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33–804 PDF 2007

FULL COMMITTEE HEARING ON

CHALLENGES AND SOLUTIONS TO HEALTH

INSURANCE COVERAGE FOR SMALL BUSINESSES

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 14, 2007

Serial Number 110-7

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 

JUANITA MILLENDER-McDONALD, 

California 

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 

JUANITA MILLENDER-McDONALD, 

California 

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 

Cockey, Jr., Adam D., National Association of Realtors ....................................... 3

Ignagni, Karen, America’s Health Insurance Plans (AHIP) ................................ 5

Wilensky, Dr. Gail ................................................................................................... 7

Stottlemyer, Todd, National Federation of Independent Business (NFIB) ......... 9

Cavanaugh, Michael, Queen City Electric, Inc. .................................................... 11

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 36

Chabot, Hon. Steve .................................................................................................. 38

Altmire, Hon. Jason ................................................................................................. 39

Cockey, Jr., Adam D., National Association of Realtors ....................................... 40

Ignagni, Karen, America’s Health Insurance Plans (AHIP) ................................ 49

Wilensky, Dr. Gail ................................................................................................... 69

Stottlemyer, Todd, National Federation of Independent Business (NFIB) ......... 83

Cavanaugh, Michael, Queen City Electric, Inc. .................................................... 93

Statements for the Record: 

Women Impacting Public Policy ............................................................................. 96

AARP ........................................................................................................................ 101

National Association for the Self-Employed .......................................................... 107

Professional Photographers of America/Alliance of Visual Artists ...................... 114

(V) 

(1)

FULL COMITTEE HEARING ON 

CHALLENGES AND SOLUTIONS TO HEALTH 

INSURANCE COVERAGE FOR SMALL 

BUSINESSES 

WEDNESDAY, MARCH 14, 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, Shuler, Gonza ́lez, 

Larsen, Braley, Clarke, Ellsworth, Sestak, Chabot, Bartlett, 

Graves, Akin, Musgrave, Fortenberry, Buchanan and Jordan. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

ChairwomanVELA ́ ZQUEZ. Good morning. This hearing on the 

challenges facing small businesses in providing health insurance 

coverage is now called to order. 

Just about every employer and employee knows there are few 

issues of greater importance than access to health care. But in today’s market, more companies particularly small businesses are 

finding it difficult to offer health coverage to their employees. The 

challenge of providing coverage not only undermines the well-being 

of millions of Americans, it also threatens the growth of small business and our economy. 

If the American healthcare system is at a crossroads, small businesses are at its center. Entrepreneurs will tell you that this is the 

number one issue they face. And unfortunately, this problem is getting worse. Every year, the number of employers offering coverage 

continues to decrease. According to the Casey Commission on Medicaid and the Uninsured between 2001 and 2005 the number of 

workers receiving coverage through their employer decreased nearly four percent. More than half of this decline was attributed to 

companies terminating insurance coverage. 

This Committee’s goal will be to ensure that healthcare reform 

does not occur without meaningful consideration of how it impacts 

small business. Simply put, any reasonable strategy to expand insurance coverage must give serious thought to the challenges faced 

by small firms. 

Today’s hearing is the first in a series for the Small Business 

Committee. We will be looking at ways the Congress can address 

the problems in the small business health insurance arena. Over 

2

the years, there have been a variety of approaches to reducing the 

number of uninsured that have been passed into law. We have seen 

the expansion of the Medicaid program, pools to help high risk populations as well as programs to provide healthcare for those laid 

off due to trade agreements. However, there have been no meaningful changes to fix the small group market. While states like 

Massachusetts and California are starting to take action on their 

own, I believe that there are changes at the federal level that can 

improve the health insurance market. 

A number of committees will be looking at the problem of 

healthcare coverage in the 110th Congress. My focus is to make 

sure that the small businesses are part of the debate. We cannot 

have a discussion on reducing the uninsured without helping the 

23 million Americans without health insurance who work at, on or 

have a family member working at a small business. In my opinion, 

any solution to America’s healthcare crisis can only take shape in 

light of an open dialogue with all interested parties. 

The panel before us will allow the Committee to do that. We 

must understand the challenges before small business and more 

importantly, we must understand how the insurance market works. 

We have with us today an impressive group of witnesses, well 

equipped to help us identify the reasons employers are finding it 

difficult to offer coverage. This is why I am so pleased that representatives from the small business community, healthcare experts as well as the insurance industry are before us today.And I 

thank all of you for taking time to have this great discussion this 

morning. 

While I know there may be differences of opinion on the best way 

to solve the problem, I think every one will agree that the current 

system is broken. I look forward to today’s testimony on possible 

alternatives and practical solutions that may go beyond the particular perspective of the constituency that you represent. My hope 

is that we can hear about some common ground on the various 

issues that will help us move forward with meaningful solutions. 

And now I will recognize Mr. Chabot for his opening statement. 

OPENING STATEMENT OF MR. CHABOT 

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

holding this important hearing on health insurance and healthcare. 

I want to particular welcome Mike Cavanaugh, President of Queen 

City Electric in Cincinnati for making the trip to testify before the 

Committee and I’ll be introducing him later. I also want to mention 

I’m pleased to see a fellow William and Mary graduate, Mr. 

Stottlemyer from NFIB. We happen to both not only graduate from 

William and Mary, but played football for that fine college, second 

oldest in the nation. I happen to be 10 years older, but not 10 years 

wiser. So glad to have you here, Mr. Stottlemyer as well. 

Purchasing health insurance is one of the most costly expenses 

for small businesses. The National Federation of Independent Business, NFIB, cites the cost of employer-sponsored health insurance 

as small business owners most pressing problem, greater than 

taxes or labor costs or even government red tape. 

As I visit with small business owners in my Congressional District back in Cincinnati, the cost of healthcare is cited repeatedly 

3

as the most significant challenge for those small businesses and the 

cost of healthcare is rising. Access to health insurance is also a 

challenge to small businesses. According to the Small Business Administration, the SBA, employees with small firms are far less likely to have health insurance than those at larger ones. Helping to 

make healthcare more affordable for small businesses is one of the 

most important issues this Committee can address and that’s one 

of the reasons that I commend the Chairwoman for holding this 

hearing today. 

We all know that small business is the engine of America’s economic growth. According to the Bureau of Labor Statistics from 

July 2005 to June 2006, small businesses created one and a half 

million new jobs, 61 percent of all the jobs created in America. Our 

nation’s small businesses and entrepreneurs drive the economy and 

we need to do all that we can to help keep their costs down, help 

them stay competitive and encourage their growth. 

Association health plans, pool purchasing and reinsurance have 

been mentioned as ideas to help reduce the cost of health insurance 

for small businesses. Other suggestions such as implementing new 

healthcare technology, chronic disease management and aggressive 

case management have also been advanced as ways to reduce the 

cost of health insurance and healthcare. With a problem of this 

magnitude, we must examine all of these options, come up with 

new ones and work together to address this issue. 

I believe that tax relief is also an important way to reduce the 

overall tax burden and make healthcare more affordable for small 

businesses. In previous Congresses, I’ve introduced the Healthcare 

Affordability Act which would provide every American the ability 

to deduct 100 percent of the cost of their health insurance, something that larger companies can do, but unfortunately small businesses or individuals are unable to do it at this time. I plan to introduce this bill or 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 healthcare more affordable for small 

businesses and their employees, and once again, thank you for 

holding this hearing. I yield back my time. 

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Chabot. And our first 

witness is Mr. Adam Cockey. You will have five minutes. The green 

light means you can start and then the red light means the time 

has expired. 

Mr. Cockey is the 2007 immediate past chairman of the Business 

Issues Committee of the National Association of Realtors Board of 

Directors. The National Association of Realtors represents more 

than 1.3 million members involved in residential and commercial 

real estate. Since 2003, Mr. Cockey has been a senior vice president of Prudential Realtors, a real estate firm with 25 offices located in the District of Columbia, Maryland and Virginia. Sir, you 

can start your presentation and thank you for being here. 

STATEMENT OF ADAM D. COCKEY, JR., SENIOR VICE 

PRESIDENT OF PRUDENTIAL CARRUTHERS REALTORS 

Mr.COCKEY. Thank you, Madam Chairwoman Vela ́zquez, and 

Ranking Member Chabot and Members of the Committee. I am 

4

here representing the 1.3 members of the National Association of 

Realtors. I thank you for holding this session and appreciate the 

opportunity to discuss the challenges that the small business community faces with the outlook for health insurance. 

I’ve been in the real estate profession for more than 32 years. I 

know how hard it is to find health insurance when you have no employer to provide coverage. I also know how hard it is to provide 

health coverage for employees when you’re the owner of the firm. 

The real estate sales profession experiences a perfect example of 

the challenges that the self-employed and small firms face today. 

You see, real estate agents are self-employed, independent contractors. They are not employees of the offices which they are affiliated. 

They are independent, legal entities. You might say that they are 

the smallest of small businesses. 

The overwhelming majority of real estate firms are also small, 

typically having fewer than five employees and like other small 

businesses, they struggle to provide health insurance to their salaried employees. I’d also note that this struggle is not limited to just 

the small firms. My firm, Prudential Carruthers, we have 140 salaried employees. Even with what some would consider a less than 

small number of employees, finding health insurance coverage is a 

challenge and is expensive, so expensive that in fact, that only 70 

of the 140 employees choose to sign up for the coverage. Why do 

they not? They do not because they find that the coverage is just 

too expenses on their salary basis. 

As a result, most real estate agent employees must find coverage 

in the individual insurance market, where there is no negotiating 

and no leverage. For the most part, you basically take or leave 

whatever coverage is offered at whatever price it is offered. Our 

firm, as an example, in Year 2005 had an 8 percent increase in insurance. This year, the increase is 21 percent. Over the two years, 

we’ve almost had a 30 percent increase in insurance coverage. Consequently, today, more than 28 percent or more than 336,000 of the 

nation’s 1.3 million realtors have no health insurance. If we add 

family members to the tally, the number of uninsured individuals 

in realtor households is estimated to be as many as 886,000 men, 

women and children. 

A growing problem. Obviously, realtors are not alone in their 

struggle to obtain affordable healthcare today and looking at employment trends, we anticipate that we have even more uninsured 

individuals in the future. Today, as a result of corporate restructuring and job outsourcing, the share of the U.S. workforce that is 

self-employed, independent contractors, freelance workers, consultants and other nontraditional workers has reached a remarkable 

level. The General Accounting Office estimates that these workers 

comprise 30 percent of the American workforce in 2000. Some experts expect that by the Year 2010, 41 percent of the U.S. workforce will be so-called free agent workers. 

Without changes in the current health insurance system, we fear 

this shift in composition of workforce will be accompanied by increases in the number of uninsured. Finding a solution to the insurance problem must become a top priority. 

As discussions of a problem must also include discussions of solution, while our organizations and its members are not health insurVerDate 0ct 09 2002 17:52 Dec 19, 2007 Jkt 033615 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\33804.TXT LEANN
5

ance experts, let me quickly share some observations. First, any 

discussion of solutions must address the shortcoming of the national individual insurance market. The market is not serving the 

needs of the self-employed dependent upon it. 

Second, efforts need to be made to define what constitutes a set 

of core healthcare benefits. Such an effort would be a first step to 

define an essential set of coverage around which stake regulators 

could get together. Together, any national or state solution must 

acknowledge that the cost of providing individuals with total access 

to all desired health services is far beyond what most individual 

families and businesses can afford. 

And finally, we believe that there is a role for the community, 

the nonprofit organizations that have not traditionally been involved in facilitating access to insurance for the self-employed and 

the small businesses. 

On that note, I will close, Madam Chairwoman, and again thank 

you for inviting us. I hope that and I’m happy to answer any questions that you may have. 

[The prepared statement of Mr. Cockey may be found in the Appendix on page 40.] 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Mr.COCKEY. Thank you very much. 

ChairwomanVELA ́ ZQUEZ. Our next witness is Ms. Karen Ignagni. 

She is the President and CEO of America’s Health Insurance 

Plans. American’s Health Insurance Plans is the national trade association representing more than 1,3000 health insurance plans. 

Thank you. 

STATEMENT OF KAREN IGNAGNI, PRESIDENT AND CEO, 

AMERICA’S HEALTH INSURANCE PLANS 

Ms.IGNAGNI. Thank you, Madam Chair, Mr. Chabot, Members of 

the Committee. It’s a pleasure to be here today to focus on the 

problems of small business and what can be done with respect to 

the healthcare challenges in that arena. 

We have submitted testimony that focuses on four areas. First, 

the current state of the small health insurance and how healthcare 

dollars are being spent there. We have executed the most comprehensive survey to date on that market and we’d be delighted to 

talk more about the specifics of those results. 

Second, an overview of the strategies that our members are undertaking to control healthcare costs, enhance choices, and improve 

quality. 

Third, solutions, specifically targeted to small business to respond to some of the challenges that my colleague, Mr. Cockey, just 

talked about. 

And fourth, our perspective on various legislative proposals, both 

in Congress now, as the Chair indicated in her opening remarks, 

as well as things you might think about. 

To begin, in November 2006, just a few months, our Board of Directors announced a proposal for expanding access to health insurance coverage for all Americans. The reason I start here is that the 

problems that small businesses are facing in the healthcare arena 

are very reflective of the problems that a number of the individuals 

6

who are presently uninsured are facing, and we need to look at 

broad strategies as well as customized strategies. 

Our access proposal includes several elements that would help 

small business and indeed, Mr. Cockey referred to some of them a 

moment ago. The Chair and Mr. Chabot referred to some of them 

and I want to highlight them. 

First, our proposal would allow for a new federal performance 

grant that would allow funding to be made available to states if 

they meet specific targets to provide a helping hand in expanding 

coverage. 

Second, our proposal for healthcare tax credits would help subsidize the cost of individuals below 400 percent of poverty purchasing health insurance coverage. Many of those individuals from 

300 to 400 percent of poverty, which is roughly $60,000 to $80,000 

worth of income, are working in small businesses and need that additional helping hand. So we would do that on a sliding scale. 

Third, we are very, very supportive of the comments that have 

just been made about the importance of tax equity. If you are purchasing health insurance on your own in our country now, you 

need to spend 7.5 percent of your adjusted gross income before you 

have a dedication. Individuals who are receiving coverage through 

employers receive their coverage from employers and have that deduction, so we think that’s a very important factor. 

And because we believe in this principle of tax equity, fourth, we 

have proposed a new mechanism, a Universal Health Account, that 

would not prescribe the type of coverage that an individual should 

purchase, but that it would create a tax vehicle to allow this tax 

equity to be secured and allow subsidies from the Federal Government, from states, from employers, to flow into those accounts so 

that individuals would have portability. 

Another front, we support steps to modernize the regulatory system. In particular, Mr. Cockey made a very important point a moment ago about the needs for states to create or have a regulatory 

environment that allows for the purchase of affordable coverage. 

We have set out two alternatives for states to consider in our access proposal. One in particular goes to this concept that Mr. 

Cockey referred to which is to establish a basic package of benefits. 

We know that there are a number of meritorious objectives that 

underpin state mandates, but they are acting as a barrier for small 

business who want to do the right thing and provide insurance coverage, but they can’t afford to cover everything that is required. We 

believe in uniform regulatory structures that do provide flexibility 

for the kinds of customized benefits that we were talking about, 

but to do that in a uniform way. 

And we also believe that it’s time to establish an independent advisory commission and a number of the states have been moving 

in this direction to assess whether or not states should move forward with additional mandates and to look at the mandates that 

have already been put on the books. 

We also believe and I think this has not yet been mentioned, the 

importance of federal funding for state high-risk pools. There are 

a number of individuals who are medically uninsurable. There has 

been legislation, state high-risk pool funding, Extension Act of 

7

2006, which has been enacted, but it needs to be appropriated annually, and this is also a very important part of the structure. 

Madam Chair, I’ve focused primarily in my oral remarks on some 

of the ideas that I thought the Committee would be particularly interested in, but in the last moment of time I do want to highlight 

for the Committee that we have provided a whole range of strategies that our members are undertaking to do disease management, 

to do care coordination, to make the healthcare system more connected, to do personal health records and allow individuals to have 

the kind of portable effective healthcare coverage that they are 

very much interested in. We’re taking leadership and partnership 

with a number of organizations and we’d be delighted to talk about 

all of those issues. I’m sorry to be speaking fast, but I see the red 

light is on. 

Thank you very much. 

[The prepared statement of Ms. Ignagni may be found in the Appendix on page 49.] 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Our next witness is Dr. Gail Wilensky. She’s an economist and 

Senior Fellow at Project Hope, an international health education 

foundation. She has served in several roles including the immediate past chair of the board of directors of Academy Health and 

the administrator of the Healthcare Financing Administration. 

STATEMENT OF DR. GAIL WILENSKY, SENIOR FELLOW, 

PROJECT HOPE 

Ms.WILENSKY. Thank you, Madam Chair, Mr. Chabot, and Members of the Committee, I am here representing my own views based 

on my training as an economist and having run Medicare and Medicaid programs and advised Congress through the MedPAC Commission. 

You’ve already heard a number of statements about the general 

problems in the employer-sponsored insurance market. We are 

where we are now because of tax laws that have encouraged the 

provision of health insurance through the under 65 population, 

through their employers because of the differential treatment of 

wages and fringe benefits. I’d like to add my support to the notion 

that we need to make sure there is tax equity so that people who 

are not getting insurance coverage through their employers, are 

also able to use pre-tax dollars. There are a variety of strategies 

that have been proposed. I will support almost any of them if it 

goes after the major problem of making sure that there’s tax equity. 

In addition, it’s important because fewer employers are offering 

health insurance coverage and we need a way to have an alternative to reliance on the primary source of insurance through employers. It has some of its own problems, but because it is the way 

most individuals receive insurance, we have to be very careful as 

we move forward to make sure we’re augmenting employer-sponsored insurance and not destroying it as a basis of insurance coverage, at least as long as we do not have a robust alternative in 

its place. 

When you look at what has been happening with regard to employer-sponsored insurance, it is really the smallest of the first that 

8

is having the most difficulty. We typically make the division under 

200 employees as small employer, but when you look at who is offering health insurance coverage, it’s only when you get to the 

three to nine employee firms that you see major difficulties. Although for the 10 to 25, only 73 percent, roughly three quarters of 

the employers actually offer insurance. Once you get above that 

number, the numbers are very substantial. Not that it’s not a problem, but they are offering health insurance coverage at least, which 

is something the smallest firms are not doing. 

The decline in the variability has been greater for the smallest 

of firms. The increase in premiums, while not as different as one 

might have guessed, has again been the greatest for the firms that 

are less than 9 percent. When you look at averages, you do not see 

some of the variation that exists, such as Mr. Cockey described. In 

general, in the last year, insurance went up at a slightly slower 

rate at about seven percent, but it was three percentage points 

faster on average for these smallest firms. So again, it appears the 

biggest problem is for the firms that are 3 to 9, although there are 

some challenges for firms below 50 employees as well. 

The variation in risk, some characteristics about the insurance, 

about the firms themselves, makes this a more difficult problem to 

resolve. There’s more variability because of the small numbers of 

employees and they tend not to have their own benefits staff and 

that means getting the expertise is more difficult. It also means 

that they pay their costs of getting advice directly through a loading factor and through their insurance broker where big firms tend 

to do it indirectly through personnel that they have on their firm 

as benefits managers or through outside consultants. Sometimes 

the differences are more apparent in terms of where they are being 

paid, rather than actual differences. 

Reinsurance has been mentioned as a strategy and it is one that 

both small firms and niche insurance companies use. Small firms 

will turn to reinsurance for stop loss. That is, in order to protect 

themselves either in the aggregate of having claims that are too 

large or if one individual has cancer or a major medical event, protecting itself from that kind of a claim. Sometimes niche firms will 

also use reinsurance as back-end insurance for their own company. 

This market seems to be functioning pretty well. It does have 

peaks and troughs. There has been some consolidated. In general, 

it seems to function pretty well. 

There’s been some question about whether there’s enough insurance offering in the small market. It’s quite concentrated, that is, 

there’s usually one very dominant firm, on average, offering about 

43 percent of the insurance to small firms, but there are actually 

a lot of players, on average, 30 to 35 players in all of the states. 

So it’s concentrated; usually a Blue Cross/Blue Shield plan, but 

there are a lot of niche players as well. 

There have been a lot of attempts to try to resolve these issues, 

guaranteed issue, guaranteed renewability, nondiscrimination, limits on pre-existing conditions. Those usually go after the offerings 

of insurance and there have been a variety of ways to try to keep 

the cost down through rate regulation, premium variation limitations. But the sad fact is while there’s been some success in terms 

of coverage offerings, there has been little success in terms of actuVerDate 0ct 09 2002 17:52 Dec 19, 2007 Jkt 033615 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\33804.TXT LEANN
9

ally getting the costs down. And it has happened because of an inability to keep purchasing groups together so that they maintain 

a significant share of the market and they have a sustainable effect. There are a variety of ways to try to go at that. That is the 

reason that association health plans have been suggested. MEWAs 

which have somewhat of a checkered history are having a resurgence. The Department of Labor is putting a little more money into 

their regulations really to know whether or not this is a good strategy. 

Figuring out how to promote more stable groups of small employers is clearly the solution. The question of how to do that has a 

eluded us in the past, but we can’t give up. That has got to be the 

answer for small employers, along with tax equity. And ultimately, 

you’ll forgive my saying this as a health economist, the real solution to lowering or slowing down the growth in health insurance 

costs is slowing down the growth in healthcare costs. We really 

desperately need to do that. 

[The prepared statement of Dr. Wilensky may be found in the 

Appendix on page 69.] 

ChairwomanVELA ́ ZQUEZ. Thank you. Our next witness is Mr. 

Todd Stottlemyer. He’s the president of the National Federation of 

Independent Business, the largest advocacy organization representing small and independent businesses in the nation. He became the fifth president of NFIB in 2006. Welcome. 

STATEMENT OF TODD STOTTLEMYER, PRESIDENT AND CEO, 

NATIONAL FEDERATION OF INDEPENDENT BUSINESS 

Mr.STOTTLEMYER. Thank you, Chairwoman Vela ́zquez. I thank 

you for inviting NFIB to discuss the challenges facing small businesses looking for access to affordable and quality health insurance. Throughout your service in Congress, you have championed 

issues of importance to small business and healthcare has always 

been one of your top priorities and our members agree. Access and 

affordability of health insurance remains their number one concern. That is why NFIB believes we must take action now to reach 

the goal of universal healthcare by increasing access to affordable 

health insurance. 

U.S. workforce is comprised of two distinct categories: big business and small business. When it comes to affordable and available 

health insurance, the difference between big and small is substantial. In today’s health insurance market, the large employer enjoys 

a market that provides competition, economies of scale and administrative efficiencies. They’re also able to obtain relief from the high 

cost of health mandates. All of these factors improve the affordability and availability of health insurance. 

However, the story is different for small business. The cost of 

their health insurance is significantly more expensive. That is because the small group insurance market lacks competition, bargaining power and administrative efficiencies. The cost is further 

exacerbated by expenses mandates and the result, according to a 

2006 Commonwealth Fund study, on average small businesses pay 

18 percent more in health insurance premiums for the same benefits as those in the largest firms. 

10

We strongly believe that health insurance should be accessible 

and affordable to everyone in the workforce, big or small. NFIB 

supports a comprehensive approach to help small businesses find 

affordable and quality health insurance. Our approach has three 

components: pooling, tax-base incentives, and cost-containment 

measures. 

First, Congress should take steps to develop health insurance 

purchasing pools for small businesses. Expanding the size of the insurance pool increases bargaining power and decreases administrative costs. This will increase coverage for small businesses. Although action on small business health plans was stymied in the 

last Congress, NFIB will continue to explore all pooling proposals 

that can increase the purchase of private health insurance for 

small businesses. 

Beyond pooling, NFIB supports tax-based incentives 

thatencourage fairness and equality for everyone purchasing health 

insurance. Rather than continue to rely on a tax system that primarily benefits those who obtain their healthcare in the employerbased system, we need a tax system that offers the same incentives 

to everyone who purchases health insurance. We’re looking at various combinations of tax credits and deductions, all with the same 

goal in mind, greater access to affordable, quality health insurance. 

Sustainable solution must also include cost containment measures designed to make everyone a better consumer of healthcare. 

Congress needs to take steps to implement health information technology and transparency practices. This will result in consumers 

being more educated about the cost and quality in the marketplace. 

Finally, there are more than 1800 state health insurance mandates on the books. More mandates mean higher cost. We must 

draw a line in the sand and understand that there’s a real difference between what we need and what we want. All mandates 

are not crated equal. There’s a difference in the value of every 

woman having access to a mammogram and everyone have access 

to hair transplants or chiropractic services. 

Cost-containment measures implemented in tandem with pooling 

approaches and appropriate tax-based incentives can significantly 

improve the access and affordability of health insurance for small 

business. 

We must take action now to reach the goal of universal 

healthcare by increasing access to affordable, private health insurance. The 27 million working uninsured in the small business community can’t wait any longer. They need solutions now. Because 

the longer we wait, the harder the task and the more uninsured 

population grows. 

Universal healthcare does not mean government takes over. It 

means taking necessary steps to transform the marketplace by injecting choice, competition and value for those services. This will 

enable more people to purchase private, quality, affordable health 

insurance that is portable over all phases of your career. 

I want to thank you again for holding this hearing today. NFIB 

very much appreciates your continuing support for small business 

and we pledge that we are going to do everything we can to increase access to affordable health insurance for America’s small 

businesses, their employees and their families. 

11

Thank you. 

[The prepared statement of Mr. Stottlemyer may be found in the 

Appendix on page 83.] 

ChairwomanVELA ́ ZQUEZ. Thank you. Now I will recognize Mr. 

Chabot to introduce his witness. I believe he’s your constituent? 

Mr.CHABOT. Yes, he is. Thank you, Madam Chairwoman, and it’s 

my pleasure to introduce Michael Cavanaugh who is the owner and 

president of Queen City Electrical, Inc. in Cincinnati, Ohio. After 

a four-year apprenticeship and three years as a journeyman electrician, Mr. Cavanaugh started his own small business. He currently employs 25 people in his business located in Cincinnati’s 

west side and my Congressional District. 

Mr. Cavanaugh devotes considerable time and effort in finding a 

healthcare plan that he can afford to offer his employees and he 

has been successful. However, he’s found this to be a challenging 

process with limited options available to the small business owner 

who wants to provide health insurance for his or her employees. A 

graduate of the University of Cincinnati, Mr. Cavanaugh serves on 

the Board of Trustees of the Independent Electrical Contractors of 

Greater Cincinnati, and we welcome you here this morning, Mr. 

Cavanaugh. 

STATEMENT OF MICHAEL CAVANAUGH, OWNER, QUEEN CITY 

ELECTRIC, INC., CINCINNATI, OHIO 

Mr.CAVANAUGH. Thank you, Mr. Chabot. Chairwoman Vela ́zquez, 

Ranking Member Chabot, and Members of the Committee, thank 

you for giving me the opportunity to testify today. My name is 

Mike Cavanaugh as Mr. Chabot said. I’m the president and owner/

operator of Queen City Electric in Cincinnati. 

Like any small business owner, I started my company for many 

different reasons. The most compelling thing for me was the prospect of doing things my own way and in a relatively short time 

after going out on my own, I started to hire other employees to aid 

in my growing business. From the beginning, I believe that to have 

a successful business, you must treat your employees well. It’s pretty basic, I think. That includes not only a good work environment, 

but also a full range of benefits, including health insurance, probably one of the most important ones. It’s a very expensive proposition, but I feel it’s necessary. 

How could I as a small business expect to attract and retain the 

quality people that I’m going to need to grow, if I cannot offer 

health insurance? Small businesses are at a significant disadvantage because we cannot easily band together to form large pools of 

insured individuals similar to large companies. As a result, we lack 

bargaining power. The expense of providing medical coverage is one 

of the single most important items most small businesses face, in 

my opinion. 

Each year in my company we face the tremendous task of shopping for health insurance. We do this because carriers will not provide fixed rates for longer than one year. So it’s an annual process. 

AS a result, each November, in search of the best overall value, we 

start working with a couple of local agencies hoping to avoid the 

annual 15 to 20 percent increases we’ve seen in rates, historically. 

We cannot start any earlier than 60 days prior to the expiration 

12

of our current plan, as carriers will not hold rates longer than 60 

days. Because each insurance carrier has its own form, we ask each 

employee to fill out three to five different applications so that we 

can get quotes from as many different companies as possible. If you 

can imagine the headache of having all these people fill out these 

forms, it’s very daunting. The process is time consuming and each 

year we spend hours and hours on the phone asking employees to 

please get their paperwork turned into the office so we can get our 

quotes back in a timely manner. This annual process causes a significant waste of time and resources for our business. We’d much 

rather be making money at what we do best instead of spending 

time on this. 

Once we complete the task of filing out and submitting all the 

applications, we wait for the companies to respond with their 

quotes. For some of the companies the quotes provided are not 

guaranteed rates, but only preliminary rates, because they require 

additional forms to be filled out by each insured person upon the 

selection of them as our carrier. So when we evaluate rates from 

these companies, we keep in mind that they are not necessarily 

what they may end up being when it’s all said and done. Of course 

the rates cannot be evaluated until a full comparison of the plans 

can be done. I am fortunate enough in my company to have an office manager who has experience in both human resources and the 

field of medical administration. Not all small businesses are as fortunate as I am and do not have the luxury of this person working 

for them. So small businesses typically lack the resources to make 

informed, educated decisions when selecting health insurance. I 

was an electrician first and foremost and for me to select the right 

plan for all my people, it’s kind of challenging. We don’t always 

have that expertise. Most small businesses probably don’t. 

So after a process of applications, evaluations and decisions 

about the various medical plans, we select one. Much time is spent 

educating employees on the new plan, discussing coverage, and 

helping the employees by calling the various providers. Small businesses spend time that they don’t have sorting out difficulties created by a myriad of rules and coverage options, all in an effort to 

provide the best coverage options at the lowest cost. 

These issues are very real and time-consuming issues for most 

small businesses. Nonetheless, we continue to grow and create jobs 

year after year. The main thing that would surely aid in the efficiency of the entire process, I feel, would be more market competition. If more options were available to the average small business, 

insurance companies would be more competitive in rates, as well 

as service. And we all know they can improve in service, with all 

due respect to that industry. 

Please don’t mistake these observations I’m made above as an 

appeal for more government intervention in the way business operates. Rather, consider it an appeal to allow for more open competition in the marketplace. I believe that market forces, in time, can 

bring efficiency to markets, where government regulations, though 

well intended, can have the opposite effect. 

Thank you again for the opportunity to testify today. 

[The prepared statement of Mr. Cavanaugh may be found in the 

Appendix on page 93.] 

13

ChairwomanVELA ́ ZQUEZ. Mr. Stottlemyer, most small employers 

generally receive the same tax advantages as large firms for sponsoring health insurance, but they often have too few employees to 

keep premiums low. Can we relieve some of the current tax burden 

experienced by small employers to make healthcare and other benefits affordable? And are there mechanisms within the current tax 

code that could be used to make insurance premiums more affordable and encourage employers to offer coverage? 

Mr.STOTTLEMYER. Well, Madam Chairwoman, as I mentioned 

earlier, we really believe in equality, looking for more equality in 

the tax system regardless of whether you’re a small employer or 

large employer or you’re self-employed. I think the comment was 

made earlier as it relates to the self-employed, the AGI is seven 

and a half percent, so you don’t have that equitable tax treatment. 

We’re also looking at different types of deductions or credits that 

would encourage employers to offer insurance. It would help give 

them some relief, if you will, for the smaller employers who offer 

insurance to their employees, if they paid a certain percentage of 

their premiums. So fundamentally, we’re looking at more fairness 

in the tax code, whether it’s large, small or the self-employed, and 

we think that’s very important. 

ChairwomanVELA ́ ZQUEZ. Mr. Cavanaugh, can you talk to us 

about how tax incentives within the code impact your ability to 

offer coverage? 

Mr.CAVANAUGH. The lack of the incentive or incentives? I’m 

going to be in favor of any incentive in the code, pretty much, any 

tax break I can get. It would certainly be helpful in my business 

for a tax break along those lines. 

ChairwomanVELA ́ ZQUEZ. Thank you. Dr. Wilensky, do you think 

there are other ways in which reinsurance can be expanded in the 

private sector or in the private market to lowering insurance costs? 

And can you tell the Committee more about the types of reinsurance and the relationship of reinsurers to primary insurers? 

Ms.WILENSKY. I will tell you, as I mentioned, there are really two 

different ways reinsurance works and people sometimes confuse 

them. The most common and in some ways it would be the most 

directly relevant to this Committee is when a small firm goes to 

reinsure against having either in the aggregate large claims or for 

any individual a large claim. There is a trigger that once an individual’s expenses exceed say $50,000, the reinsurance starts, or if 

in the aggregate, the firm exceeds $500,000 or some preset amount, 

the reinsurance comes in. 

This tends not to be nearly as expensive as the primary insurance because it is less likely. To the best of my knowledge, there 

is not difficulty in purchasing this insurance. There are a number 

of reinsurance companies that offer this type of insurance, but it 

is not the only kind of reinsurance. The other kind of reinsurance 

tends to go to the small insurance companies, to go to the point of 

trying to increase competitiveness in the market, that they will go 

and buy their own back-end insurance so that if the claims against 

them are too much, they have some protection. 

There are cyclical effects that the reinsurance companies report. 

They have peaks and troughs in their business. When they’re in a 

trough and I think that is happening, has been happening, you get 

14

some that exit and you get some consolidation which means there 

are fewer that are around. It is also an area where health insurance is a relatively small part for some companies of the reinsurance, but it does not appear to be a problem of too little supply. 

I think the problem that is much more significant is the variation in state laws means that some of the bigger players that 

don’t need or don’t turn to reinsurance are less likely to come into 

states because every time they cross a state line, when they are 

dealing with companies that are not ERISA exempted, they have 

to face a different set of benefit mandates and different rules with 

regard to rate regulation and that may be more of the competitive 

problem of not having enough insurers than a problem in the reinsurance market, as I understand it. 

ChairwomanVELA ́ ZQUEZ. Mr. Cockey, a factor that complicates 

nearly all proposals to expand health insurance coverage is how to 

deal with risk segmentation in the small group and individual insurance markets. Risk segmentation is especially back for small 

businesses. I am interested in finding ways to address this problem 

by spreading risk. Would a small employer purchasing alliance or 

comparative help prevent risk segmentation? 

Mr.COCKEY. Are you saying if they were part of a larger segment, that would—yes, I think that would certainly be some benefit to all because the problem with the small businesses as Mr. 

Cavanaugh mentioned, I too, have owned my own company for 25 

years. The greatest difficulty was trying to find the insurance because we were looked upon at a higher risk because we were the 

size we were and consequently the revenue from our premiums 

were not great enough for the insurances to feel that they could 

cover the potential expenses. 

So we went on a search every year to find another company that 

was going to cover us. So we changed every year. We were with 

new doctors and new coverage. The sad part about it is when I 

moved into a larger facility with the Prudential Carruthers group, 

thinking that would go away that we would have less risk in front 

of us and looked upon as being a greater opportunity for insurance 

companies, we are not looked upon any differently. 

ChairwomanVELA ́ ZQUEZ. My last question on this round is for 

Ms. Ignagni. Of the reforms being talked about, one which has 

begun to receive attention is reinsurance, and the Durbin-Lincoln 

proposal on the Senate side will have the government act as a reinsurer for the medical expenses of high-cost individuals. I think reinsurance is important to the question of risk. But I’m concerned 

that a government reinsurance program might not be able to adequately monitor or control that reinsurance and risk adjustment 

processing. 

Do you think that having the government as the reinsurer would 

work? 

Ms.IGNAGNI. I think, Madam Chair, your concerns are warranted 

and well stated. Having said that, we are looking at a variety of 

proposals that would allow our members to respond to the challenges we’ve been talking about today. 

And let me give you a couple of examples that go directly to your 

point. The first job is to encourage small businesses to offer the insurance and then to encourage individuals to purchase it. And 

15

we’ve been looking at a range of proposals. First, there could be 

some very targeted, tax strategies to small employers that face disproportionate costs. That would be one way to go at it, number one. 

Number two, there could be targeted strategies to small employers that are offering wellness and disease management strategies, 

again to encourage people to get in early. That’s the most affordable time to provide coverage. 

Three, subsidies for individuals who are under certain income 

level to allow them to be able to take it. 

Fourth, you could look at the subsidy question, not strictly from 

the employer perspective, but for individuals who have disproportionate healthcare expenditures. That goes directly to marrying the 

two questions, one you posed earlier, and the one you posed to me. 

So we are in the process of doing now having outlined a very broad 

access proposal for all Americans and the subsections that I talked 

about. We’re also looking at this concept of guaranteeing access 

and what can be done through pooling mechanisms in the private 

sector. Our board meets next week and we’re going to be having 

a great deal to say about that after those discussions. So I think 

we’ll be able to offer even more specifics. But the final point here 

is the issue a number of our members would love to offer more affordable products to small businesses and to individuals. They are 

simply prevented from doing so because of the tyranny of state 

mandates. And we have offered very specific proposals on how to 

address that, not addressing it just for one particular group, but 

across the board. 

I can give you also some data that suggests that the health savings accounts which are new products that we’ve been allowed to 

offer under the tax legislation, it has shown that of the small businesses purchasing HSAs for their employees, approximately a third 

didn’t provide healthcare coverage before. So we’re hitting a price 

point. There are other ways to do that, but we are provided— there 

are barriers because of state mandates. 

ChairwomanVELA ́ ZQUEZ. Thank you. I will recognize now Mr. 

Chabot. 

[Mr. Gonza ́lez assumes chair.) 

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

Cavanaugh, if I could start with you. I first want to underline the 

way you concluded your statement. Please don’t make these observations outlined above as an appeal for more government intervention in the way business operates. And I can’t tell you how much 

I agree with you in that statement. I hope we follow that recommendation. And then you went on to say ‘‘rather, consider it an 

appeal to allow more open competition in the marketplace. I believe 

that market forces in time can bring efficiency to markets where 

government regulations, though well intended, have the opposite 

effect.’’

Would the other panel members for the most part, would you 

agree with that statement in sentiment for the most part? I think 

I’m observing all nodding in the affirmative. Thank you. 

Let me follow up, Mr. Cavanaugh, with another question. You 

mentioned about your employees and their involvement and getting 

the forms back and forth and the time consuming nature of that. 

Once you got the insurance, what are some of the—are there any 

16

complaints that the employees have afterwards about things that 

they think should be better or things that annoy them, things of 

that nature? Have things percolated up to your level about that? 

Mr.CAVANAUGH. Yes, frequently we—as was alluded to in other 

comments, we change plans virtually every year in search of more 

competitive coverage. We have to. So that brings up a whole host 

of potential problems with networks, doctors being out of network 

because the insured may have had a certain favorite doctor who is 

not in the network of the new one. Now that’s improving. The networks are pretty large, but there’s generally a suspicion of the employer sometimes that we’re doing something to lessen their benefits or we’re doing it for our own selfish reason, so yes, there are 

a host of things that arise when we change plans every year. I’d 

prefer to keep more consistent coverage. So we have to explain 

these things, different co-pays, all kinds of things; different medications that are not in certain plans and other plans, so yes, there 

are a host of things. 

Mr.CHABOT. And I would assume that as a small business owner 

that your bottom line is impacted by the health insurance costs, especially as they increase. Would that be accurate? 

Mr.CAVANAUGH. Yes, that would be fair to say. Greatly affected. 

It’s one of the largest expenses that we don’t have any control over. 

We don’t know what it’s going to be either, when we look at our 

budget for years in the future because we may see a 10 or 20 percent increase. We just don’t know. 

Mr.CHABOT. And your employees share in the premium costs? 

Mr.CAVANAUGH. I pay the majority of it and I’ve had to ratchet 

that down. I used to pay 100 percent of the coverage, but it’s very 

difficult, so yes, they do share in the cost. 

Mr.CHABOT. And that’s pretty common in all the industry, small 

businesses. I am again noticing the affirmative nods. 

If I could turn to you, Mr. Stottlemyer. Relative to the association health plans, how frustrating was it to see for in the last six 

years the House passed associated health plans five times and then 

it goes over to the Senate and unfortunately, action not be taken. 

Not too loaded a question, is it? 

Mr.STOTTLEMYER. It was very frustrating and prior to my coming 

in, I was an employer. I changed healthcare providers three times 

in the last three years. I had an 18 percent increase from a Blue 

Cross/Blue Shield. I went to Cigna and United Health. I was a 

larger small employer, but certainly our membership, those members who belong to NFIB, it’s very frustrating because pooling is 

very important, particularly in states where there’s not competition. And bringing them out of those states into a bigger pool, we 

fundamentally believe creating that competition will help reduce 

costs. Very frustrating. I’m an optimistic. Yesterday, I was on the 

Senate side and spent quite a bit of time with several Members 

talking about pooling, very importantly, and I remain optimistic 

with the leadership of this Committee and others that we can move 

the ball forward. 

Mr.CHABOT. I certainly hope so. Thank you. Ms. Wilensky and 

Ms. Ignagni, if I could ask you both just a follow up on the association health plans. What role do you think they ultimately would 

play, especially if we’re able to do some things legislatively up here 

17

in answering the question about how small businesses can deal 

with the increasing cost of health care in the country. 

Ms. Wilensky and then Ms. Ignagni. 

Ms.WILENSKY. To the extent they are able to solve the problem 

that we’ve not solved to date which is being able to form large, stable grouping mechanisms, they will help small employers have 

some of the power and market share of large employers. 

What will be important is to monitor, if they were to get through 

the Senate, that they stay stable and some people have suggested 

that because groups tend to form and then dissolve, rather than 

stay in these pooling groups, at least in the past, that it might be 

that there would be some kind of a subsidy for those who remain 

in a pool, in addition to the natural advantage they gain by being 

part of a pool. There have been concerns, as you know, raised that 

these groups won’t be subject to the same regulation as they would 

if they stayed in their own states, but of course, any ERISA-exempted company and some of them are now quite small as a way 

to get around some of the barriers they feel exist in their own 

states already have that. So it seems to me this has been an unfair 

burden to put on small employers that are attempted to gain some 

of the clout of being a bigger purchaser. If it works, if you can 

make it happen, it will go a long way to helping these small employers. 

Mr.CHABOT. Thank you, Ms. Ignagni, anything you want to add 

there? 

Ms.IGNAGNI. Yes, Mr. Chabot. I think that—I understand completely why small businesses are interested in AHP legislation. But 

I think with all due respect to that concept there are these larger 

issues that if we continue to set specific remedies up to meet specific circumstances and not look at the larger picture which is we 

have a problem with mandates, we need to do a better job in the 

tax system. We need to deal with these underlying issues, that we 

do face some risks and I noted that the Congressional Budget Office had done a very good analysis about their concerns that short 

term, it may solve some problems; long term, we may have a real 

and more significant problem on our hands. 

So our view is to step back to say these problems are real that 

my colleagues are talking about and to propose remedies to deal 

with the situation once and for all in a uniform fashion and that’s 

what we’re endeavoring to do. 

Mr.CHABOT. Thank you. Mr. Cockey, let me conclude with you. 

I think you had given an example of a company that had 140—

Mr.COCKEY. My company. 

Mr.CHABOT. Your company had 140 employees and only 70 took 

the healthcare that was available. The one thing that came to mind 

that I was wondering, would some of the people that didn’t take 

it perhaps have spouses that have coverage through their employment? 

Mr.COCKEY. Very definitely some did, but the majority of them 

did not take it because it was not affordable for them. That was 

the unfortunate part. Those that have spousal coverage, their concern and our concern with that group is that their spouse’s employers may start limiting the coverage for family members. So now we 

18

add to a larger number of uninsured individuals. And that’s a real 

risk that we’re facing. 

Mr.CHABOT. Thank you very much. Thank you, everyone. I yield 

back. 

Mr.GONZA ́LEZ. Thank you very much, Mr. Chabot. The chair is 

going to make sure that I’m next in line. I’m not jumping ahead. 

I am next. I was next anyway, but the chair will recognize himself 

for five minutes. And the initial question will be to Ms. Ignagni 

and Dr. Wilensky, and we can look at the big picture and it’s overwhelming, you know, how we bring in and harness and control 

some of the costs and so on. We can look at tax treatment, on and 

on. But if we do some of those things, at the end of the day though 

it still has to be a profitable endeavor for an insurance company 

to offer the policy itself. 

It seems to me that that’s basically the thing that we need to address from the outset. How do we make it profitable? It seems to 

me insurance again is all about risk, predictability. And my experience has been that’s the biggest drawback with small businesses it 

that you can’t spread that risk as you can with others. 

So first and foremost, I guess, is what could we do, if there was 

one thing that we accomplish in this first part of the 110th Congress, what piece of legislation would it be addressing against 

spreading of risk? And is that going to be the association health 

plans or something similar? 

Ms. Ignagni? 

Ms.IGNAGNI. I think there’s one answer to that and it has a part 

A and B and I’ll be very quick about it, Mr. Chairman. The first 

is the matter of tax equity that all the witnesses talked about. It’s 

fundamental and very important. Increasingly, people will be purchasing on their own. They’re not attached to an employer. Realtors or groups of one is a perfect example of that. That’s number 

one. And number two, as part of that, I think that a very doable 

thing is to make sure that the high risk pool legislation that was 

passed is— the appropriations are there to provide this assistance 

to states who are trying to address the needs of those who are 

medically uninsurable which could definitely and significantly help 

small businesses and individuals who are in the market, who have 

average healthcare risk, but those that do not are finding it very, 

very difficult to get assistance. 

And there are three or four other things, but in the interest of 

time, I’ll start there. I think that’s one of the most important 

things and the other is the state mandates. We are ready to offer 

customized products to small business, basic packages that we 

know they want to purchase. They are affordable. They will do disease management. They will do prevention. They will provide catastrophic coverage and we can do it affordably. But we are prevented from doing so. And that ought to be addressed. 

Mr.GONZA ́LEZ. Thank you. Dr. Wilensky? 

Ms.WILENSKY. I’d like to start with the second which is that one 

of the real barriers has been both the level and the variation in 

state regulations with regard to mandates and controls over rate 

variability and offerings, etcetera. It limits the number of insurance companies that will come in and obviously affects also the 

kind of products that they can offer. Now it’s difficult because that 

19

has been traditionally a state function. It has become a more limited state function as firms opt out through ERISA exemption, but 

it doesn’t make it any smaller a problem for those companies that 

are trying to offer insurance to firms that are not self insuring. 

With regard to the risk segmentation, basically the strategy that 

you can use to resolve that is to try to encourage pooling and to 

risk adjust. I mean there’s not really a better answer than to say 

once you have predictably higher risks or spenders which will happen any time you have either complex chronic disease individuals 

or individuals who have predictably higher expenses because of a 

congenital or other identifiable problem, to pretend like this is not 

recognizable to the insurance company is to deny the obvious. So 

the question is can we find ways through risk adjustment by compensating for plans or pools that get an unusual mix in terms of 

their membership so that they will not try to find ways to exclude 

or run away from that. You can do it through high risk pools or 

other reinsurance or tax and transfer payments. But to pretend it’s 

not an issue is not going to resolve the problem and it’s something 

that we need to take on for the small firms, is to offer them a couple of different strategies or to do something through legislation 

that will allow this risk pooling to occur. 

I don’t think, with regard to the earlier question that the reinsurance market per se needs to have federal intervention. It seems 

to be functioning about as well as insurance markets function. So 

this would be a solution that doesn’t have a problem driving it. 

Mr.GONZA ́LEZ. Well, that’s good to hear because we’ve had that 

problem regarding other areas of reinsurance and whether we have 

a federal backstop or not and I know that I’m almost running out 

of time, but Mr. Stottlemyer, there’s always unintended consequences and whenever we consider something, the President proposed something in the State of the Union, right away regarding 

tax treatment to those individuals, obviously they’re paying the 

premiums for coverage and treating it differently and then you 

hear, well, that’s going to discourage employers from providing 

health coverage. That’s one concern. Association or associated 

health plans. We hear from the states, oh my gosh, then you’re not 

going to have the quality. You’re not going to have the product. 

And employers let’s say in the State of Texas will be offering products that are not as good as was presently considered the minimum 

under state standards and such. Could you address those two concerns when we attempt to find these remedies? 

Mr.STOTTLEMYER. Let me just for a moment put my employer 

hat back on, when I was an employer. As an employer, I had to 

offer health insurance because I had to compete in the marketplace 

for talent. So even if there were changes in the tax code that gave 

more equity, I wasn’t going to walk away from the employer market because I needed to compete for talent. I was day in and day 

out competing for talent. So I don’t think the idea that if we try 

to level the playing field, if you will, from a tax standpoint that 

that’s going to blow up the employer market. I was an employer 

and I would not move away from employer health insurance as a 

former employer. 

I do think tax equity is important. The fastest growing part of 

the small business community today is something called SOHO 

20

businesses, single owner home office businesses. There are 12 to 15 

million of these businesses. They also happen to be the most diverse. I mean women, minorities. This is the fastest growing part 

of this sector of the economy. From a tax standpoint, they’re disadvantaged. So we have to look for ways to give equity in the tax 

market. 

The comment was made about association health plans and unintended consequences. Whether it’s small business health plans, association health plans, that’s really not the issue for us. The issue 

is pooling. If you get bigger pools, more people into the pool, you 

can spread risk. And so when you have a state like North Dakota 

and I don’t begrudge in any way, shape or form the Blue Cross/

Blue Shield that’s there that has 90 percent of the market and 

they’ve competed for that and they dominate the market, but 

there’s not competition there. 

By allowing businesses, small businesses inside that state to 

come into a larger national pool, there’s going to be competition. So 

the idea whether age, small business—that’s really not the issue. 

It’s pooling. And I think from an economist’s standpoint, Dr. 

Wilensky and others, would—I think it’s just common sense that 

if you create a bigger pool and a stable pool, I agree with that, you 

need a stable pool and the idea of incentives to keep people in the 

pool, I think has a lot of validity. 

We’re never going to be certain. We’re going to have to try things 

because the issue is significant, I think, as we all know. And we’re 

going to have to learn from what we try. 

Mr.GONZA ́LEZ. Thank you very much. The chair is going to recognize Mr. Bartlett. 

Mr.BARTLETT. Thank you very much and in a former life, among 

other things, I was a small business person and a proud member 

of NFIB and I had the problem of trying to find health insurance 

for my employees. 

I always have the feeling in a hearing like that no matter how 

hard we try, what we’re really doing is just nibbling at the margins 

of the problem. There are two fundamental problems that we seem 

unable to address. The first of these is that the employee ought to 

own the policy, not the employer. I have no idea why. I think it 

was because of irrational and perhaps stupid action on the part of 

the government, wage and price controls and employers had to 

compete for employees. They couldn’t raise wages so they wanted 

to offer something. I have no idea why they didn’t offer mortgage 

payments or car payments or tuition payments or maybe life insurance, but they settled on healthcare. So here we are. Stuck with 

it. It is really quite irrational. 

If the employee owned the policy rather than the employer a 

number of really good things happen. First of all, it’s totally transportable. If you buy it when you’re 18, you carry it with you until 

your death. And secondly, you’re not worrying about pre-existing 

conditions any more because what 18-year-old has a pre-existing 

condition? Darn few. You don’t need to worry about pooling any 

more because the pool now is the entire universe of 18-year-olds 

out there who are buying insurance. 

We never worry about pooling in life insurance, why don’t we 

worry about pooling in life insurance? It’s because it’s a competitive 

21

market and this market will not be less competitive if the employee 

owns the policy rather than the employer. 

And the second big problem is that our sick care costs are too 

high. By the way, I say sick care because we do not truly have a 

healthcare system. We have a really good sick care system, the best 

in the world. And if we had a better healthcare system, maybe we’d 

need a less big sick care system. 

There are two big problems with costs in our healthcare system, 

our sick care system. The first one is that someone else pays the 

bill. Now if my employer provided a car for me, rather than 

healthcare for me, I could easily rationalize that I needed an SUV. 

By the way, I make do with a Prius, but if he was providing the 

car, I could rationalize I needed an SUV. Employee-owned policies, 

especially if they’re of the healthcare savings plan, would really 

make the employee more healthcare conscious. He needs to be a 

careful shopper. If you think about it, sick care costs are the only 

thing you shop for and never ask the cost. That’s because someone 

else is paying the bill. This is dumb. We need to change that. 

The second thing we need to change is litigation. We really need 

to change that. It’s not just a $100,000 premium, it’s all of the defensive medicine that’s practice by the doctor. And I’m not sure you 

can get inside the doctor’s head to know how much of his medicine 

is defensive medicine because of enormous risk of insurance. I 

think this could be solved by when the patient goes to the doctor, 

there are two paths they can travel. The doctor says Susie, you 

have a problem. It will cost you $400 for me to fix it, if you will 

agree to what you call—the kind of insurance you have with—when 

you have a board that decides the amount of money you get, rather 

than you go to court? Now if you want to go court, you wouldn’t 

have come to me if you thought I was a quack or a fraud. You’re 

here because you think I’m the best doctor you could go to today. 

But if you really want to reserve the right to sue me, then you’ve 

got to pay $800. I’m not going to ask my other patients to pay for 

my health insurance costs. Susie, which route would you choose to 

travel? Ninety-nine plus percent of the time say gee, Doc, I’m here 

because I trust you. Let’s do it because it’s cheaper and by the way, 

the extra $400 comes out of your pocket, Susie. The insurance company is not paying it. 

If we did these two things, if we had an employee-owned policy 

and if we reduced the costs of healthcare by these two rational 

things, most of the problems we’re talking about today would go 

away. What’s wrong with what I just said? 

Mr.STOTTLEMYER. The comment about transparency, I think 

that’s exactly right. When I was an employer, one of the important 

things that I did was I actually had somebody come and it was 

with a computer and as people enrolled into healthcare, came up 

and said this is your choice, this is how much it costs, this is how 

much you pay, and this is how much we pay as the employer. And 

the first time we did it, people were shocked. They honestly had 

no idea that I, as an employer, was paying the most significant 

part of their healthcare costs. So transparency is important. We 

have to have smarter consumers. I mean if you smoke, the reality 

is if you smoke, you’re using more of the healthcare system. 

22

Mr.BARTLETT. You ought to pay a higher insurance premium if 

you smoke, if you’re overweight or drink. It’s the same thing. 

Ms.WILENSKY. I don’t disagree with what you’ve proposed, although I would make the choice not just in terms of whether you 

accept arbitration, but whether or not the physician or the institution follows a certain standard set of patient safety protocols as 

well. The only difficulty is that while this would be a terrific step 

in the direction in a lot of issues, the fundamental growth in 

healthcare spending reflects what goes on in the concentrated 

spending of the sickest five or ten percent of the population. And 

they will blow beyond any threshold in the health savings account 

or major medical account. So learning how to realign financial incentives so that institutions and clinicians are spending smarter, 

making sure that the kind of information that would help patients 

and clinicians understand what they’re really going to get if they 

use a new medical technology or procedure, it’s a lot more than 

what you have done because of the huge impact that the five or ten 

sickest part of the population has on the growth in healthcare 

spending. But I wouldn’t detract from anything that you want to 

do. I think those are all actually very helpful steps. It just wouldn’t 

solve the problem completely because of concentrations in 

healthcare spending. 

Ms.IGNAGNI. Mr. Bartlett, just a note that we’ve just ask 

PriceWaterhouseCoopers to do a study for us to look at how much 

of the healthcare dollar is going to med-mal, both direct and indirect expenses, 10 cents on every dollars. That’s a very significant 

proportion. And physicians are afraid to practice medicine today. 

And so I think your point about changing the structure and having 

a better dispute resolution system is absolutely right on point. 

Mr.GONZA ́LEZ. Time is up and the chair will recognize Mr. 

Larson. 

Mr.LARSON. Thank you, Mr. Chairman. And I just have a few 

questions. Certainly we’re all acutely aware of the healthcare costs 

impacting small business and Mr. Cavanaugh’s statements are especially poignant, given a visit yesterday by a high school friend of 

mine, is purchasing a flower shop his father started many moons 

ago. So he’s got a state tax issues he’s dealing with, but also the 

employee’s ten people. In 2003, his health insurance premiums 

went up 13 percent from the year before. In ’04, they went up 21 

percent from ’03. In ’05, they went up 14 percent from ’04. In ’06, 

they went up 15 percent from ’05; clearly putting a tremendous 

strain on his ability to provide healthcare for his employees, some 

of whom have been around for 15 years working for him, but again, 

his father started this business many moons ago. Clearly, he is impacted. 

You’ve given us some thoughts on pools and tax credits. I had a 

question about that, but I think you all pretty much clearly laid 

out what your thoughts are on that. 

Perhaps for Ms. Ignagni, last year there was some legislation introduced by a lot of folks around here, including a variety of provisions. Can you talk about, well, there was a bill introduced last 

year that included community rating and it hasn’t been discussed 

at all. Can you discuss community rating and what impact it has, 

good, bad or indifferent? 

23

[Chairwoman Vela ́zquez resumes chair.] 

Ms.IGNAGNI. I think community rating is something that a number of states have tried, for obvious reasons to try to equalize the 

payment of health insurance costs. So that it’s the ultimate pooling 

mechanism. 

What we find in states that have relied on community rating is 

that the costs are the highest and our study reflects that. We have 

a very comprehensive study of both the small group and the individual market and it reflects that. This is not to make the point 

that they’re doing the wrong thing. It’s the purpose of trying to do 

the right thing to get everybody in. 

A number of states now are looking at whether or not they can 

do not that broad scale pooling, but target the individuals with the 

extraordinary healthcare costs. I suspect your high school friend 

has a couple of people in his business that have very high 

healthcare costs. Those are the individuals that we could either 

move to a risk pool or figure out another strategy and we’re going 

to be recommending a series of them very soon, where we could 

subsidize those disproportionate costs so that it could be more affordable for the employer. Sometimes we don’t want to put a complete average and then drive the people with the lowest costs out 

of the system because that then exacerbates the cost for people who 

are at the mid-range or the higher range. 

So these are the kinds of discussions that we’re going through 

with the idea of recommending some very specific strategies. So all 

these strategies that have been undertaken have been done for the 

right reasons, but we want to try and figure out how do you make 

this all work for everyone and keep everybody in the pool. 

Mr.LARSON. Washington State is one of the states with a high 

risk pool. 

Ms.IGNAGNI. Yes. 

Mr.LARSON. In fact, we’re also one of the states in ’93, ’94, moved 

forward on a larger plan in ’95, ’96, dismantled it all. 

Ms.IGNAGNI. Right. 

Mr.LARSON. And now the State Legislature is back trying to do 

all that. 

Ms.IGNAGNI. I think this is very important because the lesson of 

Washington State demonstrates that it’s very hard to undertake 

certain market changes, so-called reforms, absent the goal of universal coverage. If you have everyone in, it’s a whole different proposition to figure out what kinds of market reform mechanisms to 

undertake and I know you’re talking about that in Washington 

now. 

Mr.LARSON. Right now, yes. You also mentioned that HSA is one 

third, in your study, showed one third of the folks who are in an 

HSA did not have coverage or an ability to purchase otherwise before. Did you look at substitution at all? 

Ms.IGNAGNI. We did not look at substitution. We asked small employers and individuals who are purchasing why they purchased it, 

did they have healthcare coverage prior to this. We found a third 

of small businesses didn’t prior to that point offer health insurance 

coverage and a slightly higher proportion of individuals who are 

purchasing hadn’t had coverage before. And what that says to us 

and I know you’re struggling with this in Washington and our 

24

health plans are very much involved in that is that once you reach 

a particular price point for a small business or an individual, they 

are able to purchase affordably. So now the question is how do you 

design the structure. For some people, high deductible policies 

make sense. They’ll take advantage of the early intervention. 

They’ll be able to deal with the costs. For others, they want a more 

scaled down comprehensive package and we think there need to be 

two alternatives available and that’s what we’re working toward in 

the states as well. 

Mr.LARSON. And Washington State, either the Senate or the 

House just passed legislation to allow the offering of a bare bones 

package. 

Ms.IGNAGNI. Exactly. 

Mr.LARSON. Dr. Wilensky, in my time remaining, can you address this issue? Have you looked at substitution at all? HSAs, people moving from the current plan to an HSA, substituting one for 

the other? Or is it too early? 

Ms.WILENSKY. It’s early. There are two kinds of—the best studies 

that have done tend to be where the employers have completely 

switched over so that there isn’t a choice between plans. The studies that I have seen report out where there were options, indicate 

it is a more of a mixed bag than might have been expected, that 

is, it is not just younger, healthier people that are choosing HSAs. 

It is more of a mix and that some people with chronic diseases are 

going into them. Some people are older going into them. But I 

think it’s early to see. It will probably be another two or three 

years to see if there is a strong segmentation. 

The best way to deal with segmentation is to compensate for it. 

To me, the community rating says pretend you don’t know that the 

very sick patients that are coming in from this one area are going 

to be average. Think how much better you’re of if you are a company that’s being paid on the average, but you actually get healthy 

individuals. And so it’s why—I think they’re addressing a serious 

problem, but there are better ways to address it. 

ChairwomanVELA ́ ZQUEZ. Time has expired. 

Mr.LARSON. Thank you. 

ChairwomanVELA ́ ZQUEZ. There’s going to be a vote at 11:45 is my 

understanding. 

Mr. Buchanan? 

Mr.BUCHANAN. Thank you, Madam Chair, and I thank the panel. 

I don’t even know where to get started on something like this. I’ve 

been in business 30 years. I’m new in the House and I’ve built two 

good size firms, a thousand employees in my last firm and still 

have some of that in place, but basically I’m here full time. I 

chaired our local chamber. I was past last year chairman of the 

state chamber. I only say all of that because you know, if you put 

a crisis on a scale of one to ten, this is a ten plus. I mean it’s over 

the top and I know we talked about the tax incentives and I think 

that’s very important, but I remember Mr. Cavanaugh, when he 

was talking. 

In the mid-’80s, I provided all my employees out of Michigan at 

the time, I’m in Florida now, but in Michigan at the time, I provided everybody full coverage. Now I hate to think when I look at 

our insurance for a lot of our employees, we’re paying the indiVerDate 0ct 09 2002 17:52 Dec 19, 2007 Jkt 033615 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\33804.TXT LEANN
25

vidual and sometimes we’re paying a little less than that. The coverage kind of comes down. And the pooling of taxes, I’m all for it 

and I agree because I was at a chamber meeting and I said ‘‘why 

can’t we get pooling?’’ Someone wrote down next to me on a card, 

I was at the U.S. Chamber, up there for a meeting, two words. I 

looked over and it said ‘‘Blue Cross.’’ But, and I don’t know if that’s 

all of it, but that’s part of it. But I do want to say one thing, that 

I’m concerned about and let’s say the tax incentive and I think that 

helps. 

I think the pooling helps, but when I met with a lot of doctors 

when I decided to run for office. And I met with the hospitals. The 

hospitals aren’t making any money. The doctors aren’t making any 

money. I look at our coverage when I go back and take a look at 

that and what’s driving a lot of our costs today is drug coverage, 

mental health, emotional well being and so even if you put these 

incentives, a few of these incentives in place and I think they’ll 

help to some extent and we need to do that minimally. When I talk 

to a lot of the leaders in Florida in terms of the President and Senate and these people that are involved with legislature and trying 

to figure out what we can do more effectively for small business, 

and by the way, in the Florida Chamber we had 137,000 businesses, 95 percent were 15 employees or less. But they create most 

of the jobs. 

But when I talked to them they all say, ‘‘Vern, nobody has any 

answers. The drivers are all going the wrong way in terms of the 

cost, the aging population, this and that.’’ So when we talk about 

pooling, we talk about taxes, we talk about tort reform, we’re the 

42nd worse state in the country for frivolous lawsuits, the whole 

thing on defensive medicine is a big factor. But when you look at 

all of this, it just seems like what are the answers? I don’t know 

that anybody has any answers. I think this is a start and I guess 

Mr. Stottlemyer, I’ll just start with you. If you want to add anything to what I said from that standpoint, but on the pooling, 

what’s—the second part of that is on the pooling, what’s holding 

that up? Before you address that, can you comment on the first—

I just kind of made a lot of general comments, but I’m concerned 

about the overall direction, the cost to healthcare, all the aspects 

of healthcare. And like I said, the doctors, the hospitals in our area 

are all complaining. They’re all losing, not making half of what 

they made 10, 15 years ago, the doctors now. It’s partly Medicare 

and other issues, too. But where is this all going? 

Mr.STOTTLEMYER. I think there was the comment and like you, 

I was an employer for a long time and I too, earlier on, paid much 

more then had to pay less just because of the cost of insurance 

going up. I think pooling is important. I don’t think per se, I 

haven’t met anybody per se that’s against pooling. I think some of 

the issues last year related to community rating. They related to 

mandates in the States and those are tough issues. But we, as a 

society, I think we’re going to have to make choices and I was joking with a Senator yesterday, in all seriousness, that I lost some 

members last year because I came out and said I’m not going to 

put a mammogram on the same level for every woman in America 

as chiropractic services or hair transplantation and things like 

that. Those are mandates in States. To me, it’s not the same. It’s 

26

more important for me to make sure that every woman in America 

has access to a mammogram than it is to include chiropractic services. Now I lost some chiropractors. They’re no longer members of 

NFIB. But those are the types of choices that I think we’re going 

to have to make as we go forward, whether it’s on mandates, 

whether it’s on community rating including things like smoking, 

which we all know has—you buy more, if you will, health insurance 

because you smoke. Those are some of the tough choices as a society that we’re going to have to make if we’re going to move the ball 

forward. 

Mr.BUCHANAN. I am just concerned if we don’t start making 

those tough choices right now, that this thing is just going to get 

completely out of hand. Because a lot of people in our area, especially the small employees and employers, they either can’t get it 

or they can’t afford to give it. 

And I might just ask Mr. Cockey, my son is a realtor. What are 

the realtors doing? I mean I can’t even imagine they can even get 

insurance or they’re paying $1,000 after tax money. We have a lot 

of relatives in the State of Florida. I’m the only one on the Council 

who is from Florida, what are realtors doing, I mean, for insurance? 

Mr.COCKEY. Some of them are just praying, praying that they 

don’t get sick. Some of them have spousal coverage, again as we 

mentioned earlier. There is that concern that they’ll lose that because the escalation of the other employees’ insurance is going up 

and up. So that’s a problem. 

And many of them are just not sure what they would do if there’s 

ever a problem. To give you an idea, the average income for a realtor last year, although everyone thinks that if they sold a $1 million worth of real estate, they made $1 million. That’s not true. The 

average income was $36,500. Of that they carry about $6800 to 

$7000 just in business expenses. So if you take off your taxes and 

then you reduce that business expense that they have, now you say 

that you’re to pay $12,000 to $15,000 worth of insurance for insurance, they can’t do it. They can’t pay the insurance after tax. They 

just cannot do it. 

ChairwomanVELA ́ ZQUEZ. Time. 

Mr.COCKEY. I’ll give you a perfect example of a young lady that works for us. She makes $40,000 a year. She has two children. 

She’s the sole provider for these children. Her current insurance 

today is $750 a month, plus she pays $100 a month for her coverage for her children, for some medical drugs that they need to 

take. 

ChairwomanVELA ́ ZQUEZ. Time has expired. Thank you. 

Mr.COCKEY. So she cannot accomplish life in her present condition. 

Mr.BUCHANAN. Thank you, Madam Chair. 

ChairwomanVELA ́ ZQUEZ. Mr. Jefferson. 

Mr.JEFFERSON. Thank you, Madam Chair. There’s been a lot of 

discussion about tax equity and high-risk pool remedies and issues 

of stabilizing pools and so on. But I want to zero in on this mandate question, just to ask this panel, what do you suggest that has 

to be done about that? Everybody identifies it as a problem. States 

are trying to get after these issues just like we are up here. They 

27

come up with different solutions. Are you suggest that somebody 

the Federal Government requires some customization of these 

packages on the state level and if so, how would that be accomplished? 

Ms.IGNAGNI. Mr. Jefferson, one of the things that we have proposed is in the context of our universal coverage approach where 

the Federal Government would be giving the states a helping hand 

if they achieve specific objectives. One of those objectives would be 

to set up a regulatory construct that would make it possible for the 

purchase of affordable healthcare coverage. And we’ve given two 

options at a minimum that should be looked at: an actuarial 

equivalency of HSA coverage or a basic package of benefits which 

would involve prevention, wellness, a certain number of hospital 

days, a certain number of physician visits, prescription drugs, catastrophic coverage on the back end. Those are the kinds of packages 

that individuals can buy affordably, want to buy and that would 

give them a broad allowance of choice. 

Mr.JEFFERSON. How would you limit the states in this, to these 

provisions? 

Ms.IGNAGNI. I would say that if you’re doing a broad coverage 

strategy or in the context of the appropriations, here’s one for example, every year you have to appropriate money for the risk pools, 

so it’s sent to states from the Federal Government. As part of that, 

as a condition of that, you could create the requirement that states 

create these regulatory corridors. That would be one way to do it. 

In the context of additional subsidies that would be provided if 

you—if we move toward a universal coverage proposal, that would 

be another. But the first would be a very quick thing that could 

be done right now. 

Mr.STOTTLEMYER. Can I add something? We already do that. For 

those companies that are self-insured under ERISA, they’re exempt 

from state mandates. They’re big businesses. The small business is 

not. State mandates apply to small business. Big companies that 

are self-insured under ERISA are exempt from state mandates. 

We’re not suggesting that. 

I met with John Sefford who is the CEO of the American Cancer 

Society, the Chief Medical Officer. And one of the things that he 

talked about, which I liked, is evidenced-based medical mandates, 

evidenced-based. Things that prevent premature death, prevention, 

wellness, those types of things. We’re going to make some choices. 

I mentioned earlier about chiropractors. There’s nothing wrong 

with chiropractic services. They’re good. But if you’re going to get 

the invincibles, the young people into the pools, you’re going to 

have to charge them less because they don’t need everything that 

somebody who is in a different age or different place in life needs 

from an insurance standpoint. 

Mr.JEFFERSON. Dr. Wilensky, in your testimony you said that at 

least some place there that there’s not much talk about the rise in 

medical costs, the costs of medical services, generally, as we talk 

about this issue of the cost of medical insurance. These are certainly joined issues. And that if you’re going to actually get after 

the one you have to figure some way to get after the other at the 

end of the day, no matter what is said and done here. 

Ms.WILENSKY. Right. 

28

Mr.JEFFERSON. Make the point further and tell me how we can 

get at these things at the same time in order to make sure we actually address them? 

Ms.WILENSKY. Healthcare costs have been rising about two to 

two and a half percentage faster in real terms, that is adjusted for 

inflation on a per person basis on average for the last 40 to 45 

years. If we don’t figure out how to change that, we’re going to 

overwhelm the federal budget with Medicare and Medicaid as 

major entitlements, in addition to overwhelming what’s going on in 

the private sector. And the biggest driver for rising health insurance premiums is what’s going on in the healthcare market. 

It’s not an easy fix, the short answer is no more and pay for it 

better. Someone, I think Mr. Buchanan, commented his physicians 

are complaining that they’re making as much money under Medicare. The fee schedules have been either frozen by the Congress or 

allowed to increase very small amounts of 1.5 percent as opposed 

to the scheduled 4 percent reductions that were in place. But 

spending, under Part B Medicare, which is where the physicians 

are, grew 15 percent. It is a huge increase in the volume and intensity of services, some of which are probably needed, many of which 

are probably very marginal or questionable, some of which may be 

flat and inappropriate. It’s redesigning how we pay for things so 

that we are rewarding the institutions and the clinicians who do 

it right, do it right the first time, provide good patient oriented 

care. It unfortunately requires a lot of change in both the insurance 

and in the pay structure. So it’s not an easy answer, but boy, we 

better get busy on it. 

ChairwomanVELA ́ ZQUEZ. Thank you. Time has expired. Ms. 

Musgrave. 

Ms.MUSGRAVE. Thank you, Madam Chairman, I apologize. I 

wasn’t able to be here earlier and also to the panel, not able to 

hear all of your testimony. You know, I agree so much with what 

Congressman Bartlett said about how the employees should own 

the policy because human nature, we all know we act differently 

if we know what we have and how we’re going to pay for it is a 

consideration. And I still think and I admire what you did with 

your employees, Mr. Stottlemyer, but a lot of people still don’t 

know, nor do they care, what something costs. And I really watched 

in Colorado when I was in the State Legislature about the mandates that came forth every year and every one of them really 

wasn’t going to cost anything. In fact, it was going to save money. 

You know, we heard that time after time and yet, you know, you 

get this product that’s all loaded up with these mandates. 

And I don’t know if there’s been any discussion before, but Congressman John Shadegg from Arizona had legislation previously 

that would allow insurance to be purchased across state lines and 

to me that sounds so reasonable, you know, especially my children, 

can shop for insurance that was affordable and suited to really fit 

their needs at this particular time in their young adult life. I would 

like your response to that and anyone can respond on the panel. 

Ms.WILENSKY. Makes sense to me. Again, anything that helps 

pools and that allows for a way to circumvent some of the barriers 

that now exist. I do have some sympathy with the issue that Karen 

Ignagni has raised is that this opens up a bigger door and not just 

29

limiting it to those who are self-insured, to get around some of the 

costly mandates and helps pooling. We do ultimately have to go 

back and fix the problem for those that remain for whatever reasons. You do start setting up very unfair playing fields and that 

will probably come back to have some unintended consequences. 

Ms.MUSGRAVE. I also was interested in your remark, 10 cents on 

the dollar for medical malpractice, and again, I would agree with 

Mr. Bartlett in that I think that’s very hard to calculate, because 

how do you get into a doctor’s head and try to figure out how he 

or she practices medicine with medical malpractice hanging over 

them all the time? And you know, they probably don’t even know 

sometimes why they make the decisions they do, but always aware 

of the fact that they’re likely to get shot at when they behave in 

a certain way. So it’s hard to calculate and I would say that 10 

cents on the dollar is pretty remarkable, but it’s probably higher. 

Ms.IGNAGNI. The Department of Health and Human Services has 

done some very excellent work about the direct costs and the indirect costs and the sum total leads you to approximately 10 percent. 

You may be right. It may be higher. That’s the only—the number 

that we have is the number that PriceWaterhouseCoopers was able 

to calculate from data that we know that are reliable than exists. 

But I think this larger issue that Mr. Bartlett was getting at and 

that you’re getting at now, what is the dispute resolution system 

that we need to have in our country? Is it through the courts or 

is there a better way? In the health plan community, we’ve made 

a commitment about 10 years ago to be very affirmative about the 

concept of independent review, third party review. We think that 

concept could be imported into the med-mal arena as Mr. Bartlett 

was beginning to go to, in a very productive, affordable, predictable 

way, so that patients can be protected, but at the same time we 

don’t have these extraordinary costs. If you marry that with the 

kinds of strategies that Dr. Wilensky was talking about which we 

have now developed some path-breaking experience and track 

record and tools with, with respect to changing the way healthcare 

is paid for in the hospital arena and the physician arena and lining 

reimbursement up with performance and outcomes, all of these 

strategies taken together go to Mr. Jefferson’s question about how 

do you get the cost of the system down and do it responsibly so no 

one feels they can’t move into the system. 

Ms.MUSGRAVE. Thank you, Madam Chairman, and thank you, 

panel. 

ChairwomanVELA ́ ZQUEZ. Thank you. Mr. Akin. 

Mr.AKIN. Thank you, Madam Chair, for fitting me in for a question here. I think this is my Democrat question for the year, but 

it’s a serious one. I understand the cost of medical liability and 

some percentage there. I understand there’s also costs in 

healthcare that if we could knock down the number of McDonald’s 

french fries that people eat that there’s a wellness kind of piece 

that also a component on Americans living healthier lifestyles and 

that’s actually a pretty good chunk of change. I’ve heard that some 

of the insurance people I’ve talked to have said they think that’s 

even bigger than the liability than the trial attorney piece. 

My question, this is my liberal question, my understanding is as 

much as I’m a pro business guy, that the insurance companies, at 

30

least in some markets, have basically got a lock and a monopoly 

on medical insurance. They have so tied up the provider systems 

that there’s no one else that can compete with them. And does that 

mean that we need to take a look at a monopoly kind of practice? 

And are there some things we should do? First of all, do you agree 

with the premise, and second of all, how do we do that and still 

preserve the free enterprise kind of system and approach to 

healthcare? 

Ms.IGNAGNI. Well, in the insurance community, we don’t do exclusive contracts. We don’t so-call lock up providers. And you see 

in markets all around the country that insurers move in and out. 

What’s more predictive of whether or not you have a broad number 

of carriers in a market is what is the state regulatory structure 

like? How accessible is it? How easy is it to bring new products into 

the market? 

Mr.AKIN. So if there’s a state that’s got just one insurance company servicing the whole state, such as I think it’s—what is it, 

Iowa? Is that the one that just has one? 

Ms.IGNAGNI. I was just in Iowa with four insurers. We were visiting the Governor and the State Legislature, so I can tell you 

there is not simply one insurer in Iowa. And you find that in virtually every state around the country. So it is a question of what’s 

the regulatory structure. Could we open up and allow plans to offer 

the range of benefits, the small packages that we’ve been talking 

about and have that kind of competition. We’ve been advocating for 

that. We have some very specific proposals, but thus far, we 

haven’t been able to succeed in achieving it. 

Mr.AKIN. So you’re saying that could be solved at a state level? 

Ms.IGNAGNI. Well, no. I actually now, when responding to the 

previous question, we have some very specific suggestions of what 

the Federal Government could do to require states to move in that 

direction. 

Mr.STOTTLEMYER. That is one of the reasons why we’re for pooling, because it gets you out of the state environment. As I said earlier, I don’t begrudge Blue Cross/Blue Shield in North Dakota for 

having 92 percent of the market. They’ve worked hard to get that. 

But if you’re in North Dakota, it’s very difficult for somebody to 

come and be successful in that environment. That’s just an economic reality. So pooling, in our view, would allow somebody in 

North Dakota, a small business owner, to get into a national pool. 

And if you get into a national pool and the national pool is large 

enough, in our view, it would create more competition and more—

Mr.AKIN. Which you say pooling, you mean AHPs? 

Mr.STOTTLEMYER. It could be AHPs, small business health plans, 

just the fundamental concept of pooling. And I think as Dr. 

Wilensky said earlier, you have to stabilize the pool. You can’t have 

people come in and out. So I think the idea of some form of tax 

incentives or incentives to keep people in the pool and I think 

Karen said that as well, makes a lot of sense. But pooling, fundamentally, if you get a bigger pool, people are going to want to 

compete for that pool, and it’s going to give more competition. 

Ms.WILENSKY. If you see a place where there are one or two insurance companies, don’t look to the insurance companies, go look 

to the state regulations, because there’s nothing about the nature 

31

of the business that allows those kinds of barriers to be erected. 

And it’s usually something about the requirements that states have 

put in place that have resulted in that. 

Mr.AKIN. Anybody else? Thank you, Madam Chair. That’s my 

last one for the year or so. 

ChairwomanVELA ́ ZQUEZ. Thank you, thank you. And I have two 

or maybe three more questions. I just like for them to be as brief 

as you can since they’re going to call for a vote soon. 

Dr. Wilensky, you talked about few criteria that make up health 

insurance costs. Medical underwriting is used in both the individual and group market to set premiums. However, unlike the individual market, insurers do not review each individual’s medical 

record in the group market, rather, the insurer reviews the entire 

group’s history, taking into consideration it’s claim history, demographics and geographic location. Medical underwriting appears to 

have a significant impact on cost. 

I would like to know whether a purchasing pool could successfully implement a community rating mechanism or some alternative to achieve cost savings? 

Ms.WILENSKY. The problem that community rating is designed to 

address is to spread the risks. My belief is the way to better fix 

the same problem is to risk adjust the groups who have higher expenses coming in through a pooling mechanism or through some 

kind of subsidy like the high risk pool that Karen Ignagni mentioned. 

My problem with community rating per se is you ask people to 

pretend they can’t see that some groups aren’t going to be more expensive and to treat them as though they weren’t. So the question 

is how do you compensate if you have somebody who is a complex 

diabetic or an HIV-AIDS or a disproportionate number of very sick 

individuals? You need to allow them to come in. You need to compensate either at the individual or the company level those kinds 

of groups that will experience higher costs. I think it is a more feasible way to keep a group going than to ask people to pretend as 

though the expenses will be average when they’re not going to be. 

ChairwomanVELA ́ ZQUEZ. Any other comments? Ms. Ignagni? 

Ms.IGNAGNI. I agree with that, Madam Chair. I think that’s well 

stated. 

ChairwomanVELA ́ ZQUEZ. Okay. Mr. Stottlemyer, it seems that 

based on the testimony that we received, your group, NFIB, and 

AHIP have a different perspective on what a small business health 

plan will look like in terms of whether or not as AHIP suggests 

that on groups of 50 or less, should participate in small business 

health plans. What do you think of that? 

Mr.STOTTLEMYER. Well, I hope we support the fundamental concept of pooling and I think we do. I think there’s some differences. 

I think in her testimony talked about a smaller number of employees. I think it was 50 and we would support a larger number of 

employees, 200, if you will, coming in and the tax incentives could 

be for even smaller companies. It’s not suggesting you’d have to do 

the tax incentives for a 200-person company. You could split, if you 

will, those size companies that come into the pool versus where you 

actually apply the targeted tax incentives. Again, I would hope we 

would be in favor fundamentally of pooling. We’re talking about 

32

bringing people into the pool which is going to ultimately spread 

risk and hopefully allow cost to be less as well. 

ChairwomanVELA ́ ZQUEZ. Ms. Ignagni, are you suggesting that we 

should limit it to 50 employees or less? 

Ms.IGNAGNI. The reason that we made that observation, Madam 

Chair, is that we have a whole regulatory framework now around 

certain definitions of small employers, HIPAA, for example. 

And so the question is how do you solve this problem as quickly 

as possible and do it in a way that gets at the problem, but we 

don’t then start creating particular strategies that we have to undo 

two or three years from now. We saw that with MEWAs and I 

think that having looked at that experience, we don’t want to move 

down that way in the future. So that’s why we’ve proposed a very 

specific series of strategies to solve the problem, but not necessarily 

create those unintended consequences. 

ChairwomanVELA ́ ZQUEZ. Thank you. Mr. Cockey, while all small 

businesses face great challenges in getting health insurance, the 

self-employed face even greater challenges. They usually pay higher prices and they do not even have the same tax treatment as 

many of the corporate counterparts. 

As an organization that represents many self-employed realtors, 

can you talk to us about some of the unique challenges that your 

members face? 

Mr.COCKEY. Well, the unique challenge is by the design of our 

industry and how we earn our money is that we are not salaried 

employees or guaranteed salary. So the unique part about our business is that our income fluctuates from month to month, so that 

in good times we have money to pay the bills and in bad times, we 

have less. So that’s the big challenge for us to have a very, very 

high health insurance program because we don’t necessarily have 

that common income as many employers and employees would 

have provided. So that’s a big challenge for us. Our expenses don’t 

go away for operational side, but our income and revenue truly 

have dramatic changes. We are now, as an example, the wonderful 

market that we’ve been in, we are now in a very serious transition 

change where the income of many realtors are going to be much, 

much less and that’s going to be a challenge to pay their bills. 

ChairwomanVELA ́ ZQUEZ. Thank you. Now Ms. Ignagni, in terms 

of policies sold to the self-employed, what are some of the reasons 

these policies tend to cost more than similar policies sold to large 

firms? 

Ms.IGNAGNI. I think the reason, one of the primary reasons, 

Madam Chairwoman, is the reason that Dr. Wilensky talked about 

very effectively which is that when you small employers, what you 

find the reason for higher, disproportionately higher healthcare 

costs is that you have one or two members of the group with serious catastrophic illnesses. So if we can figure out a way to target 

those individuals for additional subsidies or the health plan that’s 

covering them for additional subsidies, you can customize that or 

put them in higher risk pools. There are a number of ways to do 

it. And as I say, we’re going to have quite a number of suggestions 

very soon, in addition to this. That would be the way to make these 

policies affordable for small business, to keep people with lower 

33

healthcare costs, not disproportionately raise theirs and be allowed 

to expand coverage. 

I think that the question you asked Mr. Cockey is very—it goes 

hand in hand with that which is that tax treatment. It’s unfair for 

people who are not attached to a particular employer to have to 

spend 7.5 percent of their adjusted gross income before they can 

get a healthcare deduction for their insurance. 

ChairwomanVELA ́ ZQUEZ. Dr. Wilensky? 

Ms.WILENSKY. There are a couple more reasons that it’s expensive. One has to do with the function finding out about the benefits. 

Mr. Cavanaugh described what he has to go through. If you have 

some kind of a grouping mechanism, that function can be done for 

the group, rather than having each individual have to do that. It 

will become more like having a benefits manager for a large firm. 

So you ought to have a broader number of people be able to take 

that fixed cost of figuring out what are the healthcare plans that 

make sense. 

The second thing is that marketing costs are more expensive for 

very small firms and that also ought to be alleviated, not completely eliminated, but alleviated with pooling, because again rather than have to go to each and every small firm of three or seven 

or nine employees, you can go to the pool and they will have made 

those. So in addition to any risk problems, you really will get a 

spreading of the administrative costs that’s now borne in the loading factor that individuals pay through their brokers. 

ChairwomanVELA ́ ZQUEZ. Yes, Mr. Chabot. Thank you. 

Mr.CHABOT. Thank you, Madam Chair. If it would be okay, I 

think I’ll let Mr. Fortenberry go. He just came in and does have 

questions. 

ChairwomanVELA ́ ZQUEZ. You’re recognized. 

Mr.FORTENBERRY. Thank you, Madam Chair, and I apologize for 

missing the majority of the hearing. Thank you all for coming. Obviously, this is a huge concern to all of us. It is a compelling need 

for us as policy makers to address the issue and to allow, to help 

overcome any deficiencies in the private market, particularly, so 

that we can help more people access insurance, health insurance. 

I want to give you all a specific example and maybe we can work 

back towards some of your general comments. I met with a person 

recently. She’s a realtor, an independent agent. She’s in her 50s. 

She was paying something like $1,000 a month for coverage and 

simply couldn’t afford it any more, so she just drops it. Now given 

the tax treatment of a person in that set of circumstances, her income size, her inability to afford that level of insurance, where are 

we left for a person like that who would not have an inclination, 

obviously, to go into the emergency room if something came up and 

wouldn’t have an inclination necessarily to use a community health 

center, wants to take responsibility but obviously can’t deduct 

costs, as you are pointing out, until they’re at 7.5 percent of income 

and you can’t deduct the premium costs. There are, of course, 

health savings accounts opportunities if that can be combined with 

some type of extraordinary coverage, but again, I think we’re going 

to have more and more people who are caught in this dilemma who 

simply don’t make the income levels high enough without being 

able to attach to some group mechanism that they can leverage 

34

down their costs by spreading out the risk or some other form of 

tax treatment that makes this option more readily available. 

Ms.IGNAGNI. We have proposed setting up a universal health account in the tax structure which would provide the same tax treatment that individuals received if they are attached to an employer, 

but also provide a portable vehicle for subsidies. Some of these individuals may qualify as the states move forward in expanding coverage for state subsidies. Eventually, when Congress moves forward on this question, they may qualify for federal subsidies, but 

in the interim, there may be some monies that the employers are 

contributing so you can put all of this into an account and from 

there they can purchase the proposal that is right for them. But 

until we address the state mandate question that we’ve been talking about, the issue of affordable, available coverage for them is 

one that is a very, very high hurdle, which is why we’ve put so 

much emphasis on what should states be required to do by way of 

regulatory constructs. You couple all these things together and 

then you can make the programs work. And then our responsibility 

in the health insurance arena is to make sure that we are reorienting the payment system, we’re focusing on outcomes and quality, and there’s much very positive news to report. 

This is the fourth year where the rate of increase in healthcare 

premiums has gone down. That almost never happens. It doesn’t 

hit the front pages of any of the national newspapers. If the opposite had occurred, it would. 

Mr.FORTENBERRY. But it’s still what, 8 to 12 percent, generally 

in that range? 

Ms.IGNAGNI. No, it is seven. It’s going down for next year. And 

that’s on average. So if we were to look to the kinds of strategies 

that we’ve been talking about today, married with the new set of 

tools that we’re bringing into the market, I’ll give you an example. 

Three years ago, prescription drug expenditures were rising at an 

annual rate of more than 20 percent. Now it’s down to six. Because 

we’ve implemented strategies. We’ve encouraged generic drugs. 

We’ve set up tiers. We’ve done a whole range of things to expand 

access, but get the cost down. We’re doing precisely the same thing 

now on the physician side and on the hospital side and we’re working collaboratively with the healthcare practitioners to set up what 

should be the criteria for payment. 

So all of this is going to flow in a productive way, but we have 

to get that regulatory construct addressed. 

Ms.WILENSKY. The tax treatment is clearly unfair. We have complete agreement that it is unfair to have people who don’t get employer-sponsored insurance have to use after tax dollars. Everyone 

else uses pre-tax dollars. 

My other advice is that unless she has major pre-existing conditions that puts her in a very special category, she should go on the 

Internet and find out what other kind of insurance is available. 

That seems extraordinarily expensive. 

Mr.STOTTLEMYER. Just to add on, the 7 percent, that may be 

good news, but again, there’s a big difference between larger employers and small employers and I’m highly confident that 7 percent is much, much higher for small employers, even this year and 

next year. 

35

Mr.FORTENBERRY. The market is segmented, basically. Larger 

employers, the ones who might be tracked or cover the broad numbers of people would be on average seven versus a higher rate of 

increase and for individuals or small businesses without large risk 

pools? 

Ms.IGNAGNI. We have actually done—we have the most comprehensive survey of the small employer marker. And in the survey 

and we highlighted some of that in our testimony, you will see the 

average rates for small employers across the country. In certain 

states those rates are very, very high because of the issues we’ve 

been talking about in terms of the regulatory structure. We can 

look at the large numbers of carriers in the states. We can look at 

the competition, but we do know that there are some regulatory 

challenges. But I’d be delighted, Madam Chair, to provide a full 

copy of that survey for the Committee, if that would be helpful. 

ChairwomanVELA ́ ZQUEZ. Sure. Thank you. Mr. Cockey. 

Mr.COCKEY. The thing that you mentioned about your realtor acquaintance, unfortunately, she’s one of 336,000 people that are uninsured. Now either they’ve become uninsured because they can’t 

afford it, never signed up for it to begin with, or they’ve had to cancel it because now their income has dropped to a point that they 

can’t afford it. She has the ability to deduct that expense as an 

independent contractor for her coverage, but the unfortunate part 

is if I don’t have the income, the deduction has no benefit. 

ChairwomanVELA ́ ZQUEZ. Mr. Chabot? 

Mr.CHABOT. Thank you, Madam Chair. I’ll be very brief because 

we have votes on the floor. I’ll just conclude with a comment. In 

my question, Mr. Stottlemyer had mentioned earlier about kind of 

the frustration with having past association health plans. I believe 

five times in the past six years, whenever the Senate—and died 

over there. I’ve had and many of my colleagues have had similar 

frustration in trying to address one of the issues that increases the 

cost and we’ve talked about that. That’s defensive medicine and 

frivolous lawsuits and medical malpractice suits. So it was frustrating to have passed the Health Act and other pieces of legislation which dealt with that issue as well that passed the House, but 

then went over and died in the Senate. 

Now my party is no longer in control of either House and I’m 

hoping that my colleagues on the other side of the aisle will have 

more success in passing such legislation in the Senate than we did. 

ChairwomanVELA ́ ZQUEZ. Well, we need the President on board 

too. It’s nice when he says that yes, I support association health 

plan, but he needs to call—well, when the Senate was in control 

of the Republicans, he needed to have placed a phone call and 

asked them to bring that vote forward, that legislation to a vote. 

Mr.CHABOT. Maybe we can call him together. 

ChairwomanVELA ́ ZQUEZ. I welcome that. Let me thank all of you. 

This was a great discussion and I can assure you it is an important 

issue for this Committee. We do understand that in order to tackle 

the issue of the crisis of healthcare in this nation, we have to address the issue of the lack of insurance for small businesses. This 

is the first hearing. We will continue with this dialogue and I want 

to take this opportunity to thank all of you for your participation. 

[Whereupon, at 12:05 p.m., the hearing was concluded.]

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