U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

34–650—PDF 2006

S. HRG. 109–875

TAKING A CHECKUP ON THE NATION’S HEALTH

CARE TAX POLICY: A PROGNOSIS

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 8, 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

(II)
C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

WITNESSES

O’Neill, Hon. Paul H., former Secretary of the Treasury, Pittsburgh, PA .......... 6

Burman, Dr. Leonard E., senior fellow, Urban Institute and co-director of

the Urban-Brookings Tax Policy Center, Washington, DC .............................. 11

Lane, Robert W., chairman and chief executive officer, Deere & Company,

Moline, IL, on behalf of the Business Roundtable ............................................ 13

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 3

Burman, Dr. Leonard E.:

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 27

Responses to questions from committee members ......................................... 50

Grassley, Hon. Charles E.:

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

Lane, Robert W.:

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

Prepared statement with attachments ........................................................... 55

Responses to questions from committee members ......................................... 66

O’Neill, Hon. Paul H.:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 75

Rockefeller, Hon. John D., IV:

Prepared statement .......................................................................................... 101

Smith, Hon. Gordon H.:

Prepared statement .......................................................................................... 102

Snowe, Hon. Olympia J.:

Prepared statement .......................................................................................... 105

COMMUNICATIONS

American Society of Pension Professionals & Actuaries (ASPPA) ...................... 107

Mercer Human Resource Consulting ..................................................................... 113

National Council of La Raza ................................................................................... 118

(III)

(1)

* For additional information on this subject, see also, ‘‘Present Law and Analysis Relating to

the Tax Treatment of Health Care Expenses,’’ Joint Committee on Taxation staff report, March

6, 2006 (JCX–12–06).

TAKING A CHECKUP ON THE NATION’S

HEALTH CARE TAX POLICY: A PROGNOSIS

WEDNESDAY, MARCH 8, 2006

U.S. SENATE, COMMITTEE ON FINANCE, WASHINGTON, DC.

The hearing was convened, pursuant to notice, at 10:05 a.m., in

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

Grassley (chairman of the committee) presiding.

Also present: Senator Baucus.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Welcome, everybody, and particularly to the witnesses who are here, coming a long ways; very busy people whom

we have on our witness list today, taking time to be here to help

us review public policy and to consider new ideas that are before

the committee.

Today, then, we are examining a very important issue. We face

a national health care challenge that we must confront. The stakes

are very high. Our ability to compete in the global economy and

maintain our leadership in the world is, quite literally, at risk with

these issues, because of the cost to our manufacturing and services

as opposed to what other country manufacturers and services

might have. We want to maintain America’s leadership in the global economy as well for the workers that benefit from that.

In case anyone has any doubts about this, let me give you just a few figures. As a Nation, we are expected to spend $2.1 trillion

on health care this year. That represents 16 percent of our overall

economy. Over the past decade, health care inflation has averaged

7 percent. That is three times the inflation rate that we go by generally.

A new report estimates that if we continue on the current path, national health care spending will have increased to $4 trillion by

2015, amounting to 20 percent of the overall economy. * I think we

all recognize that this is not sustainable. We have to chart a difference course.

Because of the sheer scope of health care in our economy, many

different policy areas intersect. Many of these policy areas fall

within the jurisdiction of this committee. Today, we will focus on

the impact of our Nation’s tax policy vis-a`-vis our health care sys-
2

tem. There can be no question that tax policy does, indeed, have

a major impact.

Tax preferences for health care are by far our single largest tax expenditure. In 2005, health care expenditures equalled $177 billion. Over the next 10 years, it is estimated that health care tax

expenditures will total nearly $2 trillion.

We are used to dealing in big numbers here in this committee, but even in the context of our massive Federal budget, $2 trillion

is a staggering amount of money. With the help of our distinguished panel that I will soon introduce, we are going to have an

opportunity today to look at our existing tax incentives and to ask

a very simple question: are we getting our money’s worth?

This is, of course, an important question and one that folks on

both sides of the aisle have been too quick to ignore. They have

said that the answer is often more tax subsidies. I have been in

that situation myself, and even passed legislation along that line.

Instead of charging down that path again, however, we need to

take a step back. Too often here in Washington we try to solve

problems by throwing more money at them. We want to believe

that if we just spend more money or provide more tax subsidies or

incentives, whatever you want to call them, our problems will

magically disappear. But we also know that, over the long term,

these easy solutions have not seemed to solve our problems.

Before we add more tax subsidies, we first should look to see if

we can make the incentives that we have today work better. We

also need to look at this issue through two different lenses, both

from the health policy lens and the tax policy lens.

From a health policy perspective we have to ask, do our current

tax incentives make sense? Are they helping to maximize coverage,

reduce costs, and improve quality? From a tax policy perspective,

we also must ask if our current tax incentives make sense, are they

fair, do they help produce good policy results that we ought to expect, and do benefits outweigh the costs?

This is the first time the Finance Committee has held a hearing

on health tax issues—we hold a lot of hearings on health issues,

but not health taxes issues—since 1994. So, I think we all agree

that this hearing is long overdue, or at least Senator Baucus and

I do, because we worked this agenda out together.

I hope that this hearing marks the beginning of this committee’s

work to strengthen our Nation’s health tax policy. Among all the

facts and figures that I gave at the beginning, there is one more

that I should mention, and it is one which we all should pay close

attention to.

This is a recent NBC/Wall Street Journal poll. Nearly 9 out of

10 Americans view the issue of health care costs as extremely, or

very, important. That puts health care on a par with the war on

terror and Iraq.

So, the American people understand we have a problem. They

want solutions. This committee has a tradition, I think, of solving

some problems. That is why most of us got on this committee in

the first place.

On this issue, we must work together. We must give it the serious attention it deserves. A person who helps me with that is Senator Baucus. Go ahead.
3

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. Thank you, all

three, for taking the time to come and share your thoughts with

us. I know all of you are very thoughtful people. You have spent

a lot of time thinking about this, and you care. I deeply appreciate

the time and effort you put into your statements and presentations.

I have read two of your statements. One, Mr. O’Neill’s, I thought

was very provocative. In fact, after I finished, I went back to my

office and said, we need to set these same sort of quality goals for

perfection. It is perfection that we are looking for, and so forth.

Mr. Lane, I know you are interested in consumer-directed health

care, so I really appreciate that too, and I thank you very, very

much.

I ask all of us to push harder than we have been to try to get

some results here. I think each day that we delay is another day

that means the solution is going to cost more in the future. I just

hope that we can find ways to address the real underlying problems facing health care in our country.

My focus is generally on what I just said, but more precisely it

is on our country’s competitiveness, which is health care as a cost

of doing business, in addition to a system where 40-some million

are uninsured, a system where health care is not as good as we

think that it is. There are just too many errors, just too many mistakes, more than I think most Americans admit and realize compared with other countries.

I have seen data, for example, where the quantity of health care

in other countries is greater than the quantity in the United

States, although it costs those other countries much less than it

costs the United States. We have higher administrative costs in

this country than I think we need to have. There are a lot of problems and areas that we can focus on.

But for me, I am now, this morning, going to focus a little bit

on competitiveness, that is, the cost of care in doing business. I

might say anecdotally, I was over not too long ago at the Jack

Welch Technology Center in Bangalore, and I talked to the head

man there, Guillermo Willey.

I asked him, why are you here? He said, well, because this is the

greatest talent pool for people who work in high technology. I said,

where is the next greatest talent pool? It is in China. I said, where

is the United States? He said, well, you are kind of down there a

little bit.

I said, what do we have to do to really get going, we Americans?

He said, well, education is one. We need to make education not

quite so expensive, so education is more available, and a higher

quality of education. Number two, your health care costs are just

too high. I hear it all the time. So that is my focus.

I think addressing high cost and the inadequate coverage of our

system is an important part of the answer.

A couple of statistics. Most have heard these, but I think they

are worth repeating. General Motors, for example, has become the

poster child for high health care costs. Other manufacturers certainly have the same problem, but GM has been kind of a poster

child. They spent more than $5 billion on health care.
4

This year, GM is expected to spend about $6 billion on health care, about $1,500 per car, compared with $500 for Toyota. Negotiated reductions in benefits are expected, however, to reduce GM’s

cost by about one-third, but that is still far higher than foreignbased competitors.

So we have a problem. We have the highest health care costs in

the world, but we do not have the best outcomes. We have more

than 45 million Americans with no insurance. There is no silver

bullet. I am convinced that improved information technology and

pay-for-performance are two important components, but they are

just the beginning. There is much, much more that has to be done.

Today we examine a major component of our health care system,

tax incentives. The exclusion for employer-provided health care

costs is the single largest tax expenditure in the tax code, more

than $100 billion a year.

This chart behind me demonstrates that. The red indicates the

estimated dollars of tax expenditures for employer contributions for

insurance premiums and medical care. It is the highest. The yellow

is deductibility of mortgage interest on owner-occupied dwellings.

This crazy blue color, or green, whatever it is, is exclusion of pension contributions and earnings. That is employer-sponsored defined benefit plans. The dark blue is the Child Tax Credit.

This sort of grayish color is exclusion of pension contributions

and earnings with 401(k)s. So, by far, the biggest is exclusion of

employer contributions for insurance premiums and for health care.

And that is just the income tax exclusion. The payroll tax losses

are virtually the same, almost has high.

This committee has the responsibility to review the incentives in

current law. We need to decide whether the benefits are worth the

costs. We need to determine whether changes are necessary, and

if so, we need to decide which proposals will improve the system

and which will probably do more harm.

We are here today to understand where we are and how the tax

code fits into moving forward. It is not an easy task. We hear concerns with the current structure: upside-down benefits, inequitable

outcomes. We hear that millions of taxpayers benefit from the system, and that we must be thoughtful and deliberate in changing

it.

Tax-based options are clearly one approach, the subject of today’s

hearings, but a comprehensive solution no doubt will include other

options. We should consider building on Medicare or building on

Medicaid, or on the Child Health Insurance Program. These existing programs already provide cost-effective coverage for millions of

Americans.

The world will not stand still while we consider our options. The

global economy, the changing nature of business’s relationship with

its workers, and advances in medical care mean that what works

today might not work tomorrow. Increasingly, our businesses and

our workers are asked to be light on their feet, ready for anything

in the world that comes their way.

The challenge that faces us is to help employers and workers

then to be light on their feet. The challenge is to make health care

coverage more affordable, more available, while helping control

costs much better than we have. This is a tall order, and it is too
5

tall for tax incentives alone, but tax incentives, I think, can be a

part of it.

In other venues, I have been quite clear about my concerns with

the administration’s proposed expansion of health savings accounts.

I am concerned that the administration’s proposals move health tax

incentives, not in the right direction, but the wrong direction.

But I want to start this hearing with hope that we can work together to improve the system. We must be conscious of both the

value and the flaws of the current system and make sure that we

do not lose the good in search of the better, but surely we must

search for the better and, in Mr. O’Neill’s view, work for the best.

We have a distinguished panel this morning. I look forward to

hearing from you all, and thank you very, very much for your contribution. I think it is very helpful.

The CHAIRMAN. Thank you very much, Senator Baucus. I appreciate your help in our getting a very fine panel together. We have,

as you have noted, three distinguished and knowledgeable witnesses. Our first witness is the Honorable Paul H. O’Neill. Aside

from serving as Secretary of Treasury for a long time, he also has

led, for many years before that, as chairman and CEO of ALCOA.

Secretary O’Neill’s extensive career in government and the private

sector has required him to consider Americans’ health care policy

from multiple perspectives.

I think what Senator Baucus and I appreciate about Paul O’Neill

is that he was a person in this town who was always willing to deliver bad, as well as good, news. He has a reputation for being very

candid.

One thing we need in this town is somebody who says it like it

is, because this is kind of a good news town, Washington, DC is.

When you only hear good news, that is why problems do not get

solved in this town. So, we appreciate your candidness very much.

Our next witness, Dr. Leonard Burman, is a senior fellow at the

Urban Institute, and also co-director of the Urban-Brookings Tax

Policy Center. Having served at both the Treasury and the Congressional Budget Office, Dr. Burman has developed considerable

expertise in analysis of tax policy.

In 1837, John Deere invented the steel plough, and the company,

still in existence, is a leading manufacturer, not only in the United

States now, but in the world. Our witness then is Robert W. Lane,

chairman of that famous company, Deere & Company. It is an Illinois corporation, but all of their manufacturing is done by Iowans.

[Laughter.] It is the leading manufacturing employer of our State,

and we appreciate the fine quality they have, but more importantly, the good jobs that they provide.

So, as the world’s leading manufacturer of agricultural and forestry equipment around the world, Deere & Company is responsible, of course, for the health coverage of tens of thousands of employees and their families. So, I thank you for joining us.

We will go in the order that I introduced you. So, Secretary

O’Neill, would you start out, please?
6

STATEMENT OF HON. PAUL H. O’NEILL, FORMER SECRETARY

OF THE TREASURY, PITTSBURGH, PA

Mr. O’NEILL. Thank you very much, Mr. Chairman. It is a great

pleasure to be back in Washington, in these hallowed halls, to have

an opportunity to talk about these important subjects.

As you were introducing me, I was thinking, he should just say,

‘‘O’Neill is a professional iconoclast.’’ It is what I do, whether I am

Secretary of the Treasury or a private citizen. But I must say, it

is really an honor to have an opportunity to speak with you. I have

a very long prepared testimony; I think it is 26 pages altogether.

I would ask that it be put in the record, and then I will just summarize it.

The CHAIRMAN. Can I say, for all of you, we hope you have a

longer statement, and we hope that, in 5 minutes or so, you can

summarize. Or if my staff gave you another time, whatever that

other time was, but normally it is 5 minutes. Your entire statement, for all of you, will be inserted in the record. Yes.

Mr. O’NEILL. All right. Thank you, Mr. Chairman.

The CHAIRMAN. Yes.

[The prepared statement of Mr. O’Neill appears in the appendix.]

Mr. O’NEILL. What I would like to do, because I think this first

paragraph is a linchpin for what I want to say to you, I am going

to read the first paragraph, and then I am just going to talk concepts. This paper is intentionally full of what I think are important

concepts.

American health care policy is in desperate need of reframing

and re-thinking, based on a return to first principles. This committee sits at the intersection of policy issues that must be acted

on together in order to produce a coherent and workable framework

for a better future for Americans, and for America.

Fundamental tax reform, financial security for retirees, and access to medical care for all Americans, in my view, are not separate

subjects. In the absence of coordinated policy and legislative action

by this committee, I think there is no hope.

So I bring passion to this subject, because I think our future is

in the hands of you all and your colleagues. Without some pretty

bold strokes, we are going to fail the competitiveness test that Senator Baucus called attention to.

So, let me begin, first, and just say a few words about my notion

of fundamental tax reform. If you want to know more about this,

when I was Secretary of the Treasury I invited all of the leading

thinkers about tax policy in the country to come and prepare papers and advise me and the people, including Pam Olson, who is

here today, about how we should think about fundamental tax reform.

It is in a 5-inch binder someplace in a safe, I think, at the Treasury Department. But if you would like to have the benefit of that,

maybe they would be willing to give it to you.

My view of fundamental tax reform is this: that our tax system

should be used to raise revenue, period. That means no credits, no

deductions. It does not mean that we should not create incentives

for people to do things. But think about what this country would

be like if we said to ourselves, if, for example, we want to induce

home ownership, instead of giving people tax credits—which I
7

would say are, to a degree, inequitable because the value of them

depends on your income level, wealth, and the investment you

make in a house—how different the world would be, instead of giving people tax credits, if we wanted to induce behavior, we had to

write them a check? That would be a different discipline, and I

would say an advisable discipline for our country.

Now, to work on the principles of health and medical care, I

think we first need to observe a fundamental truth, which is this:

the government does not have any money that it does not take

away from the people. It is a simple fact of life.

So when we talk about bestowing things on people, we are really

talking about taking money away from people and then giving it

back to them or someone else in a somewhat different way.

Having observed that all the money comes from the people, even

the money that comes from corporations truly comes from the people, because the taxes that corporations collect for us are included

in the price of their product. It is not a cost of capital, so if we

agree with those principles that the money comes from the people,

I think we need to address another question, and it is this. I think

we need to ask ourselves the question, when it comes to health and

medical care, should there be a basic meaning for Americans when

we talk about access? My answer is, yes. I believe all Americans

should have access to the health and medical care that they need.

Now, having said that—and couple that with the idea that all

the money comes from the people—I believe we should mandate on

Americans that they will purchase catastrophic insurance, where

‘‘catastrophic’’ is defined by a combination of income level and

wealth accumulation, so that if you are, let us say, a relatively

high-income family and you have $100,000 worth of annual income,

a catastrophic experience for you is different than it is for someone

who has nothing. If you have nothing and you have children and

they need to see the doctor, the first dollar is catastrophic.

So, it would really be therapeutic, I think, if we said to all Americans, as an American, you have an obligation to take care of your

family’s needs, and we are going to require you, as a responsibility

of citizenship, to effectively pre-budget catastrophic health/medical

care needs.

Then we need to say to them in the most honest way, for those

of you who have more, you are going to have to provide income,

which will run through the Federal Government, so that we can

provide financial support to those who do not have much, or anything, so that they have access to the health/medical care needs

that they have as well.

I know that it would take a great act of courage to say it that

bluntly to the American people. But I tell you, as I go around the

country, I find a lot of people who seem to be interested in the

truth these days. I think there is a yearning for ‘‘tell us the truth;

let us not do any more flim-flam with how we think about and how

we run our country.’’

Now, there is another important aspect to what I have in my testimony. I hope I can engage you in this, because I think you all

could really make a big difference if you would get engaged in this

subject. This is not an observation from a couple, 3 years now that

I have been out of the Treasury.
8

I have been working on health/medical care issues for the better

part of 45 years, coming here to Washington in 1961 as a systems

analyst at the Veterans Administration, where they hired me to try

to apply the ideas of economics and operations research to the delivery of medical care in the Veterans Administration.

When I was recruited into what was then the Bureau of the

Budget, my first assignment was to try to establish a framework

for thinking about trade-offs that we make at the Federal level between all the dimensions of the production function for health and

medical care, from biomedical research to health/medical care effects that come from interaction with the environment.

So this is not a subject I have recently come to. There is more

biographical basis for me making the assertion that I am going to

make to you. You can read that for yourself. I believe this, and it

is not a casual observation.

If we, today, were able to practice health/medical care intervention at the level of perfection that is possible, we could simultaneously reduce the health/medical care expenses of our society by

between 30 and 50 percent, and simultaneously improve medical

care outcomes and the health condition of the American people.

This is not trivial, theoretical, academic belief. You will see, I

provided some support for this assertion in my testimony. We

worked with real hospitals on the ground, sitting in medical wards,

to demonstrate that it simply is not true that it is necessary for

1 in every 14 Americans who go into a hospital to get an infection

they did not bring with them.

But that is the truth of the matter today. If you or your loved

ones go into a medical facility, even the very best medical facilities

in the country, the risks of them contributing to your ill health are

very substantial. But it is not only about things gone wrong, it is

about improving the underlying cost of what we are paying for now

in health and medical care.

Again, I have some examples in my testimony of how to attack

these problems. I do it from an observation of how systems analysis

and the application of the combined ideas of Lean Manufacturing

and Toyota Production System, and Six Sigma, and all of that as

a body of philosophical thought applied to the real world can

produce conditions that are astounding to most people.

I have included in my testimony a chart that shows the injury

rate at ALCOA, which is the safest place in the world to work. This

is a company in 43 countries, with 140,000 people. It is the safest

place to work in the world; not just in the United States, but in

all those 43 countries.

Then I have given you a comparison chart to show you that, for

health and medical care workers—forget about patients for a

minute—the injury rates are 27 times higher than injury rates at

ALCOA. It is an unforgivable thing.

But if you go, as I do, and talk to people in some of our great

medical care institutions, they do not even know what the facts are

about their injury rates, even though people are getting hurt every

day by trying to lift people who are 300 pounds without mechanical

assistance, or enough other staff to help them do the work. They

are being injured by needle sticks and things that they assume are
9

an inevitable result of delivering health and medical care. None of

that is right.

I did not include it here, but I was so busy making news with

other things when I was here, nobody paid attention to the fact

that, in the 23 months I was at the Treasury Department, we reduced the injury rate by 50 percent.

It was not because we spent an enormous amount of money. It

was because the leader cared about the people who worked in the

institution and was determined to prove these same concepts apply

to everything, everywhere.

Now, one thing that would be enormously helpful—yesterday I

was in Princeton to talk to the people at Robert Wood Johnson

about this—would be to have a concerted effort in five of our greatest medical institutions, with a team of systems analysts, people

trained in these techniques to work in those places to demonstrate

what I have asserted, that the opportunity is 50 percent—and it

can be captured pretty quickly—so that we have an unambiguous

set of propositions that demonstrates how we could get from where

we are to reducing our bill from $2 trillion a year to $1 trillion a

year. That would really be a beneficial thing for our society.

Now, there are some other things this committee could do that

would be enormously helpful, and I know you have struggled with

the issue of malpractice insurance. I would assert this. Again, go

to first principles.

The idea of medical malpractice has in it the fundamental concept that there are malevolent people out there delivering medical

care interventions to intentionally hurt people. I tell you what. I

have traveled all over this country. I have been in hospital wards

and infirmaries and surgeries. I have yet to find the person who

is intentionally hurting other human beings in the practice of medical care. So, I would argue that the fundamental premise of medical malpractice is wrong.

Now, that does not mean mistakes do not happen. I do believe,

when mistakes happen, we as a society should pay the economic

consequences to the individual who was harmed with this proposition: we should take lawyers out of this whole system and we

should have an adjudication board so that when an individual is

injured, that adjudication board, with professional medical people,

makes awards to compensate for the economic damage.

But, in the bargain, we should say this to medical practitioners.

Within 24 hours of an error, it needs to be recorded. It needs to

be put in cyberspace, with the circumstances surrounding the injury. There needs to be a root cause analysis that explains how this

happened. Then we need to have them say, what changes have you

made in your practices so that it goes into cyberspace and every

medical practitioner in the country, within 24 hours, has an opportunity to learn from that experience.

One of the things that is an underlying support to what I have

given you in my testimony about systems improvement, is the importance of two concepts: real-time problem-solving and transparency.

One of the reasons we do not have transparency in medical care

today is because people believe, if they tell the truth, they are

going to get their socks sued off, and likely even lose their rights
10

to practice. So, they have all kinds of incentives not to tell the

truth.

Later on, if I have some time, I will give you some illustrations

of how deadly that proposition is to the patient population today,

because there is no learning from one experience to another.

People are being killed every day because of things we know how

to prevent, if we can only share information. So if you all could redesign and eliminate the idea of medical malpractice, it would be

profoundly important.

Now, we need one other thing from the professions. We need

them to step up to their responsibility to clean out the people who

are not capable of doing the things they are licensed to do, and

there are some of those. But we cannot get salvation by taking

money away through the malpractice insurance system.

We can only get it if the profession will do its job of cleaning up

the profession of people who should not be permitted to do surgeries, and then requiring people to share things gone wrong so we

can learn, and compensating people who are injured for their economic loss.

There is another thing begging to be done. The reimbursement

system that largely flows from the propositions—I helped to create

some of this when I was at OMB back in the late 1960s and early

1970s.

The reimbursement system is a nightmare. It induces really undesirable behavior by medical care practitioners by, for example, focusing on the length of stay so that there is a push to get people

out of the hospital sometimes sooner than medically indicated.

I will give you a few facts. Of all the people who have bypass surgery in this country every year, 20 percent of them are readmitted

to that hospital or another hospital within a month, and about half

of them die.

Now, why are they readmitted? Because there is a biological

thing that happens after you have bypass surgery. In 6 or 7 days,

there is a tendency for the heart to have arrythmia. We know that.

So how do we try to compensate for that? The doctors create a

cocktail of medications, send the patient home, with the hope the

patient will remember take them in the right order, in the right

sequence, at the right time. A lot of patients are not capable of

that. So, we have this phenomena that is driven by the reimbursement system, which says the average length of stay for bypass patients is 5.9 days.

Our system, created here in Washington with the best of intentions, induces doctors and hospitals to get people out of the hospital

when it is not medically indicated for some significant fraction of

people who are discharged anyway because of the financial system.

It is really a travesty.

Right now, and I have this in my testimony, the system is so cynical that it kind of envelops the practitioners out there. In Pennsylvania, in 2004, the actual reimbursements to practitioners and hospitals was 28.7 percent of the amounts that were billed. So the billing clerk, who can figure out how to get more complicated, more

financially rewarding DRGs—which, again, are created here in

Washington—is more important than some of the practitioners, because by manipulating the DRGs, they can get maybe 1 percent
11

more compensation than their sister hospitals. This is not going to

be reformed or refined by private insurance companies. It can only

happen if you here do it.

Now, just a couple of other comments, Mr. Chairman. I have included in my testimony an idea that I have been proposing for how

we fix Social Security and financial assistance for the retired population, and I will leave that for you to read.

But one more thought. There are 300 million medication errors

in the United States every year, and a very large fraction of those

begin with unreadable prescriptions.

So I have been on a campaign, as I have traveled around the

country, saying to people, you want consumers to begin having an

impact? Every American should swear today, and then act on it,

that they will never, ever again accept a prescription from a doctor

that they cannot read.

The CHAIRMAN. Mr. Secretary?

Mr. O’NEILL. Yes, sir?

The CHAIRMAN. I am going to have to ask you to finish.

Mr. O’NEILL. I am sorry. I am finished.

The CHAIRMAN. Because at 11:30, we have a vote scheduled, and

want to go to the other two witnesses. Thank you very much.

Mr. O’NEILL. My pleasure.

The CHAIRMAN. Dr. Burman?

STATEMENT OF DR. LEONARD E. BURMAN, SENIOR FELLOW,

URBAN INSTITUTE AND CO-DIRECTOR OF THE URBANBROOKINGS TAX POLICY CENTER, WASHINGTON, DC

Dr. BURMAN. Mr. Chairman, Senator Baucus, thank you very

much for inviting me.

It is a little bit like de ́ja` vu for me. I actually wrote the testimony

for the 1994 hearing when I was on staff at CBO, and I was tempted to just resubmit it and say all those problems are still in existence, they are just worse.

The tax subsidies for health insurance and health care will reduce Federal income tax and payroll tax revenues by over $200 billion. The chart showed $115 billion in income tax revenue losses,

but it also undermines the payroll tax base as well.

Almost all the revenue loss is attributable to tax exclusions for

employer-sponsored health insurance. Thus, it is no surprise that

most Americans under age 65 get their insurance at work. What

may be surprising, however, is even with such huge subsidies,

more and more people are becoming uninsured, especially the

young, those with low incomes, and those who work for small firms.

Some have suggested that the tax subsidies are a significant part

of the problem. The subsidies encourage people to get insurance at

work, stifling the individual non-group market, and they encourage

employers to provide overly generous insurance, since the cost is

subsidized.

What is more, the subsidy is upside-down, aiding most those who

would purchase insurance under any scenario and providing little

aid to those of modest means.

Some have suggested that the best option would be to eliminate

the employer exclusion altogether and let the market work its

magic. The problem is that the health insurance market just does
12

not work very well. It is the poster child for what economists call

market failures. I have a few examples.

First, the very act of having insurance increases utilization. People spend more when someone else is writing the check. But this

causes insurance to be more expensive than it might be.

Second, insurance is most attractive to people who expect to benefit most from it, such as those with chronic conditions. Insurers,

thus, have to assume that purchasers have higher costs than average. That means that healthy people get a relatively bad deal from

insurance, unless they can align themselves with a large group.

This feature of insurance is called adverse selection.

Third, the existence of free, even if inadequate, emergency health

care for those with low incomes serves as a deterrent for purchasing health insurance. Why pay if you can get it for free?

Finally, healthy people, especially in the non-group market, can

only imperfectly insure against the cost of developing chronic illnesses because premiums for non-group health insurance increase

over time for sick people.

Subsidizing individuals who get insurance at work mitigates

some of these problems and it exacerbates others. On the one hand,

by encouraging individuals to get insurance at work, it reduces the

problem of adverse selection because people choose employment for

reasons unrelated to health status, and it offers those who work for

large firms a kind of renewable insurance. But this pooling works

less well for small employers whose costs may be heavily influenced by the poor health status of one, or several, employees.

On the other hand, the tax subsidies encourage over-use of medical services because people do not face the true cost of insurance.

As noted, the current tax subsidies are poorly targeted.

On balance, though, despite its failings, the current employerbased system supplies health insurance coverage to almost 70 percent of American workers under age 65. Reforms should build upon

that coverage base instead of eroding it.

Because of the rampant failures in the health market, solutions

are not simple. The data, however, suggest some obvious directions

for improvement. To start, the upside-down tax subsidy should be

set right. Currently, the largest subsidies go to those who have a

strong incentive to get health insurance, even absent a subsidy,

while those for whom health insurance is unaffordable get little or

nothing.

A better option would replace the tax exclusion with a refundable

credit, targeted at those earning less than the median income. The

President has proposed such a subsidy, but it is limited to purchases in the non-group market and so would undermine ESI,

which still covers many low-income people.

A better option would be to allow the subsidy for both group and

non-group insurance. But this is an important point. Many proposals would level the playing field between ESI and non-group insurance. It sounds fair, but it would cause many people to lose insurance.

For example, a small employer can get the same tax benefits as

its employees without going through the hassle and expense of providing ESI but would be sorely tempted to drop insurance coverage,

and it would be under strong competitive pressure to do so.
13

Indeed, the healthiest workers would be happy to take a small

increase in wages in exchange for dropping ESI coverage, because

cheap, tax-subsidized insurance would exist outside of work.

But left out in the cold would be those who are older or less

healthy than average, for whom non-group insurance premiums

would be much higher, and low-income people to the extent that

they benefitted from cross-subsidization within the firm. It is largely for those reasons that MIT economist John Gruber recently estimated that the President’s proposals for expanded HSA tax subsidies would reduce coverage.

Re-targeting the upside-down subsidy is much easier said than

done. One option would be to phase out the subsidy at higher incomes. This would reduce the incentive of employers to provide

overly generous health insurance, while still providing an incentive

for many currently uncovered individuals and families to obtain

coverage.

However, it would generate a lot of political opposition. The reaction to the Tax Reform Panel’s relatively modest cap proposal is a

daunting case in point.

An alternative, although with its own political challenges, would

be to come up with a dedicated revenue source, such as a VAT. A

more incremental option would be to help small employers to offer

health insurance, for example, by providing a refundable tax credit

or a direct subsidy to defray the higher administrative costs that

small employers, especially those with low-wage work forces, face

in purchasing health insurance.

A more far-reaching reform would guarantee that small employers who continually pay at least a certain percentage of their employees’ premiums would be able to purchase insurance at large

group rates, for example, from a pool similar to the Federal Employees Health Benefit Program.

Finally, I would note that the best option to expand care might

be outside the tax system, for example, capping the tax exclusion

and using the revenue savings to expand SCHIP or Medicaid, or

providing vouchers to low-income households.

That concludes my remarks. Thank you.

The CHAIRMAN. Thank you very much, Dr. Burman.

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

The CHAIRMAN. Now, Mr. Lane?

STATEMENT OF ROBERT W. LANE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, DEERE & COMPANY, MOLINE, IL, ON BEHALF OF THE BUSINESS ROUNDTABLE

Mr. LANE. Good morning, Mr. Chairman, Senator Baucus. I am

Robert Lane, chairman and chief executive officer of Deere & Company, and I am pleased to be here on behalf of the Business

Roundtable’s Health and Retirement Task Force.

Roundtable member companies provide health insurance for 25

million employees and their families. For the third straight year,

member chief executives report that their number-one business cost

pressure is employee health care costs.

Our companies are looking for tools, tools to help us positively

manage rising health care costs and to assure quality health care
14

for our employees. We believe existing tax incentives should be

more focused on consumer-directed options than they are today.

In particular, we are finding that health savings accounts, flexible spending accounts, and health reimbursement arrangements

can be efficient tools for our employees to gain considerably more

value from their health care dollars.

I want to provide some background information, and then some

suggestions for the committee’s consideration as you review health

care tax policy.

Now, in the past, John Deere has been innovative in managing

health care costs through the use of self-insured plans, managed

care networks, and disease management programs.

Today at Deere, the annual salaried family premium for our most

popular, 100-percent HMO plan, is $12,300. Deere’s goal is to more

efficiently spend these dollars by improving the value equation,

while ensuring our employees remain safe and healthy.

At John Deere, we are creating affordable, sustainable health

care benefit plans that encourage our employees to participate, participate actively, in their health care decisions, rewarding them for

adopting healthy lifestyles and preventative behaviors, while also

providing quality health care insurance protection.

One of Deere’s guiding principles is to reform health purchasing

processes by changing health care value at the point where most

health care consumption decisions are made, at the point of patient

care.

Business Roundtable companies believe that our employees, as

decision makers, must be given more flexibility to enable them to

make smart and efficient health care choices.

At the same time, our companies are committed to remain a

partner with our employees, to educate them and coach them about

the health care marketplace.

Now, some ideas the Business Roundtable asks the committee to

consider are: first, employees, especially those who are challenged

with health care expenses in the early part of the year, need to be

allowed to coordinate their health savings accounts with the use of

flexible spending accounts and health reimbursement arrangements to allow them to budget their expenses over the year.

Second, HSA contribution limits should be lifted. This is critically important to enable employees to save, save for future health

care expenses and not merely drain the accounts year to year.

Third, we support regulatory efforts to permit varied contribution

amounts by employers to an employee’s HSA when the employee

is a low-wage worker or has a chronic illness.

Fourth, Business Roundtable supports legislative changes to

allow individuals to carry forward funds in a flexible spending account, or roll funds over into a health savings account.

The current ‘‘use-it-or-lose-it’’ rules cause many individuals to

avoid flexible spending accounts or to incur unnecessary care at

year-end to avoid forfeiting their money.

These four changes will enhance health care delivery and allow

a broader group of individuals to combine the best features of managed care with the positive aspects of individual control over their

health spending.
15

Roundtable companies are not looking to reduce health care benefits. We want to improve on the value that health care dollars can

buy. Improving on the value is the only way to assure quality and

affordable health care.

We believe that health care expenditures can, and must, be spent

more wisely and more efficiently. We ask the committee to focus on

additional health care tax incentives directed towards our employees.

Thank you, Mr. Chairman, Mr. Senator, for listening.

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

The CHAIRMAN. Thank you very much.

We got a lot thrown at us. [Laughter.] That is a compliment.

Senator BAUCUS. It is not all consistent, either.

The CHAIRMAN. No. No.

I am going to concentrate on some of the negative ramifications

of the rising cost of health care. It makes it harder for businesses

to manage their costs to compete in the global marketplace.

For more uninsured Americans, because they cannot afford

health coverage, and even for those who can afford insurance, it

crowds out spending on other important priorities that families

have.

Some have suggested that our tax incentives help make health

care more affordable because those incentives reduce the after-tax

cost of health care. Obviously, others have suggested that the current tax incentives actually increase costs and health care inflation,

because the current policy encourages first-dollar coverage and

other gold-plated medical benefits.

So I would like your views. This is to all of you, so I will start

across the board. I would like your views on this subject. Is one

side right, both sides, or neither side? What can we do to align our

tax policies with the goals of controlling costs and increasing coverage?

Mr. O’NEILL. Senator, I believe what I said to you in my statement and in my testimony. I really believe using the tax system

in the way we do now is a fundamental mistake.

I think, in a way, it provides an opportunity to do things that

sound good, but I think often have secondary and tertiary consequences that are actually not so good at all.

To go back to my theme about fundamental tax reform, I noted—

and I know you all did, too—that the best estimate today is that

our current tax system, which is 10,000 or 11,000 pages, is incomprehensible and we are not collecting as much as $400 billion a

year that is theoretically due and owing.

Adding on more refinements for tax benefits in the name of improving the health condition of the American people, I think, is a

fundamental mistake. It is not that I want to stop where we are.

I want to eliminate what we have done and re-think the proposition about how the American people interact with themselves in

the broader context of society.

To me it is really important, because people are very confused by

this. There are people who really think Medicare Part D was a gift

from the government. I hope you do not mind me saying so, but I

think it is, frankly, the worst piece of social legislation in my lifetime. Not because we should not help people.
16

The CHAIRMAN. Those of us who wrote it appreciate that. [Laughter.]

Mr. O’NEILL. I am sorry. I am in the business of telling you the

truth as I see it. I believe that Americans should have access to the

health and medical care they need. It is not that I do not want

them to have the drugs that they need and require. But I would

like for them to have them in a straightforward way, first by asserting to them, those who are of means, you must pay for it, because if you do not pay for it, you are basically electing to consume

your money, and when you have a catastrophe in terms of a health

requirement, you shift the cost to your neighbors.

If you look at it from a farmer’s point of view, if your neighbors

ate their seed corn, you would not be to happy to have them coming to you to give them some of your seed corn, because they have

a responsibility to provide for their own future, not to consume it

and then expect you to cover their responsibility.

So I think it is time for us to say, as Americans, we have rights

and responsibilities as an American. Part of your responsibility is

to seek to take care of all of your personal and family needs, not

just for health and medical care, but for education, and everything

else that you do.

For those of you who are unfortunate, and for whatever reason

cannot meet the standard of what it means to be an American, the

rest of us should bear that burden, and we should bear it happily,

with a simple, easy-to-understand, progressive consumption tax,

and we could have a very different conversation.

The CHAIRMAN. Dr. Burman?

Dr. BURMAN. I applaud Secretary O’Neill for his efforts to try to

get tax reform through, although we probably would disagree about

exactly the right way to do it. Within the current tax system, I

think, as your question indicated, the current system is really a

mixed bag. Without any kind of a subsidy, it is not clear that many

people would have health insurance at all.

The problem is this adverse selection problem, that insurers have

to assume that people who want to buy insurance are the ones who

are sicker than average, and that means that healthy people have

an incentive not to buy into the pool, and that pushes the premiums up further.

The good thing that the current system does is, it encourages

people to get insurance through employers. In a lot of ways, employers are a good way to pool people together. You choose where

you work for reasons other than your health status, for the most

part.

So, a company like John Deere or ALCOA has thousands and

thousands of employees, a few of whom turn out to be sick, most

of them are healthy, and they can all get a relatively good deal on

their health insurance.

On the other hand, the unlimited subsidy means that employees

will demand more and more generous health insurance coverage.

This is the moral hazard problem. So the tax subsidy definitely has

contributed to the growth in health costs and in health insurance

costs.

There are things you can do about it. One thing, and this is actually the focus of the 1994 testimony, is caps on the tax subsidy.
17

You want to encourage people to get adequate insurance, but you

do not want to encourage them to get Cadillac insurance policies.

So, you can cap the subsidy at the cost of a policy like Blue Cross

Standard Option, something like that.

In fact, actually, the Federal Government did something very

much like that with Federal employees: they paid for the cost of

the least expensive options, and you paid for additional costs beyond that.

The other thing, and I think Senator Baucus mentioned this, was

that information systems would help a lot. We treat the health insurance and decisions about health care as if people are saying, oh,

boy, I can get bypass surgery. The fact is, for most kinds of medical

procedures, the price is not really the main factor. It is that you

have been convinced that you really need something.

In a lot of kinds of medical procedures, it is really unclear what

the costs and benefits are; even if everybody wanted to do the cost

benefit analysis and only do things that were economically efficient, a lot of times you don’t have the information.

So, investing more in finding out what treatments are effective

and which are ineffective, I think, would help a lot.

The CHAIRMAN. All right. Mr. Lane? Then I will call on Senator

Baucus.

Mr. LANE. Senator, to your question about whether the tax code

is incenting spending, I think, as a practical matter today, it is the

amazing expansion of technology and the demographic trends in

our country that are going to create enormous pressure on future

health care costs.

Basically, employees today, we think, practically understand

what it means if they have an umbrella policy which will cover

them in all situations for catastrophic problems, like just insuring

when you total your car, the car is totally wrecked, and then they

will pay for, with their own money, all the expenses up to that

point which are more routine, and where they have an opportunity.

For example, I think almost no John Deere employee today

knows what an MRI would cost. Many of them have had that prescription given to them or their children, but no one knows because

they have a co-pay or deductible.

Under this program, they would all learn what that meant. I do

not think they would get more of them. I do not think people would

get more than one operation. But I think it does make it more affordable and it does make it possible for them to be engaged.

We have found our employees, as a practical matter—and I believe the employees at the Business Roundtable—that their engagement can make a huge difference. We have a lot of confidence in

their practical, common-sense judgment when it is their own

money.

The CHAIRMAN. Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

Secretary O’Neill, the VA is held up to be a success story. How

much of the VA’s systems can be applied to the rest of the country?

Mr. O’NEILL. I think it can be applied very broadly. This is of a

fairly recent vintage. You all will remember, because I am sure he

testified before this committee, Ken Kaiser came to the VA as the

chief medical director, with a conviction that health care for vet-
18

erans should be looked at as the best in the country and not second-class.

I think for a long time there was perhaps the reality that veterans health care was not so good. Ken Kaiser came with a conviction, much like what I have expressed to you, about the possibility,

without more money, of creating significantly better outcomes.

I will give you a little illustration from VA Pittsburgh. When we

started working with them, and Ken had gotten them started with

this, we stopped for a week and observed what was going on in the

wards there with regard to hand hygiene policy.

A lot of the infections that people get unnecessarily in hospitals

are caused by a lack of adherence by the staff to hygiene policy,

so in a week’s time we watched what went on 24 hours a day.

What we found was, 40 percent of the nurses and technicians did

the alcohol-based scrub, gloving, gowning, masking, as they all

knew they ought to, and only 10 percent of the doctors. Ten percent

of the doctors. They had the average expected level of infections.

We worked with them and did some simple things.

First of all, we asked them, why do you not do this? You are all

scientifically trained people, and Semmelweis, in Hungary, demonstrated 150 years ago—it is not like this is new news—that there

is a way to prevent transmitting infection from one patient to another. They said, well, the sink is down the hall and we are in a

hurry, we are behind schedule. So if we have a white coat on, we

do not think we——

Senator BAUCUS. My time is a little short here. So basically, how

much of that can be applied?

Mr. O’NEILL. I think almost all of it.

Senator BAUCUS. And what would the effect be in reducing unnecessary health care costs in this country?

Mr. O’NEILL. I think if we just did the things that have already

been successful, we have demonstrated in the VA, we could look to

bring down the Nation’s health care costs bill by 10 to 20 percent.

But there is a lot more to do at the VA, as my testimony suggests,

and at all of the other medical delivery centers in the country.

I will tell you one fact. A great medical center, you all would

know the name and count it among probably the top three places

in the country. Their adherence to hand hygiene policy, by their

own audited inspection, is 29 percent, in one of the great places in

the world to get medical care. So, when you look at how big the

opportunity is, it is enormous.

Senator BAUCUS. Now, it is interesting, Mr. O’Neill. When you

spoke, there was not much discussion about tax policy, except generally at the top. You said taxes should only be used for raising

revenue. But with respect to health care, you did not get much into

employer-based exclusions, or HSAs, and all that. Your solutions

tend to be more systematic, given the current system.

Mr. O’NEILL. Yes, that is true. I will tell you what. I am fascinated by the fictions that we pick up and we all talk about. I was

on the General Motors board for 3 years and got off because I did

not think it was fixable, quite a long time ago. [Laughter.]

But the idea that they have $1,500 worth of cost in every year,

it is an accounting thing. The truth of the matter is, every employer has to earn enough money in its revenues to cover all of its
19

compensation costs. General Motors is paying their average assembly-line worker, including benefits, $125,000 a year. That has been

an unsustainable proposition for 30 years.

But it is not because they have medical care expenses. It is because their total compensation cost is too high. They negotiated it.

Senator BAUCUS. That is right.

Mr. O’NEILL. They got drawn into it, partly because, in the second World War, when we had wage and price controls, we created

this tax incentive for employers to give compensation.

Senator BAUCUS. Right. I know. We all know.

Mr. O’NEILL. I mean, we did it right here.

Senator BAUCUS. We did that. All right.

Now, you said huge savings can be achieved by applying VAtypes of systems to all the hospitals and health care providers in

the country.

Mr. O’NEILL. Right.

Senator BAUCUS. Second, how much is the solution, in your judgment, the mandatory requirement that everyone purchase health

insurance? How important is that to the solution?

Mr. O’NEILL. I think, if you think about this as a Rubik’s Cube

or something, it is a block, but it is not independent from the other

parts.

Again, let me go back to the first paragraph of my testimony.

You all sit at the intersection of really critical policy threads that,

in my judgment, for too long have been dealt with separately.

I think we need to deal with the tax system, with our ambition

and vision for what it means to be an American when it comes to

access to health and medical care. For sure, we need to create a

system, which I think we could do with a reasonable amount of

money, to provide financial security to every American when they

get to be 65 years old.

I think you maybe have seen what I have written about that subject. These are things that needed to be treated together, and the

things that you can do are to create a framework for the society

to realize its potential.

Senator BAUCUS. All right. My time is encroaching here a little

bit.

Mr. O’NEILL. Sorry.

Senator BAUCUS. I have a couple, three, quick questions that are

all related. How important is it that we in America have an insurance industry and a system of health care reimbursement where

there are a large number of health insurance plans tailored to meet

lots of different circumstances, giving people lots of choices so they

can decide which one seems to make sense for them, but a system

where—everything is a double-edged sword as you pointed out in

your testimony—a lot of providers try to game the system, try to

add the length of stay here, put in a certain procedure in a certain

DRG classification to get a little more revenue.

I am struck with your percentage. What, it was 28 percent of the

reimbursements billed for in Pittsburgh Hospital is actually received, and the rest is not received. I am leaning to something else,

and it is the single-payor system.
20

How do you get rid of all this, I think, ridiculous, excessive overhead cost that we have in our system, or at least significantly reduce the ridiculous overhead cost that we have in our system?

First of all, I know a lot is paperwork, but how much of it is because of all the numbers of insurance policies we have, et cetera,

et cetera, and how important is it to have, on the other hand, all

those various insurance policies in this country?

Mr. O’NEILL. Boy, that is a mouthful. But let me do this really

fast. I am desperately afraid of the idea of a single-payor system,

because I think it reinforces the notion that somehow the Federal

Government has a pot of money and it is now going to bestow

things on us.

I think it makes a lot more sense to say to Americans, your responsibility as an American is to cover your needs. You are mandated to buy what, for you, is catastrophic protection, and we are

going to subsidize catastrophic protection for people who do not

have it.

There is a fog around the idea of insurance companies.

Senator BAUCUS. All right, Mr. O’Neill——

Mr. O’NEILL. If I can just say this one thing. Insurance companies that survive do not take any risk. What they do is, they make

a market-necessary rate of return on the capital they employ. That

is what they do. It is like all business enterprises; that is what

they need to do to survive.

So what do insurance companies do? They bill enough premiums

to be able to discharge the responsibility for the experienced cost.

That is what they do. If they do not collect enough, they raise the

premium.

Senator BAUCUS. Well, depending upon their rate of return on

their assets, too. That is a key factor.

Mr. O’NEILL. Well, but if you look at industry generally, if you

look at the insurance industry specifically, what you will find is the

tendency is to——

Senator BAUCUS. With all due respect, you are not answering my

question.

Mr. O’NEILL. I am sorry.

Senator BAUCUS. You answered the single-payor part.

Mr. O’NEILL. Right.

Senator BAUCUS. What about the other part? Is our current

health insurance system just too complex?

Mr. O’NEILL. It is a disaster. And here——

Senator BAUCUS. And how do you make it more acceptable?

Mr. O’NEILL. Well, going from my notion of a mandate, this requires some really difficult policy choices. In the broadest sense, in

my concept, we would have one pool in the country. Every American would be in the pool. It could be run by private companies;

that is all right with me.

Now, if you say that, you are really mutualizing the risk for all

kinds of people in all kinds of circumstances. In the broadest sense,

you could make a public policy case for that. But then come the

questions, does that mean we want to mutualize the risk and the

cost for people who intentionally damage their own health?

Should we let people have the privilege of a lower cost who are

alcoholics and drug abusers and the like, or should we have some
21

separate pot that we put people in if they are imposing costs on

the rest of us that are unfair and unwarranted? So, it is complicated, but ideally, we have one pool for our population.

Senator BAUCUS. I have gone way over my time.

Mr. O’NEILL. I am sorry, I did it.

Senator BAUCUS. That is all right.

The CHAIRMAN. I have one question for the panel. Secretary

O’Neill probably has said that there is nothing good about our system, but let us start with the assumption that, with the employerbased system, there is a good deal of good in the sense that most

Americans do have health insurance coverage, and the quality of

care we receive is as good as any in the world.

As we look at possible reforms, I would like to have you comment

on this time-tested edict of ‘‘first, do no harm,’’ and what are potential pitfalls that we should be careful to avoid as we look at this?

I will start with Mr. Lane, Dr. Burman, then Mr. O’Neill.

Mr. LANE. Mr. Chairman, I think on the question of ‘‘do no

harm,’’ the current system probably will tend to do harm if we do

not make a change, for the reasons you addressed in your opening

remarks.

The CHAIRMAN. All right.

Mr. LANE. I think, as has been thoughtfully said here, there

probably are some very good things that can be retained. I think

that what we like about engaging employees in the program as it

has been proposed, and as we are actually doing—this is not theory, we are actually in the middle of coaching and working with

our employees today—is that today on the Internet there is an

enormous amount of information that is available, potentially

available, for employees to really understand more deeply, with

their doctor, what their options are and what costs are.

So, probably the status quo would be the more harmful. We are

going to keep, in our system, all of our employees covered by insurance. We are not intending to lower the coverage. What we will do

is get their engagement, use the information that is available out

there, and every one of them will have an understanding and participate with us in trying to spend their money better, which we

have seen Americans tend to do when they have their money in

their own account, which they can keep if they do not spend. It remains, it stays.

We see that as retaining the good of the umbrella coverage, but

involving them in the day-to-day going to the drug store and knowing what a prescription costs. They will pay the full bore, up until

their deductible, of every prescription. They will see that.

Today, they do not. The prescription may be $152, but they have

maybe a co-pay of $20. We have seen enormous cooperation with

our union employees. For example, we work very closely with the

United Auto Workers.

We have been successful in working together to retain the benefits for employees, but have their engagement in bringing down the

costs of the program and the cost to the company, which then, to

your question of harm, allows us to continue to make this part of

compensation.

After all, we want a healthy workforce. We want employees. We

are in this vicious competitive game worldwide that Mr. Secretary
22

referred to. In this world, as he has traveled around, we have to

compete, just like ALCOA does. We are finding that they are helping us, by their engagement, bring down our costs.

The CHAIRMAN. Dr. Burman?

Dr. BURMAN. I think there are two concerns. Basically, we all

agree that there are serious problems with the current system, but

I think a lot of people are concerned that you really could make it

a lot worse.

One problem is, if policies ended up pushing a lot of people into

the individual, non-group market and we did not find a way to

solve this adverse selection problem, so the people who were sick

actually could not get insurance any more, it seems like that would

be a serious setback.

In fact, if a lot of employers drop their coverage and you do not

solve the problems in the non-group market, even if you have large

subsidies for non-group insurance, the net result could be that

fewer people would have insurance, and the ones who really would

be hurt would be lower-income people who are sick.

A related concern is about this issue of health savings accounts.

The idea behind health savings accounts, I think, is a good one,

that you want to give people an incentive to economize. The problem is, with health savings accounts, the incentives can have vastly

different effects on people based on their income.

Secretary O’Neill had suggested a kind of catastrophic insurance

where the deductible was based on your income. Without that, the

idea of maybe a $2,000 annual deductible, which is no big deal for

upper-income people, would be a serious burden for lower-income

people with chronic illnesses; year after year after year, they would

hit the high deductible.

Well, the problem with offering a choice of this high-deductible

insurance and the HSA is that it becomes an ideal mechanism for

creating adverse selection in the workplace. We know that this can

work out badly. In the Federal Employees Health Benefit Program,

for a long time, Blue Cross offered a Standard Option and what

they called High Option.

The two programs were not that much different, but the High

Option was a little bit more attractive to less-healthy workers.

OPM did a study and they showed this graph of the premiums,

where initially there was a small difference in premiums reflecting

slightly more generous benefits in the High Option plan. Over time,

the premiums just diverged.

As healthy people opted out of the High Option plan, selected the

Low Option, the pool for High Option became sicker and sicker,

which moved more and more of the healthy people out, and eventually High Option became infeasible. The people who are paying for

it, even if they were really sick, were not getting the benefits they

were paying for.

HSAs can do the same kind of thing. The people for whom HSAs

are the most attractive are healthy people who have a sufficient income so they can afford the risk of hitting the deductible. Those

would be the two risks I would be most concerned about.

The CHAIRMAN. Secretary O’Neill? Then I will call on Senator

Baucus. This is my last question.
23

Mr. O’NEILL. Implicit in the idea of strengthening or refashioning

the tax incentives for health/medical care is the idea of transparent

information. I wonder if there is anybody in this room who can understand the communications they get from their own health care

encounters.

I am flabbergasted to get these three-page forms that have all

these numbers on them. At the end of it, it says, ‘‘This is not a

bill.’’

Senator BAUCUS. I have had that. I got one yesterday.

Mr. O’NEILL. Really?

Senator BAUCUS. Yes.

Mr. O’NEILL. And then it says, ‘‘You may be billed for this

amount,’’ whatever that means.

Senator BAUCUS. That is exactly what it said.

Mr. O’NEILL. And then nothing ever comes. The truth of the matter is what I said to you earlier. Pennsylvania is not an exception.

Every State in this country is the same: the actual reimbursements

are less than 30 percent of the amounts billed. So if you had access

to the billing information, you would not know anything. It is just

a bunch of numbers on a piece of paper.

And I live in the real world, you know. I really worry about how

we can take legislative action here, which I know you, with a great

heart and sense about what to do for this country, often take legislative action without going out and walking around to see what it

is really like out there in the world.

One experience is amazing to me. At any hospital facility—I beg

you to do this—go in and look at what they are doing with HIPAA

forms. Have you ever signed a HIPAA form? My question is, did

you read it? The truth of the matter is, we have imposed, with the

best of intentions for privacy purposes, this enormous regulatory

process for HIPAA.

Yet, if you go in, they will not treat you until you initial and sign

the form. Do you know what they do with it? They put it in a cardboard box and they send it to Central Storage for 5 years. Do you

know what value it has? Zero. It is an imposed cost that we put

out there on the system for a noble purpose, but it is part of the

$2 trillion, folks.

If I could do one thing, I would cause all economists who have

an opinion about these things to go sit in a hospital ward and

study the real facts, not the theory about how Adam Smith told us

things work, because it is not true.

The CHAIRMAN. All right.

Senator Baucus?

Senator BAUCUS. Yes. I was just going to say——

The CHAIRMAN. I am not sure I agree that everything Adam

Smith said was not true.

Mr. O’NEILL. I did not say that. [Laughter.] I did not say that.

Senator BAUCUS. It is interesting. Dr. Burman, you talked about

how the Federal Employees Health Benefit Program changed its

High Option/Low Option. I am one of those persons. As I was in

High Option for a while, I thought, gee, I will get more coverage.

But then I thought, well, I am healthier, several years ago, so it

was a lot less expensive, so I opted for Low Option. I wondered why

the premiums started getting up a little bit, even though I was in
24

the Low Option. But you finally explained it to me. I appreciate

that.

I would just like, if you would, Dr. Burman and Mr. Lane, to talk

a little about HSAs. I have some of the concerns, frankly, Mr.

Lane, that Dr. Burman has, that it is going to tend to incent people

out of group coverage and may even cause more problems than it

solves. It has a very strong initial appeal, choice. We all like choice.

But I personally believe, frankly, there is too much choice in the

Medicare Part D drug benefit. In my State of Montana, seniors

have to choose from among 47 different choices. It gets a bit complicated, as you might guess.

So do you recognize, Mr. Lane, Dr. Burman’s points? And Dr.

Burman, do you recognize Mr. Lane’s? I am trying to get some understanding here.

Mr. LANE. Sure. Well, we have decided, at John Deere, to introduce HSAs. We have announced this publicly to our employees, to

our U.S. salaried employees, and it will begin in 2007 and there

will not be a choice. Everyone will participate in them.

Senator BAUCUS. The question, really, is this—particularly if the

recommendations by the President are adopted and the limitations

are increased very significantly: overall in the United States, the

thought is that that will tend to have adverse selection consequences for less-healthy Americans, generally. That is, group coverage will cost more, the more people are moving to HSAs.

Mr. LANE. We actually believe that, with the engagement of

every employee in this process, that what will happen is that we

will just insure the big, catastrophic events and their engagement

will make it possible for people, who today would not choose to be

insured, to actually buy just this umbrella coverage, which was

available before, but not with the ability to put your own money,

pre-tax, into an account that stays if you do not spend it. This is

a very attractive new feature, and there are ways to structure it

so that the cash flow issues that Dr. Burman mentioned, which are

important, particularly at the lower end, will not be an issue.

People who are at the lower end of the wage scale do have issues

of, how will they pay for it if the expenses occur early on in the

year. But through this FSA recommendation that we just gave in

our testimony and other structures, we believe that actually it will

engage employees more and they will be more inclined to take the

insurance.

Senator BAUCUS. Dr. Burman, do you have any reaction to that?

Dr. BURMAN. Yes. I guess I have just a few other points. One of

the attractions of HSAs is that you would think that it would help

to restrain the growth of health care costs.

There are a couple of problems. One is that actually, when people

are paying for health care out of their own pockets, the evidence

from studies like the health insurance experiment in the 1980s was

that people are as likely to economize on care that they need as on

care that they don’t need, so that is really a concern.

The people for whom the cost-control strictures will be most important will be the ones who are low-income people who have a

couple of hundred dollars in their HSA and they do not want to

blow it out in a year.
25

The other thing is, the vast majority of medical expenses is incurred by people who are very sick, in the last 6 months of life for

people who have chronic illnesses. Those people will not be affected

at all by a catastrophic deductible, even at $2,000 or $5,000 a year.

In fact, in some kind of perverse way, health savings accounts

might actually encourage some new spending. I read about a company that was offering people credit cards that they could use to

pay for their medical expenses out of their HSA. In economic

terms, if you have money in the HSA, you want to keep it, because

it turns out this is a great retirement vehicle.

But if people are walking around with a credit card and they know they have $5,000 accumulated in their HSA because they

have been healthy for a few years, they might say, well, yes, getting the cosmetic stuff for my teeth, or whatever, does not cost me

anything. I have the balance in the account. The bottom line is that

the effectiveness of HSAs in constraining costs, I think, has been

vastly overstated.

The other thing is that HSAs, just like the tax subsidy for employment-based health insurance, are upside-down subsidies. The

people who get the most benefit from health savings accounts are

the ones in high brackets. If you are in the 35-percent bracket, this

is the best tax subsidy for savings that has ever been invented, especially if the President’s proposals were enacted. You not only get

a deduction at the front end, which is worth 35 percent, but you

also save payroll taxes.

As long as you eventually spend the money on medical care—you

can pay for some of your retirement expenses or your Medicare premiums when you reach retirement—the money is tax-free forever.

Concern, of course, is that if people switch from putting money

in 401(k)s to putting money into health savings accounts because

it is a better deal, then they are very vulnerable if it turns out they

get sick at some point, if they develop diabetes or something else

where they are going to hit the deductible year after year after

year. They will reach retirement and they will not have anything

in their savings account.

Senator BAUCUS. I appreciate that. One of my concerns, too, I

think the estimate is $136 billion, this cost over 10 years. That includes the refundable portion of it. Whereas, raising the limits

would cost, on that basis, $136 billion over 10 years. I appreciate

this.

The most frustrating part of this, Mr. Chairman, is this is too

short. We really need about a whole day to get down to some common understanding and directions on where to go. But it is a start.

All three of you are extremely able. We will just have to take, Mr.

Chairman, the suggestions that they have all given.

I might say, Mr. Lane, one of my fairly early memories down on

the farm was operating a John Deere D.

Mr. LANE. Thank you.

Senator BAUCUS. And going ‘‘putt, putt, putt, putt.’’ I will never

forget that thing. [Laughter.]

Mr. LANE. Thank you.

Senator BAUCUS. You are welcome.

The CHAIRMAN. I still have one of those Bs and one of those As,

and a 620. [Laughter.]
26

Mr. LANE. Time for a new one, Senator.

Senator BAUCUS. Right. [Laughter.]

The CHAIRMAN. I knew what I was getting myself into.

Just in case you might wonder at other people not being here,

the Health Committee has a mark-up today, Judiciary is working

on the very important issue of immigration, and then we have lobbying reform on the floor. So I only say that to explain to people

that are watching why other people might not be here.

For you folks, though, it is important that maybe people that

cannot be here might submit questions for answers in writing, and

we would appreciate if you would cooperate with that.

Thank you very much, all of you.

[Whereupon, at 11:30 a.m., the hearing was concluded.]
(27)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
(107)

COMMUNICATIONS
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122

Æ