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ALTERNATIVES FOR EASING THE SMALL BUSINESS

HEALTH CARE BURDEN

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 13, 2007

Printed for the use of the Committee on Small Business and Entrepreneurship

(

Available via the World Wide Web: http://www.access.gpo/gov/congress/senate

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

BENJAMIN L. CARDIN, Maryland

JON TESTER, Montana

OLYMPIA J. SNOWE, Maine

CHRISTOPHER S. BOND, Missouri

NORMAN COLEMAN, Minnesota

DAVID VITTER, Louisiana

ELIZABETH DOLE, North Carolina

JOHN THUNE, South Dakota

BOB CORKER, Tennessee

MICHAEL B. ENZI, Wyoming

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director

WALLACE HSUEH, Republican Staff Director

(III)

CONTENTS

Page

OPENING STATEMENTS

Kerry, The Honorable John F., Chairman, Committee on Small Business

and Entrepreneurship, and a United States Senator from Massachusetts .... 1

Snowe, The Honorable Olympia J., a United States Senator from Maine ......... 4

WITNESS TESTIMONY

Senkewicz, Mary Beth, Independent Consultant, MBS Consulting .................... 7

Bragdon, Tarren, director of Health Reform Initiatives, The Maine Heritage

Policy Center ........................................................................................................ 12

Kingsdale, Jon M., executive director, Commonwealth Health Insurance Connector Authority ................................................................................................... 19

Sweetnam, Jr., William F., former benefits tax counsel, Office of Tax Policy,

U.S. Department of Treasury .............................................................................. 25

Sullivan, Ann, Federal legislative consultant, Women Impacting Public Policy 36

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Bragdon, Tarren

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 14

Responses to post-hearing questions from Senator Lieberman .................... 59

Enzi, The Honorable Michael B.

Prepared statement .......................................................................................... 58

Kerry, The Honorable John F.

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

Kingsdale, Jon M.

Testimony .......................................................................................................... 19

Prepared statement (with attachment) .......................................................... 21

Responses to post-hearing questions from Senator Lieberman .................... 60

Lieberman, The Honorable Joseph I.

Post-hearing questions posed to:

Mary Beth Senkewicz ............................................................................... 59

William F. Sweetnam, Jr. ......................................................................... 59

Tarren Bragdon ......................................................................................... 59

Jon M. Kingsdale ....................................................................................... 60

Senkewicz, Mary Beth

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 9

Responses to post-hearing questions from Senator Lieberman .................... 59

Snowe, The Honorable Olympia J.

Opening statement ........................................................................................... 4

Sullivan, Ann

Testimony .......................................................................................................... 36

Prepared statement .......................................................................................... 38

Sweetnam, Jr., William F.

Testimony .......................................................................................................... 25

Prepared statement .......................................................................................... 28

Responses to post-hearing questions from Senator Lieberman .................... 59

Page

IV

COMMENTS FOR THE RECORD

National Small Business Association (NSBA) ....................................................... 62

AARP ........................................................................................................................ 72

(1)

ALTERNATIVES FOR EASING THE SMALL

BUSINESS HEALTH CARE BURDEN

TUESDAY, FEBRUARY 13, 2007

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, Washington, D.C.

The Committee met, pursuant to notice, at 10:11 a.m., in room

428A, Russell Senate Office Building, the Honorable John F. Kerry,

Chairman of the Committee, presiding.

Present: Senators Kerry, Cardin, Snowe, and Thune.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MASSACHUSETTS

Chairman KERRY. Well, officially, this hearing will open, since we

already have order. Welcome, everybody. Thank you very much for

coming in today. We welcome all of our witnesses.

Senator Snowe and I share the opportunity of both serving in a

responsible position on this Committee and also being on the Finance Committee, so we thought we would take advantage of that

and lay a foundation here with respect to the health care issue and

then dovetail and try to advance it within the framework of the Finance Committee, which has major jurisdiction, together with the

HELP Committee, and see if we can’t move that.

This is, without doubt, the single most important issue that any

of us hear about as we criss-cross the country and talk to small

business owners. The inability and struggle of small businesses to

be able to provide health care to their families and their employees

is a growing crisis. All of us understand that we have to reform the

system, and I think a lot of us are getting a little bit exhausted

with the expenditure of Congressional rhetorical energy on this instead of legislative energy. It is really almost incomprehensible

how people can be watching the trend lines—I don’t know if we

have a chart here somewhere—without a growing appetite for

something to be done, hopefully.

There are unlikely alliances between traditional rivals. Just the

other day, we saw SEIU and Wal-Mart, who had been at loggerheads, stand up and join forces in a push to try to get everybody

covered by health care.

Done the right way, health care reform ought to be able to solve

the three major challenges that we and particularly small businesses face. No. 1, give them access to a functioning insurance

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market. That is the first thing you have to do. The second thing

is you have to make sure that whatever is offered in those markets

are sensible quality care opportunities. And finally, the affordability issue. You have to be able to help people be able to afford

it and buy it once they have the access.

My own State of Massachusetts has made a step towards trying

to do this. We are still going to try to figure out whether there is

enough money in the system to handle it. But the basic structure

is to create a central purchasing exchange for individuals and

small businesses and to offer financial help on a sliding scale to

small businesses and low-income residents, but requiring as a mandate that everybody has got to purchase some type of insurance.

The fact is, and none of us, I think, take pleasure in this, but

the fact is that in 6 years, we have had a failure of executive leadership here. They just haven’t wanted to tackle this, period. There

is no other way to explain it. There hasn’t been one proposal of

major broad coverage, no significant effort. We have had small little chinks here and there, including one we will talk about today,

Health Savings Plans, but any legitimate analysis of that has to acknowledge the narrowness of the market being served and the folks

that are helped by it.

So we still have the larger issue. The President is now proposing

a standard deduction for those who have health insurance, but the

difficulty with that is it is not even based on actual health care expenses. Many observers think that approach actually hurts small

businesses in a couple of ways because while small employers

would get a tax deduction for covering themselves and their families, they wouldn’t be required to provide a similar benefit to their

employees, so there is not necessarily a downstream impact here.

And secondly, small businesses that currently offer health insurance to their workers would be less able to do so under the President’s plan. If just one of their employees gets sick, the insurance

premium could easily exceed the amount of the deduction, thereby

imposing tax penalties on all the workers or causing the small

business itself to drop coverage as a consequence.

So we have got to look carefully at the tax incentives and see

what push-pull occurs as a consequence of whatever the proposal

is.

As we know, the Health Savings Accounts are still on the table.

I think it is a fine option for somebody who has the ability to save

to be able to deduct, though in many cases those most able to save

are those who least need the deduction. But it must be acknowledged as a niche market. And for those who lack insurance or who

lack the ability to have a tax impact, it just does nothing. That is

the bottom line.

So whether the President is with us or not, I think this Congress

has to try to move forward, and Senator Snowe, as I mentioned before you got here, the fact that you and I serve on the Finance

Committee, I think gives us particular ability to try to leverage

what we glean here and the record that we build here to be quickly

transferred over there to help support whatever efforts we try to

make.

The reauthorization of the children’s health insurance program

this year is key to whatever we might be able to do. We have 11

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million uninsured children under 21 in this country. I proposed legislation 3 years ago called Kids First which would help us move

down the road of at least insuring all children in America. If you

can’t do that, where can you begin? It seems to me that it would

be enormously helpful, also, to a lot of the small businesses.

The statistics, if you look over at the graphs over here, since the

year 2000, premium prices have gone up by a total of 87 percent

compared with almost stagnant growth, as you can see in the lower

two lines, in worker wages and inflation. As a result of these increases, a mere 48 percent of firms with 10 or fewer employees are

offering health benefits. This percentage, sadly, is down from 58

percent just 5 years ago, so we are clearly going in the wrong direction.

According to a study done by the Kaiser Family Foundation, the

number of uninsured employees increased by 3.4 million between

2001 and 2005, and two-thirds of that increase, ladies and gentlemen, came from low-income families. So that brings the number of

uninsured employees and self-employed people to a staggering 23

million Americans. So 23 million Americans play by the rules, pay

their taxes, get up, and go to work, but they are either self-employed or employees of a company and they have no health insurance whatsoever.

It is simply an unacceptable statistic in a civilized, wealthy nation such as ours which has the ability to provide care in a more

effective and thoughtful way. I am not saying that some of those

folks, if they get sick, don’t get care. We all know what happens.

You go to the hospital and somebody takes care of you. But it is

a remarkably inefficient way to care for people. It is a remarkably

inefficient way to distribute the costs.

And all our businesses wind up picking up those costs, which is

why it is so staggering that we can’t persuade people to get smart

up front and do it in a smart way. I mean, we could save $100 billion from early screening of diabetes alone so you don’t wind up

with amputations and dialysis, the most expensive form of treatment, instead of preventing it early.

It is the same thing for many cancers. I was very lucky. I had

early cancer screening. I caught it, managed to have an operation,

got rid of the cancer, knock on wood, but a lot of people don’t get

early screenings. That is particularly the case among AfricanAmericans in this country, where they have a much higher rate of

death, as well as incidence of cancer. Screening and prevention are

key components and we need to get there.

So I am glad Massachusetts has taken some steps. California is

now wrestling with the idea. Others are looking at it. As with

many other issues, like global climate change and other kinds of

issues, the American people and the local communities are way

ahead of the United States Congress.

So my hope is we can take a good look at that this morning. I

have introduced the Small Business Health Care Tax Credit Act,

which is an effort to try to cut the cost of health insurance by up

to 50 percent for small business owners with fewer than 50 employees, and that would provide health insurance for their low- and

moderate-income employees. But until we can enact proposals that

will reduce the cost for small and large business alike and help

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with health information technology, which the RAND group estimates could save an astounding $81 billion per year, this tax credit

legislation is the best way we have to go until we do some sort of

comprehensive effort.

So I am hopeful that we can work with the States. Senator

Snowe, I hope you and I can help this Committee to make a contribution to this dialogue. But we are going to have to really find

a new equation around here to figure out how we do this in tough

budget times with the other issues we have created for ourselves.

There are some other issues here. Senator Lincoln and Senator

Durbin have taken an idea that I talked about a lot in 2004, which

was access to the FEHP program. If we allowed people to have access to a system like that, they could buy in and you would have

greater affordability for everyone. There are a number of different

ways to skin this cat.

I was talking the other day with my colleague, Senator Kennedy,

who spent 40 years trying to get health care legislation through

here, and there are 12, 11, 10, whatever number of ways that you

could do it. It is really the lack of willpower, not the lack of different modalities for how you do it.

The astounding thing is that Americans always say, well, I don’t

want a Government program, but the fact is, over 50 percent of our

health care system is devoted to much beloved health care programs called Medicare, the Veterans Administration, and Medicaid.

So we are kind of spinning wheels and going around in circles

and talking past each other, and my hope is that we can get a conversation going on here that helps us to be smart and do something

better about it.

Thank you all for being here. I will introduce you in a moment

after Senator Snowe says a word.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, A UNITED STATES SENATOR FROM MAINE

Senator SNOWE. Thank you, Mr. Chairman. First of all, I thank

you for focusing on such a pivotal issue as one of your first hearings as Chair of this Committee. It is obviously of crucial concern

to the small business community throughout the country and I welcome our panel here today and most especially Tarren Bragdon

from Augusta, Maine, who is the director of Health Reform Initiatives at the Maine Heritage Policy Center and is an authority on

the Maine health insurance landscape and also small business

health plans, Health Savings Accounts, and also the impact of potential reforms on small business. I welcome you, Tarren, here

today, and I welcome all of you.

It is critical that we build a record that hopefully will be the impetus for change in this Congress. It is long overdue, we recognize

that. Chairman Kerry and I have worked together on this initiative

in the past and hope to break the deadlock and stalemate on this

issue.

This is a crisis for small businesses. I certainly heard that repeatedly in the State during the fall. Without question, it is a crisis

across this country. It is a foremost concern among small businesses in each and every one of the 50 States based on all the surVerDate 11-MAY-2000 12:52 Nov 08, 2007 Jkt 036570 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\SBA\36570.TXT CELINA PsN: CELINA
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veys. It is a crisis. Hopefully, the Congress can ultimately respond

by addressing this issue.

It is going to require a variety of components to make it happen,

and I do believe that it is possible to get there. I think it is a question of political will in the final analysis and trying to determine

how we can overcome the criticisms of creating small business

health insurance plans, and there are going to be differences. Senator Enzi chaired the HELP Committee in the last Congress, which

managed for the first time to at least report out of Committee a

bill concerning small business health insurance plans.

On the other hand, it would have harmonized health insurance

regulations across State lines. That engendered considerable concern and opposition. We tried to deal with the preemption of mandates. I had an amendment that would have created a uniform 26-

State ‘‘floor’’ or threshold. If 26 States had enacted a benefit, that

benefit that would have to be included in the minimum package

within any standard benefits package of a small business health

plan.

Nevertheless, we weren’t able to get there from here, as the saying goes in the State of Maine. But the question is, what can we

do now to overcome the obstacles and criticisms of the previous

plans that have been offered and how can we coalesce around these

issues?

One potential solution is using the tax code, as Senator Kerry

said. We are both Members of the Senate Finance Committee. I

think that it is certainly possible to create incentives to help solve

this crisis.

Second, how do we price or ‘‘rate’’ these products? How do we

make small group markets more competitive, because that is a crucial challenge. As you see all the statistics and the dominance of

health insurers, few health insurers in our State and across this

country dominate the markets. I requested a GAO report that indicated that fact precisely. Large insurers control 43 percent of State

small group markets. The five largest carriers now have more than

75 percent of the market share in 26 States, and more than 90 percent market share in 12 States. In Maine, one insurance carrier

currently controls 63 percent of the market share. Five have 98

percent.

I think it illustrates the point. There is very little competition.

When you have low competition, you have higher prices. Higher

prices mean no health insurance. It is as simple as that, and that

is exactly what has happened. Health insurance has moved out of

reach for most small business owners.

Last October, I remember doing my very first walking tour during the campaign recess, and I walk into the first shop and this

store owner puts down his Blue Cross-Blue Shield increase, which

was more than 20 percent in addition to 16 percent last year, and

also his bill for a family plan. It was exorbitant, making it out of

reach for the average small business owner and their families and

their employees.

If the uninsured is growing at a great number as it is, now to

almost 47 million Americans, we could have a substantial impact

on that if we address this crisis because 60 percent or more of

those uninsured work for small businesses or depend on somebody

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who does. So clearly, the evidence, I think, speaks to the fact that

we have to address and to tackle this problem.

I also have another chart here, and I think that we are seeing

what higher prices are also doing in terms of employer-sponsored

health insurance. It has declined by 10 percentage points over the

last 5 years. That is a dramatic drop, frankly, because again, it

puts health insurance out of reach. Small businesses cannot compete with large companies who offer this vital benefit. People seek

jobs that provide attractive benefits, and one of which is health insurance. So it makes small businesses less competitive with other

companies to attract the talent and the skills necessary to be competitive with other larger entities.

So that is the problem. I think that it is possible to get this done

if we can build around some common ground, and I think there are

some common elements to all of these plans. So many people have

some great ideas and I think it is possible to accomplish it and provide some form of pooling. For example, Senator Kerry and I

worked on developing regional small business health plans. That

was one initiative. I am working with Senator Lincoln on other possible initiatives. Senator Enzi came up with his proposal. I think

there are workable solutions if we can just build across the party

line.

Second, HSAs are a component, an option, especially with highdeductible health plans. I think that is crucial. I have introduced

legislation on cafeteria tax plans, to give more flexibility for small

businesses to offer those plans because that is another dimension

that is very attractive in making it easier and creating more flexible regulations for small businesses to offer cafeteria plans. Again,

it is another option that should be available and we should make

it easier for small businesses to offer it, as well.

So there are a number of issues, an array of components, and I

think it is a question of if we can build that support. But hopefully,

this is going to be the year to do it, Mr. Chairman, and I think that

this is a great start and hopefully we can get there. Thank you.

Chairman KERRY. Thank you, Senator Snowe. Thank you very

much. Thanks for your cooperative effort on this, which I really

hope we can leverage with Senator Baucus and Senator Grassley.

Mary Beth Senkewicz is president of MBS Consulting, former

senior counsel for National Policy at the National Association of Insurance Commissioners.

Tarren Bragdon has already been introduced by Senator Snowe.

We welcome you here from the Maine Heritage Policy Center.

Jon Kingsdale, executive director, Commonwealth Health Insurance Connector Authority.

William Sweetnam, Jr., former benefits tax counsel, Office of Tax

Policy, U.S. Department of Treasury, and also formerly worked up

here.

And Ann Sullivan, head of Government Relations for Women Impacting Public Policy.

Thank you all for being here. Your full testimony will be put in

the record as if read in full, so if we could ask you to summarize

your prepared comments in 5 minutes, that will give us more

chance to have a little exchange.

Ms. Senkewicz?

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STATEMENT OF MARY BETH SENKEWICZ, INDEPENDENT

CONSULTANT, MBS CONSULTING

Ms. SENKEWICZ. Chairman Kerry, Senator Snowe, I appreciate

the opportunity to testify before you today on small businesses and

health care insurance.

With the ever-increasing numbers of uninsured in our country, it

is apparent that the system is not functioning efficiently or fairly.

Small businesses have been hit particularly hard. Small businesses

have more difficulty regarding health insurance for their employees

primarily because they are small. Insurance is about spreading

risk, and in order to spread risk more efficiently, larger pools of insureds are required. Insurance is about the law of large numbers.

That is why one small employer can’t be a pool by itself. If an employee becomes ill, their group is quickly priced out of the market.

As Congress contemplates the complex issues surrounding our

troubled health care system and financing mechanisms, it is important to keep certain principles in mind to ensure that any proposals are likely to result in a fairer, more stable system.

At Georgetown’s Health Policy Institute, my colleagues have developed a ‘‘triple A’’ of principles to consider in thinking through

these issues. Any outcome of thoughtful public policy should have

these principles fulfilled.

The first ‘‘A’’ is adequacy of coverage. This generally means coverage without holes. This principle is particularly important because if coverage has significant holes, it can lead to risk selection,

which results in sicker persons in any pool thereby driving up premiums. Therefore, we need to address minimum benefit packages

so insurers cannot risk select by benefit design.

The second ‘‘A’’ is affordability of coverage. This principle is selfevident. The primary reason small businesses don’t buy health insurance for their workers or cut back on benefits is because it costs

too much. Health care costs have spiraled, and that fact is simply

reflected in health insurance premiums.

The third ‘‘A’’ is availability of coverage. Some proposals, such as

the Durbin-Lincoln bill, try to address this issue by creating regional or national purchasing pools where small businesses can

shop for insurance. Policy makers should be wary of sending small

businesses and individuals to shop in markets where they can be

denied coverage or rated up sharply for adverse health conditions.

Health insurance needs to work for people when they are sick.

After all, 80 percent of claims are generated by 20 percent of insureds. A system that works will cover people who are sick when

they need the coverage the most rather than having them discover

the plan has so many holes as to be almost worthless or price them

out through punitive premium increases. But the only way to cover

them when they are sick is to cover them when they are well, to

spread the risk as broadly as possible.

More efficient pooling is necessary to help small businesses with

health insurance. Larger pools can spread risk across larger populations with those attendant benefits. Larger pools will also have

lower administrative costs, one factor in the price of health insurance. The pools can have rules that treat people fairly and don’t

kick them when they are down, such as a prohibition against rating up based on health status. The pools can have rules about minVerDate 11-MAY-2000 12:52 Nov 08, 2007 Jkt 036570 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\SBA\36570.TXT CELINA PsN: CELINA
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imum benefit packages to avoid risk selection. A fair and efficient

pooling mechanism will go a long way to stabilizing a market in

the long run. And rules do not necessarily mean less choice. Rules

just mean there is a level playing field.

There are other mechanisms being considered as part of the solution. We will hear later about the Massachusetts law, and other

States are considering employer and individual mandates. Reinsurance, purchasing groups, and tax credits to help small employers

with the purchase of insurance are options on the table.

One common thread running through many of these proposals is

subsidies to assist with the purchase of health insurance. The simple fact is, health insurance costs a lot of money and a lot of people

simply can’t afford it. It is going to cost tax dollars to provide subsidies so people can become insured and access the health care system most efficiently. Employer and individual contributions can

contribute to the financing, but some subsidization is almost certainly going to be required.

Thank you. It is heartening to see your Committee tackle these

issues so early in this Congressional session.

[The prepared statement of Ms. Senkewicz follows:]

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Chairman KERRY. Thank you very much, Ms. Senkewicz.

Mr. Bragdon?

STATEMENT OF TARREN BRAGDON, DIRECTOR OF HEALTH

REFORM INITIATIVES, THE MAINE HERITAGE POLICY CENTER

Mr. BRAGDON. Good morning, Chairman Kerry and Ranking

Member Snowe. Thank you for inviting me to testify.

I believe there are five specific steps that Congress should take

to assist small businesses. One, encourage small employers to offer

coverage regardless of the share of the premium paid by the employer. While a lot has been said about the cost of health insurance, employees are very likely to get coverage through their employer if it is simply offered, even when the employer pays only a

small share of the premium. Employees in the highest cost-sharing

category have a take-up rate of 68 percent, compared to those who

have 100 percent employer-paid coverage have a take-up rate of 89

percent. So even with high cost-sharing, employees are very likely

to buy health insurance if they can buy it through the workplace.

A lot has been said about choice, as well. Blue Cross-Blue Shield

of California has introduced a small business option that allows

small businesses to offer up to 17 different plans to their employees

with a minimum employer share of the premium of just $100 per

employee per month. Again, I think insurers are beginning to recognize that if they can buy through the workplace, more people will

purchase coverage.

All this would suggest that a fairly modest Federal tax incentive

encouraging very small businesses, those with less than 25 employees, to offer coverage would greatly increase offer rates and likely

also increase the take-up rates for the 25 million employees who

work in these very small businesses. Employer premium subsidies

as provided in the Chairman’s legislation would likely increase

offer and take-up rates even further.

Second, I would encourage you to consider a regional approach

to small business health plans. We appreciate Senator Snowe’s

long-standing support of association health plans and small business health plans. These would provide critical and immediate Federal relief to small businesses. This is most acute, the need for this

relief, in Maine. We only have four active insurers in the small

group market, yet we have the eighth highest premiums small

businesses pay in the country.

Medicare provides a model of a regional approach, giving more

options to individuals in particularly small or rural States than

would be likely available if each State were its own region. Maine

and New Hampshire, as well as the four New England States, are

combined into two Medicare regions. This provides many more options for Maine people, Maine seniors, than if they were in their

own single-State Medicare region.

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New England States have a total of 55 unique benefit mandates

that are required in one but not all of the six States. Sixteen of

these mandates are required in a majority of the New England

States, but only 10 of those same 16 mandates are required in a

majority of all 50 States. Therefore, if you had a regional approach

to small business health plans, you would include mandates in a

majority of States in that region and reflect regional values.

Three, allow employees to easily pay their share of the premium

pre-tax. Senator Snowe’s proposal that would allow very small

businesses to more easily set up Section 125 plans is a critical step.

It is not enough to just offer health coverage. You also have to

allow employees to pay for it pre-tax. A Maine family earning

$50,000 a year would save about 30 percent if they could pay their

share of the premium pre-tax through a Section 125 plan.

Fourth, I would encourage you to consider auto-enrollment in a

default health plan. The Pension Protection Act of 2006 allows companies to auto-enroll people in a 401(k) plan. That increases employee participation by 25 percent. Why not allow employers to do

the same with a default health plan? The average employer-sponsored HSA-qualified plan requires an employee contribution of just

$9 a week. Often, young and single employees are the least likely

to participate in employer-sponsored coverage. Auto-enrollment

could encourage increased take-up and spread the risk across a

larger and healthier population.

Five, create a national or regional market for individual insurance, as well. Often, this gets lost in the conversation about the

small group market, but Congress needs to consider allowing more

competition and options in the individual market. For very small

businesses, entrepreneurs, freelancers, and independent contractors, the individual insurance market is the only place to purchase

coverage.

Again, Maine has led the way in how not to regulate. In Augusta, Maine, a $10,000 deductible policy for my family, my wife

and our one son, costs $511 a month, a $10,000 deductible policy.

That same plan in Alexandria, Virginia costs $145 a month. Regulations matter.

High individual insurance costs discourage entrepreneurs from

setting out a shingle and starting a new business. Drawing from

the Small Business Health Plan legislation or Senator DeMint’s

Health Care Choice Act, Congress should consider national or regional individual insurance carriers and plans.

Thank you for holding this hearing and allowing me to testify.

[The prepared statement of Mr. Bragdon follows:]

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Chairman KERRY. Thank you very much, Mr. Bragdon.

Mr. Kingsdale?

STATEMENT OF JON M. KINGSDALE, EXECUTIVE DIRECTOR,

COMMONWEALTH HEALTH INSURANCE CONNECTOR AUTHORITY

Mr. KINGSDALE. Good morning, Chairman Kerry, Senator Snowe.

Thank you for the attention that you are paying to these important

issues. I am Jon Kingsdale, executive director of Commonwealth

Connector, and I thought I would describe to you briefly how we

are tackling some of the problems you have identified in Massachusetts.

As part of an extensive reform to cover the uninsured in Massachusetts, the Connector contracts with private health plans and enrolls individuals and small employer groups in those plans. In the

last 7 months, we have actually added 100,000 people, which is

more than 25 percent of the uninsured in Massachusetts, newly to

the private plans that the Connector contracts with and to our expanded Mass Health Program and to an insurance partnership program for small employers of low-wage workers.

Massachusetts health reform is based on five principles listed in

my testimony. I am going to focus on three of those that I think

are particularly pertinent to the issues under discussion here.

First of all, we require universal adult participation in health insurance as of July 1, 2007. Second, we require employers of more

than 10 workers to help finance their employee health benefits.

Third, we offer the small group and non-group end of the market

for health insurance, more choice, and better information.

These building blocks address issues especially relevant to the

small end of health insurance market. First, insurance is designed

to pool risk. You have heard about that already from other witnesses. Carriers can identify and select relatively health individuals and small groups, leaving the unhealthy unprotected, and

frankly, small employers and individuals can try to participate at

times and in ways such that their own medical costs are likely to

exceed the premiums they pay. So both sides can game this.

To protect against both forms of discrimination, our health plans

are required, A) to issue and renew coverage, B) to ensure individuals and small businesses underrate formulas that cross-subsidize

between healthier and sicker populations, and most adults will

soon be required to have insurance. This protects the sick and it

keeps the healthy in the insurance risk pool.

Second, while most large employers, 98 percent nationally, offer

health benefits, some 40 percent of small employers do not, and in

Massachusetts, small businesses actually represent and employ

two-thirds of the working uninsured. Group health benefits are designed not only to pool risk, but, of course, to subsidize coverage

and to encourage group insurance, Massachusetts now requires employers with 10 or more employees to make a fair and reasonable

contribution toward their workers’ health benefits, and we will

soon require them to offer a Section 125 pre-tax payroll deduction

plan.

Our requirement that adults, healthy or sick, buy a minimum

level of insurance and that employers contribute are designed to

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encourage employers not only to help subsidize, but to make both

the young and healthy as well as the sicker and older populations

accept those offers and participate.

Of course, medical care is expensive stuff no matter how you divide it and costs are especially burdensome for small business and

low-wage employees. To assist them, our State’s Insurance Partnership Program subsidizes premium costs for both small employers of

low-wage employees and low-wage workers. I note the similarity to

S. 99, the Small Business Health Care Tax Credit Act, sponsored

by Chairman Kerry, among others. Moreover, S. 99 offers certainty

and outreach associated with using the Federal tax code, which

frankly would benefit our own State Insurance Partnership Program.

The third principle we are addressing is about individuals on

their own in small employee groups who often lack choice of health

plans. Limited choice is itself a cause of dissatisfaction, of course,

but equally importantly, it blocks innovative efforts to control costs

and add value to address that skyrocketing trend that Chairman

Kerry pointed to. To provide more choice, Massachusetts will require health plans to offer to non-group individuals the same options and at the same prices that they offer small businesses, and

the Connector will offer to individuals, those who work for small

businesses and those who buy on their own, the kind of broad

choice of qualified health plans that employees of many large organizations, including Federal employees, currently enjoy.

The following table, if somebody could put it up, illustrates the

choice under the Connector. The small employer will make a defined contribution toward a benchmark plan. Then his or her employees would have the option of using that contribution among

any of a broad range of comparable options. The Connector will

eliminate hidden variations among the plans—how a plan defines

durable medical equipment versus another plan’s definition, for example—and highlight the important distinctions, for example, differences in premiums, cost sharing, which doctors and hospitals

participate. This transparency is intended to stimulate competition

among the health plans, much as FEHBP does. We are also working on state-of-the-art shopping tools, such as virtually test driving

a health plan before finalizing the election to enroll in it.

The Connector also relieves small business of the burden of pricing, shopping, explaining, and policing a plan each year. Instead of

reacting to their plan’s annual premium increase, as so many employers do now, by shopping for a new one, they can leave it to the

Connector to offer best in value and to their employees to comparison shop among pre-screened options. This promises significant administrative savings to small businesses, which hardly have the

manpower, the expertise, or the time to go shopping for complex financial services like employee health benefits.

Thank you for this opportunity to testify and I would be pleased

to answer your questions.

[The prepared statement of Mr. Kingsdale and an attachment follow:]

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Chairman KERRY. Thank you very much, Mr. Kingsdale. That is

very helpful.

Mr. Sweetnam?

STATEMENT OF WILLIAM F. SWEETNAM, JR., FORMER BENEFITS TAX COUNSEL, OFFICE OF TAX POLICY, U.S. DEPARTMENT OF TREASURY

Mr. SWEETNAM. Chairman Kerry and Senator Snowe, I would

like to thank you for this opportunity to testify before the Committee.

As you have stated before, there are problems with the small

business market providing health insurance coverage to their employees. The availability of HSAs and high-deductible health plans

makes it easier for small employers to provide their employees with

affordable health coverage. The purpose of my testimony is to urge

Congress not to cut back on any of the tax advantages that are afforded to HSAs and to provide additional changes to the HSA rules

which will make HSAs and high-deductible health plans more attractive to employers and employees.

Small businesses are very cost sensitive when it comes to providing health insurance to their employees. As the cost of health

insurance goes up, small business owners have few choices. One option is not to offer coverage if the cost of health insurance coverage

is too large. Other options would be to increase the costs that employees have to bear to continue to have that health coverage.

That cost increase to employees could come in different ways.

One way would be to increase the premium that the employee pays

to participate in the employer’s health care plan. This, of course,

raises the likelihood that the employee will decide that he or she

cannot afford health care coverage and not participate in the employer’s health insurance plan.

Another method of controlling cost is to increase the amount of

deductible under the health insurance plan or to increase the

amount of copayments for each service or visit to the doctor. This

helps keep the monthly premium down, but increases the cost for

the individuals when using health care services under the plan.

The fact that small businesses are already raising the deductible

under their health plans is an important factor to remember when

talking about Health Savings Accounts and high-deductible health

plans.

HSAs are really a funded account, similar to an IRA. A contribution to an HSA may be made within specified limits by individuals

who are not yet entitled to Medicare or by employers on behalf of

such individuals. Contributions to the HSA by an eligible individual are fully deductible by the individual making the contribution, regardless of whether the individual is employed. Amounts in

the HSA grow on a tax-free basis, and if used for medical expenses

may be withdrawn on a tax-free basis. Amounts may be distributed

for non-medical purposes, but such distributions are subject to income tax and be subject to a 10 percent additional tax.

In order to contribute to an HSA, an individual must be covered

under a high-deductible health plan and may not participate in any

non-high-deductible health plan, subject to certain exceptions. For

2007, a high-deductible health plan is defined as a plan with minVerDate 11-MAY-2000 12:52 Nov 08, 2007 Jkt 036570 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 C:\SBA\36570.TXT CELINA PsN: CELINA
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imum average deductible of $1,100 for self-only coverage or $2,200

for family coverage. There is also an annual out-of-pocket cap for

the HDHP. As with other traditional health insurance, premiums

that the employer pays for the high-deductible health plan are excludable from the employee’s income.

The premium for a high-deductible health plan is usually much

less than the insurance premium for typical health insurance. With

the lower premiums, employers have savings that they can contribute to an HSA. In 2004, the first year that HSAs were available, there were many examples of small businesses that purchased

high-deductible health plans for their employees and with the savings due to the lower premiums made contributions to the HSAs

for their employees. I give you two examples.

One, Activities Press of Ohio, a small business with 45 employees, switched to an HSA-HDHP arrangement. They contributed

$2,000 to their HSAs for employees with family coverage and

$1,000 for employees with individual coverage. Their total cost savings after this switch was $56,500.

Mercury Office Supply had 13 employees. They made contribu- tions to the HSAs for their employees of $2,500 for those with families, $1,200 for those with individuals. They had savings of $12,000

in 2004.

There is really little recent Government data on how many HSAs

have been opened. That information would be derived from a compilation of income tax returns and that information is only available years after the return is filed. Since HSAs have only been

available since 2004, there has not been enough time for an adequate determination from Government sources of the number of

HSAs that have been established. However, industry surveys have

shown a growth in enrollment from 438,000 in 2004 to 3.2 million

in 2006. In the small business market, enrollment growth is from

79,000 in 2004 to 510,000 in 2006.

The survey also found that in the small group market, 33 percent

of the small group policies were purchased by employers that had

previously offered no health care coverage for their workforce.

In another study from the United Health Group, it found that despite fears that HSAs would appeal only to the wealthy, HSAs,

they found, are utilized by consumers across all income ranges.

Policy makers should not take from the current data that HSAs

are not successful and that they should be curtailed. HSAs are a

new product. There must be time given for them to be more fully

accepted in the marketplace. You know, 401(k) plans were once

new and untested, yet no one now believes that in the slow early

years of 401(k) adoption we should have had Congressional action

to eliminate the 401(k) plan as an alternative savings program.

HSAs should have the same chance to mature in the marketplace

as 401(k) plans did.

Finally, I just want to mention that Senator Snowe has recently

introduced legislation that will make it easier for small businesses

to establish a cafeteria plan. The legislation, called the Simple Cafeteria Plan Act, will provide small businesses another way to offer

cafeteria plans for their employees by providing that the non-discrimination rules will be met if the employer provides a matching

contribution on behalf of lower-paid employees. This will provide

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one more way for small businesses to provide tax-effective health

care coverage to their employees and Congress should seriously

consider its enactment.

I thank you for the opportunity to testify and I am available to

answer any questions that you may have.

[The prepared statement of Mr. Sweetnam follows:]

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Chairman KERRY. Thank you, sir. I appreciate it.

Ms. Sullivan?

STATEMENT OF ANN SULLIVAN, FEDERAL LEGISLATIVE

CONSULTANT, WOMEN IMPACTING PUBLIC POLICY

Ms. SULLIVAN. Good morning, Chair Kerry, Senator Snowe. I am

Ann Sullivan. I represent Women Impacting Public Policy in Washington. WIPP is a bipartisan public policy organization representing over half-a-million women and minorities in business nationwide, including 47 organizations as well as individual members. Thank you for holding this hearing. I am appreciative of the

efforts that you have had in the past with regard to solving our

health care issue and look forward to working with you this Congress.

Every year, WIPP conducts an annual issues survey to its members. We are still in the stage of getting preliminary results, but

we see a significant shift among our members on the health care

issues. In past polls, our members have identified national trends

before the rest of us do, so I would like to share these results with

the Committee.

There are two significant policy changes that we found in the

health care questions in the survey this year. One, our members

have shifted their thinking with respect to employer-sponsored

health care. When we asked the question, ‘‘Do you believe that

businesses, either large or small, should be the main provider of

health care coverage for their employees’’, a majority said ‘‘no’’. Our

members do not believe health insurance should be the sole responsibility of employers. They believe the conversation around health

care needs to shift to individuals, as well.

When asked a question, a ‘‘proposal pending in Congress would

allow uninsured individuals to shop for health insurance across

State lines, do you believe this proposal would result in providing

more individuals with health care coverage,’’ 64 percent said ‘‘yes’’.

This, I believe, is affirmation that changes have to occur to make

the individual market strong enough to sustain the shift to individual coverage.

The second policy shift reflected in our survey was a willingness

by WIPP members to consider a number of different health care

proposals being discussed in the Congress. When a question described a proposal by Senators Lincoln and Durbin clearly stating

that small businesses could opt into the pool and that the insurance would be provided by private insurers rather than a Government program, preliminary results overwhelmingly supported that

proposal—84 percent.

When our members were asked whether States should require

everyone to carry health insurance either by their employer or by

themselves with State programs to assist those who fall below a set

income level, 42 percent said yes and 39 percent said no. Small

businesses who have operations in multiple States, even if it is one

employee, find navigating multiple State requirements very difficult.

This policy shift from employer provided to individual introduces

a different way of thinking about health care and how to obtain it.

President Bush, in his State of the Union Speech, proposed a shift

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from employer-sponsored health care to individual health care by

proposing that the tax deduction be made available to individuals

as well as employers. We note that States like California and Massachusetts, who are grappling with how to insure their residents,

are proposing the responsibility of obtaining insurance lie with the

individual.

Having said that, the individual market as it exists today is not

strong enough in our opinion to sustain a wholesale shift. According to the Kaiser Family Foundation, in 2005, only 5 percent or 14

million Americans are insured through the individual market. A

2005 survey conducted by the Commonwealth Fund compared the

experience of adults aged 19 to 64 in the individual insurance market compared with adults with employer-based coverage. Adults in

the individual market gave their health plans lower ratings. They

pay more for out-of-pocket expenses for premiums. They face higher

deductibles and spend a greater percentage of income on premiums

and health care expenses.

The only solution for small businesses and their employees, as

we see it, is to strengthen those two markets. One is achieved by

encouraging individuals to purchase insurance, the other panelists

have talked about how it increases the size and strength of the

pool. The second is to strengthen the small business market by increasing the bargaining power of a small business. That involves

establishing large pools that can negotiate better prices with the

insurers, and the reason behind WIPP’s support in the past of the

creation of association health plans or SBHPs for many years.

Another proposal providing additional tax incentives to employers to offset the exorbitant price of premiums would be helpful to

small businesses. I understand Senators Snowe, Bond, and Bingaman just introduced a bill to establish a simple cafeteria plan for

small businesses and we welcome those changes to current law.

The health care solution has many tentacles, such as using technology to centralize medical records, limiting medical malpractice,

and instituting healthy employee programs to reduce medical

claims. While we do not believe universal health care run by the

Government as opposed to the private sector is a good solution, we

are open to ideas on how best to increase the buying power of individuals and small businesses for their health care.

We are not as presumptuous to suggest that we have the solution, but we live with the problem every day. We believe it is a reasonable request from our membership that Congress take action to

ensure that small businesses can offer health care to employees at

reasonable rates or make it possible for employees to obtain individual insurance at rates they can afford. When large employers

and small employers are saying the system is broken, when 46.6

million Americans are without health insurance, it is time for the

Federal Government to adopt changes which will make the small

business and the individual market work.

Thank you.

[The prepared statement of Ms. Sullivan follows:]

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Chairman KERRY. Thank you. Thank you very much, Ms. Sullivan.

I am trying to figure out where to begin because it is a big menu

out there. Let me ask you, Mr. Sweetnam, if Senator Snowe and

I said to you, look, we want to reach beyond just small business,

you can write a health care policy for the entire country, would you

just be content with HSAs?

Mr. SWEETNAM. I think the HSAs provide one way of getting people appropriate health insurance. I think that what we are seeing

is that companies are moving to higher and higher deductibles. The

problem right now with the way that our tax policy works with regard to the health insurance is that if I receive my health insurance through my employer, anything that goes through my employer is tax excluded, so I don’t pay any tax on that at all. If I

pay for it by myself, I don’t get a deduction. I get an itemized deduction, but it is only if you are above 7.5 percent of adjusted gross

income. That very rarely happens. So really, unfortunately, as the

deductible goes up, you are pushing more and more costs onto the

employee and the employee doesn’t get the tax benefit of being able

to do that.

Using an HSA, I can use that HSA and get the tax deduction

when I use it for the——

Chairman KERRY. I completely understand the benefit of the tax

deduction to the person who gets it. I obviously understand that.

My question to you is, if you were tasked with the effort to write

a plan that is going to cover everybody, would you just have a plan

that had HSAs?

Mr. SWEETNAM. No. I would continue——

Chairman KERRY. What else would you do?

Mr. SWEETNAM. I would continue to give the employer the opportunity to offer all different types of health plans, depending on

what their particular marketplace——

Chairman KERRY. So you would give them the opportunity——

Mr. SWEETNAM. Right.

Chairman KERRY. Would you mandate that opportunity? We

want to get everybody covered.

Mr. SWEETNAM. I guess my personal background is not to mandate but to give incentives to have people—have employers get into

coverage.

Chairman KERRY. Notwithstanding the fact that experience has

shown that it won’t necessarily cover people, because people don’t

always take advantage of incentives, do they?

Mr. SWEETNAM. Well, people don’t always take advantage of incentives, but I think that the other side would be to require employers to provide coverage and then what you are really——

Chairman KERRY. That is what happened in Massachusetts with

the support of the business community.

Mr. SWEETNAM. I understand. The issue that I think people are

trying to wrestle with there is what are the costs that are then

going to come out of requiring your employers to do things.

42

One of the other issues that you have to worry about is under

ERISA, the Employee Retirement Income Security Act, there are

restrictions on State mandates on various types of employee benefit

plans so that you are going to see challenges under the Massachusetts law as you have seen challenges under other State law mandates. If Congress wanted to allow State law mandates, they would

have to go in and they would have to change ERISA.

Chairman KERRY. Well, I mean, you have got to change what you

have got to change here. There are going to have to be a lot of

changes in order to effect this. But if deductibles, if the higher

deductibles are increasingly what is happening, and that is what

is happening, I think we are shifting from defined benefit to defined contribution and they are going out and getting higher

deductibles because it is all they can afford because the premiums

are such that it is the only way to bring the premium down. So

they take their whack and they hope they don’t get sick. If they

get sick, they wind up paying a heck of a lot more.

The question is, how do you counter that trend without expanding the pool, and that comes back to what all of you have said. A

broader pool with more participation means a lower cost, correct?

If you leave it completely to the marketplace, you have no effective

leverage over the size of that pool.

Mr. SWEETNAM. Well, there——

Chairman KERRY. Or even its makeup.

Mr. SWEETNAM. I mean, there have been a number of proposals

that—and I believe, Senator Snowe, you worked with regard to

AHPs, Association Health Plans, that have sort of looked to expand

the pool of those being insured. One of the things that occur when

you are expanding the pool in AHPs is what you are overriding

State insurance mandates, which has been one of the reasons why

people have been against expanding under AHPs.

So I guess one of the tough decisions that we have to make is

whether we want a plan that is developed in Washington that sort

of says, OK, we are going to set what the rules of the game are

across all the various States, and that is pretty much what we

have with employer-sponsored plans under ERISA, or do we want

to let the States come in and do individual mandates that they

want in the States.

I think the——

Chairman KERRY. Well, they are doing that now. That is what

the States have now.

Mr. SWEETNAM. And I think that is one of the problems that you

are seeing with high insurance costs in the individual marketplace.

So if——

Chairman KERRY. Well, but there is a balance here. There is a

public policy balance, and this is tricky. Senator Snowe and I

worked very hard last year to see if we could get together on that

and we certainly tried to bring in some colleagues outside of this

Committee who are important to the health care debate. That issue

of the mandate and standard quality that you are going to provide

is really a key issue.

We all agree that we want to expand the pool. I mean, that is

just common sense. Bigger pool, more people participating, risks

43

spread more intelligently, hopefully lower cost, and usually lower

cost. So that makes sense.

The problem obviously comes in, and you are mentioning it,

when you are trying to expand that pool across jurisdictions that

have different requirements of what they think is quality care. In

some States, people think that one screening for cancer or a mammary gland scan per year or one pap scan, one whatever is a fair

standard of quality of care and then absent that, there is a history

of people being ripped off, of plans that don’t give you much and

try to cherry pick and keep the healthy and get rid of the sick and

push the sick onto the Government and we will charge good premiums to people who aren’t going to wind up using our service,

which is a really nice business, but it is not insurance.

Insurance is supposed to be that when you buy your home, you

insure against fire, flood, theft, whatever. There is an actuarial

table that figures out how often in that particular area that happens and the risk is spread. We don’t do that in health care. It isn’t

insurance. It is called insurance, but it is not insurance.

So how do you sort of skin this cat of trying to maintain a high

standard of care and still expand the pool—and I would like to get

more people into this discussion—so that you are not lowering the

quality of care? The unfortunate history of the marketplace is, and

I am not saying everybody behaves this way, but there is a long

history of people trying to get us to legislate their monopolies, a

long history of people trying to scheme the market in a way that

they are minimizing their costs and maximizing their profit. We all

understand that is the nature of the beast. And so we eventually

had the development of consumer standards, consumer protection

at FDA, FTA, different kinds of things, because you wanted to prevent that kind of practice.

The same thing is true in health care. We have had fraud within

Medicare, fraud within Medicaid. I mean, all these kinds of things

happen because people try to walk away with profits unduly. So

how do you balance that in terms of these pools, where you can expand the pool, maintain a high quality of care, not have the cherry

picking, and not allow for a kind of dumbing down, if you will, of

what is provided to people as a consumer choice?

Ms. Senkewicz?

Ms. SENKEWICZ. Thank you, Senator Kerry. Yes. I think that is

a really important issue, but it raises a question that I think we

need to address, and one is a serious dialogue between the Federal

Government and States, which I don’t really think has thoroughly

occurred, because obviously we do have issues here with various

State laws on mandates, on rating rules, a whole variety of things

with respect to insurance.

But what we do need are larger pools. So in order to expand

pools and maintain that quality of care, though, if we enter into a

dialogue with the States to retain the partnership, because believe

me, the Federal Government doesn’t want to go taking over the

regulation of insurance. The States do a lot of things very well in

that regard. I believe the Senators need to sit down with the National Governors Association, the National Conference of State Legislatures, the NAIC, and begin to try to coalesce around standards

that are acceptable nationally, but then a national standard could

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be set that the States could then administer. And the same thing

will work with regional pooling across State lines, as well.

Chairman KERRY. When you said national standards would be

set, what happens when one State has a very high level of care and

the national standard doesn’t achieve it? Are they going to feel you

are requiring something less than what we think our citizens ought

to get?

Ms. SENKEWICZ. Yes. Clearly, compromise is involved here, and

that is why I am saying a long dialogue and a fruitful dialogue and

hopefully compromises can be reached. But clearly, you are not

going to be able to satisfy—I mean, hopefully, you can reach the

point where everyone is satisfied, but clearly, there will have to be

compromises if we are going to be able to create larger pools across

State lines, because that is an issue.

I worked in Wyoming. Wyoming has less than 500,000 people. I

understand Senator Snowe’s concern about competition, but on the

other hand, there are only less than 300,000 or 200,000 people in

Wyoming to be insured not through Medicaid or Medicare. There

are only so many people among whom to spread that risk. That is

why you need to cross State lines to create larger pools so that you

can have more competition, because in States like that, it is not

viable for many insurers to pick up 10 percent of the market and

be able to compete.

Chairman KERRY. How do you feel about—I mean, I would like

each of the others here to comment on the tax approach, as in how

far do you see the tax approach being able to have an impact.

Ms. SENKEWICZ. I think that the tax approach in its variety of

forms can nibble around the margins, nibble around the edges. For

example, as you mentioned in your opening statement, Senator,

President Bush’s deduction proposal, sure, that would help me personally. I am not getting anything now being on my own, self-employed, but I think that, No. 1, it is not equal. No matter what, I

could go out and shop for some really cheap high-deductible plan

and still get the same deduction as somebody who has a more comprehensive plan. And secondly, as we have all mentioned, the way

the individual market works today, we have got to be careful about

pushing people into the individual market where they may not be

able to get insurance. But tax credits, that is another thing that

can help, obviously can help people.

The whole high-deductible issue and the tax incentives there, I

think you hit it right on the head. That is a niche market. If I am

a low-wage worker, which three-quarters, apparently, of the unemployed [sic] are connected to or are low-wage workers, a $10,000 deductible plan is not going to help me. If I still have to pay out of

my pocket up to whatever hundreds of dollars a month and then

still have to run through $3,000 or $4,000 or $10,000 to get coverage, I am not going to invest in that.

Chairman KERRY. One last question before I turn it over to Senator Snowe. Mr. Kingsdale, how does the Massachusetts experience

address both of these issues, the tax piece that Mr. Sweetnam was

talking about and this pool piece?

Mr. KINGSDALE. Well, to take the tax piece first, we are working

hard in a, frankly, somewhat cumbersome manner to expand tax

deductibility for employees by creating a pool, in effect, for cafeVerDate 11-MAY-2000 12:52 Nov 08, 2007 Jkt 036570 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 C:\SBA\36570.TXT CELINA PsN: CELINA
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teria Section 125 plans and by mandating that employers with

more than 10 employees offer, even if they don’t pay for insurance

for their employees, they offer this payroll deduction.

Frankly, it would be very helpful in dealing with the issue of affordability to have a clear, simple way for everyone, even individuals, to take advantage of the tax incentives available to employees

typically to purchase insurance.

I would note that the question in my mind is why don’t all employers offer a Section 125 plan? There is literally a 48 percent tax

subsidy available to a dollar in premium contribution by the employee or the employer versus putting that dollar into wages. So I

would like to see that made available to individuals and to smaller

employers, as well.

On pooling, that is an important issue. This market, and I was

25 years on the insurance side of it, doesn’t work very well at the

small end. You don’t have to have—when I say big end, you don’t

have to—a couple hundred thousand is a huge pool. That is perfectly fine, frankly, for spreading risk. But it doesn’t work very well

for 10, 20 employees or for an individual because of all the selection dynamics.

So you do need a set of regulations, and clearly, we need to either do it at the Federal level or at the State level. To refer back

to your reference to Senator Kennedy, there must be 10 or 12 different ways to do this. We seem to have a pretty good consensus

at the national level that we ought to have insurance. We have lots

of different ideas at the State and local idea about how.

And so, since regulation is currently vested at the State level,

since we have a lot of regional differences, I think that it makes

a lot of sense to look at Federal encouragement but State pooling

arrangements. Otherwise, there are a whole bunch of other issues

that the Federal Government is going to have to take on if you

want to structure effective pools across State lines, in terms of

shaping participation and regulating the sale and purchase of insurance that you are just going to have to take on as part and parcel of cross-State regulation. And that may be the decision you

want to take, but I think there are some good reasons to encourage

Statewide and within-State efforts to do that.

Chairman KERRY. Thank you.

Senator Snowe?

Senator SNOWE. Thank you, and thank you all for great testimony.

Ms. Senkewicz and Mr. Bragdon, maybe you could just talk for

a minute about minimum benefits. One key challenge, when we

considered small business health plan legislation on the floor last

spring was the minimum benefits package, and I know, Ms.

Senkewicz, you were speaking to a national standard. Would you

support a regional approach?

Ms. SENKEWICZ. Yes. I think anything that promotes better pooling with addressing the adverse selection issues is a reasonable

way to go, and it could be regional or it could be national.

Senator SNOWE. We, and Mr. Bragdon, you were illustrating that

point with New England and talking about the 55 benefits that

were available in one or more States. Would you support a regional

approach in that sense? You mentioned the Medicare Part D as

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sort of a template for that, and that is an interesting thought in

terms of crafting regions across the country. How would you design

a benefits package for a regional approach?

Mr. BRAGDON. I think there are two things you can look at. You

can look at the minimum provider and mandated benefits. But separate from that and where, in particularly, in Maine we have lots

of challenges are the mandates regarding rate regulation and how

much variation you can have in premiums depending on the age or

gender of the workforce. So I think we need to separate these

issues in the policy discussions. I think for provider and benefit

mandates, it makes a lot of sense to have a regional approach.

What I think you will need to separately look at, though, is how

can you adequately provide flexibility so that premiums can be attractive, so if you have a business with lots of young employees, it

is attractive for them to buy into the market and share risk with

a small business that might have a lot of near-retiree employees.

Senator SNOWE. It is sort of interesting because the regional approach that Senator Kerry and I had designed required that minimum benefits package would include the majority of benefits that

are offered within a majority of States in that particular region,

which is one way of sorting through it. I had the amendment on

a 26-State threshold, for example, that I would have offered to Senator Enzi’s legislation on the floor, but we never got to that point.

We couldn’t get beyond cloture. But nevertheless, that was another

idea to establish a minimum benefits package. I notice that you

said there are 16 benefits in the New England region that essentially are in the majority of States, is that correct?

Mr. BRAGDON. Correct.

Senator SNOWE. So a minimum benefit floor would obviously

minimize the discussion and the debate because it became controversial about preempting all benefits, so trying to establish that

benefit either on a national basis or on a regional basis. Yes?

Ms. SENKEWICZ. Very briefly, Senator, one other way to approach

it, aside from counting up States, is to benchmark it to an existing

package, for example, the FEHBP or some other existing package

that has a good solid benefit structure.

Senator SNOWE. No, that is a good point. I think we were within

the realm, but that is an interesting measurement in making it

competitive and attractive.

Did you want to say something to that point?

Mr. BRAGDON. I just think it is so important in this whole conversation about a minimum package or minimum benefits to recognize that people place very, very different value propositions on

health insurance depending on where they are in life, and a lot of

people who tend to be uninsured are young people who are not

going to spend a lot of money for a package that they have a very

low chance of using, regardless of what the deductible is.

There is a great example of this with Southern Maine Community College requires health insurance now for the first time for

students taking more than 12 credit hours. They had a significant

increase in the number of students enrolled at the campus, but a

decrease in the number of credit hours. Students didn’t want to pay

the $250 a year for the health plan, so they took fewer classes.

47

Senator SNOWE. Was it offered by Southern Maine Community

College?

Mr. BRAGDON. Through the community college.

Senator SNOWE. Through the community college.

Chairman KERRY. Could I just interrupt for one second? But at

the same time, that is where this issue of mandate comes in. Don’t

we have a responsibility to say, look, they pay into Social Security,

too, but they have absolutely zero chance of using that until they

are 65. So why shouldn’t this be the same way? If you are going

to spread risk, you spread risk appropriately and you may or may

not use it when you are young. If you have a car accident or you

fall off a building or something, you are going to use it, and you

can’t predict that. So why shouldn’t we mandate it? That was the

decision we made.

Mr. KINGSDALE. I am certainly not going to speak against mandating. I do think that it is important to distinguish two elements,

though, Senator. One is asking everybody to participate in the program—that is what Massachusetts is doing—and deciding what it

is they have to buy. So the question of participation in the pool is

one, but what do they have to buy——

Chairman KERRY. But Senator Snowe was talking about a minimum package——

Mr. KINGSDALE. Right, and so I think it is important, thinking

about the 25-year-old or the 22-year-old you just cited, and Massachusetts actually requires students to participate, but in a very,

very slimmed down insurance package. It is important to think—

underline the word ‘‘minimum.’’

Chairman KERRY. Thank you.

Senator SNOWE. I think the design of the 26-benefit mandate was

tied to the Federal employees’ three largest plans and how they

were offered, but anyway, that is one of the obstacles.

The second obstacle is the at risk and the multi-State pooling

and community rating and whether or not to create—what kind of

standard do you create. Now, Maine has a modified community rating, as Mr. Bragdon knows. Other States have rate bands so it allows greater variations in the premiums. Does anybody want to

tackle that question, because that is one of the other challenges in

crafting legislation as to whether or not you go less or more in

terms of how are you going to rate these products.

Mr. BRAGDON. I think it makes sense to probably have some sort

of limitations on variation according to health status because you

don’t want to significantly punish people just because they happen

to, in many cases, have bad genes, if you will, and have certain

health conditions. So it makes sense to limit variation based on

health status to some reasonable range. I think the NAIC standard

is plus or minus 25 percent.

I think other than that, though, you need to recognize that that

kind of premium variation reflects in many cases the value that the

people buying the product will place on it. If it costs me as much

to buy life insurance at 31 years old as it would at 61 years old,

I wouldn’t have it right now. Yet for some reason, when we get into

the health insurance world, people so often assume that individuals

aren’t going to make those same economic trade-offs.

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Senator SNOWE. Mr. Sweetnam, on HSAs, do you think there are

any other changes that we should make to the HSAs to improve

them? We made some technical corrections in the last Congress,

but should we go further in any way to make them attractive? I

like the idea of this whole auto-enrollment on health care, by the

way. I think that is an interesting concept, comparatively speaking

with the 401(k)s that we enacted, as well, to have people automatically enrolled. I think that that is really a good idea, frankly.

Mr. SWEETNAM. The legislation that you had recently passed at

the end of last year went very far and did some really very good

things in order to make it easier for companies to offer HSAs and

to give them an ability to sort of move from a traditional model

into an HSA model.

There are a few things that the President has proposed in his

budget which would be helpful, such as saying that if you could

give a higher contribution on behalf of someone that is chronically

ill, then you can under the current laws, or ways that you can design a high-deductible plan that is not like our high-deductible is

under current law. The high-deductible now is you get no coverage

up until you reach a dollar amount and then you get coverage after

that. It says, the type of qualifying plan could be—let us say that

you pay 50 percent, the insurance pays 50 percent of the benefits

up until a particular point. As long as the premium is about the

same, people should get the same ability to go into an HSA.

I mean, those are little, incremental steps. I think that right

now, I mean, we had such a sea change when we moved in 2004

and 2005 with HSAs and I think right now, let us try to see how

they develop. We did an awful lot of regulation when I was at

Treasury and trying to set these things up and give a lot of guidance. I think just little things, I don’t think major wholesale

changes, need to be made.

And just sort of as another point, you do make a very good point

about automatic enrollment in plans. It is something that can be

done under the Internal Revenue Code, and in fact, there were a

number of rulings that we had given in the Internal Revenue Code

allowing this sort of automatic enrollment.

One of the things that you have got to wrestle with is what happens if somebody doesn’t remember that he decided that he didn’t

want to enroll, and so you have to map out the way that people

can get out of those automatic enrollment, and that is, I think, a

place where legislation could be helpful, much like last year’s legislation, the automatic enrollment in 401(k) plans. As a retirement

policy person, that was the best thing that you guys did in that bill

and that is the sort of thing that I think really helps savings. If

you did something like that in health care, and you gave people the

way that they can back out—I think that would really help a lot,

too.

Senator SNOWE. Thank you. Thank you very much, Mr. Chairman.

Chairman KERRY. Thank you, Senator Snowe.

Senator Thune?

Senator THUNE. Thank you, Mr. Chairman and Senator Snowe,

one, for holding this hearing. I think it is a really important issue

and I want to thank our panelists for sharing their insights and

49

experiences with us regarding solutions that would help quell the

rising cost of health care for small businesses.

The estimates are that about half of the 45 million uninsured

Americans are employees of or are family members of employees

who work for small businesses. In 2003, only 43 percent of small

businesses with 50 or fewer employees offered health insurance to

their employees. In my State of South Dakota, only 34 percent of

small firms offered health insurance. In contrast, firms with 50 employees or more offered health insurance to 95 percent of their employees.

So clearly, this is an issue which profoundly impacts small businesses and the No. 1 reason cited by small businesses for not offering health insurance is the high cost. Obviously, coming up with

solutions that promote or put in place incentives for small businesses to offer their employees health benefit options is really important, and some of the things that have been discussed earlier

today move in that direction.

I was disappointed, as were a lot of others, that we weren’t able

to bring to closure bipartisan legislation that we have talked about

around here for a long time on small business health plans during

the last session of Congress. I have supported that since my arrival

here as a Member of the House back in 1996, and again, I think

it is really important that we figure out a way for small businesses

to drive down the administrative costs that they have to deal with

when they offer plans and I think that the concept of small business health plans, or as they were once referred to, association

health plans, really move us in that direction and so I would have

liked to have seen that enacted and I hope we will get some action

on it yet in this session of Congress.

Just a couple of questions. I appreciate some of the testimony

that has been provided with regard to the Massachusetts plan. I

applaud Massachusetts for taking the initiative to provide health

care coverage for the uninsured and folks in your State. I guess my

question has to do with, and I know it is probably a little early to

determine whether or not and how that is working, but States that

are taking initiatives to help the uninsured in their States, the one

concern I have is, is there cost shifting that it creates between the

State and Federal Government? Can you comment on how, if any,

the new Massachusetts Health Insurance Connector Authority

shifts costs? I guess that would be for Mr. Kingsdale.

Mr. KINGSDALE. Sure. I would be happy to. Thank you, Senator.

There are a number of different ways cost shifting can occur and

I am not sure I am going to hit exactly the right one that you had

in mind. Let me try and you can point me in another direction if

I am not addressing your question.

There is behind this reform a principle of shared responsibility,

so we have individuals who have to participate, employers who

have to participate financially, and significantly subsidized insurance available for low-income workers and others who are uninsured, and that is available through an expansion of the Medicaid

program and the development of a new program that the Connector

offers. Both of those, as you are well aware, are State and federally

financed.

50

So in that sense, as we expand coverage—and this is expensive

stuff, there is no question about it—there are costs to State and

Federal Government for both tax subsidies for people and employers who buy it on their own and more direct subsidies through

Medicaid and the so-called Commonwealth Care Program that we

started, which inure to both the State and the Federal Government.

Senator THUNE. The Federal Government does have caps for

total Medicaid spending in the individual States, is that correct?

Mr. KINGSDALE. Yes.

Senator THUNE. In your plan, how do you define the fair and reasonable contribution for employers?

Mr. KINGSDALE. Well, it is under draft regulations right now and

it is defined as one of two tests. An employer must pass either one

of the following two tests. One is that 25 percent of the employees

actually participate in the employer-sponsored plan, and the other

one is that the employer contribute a minimum of 33 percent towards individual coverage, 20 percent towards family coverage on

behalf of his or her employees. So either test.

Senator THUNE. OK. And that 20 percent and 33 percent of the

total cost of——

Mr. KINGSDALE. Health insurance.

Senator THUNE. OK. Let me just, if I might, direct a question to

Ms. Senkewicz. You had mentioned in your testimony—cautioned

against too much choice for individuals in choosing health care

plans, and I think you did mention Medicare Part D as an example

of that. I guess the thing that we—the experience at least so far,

and this is fairly early on in terms of Medicare Part D, too, is that

it does have the potential to drive health care costs down. We have

seen the Part D premiums are about 40 percent lower than they

had initially been estimated. And so far, knock on wood, there is

about an 80 percent satisfaction rate of those participants who enrolled in the Medicare Part D program.

So I guess my question is, could you elaborate on how the competition promotes inefficiency? I mean, we would like to think of it

as——

Ms. SENKEWICZ. Sure.

Senator THUNE [continuing]. Competition working to drive costs

down and create——

Ms. SENKEWICZ. Actually, I was talking more about inefficiency

of consumer output. I mean, anyone who had to deal with a parent

in Part D, it was just enormously time consuming to actually try

to go through every plan that was available, and I am just not sure

that, while everyone is—the satisfaction rate is high, you really

never do know, in fact, whether you have the best plan for you in

Part D. You just don’t. I mean, to a certain extent, it was just, let

us hope. So I just think that there is a balance to be made. To have

to choose from several tens of plans or a hundred plans, I just don’t

think is the most efficient use of consumer time in order to get

them into the best plan for them. I mean, there is a balance.

Senator THUNE. Right.

Mr. KINGSDALE. If I may add a comment on that, we have actually done market research at the Commonwealth Connector, what

kind of choice do people want who are uninsured, and what we

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hear is they would like, to illustrate on this chart, different levels

of coverage, so what we have labeled premier, which is pretty comprehensive, all the way down to very basic, and four to six plan options at each of those levels.

So I think it is a matter of striking a balance between overwhelming choice and what unfortunately is typical in the small

business world today, which is your employer picks your health

plan and you have no choice, which as I stated earlier—I think you

were out of the room—leads to employee dissatisfaction and leads

to a development or a design of plans to the lowest—to the single

common denominator, so a narrow network plan or a plan with aggressive pharmacy management programs or other innovations

that might appeal to Mary and not to Joe are not available for

Mary and Joe to choose between when the employer picks only one.

I think we are trying to strike the right balance. In fact, we have

prequalified plans and asked the employee to make some choices

rather than make the employer, a three-person shop, go out and

shop health insurance, which is a complicated selection every year.

Senator THUNE. Well, I know as a practical—go ahead.

Ms. SENKEWICZ. I am sorry, just one thing. But what he talks

about, Senator, is you are talking about common elements, too,

which is one thing that is not present in Part D. You are talking

about the apples-orange comparison, which I think helps a lot

when you are doing apples to apples.

Senator THUNE. As a practical matter, and I will say because my

father is 87, my mother will be 86 here in a few months, as we

went through the Part D thing, yes, it was numbing in terms of

seniors trying to go through, but it does strike me, too, that having

lots of choices is a high-class problem to have. But from a practical

standpoint, when you are talking about an elderly and a senior

population, you obviously want to make it as user-friendly as possible.

Thank you, Mr. Chairman, and I thank the panel.

Chairman KERRY. Thank you, Senator Thune.

Senator Cardin?

Senator CARDIN. First, let me apologize for missing your testimony. My staff was here and I assure you that I am very much

interested in the issues involving small business and health care.

I can tell you, I hear more about that from my small business community than any other single issue. We need to be more aggressive

in how we help companies and their employees deal with the

health care dilemmas that we have in this country. So, Chairman,

I look forward to reviewing the testimony and I thank our witnesses for being here.

Chairman KERRY. Thank you very much, Senator Cardin.

Let me make clear that my reaction to the HSAs is not that it

is a bad idea per se, but that it is sort of free-standing out there,

that there is not a lot of other effort. You have got the health plan,

the association health plan effort, and the HSAs have been the only

really two things on the table for the last years. They really don’t

address the large uninsured population, the low-income population,

or the cost reduction issue, or affordability issues for most people.

Would you not agree with that fundamentally?

52

Mr. SWEETNAM. I think there have been a few other things like

tax credits being provided both for individuals and——

Chairman KERRY. Well, I have recommended we put those out

there, but we have never had a serious bite at them from any Committee or any budget.

Mr. SWEETNAM. But I would tend to agree with you, Senator,

that there hasn’t been a concerted effort.

Chairman KERRY. So my desire would be—you know, there are

things that—I mean, I like a big menu and the more you can have

people choose. That is America, and the marketplace ought to be

that way. But what is happening is we are putting our focus and

our energy into these narrow areas where the return on investment

of that energy is not significant enough to the health care system,

which is why the States are now jumping up and saying, we are

going to do something. I mean, when California, the sixth largest

economy in the world, steps up and says we have got to do this,

it ought to ring some bells around here.

The Kaiser Family Foundation did a survey last year of enrollees

in the high-deductible plans with HSAs. Are you familiar with

that?

Mr. SWEETNAM. Generally.

Chairman KERRY. Sixty-four percent of the people who participated said that they participated to get the lower premium option.

Sixty-one percent participated because it would be a savings account for future expenses. Now, would you agree that the savings

account incentive is an important incentive?

Mr. SWEETNAM. That is one of the helpful things. I think people

have been—they don’t like cafeteria plans because when they put

their money into a cafeteria plan, they lose it at the end of the

year.

Chairman KERRY. This way, you have a pot of money at the end

that you can use. Now, that said, let me ask you this. The tax code

itself, we have created other savings incentives in the tax code.

Wouldn’t it be more efficient to provide tax relief that helps with

the cost of insurance and let the incentives in the tax code for savings take care of themselves for future health care?

Mr. SWEETNAM. Well, really, you are in a way incenting lower

cost, because the only way that you can make a contribution into

an HSA is if you go into a high-deductible health plan and a highdeductible health plan has lower insurance premiums than the traditional insurance. So yes, I would say that you are——

Chairman KERRY. Fair enough, but that is really a cost shift. It

is not a cost deduction, in fairness. It is a cost shift to the consumer. It hasn’t done anything to reduce the fundamental cost or

the rise in the premiums for the benefit you might get somewhere

else. I don’t accept that. It is not a cost reduction. It is a cost shift.

It is a shift from the insurer or the business, where the cost of

doing that business was, No. 1, deductible, and No. 2, transferred

to the product, the cost of goods, to purely shifting it to the individual consumer who just picks it up willy-nilly. I don’t think it is

an efficient system at all.

Mr. SWEETNAM. I think that it is driving individuals to be more

efficient consumers. I mean, as a staffer, you always hated when

somebody used themselves as an example, but I will do that anyVerDate 11-MAY-2000 12:52 Nov 08, 2007 Jkt 036570 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 C:\SBA\36570.TXT CELINA PsN: CELINA
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way. I just did my first HSA this year. I had to put my money

where my mouth was. I regulated HSAs for 4 years. I probably

should join one. And what I have found, I do take a lot of drugs,

prescription medications——

Chairman KERRY. The right kind.

Mr. SWEETNAM. Yes, the right kind.

[Laughter.]

Mr. SWEETNAM. No, once I left Government, I didn’t need as

many drugs.

[Laughter.]

Mr. SWEETNAM. What I found is that I do get cheaper costs on

my drugs because I have been doing generics. And, in fact, my

pharmacist makes sure that he recommends the generics to me. So

I would say that that is a cost savings and not a cost shifting. So

by being a more effective consumer, I think that—and that is what

HSAs and high-deductible health plans are intended for you to

do—I think that that does bring some cost savings into the system.

Chairman KERRY. But here is the critical point, is you weren’t

uninsured before you did that.

Mr. SWEETNAM. No, that is for sure.

Chairman KERRY. That is the bottom line.

Mr. SWEETNAM. But as we found, a third of the people that take

HSAs were currently uninsured before, so there must be something

there for them. If it is just the low premiums on the high-deductible health plan, that is something. That is something.

Chairman KERRY. Well, the Employee Benefit Research Institute

did a report which said only 1 percent of the privately-insured population ages 21 to 64 are enrolled in high-deductible plans including an HSA, and it said that they are no more likely to have been

uninsured prior to enrolling in their plan than those in the comprehensive plan.

Mr. SWEETNAM. That is true, but look at the data that they are

looking at. The data that they are looking at is the first year in

which HSAs have been available and so I——

Chairman KERRY. Well, here is the bottom line. The bottom line

is that I think you have agreed with me that it would be more valuable for us to put our energy into a broader-based effort to be

more inclusive and to reach the uninsured and that HSAs may be

part of the mix but they shouldn’t be the sort of——

Mr. SWEETNAM. I think that HSAs are a very important thing,

but yes, I think——

Chairman KERRY. The problem is, we keep considering them

free-standing, not as part of a mix. And if they are part of a mix,

I am a happy puppy, but I am concerned that they are not and are

sort of out there as, boy, here is our plan for America. We are going

to have an HSA. We are going to have association health plans,

which just don’t do what we need to do to broaden participation,

access, and cost reduction. And access and cost reduction are going

to come through a more comprehensive approach.

Yes, Mr. Kingsdale?

Mr. KINGSDALE. Just very briefly, and this may sound self-serving and parochial, but why not. You know, in Massachusetts we

spent 3 years building a consensus to do health reform and we will

spend another 2 years trying to define it and implement it. So it

54

is a 5-year process. This is 16 percent of GDP. It is a huge effort

to refinance it.

There seems to be a consensus in this country that we ought to

have broader access to financing health care, but lots of different

approaches that necessarily have to take some local conditions into

account. To the extent that Congress and the Federal Government

were to provide incentives, encouragement, sticks and carrots, if

you will, and they clearly did in Massachusetts—there was, as you

well know, $385 million a year in Federal dollars on the table to

be lost if everybody retreated to their corner rather than come to

agreement. If similarly there were significant incentives for other

States to act, I believe that, as you have noted, there are a lot of

States that want to act. It will take a long time to do it and it has

to be somewhat locally tailored. So that kind of Federal-State partnership, I would recommend, coming back to your concern, how do

we deal with the whole issue, is a very good model.

Chairman KERRY. Do you think that in looking at the pools—

take a State like Maine where the cost of living is less than Massachusetts, it also has a different income scale—that you ought to

look at a different kind of pool, for instance, Maine maybe linking

to more rural and alternative kinds of pools where you might find

an easier marriage to the mandates or to the plans offered, or is

that discriminating against them?

Mr. KINGSDALE. I think Mr. Bragdon should answer that, but I

want to make two quick points. One is probably there are different

circumstances in Maine than Massachusetts that justify a different

approach, but more importantly, this is really tough political stuff

and the solution has to be bought into by those who know and

work in Maine.

Chairman KERRY. Mr. Bragdon?

Mr. BRAGDON. I think that it is OK to link those different regions

if you are going to set up a system where you provide people with

lots of different options so that they can then pick the option that

makes the most sense given their own economic family situations.

I think you are absolutely correct. Maine is a low-income rural

State. Hopefully, we won’t always be, so maybe in a way, if you

link us with other States, providing options, making health care

more affordable, it will allow entrepreneurs and small businesses

to flourish.

Chairman KERRY. That is why I raised the discrimination issue.

So the key would be the menu that you provide, the options that

you provide, but again, you would have to have some sort of affordability sliding scale, wouldn’t you?

Mr. BRAGDON. I think ideally, yes.

Chairman KERRY. Senator Cardin?

Senator CARDIN. If I may follow up on that, one of my concerns,

if we are dealing with affordability of health care, it is a national

issue. We have to deal with the cost centers of the number of uninsured, the high cost of prescription medicines, how we get longterm care, and the whole gamut of issues. My own State of Maryland has small market reform to try to help small business and I

believe it has been effective in Maryland. Is it solving the problem?

No, it is not. Do we need national help? Yes, we do.

55

But one of my concerns is that if we look for models such as association health plans or over-reliance on Health Savings Accounts

that it can compromise work done in my State of Maryland with

small businesses that are benefitting from small market reform

who will probably lose that if we go to association health plans, because the market, the adverse risk selections will be there and we

won’t be able to continue those plans.

So I think, Senator Kerry, you have raised a good point about

uniqueness of our States. We have to be mindful that there has

been reform done. There has been progress made in some States

and some of the solutions that are looked at at the national level,

if not taken on a comprehensive approach, if it is just taken as one

option, as the solution, could very well be harmful to many of our

States and the reforms that they have already moved forward. I

welcome any of your thoughts in that regard. I know in Maryland,

our small market reform is welcomed by our small business community.

Mr. KINGSDALE. Just one thought, which is that there are a

whole bunch of issues about pooling and participation and segmenting markets and risk and so forth that we have discussed

today that are all addressed currently by State regulation. The

point I would make is that if you are going to talk about crossState insurance options, you need to talk about cross-State insurance regulation and that is a big undertaking. So I would suggest

there has to be a marriage and a synchronization of the regulatory

framework that is so critical to these pooling and other issues with

any effort to break down State regulation. You are going to have

to then at the national level take up those same issues.

Ms. SULLIVAN. Well, representing the small businesses, we already have that system where every State does what they want to.

It is not working. When we are talking about pooling, that is because we think we need more than just individual States acting.

I would just say the worry about losing mandates or the coverage

that maybe one State wants over another, the point is it is not

working as it currently is structured. We would urge you to think

broader and to think in a bigger way about how you can help us

on a national level.

Senator CARDIN. I would just point out, it is working in Maryland. It is working. The small market reform overrides State mandates for our State. We have a commission that meets with small

business and the advocacy community and works out an affordable

product for small business. If the Federal Government were to

come in and mandate association health plans, we would lose our

small market reform in Maryland. We would lose our plan. That

is why our Governor, our Republican Governor, urged against association health plans and we have opposed it in Maryland. So some

States are moving in that regard.

Ms. SULLIVAN. It is working in some States, perhaps.

Chairman KERRY. An issue that I have been championing for a

number of years now is reinsurance, that if we were to create a reinsurance pool, you know, 20 percent of the costs of health care are

contained in 1 percent of the billings. That is basically the most

catastrophic care. If we were to limit the exposure of every business and every individual in America to $50,000 of risk exposure,

56

then your premiums would drop per person in a business by about

$1,500 and you could take care of those other cases out of your reinsurance pool at the Federal level, which would have a true cost

reduction.

Then all of a sudden, if you coupled that with a tax credit for

small businesses, say up to 50 percent, you would have a doublewhammy premium reduction. You have the tax credit benefit coupled with the premium reductions by capping catastrophic. You

would lower premiums across the country and make our businesses

more competitive and have a certainty as to what the risk is that

you are going to be exposed to in the marketplace.

Does it cost a little bit of money to create the Federal insurance

pool? Yes, it does. It costs a fraction of what we are spending in

Iraq, but it costs some money. So these are the choices we need to

make.

How would you respond to having a reinsurance pool and lowering costs in that manner and making that available? Wouldn’t

that—if every business in America could say, whoa, my premiums

are down by $1,500, every car in America would go down by $1,500

per car. That is the cost that goes into each car made in America

to pay for health care for workers. All of a sudden, you are more

competitive with foreign manufacturers, et cetera. It would be a

plus for the economy, not a negative. Would any of you have any

response? No response?

Ms. SENKEWICZ. Yes, Senator. Absolutely. I mean, reinsurance—

essentially what you are talking about is, and I touched on it, how

do we take care of the sick, and reinsurance for the highest claims

is certainly one way to look at it. Healthy New York used a reinsurance mechanism. They have been very successful in reducing

the uninsured rate. You just have to be careful about how you do

it. That is what the States are doing now with high-risk pools. Essentially, it is trying to get—and that is financed, subsidized

through premium payments, State tax money, a variety of ways,

but that is exactly what you are doing. If you can cut off that most

expensive risk off the top somehow and get that out of the pool so

that the general pool can take care of itself, I think you can go a

long way towards solving some of the problem.

Chairman KERRY. That is a different discussion probably in a different Committee, but at any rate. I appreciate all of your input

today. It has been very helpful. We are going to leave the record

open for 2 weeks for colleagues to be able to submit questions in

writing, which you may receive.

We really appreciate you taking the time to come in here today.

We are going to try to synthesize this. We will probably have some

additional questions for the record just to fill it out a little bit. So

thank you very much for being here.

We stand adjourned.

[Whereupon, at 11:54 a.m., the Committee was adjourned.]

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APPENDIX MATERIAL SUBMITTED

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RESPONSES BY MARY BETH SENKEWICZ TO QUESTIONS FROM

SENATOR JOSEPH I. LIEBERMAN

Question 1. In your testimony, you stated that Congress should create a more efficient national pooling mechanism to reduce the cost of health care for small businesses. Can you provide more details about your ideas to improve efficiency in pooling? How can the Federal Government achieve this goal?

Answer. [A response was not available at press time.]

RESPONSES BY WILLIAM F. SWEETNAM, JR. TO QUESTIONS FROM

SENATOR JOSEPH I. LIEBERMAN

Question 1. The deductible of a qualifying health plan for a HSA (health savings

account) sounds high to me—$2200 for a married couple. That deductible might help

a middle income family in the United States, but I am concerned about our lower

income families who would find it difficult to handle a deductible of that amount.

In your testimony, you stated that HSAs are utilized by citizens of all income levels.

Please provide the Committee with statistics to support your claim, including the

percentages and numerical frequencies of HSA users, categorized by income level.

Answer. The statistics that I used in my testimony were based on an analysis conducted by UnitedHealth Group, which is the largest provider of HSAs in the country

with nearly 1 million HSA members. The analysis was based on the saving and

spending patterns of 25,000 individuals enrolled in its employer-sponsored HSA

plans for all 12 months of 2005. This study paired health plan membership information with financial transaction data from the company’s own health care bank,

Exante Financial Services.

The study found that HSAs are utilized by consumers across all income ranges.

Overall, the rate of account openings varies only from 80 percent to 84 percent

across all income ranges. Most notably, when their employer makes a contribution

to the HSA, 80 percent of low-income individuals (those earning $25,000 or less annually) open their accounts. However, income plays a clear role in account adoption

when the employer does not make a contribution to the account. In those cases, accounts are opened by:

• 23 percent of those earning less than $25,000

• 39 percent of those earning $25,000 to $49,000

• 50 percent of those earning $50,000 to $99,000

• 58 percent of those earning $100,000 or more.

The study that UnitedHealth conducted did not have any analysis of the distribution for HSAs based on income levels.

RESPONSES BY TARREN BRAGDON TO QUESTIONS FROM

SENATOR JOSEPH I. LIEBERMAN

Question 1. What is the rationale for not mandating participation in a minimal

benefit health plan, if such widespread participation reduces the overall risk pool?

Answer. It is easy to propose in theory an individual mandate. However, it is very

difficult to administer one. Almost all States have an auto insurance mandate, yet

often upwards of 25 percent of all drivers do not have auto liability insurance.

Rather than mandate participation, I believe that the key is to have various affordable private health insurance options so that individuals can choose the best

plan for themselves, given their own life and economic circumstances. One person’s

‘‘minimal benefit’’ may be more comprehensive than what another person needs,

wants or can afford.

Question 2. You testified that you would support auto-enrollment in a default

health plan for employees that do not have health coverage. Please discuss how you

think auto-enrollment should be structured to provide the best coverage to newly

hired employees? Would a 21-year-old receive the same coverage as an older adult?

Would gender affect default coverage? Who would make these decisions?

Answer. Auto-enrollment would be simple. A company could choose to auto-enroll

employees in employee-only coverage. For companies offering more than one health

plan, the company would choose the default plan for auto-enrollment, which would

presumably be the most affordable plan (requiring the lowest employee share of the

premium).

All employees would auto-enroll into the same default plan, regardless of age, gender or another other demographic.

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Employees could select a different plan, if available, or opt-out of coverage entirely, if desired. But the default would be to opt-in. Currently, the default is to optout.

RESPONSES BY JON M. KINGSDALE TO QUESTIONS FROM

SENATOR JOSEPH I. LIEBERMAN

Question 1. I understand that healthy competition is an incentive for lower cost

insurance. Given this fact, I am puzzled by the fact that big insurers often compromise the market, raise health care prices, and provide less coverage without any

intervention. What is Massachusetts doing to curtail the monopolization of the insurance market by large insurance companies?

Answer. Under Massachusetts’ health reform, the Commonwealth Health Insurance Connector Authority has initiated competitive, open bidding and invited eligible health plans to respond to our requests for proposals. As a result, several developments have already occurred that tend to create more competition, especially on

the part of smaller health plans, in the insurance market.

1. In response to an RFP issued by the Connector last August for our new subsidized private health plans for low-income uninsured, several Medicaid Managed

Care organizations are becoming licensed to offer commercial insurance in the Commonwealth—adding to the number of smaller health plans (several hundred thousand members each) that can compete here for both low-income and regular commercial membership.

2. In response to an RFP issued by the Connector last December for non-subsidized health plans to be offered through the Connector to individuals and selected

categories of employers, we approved for offering 42 health benefits plans offered

by 6 carriers in Massachusetts. While none of the 6 are new insurance companies

in the State, several are relatively small plans, which as a result of being offered

through the Connector, will have access to many new members. The 6 carriers have

proposed innovative, limited-network products, and are already experiencing membership growth as a result.

3. Because the Connector provides far greater transparency and ease of comparison shopping for health insurance than previously existed, and because the State’s

health insurance reforms tie carriers’ non-group offerings to their commercial group

offerings, options for non-group purchasers have expanded considerably. The Connector functions for insurers much like Travelocity for airlines, making it easier and

more affordable to buy insurance and for smaller health plans to reach more potential consumers. As a result, we have already observed several promising competitive

responses in the way health insurance carriers compete and market their products

outside of the Connector as well.

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COMMENTS FOR THE RECORD

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