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82–203 2002

SMALL BUSINESS ACCESS TO 

HEALTH CARE

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

CRYSTAL LAKE, IL, AUGUST 14, 2002

Serial No. 107–67 

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS 

DONALD MANZULLO, Illinois, Chairman 

LARRY COMBEST, Texas 

JOEL HEFLEY, Colorado 

ROSCOE G. BARTLETT, Maryland 

FRANK A. LOBIONDO, New Jersey 

SUE W. KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

JOHN R. THUNE, South Dakota 

MIKE PENCE, Indiana 

MICHAEL FERGUSON, New Jersey 

DARRELL E. ISSA, California 

SAM GRAVES, Missouri 

EDWARD L. SCHROCK, Virginia 

FELIX J. GRUCCI, JR., New York 

TODD W. AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

NYDIA M. VELAZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

DANNY K. DAVIS, Illinois 

BILL PASCRELL, JR., New Jersey 

DONNA M. CHRISTENSEN, Virgin Islands 

ROBERT A. BRADY, Pennsylvania 

TOM UDALL, New Mexico 

STEPHANIE TUBBS JONES, Ohio 

CHARLES A. GONZALEZ, Texas 

DAVID D. PHELPS, Illinois 

GRACE F. NAPOLITANO, California 

BRIAN BAIRD, Washington 

MARK UDALL, Colorado 

JAMES R. LANGEVIN, Rhode Island 

MIKE ROSS, Arkansas 

BRAD CARSON, Oklahoma 

ANIBAL ACEVEDO-VILA, Puerto Rico 

DOUG THOMAS, Staff Director 

PHIL ESKELAND, Deputy Staff Director 

MICHAEL DAY, Minority Staff Director 

(III)

C O N T E N T S 

Page 

Hearing held on August 14, 2002 ........................................................................... 1

WITNESSES 

Blankenbaker, Mary, Co-Owner, Benjamin’s Restaurant .................................... 5

Brauns, Ryan, Senior Vice President, Rockford Consulting and Brokerage ....... 6

Shalek, Scott, RHU, Shalek Financial Services .................................................... 8

Close, Brad, National Federation of Independent Businesses ............................. 11

Koehler, Ken, Flowerwood, Inc ............................................................................... 13

Buxton, Brad, Vice President of Networks & Medical Management, Blue 

Cross & Blue Shield of Illinois ............................................................................ 14

Wilson, Isabella, Chief Financial Officer, Illinois Blower, Inc ............................. 17

Milam, James, MD, Illinois State Medical Society ............................................... 19

APPENDIX 

Opening statements: 

Manzullo, Hon. Donald .................................................................................... 36

Crane, Hon. Philip ............................................................................................ 39

Prepared statements: 

Blankenbaker, Mary ......................................................................................... 41

Brauns, Ryan .................................................................................................... 44

Shalek, Scott ..................................................................................................... 53

Close, Brad ........................................................................................................ 59

Koehler, Ken ..................................................................................................... 69

Buxton, Brad ..................................................................................................... 72

Wilson, Isabella ................................................................................................ 75

Milam, James .................................................................................................... 78

(1)

SMALL BUSINESS ACCESS TO HEALTH CARE 

WEDNESDAY, AUGUST 14, 2002 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 11 a.m., in Room B–171, 

College Conference Center, McHenry County College, Hon. Donald 

A. Manzullo (chair of the Committee) presiding. 

Chairman MANZULLO. Well, good morning. Can you hear my 

voice clear enough? Okay. It is my pleasure to welcome everybody 

to today’s Small Business Committee Field Hearing on the critical 

issues of small business access to health care. As soon as this hearing ends, we will be going to Libertyville and have a hearing there 

on how the cost of medical malpractice insurance is affecting the 

cost of insurance premiums themselves. 

Fighting health care costs is one of the biggest expenses small 

businesses and the self-employed incur as they struggle to provide 

coverage for their employees. As Congress continues to examine our 

nation’s health care problems, we need to remember that 60 percent of the estimated 43 million uninsured are small business owners, their employees, and families. 

Small business owners are unable to absorb spiraling health care 

costs and find themselves priced out of the health insurance market. Many owners are faced with the choice of staying in business 

or providing their employees with insurance. 

I personally know of a small business owner who pays $700 a 

month and has a $5,000 deductible to insure both himself and his 

wife. He and his wife are considering selling their business and 

taking jobs that would pay considerably less in order to receive 

health care benefits. 

Our current health care system does not provide equal access to 

affordable and quality health care for small businesses. One of the 

reasons small businesses cannot afford health coverage is that they 

are unable to achieve the economics of scale and purchasing power 

of larger corporations and unions. Small businesses suffer from unequal treatment. What they want most is a level playing field when 

it comes to purchasing their health care products. 

Large corporations use their purchasing power of thousands of 

employees to offer affordable health care insurance to workers. 

Small business owners have to find their insurance on an individual basis, making it very difficult and expensive to find affordable health coverage. 

2

I can’t help but wonder why insurance companies cannot offer affordable health care to small businesses. Why must insurance companies charge the most to those least able to pay these high prices? 

I was very heartened to see President Bush’s issue, his plan for 

helping small businesses prosper in our economy. The President is 

aware of the health care access and affordability problems facing 

small businesses, and his plan includes concrete steps to increase 

health security for employees of small businesses. His agenda calls 

for association health plans to be available for associations that 

want to provide health coverage for their members. It calls for permanent extension of Medical Savings Accounts, including a significant reduction in the required deductible for these health accounts. 

Congress needs to ensure that there are many different health 

insurance options for small business owners to utilize. We need to 

help our businesses attract, and keep employees; and nothing helps 

more than the ability to provide health coverage. 

I look forward to the testimony of the witnesses. Now, they are 

not all going to agree. Some are in favor of associated health plans, 

and some are opposed. And the purpose here is to get a fluent discussion going to see what ideas are bouncing around Congress and 

tell us for your perusal. I am joined by my excellent mentor. I met 

Phil a long—well, I know you got more years than I do. I am not 

as graceful and distinguished as you are. Before I was elected to 

Congress, Phil Crane represented all of McHenry County, and then 

because of the redistricting in 1992, I became the blessed beneficiary of McHenry County, and had the privilege to represent you 

in the past 10 years. As you know, redistricting occurs every 10 

years, and we came to a situation where we went from 20 members 

of Congress, down to 19, and so the areas had to get bigger. 

The Congressional District that I represent, we, unfortunately, 

lost the northeast corner of McHenry County, which is cities of 

Richmond, Hebron, Johnsburg; and the city of McHenry itself, and 

Scott, also Rinkley. I’ve been thinking about the cities that we lost 

in there. So, I lost that northeast corner, and the redistricting map, 

I picked up the western half of Global County, all of Carol County, 

the top halves of DeKalb and Whiteside County. So the new branch 

of the district I represent runs from Fulton on the Mississippi, all 

the way over until Algonquin on the Fox, and then all the way to 

the Iowa and Wisconsin borders to the northeast corner. 

Phil Crane, in redistricting, we had to figure, he had to expand 

his area, he couldn’t go into Lake Michigan, and he couldn’t go into 

Wisconsin, and so, he had to come into McHenry County. And as 

we looked at the map, we tried to make it as square as possible. 

One of the townships got split, unfortunately, but at least he kept 

the cities intact. So, Phil, is again, reclaiming that northeast corner, and when we sat down and talked about redistricting, Phil and 

I had to agree that we are going to treat this county as a whole. 

So you now have two members of Congress that are looking after 

the interest of McHenry County, and I can’t think of a finer partner, and a friend, and a mentor, of so many years, and with that, 

I’ll go to you. Thank you. 

Mr. CRANE. Thank you, Don. I deeply appreciate that. It is a 

pleasure to have the opportunity to be back in McHenry, and I 

maintained a lot of friends over here, even after the loss of our disVerDate 0ct 31 2002 21:28 Dec 12, 2002 Jkt 082203 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HR\OC\A203.XXX A203
3

trict. But my district in geographic area is roughly the same. I lost 

a big chunk down in Cook County to guarantee that our colleagues 

over there stay in their districts, and they moved into mine, and 

I’ve been here eight years. 

Chairman MANZULLO. Okay. 

Mr. CRANE. At least we didn’t send you down to Kentucky. 

Chairman MANZULLO. That’s correct. 

Mr. CRANE. Well, I want to congratulate you for holding this important hearing, and inviting me to have the opportunity to participate. And I would like to commend your leadership efforts on access to affordable health care for small businesses. You’ve been a 

great ally in our fight to expand and remake, or make permanent 

medical savings accounts, and your work on establishing association health plans is to be commended as well. 

Let me just say that I believe all Americans should have access 

to quality health care, and that is the best health care system in 

the world. According to the U.S. Census Data two years ago, there 

were around 39 million uninsured. Of that 39 million, 60 percent, 

I believe are owners or employees of small businesses. 

One of the main reasons that individuals go without health insurance is the cost of the premium. Since 2000, insurance premiums have continued to increase. This year, premiums rose an average of 19.3 percent, and it said that for every one percent increase in health insurance premiums, 100,000 individuals will lose 

their health insurance coverage. That’s 1.9 million more individuals 

on the uninsured rolls this year alone. And, Mr. Chairman, if I 

could just point out that I recently read that insurance companies 

across the country are seeking rate increases of 22.5 percent for 

next year. If that is correct, that would be the highest annual percentage increase in the last four years, and it would result in 2.3 

million more uninsured next year. 

There are also other reasons that Americans find themselves uninsured. Some are unemployed workers who have the option to continue coverage under their former employer’s plan, as long as they 

pay the premiums, but do not have the money to do so. Other unemployed workers and some working families are uninsured because their employers do not offer any coverage. Still others, generally low-income workers, may be offered employer-based insurance for themselves or their families, but cannot afford the premiums. 

All responsible lawmakers want some form of action to help the 

uninsured. The argument is how best to do that. And, although 

most members of Congress believe that the employer-sponsored insurance system should continue as the basis of coverage for most 

working families, there has been a gradual recognition that, in today’s economy, the traditional employer-based system cannot serve 

all families effectively. In particular, that system does not assure 

stable, continuous coverage for all. Two factors demonstrate this 

problem. 

There are very high rates of uninsurance among employees of 

small firms. According to a Kaiser Family Foundation Survey, 

while 99 percent of large firms offer health insurance, only 55 percent of firms, with fewer than 10 employees do. Among low-wage 

4

workers, those who earned less than $7 an hour in 1996, 45 percent are not even offered insurance. 

This is probably due to the fact that employers who try to offer 

coverage to very small groups tend to face high administrative 

costs. According to data collected by the Congressional Budget Office, overhead costs for providing insurance can exceed 30 percent 

of the premium costs for firms with fewer than 10 employees, compared to about 12 percent firms with more than 500 employees. 

Also, small employers may lack access to resources to assemble 

good and affordable options for their workers. Consequently, many 

small businesses adopt a competitive compensation package that 

emphasizes cash income rather than health benefits. 

Because I am the vice chairman of the Committee on Ways and 

Means, as so indicated, I’d like to focus for just a brief moment on 

a role of taxes. The Federal Tax Code blocks employees from obtaining coverage from anyone other than an employer or former 

employer; The current tax system excludes from taxable income, 

federal and state income taxes, and payroll taxes, all compensation 

provided to a worker in the form of employer-sponsored insurance. 

But workers who do purchase insurance for themselves rarely can 

claim any tax relief or receive any other assistance toward the cost 

of coverage. 

There is one section in the tax code that provides for some tax 

relief medical expenses. Since 1942 taxpayers who itemize, have 

been able to deduct health care costs that are in excess of a statutory percentage of their adjusted gross income. The current threshold where deductions of medical expenses are allowed is after 7.5 

percent of the adjusted gross income. However, few taxpayers who 

itemize can reduce their taxable income through the existing deduction, because their unreimbursed medical expenses are unlikely 

to exceed 7.5 percent of the AGI. That is why I have introduced legislation to help make health care more affordable by allowing taxpayers to deduct most of their medical expenditures to exceed two 

percent of their adjusted gross income. 

Let me give you an example of how this legislation would help. 

Under current law, a family with an income of $30,000 would only 

be allowed to deduct medical expenses in excess of $2,250. Under 

my proposal, that same family would be allowed to deduct all 

health care costs exceeding $600. 

Let me just end by saying that providing access to affordable, 

quality health care is an issue that will be with us for some time. 

But the longer we wait to pass legislation to help improve access 

to health insurance, means that millions of Americans will continue to lack affordable protection against the potentially catastrophic costs of an illness or accident. And I look forward to hearing some of our local small business owners, as we work towards 

a solution for this issue. Thank you again. 

Chairman MANZULLO. Thank you, Phil. Most of you have never 

testified before a Congressional Committee, and the first thing I 

want to tell you is to relax, don’t be nervous, this is not the stuff 

that you see on C–SPAN and nobody is going to ask that you get 

up and swear under oath. We conduct our small business hearings 

formal enough to comply with the House of Representatives Rules, 

but informal enough so that we are goal orientated. We have a 

5

time clock of 5 minutes, and when we get to 4 minutes, does a bird 

come out of the wall? What is going to be our signal on that? 

Mr. THOMAS. I’ll wave my hand. 

Chairman MANZULLO. You will wave your hands? What if I don’t 

see you? 

Mr. THOMAS. I’ll make sure. 

Chairman MANZULLO. You will make sure you see me? Okay. So, 

when we are at 4 minutes, I will let you know, or maybe I will go 

like this, okay. And if you run over a little bit, that’s fine. But I 

do want to—after testimony, we have plenty of time for questions 

by Congressman Crane and myself, and also you might question 

each other, that is also permissible. And Mary, you look the most 

nervous up there. I’m going to start with you. Either you are first, 

or you are going to be last. So I’m going to start with you. You are 

going to be first. And then, go ahead, before any testimony, I just 

want to state that your written statements will all be made part 

of the record. And if you want to do the preliminaries, that’s fine. 

Mr. CRANE. I understand, ladies first, but you mean Isabella is 

next to last. 

Chairman MANZULLO. Oh. 

Ms. WILSON. That’s okay. 

Chairman MANZULLO. That’s all right? You are okay Isabella, all 

right. Thank you for reminding of that. Make sure you tell us a little bit about your business, if you’re self-employed, and employ employees, et cetera. 

With that, Mary Blankenbaker, you can go now. 

STATEMENT OF MARY BLANKENBAKER, CO-OWNER OF 

BENJAMIN’S RESTAURANT 

Ms. BLANKENBAKER. Thank you. Good morning. My name is 

Mary Blankenbaker. I am co-owner of a family owned and operated 

restaurant in Galena, Illinois. I have about 12 full-time employees 

and about 22 part time. 

On behalf of the restaurant industry, I would like to thank you 

for this opportunity to speak to the Committee on Small Business 

about the important health care problems that are facing small 

businesses today. 

Small business owners can tell you that any changes to the Patient’s Bill of Rights must include explicit limits on employer liability and provision for association health plans.

Of the approximate 43 million uninsured Americans, 60 percent 

live in a family, employed by a small business. Many restaurants 

cannot afford to provide health benefits because of costly state 

mandates and lack of purchasing power. 

For each of the last two years, health insurance premiums have 

gone up an average of 23 percent for table service restaurants. 

Benjamin’s has the best rating an insurance company can provide. 

As of August 1st, our renewal date, our premium increased 28 percent. 

Many more small businesses in a variety of industries are seeing 

this as well. Over 172 million people in the United States receive 

health coverage through their workplace. Yet, it is becoming increasingly difficult to offer health coverage incentives to employees 

as a result of higher premiums. 

6

Prior to August 1st, we were already under great financial burden to provide health insurance to our employees, while paying 

$745 a month for just four people. 

I continue to hear from my fellow restaurateurs that some premiums have risen even higher than ours. From 30 to 40, and even 

up to 50 percent, association health plans would provide employees 

greater access to better and more affordable health coverage by allowing small businesses to group together to purchase health insurance. 

This would reduce the premiums and greatly expand the benefits 

we could offer our employees at Benjamin’s, and the thousands of 

small businesses could offer their employees. 

The insured deserves better than more mandates. Adding new 

laws and expanding liability will only serve to increase insurance 

costs and undermine employer’s ability to voluntarily offer this valuable benefit. 

Help us to achieve proper legislation that will make it possible 

for associations to pool their members and resources so they can afford suitable coverage. 

Association health plans are a win-win-win-win situation. The insured’s companies win because they lower sales costs and write 

more policies. The employer wins because they can afford the 

health insurance and they can add another benefit for their employees. The employees now benefit because they are insured and 

the government benefits because many more citizens are insured 

without costing the government a penny. Thank you. 

Chairman MANZULLO. Thank you, Mary. 

[Ms. Blankenbaker’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is Ryan Brauns. Ryan is 

a senior vice president from Rockford Consulting and Brokerage. 

And we look forward to your testimony, Ryan. 

Are you doing okay, Mary? 

Ms. BLANKENBAKER. I’m fine. 

Chairman MANZULLO. Well, you did just fine. 

STATEMENT OF RYAN C. BRAUNS, SENIOR VICE PRESIDENT, 

ROCKFORD CONSULTING AND BROKERAGE 

Mr. BRAUNS. Thank you, Congressman Manzullo, and good morning to you and Representative Crane. My name is Ryan Brauns 

and I am the senior vice president at the firm called Rockford Consulting and Brokerage, home office in Rockford, Illinois. 

I would like to thank Chairman Manzullo for all of his good work 

and efforts in the area of small business needs. Particularly that 

of medical savings account expansion and increasing access to insurance for uninsured working Americans. Thank you, Congressman Manzullo. There is much work to do, and with your leadership 

and free market vision of you and Representative Crane, I’m sure 

efficient solutions will be found. 

When starting this, thinking about the testimony today, a call 

from—let me paraphrase, Francis Bacon came to mind. ‘‘For the 

want of understanding causes, operations fail.’’

1776, man, what a good year for the United States. What a great 

year for the world, not only did we have Jefferson in the beginning 

of this country creating an ethical framework for political freedom, 

7

but a cost upon being as Smith, creating an ethical framework for 

economic freedom, it is to be used of all the nations. The outline 

in there, what a free market, is how it could work? What it means 

to the surviving, and fried, and what its loss of power is. 

And the point of my testimony today is that there is something 

going on in health care today. A revolution so-to-speak, something 

that gives us great cause, great cause I should say to be optimistic 

about what is going on in health care. And I had college days that 

would constantly remind us that the plan for the long run is that 

we die in the short run. So clearly, a lot of things that you are discussing today, tort reform, association plans of Patient’s Bills of 

Rights, and things of this nature, certainly have a role, they are 

important issues. But I assert today, that they are not necessarily 

long-run solutions, that certainly would help people like we just 

heard from, now in the short run, but what accountable solutions 

are systemic? And that is where the role of consumers comes into 

play. Our health care system is the greatest in the world. It reflects 

our values and that’s why it’s different than any other system in 

the world. We use a fee for service system. Everybody else matches 

to allocate these scarce resources, except in the country of Singapore and South Africa, the only free countries that have any type 

of fee-for-service in free market health care. 

But the system that we have developed, really since the twenties, 

the day when Blue Cross came around, they institutionalized the 

third-party payer system has taken the consumer out of the equation by large. Taken all the power that the free market group consumerism can break, and removed it from the equation. I can give 

you two quick anecdotes, as to how this power, we might save our 

daily lives. I see people wear glasses, as do I and some of the panel. 

How often have you heard a radio commercial advertising laser eye 

surgery? I think about it. The next thing you hear one of those 

commercials, you know the commercial, when the surgeon talks 

about the quality, because we are certainly interested in that in 

health care, but he also talks about the price. I will do it for eight 

hundred an eye, I take Visa, MasterCard. The RAM study, that 

anecdote, shows us that people make health care decisions engross 

by price. 

Let’s take a look at the pharmaceutical industry for a moment. 

In 1991, they spent $55 million marketing to you and me. When 

you go home tonight and turn on the television, you are going to 

see a lot of ads for drugs. It is not a coincidence that over this last 

10-year span, direct-to-consumer drug advertising has gone from 

$55 million to $2 billion, and a large component of the rate increases that we are seeing are driven by rising pharmaceutical 

costs. I don’t begrudge the pharmaceutical industry, it’s a free market, but it does prove to us the power of consumerism, consumers 

making choices, making decisions based on their own wants and 

desire, and price is certainly a part of that. Now, bring us to, I 

guess the IRS ruling that came out on June 26, greatly expanding 

the role of medical savings accounts, and what that can do. I am 

going to assert today that just didn’t go quite far enough. That if 

we could see in your redirect, if we can see if Congressional discussion, and so forth, an expansion consumer types of model, the primary reason, it empowers their employees, it bolsters the doctorVerDate 0ct 31 2002 21:28 Dec 12, 2002 Jkt 082203 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A203.XXX A203
8

patient relationship, which, by the way, would have great effects. 

In that situation, but also the downward shift, the trend curve, we 

move up and down the trend curve, meaning increases year-byyear, but we haven’t ever come up with anything to shift it. And 

that’s the excitement that consumers brings to the market, the average rate of increases than you have seen in consumer driven 

products, it has been half or less than what we are currently seeing, and I could go on, but I welcome your questions. 

Mr. CRANE. Thank you. 

Chairman MANZULLO. Thank you. 

[Mr. Brauns’ statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is Scott Shalek, Mr. 

Crane’s new constituent in Brainwood. 

Mr. CRANE. He used to be yours. 

Chairman MANZULLO. Yes, that’s correct. I guess technically 

until January 4th, whatever it is, the—well, I have gotten to know 

Scott over the last several years, and Scott is an insurance broker. 

And we had some very, very interesting discussions on the products 

that are offered, and uniqueness of products that are out there, and 

Scott, we welcome you to the Small Business Committee to share 

with us your background, your experience, and your thoughts. 

STATEMENT OF SCOTT SHALEK, RHU, SHALEK FINANCIAL 

SERVICES 

Mr. SHALEK. Thank you, Congressman Manzullo and Congressman——

Chairman MANZULLO. Scott, can you please move the mike closer 

to you? Thanks. 

Mr. SHALEK. Congressman Manzullo and Congressman Crane, I 

want to thank you for the invitation and opportunity to testify before the Committee on the issue of affordable health care for small 

businesses. 

My name is Scott Shalek; I am with Shalek Financial Services 

in Ringwood, Illinois, and I am Regional Vice President for the National Association of Health Underwriters. Shalek Financial Services specializes in employee benefit, consulting and financial planning for individuals in businesses ranging in size from one to five 

hundred. 

Our mission is to provide comprehensive solutions to help individuals and businesses set and achieve financial security and success, while providing a level of service above expectations. 

The National Association of Health Underwriters is an association of highly qualified health insurance professionals with over 

18,000 members throughout the United States and Canada. The 

mission of NAHU is to serve the public by promoting the activities 

and ethical conduct of insurance professionals through communication, education and legislative representation. Members are trained 

and experienced in guiding individuals and employers through the 

complexities of choosing appropriate and affordable health plans. 

Many members hold advanced designations from the American 

College such as Registered Health Underwriter. We are the agents 

and the brokers on the front line of health care every day helping 

millions of individuals and businesses get the most from their 

9

health dollars. To demonstrate the value of the agent and broker, 

in my written testimony, I have said three bases for my files. 

Last meeting in Rockford you had, there was much discussion 

given to using association health plans as a way for small groups 

to receive lower rates, similar to those of union plans or large 

groups. I realize that concept, that volume discount to purchasing 

quotas as endorsed by business groups such as the NFIV and the 

IMA to be sound as an innovative solution to reducing health care 

costs to small employers. In other words, these have been tried in 

several states with disastrous results. 

Last month a big MEWA called Indiana Construction Industry 

Trust, became insolvent and left 21,000 members with approximately $8 million in unpaid claims. As you can see, there are major 

problems when considering using AHPs. First, healthy groups tend 

to drop out after a year or two to find coverage elsewhere at more 

affordable rates. Second, AHPs do not have sufficient state regulatory oversight, which limits important consumer protection. Both 

of these factors can cause premium rates to rise and lead to more 

uninsured Americans. 

Indeed, a vehicle has long been available to create group purchasing opportunity for small businesses. These are called Multiple 

Employer Trusts (METs). The difference between METs and AHPs 

is significant, and METs generally comport to state laws. 

Another suggestion that was discussed is union plans get better 

rates over small groups. I have studied major union programs in 

Lake and McHenry County, and this is not true—proved to be true. 

Union plan groups vary from a low of $631 a month to a high of 

$832 per month, with an average cost around $756 per month. We 

compared these groups to the groups that I have studied previously, there is going to be substantially higher rates, almost double to some cases. 

In 1965, there were only eight mandated health insurance benefit laws in the United States. Today, there are over 11 hundred 

and the number is escalating. These range from the trivial, to the 

serious. In fact, in Minnesota, hairpieces are coming; Georgia, 

heart transplants. In Illinois, we have in vitro fertilization, which 

is a multibillion dollar cost to the insurance industry, and passed 

on to the consumers with more in premiums. 

Mandated benefits drive up costs and increase the number of uninsured. It is estimated that mandated benefits account for between 20 to 25 percent of all uninsured Americans. In Illinois 

alone, mandates have increased costs over 20 percent. 

One idea in reducing health care costs is the elimination of exemption of mandated benefits for small businesses. The states and 

federal governments allow insurers to sell no-frills policies, which 

would compete in regulated insurance. Small employers and consumers of health care would have the freedom to choose the coverage that best meets their needs. 

The health insurance industry has always been in the forefront 

in reducing health care costs. Programs such as PPOs and HMOs 

were designed to curb rising health care costs. Administration costs 

in private sector insurance is substantially less than governmentrun programs. Compared to Medicare and Medicaid, administration 

10

costs and private sectors is about 66 percent less than what the 

government spends per dollar of benefits paid. 

Electronic claims processing with health care debit card or Internet processing administration, would also help to reduce costs by 

around five times the amount required over paper claims. Expansion of medical savings accounts and elimination of burdensome 

regulations can substantially assist individuals and businesses to 

reduce cost and make coverage more affordable. Countries such as 

Singapore and South Africa have had great success with MSAs. 

Since their introduction in 1994, MSA plans in South Africa have 

captured about half of the private insurance market. 

One plan might be ideal for making health care insurance more 

affordable, which the federal government has begun to seriously 

consider is a refundable health tax credit. The refundable health 

tax credit for low to medium income Americans would substantially 

reduce the number of uninsured, while reducing costs, and allow 

more small businesses the ability to offer health insurance programs to their employees at affordable rates. Properly designed 

health tax credits will provide a real solution to the problem of the 

uninsured America by addressing affordability, than most basic 

component of access to health care. 

In conclusion, there is no doubt that we have the finest health 

care system in the world. Yet, we are our own worst enemies when 

it comes to the issue of affordability. Government regulations and 

mandates continue to be a driving force in rising health care and 

insurance costs, forcing many individuals and small businesses out 

of the market. As an advocate of the health insurance plan consumer, the role of the agent or broker is key to the individual and 

business health care solutions. But they can’t do it alone. We need 

to work together as a team in educating the consumer and exploring sensible reforms to make health care more affordable, predictable and manageable. We need to consider responsible mandate 

laws, adverse selection, tort reform, and removal of political agendas. We need to work to find ways to encourage more consumers 

to purchase private sector health insurance. This would expand 

markets and increase the number of carriers. We need more choice 

for the consumers. Working together for a common goal, we can 

make a difference. 

Mr. Chairman and Congressman Crane, I want to thank you for 

allowing me to testify today and share some common sense solutions for reducing the cost of the quality of health care. I look forward to working with you in the future, and look forward to the 

good work that Congress will do to make health care more affordable for all Americans. 

Chairman MANZULLO. Thank you, Scott. 

[Mr. Shalek’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is Brad Close, representing the National Federation of any kind of Businesses. Brad 

is the manager of Federal Public Policy and he went on to newly 

greater pastures because—for whom did you work before NFIB? 

And who set up the hearing in Rockford, that was you, uh? 

Mr. CLOSE. Yes, sir. 

Chairman MANZULLO. The NIFB’s great gain and our great loss, 

but I guess we trained you right. 

11

Mr. CLOSE. Yes sir, you did. 

Chairman MANZULLO. We sure did. And prior to working for my 

office, Brad worked with Congressman Ewing, and your home is 

there. 

Mr. CLOSE. Yes. 

Chairman MANZULLO. At least. So with all of those ties and connections and great credentials, we look forward to your testimony. 

STATEMENT OF BRAD CLOSE, NATIONAL FEDERATION OF 

INDEPENDENT BUSINESSES (NFIB) 

Mr. CLOSE. Thank you, Mr. Chairman. Nothing is more important for NFIB members than solving our current health care problems in small businesses. We firmly believe that association health 

plans and removing the restrictions on medical savings accounts, 

are necessary steps to create more affordable health care options 

for small businesses across the country. 

As Mary stated earlier, over 60 percent of our uninsured population consists of small business owners, to families and their employees. The high rate of the uninsured in the small business community is due to the lack of available options for small businesses, 

and an increasingly shrinking small group insurance market. 

We know that the smaller the business, the less likely it is to 

provide health insurance. Our members are the smallest of the 

small. We have 6,000 members across the country and over 50 percent of them have less than five employees. Sixty percent of businesses that have three to nine employees offer health care benefits. 

While most large firms are able to offer coverage. Even the best of 

times, the small business health care plan covers only about 57 

percent of the employees in small businesses. Many even go without coverage due to the cost. 

In fact, a recent business journal of Jacksonville, Florida article 

stated that skyrocketing health premiums are leading young professionals to opt out of employer-sponsored health plans, mainly because the monthly premium is no longer affordable to them. 

We at NFIB can substantiate that the high cost of health care 

is the number one problem of small business owners today. NFIB 

survey shows that the past decade, small business owners have 

ranked the cost of health insurance as their number one problem. 

Higher than taxes, regulations, and every other problem. Our 

members have also told us that they believe providing health insurance is the right thing to do for their employees. Right for their 

employees and right for their business. However, the high cost of 

health insurance often prevents them from doing this. 

Many of our members have experienced double-digit increases 

over the past few years. Elaine Smith from Granite City, Illinois, 

experienced a 26 percent increase this year. Ron Hatch of Yankton, 

South Dakota, experienced a 50 percent increase, and Phil 

Bartmann, in McKenna County experienced nearly a 100 percent 

increase. On average, a worker in a firm with less than 10 employees pay 17 percent more for health insurance than a worker in a 

firm with 200 or more employees. 

In today’s society, when it comes to purchasing health care, the 

rules of the game are definitely stacked against small business 

owners. Small businesses with the least income actually pay the 

12

most, while Fortune 500 companies are able to offer exceptional 

benefits, have more modest annual cost increases, and more health 

plan choices for their employees. The companies have benefited 

from the economies of scale that come from being able to purchase 

health care in a large group, across state lines, under one set of 

rules. 

Small businesses under today’s laws cannot have any of these advantages. Association Health Plan legislation like H.R. 1774, in the 

House of Representatives, the Small Business Health Fairness Act, 

levels the playing field by enabling small businesses to purchase 

their health care like big businesses and union plans through association health plans under ERISA. Association health plans are a 

private market solution to our nation’s health care coverage and 

cost problems. It builds upon what has been proven to work. If 

small businesses purchase health care in the same manner and 

under the same rules as big businesses, premiums would decrease 

and coverage would increase. 

Allowing small business owners to purchase their health care 

through association health plans will allow them to save on administration costs and bring to the market a great amount of bargaining power with sufficient numbers to absorb risk without substantially increasing premiums. 

Small businesses currently must pay the highest marketing billing and claim processing costs. Some pay from 20 to 25 percent of 

their premiums towards such expenses compared to about 10 percent of the larger employers. The H.R. 1774 would become law, administrative costs would be spread over thousands of members in 

association health plans instead of just a few workers in a small 

businesses resulting in significant cost savings. The bill would also 

allow association health plan to operate without having to comply 

with the 50 individual state laws on benefits, premiums, and solvency, and the 50 individual state mandates. This would best expand opportunities for small businesses which cannot afford coverage right now. Association Health Plan Bill also requires that the 

plans put up and maintain capital surpluses before they can be certified and maintain sufficient claim preserves, stop loss insurance, 

and indemnification insurance to guarantee the claims will be paid 

even in the event the financial difficulty for plan termination.

The bill also gives clear and strong regulatory authority to ensure that the Department of Labor and partnership of state regulators are able to ensure that Association Health Plans will meet 

the very strong certification reserve departments that the legislation provides for them. 

We strongly believe that if Association Health Plans become law, 

our health care system will be fair and more choices will be available to small business owners, which is what we think is the ultimate solution. More choices for small business owners, free market 

choices, and we urge the committee to assist in moving the Association Health Plan legislation to the President’s desk issue. Thank 

you, Mr. Chairman. 

Chairman MANZULLO. Thank you, Brad. 

[Mr. Close’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is Ken Koehler. Ken is 

the, I guess the CEO, President, probably both, Chairman of the 

13

Board, of Flowerwood, Incorporated. And a very popular nursery, 

flower store, all kinds of equipment for gardens and lawns. We 

used to have those trains, LGD trains. You don’t sell those anymore, but I like your type of trains. 

Mr. KOEHLER. I still love trains. 

Chairman MANZULLO. You still love trains. I look forward to your 

testimony. 

STATEMENT OF KEN KOEHLER, FLOWERWOOD, 

INCORPORATED 

Mr. KOEHLER. Thank you, Chairman Manzullo, and also Representative Crane, for giving me the opportunity to address you 

today with a subject that I really feel needs serious attention, and 

that being, affordable health care. 

My name, as you stated, is Ken Koehler. I am president and coowner of Flowerwood, here in Crystal Lake. Flowerwood is a family 

owned and operated florist, nursery, garden center, wholesale 

greenhouse, that has served McHenry County and its surrounding 

communities since 1948. Since our beginning with four employees, 

Flowerwood has grown to its present staff which is—ranges in size 

from 75 to 100 full- and part-time employees, as well as many seasonal employees. 

We have many ethnic—different ethnic groups that are represented by the employees that we have and very many different 

educational backgrounds. Our employees range from ages of 16 

years old starting out on their first job, to many retirees that are 

supplementing their income with part-time employment, and we 

have wages ranging from about $5,000 a year up to $75,000 a year. 

Our work force includes retail clerks, floral designers, landscape 

designers, installers, horticultural growers, mechanics, delivery 

drivers and office personnel. And most of our management team we 

are proud to say has been with us from over 10 to 35 years, and 

are proud to be in service with our company. 

We value these employees, and we have tried to offer comprehensive benefit packages, which include health coverage, life insurance, 401(k) plans, Cafeteria Section 125 plan. The benefits are offered to all full-time employees and currently we have 20 that have 

elected to be part of our health benefits package. 

Flowerwood has felt health insurance coverage for its employees 

to be very important, it is a safeguard to their every day lives and 

their families’ security. In the early years, Flowerwood was able to 

fund most of the cost of the insurance, thus minimally impacting 

the employees out-of-pocket exposure. Today, that has changed dramatically with the company covering 40 to 45 percent of the cost 

and the employees bearing with 55 to 60 percent cost. 

For most of the years prior to 1998 and ’99, the cost increases 

that we experienced were less than 10 percent, in many cases 

around five to six percent. For the most part manageable and the 

impact of both Flowerwood and the employees was moderate. But 

since then, increases have become double digit, and now have put 

our health insurance program in a crisis. In the years 1999 to 

2000, we were faced with a whole 20 percent increase. At that 

time, we made a major change in the plan, and began to offer 

14

choices between HMO and PPO, and at this time greatly changed 

the deductibles. 

This change and increases in the deductibles kept the increase 

to about 13 percent, rather than 20 percent increase. In the year 

2000 to 2001, we experienced a 17 percent increase, and in the 

years 2001 to 2002, was a 18 percent increase. And then just this 

July, for the years 2002 to 2003, we had the pleasure of experiencing in the 43 percent increase. 

Since 1999, our per employee health care coverage has increased 

between 85 to a hundred percent, and I provided a table to show 

you the differences in the single and family coverage on the PPO 

and HMO. We are still trying to evaluate other options, but the 

bottom line is these cost increases significantly impacted both 

Flowerwood and our employees. 

The pay increase that we were able to give our employees in May 

has been completely eroded by the increased rates in weekly insurance. And in many cases, the increases and costs double what they 

made in increased wages. We are concerned that these huge increases will lead to our—to help fund some of the employees’ health 

cost, as well as total lack of ability for any of them to find their 

own affordable health insurance. 

We realize that there are many small businesses, such as ourselves, facing the same crisis. We have heard some of that here 

today. I hope that some affordable options become available soon. 

I have heard some good suggestions here. We are at the breaking 

point with our margins and our business is shrinking every day, 

like every other retailer and restaurant, entrepreneurs facing. And 

then when we have these unpredictable and controllable costs putting us against the wall, I don’t know where it is going to end up. 

Mr. Chairman, thank you for the opportunity to share our company’s experience with you and address the members of your committee. I hope that there are some good solid solutions to employeebased health care on the horizon. There is no easy—this is no easy 

task, and I commend you and the committee for your diligent work 

on this very important issue. And I thank you again for the opportunity. 

Chairman MANZULLO. Thank you very much, Ken. 

[Mr. Koehler’s statement may be found in the appendix.] 

Chairman MANZULLO. Our next witness is Brad Buxton. Brad is 

the vice president of Networks and Management of Blue Cross and 

Blue Shield of Illinois, and Brad, tough job. We all have tough jobs, 

it is very difficult, I mean to use the word Medical Management, 

okay. Just like calling the House of Representatives, but we look 

forward to your testimony. 

STATEMENT OF BRAD BUXTON, VICE PRESIDENT OF NETWORKS AND MEDICAL MANAGEMENT, BLUE CROSS AND 

BLUE SHIELD OF ILLINOIS 

Mr. BUXTON. Thank you very much. I’m not even popular at that 

home. My name is Brad Buxton, and I am vice president of Health 

Care Management for Blue Cross and Blue Shield of Chicago. And 

thank you, Congressman Crane and Congressman Manzullo, for inviting us today. 

15

Blue Cross and Blue Shield of Illinois’s mission is to try to provide its members with quality and affordable accessible health care 

in Illinois. And we do insure about one in four Illinoisans, and we 

worked very hard over the years to try to put together programs 

where we actually pooled for as many small businesses as we can. 

Both are HMO and PPO, to try to keep the cost down, as low as 

two members per group. 

It is a very challenging and daunting task, as you know, because 

mandated benefits, as it has been mentioned here before today, 

have grown from eight, back 10 or 12 years ago, to now over a 

thousand mandated benefits. So, it is very hard, even when you are 

dealing with small groups in any pool, to try to do things to drain 

the cost down to the small group employer, that you have to add 

the mandates. 

So, in our programs, in our HMO and PPO, we’ve added high— low-cost, high-deductible alternative plans. Our small groups get 

the same deals that our large groups get, so we try to keep them 

on the same playing field, and at the same time, we worked very 

hard in the last six years, we have actually lowered our administrative costs, that passed on from the mid-20 percent, to under 10 

percent. So, we are working very hard. 

But in any business, there are many things that are going to 

challenge you. When you look at health care, and when you look 

at, let’s say the ideology, what we try to do, is we always try to 

get to the, where the problems really come from. What is really 

driving the cost. Why are we sitting here today talking about what 

legislation we need to pass for small employers? And when it comes 

down to it, we really get down to the cost issue. And the cost issue 

is great. Just a few years ago, and the law we passed, the Patient 

Protection Act, and while the meaning of it was very, very good, 

one of the things it said was, ‘‘Insurers will pay all emergency room 

charges, no matter what.’’ And that means no matter whether they were emergency or not. That cost our HMO $57 million a year. 

Those costs had to be then passed on. And I will tell you that increase in 57 million, were not all emergency room procedures. 

We do have one of the best health care systems in the world. But 

there are problems with it and there are issues with it. And what 

we have to do is figure out how we balance what we fixed in controlling the cost, to ensure that the accessibility is still there. And 

the quality is there. Today, it is a part of our economy. If you look 

at where our health care system is today, and what it has, to the 

local economies, it’s incredible. So, if we don’t do the right things, 

and we end up hurting the employers of people that, whether it 

would be health insurance, hospitals, physicians groups, et cetera, 

they are going to hurt multiple economies. So what do we do? We 

have to be very careful, and we have to get the costs that are affordable, yet, at the same time, not cut down on advances that are 

going to make people live longer and be healthier, and more productive in their life. 

So, what we know today, is that when the medical costs are 

going up, they are going at a higher rate than a CPI. And they are 

going up on higher rate premiums, and actually the medical index 

is going up. Why is that? What is happening and what is one of 

the reasons for that? Well, one of the main reasons, and we talked 

16

about it today, is drugs. I brought a list, a little bit of information 

here, which isn’t in my presentation, that is written down, but our drug costs, in all lines of business went up from $463 million in 

1999 to $701 million in 2001. And the average cost of a brand drug 

was $77 to $78 and the average cost of a generic similar was $15. 

That’s an incredible difference, yet we don’t have—we don’t have 

a lot of businesses adapting plans that will force, or at least in 

generics. 

But we go into three-tier types of programs to drive formally, 

there are a lot of things that stand in the way of having businesses 

go to that, and that’s problematic. Three comparisons, you take Prilosec, the brand drug, versus a generic, Zantac, $153 versus $21. 

I can go down a long list of that. You talk about drugs are now 

turning at over 20 percent per year, whereas, regular hospital cost 

inflation is somewhere probably around four to five, but lower. 

If you go back in time, and you look at health care costs back 

in the 1980s, we had an average length of stay of eight days. Average days per thousand are close to 900. Out-patient visits per thousand are somewhere in the mid-300s. Doctor’s visits thousands 

were around 850. 

Today, average length of stay is less than four days, and admissions per thousand are down to about 220; doctor visits are still 

around about 850 to 900; and out-patient is now somewhere close 

to 800 visits per thousand. So, when you start to look at where the 

costs are growing, you look at that as one of the issues, and cost 

continues to escalate there and most insurance companies don’t 

have contracts which control the unit cost inflation here. 

You look at—now, you go to and you look at what’s happening 

with malpractice reform, nothing. Today, it’s not only doctors, some 

doctors are leaving communities. And, actually, I know a doctor 

who is traveling from New York City to West Virginia to practice, 

because he is getting a better health insurance rate. He can’t afford 

malpractice in New York. You can’t afford it sometimes in Chicago. 

They are moving to other places, there is good and bad in that, by 

the way. But, that’s a real problem. We have no protection for that. 

Health insurance companies today will offer managed care products which are now being told by their carriers that they may not 

carry them anymore. 

We are not talking about a cost issue here, we are talking about 

the fact that the liability of insurers who has a HMO or point of 

service program may not be allowed to have coverage anymore. 

That’s a huge problem, that’s a cost problem that won’t go away, 

we need some reform there. 

Other types of things that we have seen that have come out, last 

year the Illinois legislature, a bill which was called the Fairness 

and Contracting Bill came out. That bill would have added, by the 

state’s calculations, to the state program itself, the State of Illinois 

employees, almost $500 million. Blue Cross and Shield by our own 

calculations, by our actuaries, there are no actuaries, you know, it 

was very precise, thought it would cost us over $1 billion that we 

would have to pass on to our members, and this bill, I won’t go 

through all of the particulars of it, is not just a bill, it is inherently 

a problem in Illinois. Just go look at other state legislatures, and 

what they are doing in anti-management care legislation. In 1999, 

17

stated in the last person’s presentation is when things went haywire. That’s when anti-managed care legislation started to come in. 

You look at the biggest bumps in health care over time, and that 

care was one of them, and then when we went to payments in 

Medicare, and there were bumps that actually leveled out the cost 

of care for some time. Managed care, when it came in, to the 

eighties, to the late nineties, actually was leveling out the cost of 

care, anti-managed care legislation came in, and it went by the border. 

So, we need to do a few things to take care of that, we need to 

look at reimbursement, we need to reimburse for health outcomes, 

not just generally reimburse based on what you paid in the past, 

we really need to figure out how we reimburse in a way that pays 

for care, that’s quality, just like we do in our products. Thank you 

very much, and I appreciate your time. 

Chairman MANZULLO. Thank you very much. 

[Mr. Buxton’s statement may be found in the appendix.] 

Chairman MANZULLO. You know, that’s a story. Brad, the scenario that you painted, that society of the insurance company, that 

story is where we are really at now. The cost of health—the cost 

of liability insurance for health insurance providers, it is very interesting. Uhm, the next witness is Isabelle—Isabella; is that right, 

Isabella? 

Ms. WILSON. Correct. 

Chairman MANZULLO. Isabella Wilson, chief financial officer of Illinois Blower, Incorporated and out of Cary. In fact, I think that 

I visited your facility.

Ms. WILSON. On Industrial Drive? 

Chairman MANZULLO. Yes. In Cary, with a group of other companies, and, is that correct? 

Ms. WILSON. In our building we have one. 

Chairman MANZULLO. Okay. Were there other shops that are 

nearby in that area? 

Ms. WILSON. Yeah, it is an industrial area. 

Chairman MANZULLO. Right. And, I think we visited that part 

two years ago, and now that you are here, we look forward to your 

testimony. 

STATEMENT OF ISABELLA WILSON, CHIEF FINANCIAL 

OFFICER OF ILLINOIS BLOWER, INCORPORATED 

Ms. WILSON. Thank you. Chairman Manzullo, Congressman 

Crane, I appreciate the opportunity to testify before you and this 

committee on such an important matter. And as you stated, my 

name is Isabella Wilson, and I am the chief financial officer of Illinois Blower. Which is a small, privately held manufacturer of industrial fans located in Cary. Right now, we are at about 56 employees. The rising cost of health care has several implications for 

a company the size of Illinois Blower and its employees. 

Chairman MANZULLO. Isabella, can you pull that mike a little bit 

closer to you? Thank you. 

Ms. WILSON. Direct and monetary costs are only part of the 

story. Overall, our cost for employees has increased by 56 percent 

from 1999 to 2000; 30 percent from 2000 to 2001 and we did manage to contain it to 13 percent to 2001 to 2002. To contain last 

18

year’s increase to only 13 percent, our employees did have to make 

some sacrifices. Out-of-pocket prescription drug costs increased 750 

percent for our employees. 

Many, in fact, had to switch doctors. In the last four out of five 

years, we had to switch carriers to contain our costs. Which has an 

impact on the quality of care, and greatly increases the company’s 

administrative burdens and costs. Our new HMO plan is extremely 

limited to participation in McHenry County, forcing employees to 

either travel 30-plus miles to a participating hospital and doctor, 

or to absorb the increased cost of PPO coverage, which many just 

can’t afford. 

Financially, the impact of the company is extensive. Average 

gross margins in our industry are only 30 percent. Which means 

that for every dollar increase in health care costs, we have to increase sales by $3.31 to cover the additional costs. Over the past 

several years we have been very lucky. Our business is tied to the 

power generation industry, and we have enjoyed the boom in the 

creation of electrical power generation capacity since 1998. 

Unfortunately, that industry has taken a severe hit since September 11th, and the collapse of Enron. As the company faces more 

difficult times, managing health care costs is both imperative and 

increasingly difficult. If the economic downturn continues, and we 

are forced to reduce our work force, the options available to us from 

the number of insurance companies who write policies for groups 

our size, and the number of plan designs available decrease. 

Unfortunately, we are also seeing dramatic increases in all areas 

of our business insurance. With this year, renewal increased in our 

cost by seven percent, these dramatic increases and non-productive 

costs will have a direct impact on Illinois Blower’s ability to compete in today’s global marketplace. 

These rising costs directly impact our ability to afford, implement 

capital projects, which would allow us to improve and speed up our 

production process. This directly affects our ability to compete with 

companies located in less developed countries where labor costs are 

significantly lower. 

In summation, rising health care costs not only directly impact 

the company’s bottom line, it can also negatively affect employee 

morale and less productivity; reduce employee’s quality of life and 

medical care, and lead to a decrease, and employee’s consumer 

spending as they have a shift in income, to cover the ever increasing out-of-pocket costs, also impacting the overall economy. 

Finally, I really want to reiterate the plans that impact rising 

health care costs, have a major impact on our ability to compete 

in today’s global marketplace. As an example, we are currently 

faced with our largest customer moving 37 percent of what was historically a product we produced for them to Chinese manufacturing 

companies in 2003. Our customers are looking for greater cost savings than we are able to provide, as our cost structure is continually being hit by the rising costs of such non-productive expenses 

as health insurance premiums. 

Again, thank you for the opportunity for me to testify before this 

committee on this important matter. Thank you. 

Chairman MANZULLO. Thank you, Isabella. 

[Ms. Wilson’s statement may be found in the appendix.] 

19

Chairman MANZULLO. Our last witness is with the Illinois State 

Medical Society, I’m sorry, is representing the Illinois State Medical Society and, Dr. Jim, is it Milam? Milam is an OB/GYN from 

Libertyville. But you won’t be testifying about what we were hearing a minute ago. 

Dr. MILAM. No. Sometimes clinical care has to take precedent 

over——

Chairman MANZULLO. Is that right, you take care of patients. 

Dr. MILAM. I’m in the office this afternoon. 

Chairman MANZULLO. So, we only need you for one half, and I’m 

sure you know something about the way the cost increased in medical malpractice insurance, Doctor, and we look forward to your testimony. 

STATEMENT OF JAMES L. MILAM, M.D., ILLINOIS STATE 

MEDICAL SOCIETY 

Dr. MILAM. Thank you, Mr. Chairman. It is exactly five minutes 

after 12, so good afternoon Mr. Chairman, and Mr. Crane. As stated, my name is James L. Milam, M.D.; I am an OB/GYN in solo 

practice in Libertyville. I currently serve as the First District 

Trustee to the Illinois State Medical Society. I represent the Lake 

County, McHenry County and Kane County. On behalf of our 

14,000 physicians, medical student members, I appreciate having 

the opportunity to testify. 

I am pleased to present a medical perspective on the rising cost 

of health care. This is an extremely complex problem, but I hope 

I can provide some insight into the problems we face. 

National health spending shot up 6.9 percent to $1.3 trillion in 

2000. Health care now accounts for 13.2 percent of the nation’s 

total economic output, up to 12 percent a decade ago. Clearly, 

many factors are contributing to this unprecedented rise. One of 

the most pressing, is medical malpractice insurance rates. Insurance premiums are soaring in the highest rates since the mid1980s. Also, alarming is the high number of insures that have left 

the medical liability market. Many physicians are forced to limit 

service, retire early, or move to other states where premiums are 

more stable. It is not unrealistic to ask the question, ‘‘Will my doctor be there?’’

Many states have been categorized as seriously threatened. And, 

I am sure you have seen the list in the newspaper. In Illinois, the 

crisis is looming. The primary cause is the unrestrained escalation 

in jury awards that are part of a legal system that, in many states, 

is simply out of control. The average jury award goes to $3.49 million in 1999, up from 1.95 million in 1993. 

The soaring cost of malpractice premiums drive up the cost of 

health care which encompasses everyone, especially small business 

owners. The other cost is a loss of service to patients. Emergency 

departments are losing staff and scaling back on many services including trauma units. Many OB/GYNs and family physicians have 

stopped delivering babies, and neurosurgery is being postponed, because surgeons cannot find or afford insurance. 

The critical rise in malpractice premiums, medical costs are rising in another way. Physicians are practicing more defensive mediVerDate 0ct 31 2002 21:28 Dec 12, 2002 Jkt 082203 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\A203.XXX A203
20

cine, where ordering extra tests and choosing procedures that limit 

their risks. 

There has been an explosion in the cost of prescription drugs. 

Medicare, managed care, and many private insurers have cut drug 

benefits in the last several years. The average senior now spends 

$500 annually for medications. In addition, government regulation 

from CMS, one of the HCFA and EMTALA and COBRA, just to 

name a few, are burying physicians in paperwork and documentation. It tends to follow this regulation and are often at the risk of 

prosecution, fines and imprisonment. Soon we will have to face the 

daunting HIPAA statutes. 

There is a shortage of well-trained nurses, as you know, and 

many medical students, to say many applicants are not applying to 

medical school, because there is a huge debt, declining income and 

loss of respect. Without a doubt, it is clear that legislative action 

is taken immediately to address the soaring costs that limit services and that passed on to many, including our small business owners. 

In order to effectively stabilize medical liability insurance rates, 

while continuing to ensure that patients who have been injured are 

fairly compensated, I believe Congress must pass fair and reasonable reforms to our medical liability litigation system, that such as 

the ones that have been proven effective in other states. 

Currently H.R. 4600, the Health Act of 2002, as well as with benefit patients, by awarding injured patients unlimited economic 

damages yet cap non-economic damages up to $250,000. This would 

also address a fair share rule that allocates damage awards fairly 

and in proportion to a party’s degree of fault. These reforms are 

necessary and urgently needed. 

Earlier this summer, the House passed a Medicare bill which the 

Senate, however, did not pass. To me this is very disheartening. 

Speaking as a physician, I can tell you that we all just want to 

treat our patients and deliver the highest of care. However, in the 

current environment, this is becoming difficult, and in some cases 

impossible. Many physician practices, including my own, are counted among the ranks for small businesses. If we work together keeping the patient as the focus, I am confident we can find a solution 

to the problem. Thank you for your time and attention. 

[Dr. Milam’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you very much, Doctor, for the really quality testimony. What a range of opinions and backgrounds. 

I’ve got a—I’ve got many questions, I’m just going to take one at 

a time and we will rotate between the two of us, Mr. Buxton, you 

talked about a couple of things, and one is reimportation of drugs, 

and I think Blue Cross/Blue Shield is in favor of Congressman Emerson’s bill; is that correct? 

Mr. BUXTON. That’s correct. 

Chairman MANZULLO. Could you explain to the folks exactly—I’m 

an original co-sponsor on that bill. And could you explain to the 

folks how that works? 

Mr. BUXTON. Not exactly. No, I can’t. Uhm, actually, I am not 

as familiar with the bill. I know we are in favor of it, and unfortunately what I can tell you about the whole situation is the fact 

that, you know, the grand situation has gotten to a point, where 

21

because of the patent abuses, that we are seeing—where the drug 

goes off patent, and then they put it back on under a new name, 

has become to be unbearable in terms of the cost. Uhm, we have 

seen the—actually, the pharmaceutical companies are now beginning to control the generics. And when you talk about the reimportation, the ideas that you can get these drugs for less in another country, because they don’t have the same patent cost on 

them, and they sell them actually cheaper out there. And the idea 

with the legislation, is that we would be able to get those drugs at 

the same rate. I am not sure exactly how that works. But to be 

quite frank, if we could increase the use of generics, and the incentive to use generics, we really wouldn’t need the whole reimportation issue. And so, if we were able to actually put some regulations 

on the use of generics and incentives, I think we would actually be 

able to bring down cost. As you can see, there is a $60 difference 

between brand and similar generic. 

Chairman MANZULLO. So, you are talking about the—let’s see, 

Waxman—— Mr. BUXTON. I’m looking at Mr. Keye for a little help. 

Chairman MANZULLO. Hatch. Hatch-Waxman, that was the past 

20 years ago, the law was passed 20 years ago, and its purpose was 

to speed up of the issuance of generic drugs, but something has 

gone haywire with that bill. 

Mr. BUXTON. Right. Like, for instance, Prilosec is getting ready 

to go off brand. When Prilosec goes off brand, it would become a 

generic. Generic would take it over, or maybe multiple generics, 

and sell it as a generic at probably $60 less. What happened is that 

the pharmaceutical company made—Gateway came out with 

Nexium. Nexium is the same thing as Prilosec. They are selling it 

more than Prilosec, and what they are doing is they are gaining 

market share, very fast, and what they will do then is they will 

control the generic Prilosec by ideally, maybe the company that will 

do the generic. So, they are officially keeping the rate high, and 

you still continue to pay for a patent which, as part of the cost has 

been taken care of years passed. So the whole patent, I think—we 

think the whole patent law should be looked at in terms of, when 

a drug really needs to go off patent, in terms of have they recovered the cost of inventing that drug. That is something that is very 

important and really has never been looked at. 

Chairman MANZULLO. Well, once it was when the prescription 

drug bill came before the House, there were three provisions in 

there, one being the reimportation, the other being, and making 

sure that everybody that provided an area that show drugs can 

really get at the same original discount. And the third one dealt 

with generic reform. And none of those were a volume plan bill. So, 

that’s why any bill that comes through the House, really gets to address those issues. But what is it that’s causing this spike in the 

cost of drugs? In the last two years—I really can’t——

Mr. BUXTON. I think the doctor—I couldn’t be able to answer 

that, but I really believe over-the-counter advertising, you know, 

has some direct consumer, and that’s how they do it. 

Dr. MILAM. That’s exactly correct. This schizophrenia economy, if 

you will, because we all know drug companies stock on 401(k)s and 

we want them to make a profit. But, yet, we want the drug costs 

22

down. So when a company brings a drug to market, it may cost $20 

million as an average to bring the drug to market, because there 

may be three or four drugs of Zantac, so the company is trying to 

reduce the cost, and then obviously doing a patent, so another company who didn’t sell it might be able to sell that drug for cheaper, 

and manufacture it more cheaply. Also, you might have colors, 

there might be a difference between a white pill and an orange pill. 

But the theory is that we also—they have liability. The companies 

have lawyers that have to look at all their liability for adverse outcomes and side effects and things like that. So the notion is that 

it can be sold in Canada cheaper, because there isn’t the same liability laws up there, and so many patients can go across the 

boarder, and liability isn’t the same. 

Chairman MANZULLO. Like prices on the Internet? 

Dr. MILAM. Yes. And then bring them back over here, and I’m 

not certain in the drug industry, so I don’t understand totally, but 

it—as far as how much it costs to bring the drug to market and 

other significant research—— Chairman MANZULLO. It’s about $100 million now. Mr. 

Buxton—— Dr. MILAM. One more thing, another thing that is problematic is 

rebates. And we have PPMs that basically are—— Chairman MANZULLO. Explain what distribution is today. 

Mr. BUXTON. As if an insurance company has a covenant, or a 

PBM, a Pharmaceutical Benefits Management Company, manages 

a drug coverage for you. Okay, they have a formula, and on that 

formula there are brand and generic drugs. Every time one of those 

brand drugs are sold, the PPM has a deal with the pharmaceutical 

company, to get in a sense, a payment for that. Some people might 

call it a kickback, but it is called a rebate. That rebate then, the 

higher—the more people that use that drug, the more the rebate 

is. Now what insurance companies do, who use PPM to do their 

own, some of them may do their own rebate, they take that and 

pass it back, all of or some, to the customer. When it goes through 

a PPM, the PPM will take back a piece of that rebate and give it 

to the insurance company, who will give back some of it to the customer, or none of it, and put it back into the price, and there are 

different ways to do that. The problem is, rebates are inflationary. 

If I am paying you a dollar for every time you sell Nexium, let’s 

say. Well, you want to sell a lot of Nexium. Okay. And it may not 

net out to the bottom line to the customer in the long run because 

some of those rebates are withheld. So, quite frankly, I think there 

needs to be rebate reform, if we are going to get to the bottom line, 

cost of the drug, to get it back to the individual. 

Chairman MANZULLO. In the State of Illinois under the Circuit 

Breaker Plan that is provided for seniors, that rebate goes to the 

State of Illinois and the PBM acts in the purist capacity, maybe 

that’s not correct—well, it is, the purist capacity to negotiate the 

lowest price and the savings are passed on ultimately to the consumer. 

Mr. BUXTON. Right, that is the whole rebate, and there are other 

things like information that is sold on, what doctors prescribe what 

drugs, and do they get a rebate for that. So, there are a number 

of hidden rebates that don’t come back to the state or anybody else. 

23

And rebates still, even though the state gets the net amount, it is 

still inflationary practice, because you are sending people to more 

popular brands and not move to generics. 

Chairman MANZULLO. Congressman Crane. 

Mr. CRANE. Thank you, Don. And thank you all for your testimony and being here today. You know, this is a very important 

subject, and it’s one that—we had a town meeting yesterday, and 

the day before, and many of these issues came up at our town 

meeting. I pointed out that to the folks last night that one of the 

ways you get around this is to make sure that you have one of your 

kids get a medical degree. With all kidding aside. My dad got a 

medical degree, and we never thought about health care, that’s 

what your father was for. And before he got his medical degree, 

though, my mother went into labor and the OB was out of town 

that weekend, and so we put papers on the bed and boiled water, 

and the dog came in and sat on the floor watching, and I said to 

my father afterwards, ‘‘Weren’t you a little unnerved about delivering me?’’ He said, ‘‘No, I delivered pigs and cows at the farm, it 

was no big deal.’’ And—but, the fact is that he had his medical degree then, and he purposely delivered my sister and my two kid 

brothers at home. And we always relied on him for everything, and 

he produced—well, one of my brothers is a physician, and I had a 

nephew who is a neurosurgeon down in Downers Grove. And having members of the family that went down that path gives you 

comfort, as well as an emergency you get a hold of a dentist, no 

big deal. 

But it is something that is a big deal, and you folks have all 

touched upon component parts of it that is a big deal facing our 

country today, and potentially impacting in a negative way, if we 

don’t take some action here. So many millions of Americans—Mr. 

Brauns, in your testimony you dedicated a significant portion of 

your discussion to the power of consumerism in the free market. 

Given the employer-provided health care structure that the majority of these people seem to rely on, how do you propose that we 

begin to change the current practice, and move toward a health 

care market geared toward individual consumer? 

Mr. BRAUNS. Thank you for the question. Uhm, I think first of 

all, it starts with understanding. I think we have to understand 

that all of us in the industry, the employers, the brokers, the physicians, the government. In fact, there is tremendous power in consumerism to begin with. Once we can get people to understand that 

we can take the patient, inject that patient back into the process 

so that when he confers—that he or she confers with their doctor, 

there is only a 800 number that has to be called. There is no supervising authority that has to say, ‘‘Yes, Doctor, please go ahead and 

do that, or don’t go ahead and do that.’’ And the way you do that 

is by allowing people to generate some fund of funding that they 

call their own. 

In this country we’ve evolved into this medical savings account, 

and what I am talking about is the next evolution. And the IRS 

ruling that came out on the 26th, has had the ruling, has had tremendous impact in the industry already. And as I have said since 

then, our last—we had 50 employers that have already gone to implement something like this. So communication has to be part of 

24

it. Things like this, but we also do call on government to? To include this in your letter, to include this in your potential solutions, 

and I certainly do not diminish any of the solutions that have been 

talked about here today, like tort reform, or association health 

plans, and so forth. They are controversial, I think we would have 

been back. But if we could find a solution that would move those 

or at least make them as compared to what consumers can do. We 

can be interested in pursuing it, and in the consumer’s philosophy 

has that potential power. For decades, we—I shouldn’t say decades. 

But in the late eighties, we saw what 401(k) did to the retirement 

market. When people got their own that they control, it vastly 

changed the way we used to reflect its tool, saving pension, and 

government. That same concept could happen here. So the IRS 

read the ruling now and it also makes it still very complicated. But 

what would be great is that government would include this in its 

revenue and say to perhaps House Ways and Means of the way of 

this, in the respect that let the money that accumulate in those 

funds be used by the consumer for his or her own purpose. If he 

wants to take that money at the end of the year and buy a fishing 

pole with it, then he could do it. Currently it is restricted to just 

health care type expenses, as we see outlined in previous bills like 

125 and 105, and so forth. 

But financial engagement, and by the way, consumers want this. 

They are clamored for it. We have not seen an employer yet that 

hasn’t said send us more information on this. Large employers for 

a long time have been talking about the—defining contribution 

health. How can we do it? It is kind of a Holy Grail, but we haven’t 

really been able to—the system isn’t quite there yet. That’s probably the last step on the journey. But we are moving in that particular direction. So, directly to answer your questions, getting information out, letting government say, Hey, we have recognized the 

power of this, and we want to get that information out, crafting 

rulings like the recent medical ruling, and expanding upon that, so 

that consumers can use that money as they see fit. That’s what—

to answer some of the things that came up here at the end of the 

table. You know, most consumers have no idea what drugs costs. 

They get their EOB, their special Benefits, say, $10, $50. They 

have no idea that it was a $80 or $100 bill. But if all of a sudden 

that 80 or 100 bucks comes out of their fund of money, they are 

very interested in whether they are going to take Claritin or 

Clarinex. One way or another, one is off brand, whether its generic 

or whether it’s not. Because if they can take that money and go to 

dinner with it, or buy a fishing pole, or whether it’s for the tires, 

or the living room. Really engaged, the last time I will ask you this, 

if I gave you $1,000, Congressman, handed it to you today, and 

said, ‘‘It’s yours, do with it what you will.’’ You would love me, you 

would be very happy with that. But if I gave you $1,000 and said, 

‘‘Congressman, you can only use this for automobile repair.’’ Okay, 

you’re happy, but it doesn’t have the same effect. So the revenue 

ruling is going in the right direction, but it’s not quite there yet to 

really empower this thing. 

Chairman MANZULLO. You haven’t seen my car; a 1994 Buick Estate Wagon. A hundred thousand miles. But if you had two teenage 

boys driving, you wouldn’t want five thousand pounds of steel 

25

wrapped around them. So they have to drive that tank. And you 

made your point, but a lot of safety on that. Uhm, Ken, you mentioned in your previous, about 46 percent last year? 

Mr. KOEHLER. An increase in 43 percent. 

Chairman MANZULLO. Forty-three percent. Can you put the mike 

a little closer? 

Mr. KOEHLER. Oh, sorry. 

Chairman MANZULLO. Was there a reason for that? Was there an 

illness of one of the employees? 

Mr. KOEHLER. We have had some illness within the group, so it 

did increase. But we experienced the same thing at the county this 

year, and, you know, I am a county board member, and our rates 

were going to increase to 37 percent, and we were able to negotiate 

them down to 31 percent. So, I mean, there are dramatic increases 

that have taken place throughout the entire industry. 

Dr. MILAM. I also had the privilege, for over several years as 

serving on one of the boards for one of the major hospital groups 

in the northwestern part of this area in the State of Illinois. And 

some of the things that we found there, obviously tort reforms 

make it. This is critical. If there isn’t something done about that. 

There is no control as far as the cost of hospitals and commissions 

are going to be great. And see, we are going to lose people, just 

good people that don’t want to practice anymore because they just 

can’t afford it. I think that is important. The other thing that we 

found from a hospital perspective is the fact that there are a lot 

of costs that are never paid back in the form of Medicaid and Medicare. And the hospitals have to absorb those costs, but of course 

who ends up paying for it, it’s every other patient, certainly the patients that are covered by insurance, are impacted with that and 

it is passed on to insurance companies, but is also passed on major 

to the people that just don’t have any insurance at all, but the people who take full bulk. And then in the past, probably three years, 

one of the more interesting dilemmas that have come into the 

health care really just begins to scratch the surface as far as health 

care costs, and that’s called agency providers for nursing. And 

we’ve seen the cost go up, I mean incrementally, it’s astounding, 

and it has taken a hospital to run efficiently, and in one year turn 

around running in the red, and putting them in jeopardy of being 

able to deliver good health care. And I don’t know what the answer 

to that one is, because I mean it is a fact of life, that over the 

years, nurses were not paid very well for the type of work and the 

hours that they put in, and they realize that and then somebody 

that was very cute came up with the idea that, well, come and 

work for us as an agency nurse, and we will get you the better 

money, and the price went up from—and to use an example, maybe 

$20 an hour to $60 an hour overnight, because these people could 

get better jobs, better pay, uhm, by just working through an agency, and this is epidemic. And you talk about major cost is incredible. 

Chairman MANZULLO. Doctor. Thank you, Mr. Chairman—— Mr. BUXTON. And I have a couple of comments, I want to be 

clear, I would like my testimony to reflect the fact that I am not 

interested, we are not interested in reforming the tort concept. If 

someone is injured, they should be made whole again. It is just afVerDate 0ct 31 2002 21:28 Dec 12, 2002 Jkt 082203 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HR\OC\A203.XXX A203
26

fecting the liability issue, and the cost involved, and frankly what 

has happened with nurses, in nursing schools, in the old days if 

you were a female you went to nursing school. Now if you are a 

female you can go to medical school. So why should you necessarily 

become a nurse, when you can become a doctor. That being said, 

we have also gone to the extreme of consumerism, if you will, we 

now have free agent nurses. Baseball players can be free agents 

and go to team to team, nurses are either finding that there is not 

necessarily they are instituted——

Chairman MANZULLO. That is a serious problem. 

Mr. BUXTON. Yeah, there is a 120,000 right now, and projected 

to be about a quarter of a million by 2024. Most of it is the lack 

of respect, long hours, and the work force is not here, because the 

people who go into medicine or health care do it because they have 

an inner drive. They want to do it. Now, they can become a business, then they are getting paid just as any other business, so why 

should they work nights and weekends, and be exposed to bodily 

fluids and potentially come down with hepatitis or HIV when they 

can make the same amount of money in the business world, unless 

they really want to do it, in which case——

Chairman MANZULLO. But that is the consumerism. 

Mr. BUXTON. Yes. Also, the fact that——

Chairman MANZULLO. And I might add, please, we are all in this 

together, so what I want to know—well, no, what I mean is, we 

have to have the nurses or the doctors are affected. 

Mr. BUXTON. But we have shifting cost for so many years from 

one person to another person, as a society that’s what insurance is. 

Shifting the cost. If I don’t have a claim, I’m paying for the person 

who is sick, and, frankly, most people cannot afford out-of-pocket 

medical care. I could not go pay for a gallbladder surgery in the 

next week or long-term institutional care for my folks, next month 

or something. So I suppose part of what I think we should come 

to grips with is the fact that, as a society, we need to decide how 

much we are going to spend on our health care. We know how 

much a burger is worth, we know how much a gallon of gas is 

worth, and we know how much we are ready to go pay for a Cubs 

ticket, but how much do we want to pay for our health care. And 

we have to come to grips with that notion. 

Chairman MANZULLO. Well, you threw in the Cubs analogy, but 

I won’t touch that. Scott, on tort reform we might want to look at 

structures. So much in the state of Nebraska, which has probably 

the lowest malpractice and medical insurance rates in the nation. 

In Nebraska, they sent punitive damages to the state educational 

system instead of a plan. Now, after all, no plaintiff has the real 

right to penalty judgments—they have a real right that penalty 

judgments, actual damages—in fact, no plaintiff has a right to penalty judgments, but they do have a right to actual damages, pain 

and suffering and legal costs. But punitive judgments really don’t 

serve the purpose, except for enriching the plaintiff’s pocket. And 

why do we need to give the plaintiffs a motive to sue insurance 

companies, or doctors or hospitals? You know, it’s a big thing. We 

can make $93 million if we sue the doctor, who, on a 77-year-old 

man who had eye surgery and they did it wrong. 

27

Mr. SHALEK. In the state of Illinois, are punitives a consideration 

of medical malpractice? 

Mr. BUXTON. I think so. 

Dr. MILAM. What’s the question? 

Chairman MANZULLO. Are punitive damages—— Mr. BUXTON. A consideration of malpractice? 

Chairman MANZULLO. I don’t think they are in the State of Illinois, are they? Do you know of any awards of punitive damages in 

Illinois? 

Mr. BUXTON. There was a 77-year-old man that received $90-

some million—— Chairman MANZULLO. Was that in Illinois, the judgments? 

Mr. BUXTON. I know it was a loss. 

Chairman MANZULLO. Okay. 

Mr. BUXTON. It was finalized, it was reduced down, but still 

those kind of settlements, all it does, $93 million, who is going to 

pay for it? Punitive, excuse me. Punitive, we are going out and 

punishing Exxon for adding this bill in Alaska, but punitive in the 

sense that the jury is instructed to use their best judgment of what 

they think. 

Chairman MANZULLO. All right, it is covered under pain and suffering. 

Mr. BUXTON. Yes. 

Chairman MANZULLO. Congressman Crane. 

Mr. CRANE. Uh, yes. Mr. Shalek, you have discussed a number 

of solutions for more affordable health insurance, and I would like 

to ask you if we were able to help control over utilization of health 

care services by making consumers more aware of health care 

costs, do you think that would result in lower utilization and lower 

costs? 

Mr. SHALEK. Education of the consumer is a big factor. Now, if 

we can see it by what the drug companies are doing on TV, they 

are educating the consumers to buy brand name drugs. They go to 

the doctor, they have the symptoms, they see everything else on 

TV. We need this drug, doctor; the doctor gives them the prescription for it, and lays the cost. The biggest thing is education of consumers, and we need everybody to get involved, agents have tried, 

doctors tried, but insurance companies direct, what we need is a 

greater effort, maybe on behalf of the government to get involved 

in educating the consumer on health care and what the actual costs 

are and how to do so affordably. 

Mr. CRANE. You mentioned that there should be more emphasis 

on individually purchased health insurance, and, frankly, I am 

amazed at how many people I have talked to that has stated it is 

just too complicated to process the work through and they would 

rather not bother. Can you tell me how we can work to educate 

consumers to make that less intimidating from their prospective? 

Mr. SHALEK. That is probably a role of the agent. But medical 

savings accounts work, the health tax credit could be a great success story, with the government, people don’t understand their 

health care coverage in a big—in a lot of ways. You talk to most 

employees, they have no idea they have this benefit. They go to the 

doctor, they know they got a $10 co-pay, that’s it, that’s all they 

care about. They don’t understand what everything else costs. How 

28

to access a doctor, how to ask for discounts from the doctor. An example: My chiropractor does not charge me the deductible on insurance. Because he knows after the deductible they are going to pay, 

that’s all he settles for, he is basically paid on assignment from my 

insurance companies. There are doctors out there that will do that. 

But people are, like doctors I guess, they don’t know how to ask 

for discounts, like the insurance companies are asking for discounts, they don’t understand their benefits. They get this book 

that is this thick (indicating) and they are not going to read it. So, 

if we don’t go with MSAs and a health tax credit, a refundable 

health tax credit for all lower income to middle income Americans, 

we will increase the number of uninsured, people will start understanding their insurance better, because the government is involved with the education process. 

Mr. CRANE. When I listen to this, I keep reflecting back on the 

experience of when I grew up as a kid. I had a great grandmother 

who was in her 90s and she had cataracts, and so my dad laid her 

out on the dining room table, and he made us little kids go into 

the other room, and he had glass doors that had little shades on 

them, and my older brother and I would climb up on the backs of 

the chairs and look over and watch, whatnot. And my mother was 

in there, and an aunt of ours was assisting, as they did surgery on 

one of her eyes and restored her vision to that one eye. 

I mean, it was that whole attitude about any of the needs that 

you might have in drawing that out, makes the climate we live in 

today something that is bewildering. Because I still have tendency 

to think that, you know, I’m going to call all the medical experts 

in the family if I have a problem and that’s no big deal. But it is 

a big deal. It is a big deal in educating people in understanding 

what their options are and things to do with and likely important 

in educating us as to what we can do to help with this. Don. 

Chairman MANZULLO. Thank you. You don’t operate like that, do 

you? 

Dr. MILAM. Oh, no. Uhm, with regards to what the gentleman’s 

chiropractor does, let me just say that, most of the PPOs and contracts that I belong to and HMO contracts, require that I collect 

the deductible from the patient. If I don’t collect the deductible, 

they can kick me out of the plan. That being said, in addition with 

Medicare, we are obligated, because the Medicare fee is already set. 

That I have to collect a deductible in a co-pay for Medicare patient, 

or else then I have just changed my rates, so there are contractual, 

and, in fact, government restrictions to being kind, it’s almost like 

we are in a double bind. We want to be nice to our patients and 

forget the co-pay, but, in fact, if you forget the co-pay, there are 

some jurisdictions, where doctors have not charged their friends or 

there other associates for medical care, and that’s been considered 

kickbacks in some jurisdictions as well. So this is all about the contracts, and we are talking about businesses. It’s difficult, and it is 

still burdensome. 

Mr. BUXTON. Just a moment, Representative Crane, one quick 

fact. Last year, we run our data all the time and look at where our 

costs are generated from. Twenty percent of our members last year 

did not generate a claim, twenty percent. Seven percent drove 72 

percent of the cost. And most of those were chronic care conditions. 

29

So, when you begin to look at what’s driving the cost, chronic care 

really shows through, especially when you get down to asthma, diabetes and complications of heart and hypertension. Those are the 

major things. And obesity and smoking are the two greatest causes 

of health care problems. And if we could solve those two issues, we 

could cut our health care problem. And that’s true. That’s not 

something that is made up. And everybody agrees with that. It is 

just that it is so hard to make that change and this is why disease 

management—disease management is going to save money per se. 

Disease management help people manage their disease better and 

might save somebody that cost, like an emergency room here and 

there. But over the course of the disease like diabetes, it is going 

to be very expensive, and then the most expensive is the last two 

or three months of life. And that is where we spend the most 

money. So, when you put things in perspective, your grandfather, 

your father was right. A lot of people who don’t need care, they get 

care, and the most terrifying thing you can do is get care, and be 

in a hospital too long, because of hidden infection. And we know 

for a fact that a lot of people who are coded as dying of pneumonia, 

aren’t dying of pneumonia, they are dying of salmonella, and other 

bacteria. And that’s not even reported to the CDC, because the 

CDC doesn’t require it. So when you talk about medical errors, you 

got to start to talk about what’s going on in terms of how we are 

going to control these rates with people who are severely ill and in 

hospitals, and what are we going to do about that. And that’s a 

huge issue. So, anyway, I just thought I would bring this up. 

Mr. CRANE. You know, in that context, my dad used to write in 

a syndicated newspaper company called the ‘‘Great Medic’’ and he 

was arguing 70 years ago that smoking caused lung cancer, and I 

never ever smoked in his presence, but I was the only one of his 

kids that took up that bad habit, and I did it for 50 years. I quit 

five years ago, cold turkey. 

Chairman MANZULLO. Good for you. 

Mr. CRANE. But, I have a grandfather who lived to be 98 and 

grew his own tobacco, and his wife never thought it was—it was 

that serious. And he made his own beer, and he grew his own tobacco, and he lived to 98 in his peaceful business. But, which is 

part of the reason why, again, you know our family environment 

there. You’ve got emergency Dr. Pop, you know, it’s a broken bone, 

he’ll fix it. But at any rate, these are legitimate concerns that I was 

brought up to be more aware of than I obviously was, or I wouldn’t 

have taken that path of 50 years of Camel cigarettes. Uhm, let me 

ask a question of you Mr. Buxton, can you comment on whether 

Blue Cross and Blue Shield are trying to incorporate more emphasis on prevention in order to keep health care costs down? 

Mr. BUXTON. Yes, we are actually—most of the products now, are 

standard benefits, include preventive care, and we feel very strongly that preventive care administered correctly will actually create 

a healthy new population. So, we have done things most recently 

in our HMO product where we actually reward physicians to do 

things in preventive care, whether it be immunizations. But one of 

the most recent ones was in preventive care for doing mammograms. We found that our physicians and our HMO weren’t doing 

mammograms at the level we felt they should be, or that healthy 

30

2000 dictated they should. So what we did was, we said anytime 

we find it in the record, we will give you an extra $1,000. And we 

have done that with mammograms, pap smears, we’ve done it with 

diabetic and asthma programs, so when we find that the program, 

the five-point program to the individuals documented in the medical record, that way we know the individuals know what they are 

supposed to do to take care of themselves. We give the physician 

an extra thousand dollars. So the idea is that so the beginning of 

us getting into the payments for outcomes, because that is a good 

outcome, you can actually measure it, you see it, it’s there in the 

record and then you pay for it. 

The idea is you can tie cost effective care to quality care, but you 

are paying more for that. And the rationale in looking at doing that 

within hospitals in terms of beginning to look at as you lower infraction rates, as you lower mortality rates, and those types of 

things, we are going to actually increase payments to hospitals who 

do that, because we feel then we get a healthier population, and 

in a sense they practice better. So I didn’t get to that in my little 

deal today, but we feel that outcome-based reimbursement is one 

of the keys here. You wouldn’t pay to have your car fixed twice for 

the same thing. 

Chairman MANZULLO. I have. You haven’t seen my car. 

Mr. BUXTON. At the same time, and we think that those types 

of business principles, we need to begin to get into health care. So, 

that’s a great question, and, yes, we do reimburse extra for good 

preventive care. 

Chairman MANZULLO. There is a bill that was introduced several 

months ago, there are ten thousand bills a year, to allow an employer, an employer to have a gym on-site with the ability of the 

employees who come in there, for weight loss, for continuity, for almost anything. But if there is a gym next door, that is a separate 

business and the employer can’t contract with them to provide 

those services without the benefit being considered to be included 

as income to the employee. And so that is it in the whole wellnessthinking based upon prevention. That is some of the things that we 

are trying to do. But, Scott, I want to ask you a question and that 

is, in terms of innovation, you come up with some pretty interesting scenarios and one of those is on page three of your testimony, you talk about the Injection Molding Company in Woodstock. 

One of the things that I want the folks here to hear, and maybe 

you can help Ken in his application, how did you go about saving 

that company that tremendous amount of money? 

Mr. SHALEK. We reviewed their current programs and looked at 

their costs and I worked for almost every single insurance company 

selling insurance through the State of Illinois, and make recommendations on looking at an alternative plan that they had 

most of their people on HMO, some of them PPO; I said, ‘‘Look, 

they were complaining because the HMO was not that well available to people out here,’’ like Illinois Blower has the same problem. 

I said, ‘‘Why don’t you go all PPO with a completely different design?’’ Go with a $1,000 or $2,000 deductible and then the company offers $1,000, the insurance company gets $1,000 to $2,000 or 

$5,000 deductible, with a 100 percent coverage, thereafter. Including prescriptions, and you also get a prescription discount card upVerDate 0ct 31 2002 21:28 Dec 12, 2002 Jkt 082203 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 E:\HR\OC\A203.XXX A203
31

front. And when you start comparing the cost, I said, ‘‘give your employees all a two-hundred and fifty to $500 deductible, let them 

understand the cost. What their benefits are. But once they hit this 

cap of $1,000 to $2,000, everything is paid 100 percent. Lower the 

costs by about 50 percent.’’ I lowered their costs from $23,000— $24,000 basically, to—— Chairman MANZULLO. Per month? 

Mr. SHALEK. Per month. To $14,000 per month. Big, big, difference in cost deductions. And, you know, as was said, seven percent of all claims or 90 percent of all claims come from 70 percent 

of the people. Well, you get $1,000 or $2,000, after that you are covered 100 percent. We are getting rid of the small claims, let the 

employer pay the first $500 themselves on the little stuff, let the 

company self-insured from $500 to a thousand at 70 percent or 90 

percent, or whatever percent they want, but the employer’s self-insure that. It is going to cost them not that much more money, but 

the savings they are saving is dramatic. 

Chairman MANZULLO. So you were able, through global innovation, to actually lower their health care costs—— Mr. SHALEK. Their costs reduced $112,586.52 a year. 

Chairman MANZULLO. And that’s for 40—— Mr. SHALEK. Forty-five employees. 

Chairman MANZULLO. Ryan, we are going to wind up here pretty 

soon? You have had similar experiences in your book, isn’t that correct? 

Mr. BRAUNS. Yeah, definitely. Especially recently, with the consumer concept. And the concept is very similar in a lot of ways to 

what we have been talking about. Although some of the things, 

kind of nibbling on the edges. And one of the insurance companies 

we use is one of the South African companies, and—— Chairman MANZULLO. Is that a South African company? 

Mr. BRAUNS. Yeah. And by the way, I think all of the major insurance companies in this country are working on developing consumer-type products. This just has to be one of the first companies 

that is out of the box with a quality product. And what is interesting about that particular product is that it couples with it a 

health—a preventive healthy behavior-type of program. The difference is, though, that the compensation for the healthy behavior 

isn’t going to the doctor or the hospital, which is really a good idea, 

however, the conversation here goes directly back to the person, if 

the person engages in health behavior, smoking cessation, weight 

loss, jogging, working in a gym, and the whole list of things, and 

then they get something for it, they get money or they get airline 

miles, or they get dinners at a restaurant, and things like that. It 

sounds a bit hokey, I understand, but if you think about it, that 

is what we all do. If you say we got a gym on the premises, build 

a gym on the premises of this business for the concept of lowering 

health plans, nobody wins. Except for the people who go to the gym 

anyway, nobody wins. But as soon as they say, ‘‘Tell you what, if 

you don’t go, I’m going to take $25 out of your paycheck.’’ That’s 

financial engagement. 

Well, I did have a demonstrable and impartial effect on his 

claims in general. So, many of our cases started to go down to the 

consumers that we have. We already have seen a reduction, and we 

32

are anticipating a reduction in renewals as well because the shift 

curves a little bit lower, and the magic of this, if I could use that 

word, it is kind of expenditure, as that we just heard, many people 

don’t have claims. Many people have small claims. These people 

will roll money over in their funds, year after year, after year, their 

funds will grow, because it is much easier for the employer to have 

them say, I will have a $5,000 deductible plan, I’ll have a $10,000 

deductible plan, when the bulk of their employees are generating 

those funds underneath, or it is for the employer to say, ‘‘You know 

what, ladies and gentlemen, with my company, XYZ here, we are 

eliminating the company dental plan.’’ Under today’s scenario they 

would be wailing a national fee. But if you are able to say, ‘‘Look, 

most of you have a few thousand dollars in your fund, we are going 

to let you have a voluntary dental plan, and we will even put a little towards that.’’ All the employees are going to be happy as clams 

that the company has off-loaded some of the liability and made it 

affixed in that respect. These are the type of solutions that are 

starting to come out of the free market, primarily driven by this 

consumerism concept. And it is—— Chairman MANZULLO. So the issue is in Illinois health care. People who buy insurance need to shop more. They need to go to—— Mr. SHALEK. I think it’s not shopping, I think they need to become educated more and find out what benefits are available to—— Chairman MANZULLO. What products are out? 

Mr. SHALEK. And with destiny, they can even have a week at the 

Ritz Carlton if they wanted to. 

Mr. BRAUNS. There are solutions out there. We all know that 

there is a price in this, in the employer’s respect, we’ve got lots of 

clients who are getting 30 to 40 percent increases. You know, you 

just can’t sustain your business in that respect, so short-run stuff 

is solutions here, and actually are certainly called for. But something systemic, something long run. And there was a study done 

in California, and I can’t recall the name of it, I will put it in my 

written testimony later, uhm, where a great way was put toward 

to developing Web-site and so forth, so employers can go to that 

and find out what tax rates they had coming to them. How does 

the IRS treat expenses and even a lot of employers, small employers in particularly, rent—they don’t know that under 162 of the 

Code, you can deduct health care expenses of the business expenses. A lot of them aren’t aware of that. You would be surprised. 

So what this study found is that when you made a course of the 

range of options that are out there, yeah, they lowered their premiums, it increased substantially from what they were, now that 

doesn’t mean that those of us who are taking advantage of that 

aren’t getting much of the same problems, but there are many that 

could use additional information. 

Last point, PPOs, we talked about the rise in cost of health insurance going all the way back to July 1, 1966, Medicare, by the 

way the Medicare cost shift is killing us, if Congress can do something about that right away in that respect. Costs have continued 

to rise. We saw an inflection in that curve, an abatement in around 

the ’80s when we started to get managed care come into the picture 

in earnest. But now we see that the trends, obviously this focus 

really increased. When everybody has a discount, nobody gets a 

33

discount. PPOs are fundamentally consumers. If you go to doctor 

A, it costs you less; if you go to doctor B, it costs you more, your 

choice. But all of a sudden, you cannot find an employer that does 

not have a PPO arrangement. You can find many employers have 

two or three PPOs. In Rockford we have three hospitals. All have 

emergency care centers, all level one trauma centers and so forth, 

and we have many employers that have all three hospitals in their 

PPO in that respect. So the PPO concept proved the consumerism 

will work, but all of a sudden as a potential solution now that the 

savings have been brought out of that. 

Chairman MANZULLO. Doctor. 

Dr. MILAM. Thank you. And, Mr. Chairman, that is the last comment that I was going to agree with it. Everything that was just 

said is accurately said, and it doesn’t do anything to control the 

cost, it just shifts from one party to another party. So shopping 

around doesn’t necessarily lower the rates to the clients, it may 

lower individual rates or a group rate like the Injection Molding 

Company, but it still costs X to deliver the care. And we have addressed that so far, and that’s what we have to get across or it 

will—or else we will have to accept the fact that if we don’t control 

this, it is going to go up, so we either have to accept rising costs 

or accept controlled costs. 

Chairman MANZULLO. I appreciate that so much. I want to thank 

everybody for their testimony. Our Small Business Committee actually had more hearings on health care than I think any other 

committee has in Congress. We held five hearings on HCFA horror 

stories of how physicians and medical providers, and are being 

abused by HCFA’s 4,800 employees and 49 different Medicare contractors. We may not be in that situation where there are two 

Medicare contractors such as in Los Angeles and they have geographical divisions and the MRI indication for a particular virulent 

ailment, differs depending on which side of the street you lived on. 

There was a difference in reimbursement rate even though the providers were across the street. After there was a merger with the 

two providers, so that there was now one provider—reimbursement 

rates still varied depending on where you lived. This is totally one 

of the most inefficient systems that has ever been developed by 

Health Care Finance Administration. Physicians and other health 

care providers are hammered by provisions that do not make sense. 

Let me give you an example on closing on that. We were approached by the portable x-ray providers. My mother was at an assisted living center, when she needed an x-ray, her doctor—she 

talked to the doctor on the phone, and he would call the portable 

x-ray people, they would go to the nursing home, in the privacy of 

her room, they would take the picture, send it over to the radiologist, who is part of that team, and usually within two hours of the 

phone call that my mom would make to her primary care physician, would know the condition of her lungs. Most seniors, the biggest fear, of course, is pneumonia. But Medicare got reimbursement—reimbursement rates go down so low, that that portable

x-ray provider went out of business, and the next time she had to 

have an x-ray, guess what happens, one of those pair of ambulance 

units shows up at the nursing home, it is wintertime, she is pushed 

out there in the wheelchair, lifted up, taken to the emergency room 

34

at the hospital, sits there in a room with people of all types of ailments and diseases, and gets her x-ray taken; four hours later she 

is transported back to the nursing home. And the amount of reimbursement is that Medicare has to pay for that, that obviously is 

much higher. Brad, you know what I am talking about. 

So we held a hearing, and this was the hearing where we actually had to subpoena in the head of the Health Care Financing Administration and he blew off the subpoena. We were getting ready 

to have him held in Congressional Contempt of Congress. Finally 

he showed up, we got the parties, sat down together and said this 

stupid arbitrary rule not only is a disservice to seniors, that my 

mother was a victim of that, but also cost a lot more money. No 

one is leaving the room, bring your toothbrushes and your sleeping 

bags until we come to a resolution. Well, no one stayed overnight, 

but the hearing did last three hours, and now there has been a favorable resolution where HCFA has now decided to increase the reimbursement. 

But that is the type of stuff we have to deal with on a continuing 

basis. There is a lady that was here in the audience had a device 

called the Mary Walker. What this is, it is a device, that is the regular walker as we know it. There is a little seat on it, and the purpose of it, is to encourage seniors to become mobile and they would 

walk for a period of time, then just get a little bit of a rest, and 

get back up on that again. Well, because it had an arm that came 

across and latched across, and actually much more ergonomically 

correct, because the seat here now places his or her hands in front, 

with the legs back here, and it spreads out and redistributes the 

weight much better. But because it had a latch on there, HCFA 

continues to call it a restraint. Therefore, it is not in the nursing 

homes, if it is used. We have been working with those people now 

for several months. And, Doug, I sent you an e-mail, what is it 

called, the therapy, this is round six now with HCFA. It is everything that we have been working with for the past two years and 

the Chairman of the Small Business Committee is, going to bring 

in the decision makers from HCFA and say, now is the time you 

bring your toothbrush and your sleeping bag, because no one is 

leaving this room. We are going to lock up until you come to an 

amicable decision. So we need to talk about HCFA again. 

Mr. BUXTON. We are doing the same thing with dialysis right 

now. Kidney dialysis will become a really bad problem, if it isn’t 

now, in many metropolitan areas, where hospitals have cut down 

because of the reimbursement, and now the private vendors are 

charging so much that nobody can afford it. 

Chairman MANZULLO. Would you talk to them about that because they don’t like me? 

Mr. BUXTON. And I heard your reputation, and I’m proud of it. 

Chairman MANZULLO. Phil, did you have any closing remarks? 

Mr. CRANE. Well, the only concluding remarks that I would like 

to make is title of the Small Business Access to Health Care field 

hearing. The importance is small businesses in this country. I am 

Chairman of the McHenry Subcommittee and we had a hearing out 

here about five years ago and we got Charlie Rangel who is the 

Democratic Ranking Member on Ways and Means, to come with 

me, and Charlie is basically a free trader, and I knew that we had 

35

giants, we in our district, like Motorola and Sears, and Allstate, 

Baxter Avenue, to name a few, and so I anticipated getting input 

from all these giants in the world market. What was revealing 

about that hearing is better than 90 percent of our exports in the 

State of Illinois, and at that time we were the fifth largest export 

state in the union, over 90 percent of our exports came from companies employing 500 or less. And a fellow came in to see me that 

was doing business in the Persian Gulf and he had a folder, and 

he said, ‘‘Congressman, do you know how many businesses in your 

district that are doing business in the Persian Gulf?’’ I said, ‘‘I 

haven’t the vaguest idea.’’ He handed it to me; it was over a hundred fifty businesses in our district doing business in the Persian 

Gulf and I—and these were employers of 150 or fewer. And I 

looked at the names and there wasn’t a single one of them that I 

had seen before, and I thought he was conning me and I checked 

and they were businesses from our district, and, indeed, they were 

doing business over there. So, I think getting the message out so 

people understand that the importance of small businesses, I mean, 

that is the real strength of our nation. 

Chairman MANZULLO. But, Phil, you can yield on that, the trade 

imbalance, in our country the inability of paper manufacturers to 

export is because of the higher cost of doing business and it’s a natural sector going into—that will be the next hearing—but in terms 

of the higher cost of health care, makes that less competitive. 

Mr. CRANE. Well, that is an important ingredient, but the other 

thing, Don, is that we didn’t have trade negotiating. 

Chairman MANZULLO. All right. 

Mr. CRANE. It is eliminating in other countries very good products. 

Chairman MANZULLO. Great. 

Mr. CRANE. And now we have addressed that. 

Chairman MANZULLO. It makes it better for the farmers. Well, 

we want to thank you all for coming. You have been very gracious 

in your testimony. I’m going to leave the record open for 14 days. 

I think Ryan wanted to add something to your testimony; is that 

correct? 

Mr. BRAUNS. Uh-huh. 

Chairman MANZULLO. If you can give that to Doug. Doug, why 

don’t you give us the fax number. Uhm, it’s 202—— Mr. THOMAS. In Washington? 

Chairman MANZULLO. Yeah. 

Mr. THOMAS. Yeah, you can send your written testimony down 

there, it is 202–225–3587. I’m trying to think, I never faxed to myself, 3587. 

Chairman MANZULLO. Okay. 

Mr. THOMAS. You can put it to my attention or Piper’s. 

Chairman MANZULLO. This hearing is adjourned. 

[Whereupon, the Committee was adjourned.]

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