16

Mr. Mica. Thank you, Mayor Schundler.

We'll withhold the questions until we finish the panel. I would
like to recognize Dr. Eck now, please.

Dr. Eck. I come before you today as a physician as well as a
healthcare consumer. I have studied the history of our healthcare
system from the development of penicillin to the inception of the
huge Government programs, Medicare and Medicaid in 1965, to the
phenomenal healthcare inflation that has ensued. I am convinced
that every time the Government has intervened to “help” it has
made things a little bit worse. The Government cannot and should
not be making medical decisions, yet it cannot help but do so when
it has decided it is going to pay the bills. Now I realize the Govern-
ment as an employer is different from the Government as the pro-
vider of healthcare to people who are not under their employment.
So I want to make a distinction there. So Medicare and Medicaid
are different from the Government employees.

But let me just continue. The question before us is whether Med-
ical Savings Accounts should be offered to Federal employees. But
the broader question is whether or not they are good policy at all.
If so, what should they look like? It is clear that we can’t provide
an infinite amount of healthcare to every American. Now I know
that is an unpopular thing to say, but it is just like saying we can’t
say every American deserves a Cadillac and so let’s just buy one
for everyone, or everyone deserves to live in a 10-room mansion.
Obviously economics would say that we cannot do that.

So someone has to decide in healthcare where to draw the line.
The question is who. Should it be an HMO executive? Should it be
the Government? Should it be the physician? Or should it be the
individual patient? I believe that there are great pitfalls with a dis-
interested third party or the Government making rationing deci-
sions. Physicians when unrestrained will do as much as possible for
every patient. This leaves the individual patient and his family
being the best ones to decide, provided that they care what the care
costs, and thus will not overuse it.

Medical Savings Accounts pay for the routine and preventative
care, coupled with high deductible indemnity insurance, leaves the
patient with the most control over his own destiny. This is why
they are an excellent idea.

If I had my way, there would be two requests I would have of
our Government that would do the most to solve the healthcare
cost crisis. Once the cost crisis is taken care of, it will be much
easier for us to take care of the poor.

First, move the tax break for healthcare from employers to indi-
viduals. This would cause the insurance companies to have to com-
pete for individual consumers rather than employers, and would
allow people to choose the best priced plan for the value provided.

Second, we have to stop piling new laws on top of bad laws to
fix the problems that the Government has caused. A great example
would be the new Patient Protection Act that’s currently being pro-
moted. Patients are being forced into HMOs that they hate because
their employers put them there. HMOs exist largely because the
Government has mandated that large employers ‘offer them. But
they exist for the purpose of concealing the fact that they are ra-
tioning medicine. Now the Government has to micromanage the


37

would be very, very well served by having a Medical Savings Ac-
count.

In no other program is there such flexibility. You can’t say this
is for the wealthy and just for the healthy. The other alternative
is if this is a diabetic or somebody who has more ongoing
healthcare needs, that person wants to be able to go to the
endocrinologist. HMOs say you can only go to an endocrinologist
once, and then their family doctor has to take care of all your insu-
lin pump and all these very complicated things. These people value
the choice of being able to go to their own doctor. It sounds to me
like in Mayor Schundler’s program, it would cost them only $200
out of pocket, compared to say $500 or $1,000 deductible. These
people would benefit greatly.

We had an example in our office. Everybody in our office has a
Medical Savings Account. One of our workers needed a thyroid
scan. She called up one hospital and it was going to be $750. She
said, Oh, I’m going to be paying that out of my own pocket so let
me just check around. She called the next hospital and it was $350.
So my husband said to her, he is also a physician, “Call around.
Keep going.” She called another hospital and that same test was
going to be $150.

Now if she had any other healthcare plan, she wouldn’t have
checked. She would have gone to whatever is closest. She would not
have cared what anything cost. But you multiply that type of work
by the patient by millions and millions of transactions, and you will
find healthcare costs go way down.

Mr. Mica. Thank you for your observations.

Dr. Goldfarb, you seemed to be one of the most rabid advocates
of Medical Savings Accounts or savings accounts. If I belonged to
an HMO or managed care, one of the things that folks point to is
that it does provide for preventative care and people are more like-
ly to go and get preventative attention with an HMO. Maybe the
premiums are more. Now wouldn’t this work in opposite fashion for
MSAs? If you have got to take money out of your MSA for prevent-
ative care, aren't you going to be less likely to make those trips to
the physician? What experience have you seen from a_ practical
standpoint or what would you say would happen under MSAs?

Dr. GoLpFarB. I think it is a very complicated question. First
you have to get a person who wants to go to the doctor to have
whatever procedure, colonoscopy, say.

Mr. Mica. I’m not anxious to go for that. [Laughter.]

Dr. GOLDFARB. I am just using it for an example. But first some-
body has to want to go to the doctor. I have to want to go and be
screened. If you don’t want to go, that is one situation. If you want
to go and your internist says well, I have to send you to a GI guy.
He is going to charge the HMO money. Maybe you don’t need it.
You don’t have a positive enough family history. Let’s do stool for
guaiac, for blood, and we’re not going to send you for a colonoscopy.
I can tell you this has happened to people that I know. Even
though they have had a family history, somebody in their family
in their 40’s had colon cancer, they are not getting referred by the
HMOs. It sounds like it’s a health maintenance organization. Their
benefit to the insurance company would be to send them for the


33

Medicare has many restrictive cules that waste money also. People with Severe
infection have to stay in the Lospital for four to six weeks of antibione trearment, which
is much mote expensive than homte care, when all other more enlightened pians allow
home IV therapy. Other patients much be admitted to the hospital for treatments to be
covered.

‘Yhere are hundreds of such money-wasting problems, and hundreds of money-saving
ideas that should be implemented.

MSAs should be extended to car insurance and to the Social Secunty system. If
applied to the Social Security system, and if the system were "privatized," a retiree would
have onc million dollars of cash in his account upon retirement, instead of five hundred
thousand dullars in IOU's. What would any of us prefer?

Ive talked about MSAs and the power behing how they work It'sa return ta taking
personal responsibility for your health Youll be more interested in staying healthy. For
car insurance, you will have incentive to become a better driver and to sue less.

Lurge you to apply Medical Savings Accounts 0 federal workers, but also fo take the
message to every Mayor, School Board Member, and public citizen, to let them know
that MSAs are available. that they are better than our current insurance products. and that
they save moncy. We'll all be patients someday, myself included, { want the choice of
free and vigorous health wre system to be there for me, my childrea, and my children's
children when the time comes. | feel the government and the insurance companies must
get out of our lives and out of managing health care.

{t's « question of Feonomics 101 and Folitios 101, Economios (01 teaches that it”
citizons are given an incentive lo save, they will. Politics 102, however, says that it is
hard 16 change the system and think “out of the box.” T hops we can get beyorid base
politics and help correct our medical system.

Economics 101 applics also to the problem of cigaremtes. 1 would urge Congress to
pass «tax cquivaleni iu any proposed settlement with the tobacco companies. This would
mean We could have moncy coming in immediately to pay for health care bencfits. It
‘would also cut out lawyers’ contingency fees that may approach $100 billion dollars. 1
cant sce wasting $100 billion doflars of moncy by having a scttlement. Also, the tax
should be passed in one fell swoop, not in small increments. Economics 101 says that
with » huge price increase, oar teenagers would be less likely to smoke. If you raise
prices slowly, with a scttlement, very few people with stop smoking. In Europe, a pack of
cigarettes costs $4.00 # puck, and $0% of the population still smokes.

Thank you.

Sidney Goldface


42

on adding more and more bureaucracy to a situation that maybe
shouldn’t need that bureaucracy with certain changes. Just one
other thing about MSAs and the portability, which is a big plus,
is that of the 87 million estimated uninsured in the United States,
a half of which are uninsured for 4 months or less, if they had
MSAs and the money in their accounts that they could carry over,
we would eliminate half of the uninsured in the United States. Ba-
sically when you look at only about 15 percent of the uninsured are
uninsured for greater than 2 years. So it certainly would——

Mr. SCHUNDLER. Congressman, I just want to throw out one
other idea. When you talked about pilots, one group that you could
target would be congresspeople and their immediate staffs. So you
would have such direct experience with it, you become the most
significant experts in the country. I think you would find that you
had incredible bipartisan support for this. You would find other
Federal employees complaining that you have given yourself a ben-
efit that they are not entitled to. So you would find tremendous
pressure put upon you to expand it for all Federal employees.

Mr. Mica. That might be a good approach.

Dr. GOLDFARB. Give it to Hilary Clinton.

Mr. Pappas. I have just a couple of other questions. One is for
Dr. Eck. I remember, I probably should have asked you this before
the hearing. But as you were speaking, I remember reading an op-
ed piece that you had written a few years ago that appeared in the
local paper, where you spoke of the experience of one particular
woman who had had some bad experiences with I guess it was an
HMO. It was I guess she was in a coma or something like that. Do
you recall the story?

Dr. Eck. I think I can remember the story. It was a woman that
had contracted HIV before she came to this country. She was mar-
ried here and was well until she got sick with AIDS. Her husband
worked for a company that only provided an HMO. He was happy
to have anything, but it was amazing how I watched the care that
this woman got. She wound up having a stroke at the age of 36.
She was home. The HMO wouldn’t let her go into the hospital.
After a couple hospitalizations, they said, you just stay home. But
I went to her house. She was lying on a couch and her 4-year-old
daughter was suctioning her. She couldn’t move and her 4-year-old
daughter was suctioning her. I was able to get on the phone and
find out who the case manager was. She was two States away and
had never seen the patient. 1 said I would like to paint you a word
picture and I described the scene. A hospital bed arrived the next

day.

But she had a doctor who was paid $10 a month to take care of
her. That doctor was overwhelmed with other patients and just
didn’t really do anything for her. The other sad part about this,
which is pointed out by what I said before about the job relation,
her husband missed getting to work on time a couple of times be-
cause of having to take care of her. They saw that she was costin;
them a lot of money through the insurance system so they ende
up laying him off. So she lost the poor insurance she had anyway.
At least she had her prescriptions with that HMO.

It was really a pathetic scene. It wound up that the church took
care of her. People came in with several volunteers. They went onto


10

at this time, I'll briefly explain our experience in Jersey City with
Medical Savings Accounts.

In 1994, Jersey City became the first governmental entity in the
United States to offer Medical Savings Accounts to its employees.
We wanted to conduct an experiment with MSAs, so we obtained

ermission to withdraw temporarily our management employees
Rom the New Jersey State Health Benefits Plan to enroll them
with Blue Cross/Blue Shield of New Jersey, who was in fact the
manager of the State Health Benefits Plan at the time. So we
didn’t even have to change people that the city was working with.

Our management employees were allowed to choose either from
the three optiors that were constructed to exactly mirror the State
Health Benefits Plan, which are a low deductible, fee-for-service in-
demnity option; an HMO option; and a Preferred Provider Option.
Or a fourth new option, Medical Savings Accounts.

Fifty-six percent of our management employees chose the Medi-
cal Savings Account option, including all of those who had pre-
viously opted for the standard indemnity option. Under our Medical
Savings Account plan, the city purchased the catastrophic insur-
ance policy that covered 100 percent of a family’s medical costs
above a $2,000 deductible. The city then placed an additional
$1,800 in a Medical Savings Account that an employee could draw
down to pay for most of that deductible for his family. There was
a $1,400 amount for individual policies. Putting these elements to-
gether meant that a family of four would at most have to pay $200
in out-of-pocket deductible expenses for medical care in any given
year. That $200 contribution came in the form of a back-end de-
ductible. In other words, an employee would not have to reach into
his Pocket for the first $200 of medical costs until the $1,800 in the
Medical Savings Account had already been expended. If a family’s
total healthcare costs fell below $1,800 in a given year, the money
remaining in a Medical Savings Account was refunded to the em-
ployee at year’s end. The employee was free to use that money as
he or she saw fit.

Employee satisfaction with Medical Savings Accounts was ex-
tremely high. The vast majority of new city employees choosing
healthcare options opted for the Medical Savings Account plan.
Even initial foes to this experiment among the city’s civil service
management employees, soon came to praise the plan. This
shouldn’t come as a surprise. In comparison with the standard in-
demnity plan, a Medical Savings Account reduced out-of-pocket
healthcare expenses for major healthcare users, gave money back
for minor healthcare users. In fact, the average employee family re-
ceived $1,100 back at the end of the year, and it preserved absolute
freedom of choice for all.

What we set out to prove in Jersey City was that Medical Sav-
ings Accounts would prove less expensive than traditional low-de-
ductible indemnity plans, and would provide superior health cov-
erage for employees. Four years later, we are confident that our ex-
perience has proved successful. With final renewal pricing based on
several years of real claims experience, the renewal cost to the city
for families choosing the Medical Savings Account option, including
both the catastrophic premium and the Medical Savings Account


0

Introduction

Mr. Chairman, | am Janine Kenna, Associate Manager for Product Development for Merrill Lynch. Thank
‘you providing me with the opportunity to address the Subcommittee today on the subject of Medical
Savings Accounts (MSAs). Merrill Lynch provides investinent, financing, insurance and related services
‘on a global basis. In particular, Merrill Lynch is the industry leader in the establishment and maintenance
of Individual Retirement Accounts (RAs). Because MSAs are in many ways similar to IRAs, Merrill
Lynch used its IRA experience and infrastructure to become the first full-service brokerage firm to offer
MSAS to its clients.

Today, 1 would like to share with you the experience that Merrill Lynch has had with MSAs since they first
became available in January of 1997. 1 hope this will help the Committee in its consideration of legislation
that would provide federal employees the opportunity to choose MSAs as an option under the Federal
Employees Health Benefits Program (FEHP).

At the outset, let me thank you for conducting these hearings. The MSA concept is one of the most
‘exciting and innovative developments in recent years from both a health policy and 2 savings perspective.
Congress is to be commended for enactment of the MSA concept and this Committee's efforts to consider
appropriate expansion of the group eligible to maintain MSAs is an important one.

Medical Savings Accounts

Today, MSA eligibility is limited to employees covered under a small employer's high deductible health
plan and self-employed individuals regardless of the size of their business. Those who are eligible are
‘given the opportunity to save for the payment of unreimbursed health care expenses through an MSA. For
individuals, MSAs provide an attractive means of accumulating assets for the payment of current and
future health care expenses that are not covered by insurance. Investing in an MSA can significantly
strengthen health care security, enhance retirement security, and potentially decrease current tax liabilities.

For the self-employed, 100 percent of eligible MSA contributions are deductible for Federal income tax
purposes. For employees of small businesses that set up MSAs, employer contributions are not taxed under
either the Federal income tax or Federal payroll taxes. After contributions are made, MSA assets grow
tax-deferred and, if funds are needed to pay medical expenses, they are not taxed under federal law when
withdrawn.

Providing individuals with an MSA option has a number of benefits:

MSAs give consumers more control over their health care dollars ~ control over where, when and from
whom to get their health care.

MSAs improve the portability of health care coverage. When an individual changes jobs or becomes
temporarily unemployed, the MSA goes with them. This provides assets to continue paying health
insurance premiums or to pay for medical expenses that may arise during a job transition.

MSA promote increased personal savings. This important advantage of MSAs is often underemphasized.
If an individual does not have to spend MSA assets on medical expenses, those funds remain in the account
and are available to fund future medical expenses or as a supplement to retirement savings.

‘MSAS create the opportunity for expanding health insurance coverage to some individuals who could not
otherwise afford it.


52

In addition, I have seen market research presented at industry seminars which indicates
that, when employees have the ability to choose from multiple plans, one of the major
decision drivers is “low or no deductible”. Given all of this, it is no surprise that there has
been little demand in the market for high-deductible plans. This also probably helps
explain why initial demand for MS.\’s has been slow.

Meanwhile, employers are struggling with the problem of controlling costs. Some of this
has been accomplished by moving deductibles marginally upwards with inflation. For
example, the $100 deductible of the 1970°s may become a $250 or $300 deductible today.
Most employers were not willing, bowever, to force deductibles to high enough levels to
significantly impact premiums.

‘One could argue that they did not bave to take that unpopular action because a different
cost-containment tool became available: Managed Care, and, specifically, HMO's.
HMO’s offered both low costs and low (or no) deductibles, so they had appeal to both
employers and employees. They were able to offer the perceived “better benefits” at
“lower costs” by putting controls on health care providers. It is impossible to know
whether or not the full implications of this were known or understood by health care
consumers initially. It is widely understood today.

HMO’s also emphasized wellness and prevention, which are obviously desirable.
Whether or not this actually lowers costs is still open to discussion. Some have argued
that HMO’s initially attracted large numbers of low-risk (young and healthy) insureds. If
true, this would also help account for the “low cost.”

Traditional insurance companies also attempted to lower costs by implementing
utilization controls such as hospital pre-admission review and mandatory second opinion
for surgery. This did enable them to lower premiums without raising deductibles to
unpopular levels.

Introduction of MSA’s

So MSA's have been introduced into a market that has historically not been receptive to
high-deductible plans. Employees still want “better benefits” and employers still want
“lower costs.” Has anything changed that would make MSA’s popular? What are their
benefits? What are the marketing results?

The timing of the introduction of federally-qualified MSA’s has been fortuitous. They
have been introduced in the midst of a backlash against strict forms of Managed Care.
Employers and employees have the same concerns they have always had, but now they
have something new to look at as an alternative. The publicity surrounding the Kennedy-
Kassebaum bill, and the fanfare of cartiers entering the market gave a significant boost to
consumer awareness.


50

Testimony of William Raab
Vice President of Marketing
Anthem Health and Life Insurance Company
Before the House Civil Service Subcommittee
Hearing on Medical Savings Accounts
Ft. Monmouth, New Jersey
March 9. 1998

Introduction

Good morning. Thank you for inviting me to speak. My name is Bill Raab. I am Vice
President of Marketing for Anthem Health & Life Insurance Company (Anthem Health)
in Piscataway, NJ. My full biography and a profile of my company are attached to my
written testimony. I have held a variety of employee benefit sales and management
positions since 1971. I have been in my current position for three years.

My company, Anthem Health, is a nationwide employee benefits company. We currently
service in excess of 10,000 small employer policyholders, representing approximately
$200 million in annualized revenue.

Before discussing how MSA's might fit in to the Federal Employees Benefit Plan, I will
discuss MS's in general and our experience with them.

MSA Offering

Anthem Health's MSA product is called “Anthem Rewards Medical Savings Account”.
and was released to our sales force on March 5, 1997, This product offers a complete
package combining a MSA-compatible high-deductible medical plan and a Medical
Savings Account. Anthem Health selected American Health Value (AHV) to be their
designated MSA administrator.

The Anthem Rewards MSA program features nine medical plan options that have been
designed to meet federal guidelines. Three comprehensive major medical and six
preferred provider organization plan choices are available with deductible limits ranging
from $1,500 and $2,000 for an individual and $3,000 and $4,000 for a family.

Because of the nature of the MSA, individuals have more responsibility for Healthcare
expenses. Anthem Rewards MSA program works in conjunction with a no-cost medical
management component that permits participants to obtain information aimed at
improving their health. By using the “Anthem Be Healthy” program's toll-free telephone
line, covered individuals can gain answers to health-related questions and obtain printed
information on a variety of medical topics to help them make more informed health care
decisions.


56

If 60-70% of the population purchased MSA‘s. the feared adverse selection might
become a reality. But I think the best hopes of MS.A proponents and the worst fears of
MSA opponents have been exaggerated. Consider the experience of HMO’s: even with
the considerable support of the Federal Dual Choice Mandate. and even though they
offered benefit ard cost levels with inherently broad appeal among employers and
employees. it has taken them twenty years to get 33% market share. Since MSA‘s
inherent appeal is to a narrower segment of the population (savers as opposed to
spenders), I consider it highly unlikely that MSA market share could ever get large
enough to cause a major dislocation.

Summary~MSA‘s for Federal Employees

How does all this relate to federal employees? I would expect that federal employees
want what other employees want. Consequently. I expect their reaction to the concept to
be consistent with what we have already seen. Initially, MSA’s would appeal to the well-
educated and high-income employee. Next, you will probably find that MSA's have a
much broader appeal than expected, as we discovered.

The same benefits that I outlined above would accrue: choice, the opportunity to change
spending patterns. active participation in managing one’s care, and encouragement of
thrift.

I believe this can be accomplished without harm to the employees’ health, and at little or
no risk to the FEHBP risk pool. Consequently, I urge favorable consideration. Thank you
for your time.

Background

William A. Raab is vice president of marketing for Anthem Health & Life insurance
Company (Anthem Health ) in Piscataway. NJ. In this position since 1995. he oversees
all marketing, advertising, communications and field operations functions for the
company.

Raab joined the organization in 1986 as district group manager in the Pennsylvania office
and was promoted to vice president of research and development in 1994. He began his
insurance career in 1971 with Phoenix Mutual Life Insurance Company as a district
group representative and a group billing supervisor, and later worked for Mutual Benefit
Life Insurance Company as a regional group manager.

He is a past multi-year member of Anthem Health’s top sales honor clubs, the President's
Council and Executive Council.


5520 Used Car & Truck Dealers. 2 14
5530 Auto & Home Supply Stores 2 23
5600 Apparel and Accessory Stores 1 2
5700. Home Furniture, Fumishings & Cons 1 1
3734 ‘Computer & Computer Software 1 2
Store
S8il Eating Places 3 10
5812 Eating & Drinking Places 1 5
5900. Miscellaneous Retail 16 54
5921 Liquor Stores. 2 6
5932 Used Merchandise Stores 1 2
5994 Tobacco Stores 1 1
(6000 Banking 1 14
6100 Non-depository Credit Institutions i 2
6200 Security and Commodity Brokers 15 44
6400 Insurance Agents, Broker & Related 34 66
6500 Real Estate; Agents, Brokers & App 15 28
6530 Building & Real Estate Management 6 16
6700 Holding & Other Investment Offices s 10
7000 Hotels 3 10
7210 Laundry, Cleaning & Garmet Services 2 4
7220 Photographic Studios; Still or Video 4 5
7230 Barber & Beauty Shops 2 4
7290 Miscellaneous Personal Services 2 4
7310 Advertising i 2
7330 Mail Services 4 5
7342 Pest Control Services 1 4
7349 Building Cleaning & Maintenence 2 4
7350 Equipment Rental & Leasing _ 1 3
7370. Computer & Data Processing Serv 13, 62
7380 Miscellaneous Business Services, N 19 40
7381 Detective, Guard & Armored Car Ser 1 2
7389 Auto Reposs/Bail Bondsmen. 2 3
7500 ‘Automotive Repair Shops 5 20
7600 Miscellaneous Repair Services A 36
7800 Motion Pictures 7 14
7910 Dance Halls 1 4
7920 Theatrical Productions 2 2
7999 Amusements NEC 2 3
8010 Offices of Physicians 67 305
8020 Offices of Dentists 12 34
8040 Offices of Other Health Practitioner 18 41
8070 Medical & Dental Labs 2 3



48

Mr. Raas. Thank you.

Mr. Mica. Can you pull the mic or just get as close as possible
so we can hear you?

Mr. Raa. Is this better?

Mr. Mica. That’s great.

Mr. RaaB. Thank you, Mr. Chairman. My name is Bill Raab. I
am vice president of marketing for Anthem Health and Life Insur-
ance Co., in Piscataway, NJ. My company, Anthem Health, is a na-
tionwide employee benefits company currently servicing in excess
of 10,000 small employer policy holders. We introduced our MSA
product to our sales force in March 1997. We do offer a complete
package with a variety of deductibles and a savings account fea-
tures. Our program is currently available in most States.

The idea of lowering healthcare premiums to save money by pur-
chasing a high deductible plan isn’t new. In fact, high deductible
plans have been available since at least the 1970’s when I started
selling employee benefits. In fact, as Dr. Eck pointed out, high de-
ductible plans are really more consistent with the basic concept of
insurance, which is basically that you should insure against unpre-
dictable events and catastrophic losses and budget for lower cost,
and more predictable expenses.

In fact, I heard a consulting actuary speak at an industry trade
seminar on MSAs back in 1996. He stated that in any given year,
you could expect that 60 percent of all claimants in the population
would actually experience medical claims less than $1,000. If we
accept those numbers as reasonable, it would appear that 60 per-
cent of the population would be a likely candidate for high deduct-
ible plans. But my personal experience indicates that that’s not the
case.

Basically, employees have always wanted better benefits, which
they interpret to mean low out-of-pocket costs. Employees have
been conditioned for decades to expect good health benefits. They
have utilized them quite freely. Since these benefits had low out-
of-pocket costs and were heavily subsidized by the employer, em-
ployees were to a great extent immunized from the economic con-
sequences of their utilization decisions.

So essentially MSAs were introduced into a market which had
historically not been receptive to high deductible plans, but yet
there is tremendous interest in them. I guess that brings up the
question what has changed and what would make MSAs popular?
Well, I think the timing of the introduction of federally qualified
MSAs has been fortuitous. They have been introduced in the midst
of a backlash against strict forms of managed care. We have heard
plenty of testimony regarding that backlash already this morning.

I think the tax advantages built into Kennedy-Kassebaum have
been a tremendous impetus to sales. I won’t discuss in detail the
benefits. You have heard other testimony already. I think we all
know what the benefits are and the possible benefits that can be
reaped from MSAs.

I did want to talk about sales results, however. Although sales
results at first were slow, the pace is picking up. We find reason
for encouragement regarding the MSA concept, bearing in mind of
course that we’re speaking about small employers under the Ken-
nedy-Kassebaum pilot project. So we looked at the first 10 months


20

consumers rather than employers, and would allow peopie to choose the
best priced plan for the value provided.

2) Second—stop piling new laws on top of bad laws to fix the problems
that government has caused. A great example would be the new "Patient
Protection Act" that Is currently being promoted. Patients are forced Into
HMO's that they hate because thelr employers put them there. HMO's exist
largely because the government has mandated that large employers offer
them. But they exist for the purpose of concealing the fact that they are
rationing medicine. And now the government needs to micromanage the
HMO’s to keep them from hurting the very patients they are pretending to
help.

1 happen to live in a state that essentially enacted the Kassebaum-
Kennedy legislation three years before the federal government did. itis so
bad that the rest of the country is being told to look at New Jersey to see
what will happen to them if they don’t fix things quickly. Since 1992, New
Jersey has had “guaranteed issue" and “community rating," two provisions
which mean that people can wait until they are sick to buy insurance, that
the Insurance company cannot ask any health questions, and that 20-year-
olds must pay the same rate as 64-year-olds. Every principle of insurance
is violated, similar to our being able to rush out and buy fire insurance
even as the firefighters are trying to put out the fire. As in every new
Program, it seemed to work well at first, but now the fall-out Is occurring.
Predictably, the young healthy people are dropping out, leaving the older,
sicker people to pay higher and higher rates. Another feature of NJ
insurance Is that they mandate coverage of $300 per person for
preventative care such as immunizations, blood work, mat
routine physical and EKG's. These are the type of things that ought to be
paid for out of the MSA’s—they are not “insurable events." They simply
drive up the insurance rates unnecessarily. Our family rates were going
trom $585 per month to $870, for a $1000 deductible policy. We dropped
our personal family coverage In June of iast year. A friend just Informed us
that he received notice that his rates are about to double this coming April,
80 he is dropping his coverage as well. As we might expect, many people
are begging for the government to “do something," but | would suggest
that it has done enough damage already. How about getting out of the
way?

‘Since starting our medical practice in 1988, my husband and | have been
outspoken proponents of Medical Savings Accounts. It makes perfect
‘sense that the best way to eliminate administrative costs would be to
eliminate the administrators, and MSA’s would do just that. People would
only access health care that was worth their hard-earned cash, they would


38

early detection. But in the end, they don’t even want to do that be-
cause they are not that far-sighted.

If you knew you had to go for your own colonoscopy, I mean you
have to be an educated patient to some extent, you would just go,
and you would pay your $100, your $1,000 for your maintenance
healthcare a year, which is generally not that expensive. I have
$3,700 in my Medical Savings Account. I will bank the $2,700 until
next year. I think that’s pretty good. I mean you pay for your little
small expenses, your physical, a couple of drugs, a pair of eye-
glasses, and you still fave thousands of dollars that you can roll
forward.

I think with the Kennedy-Kassebaum bill, it is the equivalent of
an IRA. It’s a retirement account. If you stay healthy your whole
life, which most people will do on average, you have money when
you retire.

Mr. Mica. Dr. Cauda, you seem to advocate that the self-em-
ployed should get the cost for benefit of deduction rather than just
making it available for the big employer. How do you think that
would work with MSAs? Do you think we should have some tax ad-
vantage for the individual with MSAs for a portion of that account?
What is your feeling about incorporating your proposal for MSA
participants?

Dr. Caupa. There is no question that the majority of people that
I see in my office without insurance are people that work either
self-employed or they work for a small business that cannot afford
healthcare benefits for their employees. This is a growing problem
with the escalating cost of indemnity insurance, or even the HMOs.

If we look at the growth pattern in the HMO policy costs over
the last 5 to 10 years, they have approached the indemnity cost.
There’s getting to be basically no difference between the HMO pol-
icy premiums and an indemnity policy premium. People that work
for themselves or in small businesses, which is really a good per-
centage of Americans, they are at a total disadvantage. When they
pay $500 a month or $700 a month for their premiums, they are
paying with after tax dollars. Someone who works for a big cor-
poration has a great tax plan. The Heritage Foundation did a study
that showed that people with greater than $50,000 a year income
have a $35 billion tax relief by this tax-free insurance that they are
getting through their employers.

Families with incomes of less than $20,000 only glean a $2.7 bil-
lion tax advantage. The top fifth of all——

Mr. Mica. Would you repeat that last figure? I got the $35 bil-
lion. What was the-——

Dr. CaupA. Receive $35 billion tax relief.

Mr. Mica. Then you went to the other category.

Dr. Caupa. Those earning less than $20,000-—.

Mr. Mica. Less than $20,000 get what?

Dr. CaupaA. $2.7 billion. This is from the Heritage Foundation
study. The top fifth of wage earners in the United States receives
six times the tax relief that the lower fifth of wage earners receive.
There is something wrong with this system. Somebody making
$100,000 a year can afford better to take out $600 a month or $700
a month or $800 a month for their family than someone who is
making $15,000 a year or $20,000 a year. It’s an obscenity the way


69

surance companies have not offered MSA-eligible health plans, or
have not designed them in a manner that maximizes the advan-
tages of an MSA.
‘he complexity and limited availability of MSAs have also com-
bined to limit the effectiveness and the volume of advertising. Ex-
laining a complex new product in an advertisement is not cost ef-
fective if the target market is too small. Despite these difficulties,
we would emphasize that the MSA remains an attractive option for
many people. We anticipate that the public’s interest in MSAs will
continue to grow slowly as the level of understanding increases, es-
pecially among professional advisors.

We commend you, Mr. Chairman, for introducing legislation that
would provide Federal employees with an MSA option beginning
next year. Your legislation could substantially improve MSAs by
helping to deal with the major problem with the existing MSA re-

ime, the small target market. By expanding the potential market
for MSAs to include Federal employees, health insurance plans
would be hard pressed not to offer a competitive MSA-eligible high
deductible policy—policies that could then be offered to others who
are also eligible for MSAs.

In addition, the financial incentives to advertise the MSA prod-
uct would improve, particularly in markets with a high concentra-
tion of Federal workers. Thank you again, Mr. Chairman.

(The prepared statement of Ms. Kenna follows:]


MEDICAL SAVINGS ACCOUNTS [MSAs] IN THE
FEHBP

MONDAY, MARCH 9, 1998

House OF REPRESENTATIVES,
SUBCOMMITTEE ON THE CIVIL SERVICE,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Fort Monmouth, NJ.

The subcommittee met, pursuant to notice, at 10:13 am., in
Building 1206, Fort Monmouth, NJ, Hon. John Mica (chairman of
the subcommittee) presiding.

Present: Representatives Mica and Pappas.

Staff present: George Nesterczuk, staff director; Caroline Fiel,
clerk; and Cedric Hendricks, minority counsel.

Mr. Mica. We're going to call this meeting of the House Civil
Service Subcommittee to order. I chair the subcommittee.

First of all, I want to take just a moment to thank those involved
in hosting us today, particularly the base commander, General
Dwyer Brom, for the wonderful support that people at Fort Mon-
mouth have provided to our subcommittee in organizing this field
hearing.

We do much of our work in Washington, but dealing with the
workforce issues makes it very sensible to go into the workplace
whenever our subcommittee is able. I want to also mention the
point that the Defense Department employs nearly half of their
Federal workforce in this area. I am pleased to have been able to
receive the recommendation of the vice chairman of our subcommit-
tee, Congressman Pappas, to host and also convene this field hear-
ing of our subcommittee.

I might announce also that the ranking member, Mr. Elijah
Cummings, is not going to be able to be with us today. I think
we're all fortunate, given the circumstances of the weather, that
any of us that made it coming in last night and this morning. We
do have Cedric Hendricks, who is the counsel for the minority and
the liaison to the ranking member of our subcommittee with us,
and George Nesterezuk, who is the staff director for the sub-
committee, also here on the podium with us here today.

The manner in which we'll proceed, first I’ll make an opening
statement. Then I will yield to Mr. Pappas for his opening state-
ment. Then we will hear from our witnesses. Today we have two
panels. At the conclusion of that time, if we can, we will be glad
to allow others to make brief statements.

I might also say that it is the practice and custom of our sub-
committee to invite written comments, and I will leave the record

mM


12

‘Our experience with MSAs also suggests that the major problems with the MSA law today are its
complexity and the limited segment of the population that is eligible for MSAs. For example,
determinations of eligibility to establish an MSA can in some instances be burdensome, involving a
monthly analysis of the health coverage of the individual and the individual's spouse. Similarly, the
calculation of the maximum amount that can be contributed to an MSA can become very complicated,
involving multiplying a percentage by the health insurance plan deductible that was in place in each month.
Moreover, MSAs are only effective on a pilot basis from January 1997 through December 2000 and the
number of MSAs that can be established has been limited to 750,000 accounts. These limits apply in
addition to the general small employer and self-employed limits on MSA eligibility.

Those two factors, complexity and limited availability, have combined to frustrate the growth of MSAs in
a number of ways. First, because of the limited nature of the pilot project and the concem over convincing
customers to move to a complex new product, many health insurance plans have not offered MSA-eligible
plans, or have not designed them in a manner that maximizes the advantages of the MSA. Similarly, the
complexity and limited availability of MSAs have combined to limit the effectiveness and the volume of
advertising. Explaining a complex new product in an advertisement is not cost effective if the target
market is small.

Despite these difficulties, we would emphasize that the MSA remains an attractive option for many people.
We anticipate that the public's interest in MSAs will continue to grow slowly as the level of understanding
increases, especially among professional advisors.

MSAs for Federal Employees

‘We commend you Mr. Chairman, along with Government Reform and Oversight Committee Chairman
Burton, Ways & Means Committee Chairman Archer and the other cosponsors for introducing the "Federal
Employees Health Care Freedom of Choice Act" (H.R. 3166). That legislation would provide all eligible
Federal employees with an MSA option beginning in 1999. We would note, in particular, that we are
pleased that the legislation appears to allow each Federal employee to choose his or her own MSA.
Allowing this type of competitive market for MSAS is critical to their ultimate success, both among the
Federal workforce and in the general population.

Providing MSAs as an option under the FEHP has the potential to substantially improve MSAs by helping
to deal with a major problem with the existing MSA regime — the small target market. According to the
Employee Benefits Research Institute, almost 9 million individuals received coverage under the FEHP in
1992. By expanding the potential market for MSAs to include those Federal employees, health insurance
plans would be hard pressed not to offer a competitive MSA-cligible high deductible policy ~ policies that
could then be offered to others who are eligible for MSAs. Moreover, the financial incentives to advertise
the MSA product might improve, particularly in targeted markets with a high concentration of Federal
workers. These improvements would "spill over" into the other groups that are eligible for MSAs and
could improve the existing MSA pilot program.

Thank you again, Mr. Chairman,

Other factors that have impeded MSA growth include: certain state laws that have limit (or have delayed)
the offer of MSA-eligible high deductible plans; restricting MSA contributions to a percentage (65% for
individual coverage and 75% for family coverage) of the deducible, thus limiting the ability to achieve full
protection from unexpected health expenses; a rule that says if an employer contributes anything to an
MSA for a year then the individual cannot make additional cootributions in that year.


1

‘The Merrill Lynch MSA.

‘The Merrill Lynch MSA is, by design, not associated with any particular high deductible health plan. The
self-employed individual or small business puts an MSA-eligible individual or group health plan in place,
and then participating individuals establish a Merrill Lynch MSA. Some of the important features of our
MSA include:

‘Access to liquid funds to pay medical bills through an MSA VISA® debit card or through unlimited check-
writing privileges. These access options allow the account holder to pay their doctor directly from the
MSA and make it easy to keep records of medical expenses.

Investment choices similar to those available to IRAs, including money market funds, Certificates of
Deposit, mutual funds, bonds, and equities.

The advice of investment professionals trained to help the client identify financial needs and investment
‘goals, and then help select the investments that are most appropriate for an MSA.

Regular comprehensive statements detailing all transactions.

‘The delinking of the Merrill Lynch MSA from any particular health plan distinguishes the Merrill Lynch
MSA from many other MSA products on the market. By giving the individual a broader array of
investment options, the individual can choose the option that best suits their own needs. As a result, the
individual has the ability to use the MSA wisely as an investment vehicle until the assets are needed to
offset medical expenses. This contrasts with certain other MSA products on the market that simply offer
MSAS a fixed interest rate comparable to the interest paid on a savings account.

Merrill Lynch's MSA Experience

To date, the Merrill Lynch experience with MSAs has been positive, at least for those who are eligible and
who take the time to understand the many advantages of the product. Approximately 75% of Merrill
Lynch's MSAs have been established by self-employed persons, although that may change as more small
employers go through an open season with their existing health plans. The average age of those
establishing Merrill Lynch MSAs to date is 46. Significantly, 15% of our clients report that they were
previously uninsured. Let me caution, however, that this data is preliminary. MSAs have been in
existence for just over a year and our experience with new concepts of this type is that it takes time for the
‘general public to achieve an understanding of the advantages of, and to develop a comfort level with, the
‘concept.

Our clients tell us that the two most important factors that led them to establish an MSA were: (1) the
ability to control their choice of doctors and (2) the ability to use funds that are not used for medical
expenses to supplement retirement savings. This latter point is consistent with findings in the 1997 Ninth
Annual Merrill Lynch Retirement and Financial Planning Survey (the Baby Boom Retirement Survey),
which found that there is a substantial disparity between the percentage of income that should be allocated
to retirement and the income that is actually allocated to retirement.



74

Mr. Mica. Thank you for your testimony, and each of our panel-
ists for providing us with their insight.

First, Mr. Raab, I am trying to figure out, and maybe you can
tell me based on your experience or knowledge looking at the MSA
market—first of all, I think your testimony indicated that you felt
a very small percentage of folks would take advantage of MSAs if
offered. Is that correct based on your experience?

Mr. Raas. Yes, Mr. Chairman. That was our original presump-
tion, that this would appeal to essentially high income better edu-
cated people because of the complexity and because of the long-
term savings feature. But that has only been partially borne out.
Actually only approximately 50 percent of our purchasers are in in-
dustries that we would consider high-end. So I think our results
might be debunking the preconception already.

Mr. Mica. The other question is if their premiums are lower, and
the cost to the employers are lower, there are definite advantages
to both the employee and the employer. But when there are other
plans available, the accusation, again, is raised about adverse se-
lection, and that costs will go up for some of these other plans be-
cause people will cherry pick or the healthier folks will opt out.
What is your comment observation?

Mr. RAAB. Well, I have two comments for that. First of all, at the
pace these are being sold in the small employer market, it would
probably take a decade before there could be a major dislocation be-
cause of so-called cherry picking. But there is an easier answer to
that. That is, if you as a carrier have both parts of the risk, both
the low deductible and the high deductible within one financing
mechanism, then you are not harmed by the adverse selection po-
tential.

Mr. Mica. You think that should be part of the mix, the required
part of the mix?

Mr. RaaB. Exactly. I think that’s what Mayor Schundler was get-
ting at. If you offer all four options within the same plan, then you
can’t adversely select against the plan because all the possible op-
tions are being paid into the same pool of money, so to speak.

Mr. Mica. Dr. Cosman, you had talked about the criminalization
under all the laws we have passed now, and how we have
criminalized health care providers. Some of that was done in an ef-
fort to eliminate waste, fraud, and abuse from the system. You
have testified today that you think individuals can do a better job
in making that determination, or we wouldn’t have the same de-

ree of criminalization. Is that correct or do you think that under

'SAs, there would still be the same amount of fraud, maybe not
utilization because people are going to individually choose to par-
ticipate or to get service provided. I am trying to think of how you
are telling us that there would be less criminalization under MSAs.

Mr. CosMAN. The problem is that with certain of our current
medical laws, we are more concerned with protecting the program
than we are with protecting the patient. If one looks at the Medi-
care and Medicaid Patient and Program Protection Act, one finds
that most of the accusations against physicians are not for fraud
which in any way hurts the patient, but for what might be con-
strued as billing fraud. Then when one looks at that carefully, it
is not fraud at all, but rather accident. That is to say physicians


31

Testimony on Medical Savings Accounts
for Civil Service Committee

Sidney J. Goldfarb, M.D.
3/988

T would like to thank the committce for inviting me to speak today on Medical
Savings Accaunts and my perspectives on them. Our medical system is deteriorating
‘under managed care as practiced today. Care is not being managed . rather profits are
‘The large insurance companies have a need to report larger and larger profits each fiscal
quarter or else Wall Street moans or the chief exec: groans, The federal government,
23 well, looks primarily at it's budget numbers while giving more lip service to the quality
of care. Medicine is therefore financially besieged by the government and the insurance
companies. The Clinton health care plan gave greater impetus to this trend.

1 became a candidate for congress in 1994 for the 12th congressional district
advocating MSAs, local township office in 1995 saying MSAs would save millions of
dollars locally and kecp local municipal workers and teachers out of managed care. This
would give them their choice of doctor or hospital and give them more of s hand in their
care. In 1997, I ran for state assembly in New Jersey where I invented the concept of auto
Insurance Saving Accounts{ISA}, which I felt would save 50% a year in premiums and
begin to cut down on needless lawsuits and allow benefits to remain at full levels.

1 may still have this issue to run on in 1999, Possibly, Conyress can push this concept
nationwide,

Tehose a MSA for my families persona! health insurance because ] was able to save a
nat of 75% of my health insurance pramium. My premium was going to go from $8000 &
year to $9000, My MSA was $6000 2 year going down to $5500 this year, by the way.
$3750 of my $6000 is in the MSA, to be used for my first $5750 of medical expenses. If
not used, the $3750 rolls forward each year as well as being tax deductible. If I had
started this at age 23, when | began to work twenty years ago, | would have had $75,000
in my MSA plus interest. This would total possibly $150,000 to $200,000 today. I would
be able to pay for most major ilinesses by myself, This would include surgeries,
transplants, or a long hespitelization, This could be a supplemental retirement plan, as it
is under the Kennedy-Kassebaum law, or people might be able to increase their
deductible to save even more, of simply keep their money for something else. The AMA.
offered me a health policy last year with a $20,000 deductible for a total premium af
$500 for the year. 1 would get to keep my other $5,000 and use it for college costs or
sey eaPromeone is ill and necds coverage, be or she would lose the MSA building up but
would still have been saving 33% a year in lower premiums all along. Plus he would not
be in manayed care, The HMO contract { was able to get last year were still more than
we oars bata tw be combined with a fee structure like I have veh Blue Shield of

1 wise patients will be asked somotimes for exorbitant foes.
maclareeine stents oy. many times, that price is no object in a loved one’s case. This
is generally tric, because people now don't pay for their health care beyond the yearly



VW

HMOs to keep them from hurting the very patients that they are

pretending to help. I realize I am rather negative about HMOs, but

b have just had so much experience with them that I can’t help but
e So.

T happen to live in a State that has essentially enacted the
Kassebaum-Kennedy legislation 3 years before the Federal Govern-
ment did. It is so bad that the rest of the country is being told to
look at New Jersey to see what will happen to them if they don’t
fix things quickly. Since 1992, New Jersey has had guaranteed
issue and community rating, two provisions which mean that peo-
ple can wait until they are sick to buy insurance, and that insur-
ance companies cannot ask any health questions. It means that 20-
year olds have to pay the same rate as 64-year olds. Every prin-
ciple of insurance is violated, similar to our being able to rush out
and buy fire insurance while the fire fighters are already putting
out the fire in our house.

As in every new program, it seemed to work well at first. But
now, the fallout. is occurring. Predictably, the young and healthy
people are dropping out, leaving older and sicker people to pay
higher and higher rates.

Another feature of New Jersey insurance is that they mandate
coverage of $300 per person for preventative care, such as immuni-
zations, blood work, mammograms, routine physicals. These are
the type of things that ought not to be covered by insurance at all,
but should be paid out of MSAs. They are not insurable events.
They are events that we know we are going to need. They simply
drive up the cost of insurance.

Personally, our family rates were going from $585 per month up
to $870 per month for $1,000 deductible policy. Therefore, we
dropped our own personal health insurance in June 1997. A friend
just informed us that he received notice that his rates are about
to double this coming April. He is about to drop out as well. As we
might expect, many people are begging the Government to do
something. But I suggest that they have done enough damage al-
ready.

Since starting our medical practice in 1988, my husband and I
have been outspoken proponents of Medical Savings Accounts. It
makes perfect sense that the best way to eliminate administrative
costs would be to eliminate the administrators. MSAs do exactly
that. People would only access the health care that is worth their
hard-earned cash. They would not need to submit claim forms to
be scrutinized and reviewed and denied. Then they would get high
deductible insurance only for unforeseen medical catastrophes. Sev-
eral years back when Congress was debating it, I was right there
trying to promote Medical Savings Accounts, and when they had
that faw that said that 750,000 new accounts could be started, you
would have thought that we would have been the first ones there
to get one. But we found out that the insurance industry and the
mandates on insurance made them so expensive that they were not
worth the money that they would cost. It would have cost us $545
a month for a $4,500 deductible policy. We turned it down.

If I have just another minute, I could tell you what we actually
did. We have been fortunate. We found a program that the Govern-
ment hasn’t been able to mess up, frankly. Our family has enrolled


23

Mr. Mica. Thank you for your testimony. I'll recognize Dr. Cauda
next.

Dr. CauDA. Thank you. It’s an honor to be here this morning as
an ordinary citizen who practices surgery only a stone’s throw from
Fort Monmouth. My name is Joseph Cauda. I graduated from med-
ical school in 1980.

Mr. Mica. Just a second. I’m not sure if you are being picked up.

Dr. Caupa. Yes. My name is Joseph Cauda. I graduated from
medical school in 1980. I had 6 years of post-graduate training. I
started practice as a general surgeon in 1986. Over that period of
time, I have witnessed the steady erosion in the quality of our
healthcare system, both from the doctor’s and patient’s point of
view.

Escalating costs were inevitable with the technological explosion.
Twenty years ago, CAT scanners were just coming on the scene.
MRIs were practically science fiction. The equipment necessary to
remove a gall bladder could be reused literally thousands of times.
Today, CAT scans and MRIs can be found in almost every small
town hospital throughout the United States. A gall bladder oper-
ation is done with four puncture wounds, which enables a patient
to leave the hospital within 24 hours out of surgery. But this re-
quires the use of expensive high tech equipment, sometimes dis-
carded after only one use.

These are only some minor examples of how medicine has
changed, but each one has made your life better. One thing that
has not made either the patient’s or the doctor’s life better is the
current insurance system. As the cost of low deductible, traditional
indemnity insurance has climbed, HMOs have taken its place. They
provide managed care. One wonders who is managing what kind of
care.

I will give you an example of how managed care has affected my
patients. One night I received a phone call from the emergency
room. I was awakened from my sleep and I was asked if I accept
a certain HMO. I frankly wasn’t sure. The emergency room doctor
stated that he had a very sick patient who likely needed surgery,
but could not find a surgeon who participated in the plan.

Now let me ask everyone here, is this the conversation that two
physicians should be having in the middle of the night concerning
an emergency? Or should they be discussing the vital signs and
other information pertinent to the patient’s health?

I went in and took care of the patient. The patient did fine. But
these types of delays are so common with the routine treatment of
patients in emergency room, it’s obscene. This is not an unusual
story.

The average duration of time a person remains in a given HMO
is about 20 months. Most people do not like the fact that an insur-
ance company limits them to certain doctors or hospitals. As they
change plans, they have to change the doctors and hospitals. They
also resent the fact that a clerk in the insurance company may de-
cide on whether a test or a procedure deemed necessary by the doc-
tor is truly needed. It’s about time that the consumer of medical
care, the patient, once again have the right to make decisions
about his health.


19

Alieta Eck, MD
1056 Stelton Rd.
Piscataway, NJ 08854
732/463-0303 * FAX 732/463-2289

Testimony before the Committee on Government Reform and Oversight
Civil Service Subcommittee—March 9, 1998
Fort Monmouth, NJ

1 come before you today as a physician as well as a health care
consumer. | have studied the history of our health care system, from the
development of penicillin to the inception of the huge government
programs, Medicare and Medicaid in 1965, and to the phenomenal health
care inflation that has ensued. | am convinced that every time the
government has intervened to "help," it has made things a little bit worse.
The government cannot and should not make medical decislons—yet it
cannot help but do so, when it has decided to pay the bills. The question
before us is whether Medical Savings Accounts should be offered to
federal employees. The broader question is whether or not they are good
policy at all—and If so, what should they look like?

It is clear that we cannot provide an infinite amount of health care to
every American. Someone has to decide where to draw the line. The
question Is "Who?" Should it be an HMO executive, the government, the
physician or the Individual patient? | beileve there are great pitfalls with a
disinterested third party or the government making rationing decisions.
And physicians, when unrestrained, will do as much as possible for every
patient. This leaves the individual patient and his family being the best
ones to decide—provided that they care what the care costs and thus will
not overuse it. Medical Savings Accounts to pay for the routine and
preventative care, coupled with high deductible indemnity insurance,
Jeaves the patient with the most control over his own destiny. This is why
they are an excellent idea.

if |had my way, there would be two requests | would have of our
government that would do the most to solve the health care cost crisis.
And once the cost crisis Is taken care of, it will be much easier to care for
the poor:

1) First-move the tax break for health care from employers to individuals.
This would cause the insurance companies to compete for individual


32

premium, If they did, tho rystem Would be mory normalized, but now their insurance
companies provide them with pre-paid care. They don't want to puy one dollar more.

MSAs shift the emphasis to prevention and carly detection, where a greater impact
can be made. Al} the money in the world can put a cancer back in the originating organ
where cure rates are much higher.

MSAs differ from the current spending accounts that many cosporations have. With
spending accounts, a worker puts aside a certain amount of money, but loses it at the end
of the year if it is not spent. Theretore, come the year’s end, peuple get services, or
glasses. or other products that they might nat really need. With an MSA, peuple would
not rush to spend for these possibly marginal needs, This is u further money-saver. The
‘experience af Forbes magazine is a shining example in this.

A huge problem with getting MSAs accepted ix publicity, We need a prominent
spokesperson to lead in spreading the concept of MSAs. Mr. Forbes strongly advocates
these, but has many other issucs to deal with. Insurance companies and brokers make less
money per policy under MSAs, but an informed populace would love them.

People always ask how an MSA works to cut casts, and can't quite srasp the concept.
My Mayor, Schoo! Board President, and legislators al! just don't get the full impact of the
benefit of giving the consumer a choice, along with increasing theit personal
responsibility.

Tf we had MSAs, and could lower expenses 33% to 75%, we could afford to keep full
benefit packages with health and car Insurance. We dun't want insurance companies and
the government to cut benefits.

An example of lost benefits is the Joss of psychiatric benefits duc to costs. We havc to
save motiey someplace. If someone becomes mentally ill, insurance benefits are much
lower, run out much faster, and are of 2 lesser quality than other medical benefits. It
would be more effective to cover these problems snd have a functioning person hack at
work than to pinch pennics. The government participates in this by closing psychiatric
hospitals, such as North Princeton Developmental Center in New Jersey. As a result. they
don’ give full benefits to their citizens for psychiatric citizens. These psychiatric
hospitals are being closed at « rapid rate, This has resulted in people being cut off from
their supports, and we have seen increasing homelessness, discasc, morc cases of HTV
and drug addiction, and a general cheapening of life and our society's level of morality.

On the other hand, we spend far too much money on "disnbility." We are too soft on
some people, too hard an others. { see peaple who come to stc me professionally whe are
termed “disabled” when they are actually able to work and contribute to society. Then |
walk to a local store and see a woman in a wheelchalr with obvious lower extremity
problems who is working behind the cash register. If this person can work, so can these
minimally impaired people.

I feel that the Veterans Administration System should be reexamined and possibly
phased out as @ sepsrate system, Many VA hospitals are half-full und really should be
‘only one-quarter full, and are not effective cost-wise or resource-wise, [ would suggest
integrating these hospitals into the total system. A veteran could have a card allowing
him full veterans’ benefits in any hospital in the country, not only if he of she goes to a
‘VA. Teas of billions could bu saved with av benefit reduction.


4

Your example could move huge numbers of private employers to follow suit. The anti-
inflationary impact of the MSA approach, which creates first-party incentives to obtain value for
every health-care dollar, could even help preserve the solvency of Medicare and help to keep
health care affordable for all.

We in Jersey City had a tremendously positive experience with MSAs. By providing
MSAs on a large scale to federal employees, you could send the nation a message about the
benefits of MSAs. I strongly encourage you to implement an MSA option for federal workers to
show the nation how to provide quality care at lower costs, while at the same time returning
freedom of choice in health care to the consumer.

Thank you!


86

* Previous estimates by the nonpartisan Congressional Budget Office (CBO) oa
similar proposals to require MSAs and catastrophic insurance in FEHBP indicate
‘tach plans will cost - not save - the government money

* — Ofthe MSAs currently available, dercand and imerest is low. The Internal
Revenue Service (IRS) says that, in more than a year and « half after MSAs were
offered by the Kassebaum-Kennedy bill in 1996, less than 20,000 MSA accounts
had been opened, far less than the 750,000 policies this law made available for the
self-employed and small business employees.

“It’s quite clear that most Americans are not c'amoring for MSAs as the cure for their

health care woes,” said NARFE New Jersey Federation Presidert Sam Girson.

“Certainly, we all support good, affordable health care being available to all Americans,

bbut we don’t believe expanding MSA-catastrophic plans into the Federal Employees

Health Benefits Program is the answer.”

xxx

MARFE, ome of America's ode nd lagen amccions, was fanded in 1921 withthe
mmission of protecting th armed ight and SencfofAmeric's ce and rate fderel
workers. NARFE hes « membership of nearly 300,000 men and women

1e)


3

Janine Kenna is an Associate Manager of Product Development at Merrill Lynch. In this role, she manages
the Medical Savings Account, a tax advantaged savings vehicle for self employed individuals and small
businesses. Janine joined Merrill Lynch in 1995 as a member of the Private Client Development Program.
She is a graduate of Yale University.


[ Subject: Additional MSA Info

During Monday's Q&A, Mr. Pappas asked me for our sales results by
industry. The attached chart shows the breakdown for sales
4/1/97-1/31/98.

Please thank the Subcommittee for their courtesy in giving us the
opportunity to express our views.

Bill Raab


2

taken on legislation that would change the nature or scope of
the program.

Last month, legislation was introduced that would allow
for high deductible health plans and medical savings accounts
to be made available as an option under FEHBP. The bill, H.R.
3166, the Federal Employees Health Care Freedom of Choice
Act, is not specifically the focus of today’s hearing. Its subject

matter, however, clearly is.

This is not the first time that the Civil Service
Subcommittee has examined the MSA issue. A previous
hearing was held in December 1995. Testimony was received
from local government officials from two different jurisdictions
about MSA plans they had established for their public
employees. At the time, however, these programs -- in Jersey
City, New Jersey, and Ada County, Idaho -- had only been
underway a few months and its was too early to evaluate the

level of participant satisfaction and the overall impact on health
insurance costs.


29

T feel the MSA, from a patient’s point of view, needs to be com-
bined with a fee structure like I have with Blue Cross/Blue Shield.
Otherwise, I might be charged exorbitant fees. With the Blue
Cross/Blue Shield MSA, I am not. I have heard many times pa-
tients tell me as a physician, “Gee, doctor, do anything you need.
Cost is no object.” Indeed, cost is no object because the patients
generally nowadays have pre-paid healthcare. They pay their pre-
miums and they don’t have to pay another dime. They want to
have everything done. This is also raising the cost of healthcare.

Medical Savings Accounts shift the emphasis to prevention and
early detection, where greater impact can be made on healthcare.
All the money in the world can’t put a cancer back in the originat-
ing organ where cure rates would be much higher.

fedical Savings Accounts differ from the current spending ac-
counts that many corporations have. With spending accounts, a
worker puts aside a certain amount of money. But if he doesn’t
spend it by the end of the year, he loses it. This money would be
rolled forward with MSAs.

Mr. Schundler and I believe at Forbes magazine, they have done
this. They are shining examples of this. A huge problem with get-
ting MSAs accepted is publicity. No one knows what these things
are. I tried to talk to my local mayor. She had no idea what a Med-
ical Savings Account was. I told her it would save her $1 million
in her budget. She said, well, come on over and we'll talk about it.
I have talked to the local school board president, I have talked to
legislators, I have tried to get this pushed for car insurance. There
is a lot of reluctance because people just don’t understand how
these things work.

If we had MSAs, we could lower expenses 33 to 75 percent. Then
we could afford to keep our full benefits, which is what people
want. Otherwise, without the full benefits, we lose things as con-
sumers, as taxpayers.

An example of lost benefits is what is happening in the psy-
chiatric field. My wife is a psychiatrist. They are closing psychiatric
hospitals. If you have a depressed patient, you could give them a
drug, you could get them good medical care and they would be back
at work being productive. On the other hand, now they are not.

I also feel that there is a lot of waste in other areas in medicine
which would save the Government and the insurance companies
money, such as on disability where some people come in and they
are perfectly functional. I feel the Veterans Administration system
could probably be merged in with the general healthcare system so
a veteran would be able to get the benefits that they are entitled
to at any hospital. The veterans hospitals seem to be about half
full. They really should be a quarter full. They are being over-uti-
lized. There is a lot of money wasted. Medicare has many restric-
tive rules. People can’t go home for IV antibiotic therapy. They
have to stay in the hospital for 4 to 6 weeks. For some reason,
these are the rules that are in existence.

T have talked about Medical Savings Accounts and the power be-
hind how they work. It is a return to taking personal responsibility
for your health. You will be more interested in staying healthy, for
car insurance you will have an incentive to be a better driver and
to sue less. I urge you to apply Medical Savings Accounts to Fed-


32 Knickerbocker at Oak De. Conan, MSs, 2
Tenafly, New Jersey 07670

LEGAL and FINANCIAL BENEFITS of MEDICAL SAVINGS ACCOUNTS

Medical Savings Accounts (MSAs) credit each American's intelligence, individuality, discretion,

minor problems a person
worth paying a practitioner to solve. Tho whe owas his vod) and ruad denon pias edically
necessary along with the doctor providing medical care.

1. MSALAW

MSA law controls bebavior of doctors and patients just as American law guides and guards other
important commodities of life and other owned property. People have rights to have, to hold,
to quietly enjoy, and to convey what they have bought, inherited, or received as « gift.

MSA law assumes tort Jaw protection for patients ageinst medical malpractice and contract law
protection against false promises and overpayments, MSA law diminishes the seven severest
intrusions upon patient freedoms imposed by health laws governing managed care, health
maintenance organizations (HMOs), and Medicare,

1) MSA law partially avoids capitarion which is the prepayment of a physician or medical
‘orgenization per head of American, whether the head is troubled with a splinter, a virus, or a
cardiac arrest. Three HMOs now offer MSAs and others plan to (according to the 1997 U.S.
General Accounting Office survey).

2) MSA law partially avoids community raring whereby insurance companies must charge the
same premium for all people of all ages in « geographic area, as in New York and New Jersey,
and Open Enrollment all year, tain New York, where inners must vide coverage no mater
the person’s current health or priot illness.

3) MSA lew partially avoids violation of confidentiality. Every Medicare patient encounter as
‘well as almost every claim for routine insurance payment requires the confidential medical recard
to be reviewed by insurance or government personnel and private data entered into « networked
computer databank, Confidentiality

4) MSA lew pastially avoids third party definitions of medically nacassary treatment. While in
standard English medical necessity means medication or surgery necessary to prevent, treat, or
cure a disease or injury, medical necessity in modern medical law has been perverted to mean
whatever the third party payor will pay for. Modical necessity under MSAs is a two party


67

MEDICALVEQUITY, nec
32 Knickerbocker at Oak Dr Couman, MSc, 4
Tenafly, New Jersey 07670

‘MSAs financially sre better than popular corporate Flexible Spending Accounts under IRS
Section 125, allowing contributions of pretax dollars for spending on medical care or other
perquisites. Flexible Spending Accounts require the owner to use the annual money or lose it.
But Medical Savings Account owners can use money for desired medical care or save it. The
‘MSA owner with a prudently healthy year can roll over the unused money to let it continue
cerning interest year after year.

Even if the MSA owner later suffers a medical disaster, the MSA account will lose no more than
the stipulated "deductible" for that particular year. Then catastrophic medical insurance monies

Erodently invested. Curtomary beat fasaence, on the ober hand. which is pot true insurance
‘but discounted prepsyment for medical services, produces for the policy holder st year’s end
nothing but a canceled check.

Under medical law and the dictates of finance, MSAs are rational, logical, responsible, prudent
celebrations of the intalligence, diversity, and comparative good health of America, MSAs are
& worthy choice for government personne! st all levels.

For all who cherish medical freedom, MSAs are important. Who benefits? Patients freely select
‘their doctors and make reasoned decisions about their own care. Employers pay no more, usually
less, for MSAs plus catastrophic health insurance than for othe: health insurances, Doctors favor
MSAs for allowing them to practice good medicine without threats of costly litigetion and
Protective measures required against accidentally violating criminal laws, Over 3000 diagnostic
codes (ICD-9) and over 3000 treatment codes (CPT) changed in 1997; even the mest meticulous,
ethical, carefull physician billing for medical service will ex. Criminal intent is not necessary for
the doctor's guilt to be proved and punisbed as « felouy under strict Federal Sentencing

ne

Mostcal innovation and medicel entrepreneurship tenet cha medica met ‘Insurance carriers,

insurance marketers, indemnity
policies). Banks beasfit. With MSAs everyone wins except social engineers who want to impose
protections againet personal freedoms, control quality and quantity of medical care, and redefine
medically necessery" a1 whatever they think is medically best.

[Dependable information sources on MBAS are:

(Patio Power Report monthly nevaleter Grog Scandian adits Heath Benetts Group, Box 806, Frederick, MDD 21705
‘TEL 301-687-8029, PAX 301-682-7241

Eatlant Rowss, the 1992 book by John Goodman ind Oeruld Musgrave, Coto Institue, 1000 Massachusetts Ave, N.W.,
‘Weshingson, 20001, 1-400-767-1241

(On the web: MA Central's tte www mescentraLcom,
‘MP. Comnsn, Medical Bquity, 32 Kaickarbockar, Tenafty, New Jersey, 07670, TEL 201-567-2424, FAX 201 567-2536


68

Mr. Mica. Thank you for your testimony.

Now I'll recognize Ms. Kenna.

Ms. KENNA. Thank you. Mr. Chairman, my name is Janine
Kenna. I am the associate manager for product development at
Merrill Lynch, responsible for our MSA product. Thank you for giv-
ing me the opportunity to testify here today.

you know, Merrill Lynch provides investment financing, in-
surance, and related services on a global basis. In particular, Mer-
rill Lynch is the industry leader in the establishment and mainte-
nance of Individual Retirement Accounts. Because MSAs are in
many ways similar to IRAs, Merrill Lynch used its IRA experience
and infrastructure to become the first full-service brokerage firm to
offer MSAs to its clients.

I would like to share with you the experience that we have had
with MSAs since they first became available in January 1997. At
the outset, let me thank you for conducting these hearings. The
MSA concept is one of the most exciting and innovative develop-
ments in recent years from both a health policy and savings per-
spective. For individuals, MSAs provide an attractive means of ac-
cumulating assets for the payment of current and future health
care expenses that are not covered by insurance. Today MSA eligi-
bility is limited to employees covered under small employers high
deductible health plan and self-employed individuals. We commend
this committee’s efforts to consider expansion of the group eligible
to maintain MSAs.

Providing individuals with an MSA option has a number of bene-
fits. MSAs give consumers more control over how their health care
dollars are spent. MSAs improve the portability of healthcare cov-
erage. When an individual changes jobs or becomes temporarily un-
employed, the MSA goes with them. MSAs promote increased _per-
sonal savings. If an individual does not have to spend their MSA
assets on medical expenses, those funds remain available for future
medical expenses or their retirement savings.

To date, the Merrill Lynch experience with MSAs has been posi-
tive. About 75 percent of our MSAs have been established by self-
employed persons. The average age of those establishing a Merrill
Lynch MSA is 46 years old. Significantly, 15 percent of our current
clients report that they were previously uninsured. Let me caution
however, that this data is preliminary.

Our clients tell us that the two most important factors that led
them to establish an MSA were one, the ability to control their
choice of doctors, and two, the ability to use funds that are not
used for medical expenses to supplement their retirement savings.

Our experience with MSAs also suggests that the major problems
with the MSA law today are its complexity and the limited seg-
ment of the population that is eligible for MSAs. For example, de-
terminations of eligibility to establish an MSA can be burdensome,
as can the calculation of the maximum amount that can be contrib-
uted. Finally, MSAs are only effective on a pilot basis with the
number of MSAs that can be established limited to 750,000.

Those two factors, complexity and limited availability, have com-
bined to frustrate the growth of the MSA market. First because of
the limited nature of the pilot project and the concern over convinc-
ing customers to move to a complex new product. Many health in-


26

an insurance company limits them to certain doctors or bospitals. They also
resent the fact that a clerk in the insurance co. may decide whether a test or
procedure is needed.

It is about time that the consumer of medical care, the patient, once
again have the right to make decisions about his health. People are asked to
make dozens of decisions each day that affect their lives. Suddenly, we are
told that we need a big brother to make choices that directly impact our lives
and health. The doctor patient relationship is vital to this decision making
process, but is eliminated in managed care. This trusting relationship is
developed over the years as a result of the physician's skilJ in the art and
science of medicine. Because of the bond the physician becomes the patient
advocate.

A well informed patient is not only equipped to seek proper medical
care but the most economical care if allowed. Rand Corporation studies
show that the medical consumer, when faced with out of pocket costs (higher
deductibles) make more responsible choices than those in low deductible
plans.

Medical savings accounts will help retum medical care to the patient
and the doctor. They will eliminate the mindset of rationed care and replace
it with responsible care.

Since most people, 90%, do not utilize $3000. per year, the amount of
paperwork can be drastically reduced. Some estimates have MSAs reducing
administrative costs by $33 billion per year, by eliminating low dollar claims.
The increased manpower necessary to process these claims and obtain
clearance for procedures bas greatly increased my office payroll as well.

J will leave it to another speaker to discuss the benefits of MSAs to
everyone, The present system of tax free employer provided health insurance


78

My point is that there is a common understanding both in reality
and in the law that medically necessary should be what is required
for the particular patient’s disease or injury for its prevention or
its treatment or its cure. Medically necessary shall not be or should
not be that which an insurer will pay for. That is what it has be-
come.

Let me just give you a very quick example. Literally as I was
driving down on the very wet rainy highway, I got a call on my car

hone from a urologist in another State who had in his office a po-
lice officer who had been shot. The problem was not with the bullet
wound, but with an infection of the police officer’s genitalia. The
question was, did this urologist dare to put on the medical record
a particular antibiotic which would quickly cure the infection be-
cause that same antibiotic is used for the cure of venereal disease.
The police officer was worried that if anyone got a hold of his medi-
cal record, it would first impede his advancement and his elevation
in the police department, but second, interfere with his marriage.

Now what is medically necessary for that officer was that high
price excellent antibiotic. The practitioner was worried that not
only would he be providing what is medically necessary, but he
would be essentially potentially wrecking the reputation of the man
if he provided what was truly medically necessary, but someone
later misunderstood that and viewed it as not only not medically
necessary, but as evidence of venereal disease.

So that gives you an example of the two points I was making.
One, what is medically necessary shall be truly what’s medically
necessary. Two, potential violation of confidentiality when the con-
fidential medical records ceased to be confidential because of their
being open to insurance and other investigators.

Mr. Pappas. Thank you.

Ms. Kenna, one final question. You in your testimony indicated
that you are providing this product, MSAs to your clients. As I am
sure you know, this pilot project is limited 750,000. One question
which I guess I could answer is that would you want to see this
number increased. I’m sure the answer to that is yes. If so, what
do you think would be a reasonable increase to maybe assist com-
panies such as your, your actuaries to get a feel for what impact
this may have to just the coverage, health care coverage for your
client base?

Ms. KENNA. We would like to see the entire numerical limitation
taken off of this 750,000, because the private sector at least looks
at this and they think oh, 750,000, that will go by like that. I al-
ready probably missed the boat, which is not in fact the case.
Again, it has been very difficult to find insurance that’s compatible
with these Medical Savings Accounts.

So, from our perspective, just from a public relations standpoint
and a consumer education standpoint, I think it would be helpful
to remove the 750,000 limit and not to put in another numerical
limitation in its place, because I think, to be frank, that is scaring
a lot of people away at this point.
ti Mr. Pappas. Mr. Raab, would you want to answer the same ques-

ion?

Mr. Raa. Yes. I agree. I think in the free market of ideas and
products and services, that I don’t see a need for any numerical


3

party payment system. Patients are often insulated from the cost
of their medical services by the fact that someone else, perhaps in-
surance, Medicare or Medicaid, will pay the cost. MSAs provide one
method of dealing with some of these problems. They allow more
choice in medical services available to consumers. At the same
time, they give people greater control over healthcare spending.

MSAs combine a savings account to cover out-of-pocket medical
expenses, with a higher deductible insurance plan to cover major
medical expenses. MSAs also have the additional benefit of being
completely portable. In contrast to standard employer health paid
insurance, MSAs will follow the individual regardless of changes in
their employment status. Funds in MSA accounts can be used to
purchase medical insurance during lapses in employment.

Congress has allowed individuals in the private sector to take ad-
vantage of the MSAs. Federal employees, too, are vitally concerned
about both the quality and cost of healthcare for themselves and
for their families. They work hard to serve the public. They should
not be denied, in fact, the same freedom of choice now available to
our private sector employees.

We have invited today two panels of expert witnesses to our
hearing. But this is not a congressional hearing where Washington
brings experts to New Jersey to sell you another Government pro-
gram. No, in fact, our witnesses are from your community here in
New Jersey. They provide expertise based on their experience.
Hopefully we can learn from their expertise, and that expertise will
be a benefit to us and in national interest.

We will be listening carefully to each of our witnesses today, and
to their testimony and their recommendations to our panel. I will
go into the list of the witnesses after we hear from our vice chair-
man. If he has an opening statement, he is recognized.

Mr. Pappas. Thank you, Mr. Chairman. Ladies and gentlemen,
thank you for attending and thank you especially to the folks here
at Fort Monmouth for their cooperation.

Mr. Chairman, let me begin by thanking you for holding this
hearing at Fort Monmouth, and welcome those of you, certainly
from the committee and staff and others through the 12th district,
the heart of the Garden State. I hope all of you that traveled here
today take some time to look around and explore what we are very
proud of here in this part of the State, a very historic area and
very beautiful county of Monmouth. If the weather were a little bit
better, we might be able to hold the hearing on the beach or the
Jersey Shore, as those of us from New Jersey call it. It’s only a few
miles from here. But if the weather doesn’t improve, Mr. Chair-
man, we may want to hold the next hearing in your district in Flor-
ida.

We are truly honored today to have such——

Mr. Mica. Excuse me. Are you inviting the audience to come
with us? We might have a deal here. [Laughter.]

Mr. Pappas. We are truly honored today to have such a pres-
tigious panel of witnesses, who are themselves in some instances
practitioners, policymakers and others from the private as well as
the public sector. Once again, thank you very much for the trouble
that you have taken to be here.


2

open for at least 1 week so that your comments or recommenda-
tions become part of the record of this congressional hearing.

Today, we will look at a very important issue and program, the
Federal Employees Health Benefits Program or FEHBP, as many
of us call it. Specifically, we are here to gather information about
Medical Savings Accounts or MSAs. As we consider adding MSAs
as a health insurance option in the Federal employee benefit pro-
gram, it is important that we hear from those who have been in-
volved with this type of health care service and hear first hand
from those individuals. So that is why our subcommittee came into
the field today.

The growing cost of healthcare is of great concern to many of us.
Last year, Federal employees experienced, on average, an increase
of more than 15 percent in their share of healthcare premiums.
Now, if you have a 15 percent increase in healthcare insurance pre-
miums on average, and our average Federal employee received a
2.8 percent pay increase, and our average Federal retiree received
an average increase of 2.7 percent, that can have quite an impact
on their pocketbook.

Our committee is responsible for finding alternatives that will
help control costs, but hopefully do not interfere with the doctor/
patient relationship. I personally believe that MSAs should be ex-
plored as such an alternative.

Federal employees who participate in the Federal Employees
Health Benefits Program know that it is, in fact, a well-managed
system. But to provide our employees and retirees with the best

ices available, we must be flexible and adapt to changing cir-
cumstances. In the 1980’s when HMOs first came on the scene, the
FEHBP program was expanded to include HMOs as an option. Now
many Federal employees are, in fact, happy in their HMOs. But if
Congress had listened to the naysayers, the same naysayers who
oppose MSAs today, Federal employees would have been denied

at option. As times change, our Federal programs and our Fed-
eral options change. That is again one reason why we are here
today.
Or. course I would be the first to acknowledge that many Federal
employees are concerned about the practices of some HMOs and
other managed care providers. In a meeting just before this, we dis-
cussed it. I commented that the law has not kept up with the new
service delivery system such as HMOs. That is one of the impor-
fant questions before Congress as we return this week as a matter
of fact.

Some Federal employees and retirees fear that healthcare ration-
ing by HMO and insurance company so-called bean counters, that
we have that. They want to choose their own doctors. They believe
that healthcare decisions should be made by the individual em-
ployer, retiree, and their doctors. I support their opinion on those
issues.

Some say more Government regulation is the only way to deal
with these problems. But Government regulators can be just as in-
centive and inflexible as private sector bureaucrats. We need alter-
natives that return control to the consumer.

Economists across the political spectrum have concluded that an,
important factor driving the cost of healthcare coverage is our third


15

‘The Honorable Bret Schundler
Mayor, Jersey City, New Jersey

Supplementary Statement to Testimony Delivered at
Ft, Monmouth, New Jersey
March 11, 1998

A question has been raised as to why Jersey City has re-enrolled its management employees in the
State Health Benefits Plan, given the success of its experiment with medical savings accounts. This
amendment to my earlier testimony seeks to respond to that question.

‘When purchasing health care for its employees, any organization has to answer two questions for
itself. First, does it want to stand alone when purchasing health insurance, or be part of a larger
group? Second, what kind of health care options does it want its employees to receive?

Relative to the first question, Jersey City does NOT want to stand alone, On average, our employees
‘use more beaith care than other members of the State Health Benefits Plan. By becoming part of the
State pool, we essentially receive a partial subsidy, resulting in lower premiums for the City, whether
we are talking about the cost of providing HMO, PPO, standard indemnity, or MSA coverage for our
employees.

Relative to the second question, we do want the State plan to offer an MSA option. We want our
employees to have lower out-of-pocket expenses when their health care usage is high. We want them
to receive money back when their health care usage is low. And we like the fact that offering an
MSA option will save the State money, compared to its cost for offering the standard indemnity
option.

HMOs are fine for employees who are willing to give up control of their health service buying
decisions to a third-party rationer, but most of our employees reject that option. That is why the
standard indemnity option was the most popular option among our managers before Jersey City left
the State Health Benefits Plan.

Given the fact that all City employees who had previously chosen the standard indemnity option opted
for the medical savings account option once it was offered, it is clear that the State, if it is going to
continue to offer a standard indemnity plan at all, should offer an MSA option as well. It will cost
state taxpayers less to offer and make state and municipal employees much happier than they are
today with their current three coverage options.

In conclusion, we here in Jersey City do want to be part of the State Health Benefits Plan and we also
want to see the State add an MSA average to its current menu.


OPENING STATEMENT OF THE HON. ELIJAH CUMMINGS
RANKING MEMBER
SUBCOMMITTEE ON CIVIL SERVICE
HEARING MEDICAL SAVINGS ACCOUNTS AS AN OPTION UNDER
UNDER THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM

March 9, 1998

Mr. Chairman, the Federal Employees Health Benefits
Program (FEHBP) is a proven, competitive health benefits plan
which has served Federal employees and their families since
1960. Just a few years ago, during Congressional
consideration of health care reform legislation, FEHBP was
roundly hailed as a model for the nation because of the wide

array of health plans offered, and effective cost containment.

As successful as FEHBP has been, ! have no doubt that it
can be improved. Studies done during the 102nd and 103rd
Congresses by consultants to the House Post Office and Civil
Service Committee recommended many changes that were
never implemented as that Committee's work on FEHBP was
eclipsed by the national broader health care reform effort. In
1994, the Committee reported a bill that would have opened
enrollment in the existing program to nonfederal employees.
That proposal went no further. No further action has been


80

Mr. CosMan. Here it depends upon the State we're dealing with
and the particular company selling it. My point here is that when
we are dealing with money paid out of an MSA, there is no prob-
lem in copayments. One pays the amount according to the agree-
ment between the physician and the patient and that’s it. That is
almost invariably better for someone who has got, if you will, an
expensive chronic disease than having to pay 20 percent of what-
ever is the payment for service under a usual indemnity insurance

an.

That is, there are numerous figures which I can provide for the
subcommittee, if you so wish them, which demonstrate that even
the sickest people come out ahead. They do not do as well as the
well people, but they still get an economic advantage.

My final point on the economic advantage is that much like an
IRA, there is a tax benefit so that this is really tax advantaged to
everyone who has an MSA. They are making minor profit or as I
would hope most people in the audience, major profit.

Mr. HENDRICKS. Thank you, Mr. Chairman.

Mr. Mica. Thank you. I want to take this opportunity to thank
each of our panelists for their participation today. We may have ad-
ditional questions we would submit to you. If you have additional
comments you would like made for the record, they will be made
a part of the record. You are excused. Again, we appreciate your
testimony.

Ladies and gentlemen, this will conclude the formal part of our
hearing; we’ve turned into this afternoon; we started this morning.
I did want to provide an opportunity, though, and somewhat abbre-
viated because of time constraints and flight arrangements, to at
least one other request for a comment.

I think we have Mr. Collier from the National Association of Re-
tired Federal Employees. Mr. Collier, you are welcome to come up
if you would like and make a brief presentation to the subcommit-
tee. Can you first identify yourself? You have a gentleman with
you. If you would go ahead and be seated. I am not going to swear
you in. We are in an informal open mic session here. But if you
could identify yourself for the record and then we will have you
later give us your address for subcommittee purposes.

Mr. Collier, you are recognized, sir.

STATEMENT OF BENJAMIN COLLIER, NATIONAL ASSOCIATION
OF RETIRED FEDERAL EMPLOYEES, ACCOMPANIED BY
FRANK BEEG, LEGISLATIVE DIRECTOR, NEW JERSEY FED-
ERATION OF NARFE

Mr. COoLLiER. Thank you, Mr. Chairman. I have with me Mr.
Frank Beeg, who is the legislative director of the New Jersey Fed-
eration of NARFE. I am also a member of NARFE and have been
working with Congressman Pappas and some others in this regard.

I know that you have had a meeting this week with Judy Park,
our national legislative director, so I won’t go over many of the
things that you may have discussed with her. But I would like to
read into the record a statement by our national president, Mr.
Charles Jackson, on this matter of MSAs.

The National Association of Retired Federal Employees reaffirms
its opposition. Your legislation that imposes Medical Savings Ac-


83

Mr. Mica. We do try to do that. Mr. Pappas—whoops, our plat-
form is falling apart here. Maybe it is time to go. But we are work-
ing on that. We are also trying to make certain that we continue
the open season on retirement. We will continue to not allow Fed-
eral retirees to be picked out and picked on, at least from the
COLA standpoint.

Again, I want to thank each and every one of you for coming out
today. I wish we had more time to hear from everyone from the au-
dience. We have run a little bit late. We do have some transpor-
tation commitments to keep. But I will leave the record open, as
I said. Anyone is welcome to add comments written to the House
Subcommittee on the Civil Service, Washington, DC, 20515. We
welcome your further participation.

Again, Mr. Pappas, I thank you so much for your hospitality and
having us here in your community, and the opportunity to hear
from individuals in your community and New Jersey on their per-
spective on MSAs and our Federal Employees Health Benefits Br a

‘am.

There being no further business to come before the subcommit-
tee, this meeting is adjourned. Thank you.

(Whereupon, at 12:49 p.m., the subcommittee was adjourned,
subject to the call of the Chair.]

{Additional information submitted for the hearing record follows:]


21

Not need to submit claim forms to be scrutinized and reviewed and denied.
And they would only need high deductible insurance for the unforeseen
medical catastrophes. Several years back, when the Congress was
debating the MSA concept, | was right there, arguing on thelr behalf and
pushing for their enactment. | valued freedom and was not willing to be
told by the government or an HMO what I could and could not get. My
patients were being increasingly herded into HMO's against their will, and!
was fighting for their freedom to choose. When the law finally passed,
allowing for the 750,000 new MSA's as a trial, you would have expected our
familly to be the first to sign up. The trouble came when we searched for
the policy that we could purchase to meet the requirements of the new law.
To my dismay, a $4500 deductible family policy, the only one offered in NJ,
cost a phenomenal $545 per month. | turned it down. it was not worth our
hard-earned money.

We have been fortunate though. We have found a program that the
government has not been abie to mess up. Our family has enrolled in the
Christian Brotherhood Newsletter, a system that allows us to give a gift to
some family in the United States each month that will help them pay their
health care bills. Amazingly, this system only asks us to give $300 per
month, and if we have a medical event that exceeds $200, Christian
Brotherhood families will help us. This is not insurance, but a voluntary
giving system that has worked for the past 15 years, covers 80,000 people,
and has been instrumental in the paying of $4.3 million in health care bills
per month. We started this last June, and have systematically put the $585
we were paying for insurance, into our own Medical Savings Account.
From that account, we are paying the $300 per month to a real family with a
real need. We have managed to save $3000 in premiums and that is
building with interest in our MSA, waiting for the time when we will need it.
it is OUR money—not Insurance company profits. We cannot claim a tax
deduction under Kassebaum-Kennedy, because we do not have the
mandated health insurance policy required, but we are still way ahead.

My last request to my government would be this. If we could help
people to understand that health insurance Is just another way that they
fare compensated for their work, they might value the cash instead. If
federal employees could have medical savings accounts from which they
would purchase their own health care and catastrophic Insurance, they
would be on thelr way to being able to obtain the best health care with the
fewest strings attached. They would be able to join and develop voluntary
cost-sharing programs such as the Christian Brotherhood Newsletter.
Federal employees should not have better or worse health care than the
taxpayers who pay their salaries. They just should have the same freedom
that we have personally found.


MEDICAL SAVINGS ACCOUNTS [MSAs] IN THE
FEHBP

HEARING

BEFORE THE

SUBCOMMITTEE ON THE CIVIL SERVICE

OF THE

COMMITTEE ON
GOVERNMENT REFORM
AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
SECOND SESSION

MARCH 9, 1998.

Serial No. 105-152

Printed for the use of the Committee on Government Reform and Oversight

a

U.S. GOVERNMENT PRINTING OFFICE
50-456 CC WASHINGTON : 1998

For sale by the U.S. Govemment Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-057696-2



ext Geert Masttng
pvt Chet Group
save oes
Peat
BS, Plainsboro, New Jersey 08536
Merril ato asdrese
Lynch walessicee
Princeton, New Jersey 08543-9028
‘The Honorable John L. Mica
Chairman, Civil Service Subsommitcs
‘on Government Reform and Oversight
Sis1 Revksen Pes Oftee Belting
‘Washington, DC 20515-6143
March 17, 1998

Dear Mr. Chairman:

‘Thank you very much for giving me the opportunity to testify on behalf of Merrill Lynch before the Civil
Service Subcommittees field hearing on providing medical savings accounts to federal employees. I hope
the information I provided was informative and useful to the committee, as well as to the federal employees
in attendance,

In my testimony, I stated thatthe average age of Merrill Lynch MSA account holders is 46. You asked if]
knew the age distribution of our account holders who are greater than 46 in age, a statistic that I have
included below for your reference.

Currently, 51% of Merrill Lynch MSA holders are more than 46 years old. Our highest account holder age
concentration is between 46 and 50 years old which includes 19% of the total client base, followed by the
51-55 age range, which includes 17% of account holders. 9% of our MSA clients are between 55 and 60,
‘and 6% ofthe client base is in excess of 60 years old

Again, thank you for giving me the opportunity to testify, and please contact me if I can be of further
assistance to you.


44

Mr. HENDRICKS. Thank you, Mr. Chairman. I just have a few
questions for Mayor Schundler.

Mr. Mayor, you testified that in 1994, Jersey City undertook its
MSA program, and that that would make your jurisdiction the gov-
ernmental entity with perhaps the most experience with MSAs
across the country. Is that correct?

Mr. SCHUNDLER. Right. I think.

Mr. HENDRICKS. Now does Jersey City today continue to offer its
MSA program?

Mr. SCHUNDLER. What happened with us, you can think of it as
if again, a single individual is very ill, it’s not wise for that person
to try to go and buy insurance on an individual basis. It makes a
lot more sense to go into a group plan where their costs will be
averaged down by the group. So we decided that it doesn’t make
sense for us to be alone. We should go in with the State plan, given
the particular character of our management employee group, where
we do have a number of people who are more ill than average and
more older than average.

Mr. HENDRICKS. So you had to shut your MSA program down?

Mr. SCHUNDLER. Right. So we went back into the State plan. I
think we have a pretty good chance of getting the State plan to
offer this, because they have had a chance to see some of the bene-
fits that we have experienced.

Mr. HENpRIcKS. OK. Now your testimony suggests that the de-
mise of your MSA program was attributable to your work force
being comprised largely of people with disabilities, illnesses of var-
ious sorts, or being pst elderly. Is that correct?

Mr. SCHUNDLER. Having a higher than average medical usage.

Mr. HENDRICKS. OK. Now when you appeared before the sub-
committee at our December 1995 hearing, you shared a panel with
a county commissioner by the name of Gary Glenn from Ada Coun-
ty, ID.

Mr. SCHUNDLER. Yes.

Mr. HENDRICKS. He testified that his jurisdiction had just, as
yours had around that time, undertaken to establish an MSA pro-
gram. Is that correct?

Mr. SCHUNDLER. Yes.

Mr. HENDRICKS. OK. Are you familiar with what happened in
Ada County?

Mr. SCHUNDLER. No.

Mr. HENDRICKS. OK. I have an article from something called the
Health Care Policy Report that’s published by the Bureau of Na-
tional Affairs. It’s an organization that does a lot of writing about
things that happen on Capitol Hill and everywhere else. But this
is an article dated August 11, 1997. It’s headline says “Idaho,
State’s most populous county dropping Medical Savings Accounts.”
It goes on to say that what they experienced was a 15 percent in-
crease in healthcare premiums as a result of having launched their
MSA. It says here that the county saved only $39,000 by offering
MSAs to the 150 employees who selected the MSA option. But on
the other hand, the 15 percent increase would have meant a
$328,000 increase in their premiums.

It says here in the last sentence that, “The economics of making
the decision to drop the MSAs was simple.” Now last, let me just


4

on the dollar amounts to be deposited into the
accounts?

* What types and what percentage of employees
would likely be attracted to MSAs?

What rules might be needed to forestall adverse

selection? and

* What would the effect be on overall FEHBP premium
rates?

Mr. Chairman, MSAs are controversial and the issues
surrounding them are complex. | hope that today's hearing will

enable us to determine their true merits.

Thank you Mr. Chairman.


3

It is my understanding that since that hearing, both
jurisdictions have terminated their MSA plans as the result of
sky rocketing costs. | am pleased that the Mayor of Jersey
City is back before the Subcommittee today to update us on
his experience with MSAs. | want to know why Jersey City’s
program failed? | also want to know if, in light of the failures
in Jersey City and Ada County, he still believes, as he did in
December 1995, that it would be a good idea to make MSAs a
part of FEHBP?

Whether or not providing the option to participate in
medical savings accounts would improve FEHBP or ruin it is the
issue before the Subcommittee today. There are many more
questions that | would like to have answered by the other
witnesses who will appear in order to help me form a

judgement about this. | would like to know:
What is the nature and extent of favorable tax
treatment necessary to make MSAs viable and

attractive?

What minimum and maximum limits should be placed


57

Raab is a graduate of Allegheny College, Meadville, PA, and a US Army veteran. He
serves as vice president of the Board of School Directors of the Upper Perkiomen (PA)
School District and as a director of the Lions Club. He is also a past president of the
Upper Perkiomen Parents’ Assoc‘ation for Gifted Education.

Raab and his wife. Janine, live ir East Greenville, PA. They have three children.

Anthem Health is a subsidiary of Anthem, a Fortune 500 company and one of the
nation’s larger health care mazagement and insurance companies. Anthem Health
conducts business in 49 states ard the District of Columbia. Its affiliate, Anthem Health
& Life Insurance Company of New York, serves New York.

Together, these companies satis:y the increasingly complex needs of a broad range of
groups by offering a variety heelth, life, disability and dental products and associated
services to thousands of employers throughout the country. Two voluntary products,
Anthem Voluntary Group Term Life and Anthem Personal Dental Plan, as well as the
Anthem Rewards Medical Savings Account, are also offered.

Sales activities are conducted through 25 sales offices nationwide, which exclusively
promote Anthem Health produc:s through a network of more than 23,000 independent
agents and brokers.


40

ly the biggest issue for us, is that because the city had a histo:
of trying to create opportunities for people who, because of disabil-
ity or illness may have had a hard time getting employment in the
private sector, the city has over the years employed many people
who are very, very significant health care users. There is an argu-
ment to be made that perhaps government should create opportuni-
ties for people who would otherwise find it hard to find employ-
ment because of illness. But the city had done that over a long pe-
riod of time. So it makes ours a very high cost group, if you will.
So we save money being part of a large group that is on average
much healthier than our own employee system.

Now the real issue for the State of New Jersey is why should
they not offer this as part of the State Health Benefits Plan? You
should offer this as part of the Federal Health Benefits Plan, be-
cause you would end up saving taxpayers money and making sure
that employees were able to be in control of their own healthcare
decisions and get better coverage. You could do all of this without
having any employees get nervous about having to leave the State
Health Benefits System or the Federal system.

Mr. Pappas. Thank you. As was mentioned earlier, the inclusion
of MSAs as an option is being talked about. That is part of the rea-
son that we are here conducting this hearing in Fort Monmouth.
Some are advocating that we consider this on a pilot basis for pos-
sibly a limited period of time or for a certain percentage or group
of Federal employees. I am curious to know if you have an opinion
about whether you think that would be a more advisable approach.

Mr. SCHUNDLER. Well, from direct experience, I am such a big
believer that I would really love to see all of my employees be able
to take advantage of this and all of my taxpayers benefit, at the
same time my employees do. But I think pilots are very good be-
cause they give you a chance to have direct experience, and it does
so because this works so well in such a compelling fashion, that if
you are a believer in this, there is no reason to oppose a pilot be-
cause it will prove itself to be very successful.

Mr. Pappas. Thank you. Based upon your experience with MSAs,
and this would be really for anyone on the panel that would choose
to respond, there has been some discussion here about what we
have in New Jersey is Kennedy-Kassebaum. That being the case,
especially for the physicians who are here, but certainly for the
mayor, if you have anything to add to this, would you have any
specific suggestions to how that could be improved based upon your
experience that public policy here in New Jersey?

‘ir. SCHUNDLER. The one thing I would say clearly is that after
we finish offering MSAs to our employees, we should also deal with
the tax code. I have had a chance to testify before the Ways and
Means Committee on this as well. There is no reason in the world
why contributions to a Medical Savings Account should be taxed as
ordinary income. If the money is taken out for non-health care ex-
penses, it should be taxed as ordinary income. But if the money is
rolled over or used for medical care, it should receive the same tax
preference, if you will, that a corporation’s payment for an employ-
ee’s premium receives. So that is the way to improve it.

I am proud to say that, in New Jersey, we have done that. As-
semblyman Richard Bagger, the Republican conference leader, in-


81

counts [MSAs], on the Federal Employees Health Benefits Pro-
gram. NARFE members adopted this position at our last biannual
convention. While supporters of this bill say that MSAs will allow
participants to select the doctor of their choice, FEHBP fee-for-serv-
ice enrollment enrollees already have an unlimited choice of physi-
cians. MSAs are neither warranted in FEHBP nor wanted by Fed-
eral employees and annuitants.

[ARFE bases its opposition to H.R. 3166, you know the bill in-
troduced by Representative Barton, on the followin, ints. One,
since MSAs tend to attract healthy persons their de fection from.
FEHBP plans that already provide limitless choice will upset the
community of coverage and force insurance carriers to cut benefits,
raise premiums or both. Studies have found that persons who per-
ceive their MSA balance as their money are more likely to delay
seeing a physician at the onset of a health problem, leading to
more serious and costly complications later. I think Dr. Eck men-
tioned something of this nature.

Previous estimates by the non-partisan Congressional Budget Of-
fice on similar proposals require MSAs and catastrophic insurance
in FEHBP indicate such plans will cost, not save, the Government
money. Of the MSAs currently available, demand and interest is
low. The Internal Revenue Service says that in more than a year
and a half after MSAs were offered by the Kassebaum-Kennedy bill
in 1996, less than 20,000 MSA accounts have been opened, far less
than 750,000 policies this law made available for the self-employed
and small business employees.

It is quite clear that most Americans are not clamoring for MSAs
as the cure for their healthcare wishes, says our New Jersey fed-
eration chairman president Sam Girson. Certainly we all support
good affordable health care being available to all Americans. But
we don’t believe expanding Mi catastrophic plans into the
FEHBP program is the answer. That is the end of the statement,
sir.

Mr. Mica. Thank you so much. We have enjoyed working with
Charles Jackson, your president. It’s good to hear his comments
again. Judy Park, we also work very closely with. The concerns
that they have expressed about adverse selection we intend to ad-
dress in any legislation that is passed, making this option avail-
able. We are also very concerned about reducing the healthcare
costs for our Federal retirees, which I think you know and I think
I stated in my opening comments, were 15 percent increased on av-
erage last year, which is burdensome.

So we’re trying to find a way to bring those costs down, both for
the active Federal employees and for our retirees. We appreciate
your comments both on behalf of the New Jersey NARFE and also
on behalf of Charles Jackson, the national president of the Na-
tional Association of Federal Retirees.

Excuse me, sir, would you please repeat your name too for the
record?

Mr. BEEG. My name is Frank Beeg. State legislative officer of
New Jersey NARFE.

Mr. Mica. Thank you. You are recognized, sir.

Mr. BEEG. I just want to reiterate some items that Ben brought
up. First of all, one of the last members of the panel, was talking


28

Mr. Mica. Thank you.

I would like to recognize Dr. Goldfarb. You are recognized, sir.

Dr. GOLDFARB. Hi. My name is Dr. Sidney Goldfarb. I am a urol-
ogist in private practice in Princeton. I would like to thank the
committee for inviting me to speak today on Medical Savings Ac-
counts and my perspectives on them. Our medical system I feel is
deteriorating quickly under managed care as practiced today. Care
basically is not being managed, rather profits are. Large insurance
companies have a need to report larger and larger profits each fis-
cal quarter or else Wall Street groans or their chief executive
moans. The Federal Government, unfortunately, is looking pri-
marily at it’s budget numbers, while giving more lip service to the

juality of care. Medicine is therefore financially besieged by the
Government as well as the insurance companies. The Clinton
health care initiative gave greater impetus to this as well.

I became a candidate for Congress in 1994, for the 12th Congres-
sional District advocating Medical Savings Accounts. A local town-
ship office in 1995, saying Medical Savings Accounts would save
millions of dollars focally, as well as keep local municipal workers
and teachers out of managed care. This would give them their
choice of doctor and hospital, and give them more of a hand in
choosing their own care.

In 1997, I ran for the New Jersey State Assembly, where I in-
vented the concept of auto insurance savings accounts, using the
same idea behind Medical Savings Accounts, which I felt would cut
car insurance costs in New Jersey by 50 percent, and begin to cut
down on needless lawsuits by allowing sort of a deductible for law
suits. I still may have this issue to run on next year, and hopefully
Congress can push this particular idea nationwide.

I chose a Medical Savings Account for my own family’s personal
health care insurance because I was able to save a net of 75 per-
cent of my health insurance premium. As a surgeon, I thought I
would get cheap rates, but my rates were $8,000 a year going to
$9,000 a year. The Medical Savings Account, which is available
through Blue Cross/Blue Shield, was only $6,000 a year, which is
going down, by the way, this year to $5,500. Of the 36,000, $3,750
was in my Medical Savings Account. If I don’t use it, I get to keep
it and roll it forward to next year.

If you are healthy, as most people are when they start working
in their 20’s, by the time they are in their mid-40’s or 50’s and they
needed to have some major healthcare situation corrected, either
surgically or with a hospitalization, you might have at least
$75,000, maybe $100,000 in your Medical Savings Account. You
could pay for your own bypass, your own transplant, and your
deductibles would be very very high at the same time, saving you
even more money.

If someone is ill and needs coverage, he would unfortunately lose
the Medical Savings Account building up, but still you have been
saving the 33 percent a year in lower premiums all along. Plus, you
are not in managed care where you have somebody else telling you
what you can and can’t do. This is becoming worse. You read the
newspapers, Aetna Insurance is losing their profitability. The
have to raise their premiums by 10 or 15 or 20 percent. You will
be reading more of this as time goes on.


45

point out that a guy named Terry Johnson, who was the Ada Coun-
ty human resources coordinator, says that the reason for the in-
crease in insurance rates was due to the adverse selection of the
MSA that drove up costs for the other imdemnity plan. I guess they
had an indemnity plan running side by side with the MSA.

Now it sounds like then that Ada County, which started its pro-
gram around the same time as you did, its program met the same
fate as your program. Adverse selection drove up the cost and ulti-
mately caused both Jersey City and Ada County to terminate their
programs. Is that a correct reading of what occurred?

Mr. SCHUNDLER. No. You can create a policy where if you don’t
match your MSA with the catastrophic policy, you could create an
adverse selection situation. In Jersey City, now I don’t know what
they did in Ada, but I can say in Jersey City, we coupled the MSA
with a catastrophic policy and you did not experience any adverse
selection. You had sick people in the MSA plan in the same num-
bers as in the general distribution.

Mr. HENDRICKS. Whether you call it adverse selection or not, the
result was that your costs went up, that led to—-

Mr. SCHUNDLER. It is a total misreading of the reality. My HMO
costs, all of our costs are higher because their claims are higher.
Now if you have a sick person, his costs are going to be higher than
my costs. I am not sick. The issue isn’t should I, if I am an individ-
ual who is sick, try to get into a big group which is healthier than
me. Of course you should. The issue is what, regardless of your sit-
uation, whether you are sick or healthy, is the best way for you to
buy health care.

If the city of Jersey City were forced to go it alone because some-
one said we don’t want your sick employees with ours, you are in-
creasing our average cost to this plan, so they threw us out and
they forced us to go alone, well, if we were forced to go alone and
I just offered the three plans that the State Health Benefit Plan
offers today, my costs would continue to rise because there is no
first party incentive to seek value in health care.

But because we offered the MSA, you have an awful lot of em-
ployees who did become health conscious. That is why that particu-
lar policy is such a break versus the standard indemnity plan. I
might add that that policy comes in at about the same level as the
HMO, even though the HMO achieves its price advantages versus
the standard indemnity plan because of rationing.

Mr. HENDRICKS. Let me just ask one last question then. In both
Jersey City and Ada County, Blue Cross/Blue Shield was the insur-
ance company that provided the MSA. It would appear because nei-
ther jurisdiction today has an MSA that there was some difficulty
in working the problems out. I just want you to explain the extent
to which your jurisdiction endeavored to try and work with your in-
surer to preserve the program and why some successful remedy
wasn’t at hand.

h Mr. SCHUNDLER. Well, I think there is a successful remedy at
and.

Mr. HENDRICKS. I ask because Blue Cross/Blue Shield does a big
chunk of the business within the Federal Employees Health Bene-
fits Program.


27

benefits high wage earners. MSAs help lower income families gain access to
better and more complete health care. Hopefully with increasing support,
Congress will expand the availability of MSAs to all who would choose them.
Also legislation is needed that would support MSA surphuses to be rolled
over to IRAs. This could help low income families provide future medical
expenses or retirement. The excess may even someday replace the present
Social Security or Medicare method of pay as you go funding. In closing, I
‘would like to emphasize that we must take back control of our bealth care,
We must have the liberty to choose our own doctors and course of therapy
unrestrained by a third party that only looks at the bottom line. Thank you.


MEDICALWEQUITY, nc

32 Knickerbocker at Oak
Tenafly, New Jersey 07670

LEGAL and FINANCIAL BENEFITS of
MEDICAL SAVINGS ACCOUNTS

Madeleine Peiner Cosman, Ph.D., Esq.

Testimony for Committee an Government Reform and Oversight
House of Representatives
105th Congress of the United States

Port Monmouth, New Jersey
Praden Avditorivm, Building 1206, Aveave of the Memories
March 9, 1998

‘Dr. Madeleine Pelner Cosman is an attorney specializing in medical law and the relationship
‘between legislation and medical practice. She is President of Medical Equity, Inc., « national
medica! and surgical practice brokerage located in Tenafly, New Jersey, which sells medical
practices for physicians who retire, relocate, or retrain.

She lectures nationwide for medical, law, and popular audiences, and teaches Continuing Medical
Education and Continuing Legal Edveation couracs. ‘Here August, 1997, lecture Who Qwns Your
Body? was telecast nationally on C-Span. Dr. Cosman is Professor Emerita of the City
University of New York where for 30 years she taught medical students medical law, medical
ethics, and medical business, and directed a 15 department degree-granting Institute. One of her
14 books and over 120 published essays was nomainated for the Pulitzer Priza, the National Book
Award, and sold as a Book of the Month Club dividend volume.

Dr. Cosman holds ber 5.D. from Benjamin N. Cardozo School of Law in New York City, B.A.
from Barnard College (1959), an M.A. from Hunter College (1960), and a PhD. from Columbia
University (1964). She i x member of the New York State Bat, the New Jereey Bar, snd
American Bar Association Sections on Health Law and on Law Practice Management. Be

1989 and 1994 she served as Associate Editor of National Trial Lawyer. See iso Basrister of
the Arthur Vanderbilt Inn of Court.

DISCLOSURE :M. P. Corman does not now have any current federal grant, contract, or nibcontract nor hat she
had ary gran. contract, subcontract during the previous two flscal ynarz. She doas not pall innaronce or amy product.


4

Mr. Chairman, I can’t think of a better place to hold this hearing
today than Fort Monmouth. Just over 6,000 Federal employees,
Fort Monmouth owes its success to the hard work of its civilian
and defense employees. Fort Monmouth is at the forefront of cut-
ting edge technology and communications that’s providing our Na-
tion with the army of the future today. Just as Fort Monmouth is
at the cutting edge of technology, many argue Medical Savings Ac-
counts or MSAs are at the forefront of the healthcare industry.

Medical Savings Accounts are currently available in the private
market to employees who work for small businesses and the self-
employed. Beginning in January 1999, Medicare beneficiaries will
also have the opportunity to enroll in MSAs. I am grateful that we
are going to examine whether Federal workers should have the
same option that is or will soon be available to other Americans.

By offering MSAs as another option in the Federal Employees
Health Benefits Program or FEHB, Federal employees and their
families may well have the opportunity to take control of their own
health care decisions, including choosing their own doctors rather
than Government, insurance companies, or providers, employees
will be able to choose their own health care.

Under current legislation being considered by the Congress, Fed-
eral employees will be able to choose an MSA option combined with
a high deductible catastrophic policy. The annual deductible limits
are identical to those currently permitted for private market MSAs,
$1,500 to $2,250 for individual coverage, and. annual out-of-pocket
cap on expenses of not more than $3,000, and $3,000 to $4,500 for
family coverage, an annual out-of-pocket cap on expenses of no
more than $5,500.

Contributions made to the MSA and any interest on the account
will accumulate tax free. Should the worker retire prior to age 65,
he or she can continue coverage through the high deductible health
insurance plan and continue to make contributions through his or
her MSA.

I am looking forward to hearing the testimony of our panel of
witnesses on whether the Government should expand choice to
Federal workers, thereby helping improve their healthcare cov-
erage and reduce healthcare costs.

Specifically, I am interested in determining if the Medical Sav-
ings Account option will further strengthen and improve the FEHB
Program by expanding the array of choices in the program. Again,
I want to extend a welcome to everyone here, and thank the chair-
man for making this hearing possible.

Mr. Mica. Again, I want to thank you, Mr. Pappas, for hostin;
our congressional subcommittee this morning. Mr. Pappas aske
unanimous consent that we enter into the record a statement from
our ranking member, Mr. Elijah Cummings, the gentleman from
Maryland. Without objection, it is so ordered.

{The prepared statement of Hon. Elijah E. Cummings follows:}


18

in something called a Christian Brotherhood Newsletter, a system
that allows us to give a gift to some family in the United States
that will help them pay their healthcare bills. Amazingly, this sys-
tem only asks us to give $300 a month. If we have a medical event
that exceeds $200, we can obtain help from other Christian Broth-
erhood families. It’s not insurance. A voluntary system instead that
has worked for the past 15 years. It covers 80,000 people. It has
been instrumental in the paying of $4.3 million in healthcare bills
per month.

We started this last June. We have been putting the same $585
we were spending on insurance away in our Medical Savings Ac-
count, giving $300 to a Christian Brotherhood family. To date, we
have $3,000 that’s now sitting in our Medical Savings Account,
which we can use for routine healthcare.

We can’t claim a deduction under Kennedy-Kassebaum. We don’t
fall under their guidelines, but we are still way ahead. So, thank
you very much. We're doing fine with our Medical Savings Account.

Healthcare inflation began when the Government got involved. If
the Government stays involved, rationing will become the only so-
lution. The only other alternative is freedom. Medical Savings Ac-
counts are the best way to provide that freedom. Thank you.

[The prepared statement of Dr. Eck follows:]


82

about self-employed people. The average age of those people is 46
years old, which is a much healthier group than I am associated

with.

We feel that tinkering around with this plan can only harm it.
There is no benefit to be made by introducing MSAs into the
FEHBP plan right now at this current time. In fact, the notes I
have show that Kassebaum-Kennedy opened up 750,000 accounts
for people to participate in. Somewhere like 20,000 people actually
have opted to go into this plan, which is actually less than 3 per-
cent of the spots that were to have been filled.

People in FEHBP plans are very happy with their plan. They are
contented with what they have. As I travel around the State at-
tending different meetings, this is one of the things I constantly
hear. To put it in the vernacular of the older population, if it ain’t
broke, why fix it? They are contented with what they have and
they don’t want to see anything that will endanger their health
coverage.

One further point. The information I have is that the CBO says
that this conversion will actually cost the Government money, and
it will not save the Government money. So it befuddles a person
to understand what would be the benefit of this if the Government
is going to be spending more money. That’s about the end of my
observations on this.

Mr. Mica. We want to thank you for your observation and com-
ments today. Of course the concerns that you raise have been con-
cerns that we subcommittee members have. We certainly wouldn’t
want to adopt anything that would increase costs. We do want to
look at what will reduce costs, both for our active employees, and
particularly for our Federal retired employees, who are probably in
a much more difficult financial position to keep up with the in-
creased costs that are, in most instances, double digit, while their
increase and funds available are very minimal.

So we, in fact, are trying to approach any institution of this as
an option in light of the concerns that have been raised. I have also
advocated, as chairman, that we do this on a demonstration basis
to; that we can have some test as to how it is utilized. We have
noticed that some folks said under Kennedy-Kassebaum that there
would be tremendous utilization. Yet, in fact, there has been a
smaller number of folks making themselves available. So on the
one hand, that does also counter the argument that everyone in the
Federal employment would rush to MSAs. We don’t know that to
be the case based on what we have seen with the Kennedy-Kasse-

aum.

We appreciate your opinion. We look forward to working with
both the State organization, and our continued efforts with the na-
tional organization to see whatever is implemented is done on a
sound concurrent basis.

Mr. COLLIER. Just one statement. I am happy to hear that you
used the word COLA, because we are happy that we got our
COLAs this year starting in January rather than having to wait
until the middle of the year almost.

Mt Mica. Did you want to personally thank me for fighting for
that?

Mr. CoLuier. Yes. We do thank you and Mr. Pappas both.


55

First, 1 think the current tax-qualified funding limits on annual deductibles should be
raised. Insured should be able to put up to 100% of the annual deductible into the MSA
on a tax-favored basis. This makes the concept more viable in practice. although I don’t
know the revenue impact to the Treasury.

In addition. I think both employers and employees should be permitted to make
contribution to the MSA in the same year. This enhancement, along with the first I
mentioned, would be helpful in answering one of the major concerns of MSA's: that
people will forego necessary care to save money.

Finally, I believe that a technical flaw in Kennedy-Kassebaum should not be replicated in
this bill. The requirement that insurers administer family claims as an aggregate
deductible, as required under Revenue Ruling 97-20. should be eliminated. This runs
counter to decades of industry practice and consumer expectations, and can penalize
families if only one member has claims in a year.

The next step would be to incorporate these changes into the MSA’s available under the
pilot project.

Issues of Concern

There were concerns raised about MSA’s during the debate on Kennedy-Kassebaum. I
will discuss two of them.

First, there is a fear that people will choose saving money over getting necessary medical
care. This is particularly feared when it relates to routine preventive care, such as
childhood immunizations. I can understand this concer. The pilot project is too new for
us to draw any meaningful conclusions from our emerging claims experience. Until we
can see what the facts are, I question the faimess of making an assumption about
employee behavior and enacting a form of prior restraint based on that assumption. After
all, we are discussing an optional benefit, not a mandated one. In addition, the proposed
funding changes mentioned above could obviate this concem.

Second is the widely discussed concern that MSA’s will lead to adverse selection, impair
the ability to spread risk, and create two pools. One pool would consist of healthy
insureds with low premiums, and the other pool would consist of unhealthy insureds
paying high premiums. Once again, I understand the concern. Since this theory was
advanced by noted actuaries, how can a lay person refute it?


79

cap. To get back to your earlier question, if it would be helpful to
the committee, I could send down to the staff a listing of all our
purchasers by industry, if you would find that helpful.

Mr. Pappas. Thank you.

Mr. Mica. Thank you. I would like to yield now for the purpose
of questions to the representative for our ranking member, Mr.
Hendricks.

Mr. HENDRICKS. Thank you, Mr. Chairman. Just a few questions,
in fact, one for each of you.

Mr. Raab, does Anthem Health do any public sector MSA busi-
ness presently?

Mr. RaaB. My company is Anthem Health which is here in New
Jersey. Our parent corporation is Anthem Blue Cross Blue Shield.
They may or may not be in the public sector environment. I don’t
know. We are only offering products in areas where our parent
does not write coverage. We are offering it only in conjunction with
the pilot project.

Mr. HENDRICKS. Thank you. Ms. Kenna, let me ask you the same
question. Does Merrill Lynch presently do any public sector MSA
business?

Ms. KENNA. To the best of my knowledge, currently all of our ac-
counts are contained within the private sector.

Mr. HENDRICKS. OK, thank you.

One last question for Dr. Cosman. You stated in your testimony
that reasonably healthy people could not fail to make money with
an MSA. Is that correct? Is that your testimony?

Mr. CosMAN. That was part of my written testimony, yes. The
audience did not hear that.

Mr. HENDRICKS. Now does it then follow that sick and elderly
people could very well lose money with an MSA?

Mr. Cosman. No. I don’t think that is too likely. Of course people
could make errors. But let me explain my point. When a person
has an MSA and has whatever is the amount dedicated to it,
$1,800 or $2,000 to use for that year, if only a certain small
amount is used that year, let us say half, then that $900 is then
rolled over to the next year and added to the next $1,800 which
comes in that year, and constantly and continuously earns interest.

My point is that the person of any age or any degree of health
who does not use all of the amount has the opportunity to make
money and generally to make a fair amount of money, just as our
IRAs enable us to make money.

Now the person who has very high medical bills and uses up all
the money in the MSA has nothing at the end of the year, that is
true. But it is also true that under our current indemnity insur-
ance at the end of the year what do we have? A canceled check,
nothing more. My point is that if we have a good year, we make
profit. If we have several good years, we make a lot of profit.

The person who is very ill with a serious chronic disease may not
make profit, but probably will come out ahead because he or she
will not have to pay the copayments which are customary in the
first dollar indemnity plans.

Mr. HENpRICKS. Then let me just add this followup question. Are
copayments characteristic of the high deductible catastrophic plan?


85

(@NARFE — Besant A. Collier

RegtanatAUDCINEN of wed Feder EmesOVeeE
—————

000 Nortn Wasnington
Alexcndr 0. vi'g nia 223:
(703) 838-7706 + FAX (703) 838-7785

FOR IMMEDIATE RELEASE CONTACT:

March 9, 1998 Chuck Timanus, Public Relations
Dan Adcock, Legislative Department
(703) 838-7760

NARFE SAYS MEDICAL SAVINGS ACCOUNTS (MSAs) ARE
NEITHER WARRANTED
NOR WANTED IN FEDERAL HEALTH PLAN

‘The National Association of Retired Federal Employees (NARFE) reaffirmed its
‘opposition to legislation that imposes Medicare Savings Accounts (MSAs) on the Federal
Employees Health Benefits Program (FEHBP) at an informational hearing hosted today
by Rep. Mike Pappas (R-NJ) in Ft. Monmouth, New Jersey

NARFE members adopted this position at their last biennial national convention.

“While supporters of this bill say that MSAs will allow participants to select the doctor of
their choice, FEHBP fee-for-service enrollees already have an unlimited choice of
physicians,” said NARFE President Charles R. Jackson. “MSAs are neither warranted in
FEHBP, nor wanted by federal employees and annuitants ”

NARFE bases its opposition to HR. 3166, introduced by Rep. Den Burton (R-IN), on the
following points:

‘* Since MSAs tend to attract healthy persons, their defection from FEHBP plans
that already provide limitless choice will upset the community of coverage and
force insurance carviers to cut benefits, raise premiums, or both

* Studies have found that persons who perceive their MSA belances as “their
money” are more likely to delay seeing « physician at the onset of « health
problem, leading to more serious ~ and costly ~ complications later.

(over)

National Association of Retired Federal Employees

Cranes 8. Jacksen Al James Goo Rese 7 sensen Fara. Atanter
meson ‘vee prgaocur Beata rca scm


62

Mr. Mica. Thank you, Mr. Raab.

Dr. Cosman, you are recognized. Welcome.

Mr. CosMAN. Thank you. I am delighted to be here. I have been
invited to speak about the legal benefits of Medical Savings Ac-
counts. I have got a nice 33 year history in.medical law to give me
some legitimacy in doing it.

The Medical Savings Accounts really give credit to every Ameri-
can’s intelligence, individuality, and responsibility. The law govern-
ing Medical Savings Accounts helps each individual overcome at
least seven of the nastiest problems which most other managed
care law cause for each patient today. First, an MSA avoids capita-
tion. What most people don’t fully perceive is that capitation means
the e-payment of a practitioner or a medical facility in advance
per head of American. So that the practitioner gets no more and
does not get paid more frequently whether the head comes in with
a splinter, with a virus, or the head has its heart in cardiac arrest.

‘he second value of an MSA from a legal point of view is that
it avoids community rating, which is the arrangement, as we have
heard, whereby an insurance company must charge the same pre-
mium for everyone in a geographic area, no matter the age or the
sex or the state of health. Because the individual patient pays out
of his or her own MSA, there is no problem as to what is paid. It
is the market value for that particular medicine or surgical proce-

lure.

A third and very important advantage from a legal point of view
of an MSA is that it avoids the violation of confidentiality. In vir-
tually every cireumstance in which say a Medicare patient, or for
that matter, anyone who is having an insurance reimbursement,
the physician must provide to the insurer some aspect of the pa-
tient’s confidential medical record. With an MSA there is no such
providing of confidential information to anyone. The only two peo-
ple making the decisions and therefore having that record of the
medical or surgical event are the patient and the practitioner.

Related to that is the fourth important advantage. That is that
an MSA avoids any third party definition of medically necessary
treatment. Now we who are all highly intelligent creatures here
make the assumption that medically necessary means that which
is necessary to help prevent or treat or cure a disease or injury.
But that’s not what medically necessary means in the current med-
ical law, particularly under managed care. Unfortunately, medi-
cally necessary means whatever the third party payer wants to pay
for. MSAs avoid that. What is medically necessary is indeed what
the patient and the practitioner decide is correct for that patient.

The fifth important point making Medical Savings Accounts valu-
able for Government employees as for all other Americans is that
it partially avoids what I have been calling the criminalization of
American medicine. Most physicians do not realize, and most pa-
tients do not realize that the law now guiding and guarding medi-
cal care as under the Medicare and Medicaid Patient and Program
Protection Act, as under the Health Insurance Portability and Ac-
countability Act, which we have all been calling Kennedy-Kasse-
baum here, is not civil law. It is criminal law, which means that
any practitioner who by accident, let alone intention, violates a rule
on medically necessary care or violates a billing code rule, may


35

Mr. Mica. Then I think you also spoke to the question of con-
sumer choice under MSAs versus the rationing under HMOs.
Maybe you could explain that better; what the options are that
these folks-——

Mr. SCHUNDLER. Some people continue—almost everyone who
was in a standard indemnity plan, I shouldn't say almost everyone.
Everyone who is in a standard indemnity plan left it because their
costs were high. This gave them less out of pocket expense. If their
costs were low, they got money back.

Some of those who were in the HMO stayed in the HMO because
of its cost to them, because there was only a $5 office visit charge.
This gave them the guarantee of the lowest out-of-pocket expenses.
So what happens is you have some people staying with the HMO,
but everyone who wanted to be able to have the choice of their own
doctors and to be in the driver’s seat relative to the procedures
they receive, every single one of those individuals who valued that
ability to make their own healthcare decisions, every single one of
them went into the MSA plan.

Mr. Mica. You also said that about 56 percent of the managers
chose an MSA. I would imagine that your managers would prob-
ably be a little bit further up in age than the average employee.
Was there any evidence of what has been termed “cherry picking”
or fo.

Mr. SCHUNDLER. With this plan, because it decreased costs, if
you had high healthcare usage relative to the standard indemnity
plan, you did not have any of that adverse selection problem. You
had again, just to put it in perspective, the way the standard in-
demnity plan worked, it was a $200 front-end deductible, whereas
this was a back-end deductible. So it’s better to know you are not
going to pay any dollars out of your own pocket until you have ex-
pended the $1,800, than to know the first dollar of health coverage
you get in a year is going to come out of your pocket.

Second, the standard indemnity plan had a 20 percent co-pay, up
to a $400 expense per family member. So that could become a very
big cost out of pocket. This eliminated that. Our MSA eliminated
that altogether. So there was no cherry, picking. You had People
who were very ill still opt for the MSA. The only people who didn’t
opt for the MSA again, were people who felt comfortable with their
HMO relationships and the fact that they only have to pay $5 co-
pay. If they felt comfortable giving up their choice, then they typi-
cally felt comfortable with the HMO.

Mr. Mica. I think in your testimony you also said that the re-
newal costs for the MSA option was almost $1,000 lower than the
renewal cost for the more traditional, low deductible indemnity

lan.
P Mr. SCHUNDLER. Exactly.

Mr. Mica. Is there anything specifically you could attribute the
reduced costs to?

Mr. SCHUNDLER. Again, it grew from $500 to $997. I think it is
because there is an ‘incentive created to get value for your dollars.
People don’t waste money when they know at the end of the year
that if they don’t waste it, they can get it back. So because there
is an incentive for people to seek value in health care, you begin
to see lower claims growth, which results in lower premium growth


15

who are being reimbursed by Government payers are for the most
part submitting bills to the Government, and they are not them-
selves submitting the bills. They have billing secretaries or their
billing assistants or their billing systems are.

If a practitioner whose billing secretary or billing system
accidently uses a wrong code and uses it several times, and remem-
ber, these codes, these CPT codes as they are called, in the last
year of 1997, 3,000 new CPT codes were introduced, 3,000 new di-
agnostic codes were introduced. Even the most meticulous, precise,
honest and ethical practitioner can make an error completely
accidently. My point is that because we are so concerned with pro-
tecting the program and its costs, which is a valid concern, we are
over criminalizing the actual provision of medical care.

Under MSAs, since one doesn’t have to then worry about a third
arty payer under criminal law, there are the usual ethical, intel-
ligent market forces. There is the usual American tort law which

protects the patient against medical malpractice. There is the usual
American contract law which protects the patient against say ex-
cessive fees or misrepresentation.

My belief is that the MSA allows a normal, natural, and intel-
ligent legal system to guide and guard medicine. It is the over-le-
galization under criminal law of such programs as Medicare and

[MOs which leads to the excessive use of criminal law against
good practitioners.

I Point out I am not interested in defending the quacks and the
charlatans and the real frauds. I am eager to see us allow reason,
balance, and intelligence to return to the doctor-patient relation-

ship.
Mr. Mica. Thank you. Ms. Kenna, Merrill Lynch, how long have
they been offeri: ISAs?

Ms. KENNA. We have been in the market nationally since Sep-
tember 1997.

Mr. Mica. So it’s a fairly short period of time.

Ms. KENNA. Very short.

Mr. Mica. Are you saying that 15 percent of MSA clients pre-
viously had no medical insurance?

Ms. KENNA. Yes.

Mr. Mica. Have you looked into any reasons why these folks
didn’t have coverage?

Ms. KENNA. We have done some focus groups with our clients,
asking them exactly that question because it seems unusual that
generally sophisticated investors don’t have health insurance. But
as I mentioned earlier in my testimony, about 75 percent of our cli-
ent base are self-employed individuals. They found it very difficult
to procure health insurance at a competitive rate. As a self-em-
ployed individual, you don’t have the benefit of being subsidized by
a large organization. So they have not found health insurance that
has been something that they could afford. This was a way that
they could get a tax break at the same time as making sure that
their family was insured.

Mr. Mica. You said that the average age of your participants is?

Ms. KENNA. Forty six.

Mr. Mica. Forty six. Do you know what portion is under and
above? Have you looked at that?


36

on the catastrophic policy than what you are getting in the stand-
ard indemnity plan premium.

Mr. Mica. ink you, Mayor.

Dr. Eck, you had some pretty harsh comments for what New Jer-
sey is doing with their guaranteed issue, and also the $300 man-
dated preventative per person care cost. Many times we're asked
in Congress to take a similar approach, mandated coverage in par-
ticular. That, in fact, we held hearings on the reason that we have
averaged 15 percent increase in costs for our FEHBP program in
the last year. A great deal of the attributed cost is to mandated
coverage.

I guess you are seeing the same experience in New Jersey. How
long has this been in effect? Is that the case?

Dr. Eck. 1992 was when New Jersey began mandated commu-
nity rating and guaranteed issue. In the past year, the insurance
costs for individuals that want to just buy insurance has doubled.
It has gotten out of hand. So what is happening is the people who
were on the fringe; who were already Paying too much for their
health insurance, suddenly when it doubled, they dropped out.
Those are generally the healthy people.

People who are very sick buy their health insurance no matter
what it costs because it’s cheaper than paying cash for healthcare.
It is the healthy, 20 year olds that just say forget it, I’m not going
to pay that for insurance. They drop out. Then you have a death
spiral. As the healthy people drop out and you are left with sicker
and sicker older people, the insurance rates just become exorbitant.

Mr. Mica. One of the accusations against MSAs is that you will
see the same pattern developing; that people will not participate,
especially the younger people, and you'll get this adverse selection
or cherry picking. I questioned the mayor about this. Now you tell
me you switched into a different plan.

Dr. Eck. Something totally different.

Mr. Mica. It’s not even official—

Dr. Eck. Not officially insurance, right.

Mr. Mica. You couldn’t really speak to this point.

Dr. Eck. In favor of Medical Savings Accounts, let me think. If
you take a woman, say a single mother making $12,000 a year, on
January 2, her child wakes up with a fever. She knows she has got
to go to work and she doesn’t have a lot of time to spend. Put her
in a traditional insurance policy and she’s got a $500 deductible.
She’s only making $12,000 a year. That $500 is a lot of money she
has got to come up with. So she is going to hesitate getting that
child healthcare.

If she is in an HMO, now it might only cost her $5 for a visit.
But she gets on the phone. She calls a secretary. She tries to get
into the office. They say we can’t see you for 3 days. It’s very hard
to get care when time is of the essence.

If she had a Medical Savings Account and worked in Jersey City,
she would have gotten $1,800 placed in her Medical Savings Ac-
count on day one, January 1. There would be nothing to stop her
from calling the doctor that she has known for the past 20 years.
He would say sure, come right in. He would take care of her. She
would pay out of her Medical Savings Account. There would be no
claim forms. She would be only making $12,000 a year, so she


51

The Anthem Rewards MSA program is currently available in all states except
Connecticut, Hawaii. Indiana. Kentucky, Maryland. Minnesota. North Dakota, Ohio,
Rhode Island, and Wisconsin. The requirement to comply with first dollar state mandates
(other than preventive care) does not allow us to sell in Connecticut, North Dakota,
Rhode Island and Wisconsin. However, this program can be offered in these 4 states to
prospects of 50 lives and under for self-funded plans.

Historical Perspective

An historical perspective may be helpful in understanding consumer reaction to MSA’s.
The concept of lowering health care premium to save money by purchasing high-
deductible plans is not new. High-deductible medical plans have been widely available
since at least the 1970's. In fact. high-deductible plans are more consistent with the basic
concept of insurance (i.e.. that you should insure against unpredictable events and
catastrophic losses, while budgeting for lower-cost predictable expenses). Nonetheless,
high-deductible plans have not had broad market appeal. For example, prior to the
introduction of MSA plans. high-deductible plans (annual deductibles of $1,500 or more)
represented less than 3% of our small group policyholders and less than 1% of our small
group revenue. I would expect that the experience of other carriers is essentially the same.

These statistics appear strange when compared to the pattern of incurred claims in the
population as a whole. At an insurance industry seminar on MSAs in late 1996, a
consulting actuary stated that in a recent year only 12% of claimants in the insured
population incurred claims in excess of $5,000. Their claims represented 77% of all claim
dollars. He further stated that 60% of claimants incurred claims less than $1,000. If we
accept those numbers as reasonable, it would appear that 60% of the population should
have an interest in high-deductible plans. Yet, high-deductible plans have not had
anywhere near that market penetration. Why?

In my twenty years of experience selling benefit plans, there were two basic underlying
premises: employees wanted better benefits, and employers wanted lower costs. I believe
these premises to be just as valid today as they were in 1975.

When it comes to employee perceptions of medical plans, one of the major components
of “better benefits” is “low out-of-pocket costs.” Employees have been conditioned for
decades to expect good health benefits, which they have utilized quite freely. Since these
benefits were heavily subsidized by the employer, employees were to a great extent
immunized from the economic consequences of their health care utilization decisions.

With this as a backdrop, it is clear that high-deductible plans, which would increase out-
of-pocket costs, would be perceived as a reduction in benefits and would have little
appeal to employees. If the employees were paying the premium they might have reacted
differently, but there is no guarantee that this is so. I have had personal experience where
business owners and professionals deliberately opted for more expensive low-deductible
plans, as opposed to saving the premium and budgeting for routine medical expenses.


24

People are asked to make dozens of decisions each day that affect
their lives. Suddenly we are told that we need a big brother to
make choices that directly impact our lives and our health.

The doctor-patient relationship is vital to this decisionmaking
process, but it is eliminated in managed care. This trusting rela-
tionship is developed over the years as a result of a physician’s
skill in the science and art of medicine. Because of this bond, the
physician becomes the patient’s advocate, unlike the clerk in an in-
surance company.

A well-informed patient is not only equipped to seek proper medi-
cal care, but the most economical care if allowed. Rand Corporation
studies show that the medical consumer, when faced with out-of-
pocket costs, that is to say with higher deductible policies, they
make more responsible choices than those in low deductible plans.
Medical Savings Accounts will help return medical care to the pa-
tient and the doctor. They will eliminate the mindset of rationed
care and replace it with responsible care.

Since most people, up to 90 percent, do not utilize $3,000 per
year, the amount of paperwork can be drastically reduced. Some es-
timates have MSAs reducing administrative costs by $33 billion a
year by eliminating all these low dollar claims as patients come in
with their sore throats or whatever low dollar problem they have.
This all generates paperwork. The increased manpower necessary
to process these claims and obtain clearance for procedures has
greatly increased my office payroll as well.

I will leave it to other speakers to discuss the benefits economi-
cally of the MSAs. We have heard some from Mayor Schundler and
from Dr. Eck. The present system of tax-free employer provided
health insurance benefits highway journeyers. MSAs help lower in-
come families to gain access to better and more complete health
care. For example, the person that paints your house, I recently
had a wallpaperer come in. He told me he didn’t have health insur-
ance because he couldn’t afford it. He is self-employed. This is not
tax deductible for him. If he was employed by somebody else, it
would be tax deductible to the employer. This should stop.

Hopefully, with increasing support, Congress will expand the
availability of MSAs to all who will choose them. Also, legislation
is needed that would support MSA surpluses to be rolled over to
IRAs. This could help low income families provide future medical
expenses or retirement. The excess may even some day help sup-
plement | the present Social Security or Medicare method of pay as
you go funding.

In closing, I would like to emphasize that we must take back con-
trol of our healthcare. We must have the liberty to choose our own
doctors and course of therapy, unrestrained by a third party that
only, looks at the bottom line. Thank you.

{The prepared statement of Dr. Cauda follows:]


54

The results are even more impressive when considered in the context of new business
sales. For the same ten month period, MSA-compatible plans represent 20% of new
policyholders sold, and 8% of new business sales revenue. The percentages are even
higher when only January 1998 sales are considered.

We have done some preliminary segmentation studies to identify our typical buyer. So
far, 53% of policyholders and annualized revenue are concentrated in a few industries.
These are professionals (doctors. dentists, lawyers. accountants and engineers).
management and high-technology consulting, and financial services (insurance and real
estate agents and securities brokers). It is no surprise that well-educated. high-income
people would be attracted to this concept. What is a surprise, at least to me, is that they
represent only half the buyers. This could very well indicate that MSA’s would appeal to
abroad spectrum of federal employees.

Impediments to Sales

Much has been written in trade journals about the slow initial response to the MSA
concept, so I don’t need to discuss it in depth here. The two major obstacles that have
been widely discussed are the complexity and newness of the concept. and the resistance
of insurance agents and brokers.

As I have indicated previously, this is not really a new concept. It just hasn't been widely
used in the past. Kennedy-Kassebaum does add a new twist (the savings account piece) to
the standard insurance sale, which accounts for the “complexity” argument. As the
concept becomes more widely understood, this obstacle will disappear.

The vast majority of small employers utilize an intermediary (an insurance agent or
broker) when purchasing an insurance product. Our own research supports the position
that there has been some resistance to the MSA concept on the part of these
intermediaries. The reason is obvious: premiums for high-deductible plans are 40-50%
less than low-deductible plans, which drastically reduces commissions. Competitive
market forces will gradually resolve this situation, and agents and brokers will sell the
concept or risk losing clients. Our recent sales results indicate that this is already
happening.

A Better Mousetrap

As currently structured, federally-qualified MSA’s do have appeal. However, there are
several improvements that could be made which would make MSA’s more attractive. The

Sub-committee may wish to consider incorporating these design changes into the
program before it is offered to federal employees.


63

suddenly find himself guilty of a felony, fined, have all of his assets
forfeited, and also find himself in jail.

An eye surgeon in the State of California was accused of perform-
ing 15 medically unnecessary cataract operations which his pa-
tients voluntarily requested and which improved their vision. He
was convicted on a technicality of fraud against the U.S. Govern-
ment of $65,000 over 5 years. He is now serving 11 years in a Fed-
eral penitentiary. He was fined $16.2 million in penalty. Here, in
our magnificent USA.

Related to that, and it’s related to this case, is my sixth point
about the law. Namely, that Medical Savings Accounts will avoid
the possibility of what is becoming increasingly frequent. That is
a particularly vicious and distressing type of legal action. It will
help avoid qui tam actions. For those in the audience, a qui tam
action is a whistleblower action whereby the person who is report-
ing the so-called fraud gets up to 30 percent of whatever the Gov-
ernment can collect in penalties. While for big Government contrac-
tors and while for a nation under war, the whistleblower legislation
and qui tam actions are valid and wonderful, they are being used
now for disgruntled fired office workers, for disgruntled spouses
who find that a qui tam is quicker and cheaper than the divorce
court. They are being used by envious competitors in medicine. I
have seen a few horrendous cases. Now under Kennedy-Kassebaum
and HEPA, health insurance portability, they are being used to
elicit from patients reports through various fraud hotlines to en-
courage them the bring qui tam actions. This is an abuse of both
the law and reason.

The last point, the seventh, is that MSAs help avoid medical ra-
tioning by third parties. The MSAs will encourage individual pa-
tients medical prudence. Managed care, on the other hand, uses
the carrot and the stick. It uses the carrot of a bonus and the stick
by the so-called withhold to reward practitioners who avoid sending
their patients for expensive diagnostic procedures and treatment
methods such as surgery.

The MSAs avoid all of these seven unpleasant legal cir-
cumstances. They place the personal rights and responsibilities in
the mind and in the hands of the American individual needing
medical care. An MSA does not require as a Medicare law does, an
operation restore trust with its harsh penalties, its fines, its forfeit-
ures and its criminal penalties for physicians and surgeons.

Under an MSA, the physicians’ allegiance is to the patient,
namely the patient who pays, and not to a third party payer. Trust
is not violated. So there is no need for restoration.

I heartily encourage for Government workers the same sort of re-
spect for their intelligence, their individuality and their initiative
as we will lavish upon the best working outside of Government.
Thank you.

[The prepared statement of Ms. Cosman follows:]




43

shifts. They did all the care for free that the health insurance
should have been doing for her. She finally died peacefully at
home. That was the end of that story. The husband is now just
making his way by himself.

Mr. Pappas. Thank you. One last question. I assume, I know that
Dr. Eck, you in your Practice do not deal with any health mainte-
nance organizations. You other two gentlemen, I mean do you have
any——

Dr. Caupa. We have to out of necessity because of their
penetrance now in this part of the county. People cannot afford out-
of-pocket, especially for a surgeon health care. But in my practice,
we have 15 surgeons; we’re a multi-specialty practice. Two of them
in their early 50’s, prime in their career, have left medicine for
other ventures.

Mr. Pappas. My question is, since at least for one of you the an-
swer is yes, how many—have you seen any kind of a change in the
personnel structure of your own practice regarding administrative
costs that may have changed with what I have heard from other
physicians in dealing with some of these plans, can you comment
on that? What changes and what costs you feel you have incurred?

Dr. GOLDFARB. We have had to hire another person to do the in-
surance work. Our every procedure needs to be pre-approved. My
secretary has to call up the insurance company. They put her on
hold for 30 minutes. We have a speaker phone so you can function
and do some other office work during that time. I think this is a
rate-limiting step that is put in the way, that they only can do a
certain number of approvals a day, and that’s part of their cost
management. They are managing their profit. They are not manag-
ing care. They provide care, but that’s their business. But they are
really managing their profits.

I think it’s just going to get worse and worse and worse. We are
going to become capitated. People are going to be paid, as Dr. Eck
said, $10 a month to take care of a patient. A lot of doctors will
have no incentive to take care of their patients properly.

Dr. Caupa. The process and decisionmaking is no longer left to
the physician because it’s almost uniform where we have to hire
extra girls, not only to call the insurance company to get approval.
Sometimes it takes two and three phone calls where finally I have
to take time from my day to get approval to speak to a physician
from the insurance company. When you multiply this by dozens of
patients each month, it reaches a proportion that just totally it sti-
fles your ability to work. It’s gridlock.

Managed care plans are now, we have seen where anesthesiol-
ogists have had to say that they would not accept patients from the
care plans because they do not reimburse correctly. You talk about
a danger from managed care. Last week’s Asbury Park Press, I
have the article right here, speaking about I believe it’s Oxford
Healthcare Plan refusing assistant surgeons on procedures where
an assistant surgeon is required by the State Board of Medical Ex-
aminers. The health care plan is saying that we will not pay them.
Who is to pay them?

Mr. Mica. I thank the gentleman. Now I would like to yield to
Mr. Hendricks, who is going to represent our ranking member, Mr.
Elijah Cummings, the gentleman from Maryland for questions.


41

troduced and passed legislation so that there is the same kind of
tax treatment for MSA contributions for New Jersey State tax pur-
poses as for basic premium payments. But we don’t have that bene-
fit at the Federal level yet.

Dr. Eck. If I were to make a suggestion, No. 1, if we could have
people understand that their health insurance is just another way
that they are compensated for the work that they do in whatever
job it is, whether it’s a Government job or a private sector job, they
might value the cash instead. Here is how they could benefit.

If Federal employees could have Medical Savings Accounts by
which they could purchase their own healthcare and catastrophic
insurance, they would be getting their own insurance. When they
are 20 years old, they buy a policy that can’t be canceled when they
get sick. Then that policy, they would carry with them from job to
job, with the Medical Savings Account paying routine things. Then
if they lost their job, they could pay their premium through their
Medical Savings Account that had accrued. You need to start with
healthy people when they are 20 years old. Then watch this ac-
count grow and grow.

The problem that we have now, is it’s very fragmented. People

(0 from job to job, insurance company to insurance company. As

r. Goldfarb was saying, or was it Dr. Cauda, that if the different
companies try to delay getting expensive treatment done until you
are in some other insurance company, now all you have to do is
make it so that insurance companies cannot drop you when you get
sick, and have Medical Savings Accounts. I think that would go a
long way in solving the entire problem that we now have with
healthcare.

But the other thing is, I don’t think employees realize that many
of them stay in a job in which they are underpaid simply because
they have “health” benefits. This whole thing would totally be
eliminated with MSAs. So really they are getting underpaid and
they have health benefits, some of which are good and some are not.
so good. I think their employers are getting away with something
there in certain respects. Let the health benefits or the health in-
surance be the same as their car insurance and their home owners
insurance, something that they privately own, carry with them
wherever they go, and I think the problem would be solved.

Dr. GoLprarB. I agree 100 percent. I think in the United States
in the 1940’s, health benefits were given as an employee benefit.
But it was a mistake. It was a real mistake. If you change your
job, if you move to another State, you lose your coverage. Then you
are uninsured, and you have pre-existing conditions. If you owned
your policy and you owned it for your whole life, if you moved from
New Jersey to Arizona, it’s your policy. You never had a pre-exist-
ing condition. Your old insurance company can certainly afford to
insure you, so why the hell can’t the next insurance company? You
would just have your same policy for your whole life. I think it
makes much more sense.

I don’t know if we can ever unravel the present byzantine system
that we have. But that would make a lot more sense.

Mr. Pappas. Do you have anything to add?

Dr. Caupa. Basically I think everything has been said. We just
have to remember that the Kennedy-Kassebaum in a sense keeps


MEDICAL EQUITY, INC

32 Kaickerbocker at Oak Br Conman, MSA, 3
Tenafty, New Jersey 07670

decision for medical success joining ideas of the patient and the physician.
S)MSA law partially eoids crimination of medicine Physicians under the Medicare and
the Health Insurance Portability and

sme Kamehens) A foes, foci aes ey
Piaan car or tenag on fudgmens of weal nace ty. Amazingly, patients also risk fines

pati
of $65,000 over 5 years (U.S. v, Rutgard). He is now serving 11 years in s federal penitentiary
and asseased a penalty of $16.2 million dollars.

SLMSA lew pstialy avoids gut tom lal actions he fecal whist Bower aon fr False
Claims against the government, whereby a disgruntled fired employee, a divorcing spouse,

tchappy patient, of an eavious suodieal competior can report « physician's wupposed biling
abuse, and then collect up to 30% of any penalty.

7) MSA lew partially avoids medical rationing by third parties but encourages the individual
patient's medical prudence. Managed care law, on the other hand, uses the "bomus" carrot and
the “withhold” stick to financially reward physicians who refuse to recommend expensive
lagoons and surgery, end who plodge lepiance to con cootainment rath than tothe patient
‘or reasoned medical judgment, Many managed care contracts retain "gag clauses" requiring
doctors to not reveal to patients expensive, available alternatives for their care.

MSA law places personal rights and responsibilities in the mind and hands of the American
individual requiring medical care. MSA law does not require Medicare’s Operation Restore Trust
‘with its harsh penalties, fines, forfeitures, and prison terms for physicians and surgeons. Under
MSA law the physician's allegiance is to the patient who pays, not to a third party payor, Trust
not violsted needs no restoration,

tL MSA FINANCE

‘MSA financing also respects the citizen's intelligence, individuality, initiative, and bank account.
Individual patients determine the benefit versus the cost of each medicine or procedure before
consent. Cardiologists and urologists have the same market incentives to behave reasonably when
selling their talent and services as other professionals, crafismen, snd purveyors of honest product.

Community medical costs and national costs will decrease if « true medical market is permitted
tw flourish. Many currently costly medical procedures are not inherently expensive but become
outrageous because of habitual cost shifting from those who will not or canoot pay the fair price
to those whose insurance will pay. Practitioners reimbursed $4 per patient encounter, the amount
tho Ingest Now York sate macaged cae Medicad progrem pay obuttiiens and

must make up money elsewhere for that leas than minimum wage recompense for their time snd
talent.


il

contribution costs, was $997 a year less than the renewal cost for
a family choosing the traditional low deductible indemnity option.

The HMO option also continued to be priced cheaper than the in-
demnity Plan. But the HMO option achieved this cost efficiency
through third party rationing of medical care. Our MSA option, in
contrast, achieved this cost saving while preserving full employee
choice relative to healthcare providers and services.

The ability of individuals to control their own healthcare deci-
sions is growing more and more endangered in our current national
healthcare environment. With our MSAs, patients were able to
choose the doctors they wanted to see and the procedures they
wanted to receive. I think this is an extremely significant
healthcare advantage of the MSA option compared to the HMO op-
tion.

We were ultimately forced to return our management employees
to the State Health Benefits Plan. Our city employees tend to be
older than the State average. Many have disabilities and illnesses.
Some take part-time jobs with the city just for health insurance to
pay their ailments. By switching back to the State plan, Jersey
City employees will now be grouped with a much larger and
healthier pool of individuals.

We are now endeavoring to have the State plan offer an MSA op-
tion. We will be pushing hard for the State to implement such an
alternative. As we showed in Jersey City, the MSAs would quickly
become the most popular healthcare option for New Jersey State
and local employees, would save employers, in this case taxpayers,
money, and would accomplish this while granting freedom of choice
over medical care to participants, a freedom that all Americans
cherish.

You will see from my comments that I have written out that I
think this would have tremendous benefits, not only for employees
and for the Federal taxpayer, but I think you would accrue a sig-
nificant appreciation for our congressional representatives who had
the foresight to introduce this option for Federal employees.

(The prepared statement of Mr. Schundler follows:]


53

The tax advantages given to MSA's provide additional impetus to the concept. The
formalized savings account mechanism with rules and procedures for deposits and
withdrawals should make it easier than ever before to sell and implement high-deductible
plans. No such structured depository for premium savings existed when we tried to sell
high-deductible plans in the *70"s or 80's.

MSA Benefits

MSA’s can produce several good results if sufficient numbers of people utilize the
concept. These are in addition to the obvious benefit of providing an additional choice.
First, MSA's do have the potential to reverse health care spending pattems. Rather than
spending someone else’s money. the insured is spending his or her own money, and is
directly accountable for the results. This should lower utilization over the long term.

Second, the insured is more likely to actively participate with his or her physician in
managing his or her own care. This should lead to more individual responsibility.

Third, thrift is rewarded, but money is there if you need care. Long-term MSA savings
can supplement other retirement savings vehicles. This is particularly advantageous for
high-income individuals, for whom Social Security will provide a smaller percentage of
income replacement.

If these benefits are desirable for the small employer market, I think they are desirable for
federal benefit plans as well.

Sales Results

There appears to be some disagreement about the IRS count of qualified MSA's
established to date. I am not in a position to know if the actual number of accounts has
been understated or not. I think all involved would agree however, that whatever the
actual number is, it is well below the caps in Kennedy-Kassebaum.

However, I am in a position to know our sales results. (Recall my initial comment that,
prior to the introduction of MSA's, high-deductible policies represented less than 3% of
our small group policyholders, and less than 1% of our small group revenue.) Our results
have been encouraging. Although slow at first, MSA sales are accelerating.

The earliest possible effective date for an MSA with Anthem Health was April 1, 1997.
We can measure ten months of sales, through January 31 of 1998. Our MSA-compatible
high-deductible plans already account for 6% of our small group policyholders, and 2%
of our annualized small group revenue. In other words, the Federally-qualified MSA
concept has enabled us to double our high-deductible business in just ten months.
Although these plans are still a small portion of the total block, this is a remarkable
outcome.


59

Anthem Rewards Policies by SIC Code

SIC Code Industry Policy Count | Exposed Lives
0100 Agriculture Production - Crops 1 3
0200 Agriculture Production - Livestock 2 4
0740 Veterinary Services 2 3
0780 Landscape 1 I
0800 Forestry 1 &
0910 Commercial Fishing 2 2
1500 Binding Construction - General and O. 1 3
1520. General Contractors - Residential 7 M4
1710 Plumbing, Heating, Air Conditioning 4 10
1720 Painting and Paper Hanging 4 9
1730 Electrical Work 2 3
1750 ‘Carpentry and Flooring, 2 6
1790 Special Trade Contractors, NEC 2 8
2430 Millwork, Plywood, Kitchen Cabinets 3 En
2490. Miscellaneous Wood Products 1 i
2700, Printing, Publishing & Allied Industries 15 46
2740 Miscellaneous Publishing 1 2
2820 Plastics & other Man-Made Fibers i 2
2840 Soaps, Detergents, Perfumes & Cos 1 1
2850. Paints and Allied Products 1 5
3320 Iron & Steel Foundries 1 1
3500 Industrial & Commercial Machinery. 1 3
3600. Electronic & Other Electrical Equipm 1 3
3730 Ship and Boat Building L 1
3900 Misc. Manufacturing Industries 4 10
4210. Trucking - Local 1 2
4213 ‘Trucking - Long Haul 2 4
4220 Public Warehousing 4 2
4491 Cargo Handling 1 5
4499 Water Trans, NEC 2 2
4500 Air Transportation. 1 2
4720 Arrangement of Passenger Transport 1 1
4730 Arrangement of Transportation of Fre 1 3
4800. Communications; Telephone, Telegr 2 2
5000 Wholesale Trade - Durable Goods, N. 20 105.
5093 Scrap & Waste Materials 1 3
5100 Wholesale Trade - Non-durable Goo. 2 9
5200 Building Materials, Hardware & Gard 2 9
5400 Good Stores 1 2
5410 Combination Mini Marts i 9



13

What we set out to prove in Jersey City was that MSAs would prove less expensive than
traditional low-deductible indemnity plans and provide superior health-care coverage for our
employees. Four years later, we are confident our experiment has proved successful. With final
renewal pricing based on several years of real claims experience, the renewal cost to the city for
families choosing the MSA option (including both the catastrophic premium and the medical
savings account contribution costs) was $997 a year less than the renewal cost for a family
choosing the traditional, low-deductible indemnity option. The HMO option also continued to be
priced cheaper than the indemnity plan, But the HMO option achieved its cost efficiency through
third-party rationing of medical care. Our MSA option, in contrast, achieved this cost saving
while preserving full employee choice relative to health-care providers and services.

The ability of individuals to contro! their own health-care decisions is growing more and
more endangered in the current national health-care environment. With our MSAs, patients were
able to choose the doctors they wanted to see and the procedures they wanted to receive. I think

this is an extremely significant health-care advantage of the MSA option compared to the HMO

option.

We were ultimately forced to return our management employees to the State Health
Benefits Plan. Our city employees tend to be older than the state average; many have disabilities
and illnesses. Some take part-time jobs with the city just for the health insurance to pay for their
ailments. By switching back to the State plan. Jersey City employees will now be grouped with a
much larger and healthier pool of individuals.

We are now endeavoring to have the State Plan offer an MSA option, We will be pushing
hard for the state to implement such an alternative. As we showed in Jersey City, MSAs would
quickly become the most popular health-care option for New Jersey state and local employees,
would save employers (in this case the taxpayers) money, and would accomplish this while
granting freedom of choice over medical care to participants--a freedom that all Americans
cherish,

You, too, should offer medical savings accounts to your employees. As members of
Congress, you could take the lead in national health-care reform by starting it in your own,
backyard. Also, as candidates for reelection, imagine how happy federal employees will be with
you if the average employee family is able to save, as was the case with our experience, $1,100
each year, or at worst (if their health care usage is high) are enabled to reduce their out-of-pocket
expenses.

Also imagine how happy taxpayers will be with you for the tax savings you provide.
Imagine, too, how happy doctors and pharmacists will be with you for helping to move America
away from the darkening nightmare of having to deal with arbitrary HMO rules.


CONTENTS

Hearing held on March 9, 1998 .
Statement of:
Collier, Benjamin, National Association of Retired Federal Employees,
accompanied by Frank Beeg, legislative director, New Jersey Federa-
tion of NARFE .. .
Raab, William, vice president of marketing, em
Insurance Co.; Madeline Cosman; and Janine Kenna, associate man-
ager of product development, Merrill Lynch ....
Schundler, Bret, mayor of Jersey City; Alieta Eck, M.
seph Cauda, M.D., Surgeon; and Sidney Goldfarb, M.D.
Letters, statements, ete., submitted for the record by:
Cauda, Joseph, M.D., Surgeon, prepared statement of .
Cosman, Madeline, prepared statement of ....
Cummings, Hon. Elijah E., a Representative in Congress from the State
of Maryland, pared statement of ...
Eck, Alieta, M.D., By cian, prepared statement of ..
Goldfarb, Sidney, M.D., prepared statement of ..
Kenna, Janine, associate manager of product development, Merrill Lynch,
prepared statement of... ..
Raab, William, vice president of marketing, Anthem Health and Life
Insurance Co., prepared statement of
Schundler, Bret, mayor of Jersey City, prepared statement of ..

(a)


34

Mr. Mica. Thank you, Dr. Goldfarb. Thank you to our other wit-
nesses this morning. I will lead off the questioning. I’ll start first
with Mayor Schundler.

First, Mayor, I am surprised to see you back in public office.
Given the circumstances of your first testimony—I think you told
our subcommittee you inherited a pretty dismal financial scene
from Jersey City and some opposition to some of the tough pre-
scription which you had recommended. One of those changes I
think you said was brought about by, as I recall, looking at the
budget like we look at the Federal budget: how much it costs us
for providing health care for our employees and retirees. I think
you told us, as I recall, that it was one of the most significant budg-
et items. Is that correct?

Mr. SCHUNDLER. It definitely created savings for us. At the time
that we went into this plan, the State Health Benefits Plan was
preparing a very significant health premium increase. I would have
liked to have taken our union employees with us out of the State
plan as well. My council members were not willing to go along with
me on that, given the union’s opposition.

The union’s opposition was easy to understand. They had what
they thought was a nice plan. They didn’t want to risk anything
on something new. So they wanted to stay where they were. As a
result, we were able to make some nice savings on covering our
management employees. We were not able to get the full savings
we would have liked to have gotten out of all of our employees.
wer Mee. What percentage of your employees were eligibie for

Mr. SCHUNDLER. It was about 200 employees out of about 3,000
employees at a time. Now we are at about 2,600 employees full-

ime.

Mr. Mica. And based on your experience with a smaller group,
were there or weren't there savings?

Mr. SCHUNDLER. There were definite savings. Among other
things, we avoided the entire State Health Benefits Plan premium
increase. Again, I would point out that we not only achieved sav-
ings, but these savings become more substantial as time goes for-
ward because you just continually have this inflation in the price
of the standard indemnity plan. So the savings started at about
$590 for those taking a standard indemnity plan. Now it is up to

Mr. Mica. Now the other thing besides the cost is the element
of coverage. What about the satisfaction of the 200 or so folks that
enrolled?

Mr. SCHUNDLER. They are usually happy. I mentioned that some
people who opposed it originally simply Peeause they are the believ-
ers hat doing anything that hasn’t been done before ever is not
good.

Mr. Mica. You had lower premiums for the city.

Mr. SCHUNDLER. Right.

Mr. Mica. And lower cost for the employees. And you are testify-
ing back with us today that they felt they had adequate coverage.

r. SCHUNDLER. Again, even those who never want to try some-
thing new and were originally opposed to it, became tremendous
proponents of the plan once they had a chance to experience it.


76

Ms. KENNA. We haven't looked at that yet, but I can get you that
information if you are interested.

Mr. Mica. I think that would be interesting for us to see. It’s
only a short period of time, but it would be interesting to see if you
are attracting elderly and young, and for what reasons. So we
would appreciate your followup with our subcommittee.

I have no further questions at this time. I will yield to Mr.
Pappas, the gentleman from New Jersey.

Mr. Pappas. Thank you, Mr. Chairman. Thank you folks for stay-
ing and participating.

Mr. Raab, you spoke of the individuals that you dealt with, 53
percent are professionals, attorneys, physicians, engineers, and oth-
ers. You didn’t talk about the other 47 percent. I am wondering if
you could talk to us a little bit about who they are.

Mr. RaaB. Well the other 47 percent are scattered amongst the
full range of standard industrial codes, which is how we searched
our client data base, including, I believe, some farmers. We essen-
tially searched all the standard codes. We did notice this concentra-
tion which we expected, but the concentration was not as heavy as
we had expected.

This concept burst on the scene so quickly that we didn’t really
have time to do market research to get an idea what to expect. So
we didn’t have a real scientific notion. We just had our own in-
stincts to tell us. Lo and behold they were only somewhat correct,
but also pretty wrong. We expected about probably 75 to 85 percent
concentration in the professions. We were just wrong. Pleasantly
surprised, I might add.

Mr. Pappas. The first panel I asked the question which I want
to ask of you folks as well. In New Jersey, we have what people
refer to as the Kennedy-Kassebaum. I am wondering what changes,
if any, you think should be considered.

Mr. RaaB. Changes to the way the plan was designed in Ken-
nedy-Kassebaum?

Mr. Pappas. Yes.

Mr. RaaB. Yes. In fact, I think there are three things that should
be done. First of all, I think it makes more sense to permit funding
the savings account up to 100 percent of the deductible as opposed
to 65 or 75 percent of the deductibles as currently structured.

As a corollary to that, I think it would also make sense to permit
both employers and employees to contribute tax favored funds to
the account in the same way. The current law prohibits that. Obvi-
ously, therefore, if the employer can’t afford or is unwilling to make
a full contribution, I think it would make sense to permit the em-
ployee to do it. Current law won’t permit it.

Finally, I think the way the Internal Revenue Service has inter-
preted Kennedy-Kassebaum has actually narrowed market avail-
ability; not necessarily intentionally, but revenue ruling 97-20 re-
quires carriers to administer claims in essentially a manner that
is counter to decades of industry practice and consumer expecta-
tions. Families with only one sick person in them are really dis-
couraged from buying into the MSA concept because of the way the
claims must be adjudicated.

Mr. Pappas. Doctor?


22

Health care inflation began when the government got Involved. if the
government stays Invotved, rationing will become the only solution. The
only other alternative Is freedom, and Medical Savings Accounts are the
best way to provide that freedom.


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California

J. DENNIS HASTERT, Ilinois TOM LANTOS, California

CONSTANCE A. MORELLA, Maryland ROBERT E, WISE, JR., West Virginia

CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York

STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York

CHRISTOPHER COX, California PAUL E. KANJORSKI, Pennsylvania

ILEANA ROS-LEHTINEN, Florida GARY A. CONDIT, California

JOHN M. McHUGH, New York CAROLYN B. MALONEY, New York

STEPHEN HORN, California THOMAS M. BARRETT, Wisconsin

JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington,

THOMAS M. DAVIS, Virginia Dc

DAVID M. McINTOSH, Indiana CHAKA FATTAH, Pennsylvania

MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland

JOE SCARBOROUGH, Florida DENNIS J. KUCINICH, Ohio

JOHN B. SHADEGG, Arizona ROD R. BLAGOJEVICH, Illinois

STEVEN C. LATOURETTE, Ohio DANNY K. DAVIS, Illinois

MARSHALL “MARK” SANFORD, South JOHN F. TIERNEY, Massachusetts
Carolina JIM TURNER, Texas

JOHN E. SUNUNU, New Hampshire THOMAS H. ALLEN, Maine

PETE SESSIONS, Texas HAROLD E. FORD, Jn., Tennessee

MICHAEL PAPPAS, New Jersey —_

VINCE SNOWBARGER, Kansas BERNARD SANDERS, Vermont

BOB BARR, Georgia (Independent)

DAN MILLER, Florida
KEvIN BINGER, Staff Director
DantEt R. Mout, Deputy Staff Director
WILLIAM MoscHELLA, Deputy Counsel and Parliamentarian
dJupitH McCoy, Chief Clerk
Put SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON THE Civil SERVICE
JOHN L. MICA, Florida, Chairman

MICHAEL PAPPAS, New Jersey ELIJAH E. CUMMINGS, Maryland
CONSTANCE A, MORELLA, Maryland ELEANOR HOLMES NORTON, Washington,
CHRISTOPHER COX, California DC
PETE SESSIONS, Texas HAROLD E. FORD, Jr., Tennessee

EX OFFICIO
DAN BURTON, Indiana HENRY A. WAXMAN, California

Georce NESTERCZUK, Staff Director
SuSAN MosYcHUK, Professional Staff Member
Canouine FreL, Clerk
CEpRIC HENDRICKS, Minority Counsel

ap


46

Mr. SCHUNDLER. The problem was not with Blue Cross/Blue
Shield, again. We had the same faceless bureaucrats that we were
working with while we were part of the State Health Benefits Plan
as we had after. When someone fills out a form and sends it in,
for the most part, they don’t meet the person who is at the other
side of the process. Blue Cross/Blue Shield was administering the
State plan. It was administering our MSA plan. So it is the same
people who are administering the Jersey City program. Again, the
options they had, we provided the same three options in our own
Program as they were providing in the State Health Benefits Plan.

‘he only thing we did was offer a fourth.

So there was no problem with Blue Cross/Blue Shield. They were
fine to work with. The only issue is that it doesn’t make sense for
us to stand alone. It makes sense for us, as it would for a sick indi-
vidual, to get into a large group where the average healthcare
usage is lower. Then the issue is now that you are part of a group,
whether you are going to stand alone or you are part of a group,
does it make sense to offer three options or does it make sense to
offer four options.

If what you want to do is give a better deal to the employee and
a better deal to the cost payer, in this case the taxpayer, you want
to offer the four options. The reason why I say I think we will be
able to work things out is I do think the State will offer this fourth
option. Looking at our results, I think they will make the very
clear decision that it would be a good deal for them to offer a fourth
option to State employees.

Mr. HENDRICKS. Mr. Chairman, I don’t have any more questions.
I just want to point out that within our program, we have a high
number of older employees and we have a high number of retirees
that are members in the program. So it just strikes me that some
of the characteristics of your workforce that led to the problems
that you experienced, could in fact be manifested within our work
force. So it just leaves me a little concerned and cautious about
going forward with the idea when the experience in Jersey City
proved not to be a successful one.

Mr. SCHUNDLER. It did prove to be a successful one.

Mr. HENDRICKS. And the experience in Ada County proved not to
be successful. Thank you, Mr. Chairman.

Mr. SCHUNDLER. I think your employees are like our employees.
I think you would have the same positive experience with this pro-
gram.

Mr. Mica. Dr. Eck, could you briefly respond?

Dr. Eck. Yes. I am familiar with the situation in Ada County.
I know that Gary Glenn experienced intense opposition when he
first had the idea of Medical Savings Accounts. The other two com-
missioners were vehemently opposed to it for reasons that were
never ever made clear. It is also possible that the insurance compa-
nies might not have a great incentive to offer reasonably priced
high deductible policies. tis what we found in New Jersey.

‘When we were paying $585 for $1,000 deductible, Blue Cross/
Blue Shield turned around and said well it’s going to be $545 for
a $4,500 deductible. Who in their right mind would give up $3,500
worth of insurance for $40 a month? It did not make sense. I didn’t
understand why the insurance company was unwilling to provide


30

eral workers, but also to take the message to every mayor, school
board member, and public citizen, to let them know that Medical
Savings Accounts are available and they are better than our cur-
rent insurance products.

It’s a question of economics 101 and politics 101. Economics 101
says give the person an incentive and they will respond. I hope pol-
itics 101 in this case will be to be brave and to offer this new prod-
uct to everybody.

[The prepared statement of Dr. Goldfarb follows:]


39

the tax code is written. This will certainly help our lower wage
earners, which also includes younger patients.

You mentioned about younger patients opting out. They certainly
wouldn’t opt out because of Medical Savings Accounts. They would
receive the tax benefit of money that they can roll over from year
to year to year, which is a substantial percentage of their annual
income. It would enable them to save a tremendous amount of
money.

The benefits of MSAs as opposed to our present system, which
is just totally collapsing, is incredible. You were mentioning also,
Dr. Goldfarb, about the well person care, checkups. HMOs really
would like you to delay them because the fact of the matter is that
an HMO policy holder holds that policy for about 20 months. They
are hoping that they can stall you off with enough low-tech tests
such as stool guaiac instead of a colonoscopy long enough so that
your business will move onto another HMO and somebody else will
get that cost.

Mr. Mica. Interesting observations. I thank the panel. I will

ield now to the gentleman from New Jersey, our vice chairman,
ir. Pappas.

Mr. Pappas. Thank you, Mr. Chairman. I would like to begin
with a question for the mayor. I believe, Mayor Schundler, you in-
dicated that approximately 56 percent of a certain group of your
employees that were eligible for this opted for the MSAs. I guess
that’s management level folks. At the same time this was being of-
fered or talked about, you indicated that public employee groups,
unions were less interested. 1 am wondering if you could talk just
a little bit about some of their specific concerns, because these are
probably similar to some of the concerns that we are hearing
among Federal employees.

Mr. SCHUNDLER. The biggest thing is the belief that if it’s not
done by the Government, it is not good. Now these are Government.
employees unions. So their feeling is, is this privatization? That’s
the first issue that is raised. Now the reality is, the State Health
Benefits Plan is managed by Blue Cross Blue Shield. We went from
having them manage the State Health Benefits Plan to withdraw-
ing employees and having their policy with Blue Cross and Blue
Shield. So they were working with the same people, our manage-
ment employees were working with the same people who working
with them before when they were in the State Health Benefits
Plan. But the opposition of the unions was they saw it as privatiza-
tion so that gets people scared.

Health benefits are so important to people that anything that
represents change is scary. Since there is absolutely no employee,
let’s say co-payment in municipal government here, there is not a
sensitivity to the cost involved. So their feeling was, well so what
if the State Health Benefits Plan costs keep going up. That is not
our problem. That is the taxpayers’ problem and the politician’s

roblem. That’s not our problem. So there was a resistance to any
ind of change.

Now I can guarantee you that when they saw their own manage-
ment employees making more money than they were, on average
getting $1,100 back at the end of the year, there was significant
interest at the end of the year. The issue with Jersey City, it’s real-


25

My name is Joseph Cauda. I graduated from medical school in 1980
and had 6 years of post graduate training. I started practice as a general
surgeon in 1986. Over that period of time I have witnessed a steady erosion
in the quality of our health care system, from both the doctor and the patient's
point of view. Escalating costs were inevitable with the technological
explosion. Twenty years ago CAT scanners were just coming on the scene.
MRIs were practically science fiction. The equipment necessary to remove a
Ball bladder could be reused literally thousands of times. Today, CAT scans
and MRIs can be found in almost every small town hospital throughout the
USA. A gallbladder operation is done with 4 puncture wounds but requires
the use of expensive high tech equipment sometimes discarded after one use.

These are only some minor examples of how medicine has changed,
but each one has made your life better. One thing that has not made either the
patients’ or the doctors’ life better is the current insurance system. As the cost
of low deductible traditional mdemnity insurance has climbed HMOs have
taken it's place. They provide managed care. One wonders who is managing
what care!

I will give you an example of how managed care has affected my
patients. One night I received a phone call from the emergency room. As {
‘was awakened from my sleep, I was asked if I accept HMO X. | frankly
wasn't sure. The ER doctor stated that he had a very sick patient who likely
needed surgery bat could not find a surgeon who participated in the plan. I
saw the patient, performed the emergency surgery and the patient recovered
quickly. It took over 6 months for the patient to have his bills to the hospital
and doctor paid.

This is not an unusual story. The average duration of time a person
remains in a given HMO is 20 months. Most people do not like the fact that


9

Mr. Mica. Our first panel this morning consists of four individ-
uals. Our first witness is Mayor Bret Schundler of Jersey City, who
testified at one of our hearings some time ago in Washington. We'll
be getting an update from the mayor on some new and interesting
information he has to provide, and also share with us the experi-
ence they have had with MSAs in Jersey City, NJ.

He will be joined by Alieta Eck, whose family opted out of tradi-
tional insurance that became prohibitively expensive. We'll also
hear from Dr. Joseph Cauda, and another doctor, Dr. Sidney Gold-
farb, both New Jersey physicians, who believe that the interest in
MSAs on the part of doctors hopefully will be a prescription that
could benefit all of our Federal employees and retirees.

I would like to invite our first panel to come forward. As they do,
I might indicate for those in attendance, and also our witnesses,
that this an investigations and oversight subcommittee of Con-
gress, part of the Government Reform and Oversight Committee,
which is the chief investigative and oversight audit arm of the
House of Representatives. In that capacity, we do swear in all of
our private citizen witnesses. So if you will please raise your right

ands.

[Witnesses sworn.]

Mr. Mica. We'll let the record reflect that the witnesses an-
swered in the affirmative.

Will you please be seated? I would like to welcome you again. I
will also set the ground rules for our hearing this morning. Mayor
Schundler has been before us before. What we do is we allow 5
minutes. We have a little timer over here. We would be glad if you
would give a 5-minute presentation. We do give a little bit of lee-
way on the oral presentation, however, you are permitted to enter
and provide for the subcommittee any lengthy statements or docu-
ments. They will be, upon request, made a part of the official
record of this hearing.

So with those opening comments, again, I would like to welcome
our panelists. I will recognize, first, the mayor. Welcome back to
our panel. We are anxious to hear your statement and the experi-
ence with MSAs. Welcome. You are recognized, sir.

STATEMENTS OF BRET SCHUNDLER, MAYOR OF JERSEY CITY;
ALIETA ECK, M.D., PHYSICIAN; JOSEPH CAUDA, M.D., SUR-
GEON; AND SIDNEY GOLDFARB, M.D.

Mr. SCHUNDLER. Thank you and good morning, Chairman Mica
and members of the subcommittee. It’s a great pleasure to be with
you. I am appearing before you today again to encourage you to in-
clude Medical Savings Accounts as part of your Federal Employees
Health Benefits Program.

My last testimony, you will remember——

Mr. Mica. Mayor, could you pull—I don’t know if that mic has
a cord—

Mr. SCHUNDLER. What I'll do is I'l! try to get closer to it.

Mr. Mica. As close as you can get. I think it will pick you up bet-
ter. That’s it. Thank you.

Mr. SCHUNDLER. As you recall, my last testimony before you on
this issue was in December 1995. For those who were not Members


61

8100 Services 19 59
8299 Modeling & Finishing Schools. 1 2
8350 Child Day Care Services 3 30.
8390 Social Services, NEC i] 3
8400 Museums, Art Gall., Botanical & Zool 1 2
8660 Operation of Religious Organizations 2 33
8710 Engineering, Actuarial, Arch, 6 19
Surveying
8720 Accounting, Auditing & 20 62
Bookkeeping
8730. Research, Development & Testing S 4 16
8740 Management & Public Releation x 65

Serv.



77

Mr. CosMaNn. I would like to see two changes. One, as has been
mentioned, I would love to see the employees be able to get the tax
advantage of providing their money into their MSA in addition to
the Government.

The second, I would very much like to see the possibility of
avoiding what is in essence a type of community rating, whereby
we essentially make those living in less expensive areas pay as
much as those living in very expensive areas. Therefore, there is
a somewhat perverse subsidy in which those who are able to get
lower cost medical care are in essence subsidizing those living in
more expensive geographic areas.

Mr. Pappas. Do you have anything to add, Ms. Kenna?

Ms. KENNA. I would agree both with Dr. Cosman and Mr. Raab.
There is no reason why these shouldn’t be 100 percent deductible.
I think that would foster a much larger market than we have

Ly.

I would also concur that both employer and employee contribu-
tions should be permissible in the same year. It just maximizes the
potential of these accounts.

The one thing that I would contribute on top of that is that the
market is so limited right now that it’s very difficult for consumers,
especially in the private sector, which is with what I am most fa-
miliar, to find education on this product and to build their famili-
arity with it. By extending availability both to Medicare and to
Federal employees in the next year, I think that people would be-
come much more aware of what it is, and how to use it. We'll all
become much savvier consumers.

Mr. Pappas. Dr. Cosman, in your seven points that you made
very well, and you submitted that to us in writing, I want to focus
upon the medically necessary definition that you expounded upon.
I am wondering if you could describe any court rulings that have
dealt with this issue, this contentious issue, and have there been
rulings that have been at odds with one another?

Mr. CosMaN. The whole phrase medically necessary, has become
essentially perverted in the courts as well as in our language. Let
me just refer to that case that I suggested in which the eye surgeon
in California was accused of medically unnecessary cataract oper-
ations.

The patients were not only not harmed, they were helped. The
patients requested the care. Three years after the event, Federal
investigators looked at certain of the numbers in the so-called re-
fractions. Was it 20-20 is normal, was it 20-200 or was it 20-170,
what were the numbers. Well, because a few of those cases were
what might be construed as borderline cases, they were then dis-
allowed after the fact, but as opposed to being merely construed as
differences in medical opinion, they were viewed as criminal viola-
tions.

Now this is an outrageous interference in medical judgment as
well as in the patient-physician relationship. What was medically
necessary for those patients was determined by the physician and
patients at the time the work was performed. It was only after the
fact that the phrase medically necessary became in essence a crimi-
nal charge.


AT

the low priced insurance. I think something like that happened in
Ada County. The insurance companies did not want to see Medical
Savings Accounts succeed, as far as I could tell.

Mr. SCHUNDLER. You need to understand why, because they op-
erate on a cost-plus system, so the higher the cost, the bigger the

plus.

Mr. Mica. Dr. Goldfarb, very briefly.

Dr. GOLDFARB. If they are Josing out on my $3,700 because I am
going to get to keep it and roll it forward, they are not going to
make as much money and profit and neither will the brokers,
which is why they are not being pushed by the insurance compa-
nies.

Mr. Mica. I want to thank our panelists for their input. Mayor
Schundler, it’s food to see you back. We appreciate the leadership
you have provided for your community. I know it had some difficult
times when you took over. We wish you every success. I look for-
ward to working with you. We thank our other panelists for the in-
sight they have provided to the subcommittee based on their expe-
rience and providing their recommendations to our panel. We cer-
tainly will pursue some of the recommendations that you have pro-
vided for us today.

I will dismiss the panel. I will call our second panel this morn-
ing. Our second panel includes experts in the law, financing and
marketing of MSAs. We have Dr. Madeline Cosman, who has fol-
lowed developing trends in medical law and financing for more
than 30 years. She adds a strong voice of experience to our hearing
this morning. We have Mr. William Raab. He will provide a per-
spective from the insurance industry. Finally, we have Ms. Janine
Kenna of Merrill Lynch’s Plainsboro office, who will provide insight
into the savings dimension of MSAs.

As I explained before, this is an investigations and oversight sub-
committee of Congress. We do swear in our witnesses. So if you
will remain standing.

{Witnesses sworn.]

Mr. Mica. The record will reflect the witnesses answered in the
affirmative. I would like to welcome our three panelists and wit-
nesses this morning. As I explained to our previous panel, we gen-
erally allow 5 minutes. We give leeway for an oral presentation.
Then if you have extensive, lengthy statements you would like to
be made part of the record or submit documents, we will do that
upon request.

So with those welcoming remarks, I would like to first call on
Mr. Raab.

STATEMENTS OF WILLIAM RAAB, VICE PRESIDENT OF MAR-
KETING, ANTHEM HEALTH AND LIFE INSURANCE CO.; MAD-
ELINE COSMAN; AND JANINE KENNA, ASSOCIATE MANAGER
OF PRODUCT DEVELOPMENT, MERRILL LYNCH

Mr. RaaB. Thank you, Mr. Chairman. Good morning. It is an
honor to be here. Thank you for inviting me to speak. I will give
a brief synopsis of my written testimony, if you would be so kind
as to enter the full testimony in the record, I would appreciate it.

Mr. Mica. Without objection, your full written testimony will be
made a part of the record.


49

of sales of this product from April 1, 1997 through January 31, of
this year. Essentially this new concept of a federally qualified MSA
with a high deductible plan has essentially enabled us to double
our high deductible business in just 10 months. I think that is a
pretty remarkable achievement.

For that same 10 month period, MSA compatible plans rep-
resented approximately 20 percent of new policy holders sold in
small groups, and about 8 percent of our new business sales reve-
nue in small groups.

We have also done some analysis of our typical buyer of an MSA
product. So far, 53 percent of these new policy holders are con-
centrated in a few industries: Professionals, such as doctors, den-
tists, lawyers, accountants and engineers, management and high
tech consultants, and also financial services people, such as insur-
ance and real estate agents, and securities and commodities bro-
kers. What surprises me in fact is that these people represent only
half of the buyers.

I heard some concerns raised this morning about adverse selec-
tion. I would just like to close my comments by saying that if in-
deed 60 to 70 percent of the population purchased an MSA, there
might be some concern about adverse selection. But I think the
best hopes of MSA proponents and the worst fears of MSA oppo-
nents have been exaggerated.

When you look at the experience of HMOs, which have essen-
tially had Federal backing, the HMO act required employers to
offer HMOs as part of a dual choice. They did offer low cost, and
yet it took them 20 years to get a 33 percent market share. So I
think it is unrealistic to expect that MSAs are going to cause a
market dislocation. I think in reality they will appeal to a certain
segment of the population and that those people should be given
the opportunity to purchase them. I think the experience with Fed-
eral employees would probably be the same. Initially it would be
the better educated ‘and. high income employees, and eventually you
may find that the appeal is really broader than anyone would ex-

ect. I don’t think there would be any harm to the risk pool for the

‘ederal plan. Consequently, I urge favorable consideration. Thank

you.
{The prepared statement of Mr. Raab follows:]


12

Testimony of the Honorable Bret Schundler
Mayor, Jersey City, New Jersey
Before the House Civil Service Subcommittee
Hearing on Medical Savings Accounts in the
Federal Employees Health Benefits Program
Ft, Monmouth, New Jersey
March 9, 1998

Chairman Mica and Members of the Subcommittee on Civil Service

Good morning. 1 am appearing before you today to again encourage you to include
Medical Savings Accounts (MSAs) as an option in the Federal Employees Health Benefits
Program. My last testimony on this issue in front of your committee was in December 1995. For
those of you who were not members at that time, let me briefly explain our experience in Jersey
City with MSAs.

In 1994, Jersey City became the first governmental entity to offer MSAs to its employees.
In order to conduct an experiment with MSAs, we obtained permission to withdraw temporarily
our management employees from the State Health Benefits Plan to enroll them with Blue
Cross/Blue Shield of New Jersey.

‘Our management employees were allowed to choose either from three options that
exactly mirrored the State Health Benefit Plan—a low-deductible. fee-for-service indemnity
option; an HMO option; a Preferred Provider Option--or a fourth, new option: MSAs. Fifty-six
percent of our management employees chose the MSA option, including almost all of those who
had previously opted for the standard indemnity option.

Under our MSA plan, the city purchased a catastrophic insurance policy that covered 100
percent of a family’s medical costs above a $2,000 deductible. The city then placed an additional
$1,800 in a medical savings account that the employee could draw down to pay most of that
deductible. Putting these elements together meant that a family of four would, at most, have to
pay $200 in out-of-pocket deductible expenses for medical care in any given year. That $200
came in the form of a “back end” deductible. In other words, the employee would not have to
reach into his pocket for the first $200 of family medical costs until the $1,800 in the MSA had
been expended. If a family’s total health-care costs fell below $1,800 in a given year, the money
remaining in the MSA account was refunded to the employee at year’s end. The employee was
free to use that money as he or she saw fit.

Employee satisfaction with MSAs was extremely high. The vast majority of new city
employees choosing health-care options opted for the MSA plan. Even initial foes of this
experiment among the city’s civil-service management employees soon came to praise the plan.
This should come as a no surprise. In comparison with the standard indemnity plan, our MSA
option reduced out-of-pocket health-care expenses for major health-care users, gave money back
to minor health-care users (the average employee family received $1,100 back at the end of the
year), and preserved absolute freedom of choice for all.