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32–331—PDF 2006

S. HRG. 109–803

HEALTH CARE COVERAGE FOR SMALL

BUSINESSES: CHALLENGES AND OPPORTUNITIES

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

APRIL 6, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

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(III)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 1

Snowe, Hon. Olympia J., a U.S. Senator from Maine .......................................... 8

Lincoln, Hon. Blanche, a U.S. Senator from Arkansas ........................................ 10

WITNESSES

Durbin, Hon. Richard, a U.S. Senator from Illinois ............................................. 3

DeMint, Hon. Jim, a U.S. Senator from South Carolina ...................................... 5

Rossmann, Joe, vice president, Associated Builders and Contractors, Arlington, VA .................................................................................................................. 13

Nichols, Len, PhD, director, Health Policy Program, New America Foundation, Washington, DC ........................................................................................... 16

McCracken, Todd, president, National Small Business Association, Washington, DC ............................................................................................................. 18

Chollet, Deborah, PhD, senior fellow, Mathematica Policy Research, Washington, DC ............................................................................................................. 20

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 49

Chollet, Deborah, PhD:

Testimony .......................................................................................................... 20

Prepared statement .......................................................................................... 52

Responses to questions from committee members ......................................... 61

DeMint, Hon. Jim:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 71

Durbin, Hon. Richard:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 74

Grassley, Hon. Charles E.:

Prepared statement .......................................................................................... 79

Lincoln, Hon. Blanche:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 80

Letter from:

Beebe, Mike, Attorney General, State of Arkansas, dated March 20,

2006 ......................................................................................................... 82

Julie Benafield Bowman, Commissioner, Arkansas Insurance Department, dated April 5, 2006 ..................................................................... 83

McCracken, Todd:

Testimony .......................................................................................................... 18

Prepared statement .......................................................................................... 87

Responses to questions from committee members ......................................... 98

Nichols, Len, PhD:

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 103

Responses to questions from committee members ......................................... 115

Page

IV

Rossmann, Joe:

Testimony .......................................................................................................... 13

Prepared statement .......................................................................................... 120

Responses to questions from committee members ......................................... 132

Smith, Hon. Gordon:

Prepared statement .......................................................................................... 137

Snowe, Hon. Olympia J.:

Opening statement ........................................................................................... 8

Prepared statement .......................................................................................... 139

Letter from GAO dated October 13, 2005 ....................................................... 142

Thomas, Hon. Craig:

Prepared statement .......................................................................................... 147

COMMUNICATION

Coalition to Protect Access to Affordable Health Insurance ................................ 149

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HEALTH CARE COVERAGE FOR SMALL BUSINESSES: CHALLENGES AND OPPORTUNITIES

THURSDAY, APRIL 6, 2006

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:40 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Hatch, Snowe, Thomas, Baucus, Bingaman, Lincoln, and Wyden.

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. The hearing will come to order.

The Chairman is temporarily detained, and we will commence in

his absence. He should be here any minute now. Just for the sake

of efficiency, I think it would make sense for us to keep moving.

I know that the Chairman would want that, so let us go ahead and

proceed.

He will certainly have a statement when he arrives. I have one

that I will give now, and then we will just certainly defer to the

Chairman when he does arrive.

This hearing is partly as a consequence of the Senator from Arkansas, who asked for this hearing, and I thank her for that.

Today we discuss ideas to address the health insurance crisis facing small businesses, and, as we do this, we will see that what

Lord Tennyson wrote of men and women is equally true of people

covered by insurance. He wrote, ‘‘They rise or sink together.’’

America has a unique, fragmented system of health coverage.

America is the only industrialized country without universal health

insurance. Most Americans get their health insurance through

their work.

Our employment-based system is a relic of World War II. Wartime wage controls prevented employers from competing for new

workers by raising salaries, so instead employers competed for

workers by offering health insurance. For the 60 years since, employer-based insurance has dominated Americans’ health coverage.

But now the employer-based system is struggling. Today, only 60

percent of workers are offered coverage by their employers. That is

down from 68 percent just 5 years ago. And, like Medicare and

Medicaid, the employer-based health system is struggling under

rising health costs and an aging America.

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This is particularly true of small employers. Administrative costs

are a greater burden for small businesses than for big businesses.

Small employers run a greater risk of being priced out of affordable

coverage when even one worker falls ill.

In Montana, only about 40 percent of the smallest businesses are

able to offer coverage to their workers. These small businesses simply do not have the wherewithal to insure their employees that

large corporations do.

At some point, God willing, we as a society will deal with health

care costs and the uninsured. We spend twice what many industrialized countries do on health care, and yet our outcomes are worse.

One in six Americans has no health insurance. Our system simply cannot hold out in its current form over the long haul, and I

suspect we will have to make some significant changes.

The current system is unfair and it is inefficient, and it is hobbling American competitiveness. American companies face a competitive disadvantage relative to firms whose governments insure

their employees. Moreover, America suffers lost productivity when

workers miss days because they are sick.

So what do we do about all this? Creating a new national pool

for small employers like the Federal Employees Health Benefit

Plan sounds like a good place to start.

It would provide a big pool for spreading risk among lots of small

businesses and the self-employed. It would get more of us in one

pool together. And, if it is good enough for members of Congress,

it is probably good enough for small business and other Americans.

It is a privately run system that benefits from free market forces

to encourage better value for enrollees.

Tax credits or other subsidies are also important. Pooling can

lower administrative costs and improve the quality of coverage

small businesses can buy, but that may not lower costs enough to

make coverage affordable. Studies have shown some small businesses would need a dramatic reduction in costs to join.

Targeting subsidies to help the neediest families also seems like

a good idea. Nearly a quarter of the uninsured are in families making less than $25,000 a year. One might ask, why not help those

most in need first?

Another good place to start would be not making the problem

worse. In other words, we should ‘‘first, do no harm.’’ Unfortunately, some of the bills before us in Congress may well do more

harm than good.

As we consider reforms, we must let the rising tide lift all boats.

Insurers should not be allowed to cherry-pick out of the healthy

and leave the less-healthy, older workers behind. We must ensure

that any final proposal does not undermine protections for consumers and States’ ability to oversee insurers.

Finally, I am concerned that many proposals, like health savings

accounts, follow the ownership of society model of putting more risk

on individuals to solve society’s problems. The idea is that society

will benefit if we only give individuals more stake in their future.

To a large extent, I agree with this philosophy. I am a free trader. I believe in the ethic of individualism. The invisible hand can

produce remarkable results. But I am not sure the individualistic

ethic can be cleanly extended to health insurance. The nature of

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health insurance is shared risk. We all pay into the pool, and we

benefit from the pool when we need help.

I am concerned, generally, that the AHP concept, like health savings accounts, will lead to the healthiest individuals leaving the

pool. I am concerned that this phenomenon will leave the sicker,

older, and least able to pay behind.

In the end, what Tennyson said was good insurance policy. I am

not sure he was thinking about insurance when he wrote this,

when he said, ‘‘We rise or sink together.’’ Let us seek a solution for

small business health care needs that does not simply move the

healthy out of the pool. Let us find ways to aid small business that

does not sink the sicker and the older among us. Let us all try to

rise together.

I might say, Mr. Chairman, your timing is perfect. I have just

finished my statement, if you want to give yours.

The CHAIRMAN. No. I am going to put mine in the record.

[The prepared statement of Senator Grassley appears in the appendix.]

Senator BAUCUS. All right.

The CHAIRMAN. Thanks, all of you, for being here on time and

getting this meeting started.

Senator Durbin, would you start out, please?

STATEMENT OF HON. RICHARD DURBIN,

A U.S. SENATOR FROM ILLINOIS

Senator DURBIN. Mr. Chairman, thank you, first, for giving me

this opportunity. I know this is a busy committee. I will make my

comments as brief and direct as I can.

Let me also thank Senator Baucus for his opening statement. I

really think you summarized the challenge that faces us.

One thing I have learned in the time I have served in the Senate,

when you have a good idea, it is good to have an ally on the Senate

Finance Committee. The first ally that I have is Senator Blanche

Lambert Lincoln. She has been terrific.

We have stood together to come up with an alternative—at least

an alternative—for many millions across America who have no

health insurance. I thank Senator Baucus and others who have expressed support for our concept.

Travel across your State and ask employers, large and small, the

biggest challenge they face. I have found, year in and year out, it

is always the same answer: the cost of health insurance, whether

they can offer it, how much it costs, whether the owners of the

business even have health insurance.

Then walk across the street from that favorite business to your

favorite labor hall and ask the labor union, what is your big problem today? The cost of health insurance. We just got a dollar an

hour more for next year’s contract. Eighty cents is going for health

insurance, and it means less coverage. They are upset and frustrated. We know the millions of uninsured Americans grow by the

year.

So we have to ask ourselves, why have we not spoken to this

issue? I am glad this hearing is taking place. I thank Senator Lincoln for bringing us together. Why have we not done anything

major about health insurance in the years that I have served on

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Capitol Hill? I think it is a failure of vision, it is a failure of leadership. We are not just facing a challenge to solve a difficult problem

when we take up this issue. We are facing a challenge to our relevance to America.

You wonder why people are not engaged in this political process?

If we can ignore the most important issue in their lives day in and

day out, is it any wonder they have given up on us? Well, we have

to accept this challenge, as tough as it may be. Senator Baucus has

outlined the cost of health insurance which small businesses and

others face, and that is a fact.

But I think we all come together, agreeing on fundamental principles. We should make premiums more affordable by giving small

businesses a way to pool their purchasing power. We should encourage competition among health plans on the basis of quality, efficiency, and value, and we should help reduce the administrative

and transaction costs in the small group market. It is the details

that will make or break the effectiveness of any of these approaches.

I am glad that Senator Baucus reminded us of the Hippocratic

oath: ‘‘First, do no harm.’’ Some of the bills before us today, I am

afraid, will do harm. If the answer to health insurance is to lower

the bar to reduce coverage for Americans across the board, we certainly have not answered the challenge, as far as I am concerned.

If the answer to providing more health insurance is to give a

nominal health insurance policy of little or no value when you really need it, then we have not done much to solve the problem.

Now, Senator Blanche Lambert Lincoln and I have produced a

plan based on the Federal Employees Health Benefit Program, and

it really looks at the fact that 8 million Federal employees and

their families currently use the private market and come up with

a pretty good level of protection.

I think anybody in my State would gladly trade their health insurance for mine any day; my wife and I have an open enrollment

period as Federal employees every year, and in Illinois choose from

nine different private insurance plans the one that is right for our

family.

Across the United States, 278 different private insurance plans

offer these opportunities to Federal employees. If this model works

so well for 8 million Federal employees coast-to-coast in totally different circumstances, why would it not work for small businesses?

It is that question which drove Senator Lincoln and I to the point

of putting together this legislation, legislation which I think is very

basic.

We know this is good insurance. We count on it for our families.

But we believe every American family deserves health insurance as

good as the insurance that members of Congress enjoy today.

Now, there is a question that will come before this committee:

how will small businesses with limited means pay for it? How can

families of limited means pay for it? That is where this committee

will have to accept a challenge. If we do not prepare some type of

tax incentive for these businesses and families, they may not be

able to pay for it.

Is it worth the cost? Would it be worth the cost to say that, once

and for all, every American finally has health insurance? I think

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it would be. The State of Massachusetts recently moved on their

own initiative.

My State, through Governor Blagojevich, is offering health insurance for all the children in our State. States are showing initiative

on this, and we need to join them in this effort.

Now, the choice we have is stark. If we do not offer tax help to

businesses and families that need health insurance, they will either

go without or have health insurance which protects them in name

only.

I commend to my colleagues the Small Employees Health Benefit

Program that Senator Lincoln and I have put together. You will

understand it quickly, because it is the same health insurance that

protects you as a member of Congress.

We are honored that so many organizations have endorsed this

effort, including the American Medical Association, the American

College of Family Physicians, and numerous other small business

and other consumer groups. So I hope that, when the committee

considers this issue, they will consider the Lincoln-Durbin bill, as

we call it, before the Senate Finance Committee.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator DeMint? Thank you for coming, both of you.

STATEMENT OF HON. JIM DeMINT,

A U.S. SENATOR FROM SOUTH CAROLINA

Senator DEMINT. Well, thank you, Mr. Chairman. I am honored

to be here with this group today to talk about small business

health insurance.

I had a small business for about 15 years, with from 5 to 15 employees. Most people in this country are employed in smaller businesses. Every year we sat down and we would get our increase notice from our insurance company and try to figure out whether to

change or to pay more.

And you know when you change, you have preexisting conditions.

It becomes a huge hassle, with very little leverage in negotiating

for prices for insurance. So I know the pain of this, so I am very

engaged in this issue and have been since I’ve been in Congress.

There are different ways to go with this. And I appreciate the

thinking from my colleague, Senator Durbin, but I would just propose an alternative, because a lot of my clients were small businesses like myself and also did a lot of work with hospitals and

physicians, and I am fairly familiar with how the health care reimbursement system works.

Folks, I have to tell you, if you are honest about, really, why we

have many of the problems we do today, it comes back to government. Government is not the solution.

You find the tax incentives that we created, as Senator Baucus

referenced, were for companies, not for individuals. We have made

it very hard for individuals to have health insurance policies that

they could afford, own, and keep.

Even we here in the Senate, once we leave, we cannot buy a

health insurance policy here that we can take with us. We will be

uninsured when we leave. That model makes no sense in an economy where people change jobs regularly.

6

The government set up this elaborate coding/billing fixed price

system for Medicare, which Medicaid has adopted, and so has the

private market, so that the third party payor system now is incredibly expensive to administer. Over half of the staff in every physician office and every hospital is administration. They are not

health care.

I get 10 or 15 letters a week or more, sometimes a day, from

Blue Cross, about, I went to the doctor, something has been paid,

something needs to be paid. The administration is incredibly expensive, and there are better ideas on how to make health care

work, and we can make sure that everyone is covered.

If we look at what was just done in Massachusetts, it is something we need to watch because it is universal coverage. The State

has figured out that it is less expensive for them to pay for private

health policies for individuals than to try to create a government

administration system that covers everyone, because the model we

are talking about for our Federal employees plan is different.

We know how many are here, we can rate it. The first thing I

would have done as a company is turn it over to the government.

Folks, that is the last place we need to go.

Let me just talk about an alternative in hopes that you might

give it a chance. Health savings accounts are a new idea, and there

is a lot of information going back and forth about who is buying

them and not buying them, and I want to talk about that, too.

But what it does is, it turns patients into shoppers. It creates

millions of people out there putting pressure on physicians for better information, more quality information. And it does not reduce

coverage, it, in fact, increases coverage. We have seen it with many

employers.

So I, first, before we get into a health savings account, want to

encourage those of you on this committee, particularly the Chairman, who are dealing with the pension conference bill, we have a

bipartisan bill—Ken Salazar introduced it with me—to allow employees to roll over $500 of a flexible spending account.

This is an opportunity that helps individuals cover things that

are not covered by insurance. And, Mr. Chairman, we have the opportunity in this pension conference to have flexible spending accounts as a better tool for individuals to use to pay for health care.

But I think there are two ways that we can make health savings

accounts work better. First, I think we need to confront the criticism that only the rich and the healthy will buy health savings accounts or that we will leave all the sick in plans and the healthy

will not buy insurance.

Health savings accounts are the first insurance policies that encourage the healthy to actually buy them because you get to keep

what you do not spend, and it grows and it rolls over and it begins

the process of access to health care that is not covered by insurance.

You do not have to mandate an insurance company cover mental

health if they have several thousand dollars a year that they can

use for that, or any kind of chronic problem. We are finding people

have more flexibility in covering things that insurance does not

cover at all.

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The average HSA owner—and keep in mind, these have just

been around a couple of years—is 47 years old with one or more

children. Almost a quarter of all health savings account purchasers

have incomes below $35,000, and one-third of the individuals and

families were previously uninsured. It is giving people access to the

market.

But there are two things that we could do to health savings accounts that could make them work better that would cost very little for our country.

One, under current law, health savings accounts can be used to

pay for the out-of-pocket expenses by employees, but they cannot

use a health savings account to pay for a premium.

If we will just allow people to pay for a health savings account

premium from their health savings account, we could have many

more Americans insured. As a small employer, I could tell you how

this could work.

Many of us cannot administer a health insurance plan, but if we

could just put money in a health savings account that the employee

could use to pay for a premium, either one that I offered or one

that is offered through an association or some other model, then

again, we would have many more people insured, and more employers would contribute if they did not have to administer a

health plan.

Another thing that we could do, which is a bill that we introduced last year with some folks from the House, is we call it the

Health Care Choice Act. The State-regulated insurance industry

has set up a network of monopolies, for the most part, but there

are many States where different insurance products are less expensive. They are all certified. They all come under the quality control

of a different State.

But this Choice Act would simply allow individuals, through a

local insurance broker, the Internet, or over the phone, to purchase

a health insurance policy from anywhere in the country.

If they could do this, particularly out of their health savings accounts, we would open up the market for individuals to buy health

insurance that they could afford, that they could own, and that

they could keep. That is the model that I am encouraging today.

I think, before we give in and turn this over to the government,

we first of all should have a clear evaluation. What the government

is doing now is not working. Fewer and fewer physicians are even

taking Medicare and Medicaid patients. If we think we can fix the

price and ratchet down the price and physicians will continue to

see patients, it is not going to happen.

But think of what happened with laser eye surgery, my colleagues, here. When individuals started shopping for it, the price

went down, the quality went up, the physicians made more money.

I was in an outpatient surgery center/hospital in South Carolina

2 weeks ago and I said, how many of these procedures that you do

could be done for less than $5,000 if you actually got paid for it?

They said, over 90 percent.

I believe, within a few years, that Americans could be buying

most of their health care out of health savings accounts, and we

would drastically reduce the price and the complexity of our health

care system.

8

Our dollars could go to pay for health care rather than administration, and you would see insurance be used for insurance. We

need to push what we are spending for health care up to where we

need it to be spent and not encouraging people to go to the physician every time they have the sniffles.

So, again, Mr. Chairman, we could significantly improve the

health care system in this country while we are debating these

other plans if we just allow roll-over for flexible spending accounts,

if we allow health savings accounts to be used to pay for a premium, and if we allow individuals to buy health insurance from

anywhere in the country.

Thank you, Mr. Chairman.

The CHAIRMAN. I would like to make some announcements. I

want to announce a couple of things here. We are going to have

deference to two of our members who have put a bill in, Senator

Snowe and Senator Lincoln, to make short statements on their bill

at this point. Then we will call the panel.

I may not be able to come back, so Senator Hatch will chair the

meeting in my absence. If I come back, then obviously I will be

back, but if I cannot come back, Senator Hatch will chair that.

So I would like to have Senator Snowe and Senator Lincoln do

that before we go vote, if we can squeeze those in. If we cannot,

then you will have to do yours after the vote. The voting has started.

Senator THOMAS. Could we file our statements if we are not able

to come back?

The CHAIRMAN. Yes, please. Any statements will be submitted for

the record. Yes.

[The prepared statement of Senator Thomas appears in the appendix.]

Senator Snowe?

Senator WYDEN. Just a quick question. Are we keeping the hearing going, so we can go and vote and come back?

The CHAIRMAN. Yes. Yes.

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE,

A U.S. SENATOR FROM MAINE

Senator SNOWE. Thank you, Mr. Chairman. I will be brief and include my entire statement in the record.

I do think it is critical to have this hearing today, and I want

to commend you for your leadership in sponsoring this hearing

today on behalf of small businesses and accessing affordable health

insurance for themselves and for their employees. We know that

the small business health insurance crisis is real. It is an undue

burden on small businesses and their employees and families

across this country.

This is not a crisis that developed overnight. It has been evolving

over many years, where now health insurance costs are the foremost concern among small business owners in my State, that is a

small business State, indisputably, and across this country. We

have 45 to 46 million uninsured Americans, and 60 percent or more

could be benefitted by what has been known as small business

health insurance plans.

9

I have introduced legislation, and I know that Chairman Enzi

and his committee have recently reported a bill. There have been

other options available.

Suffice it to say that study after study, statistic after statistic

has confirmed beyond a doubt that fewer and fewer small businesses are able to offer health insurance for their employees, and

little has been done to alleviate this problem.

So, Mr. Chairman, the time for talking has long since passed. I

do not think that we need to stall this issue any longer in the entire Congress. For the last few years in the House of Representatives, they have passed legislation concerning association health

plans. I have introduced similar legislation here in the U.S. Senate,

and I think the time has come for us to take action.

So, I am pleased that you are holding this hearing today, because

I think it does illustrate and underscore this crisis that small business owners are facing across this country.

Regrettably, so much has been said in describing what is known

as association health plans, or small business health insurance

plans.

Let me tell you what it is not. It is not about cherry-picking or

adverse selection. It is about offering plans to small businesses

across this country and being able to join bona fide associations

where they can offer competitive, affordable plans to small business

owners in this country who can ill afford to pay for the skyrocketing premiums that they have experienced over the last 5

years, and in particular, I know in my State where premiums have

increased from 30 to 50 percent.

So they cannot provide this important benefit to their employees.

Association health plans will afford small business owners access

to more competitive health insurance plans.

They will be able to offer it to all their employees. Cherry-picking

and adverse selection would be prohibited. Also, it would be tailored to the needs of the membership and those who want to join

these association health plans.

We have a number of provisions in the bill that will protect the

type of plans that are being offered, protect the benefits for the employees, but most importantly it will give small business owners an

option that they have not had in the past.

What has benefitted large corporations and unions has not been

available to small business owners, so this is leveling the playing

field with respect to this kind of option that would be available.

I hope we can reconcile the differences, Mr. Chairman. I know

that Chairman Enzi has a modification of the bill I have introduced. I think it moves in the right direction. I think I do have

some concerns with some of the issues, with respect to the fact that

self-insured options would not be available, or having more harmonized national rating standards.

I think we have to discuss those issues, but I think it moves in

the right direction to get us to where we need to go without creating a government-run program or a confusing, complicated bureaucracy that will not well serve the interests of small business

owners across this country.

This will not be costly. In fact, it will not cost anything, for all

practical purposes. But it will make an option and a tool available

10

to small business owners that is absolutely long overdue and will

not create a new Federal bureaucracy to design this program.

It will already build into a system that protects the employees,

it preserves options for the small business owners, and gives them

a mechanism where they have no options now.

In small group markets, this is a crisis. I know in my State, and

again, in many States across this country, we have seen a consolidation by the largest private insurers in this country.

That was illustrated and buttressed by a Government Accountability Office report that I requested that was recently released

that indicated that we are seeing more market consolidation by

health insurance companies, and that is adversely affecting small

group markets, like my State, where there is very little, if no, competition because the health insurance plans are offered by few insurers.

So that is why this legislation is so vitally necessary, and that

is why I appreciate the fact that you are holding this hearing today

to illustrate the problems that small business owners are confronting.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Snowe.

[The prepared statement of Senator Snowe appears in the appendix.]

The CHAIRMAN. Senator Lincoln?

OPENING STATEMENT OF HON. BLANCHE LINCOLN,

A U.S. SENATOR FROM ARKANSAS

Senator LINCOLN. Well, thank you, Mr. Chairman. I want to compliment my colleague from Maine. Senator Snowe, as Chairman of

the Small Business Committee, has done a tremendous job in focusing on this issue and recognizing the challenges that small business faces and putting the kind of energy and devoting it to this

issue, and I am grateful to her because it is a critical issue before

this country.

And certainly with her leadership, the examples that States like

Maine set in the programs that they put forward are critically important to our debate. So, I compliment her.

And, Mr. Chairman, I just want you to know how grateful I am

to you, a man of his word, without a doubt. But it has been enormously important to me, this issue. It has been something I have

worked on for several years, and I am so grateful to you for holding

this hearing today. And in your usual form, not only do you make

good on your word and you have a hearing, but you do it during

National Small Business Week, which is critical.

As we focus on National Small Business Week, we see that the

Chairman is looking at one of their most challenging of issues, and

here we are in the committee looking towards that. So, I appreciate

it, Mr. Chairman. Thank you so much.

Early this morning, or I guess it was earlier this week, I called

and made an appointment with the pediatrician for early this

morning so I could get my son to the pediatrician’s office and get

to work in time to be here.

When I left this morning, I saw the irony of it, because I walked

out, and the woman in Bookkeeping said, thank you, Ms. Lincoln,

11

we will file this on your insurance. And I thought to myself, how

grateful, how blessed I am to be covered by insurance, and my children to be covered by insurance.

And then as I got in the car, I remembered why I was so tired:

because I had stayed up last night putting things in my garage for

a yard sale that our PTA is having to raise money for the clinic,

the free clinic, to provide free health care to the children in our

school who are uninsured.

It made so much sense to me why this issue has been so important to me over the past several years, and certainly why it is important to the millions of Americans who are hard-working, day in

and day out, and yet still uninsured. So, Mr. Chairman, again,

thank you.

The small business health care crisis is, undoubtedly, the number-one issue I hear about when I am traveling in Arkansas, and

I know why because of my own personal experiences.

I have been working very hard on this solution, to come up with

something that makes sense, both fiscally responsible, but also

something that is going to work and that is going to get at the

heart of the problem and do it quickly enough that we can get

enough of these uninsured into insurance programs where they can

actually have good choice at lower cost. It is not a government program. It is a program that utilizes the private sector, the best

things that both of us have to give, the private sector and government.

Two years ago, I introduced legislation with Senator Durbin

called the Small Employers Health Benefit Program, and it came

about because we were sitting together with staff, myself and the

staff, talking and thinking, what in the world can we do about this?

I said, wouldn’t it be wonderful if we could offer all of these hardworking Americans who are uninsured the same thing that we

have? Then as we sat there and talked we realized, it is not that

impossible.

It is not that impossible to duplicate what the Federal Government found to be its clearest and most cost-effective solution to insuring the 8 million Federal employees across this country.

It was to say, let us take the most productive and positive things

about the private marketplace and let us look at how government

can help steer those products in a way that we provide consumers

the best product possible at the lowest cost. So what did we do? We

fashioned it after the Federal Employees Health Benefit Program.

I believe that the bill we have put forward takes a moderate and

balanced approach that combines the best of what government can

do with the best of what the private sector can do, while preserving

important State laws that protect our consumers.

Our States have done tremendous work in trying to make sure

that they provide what consumers need and want. Like the Federal

plan, our program does not promote government-run health care,

but harnesses the power of market competition to bring down

health insurance costs using a proven government negotiator.

By pooling small businesses across America into one risk and

purchasing pool, similar to the same one we belong to, our new

SEHBP program will allow employers to reap the benefit of group

purchasing power and streamlined administrative costs, as well as

12

access to more plan choices, exactly what Senator DeMint was talking about, not government-run, but something that is done by the

private sector in order to bring down costs.

This hearing is an excellent opportunity to discuss the various

proposals to help small businesses purchase quality health insurance for their employees and help more working families become

insured.

As we continue this debate, I believe that my colleagues will

come to a very similar conclusion that I have, and that is: we can

achieve our goal in helping to reduce medical costs and provide better care for a larger number of uninsured Americans by allowing

them access to the very model that we enjoy ourselves, Mr. Chairman.

There are nearly 46 million Americans currently without health

insurance, including 456,000 Arkansans whom I have a tremendous responsibility to. Small businesses are our number-one source

of jobs in Arkansas, yet only 26 percent of businesses with fewer

than 50 employees offer health insurance coverage. Workers at

these businesses are most likely to be uninsured.

In fact, 20 percent of the working-aged adults are uninsured in

Arkansas. Those who lack health insurance do not get access to

timely and appropriate health care.

All that does, Mr. Chairman, is cost us more in the long run, because as they become less healthy they are going to be in emergency rooms, they are going to get out of work and get onto Medicaid, or as they continue through 15 or 20 years of not getting

health care, when they do hit Medicare age they are going to be

a more costly Medicare candidate.

We have a tremendous job before us, Mr. Chairman. Without a

doubt, I know that you can provide the leadership to help us focus

on how we tackle this issue and how we do it in a common-sense

way that is fiscally responsible, where government can make an investment. It is not a large investment, but over 10 years it is less

than a third of what the HSAs would cost.

We could make that investment, along with other products that

would be helpful to Americans, whether it is HSAs or others, but

something that will get at the bulk of these low-income working individuals who are in small businesses who are the predominant

portion of the uninsured, and provide them a product that will really make a sizable difference in their lives.

Mr. Chairman, I appreciate the opportunity that you have given

us today, and I will ask unanimous consent to include the remainder of my opening statement in the record.

I look forward to our ability to not just start this discussion

today, but continue it, because I know from my experience and my

personal feelings over the last 3 years I enjoy incredible coverage

as a member of Congress, as a Federal employee. I look out at the

people I go to school with, the people I see in my communities, and

the people who continue to ask the questions, and I know we can

do better in what we provide to those working individuals who are

the fabric of this country. I know that, through your leadership and

the work in this committee, we can make that happen. So I appreciate it, I thank you, and I look forward to the discussion.

13

[The prepared statement of Senator Lincoln appears in the appendix.]

The CHAIRMAN. We will be in recess while the three of us go

vote, but I believe that Senator Hatch will re-start the hearing. I

believe he is on his way back. So, I would ask the audience not to

venture far from the room.

[Whereupon, at 11:16 a.m., the hearing was recessed. The committee reconvened at 11:21 a.m.]

Senator HATCH. We are going to now turn to Panel 2.

Let me welcome our second panel here. We will first hear from

Mr. Joseph Rossmann, who is the vice president of Associated

Builders and Contractors in Arlington, VA. We will then hear from

Dr. Len Nichols, the director of the Health Policy Program at the

New America Foundation.

Next, Mr. Todd McCracken, president of the National Small

Business Association in Washington, DC, will testify. Finally,

Deborah Chollet from Mathematica Policy Research will share her

testimony. I think I am pronouncing that fairly close to right.

Dr. CHOLLET. Yes.

Senator HATCH. We are happy to have all four of you here. We

appreciate your willingness to come. These are very important

issues to everybody on this committee, and we want to find some

reasonable ways of solving them, if we can.

So we will turn to you, first, Mr. Rossmann, and we will just go

across the table.

STATEMENT OF JOE ROSSMANN, VICE PRESIDENT,

ASSOCIATED BUILDERS AND CONTRACTORS, ARLINGTON, VA

Mr. ROSSMANN. Thank you, Senator Hatch and members of the

Finance Committee. Thank you for holding this hearing to address

the problems that small businesses are facing in providing quality

health insurance coverage for themselves and their employees.

I am testifying before you today on behalf of the Small Business

Health Plan Coalition, which consists of 180 national and regional

organizations. The coalition represents over 12 million employers

and 80 million small business workers throughout the United

States.

It goes without saying that small employers have their backs

against the wall, struggling to maintain a business, while at the

same time being able to provide quality health insurance coverage

to their employees and families.

The problem is exacerbated because they must mitigate the effects of annual double-digit rate increases that have hit them over

the last 4 to 5 years.

At the same time, we have seen major insurance companies consolidating for what they call increased efficiencies and economies of

scale, telling us that bigger insurance companies would have more

clout to negotiate lower prices from hospitals, doctors, and drug

companies.

According to an article in the Washington Post, this just has not

happened. Instead, our reward seems to be the creation of local and

national oligopolies, characterized by less competition, less choice,

higher prices, and higher returns to insurance company stockholders.

14

The Post went on to report that James Robinson, a professor in

Health Economics, calculates that the top three health insurance

companies control two-thirds or more of the business in all but 14

States.

Robinson juxtaposes those numbers with the 2000 to 2003 financial results from five top national firms, and he shows a decline in

the percent of each premium dollar that goes to pay medical

claims, along with a stronger trend towards higher premiums,

higher profits, and higher stock prices.

This appears to have been accomplished on the backs of small

employers who have borne the brunt of double-digit rate increases

over the past 5 years.

The bottom line, to me, seems to be that we need to create more

competition in the health insurance marketplace and provide more

options for small employers, not fewer.

I have been involved with Associated Builders and Contractors’

health plan for over 18 years. During that time, I have been the

vice president of Fringe Benefits for ABC. I have worked for trade

associations, exclusively with their health plans, for over 28 years.

I can tell you from experience that health plans through associations work for small employers.

ABC established its insurance trust back in 1957 by five contractors who could not buy insurance coverage because they were just

too small. Since then, we have enjoyed a 48-year history of providing health and other welfare benefits to contractor members and

their employees.

During the first 43 years, ABC Insurance Trust had only two different insurance carriers. That speaks very highly of the stability

of our program, and also the confidence that the insurance companies had in ABC, and in our plan.

ABC is also a perfect example of the savings that can be made

available to small employers. The total cost for the ABC health program varied from 13.5 percent to 16 percent, and those numbers

included the insurance company expenses.

On the other hand, the sales, the administration expense, and

profits of insurance carriers selling in the small group market

today by one of the largest insurance providers is targeted at 35

percent.

The difference between their number and ours is 19 to 22.5 percent in premium savings, which could go directly to small employers this year, and in future years.

In 1999, ABC’s insurance carrier told us that they no longer

wanted to stay in the business of providing a group plan under the

master trust concept. This was understandable because, in the previous 6 years to that, we saw our program being carved to pieces

as the insurance carrier pulled out of one State after another because of the States’ small group insurance legislative activity, pulling out of States like New York, Kentucky and Colorado because

it became almost impossible for them to comply with the new State

laws and continue to provide the master policy approach under

ABC’s insurance trust.

ABC had a strong and viable program, one which was gradually

dismantled piece by piece by well-intentioned insurance reform. We

talked to over 50 different insurance carries to take over the ABC

15

trust, which at that point was about $44 million in premiums, and

there were no takers.

No insurance company wanted to be involved with our program,

with all the State insurance requirements as they exist today. They

are just too inconsistent and too piecemeal.

ABC even looked at the concept of going to a self-insured approach, but we have determined that the expense involved in complying with each and every State’s separate filings would have actually cost more in the long run than it would have saved our

members.

ABC is kind of like a poster child for small business health

plans. We provided an affordable, comprehensive set of health insurance plans that were eventually eliminated because of the

changes at the State level. We succeeded as a health plan, but we

were legislated out of existence for our members.

Based on our history, we look forward to the passage of S. 1955

to bring new options back to our members, because it fosters competition and it is a model that works, and it is also a model that

does not have its hand out for a government subsidy.

S. 1955 is a bill which has been negotiated in good faith by representatives of the insurance industry, the NAIC, and the business

community through our coalition. It provides for fully insured plans

with State oversight of insurance companies and patient protections.

S. 1955 has three fundamentally important components. It provides the ability to pool all small employer members together for

experience rating purposes. It also provides for common rating

techniques which are consistent across State lines, a set of rating

techniques actually developed by NAIC, which are currently in use

in a majority of States.

Third, it provides for consistency in benefits and plan designs,

where small employers can select a high-option or Cadillac-style

plan, plus have other, lower-cost options available, all based on

actuarily developed rates, taking into consideration only the plan

design differences. All the plans are then pooled together into the

small business health plan for experience rating purposes and future rate development.

ABC’s Insurance Trust offered a fully insured health care plan

for over 43 years. We offered over 14 medical plans for members

to select from. The plans were comprehensive in that they covered

all licensed providers and any required benefits in our home State

of Virginia, and these same plans were provided to members in all

other States, even if that State had lower requirements.

Under this legislation, ABC Trust would take a similar approach.

The insurance trustees, working with the carrier, would make sure

that ABC provided coverage options stressing preventative care

and cost-effective treatment of medical conditions.

The goal is to provide comprehensive and affordable health insurance to our members. Small employers must compete with large

employers for their workforce. Because of this, small employers

want to offer the same, high-quality, comprehensive benefits that

large employers offer their employees today.

The ABC small business health plan would be on a level playing

field also with all insurance companies. We would simply be anVerDate 11-MAY-2000 15:06 Feb 26, 2007 Jkt 095484 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 32331.000 SFIN1 PsN: SFIN1
16

other health insurance option, if you will, for members, and we

would have to earn our members’ business by providing highquality coverage at a reasonable cost.

I am very excited about Senator Enzi’s bill, S. 1955, and the

choices it can make available to ABC members.

I appreciate this opportunity to testify before the committee on

an issue that is vitally important to our membership and small

business owners across the country. We look forward to continuing

a constructive dialogue on how to increase access to affordable

health care coverage for small business.

Thank you, Senator.

Senator HATCH. Well, thank you, Mr. Rossmann.

[The prepared statement of Mr. Rossmann appears in the appendix.]

Senator HATCH. Dr. Nichols, we will turn to you.

STATEMENT OF LEN NICHOLS, PhD, DIRECTOR, HEALTH POLICY PROGRAM, NEW AMERICA FOUNDATION, WASHINGTON,

DC

Dr. NICHOLS. Senator Hatch, thank you for having me. My name

is Len Nichols. I am the director of the Health Policy Program at

the New America Foundation. I have a longer statement I will submit for the record.

Senator HATCH. Without objection, we will place it in the record.

[The prepared statement of Dr. Nichols appears in the appendix.]

Dr. NICHOLS. I am honored to have been invited to offer my

thoughts as you consider how to make health insurance more affordable for more small employers and their workers, a goal I know

every member of this committee shares.

We all agree the fundamental issue here is that health care and

health insurance cost too much in this country. We also agree that

large employers and large groups have cost advantages over smaller employers in three main dimensions: administrative economies

of scale, risk pooling, and bargaining power vis-a`-vis insurers and

providers, as Mr. Rossmann just suggested.

Despite this general agreement, we have before us starkly different approaches to helping small employers in S. 2015, S. 1955,

or Durbin-Lincoln and Enzi-Nelson, as I will refer to them.

While sharing a common goal, they differ in technical details.

These details reflect profoundly different visions of what would be

most helpful to small employers, and indeed, to our health care

system as a whole.

Let me start with vision. Durbin-Lincoln manifests a vision of

having all small employers, including those with fewer than 100

workers, and all of the self-employed together in one large purchasing pool that could lower administrative costs to a minimum,

spread risk equitably and efficiently, and create the bargaining

power that can finally be used on behalf of small employers and

their working families to generate more affordable and sustainable

choices.

In addition, the vision of Durbin-Lincoln includes a commitment

to devote resources so that lower-wage workers and their employers can afford the health insurance that, today, is out of reach.

17

Finally, Durbin-Lincoln is forward-looking in the sense of laying

a foundation, both in the large, efficient purchasing pool and in the

courage to commit new resources to subsidizing health insurance,

a foundation for further coverage expansions and for building a

health care system that can deliver better value for the dollar in

response to purchasing power that could, and should, be wielded

wisely on behalf of all Americans, not just some of us.

Enzi-Nelson, by contrast, as well as the bill Senator DeMint was

promoting a few minutes ago, seems to look at the world as if all

small employers would have lower premiums somewhat magically

if markets were completely unregulated, with no benefit mandates

at all, with rating on health status permitted, and with no limits

on age, gender, group size, and geographic rating factors.

If this were all true, Senators, why did 48 States pass and keep

rating restrictions, and why have 50 States passed and kept various benefit mandates over the years?

The very fact that so much premium rate and benefit package

variation is allowed, and indeed encouraged, in the Enzi-Nelson approach and in Senator DeMint’s bill is prima facie evidence that

some premiums are expected to go up by someone, even as premiums for the healthiest small groups might come down, at least

in the short run. Thus, Enzi-Nelson conveys a vision that is manifestly about helping some at the expense of others.

Now, I suspect that the sponsors of these bills honestly believe

that health insurance is actually just like most other commodities,

say, for example, ice cream, in that market competition, properly

unleashed, will naturally limit variation in price and quality to

something far less than the nightmare scenarios which actuaries

have pointed out would be permitted under the bills.

Now, this is a debatable proposition, that health insurance is

close enough to ice cream to merit freedom from price and quality

regulation. But there is one obvious distortion in that world view,

in my considered opinion based on the research literature. That is

that sellers of ice cream always want to sell more to every new customer.

In health insurance, because the sick are expected to be so much

more expensive than the healthy, it can actually be profitable to

not sell to that customer on the margin.

Thus, it can be profitable to set prices for some people so high

they run away, or to offer benefit packages so lean that those with

chronic conditions may just as well save their own money and depend upon the kindness of strangers and the safety net.

So I fear the proponents of Enzi-Nelson vastly over-estimate the

disciplining power of unfettered market forces in voluntary health

insurance markets.

Wrapping up my statement on key technical details, DurbinLincoln will create more administrative efficiencies than EnziNelson because Durbin-Lincoln’s single pool will be so much larger

than the many association-specific pools of Enzi-Nelson. DurbinLincoln has subsidies that will pull in many more employers and

self-employed; Enzi-Nelson has no subsidies.

Durbin-Lincoln will create serious bargaining power that could

become a force for the value-enhancing efficiency in many local

markets around the country, whereas Enzi-Nelson is much more

18

about seeking lower premiums for some than about creating bargaining power for all.

Finally, let me say one word about the self-employed. DurbinLincoln welcomes them into the large national pool with everyone

else, in effect giving them the same treatment as other businesses,

giving them access to modified community rating rates in their

turbo-charged small group market, as well as subsidies for the low

income.

Enzi-Nelson, by contrast, would allow them to join the association for the small business health plans, but would force them to

face individual underwriting that will make the highest-risk selfemployed want to stay away forever. Maybe that is the intent,

maybe not, but that will be the consequence of this bill as it was

reported out of the HELP Committee in March.

I thank you for your time, and I would be glad to answer any

questions you might have.

Senator HATCH. Thank you, Dr. Nichols.

Mr. McCracken, we will turn to you.

STATEMENT OF TODD McCRACKEN, PRESIDENT, NATIONAL

SMALL BUSINESS ASSOCIATION, WASHINGTON, DC

Mr. MCCRACKEN. Thank you very much, Mr. Chairman. I appreciate the opportunity to be here today.

Again, I am the president of the National Small Business Association, and we represent tens of thousands of small companies all

across this country.

As has been said many times today, there is no greater issue facing the small business community than the affordability of and the

access to health insurance.

I am going to take a different sort of tack here today than the

first two witnesses have and take a much broader look at the

health care marketplace and what our ultimate solutions may need

to be, or some of the solutions we are talking about leading us in

that direction.

The challenges that the health care system presents us with are

so enormous and so intertwined, that we have come to the conclusion that we really need to look at a much more fundamental reform of the health care system, ultimately, and that we cannot look

at this in a piecemeal way, at least without a larger vision of where

we are going.

The challenges that small businesses face really are in three

main areas. One is the insurance market they find themselves in.

Let me talk about that just for a moment.

With the advent of ERISA—talking about ancient history now—

in the 1970s and large employers pulling out of the insured marketplace and becoming self-insured, that meant there were many

fewer folks for insurance companies to spread their risks across.

They, therefore, became much more risk-averse, much more likely to develop rules that could exclude people, rating practices that

could keep people out, and all the rest that we know so well today.

Well, the reaction to that, in the 1990s, is the States began to

put in place insurance reforms that would set limits on whether

you could underwrite, how much you could vary the ratings on varVerDate 11-MAY-2000 15:06 Feb 26, 2007 Jkt 095484 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 32331.000 SFIN1 PsN: SFIN1
19

ious factors for folks. Those ratings are what really create the pool

of shared expenses among employers.

So I think we have to fundamentally understand that it really

is those rules that create those shared risks rather than people just

paying something very close to their actual expenses in a given

year, and because those will have great variation in the small business community.

The employee demographics of one company, a very large corporation, can spread risk across huge numbers of people, and

whether an employee comes or goes, maybe is old, young, sick, or

healthy, really does not affect them in a global sense.

In a small business, it can affect them fundamentally. One employee changing can increase your average age from 30 to 50. It

can make your workforce very unhealthy, or very healthy. So these

are huge issues that have to be shared costs. They cannot be separated out. But States have various approaches. They are extremely

diverse in how much they have set up these insurance rules.

Some States allow wide variation in rating, such that there is

relatively less sharing of those various costs among different employers. However, the benefit is that the average premium, therefore, is much lower and those low-wage employers have much better access to affordable coverage.

There is a real trade-off here that we have to address. Other

States have very narrow, community-rated bands, and that does

help some older and sicker employees, but it also pushes the cost

of health insurance well out of reach for many, many small businesses and their employees.

So that is a key thing I think we have to understand. We have

come to the conclusion, as the people, I think, in the great State

of Massachusetts have come to, that what we have to do is require

folks, individuals, to have insurance.

Then we can change the rating rules, require insurance companies to take them, have narrow bands for how they can be insured,

and then we have to subsidize people based on their income, not,

we do not believe, based on the size of the business they work for,

or any of these other factors. So that is key. We have to subsidize

the people.

We have to change the incentives. That is the second important

component here. Right now, small businesses are dramatically

disincented to provide the right coverage. Large corporations get

much more of a tax subsidy for the provision of health insurance.

Small companies who generally cannot afford that type of coverage, they not only do not get as much of a tax subsidy, their individual employees who may be left in the individual market get no

tax subsidy whatsoever for the purpose of health insurance.

We have to bring equity both to the individual and employer

markets on the tax side, and we have to bring equity between the

purchase of insurance and the purchase of health insurance itself,

because right now there is a fundamental disconnect there.

Finally, the key issue for small businesses is the overall cost of

health care itself that we are talking about spreading in various

ways. For that, my written statement goes into, I think, a good

deal of detail about that.

20

But fundamentally, we have to change the incentives for health

care providers. I would like to associate myself with the terrific testimony this committee heard about a month ago from former

Treasury Secretary Paul O’Neill in that regard, and I think he

clearly lays out a road map for how we can change the incentives

for health care costs in this country.

With that I am going to stop, because I have run out of time, but

I appreciate the opportunity to be here and look forward to answering your questions.

Thank you.

Senator HATCH. Thank you very much.

[The prepared statement of Mr. McCracken appears in the appendix.]

Senator HATCH. Dr. Chollet, we will turn to you. I understand

you and Dr. Nichols are both medical doctors?

Dr. CHOLLET. No, PhDs.

Dr. NICHOLS. PhDs. Economists.

Dr. CHOLLET. We are both economists.

Senator HATCH. Somebody told me you were medical doctors. You

did not look like medical doctors to me, you looked like PhD economists to me. [Laughter.]

Dr. Chollet?

STATEMENT OF DEBORAH CHOLLET, PhD, SENIOR FELLOW,

MATHEMATICA POLICY RESEARCH, WASHINGTON, DC

Dr. CHOLLET. Good morning, Mr. Chairman and members of the

committee.

I was asked to describe the cities’ and States’ efforts to stabilize

their health insurance markets and make coverage more affordable

to small businesses and their workers.

I have submitted written testimony, and this morning would like

to make three points that echo many of the points that Dr. Nichols

and Mr. McCracken have just made.

The first is that wide variation in premiums associated with specific characteristics of each small group, such as health status, age,

gender, and group size, can make coverage unaffordable for some—

that point has been made—but it also puts small employers at risk

for large jumps in premiums when an employer or dependent becomes ill, or when even one employee is hired or leaves the business.

The unpredictability of premiums is a major reason that small

employers do not offer coverage to their workers, and in States that

have substantially loosened rating restrictions and permitted

health rating, specifically in Minnesota and in New Hampshire,

small groups have experienced very volatile premiums.

Minnesota abandoned community rating in a series of deregulation initiatives since 2001, and today a much lower percentage and

an absolutely lower number of people are insured in the small

group market. Significantly more rely on Medicaid and are uninsured in small groups. New Hampshire abandoned its deregulation

of rating and has reinstated community rating and tight rate bands

overall.

Second, when coverage is voluntary, insurance regulation, or the

lack of regulation, determines who is favored in private health inVerDate 11-MAY-2000 15:06 Feb 26, 2007 Jkt 095484 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 32331.000 SFIN1 PsN: SFIN1
21

surance markets. It is a choice that no State can avoid, whether

they regulate or not.

When small group rates vary widely with health status and characteristics that indicate health status, working families with health

care needs are more likely to be uninsured. The research literature

is fairly clear on this.

Conversely, when States have required community rating and set

narrow rate bands overall, working families with health care needs

are more likely to be insured.

Some individuals who expect to use little or no health care may

remain uninsured, but the research evidence indicates that there

is no significant net effect on the total number of workers covered.

Finally, a number of States have developed programs to assist

small employers and their workers to afford coverage. These programs take various forms: reinsurance programs in Arizona and

New York; premium subsidy programs in Maine, and we expect, in

Massachusetts; and standardization of benefits to encourage price

competition in Maryland and in New Jersey.

All of these efforts rely fundamentally on a stable small group

market and one that accepts and retains significant risk. If uninsured small groups are substantially less healthy than the population average, State reinsurance and premium subsidy programs

that target uninsured small groups are too costly to maintain.

In summary, States that have enacted community rating and

narrow rate bands view broad risk pooling as essential to stable

health insurance markets. These States have made a choice to minimize premium volatility for small groups and to favor coverage of

workers with health problems.

They have attempted to maintain broad benefits and avoid the

market disruption and loss of coverage for critical health care services, such as maternity and mental health, that occur when broad

risk pools are broken into pre-payment puddles.

All of the States that have put in place these kinds of regulatory

reforms have been responding to specific problems. None of the

States invented regulation around fiction; there were serious and

specific problems that these regulations were intended to address,

and have addressed, in these States.

So I thank you again for the opportunity to speak with you this

morning, and I would be pleased to take questions now or later.

Thank you.

Senator HATCH. Well, thank you so much.

[The prepared statement of Dr. Chollet appears in the appendix.]

Senator HATCH. We appreciate all four of you showing up and

giving us your respective points of view.

Now, I am a member of this committee, but also I serve on the

HELP Committee. I used to chair what was then called the Labor

and Human Resources Committee, but is now HELP.

I am here to tell you that I believe providing affordable health

care options to employees with small businesses, that happens to

be a very important issue, and we have to find some way of resolving it.

I am pleased that the Senate HELP Committee has taken action

to resolve this matter in such a way that those who work for small

22

businesses would have an option to purchase quality health insurance that hopefully will be affordable.

But let us remember that the HELP legislation is only one part

of the solution. It may be a silver bullet. Frankly, it is probably not

a silver bullet, and it is certainly not the total solution.

Now, our Finance Committee has the ability to provide assistance in other ways, such as in making health savings accounts

more appealing to employers, their employees, and others who may

not have health insurance. We need to examine other options

which will make health insurance more affordable and encourage

people to buy health insurance.

Now, I found the testimony of all of you witnesses to be extremely interesting, and I plan to work with both you and our colleagues on this committee, and the HELP Committee as well, and

Chairman Enzi, in resolving this problem. As we all know, there

are not any easy solutions, but it is so much easier to criticize proposals as opposed to being constructive and presenting solutions.

I know that the Chairman and our friend, Senator Enzi, are trying to present solutions here. I will say it again: these proposals

may not be perfect, but they certainly are a step in the right direction. So I appreciate all the hard work that Senator Grassley, Senator Enzi, and those who are working with them are putting into

trying to resolve these problems.

I would also like to clarify that the Durbin-Lincoln plan has

nothing to do with the Federal Employees Health Benefit Program.

I do not believe that that was made clear during the first panel’s

discussion.

The only thing that the Durbin legislation has in common with

the FEHBP is that the small business health plans would be run

by the government, and I do not think that is quite enough.

Now, I am not saying we should ignore these suggestions, because Senator Lincoln is a great member of this committee and

feels very deeply about it, so we have got to look at all these

things.

But let me ask one question for everybody on the panel. The

FEHBP program is basically the government acting as a big selfinsured employer. That is basically what it is. Again, I do not think

that is going to help employers and small businesses get affordable

health insurance.

But the actuaries at Mercer have run an analysis of the EnziNelson bill, and they have concluded that it would reduce small

business health costs by 12 percent and would increase the number

of working uninsured by about a million, and all this without any

appreciable Federal expenditure.

Now, I would like to know, comparing the two bills, how much

would the Durbin-Lincoln bill reduce costs and increase access, and

is there data available for that? Is the answer different where we

would look at the Durbin-Lincoln bill without the accompanying

$55 billion tax credit? And compare that with the Enzi approach

from the HELP Committee, and give us the best you can on that.

I think that is basically probably the question we are all interested

in.

Mr. Rossmann, we will start with you.

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Mr. ROSSMANN. Thank you, Senator. I think, from my perspective, the Enzi-Nelson bill has the greatest advantage to provide

cost-effective health insurance to small employers, with minimal

cost to the Federal Government. It keeps it in the private sector.

I think you talked about savings from the Mercer report today, the

12 percent savings they estimate.

ABC personally would estimate 15 to 20 percent savings, and

historically we have been able to prove that from our plan in the

past, where our administrative, and marketing, and carrier expenses were about 13.5 cents on the dollar.

You look at small employers today, they are paying a dollar’s

worth of premium to an insurance company, but about 35 cents of

that dollar is going to their administrative costs, their marketing

costs, and their profits.

So the difference between those two, I think, is a true savings

that we can bring to employers right now, and in the future. So,

I would say that I feel that the most cost-effective is the EnziNelson bill, and the one that is easiest to implement right now.

Senator HATCH. All right.

Dr. Nichols?

Dr. NICHOLS. Senator Hatch, I think it is pretty difficult to evaluate precisely, but I will certainly give you my best shot on the fly,

and I will be glad to——

Senator HATCH. We found that around here to be true.

Dr. NICHOLS. I will be glad to work with you later for more details, seriously.

Senator HATCH. All right.

Dr. NICHOLS. But I would say, first, let us start with the Mercer

report. It is interesting that the Mercer conclusion about the AHP

bill that came out of the House was completely opposite.

This conclusion was different and the assumption was essentially

that premiums would be lowered by a sufficient amount, I think

you said 12 percent. I believe what that analysis did not take into

account is how much premiums would go up for those firms that

would end up worse off once the risk pool is resettled.

We are all talking about, any time there is no new money

brought into the equation, you are just talking about shifting dollars around. So, I do not think there was adequate attention paid

to the average premium increase for those who will lose. There will

be some gains from that sort of thing, and where you come out on

that really comes down to very detailed calculations.

As far as Durbin-Lincoln would go, I would answer in two ways.

First, there are three sources of efficiency that that big pool would

bring, I believe, that would lower costs. I cannot give you a precise

estimate, other than to give you some ballparks.

Administrative efficiencies alone, you go from paying what loads

are currently in the small group market, 25, 30 percent, that is, a

difference between premium and claims cost, and look at what the

load is in the FEHBP program, and I think you are looking at savings of 15 to 20 percent off the bat.

Second, you are talking about a bill with a subsidy for low-wage

workers, a 25-percent premium subsidy, at least, and it can be

larger depending upon family structure and how much the employer ends up contributing. If 40 percent of workers are low-wage

24

in small business, then 25 multiplied by 40, there is another 10

percent.

So I think you are talking about well more than 12 percent before you even get to, in some ways, the best advantages of the

Durbin-Lincoln bill, and that is, the risk spreading very efficiently

and the bargaining power you could have by having everyone in

one pool. The limit on bargaining power, I would submit, is the sky,

precisely because of what Paul O’Neill talked about in this committee a couple of months ago.

So I would submit to you, whatever the number is for Enzi,

Durbin-Lincoln can beat it, and I can prove it to you in a little

more time.

Senator HATCH. Mr. McCracken?

Mr. MCCRACKEN. Thank you. As you know, our association commissioned the Mercer reports both on the Enzi-Nelson legislation,

as well as the House-passed legislation on AHPs 3 years ago.

It does show that premiums, on average, would go up for small

employers under the AHP bill, and it would go down somewhat significantly, 12 percent, and the number of uninsured would go down

slightly, by almost a million, under Enzi-Nelson.

The key thing to remember here, of course, is there are people

whose premiums will go up, there are people whose premiums will

go down under both scenarios, under any scenario we are looking

at, because that is the nature of insurance. We have to remember

that: that there will be winners and losers no matter what we do,

including doing nothing.

However, the key thing that the Enzi-Nelson legislation has that

the other two pieces that we are talking about today do not have

is that it ensures that in every State, in every market, there is one

market functioning. I think this is a point we cannot overlook the

significance of.

The reason that the Mercer report said that the average premiums would go up under the AHP legislation is because of this

cherry-picking phenomenon that goes on under that legislation,

and over time it is going to increase the average premium because

of the various gamesmanship that happens on both sides of that

transaction.

We are concerned that the Lincoln-Durbin bill might have the

same thing. Now, the cherry-picking would be on the other side,

that is to say, because the pool would be operating alongside the

current markets that already exist in the States.

The Small Employer Health Benefit Plan would not include everyone. I think Len’s points are exactly right, if it included everybody. But the reality is, it would not include everybody. Employers

would choose whether they wanted to buy insurance outside of that

pool or not, choose whether they wanted to by insurance or not.

So we are concerned that the incentives that insurers have to decide whether to sell through the SEHBP or not, or sell outside of

it or not, and individual decisions to buy that or not, could really

confuse the marketplace, shall we say.

The Enzi bill is the only one of the three to make sure there is

one market. And we can debate whether the rules are the right

ones or not. I think obviously the debate about whether the rating

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standards it sets up are the right ones. But to be clear, in a given

State there ought to be one set of rules. I think that is necessary.

Senator HATCH. Thank you.

Dr. Chollet? You will be it. My time is up, so if you could be

brief, I would appreciate it.

Dr. CHOLLET. It is useful to be at the end of two people with

whom I largely agree.

I would like to make two points. First of all, reports like the Mercer report assume that the market settles, the status quo persists;

whatever the first round of results is in the model is the round that

continues.

What is striking about the Enzi bill is the amount of volatility

in premiums that it sets up, the huge changes in the year-to-year

that can occur with an illness of a worker or with the hiring or exit

of a worker. Putting on one older worker, putting on one young

woman can shoot premiums wildly above market trend, above medical trend.

So, I think we need to pay attention to the longer term the second and third year out, and that is the experience we saw in New

Hampshire, for example. By the end of the second year, premiums

were still hugely volatile, had not settled, and small employers

were disgusted with it and the bill was repealed.

With respect to the Durbin-Lincoln bill, I have one comment.

That is, for the last 10 years or so I have looked at the supply side

of the market. I started out looking at uninsured people and decided that we needed to have a much better understanding of what

was going on on the supply side.

When I estimate prices in health insurance markets, I am repeatedly reminded how efficient the FEHBP program is. The prices

the FEHBP program has, adjusted for risk in the pool, are startlingly lower than the rest of the market.

In fact, I could argue that insurers are favoring FEHBP to be

well over the small group market, in particular. So I think putting

small groups in a large pool like FEHBP with government bargaining power behind them probably would do the most, the fastest

to reduce health insurance prices for small groups.

Senator HATCH. Well, thank you.

Senator Baucus?

Senator BAUCUS. Well, thank you all very much, Mr. Chairman,

and all of you.

I keep coming back to the basic question, what is best for Americans? Is it more individual choice or is it more pooling and wider,

say, group coverage as a whole? I understand very much the desire

for those who support the Enzi bill, because they are frustrated

with insurance costs. They cannot afford insurance, in most cases.

Associations grouping together and marketed by association

plans see an opportunity. Some of it is altruistic, some of it is

profit-motivated. There are a lot of reasons. But I am bothered,

frankly, that that sort of creates an additional, if you will, silo. It

segments the market even more.

Now, my assumption, obviously, is that we do better if we are together. I kind of go back to Ben Franklin, ‘‘Either we hang together, or most assuredly we will hang separately,’’ or ‘‘the whole

is greater than the sum of the parts,’’ and all the various things.

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We do better working together than when we are not working together.

I would just like you, Mr. Rossmann, to kind of address that

basic concept, if you would, please.

Mr. ROSSMANN. Thank you, Senator.

I think, from my perspective, what we are looking to do for small

employers is being able to aggregate those folks together to look

like one large employer, to be able to negotiate with insurance companies for good plans and good rates, and to be able to take advantage of good experience rating, good claim losses.

I think the panelists made a couple of comments just a moment

ago, that that is one of the key features in an association plan, the

fact that if you have profits or margins at the end of the year, if

the claims are low for that total plan, those profits do not go to the

insurance company, those profits stay in the health insurance plan

for the benefit of participants going forward.

Senator BAUCUS. One slight problem I have, though, with the

Enzi bill is Massachusetts, just yesterday, took a big, bold step.

The Enzi bill would prevent States like Massachusetts from enacting those kinds of proposals, as I understand it. That is what the

Senator from Massachusetts believes. That would be preempted.

That is, the Enzi bill would prevent Massachusetts from adopting

its form of universal coverage.

Mr. ROSSMANN. I think what the Massachusetts legislature did

was to require employers to purchase insurance, basically.

Senator BAUCUS. I’m sorry?

Mr. ROSSMANN. Require employers to purchase insurance for

their employees. If they do not, then they have to pay.

Senator BAUCUS. I am sorry. I missed the first part of your sentence.

Mr. ROSSMANN. I said, I think what Massachusetts did was to require employers to purchase insurance for their employees.

Senator BAUCUS. That is right. Everyone has to have insurance.

If they do not, individually they are penalized.

Mr. ROSSMANN. Correct. I think association health plans would

be a nice added feature to that equation, because now you are saying to small employers, you must purchase insurance or you have

to pay a penalty.

Senator BAUCUS. But the bill prevents Massachusetts from enacting that proposal. That is what I understand.

Mr. ROSSMANN. I do not believe so, Senator. Not to my knowledge, it does not.

Senator BAUCUS. That is what the Senator from Massachusetts

thinks. I may be wrong. I do not know. That is just what he thinks.

Mr. ROSSMANN. Yes. My feeling would be, it would allow associations in Massachusetts to pool those small employers together and

get cheaper insurance, if you will, lower administrative costs, lower

marketing costs, and still try to cover all its employees.

Senator BAUCUS. Dr. Nichols, could you just respond to my first

question about pooling versus individual, and maybe your thoughts

on what Mr. Rossmann said, please?

Dr. NICHOLS. Well, on pooling, sir, there is no doubt, if we do not

pool, we will certainly all face, eventually, bad health and high premiums. We have a lot of information about that. It is called history.

27

You go back and look at what the States saw before these regulations existed, like I said, 47, 48, depending on the specific provision. The reason they all passed that stuff is because they saw

what life was like without that, and it was pretty ugly.

Small business themselves were the ones clamoring for relief and

help. I am sure these guys were either doing it, or their predecessors can tell them about it, no question about that. But we have

had, since then, a stabilization, as Deborah talked about.

I mean, fundamentally, what regulations do is define the contours in which competition can work. There is nothing anticompetitive about regulation, as long as you let markets breathe.

That is where I think the reasonable regulation, like that coming

out of NAIC—it is very fascinating to me that the Enzi approach

adopted the 1993 model act which the National Association of Insurance Commissioners promulgated, which they themselves, the

NAIC, has modified over the years, which States amended in very

important ways over the years. So why are we ignoring the history?

That is what I am sort of confused about.

Senator BAUCUS. I am just struck by the experience of Minnesota

and New Hampshire. What does that tell us? I am not trying to

drive a point here, except that a similar concept was attempted in

those States and they changed their mind, basically, because it did

not work. I mean, again, I do not have an axe to grind here. But

what in the experience in those two States is relevant here? Anybody who wants to talk about that. I will start here, then go back

to you.

Dr. CHOLLET. New Hampshire clearly abandoned that, if you

will, experiment. In 2001, when S.B. 110 was legislated and became effective in 2001, effective rate bands in the State expanded

from about 4 to 1 to about 12 to 1. Insurers were allowed to rate

on health status. They were allowed to use proxies for health status, such as durational rating. They were allowed to use group size,

industry.

Prior to 2001, there was no rating on health status. It was a

community rating. It was a modified community rating and there

were separate bands on rating around group size and rating for industry.

The premium increases were enormous. More than half of small

groups in New Hampshire saw rate increases of 50 percent or more

on a medical trend of about 16 to 17 percent. They were just huge.

The second year, the same kinds of rate increases occurred. So,

that has been disbanded. It has been repealed. There is now, again,

community rating in New Hampshire and rate bands set comprehensively across all rating factors of 3.5 to 1.

Senator BAUCUS. Again, I may be wrong, but I am told, in the

Enzi band, the rating band is as wide as 26 to 1.

Dr. CHOLLET. Actually, that has been estimated by the Department of Insurance in New Hampshire, and exclusive of the geographic rate bands that are allowed. The safe harbor rate bands

would be 25 to 1.

Senator BAUCUS. All right.

You raised your hand there, Mr. Rossmann?

Mr. ROSSMANN. Yes, Senator. I just wanted to kind of respond to

that, if I could. I think hindsight, of course, is 20/20. When you

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look at New Hampshire, that was a situation where they had gone

to community rating and then determined that a little more competition in the marketplace was good, and went back to the concept

of rate bands.

I think that the problem there was the fact that it was done all

in one fell swoop: one year it was community rating, the next year

it moved to a more liberal rating, if you will.

I think, under the Enzi-Nelson bill, there are specific provisions

in there to handle outlier States that have a modified community

rating today to implement this rate banding over a 5-year period

so that you have very incremental changes to the rates, so you do

not have what happened in New Hampshire where the market goes

crazy, if you will.

One other State I would mention, would be the State of Colorado.

Colorado went to community rating back in the late 1990s. I remember it well. Not the exact date, but I remember it very well.

Senator BAUCUS. Could you be very brief? Because I want to ask

Dr. Chollet to respond to you. So be very brief, please. My time is

up. I am over, but be just very brief here.

Mr. ROSSMANN. If I could just take 30 more seconds, if I could.

Senator BAUCUS. No more than 30.

Mr. ROSSMANN. All right. Colorado was a program that we had

through ABC’s trust, and at that point in time our carrier backed

out of Colorado because they went to community rating.

So, basically we could no longer serve the members in that State

up until recently, when they have now moved back to rate banding,

and they have rating techniques similar to what is being done

under the Enzi bill. I think there are differentiations, 10 percent

up, 25 percent down. The Enzi bill is 25 up, 25 down. So, thank

you.

Senator BAUCUS. All right. Thank you.

Dr. Chollet?

Dr. CHOLLET. Two things. I certainly respect the issue of one fell

swoop in New Hampshire and the chaos that that caused, but in

my written statement I focused on Minnesota for just that reason.

Minnesota did that in a series of steps, similar to what Enzi

would do. The series of steps had the same result—probably a little

less dramatic, but at the end of 4 years essentially the same—as

the one fell swoop approach.

The fact that Minnesota has gone from being the most insured,

the most privately insured, State in the country to the least privately insured State in the country in 4 years, is pretty startling

and pretty sobering, even to the folks in Minnesota.

Senator BAUCUS. All right. We have about 10 seconds.

Dr. CHOLLET. Well, I will just leave it. That is fine.

Senator BAUCUS. Thank you.

Thank you, Mr. Chairman.

Senator HATCH. Thank you.

Senator BAUCUS. I am sorry for going over.

Senator HATCH. Thank you, Senator. That is fine.

Senator Lincoln, you are next.

Senator LINCOLN. Well, thank you, Mr. Chairman.

And I would just say, from your comments earlier, I think this

debate is not about criticism of one bill or the other, it is about

29

seizing an opportunity where we have a tremendous issue in this

country that is costing us resources and diminishing the quality of

life of so many Americans, that our charge here is not to criticize

one another, but to look for the most plausible solution.

Where is it that we, as a Nation, can invest a reasonable amount

of dollars? Mr. Rossmann mentions that Enzi does not cost very

much. That may be true. But does it accomplish as much as we

want to accomplish?

Our bill costs a little bit because of the incentives it provides, but

in turn the projections indicate that it would definitely ensure almost 20 times the individuals that you would see that are uninsured.

So I see it more as, what are we willing to do? What is important

to us? What are our American values for those 46 million Americans who are uninsured? And compared to the kind of money that

we spend around here, a $50 billion investment over 10 years to

reach almost 20 million Americans that are uninsured seems somewhat reasonable, and a good investment, particularly if you look at

what it does for the other types of health care products we have,

the health care safety net.

So many, we find, in small business who, when something happens to that family, all of a sudden they have to leave a job in

order to qualify for Medicaid in order to get the health care they

need. What does that do to the cost for the taxpayer?

Or what happens if someone working in a small business, which

is very traditional for us in Arkansas, for 20 years gets no health

care or no consistent health care, and then enters the Medicare

system?

Well, they are much more costly to us as a country because they

have not gotten 20 years of health care that they would have, had

we provided the incentive to that small business to provide that

low-income worker the kind of coverage that would give them a

day-to-day or month-to-month, responsible health care plan that is

going to allow them to not only be a more productive worker, pay

probably greater taxes, be more productive to that small business,

but be less of a cost when they do hit the safety net programs that

exist.

So I hope we will not see this as a process of criticism, but, more

importantly, look at how we can productively reflect our American

values in things that are really, really important to us.

And so I think I would kind of like to talk about that. I look at

my office, or try to, oftentimes, as a small business, and recognizing that I have two of my staffers, one of whom is about to reach

25 years with the Federal Government, and one who is about to

reach 30 years with the Federal Government. I have one end of the

spectrum, while I also have two women on maternity leave.

So, if I look at that and I compare it to the mandates that the

State of Arkansas requires, under which of these proposals am I

more likely to find a plan that is going to be cost-effective and

cover all of these employees in the diversity of needs that they

have, in something that is going to be cost-effective to me as an

employer, and more importantly, provide for them the kind of care

that they need?

30

And so, that is the approach I have taken, which may be a little

simplistic, but I think that is part of what we have to do here, is

to go back to basics.

So I would like to ask you all. Dr. Nichols, since you are a native

of Star City, I am going to start with you, home of one of the best

rodeo parades in the whole wide world.

But the effect, I guess, on older workers is where I would like

to begin. I think, as we are dealing with the Medicare debate right

now, prescription drugs and otherwise, we see both Medicare and

Medicaid consuming an enormous part of our budget in this day

and age.

If any of this can provide the help that we need to prepare those

individuals in those categories, maybe you could help us walk

through some of the benefits currently mandated at State levels

that might be lost if, in fact, we open up Pandora’s box and do not

maintain some of those. I have just named two in my office, but

I know there are many more.

Dr. NICHOLS. Well, Senator Lincoln, I am certainly glad to speak

to that. I think, fundamentally, what your bill does is preserve the

benefits that all States have already decided are important, and

what the other approach would do is basically repeal all of them,

that is to say, allow products to be offered that had no benefit mandates present.

I also would like to pick up on the spirit of your opening comment there. This is not about criticizing specific people or specific

bills. It is really about, what is the best deal?

I understand completely where Mr. Rossmann and Mr.

McCracken are coming from. I have studied the decision to offer

health insurance for at least 15 years, and I have two brothers who

own small businesses. Trust me, they talk about this all the time.

‘‘Len, why haven’t you all solved that up there in Washington yet?’’

I am sure you get the same thing.

Senator LINCOLN. Yes.

Dr. NICHOLS. So I understand the problem. The problem, I think,

is that people are so desperate to avoid high costs, they are looking

for any port in the storm. And a port in the storm when you do

not have an older worker, and you do not have someone who might

get pregnant, is a plan with no benefits.

But you might have heard this rumor: we are going to get older

and most of us are going to be connected to folks who have babies.

So at the end of the day, we are all going to be sharing these costs

one way or another.

So the short answer is, your plan would basically preserve the

benefits every State has decided on, and they make different decisions. It is a big country. There are very different views on some

of these trade-offs out there.

But the other plan would essentially have no benefits, and therefore would allow any product to be offered. Basically, your small

business office, if you will, would be a very high-cost plan in that

world and you would get to pay for that.

Senator LINCOLN. Yes.

Senator HATCH. Senator, your time is up.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

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Folks, this sounds to me an awful lot like the same debate we

have had for 60 years, literally going back to Harry Truman. You

see it in the dueling bills. They are offered by good people, by Senators Durbin, Lincoln and Enzi. They are all good people.

But what the fight has always been about is the role of the individual. If you really think about this, going back to Harry Truman,

1945, 81st Congress, our inability to solve this has been about

these dueling views of the individual.

Senator HATCH. Would the Senator just yield for a second, without losing his time?

Senator WYDEN. Sure.

Senator HATCH. I have to leave for another appointment, so Senator Snowe is going to finish out the hearing as the Chairman.

Senator WYDEN. All right. I think I still have 41⁄2 minutes.

We have dueling views with respect to the role of the individual.

One side says it is primarily an individual kind of choice, the individual ought to drive the markets. The other side says we primarily ought to use government, it is a government matter to drive

it. Sometimes I feel that I am one of a small group who thinks

there is a role for both, both the individual and a role for government.

My question to you is not about the specifics in Massachusetts,

but is the philosophy of what is being discussed in Massachusetts

not something that could break the gridlock that we have had for

60 years?

It seems to me what they are talking about in Massachusetts has

some of the appeal of the Enzi bill, which is to use an individual

mandate, to let the individual be more involved in markets, but

also a role for government, a role for the uninsured, a role for business, and it melds together these two separate kinds of camps.

So, set aside what you think about the Massachusetts bill, but

with respect to the philosophy, rather than just having these dueling alliances go at each other, as we are going to do, apparently,

this spring, would we not be better off to try to pick up on the kind

of philosophy that might meld these two camps and give us a

chance to finally do what Harry Truman envisioned?

Every year I give this speech, it just adds on. Now it has been

77 years. If I might just go down the row with respect to the philosophy of melding a role for the individual with a role for government.

Dr. CHOLLET. Shall I start?

Senator WYDEN. Yes.

Dr. CHOLLET. Senator Wyden, I agree entirely. I think that, in

a system such as we have had, in a country such as this, individual

responsibility is the bedrock of success. If you do not have a sense

of individual responsibility, nothing will work. So, emphasizing

that, I think, is absolutely critical.

However, in addition to a sense of individual responsibility, there

has to be an affordable, meaningful, reachable product for people

to buy, and that, I think, is as important. One cannot be put in

place without the other.

So I agree that this is not about finger-pointing. It is about what

will work best for this country. What achieves most quickly, most

certainly, most stably access to an affordable product for everyone?

32

The two have to go hand in hand, and one will not succeed without

the other.

Senator WYDEN. Do any other panel members want to get into

it?

Mr. MCCRACKEN. I would agree. We may have some specific

quibbles with some particular provisions of what Massachusetts

has done, is doing, but in the broad framework of the reform, they

have it exactly right. We think this is a model that not only could

be used by other States, but hopefully could be used by Washington

to look at how to address this problem long-term.

Senator WYDEN. Just so you get into it, it is very different than

what we are talking about here today. We have these two bills, one

bill with the individual, one bill for government. So apart from

Massachusetts, I want the philosophical breakdown.

Mr. MCCRACKEN. I think the key is, what you can do incrementally is fundamentally different than what you can do if you are

looking at a systemic change to this system. If you are tinkering

with one part of the problem and you are not looking at a fundamental solution, you are going to create problems someplace else.

So all these bills are all designed to, well, this will make this better, but this might cause a problem over here, and we had better

fix that with this. With something like what they are doing in Massachusetts, they are looking at the entire problem, and that enables you to do some very different things because you have everyone in the system.

I would point out to you that I am greatly encouraged politically

as well, because what you have in Massachusetts is a Republican

Governor with a very Democratic legislature coming together.

You have had similar interest on this, and a very similar approach, in the States of Maryland and California that are similarly

situated. So, I am hoping it can be a bipartisan model.

Dr. NICHOLS. I want to pick up on the bipartisan point, and also

say what we are talking about here with the level of philosophy is

individual responsibility coupled with shared responsibility. It has

to be an American plan. It has to be a plan consistent with American values. I think both of those are fundamentally American.

Individuals have to be required to fend for themselves, but the

community has to be sufficiently involved to make sure all individuals can, indeed, take care of themselves. I think, fundamentally,

what Massachusetts has done is squared the circle and brought the

parties together, and it is built around that principle.

I would submit, you could build that off of Durbin-Lincoln, you

could let Enzi be part of it, but I think you are going to want that

pool to be the core of it.

Senator WYDEN. We have some circle squaring to do here, I can

tell you that.

One last person. My time is up.

Mr. ROSSMANN. If I can make one comment, Senator. I think

Senator Burr said, at a hearing not too long ago, that he realizes

that the association health plan bill or the Enzi-Nelson bill is not

the end-all, be-all, but it could be the bridge to the future.

It is a step in the right direction to help small employers pool

together to get the economies of scale that large employers have,

33

and it could match up well with what they are doing in Massachusetts.

Senator WYDEN. My time is up. My only concern is, if you go off

and take one of these approaches in isolation, it is going to be very

hard then to double back and come up with a sensible approach

that involves a role for the individual and a role for government.

Everybody always says—and I do not mean any disrespect for

you—start with mine, and then you can build on these other concerns later. I think what we have learned is that health care is an

ecosystem; what you do over here affects everything you do over

there. You really no longer can say, well, we will just start with

that piece and hope that everything else works out.

You all have been a great panel. I have stood up all kinds of people in my office just because of your expertise, and I thank you for

it.

Thank you, Madam Chair.

Senator SNOWE. Thank you, Senator Wyden.

Suffice it to say, we have a dysfunctional market, particularly as

it affects small business owners and their employees and families.

As I said earlier, that is the single greatest impediment for small

business owners in offering health insurance plans to their employees, is the escalating costs, the rising costs, and it is a crisis.

I am just concerned in some ways that it will allow the perfect

to be the enemy of the good, and there has been a track record with

so-called association health plans, small business health insurance

plans. The fact is, there is no competition in the existing market

for small group markets like the State of Maine, Arkansas, or Montana.

That has certainly been buttressed by the recent GAO report, as

I mentioned earlier, that shows that the five largest carriers now

control more than 75 percent of market share in 26 States, up from

19 in 2002; more than 90 percent of market share in 12 States, as

opposed to 7 in 2002.

In my State, Blue Cross/Blue Shield now has 63 percent of the

market, up from 39.1 percent, and the five largest carriers have a

98 percent share. That is just an illustration of the problem that

small business owners are facing. So they are at the point of

$5,000, $10,000, $15,000 deductibles for, at best, the type of insurance they can offer, which is catastrophic.

So, there is no competition. There are no choices among any competitive plans. We essentially have a dysfunctional market. Mr.

Rossmann, you have had an experience. ABC has offered health insurance plans and you, I guess, got out of the market a few years

ago. Is that correct?

Mr. ROSSMANN. Yes.

Senator SNOWE. Well, can you speak to your experience? Because

I know we have heard from others, like Dr. Nichols, who are saying, essentially it engages in cherry-picking. This is one of the

issues we have heard. We have had prohibitions in my legislation,

I know in Senator Enzi’s legislation, against cherry-picking.

I mean, we are allowing the organizations to establish plans that

are tailored to those who join a particular plan. Obviously they are

going to devise a plan that is going to be attractive in terms of the

34

benefits so that you can encourage more people, more businesses,

more employees to join that plan.

So what was your experience with the type of plans that you offered your membership? Were they generous? How would you describe them?

Mr. ROSSMANN. Our programs were all fully insured plans. We

had about 14 different medical plans that we offered to our members to pick and choose from. The programs included all licensed

providers around the country.

They included all the required mandates in Virginia. They also

provided the same types of plans in other States, even if they had

lesser benefits. So, they were very comprehensive plans that the

employers could pick and choose from.

I would envision that we would have that same type of program

in the future in the small business health plan legislation, because

our small employers are fighting desperately to retain their employees, they are fighting more desperately to be able to provide

them cost-effective health insurance coverage.

Senator SNOWE. Well, did you ever hear criticisms of your plan?

Well, first of all, were complaints filed against your plans because

you excluded certain individuals or you did not include certain benefits in your plan?

Mr. ROSSMANN. No. We had to make the plans comprehensive.

It is not a mandate to small employers to buy from ABC. They can

buy from whomever they wish to buy from. Granted, we do not

have as much competition, but that is another issue. But we are

an option for those employers, so if they do not feel our plans are

good enough, they can go elsewhere.

We always had to provide comprehensive benefits because we

had a group of trustees—and we still have a group of trustees—

who are all contractor members that oversee the program, and they

have their own families and their own employees insured under the

program, so they want to make sure they have complete, comprehensive-type benefits that pay the expenses that are incurred.

Also, in addition to that, one last thing I would say is that you

find that preventative care and maintenance care is very important

in keeping the costs down on a health insurance program nationally.

Senator SNOWE. Right.

Mr. ROSSMANN. So it would only make sense for any program to

have coverage for diabetes and other conditions to make sure that

you control them currently so you do not have huge hospitals bills

down the line. And the ABC programs have done that in the past,

and they will do that in the future.

Senator SNOWE. And so exactly why did you withdraw from offering plans?

Mr. ROSSMANN. It certainly was not intentional, Senator. What

happened is, in 1999, our insurance carrier came to us and said

they no longer wanted to provide the insurance for our program because of the inconsistency and the complexity of State law, so they

basically backed out. We looked at 50 different insurance companies to take over the plan, and nobody wanted it, based upon the

variance in laws.

35

Senator SNOWE. How would you describe the plans that ABC offered? Do you think it was a successful program?

Mr. ROSSMANN. Very successful. The program was in operation

for 43 years, and well-served by the members, and well-participated in by the members.

Senator SNOWE. That is an incredible track record.

Dr. Nichols, I would like to have you respond because you had

said that supporters of small business health insurance plans think

that somehow we are going to magically lower premiums.

The point is that small business currently has no ability, no options available in the current marketplace, certainly in small group

markets like the State of Maine. That is a fact that is indisputable.

That is where we are today.

I just hope that we can develop a strategy in this Congress to

overcome some of the hurdles and to try to fuse some of these differences so that we can offer a competitive mechanism for small

business owners. The time has come. We have heard so many different arguments about association health plans, and yet I think

the reality does not square.

So I would ask you, with this past success of Mr. Rossmann and

ABC for the last 43 years, why is it you think that small business

health insurance plans would not work?

Dr. NICHOLS. Well, Senator, first of all, let me commend you for

your hard work and leadership on this issue. As you know, I have

testified before your Small Business Committee twice on this issue,

and I have always been impressed with how engaged you are and

how you want to solve this problem. We agree completely that the

current small group market is broken; I am there, you are there,

we are all there, everybody is there.

The question is, what is the best path out? My concern is not

about Mr. Rossmann, Mr. McCracken, or a number of people who

run these associations. As you know, I get to testify with him. I

know these guys. I know they would never do all the bad stuff.

The problem is, the law permits it. The problem is, the freedom

to do exclusion, the freedom to have unlimited rating on age, all

that stuff makes it possible. The difference is really about, what

path should we take?

Should we allow a path that is going to be available to members

of associations that have been in place for 3 years so that they can

then get out of the benefit mandates and get out of the rating rules

and offer, certainly in the short run, favorable premiums with less

coverage. These things are trade-offs.

But what about the firms that are not in these associations?

What is going to happen to them? They are going to be stuck in

that same small group market that is dysfunctional now, except a

lot of what I would expect to be, and I think logic and experience

would suggest to be, the healthier pools are going to get out.

What will be left in the small group market will be the less fortunate, and they are going to be paying even more and dropping off

and becoming more uninsured. So that is my concern. It is not that

the associations themselves would suddenly decide, this member is

not worthy of inclusion. I know these guys would keep that together.

36

The difficulty is what happens to those who are not in the association. So we come back to the question, Senator, why not have

everyone in the same pool? Why not have a pool which had real

bargaining power? The problem with the market at the moment, if

I could, is that there is not enough bargaining power vis-a`-vis the

insurers. Well, I submit, a larger pool is a better way to get bargaining power than carving up the existing market into more and

more smaller pools.

Senator SNOWE. Mr. Rossmann?

Mr. ROSSMANN. The only comment I would make to Dr. Nichols,

is the fact that an association, whether it be ABC or any other association, cannot condition membership in their association on

health status. They cannot deny coverage to any employer, nor to

any employee, under this bill.

Likewise, there are specific rating requirements in the program

which say that all the States would operate under the specific set

of guidelines that were outlined by NAIC and written into the plan.

The last thing I guess I would mention is the fact that, under

this bill, it requires the association, the small business health plan,

to offer a Cadillac-type plan which would provide all the benefits

that people want or need, whatever those might be, and it could

not be priced strategically against that group of individuals, it

could only be priced actuarily, as far as the value of benefits goes,

over and above some other plan.

So you would have a lot of options available, Cadillac plans, right

on down the line. I think our members in ABC—some are healthy.

I wish they were all healthy. But we all have a lot of sick folks.

We are as healthy and sick, I guess you would say, as the rest of

America is.

Senator SNOWE. Well, under my legislation, what you are speaking to, Mr. Rossmann, is correct. I mean, that is exactly right. It

would be a prohibition against any type of selection or previous

health status and, in fact, that mechanism would conform with the

States’ ratings.

So, I understand what you are saying, but it is sort of like, you

have to get started someplace, Dr. Nichols. That is the problem we

are facing. Maybe there is a way of addressing what you are saying

about doing the entire national pool. I do not know what the implications are.

I am concerned about the fact that if we say that all these plans

have to conform to all 50 States’ mandates of some kind, then we

are back to where we started. That is the issue that we are facing

because of the crisis that characterizes this particular circumstance

in the small group market. It is getting worse. It is not getting any

better.

I just do not see how you get around some of these issues. You

have to give them options. I mean, we have not heard these complaints with large corporations, even in terms of the self-insured or

unions. They have all the options available to them. Yet, here we

are, confining small businesses and restricting them in a way that

really ill serves them and the people who work for them.

Dr. NICHOLS. If I could just have 20 seconds.

Senator SNOWE. Yes.

37

Dr. NICHOLS. I would just say, I agree with you, we have to do

something. I applaud your commitment to this. But, first, let us do

no harm. One thing you could do if you are going to go this way

is to restrict the premium variance that is allowable outside the associations.

Let us talk about that. There are details about that. I would submit to you, the variance that is actually present, as the New

Hampshire Insurance Department calculated, would permit 25 to

1. Mr. Rossmann and Mr. McCracken would never impose that, but

others might. That is what you really need to constrain.

Senator SNOWE. I appreciate that.

Dr. Chollet? Then I will go to Senator Lincoln.

Dr. CHOLLET. Just a quick point. I would be concerned, actually,

with a rate variation of 25 to 1 outside of an association plan, that

the association plan itself could survive.

If there is no reason for small groups not to leave the association

if offered a better rate, I would assume that you would be concerned about adverse selection in the association, that you would

be left with a sicker pool because your healthier groups would leave

when offered a better rate outside the pool, and it would come back

when they had a health problem that was rated up in the regular

market.

So I tend to think that the wide rate variation is exactly the

thing that would make association plans infeasible if they were

good players, if they did not do what the market does.

In fact, the experience of purchasing cooperatives has been just

that. They have to do what the market does. They cannot do better

than the market, otherwise they become, basically, a high-risk pool.

Senator SNOWE. Senator Lincoln?

Senator LINCOLN. Thank you, Madam Chairman. And thanks to

the panel. You all are providing tremendous, I think, conversation

and dialogue on a critical issue. I know everybody has many places

to be, but I just have a few more questions.

I guess I would like, Mr. Rossmann, to just go a little bit further

in terms of why the S. 1955 does not provide health insurance coverage to all small businesses. Unless you are a member of an association, you cannot access that.

So if perhaps you all have a great track record and a great program, the automobile dealers, the realtors, or whoever cannot really purchase into your pool. Yet, when you talk about what happened to your program when it was relinquished, that was really

because of the quality of what you wanted to maintain from the

State mandates that occurred. I mean, you met State mandates,

did you not?

Mr. ROSSMANN. Yes, we did.

Senator LINCOLN. Well, in order to do that, it appears to me that

you would want a bigger pool.

The other reason you said for the demise of the program, meeting

those requirements, the paperwork, again, to me goes back to looking at not reinventing the wheel, but looking at what exists.

In a Federal program that we have for Federal employees, the

Office of Personnel Management has done that. They have navigated those States. They have navigated the negotiation with the

insurers to ensure that my staff that are in Arkansas have access

38

to Arkansas plans, as well as Federal plans, all of which meet the

basic requirements.

So the problems that existed for you would technically exist for

us, except for the fact that we have solved that problem through

the Office of Personnel Management and their ability to navigate

all of the kind of problems that your insurers saw.

So I guess that is a point I would like to make. But to that point,

if you could have increased your pool, you probably could have

maintained your program, could you not?

Mr. ROSSMANN. I think it was not so much the demise or the fact

that the pool got smaller. It was the fact that the insurance company decided they no longer wanted to be in the State of Colorado,

or they no longer wanted to be in the State of New York.

So they said to us, the folks you have insured in those States can

stay there, but we are not allowing you to enroll any new members.

The reason they did that was because it was difficult for them to

comply with the rating laws and the mandated benefit laws of that

State.

Senator LINCOLN. Which, for Federal employees, we have overcome. The park ranger that works in Montana or Colorado has access to the 274 plans that I have access to if he is single, or maybe

he is married with children, maybe he has 35 years in the Service,

or maybe he is right out of college.

So, we have overcome that barrier through what we have done

with the Federal employees’ plan. It seems like we would use that

information as a way to be able to allow you to increase the pool

and put yourself in a pool where there is greater risk that can be

balanced out.

Mr. ROSSMANN. Right. I think the Federal Employees Health

Benefit Plan is terrific, but it is a captive plan in that it is restricted strictly to government employees.

Senator LINCOLN. Yes.

Mr. ROSSMANN. What we are talking about under this new program is one that is open to small employers, open to individuals,

open to everyone, but not required to be in one of the plans within

that purchasing group.

So you are going to have adverse selection, in my mind, where

you will have people going outside of the pool, going directly to insurance carriers as a small employer, rather than staying in the

pool.

Senator LINCOLN. But that is the point of, again, the investment

that we make. I mean, your bill does not cost a whole lot, but you

do not make the investment to initiate getting a greater number

of people into the pool.

By the incentives we provide, hopefully not only through an incentive to the employer to increase their share of the costs for the

low income, but also giving them a bonus to sign up in the first

year to increase that pool the first year enough that we can sustain

ourselves, and then show a product that can grow and increase the

pool.

Mr. ROSSMANN. I wish we had the ability to have those incentives for the association program. But in the absence of that, we

are going out to keep the coverage for our small employers in the

private sector and compete with insurance carriers as they are

39

today, and it will be a level playing field between the association

plans and the insurance carriers, so we have to prove our worth.

But we feel we have the administrative efficiencies and, I guess I

should say, the infrastructure and the contact with our members

to make them want to do business with us versus going to a local

insurance company.

Senator LINCOLN. Yes. Well, this provides them the same thing.

They are just a part of a bigger group of small businesses and have

the ability to have negotiators go through that hassle for them instead of you having to go through that hassle and negotiate with

those plans that do not want to work in Colorado, or do not want

to work in Alabama, or wherever else you have members. I think

that is what we try to point out.

I think Mr. McCracken pointed some of that out, why that is a

problem, because of the transition with ERISA and self-insured

plans limiting the insurance market. This way we have an opportunity, because this is not a government plan, this is just where

the government negotiates for small businesses to get into the private marketplace.

I mean, mine is a Blue Cross/Blue Shield plan. There are multiple other plans in the Federal system that are private entities

that have negotiated with the Office of Personnel Management to

provide that product.

So you get two-fold. One, you get the pool, you get the size, you

get the ability to cover all of those people and the mandates and

the things that they need at different ages and schemes of their

lives, but you also get an influx into the private marketplace that,

as you mentioned, was taken out through the self-insured by the

major corporations and people who were big enough to be able to

be competitive in that sense and provide that market to their employees. So, I hope that we can look at some of those factors as

well.

One of the things that I do have particular concern about, and

Mr. Rossmann, when we talk about coverage, there are so many

different things out there. If we look at our co-workers, our family

members, neighbors, others, what have you, we see all of the variety of issues that people have in health care.

One that has been particularly important to me has been infant

screening, newborn screening. There is one that we have seen in

at least 33 States where there is a formula mandate for a condition

called PKU.

A newborn gets screened. PKU is a condition where, if placed on

formula in the first 7 to 10 days of life, you can avoid mental retardation, but if you do not, then oftentimes a child will grow up, become mentally retarded, and have very difficult circumstances.

I guess my concern is, when you have these plans, if there are

not the State mandates, who is going to look to see if a plan carries

this obscure coverage? I mean, if you are single, you get married,

and all of a sudden you decide to start your family, you deliver a

baby and find out that there is this obscure circumstance which 33

States have realized is cost-effective to mandate the coverage of,

and it is important to the quality of life of families in this country,

but insurers just do not cover it because it is not mandated, and

40

it is obscure. Who is going to look at that policy and say this needs

to be covered?

Mr. ROSSMANN. I think our insurance trustees, in conjunction

with the insurance carriers, who are well-aware of all these different benefits, I guess you would say, and the mandates that exist

today would be the ones that would recommend to the program to

make sure you have those things, because every insurance program, ABC especially, would want to have a program that provides

the wellness benefits, the preventative care, the types of things

that keep people healthy and viable long-term. You do not want a

person who gets sick and has a huge medical claim, because that

defeats the whole purpose of insurance. You want to keep people

healthy.

Senator LINCOLN. This may be a bad example because it is very,

very low in cost, it costs less than 1 percent, this particular coverage.

But say, for instance, you have a board, or trustees, or what have

you. The question comes down to, are you going to mandate something that happens in 1 in 200, or 1 in 300 cases and costs are

maybe not substantial, but something that is recognizable? I mean,

who is going to make those decisions?

Is it going to be this board or is it going to be those who have

experienced that type of an issue, like a legislature in a State

where they have made a calculated decision that this is a value

that we want to have?

Mr. ROSSMANN. I guess, from a practical standpoint, from my

opinion, you have those in place today, all those various mandates

in each of the States.

Senator LINCOLN. State mandates. Yes.

Mr. ROSSMANN. You have insurance carriers who are working

with those today. So you would logically have these insurance experts, the underwriters, the actuaries, whoever, and the cost containment specialists to make recommendations to any employer,

whether it be an association plan or a large employer, to include

these types of benefits.

Senator LINCOLN. But it allows those plans to preempt all of

those mandates.

Mr. ROSSMANN. Yes.

Senator LINCOLN. So you are just creating more work for yourself

in having to go back and review all those mandates, or have your

Board of Trustees figure it out in however many States you deal

with, that you are going to cover PKU formula or you are not, or

you are going to cover diabetes, or how much of diabetes you are

going to cover.

It just seems common sense to me that, if we increase the pool,

we use what already exists and do not reinvent the rules, that we

can actually create something that is going to bring your costs

down, provide your members greater coverage at a lower cost, with

the assurance that you are not going to be liable if for some reason

you have a member who decides to start their family and ends up

with a circumstance like that.

Mr. ROSSMANN. I think the problem for any association plan is

the fact that you need to have consistency across State lines on

those benefit levels. There is so much diversity, if you will, or difVerDate 11-MAY-2000 15:06 Feb 26, 2007 Jkt 095484 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 32331.000 SFIN1 PsN: SFIN1
41

ference between each State now, that it is very difficult for an insurance company to serve an association, and sometimes even large

employers, nationally.

That is the problem we are in, and we are trying to find a way

to fix that problem. We think that the SBHP, S. 1955 legislation,

is a way to do that, a way to get consistent benefits across State

lines, maintain consistent rating, and still have a high level of benefits with a high-option plan available for anybody who wants that

program.

Senator LINCOLN. Well, just in closing, we look at the special concerns, and they are tremendous. I do not know what the track

record is for typical plans like you have had; yours particularly had

to adhere to the State mandates.

But if not given that mandate or the requirement to do that, I

look at the things that are mandated in the State of Arkansas, like

diabetes, like maternity, and child well-care, a host of things that

mean a tremendous amount.

And I just think, what does it mean to 21 million Americans with

diabetes, many of those in our small businesses, hard-working people with other chronic illnesses, too, and those who want to employ

them. I think if we pool all of those individuals, we have a much

greater outcome in our ability to provide everybody what they really need.

So I hope that there will be more time to discuss this. I know

the Chairlady has to get to a very important meeting, so I will conclude my questions, but I do want to thank a very thoughtful panel

for bringing your discussion and debate to what I think, and I see

personally every day, is a very critical issue to this country.

Thank you.

Senator SNOWE. Thank you, Senator Lincoln.

Just a couple of follow-up questions. I think the point is that we

have to start someplace. The question is, what mechanism is going

to draw the largest pool?

Obviously, a national pool would be optimal. The question is,

what cost and which carrier is going to provide that type of health

insurance, with all the restrictions, all the requirements, and all of

the benefit mandates?

I do not think anybody disagrees that the ideal situation is to

have as many benefits available as possible. On the other hand, if

you are looking at where small businesses are today, which is virtually not being able to provide any type of health insurance for

their employees, or, as I said, catastrophic, so where do we begin

this process?

I just think we certainly could move ahead with some kind of

mechanism on small business health insurance plans that does

give, I think, some competitive choices to small business that otherwise are just simply not available.

I mean, we have had insurance carriers that simply are not providing for small business owners in the State of Maine. I think it

is no surprise then as to why the cost of health insurance has been

the single greatest impediment and of most concern for small business owners in terms of providing this valuable benefit. I think

that is the real issue here, is how we can overcome that.

42

Now, some begin with a process, we are trying to get around

something. We are trying to get around the benefit mandates. We

are trying to get around offering generous benefits. This is trying

to exclude those who are sick, or had previous illness, or various

conditions.

So we are starting, I think, in some ways with the negative assumptions rather than starting from the premise, what can we do

to help those who are without health insurance today, and what

can we do to override the system in a way that does provide, as

much as possible, generous benefits tailored to those who join these

associations?

Now, there is some other way of doing it. I am concerned, as Senator Lincoln was talking about, in terms of offering that plan. It

might be great to have a national pool, but what are the restrictions, what are the costs, and who is going to provide it? And

whether or not it is going to be cost-effective and cost-competitive

enough for small business owners to be able to participate. That is

the issue.

When you are talking about who is in the market today, there

are very few small business owners that have three to five employees. So, obviously, this is not the exclusive mechanism for helping

them to have access to health insurance. It is one dimension to a

wide-ranging problem. I believe in targeted tax credits and so on,

but I will not get into that now.

But that is really the issue: where do we start, right now, to offer

something to small business owners that I think that we could all

agree is one step in the right direction and may not be the entire

answer?

So that is my concern. If we go with an overall national pool

through OPM, with restrictions, mandates, and all of that, we

might be, at the end of the day, in the same situation where we

are today, that we are not going to have a competitive enough plan

for small business owners even to sign up.

So, I would be interested in hearing your views on this. I know

under the Enzi bill, and even in my bill, we created the same rules

for ratings and mandates for both the small group market and for

the plans.

So I am still getting back to the original question, as to why we

had these serious concerns, and saying you are going to have businesses fall outside of it and therefore going to be excluded, and

they are not going to be able to join these plans. See, I just do not

understand why we cannot address those issues in this instance,

in the Enzi plan, for example.

Yes, Mr. McCracken?

Mr. MCCRACKEN. Senator, I think you make some really great

points. I think it is clear that S. 1955 would dramatically increase

competition, especially in many parts of the country where it is

very limited right now. There is no question that has real benefits

for the small business community.

The other thing that we like about that bill is that it retains a

very strong role for the insurance commissioners in all 50 States.

That is to say, every insurer, under S. 1955, would have to be licensed in every State in which they sell insurance, and while they

may be able to rate on things like age, gender, et cetera, those inVerDate 11-MAY-2000 15:06 Feb 26, 2007 Jkt 095484 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 32331.000 SFIN1 PsN: SFIN1
43

surance commissioners will be in a position, as they are today, to

ensure that those ratings are based on actuarial data, that they are

not just rating people up to keep those people out of the plan.

Not only that, but insurance commissioners will be in a position

to make sure what they are selling is real insurance, not something

that you pay a premium for and there is nothing there, but they

really are covering real medical care. So is it perfect? Is it going

to solve every problem that is out there for small business? No.

And nothing short of a fundamental solution is going to.

The other point you made is having affordable coverage. It is nice

to do something that solves all of these problems, to make sure everyone has every benefit they need, but the reality is, as we see

coverage declining in the small group market today, year over year,

it is an affordability issue.

If we put a plan in front of them that is totally unaffordable for

them, we have essentially done nothing, even if it has all the bells

and whistles that their people need.

So in the short term, it is clear this is an exercise in hard

choices, but we think the framework that Senator Enzi has put together is the right place to start.

Senator SNOWE. Dr. Nichols?

Dr. NICHOLS. Senator Snowe, I would share the sense that we

have to do something. I guess I would want to start with the question, though, what is the source of the high cost today?

Why is it that small business finds this so expensive? I submit

to you, it has to do with the fact they are paying way more in loading costs, way more than all those profit figures that were talked

about, and so forth, the difference between premium and claims,

that load, is much higher in the small group market now.

So why is it high? Well, partly from lack of competition and partly from lack of bargaining power. It is high because of the high cost

of selling and underwriting to those smaller groups.

Who has the lowest load in the country? OPM. So why not have

large groups bargain on your behalf? And it may very well be. I

think part of what came to mind as we were talking before, maybe

one plan is not going to want to be in every State, but what OPM

becomes is an agent to go find the right plans wherever you are.

That is the beauty of it. That is the power of it.

That means that in Montana they have access to a lower load

than they would ever have in the absence of it, which is why, if

you are a working couple, one works for the Federal Government,

one does not, the likelihood of buying Federal coverage over the

other coverage is very, very high, especially if the alternative is in

the small group market. Why? Because it is cheaper. That is what

I am talking about. So let us figure out a way to get that cost

down. I submit to you, a bargaining agent on the behalf of all firms

is going to do better.

Senator SNOWE. But are you not taking a greater risk that way?

That is the concern that I have. The greater risk is that you are

going to have a very costly plan.

Dr. NICHOLS. Because of the mandates?

Senator SNOWE. Yes, because of the mandates. The current Federal employees’ plan does not have to cover every State mandate.

That is my concern if we move in that direction and we are where

44

we are today. So, that is the problem. I think we all would agree

we would love to have every mandate in there.

But the question is, at this moment in time for small businesses,

what can we offer them, at least to start this process and get access

to probably a pretty generous plan in the final analysis? I have not

heard that they would not be generous plans. I have not heard that

they would not be tailored to those who join the plan and what

their needs are and what their preferences are.

I think the question is, once you get into an overall national

plan, running it through a Federal agency, mandating all State

benefits, you are ultimately going to increase the cost. I mean, I

think that is the risk that ultimately will be another deterrent and

barrier for small businesses. Is that not a risk, or do you not think

that that is a real risk?

Dr. NICHOLS. I think it is a real risk if what we do is make the

plan include absolutely every benefit imaginable by every provider

known to human-kind. As you know, human ingenuity is quite creative.

But I would also say, maybe what we want to have is a national

conversation about what benefits should be everywhere. That may

be a separate track you want to go on, because there are some benefit mandates, I would agree, and I am sure you would, too, we

probably do not need.

On the other hand, as the Senator from Arkansas pointed out,

there are some that are fairly obscure that may not show up very

often unless you had a process whereby it was there.

But let me go back to the Montana case. Let us look at the price

of the FEHBP offerings there versus what the small group market

is. I submit to you, and I would be glad to do that for you and send

it to you later because I think it is actually a good question.

Senator SNOWE. I would certainly welcome it.

Dr. NICHOLS. All right.

Senator SNOWE. Mr. Rossmann?

Mr. ROSSMANN. I would just make one other comment. I think

OPM does a great job, but again, it is a captive market, in that it

is all Federal employees or all government employees. When you

get into this purchasing pool or this small employer pool that you

are talking about, there is still the requirement to go out and market it.

You have to go out and entice those small employers to come to

you, and I do not think a tax credit is necessarily going to do it.

I know employers, in general, are scared of taxation, forms, and

things they have to fill out.

So a small employer may not be so quick to jump into a plan because they may have read about it in a newspaper. They have to

be sold on the concept. I think that is where associations, in the

short term, do a great job because we have the infrastructure in

place, we have the relationship in place.

Those folks, those little contractors like Gary Houston Electric in

Little Rock, AR, they belong to ABC for other purposes than just

buying insurance. But by purchasing insurance, that is one of the

things that helps them along, too. So we have the connection with

them, and that is what keeps our costs down, to deliver the product

to the members.

45

Senator SNOWE. Well, did you ever hear complaints about your

plans, as I asked earlier, about some benefits being excluded, or

whatever you were offering?

Mr. ROSSMANN. No, ma’am, we have not. No. We pride ourselves

in having great, comprehensive benefits for the members. Because

Gary Houston Electric—Gary Houston, I mentioned. He happens to

be a trustee under the ABC insurance program right now, and he

participates in the program. So he is concerned for——

Senator LINCOLN. You had to meet the Arkansas State mandates.

Mr. ROSSMANN. Yes, ma’am.

Senator LINCOLN. Right. That is why you did not get the complaints.

Senator SNOWE. And that is true. For where it is being offered,

you have to meet the mandates and the requirements within the

State that is offering the plan.

Senator LINCOLN. It preempts the State mandates.

Mr. ROSSMANN. But that is the reason we lost the coverage back

in 1999, because of all those mandates and all the rating changes.

The insurance company said, we can no longer play the game with

ABC to provide you insurance. So what we are trying to do is be

able to get that back under some reasonable level of consistent rating and consistent benefits so that Gary could have a chance to

come back in.

Senator LINCOLN. Right. With a greater pool and an existing system that has already invented that wheel, you could probably do

that.

Senator SNOWE. Well, this debate is going to go on, is it not?

[Laughter.]

Senator LINCOLN. Madam Chair, may I just ask one more question?

Senator SNOWE. Yes, Senator Lincoln.

Senator LINCOLN. Thank you. I appreciate that.

I guess, one last question would be, particularly, to Mr. Rossmann. The self-employed. They are treated very differently under

your bill as a small employer. They are self-employed, which means

they are going to be out of your group and they are going to have

to kind of deal on their own. Is that correct?

Mr. ROSSMANN. No. Actually, they can be a part of the group. It

is really important for an association like ABC to serve the selfemployed individuals who are members, small employers between

250 and the large employers.

Senator LINCOLN. But they are rated differently, correct?

Mr. ROSSMANN. So the way the bill is structured at this point is

to bring those self-employed individuals in under the same rating

rules that are used by the insurance industry today.

Senator LINCOLN. The bill does not require that.

Mr. ROSSMANN. It does not require it. You could bring them

in——

Senator LINCOLN. They are under different rating rules under

the current bill, are they not?

Mr. ROSSMANN. Actually, the bill says that you can bring them

in under the rules for individuals out in the open market as they

46

are today, or you could use the small group rating rules. It would

be the choice of the association.

But the idea of the association is to bring those folks into the

program so they have the advantages of more comprehensive plans,

which we know, group insurance plans are much more comprehensive than individual plans, so they have the advantage of comprehensive health insurance plans that they do not have in the individual market today, plus they would have the experience rating

so that their rate increase next year would be that 5 or 10 percent

that every employer got nationwide.

Senator LINCOLN. But they do not get the same rating as your

association group plan. You give them a rating under the small

group market plan rating, correct, in the individual market?

Mr. ROSSMANN. The NAIC rating model is the one we are using

for everyone. The only exception would be that, for large employers

and single, self-employed individuals, you would bring those folks

into the association plan or the small business health plan using

the same rating techniques that insurance companies use today.

That is to keep a level playing field between the insurance industry and the small business health plan, because we do not want

them to have an unfair advantage, and they do not want us to have

an unfair advantage.

Senator LINCOLN. Right. Maybe I misunderstood that. I do not

know if anybody else can explain that to me in a better way.

Mr. ROSSMANN. I am sorry if I have not clarified it.

Senator LINCOLN. To me, I understood the bill to mean that they

were not rated under your group plan, that they were in the individual market, and they had to be rated that way.

Mr. ROSSMANN. When they come into the program, the SBHP,

the association plan, can use the individual market rating techniques to calculate what their plan rate should be and bring them

into the plan. But once they are in the plan, they have the same

kind of increases that everybody else would.

Senator LINCOLN. But to get into the plan they have to meet

those individual ratings from outside the plan. Correct?

Mr. ROSSMANN. Because you are trying to do the same thing that

insurance companies are doing today for the benefit of, or the notso-good benefit of——

Senator LINCOLN. So, quite frankly, it is no different. I mean, the

self-employed are either going to meet the ratings of the individual

market now as it is in order to get into your plan or to get into

an individual market plan.

Mr. ROSSMANN. Right. But if you went to the individual market

plan, you would not have near the comprehensive coverage that

you have——

Senator LINCOLN. But they cannot get there without going

through that. They cannot get to your plan without going through

the individual market rating. Right?

Mr. ROSSMANN. It is the same thing, I guess. I am lost.

Senator LINCOLN. I do not know. Maybe somebody else can shed

a little light on this.

Dr. NICHOLS. I think you are talking about related, but two different things. I think the issue is, will the self-employed person

47

have access to the same premium that a business group member

of your association will have?

Senator LINCOLN. Same thing.

Dr. NICHOLS. The answer to that is no, because the individual we

rated in the individual market by age, whatever else is allowable

in that State. And some States, as you know, are quite creative

about rating. So you could have quite a high rating, like 52-yearold overweight white guys like myself that pay more than some

other people. So I come in at a higher level.

What Mr. Rossmann is suggesting, though, is that over time the

rate of increase would be pegged to the association as a whole. The

benefit package would presumably be exactly the benefit package

that would be offered inside the association. But the high-risk individuals will come in at a higher premium, and that differential

would maintain itself.

Senator LINCOLN. So they come in at this level compared to your

other members.

Mr. ROSSMANN. Right. And if they do not come in at all, they are

out there at the higher level, with lesser benefits.

Senator LINCOLN. Right. My plan would put them all together so

everybody can enjoy that benefit.

Mr. ROSSMANN. We want to get those small, self-employed individuals into the——

Senator LINCOLN. But they are going to always remain above the

other members of your association plan because they come in at a

higher premium. It is kind of like agricultural subsidies.

Mr. ROSSMANN. I guess that is one I really cannot answer honestly right now. I think that would determine how the insurance

company and the trustees of the SBHP would work it. That last

thing, I really cannot answer. But I do know they get a better plan

and they get the advantages of the experience rating.

Senator LINCOLN. At a higher cost. At a higher premium cost.

Mr. ROSSMANN. Yes. There are about 10 States that have rating

requirements for individual coverage also. So, if that is the case in

the rating requirement, you would have to bring them in under the

basis of that.

Senator LINCOLN. Yes. I do not think Arkansas has those kind

of individual rating mandates. But, yes. I think that becomes a real

issue for the self-employed, because, as an individual looking for a

marketplace to go to, they may not be all 46 million, but there are

a lot of individuals out there who are self-employed who do not

have insurance.

They are going to think that they can come into your plan and

get the same benefit that your members do, and they cannot. They

are going to have to pay a higher premium because they are going

to be judged by a different rating system in order to get into your

plan. Is that right? Am I saying that correctly? I think I am.

Yes, Mr. McCracken?

Mr. MCCRACKEN. May I put in a couple of quick plugs for something we could do with the self-employeds?

Senator SNOWE. Yes.

Mr. MCCRACKEN. Do you have time for that?

Senator LINCOLN. Well, Olympia and I might just invite you all

for coffee another time, another place.

48

Senator SNOWE. Exactly.

Mr. MCCRACKEN. Because the self-employed right now, that is,

the owners of a non-corporate entity, right now cannot participate

in a cafeteria plan, for instance, today. So, surprise, surprise, they

do not have them for their employees, either.

So those are very important mechanisms to get at a lot of these

other health care costs that insurance does not get to. Senator

Snowe has put in a bill just this week that would address that

question, S. 2457, and it would be a big help to the self-employed.

Another issue that greatly harms the self-employed is they cannot deduct any of their health insurance expenses against their

self-employment taxes. So they essentially pay 15-percent taxes on

their health insurance costs that no other worker, for employmentbased health care, has to pay in this country. That could add up

to $2,000 or $3,000 in taxes that they have to pay that nobody else

has to pay. Fortunately, Senator Bingaman and Senator Thomas

have put together a bill, S. 663, that would address that issue. So,

I hope those are some things that are in the direct jurisdiction of

this committee that could be addressed, Senator.

Senator LINCOLN. Absolutely. Thank you.

Senator SNOWE. I think using the tax code is essential as well.

I think that would be another critical component. In fact, I have

introduced a bill that would help the real small businesses, with

three to five employees, to help them with health insurance, and

also a tax deduction for costs associated with insurers getting into

small group markets so that we encourage more insurers, more

competition in small group markets, and provide for a tax deduction in that regard.

This has been very helpful today and very informative, and we

really appreciate your participation. It is obviously a very critical

debate that will begin on the floor of the Senate in early May.

But in the final analysis, I hope that we will be able to reach a

consensus on this vital issue for small business owners across this

country. I mean, it is a preeminent concern, foremost concern

among small business owners, as you well know.

So I hope this will be the year in which we can make a decision

and do something that is concrete and effective for the interests of

small businesses in America. So, I want to thank each and every

one of you for being here today.

If any Senator has any questions for the record, they must be

submitted to the committee by close of business, Monday, April 10.

This hearing is adjourned. Thank you.

[Whereupon, at 1:03 p.m., the hearing was concluded.]

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