporation 

plans do is that they have one set of administration rules across 

the 50 states, which improves efficiency tremendously. What we 

want to do is allow small businesses, so I think it certainly gets 

right to the heart of insurance, especially the protections that we 

put in, the reserves and the stop loss insurance. 

Let me say in response to Congresswoman Kelly’s statement 

there that the largest growing segment of small businesses is 

women initiated businesses. This gives them the advantage of certainly being able to offer their employees I think a quality health 

insurance product at a cost that is substantially lower than what 

they may be able to get otherwise. 

Chairman MANZULLO. You used the term spreading the risk. 

That is the definition of insurance, is it not? You form a large pool 

where you have a lot of healthy people and then some sick people, 

and everybody contributes an equal amount. The purpose is to 

spread the risk so that when there is a need for insurance that the 

money that is pooled will be used for the people that obviously 

have the need. 

Mr. FLETCHER. You are right, Mr. Chairman, and the more efficiently you can run the insurance product, the lower you can keep 

the premium, and the more attractive it is to healthy individuals. 

The higher the premiums go out, we find the healthy individuals 
6

drop out because it is a risk/benefit or cost/benefit analysis that, 

you know, each individual goes through when they are looking at 

purchasing insurance. 

Chairman MANZULLO. One of the arguments that is used against 

AHPs is the fact that it cherry picks, that you can form groups only 

of healthy people. I mean, how can the National Restaurant Association have more healthy people than the NFIB or any other trade 

association? I do not know how we come up with that standard. 

But, Dr. Fletcher, is essentially what you are trying to do is offer 

small business people the same type of insurance benefits that 

members of unions have, because unions have been out in front of 

this issue for 50 years by allowing the insurance to follow the individual, as opposed to the individual having to get his insurance 

through the employer? 

Mr. FLETCHER. Mr. Chairman, absolutely. As a matter of fact, 

some of the union plans are some of the best plans and the best 

coverage across the country, so I laud them for the work that they 

have done. We just want to offer the same opportunity for small 

businesses to provide that sort of plan with that sort of efficiency. 

As we look at this, it really is an issue of leveling the playing 

field and making sure that everyone can provide the best health 

care benefits possible. 

Chairman MANZULLO. I know years ago when my father, who 

was a union carpenter, transitioned from being a full-time carpenter into the full-time restaurant business he struggled to make 

sure he kept his union card and kept his union insurance benefits 

because even years ago it was much cheaper and there was much 

better coverage through his local than there would have been if he 

had been at purchasing insurance independently for the small restaurant business that he founded years ago. 

Mr. FLETCHER. You are absolutely right. The provisions that I 

outline in the bill really prohibit cherry picking. An association has 

to have existed for three years. They have to be associated for a 

purpose other than offering health insurance. 

Chairman MANZULLO. So you cannot form an organization just 

for the purpose of having an AHP? 

Mr. FLETCHER. You are absolutely right. If you form a new association even for other purposes and have a below average risk—in 

other words, if you try to form an association that would include 

only healthy people—it is prohibited by the bill. 

Chairman MANZULLO. So you cannot form an association and as 

a basis of the association you have to pass some kind of a medical 

examination? 

Mr. FLETCHER. Absolutely. 

Chairman MANZULLO. Okay. I have no further questions. How 

are you doing on time, Dr. Fletcher? 

Mr. FLETCHER. I think, you know, I will be glad to take as much 

time as you need. 

Chairman MANZULLO. Does anybody else have any questions of 

Dr. Fletcher? 

[No response.] 

Chairman MANZULLO. If not, thank you for coming. I appreciate 

it very much. 
7

Mr. FLETCHER. Mr. Chairman, Ranking Member and Members of 

the Committee, thank you for this privilege. 

Chairman MANZULLO. Thank you. 

Before we go down the order, Congressman Tubbs Jones, you 

have a constituent you would like to introduce even though it may 

not be that person’s time to testify right now. 

Mrs. JONES. Thank you, Mr. Chairman. Thank you, Mr. Chairman, and other Members of the Committee. It is my pleasure 

[TECHNICAL DIFFICULTIES]. His name is Mr. Raymond Arth of 

Phoenix Products, Inc. Mr. Arth’s company manufactures faucets 

for manufactured housing and RVs. He came here today to discuss 

the health plan he participates in offered by GWI, a wholly owned 

subsidiary of the Growth Association. 

In Cleveland, the Growth Association is our chamber of commerce. It is probably one of the largest chambers of commerce in 

the country, and they operate a program. They have a small business organization called COSE, Council of Small Enterprises, that 

offers health care insurance to employees of that business. 

I thank you, Mr. Arth, for coming to our Committee this morning, and I am pleased to introduce you to my colleagues and Members of the Committee and people in the audience. Thanks very 

much, sir, for coming. 

Mr. ARTH. Thank you very much. 

Chairman MANZULLO. Okay. Ms. Velazquez, do you have an 

opening statement? 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. I appreciate your initiative in calling this hearing on such an important subject. 

We have a health care crisis in this country. Today, 40 million 

Americans, or one in seven, almost 15 percent, do not have health 

coverage. The number has dropped in the past couple of years. It 

is still unacceptably high, and I fear the slowing economy will swell 

the ranks of the uninsured again. 

The great majority of Americans get health coverage through 

their employer. There is a reason for this. Companies, especially 

large ones, can get the best deal to contain cost. It is not surprising 

then that only 42 percent of companies with fewer than 100 employees provide health coverage for their workers, while 95 percent 

of companies with more than 100 employees provide health coverage. 

In fact, 60 percent of uninsured people, 24 million Americans, 

live in families where the head of the household works for a small 

business. Self-employed people account for ten million uninsured 

Americans, including two million children. 

Most small business owners would like to provide health coverage for their employees and their families, but they are restricted 

by cost. This is the main reason why health care coverage was 

named as one of the top 11 small business issues for this Congress 

in a report the Democrats released last month. 

These companies want to provide health coverage for their employees, but cannot. This is not a one size fits all proposition. No 

one solution would cover the entire diversity of small businesses. 

Nonetheless, we have two strong proposals that can help these 

companies help their workers. 
8

First, we can accelerate the 100 percent deductibility of health 

care premiums. We are now at 70 percent, with the full 100 percent coming nearly two years later from now. There is no reason 

why we should not make that 100 percent available right now. I 

hope we can work together to put this powerful incentive into effect 

immediately. 

Another proposal is the association health plan which would 

allow small businesses and the self-employed to band together in 

industry specific groups and leverage their collective strength to 

provide better and more affordable health care options than they 

would alone. AHPs could level the playing field, putting small business purchasing and bargaining power on par with their corporate 

counterparts. It would be a hedge against precipitous price hikes 

that make it difficult for small businesses to continue offering 

health benefits when they have them. 

A.H.P.s and 100 percent deductibility are just two very good possibilities. Still, there are other options to learn about. That is the 

purpose of this hearing. 

But I think we should keep one ultimate goal in mind while we 

listen to our witnesses and various new policy proposals. Our goal 

must be to continue expanding the number of American working 

families with health care coverage. It is the right thing to do, for 

our country and our future. 

Thank you very much. 

[Ms. Vela ́zquez’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you. 

Let us move on to our first witness, which is Elaine P. Smith, 

president of E. Smith & Associates of Granite City, Illinois. 

Where is Granite City? 

Ms. SMITH. Southern Illinois. 

Chairman MANZULLO. Is that between your district and mine? 

Okay. Well, you are at the bottom of the state, and I am at the 

top of the state, so she has to be in between. Right. 

We look forward to your testimony. We have a five minute clock. 

Ms. SMITH. Okay. 

Chairman MANZULLO. Green is okay. When it gets to yellow, that 

means you have a minute. When it gets to red, then we need you 

to conclude. 

We look forward to your testimony. 

STATEMENT OF ELAINE P. SMITH, PRESIDENT, E. SMITH & 

ASSOCIATES 

Ms. SMITH. Good morning, Mr. Chairman and Members of the 

Committee. Thank you for inviting me here from Illinois to talk 

about important issues of affordable, accessible health insurance, 

especially for those of us who own or work for small businesses. I 

am pleased to be here on behalf of the National Federation of Independent Business representing 600,000 members who face a similar challenge. 

My name is Elaine Smith, and I own E. Smith & Associates, 

which is a promotional marketing and fulfillment company based 

in Granite City, Illinois, just across the river, the Mississippi River, 

from downtown St. Louis. 
9

At E. Smith & Associates, my employees and I work together to 

develop, market and sell point of sale displays, corporate merchandise and other related advertising support materials for companies 

such as Anheuser-Busch, Ralston-Purina, Energizer Battery, 

Snapple and Motorola, to name a few. For Ralston-Purina, my company has fulfilled over four million How to Raise a Healthy Puppy 

and Kitten kits that are marketed to veterinarians and veterinary 

schools. 

E. Smith & Associates was born out of an opportunity to become 

an outside vendor for various Anheuser-Busch projects. At the time 

I was employed by Anheuser-Busch, but in 1986 I left the corporate 

world to work out of my basement with just one employee. Since 

then, E. Smith has grown to 12 full-time employees and approximately 80 temporary workers that occupy three warehouse facilities and over 100,000 square feet. My employees range in skill level 

from high school graduates to college graduates and in age from 

teens to mid-fifties and earn an average salary of $25,000 to 

$35,000. 

Like many entrepreneurs, I learned early that I could not compete with the large corporations in the area of extensive benefit 

packages. Instead, when hiring employees I offered perks that big 

companies could not—flexible and individualized schedules, the 

chance to move up the skill ladder quickly and so on. 

For many years I did not offer health insurance as a benefit. In 

fact, having come out of the corporate world, I truly had not given 

much thought to health insurance at all. It was a standard in the 

work arena from which I had come, and I had never stopped to 

think about who was paying for the benefit and how much it really 

cost. However, in recent years two experiences forced me to stop 

and think about health insurance and what role an employer 

should play. 

First, I began to realize that my small business attitude and 

start up perks were not enough to attract and retain talented, 

highly educated workers. At E. Smith, I run a formal college internship program providing marketing experience to students from 

Ball State University, Southern Illinois University and all the local 

junior colleges. Ideally, I like to hire these interns after they graduate. However, former interns began to turn my employment offers 

down because of the lure of benefit packages offered by larger corporations. I quickly realized I needed to increase the types of benefits I offered, namely health insurance. 

The second experience was more personal than business. A good 

employee who had been with me for quite some time experienced 

a series of common ailments—sinus, sore throats, cough, flu. She 

just could not seem to get well. 

Chairman MANZULLO. Elaine, excuse me. If you could get right 

into the meat of the plan that you offer? 

Ms. SMITH. Yes. 

Chairman MANZULLO. The same with the other witnesses. You 

have a great background, but I do not want you to run out of time. 

Ms. SMITH. You got it. 

Chairman MANZULLO. Okay. 

Ms. SMITH. Last year, I decided to provide employer sponsored 

health coverage. I knew I wanted to provide a quality plan—med-
10

ical, dental and vision—with a great network of doctors, and I 

knew I needed to set parameters in order to afford it. I set an eligibility requirement of one year and a 50/50 employer/employee contribution rate. 

In searching for a plan to meet these objectives, I was quite surprised to learn how difficult it was to find an affordable plan. However, I proceeded and began offering the benefit to our employees, 

to four of them. Eight others were covered by spouses or parents. 

Employees paid $125 a month, with employees with dependents 

covered paying an average of $250 a month. My idea was to manage the first year’s benefit while developing plans to extend the 

benefit the following year so that as the employees’ seniority increased so would the premium contribution paid by our company.

Everything seemed to be going smoothly. We budgeted accordingly so more employees could be added to our plan at our annual 

renewal. Therefore, I was completely flabbergasted when I received 

my first annual policy renewal statement with a whopping 26 percent increase for apparently no particular reason. Naturally I contacted my insurance representative to inquire about the big jump 

in cost. I was told quite simply that double digit increases were not 

atypical for small business owners and, in his words, were just the 

nature of the health care market. 

My first reaction was to replace the current plan with something 

more affordable. However, after preliminary research I realized 

that in order to keep the quality of my plan my choices were very 

limited. Knowing that providing health insurance is necessary for 

both business and personal reasons and knowing that I cannot increase prices to my customers an extra 26 percent in order to absorb the cost, I reluctantly renewed the policy. 

Ironically, a few months before receiving the health insurance 

premium increase I had taken another big step offering long-term 

and other insurances. All employees signed up to participate, and 

it reaffirmed my belief that insurance benefits are important. 

Therefore, I want to do my best to continue offering benefits, but 

if I face a 26 percent increase every year it will become more and 

more difficult or impossible. 

A recent bipartisan poll asked 1,000 Americans what worries 

them most about the economy. The top response overwhelmingly 

was the rising health care cost, with one in three people listing it 

as their top concern. 

Those in the small business community who are insured are 

struggling each year to afford the cost of increasing premiums. It 

is for this reason I support legislation endorsed by the NFIB that 

would create association health plans. AHPs will allow small business owners like myself to band together across state lines to purchase health insurance as part of a large group, thus insuring 

greater bargaining power, lower administrative cost and freedom 

from costly state insurance mandates. 

Chairman MANZULLO. I am going to have to put a period right 

there on your testimony. 

Ms. SMITH. Okay. 

Chairman MANZULLO. Perhaps during the questioning we can get 

out the rest of it. 

[Ms. Smith’s statement may be found in the appendix.] 
11

Chairman MANZULLO. Let me just mention to the rest. Please try 

to abide by the clock. Go right to the meat of your testimony, the 

stuff you really want us to hear. 

If there is other stuff that you do not consider to be as important, 

throw that in at the end because we have a lot of Members with 

a lot of questions. 

Elaine, thank you for participating. 

Let me introduce to you Scott Shalek, who is my constituent. 

Scott, do you want to wave back there? 

Scott is from McHenry County. He has been involved in the sale 

of insurance products for years. He was in town for a meeting with 

the trade association. I asked him to stay over so that he could listen to the testimony and give me some input later on. 

Our next witness is Raymond Arth. Mr. Arth is the president of 

Phoenix Products in Avon Lake, Ohio. Mr. Arth? 

STATEMENT OF RAYMOND ARTH, PRESIDENT, PHOENIX 

PRODUCTS, INC. 

Mr. ARTH. Good morning, Mr. Chairman, Members of the Committee. 

Chairman MANZULLO. If you could put the mike in front of you? 

Thank you. 

Mr. ARTH. Yes. Thank you. Good morning, and thank you for the 

opportunity to be here today. 

Adding to the Members’ kind introduction, I would like to tell 

you that COSE runs a health plan for small businesses in greater 

Cleveland with 14,000 companies, 87,000 subscribers and nearly 

200,000 covered lives. We also run chamber programs elsewhere in 

the State of Ohio. 

I am also here today on behalf of National Small Business 

United, the country’s oldest small business advocacy organization 

headquartered here in Washington. Health insurance has been one 

of our primary concerns for years. 

After a period of relative stability, we are seeing costs escalating 

again. In our renewal last year, our most popular health care plan 

went up by 24 percent. Most of my employees elected to switch to 

another plan option, but we still were facing a 12 percent increase 

in premiums last year, and we expect much higher increases this 

year. 

We believe there are some fundamental problems that need to be 

addressed, and probably chief among them is the fact that our 

health care delivery system runs on other people’s money. If you 

are covered under Medicare or Medicaid, it is taxpayer funded. If 

you have private insurance, it is probably under an employer sponsored plan with your employer paying most or all of the cost. None 

of us spend other people’s money as prudently as we spend our 

own. 

We have a problem with cost shifting; that Medicare and Medicaid do not really pay all the costs for the services that are delivered. Those costs do not just disappear. They get shifted to the insured segment. Unfortunately, most of the burden will fall on small 

businesses that need to buy private insurance. Large self-insured 

groups do have the clout to avoid much of that burden. 
12

We also have issues with state mandates that affect small business in particular. You have heard before about the ERISA preemption. We will not bother to revisit that. 

If those are the problems, the question becomes what are some 

of the solutions we can deal with? COSE and NSBU, I believe, both 

were proponents of the MSA program when it was first discussed 

and enacted some years ago. The problem is it was not done correctly. We put caps on the number of plans that could be sold totally. We capped participation to companies fewer than 50 employees. My company with 60 employees is not eligible to offer an MSA. 

With those caps, it was not attractive to insurance companies or 

banks to develop the products because there was no assurance 

there would be a big enough market to earn a return. The fact that 

I cannot offer it excludes a number of companies and insurers from 

the program. 

The laws regulating HMOs prohibit the kind of cost shifting or 

cost sharing rather that would be required under an MSA program. 

About 40 percent of the people in this country are covered under 

an HMO program and hence would be ineligible to participate in 

an MSA. That would need attention here. 

The rules are very complex. It is hard to develop and manage a 

plan. I may have to rely on my glasses here. Excuse me. There are 

also issues that the employer and the employee cannot make contributions into the savings components. If the employer makes a 

contribution, the employee may not. 

We do have the Section 125 cafeteria plan also as a tool with respect to health care, but it is really only available to C corporations. If you are an LLC, a partnership, a sole proprietor, you cannot contribute to a Section 125 plan. 

The Section 125 plan, with its use it or lose it provision, discourages some people from participating in the beginning and also encourages a lot of discretionary but perhaps unnecessary year-end 

spending to buy a new pair of glasses or other health services that 

would not otherwise be purchased rather than lose the dollar savings. Try to make a doctor’s appointment in the month of December. 

Another issue we need to address is the whole issue of tort reform. The cost of lawsuits is driving up the cost of health insurance. There is defensive medicine. There is the basic cost of malpractice insurance and so forth. We are very much in favor of holding providers responsible for incompetence or malpractice. We are 

very concerned about the provisions in the Patients’ Bill of Rights 

especially as it relates to employer liability. 

The Patients’ Bill of Rights is expected to add 4.2 percent, which 

would translate into almost a million additional uninsured. If you 

add liability, quite frankly, I am not going to expose myself or my 

company to yet another range of reasons for my employees to sue 

me, and I would feel no choice but to get out of the health insurance business altogether. I would urge, in your considerations with 

respect to the Patients’ Bill of Rights, that you be very sensitive 

to that potential problem. 

At that point I guess I would be willing to wrap up my comments 

and yield back the balance of my time to keep things moving. 

[Mr. Arth’s statement may be found in the appendix.] 
13

Chairman MANZULLO. You know the term of art, do you not? 

Yield back the balance of your time. I appreciate that. Thank you. 

Our next witness is Robert Hughes. He is the president of the 

National Association for the Self-Employed. I look forward to your 

testimony. 

STATEMENT OF ROBERT HUGHES, PRESIDENT, NATIONAL 

ASSOCIATION FOR THE SELF-EMPLOYED 

Mr. HUGHES. Thank you, Mr. Chairman and Members of the 

Small Business Committee. I would like to thank you for this opportunity. 

Chairman MANZULLO. Mr. Hughes, could you move the mike a 

little bit closer to your mouth? Thank you. 

Mr. HUGHES. I would like to thank you for the opportunity to testify before you today to discuss small business health care issues. 

I am Robert Hughes, a self-employed CPA. I am also currently 

president of the National Association for the Self-Employed, a bipartisan, non-profit small business trade association that has over 

200,000 members nationwide. Ninety percent of our membership 

consists of small businesses with five or fewer employees. 

There are approximately 24 million small businesses in our nation. They account for 99 percent of America’s employers and employ 53 percent of the private work force. Of the 43 million uninsured, approximately 24 million have family head that is self-employed or working in a firm with fewer than 100 employees. 

According to the General Accounting Office’s October, 2001, report on private health insurance, only 36 percent of employers with 

fewer than ten workers offered health coverage to their employees. 

The report cited the primary reason small employers gave for not 

offering coverage was cost. 

These statistics are telling us that Congress and the Administration must focus on affordable health care in order to effectively reduce the number of uninsured in our nation. We strongly believe 

that association health plans and health care tax incentives, including tax deductions and tax credits for the self-employed, are 

necessary to provide affordable health coverage. 

There are approximately 135,000 associations in existence today 

within the United States, and nearly every industry, profession, 

cause and interest is represented. Many associations also offer tangible value to their members through member benefits because of 

their group purchasing power and economies of scale. 

Associations can also tailor benefits specifically to their membership’s needs. Small businesses with five employees or under have 

very different needs from small businesses with 25, 100 or 250 employees. The self-employed and small business community should 

be able to pool their purchasing power in the acquisition of affordable health coverage, and association health plans, we believe, are 

a mechanism to do that. 

On average, a worker in a firm with less than ten employees 

pays 18 percent more for health care than a worker in a firm with 

200 or more employees. AHPs, we believe, can reduce health care 

costs by 15 to 30 percent by allowing small businesses to join together to obtain the same economies of scale, purchasing clout and 
14

administrative efficiencies now available to employees in large employer and union health plans. 

New coverage options for the self-employed and small business 

workers will promote greater competition and choice in health insurance markets. Tough new solvency standards protect patients’

rights and insure benefits are paid. 

Employee enticement and retention within the small business 

community are also a direct positive effect of association health 

plans. We believe AHPs would enhance the ability of the self-employed to obtain affordable health insurance coverage. 

Tax credits and deductions are also a viable solution to achieve 

affordable health insurance. Existing inequities within the Internal 

Revenue Code should be addressed first to create parody between 

employer provided health insurance and health insurance for the 

self-employed with regard to social security and Medicare taxes. 

Currently, premiums for employers and employees are not subject to FICA withholding tax, which is social security and Medicare. 

Thus, they enjoy health insurance premiums free from income tax 

and FICA tax. 

However, health insurance premiums for the self-employed individuals are subject to self-employment tax for themselves and their 

dependents. The result is that the self-employed pay a premium on 

health insurance of up to 15.3 percent of the cost of that insurance. 

Combined with other non-deductible premiums, the self-employed 

pay an additional 25 percent for their health insurance. 

By allowing the self-employed to claim their health care premiums as a business expense, the net cost of health insurance premiums will be reduced by up to 25 percent, which is a significant 

reduction in purchasing health insurance. 

We believe further that a tax incentive, such as a refundable tax 

credit, should be made available for those who purchase health insurance coverage for up to $500 for individuals and $1,000 for families. A refundable tax credit should be made available to those individuals whose employer does not sponsor or contribute to an individual or family health plan for their employees and the unemployed. Self-employed individuals would have the opportunity to 

utilize either the self-employed health insurance deduction or the 

refundable tax credit, but not both. 

We talk about numbers and statistics and plans here, but we 

want you to know that all of these items have individuals and faces 

to them throughout the country. We received a call this week from 

one of our members who indicated that his monthly premiums are 

going from $522 a month to $945 a month for his coverage. These 

double digit increases are going to be stifling for the self-employed 

and we believe will hurt the overall economy and the self-employed 

business nationwide. 

Thank you, Mr. Chairman.

[Mr. Hughes’ statement may be found in the appendix.] 

Chairman MANZULLO. Thank you, Mr. Hughes. 

Our next witness is Rick Curtis, president of the Institute for 

Health Policy Solutions here in Washington. I look forward to your 

testimony, Mr. Curtis. 
15

STATEMENT OF RICK CURTIS, PRESIDENT, INSTITUTE FOR 

HEALTH POLICY SOLUTIONS 

Mr. CURTIS. Thank you, Mr. Chairman. Just by background, we 

are a not-for-profit, independent institute. We largely focus on the 

working uninsured. 

Chairman MANZULLO. Would you push that mike a little bit closer? 

Mr. CURTIS. Okay. I am sorry. We work with private businesses. 

We work with consumer groups. We work with the government on 

approaches to coordinate with private employer coverage, and we 

have also worked on the development of what we call consumer 

choice purchasing groups in the private sector. 

There are several of them that are thriving out there. There is 

one in Connecticut, the Connecticut Business and Industry Association. There is one in California under the umbrella of the Pacific 

Business Group on Health. There is one in Colorado some of you 

are aware of. There is a new one in New York City. 

The interesting thing to note is that in the face of premium increases and the downturn in the economy you are all painfully 

aware of, their enrollment is going up substantially right now, 

which I think points to the obvious advantages of worker choice of 

competing health plans, which these kinds of organizations are 

structured to achieve. 

I would note we do not take positions on things. We are not a 

trade association. I would note that most of these kinds of organizations are not a professional or trade association that would qualify as a bona fide association under the bill. They tend to be under 

the auspices of business groups on health that were formed by big 

employers to address quality issues and so forth, and then they 

have developed a purchasing pool. For small employers, organizations like COSE, of course, and like the Connecticut Business and 

Industry Association would qualify. 

What I want to focus on, though, is this issue of the uninsured. 

In good times or bad, as you all know, a very large proportion of 

working uninsured are concentrated in small firms. While that is 

true, it is also important to note that there are more workers covered through their small firm than there are uninsured, and indeed 

there are more of them covered as a dependent through a spouse’s 

employer than there are covered through individual coverage, so it 

makes sense as Congress thinks about the various proposals to extend coverage to the uninsured to do things that complements rather than replaces coverage through small firms. 

As you all are well aware, surveys show that working Americans 

prefer coverage through their place of employment. Nevertheless, 

there are lots that do not have a stable place of employment, who 

are not full-time, full-year workers, whose small firm may not be 

viable yet. For them, you need other approaches. 

The emerging details of the Administration’s proposals here I 

think will give latitude for a lot of creative responses in both the 

private sector and the public sector, but our impression is there is 

this iron curtain in these proposals between the individual tax 

credit and the exemptions for employer based coverage, and we 

think that could be very unfortunate for an important sector of 

small employers, and those are the small employers who have a 
16

majority of low wage workers. Some of them do offer coverage, a 

minority, but depending on how you define it, somewhere between 

20, 30, 40 percent. 

For those kinds of employers, I think it is very clear that the tax 

credits are going to be worth a lot more than the existing exemptions, so the advantages of employment based coverage will be lost. 

As has been mentioned in previous testimony, those advantages include retention of workers, as well as the convenience for the workers of payroll deductions and so forth. 

While I am not privy to the details as they emerge, it looks as 

if there is this kind if iron curtain as there was in previous proposals, and we think there could be a fairly simple variation on the 

theme. There could be a sensible way to better reach the uninsured 

workers and dependents who do have this kind of employer who 

does want to somehow participate. 

That would simply be this. That kind of an employer, and it 

would be defined, you know, fairly simply. The federal government 

through FICA forms and so forth knows the wage profile of small 

employers, and you would simply say those with a majority, for example, or two-thirds or 40 percent, whatever you wanted, whose 

workers make less than—pick your number—$20,000 a year would 

have an option of having their employees benefit from the tax credit instead of existing exemptions. 

If the employer was willing to contribute something, that would 

be exempt from FICA taxation, not individual withholding, and 

then that employer could participate in these various kinds of pools 

that the Administration is proposing be available for tax credit recipients, but through the workplace. 

We think that that kind of variation on the theme would be constructive for small employers and for the public purpose of reaching 

the working uninsured. You said to keep it brief. I will keep it 

brief. 

[Mr. Curtis’ statement may be found in the appendix.] 

Chairman MANZULLO. I appreciate that. Thank you for your testimony. 

Our next witness is Janet Trautwein, who is with the National 

Association of Health Underwriters. We look forward to your testimony. 

STATEMENT OF JANET TRAUTWEIN, NATIONAL ASSOCIATION 

OF HEALTH UNDERWRITERS 

Ms. TRAUTWEIN. Thank you. As we have heard earlier today, the 

current estimate on the number of uninsured in this country is approximately 40 million. Over half of the 40 million uninsured 

Americans are the working poor or near poor, and many of these 

people actually do have access already to health insurance through 

an employer plan. Unfortunately, although they have coverage 

available, many of them just cannot pay their share of the cost. 

I know we are focusing today on ways to provide new access to 

small employers, but in doing so we need to keep in mind that 

whether it is from a group health plan, an association plan, some 

type of pooled arrangement, that health insurance premium is still 

calculated based on claims paid out. That is where you get a premium. 
17

Many of the costly services that health insurance premiums are 

based on are not directly impacted by mandates, such as the cost 

of new technology, the cost of prescription drugs. Many of those are 

not affected at all by an exemption on mandates. 

One of the reasons health insurance premiums are so high, as we 

have heard reported today, is that low income employees, many of 

whom are actually in relatively good health, cannot afford to participate in the employer’s plan. This leaves the sicker employees as 

the ones that are participating and, as we discussed earlier, fewer 

participants over which to spread the risk of the entire group. 

If we really want to lower the cost of health insurance, which is 

I think what we are talking about here today, regardless of what 

the insurance vehicle is we have to get greater participation in the 

plans that the employers offer. Even with financial contributions 

from employers, many low income people who must pay part of the 

cost of their plan still cannot afford their plan. Many of these employees work for small businesses. 

While increased deductibility of health plan premiums for the 

self-employed has helped and will certainly help more as deductibility is increased, it does not do anything for the bulk of the uninsured who are the working poor with no or very low tax liability. 

People with no tax liability do not benefit from a deduction for 

two reasons. First, if they owe no taxes there is nothing from which 

to deduct their premiums even if the deduction is available without 

the requirement that they itemize. Second, more important for the 

working poor, a deduction or a credit that is only available at the 

end of the year is of no value to them because they need the funds 

at the time the premiums are due. They cannot wait a year to be 

reimbursed, so they forego insurance entirely. That is why they are 

uninsured. 

Fortunately, we think there is a solution to this problem and 

that it will address at least the participation problem of the uninsured, and that is a refundable, advanceable tax credit that would 

allow individuals to receive their tax credit dollars monthly when 

their premiums are due. 

We also think it would help small employers who currently cannot afford to provide a health plan for their employees to offer a 

plan to the workers with the knowledge that employees had tax 

credit dollars to help pay the cost. Now, some tax credit proposals 

do not allow individuals to use a tax credit to pay their share of 

employer premiums. We think a better solution is to have a flexible 

tax credit that can be used either to help employees pay their share 

of their employer’s plan or to buy coverage in the individual market 

if their employer does not offer a plan. 

I would like to add one point of clarification here. There are a 

number of proposals out there that call for a tax credit to go to employers. There is nothing wrong with a tax credit to employers. We 

should do anything we can do incentivize employers to offer coverage. 

However, let us keep in mind again today the number of employers that do already offer plans. Some of their very biggest challenges are in getting their low income employees to participate. If 

we only give the credit to the employers, that does not help those 

employees who are uninsured to pay their share of the cost, and 
18

overall those health insurance premiums rates are not going to go 

down. We have to look at some sort of combination approach to 

make this work. 

In conclusion, we think a refundable health insurance tax credit 

represents a simple and realistic way to extend private health insurance coverage to uninsured individuals and families who are 

most in need of assistance. It is an important component of an 

overall program to increase health care access for small business 

owners, and we think it would provide a real solution to the problem of the uninsured by addressing affordability, the most basic 

component of access to health care. It is a private sector solution 

to a difficult public problem, and it gives people the tools to make 

their own decisions. 

We believe the most important patient protection is the ability 

to afford health insurance coverage and that real access to health 

care and choice cannot exist without the dollars to buy a health 

plan. 

I appreciate this opportunity, and it looks like I have some time 

left, so thank you. 

[Ms. Trautwein’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you for your testimony. All the 

written statements of the witnesses will be made part of the record. 

Our next witness is Mary Nell is it Lehnhard? 

Ms. LEHNHARD. Lehnhard. 

Chairman MANZULLO. Mary Nell Lehnhard, who is with us. She 

is senior vice-president for policy at Blue Cross/Blue Shield, and we 

look forward to your testimony. 

STATEMENT OF MARY NELL LEHNHARD, SENIOR VICEPRESIDENT FOR POLICY, BLUE CROSS/BLUE SHIELD 

Ms. LEHNHARD. Thank you, Mr. Chairman, Members of the Committee. Blue Cross and Blue Shield plans are committed to making 

small group coverage as stable and an affordable as possible. We 

offer coverage everywhere in the United States. We do no red lining. It is available to every small group. 

Blue Cross and Blue Shield plans bring two messages to you 

today. First, we believe the problem of the uninsured should be addressed primarily by targeting small employers. The statistics 

speak for themselves. Two-thirds of the workers in small firms, 

groups under ten, are uninsured. We think the best way to address 

this is tax credits for low income workers in small firms. Often the 

employees have access to coverage, but they just cannot afford to 

pay their share of the premium, which is typically 50 percent. 

Our second message is that exempting AHPs from state regulation will not meet the objectives of the proponents, but will result 

in very serious problems for small employers. Proponents argue 

primarily that AHPs are needed to create very large pools of small 

employees so you can negotiate with providers. States figured out 

that large pools were a good idea in the 1990s. Every state enacted 

a law, a pooling law, that said to every insurance company you put 

all of your small groups in one pool. 

For Blue Cross and Blue Shield in a small state, this means tens 

of thousands of employees in one pool. In large states it means 

hundreds of thousands of employees of small employers in one pool. 
19

This gives us maximum spreading of risk among major insurance 

companies in a state. 

States have also said we have to limit how much we charge a 

sick group compared to a healthy group. The states have said we 

want maximum spreading of risk, and by law we are going to limit 

how much you can vary your premiums based on how sick a group 

is. I emphasize states have maximized the architecture of pooling 

and cross subsidies. 

I would also note that the small employers get the same discount 

from providers that our large employers get. When we negotiate 

with a hospital in town, our small employers get that same rate as 

the largest company in town. 

In fact, what we are concerned about is that AHPs will raise the 

cost for our small employer pools by making it very attractive for 

healthier groups to leave the pools, whether it is us or another insurance company, and join an AHP where there are no mandated 

benefits, and they do not need those benefits. The people who need 

the benefits would stay with the state insured pools and make the 

costs go up for those sicker small groups. 

Proponents also argue that AHPs will reduce the number of uninsured, and I know the number the NFIB has put on is eight million. Only two independent studies have been done on this. CBO 

said they would reduce the number of uninsured by only about 

300,000, but the premiums, because of the phenomena I just described, would go up for 80 percent of employers in the rest of the 

market. One reason their numbers are so high is because they 

used, for example, the entire Medicare population and made assumptions that they would join AHPs. We urge you to look at their 

assumptions.

The Urban Institute said there would be no increase in the uninsured because of AHPs, and, in fact, the number of uninsured 

would go up by one percent because of again risk selection against 

state insured pools raising the risk for sicker groups. 

Not only would exempting AHPs from state regulation and oversight not achieve the objective. We think it will mean a return to 

the days of unregulated MEWAs, which were nothing but associations of employers exempt from state regulation and subject to regulation by the federal government. They were made subject to state 

regulation after very lengthy Senate hearings conducted by Senator 

Nunn citing how employer dollars were misused, misspent, sometimes fraudulently, sometimes because they did not have the expertise and they did not understand they were running an insurance 

company. 

I would note that insurance regulation of insurance companies is 

intense. They review financial information quarterly, daily. If there 

is a problem, they move in with us. They co-sign checks above 

$500. If there is a problem, they review all our benefit structures 

to protect consumers. They review every one of our marketing materials so consumers are not misled. You cannot market a policy 

with ten days of coverage as comprehensive coverage. 

They review our rates for small groups. They respond to consumer complaints and watch for signals that there might be a problem. For example, if providers are not paid the Insurance Commis-
20

sioner gets complaints and knows somebody might be running out 

of money. 

Very importantly, and we can give you stories and evidence of 

this, they act very quickly to seize the assets of a company when 

they see the company going under because they are sitting in the 

company, so those assets cannot either go out of state or move offshore, and then there is no money left to pay providers, and the 

employers have to pay their employees’ bills or the employees have 

to pay them. 

D.O.L. will not have the authority or the resources to do these 

kinds of things to protect employers. AHPs will simply file a certificate certified by an actuary that they hire to DOL, and they are 

in business. They self-report to DOL when they run into trouble. 

I would close by saying we have tried AHPs. Their economy was 

an association of employers. They did not work for consumers. It 

was a very public and heartbreaking series of hearings that the 

Senate went through, and we urge Congress not to reinvent them. 

[Ms. Lehnhard’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you. 

Our last witness is Duane Musser, technical consultant with the 

National Federation of Independent Businesses. 

If you could pass the mike down to Mr. Musser? 

Mr. MUSSER. Sir, I was not asked to give a statement. I was just 

asked to appear with the NFIB witness with respect to——

Chairman MANZULLO. For any technical questions? 

Mr. MUSSER. For technical questions. If you would like me to say 

something, I will, but——

Chairman MANZULLO. No. That would be fine. I appreciate that. 

I appreciate that you are here. 

I have a question here that I would like to ask Ms. Lehnhard. 

What is the solution? I had two ladies in the office yesterday. They 

both have Blue Cross/Blue Shield. One had 40 employees. One had 

eight employees. Their increase in premiums ranged between 35 

and 47 percent for one year. 

As they have been checking, they said the small employers are 

saying Blue Cross/Blue Shield is not interested in representing 

small employers. Tough question, but that is what they posed to 

me yesterday. They were from the National Association of Women 

Business Owners. 

Ms. LEHNHARD. That is an excellent question. That is the heart 

of our business. We are local. That is our bread and butter. We are 

part of the community. That is our most important part of our 

business. 

The reason health care premiums are going up is because hospital costs are going up 16 percent in the last 12 months, drug 

costs are going up 18 percent in the last 12 months, Medicare is 

not paying its fair share, so you put that on top of the 16 percent. 

Chairman MANZULLO. But how much of an increase do you give 

to the large corporations that have the larger plans with you? 

Ms. LEHNHARD. You look at the large employers. They are saying 

the same thing. Hospital costs are going up 16 percent. They are 

having the same experience. 
21

Chairman MANZULLO. No. I am talking about your premiums to 

the large corporations that have the big pools. They are not going 

up anywhere near 35 to 47 percent. 

Ms. LEHNHARD. No. They are. I think if you look at the data, 

large employers are experiencing very large increases. 

Chairman MANZULLO. But not to that extent. I mean, the data 

shows conclusively that small employers pay 18 percent more in 

premiums than the average, than large employers. 

Ms. LEHNHARD. I think if you look at that data, it included 

broker fees for small employers, which run about eight percent. It 

also included royalty paid by small firms to insurance companies. 

These are assumptions for how AHPs would function, but they 

are costs that they assume that you have in a small group market 

that we do not have. 

Chairman MANZULLO. So you are testifying that Blue Cross/Blue 

Shield charges the same premiums to a small employer as it does 

to a large employer? 

Ms. LEHNHARD. No. I am saying that we are facing in all segments of our market the fact that hospital costs are going up 16 

percent. 

Chairman MANZULLO. I understand that, but are you saying that 

the rate of increase in premiums is the same to the small employer 

as to the large employer? 

Ms. LEHNHARD. No. It will not be the same because of problems 

in the turnover in the small group market, which AHPs would experience, the fact that individuals in the small group market tend 

to be sicker because often they are—— Chairman MANZULLO. Because their pool is smaller. 

Ms. LEHNHARD. No. Our pools for small employers are huge. It 

is all of our small group enrollment is in one pool in every state. 

Chairman MANZULLO. Yes, but they are not rated according to 

that one pool. 

Ms. LEHNHARD. Yes, they are. That pool is used to develop their 

premium. It can be adjusted based on age, sex, and in some states 

they let you adjust for health status, but it has a corridor on it like 

25 percent or more. 

Chairman MANZULLO. Do you mean the amount of increase cannot exceed 25 percent? 

Ms. LEHNHARD. The amount of difference between your sickest 

and your healthiest group. 

Chairman MANZULLO. Does anybody disagree with this? I mean, 

the data I have seen, the people I have talked to, the corporations 

I have talked to, their rate of increase is a lot less than the small 

businesses. I mean, that is why we are having the hearing. 

Ms. LEHNHARD. I am not saying the rate of increase is the same. 

I am saying that large employees are experiencing double digit increases, and they are very alarmed about it. 

Chairman MANZULLO. Then if the rate of increase with the large 

employers is not the same as for the small employers, is the reason 

for that that the small employers do not have enough people in 

their pool——

Ms. LEHNHARD. No. 

Chairman MANZULLO [continuing]. In order to spread the risk? 

Ms. LEHNHARD. No. You could not——
22

Chairman MANZULLO. What is the reason then? 

Ms. LEHNHARD. Again, you have the maximum number of people 

in the pools right now because the states have said we have seven 

insurance companies in our state. All right. Blue Cross used to 

have 25 pools. You have one pool now for small groups. Aetna, you 

have to have one pool for small groups. Every insurance company 

can only have one pool, and they have to spread the risk across 

that entire pool. 

Chairman MANZULLO. My brother and his wife run a restaurant. 

They pay—just the two of them; their kids are grown—$700 a 

month in premiums with a $5,000 deductible. Are they automatically in some kind of a pool in Illinois, two people? 

Ms. LEHNHARD. They are probably in the Illinois small group 

pool. Now, you can have association health plans that are rated 

separately in some states. I do not know what Illinois law is. Rick 

Curtis follows all of this stuff closely. 

Chairman MANZULLO. Please, could you explain that? Thank you. 

Mr. CURTIS. Well, that may be an overstatement, but there are 

a couple differences here I think worth noting. One is different 

states do have different rating rules. Illinois is one that allows very 

substantial latitude in how a small employer is rated. Health status of the employees of a given group can have a big effect on rating. 

Chairman MANZULLO. So if you have a small group where somebody has an illness, then the price goes through the roof for those 

premiums? 

Mr. CURTIS. Yes. There are rate of increase limits usually. Even 

in a state like Illinois, they are there even though there is latitude. 

Very often the example you gave before of a couple of women 

business owners who had 40 some percent, very often what is going 

on is they have a change in their employee composition. They get 

a new older employee or younger employee. 

Chairman MANZULLO. No, they did not. What they did was they 

were told this by their insurance company, and the insurance company said well, it is because you have somebody here who is at 

risk. They said who is that risk? You know, what is going on here? 

They said well, we cannot tell you because of privacy issues. 

They sat down and had a meeting with the owner of the business 

and the employees and said look, the insurance company wants to 

raise your rates by 45 to 47 percent. That means that we may have 

to cut back on your wages in order to put money into it. 

They interviewed each of the people. Come to find out, it was one 

person in the group had a child with AHD. Is that what it is? The 

attention deficient disorder. ADD. Thank you. With ADD that saw 

a doctor once a year. 

Then they turned back to the insurance company and said well, 

we have talked to everybody. The one child sees a doctor once a 

year. The insurance agent said well, yes, that is the person that 

the insurance company says is at risk, and that is why your premiums are going up 47 percent. 

Ms. LEHNHARD. Mr. Chairman, I would just note as an aside 

that——
23

Chairman MANZULLO. I am getting a letter from her, and I am 

going to send it to her insurance company. I want in writing exactly what happened there. 

Ms. LEHNHARD. That may be able to happen, but I would just 

note that will still be able to happen under AHPs. There is nothing 

that says everybody in the AHP pays the same rate. 

Chairman MANZULLO. I accept that the rate of increase would be 

less because the pool is bigger. 

Ms. LEHNHARD. No. The pool would not necessarily—the chamber 

of commerce in a state would not have maybe a bigger pool than 

a Blue Cross and Blue Shield plan. They can still vary the rate between groups. 

Chairman MANZULLO. Mr. Curtis. 

Mr. CURTIS. Yes. I was just going to say the groups I was talking 

about that offer consumers a choice do not allow those kinds of 

variations. They only allow age rating, but they only operate in 

states with pretty tight rating rules because if they did that, just 

as if an AHP did that, in a state that allows the sort of thing you 

are talking about they would be creamed to death. In the case of 

these kinds of groups, they would not have any plans to participate. You know, there is a reality of what happens in the outside 

market. 

The other thing is the states that do have loose rating rules usually have a 15 percent rate of increase limit on how much a given 

employer’s costs can go up in addition to what is called trend, and 

so if the trend is 15 percent and then you can add 15 percent on 

top of that and then you have an old worker come in or something, 

you are pretty soon up to 45 or 50 percent. 

The state rating rules have a lot to do with what can happen to 

an individual small employer, but I would submit to you that an 

AHP that tries to be nicer than that would end up with their low 

cost members going elsewhere within a state that allows loose rating rules. 

We had in Illinois actually a business association that tried to 

put up a consumer choice purchasing group. They started in the 

Chicago area. It was the manufacturers association, a very important, very powerful, very large membership with a lot of resources 

group. You know, they tried to be better than the market on this 

very issue. They failed. 

Ms. LEHNHARD. I think that is a fundamental point. What our 

CEOs have said is we cannot operate in a market that has two sets 

of rules. A very typical example might be a Blue Cross and Blue 

Shield plan might have a small group market pool, and they might 

be the insurance carrier for the chamber of commerce in that state, 

an insured product. 

If this passes, we would still be the insurance company for the 

chamber, but the chamber group would not have to cover substance 

abuse, ADHD, mental health, any of the state mandates. What 

would start to happen if they did not cover those mandates is people would jump back and forth when they needed the benefit because the HIPAA law says you can move without any waiting period. 

So you stay in the chamber coverage. If you need substance 

abuse or someone in your family does, you are not penalized be-
24

cause as soon as you need it you can jump back into the state insured pool. 

Our CEO said we cannot keep it affordable for the people who 

for whatever reason cannot get into the association or do not want 

to join the association because they need the mandated benefits. 

We cannot keep it affordable for them if we start splintering the 

pools these ways. 

Chairman MANZULLO. I appreciate that. I am way over my time. 

Mrs. Vela ́zquez? I am sorry I took too much time, but they were 

great answers. 

Ms. VELA ́ ZQUEZ. That is okay. Thank you. 

Chairman MANZULLO. It is very complicated. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Ms. Lehnhard, you make reference here to the 2000 CBO report 

throughout your testimony. Are you aware that when we conducted 

a hearing last February, February of 2000, they recognized that the 

report was fundamentally flawed, and is it not true that the CBO 

report did not specifically evaluate AHPs alone, but all types of 

group purchasing arrangements? 

Ms. LEHNHARD. I actually testified at that hearing, and we followed up with CBO afterwards. What they said in the hearing did 

not affect their numbers. We have checked with them very closely. 

They are the same numbers. 

Ms. VELA ́ ZQUEZ. So they came here before our Committee and 

they said that they recognized that it was fundamentally flawed, 

and you say that it does not affect what they stated in the report? 

Ms. LEHNHARD. It was a very confusing discussion in the hearing. I can follow up with you, but they are still saying that the 

numbers from AHPs for increased insurance is only about 300,000. 

Ms. VELA ́ ZQUEZ. Ms. Lehnhard, we have been meeting with a lot 

of doctors who are small businesses because doctors in private 

practice are small businesses. For years they have complained that 

many times their treatment decisions are determined by an administrative executive of an insurance company not to be medically 

necessary. As a result, an insurance company refuses to provide or 

pay for such services. 

Do you oppose putting the decision making authority back in the 

hands of doctors? 

Ms. LEHNHARD. This is probably the most difficult question—— Ms. VELA ́ ZQUEZ. I know. 

Ms. LEHNHARD [continuing]. In health care. Our concern is I will 

give you an example in Medicare. I worked on the ways and means 

committee for eight years, and we constantly had issues like Medicare eligible would want B–12 shots. 

There are millions and millions of people who would like to have 

B–12 shots because they make you feel better. Medicare had to say 

the only time it is medically necessary is if you have pernicious 

anemia. Otherwise Medicare would be paying for all these B–12 

shots. 

There has to be some tension in the health care system so that 

we do not pay for things that are not tested, are not clinically proven or certainly are clinically proven not to be necessary or people 

are not going to be able to afford coverage, but it is a very difficult 

issue. 
25

Ms. VELA ́ ZQUEZ. Are you in insurance clinically trained to make 

those determinations? 

Ms. LEHNHARD. First of all, only physicians make those determinations, and we use guidelines. We work rigorously with the different medical specialties. We are very well known in our tech program for developing guidelines with medical specialty groups on 

what is now a range of such complicated medical procedures that 

physicians—it is very difficult for them to stay up on what the new 

technology is and whether it is effective for what conditions. 

Ms. VELA ́ ZQUEZ. Let me ask you a question about fairness. Doctors can be held liable under state law if the decision causes harm 

to the patient while the insurance company escapes liability. Why 

should doctors be liable for decisions clearly made by insurance 

companies? 

Ms. LEHNHARD. You know, you can argue the debates of this all 

day, but I think the fundamental bottom line is our system is voluntary in the United States, and we depend on employers to offer 

coverage voluntarily. 

I can envision a board room if liability for employers passes, 

board rooms all over the country saying we cannot explain to our 

stockholders you being in the business of exposing the company to 

hundreds and tens of millions of dollars in liability. We are going 

to cash out employees and send them out on their own. 

You know, you can argue the merits, but the problem is we are 

based on employers stepping up to the plate and doing this voluntarily, and you just heard that it would be very difficult, particularly for small employers, to do this if they have the exposure of 

liability. 

Ms. VELA ́ ZQUEZ. This is going to be a long debate. 

Ms. LEHNHARD. It is a long debate. 

Ms. VELA ́ ZQUEZ. Ms. Trautwein, in your testimony you say that 

the proposal could be administered through the employer. Will this 

increase additional administrative burdens on small business owners? 

Ms. TRAUTWEIN. No, I do not think so. There are actually two different ways that it could be done, just to give you some examples. 

There are some credits that are available already that are done 

in the way I am going to suggest first, and that is the employer 

advances the amount of the credit the employee is eligible for on 

his paycheck, and then when employers do that every time they 

have a payroll they have to make a tax deposit. From that tax deposit they simply subtract out the amount of any credits that they 

have advanced to eligible employees. It is not reinventing the 

wheel. They do this already. 

Second, in the economic stimulus bill that passed the House 

there was a provision for transfers and people receiving certificates 

through unemployment offices. That is an idea that could be modified so that if there were any sort of a cash flow situation what 

would happen is the employer, when remitting their premium, 

would remit their premium less any tax credit amounts and give 

the names and eligibility numbers directly to the insurance company, and the insurance company would be wired the money in a 

few days. 
26

Ms. VELA ́ ZQUEZ. Can you explain how affordable the health insurance for low income workers would be if the employer does not 

provide and does not make a contribution? 

Ms. TRAUTWEIN. Most states in terms of group plans require— in order for them to be categorized as group plans require some degree of employer contribution, so I think that that is dependent 

on—small business people generally cannot afford to make the 

level of contribution that some of the larger employers can. 

I know we are off the discussion of the underwriting pools and 

everything, but that partly has to do with why a group of 10,000 

people made up of small employers is different than a group of 

10,000 people that work for one. 

I know that is not what you asked me now, but we are dependent 

on employer contributions. We have to have employers continue to 

do that, but it is just not enough for some of their low income people. That is why we need some help with that. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Chairman MANZULLO. Thank you. This is pretty confusing. 

I would like to go to Mr. DeMint, going out of order with Mr. 

Grucci. 

Mr. DEMINT. Thank you. 

Chairman MANZULLO. Mr. DeMint, please? Then, Mr. Grucci, we 

will come back to you. 

Mr. DEMINT. Thank you, Mr. Chairman. You mentioned employer contribution, and I would like to follow up on that. I do 

apologize for being late. 

As soon as I ask my question, I am going to have to leave, but 

I would like to throw another idea in the mix because I think we 

will all agree that the more choices we give employers and employees to put money into this purchase of health insurance and purchase of health care the better off we are. I will address my question to is it Ms. Trautwein? 

Ms. TRAUTWEIN. Trautwein. 

Mr. DEMINT. Ms. Trautwein, in your testimony you recognized 

that there are 40 million Americans that are uninsured. About 25 

million of those work for companies that just do not offer insurance. 

I like your idea, and I think others do, too, of the refundable tax 

credit idea to get the employee, the individual himself or herself, 

involved with paying for health care, paying for health insurance 

or even using that credit to offset the cost of an employer plan. 

There is another idea in the mix related to an employer contribution that I would just like to throw out, get your response to, and 

maybe you can discuss after I am gone, but the idea of allowing 

an employer to put money into a health expenditure account or a 

health 401(k) for the employee to purchase health insurance and 

health care. 

The employee could add to that with the idea of a refundable tax 

credit if they wanted to, but we want to encourage these employers 

that do not offer health insurance now to put money with the same 

tax treatment that they get if they did offer a benefit. 

As a small employer myself, I know that dealing with the administration of a plan and purchasing small group plans, the fact is 

that in my company of under 20 people the individuals could have 
27

bought better policies on e-health insurance for less money than I 

was paying for a group policy, and it would have been easier for 

me to give them money and let them own their own plan with some 

changes in the regulations so that those plans would not be considered group plans. 

What do you think of the idea of an employer having the option 

of contributing money to an employee’s health expenditure account? 

Is that something you have considered? 

Ms. TRAUTWEIN. Yes. We have actually thought quite a bit about 

this, in fact. 

So what you are suggesting is they take funds from this account 

and purchase like a policy from an insurance broker or on e-health 

and wherever in the individual market? 

Mr. DEMINT. Right. Use some of the money for a base health 

plan. They would have to do that at least in the bill that we are 

talking about. The rest of the money could accumulate, roll over, 

and they could buy their basic health care with it, as well as have 

a backup insurance policy. 

Ms. TRAUTWEIN. Okay. Let me characterize this very carefully 

because I do not want it to come across the wrong way. 

The individual market is a very important resource for very 

many people. A lot of people can get good coverage there, but everyone cannot buy there. The individual market is medically underwritten in most states. We have done extensive studies and research on this market across the country. Although you can go to 

e-health and pick out a policy, you still have to go through medical 

underwriting in most states. A lot of people do not make it through 

underwriting, and that is the honest truth. 

You do not necessarily have to have cancer to have a problem 

being underwritten on an individual policy. It can be as simple as 

having chronic allergies or controlled asthma, controlled high blood 

pressure, 20 pounds overweight. It does not have to be something 

terrible. That is my concern about just all of a sudden just dumping people out and that is the only place that they have to go because of that problem. 

So what happens? When they apply for those policies, one of 

three things happens. They either get a very large rate up—it can 

be like 50 percent or more; sometimes it is only 25 percent if it is 

something minor—or they can have a rider, and that is very frequent, where a certain condition can be ridered out. 

For example, let me tell you what a rider would be. This is important. Let us say that you had had a strained back. A rider 

might be a rider on anything that happens to your back. This is 

fairly common. 

The third thing is they could be turned down altogether. In many 

states, and fortunately we have 28 states that have high risk pools, 

those people would have somewhere to go at a controlled cost, but 

they may not be able to have exactly the same benefits that they 

would have had if somehow the employer would have offered a 

plan. That is our concern. 

Mr. DEMINT. My hope is that ideas like association health plans 

will offer different products that individuals could also buy from 

too, but the thought is that the individual would still be better off 
28

in the open market than having no insurance at all from their employer again as an option. 

I would like to contact you with some of the research that you 

mentioned on the individual plan market. 

Ms. TRAUTWEIN. I would love to talk to you about that. 

Mr. DEMINT. Thank you, Mr. Chairman. 

Chairman MANZULLO. Would you talk about your bill? 

Mr. DEMINT. This is a bill designed for employers who do not 

make a contribution to employee benefits—basically to allow them 

to make a contribution that could only be used for health insurance 

and health care. It is really focused on small employers, those 25 

million individuals who work for companies that do not offer insurance, to try to stimulate the individual market to a degree, but not 

to replace group benefit plans offered by employers or not to conflict with association health plans. 

The thought again is we have a problem with the uninsured. If 

employers are willing to put some money into a plan or that the 

individual can own and accumulate, and it is just like a 401(k) for 

health care, then this is just an additional option. The thought is 

we are not going to replace current benefit plans, but the fact is 

with the cost of insurance, the erratic changes in the cost of insurance, small employers have a very difficult time purchasing small 

group plans, keeping up with the expenses. 

As we look more and more to adding liability to that, they are going to dump off in droves. If they are spending $500 a month on 

a health plan for their employees, rather than get out of health insurance completely if they decide I would much rather see them 

put the money in a health expenditure account and allow them to 

at least try to buy on the open market, but then as we push for 

things like association health plans or other ideas that aggregate 

risk over a larger number than just an individual or an employer, 

we create another option. 

Mr. Chairman, that is the hope is that we can look at all segments of the market and try to encourage employers that do not 

offer a benefit plan to at least put money into an account. 

Chairman MANZULLO. What I would like to do is have a lot of 

hearings at the full Committee level on this. What I would encourage you to do, Congressman DeMint, is to meet with one or more 

of the people here. There is an obvious desire to insure more people. 

Mr. DEMINT. Exactly. 

Chairman MANZULLO. Ms. Lehnhard, you know, does not like 

AHPs, but that is okay. She has given some very good reasons for 

that. 

Mr. DEMINT. Right. 

Chairman MANZULLO. She has also stated there is a desire to insure more people at rates they cannot afford. 

At the next hearing, I would be interested in knowing what Blue 

Cross/Blue Shield, which is the largest provider in this country, 

what their views would be on what may be an alternate plan to 

AHPs. We are looking for anything that would work here. 

Thank you for your time. 

Mr. ARTH. Mr. Chairman, if I may?

Chairman MANZULLO. Sure. 
29

Mr. ARTH. Congressman DeMint, your comments and Ms. 

Trautwein’s response really go to the point we were trying to make 

earlier with respect to MSAs. Because MSAs are a group product, 

it addresses some of the access issues that Ms. Trautwein mentioned with respect to people who do not have perfect health. 

At the same time, it is a high deductible, lower premium plan 

which makes it much more affordable. It is based on the premise 

that the employer and employee, but currently not both, could 

make a tax advantaged contribution into a spending account dedicated for health insurance, and it is the reason that we really believe that is a solution that is on the table, but just has not been 

properly executed. 

Mr. DEMINT. Right. Thank you. 

Chairman MANZULLO. Thank you. 

Congressman Davis, my colleague from Illinois? 

Mr. DAVIS. Thank you very much, Mr. Chairman. Let me commend you for holding this very terse, insightful, thought provoking 

hearing. 

As a matter of fact, the more I listen the more convinced I am 

that the only way we are going to really get to the bottom of the 

problem is to ultimately have a national health plan. I suspect that 

there are lots of people who are in disagreement with that. 

The question, and anybody can respond, is for those individuals 

who have 20 employees or 25 employees with the employees earning $12 an hour or $10 an hour. Is there any way that you see either the employer or the employee being able to afford a health 

plan that can be put together that would give them adequate protection? 

I understand the complexities of the business. I understand the 

economics. I understand all of it. I still have not seen anything yet 

that provides for that group of individuals that I just laid out. 

Mr. ARTH. Congressman Davis, my assemblers, which represent 

the majority of the employees in our company, currently I believe 

the ceiling rate is about $9 an hour, give or take a little bit. They 

have access to four different plan choices, employer sponsored. 

We pay, depending on the number of dependents, 75 to 95 percent of the premium. Virtually every employee participates with 

the exception of those who have better coverage available through 

their spouse’s employer. 

I think it is getting into the target area you were talking about. 

The participants in the COSE plan are smaller companies. The average plan size has 6.2 subscribers, and a lot of those companies 

are not particularly high wage companies. I mean, it can be done 

so I would not throw my hands up and say the only choice is to 

go to a national health plan. 

Mr. DAVIS. You pay part of the premium? 

Mr. ARTH. Yes, sir. We pay the majority of it. Yes, sir. 

Mr. CURTIS. Mr. Davis, as you clearly know, most employers like 

you just described cannot afford to pay 90 percent. Many of them 

cannot afford to pay 50 percent of existing rates. However, many 

of them can afford to contribute something. Our best guess is they 

could contribute maybe 25 percent of premiums. 

There need to be public subsidies, be it from a state CHIP program or from a tax credit that helps the individual out substan-
30

tially. There are some small demos actually within the very limited 

foundation dollars available. There is one in San Diego run by the 

Sharpe Health Plan which is structured like that. 

The amount the individual contributes actually slides based on 

family income. There are others that are based on wage like one 

in Wayne County, so there are a couple models out there that very 

generally described fall into that category, and they seem to work 

quite well. They quickly fill up. 

There are several others. There may be one announced today announced by a governor in a New England northeastern state, a 

demonstration that would be bigger than the ones I have mentioned, but I think that kind of a structure does have substantial 

promise. 

All you have to do is look at the data. Employers under a size 

of ten who have a majority of workers making less than $6.50 an 

hour, which happens to use what a national survey uses as a 

threshold, only about 19 percent in 2000 offered coverage, and 81 

percent by definition did not. 

That is better than it was a couple years before. Employers like 

you have described typically cannot afford traditional contribution 

requirements. 

Mr. DAVIS. Thank you. 

Mr. MUSSER. Congressman, on behalf of NFIB and the coalition 

of small business organizations that support the association health 

plan bill, we would urge you to take another look at that in the 

sense of achieving the goals that you are looking at. 

Going back, to give you an example, to the example that Chairman Manzullo put forward with a small business getting a 45 percent increase in their health insurance premium, large businesses 

are not getting those types of increases. It is small businesses normally with less then ten or 20 employees that are getting hurt. 

What we are looking for is to work on a bipartisan basis to give 

small businesses the same types of tools that large companies and 

labor unions have used for many years. We have tried to work with 

all groups on this over the last few years. 

This has not been tried in the current form that the bill has been 

proposed, so we think it is the most effective way to go in the direction that you want to see where we have more access to health insurance for small businesses. 

Mr. DAVIS. Thank you very much. 

Chairman MANZULLO. Are you going to be able to come back, 

Congresswoman Tubbs? 

Mrs. JONES. No, I am not. I was hoping I could have a chance, 

at least two or three minutes, from Mr. Grucci. 

Chairman MANZULLO. Could you guys work together so we can 

still go down and vote and finish up? 

Mrs. JONES. Yes. We will be short. 

Chairman MANZULLO. Go ahead. Both of you ask questions in 

whatever order you want. Felix, you would be next, but you were 

here way at the beginning, so however you want to do it. 

Mr. GRUCCI. With deference to the senior Member, I will——

Mrs. JONES. Oh, I love to hear that. It has taken me a long time 

to be more senior than somebody on this Committee. 
31

Chairman MANZULLO. With only a year on the job, you have to 

be more senior now. 

Mrs. JONES. Thanks, Mr. Grucci. I will be brief. 

What I would like to do is give Mr. Arth an opportunity to make 

any other commentary since he came all the way here from the 

City of Cleveland with regard to the COSE proposal. 

Let me ask you, and then you can talk about whatever else you 

would like to. I will restrict comments to three minutes. That way 

it will give you a chance. 

Can you assess your increased costs or your annual increased 

costs for the plan that you provide for your employees, sir? 

Mr. ARTH. Do you mean for this coming year, ma’am? 

Mrs. JONES. Yes. Generally, what is the average increase? 

Mr. ARTH. Well, actually during the 1990s we had a relatively 

stable period. We had a couple years with increases as low as two 

percent or thereabouts. Last year, as I say, we ended up settling 

at 12 percent through plan changes. 

Those options are gone this year, and we are expecting a very 

sizeable increase. I would guess 20 percent or higher. It is going 

to be a real challenge for me in terms of how much of that can the 

company pick up, and we are obviously going to have to look at additional cost sharing with our employees on that. 

Mrs. JONES. Make a suggestion before a panel of Congress with 

regard to small businesses as to what we could do to help you bear 

that 20 percent increase. 

Mr. ARTH. Our group has access to all the data regarding utilization. We know where all the dollars are going. If we want to get 

control on health care costs, we have to control utilization—hospitals, drugs and so forth. 

As I said earlier, and I will not beat this to death, one of the 

problems is other people’s money. That is part of the reason we 

pushed the MSAs because it gets the consumer of health care more 

involved with paying for what they are getting. We think there will 

be better choices. I will not beat that further at this point. 

Chairman MANZULLO. Mr. Grucci. 

Mr. GRUCCI. Thank you, Mr. Chairman. I do have an opening 

statement, and I will ask if I could submit it and it be made part 

of the record. 

Chairman MANZULLO. It will be made part of the record. 

Mr. GRUCCI. Ms. Lehnhard, the question that I have I will get 

right to. In New York state we have over three million people who 

are uninsured. We have health care providers that are evacuating 

out of counties because of some of the things that you mentioned 

earlier—reimbursement rates, et cetera. Blue Cross was not one of 

them. 

As a result of the increase in customer base that it got, it also 

raised rates considerably. I was questioning why with the increase 

in new enrollees coming from other health care plans would there 

be a need to raise rates in some instances as much as 40 percent? 

If you do not believe that the health care plans and the medical 

savings associations are the right way to go, seeing that what we 

currently have in place is costing itself out of the marketplace and 

out of the reach of small businesses and employees, what would 

your suggestion be to fix the problem? 
32

Ms. LEHNHARD. Let me address the increase in cost first. Now, 

I mentioned this 16 percent increase in hospital costs, which is 

enormous. That is the bulk of our spending. What you have to do 

is not only catch up for those unanticipated increases; you have to 

collect money for the future to build up your reserves because your 

reserves are going down faster. 

Also, in a small group market even though you have a giant pool, 

if you have a big employer he is going to cover everybody. When 

you get to the small group market you are going to have employers 

that do not offer coverage unless their employees are really sick. 

When you get to the individual market, you have the worst case 

that people only buy insurance when they really need it. 

As you move down that continuum—large group, small group, individual—you have sicker and sicker people, so when health care 

costs go up you multiply the effect because you have more people 

using health care costs in a small group pool as compared to the 

large group pool. 

Chairman MANZULLO. We are out of time. I know you did not finish your answer. I am very much interested in it. If you want to 

put that in writing and give it to us, we are very much interested 

in it. 

We have to run off to a vote. The Committee hearing is adjourned. 

[Whereupon, at 11:40 a.m. the Committee was adjourned.]
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