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HEALTHCARE AND SMALL BUSINESS: PROPOSALS

THAT WILL HELP LOWER COSTS AND COVER

THE UNINSURED

HEARING

BEFORE THE

SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT 

& GOVERNMENT PROGRAMS

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

WASHINGTON, DC, APRIL 27, 2006

Serial No. 109–49

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Deputy Chief of Staff/Policy Director 

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT AND GOVERNMENT 

PROGRAMS 

MARILYN MUSGRAVE, Colorado Chairman 

ROSCOE BARTLETT, Maryland 

BILL SHUSTER, Pennsylvania 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

THADDEUS MCCOTTER, Michigan 

JEB BRADLEY, New Hampshire 

DANIEL LIPINSKI, Illinois 

TOM UDALL, New Mexico 

DANNY DAVIS, Illinois 

RAU ́ L GRIJALVA, Arizona 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin

JOE HARTZ, Professional Staff

(II) 

C O N T E N T S 

WITNESSES

Page 

Shadegg, The Honorable John (AZ-3), Congressman, U.S. House of Representatives ..................................................................................................................... 5

Carroll, Mr. Robert J., Deputy Assistant Secretary for Tax Analysis, U.S. 

Department of the Treasury ................................................................................ 15

Lawler, Mr. Ed, ReMax Alliance, National Association of Realtors .................... 27

Wilson, Dr. Cecil B., M.D., Chair-Elect, Board of Trustees, American Medical 

Association ............................................................................................................ 29

Matthews, Mr. Merrill, Ph.D., Director, The Council for Affordable Health 

Insurance .............................................................................................................. 30

Hense, Mr. Paul, Hense and Associates, National Small Business Association 32

Perrin, Mr. Dan, The HSA Coalition ..................................................................... 34

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 43

Velazquez, Hon. Nydia ..................................................................................... 47

Bean, Hon. Melissa ........................................................................................... 49

Prepared statements: 

Shadegg, The Honorable John (AZ-3), Congressman, U.S. House of Representatives ................................................................................................... 50

Carroll, Mr. Robert J., Deputy Assistant Secretary for Tax Analysis, 

U.S. Department of the Treasury ................................................................ 53

Lawler, Mr. Ed, ReMax Alliance, National Association of Realtors ............. 68

Wilson, Dr. Cecil B., M.D., Chair-Elect, Board of Trustees, American 

Medical Association ...................................................................................... 83

Matthews, Mr. Merrill, Ph.D., Director, The Council for Affordable Health 

Insurance ....................................................................................................... 92

Hense, Mr. Paul, Hense and Associates, National Small Business Association ................................................................................................................. 101

Perrin, Mr. Dan, The HSA Coalition .............................................................. 104

(III) 

(1)

HEALTHCARE AND SMALL BUSINESS: PROPOSALS THAT WILL HELP LOWER COSTS 

AND COVER THE UNINSURED 

THURSDAY, APRIL 27, 2006

HOUSE OF REPRESENTATIVES

SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT, ANDGOVERNMENT PROGRAMS

COMMITTEE ON SMALL BUSINESS

Washington, DC 

The Subcommittee met, pursuant to call, at 10:30 a.m., in Room 

2360 Rayburn House Office Building, Hon. Marilyn Musgrave 

[Chairman of the Subcommittee] presiding. 

Present: Representatives Musgrave, Lipinski, Udall, Davis, Barrow. 

Chairman MUSGRAVE. Well, thank you for being patient this 

morning. We are waiting on our ranking member, who is very conscientious. I assure you he will be here just as soon as he can. And 

Mr. Shadegg, we want to be very respectful of your time. 

So I will call the meeting to order, and I thank you all for being 

here, and thank you especially for those who have traveled long 

distances to be with us here this morning. And we are going to examine health care choices for American small businesses, their employees, and for working families in this country. 

All Americans deserve and want reliable, high quality, and reasonably priced health care that will be there when they need it. 

One of the most stressing statistics that we see each year is the 

rising number of Americans who live without health insurance, 

currently estimated at 45 million people. Of those without health 

insurance, about 60 percent are small businesses—are small business owners, and they employ a number of people, and they are 

very concerned about them and their families. 

As health care costs continue to rise, fewer employees and working families will be able to afford the coverage that they need. 

Clearly, we in Congress must look at this pressing problem, and we 

must find solutions that will create an environment, so those that 

need health insurance cannot only find the coverage that they need 

but they can afford it. 

We need to be working toward a health care delivery method 

that works best, not just what we have done before. A simple look 

at the current health care landscape shows that our system is 

clearly not working. 

2

So the focus today in the hearing will be on four proposals that 

Congress has begun work on to help Americans get the coverage 

they need at a price they can afford. These proposals are the establishment of association health plans, AHPs, increasing the availability, use, and ease of the health savings accounts, or what we 

refer to as the HSAs. We also want to reform the medical liability 

system and examine Congressman John Shadegg’s common sense 

legislation, H.R. 2355, the Healthcare Choice Act. 

I admire Mr. Shadegg very much, and you can always depend on 

him to come up with a common sense approach that will really 

work. 

On July 26, 2005, the House of Representatives passed H.R. 525, 

the Small Business Health Fairness Act of 2005, the legislation 

that would establish federally regulated association health plans. 

And there was strong bipartisan support for this legislation. That 

was the seventh time the House had passed it. 

I am confident that real progress on this legislation will be made, 

I am hoping, on the other side of the Capitol this year, so we are 

looking to the Senate. 

AHPs would allow small businesses to band together across state 

lines through their membership in an association to purchase more 

affordable health insurance. Unions and large corporations already 

have this ability, and it makes sense to me that small businesses 

should have the same opportunity. 

HSAs are a new way for people to pay for medical expenses not 

covered by insurance or other reimbursements. Eligible individuals 

can establish and fund these accounts when they have a qualifying 

high deductible health plan and no other health insurance with 

just a few exceptions. The accounts have significant tax advantages. The contributions are deductible. Withdrawals can be used 

for medical expenses and are not taxed. The account earnings are 

tax exempt, and the unused balances can accumulate without any 

limit. 

President Bush has proposed several improvements to HSAs, 

such as allowing Americans who purchase HSA qualified insurance 

policies on their own to have the same tax advantages of people 

who obtain insurance through their employers and eliminating all 

taxes on out-of-pocket spending through HSAs. 

There is an additional area that Congress and the President 

have worked on, and that is tort reform in the medical community. 

American patients are losing access to care, because the nation’s 

out-of-control legal system is forcing physicians in some areas of 

the country to retire early, stop practicing medicine, or they give 

up the performing of high-risk medical procedures. And it hurts 

people in the area that need health care. 

Right now there are 21 states in full-blown medical liability crisis, and in 2002 it was estimated that there were 12 that were in 

that situation. So in crisis states patients continue to lose access 

to care, and in some states obstetricians and rural family physicians no longer deliver babies. Meanwhile, the high-risk specialists 

no longer provide trauma care or provide complicated surgical procedures. 

Excessive litigation and high medical malpractice rates have 

added to employer’s health care costs and spurred some providers 

3

to err on the side of caution. That comes at the expense of both 

health plan dollars and patients receiving unnecessary service. And 

we know that this issue just isn’t about the physicians. Its effects 

cut across the whole health care sector. 

Hospitals need physicians to admit patients. Companies that 

manufacture medical devices and pharmaceuticals need physicians 

to use and prescribe their products. 

Similar to the AHP legislation, the House passed H.R. 5, the 

Help Efficient, Accessible, Low-Cost, Timely Healthcare, or 

HEALTH Act, of 2005, on July 28. The Senate is continuing to debate this critical legislation right now, and there is another proposal to help Americans find and purchase affordable health care 

insurance, and that is the legislation introduced by Congressman 

John Shadegg from Arizona, H.R. 2355, the Healthcare Choice Act 

of 2005. 

Under this legislation, consumers would no longer be limited to 

purchasing policies dictated by their state’s regulators and mandated benefits. Instead, they could decide among a variety of insurance policies qualified in one state but for sale in multiple states. 

I am very pleased to have you here today, Congressman Shadegg, 

to give us the details on this legislation. 

And as we all know, there is no one solution to this complicated 

and very serious issue when we talk about 45 million people in the 

United States without health insurance. Small business employers 

and employees are in critical need of new ways to be able to increase health insurance coverage, and we will look at these proposals today as responsive solutions to the problem. 

I am eager to hear the testimony. Before I do that, though, I 

would like to recognize our ranking member, Mr. Lipinski, for an 

opening statement. 

[Chairman Musgrave’s opening statement may be found in the 

appendix.] 

Mr. LIPINSKI. Thank you, Madam Chairman. I would like to 

thank you for holding this hearing on such a critical issue, especially critical for small businesses. 

Every small business owner I speak with, whether here or back 

home in my district, no matter what type of business they operate 

talks about one overriding issue that they face in running their 

business: how to provide affordable health care for their employees 

and for their own families. 

Over the past five years, health insurance premiums for employers have increased by 60 percent. Small businesses that have been 

able to offer health care simply cannot continue to absorb these 

dramatic increases. This has forced many to greatly increase the 

cost of health insurance for their employers—for their employees or 

for the employers to stop offering health insurance at all. 

A failure to address this crisis has created a situation where millions of working Americans have no health insurance. And while 

large businesses have a coverage rate approaching 90 percent for 

employer-based health insurance coverage, small firms have a coverage rate of only about 50 percent. In fact, 6 out of every 10 uninsured Americans are in families headed by self-employed workers 

or small business employees. This is simply unacceptable. 

4

I look forward to hearing today’s witnesses discuss a variety of 

solutions they believe could help bring down the cost of health care 

and provide better access for small businesses. 

I supported the AHP legislation we passed last year in the 

House, and I am hopeful that the Senate will do the same this 

year. But that clearly is not enough. Because of the depth of this 

problem, I believe that all options should be considered, but we 

must make sure that in covering more Americans we do not significantly undermine the coverage or treatment that Americans currently have. Health care that is inadequate or risky cannot be accepted. 

One of the issues I have been particularly focused on is addressing the skyrocketing costs of health care at the source, specifically 

at hospitals. Most of us would never consider getting our car repaired at a shop without first getting an estimate, but this is exactly what we do when we go to a hospital. 

Lack of information prevents families from making well informed, cost effective choices. In addition, lack of information 

means that hospitals do not have to compete at all in their costs. 

When California passed a law to require hospitals to disclose their 

entire price list, it was revealed that there was a great disparity 

between hospitals in what they charge for common procedures and 

medications. 

One hospital charged $120 for a chest X-ray while another charged more than $1,500 for the same X-ray. And while one hospital did not charge for a Tylenol capsule, another hospital charged 

$7 for the same capsule. 

When California passed the law and required disclosure, disclosure helped to change the situation. This is why I introduce last 

year, along with Representative Bob Inglis, H.R. 3139, the Hospital 

Price Reporting and Disclosure Act, a bipartisan effort to require 

every hospital to give consumers clear, concise information about 

what they charge for common procedures and medications. A companion bill has also been introduced in the Senate by Senators 

Durbin, DeMint, and Cornyn. 

Now, unfortunately, the people who are hit hardest by prices not 

being disclosed are the uninsured, including millions who work for 

small businesses. They are the ones who have to pay the full price 

for often unknown and unexpected charges. The Hospital Price Reporting and Disclosure Act would require hospitals to regularly report to the Department of Health and Human Services the amount 

they charge for the 25 most commonly performed in-patient procedures, 25 most common outpatient procedures, and the 50 most frequently administered medications. 

More than a half a dozen states have passed some form of hospital price disclosure, including my home state of Illinois, and at 

least 10 states currently are considering such legislation. States 

such as Wisconsin and Oregon already have this kind of information available to the public on an easy-to-access website, similar to 

what would be required by H.R. 3139. 

This information is essential to the 46 million uninsured Americans, and especially for those millions who work for small businesses. A recent report on 60 Minutes demonstrated the high impact that undisclosed hospital prices have on uninsured Americans. 

5

While we work to get coverage for the uninsured, we should give 

them information that will help in their health care choices. 

Obviously, though price is not the only factor that families 

should take into account when making their health care choices, 

this is an important point to consider not only when looking at 

H.R. 3139 but when considering all our options. 

Quality information is also critical, and I am happy that the Centers for Medicare and Medicaid Services is beginning to make some 

quality measures available, but more is certainly needed. And the 

advice of health care professionals will always be essential when 

making care decisions. But these are not reasons to oppose making 

price information available. 

Clearly, tackling the cost of health care is a very complicated 

issue. Protecting small businesses and the self-employed should be 

a top priority, especially as health care costs continue to skyrocket. 

I look forward to hearing from our witnesses today about their 

ideas to provide more small business owners, their workers, and 

their families with health care coverage. This is clearly a problem 

critical to millions and millions of Americans, especially those who 

are small business owners, employees, and something that we need 

to get to work on. We cannot let this continue to go on, and I look 

forward to hearing today from all of our witnesses. 

Thank you. 

[Ranking Member Lipinski’s opening statement may be found in 

the appendix.] 

Chairman MUSGRAVE. Thank you, Mr. Lipinski. 

Mr. Shadegg, we will start with you on the first panel. We appreciate so much your testifying before the Committee today, and 

please proceed. 

STATEMENT OF THE HONORABLE JOHN SHADEGG (AZ-3), 

CONGRESSMAN, U.S. HOUSE OF REPRESENTATIVES 

Mr. SHADEGG. Thank you, Madam Chairman, and members of 

the Committee. I greatly appreciate this opportunity to appear before you today and to discuss the Healthcare Choice Act. I have 

had a passion for health care reform since I joined the United 

States Congress. I believe it is incumbent upon this government to 

make health care more affordable and to assess the problem that 

many Americans have with being able to find and to purchase affordable health insurance coverage. 

With your permission, Madam Chairman, I will submit my written testimony and just direct my remarks to some of the highlights 

of this issue. 

The Healthcare Choice Act is a simple and straightforward proposal which I believe could have a very profound impact, but it requires that we set the stage first. And I think members of this 

Committee understand these points, but perhaps not all people listening to this hearing or perhaps reading about it will understand. 

I support the Committee’s efforts on association health plans, 

health savings accounts, the possibility of reform of medical liability. I think all of those are critical. But as you stated, Madam 

Chairman, this problem—the high cost of health insurance, the 

lack of access to affordable of coverage—is a problem that cannot 

be solved in a single way with a single solution. 

6

We know, for example, that people who work for large employers 

and get their health care through those employers often have access to affordable health care, though listening to Mr. Lipinski discuss well informed, cost effective choices, I would argue that choice 

is a key factor in bringing down the cost of health care, and that 

many of those employees who work for large employers don’t have 

enough choice. 

Right now many of them are offered only one plan to choose 

from. They can’t pick that plan or reject it. Once they are in the 

plan, they can’t pick their doctor or reject that doctor. And all too 

often, if the plan harms them under our current law, ERISA, they 

can’t fire the plan or even hold them liable. So that is the situation 

that governs many who work for large employers. 

AHPs go directly at the problem of small businesses, and I enthusiastically support AHPs and the efforts of this Committee to 

make AHPs available to smaller employers and their employees, so 

that they can buy the kind of affordable coverage that employees 

of big companies get. I also strongly support HSAs. 

But there is a segment of our market—and I think this goes at 

the issue of the 45 million uninsured, Madam Chairman, that you 

mentioned who are not able to get insurance through an employer 

and who are buying health insurance in the individual market. 

And it is that segment of the population, which I submit includes 

many of the 45 million uninsured, who have to go into the individual market to buy their health insurance that would be helped 

by the Healthcare Choice Act. 

Let me explain what the Healthcare Choice Act does. Right now, 

if you are in the individual market and you are buying a policy for 

yourself, you are self-employed or your employer doesn’t offer you 

health insurance, you have to buy a policy that has been qualified 

in your individual state—that is to say, that meets every single dot 

and title of the laws of that state, not only with regard to financial 

solvency of the company but with regard to every single mandated 

coverage that the state dictates. 

And we will talk about these benefit mandates in a moment, but 

they drive up the cost of insurance immensely. An insurance company wanting to sell in an individual state has to then go to that 

state, qualify to do business, and write an insurance policy for that 

state unique to that state. If it wants to go to the state next door, 

it has to do it again, qualify to do business in the state next door, 

and write a new policy that meets every dot and title of that state’s 

laws. And they must do that on and on in all 50 states if they want 

to sell in all 50 states. 

The Healthcare Choice Act says there is immense inefficiency in 

having to meet every single one of those requirements, including 

all of the benefit mandates of those states. And so what it says is 

that you would be able to, as an insurance company, go to one state 

and to meet all of the health insurance requirements of that state 

and write a policy that meets that state’s benefit mandate laws. 

You could then go to any other state and file your health insurance policy with the State Insurance Commissioner and then sell 

the policy in the second or third state, and the state Health Insurance Commissioner of that state could enforce that contract, that 

7

health insurance policy, on behalf of the individual consumer who 

bought the policy. 

Let me explain why this came about. We have talked about mandates. The State of New York, for example, requires that every insurance policy sold in New York cover podiatry. Acupuncture, 

which I doubt if anybody in this room has used but may have, is 

mandated in 11 states. Massage therapy is mandated in four 

states. Hair replacement coverage is mandated in many states. 

Substance abuse treatment coverage is mandated in many states. 

Chiropractic care is mandated in 47 states. 

The Council for Affordable Health Insurance, CAHI—and I believe you have a witness coming this afternoon or in your second 

panel to discuss this—estimates that these individual state mandates can hike or increase the price of insurance by somewhere between 20 and 45 percent. For example, a health insurance policy 

for a single individual in Pennsylvania costs roughly $1,500 a year. 

Simply cross the Delaware River into New Jersey and that identical plan costs about $4,000 per year. 

And I would like to then point to this chart, if I might. This is 

a chart of a study that was done which shows the monthly cost of 

family health insurance coverage with $500 deductible in four different states. As you can see, that policy for a family of four in 

those four different states—in Trenton, New Jersey, the policy 

costs $3,881 a month. In Portland, Maine, it is $1,781 a month. In 

Arlington, Virginia, it is only $548, comparable policy, same coverage, same family, same pre-conditions. Madison, Wisconsin, that 

policy costs only $484. 

If I could relate kind of a story of how this issue came to us. In 

point of fact, as you know, Trenton, New Jersey or New Jersey is 

just across the river from Pennsylvania. There are consumers in 

America who are literally shopping with their feet. They discover 

that they live in New Jersey, and to buy an insurance policy for 

their family it costs almost $4,000 a month. 

They chat with their best friend who lives right across the river 

in Pennsylvania, or their sister or their brother or their father or 

their uncle, they are at a Sunday night barbecue, and they are discovering that the same essential coverage across the river in Pennsylvania costs anywhere from one-sixth of as much, a few hundred 

dollars a month, versus several thousand, $4,000 a month. 

And so people are actually renting post boxes or asking a relative 

to—if they can say, ‘‘Well, look, I often get my health treatment 

across the river in Pennsylvania. The insurance company doesn’t 

really care whether I go to a hospital or a doctor in Pennsylvania 

or New Jersey. The cities cross the line. What I will do is, if you 

wouldn’t mind, I will list my home address as your home address 

in Pennsylvania, rather than my home address as being my home 

address in New Jersey, and I can save thousands of dollars a 

month.’’ The reason for that: our benefit mandates and the nature 

of the New Jersey law. 

What the Healthcare Choice Act would say is, ‘‘We can produce 

dramatic savings for people in this individual market in two ways.’’ 

One, you allow the insurance company to qualify the plan in one 

state, and then to market it in 50 states, but to be held accountable 

8

to the consumer in the state where the consumer lives. And the bill 

has been carefully written to ensure that. 

So if you buy a policy that is, say, qualified under Illinois law, 

and you buy it in my home state, Arizona, and you have a problem 

with the insurance company in living up to the terms of the contract, the Arizona Health Insurance Commissioner can represent 

and protect you as a consumer. 

We also have certain minimal consumer protections that apply 

across the board, including provisions that require, for example, an 

independent review of a denial of care. There is a minimal threshold that is placed in the law. But the big savings, we believe, would 

occur in these benefit mandates. 

I will conclude by pointing out—and I would be happy to answer 

any questions—as Mr. Lipinski noted, well informed, cost effective 

choices are critical here. And I think his point about being able to 

make a choice about a hospital with very high costs for the procedure you need versus a hospital with very low costs is a very critical power that an individual consumer needs. 

But if you step back from that, if a consumer can say, ‘‘Look, I 

might like to have coverage for podiatry, or I might like to have 

coverage for acupuncture, or I might like to have coverage for massage therapy,’’ but, quite frankly, each of those coverages that I demand in my policy runs the cost of the policy up. I can barely afford it. Then, they might want at least the opportunity to be able 

to purchase a policy that has fewer mandated benefits. 

And just to conclude, as you mentioned, Madam Chairman, 45 

million Americans are uninsured. Statistics show or surveys show 

that two-thirds of those have incomes below 200 percent of the federal poverty level, and they cite unaffordability as the top reason 

why they are uninsured. As a nation, we want—we encourage them 

to become insured. It is incumbent upon us to do everything we can 

to make that health insurance affordable. 

I believe for those in the individual market, the Healthcare 

Choice Act, giving them many more choices of policies to pick from, 

ending kind of the monopoly status that many insurance companies 

have in states where they are the only individual policy sold, or one 

of only two or three that is sold in that state, giving them many 

more choices would help bring down the cost of insurance, and, 

thus, make it more affordable for those who can’t currently afford 

it. 

With that, Madam Chairman, I would be happy to answer questions at the end of the panel. 

[Congressman Shadegg’s testimony may be found in the appendix.] 

Chairman MUSGRAVE. Thank you, Mr. Shadegg. And before we 

go to Mr. Carroll, I am going to ask for questions for you first, out 

of respect for your time, not that your time isn’t valuable, but he 

has got other Committee things to do. 

I would just like to comment that having served in a state legislature I saw in Colorado mandate after mandate added. And there 

was always a very persuasive group that came in to ask for the 

mandate. There were, quite frankly, many times other than those 

individuals who had suffered enormously that wanted this kind of 

mandate put on, because they felt it was the appropriate public 

9

policy decision. There were also other times there were just turf 

wars going on, and certain groups that wanted to make sure that 

whatever they provided was covered. 

And, you know, we were invariably told, Mr. Shadegg, that we 

were actually going to save money in the long run. I heard that 

time after time after mandates were added. And can you tell us 

anything about the trends in state that are many mandates in 

place and states that don’t have as many in regard to how many 

uninsured there are? Do you have any idea how these mandates 

have impacted individual states? 

Mr. SHADEGG. Madam Chairman, they have exploded. And there 

are, according to CAHI’s calculations, 1,800—and these are numbers that are just a little bit out of date, they are several years out 

of date, so there may be more now. Across the 50 states, there are 

more than 1,800 separate types of mandates. And when you look 

at, for example, massage therapy or acupuncture, I don’t know 

yet—I believe there may even be aromatherapy mandated in some 

states now subsequent to this—there has been an explosion of 

these mandates. 

I certainly agree that some of the basic coverage should be included in any policy. No one would want to go out and buy a policy 

that didn’t cover, for example, heart—cardiac issues or cancer 

treatment or emergency room treatment. But informed consumers, 

as I think Mr. Lipinski noted, can look at these and make those 

kinds of choices. 

And I think that in many instances it may be true that some of 

the mandates put in place procedures that do save costs. But it is 

hard for me to understand how, for example, mandating massage 

therapy or perhaps mandating acupuncture is going to produce a 

savings. 

One of the things that we believe this legislation would do would 

tamper down—that is, cause there to be a slowing—of the demand 

for some of the more extreme mandates. But the important thing 

to remember is that no state would be precluded, and no insurance 

company would be precluded, from continuing to offer policies with 

all of the mandated coverage. The consumer would have the right 

to pick from that. 

And another important thing to think about is survey data shows 

that people—consumers—buy the most comprehensive policy when 

given the choice that they can. So if—or that they can—and when 

I say ‘‘when they can’’ it means that they can afford. When there 

are multiple policies in a market, one may cover very basic things, 

one may cover slightly more comprehensive things, and one may 

cover the most comprehensive. Consumers tend to buy what they 

can afford to buy. 

The problem with mandates—and Speaker Hastert I think addressed this rather well—is that with these mandates, when you 

are mandating massage therapy or acupuncture, in a way because 

every single mandate adds to the cost of the good, you are saying, 

‘‘Well, you may want to buy a KIA, because that can get you as a 

young person to and from work, but we are going to mandate that 

you buy a Mercedes, because we have decided a Mercedes is better 

for you and safer.’’ 

10

And that is a part of what the problem is, and this would just 

give consumers that ability to choose amongst more options than 

they have now. 

Chairman MUSGRAVE. I think we also need to give consumers a 

little credit. And perhaps if mammography wasn’t covered, I would, 

I would still have a mammogram, and I believe that people that 

are health care conscious, the gentlemen will go in for prostate cancer screening. 

You know, it was almost like if the mandate wasn’t there, no one 

would go in for those tests or do those things. But I think it is, you 

know, a consumer choice, being able to buy the type of product that 

fits their need that they can afford. 

Mr. SHADEGG. Right. 

Chairman MUSGRAVE. And you have really emphasized that very 

well. 

Mr. SHADEGG. Well, I think it is very important to look at the 

statistics about who this would appeal to. The reality is, sure, we 

wish that every single American got mammography screening, 

every single American had the most comprehensive coverage. The 

reality is we have 45 million uninsured Americans. The choice for 

them is not between a policy that does cover mammography and 

one that doesn’t; it is the choice between no health insurance or 

some health insurance. 

And, clearly, the kind of basic things that most Americans need 

are going to be covered in all of the policies that we marked, enabling them to get at least initially, and perhaps as their income 

grows or as they go to work for a bigger employer that can offer 

them health insurance, the opportunity to get a more comprehensive policy. But what we need to do is get them into some level of 

coverage, and I believe this will offer that opportunity. 

Chairman MUSGRAVE. Thank you. Mr. Lipinski. 

Mr. LIPINSKI. I just wanted to thank Mr. Shadegg for his testimony, and I have no questions. Thank you. 

Chairman MUSGRAVE. Mr. Davis. 

Mr. DAVIS. Thank you very much, Madam Chairman, and I just 

have one question. I must admit that I don’t have much confidence 

in any of these piecemeal approaches to providing the kind of 

health coverage that we need. And every time I get an opportunity 

I emphasize the fact that I believe that we need a national health 

plan that covers every citizen without regard to their ability to pay. 

And I think eventually we will get to that. I don’t know when. 

But, Mr. Shadegg, I am intrigued a bit by the creativity that you 

have used to put together your concepts and ideas, and I just want 

to understand. You are saying that, for example, if I live in Illinois, 

I may be paying more for the same plan that someone in Indiana 

or Colorado are paying, and under your legislation I could then 

purchase that same plan in Illinois, and it would be governed by 

my state laws and health commissioners or whoever or plan administrators, and someone else would actually be governed by what 

takes place in Colorado. 

But I am able to save money as a result of your legislation. 

Mr. SHADEGG. Yes, sir. The way it is designed is that you could 

buy that policy that had the coverage mandated by, say, the Colorado law, you could buy that in Illinois and it would—and because 

11

it might not have the same—well, number one, it would not have 

gone through the same qualifying process in all 50 states. 

And there is a parallel here to, for example, as I mentioned in 

my written testimony, the interstate banking. We enable people to 

get into interstate banking, and it has caused a decrease in the 

overall cost of banking. But the answer to your question is: yes. 

The important thing we wanted was for you—for the consumer, you 

the consumer in Illinois, to be able to rely on the local insurance 

commissioner to enforce the policy and protect you. 

And there are also minimal financial guarantees that are covered 

in most of the 50 states. This is not unlike—and I do not know, 

sir, if you served in the legislature. But as you know, there are 

many uniform state laws, and much of insurance law in the 50 

states with regard to the financial solvency of these insurance companies is governed by uniform laws. 

This takes this one step further and says, ‘‘We are going to have 

uniform law with regard to the basic things that cover an insurance policy.’’ But with regard to those other variables we are going 

to, number one, allow you to get into the business more readily; 

and, number two, limit the number of mandates based on the policy that was chosen to be sold, and then you, the consumer, would 

get to make that choice of which policy you wanted to pick. That 

is where—it is the second way that you get some savings. 

Mr. DAVIS. Thank you very much, Madam Chairman. I appreciate the creativity, as I indicated. And, unfortunately, I did not 

serve in a legislature. I came out of the Chicago City Council, and 

there were times when we had to convince people that there was 

something called Illinois. 

[Laughter] 

Thank you, Mr. Davis. 

Mr. Barrow. 

Mr. BARROW. Thank you, Madam Chairman. As a former local 

government man myself, I want you to know we need more folks 

up here who have had a little experience at the local level, at the 

bottom of the food chain. 

I want to thank you, Congressman, for your initiative here. I 

want to make a couple of observations, though. First off, I think 

it can skew the discussion a great deal to take some of the extremes and the wacky stuff out there and treat that as if that is 

the norm. But I do want to point out that mandated benefits that 

aren’t widely used cannot drive up the cost in a large risk pool very 

much to begin with, by definition, because they are not widely 

used. 

And the concern I have got is with the stampede on the part of 

folks up here to say to basically the states, ‘‘Stop me before I protect the consumer again. You know, stop me from doing what we 

are doing.’’ And I am a little concerned about that. 

I want to express some reservation about that, because it has 

been federal policy to leave regulation of this matter to the states. 

And if the Federal Government is going to say, ‘‘We are going to 

start mandating and protecting the consumer,’’ we need to do it in 

a comprehensive manner, rather—because the worst possible situation is for the Federal Government to say, ‘‘We are not going to 

protect the consumer, but we are not going to let the states protect 

12

the consumer either.’’ It seems to me that that is a road we don’t 

want to go down. 

The starting point that I begin with, which I think is key to the 

jurisdiction of this Committee, is it still makes no sense to me why 

50,000 employees working for 10,000 employers should have to pay 

a higher cost per capita for the same insurance product that 50,000 

employees can get at the same—at a different cost working for one 

employer. 

The secret, of course, is that you are pooling large numbers of 

people as much as possible, you are building the risk pool, so that 

you have the largest number of lucky people subsidizing the unavoidable number of unlucky people. Rather than approaching the 

statement of the problem as too many people getting wacky services mandated for them, the problem is we don’t have the optimal 

balance of lucky people subsidizing the unlucky, which is what insurance is all about, certainly what we are doing when we insure 

our homes. 

And our approach as the Small Business Committee ought to be 

to try and direct policy in such a way as to build risk pools, not 

to Balkanize and break up the risk pool. What I am concerned 

about is, with the efforts we have got here, a back door deregulation or creating an unregulated market inside a regulated market 

competing side by side. 

That is, to me, the worst of all possible worlds, because you won’t 

be able to connect the dots between the increasing cost in the good 

insurance that is out there, the more comprehensive insurance, as 

a result of people being drained out of that risk pool, taking their 

premiums and going into products that are—you know, have less 

bells and whistles on them. 

So it seems to me that, you know, some of these mandates, they 

may not be needed by many people very much. But if it is needed, 

it is needed badly. 

The concern I want to address, I want you to help me understand, the idea that I get from you is that some insurance is better 

than none. That is, at bottom, what I think you are saying. Something is better than nothing. The trouble is, if you have a whole 

bunch of people either exiting the current system, or entering the 

new system from the ranks of the uninsured who can barely afford 

to—who can’t afford to pay in the present system, if you have got 

so many folks buying some kind of insurance, you are going to 

drive up the cost of the good insurance. 

Let us just say the adequate comprehensive insurance for the 

rest of us, and what is the answer to that? It seems to me that it 

is, at bottom, a policy of Balkanizing and breaking up the risk pool, 

creating so many options, you walk down the shelf you have got 

1,000 things to choose from. That really cuts against what insurance does to begin with, which is taking those risks that can’t be 

avoided and spread them as far and wide as possible. 

This seems to be going in the other direction. How do you answer 

the problem of the cost of the good insurance going up for the rest 

of us when you drain out so many folks from the risk pool? 

Mr. SHADEGG. Excellent points, and I would like to address them 

all. But let me start with the—kind of your final question. There 

13

is no motivation on the part of this legislation to encourage anyone 

to exit who has never had a health insurance plan. 

Mr. BARROW. My point is those who want to stay in have got to 

pay more. 

Mr. SHADEGG. The reality is that if you have health insurance 

through your employer, or if you can get into a group policy—and 

you weren’t here when I began this discussion. 

Mr. BARROW. I know. I apologize for that. 

Mr. SHADEGG. That is all right. I know what it is like to try to 

make two hearings. 

Mr. BARROW. I was in Ag dealing with gasoline this morning. 

Mr. SHADEGG. I have been there, done that. 

[Laughter] 

We began with a discussion of association health plans, HSAs, 

and the issue of medical liability. And the Chairman said, ‘‘Look, 

there is no one solution.’’ I agree with you completely. Getting people into large pools is the best mechanism to give them the most 

affordable health insurance. 

Indeed, one of the problems that—one of the biggest criticisms I 

have, I imagine that I have a passion for health care reform, is 

that we have the notion in America that the only pool you can use 

is an employer pool. I think that is a false notion, and I have argued in other legislation which I introduced that we should be giving people more pooling mechanisms, so that they could get in—

have the opportunity to get into other pools. 

For example, why not allow the Daughters of the American Revolution to offer a health insurance pool and create their own pool? 

Why not allow the University of—I happen to be from Arizona—

Arizona Alumni Association offer a health insurance pool? I completely agree with you that the motivation is to get as many people 

out of the individual market and into a larger pool. They can get 

a better health insurance policy. 

And my passion in health care reform is to then work at that end 

of the specter. However, this bill is designed solely to look at those 

Americans who are forced to buy individual health care coverage. 

That is to say, they are either unemployed— 

Mr. BARROW. I recognize that. 

Mr. SHADEGG. —or they work for an employer who can’t get them 

in a plant, point one. Point two, I completely agree with you that 

it is outrageous to say to American consumers, ‘‘Oh, you are one 

employee working for a large employer that’’—your example of 

10,000 and 50,000. If you happen to work for a large employer, you 

get a very good health insurance coverage, because the Federal 

Government made it possible through ERISA. but if you work for 

a small employer, but there is many of you, you just described 

AHPs very accurately, sorry, you don’t get the same policy. 

I think that is a huge flaw, and one way of addressing that flaw 

is AHPs. And that is a much better way to address the flaw for 

people who have a job with a small employer. 

Mr. BARROW. Except to the extent that the only inducement 

would be to give the insurance industry—to get into the business 

of creating pools, large pools, out of small—out of large numbers 

of small groups—is preemption of state law. 

Mr. SHADEGG. And that is the next point I wanted to go— 

14

Mr. BARROW. That is the only inducement. Again, you are going 

to have a regulated carrier and an unregulated carrier playing in 

the same marketplace. How is that going to help the cost of insurance for those who are trying to stay with a good product? 

Mr. SHADEGG. And I guess that is kind of where I go, and that 

is I—as much as ERISA enabled large employers to offer low cost 

health insurance, it, quite frankly, leaves consumers without protection. I began my talk by discussing about the fact that for that 

employee of a large employer they come under ERISA. Now they 

are getting their health insurance plan—they didn’t pick the plan, 

their employer picked the plan, and they didn’t have much voice in 

whether the—in the plan the employer picked. 

Mr. BARROW. ERISA’s concern is not with the definition of this, 

but protection of the solvency of the plan that you buy. 

Mr. SHADEGG. Well, let us keep going, because let me finish my 

point. Number one, they didn’t get to pick the plan. Number two, 

once they are in the plan, they can’t pick their doctor. Number 

three, if they don’t like the plan or the doctor, they can’t fire it. 

And if you follow the decisions on ERISA, if the plan wrongfully 

denies them care and it kills them or harms them, under current 

law they are granted immunity. And so the plan— 

Mr. BARROW. I am glad you realize it. That is sort of tort reform 

that doesn’t work. 

Mr. SHADEGG. It is a serious problem, and granting anybody immunity, absolute immunity, as ERISA does for these large plans 

encourages them to abuse people and deny care that they need. So 

you and I can get on my bill that says we are going to end that 

ERISA immunity any day. 

But the point of that is, when the Federal Government offered 

large employers that option, it essentially took away from consumers state regulation. And when I drafted this bill, at least I was 

looking at the narrow market of those who must buy individual 

coverage. You could solve that by moving them into a federal pool 

and taking them out from under the protection of state health insurance regulators. 

I argue, no, that is not a good way to do it. I don’t believe that 

the Federal Government is a good regulator as a general proposition. I don’t want the citizens of Phoenix, Arizona, or much less 

Baghdad or Winslow, Arizona, to have to come to Washington, 

D.C., or for that matter to even have to travel down to Phoenix, 

to go to the Department of Labor to get help. 

I want them to be able to use the Arizona Commissioner of Insurance, whose job it is. So the way we wrote this bill was not to 

make them unregulated. It was to say, ‘‘We are going to allow more 

insurance products into the market, but we are going to leave the 

regulation at the state level.’’ So that consumers can keep going to 

the place they have been going to in the past. 

Mr. BARROW. I hear you, and I think I understand your point 

very well, but you are still Balkanizing the risk pool, creating 

smaller—a larger number of smaller plans, and I am trying to 

think how we can—how we can go towards trying to keep larger 

risk pools. You want to put more risk pools, some way to get into— 

Mr. SHADEGG. I will join you in addressing moving people into 

larger risk pools. However, there will I believe always be, absent 

15

the passage of universal health care, a group of people that buy 

their health insurance through the individual market. They simply 

are no longer in a pool. 

The last point I want to make is that—and you make a good 

point. My testimony, for emphasis, focused on things like massage 

therapy or acupuncture, but the CAHI study said that these benefit 

mandates increase insurance prices between 20 and 45 percent. 

Just a 20 percent cut in an individual health insurance policy 

would make a dramatic difference for at least a number of consumers. 

And I think you are right. My argument is, in fact, that some 

level of health insurance for those 45 million, at an affordable level 

so that they could get it, beats no health insurance, beats putting 

them in an emergency room asking for us to give them ERISA care. 

Chairman MUSGRAVE. Mr. Barrow, I thank you. 

Mr. BARROW. Thank you, ma’am. 

Chairman MUSGRAVE. And I happily let you gentlemen go on. I 

have never enjoyed abusing the clock so much. 

[Laughter] 

Mr. Shadegg, if you will just indulge me for one more question. 

Do you have some thoughts on what is going on in Massachusetts? 

Mitt Romney is talking about, you know, every citizen having coverage, and would you just indulge me and give us an opinion on 

that before you go? 

Mr. SHADEGG. Well, I think the Founding Fathers intended the 

states to be laboratories, and to try different experiments in health 

care. I am not convinced that the Massachusetts experiment will 

work out to produce lower cost insurance, but I would not criticize 

any state for making the attempt. 

I personally think they would be better off, and The Wall Street 

Journal has joined me in this, in embracing a concept like this and 

making more different policies at lower costs available to the people in their state. But I applaud anybody who goes after this issue. 

As I began my testimony, I am impassioned about health care reform. I think we can do better, and I think we must do better, and 

I think it is intolerable that we would have 45 million uninsured 

Americans. 

Chairman MUSGRAVE. Thank you so much, and we really appreciate your time before this Committee today. 

Mr. SHADEGG. Thank you. 

Chairman MUSGRAVE. Mr. Carroll, you have been very patient, 

and I want to respectfully say there was a reason for all of that, 

delaying your opportunity to testify, and we look forward to hearing from you now. 

STATEMENT OF MR. ROBERT CARROLL, U.S. DEPARTMENT OF 

THE TREASURY 

Mr. CARROLL. Well, thank you very much. I would like to submit 

my written testimony for the record and to highlight some issues 

in my oral statement. 

Mrs. Chairman, Ranking Member Lipinski, and distinguished 

members of the Subcommittee, I really do appreciate the opportunity to discuss with you today the health care proposals included 

in the President’s fiscal year 2007 budget in the tax area. I will 

16

focus my remarks on both the problems in health care and how the 

President’s proposals helped to address those problems, namely by 

making health care more accessible, affordable, and— 

Chairman MUSGRAVE. Could I just ask you to move the microphone a little closer, so everyone can hear you? Thank you. 

Mr. CARROLL. —thus enabling Americans to obtain health care 

and retain their health care when they change employment. Health 

care costs continue to rapidly—to rise rapidly in the United States. 

Growth in health care costs have been exceeding GDP growth by 

two percentage points annually since 1940, comprise 16 percent of 

GDP in 2004, and are projected to grow to nearly 20 percent of 

GDP by 2015. 

Higher insurance premiums pose a challenge for employers and 

burden workers. The burden of rising health care costs is particularly problematic for small businesses which often must choose not 

to offer any health insurance to their employees. At the same time 

health care costs are rising, the number of uninsured also continues to grow. As health care costs grow faster than incomes, an 

increasing number of individuals are unable to purchase health insurance. 

Also, those higher and ever-increasing costs mean that the selfemployed and employees of small businesses are far less likely to 

have coverage. A significant number of the uninsured work for 

small businesses. 

A substantial portion of rising health care costs is due to the effects of our insurance system itself. Health insurance gives people 

valuable protection and peace of mind that they will have help paying their medical bills should a major illness arise. 

However, because third parties such as insurance companies, employers, and the government finance the majority of health care 

spending, most insured do not know or feel the full cost of health 

care services they consume. The direct expenditure for health care 

by an insured person may be only a small portion of his or her total 

health care costs. 

This is characteristic of low deductible and first dollar health insurance. The prevalence of this type of insurance is rooted in the 

tax treatment of health care generally. The Tax Code reduces the 

cost of health care when financed indirectly through employer-provided insurance rather than when purchased directly by the consumer. 

The greater reliance on first dollar coverage may lead the insured person to receive medical treatment that the person may 

value at less than its true cost, leading to inefficient and overconsumption of medical care. First dollar coverage in effect dulls 

the incentive for consumers to shop carefully for cost effective 

health care, and the tax bias that favors this coverage is an important piece of the puzzle explaining the rapid growth in health care 

costs. 

With the appropriate reforms, the U.S. health care system can 

become more efficient at supplying cost effective health care to consumers, while continuing to lead in innovation. 

The President’s Health Care Initiative would address rising 

health care costs through a series of proposals designed to improve 

the functioning of the health care market. At the core of this initiaVerDate 0ct 09 2002 20:07 Nov 03, 2006 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\HEARINGS\28599.TXT MIKE
17

tive is a set of tax proposals that puts the health care consumer 

more in control of his or her health care and places health care 

purchased directly by individuals with high deductible health plans 

on an equal footing with employer-provided health insurance. 

When consumers have more at stake, when they have more skin 

in the game, they can be expected to make better decisions. Greater reliance on competition and market forces, coupled with less reliance on third parties, such as insurance companies, employers, and 

the government, in making health care decisions, will lead to more 

efficient use of resources and help stem the excessive rise in health 

care costs. 

The President’s Health Care Initiative builds on the early success of HSAs by making high deductible health plans more attractive and expanding HSAs. Just a couple of years after the enactment of HSAs, 3.2 million people are now covered by high deductible health plans. Moreover, there is broad use of these plans by 

important segments of the population. Early evidence indicates 

that over 40 percent of those covered by these plans have incomes 

below $50,000, and roughly 50 percent are age 40 or over 

The President’s Health Care Initiative allows those with high deductible health plans to deduct insurance premiums and out-ofpocket expenses and to claim refundable tax credits to recover payroll taxes paid on these premiums and out-of-pocket expenses. The 

initiative also includes a refundable tax credit to cover the cost of 

high deductible health plan insurance premiums that is targeted to 

the lowest income Americans. 

The result is a policy that provides the same tax advantage 

available to those with employer-provided insurance to health care 

purchased by all Americans with high deductible health plans. Providing consumers with a larger role in health care decisions will 

help bring market forces to health care. Where market forces are 

prevalent, there is evidence that health care costs have grown slower, or in some cases even decreased. 

The President’s Initiative also helps make health care more portable. In today’s economy, employees frequently change jobs, and 

these changes are often for the better. Each year 56 million employees are hired, while 53 million leave their jobs. The average 

American between the ages of 18 and 38 has held 10.2 jobs. Seeking out and testing different jobs may generally lead to a better 

matching of workers to jobs and contributes to skill development 

and wage growth. 

Americans also tend to change jobs much more frequently than 

workers in other major industrialized nations. In some cases, twice 

as often, which then allows our economy to adapt more quickly to 

changing economic circumstances. 

Our dynamic labor markets are an important contribution to our 

higher economic growth and our higher living standards. Tying employees’ health insurance to their workplace, however, is a source 

of job lock and an impediment to fluid and flexible labor markets. 

HSAs have the distinct advantage of being owned by individuals 

regardless of their employer. When workers change jobs, they take 

their HSAs with them. 

The President’s Health Care Initiative reorients HSAs, and in 

many circumstances lower income Americans would receive a largVerDate 0ct 09 2002 20:07 Nov 03, 2006 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\HEARINGS\28599.TXT MIKE
18

er tax subsidy than those with higher incomes, and is in stark contrast to current law, where lower income Americans often receive 

little benefit from the existing tax subsidy for health care. 

In summary, the lack of appropriate pricing incentives in the 

health care market has contributed to rising health care costs and 

the uninsured. At the root of this problem is the tax bias for first 

dollar coverage, and the diminished role of the consumer in health 

care decisions. The President’s Health Care Initiative addresses 

these problems by putting the consumer more in control of their 

health care decisions and injecting market forces into the health 

care market. 

The Treasury Department estimates that the President’s Initiative would increase the number of HSAs by some 50 percent by 

2010. Building on the early success of HSAs, this initiative can contribute to health care that is more affordable, accessible, and affordable. 

Thank you for the opportunity to testify, and I look forward to 

your questions. 

[Mr. Carroll’s testimony may be found in the appendix.] 

Chairman MUSGRAVE. Thank you very much, Mr. Carroll. We 

know that the growth in health savings accounts has been significant. Could you give me a little more specific information on how 

many people use them now? And can you give a prediction for the 

future on the use of HSAs? 

Mr. CARROLL. Sure. According to some research in the private 

sector, about 3.2 million individuals are currently covered by high 

deductible health plans. That represents a dramatic growth in the 

number of people who are covered in just one year. It has tripled. 

In 2004, the IRS released some data that showed that a relatively 

small number of people had HSAs or were covered by high deductible health plans, and there has been a dramatic growth in the 

number of individuals covered by high deductible health plans 

since that time. 

By 2010, as I indicated, under the President’s policies we expect 

the number of individuals covered by—who have HSAs to increase 

by 50 percent. In 2010, we forecast that about 14 million people—

14 million taxpayers will have HSAs. A 50 percent increase would 

increase that to 21 million. 

Chairman MUSGRAVE. How about small businesses? What are 

the opportunities with HSAs for small businesses? 

Mr. CARROLL. Well, I think that is a very important contribution 

that HSAs make to a comprehensive solution to the health care 

problem. I don’t think—I agree with the Congressman, and the 

members of the Subcommittee as well, that one particular policy 

isn’t going to solve this very complicated problem. But one of the 

things that we do see in the data is that an awful lot of the uninsured are—either are small business owners or work for small 

businesses. That is a fairly important source of the uninsured problem. 

HSAs are very helpful for small business owners, and to—and 

the employees who work for small businesses, to provide them essentially the same tax advantage that large employers and individuals who work for large employers currently have. 

19

Chairman MUSGRAVE. We always are concerned about people 

that don’t have a very high income being able to afford health insurance. Could you specifically comment on what hope HSAs give 

for low income individuals who desperately need health care coverage? 

Mr. CARROLL. Sure. What is particularly interesting about the 

early evidence on HSAs is that a fairly substantial fraction of those 

who have HSAs, or high deductible health plans that qualify for 

HSAs, are low income. As I mentioned, over 40 percent of those 

with HSAs, according to some recent preliminary evidence, have 

high deductible health plans. That is a very significant—that is a 

very significant finding. HSAs already, as they are currently constituted under current law, are helpful for the low income. 

In the very early data that the IRS released a month or two ago 

for tax year 2004, which is taking a very early glimpse at the HSA 

market, again, it was kind of a prelude to the industry data released earlier this year. A large fraction, a significant fraction of 

those with HSAs were lower income Americans. 

And what is interesting and what is important about the President’s policy is it really reorients HSAs and high deductible plans. 

The series of refundable tax credits for payroll taxes paid for insurance premiums, payroll taxes paid for out-of-pocket expenses, and 

the tax credit for—the refundable tax credit targeted to the lowest 

income Americans to help make insurance more affordable for 

them, all make this system, this web of tax preferences, more progressive than they are actually currently constituted today. 

In my written testimony, we present—I present a chart for an illustrative example for a family of four, age 35, and what it shows 

is for kind of the typical level of insurance premiums, the typical 

out-of-pocket expenses for a family of four, age 35, that lower income people under the President’s policies actually would get a 

larger tax subsidy at the low end of the income distribution than 

at the middle or at the high end of the income distribution. 

And it is because of this set of refundable credits for payroll 

taxes paid on the insurance premiums, the out-of-pocket expenses, 

and the refundable tax credit targeted to low income Americans. 

And what is interesting about the payroll tax credits is, you know, 

it is a credit for payroll taxes paid on the premiums. Of course, 

when individuals reach the wage cap for Social Security taxes, they 

stop paying those taxes, and the benefits of these credits are 

ratcheted down. And that is one of the features of the proposal that 

explains its progressivity. 

Chairman MUSGRAVE. Thank you very much. Mr. Lipinski. 

Mr. LIPINSKI. Thank you, Madam Chairman. I want to in a way 

go back to what Mr. Barrow was so eloquently stating and asking 

about earlier I won’t have the eloquence of Mr. Barrow, but I want 

to—I want to ask specific questions about HSAs and what impact 

they are going to have on the health insurance market in general, 

because in a way it very much appeals to me the idea of having 

the marketplace work to better provide, have a more efficient system of providing health care, but I have very serious questions 

about it. 

Looking at myself, I am diabetic. I know that every year I am 

going to have certain costs associated with my disease. But if those 

20

costs are paid if I take care of myself, I can live a normal healthy 

life. It seems to me that an HSA would never make sense for someone such as myself who knows they are going to have such costs, 

that it would be much better for me to be in the regular insurance 

market. 

And unless you can, you know, convince me otherwise, that is the 

way it looks to me. In that case, in the regular insurance market, 

young healthy people will go into—will have HSAs because it will 

be cheaper for them, and we are going to Balkanize—as Mr. Barrow was saying, we are going to Balkanize the market. We are 

going to have the sick people in one market, the healthy people in 

another market. 

Now, can you disabuse me of this belief? 

Mr. CARROLL. Well, you know, I think the issue you are raising 

is the issue of adverse selection. HSAs are a new product. They 

have been around just for a few years, and it will be some time before we do get a complete picture of HSA enrollment. 

But so far I think there is little to suggest that this problem is 

going to be significant. The preliminary data that I referred to earlier does suggest a few important things. One, lower income Americans are benefitting from HSAs. That is a group that tends not to 

have insurance, that tends to perhaps have some of the concerns 

that you mentioned. 

Older Americans are much more—a significant number of older 

Americans have HSAs. Over 50 percent are over 40 years old, over 

20 percent are over 50 years old. Those groups are often associated 

with those with a health status that might not be as good as the 

average. 

So I think when you look at the very early evidence on HSAs, 

it doesn’t appear to be an issue, and the preliminary indications 

are is that some of these—some of the groups correlated by income 

and age, to the extent health status is correlated by income and 

age, it tends to be particularly helpful for some of these groups. So 

this tends not to be a problem. 

And another thing to kind of focus on—and perhaps this is—I 

think this is another important issue, is that when you look at the 

employer market, which broadly provides benefits, 174 million people currently get their insurance through employer—the employer 

market, and that is an extreme—it is just central to our insurance 

system. But the employer market tends—is much more likely to 

cover middle income and upper income Americans as opposed to 

lower income Americans. 

A chart I have in my written testimony based on some data from 

the current population survey released by the Census indicates 

that for those with incomes of $75,000 or more, there are—81 percent of that group gets their insurance through the employer market. But when you look at those—the group who have incomes 

below $25,000, only 23 percent of those individuals— 

Mr. LIPINSKI. Okay. I just want to interrupt you, because I am 

running out of time here. It would seem to me, though, that in the 

long run you have this what you say is evidence, and it seems to 

suggest you are picking up with HSAs people who otherwise 

wouldn’t have insurance, and that is great. 

21

But it seems in the long run, if you are looking at this from an 

economic perspective, it makes a lot more sense if people are making the economically wise choices that healthy people are going to 

choose HSAs, and people right now who are more likely to be covered, as you said, with the—with health insurance coverage. 

In the future, though, if HSAs become more available and businesses—employers are going to be offering HSAs because those are 

going to be cheaper probably for the business and for the individuals, you know, that situation is going to change with, as you said, 

those who are more likely to have insurance now are—you know, 

are in that category who work for the bigger employers. 

It would seem in the long run it only makes economic sense that 

the people are going to pull out of the—those who are healthy are 

going to pull out of the insurance. And that is just looking—that 

is just looking at the people who are making, as I see, wise market 

decisions, that is the way in the long run it is going to work. 

Chairman MUSGRAVE. Just answer briefly, if you could, Mr. Carroll. 

Mr. CARROLL. Okay. Well, you know, one of the features of HSAs 

is they have a deductible, and above that deductible they cover—

your insurance costs are covered. What we found—you know, I 

think it is the case that HSAs have been attractive to the chronically ill. I think that is reflective in the data that we have seen 

to date with older Americans and lower income Americans. 

Chairman MUSGRAVE. Okay. Mr. Davis. 

Mr. LIPINSKI. Thank you. 

Chairman MUSGRAVE. Thank you, Mr. Lipinski. 

Mr. DAVIS. Thank you very much, Mr. Secretary. Can you tell me 

how an HSA actually benefits a low income person? 

Mr. CARROLL. The way the President’s initiative—looking at it in 

its totality—benefits low income Americans in a number of different ways. First, a low income American would typically pay payroll taxes on their first dollar of wages, and the individual would 

receive a—under the President’s proposal would receive a tax credit 

through the income tax for the payroll taxes paid on insurance premiums. 

The individual would also receive—and that credit would be refundable. The individual would also receive a refundable tax credit 

for out-of-pocket expenses paid on—by that individual. And there 

is also included in the proposal another refundable tax credit that 

is targeted to the lowest income Americans. It is a 90 percent—it 

would cover up to 90 percent of the costs of premiums. It would be 

up to $1,000 for single individuals, up to $3,000 for families. 

And what you see in the chart I referred to—I think it is chart 

7 in the written testimony—if you have a chance to look at it, what 

it shows is that relative to current law where individuals—low income individuals tend to receive a fairly small, actually very small 

benefit from the current set of tax preferences in the tax system 

relative—whereas under the President’s proposal they receive a 

much richer set of tax—a much richer tax subsidy. 

Mr. DAVIS. What do we call ‘‘low income?’’ 

Mr. CARROLL. Well, the low income—the refundable tax credit I 

mentioned, that is targeted to the lowest income Americans. For 

22

singles, it is fully phased out I believe at $30,000 for singles, and 

$60,000 for families. 

Mr. DAVIS. Do these people need any additional tax credits? Do 

they need something else? 

Mr. CARROLL. Well, I mean, the broad structure of the proposal 

is not only to provide—you know, in part it is trying to make insurance more affordable. It is also trying to level the playing field between insurance provided in the employer market as well as in the 

non-group market. And it is also, importantly, trying to place individuals—the health care consumer at the center of health care decisions, so that they will have more at stake. 

When individuals have more at stake in decisions, they typically 

make better ones. And by giving individuals a larger role in health 

care decisions, we expect this proposal to have positive effects on 

the—on health care costs. 

Mr. DAVIS. Would it not make more sense for the government to 

just pay for the health insurance for these individuals than to talk 

about a tax credit that they may not meet or can’t benefit from? 

Mr. CARROLL. Yes. The broad structure of the proposal increases 

reliance on individual choice. As was mentioned earlier, well informed, cost effective choices is—you know, is something that is extraordinarily helpful in controlling costs. In some elements of the 

health care market, where the procedures typically aren’t covered 

by insurance, we have seen a fair amount of competition. 

We have seen a fair amount of price and quality information provided by the health care industry, by doctors, hospitals, and others. 

In vitro fertilization is an example. Eye laser surgery is another example where we have seen health care costs—not only the rise in 

health care costs diminished, but we have actually seen health care 

costs come down. So in the case of routine procedures, I think there 

are probably some very real benefits that can be gained by greater 

individual choice, by giving individuals more at stake in health 

care decisions. 

Mr. DAVIS. While I have still got a second, let me just ask, have 

we really seen anything that has—I know I have been engaged for 

about 30 years I guess in public discussions. Cost containment has 

always been a big issue in health care, since I have been engaged. 

I have never seen anything yet that has actually brought the cost 

down. 

It seems to me that the cost has simply been going up all the 

time. I have never seen anything that has brought the cost down. 

Mr. CARROLL. Well, again, I think one area in the health care—

in health care where you do see costs coming down is where market forces are more in play. Where they are more in play, the 

health care costs are either not rising as rapidly or falling, where 

individuals do not feel the kind of what economists would call the 

true marginal cost of health care, where they are not paying themselves directly a large fraction of the health care costs, you know, 

they tend not to be as involved in the decisions. Third parties are 

much more involved in the decisions. Market forces are a lot less 

at play. 

Mr. DAVIS. Thank you very much. 

Chairman MUSGRAVE. You are very welcome. Mr. Barrow. 

23

Mr. BARROW. Thank you, Madam Chair. Mr. Carroll, I was 

struck by your observation that there are lots and lots of folks out 

there who are eligible to take advantage of the benefits of HSAs 

because they are already covered by essentially catastrophic coverage, high deductible policies to begin with. 

The problem is, at least the problem—one of the problems that 

I start with is one of the reasons that folks got catastrophic coverage is they can’t afford more comprehensive coverage. They can’t 

afford coverage that covers stuff at the front end, so all they can 

afford is stuff that covers things out of the back end. Of course that 

covers you. It is cheaper because it doesn’t cover most of the stuff 

most of the folks deal with most of the time, so I can understand 

why they are eligible. 

The reason why they are eligible to take advantage of benefits 

is they ain’t got the money to save. And it seems to me that if you 

do have enough money to save, and thereby actually get the benefit 

of any HSA type of legislation, it seems to me that you can’t win 

for losing. If you don’t have enough to save to begin with, you are 

bare. If you do have enough money to save, then you are either 

going to get lucky, in which case you will get the benefit of your 

savings account, you can do with that as you will, or you are going 

to be unlucky. 

And if you are unlucky and get sick and have upfront costs that 

you aren’t insured for, you lose there. You might as well be bare. 

You are no better off. But if you are actually lucky enough to be 

able to pocket some of the money you would otherwise spend on 

premiums covering upfront coverage you didn’t need, you are pulling that person out of the risk pool. 

They are not contributing to that extent to that pool of people 

who are taking their luck and mixing it with those folks who are 

unlucky, so that the lucky end up subsidizing and supporting the 

unlucky. Since we don’t know who those folks are going to be, everything you are doing is fundamentally opposed to the whole notion of insurance. We are not insuring. It is just pushing folks to 

go more and more bare. 

Now, how do we get folks insured if the objective—if the consequence of our policy is basically to say every man, woman, and 

child for themselves? If you can afford to save, do you want me to 

use—you know, you are either going to win or you are going to 

lose. But even if you are winning, you are pulling out of the risk 

pool. 

Mr. CARROLL. Right. I think this is one part of a more comprehensive approach to health care. It is one of the elements of the 

problem in health care is—is the reliance on first dollar coverage. 

The first dollar coverage basically takes the consumer out of the 

decisionmaking and leads to less and less— 

Mr. BARROW. I am going to leave the consumer in there for reasonable deductibles and stuff like that there. Everybody else who 

has paid in and is getting comprehensive coverage has got some 

kind of role to play in making sure you are not overutilizing the 

system. 

But, you know, the concern I have got is folks overutilizing the 

system at the other end, at the emergency room, because they ain’t 

got no coverage. And I just don’t see HSAs increasing the number 

24

of people who are pooling their risk and thereby trying to achieve 

the optical level, the largest number of lucky people subsidizing the 

unavoidable number of unlucky people. I just don’t see that happening. 

The arithmetic just don’t add up. You can say it is part of a comprehensive package, but this does not add to that solution at all. 

It rewards people for being lucky, but it penalizes the community 

as a whole by taking those folks out of the risk-sharing formula. 

Mr. CARROLL. I think when you look at the package in its entirety, its positive effects on health care costs will lower health care 

costs generally and be very helpful to the market generally. 

Mr. BARROW. Well, I know a guy who says the national sales tax 

is the optimal, ideal health care solution, because it is going to 

raise the tax for everybody and chase all of those slackers and 

those hypochondriacs out of the system, reduce the overall demand 

of those folks who really need it. And that is going to more than 

offset the amount of the 33 percent national sales tax on premiums, and the 33 percent sales tax on doctors’ bills. I don’t believe 

that either. 

I just don’t see this part of it. I just don’t see that part of the 

comprehensive package doing any good. 

Mr. CARROLL. And another element of the proposal is that—for 

the initiative is that it extends to individuals purchasing their 

health care directly. The same tax advantages that are commonly— 

Mr. BARROW. I am all for that. I am all for that. I just don’t—

I just see risk segmentation, breaking up the risk pool— 

Mr. CARROLL. There is a large segment of the population that is 

not covered by the employer system. 

Mr. BARROW. Fair enough. 

Mr. CARROLL. They tend to be lower income. They tend to work 

for small businesses. 

Mr. BARROW. I am for tax equity, as far as that is concerned. 

This just doesn’t seem to get it there. Thank you. 

Chairman MUSGRAVE. Mr. Udall. 

Mr. UDALL. Following up on Mr. Barrow here, the HSAs, don’t 

they really work well if you have money? And if you are living paycheck to paycheck, I mean, you don’t have the ability to put the 

money into HSAs. 

Mr. CARROLL. Well, something I mentioned earlier is the preliminary evidence on HSAs suggests that a lot of—a significant number 

of lower income Americans are using HSAs. Roughly over 40 percent, actually 42 percent, of those with HSAs, of the 3.2 million 

with HSAs have incomes below $50,000, suggesting that a very significant number of lower income Americans are finding HSAs to be 

useful. 

That general statistic is going to be confirmed by some earlier 

IRS data for—released for 2004 a few months ago. It is—so I think 

the early evidence is that HSAs, you know, are kind of consumer 

choice. Lower income Americans are choosing to take up HSAS. 

Then, an important aspect of the President’s proposal is that it 

very much refocuses HSAs through the series of—as I mentioned 

earlier, the series of tax credits, refundable tax credits for payroll 

taxes paid on premiums and out-of-pocket expenses and refundable 

tax credit for lower income Americans. That really shifts the beneVerDate 0ct 09 2002 20:07 Nov 03, 2006 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\HEARINGS\28599.TXT MIKE
25

fits of the tax subsidy received by Americans, it provides very significant tax subsidies to lower income Americans. 

There is a chart I have in the written testimony I mentioned earlier that illustrates for an individual with pretty much an average—the average out-of-pocket expenses and the average insurance 

premium, individuals in the $10-, $20-, $30,000 range actually will 

receive a larger tax subsidy under the President’s proposal than 

higher income Americans. 

Mr. UDALL. Mr. Carroll, where is the evidence that people earning under $50,000 are using the HSAs? You said it is preliminary 

evidence, is that correct? 

Mr. CARROLL. It is—there is an IRS—the IRS released some statistics off of tax year 2004 returns a month or so ago. I can get that 

to you. That data, when HSAs were just starting out and there 

weren’t all that many people with HSAs, that data nevertheless indicated a very significant fraction of those with HSAs were lower 

income Americans. 

More recently, in January of this year, AHIP released some data 

that indicated that—I believe it is the AHIP data that indicated 

that more than 40 percent of Americans with HSAs had incomes 

below $50,000. 

Mr. UDALL. Well, I suspect what is going on here is people may 

have been forced to shift into these situations. Can you tell me how 

many of those switched from comprehensive plans through no 

choice of their own? 

Mr. CARROLL. I don’t have that information. 

Mr. UDALL. Would you be able to get that for us and give us an 

indication as to what is happening there? I mean, if we made some 

policy decision and we are forcing people to do that, I think that 

would be very important to this equation, wouldn’t it? 

Mr. CARROLL. Yes, I don’t believe that the data are split out in 

a way in which we could kind of directly answer that question. But 

I would simply observe that it often may be in the interest of consumers to move towards a high deductible plan, because their premiums will in fact be lower. And that is—so, you know, to characterize it as people are being pushed into high deductible plans is 

not something I would necessarily agree with. 

Mr. UDALL. Thank you. Appreciate it. Thank you. 

Chairman MUSGRAVE. Thank you, Mr. Udall. Mr. Carroll, I did 

receive a note that Mr. Perrin, the last panelist on our second 

panel, says that he can answer the last question that Mr. Lipinski 

asked. And so I would like Mr. Perrin to come up and join you, Mr. 

Carroll. 

Mr. Lipinski, could you—would you like to restate that question 

for us? 

Mr. LIPINSKI. Does Mr. Perrin need the question restated? 

Mr. PERRIN. No. 

Chairman MUSGRAVE. Okay. Let us just—he is eating. That is 

what the deal is. Go ahead. 

Mr. PERRIN. The question about diabetes or any other serious illness is one we get all the time. And for you, Congressman, I could 

make a pretty clear argument that you would be better off with an 

HSA, even if you spend every dime in the account every year. 

26

There are two reasons the sick or the less healthy choose an 

HSA. The first one is financial. If you take a traditional family 

plan that now costs $11,000 a year, what you have is usually a 

$500 deductible, 20/80 co-pay up to $5,000. So you, as somebody 

who is less healthy, is going to spend that $500, you are going to 

spend the $1,000. So you are now talking about $12,500 that you 

are spending. If you move to an HSA and you take that $12,500 and you get a $3,000 deductible, and you put $3,000 in the account, your health 

insurance policy is not going to cost you $9,000. It is going to cost 

you about $6,000. So you have got $3,000 in the account, you have 

got $6,000 for the insurance, let us say, depending on what state 

you live in. That is $9,000. You immediately have a savings of 

$3,000 instantly. So there is a financial incentive on the part of 

some less healthy to choose an HSA. 

Now, on the non-financial side, you get complete choice, control, 

treatment options, because you are paying cash. And for somebody 

who is less healthy you have obviously a large amount of experience with the health care system. You know your condition better 

than most. You are perfectly happy being in charge of your health 

care. And you are probably the best person in the world qualified 

to be in charge of your health care, which is exactly what HSAs 

do. 

We have a financial incentive, we have a non-financial incentive. 

That is why the sick choose an HSA, and that is why there isn’t 

going to be adverse selection. Now, the final point that I would add is when you move $3,000 

into a savings account you are increasing your buying power by 

your tax rate. Right? That $500 deductible, that $1,000 to get to 

the 100 percent coverage on the co-insurance, really is after-tax 

money. We are talking about pre-tax money. So there is an additional financial kicker. 

Now, the problem is that if somebody says, you know, the sick have to pay this $3,000, therefore, they won’t choose an HSA. It 

really is a pretty simplistic analysis of what is going on on the 

ground with HSAs. 

Now, you don’t have to take my word for this. There are a number of studies, including from McKinsey and Company, that show 

that the less healthy when they have a high deductible plan become much more engaged in their health care. And the reason is 

really quite simple. If their condition gets worse because they don’t 

take care of themselves, they are the ones that pay. It comes out 

of their pocket. 

So you have a financial—an added financial incentive for the less 

healthy to become more compliant with their treatment, which is 

exactly precisely what the McKinsey study and others have shown. 

And I would be happy to provide that to the Committee. 

Chairman MUSGRAVE. Mr. Lipinski, did you want to comment? 

Mr. LIPINSKI. Well, I think probably right now I just want to 

leave it at that. I would very much like to see that study, but I 

think maybe we should wait. I think I have some questions and my 

colleagues have questions, but why don’t we wait until Mr. Perrin 

gives his testimony. 

Chairman MUSGRAVE. Thank you so much. 

27

Mr. LIPINSKI. Thank you. 

Chairman MUSGRAVE. And we all would like to be eating, so no 

criticism there. Just grab when you can. 

Okay. Mr. Carroll, I thank you and thank you for your patience 

as I let Mr. Shadegg talk longer than the five minutes. I appreciate 

that, and we are glad you are with us today. 

And I would call up the second panel. And at this point, I have 

seen the light, so we are going to get back on the strict time schedule. So if the second panel would come forward, I am going to introduce you as you are coming. 

We have Mr. Ed Lawler, ReMax Alliance, National Association of 

Realtors from Fort Collins, Colorado; Merrill Matthews, Dr. Matthews is the Director of The Council for Affordable Health Insurance from Alexandria, Virginia; Mr. Dan Perrin that you just heard 

from is from the HSA Coalition here in D.C.; Dr. Cecil Wilson, he 

is the Chair-Elect of the Board of Trustees, American Medical Association, from Orlando, Florida; Mr. Paul Hense, Hense and Associates, National Small Business Association, from Grand Rapids. 

Welcome. And, Mr. Lawler, we will start with you. Happy to 

have you in the hearing today. 

STATEMENT OF ED LAWLER, NATIONAL ASSOCIATION OF 

REALTORS 

Mr. LAWLER. Thank you. Chairman Musgrave and Ranking 

Member Lipinski, and members of the Committee, my name is Ed 

Lawler, and I am a realtor from Fort Collins, Colorado. And I am 

speaking on behalf of roughly 1.2 million members of the National 

Association of Realtors. 

NAR is the nation’s largest professional trade association. Our 

members include real estate professionals engaged in every aspect 

of the real estate industry. I appreciate the opportunity to share 

our thoughts on the challenges that face small businesses and the 

smallest of the small businesses—the self-employed—in finding affordable health insurance coverage. 

Unlike other issues on which NAR has testified in the past, NAR 

members’ interest in this topic is personal rather than professional. 

Real estate sales is a prototypical small business. Real estate firms 

typically have fewer than five salaried employees, and real estate 

agents, as independent contractors, are not employees of the firms 

with which they are affiliated, but are in fact the smallest of small 

businesses, a firm of one. 

As a consequence, real estate agents are typically forced into the 

individual insurance market, a market where you basically take or 

leave whatever coverage is offered. There is no negotiating, and 

there is no leverage. 

Today, 28 percent of the realtors, more than one in four, of the 

nation’s 1.2 million realtors do not have any health insurance. In 

seven years, the percentage of uninsured NAR members more than 

doubled, going from roughly 13 percent of its membership in 1996 

to 28 percent in 2004. By comparison, the percent of U.S. population without health insurance was estimated to be 15.7 percent 

in 2004. The percentage of uninsured realtors is almost double that 

of the nation as a whole. 

28

To further put these figures into light, 28 percent of our membership is 336,000 individuals. If each of those individuals is uninsured, it is likely that their family—spouses and children—are also 

uninsured. Therefore, we would expect that as many as 873,000 

members and their dependents are uninsured. 

When asked why they are uninsured, 74 percent say the cost of 

the coverage is their biggest barrier rather than uninsurability. It 

is not surprising, then, that the number one question members who 

call NAR information central ask: what can NAR offer me in the 

way of affordable health insurance? 

Unfortunately, the answer to that question right now is very little. Not what the typical caller wants to hear from our association, 

representing them as one of the largest entities, as big as some of 

the largest corporations in America. 

Madam Chair, our members believe the powers granted to a 

trade organization should be equivalent to those granted to large 

employers or trade unions when it comes to negotiating for a quality, uniform national health plan for their constituents, regardless 

of where they live. As a result, NAR members strongly support 

small business health plan legislation, including H.R. 525, S. 406, 

and, more recently, S. 1955. And we are not alone. 

A March 2006 survey of likely voters done by two nationally respected polling firms, public opinion surveys, and research partners 

found that the American public shares NAR’s support for small 

business health plans with 89 percent of the participants responding favorably. Even when presented with the arguments against 

small business plans, including both pollsters indicated using the 

harshest criticism lodged against AHPs and SBHPs, support for the 

plans remained extremely high with 86 percent of the national voters still favoring the concepts. 

The result also showed that support crosses party lines with approval levels for voters of all parties greater than 86 percent. 

Americans understand that the current insurance delivery system 

is broken and that the following firms to join—and that allowing 

firms to join together to negotiate will make a difference, creating 

another large pool. 

Last year, testifying before the Senate Small Business Committee on S. 406, NAR’s then-president Al Mansell admitted that 

small business health plans are by no means the silver bullet that 

will solve all the nation’s health insurance plans. But he pointed 

out that it was time for all parties, supporters and opponents, to 

sit down together and figure out how to address the issues that 

were contentious. 

We are heartened by the fact that this is exactly the approach 

that Senators Enzi and Nelson have taken this last year in developing their compromise SBHP bill, S. 1955, the Health Insurance 

Marketplace Modernization and Affordability Act, which passed the 

Senate Health, Education, Labor, and Pensions Committee last 

month. Once their bill had been drafted, the Senators asked the 

major stakeholders—insurers, insurance commissioners, and the 

small business community—to submit their concerns with draft 

language. 

Those concerns were then discussed over the course of several 

months, and acceptable alternatives were found. Additional 

29

changes were also made as others weighed in on the issue. The end 

result of this process is a bill that addresses most of the concerns 

that traditionally have been raised, including state regulatory oversight, mandates, and financial solvency. 

Are there still those who have objections? Yes. But it has been 

our experience that the bill’s co-sponsors have been open to concerns and are continuing to work on addressing them. We believe 

that an acceptable compromise is possible. NAR is committed to 

working to advance what we believe can be a very effective insurance delivery system. 

If SBHPs are approved, we will be one of the first to be in discussions with our insurers to craft a quality health insurance package 

for our realtor members. 

Once again, thank you for giving NAR a place at the table, and 

for giving me the opportunity to share our thoughts and my 

thoughts. I am happy to take any questions. 

[Mr. Lawler’s testimony may be found in the appendix.] 

Chairman MUSGRAVE. Thank you. We will come back to questions after everyone testifies. Dr. Wilson. 

STATEMENT OF DR. CECIL WILSON, AMERICAN MEDICAL 

ASSOCIATION 

Dr. WILSON. Good morning, almost good morning, and thank you. 

Chairman Musgrave and Ranking Member Lipinski, we appreciate 

your holding this hearing on common-sense reforms to reduce 

health care costs and expand health care coverage. I am Cecil Wilson, a physician internist from Winter Park, Florida, and ChairElect of the Board of the American Medical Association. 

My testimony focuses on medical liability crisis, but first I would 

like to briefly comment on health savings accounts and association 

health plans. 

Like any small business, physician practices are grappling with 

the rising cost of providing health insurance to our employees and 

their families. The AMA believes that health savings accounts and 

association health plans, if properly crafted, could expand affordable health insurance options for small businesses. 

Now, the AMA also believes that Congress must address the high 

medical liability insurance costs and the burden they place on physician practices and patient access to care. My practice employs one 

physician—myself—and three staff. In fact, nearly 75 percent of 

practice-based physicians in this country either work or own small 

practices of less than nine physicians. And escalating jury awards 

and the high cost of defending against lawsuits, including meritless 

claims, are the primary drivers of increased medical liability insurance premiums. 

These premium costs are part of our overhead expenses, and 

when expenses increase physicians must either raise revenue by increasing fees or cutting other expenses to sustain their practices. 

And covering these costs is more challenging as Medicare, Medicaid, and managed care plans limit physician compensation for 

treating patients. 

The resulting need to cut expenses forces physicians to face the 

difficult choices of laying off staff, dropping or reducing health insurance benefits for their employees, foregoing the purchase of new 

30

medical equipment, or limiting certain aspects of their practice that 

are too expensive to insure. 

In addition, we are all aware of the human costs that the liability crisis exacts from patients any physicians alike. We have heard 

sobering stories of patients who could not find trauma care in time 

and of pregnant women who had difficulty finding a physician to 

deliver their babies. 

Viewed on a broader perspective, we all pay the price of a broken medical liability system. A medical liability adds $-70 to $126 billion to the cost of health care each year, and these costs translate 

into higher health care costs for everyone. These are the reasons 

we support proven reforms to the medical liability system. The 

AMA worked hard in supporting the passage of H.R. 5, the 

HEALTH Act. And, as you know, that provides reforms that have 

proven effective at keeping medical liability insurance premiums 

stable. 

This Act allows patients to recover unlimited economic damages and includes a $250,000 limit on non-economic damages, also 

known as pain and suffering. As discussed in my written statement, a $250,000 limit on non-economic damages has worked in 

California. It will work nationwide. 

Texas enacted effective reforms in 2003. These include limits on 

non-economic damages—that is, a $250,000 cap for physicians—

and a limit of up to $500,000 for health care facilities such as hospitals. That new law works. What we have seen already is an increase in new physicians going to Texas, and in 2005 Texas physicians saw an average cut in their premiums of 13.5 percent. This 

will result in a savings in 2006 of an estimated $49 million. 

Not only do these reforms work, the public supports them. An 

April 2006 Harris poll shows that three-fourths of Americans support comprehensive medical liability reform. Seventy-five percent 

believe the crisis affects their access to health care, and a majority 

believe that medical liability lawsuits are the primary driver of increased health care costs. 

Madam Chair, federal legislation based on proven reforms that 

stabilize medical insurance premiums, and preserve patient access 

to care, is the solution to the crisis. AMA looks forward to working 

with Congress to continue to work to enact common-sense medical 

liability reforms this year. 

Thank you. 

[Dr. Wilson’s testimony may be found in the appendix.] 

Chairman MUSGRAVE. Thank you, Dr. Wilson. Dr. Matthews, we 

will hear from you at this time. 

STATEMENT OF MERRILL MATTHEWS, THE COUNCIL FOR 

AFFORDABLE HEALTH INSURANCE 

Mr. MATTHEWS. Thank you, Madam Chairman, and Ranking 

Member Lipinski. I appreciate your taking the time to have this 

hearing on a very, very important subject. I am Merrill Matthews, 

Director of The Council for Affordable Health Insurance, which is 

located in Alexandria. 

CAHI is a research and advocacy organization. We have members, health insurers, doctors, third party administrators. We have 

been around since 1992. 

31

We at the Council believe that all Americans should have access 

to affordable health coverage. And by taking just a few steps, we 

think Congress can move us much closer to that goal. Let me identify three issues. 

People need access to affordable health insurance plans. State 

laws often impede that access, and Congress can take a few steps 

that will ensure a vibrant and competitive health insurance market. Let me start with creating affordable health insurance plans. 

Everyone knows that health insurance premiums have been going 

up, and that is largely responsible for the growing number of the 

uninsured. 

A recent survey by Deloitte of 152 major U.S. employers found 

that preferred provider plans, PPOs, were going up an average of 

7.2 percent, HMOs 8 percent. That is lower than it has been, but 

it is still significantly higher than the consumer-driven plans that 

were going up by an average of 2.8 percent annually. 

This is why the Council believes that expanding access to consumer-driven plans such as health savings accounts and health reimbursement arrangements is one of the best ways to keep health 

insurance affordable. HSAs have been operating now for two years. 

We have seen a lot of criticisms of them, but it is remarkable how 

wrong the criticisms have been. 

Even with the criticisms, the growing dynamics, we think that 

Congress can do a couple of things to make HSAs and consumerdriven plans even more attractive. The non-self-employed, people 

who work for an employer who does not provide health insurance, 

do not get a tax break for that insurance, the ability to be able to 

put money into an HSA and to be able to get their health insurance 

premiums tax deducible, tax-free for those health insurance premiums would help make health insurance more affordable for that 

population. 

In addition, Americans spend a lot of money out of pocket on 

health care, allowing them to be able to pay that money out of 

their HSA for the wide range of health care costs, would help make 

health care more affordable. 

Second, not everyone has access to affordable health insurance 

plans. In large part, the affordability of health insurance depends 

upon the state that you live in. Many states—Congressman Shadegg talked earlier about the mandates that are out there. The 

Council, we track these on a state-by-state basis. According to our 

figures, you have got about 1,843 mandates out there. 

If you had the ability to be able to bypass some of those mandates, you would be able to have access to more affordable policies. 

For instance, Minnesota has 62 mandates, Maryland 60, Virginia 

54. Washington, D.C. has only 17. Alabama has 18, and Idaho 13. 

There are no stories in the press about people falling dead in Idaho 

because they only have 13 mandates. You can get affordable policies out there with fewer mandates and still have quality coverage. 

In addition, one of the biggest problems we have is guaranteed 

issue in community rating. Eight states passed those laws. Kentucky backed off from them. All the states that have done that 

have ended up destroying their health insurance markets by making health insurance virtually unaffordable. Congressman Shadegg 

32

talked about New Jersey. That is our sort of prime example of how 

not to reform the health insurance system. 

Ensuring a competitive market for health insurance—we think 

Congressman Shadegg’s bill would allow people to be able to buy 

health insurance across state lines. He talked at length about it. 

Let me just mention one thing about it. There is some discussion 

about, doesn’t this allow people living in one state to be able to 

have health insurance in another state? And isn’t that a problem? 

Council for Affordable Health Insurance based in Virginia provides insurance. I live in Texas. I could have the Council’s plan. I 

choose not to do that. I have a plan in Texas. If I did choose the 

Council’s plan, I would be a person living in Texas with a Virginia 

regulated health insurance policy. I can do that right now. 

My daughter, who is from Texas. goes to school in New Jersey. 

She is a graduate student at Rutgers. She is under my Texas plan. 

She could choose to go under New Jersey, but we can’t afford that. 

She is a Texas resident living in New Jersey with a Texas-based 

plan. 

You already have that going on now, and it seems to work just 

fine. Incidentally, if you live in Pennsylvania, and you decide to 

move to New Jersey, you live in Pennsylvania, you have the individual policy there, you move to New Jersey, you can keep that individual policy living in New Jersey. You will pay lower premiums 

than somebody who actually goes through the insurance department there in New Jersey. But under current law, you can carry 

your insurance policy with you to another state. 

Chairman MUSGRAVE. Could you just wrap up, please? 

Mr. MATTHEWS. Yes, ma’am. In summary, let me say that just 

with a few steps Congress could dramatically improve Americans’ 

access to affordable health insurance, especially for those living in 

states that have virtually destroyed their health insurance market. 

I encourage you to look at some of those provisions, and we will 

be—we look forward to answering your questions. Thank you. 

[Mr. Matthews’s testimony may be found in the appendix.] 

Chairman MUSGRAVE. Thank you, Dr. Matthews. Mr. Hense, we 

would hear from you at this time, please. 

STATEMENT OF PAUL HENSE, NATIONAL SMALL BUSINESS 

ASSOCIATION 

Mr. HENSE. Yes. I am pleased to be here. I want to thank Todd 

McCracken and the National Small Business Association for having 

me here. I am a humble CPA from Grand Rapids, Michigan, so this 

stuff to me isn’t statistics and numbers; it is people, because this 

is what I do. I don’t study these bills as much as maybe some people who live in Washington, but I do see the results. 

I am a University of Detroit graduate, not a Harvard or Ivy 

League school graduate, inner city school. This is real to me, not 

theoretical or statistical. 

There is a term called a BFO, blinding flash of the obvious, that 

I think applies to what I want to present to you, because I just 

don’t understand. And I use the example of Michigan is imploding. 

We are kind of looking forward to having Ford and General Motors 

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sociation of Michigan, because we are going through, you know, a 

real meltdown. 

And, of course, most of you know, if you do follow Michigan 

issues, that it is health care that is driving what used to be the 

Big 3 down, not just the Medium 2. 

But the situation that I look at is people—we are almost exclusively a small business CPA firm. It is what we do. It is what we 

are—our total involvement is. So if somebody comes to me and 

says, ‘‘I want to start a business. I have just been downsized by one 

of these giant corporations,’’ or because we have a reputation for 

helping people with startups, we get people who don’t have a business background, their family doesn’t have a business background, 

and they say, ‘‘Well, what do we do?’’ 

So we go into this, we are going to hire somebody. So you take 

two people, say you have one person that says, ‘‘I want to start a 

business, I am going to hire somebody.’’ so you—tell me how I explain to this person who is going, ‘‘I can do it, I want the American 

dream, I want to own a business. How do I do this?’’ And I say, 

‘‘Look, you hire this person, you get health care on both of you.’’ 

By the way, the employee gets 100 percent scot-free, tax deductible health care. You don’t. Well, why don’t I? Because you are the 

owner. You have just become a capitalist. And here is what we do. 

I am going to—say $10,000 a year you pay in health care, you are 

going to pay a 15 percent premium that the employee doesn’t have 

to pay. Well, why? Because you own the business. 

You had the initiative. You went out and started this business, 

you had the guts to do it, and, by God, the government is behind 

you 100 percent. They want your down payment right up front, 

how much they are going to get out of you over the years. Hardly 

understandable. 

The same thing applies to pension Section 125 plans. You want 

employers to set up a 125 plan, have health care for the employees, 

set up a pension plan. Who do you exclude? The employer. From 

the Section 125 plan and from the health care 100 percent deductible. Hard to understand. 

There is, by the way, a good side to this. There is all this negative talk. In order to avoid self-employment tax on small businesses 

and their health care plans, we have to usually set them up in an 

entity. And what do you suppose that does, an S Corp or a C Corp? 

That drives up accounting costs. So there is a bright side to everything. 

The other point is, I had just—again, people, not numbers, nor 

statistics, real people—I have a young woman working for me, wonderful young woman, 15 years with me, raised three kids, just got 

through a bout of bone cancer with a son, finished college while her 

son was being treated for bone cancer, got her degree, passed the 

CPA exam, and we are talking about bringing her on as an owner. 

And what is our hurdle? Well, she loses her—the health care becomes a problem, because she has to pay self-employment tax on 

the health care. But she loses her Section 125 plan. I mean, what 

is the message? So when I look at this, like I say, I would like to 

somehow someday have somebody explain to me why you would 

differentiate between the person who says, ‘‘I will not be on welfare, I will not be a statistic, my job went away with General MoVerDate 0ct 09 2002 20:07 Nov 03, 2006 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\HEARINGS\28599.TXT MIKE
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tors’ downsizing, I am going to own a business, and I am going to 

hire somebody.’’ Well, you can do that. This is America. That is 

what we want you to do. 

But when you start that business, your friend or your neighbor 

or the person you hire, you don’t pay self-employment tax on their 

health care insurance but you do on your own. And I have never 

had an explanation of that that satisfied any rational bone in my 

body. So basically, I think that if it is good for General Motors it 

is good for Ford. Obviously, it hasn’t been, but if it is good for big 

business it is good for small business. 

If it is good for government employees, let us level the playing 

field. If you own a business, you should have the same health care, 

you should have the same availability of health care with the same 

tax, same pension plan, same Section 125. There is no reason to 

prejudice the owner in these programs. We should actually be 

thrilled that they are doing it, because they are helping solve our 

employment problem. 

Thank you very much for having me. And I just want to throw 

one thank-you out, Representative Musgrave, for your extending 

the Section 179 deduction. That is a big issue for small business, 

extend that a few years. And, Representative Lipinski, your bringing things out into the light with the hospitals--I don’t remember 

the numbers on the bills. I know the concepts. Anything that 

brings the cost out in light gets—allows people to say, ‘‘This is 

what the problem is.’’ 

I ask continuously, why does this keep going up? Nobody ever 

answers. The problem we are talking here about who is going to 

pay. Well, that is a problem. The bigger problem is: why is it so 

much? And thank you very much for shining a bright light in that 

dark little corner of the world. 

Thank you. 

[Mr. Hense’s testimony may be found in the appendix.] 

Chairman MUSGRAVE. Appreciate your comments. Mr. Perrin. 

STATEMENT OF DAN PERRIN, THE HSA COALITION 

Mr. PERRIN. Thank you, Madam Chairman, and members of the 

Committee, Mr. Lipinski. I want to echo my colleagues’ comments 

on your hospital bill. Trying to explain consumerism in health care 

when there are no prices is a kind of rough road. And it is a real 

problem; we salute you for your leadership in that regard. 

Let me just go back to basics a little bit on HSAs. You know, people have a lot of ideas about what they are, and one Congresswoman was asking me, you know, how are you supposed to explain 

an HSA to people? I said, ‘‘Congresswoman, let us say I give you 

$2,500, and once you have spent that money your insurance kicks 

in.’’ That is an HSA. She said, ‘‘Where does the $2,500 come from?’’ 

Which is the obvious question. 

It comes from reducing your premium. And that is why Congress 

mandated that an HSA-qualified plan have the characteristics it 

does, to create that money available to people to fund their account. 

And I have a little vignette to share with the Committee. I took 

my kids to one of these amusement parks where you pay the fee, 

the rides are free once you get in the park, except for the souvenirs 

35

and the games and the arcades and the food. And I have five kids, 

and my older kids wanted to go off on their own, so I said, ‘‘Okay. 

Here is your money.’’ I gave them $40 each, because I, frankly, 

didn’t expect to see them until sundown, but they sought me out 

about two, three hours later, and, ‘‘Dad, we don’t have any money.’’ 

So they are standing there, they have no large stuffed animals 

or hats or T-shirts, any noticeable thing that they have spent the 

money on. And I said, ‘‘What happened to the money?’’ and they 

proceeded to list this long list of things including telescopes that 

take quarters that were on top of a tower. They basically just wasted the money instantly, almost instantaneously. So I said, ‘‘No, I 

don’t have any money.’’ So we went to the waterpark and spent the 

rest of the day there. 

Now, my wife then tells me our cousins are visiting, and I have 

been elected to take the kids again to the amusement park. This 

time there are three more, and they are teenagers. So when I 

handed out the money this time, I said, ‘‘Look, what you don’t 

spend you get to keep.’’ Okay? So some of the kids were literally 

jumping up and down they were so excited. They thought they hit 

the jackpot. 

And the behavior changes were substantial. My son said, ‘‘Well, 

Dad, you know, the arcade is too expensive, and so is the souvenir 

shop.’’ My daughter skipped lunch and had an ice cream cone. They 

actually argued with the clerk about the change; something I have 

never seen them do. 

There was a huge discussion about the fact that I had brought 

20 SPF sunscreen, but the teenage girls wanted 40. But it was $15 

at the park, so they spent 15 minutes trying to decide how to divvy 

up that cost. And what that really illustrates is that when an employee, either the employee gives them the money or they finance 

it when they are in individual insurance, when they are spending 

their own money they spend it a lot differently. 

And that is at the core of why HSAs—as my colleague Mr. Matthews pointed out, the Deloitte study showed only a 2.8 percent increase year or year. We have another study from United Benefit 

Advisors, largest private sector study ever done, 3.4 percent yearover-year premium increase. And this is what is killing business. 

These price increases are unsustainable. Unsustainability means 

you can’t afford it. 

When you can’t afford it, it means you don’t have any. And for 

the first time, ehealthinsurance, who has about 60 insurers on 

their website, sells exclusively to the individual market, showed a 

15 percent premium decrease, a double-digit premium increase between 2004 and 2005. I don’t know about you, but it has been a 

long time since health care costs have gone down, insurance costs 

have gone down. 

So there are a lot of dynamics that HSAs bring to the table, but 

really it starts with reducing the premium cost and using those 

savings to fund the account, which then changes behavior. 

So, Ms. Musgrave, I appreciate your allowing the Coalition to be 

represented here today, and thank you. 

[Mr. Perrin’s testimony may be found in the appendix.] 

36

Chairman MUSGRAVE. Well, thank you, and maybe you could 

have a second job with parenting classes. I like the analogy with 

the amusement park. 

The testimony has been especially good. I really appreciate it, 

and I would just like to start out with a question for Mr. Lawler. 

I think a lot of people when they hear ReMax or Century 21, you 

know, they see this big company. You know, we have seen the 

signs all over the country and everything, but would I be correct 

in stating that you are more like an independent contractor? And 

tell me if that is true, and, if so, what kind of challenges do you 

face with— 

Mr. LAWLER. Absolutely. I am glad you brought that up. In my 

testimony here, so often that is a confused assumption, large companies we hear have market share across the whole United States. 

But the vast majority of these agents are independent contractors, 

and, as such, they are a sole person, one-person entity. They are 

not employed by ReMax in this case. I am not employed by ReMax. 

I work as an independent contractor and have to provide my own 

health insurance as an individual. 

Of those agents that do have health insurance, approximately 30 

percent get their own health insurance as individuals, and it is 

very limited and it is costly. 

Chairman MUSGRAVE. You know, you see those ubiquitous signs, 

and you really do have this concept that this is a big company, and 

I think it is very easily overlooked, what kind of challenges you 

face as an independent contractor. 

Dr. Wilson, I was elected my freshman class with some doctors, 

and they have very eloquently spoken about the challenges that 

much of my district faces being a remote rural area. And you 

talked about the challenges that in some areas you can’t even get 

docs to deliver babies. 

Could you dwell on the tort reform issue a little bit for me? And 

put a picture on what that does to someone who lives 75 miles from 

a major city, and they live in a farming community of 10,000 people, and help us out with that a little bit. 

Dr. WILSON. Thank you, Madam Chair. And maybe I can approach that from my personal experience, which is actually in the 

greater Orlando area, which is urban. And let me just say the bottom line is that what happens in urban areas is magnified by the 

challenges you just described of geography. I mean, if you only 

have one physician in a community, and that physician decides because of the challenges related to viability to retire earlier, or to 

move to another state, then all of a sudden you go from one physician to zero physicians. 

Let me just say that my experience—and I have been in practice 

for a fair number of years now—and a surgery group that I have 

used for some 25 years in one of the hospitals at which I have 

privileges two years ago lost their liability insurance because in 

Florida at that time companies were fleeing the State. Two members of that group left the State, one member retired, and the remaining members of that group decided not to provide coverage at 

that community hospital. 

So the group I had used for my patients in Winter Park Hospital 

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37

eral surgery group for nine months that hospital had no general 

surgeon. So if one of my patients or any patient in Winter Park 

came to that hospital with an acute abdomen, with appendicitis, or 

a gall bladder problem, they had to be transferred. And that’s the 

reality of the liability crisis, which is—does not solve the problems 

in terms of recompensating people who are injured, but results in 

these effects. 

So as I said to begin with, those kinds of things are multiplied 

many fold, not only in rural settings but also in the urban high 

density population settings as well. 

Chairman MUSGRAVE. I believe you mentioned 21 states in crisis. 

Are there states where docs are literally fleeing? They just don’t 

want to practice there anymore? How bad is that crisis that you 

are referring to in your testimony? 

Dr. WILSON. The 21 states—and that is an American Medical Association designation—and we designate states based on our understanding of the challenges to access to care for patients in that 

state relating to the liability crisis, the value of awards, the excess 

awards, the difficulty of getting insurance, and that is how we categorize those states. 

I will just give you the example from my State of Florida. It is 

very difficult to recruit physicians to come to Florida. One of the 

other groups that I use is an orthopedic group who has for the past 

three years tried to recruit a physician to come to their practice. 

One of my brothers who is a general surgeon in the panhandle, a 

group of five general surgeons, took them three years to recruit two 

general surgeons to come to the panhandle, and it was because of 

the liability crisis. 

My brother, who was hoping to retire, kept saying, ‘‘I am hoping 

to retire.’’ And I said, ‘‘Well, you know, Ted, you keep promising 

that,’’ but it was the challenge. So that is the personal experience. 

The other final observation which I alluded to is Texas. And 

prior to Texas reform in 2003, you could pick any particular high 

risk specialty and find that the numbers—actually the numbers 

were decreasing in the State. And just in the three years since passage of that legislation, that climate has changed such that physicians are now coming and we are seeing increased numbers coming 

to Texas. 

Chairman MUSGRAVE. Thank you. Mr. Lipinski. 

Mr. LIPINSKI. Thank you, Madam Chairman. We have been here 

for more than two hours already, but I could probably go on for at 

least two hours myself here. I will try not to do that. 

I would like to first thank Mr. Hense and Mr. Perrin for their 

comments on my bill, H.R. 3139, Hospital Price Disclosure Act, and 

hopefully maybe I can get the Chairman of the Committee to sign 

on to that bill. 

But I want to move on to a couple of questions that I have. First 

I want to talk a little bit—Dr. Matthews had talked about mandates and the problems with mandates, and it is certainly easy to 

pull out ones that—most of us would say, ‘‘Well, that is kind of ridiculous, that that needs to be covered.’’ 

I just wanted to make a statement about my concerns. Right 

now, it is not a problem if you live in one state and for some reason 

or another you could have insurance through—from another state. 

38

My concern is that, though, if you can have an insurance company 

just following the—whatever the requirements are in one state, 

what it is going to lead to with every insurance company is going 

to be going to one state. What state is that? 

The state that has the fewest regulations, the fewest mandates, 

and is going to be in the interest of the states to fight against each 

other to get to the bottom, so that they have insurance companies 

there, so they are getting in the money from these insurance companies. I mean, that is my concern about that. 

One thing, this is going to violate probably all kinds of norms in 

etiquette, but let me pull something out from my shoe. 

[Laughter] 

This is an orthotic. I have had orthotics now for four or five 

years. I was having knee pain. I was a runner, and I didn’t have—

hadn’t had any problems for many years, and, you know, first I 

was told, well, you are just getting older, you have got to accept 

that. Then, I went and was told, ‘‘Well, you get these orthotics. It 

will make a difference. It can help to get rid of your knee pain.’’ 

Now, they were covered—the insurance I had at the time, they 

were covered. Moved to a different insurance, they weren’t covered. 

I actually waited a little while until I was elected to Congress—

until I started my coverage, I should say. I had been elected, but 

I checked the insurance I had before I started and got the insurance, it didn’t cover it. So I thought, well, I could wait a little 

while. I waited, and, sure enough, now I have coverage, which is 

fantastic. 

I would have bought it no matter what. But I can certainly see 

this isn’t the best example, but it is an example. What difference 

does it make? On a good week, I run 20 to 25 miles in a week. It 

certainly helps my health. I am in much better shape because of 

that, and I would want to do that. However, I would be concerned 

that there are people who certainly simply for one reason or another didn’t want to do it or couldn’t afford it—to go out and spend 

the few hundred dollars that it costs to buy one of these. 

That is my concern, getting back to Mr. Perrin on HSAs. Do we 

have—what evidence do we have about people’s long—their decisionmaking in terms of long-term impacts? It is easy to look at all 

of these different things you might buy at an amusement park and 

say, ‘‘Well, the kid doesn’t really need that or didn’t really need to 

do that.’’ I mean, that is one thing. But it is another thing if someone is not going to get a test or someone is not going to get something done. 

Do we have any evidence that people do make good decisions for 

themselves in the long run? And it gets down to not whether people, you know, are smarter or not, as much as, what information 

do people have? Do people have enough information to be making 

those types of decisions? 

Mr. MATTHEWS. Let me address a couple of points there. Number 

one, we had a group of actuaries oversee this mandate chart, and 

you will find in there that we did an actuarial estimate on each of 

the mandates. The vast majority of them are less than one percent, 

would affect the cost of a premium less than one percent. 

39

Some of them have very little impact. It is when you begin to add 

20, 30, 40, 50 mandates together that you begin to start having a 

real significance. 

Another question that came up in the discussion of this is: 

wouldn’t we think that some of these—some of the things that are 

in there that we look at as mandates are things that you would expect a good health insurance policy to cover anyway. But because 

some state or another state—for instance, prescription drugs—we 

mention that as a mandate, because a couple of states have a law 

about that. 

We would think that a good prescription—a good health insurance policy would include prescription drug coverage anyway. So 

some of the things that we call mandates are going to be part of 

what we think a comprehensive policy should have. But there is no 

evidence that I am aware of that when deductibles rise our mandates decrease, that you have any adverse effect on health outcomes. We are not aware of that. 

What most happens is that most of the mandates that you could 

begin to extract are things that people could pay for out of their 

own pocket, but because insurance covers they go ahead and do—

they cover it under the insurance. And that gets to an issue of, you 

mentioned—the term overinsured or underinsured was mentioned 

here earlier. 

In many cases, people have comprehensive coverage for things 

that they could pay for easily out of pocket. And ideal insurance 

would not necessarily cover everything that somebody could reasonably spend on health care. It would actually cover large unforeseen 

costs, things that insurance, when you talk about insurance, should 

actually be covering, not standard, routine, daily, or lower cost. 

But there is no evidence that I am aware of that by moving people to higher deductibles or removing some of the mandates that 

it adversely affects their health in any shape, form, or fashion. 

Mr. LIPINSKI. I know Mr. Perrin is going to address this next, but 

let me also throw in this other part of this question. Why do insurance companies—insurance companies—health insurance companies are not out there for people’s—to look after—just to look after 

people’s welfare. They are out there to make a profit. Why don’t insurance companies encourage people to not overspend? Because the 

money doesn’t come out of nowhere. 

They money comes from the insurance company. How can insurance companies aren’t themselves—they are in the business. This 

is their business. And if they don’t want people to spend too much, 

if they think the way their insurance is structured that people are 

going to spend too much, why don’t insurance companies do something about it? 

Mr. MATTHEWS. That is one of the reasons why deductibles have 

been rising over the past decade or two. It used to be—several 

years ago it would be a $50 or a $100 deductible. Now it is—$500 

or $1,000 is common. Also, a change in the co-pays. But as Dan 

pointed out, that sort of increases your cost up front. And if you 

have a $1,000 deductible, without an HSA or a health reimbursement arrangement, you may discourage or put off certain care that 

you might otherwise get if you had coverage for it. 

40

That is why what the consumer-driven plans with the HRA or 

HSA are meant to do is to say there is money in an account for 

you if you need preventive care, if you need to get routine care, but 

there is an incentive for you to ask the question: where do I get 

value for my money? And that is what they are trying to do is to 

get that element back in. 

Now, in the ’90s, many of the insurers, especially large insurers, 

were moving to managed care as a way to try to control utilization. 

But that was just never going to work. People and physicians do 

not want somebody looking over their shoulder telling them what 

they can and can’t have. 

The only alternative we really have now is to give that power to 

patients and let them make the decisions in consultation with their 

physicians. 

Mr. PERRIN. Mr. Lipinski, let me give you a couple of quick bullet 

point answers. I thought about the amusement park analogy, and 

if one of my kids was in pain in some way, you know, and I kept 

true to the—you have got $40, they would likely go and spend 

money to make themselves feel better. If they felt nauseous, they 

would buy some Pepto-Bismol. If they twisted their knee, they 

would get a bandage, or whatever. And I expect that they would 

be incented by the fact that they don’t feel well to spend the 

money. 

The HSA provides you the ability to have the cash by reducing 

your premium to spend the money. I have got, you know, a couple 

of quick vignettes personally. I used to smoke. I would get bronchitis. I go in. I had Kaiser. They would give me this, you know, 

10-day, three times a day pill, which I could never take, because 

I can’t even take my vitamin every day. And so I would get bronchitis again, and then a buddy told me about Zithromax. 

So I went in and I asked for Zithromax, and they said, ‘‘It is not 

on our formulary.’’ I said, ‘‘Just write me the script, and I will pay 

out of pocket.’’ And so they gave me so codeine syrup as well, which 

for five bucks I could get at the Kaiser pharmacy. So I went down, 

I gave them the prescriptions, and they filled it with Z-Pak. And 

I said, ‘‘I thought you guys didn’t have Z-Pak, you know, for patients.’’ And she said, ‘‘Well, we don’t, but the doctors take it when 

they get sick.’’ 

So the point I am trying to make is that with a little bit of 

knowledge a consumer can make decisions which benefit them, provided they have the funds to pay for it. An HSA, by lowering your 

premium, will give you access. 

With regard to the insurance companies, you know, if you look 

at this chart, which is Exhibit C in my testimony, you will see that 

as the out-of-pocket costs for individuals has dropped, the cost of 

health care has increased—premiums mostly. Insurers don’t insure 

anymore. I mean, most of these insurers are, you know, administrative services organizations that take $50 or $80 claims, plus 15 

percent, and charge you for being a clerk. Okay? 

And as insurance has come more to that sort of model where the 

deductibles get so low that everybody blows past them, they essentially become these huge, you know, electronic claims processing 

companies, and there is an enormous amount of waste. 

Let me just tell you what happened in South Africa. 

41

Chairman MUSGRAVE. Very quickly. We are going to have to 

wrap it up, please. 

Mr. PERRIN. All right. You know, in 10 years in South Africa we 

saw 65 percent of the insured population get an MSA, almost exactly like an HSA. You know, there are some insurers who really 

don’t want to see an HSA succeed, because their top-line profit goes 

from $927 a month down to $400 or $500 a month in premium. 

So, you know, those companies are in this MSA market and that 

are pricing their plans properly, they are making money because 

the insurance works, the insurance science of the less healthy and 

the healthy combined to, you know, give them appropriate and 

practical coverage. 

And, you know, if you look at the McKinsey study, if you look 

at other incentives that are in place with an HSA, the less healthy 

are simply not adversely affected by not getting care. And one of 

the reasons for that is that an HSA allows for preventative care to 

be a covered benefit. And that is the only covered benefit that is 

allowed below the deductible. 

Now, notwithstanding that, Assurant, which was in the MSA 

pilot, found that 30—more than 30 percent of the people in an HSA 

got preventative care, more preventative care, when compared to 

their normal fee-for-service, you know, or HMO population. And 

the reason is really simple. It is like that noise in your car when 

you first get a car and you ignore it and you end up paying 10 

times more than if you had just fixed the damn valve in the first 

place. Right? 

And you learn the lesson where if you let things go, they are 

going to get more expensive, and you have to pay to get your car 

out. This is the exact same lesson that people with an HSA know 

intuitively, and that is why they spend more on preventative care. 

Chairman MUSGRAVE. Mr. Lipinski, did you have any thing else? 

Mr. LIPINSKI. I will—well, I will pass right now. I don’t know if 

you have any more questions or you have— 

Chairman MUSGRAVE. I am going to just ask one more thing, and 

this is a subject that we can certainly pursue more. I just have to 

ask my constituent, Mr. Lawler, when you talked about those realtors, those members calling and saying, ‘‘Well, what can you do 

about the high cost of health insurance?’’ do you think that we 

have offered some solutions today, and could you just comment on 

that? I would just like to hear what you think Congress could do 

that is really going to address this problem. 

Mr. LAWLER. Well, I have to commend the House side, because 

you have worked diligently on association health plans, and I think 

that is probably the best answer or route for realtors. We need to 

get the Senate to come along, and at least the Senate bill— 

Chairman MUSGRAVE. We agree with that. 

Mr. LAWLER. —1955—Senate bill 1955 at least I think is marching down that direction. But I think, you know, we are the largest 

group of our type, and it is difficult for our agents to get health insurance. Roughly a third don’t have insurance. Roughly a third are 

buying it as individuals. They have no way to be in a pool. And the 

other third are basically getting their insurance through their 

spouse or somebody else. 

42

So I think it would be terrific if all the House members would 

work with their Senate compatriots to get an association health 

plan as soon as possible. I think the—when we asked our realtors 

recently what was one of their biggest concerns, within less than 

a week we had over 400 responses regarding associated health 

plans or health plans. And this is just the State of Colorado. This 

isn’t the National Association of Realtors, just in our local area. 

Chairman MUSGRAVE. Thank you very much. Some of the legislation—the legislation that Mr. Hense mentioned is Melissa Hart’s 

Self-Employed Health Care Affordability Act. And I am a co-sponsor of that, and I certainly think that the disclosure for prices—

that is going to get us in the direction that we need to go. I mean, 

it is incredible that we think of going into it blind so to speak and 

not have any idea what the prices are. 

I just commend you for your testimony. This has probably been 

the hearing where we have gone over the most, but I feel that we 

got some very good information today, and I appreciate all of you 

for being here. Appreciate the fact that you all made the effort to 

get here and share your expertise with us today. 

And thank you, Mr. Lipinski. 

This hearing is adjourned. 

[Whereupon, at 12:54 p.m., the Subcommittee was adjourned.]

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