U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

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

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

34–837 PDF 2007

FULL COMMITTEE HEARING ON EXPANDING

SMALL BUSINESS HEALTH INSURANCE COVERAGE

USING THE PRIVATE REINSURANCE MARKET

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 24, 2007

Serial Number 110-25

Printed for the use of the Committee on Small Business

(

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

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

WILLIAM JEFFERSON, Louisiana 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

DEAN HELLER, Nevada, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman

WILLIAM JEFFERSON, Louisiana 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma

(II) 

Subcommittee on Regulations, Health Care and Trade

CHARLES GONZA ́ LEZ, Texas, Chairman 

WILLIAM JEFFERSON, Louisiana 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Urban and Rural Entrepreneurship

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

LOUIE GOHMERT, Texas, Ranking 

LYNN WESTMORELAND, Georgia

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1

Chabot, Hon. Steve .................................................................................................. 2

WITNESSES 

Crouse, Dr. Leonard D., Vermont Department of Banking, Insurance, Securities & Health Care Administration .................................................................... 3

Collins, Patrick L. American Academy of Actuaries ............................................. 5

Harter, Steven J., National Association of Professional Insurance Agents ........ 7

Trautwein, Janet, National Association ofHealth Underwriters ......................... 9

Haislmaier, Edmund, The Heritage Foundation ................................................... 11

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 32

Chabot, Hon. Steve .................................................................................................. 34

Altmire, Hon. Jason ................................................................................................. 35

Crouse, Dr. Leonard D., Vermont Department of Banking, Insurance, Securities & Health Care Administration .................................................................... 36

Collins, Patrick L. American Academy of Actuaries ............................................. 40

Harter, Steven J., National Association of Professional Insurance Agents ........ 47

Trautwein, Janet, National Association ofHealth Underwriters ......................... 50

Haislmaier, Edmund, The Heritage Foundation ................................................... 56

(V) 

(1)

FULL COMITTEE HEARING ON EXPANDING 

SMALL BUSINESS HEALTH INSURANCE 

COVERAGE USING THE PRIVATE 

REINSURANCE MARKET 

THURSDAY, MAY 24, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:00 a.m., in Room 

2360 Rayburn House Office Building, Hon. Nydia Vela ́zquez 

[Chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Jefferson, Cuellar, Clarke, 

Ellsworth, Johnson, Sestak and Chabot. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

ChairwomanVELA ́ ZQUEZ. Good morning. This hearing on expanding small business health insurance coverage using reinsurance in 

the private market is now called to order. 

It is no secret that small employers are finding it difficult to purchase health insurance. However, what is less well known is that 

fewer carriers are offering coverage in the small group market. 

In 2006, the Government Accountability Office reported that in 

a typical state the largest insurer controlled 43 percent of the market, up from 33 percent in 2002. In nine states, the largest carrier 

held more than 50 percent of the market. Consolidation in the insurance industry has made it difficult for smaller insurers to compete, and a number have dropped out altogether. 

The lack of insurers helps explain why small employers can pay 

as much as 20 percent more than their corporate counterparts for 

the same health plan. Without competitive forces, insurance companies can dictate prices. 

Today’s hearing is the second in a series held by the Committee 

to address the issue of providing affordable health insurance for 

small businesses. This morning we will look at the state of the reinsurance market and whether there are ways to expand the use 

of reinsurance to provide more health insurance options for small 

employers. 

Second, the Committee will consider whether it is feasible for 

small businesses to purchase reinsurance directly from a reinsurer. 

Typically, only insurance companies and large employers buy these 

policies to cover catastrophic claims. Small employers simply do not 

have the resources to purchase this type of policy on their own. 

2

The issue is: what changes to our laws, if any, will make it possible for an entrepreneur to purchase such reinsurance coverage? 

I would like for witnesses to comment on whether collective arrangements would allow small employers to buy reinsurance. 

Too often, we hear the excuse from insurance companies that 

they cannot offer small employers coverage or have to charge exorbitant prices due to the risk factor. If we can eliminate this argument, small businesses can start negotiating rather than simply accepting health insurance prices. 

While this may seem like a unique approach, the depth of the 

problem requires us to look at all our options. If we fail to do anything, costs will continue to rise, more individuals will find themselves uninsured, and the growth of America’s economy and small 

businesses will come to a halt. 

We have with us a distinguished group of witnesses well 

equipped to help us understand the reinsurance market and whether it holds the key to expanding small business health insurance 

coverage. This Committee’s goal is to ensure that health care reform does not occur without meaningful consideration of impact on 

this country’s small businesses and the workers. 

I am pleased that witnesses are here today to share their insights, and I look forward to today’s testimony. I now recognize 

Ranking Member Chabot for his opening remarks. 

OPENING STATEMENT OF MR. CHABOT 

Mr.CHABOT. Thank you, Madam Chairwoman, and thank you for 

holding this hearing on expanding small business health insurance 

coverage. 

At the center of our examination are the issues of cost and access. As we all know, purchasing health insurance is one of small 

business’ most costly expenses. According to the National Federation of Independent Business, the NFIB, health care is the ‘‘most 

severe problem for small business owners’’—greater than taxes, 

cash flow, or government regulations. 

Small groups, including small businesses, usually pay more for 

similar or less coverage than large businesses. As a result, small 

businesses are less likely to offer health insurance than large 

firms. Not surprisingly, the principal reason given is that the small 

business could not afford the coverage. 

Access to health insurance is also a challenge for small businesses. According to the Small Business Administration, employees 

with small firms are far less likely to have health insurance than 

those at larger ones. Ensuring that health care is affordable for 

small businesses is one of the most important issues Congress can 

address. 

Our nation’s small businesses drive the economy, and we need to 

do all that we can to help them stay competitive and encourage 

their growth. Association health plans, pool purchasing, and reinsurance have been mentioned as ways to help reduce the costs and 

increase access to health insurance for small businesses. 

I am pleased that we will consider reinsurance during this hearing. Although I have reservations about the implications of a federal mandatory reinsurance program, I think reinsurance deserves 

further examination. I also believe that tax relief is not only an imVerDate 0ct 09 2002 09:02 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34837.TXT LEANN
3

portant way to reduce the overall tax burden, but to make health 

care more affordable for small businesses. 

In previous Congresses, I have introduced the Health Care Affordability Act, which would allow every American to deduct 100 

percent of the cost of their health insurance. I plan to introduce 

this bill or a similar bill in the near future. 

Madam Chairwoman, I appreciate your holding this hearing. I 

look forward to hearing from our witnesses and to working with 

you on finding ways to make health care more affordable for small 

businesses and their employees, and I yield back the balance of my 

time. 

ChairwomanVELA ́ ZQUEZ. Thank you. I welcome all the witnesses. 

You will have five minutes to make your remarks. 

Our first witness is Mr. Leonard Crouse. He is the Deputy Commissioner of Captive Insurance at the Vermont Department of 

Banking, Insurance, Securities & Health Care Administration. He 

has worked in the insurance regulation field for 35 years. Mr. 

Crouse has been the head of the Vermont Captive Insurance area 

for 16 years. 

Welcome, sir. 

STATEMENT OF MR. LEONARD D. CROUSE, CFE, DEPUTY COMMISSIONER, CAPTIVE INSURANCE DIVISION, VERMONT DEPARTMENT OF BANKING, INSURANCE, SECURITIES & 

HEALTH CARE ADMINISTRATION 

Mr.CROUSE. Thank you, Madam Chair, and members of the Committee. I have been in insurance regulation for 35 years, the last 

16, as the Chairman said, in Vermont. When I came to Vermont, 

we had 200 captive insurance companies. We just licensed our 

800th captive insurance company last week. 

It has been an industry that is referred to as the alternative insurance market. It has been around for a number of years. We 

passed our legislation in 1981. Many states have adopted regulations to form these type of insurance entities. 

There are basically three types of captives when we talk about 

captives. We have a pure captive that insures only the corporation 

that owns it or that of its affiliates. And then, we have association 

captives made up of smaller groups that get together, pool their 

risks, whatever, and form. And then, we have what we call the risk 

retention groups. Those are the smaller groups that get together 

again, usually have similar business, similar type of exposure. 

They get together to form a risk retention group. We have 79 of 

those in Vermont currently. 

If I could just refer back to the, oh, maybe four or five years ago, 

the medical malpractice crisis that was going on in this country 

and how the alternative market helped that market get over a 

major hump. Pennsylvania was a main state with major problems 

in medical malpractice. I believe we formed something like 39 captives that year, risk retention groups, put together by doctors, doctor groups, hospitals, universities with medical centers, and it really alleviated a serious problem. It was an alternative for many of 

these companies to go to. 

4

Again, the reason was that costs were becoming too high in the 

traditional markets. Insurance was, in some cases, unavailable. So, 

again, it has been a great success in that industry. 

Companies that do form captives, they generally realize lower 

costs, stable pricing, and the ability to receive a policy that meets 

its needs. Commercial premiums are based on the cost of claims, 

administrative costs, profit, and market competition. Companies 

forming captives feel that they can better estimate their own claim 

costs, lower administrative costs, and adjust the required profit to 

suit their needs. 

Captives should not be subject to market conditions. Basically, a 

lot of people will form a captive, and what we call the hard market 

and the soft market occurs, a soft market being where insurance 

is readily available and a hard market when insurance costs go up 

and insurance is not readily available. 

But when you form a captive, you stay in it for the long run, so 

you get over those humps that come and go, usually in the course 

of seven years, hard market/soft market, although recently those 

hard markets and soft markets have come a little bit more frequently. 

We are a regulator in Vermont. I am a regulator, number one. 

It is important to regulate these entities. And anything that is 

done by your Committee or by the Federal Government that would 

be able to assist the small markets should be done in a regulated 

environment. Insurance is a regulated industry. It always has 

been; it always will be. And what we need in the smaller markets, 

we are having problems right now with risk retention groups. 

It is a federal act. The Federal Risk Retention Act has been in 

effect since the early ’80s when we passed our law. There is just 

not enough meat in the regulation and the requirements that are 

in that law. So if there is something that is passed, you have got 

to put a little more meat and a little more stiffness in there about 

the regulation and oversight of any type of program that is done. 

We are working closely now with the NAIC, trying to bring the 

states together. There is about 15 active states in the risk retention 

group business. We are trying to bring them together and get some 

uniformity. There has to be uniformity in the oversight and regulation of any type of alternative program. 

Basically, the GAO did a study, and it was completed two years 

ago. I believe it was the House Financial Services asked the GAO 

to do a report. It was a very successful report, and it would behoove you folks I believe to take a look at that and read it. It is 

excellent. There was a lot of good suggestions there on what they 

could do to improve the Risk Retention Act, and I think it would 

fit right into what you folks here are possibly thinking of doing. 

I think the alternative market properly done for the small businesses and health care, something could be structured. I think a 

State like Vermont would be ready and willing to work with you 

folks to set something up, and I believe we are positioned to do so. 

I will say this: Vermont has 28 people just in our alternative 

market division, which is the largest by far of any other state. We 

are the only state that has a dedicated department just for alternative markets and for risk retention groups, and what not. 

5

So I just want to let you all know that we are readily available 

to answer any questions and work with you folks. 

[The prepared statement of Mr. Crouse may be found on page 36 

of the Appendix.]

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Crouse. 

Our next witness is Mr. Patrick Collins. He is the Vice President 

and Reinsurance Underwriter at Munich Re America HealthCare 

and is appearing on behalf of the American Academy of Actuaries. 

He is the Chairman of the Medical Reinsurance Workgroup and 

Vice Chairman of the Federal Health Committee. The American 

Academy of Actuaries represents over 15,000 members from all 

practice areas. 

Welcome, sir. 

STATEMENT OF MR. PATRICK L. COLLINS, MAAA, FSA, VICE 

PRESIDENT AND REINSURANCE UNDERWRITER, MUNICH RE 

AMERICA HEALTHCARE, PRINCETON, NEW JERSEY, ON BEHALF OF THE AMERICAN ACADEMY OF ACTUARIES 

Mr.COLLINS. Thank you. Good morning, Madam Chairwoman 

Vela ́zquez, Ranking Member Chabot, and members of the Committee. On behalf of the Academy of Actuaries, I thank you for the 

invitation to sit down with you today and discuss private reinsurance in the small business context. The Academy is a non-partisan 

public policy organization representing actuaries of all specialties 

in the United States. 

We applaud your efforts to take on the difficult and complex 

health care cost problem. We are on an inevitable path to a collapse in the commercial medical insurance market. There is nothing that we can see on the horizon that will be able to stop it, and 

it is not a matter of if this will take place, but more of a matter 

of when and what form the market will look afterwards. 

Small employers are on the front lines, bearing the brunt of 

these high health care costs, and it hurts, not just on a financial 

level but on a personal one. As you are aware, 80 percent of small 

employers have 10 or fewer employees, and the business owner 

tends to know each employee. In many cases, their relatives are 

family members. 

The choices used to be which plan of benefits to buy or from 

which carrier, and now increasingly it is whether or not they can 

afford to buy anything at all. The burden imposed by these health 

costs on small business also hurts the very innovation and entrepreneurial activity that has been fueling the economic growth of 

this country, and for these reasons your efforts to address these 

items are to be commended. 

The issue of how to address the high cost of health care benefits 

is indeed a complicated one, and solutions will most likely need 

multiple interlinking components that can’t be solved with simple 

or quick fixes or sound bytes. And I understand you are considering 

reinsurance as part of the solution, and I hope that you found my 

written statement useful. 

In addition to providing some background information on reinsurance, the statement is intended to provide you with a list of 

items to consider when designing a program. I would like to emVerDate 0ct 09 2002 09:02 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34837.TXT LEANN
6

phasize and highlight just a few of these points. I think it is important to understand the role that reinsurance plays. 

In the private market, medical reinsurance reduces risk by providing financial protection. And by taking that risk, it reduces the 

required capital and increases the capacity by allowing the company to write larger programs. And it also provides the company 

with a source of intellectual capital and value added services. 

What reinsurance does not do, however, is it does not reduce 

overall medical costs. It simply shifts costs from one entity to another. Nor does it render an uninsurable risk insurable. By simply 

shifting risk around does not change its underlying nature. While 

the commercial medical reinsurance market today is vibrant and 

fills a valuable market need, it is relatively small. It is used by 

small to mid-sized health insurers, and it is also used by small to 

mid-sized employers who self-fund their medical benefits. 

Large health plans and large employers generally do not buy 

much reinsurance. For those who do buy reinsurance today, reinsurance tends to be very customized and tailored to the needs and 

goals of the organization. A standardized reinsurance program will 

tend to work well for some and not for others. And while it may 

work on average, it may not work very well for any one health plan 

or employer. 

And of the issues outlined in my statement, I think the ones 

worth highlighting the most are, first, defining the objectives clearly. Understanding exactly what the program is trying to accomplish 

is important. Some objectives may tend to work against each other. 

For example, providing coverage to sicker people with higher 

health costs may work against an objective of lowering costs and 

premiums. 

The second is: beware of unintended consequences. People in organizations, I think it will come to no surprise, will tend to act in 

their own best interest. One way that we use to flesh out these consequences is to look at the incentives. We first ask, what is the program incenting each party to do? And then, we ask if we are comfortable with those incentives. 

Often programs are put into place with an assumption that everything else will remain the same. And often everything does not 

remain the same. 

Before I close, I will leave you with one final thought. I was 

studying a condition recently called hormesis, and that is a condition where something in controlled doses is beneficial and good for 

you, but it is lethal in high doses. And the two most oft cited examples are water and oxygen. 

And I suggest thinking about reinsurance in the same way. 

Using it wisely and judiciously and it will serve you well. Relying 

on it too heavily and it may cause more problems than it is worth. 

Thank you for your time. I and the Academy are available to you 

as a resource to assist you in any way that we can. And I wish you 

all the best in your endeavors. 

[The prepared statement of Mr. Collins may be found on page 40 

of the Appendix.]

ChairwomanVELA ́ ZQUEZ. Thank you. Thank you. 

7

Our next witness is Mr. Steven Harter, owns and operates Select 

Risk Management Inc., and is the Past President of the National 

Association of Professional Insurance Agents. The National Association of Professional Insurance Agents represents member insurance agents and their employees who sell and service all various 

insurance products. 

Welcome, sir. 

STATEMENT OF MR. STEVEN J. HARTER, PAST PRESIDENT 

NAPIA, SELECT RISK MANAGEMENT INC., ON BEHALF OF 

THE NATIONAL ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS (NAPIA) 

Mr.HARTER. Thank you. Thank you, Madam Chairwoman, and 

members of the Committee. In 2002, I had the honor of serving as 

President of the National Association of Professional Insurance 

Agents. I continue to be involved with PIA and am the current 

President of the PIA trust, which is involved in health insurance 

products. 

On behalf of PIA and its members, I would like to thank you for 

this opportunity to testify before the Committee. 

PIA members are owner principals of their own independent 

agencies. We specialize in selling all sorts of insurance products, 

primarily to small and mid-sized businesses. Those products include automobile, home, business, including health insurance products. We are main street agents serving main street America. 

PIA’s experience and perspective in this area is both as purchasers as well as insurance experts. We also have to buy health 

insurance for our employees. 

As I stated before, I do own and operate an insurance agency. In 

addition, until September of 2006, I owned another business. It was 

a social service agency providing supports to individuals with developmental disabilities. I employed approximately 120 people that 

we tried to provide health care for. In 2006, we merged with a 

large organization, largely because of the incredible cost of health 

insurance for my employees. 

For many years, I did provide full health insurance. I paid 100 

percent of the premium. As the costs continue to rise, I raised 

deductibles, much like other small businesses do. At that point, the 

costs became too much, and I started having my employees contribute toward the cost of their insurance. 

In the health care/social service industry, people are low paid. A 

lot of my people only make like $10 an hour. So an increase in cost 

to them was disastrous, and many of them dropped their coverage. 

On the last renewal, the cost for each employee was quoted at over 

$500 per month. I didn’t have the money to do that. 

I determined the amount that I could pay, searched the market 

to find some sort of product that would be better than nothing—

and I think a lot of small business people do this every day—and 

what I wound up with was what is called a mini-med product that 

basically is a band-aid. It is not the answer to the problem. And 

I think you have other small businesses that are probably doing 

those same sorts of things. We are trying to work within the—in 

the system, but it is not being very successful. 

8

Allowing cost considerations to limit access to care in this manner by employees of small businesses is not a solution. It is another 

indication that there is a broader problem. I feel the overwhelming 

driver of insurance costs is the high demand for medical services 

coupled with the skyrocketing costs of health care, including prescriptions. I am not telling you anything new. 

Today, as a nation, we are healthier than we have ever been before. Part of the reason is the advance in medical treatment, which 

of course adds to the cost. I don’t see that reinsurance will necessarily help curb costs. I see reinsurance as more of a vehicle for 

availability. I have always been able to find group insurance. I just 

can’t afford it. I don’t get the impression from my clients that they 

can’t find the coverage. Most of the time there is a market somewhere, but people can’t afford to pay the premium. 

I think there are only three broad answers—either have the government pay for part of the cost, somehow limit the cost of services, 

or pass more of the costs to individuals. And more than likely, it 

is going to be some combination of all of the above. 

All reinsurance does is redistribute the exposure to loss by the 

insurance company. It does not lower the total cost. Conceptually, 

the ability of insurance carriers to lower their overall exposure to 

loss through reinsurance could cause more carriers to compete in 

the marketplace. With more competition, costs could be lower. It is 

a concept that needs to be explored more, just as your Committee 

is doing. 

As Congress moves forward in developing effective legislation, we 

would like to make the following recommendations. First of all, we 

need to consider affordability as a key to availability. Number two, 

we need to clearly outline administration of the program, preserving state regulation. We strongly believe that state coverage, 

mandates must remain. Establishing financial soundness standards, including a structure of operative principles, is critical. It is 

not merely enough to have funding. 

We must learn from past mistakes. ERISA is an example. ERISA 

needs to be fixed before anything else is piled on top of it. We need 

to operate outside of that. 

PIA strongly advises that legislation moving through Committee 

be available for public vetting, and that before the concepts are implemented they are subjected to economic and operative modeling. 

In closing, let me emphasize that what we are really discussing 

here today is how we go about delivering more high-quality health 

care to people who cannot afford to bear the full brunt of the cost. 

People who choose to work for America’s small businesses should 

not be less able to have quality health care than people who work 

for large concerns. 

Aside from the issue of basic fairness, such a situation places 

small businesses at a competitive disadvantage in the marketplace. 

Reinsurance should be a part, but only one part, of a number of 

potential solutions that need to be accomplished to make health insurance available and affordable to small businesses. 

Thank you. 

[The prepared statement of Mr. Harter may be found on page 47 

of the Appendix.]

9

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Harter. 

Our next witness is Ms. Janet Trautwein. She is the Executive 

Vice President and CEO of the National Association of Health Underwriters. The National Association of Health Underwriters is a 

trade association for health insurance agents and brokers, representing more than 20,000 health insurance producers nationally. 

Welcome. 

STATEMENT OF MS. JANET TRAUTWEIN, EXECUTIVE VICE 

PRESIDENT & CEO, NATIONAL ASSOCIATION OF HEALTH UNDERWRITERS 

Ms.TRAUTWEIN. Thank you, Madam Chairwoman. I think I just 

want to go ahead and move right into—not talk about the things 

that others have spoken about today. 

I want to talk a little bit about reinsurance and why we are talking about reinsurance. You know, what is reinsurance for at the 

most basic level. One of the major cost drivers in health insurance 

today are the expenses by a few people who either have chronic or 

serious medical conditions. In fact, 20 percent of the people who 

have these conditions actually produce 80 percent of the expense in 

any plan, regardless of the size of the case. 

And that is why reinsurance is used. Spreading the risk in plans, 

particularly small employer plans, is difficult for insurers to do 

that, and that is why many insurers do buy reinsurance. I find that 

people are surprised when insurance companies reinsure themselves. That seems, you know, at odds with what an insurance company would do. But this allows them to be more competitive. 

And what do we mean by ‘‘being more competitive’’? That means 

they are offering a lower cost. And if they can reinsure part of that 

risk, it helps them to offer a lower cost to more employers. That 

is what being competitive is all about. 

And I want to emphasize one thing about reinsurance. When a 

company reinsures or even an employer, large or small, reinsures, 

they don’t reinsure for losses that they expect—they price for those. 

They insure for losses that they don’t expect, that would be out of 

the range of things that would normally happen. 

There are two basic types of reinsurance. There are actually 

many types, so I am going to oversimplify this discussion for those 

of my fellow panelists that would say, ‘‘Well, it is really more complicated than that.’’ It is, but I am going to—for purposes of our 

discussion today, I want to break it down into two types. 

Reinsurance can be bought on individual losses, against losses by 

an individual within a group, and then it can also be purchased for 

the losses of a pool of individuals as a whole. And there are a lot 

of calculations that go into how much reinsurance you buy. One 

thing I want to point out is that the amount of coverage purchased 

is never an arbitrary amount today, and it never should be, because the ability to absorb risk is very, very different from one 

group to another. 

And when I talk about a group, I don’t mean one small employer. 

I mean for an insurer, their group of small employers, or their 

group of a particular market, and that is who they reinsure. If they 

were to buy too much reinsurance because it had to be purchased 

at an arbitrary amount, that would be a huge waste of money and 

10

would cause prices to go up, not down. So you don’t want to throw 

dollars away there. 

I do want to point out that there is a cost for reinsurance. We 

have mentioned this before. It is factored back into the premiums 

that people pay. There is a premium that insurers or employers 

pay for reinsurance, and it does help them be more competitive, but 

it is not free. And that is just an important component to keep in 

mind, that it is a rearranging of things, and it can lower costs, but 

sometimes it is just spreading it out differently. 

I want to point out that some states have tried to assist small 

employers already by developing small employer reinsurance pools. 

There are about 19 of these pools in existence so far today. They 

have been marginally successful, primarily for two reasons. One is 

that they are very small, and most of the large carriers do not participate. 

The reason why they don’t participate is because the pools are 

set up with an arbitrarily low attachment point for the reinsurance, which is—they feel is silly to reinsure at that level and would 

be a waste of the dollars that could go towards paying claims for 

their customers. And so the pools have almost today been set up 

to fail. That old NAIC model needs to be changed, so that they 

could work more effectively. 

There have been some ideas circulated about federal subsidies for 

the reinsurance market, all different ways—federal subsidies, state 

subsidies, any sort of assistance. The reason why these have been 

kind of popular concepts is that they actually—a subsidy would actually take away part of the cost, as opposed to rearranging it, like 

I was talking about a few minutes ago. 

So, for example, a subsidy could be constructed so that it would 

actually reduce the amount of a reinsurance cost or reduce the 

amount of a claims cost that normally would have been calculated 

into figuring how much to charge people for their coverage. So it 

should force costs down in the market, if it were done correctly. 

In closing, I have just a couple of key principles that I would say 

that you should adhere to on any reinsurance proposal, no matter 

what it looks like. If you were going to set up a subsidy, or even 

a program, you need to make sure that you set it up across a market, and that you don’t segment a market. And so what do I mean? 

If you are going to set up a reinsurance program, then it is for 

the individual market or it is for the small employer market, but 

not a part of that market. Now, it can be broader than that, but 

you don’t want it to be only for people who buy in this pool or only 

for people to do that. If it is for the small employer market, it is 

for the whole market. Otherwise, you are going to eliminate coverage that is already available to people. So no market segmentation, very important. 

The other thing, as I mentioned before, this issue about not using 

arbitrary amounts, make it flexible, so that people buy coverage 

that would be in excess of claims that they already expect, and 

then they are not insuring—being forced to insure too low. 

And those are my primary issues. I think there are a lot of creative things that could be done. It just needs to be done correctly, 

so that you are doing something good instead of doing something 

that backfires on you. 

11

[The prepared statement of Ms. Trautwein may be found on page 

50 of the Appendix.]

ChairwomanVELA ́ ZQUEZ. Thank you. 

Our last witness, but not least, is Mr. Edmund Haislmaier. He 

is a Senior Research Fellow at the Center for Health Policy Studies, which is part of The Heritage Foundation. Before coming to 

The Heritage Foundation, Mr. Haislmaier was the Director of 

Health Care Policy in the Corporate Strategic Planning and Policy 

Division of Pfizer. 

Welcome. 

STATEMENT OF MR. EDMUND HAISLMAIER, SENIOR 

RESEARCH FELLOW, THE HERITAGE FOUNDATION 

Mr.HAISLMAIER. Thank you very much. The Committee has copies of my testimony. I won’t go into that in great detail. I would 

like, Madam Chairman, to just echo a couple of comments that 

were made by the other witnesses, because I think they are very 

important ones, and they are comments that I made in my testimony. 

First off is the observation by several of my fellow panelists here 

that what we are discussing is transferring costs or rearranging 

costs or shifting who bears some of the costs. We are not talking 

about reducing the underlying costs. It is possible in theory in 

some designs to marginally reduce the costs through better case 

management. But by and large, we are not here to talk—this sort 

of mechanism does not reduce cost. What it does is it more equitably distributes the cost. 

Now, there is a value to more equitably distributing the cost, and 

so that is something worth pursuing. But let us make sure that we 

are not under any illusions that we are going to have reductions 

in the cost of health care as a result of this alone. That is a topic 

for another hearing, I am sure. 

The other point that I would like to make here is that while, as 

my fellow panelists have explained, there is reinsurance in the current market, and particularly for smaller carriers and employers, 

and those are the ones who feel the need to get it, because they 

are the ones for whom one or two incidences might tip the balance. 

It takes a lot for a large insurer in any line of insurance to have 

a situation where there is a sort of perfect storm of bad events that 

results in the inability to cover all the claims. The smaller you get, 

the more likely that is. And so the more likely they are to purchase 

reinsurance in any particular line. 

Now, that does get to a related issue, which I won’t get into now, 

but I find it extremely questionable whether we should continue to 

operate on the premise that employers in the small business sector 

should be the principal organizers of health care. This is a model 

that may work, and still in some respects does work quite well for 

large employers. 

But I think it is quite clear that there are enormous problems 

when we try to pretend that a business of 10 is really sort of similar to General Motors or General Electric. It is not in this area, and 

I think we are putting too much of a burden on them, and I think 

we need to devise alternative methods for their workers to get covVerDate 0ct 09 2002 09:02 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34837.TXT LEANN
12

erage. That is, again, a separate subject. I would be happy to talk 

about it if you would like. 

The other point that I would like to make here is we very quickly 

get into something that is a related concept, but I think a more relevant concept and a slightly different concept, and that is whether 

or not government should organize risk transfer pools. That is not 

pure reinsurance, as it is commonly understood, and I address that 

in the testimony. 

Rather, it is a way of dealing with selection issues to ensure that 

the distribution of the costs associated with a small portion of the 

population that has higher than average expenses, that it is evenly 

distributed. Again, there is value in doing that. 

Right now, we have a situation in which it is almost hot potato. 

People are trying to avoid certain costs. Whether they are employers or insurers, everyone—I like to say it is—we see this in pharmaceutical pricing. It is sort of the reverse Lake Woebegone effect. 

As you recall, in Lake Woebegone all the kids were above average. 

Well, everybody wants to pay below average. The problem is that 

is not only economically impossible; it is mathematically impossible. 

So what would a fairer system look like? It would be one in 

which I think everyone would pay an average appropriate cost 

based on the general population. And if there were disparities, they 

would be evened out through a risk transfer mechanism. So, for example, if on average say 10 percent of the population is diabetic, 

and one insurer gets—15 percent of its business is diabetics, and 

another gets 5, there would be a redistribution through some sort 

of pooling mechanism. 

Now, states, as Ms. Trautwein pointed out, have done some of 

this in the small group market. They have done more in the individual market—and her organization has written extensively on 

that—in high-risk pools. Again, the cost does not go away. It is 

simply spread out evenly. It is simply transferred. 

So what that leads to is another point that Ms. Trautwein made, 

which is that if you have any kind of mechanism like this, you 

want it to be as broad as possible to encompass as much as possible 

of the market to be as fair as possible, and also to be as—to minimize any kind of disruption. 

Now, I happen to think that given the state’s role in regulating 

insurance, in general, and some of the work that they have done 

there, that this is principally an activity that the states ought to 

pursue and experiment. Also, because markets are localized, both 

for health care services and for health insurance, the Federal Government may be able to help. 

When the state tries to do this, it does run up against an obstacle that depending on the state, you know, upwards of a half of its 

population is beyond the reach of the state, because they are in 

self-insured ERISA plans. And so it is in that context that states 

look to use mechanisms other than passing back to carriers the 

cost, such as provider taxes or general revenues, to, again, make 

sure that the costs are being spread not just only on half the population but on all of the population. 

That is an area that Congress ought to look at. Should ERISA 

be amended, for example, to allow states with a qualified risk 

13

spreading mechanism to require ERISA plans to participate in it? 

I am sure that will be controversial. But if you look at the logic of 

trying to spread all the costs—to spread those costs across all of 

the participants, there is reason to consider that. 

I will stop there. I would be happy to answer the Committee’s 

questions, and thank you for the opportunity to testify. 

[The prepared statement of Mr. Haislmaier may be found on 

page 56 of the Appendix.]

ChairwomanVELA ́ ZQUEZ. Thank you very much, Mr. Haislmaier. 

Mr. Crouse, I would like to address my first question to you. As 

you know, large employers’ plans are sometimes underwritten by 

captive insurance companies formed, owned, and managed by the 

employer. And these arrangements allow for the employer to collect 

premiums, pay claims, while still managing the risk of running a 

plan. Can you give us a little more detail as to the nature of a captive insurance arrangement and why an employer will use such a 

structure? 

Mr.CROUSE. Basically, we are talking about a pure now, something—a captive that is owned by a corporation that is writing 

business for themselves or their affiliated companies. The simplest 

answer to that would be insurance costs. You take worker’s comp, 

you take general liability, some of the property casualty lines, a 

large corporation will be paying premium based on a national average. In other words, those rates are set by, you know, whomever. 

That corporation may feel that their experience in worker’s comp, 

their experience for general liability, is much better than that of 

the national average. So they will form a captive insurance company. They will pay them to set it up. It is capitalized, it is the 

actuarial work-up, the whole—everything involved. And what that 

does, it basically lowers the cost of the premium that they are 

being charged for, because their experience is better than the average. 

And what they can do, then, is they get that money, they invest 

that money, you know, they collect their own premiums. Basically, 

it is their company, and they have got the investment income from 

that, the admin costs are less. There is just a lot of reasons why 

it makes sense for a large corporation. 

And in the health care, most of our large corporations that are 

writing their post-retirement medical benefits, these large, large 

corporations are doing that. That is mostly on the pure side. But 

those are some of the reasons why corporations do form captive insurance companies. It is a better way to have their insurance programs directly in front of them. They are basing their insurance experience on themselves, as opposed to a national average. 

ChairwomanVELA ́ ZQUEZ. So do you believe that captives or some 

alternative options or version could successfully be used in the 

small group market to achieve the success experienced by large corporations? 

Mr.CROUSE. Well, that is a difficult—Madam Chairman, that is 

a difficult question. We have had experience with small groups. We 

have small groups in transportation. We have small groups—you 

name it. I mean, medical groups, dental groups, small railroads. I 

14

mean, there is a lot of small groups that have been successful in 

doing this business. 

In regards to health care, it is going to be a little bit more complicated. Basically, what we have seen, what we have done with 

the small groups that have done—tried to accomplish some of these 

benefits in the health care field, a lot of these companies, they are 

small companies. And the other panelists here are talking about 

the large pool and everybody in the country. Well, I really can’t sit 

here and tell you that is what our concept does. 

Our concept would help individual small companies pool and get 

together and basically, you know, accomplish what they have to accomplish. But it is safety—it is a health program. A lot of these 

companies that come in, they must have a program that is designed to work with their employees, safety programs, health maintenance programs. And, basically, as you know, it is discriminatory 

to charge a certain group less than the average. 

So what they do after the experience is all over and done with, 

those insurers get money back, and that is how our programs work. 

And they have to be put together by somebody. They just can’t say, 

‘‘I am going to do this.’’ As someone talked about the agencies here, 

there has to be a large agent company, a large life agent or somebody, get together, get out there and try to bring these people together with the concept that this will work. 

And then, the actuaries have to come into it. The most important 

part of any program is the feasibility study done by the actuarial 

community. It has to make sense. It has to be sound. So, yes, it 

works. But the captive business would not be in existence today if 

it wasn’t for reinsurance markets. There is not a captive out there 

that doesn’t utilize the reinsurance markets. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Mr.CROUSE. Whether it be pure, small groups, whatever, associations. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Mr. Collins, if a small business wants to reinsure its own catastrophic health risk, it can either purchase coverage to provide protection against individual claims or aggregate claims. Can you tell 

me at what point reinsurance coverage generally kicks in, or, rather, what is the average attachment point for the health reinsurance 

policy? 

Mr.COLLINS. The average attachment point for the individual 

claim level starts out at a low point, relatively speaking, if the employer is very small. And as the employer gets larger, the attachment point rises. And the decision about whether the level that the 

employer decides to purchase is generally up to the employer based 

upon their risk tolerance and how much risk they feel like taking. 

Generally speaking, I would say that they do not self-fund their 

plan and buy specific and aggregate stop loss, which is what you 

are referring to, if they have less than 50 employees. So it is generally not much of an issue for very small employers. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Ms. Trautwein, one way to make reinsurance more available to 

small businesses will be to encourage formation of pool purchasing 

arrangements. In order for this to work, this task will likely fall 

on established business groups, such as trade associations rather 

15

than individual business owners. Are there any dangers associated 

with this option? And what, if any, precautions should be taken? 

Ms.TRAUTWEIN. Well, I think you would have to be very careful 

about on the trade association side making sure it is bona fide 

trade associations that were not what we would call ‘‘shelf associations,’’ that they really have been in existence for some other purpose for a period of time. And then, you have to be careful when 

you are putting together a pool as to how you do it. 

There are lots of different ways that you could use these ideas, 

and you could create a pool to do it, or you could do it without a 

pool, but you could do it with a pool, and it may not even be reinsurance in the way that any of us are thinking about it as the 

table. 

It might just be super catastrophic coverage with a very, very 

high deductible, and then a company perhaps could purchase more 

of a mini-med type policy, like Mr. Harter was referring to, and 

then the super catastrophic coverage would pick up after that. That 

is kind of a—that is a sort of reinsurance coverage, too, but certainly associations and other groups—a lot of different kinds of 

groups could facilitate that type of thing, but we would want to be 

very careful so that the public was not misled. 

The worst thing is for some small employer to think they are covered, and then when it comes time for their large claim it is not. 

So I would just say some very careful consideration of that language. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Mr. Chabot.

Mr.CHABOT. Thank you, Madam Chair. 

Let us see, Mr. Haislmaier, if I could begin with you. You mentioned I think in your comments that what we are really talking 

about here is not necessarily reducing the overall cost of the health 

insurance itself. It is sort of shifting who pays for it and—

Mr.HAISLMAIER. Yes, as did some of the other panelists, yes. 

Mr.CHABOT. Right, right. Now, if you are looking at something 

that really does reduce the actual cost of the health care itself, 

would an example of that be something like if you are looking at 

maybe the high cost of medical malpractice insurance, and proliferation of lawsuits against doctors and things, and the resulting 

practice of defensive medicine, where a lot of expensive tests are 

ordered in order to protect somebody from being sued, perhaps 

more tests than are really warranted. Is that an example of where 

you actually could bring the cost down itself? 

Mr.HAISLMAIER. In some cases, that might be. I mean, some 

states have had those problems more so than other states. Some 

states have done liability reform in that area. It is a piece of the 

issue. There are a lot of pieces that go into the cost of health care. 

There are enormous variations in practice patterns that are documented that have nothing to do with, really, you know, lawyers or 

anything like that. 

There are regulatory costs and the insurance—you know, sometimes the benefit mandates. Again, those are usually small pieces, 

but you add these things up together, there is—in a number of 

states you have very uncompetitive provider markets in some 

16

areas. You know, for example, in Massachusetts health reform, one 

of the things I always point out to people, you know, when they 

say, ‘‘Well, could we do that in another state?’’ and I say, ‘‘Well, we 

don’t have this—we have got this problem that Massachusetts 

doesn’t have.’’

And I said, ‘‘Yes, but you don’t have their problem.’’ And they 

said, ‘‘Well, what was that?’’ And I said, ‘‘Well, they have got the 

least competitive hospital system in the country.’’ You know, so a 

large part of what they were doing in reforming their system was 

to focus on trying to create competition at the hospital level, which 

is not an issue, say, in California or Washington State. 

So, yes, it is a piece of it. There are a number of different pieces. 

And I think, frankly, that would probably be another whole hearing. 

Mr.CHABOT. Okay. Actually, we did have a hearing somewhat related to that, but let me ask a couple of the questions. And there 

are a number of people that addressed this, and I would like to 

hear you maybe elaborate a little bit on it. You talked about one 

possibility—I think you, Mr. Harter, especially mentioned this, and 

I think you did, Ms. Trautwein, as well, the possibility of a federal 

subsidy is part of the solution. 

Now, as kind of a conservative member of Congress, there is a 

lot of us that think that when the Federal Government gets real 

involved, especially if it is—I mean, the money isn’t ours to begin 

with. It is being taken from your employees and taxpayers, 

etcetera. So if we would fund something like that, it is not free 

money, obviously. It is something to be considered, that these are 

tax dollars and we would have to take them to give them out. 

So what is your idea relative to that? And our concern that if we 

are using federal dollars, in essence we are just taking it from one 

group and then subsidizing this. And I think probably, Mr. Harter 

and Ms. Trautwein, and then Mr. Haislmaier, I would like to have 

your comment on that, too. 

Mr.HARTER. My personal opinion is there is going to be—there 

is a lot of pain to be passed around in the health insurance issue. 

As I have said before, there are many, many components that go 

into the issue. I think federal subsidies is one solution to it. I think 

it is a very painful solution. 

I think we have to really get down to the nuts and bolts of working the system. As people like at the table here, it is not the presidents of companies doing this. It is people who are in the working 

trenches with these products and with what can pull this together, 

I think is where the solution is going to come. A lot of agendas 

have to be set aside I think to have a successful outcome for this 

very, very complicated problem. 

Mr.CHABOT. Ms. Trautwein? 

Ms.TRAUTWEIN. Yes. And I have to tell you that I share some of 

your concern about even mentioning the words ‘‘federal subsidy.’’ 

And the reason I do mention it, though, is I don’t believe that it 

has to be complicated with lots of strings attached. We have 

watched the subsidies for the high-risk pools that came through, 

not huge amounts of money for the federal high-risk pool program. 

And you know what they have done? It is a simple grant program. There is one person at CMS that administers that. One perVerDate 0ct 09 2002 09:02 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34837.TXT LEANN
17

son. And they look at these grants once per year. The grants go out 

to the state high-risk pools. They have not changed any of the way 

that they do business, other than the fact that the rates that they 

offer people are lower. 

They are dealing with the sickest of the sick, and reinsurance 

also deals with the sickest of the sick, and that is why I have modified my own ideas about it a little bit, because when we look at 

what is an appropriate role of government, you know, my personal 

belief is that it is for people that need help the most. And I believe 

it is—really, really sick people do fall into that category, and they 

do impact the costs for everyone. 

And so that is the reason why I have modified my own viewpoints about that more than I would have a few years ago, because 

I have seen that it actually has been beneficial in this other program, and I wonder if maybe it couldn’t help this market, too. 

Mr.CHABOT. Thank you. 

Mr. Haislmaier? 

Mr.HAISLMAIER. Yes. I come back to my comment that we are 

transferring these costs, we are not reducing them, and that is true 

if you have either a state or a federal taxpayer subsidy going into 

them. And, again, it is just a transfer to somebody. 

Now, given that, does it make sense on occasion to do that? Well, 

let us walk through the scenario. Let us say a given state decides 

to have a system that says, ‘‘Look, we are going—10 percent of our 

state is, as Ms. Trautwein pointed out, the sickest group. We want 

to spread their excess costs evenly among the other 90 percent.’’

All right. At that point, you can say, ‘‘Well, we will pass it all 

back through the insurers, in which case it gets added to their premium.’’ But what if we can’t reach all of them that way? Well, 

then, maybe a tax mechanism, a taxpayer funding mechanism 

might be a way to do it. 

At a national level, what Ms. Trautwein pointed out was really 

a demonstration project, a block grant, of a limited amount of 

money to help states set this up. At a national level, one could, in 

theory, say, ‘‘Well, all right. That is fine and good for each state 

to do it. But what if one state has a population that is sicker than 

the national average? Then, we are going to sort of rebalance.’’

We do that in Medicaid, in effect, when we say, ‘‘Well, some 

states have a much higher poor population than other states,’’ and 

then so they get more money in Medicaid than other states. In theory, that would work. 

The caveat that I have on all of this, whether you are doing it 

at the federal or state level, is if you do put public money in, make 

it—do not make it any kind of entitlement, do not make it attached 

to any kind of revenue source, it should be a very clear, very specified and capped amount going into that, because you do not want 

to create a situation where you then have a new game, which is 

let us tag the Federal Government or the state government, if it 

is the state, with these costs and let us shift more and more and 

more onto the taxpayer. 

So you just have to be—I mean, it is possible to do it. A number 

of states fund their high-risk pools partly out of public money. 

Some states do not fund them out of public money at all. It is all 

passed back to the insurance carriers. So it is possible to do it, but 

18

you have to be careful that you don’t get a game of tag going where 

the taxpayer gets tagged as it for more and more and more. 

Mr.CHABOT. Okay. Thank you. 

Madam Chair, if I could just ask one quick final question. 

ChairwomanVELA ́ ZQUEZ. Sure. 

Mr.CHABOT. Mr. Harter, you had mentioned when you had your 

insurance agency that the costs were getting very expensive. I 

think you said they were about $500 a month per employee at one 

point, and you got a mini-med plan. Could you just give us, very 

briefly, what sort of coverage your employees would get under 

mini-med, and about what it would cost a small business owner? 

Mr.HARTER. We are speaking in Missouri. That is going to be 

probably less there than it might be in New Jersey or somewhere 

like that anyway. A mini-med basically provides specified coverage. 

It does pay some for doctor’s visits. It will pay up to—I think mine 

is $90. There is a $30 co-pay, and then it will pay up to $90 for 

a certain number of visits per year. 

It is very, very weak in the hospital side of it. Ms. Trautwein was 

mentioning I think the mini-med might be a good vehicle for some 

of the fundamental coverage, but somewhere you still need that 

major medical. I think this program pays $1,500 for a hospital 

visit. Well, a hospital—

Mr.CHABOT. But not over? There is not like a catastrophic? 

Mr.HARTER. It is not. 

Mr.CHABOT. Okay. 

Mr.HARTER. It is not. You would have to somehow be able to put 

a catastrophic on top of one of these mini-med programs. The minimed—we have a couple of versions of it that people can buy, but 

it is basically $150, $175 a month. So it is pretty affordable. 

Mr.CHABOT. Now, that is for the—that is the total cost, including 

the employee and the employer? 

Mr.HARTER. That is correct. 

Mr.CHABOT. Yes. Okay. Versus, say, $500 or—

Mr.HARTER. Absolutely. 

Mr.CHABOT. Okay. All right. Thank you very much, and I yield 

back, Madam Chair. 

ChairwomanVELA ́ ZQUEZ. Mr. Jefferson. 

Mr.JEFFERSON. Thank you, Madam Chairlady. 

I want to see if we can get back to what I think the Chairlady 

had in mind when she put this hearing together. That is this: that 

one of the reasons for high costs among small business—for small 

business employers and employees is a lack of competitive. 

And the notion is that if competition is introduced into the small 

business market, costs will go down for insurance. This is borne out 

by the notion that in larger enterprises costs are lower, because 

there are larger pools and there is more competition and more people who want the business. 

So it is not a matter of whether the cost is shifted around or not. 

It is a matter of whether the idea of reinsurance will mean there 

will be more people willing to come into a marketplace and compete 

for business. 

Now, the notion here is not so much whether—as I saw it in the 

Hurricane Katrina context, it was this. The question was: who, 

amongst insurance companies, had to pay? And that was a big 

19

question of risk, and not the questions underlining risk for the 

folks getting sick and all of that. It was a risk the insurance company had to pay, and whether somebody else would have to pay. 

And we saw it in the case where those who didn’t—who had help 

in that—for instance, call names, State Farm had most of its outfit 

reinsured. Therefore, it paid claims quickly and rapidly because it 

wasn’t paying the whole thing. Whereas, I feel like Allstate that is 

invested in the market, playing the stock market, and had investment insurance, found itself in terrible trouble having to pay everything, and ended up threatening to go bankrupt, and all of that. 

So the question I have is: do you think there is anything to the 

notion that reinsurance may help to introduce competition in the 

small business marketplace, and, by that fact, lead to some cost reductions on the part of those who compete? Because the notion is—

and the American economy is the best competition, there is likely 

to be cost reduction. Does that make any sense to anybody out 

there? 

Mr.CROUSE. Mr. Jefferson, it does make sense to me. There is 

usually a little bit of savings when you have large numbers, there 

is no question. And, again, getting back to what this Committee 

has addressed here is small business and small business owners as 

opposed to the national health problem, health care problem. 

I do believe that reinsurance can help. I believe also that it is 

very, very important. There is a lot of costs involved when you 

have a small business and you pay that premium to the health insurer. The cost that they use to administer that, the admin cost, 

it gets quite expensive. 

There are savings that small businesses can make. If they structure something put together with a group, a fairly large group, 

they can cut the costs of administration, they can cut some of these 

costs that are—you know, that go along with these normal policies 

with large life companies. 

And as far as reinsurance goes, what you point out, Mr. Jefferson, is true. I mean, most companies do retrocede some of their 

risk. In the case that you said of Katrina, they spread their risk 

as well as the first risk. The second person spreads, the third person spreads. I mean, retrocessions are done all the time, and most 

reinsurance companies do that. 

So I do believe that the numbers to me—if you get a pool big 

enough, and you can show that you can save some costs by doing 

something yourself—again, put together by someone that knows 

what they are doing. This takes a little bit of talent out there from 

various industries to put these together. It can be accomplished. It 

can be accomplished. 

And then, you have a bargaining chip to go to these reinsurers—

these insurers for your health care. They may look at your program 

and say, ‘‘That is a well-run program. There are some cost savings 

there. Maybe my rates won’t be as bad.’’ I have seen that. 

Mr.HAISLMAIER. Yes, sir, if I could make a couple of comments. 

First off, the example you cited with your state being hit by two 

hurricanes actually back to back is a classic example of why a commercial and property insurer will buy reinsurance. It is for exactly 

that unlikely eventuality. And as you pointed out, State Farm, you 

know, came out okay because of that. 

20

I want to make a couple of points here as we think about this. 

One of the big issues that folks focus on with small business is the 

size and the idea of aggregating them. I mean, association health 

plans, this is another aspect. And it is just very important to understand that in any risk pooling arrangement in health care or 

anything else, size is only part of the equation. The other two factors are randomness and stability. 

And when you consider saying the difference between 1,000 

small businesses of 10 employees each and one employer of 10,000, 

the difference is not in the size, it is in the randomness and the 

stability of those two pools. So when we look at why larger employers maybe come out with better rates than smaller businesses, a 

lot of that has to do with the uncertainties surrounding not the size 

but the randomness and stability, which gets me back to my point 

of risk transfer. 

Now, to address your question, Congressman, about does this—

is there ways to make—to increase competition, yes, there are. 

There has been limited success, as Ms. Trautwein pointed out—and 

she can speak to that—in trying to do precisely that in the small 

group reforms. A number of states—as she pointed out, 19 of 

them—said, ‘‘Well, we will set up a voluntary reinsurance mechanism in the small group market as part of our small group reforms.’’

And that was designed to encourage smaller carriers to come in 

and compete against the dominant incumbent carriers, by saying, 

well, you know, you don’t have to have the same capitalization to 

go up against them, because you can offload some of the risk. Because of the voluntary nature of that, I think it has had limited 

success. 

Now, the next question then becomes: well, do we move to an all 

market risk transfer mechanism? That was what I was getting at 

in my testimony. Do we say that, fine, anybody coming in here, we 

are going to level the playing field in a given state for any insurer 

coming in. And as part of that leveling, we are also going to have 

a risk transfer mechanism, so that any insurer, big or small, can 

pass claims into that. 

Those claims get pooled together and then re-spread based on 

how many lives everybody is covering. And that way, if there is any 

disparities where one carrier, big or small, gets a larger than average share of sick people, that can be made up out of the carriers 

that don’t. Those are the kinds of risk transfer mechanisms that 

we are looking at. 

But, really, for that to work you have to have as much of the 

market as you possibly can. At a minimum, as Ms. Trautwein said, 

you don’t want to subdivide an existing market. Ideally, you want 

to aggregate together markets—individual, small group, larger 

group, etcetera. 

ChairwomanVELA ́ ZQUEZ. Ms. Clarke. 

Ms.CLARKE. Thank you very much, Madam Chairman. 

And to our panelists, your testimony has been quite interesting 

and quite informative. You know, it is quite evident that fewer insurers are offering health insurance coverage to small businesses 

because of their unusually high health care expenses. This fact 

compels us to examine whether or not the expansion of the private 

21

insurance market may be an approach that will lower health insurance costs and reduce health care premiums for small businesses, 

thereby making medical coverage more affordable. 

I am intrigued by the notion that by developing small business 

coalitions—excuse me, small purchasing coalitions known as reinsurance pools—among health insurers, or small business employers, it will spread the insurance costs among everyone in the purchasing pool. More importantly, it will spread the risks more fairly, 

so that one catastrophically ill, sick employee out of work for an extended period of time will not cause a small business’ health insurance rates to propel so high that it bankrupts them. 

My question to the panelists is that I am trying to understand 

whether, in fact, there is a way that we can establish fairness and 

stability in the health reinsurance market that is private for small 

businesses when it is very probable that at any given time premiums can rise due to market volatility. 

And, you know, whether small businesses in the long term greatly need—we know that small businesses in the long term greatly 

need insurance rates to be stable. What measures can be placed—

can be put in place to ensure that these rates will be stable over 

time? If folks on the panel could sort of address those two issues. 

You know, I am trying to get to solutions here. We have come up 

with so many variables, I am just trying to find the common denominator. Maybe we can start with Mr. Crouse. 

Mr.CROUSE. Well, you are answering a direct question. How can 

we reach a point where small businesses’ costs are going to go 

down? Again, the only solution that I talked about, or that I 

thought, was that if small businesses get together and form cooperatives in a sense that there may be some more purchasing 

power. In other words, again, there may be better buying circumstances for these corporations—small businesses, rather. 

Other than that, ma’am, I don’t—it is a tough, tough call. I just 

don’t know. 

Ms.CLARKE. Do you think that will ensure these rates will be stable over time? 

Mr.CROUSE. Again, they should be stable over time. If you look 

at happened in med mal right now—and med mal is tied into 

health care in a way. To go back to what people said about, you 

know, the tort reform, it is working in some states, it has helped 

states do that, if you look at the med malpractice—I mean, the industry right now, the rates are down. It is softening up in the med 

mal area. That all should go back into the costs of health care. 

So I just feel that possibly—again, possibly, that if you do form 

cooperatives, but there has to be, you know, again, small businesses. We are not talking about the whole universe here in the 

country. I am talking about small businesses that want to get together and do it right and set it up and have the health program—

you know, things that must be provided—that there can be benefits. It can be well structured within small businesses. 

And I say small businesses—I say possibly even in associations, 

associations that we have that have up to 5,000 members. And 

they formed a small captive insurance company to do just that. It 

is put together by an insurance agency, a large TPA firm in the life 

business. It is being handled by them. It has worked. We have had 

22

feasibility studies. We have had legal opinions on it. It is structured, and it is working fine. 

So there is reinsurance involved at the high end. They fund it 

with trusts up to I think it is 125 percent of—you know, of the premium or what not. But it works. It works. There are ways to do 

this. 

Ms.CLARKE. Thank you, Mr. Crouse. Let me try to get—I see Mr. 

Harter there chomping at the bit, and I am running out of time. 

But I appreciate your comments, Mr. Crouse. Thank you. 

Mr.HARTER. I think we are talking about one aspect of it. I think 

the other end of it is the cost of the medical services is driving that. 

We have to respond to that, and I think that is a factor in that—

in the unpredictability of the premium cost. It is all of it together. 

It is not just one factor. 

Ms.CLARKE. Thank you. 

Thank you, Madam Chair. 

ChairwomanVELA ́ ZQUEZ. Mr. Sestak. 

Mr.SESTAK. Thank you. 

Sir, may I follow up on a statement you made about ERISA? 

Mr.HAISLMAIER. Certainly. 

Mr.SESTAK. You also made the comment that the importance of 

any approach, if you want to distribute the risk, is the larger the 

market, the better it is. My understanding is ERISA, I mean, probably impacts, if I am wrong—and I am not sure of this fact, but 

over 50 percent of our employers in the state. Is that correct? Or 

65 percent? 

Mr.HAISLMAIER. It would depend on the state, but roughly. 

Mr.SESTAK. So if you didn’t want to go about this reinsurance 

and redistribution, you are not going to be able to do it unless you 

potentially change ERISA—do it as well until you change—

Mr.HAISLMAIER. You won’t be able to do it as well. That is true. 

There are some work-arounds you can do, but they are not perfect. 

Mr.SESTAK. I guess Maryland has, you know, had its effort at 

risk of fail. 

Mr.HAISLMAIER. At the state, yes. 

Mr.SESTAK. At the state. To pursue this reinsurance, I mean, you 

also made a statement that—to a comment about tort reform, 

something about it is a piece of it. Are we doing good by just focusing on the reinsurance? I mean, everybody has already asked a lot 

of questions in that area, so I won’t. That piece—or do we really 

have to approach it more holistically to do—to really do it well? 

And I ask that because somebody, as I walked in—I think it was 

you, Mr. Collins, is, you know, you can—by doing some good, you 

may impact something else that is not as—goes beyond here. Must 

we capture ERISA this? 

Mr.HAISLMAIER. I don’t think it is absolutely essential that you 

capture ERISA in this. I am simply pointing out that if you want 

to go beyond what states are capable of doing, this is an area that 

you would have to get into federal law. I can give you an example 

of, in states that I have worked in, where we have designed some 

of these proposals. And they haven’t passed yet but, you know, 

there are various proposals on this—setting up a state—an all carrier risk transfer pool. 

23

And you say, ‘‘Well, all carriers are members. They have to participate. By virtue of being a participant, they have a right to see, 

and they set their own rules as to what the attachment points and 

the risk corridors are.’’ Now, at that point you are getting about 

half the market. And then, you say, ‘‘Well, can we do anything with 

this ERISA piece of it?’’

Well, one of the creative things we did is we said, ‘‘Well, look, 

we can’t as a state—as state can’t require those employers to come 

in and play in that system.’’ But what it could do is it could offer—

it could say, ‘‘Look, you can voluntarily come in. Of course, you 

don’t want them to come in, dump their risk, and leave.’’

So we set up what we call Lloyd’s rules, which says that if you 

voluntarily come in, you have to stay and make payments on the 

assessments for three years after you voluntarily leave. That is 

how Lloyd’s of London works with their syndicates. You can’t just 

leave when the losses come. 

So that is kind of a work-around on that. I think if you went that 

far, you would make huge progress. 

Now, is there—to get to your second question, is there value in 

doing just this piece? And the answer I think is yes, and let me 

explain why. To the extent that you have some sort of a mechanism 

whereby the unpredictable disparities in where these high risks 

pop up and who gets, you know, a disproportionate share, to the 

extent that you have a mechanism that evens that out for everyone, what does that do? Well, it takes off the table that issue. 

Okay? 

So it says that we can now focus on other things, like the underlying cost of care, and we have taken away the ability for people 

to, you know, do the easy route, which is, well, I will, you know, 

bring premiums down by not having sick people. So if you take that 

off the table, then you have improved the market, in my view, to 

the point where people now have to concentrate more—

Mr.SESTAK. But is there a transfer, then, between those who are 

bound by ERISA and those that aren’t still? Since the state can 

only impact the insurers, can’t impact the employers under ERISA. 

Mr.HAISLMAIER. That is right, and that is why states have looked 

at several mechanisms—

Mr.SESTAK. In other words—

Mr.HAISLMAIER. —to subsidize that pool out of—

Mr.SESTAK. If you don’t mind, just to make sure I have it—

Mr.HAISLMAIER. Sure. 

Mr.SESTAK. —to do what you just said, which I agree with, you 

would have to have a mechanism such as you described—which 

state did you do that for? 

Mr.HAISLMAIER. Well, we originally drafted it for D.C., and this 

will come back and probably be considered by the Council again 

this year, as part of—

Mr.SESTAK. You would also have to have that mechanism taking 

place. 

Mr.HAISLMAIER. We have done that in Maryland, too. 

Mr.SESTAK. You would also have to have that—a similar mechanism to what you described put into place in order to make sure 

that the distribution is fair throughout everyone. Is that correct? 

Mr.HAISLMAIER. It helps to do that, yes. Now—

24

Mr.SESTAK. So you would need to do the reinsurance and this 

mechanism. 

Mr.HAISLMAIER. Well, what I am saying is that this is different 

from classic reinsurance. Classic reinsurance is a carrier saying, 

‘‘Look, under normal circumstances, I am going to have losses, and 

I can cover them.’’ What happens if there is an abnormal loss? 

What if I am writing commercial and property insurance in the 

State of Louisiana and we get hit with two hurricanes back to 

back? I am not set up to deal with that. 

So in classic reinsurance, that is what you are doing is you are 

buying against the very unlikely event. That is why, in the life and 

health area, you don’t see a lot of it unless it is a small company. 

I mean, you know, a New York Life doesn’t need to buy reinsurance against the unlikely event that half its policyholders die in a 

year and claim—and their life insurance is claimed against. That 

is just, you know, the—I mean, you never say never in insurance, 

but the likelihood of that happening is near zero. 

So that—does that help? 

Mr.SESTAK. Yes, that does. Thank you. 

Thank you, Madam Chair. 

ChairwomanVELA ́ ZQUEZ. Mr. Ellsworth. 

Mr.ELLSWORTH. Madam Chair, if it pleases the Chairlady, I 

would like to—Mr. Jefferson brought up a point during one of the 

questions. I would like to yield to him if that is agreeable. 

ChairwomanVELA ́ ZQUEZ. Sure. 

Mr.JEFFERSON. Thank you for yielding. I thank the gentleman 

for yielding. I thank the Chair for indulging me. 

First, I didn’t know whether everyone had a chance to react to 

the question that I asked earlier. And I don’t know whether there 

was someone left to react to it; my time had run considerably. If 

there wasn’t, I have another thing I want to ask, but I want to 

make sure that everyone responded to it first of all. 

[No response.] 

I guess so. Let me get to the other one. There are two issues 

here. One is the issue of cost, and which we have talked about. The 

other is the issue of access, which is basic choice for people in the 

business. And so the second question is whether this idea of reinsurance, which we hope would bring folks to the marketplace, 

would give a greater panoply of choices for small business folks as 

opposed to the panoply of choices that only folks have in larger enterprises. 

That is the second question, which I will just—and I will ask—

the one that follows up, which I intend only for Mr. Haislmaier, I 

believe it is, the last one, which is, you talk about the different 

ways to set up the mechanisms for—that risk transfer mechanism 

set up, exclusionary, inclusionary, and so on. 

And you prefer, at the end of the day—I think you do—the 

inclusionary design. And you say, but you must ensure there are 

sufficient incentives in that design to make it work across the 

board and be fair to everybody. So I want you, at the end of the 

day, to comment on the examples of what you mean by these incentives, to make an inclusionary plan work that at the end of the day 

might lower cost. 

25

But the first issue is about the access issue, and the effect of reinsurance on that, because our notion here is that with reinsurance 

we bring more folks to the marketplace, and, therefore, create better access for a panoply of options for small business folks who may 

not have them now. 

Ms.TRAUTWEIN. Can I start? 

Mr.COLLINS. Before you do, what I was going to mention regarding cost and access is that those two things tend to compete with 

each other. And the one parallel that comes to mind is when they 

enacted rate reform for small business insurance plans throughout 

the states in various ways back in the ’90s, prior to that health insurance companies could, if they chose to, raise rates on a particular group. 

When rate reform was installed, it limited the ability, depending 

on the state, on the level of rate increases, and, therefore, promoted 

more rate stability at an employer level, and it increased access 

through guaranteed issue and in many cases a maximum rate that 

you could give to a particular group. 

What it did, though, as the offsetting cost of putting into that 

type of benefit for the market is it raised the overall level of health 

insurance costs for the entire small employer market. So the ability 

to increase access may be a noble goal, but the experience is that 

increased access will generally result in higher costs. And as a policy decision, you will have to be able to balance those two. 

Ms.TRAUTWEIN. That is exactly the point that I was going to 

make as well, that you have to be careful in access. Even if you 

are talking about just adding additional types of policy choices, 

human nature is that people gravitate toward the one they are 

going to use the most. And you know what happens if your—the 

one thing that you are going to use the most, that means that it 

will—the cost will be abnormally higher on a particular type of 

plan. 

And we have seen this in purchasing pools across the country in 

the pools that are already there. Some certain plans end up dropping out because they are selected against. So I just wanted to—

Mr.JEFFERSON. Thank you. 

Before my time goes, Mr. Haislmaier, could you—

Mr.HAISLMAIER. Yes. By inclusionary and exclusionary, as I said 

in the testimony, it refers to these risk transfer mechanisms. Essentially, an exclusionary mechanism is one where we say, ‘‘Well, 

we have identified somebody who is high risk. We are going to turn 

them down. We are not going to cover them. They can only go over 

there and get coverage, and we are going to subsidize the coverage 

over there.’’ That is how the individual high-risk pool works. 

Obviously, they lack choice when you do that. The inclusionary 

mechanism says, ‘‘Well, no, the insurers have to take all these 

folks. But if they have high claims’’—

Mr.JEFFERSON. Where in the standards did you—

Mr.HAISLMAIER. The incentives I was referring to in the 

inclusionary model are this. In the exclusionary model, there is the 

ability of that pool, on the plus side, to manage those costs, because 

they got everybody together, and they are the only plan. In the 

inclusionary model, each of these people stays with their primary 

insurer. So the incentive—and this is what the carriers will be worVerDate 0ct 09 2002 09:02 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34837.TXT LEANN
26

ried about—is to say, ‘‘Well, those primary insurers each have to 

have a continuing incent to manage those claims costs.’’

That is why when insurers look at doing this inclusionary model, 

they want to see things like risk corridors. In other words, you are 

still paying 20 cents of every dollar, so you still have to—you are 

only ceding 80 cents of the dollars about X. So you still have an 

incentive to manage, to just not say, ‘‘Well, okay, I am not paying 

anything anymore. I have given it to the pool. And the cost—you 

know, I don’t care about the cost.’’ That is the incentives I am referring to in the inclusionary model. 

ChairwomanVELA ́ ZQUEZ. Mr. Johnson. 

Mr.JOHNSON. Thank you. And I apologize for coming in late. But 

I am having a problem just understanding how reinsurance will 

lower the cost of insurance for small businesses, or any business 

for that matter, other than to the insurance company that might 

purchase the reinsurance. It might add to their bottom line to 

have—like State Farm, but if a business or a person purchases reinsurance, how does that lower their cost of insurance? 

Mr.COLLINS. If a plan is in place to, say, have a federal entity 

take all claims greater than a certain level, what will likely happen 

in a reasonably competitive market is that the premium rates will 

go down accordingly. 

Mr.JOHNSON. If you have a federal entity—

Mr.COLLINS. That simply takes on all medical costs over a certain level, if there is competition of some kind in the market, what 

will happen to the premium rates is they will go down by roughly 

the same percentage. However, the point that was made before 

was—

Mr.JOHNSON. In other words, that is assuming that the Federal 

Government would become the reinsurer. 

Mr.COLLINS. Correct. That is correct. And then, the same would 

apply if it transferred to some other entity, whether a private insurer or—so if somebody—the point that we were making earlier 

is the total costs aren’t going down. And if that is what you are 

thinking of, I think you are exactly right. The responsibility for the 

total cost is still going to need to be borne by somebody, and it is 

simply being shifted. 

Mr.JOHNSON. So reinsurance is really not—is there anyone who 

disagrees with that premise that reinsurance does not lower the 

cost of insurance for small businesses? 

Ms.TRAUTWEIN. I just think I should add something there. To the 

extent that reinsurance allows more players in a market, so that 

you have the ability to spread risk more broadly, then for any given 

employer, you might—it might result in a lower cost. That doesn’t 

mean that if you added all the people up together that you are 

really getting rid of the cost, but any certain employers might experience a lower cost if it results in an injection of more competition, 

and, thus, more ability to spread risk across a whole market. Then, 

it could help. I don’t know if people disagree. 

Mr.HAISLMAIER. I mean, again, this is—I mean, Ms. Trautwein’s 

point is you bring more people in, you spread it across-again, you 

are just—you are transferring. And this is a good thing, and it can 

be beneficial in the market, and it can create a more competitive 

market, induce new entrants into the market in terms of players, 

27

which then might later, through other mechanisms, bring down 

costs. But in and of itself, it is not going to bring—I would agree, 

it is not going to bring down costs of the underlying health system. 

Mr.JOHNSON. So, basically, you are saying if there are more reinsurers that could potentially make more—create more competition, 

if you will, or create more opportunities for various insurers to get 

in the business, that would then insure the people and cause costs 

to go down as far as policies. 

Mr.HAISLMAIER. The value—and I was trying to explain this to—

and, unfortunately, the other Congressman has left. The value that 

I see in this is, to the extent that you theoretically have a system 

that fairly distributes the excess cost of the small number of people 

that are sick. 

Then, you have a market in which it is not a winning strategy 

to base your business on avoiding sick people and only insuring 

healthy people. To win in that market, you have to come up with 

a different strategy. What is the different strategy? Do a better job 

of making sure that people get better quality care at a better price. 

That starts to maybe lower cost. 

So what you have done is you have taken away something that 

might be an obstacle, but you haven’t affirmatively lowered cost. 

That has to come later. 

Mr.JOHNSON. It seems that there might be some—it might be a 

good thing for the Federal Government to step in and subsidize 

health care for high cost, individuals with medical needs of a high 

cost in other words, to kind of bridge the gap, take some of the 

strain off of the health insurance industry. Is that—would any disagree with that? 

Mr.CROUSE. Catastrophic losses, large losses, on the high end, 

the Federal Government come in at the high end. Those lines that 

you—you know, those losses you can’t basically afford. 

The business I am in here, the alternative market, the small 

company, small company market, you have a company, a group of 

small businesses that get together and form a captive or a group. 

They will fund up to a certain level. They will put in X amount of 

dollars, the expected level. The actuarial will do a study. They will 

have expected losses are such, and they will fund to that. 

And then, they go out and they buy reinsurance on top of that. 

Now, to me, if that reinsurer looks at that company, and it is well 

run, and the expected losses in the actuarial’s workup, you know, 

it looks good, then the reinsurance costs will be less. But, again, 

it has be a well run captive company, a small group, that keeps 

their costs down, all actuarially determined on their loss experience. 

So, you know, in that sense, I would say—and I don’t know if the 

panel agrees—but wouldn’t reinsurance be less at the higher end 

if you retain some risks yourselves and doing a good job with it? 

That is the alternative market that I am talking about, that 

Vermont—we are in here. And that is why, as I say, you get a 

group of companies together, similar business, similar exposure, 

and they want to form a large group. And if somebody can run this 

for them, including themselves, and make it work, there is savings 

there. 

28

But, again, as someone else mentioned, you have to have a plan 

where you are going to have these people health plans. I mean, in 

other words, programs where they are going to stay healthy, they 

are going to follow certain criteria. That is why this wouldn’t 

work—this concept did not work for the universe out there, but it 

does work for possibly some good small businesses that want to 

lower the cost of their health care. 

Mr.HAISLMAIER. I would simply observe, Congressman, that what 

you are suggesting has been proposed, and, again, it is not reducing costs, it is simply shifting it to the federal taxpayer. So the cost 

reduction comes, as Mr. Crouse points out, if somebody somewhere 

in the system does a better job of providing quality care at a lower 

cost. 

Now, one can make the argument that pooling people together 

who are sicker than average and managing them better, you know, 

is one way to go. So, for example, you know, specializing and treating cancer patients and getting a better result at a better price. 

Yes, that will bring down cost. But to simply transfer those costs 

to, say, a federal program or a state program is not in and of itself 

going to do that. Again, it is just transferring it to somebody else’s 

pockets to pay for. So—

Mr.JOHNSON. Well, I am trying to find some way of mitigating 

the tension between insurers and health care providers. Insurers 

put pressure on the health care providers to cut as much—cut as 

many corners as possible to make—or to decrease the number of 

claims. In other words, you have a claim, so, therefore, let us make 

sure that the doctors do not—and health care providers do not embellish upon the claims. Let us cut those health care costs in that 

way, and I think insurance companies are in that kind of posture, 

a natural tension between the health care provider and the insurance company. 

But then, the sick individual or the individual who needs the 

care perhaps may not get the kind of—or the extent of care that 

they may need, particularly when they are in bad shape. So the 

Federal Government may be stepping in to take over in that kind 

of a situation. I think it is something that we should definitely consider, and I know that there are those who are opposed to Federal 

Government becoming more involved in paying for health care. And 

there are some valid reasons for that. 

Mr.CROUSE. Representative, you are correct. You take doctors 

that are adding all these tests on. Medical malpractice premiums 

for doctors are astronomical. 

Mr.JOHNSON. And, certainly, there has been not one shred of evidence that when you go into a tort reform kind of posture and limit 

the amount of non-economic losses that can be recovered, that it actually translates into lowering of premiums for doctors. 

Mr.CROUSE. Well, I guess my point was, most doctors now, they 

are going to send you for every possible test imaginable, just to protect themselves. 

Mr.JOHNSON. Well, isn’t, though, it a good idea for doctors to—

and this gets into the tension with the insurance industry. Isn’t it 

a good idea for the doctor to be able to, as a—as a scientist or a 

professional to be able to test as far as he or she thinks is prudent 

29

for a particular individual without regard to whether or not they 

are going to be adequately reimbursed? 

ChairwomanVELA ́ ZQUEZ. Mr. Johnson, time has expired, but I 

will allow for the witness to answer your question. 

Mr.JOHNSON. Thank you. 

Mr.CROUSE. There is no question what is prudent. I guess what 

I am saying is I feel, and what I have read, and what not, and 

seen, that I just think there are too many of these, you know, additional tests being ordered by doctors. What is prudent is fine, and 

that is what a doctor should do to a certain point. But I think they 

get a little paranoid. I mean, the lawsuits that are out there, Representative, in this country, they are astronomical. 

Mr.JOHNSON. I think that the more doctors could do to be careful 

about patient options, and to be careful about the kind of care that 

they give, the better off they are and the patients. And it is—

Mr.CROUSE. But that adds to that cost of health care, Representative. 

Mr.JOHNSON. I understand. I understand. We have got to trust—

who do we trust, though, the doctors, the insurance companies? 

Who should be in control of that? That is the real question. 

Mr.CROUSE. You are exactly right. 

Mr.JOHNSON. Thank you. 

Mr.HAISLMAIER. I have an answer. 

ChairwomanVELA ́ ZQUEZ. Maybe you will answer now. 

Mr.HAISLMAIER. Sorry. That is why I would favor a more consumer-driven system where instead of the business picking the 

plan, the individual is picking the plan, and the plan then works 

for the individual, because there is a lot of ways to raise costs and 

cut costs that have nothing to do, as you pointed out, with the 

quality and the benefit to the patient. 

And it is only when the insurance plan works for the patient that 

it has the right incentives to balance these factors when dealing 

with the providers. That would be a much bigger reform in health 

care, and this would just simply be an ancillary piece to help make 

it work. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Mr.HAISLMAIER. Thank you for indulging me. 

ChairwomanVELA ́ ZQUEZ. Mr. Collins, I would like to ask you, you 

know, sometimes lawmakers call for the Federal Government to intervene if an industry is encountering financial problems or regulatory issues. If there is any indication that the reinsurance industry is facing problems, or has a history of defaulting on its claims? 

Mr.COLLINS. I don’t think I would be prepared to comment on the 

reinsurance industry as a whole. I would say that in the medical 

reinsurance component there is none of that history that I have 

seen or experienced. It has been a fairly vibrant and active reinsurance marketplace. 

ChairwomanVELA ́ ZQUEZ. Any other of the witnesses? Ms. 

Trautwein? 

Ms.TRAUTWEIN. I agree. Exactly. It is a pretty healthy market. 

ChairwomanVELA ́ ZQUEZ. Okay. Mr. Chabot. 

Mr.CHABOT. Thank you, Madam Chair. I will be brief. 

Just in the response to the gentleman from Georgia’s comment 

about the ‘‘not a shred of evidence’’ that medical malpractice reform 

30

has resulted in any doctors’ premiums coming down. I think California is an example of a situation where the premiums on the doctors were skyrocketing, and they passed medical malpractice reform, pretty comprehensive out there, and I believe the premiums 

on the doctors came down substantially and—

ChairwomanVELA ́ ZQUEZ. If the gentleman would yield? 

Mr.CHABOT. I would be happy to yield. 

ChairwomanVELA ́ ZQUEZ. And I also know, if I am not mistaken, 

that the contrary is true in Texas where they passed liability reform. So in order to bring premiums down, it has to be coupled, liability plus insurance reform. 

Mr.CHABOT. But anyway, so maybe there are shreds of evidence 

on both sides, depending on the particular state and how they dealt 

with it. But anyway, I just—I didn’t want to let that go 

unresponded. 

[Laughter.] 

So I also, then, just wanted to conclude—and just—I said this in 

my opening statement and some of my questions. I have to say, I 

am very leery of federal subsidization for virtually anything, and 

not that it is never warranted, but I am always going to be very 

leery of it and hesitant to do it. And so, anyway, I just wanted to 

mention that in this case, although I certainly appreciate that 

point of view and would be willing to look into it. 

But, finally, I just want to, once again, comment the Chairwoman for meeting her—what she said she was going to do. You 

know, she said at the beginning when she took over as Chair of 

this Committee that she was going to leave no stone unturned 

when it came to doing whatever we could to reduce health care 

costs to the small business community, and this is yet one again 

hearing where I think we are looking maybe to some degree at the 

minutia, but reinsurance is probably not a term that every American is familiar with. 

But I believe those of us on the Committee that were here today 

are more familiar with it—you know, what it actually means and 

how it affects insurance and the ability to provide the health care 

to small businesses, and, most importantly, to their employees. 

So I want to, again, compliment the Chairwoman for calling this 

hearing, and I want to thank the very informative panel here this 

morning for their testimony. 

And I yield back. 

ChairwomanVELA ́ ZQUEZ. Thank you, Ranking Member. 

And the truth of the matter is that this Committee has played 

an important role in addressing the issue of health care crisis in 

this country, especially when we know that a large number of the 

people that are uninsured in this country are either small businesses, their employees, and their relatives, and to look at solutions. This is a very complex issue. We will continue to hold hearings, to listen to everyone, to see if we can come up with maybe 

not the solution, but look at ways where we can bring premium 

costs down. 

So I ask unanimous—I want to take the opportunity to thank the 

witnesses. This has been a very insightful hearing. I ask unanimous consent that members have five days to enter statements and 

supporting materials into the record. Without objection, so ordered. 

31

This hearing is adjourned. 

[Whereupon, at 11:44 a.m., the Committee was adjourned.]

32


34837.001
33


34837.002
34


34837.003
35


34837.004
36


34837.005
37


34837.006
38


34837.007
39


34837.008
40


34837.009
41


34837.010
42


34837.011
43


34837.012
44


34837.013
45


34837.014
46


34837.015
47


34837.016
48


34837.017
49


34837.018
50


34837.019
51


34837.020
52


34837.021
53


34837.022
54


34837.023
55


34837.024
56


34837.025
57


34837.026
58


34837.027
59


34837.028
60


34837.029
61

Æ


34837.030