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93–203 PDF 2004

THE BENEFITS OF HEALTH SAVINGS ACCOUNTS

HEARING

BEFORE THE

SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT 

& GOVERNMENT PROGRAMS

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

WASHINGTON, DC, MARCH 18, 2004

Serial No. 108–58

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 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

FRANK BALLANCE, North Carolina 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

BRAD MILLER, North Carolina 

[VACANCY] 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Policy Director 

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT AND GOVERNMENT 

PROGRAMS 

TODD AKIN, Missouri, Chairman 

JIM DEMINT, South Carolina 

SHELLEY MOORE CAPITO, West Virginia 

JEB BRADLEY, New Hampshire 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

TOM UDALL, New Mexico 

DANNY DAVIS, Illinois 

GRACE NAPOLITANO, California 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

[VACANCY]

JOE HARTZ, Professional Staff

(II) 

C O N T E N T S 

WITNESSES

Page 

Crane, Hon. Philip M., U.S. House of Representatives (IL-8) ............................. 4

Braden, Ms. Victoria, Braden Benefit Strategies .................................................. 9

Sullivan, Ms. Kate, U.S. Chamber of Commerce .................................................. 11

Alders, Mr. David, Carizo Creek Corp. .................................................................. 13

Perrin, Mr. Dan, HSA Coalition ............................................................................. 15

Blumberg, Ms. Linda, The Urban Institute ........................................................... 17

APPENDIX

Opening statements: 

Akin, Hon. W. Todd .......................................................................................... 32

Prepared statements: 

Crane, Hon. Philip M., U.S. House of Representatives (IL-8) ...................... 35

Braden, Ms. Victoria, Braden Benefit Strategies .......................................... 39

Sullivan, Ms. Kate, U.S. Chamber of Commerce ........................................... 45

Alders, Mr. David, Carizo Creek Corp. ........................................................... 54

Perrin, Mr. Dan, HSA Coalition ...................................................................... 59

Blumberg, Ms. Linda, The Urban Institute ................................................... 75

(III) 

(1)

THE BENEFITS OF HEALTH SAVINGS 

ACCOUNTS 

THURSDAY, MARCH 18, 2004, 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON WORKFORCE, EMPOWERMENT AND

GOVERNMENT PROGRAMS

COMMITTEE ON SMALL BUSINESS

Washington, D.C. 

The Subcommittee met, pursuant to call, at 10:39 a.m. in Room 

311, Cannon House Office Building, Hon. Todd Akin [chairman of 

the Subcommittee] presiding. Present: Representatives Akin, Udall, Case 

Chairman AKIN. The hearing will come to order, please. We have ourselves a brand new redecorated room, but we do not have a 

gavel up here so we will just have to have an unofficial gavel. 

As I believe most of you are aware, we are here to talk about medical savings accounts and I have an opening statement and I 

believe that Congressman Udall will have also an opening statement and then we will proceed to our witnesses. 

Good morning. I would like to extend a warm welcome to those 

of you who have taken time out of your busy schedules to testify 

before the Committee today. 

Approximately six of every ten uninsured Americans are in families headed by workers who are either self-employed or work at 

firms with fewer than 100 employees. It is often the case that the 

overall cost of health insurance is the greatest barrier to small 

business in providing such coverage to their employees. 

In fact, annual premium increases of 40 to 50 percent are typical 

of what small businesses and their employees throughout the nation are experiencing today. 

In January, the President noted that the best way to help these 

families is in his words, to let them save and spend their health 

care dollars as they see fit. He argued that the federal government 

must empower people to make the right decisions with their health 

care dollars. 

Give them control of a routine cost so that people see the doctor 

when they need to, spend their dollars wisely and will be able to 

have coverage for major medical bills. Health savings accounts or 

HSA’s do just that. 

Last fall, with the enactment of the Medicare law HSA’s became 

available to an estimated 250 million non elderly Americans. Martin Feldstein, a Professor of Economics at Harvard University and 

former Chairman of the Council of Economic Advisors under PresiVerDate 0ct 09 2002 16:01 Aug 23, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\HEARINGS\93203.TXT MIKEA
2

dent Reagan argues that HSA’s may well be the most important 

legislation of 2003. 

Under the HSA provisions, consumers can make pretax contributions into an HSA account, up to the amount of their deductibles. 

The HSA earns interest tax free and unused funds can be rolled 

over from year-to-year. 

As long as the account is used for qualified medical expenses, it 

can be withdrawn tax free. Pretax contributions can be made by 

the individual employer or family member. 

Individuals between 55 to 65 can make up pretax catch-up contributions, which they can use for non-covered Medicare expenses, 

such as their Medicare premiums. 

In addition, HSA’s are portable, because the individual owns the 

account and he may take it with him to another job. Upon death, 

HSA can be transferred to a family member. 

The issue before us today is to examine the benefits HSA’s provide to small business owners. I would like to thank the small business owners and health care policy experts who have joined us here 

today. 

Before we hear from you, however, our esteemed colleague, Congressman Phil Crane of Illinois, has been kind enough to speak to 

us about legislation he recently introduced, his Bill H.R. 3901, 

known as HSA’s for The Uninsured Act would allow an individual 

to deduct 100 percent of their premiums for high deductible plans 

that are associated with HSA’s. Congressman Crane, thank you for 

joining us. 

Before we proceed with the testimony though, I would like to 

give our ranking member, Congressman Tom Udall of New Mexico, 

an opportunity to say a few words. Congressman Udall. 

[Chairman Akin’s statement may be found in the appendix.] 

Mr. UDALL. Thank you very much, Chairman Akin. Pleasure to 

be with you and good to have you here today, Congressman Crane. 

One of the greatest concerns I think for our nation’s small businesses is access to affordable and quality health care. The small 

business community is hit hardest by this growing problem. 

Many small firms have no health insurance at all. As the Chairman has indicated, it has been estimated that more than 60 percent of the approximately 44 million uninsured in this nation are 

small business owners, their employees or their families. 

As the coverage rate for large employers approaches 90 percent, 

firms with fewer than 50 employees have coverage rates just shy 

of 50 percent. The reason: Small firms pay as much as 30 percent 

more for policies similar to those used in big corporate entities. 

While large corporations have an easy time accessing quality, affordable health care, small businesses, the drivers of our economy, 

are not as fortunate. 

Today we are here to discuss some possible solutions for this 

growing crisis in the small business sector. I want to ensure that 

any reforms in our health care system do more good than harm. 

Everyone benefits when more Americans can obtain quality 

health care coverage. President Bush as been looking at ways to 

use the tax code to encourage more people to purchase health insurance. 

3

The problem with many of his proposals, that while they may 

help a few, the adverse effects on the rest of the market will only 

exacerbate the problem. We should actually see the number of uninsured and underinsured in this country increase with some of 

these reforms. 

One of the proposals that we will look at today is expanding the 

tax benefits for health savings accounts or HSA’s, as they were created as part of the Medicare bill last year. 

These accounts already offer a tremendous tax advantageous for 

wealthy individuals who can now put thousands of pretax dollars 

away for medical expenses. President Bush’s Fiscal Year 2005 

budget calls for increasing the tax advantages of HSA’s by allowing 

individuals to deduct their health insurance premiums. 

While this change may provide an additional health care option 

for a few small businesses, we must look at the bigger picture: The 

impact on the rest of the health insurance market. 

While some argue that HSA’s increase the available options for 

small businesses, these health insurance reforms do not operate in 

a vacuum. The expansion of HSA’s could have the effect of separating groups of employees into healthy and sick insurance pools. 

This could drive up costs for those in the traditional insurance 

market and could devastate some small businesses, particularly 

those with older and less healthy work forces. 

The resulting price hikes from this adverse selection may lead 

employers to stop offering comprehensive coverage or to raise the 

share of premiums that employees pay, only creating additional 

barriers to accessing health care. 

It is also of concern that those in the higher tax brackets reap 

the majority of benefits from these proposals and while I agree 

something needs to be done, we must target those groups particularly low income workers, who are most likely to lack health care 

coverage. 

I believe the tax incentives like small employer tax credits, if 

used properly, can help reduce the number of uninsured in this 

country. Many small businesses which currently do not offer health 

insurance could easily be enticed to start doing so with the proper 

fiscal tools. 

If we continue to take a piecemeal approach to this issue, it will 

not tackle the underlying problem: The inability of small businesses to afford health care. Congress needs to create a system in 

which small business owners, their employees and their families do 

not live in constant fear of just being one illness away from bankruptcy. 

After all, small businesses are this nation’s main job creator. It 

is disconcerting to think they are left without health care options 

and piece of mind, even though they are the backbone of the American economy. 

Thank you, Mr. Chairman. I look forward to hearing the testimony of Congressman Crane and our other panelists today. 

Chairman AKIN. Thank you, Congressman. Congressman Crane, 

thank you so much for joining us and for providing a prospective 

on your own piece of legislation, which originally I thought of when 

I heard about medical savings accounts, I thought that was part of 

4

it. It seems like you are adding a piece that maybe seemed like it 

was missing. Would you please proceed? 

STATEMENT OF THE HONORABLE PHILIP M. CRANE, U.S. 

HOUSE OF REPRESENTATIVES (IL-8) 

Mr. CRANE. Thank you very much, Mr. Chairman. Also, Tom, I 

served with your distinguished uncle and it was a privilege. Mo 

was your uncle, right or is your uncle? 

Mr. UDALL. Yes, he is my uncle. 

Mr. CRANE. Yes, indeed. I had the honor of serving with him. 

I appreciate the opportunity to be here today to discuss my new 

legislation to help uninsured small business employees and owners. 

Just this month alone over 30 members of Congress joined me in 

introducing H.R. 3901, The HSA’s for the Uninsured Act of 2004, 

which I believe will benefit millions of Americans who are struggling with the high cost of health insurance. 

Under current law, health savings account must be purchased in 

conjunction with a qualified high deductible health plan. Our new 

bill, The HSA’s for the Uninsured Act, allows an individual to deduct 100 percent of the premium of his or her high deductible 

health insurance, if bought in conjunction with a new health savings account. It is an above-the-line deduction for people who do 

not have health coverage through their employer. 

H.R. 3901 will promote the use of health savings accounts 

throughout the country and is one of President Bush’s top priorities. The premise for this bill is simple: By reducing the cost of 

health insurance for individuals, more people will be able to afford 

it. 

Before I describe to you the benefits of my new bill, I first want 

to talk a little bit about HSA’s. Health savings accounts work like 

an IRA. A person can contribute to a health savings account on a 

tax free basis. The account grows tax free and funds in the account 

can be withdrawn tax free for medical expenses. 

Many of you are familiar with medical savings accounts, the 

predecessor of the health savings account, which began as a limited 

demonstration project in 1996. HSA’s are a significant improvement over the old medical savings accounts, because they are available to absolutely everyone that wants one. 

Medical savings accounts had a number of restrictions that prevented their use from becoming more widespread. MSA’s were very 

successful at making health insurance more affordable for selected 

individuals. 

According to the last report of the U.S. Treasury, 73 percent of 

all MSA buyers were previously uninsured and at the end of 2003, 

MSA policyholders saved about $150 million in their accounts. 

M.S.A.’s provided the majority of its policyholders with health 

coverage they couldn’t find anywhere else and savings to spend on 

future medical expenses. 

Because the medical savings account program was scheduled to 

sunset in December, 2003, Congress acted last year to create the 

next generation of MSA plans. On December 8, 2003, legislation 

creating health savings accounts was signed into law by President 

Bush and people have already begun to purchase health savings accounts. 

5

The basic idea behind these accounts is to let people put their 

own money away for their future health care needs. HSA’s are completely portable and can be used for any health care expense, such 

as prescription drugs or doctor visits. 

Under current law, a health savings account must be purchased 

in conjunction with a qualified high deductible health plan. High 

deductible health plans are considerably less expensive than traditional health insurance. 

The premise behind this requirement is for individuals to use 

their health savings accounts for their small medical bills, like routine doctor visits. The high deductible health insurance is used for 

big medical bills, like hospital stays. 

Because people get to keep what they don’t spend from their account, they will have an incentive to ask for the price before care 

and check their bill after care to make sure they haven’t been overcharged. 

Let me explain to you why HSA’s are so important for all Americans. Most insured Americans will see an estimated 13 percent increase in their health insurance premiums. This increase follows 

several consecutive years of double digit increases. 

These rising costs are driving people out of the health insurance 

market. Currently there are more than 43 million Americans without any health insurance at all. One piece of legislation isn’t going 

to solve this problem. 

There isn’t a simple answer, but there is a necessity to take multiple steps now. One of the most important steps Congress can take 

right now to make health coverage more affordable is to make 

health savings accounts more accessible and that is what my legislation does. 

H.R. 3901 is the first step toward tax fairness in our health insurance system. All members in Congress, all of our staff and probably most of the people watching this hearing get their health insurance tax free. 

Currently, health insurance is tax free to the employer and tax 

free to the employee. Tax free benefits for health insurance date 

back to the 1940’s and 1950’s. In 1943, the IRS ruled that employer 

provided health insurance was tax free and in 1954, Congress codified that ruling. That has enabled hundreds of millions of families 

to have health coverage over the years. 

As we all know, the economy changes and as a result, the way 

in which people buy health insurance changes. For the most part, 

Congress has kept up with this trend. 

A few years ago, Congress gave self-employed individuals full deductibility of their health insurance premiums, but our tax policy 

still leaves the individual purchaser out of the system. 

Many of us in Congress have constituents who work for small 

employers who can’t provide health insurance, because of the high 

cost. Our constituents may be waitresses in diners, workers in a 

dry cleaning store, widows who go back to work as temporary 

workers or seasonal workers in the service sector. 

None of these workers are eligible for tax breaks for health insurance. It is unfair that some people get tax breaks and some 

don’t, all dependent on whether their employer can offer health insurance, yet it has been our tax policy for 60 years. 

6

The HSA’s for The Uninsured Act takes the first step towards 

providing fairness in our health insurance system by giving a tax 

break to individuals who purchase health insurance on their own. 

In a perfect world with an unending supply of revenue, I would 

like individuals who buy any type of policy to get it tax free, but 

with limited revenue, I believe we must start somewhere. We have 

to target the population who needs help the most, uninsured working Americans who have to buy their own health coverage. 

My legislation, The HSA’s for The Uninsured Act, does just that, 

while also fostering savings for the future. Thank you and I now 

would be happy to try and respond to any questions you might 

have. 

[Representative Crane’s statement may be found in the appendix.] 

Chairman AKIN. I really appreciate your stopping as I said and 

talking to us about your legislation. First of all, I think the minority member mentioned his concern with the people who are on the 

lower end of the economic spectrum and their accessibility to 

health care. I think you are addressing his question to some degree, aren’t you, by making it tax deductible for people to purchase 

their own? 

Mr. CRANE. Right. 

Chairman AKIN. It is what we used to call a major medical policy 

or something like that, is that correct? 

Mr. CRANE. Yes, indeed. 

Chairman AKIN. You said though that in some way it is limited, 

because we couldn’t afford to do it for literally everybody. I don’t 

understand. 

Mr. CRANE. It is limited in that it is catastrophic coverage. 

Chairman AKIN. Okay. Only in that? 

Mr. CRANE. Right. 

Chairman AKIN. Currently——

Mr. CRANE [CONTINUING]And that is because of the premium cost. 

If you go beyond that and the administration has estimated the 

cost I think at 24.7 billion over ten years. 

Chairman AKIN. One of the things that is always helpful for me 

in legislation is do sort of a before and after scenario. The before 

scenario, let us say that I am a waiter at a little restaurant, Joe’s 

Truck Stop or whatever it is. It is a part-time job and they are not 

offering me health insurance at that establishment. 

The way it is right now, the only thing that I can do is just go 

out in the private market and buy a major medical policy, is that 

right? 

Mr. CRANE. Right. 

Chairman AKIN. If I do that, there is no tax break on that at all, 

is that correct? 

Mr. CRANE. No. 

Chairman AKIN. Currently, as a member of Congress, my medical insurance is provided as part of my job and that is a pretax 

benefit, isn’t it? 

Mr. CRANE. By your employer. 

Chairman AKIN. Or by the employer, right? 

Mr. CRANE. Yes. 

7

Chairman AKIN. Or if I work for General Motors, General Motors 

pays for an employee and that is all pretax dollars, right? 

Mr. CRANE. Right. 

Chairman AKIN. So basically we have set up a system where the 

people working for the big guys get a pretax or there is no tax on 

their medical, whereas the guy at Joe’s Truck Stop doesn’t have 

that benefit, is that right? 

Mr. CRANE. Yes. 

Chairman AKIN. Does your legislation create a more level playing 

field by allowing the guy at Joe’s Truck Stop also to deduct his policy? 

Mr. CRANE. To deduct his policy? 

Chairman AKIN. To deduct the cost of the policy so that it is 

pretax dollars. 

Mr. CRANE. Yes, right. 

Chairman AKIN. Basically what you are doing is something that 

is a matter of justice, isn’t it? People are being equal before the law 

in a sense. 

Mr. CRANE. It is expanding the opportunity for coverage to many 

millions literally of folks out there———. 

Chairman AKIN. And the people who are most likely to be uninsured are going to be the people who are in that type of category, 

aren’t they? 

Mr. CRANE. Exactly. 

Chairman AKIN. What you are doing is really a very important 

building block to add to or to supplement or compliment the medical savings accounts that we have already enacted into law. 

Mr. CRANE. Yes, indeed. It is something that is not Republican, 

not Democrat. It is something I think in the interests of all of us 

to try and make that outreach to help those who are in lower income brackets especially and have no coverage and are at that kind 

of risk to give them an incentive to get into a health savings account and to then take out their deductible insurance coverage. 

Chairman AKIN. Is there any problem with insurance companies 

offering this kind of insurance? I remember before some of the insurance companies said, but it is hard to buy that kind of major 

medical policy anymore. Will that be available do you believe? 

Mr. CRANE. I am sure. I think it is available right now. 

Chairman AKIN. Okay. I had heard that the availability was a 

little bit spotty, but I don’t know if that was more of an excuse or 

whether that was true or not. As far as you know, that type of coverage would still be available? 

Mr. CRANE. This kind of legislation would greatly expand that 

opportunity out there. 

Chairman AKIN. If I were sort of the typical 25-year-old working 

at Joe’s Truck Stop, I am pretty much invulnerable. I haven’t been 

to a doctor in ten years and I won’t get sick and I won’t get old 

and so I might not have a lot of incentive to get a medical policy, 

but if I can get one without having to use pretax dollars to buy it, 

there is at least some economic incentive to do that, right? 

Mr. CRANE. There is also an economic incentive to take that 

health savings account out, because that money accumulates tax 

free and you can roll it over from year-to-year and build up that 

account. 

8

Chairman AKIN. Joe’s Truck Stop doesn’t have a whole lot of 

extra money they are making, but it is a good guy that runs it. If 

he wanted to help a little bit, could he then partner with the employee and also purchase insurance or something like that? 

Mr. CRANE. I am not sure what you mean by partner. 

Chairman AKIN. Let us say that——

Mr. CRANE. He can———. 

Chairman AKIN [CONTINUING]The major medical policy is going to 

cost me $2,000 for the year and I work for Joe’s Truck Stop. Could 

the boss pay 1,000 and I pay 1,000 toward that? Is that something 

that would work? 

Mr. CRANE. If he gives it to you. I think he has to give it to you 

as an individual, doesn’t he? To the individual. 

Chairman AKIN. Okay. So they could give me 1,000 and say, this 

would be 1,000 toward buying some insurance. 

Mr. CRANE. Yes, right. 

Chairman AKIN. You put a 1,000 of your own in or something 

like that. 

Mr. CRANE. Yes. 

Chairman AKIN. It allows a lot of flexibility then? 

Mr. CRANE. Yes. 

Chairman AKIN. Thank you very much, Congressman. 

Mr. CRANE. Thank you. 

Chairman AKIN. I think you answered my questions. No additional questions. 

Mr. CRANE. All right. Thank you very much and I trust I can 

look forward to getting you both as co-sponsors ASAP. 

Chairman AKIN. I bet you I am already a co-sponsor. 

Mr. CRANE. That is right. You are. Thank you. Well, I need you, 

Tom, on board. 

Chairman AKIN. Thank you very much. You said that your 

schedule doesn’t permit you to join us on the panel? 

Mr. CRANE. No, unfortunately. 

Chairman AKIN. I just wanted to extend the invitation. Thank 

you. 

I think we will now go ahead to proceed to our panel two. If the 

panel two witnesses would come forward. I think we will get some 

name tags up there for you and we will get started. [Whereupon, 

a short recess was taken.] 

Chairman AKIN. Welcome to everybody here on our second panel. 

I see looking down the list that a couple of you have traveled from 

some distance so we are very thankful for your taking time out of 

your schedules. 

I know everybody has busy schedules and I think that is the case 

of Victoria Braden. It looks like you are hailing from Georgia, if I 

am not mistaken and you have your own small business, as I understand and also connected with women owned businesses. 

I think what we will do in terms of procedurally, we are going 

to let each of you make a five-minute statement. I think you have 

probably been briefed on that ahead of time. 

Then after you have made your statements, we will have a 

chance to interact and ask some questions. If you would proceed, 

Victoria, please. 

9

STATEMENT OF VICTORIA BRADEN, BRADEN BENEFITS 

STRATEGIES 

Ms. BRADEN. Mr. Chairman, members of the Subcommittee, I am 

Victoria Braden, President of Braden Benefit Strategies located in 

Norcross, Georgia. 

My company specializes in designing and implementing employee 

benefit plans for small businesses. I am pleased to appear before 

you as a member of Women Impacting Public Policy, a national bipartisan public policy organization representing 500,000 women in 

business. 

The subject of today’s hearing, the benefits of health savings accounts, is one I am passionate about. I deal with the issue of employee benefits health insurance all day, every day. 

As this Subcommittee knows, health benefits to employees, particularly in small companies, is one that is vital to the future of 

this nation’s economic growth. Women Impacting Public Policy 

commissioned a bipartisan poll of women business owners nationwide in December. 

Only one in five businesses offer fully paid health insurance coverage. When asked why they do not provide coverage, the majority 

said it was too expensive to offer. 

Women business owners were asked what would cause them to 

close their businesses in the next five years. The number one reason, rising cost, was further defined as health insurance costs. 

Here is what one of my customers, David Carr, CFO of W.H. 

Bass and Company had to say about offering health insurance. 

‘‘Every year, just after we renew our health insurance and then 

sporadically throughout the year, I find myself thinking, what are 

we going to do next year? We continue to tweak the benefits to 

keep the cost affordable, but at what point are we no longer going 

to be able to make adjustments and then find our health insurance 

unaffordable either to the company or to the employees or both?’’

David’s remarks articulate the struggle that many small businesses face with regard to health insurance coverage. One of the 

bright lights in this rather dismal picture I believe is the establishment of health savings accounts. It builds on a fundamental principle that employees should share in making decisions about their 

health care, as opposed to relying on their employers and insurance 

companies to make those decisions for them. 

I would like to offer two examples of how health savings accounts 

will assist my clients in providing better health care coverage and 

reduced insurance rates. 

My first example is Rhodes Young Black and Duncan, a CPA 

firm with 14 employees. The firm pays 99 percent of the employee 

cost of the health insurance the employees pay 100 percent of the 

dependent cost. Braden Benefits has worked with this business 

since 2000, when the cost for the employee health insurance was 

$202 and the cost to the family insurance was $421. 

In 2004, Rhodes Young Black and Duncan health insurance plan 

offered $30 office visit co-pays versus a $10 office visit co-pay in 

2000 and a $1,500 deductible instead of a $500 deductible. 

In addition, in-network and out-of-network costs have shifted 

dramatically to the employee. The cost of the current plan is $283 

10

per employee and $842 per family. For the employer, the cost per 

employee has risen 40 percent and the cost per family has doubled. 

At the renewal, we determined that eliminating the doctor office 

co-pay all together and placing all doctor office charges toward the 

deductible would save between 12 and 24 percent in premium. 

With these savings, the company plans to fund the health savings account for each employee. The employees will have less exposure than they currently have, because that $1,500 deductible must 

be paid as an out-of-pocket expense. 

With the health savings option, the plans will be available to 

their account, which is tax free and allows them to roll over the 

money they do not spend year-to-year. 

My second example is Johnson Wholesale Floor, an Atlanta 

based company with 112 employees, 75 percent of which are blue 

collar work force. 

The company has been in business for 40 years, is a solid stable 

company, with branch offices in Florida, Tennessee and Alabama. 

The situation at this company is that their insurance carrier 

year-after-year pays out more in medical claims than they take in 

in premium. Every year the company receives a maximum amount 

of premium increase. Consequently, the company now has a $1,500 

deductible. 

As benefit providers, we anxiously await the availability of 

health savings accounts for Johnson Wholesale Floor, knowing that 

a HSA will prepare the employees for the expense should he or she 

need to use the $1,500 deductible. Currently it is a completely outof-packet, after tax expense to the employee. 

As costs are increasingly shifted from employer to employee, the 

availability of a health savings account will help employees make 

wise health care choices by allowing them to choose to spend their 

health care dollars. 

More importantly, HSA products protect employees that do not 

currently have availability to pay a deductible, should the employer 

participate in funding the account. 

H.S.A.’s are a wise tool for employers to use for the following reasons: First, the majority of employers that we work with are concerned when the increase costs that their employees bear and are 

looking for alternatives. The HSA provides one of those alternatives. 

Second, the HSA allows employees to accumulate health care dollars over a number of years to utilize at times when they need the 

health care dollars. 

Let me shift to some of the challenges we face in the commercial 

market at bringing HSA’s to our clients. We can’t get product. We 

need clarification from the Treasury Department on several key 

points that are restraining the carriers from creating and filing 

products. 

What is and is not considered preventative? Can wellness visits 

have a co-pay? Are prescriptions considered wellness? Can prescriptions have a co-pay and be within the confines of the law? Until 

we have clarification, carriers cannot develop product. Therefore, 

we do not have anything to offer companies, at least from the A 

carriers. 

11

Can flexible spending accounts be used with an HSA? If an employee elects an HSA for their employee health coverage, do they 

forfeit their participation in the flexible spending account? If the 

employee cannot participate in both funds, what effect does this 

have on the discrimination testing? 

Answers to these questions will expedite the offering of the 

health savings products, a very positive addition to the health insurance benefit offerings. 

In closing, let me just say that the responsible employers do not 

want to eliminate the doctor visit co-pays, eliminate prescription 

co-pays and leave the employee and their family without a means 

to afford health insurance. 

They want to provide health insurance to their employees. At the 

same time, they struggle to get health insurance costs under control. 

I believe HSA’s used proactively to promote options to businesses 

and their employees gives both the employers and the employees 

new options which will have a positive effect on small businesses. 

Thank you, Mr. Chairman. 

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

Chairman AKIN. Thank you, Victoria. I appreciate your comments. 

Our next witness is Kate Sullivan, U.S. Chamber of Commerce 

and coming from D.C. here. 

Ms. SULLIVAN. Yes. 

Chairman AKIN. Kate, thank you so much for joining us. 

STATEMENT OF KATE SULLIVAN, U.S. CHAMBER OF 

COMMERCE 

Ms. SULLIVAN. Thank you. We are very pleased to be here this 

morning. The Chamber is the world’s largest business federation, 

representing over three million employers of all sizes and all sectors all around the country, around the world. 

President Bush spoke this week at the Chamber about what 

HSA’s have done for small businesses and we had several small 

business owners there explaining how this has helped them save 

money and to do more for their employees. 

As an aside, he also spoke about association health plans and the 

need to get this enacted by the Senate this year. 

We have advocated for a number of years that all Americans 

have health coverage through an appropriate mix of market reforms, public financing and a meaningful safety net. 

Everyone in this country, whether privately covered, publicly 

subsidized or uninsured also has the right to expect that our health 

system has at its root the best possible quality with uncompromising standards of safety. 

An ideal health system involves many elements that must work 

together, such as private sector choices, effective us of the tax code 

and greater use of information. 

Enacting last year of health savings accounts came at a critical 

time for America’s employers and working families. There is much 

they offer, not only for small business, but for workers at any point 

in their lives, particularly those times when they are not working. 

12

Healthy market competition will help lower health care costs and 

improve our health system. The insurance market, particularly for 

small businesses, has largely stagnated over the last five years. 

We have found that this lack of competition stems from state 

mandates on health plans, which have taken away health plan’s 

ability to differentiate themselves in the marketplace and compete 

for customers by offering benefits tailored to meet their needs. 

Health savings accounts hold the promise of reviving the largely 

abundant, but costly small business insurance market. While a 

number of larger employers have experimented with so-called consumer driven health plans, made possible by health reimbursement 

arrangements, non-discrimination compensation testing has largely 

prohibited the availability of this plan design for small businesses 

and partnership arrangements. 

H.S.A.’s offer a number of advantages for employees. First, the 

account is held exclusively by the taxpayer, rather than the employer. Employers may contribute to the HSA, to the account itself, 

as well as to the insurance premiums, which ease concerns for 

younger or less affluent workers about funding their deductibles. 

As with other compensation requirements, employer contributions must be made fairly across the employee base and HIPAA 

compliance with require that contributions not vary based on an 

employee’s health status. 

Many small businesses were already forced to adopt higher deductible health plans as insurance costs nearly doubled over the 

last five years and insurers specializing in these kinds of health 

plans have entered stated, will now come into states where they 

have once done business, but left, because of the over regulation in 

some of those markets. 

We will also see traditional insurers also offer HSA products in 

an effort to hang on to their small business customers. 

This is great news for small business owners, because they really 

do desperately need that competition for their many substantial 

dollars that they are spending this way. 

They also offer a pretax mechanism for those who are paying for 

insurance when the account holder does not have work place coverage. This is the first time the tax code has operated in this way. 

Premiums must be paid from HSA balances, though annual contributions are still restricted to the amount of the annual deductible. 

Greater tax code changes must be made. President Bush and 

Congressman Crane, as we just heard, have put forth important 

proposals toward this goal and we support that legislation. 

Providing tax code parity for the millions of taxpayers who acquire their own coverage in the individual market has been a longtime priority of ours and it will continue to be a greater need for 

more Americans. 

More retirees do not have access to that coverage and we have 

people in their 20’s who are not working because they are pursuing 

higher education later in life. 

We need to make this tax code parity greater across the board 

and we shouldn’t restrict ourselves just to premium deductions for 

HSA’s. We need to do more for low income individuals through 

13

vouchers or tax credits, to help those who do not pay taxes, but still 

need to pay premiums on their own. 

My full statement goes through some of the other issues in the 

tax code that can help benefit both health savings accounts and 

other forms of health coverage and that is available in the back of 

the room. 

In summary, we also recognize there is a much greater need for 

information about our health system, the best quality doctors and 

the prices that providers pay. 

Large employers have been working very hard to make that information available and the Medicare law enacted last year will 

provide additional incentives to hospitals to disclose more information about how they treat patients. 

Critics of market place health care solutions are working hard to 

convince policymakers that the widespread use of HSA’s and health 

insurance tax incentives that are aimed at individuals will undermine the employer based health system. 

In fact, the real thing that is going to undermine the system is 

cost in this system. We need to do better, in terms of bringing 

down that cost and empowering individuals to take control of their 

health care dollar. 

No longer can employers allow the money to go into health insurance premiums that should go in to paychecks and we need to get 

that money returned to individuals, both for their health care dollars and for all the other consumer needs that they have. I look forward to discussing this with you more and questions and answers. 

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

Chairman AKIN. Thank you very much for your testimony, Kate. 

Our next witness is David Alders, coming all the way from 

Texas. I understand, David, that you are a small business owner 

yourself. 

Mr. ALDERS. That is correct. 

Chairman AKIN. If you would proceed, thank you. 

STATEMENT OF DAVID ALDERS, CARIZO CREEK CORP. 

Mr. ALDERS. Thank you. Mr. Chairman and members of the Subcommittee, it is a distinct privilege to be with you today to testify 

on one of the critically important issues facing almost every American family, including my own: That of access to quality, affordable 

health care. 

My name is David Alders and I am the owner of a small diversified agribusiness enterprise in Nacogdoches, Texas. 

I am here today also representing the National Association for 

the Self-Employed and its 250,000 member businesses, representing well over a half million individuals across America. 

The NASE represents the smallest of America’s small businesses, 

those which often are in the process of being bootstrapped by owners whose vision and ambition outstrip their capital or credit, but 

who enthusiastically incubate the American dream and who collectively are a major force for job creation in our economy. 

Because our businesses often are so thinly capitalized, ours is a 

sector which perhaps is most squeezed by America’s health care 

cost crisis. 

14

Census data indicate that of the approximately 43 million Americans without health insurance, 62 percent are from families in 

which the household head is either self-employed or working for a 

company with fewer than 100 employees. 

The reason this group disproportionately neglects to secure 

health care coverage is easily understood. On average, workers in 

firms with fewer than ten employees pay 18 percent more for 

health coverage than those who work in larger firms and as Representative Udall noted earlier, perhaps that number actually now 

is significantly higher. 

We at the NASE are convinced that America is blessed with the 

finest health care system in the world and that it is so blessed because of and not in spite of its reliance on market forces. 

While we don’t believe market mechanisms with eliminate every 

unfortunate human experience in the delivery of health care, we do 

believe they will produce better outcomes than those of centralized 

government mechanisms. 

Market based reforms begin with more neutral tax treatment of 

health insurance purchasing options, insurance options which emphasize protection against major risks and deregulation of health 

care suppliers. 

Instead of more regulation and litigation, such reform underscores the primacy of voluntary contracts and market prices. 

In short, the ultimate market based reform is to guarantee that 

the health care consumer is also the health care billing watchdog. 

Health savings accounts, coupled with high deductible health insurance plans, work splendidly to accomplish this basic measure of 

market accountability. 

My business has taken this approach for several years, maintaining adequate coverage due chiefly to ever escalating deductible 

thresholds. 

Health savings accounts now offer me the opportunity to set 

aside pretax dollars to fund care which is relatively minor or merely palliative and gives me the incentive to carefully question 

whether I need to access the system at all, a question which a 

meaningless $10 co-pay in a conventional plan will always lead a 

consumer to answer in the affirmative. 

To further enhance the appeal of HSA’s, we strongly support the 

passage of H.R. 3901, which as Representative Crane noted, would 

allow individuals who purchase high deductible insurance policies 

and who also fund HSA’s to deduct the value of those premiums 

from their income taxes. 

Of course, H.R. 3901 applies only to those taking advantage of 

HSA’s and we believe this disparity in the tax code ought to be 

remedied and removed, regardless of whether a small business 

owner funds an HSA. 

H.R. 1873, the Self-Employed Health Care Affordability Act, 

would allow the self-employed to fully deduct their health insurance premiums and thereby achieve parity with corporations, 

which provide their employees’ health care coverage and expense 

the cost thereof. 

Heretofore, the self-employed and small business owners have 

been discriminated against by having to purchase their health care 

15

coverage with after tax dollars and by in effect having to pay the 

self-employed payroll taxes on their health insurance premiums. 

Starting and expanding a competitive small business is difficult 

enough without having to pay an additional 15.3 percent on one’s 

insurance premiums. 

Our members would greatly appreciate your support of both 

these important pieces of legislation. 

We are not under the illusion that tax code changes and the creation of HSA’s alone will constitute a silver bullet, which will solve 

America’s health care cost crisis, but they are a welcome step toward consumer driven health care. 

The Galen Institute brought to Capitol Hill last month six of the 

leading vendors of health reimbursement arrangements, such as 

MSA’s or now HSA’s. The experience of these vendors is that people who utilize these vehicles tend to be older and slightly sicker 

than those who do not, but they also tend to make much better use 

of preventive services, use generic drugs much more, use hospital 

ER’s much less, access supportive services like nurse hot lines 

much more and generally have been holding down costs significantly. 

In short, the market works when given a chance and people will 

spend their own money more wisely than they will spend someone 

else’s. 

I am grateful to all of you who are working to contain costs, 

while protecting the quality of our system. Preserving the world’s 

finest health care system is worth the effort and America’s employers and employees are counting on your success. Thank you. 

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

Chairman AKIN. Thank you very much for your comments, David 

and we will get back with questions in just a minute. 

Our next witness is Dan Perrin. I believe you are the Executive 

Director of the HSA Coalition. 

STATEMENT OF DANIEL B. PERRIN, HSA COALITION 

Mr. PERRIN. Thank you, Mr. Chairman and thank you Mr. Udall. 

On behalf of the HSA Coalition, we appreciate this opportunity and 

ask that my statement appear in the record as if read. 

Chairman AKIN. Without objection. 

Mr. PERRIN. Thank you. Mr. Chairman, the most consumer 

friendly type of health care is health care that is affordable and I 

thought it would be useful to go through an example of how that 

works with the health savings accounts. 

Essentially what you are doing is you are refinancing your health 

care. You are taking a lot of money that both the employer and the 

employee spend and you are rearranging the way you spend it. 

Part of it goes towards a major medical insurance policy, which 

costs a lot less and then what is left over goes into an account from 

which you draw down. 

What happens is that then creates a behavioral change in the 

consumer, which is a lot like the difference between going to a restaurant where you are on an expense account versus going to the 

same restaurant when you are paying yourself. Your choices on the 

menu vary greatly. 

16

If we move to Exhibit A, basically the average monthly premium, 

according to Kaiser Family Foundation, in 2003 for the United 

States was $755 a month, which is $9,068. That is both employer 

and employee money. 

Taking an example for a 40 to 49-year-old out of Florida, in the 

individual insurance market, that premium is $235 or $34 a month 

now in Florida, which is a total of $2,800 in rough numbers a year. 

If you then take $5,150, which is the amount of that deductible 

and you put it in a bank account, you have a total expenditure of 

roughly $8,000. You started with 9,100, which is the average. 

Fully funding the health savings account leaves you with an expenditure of $8,000, to be divided up between employer and employee as they see fit. You save a grand, in this example 1,100 and 

you have effectively given the employee first dollar coverage, because they spend that money to get to their deductible. 

The second example in terms of the bigger picture in how this 

works and what we have been through in the United States with 

double digit health insurance cost increases, especially over the last 

five years, is this chart from the Joint Economic Committee, which 

is Exhibit B of my testimony. 

Basically the story that it tells is pretty clear. It essentially says 

that since 1960, the out-of-pocket percentage of expenditures, in 

terms of what the actual consumer is spending, has dropped and 

inversely, the cost per capita of health care has increased. It is a 

pretty clear picture. 

Health savings accounts will do simply this: It will decrease the 

total cost of health care by increasing the out-of-pocket or in this 

case the out of your health care savings accounts expenditure by 

consumers. 

Mr. Udall, I just wanted to note that your opening statement 

talked about the decreasing base of employer provided coverage. 

The baseline that we are working from today is that we are at 45 

percent. We were at 63 percent ten years ago. 

At the current rate of decline, we are going to be at 36 percent 

in five years and that cite from the Labor Department is on point 

three in Exhibit E. 

Finally, Mr. Chairman, I just wanted to go through quickly Exhibit C, which is the build-up of funds potentially under various expense time scenarios for a health savings account. 

The reason this is important is because people should be showing 

up at the doors of Medicare with cash, because we all understand 

that system is under increasing financial duress and this chart 

simply goes through some scenarios which may apply to certain 

people, depending on the amount of their deductible and how much 

money is deposited in their account a year, but the numbers are 

significant and it is a very important piece of this. 

Finally, let me just add the following: We have seen an explosion 

of insurance companies coming into this market. There are 30 insurers today offering. They are in every state. There are 12 more 

who have announced that in the next eight months they are going 

to be in some very large companies. 

Yesterday, for example, Blue Shield of California came into the 

market and in one case, a trustee who is a businessman who holds 

the account money for an individual who purchased the insurance 

17

from an insurer, who may not provide that account management 

service, said their business is doubling every month since January. 

When you compare it to the medical savings account start in 

1996, this is a dramatic and significant difference. Thank you, Mr. 

Chairman. 

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

Chairman AKIN. Thank you very much for your comments, Dan. 

Our last witness is Linda Blumberg, a Ph.D. from The Urban Institute, Washington, D.C.. Linda. 

STATEMENT OF LINDA J. BLUMBERG, THE URBAN INSTITUTE 

Ms. BLUMBERG. Mr. Chairman, Mr. Udall and members of the 

Subcommittee, thank you for this opportunity to testify on health 

savings accounts and H.R. 3901, a proposal to make premiums for 

the high deductible policies associated with HSA’s tax deductible. 

Reforms of the health insurance market have important implications for small businesses, which face special challenges in providing health insurance coverage to their workers. 

There are three main problems for small businesses: First, small 

firms face much larger administrative costs per worker than do 

large employers; second, insurers charge small firms higher risk 

premiums because of their greater year-to-year variability in medical expenses; third, the average worker in a small firm is paid significantly less than the average worker in a large firm. 

While there are mechanisms available for addressing the problems facing small businesses, HSA’s and the policy contained in 

H.R. 3901 are not among them. Instead, they will tend to increase 

administrative loads, reduce pooling of health care risk for workers 

in small firms and subsidize high income individuals much more 

than low income, low wage workers. 

The HSA provisions and the Medicare prescription drug legislation provide a generous tax incentive for certain individuals to seek 

out high deductible policies. Individuals and families buying these 

policies, either through their employers or independently in the private non-group insurance market can make tax deductible contributions of up to $2,600 per year in a HSA, $5,150 for a family. 

Money in the account and any earnings are tax free, if used to 

cover medical costs. 

These accounts provide the most advantage to high income people and those with low expected health expenses. The tax subsidy 

is of little or no value to those who do not owe income tax. Higher 

income individuals are also better able to cover the cost of a high 

deductible. 

Additionally, those who do not expect to have much in the way 

of health expenses will be attracted to HSA’s by the opportunity to 

accrue funds tax free that they can use for health care that is not 

covered by insurance. 

They can also be used effectively as an additional IRA, whose 

funds can be used without penalty after age 65. Young healthy individuals may even choose to use employer contributions to their 

HSA’s for current non-health related expenses, after paying a ten 

percent penalty and income taxes on the funds, a perk unavailable 

to those enrolled in traditional comprehensive insurance plans. 

18

H.S.A.’s will not address the high administrative costs of small 

employers. In fact, administrative loads are actually higher for 

high deductible policies since the many fixed administrative costs 

must be charged on the smaller level of benefits paid out and the 

tax subsidy under H.R. 3901 would also be worth more to those 

who need less assistance. 

More importantly, it would undermine the small employer market by increasing the incentive for individuals to purchase health 

insurance in the private non-group insurance market as opposed to 

acquiring it through employers. 

Low cost, high income purchasers equipped with yet another subsidy would be likely to find price advantages in the non-group insurance market, since most states allow non-group insurers to 

charge lower premiums for those in good health and to completely 

exclude from coverage those with current or past health problems. 

But as low cost purchasers leave the group market, the average 

cost of those staying in the group market will rise, making group 

insurance more difficult to afford for higher risk and low income individuals. 

In addition, since employers and key employees will be able to 

get tax breaks for their high deductible health insurance, even if 

it is not provided to other employees, there will be even less incentive for employers to take on the hassle, expense and risk of offering insurance to their workers. The net result could be less insurance coverage among small businesses. 

While the risk pooling available to small firms is low, compared 

to large firms, they are still afforded a greater degree of pooling 

than is the case in most states’ non-group markets. 

Administrative costs in the non-group market are also much 

higher than for small firm purchasers. Consequently, high cost and 

low income workers will be the big losers, as coverage shifts from 

the small group to the non-group market. 

High administrative costs, limited ability to spread health care 

risk and lower wages can be addressed in a variety of ways. These 

include providing mechanisms for small employers to purchase coverage in larger groups, thereby lowering administrative costs; 

broadly spreading the costs of high risk individuals across as large 

a segment of the population as possible, using public re-insurance 

mechanisms or other risk spreading tools; and providing subsidies 

to low wage, low income workers for the purchase of coverage. 

The Treasury Department estimates that allowing deductibility 

for individually purchased high deductible health insurance would 

reduce federal revenues by $25 billion over the next ten years, even 

though the net result could be a reduction in coverage. 

Funding approaches designed to address the problems faced by 

small employers would be federal money better spent. Thank you 

very much and I would be happy to answer any questions that you 

might have. 

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

Chairman AKIN. Thank you very much all of you for your testimony and we will proceed now I guess with the questions. Just because of the makeup that we have got, I will defer and let Mr. 

Udall, if you would like to go first with your questions it would be 

fine. 

19

Mr. UDALL. Thank you, Mr. Chairman. Let me ask Ms. Sullivan 

with the Chamber: Would you support a proposal that allows small 

businesses to buy into the Federal Employee Health Benefits Program to purchase insurance for their employees, a small employer 

health benefits plan? 

Ms. SULLIVAN. There are proposals like that and I think the way 

it is structured is that you don’t actually buy into the actual 

FEHBP but something administered by OPM that stands side-byside. 

I think federal employees and retirees have some concerns about 

allowing people who are excluded basically from the current insurance market to get into it. 

We have reservations about the proposal that was introduced in 

the Senate, because it is being administered by OPM, which really 

does not deal right now with the private market and it comes along 

with some requirements about cost sharing, how much the employer must contribute to these plans. 

We really believe that because health benefits are part of your 

overall compensation, that you need to really work within the industry and allow them to decide how much you need to pay in 

wages versus benefits. 

Clearly those who advocate such a proposal recognize two fundamental problems with limiting that kind of risk pooling only within 

a state. You have more small businesses that now operate across 

state lines. They are doing now what only could be done by very 

large corporations a few years ago. 

I think turning it exclusively over or providing some kind of market preference like that to a federally run plan then really would 

suck up everything that does allow the private market to work 

with individual small business owners to offer that proper mix of 

benefits and compensation. 

I would be happy to provide you with more extensive comments 

about these proposals. 

Mr. UDALL. Thank you. Ms. Blumberg, one of the things we always hear about MSA’s and HSA’s is that the result is adverse selection and separation of risk pools. Would the proposal we are 

looking at today increase the likelihood of adverse selection and 

could you describe if that is the case, how would that happen? 

Ms. BLUMBERG. I believe that would be the case with H.R. 3901. 

What the legislation does is creates an additional tax incentive for 

individuals to purchase their insurance coverage through the individual non-group market, as opposed to the group market. 

What we know about insurance markets is that there is a much 

greater degree of risk pooling, of bringing together individuals of 

different types of risk for purposes of determining insurance premiums, in group markets, as opposed to the non-group market. 

In the majority of states, what we see is regulations that will 

allow insurers in the non-group market to adjust premiums 

charged as a function of what an individual’s health status is. 

In fact, most states also allow insurers to actually exclude very 

high cost individuals or individuals they perceive as being high risk 

from coverage completely. 

What could happen as a consequence of this legislation, as we 

give more tax advantages to higher income people who are basiVerDate 0ct 09 2002 16:01 Aug 23, 2004 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\HEARINGS\93203.TXT MIKEA
20

cally healthy, to move into the non-group market, what happens is 

the residual people, the higher risk people, the lower income people 

who are left in the group market will see their premiums on average increasing as the healthy people are exiting. That is a pretty 

classic adverse selection dynamic. 

Over time, the premiums could escalate substantially in the 

group markets and these individuals who are left would have a 

hard time getting a group policy or comprehensive policy after that. 

Mr. UDALL. One of the things that you mention in your written 

testimony on page two is you say only 39 percent of establishments 

in firms of fewer than ten workers offer health insurance to any 

of their workers, compared to 99 percent of establishments in firms 

of 1,000 or more workers. 

It seems to me in looking at this that our problem is trying to 

get health insurance coverage to smaller firms and that that is 

where we are having this problem with insurance. 

Would you comment on that and on those figures that you laid 

out there and where you see the real problem today in terms of the 

uninsured and underinsured? 

Ms. BLUMBERG. Sure. What you said is true, that there is obviously a much lower rate of insurance coverage being offered among 

small firms and for very good reasons I would say, because of the 

high administrative loads that they face compared to bigger firms, 

because they don’t have as much ability to spread risk as larger 

firms, even though they can spread risk better than is true in the 

individual market. 

Small firms’ workers have lower wages on average, than do large 

firms’ workers. Economists believe that individual workers are actually paying for the full premium, because their employers will 

pay them less cash wages in order to compensate for the cost that 

they are paying in benefits, as opposed to wages. When you have 

got a lower wage work force, there is less room to pass those costs 

back in lower wages. 

One could look at it as you did, that the problem is figuring out 

how to get more coverage in the small employer market and there 

are mechanisms I believe for doing that, but I think you could also 

ask whether structurally if the small group market is the place to 

actually rely upon to increase coverage. 

If we decide that the answer is no, that that is not the best place, 

then what we need to do is create a structure that is conducive to 

the workers and their dependents who are associated with small 

firms, to purchase coverage. But the current non-group insurance 

market is just not efficient, it is not effective, it is not as equitable 

in terms of the risk pooling that is available, for us to rely upon 

it for a widespread increase in insurance coverage. 

I would say if you are going to move away from looking at small 

employers as the base, then you need to build something to replace 

it in the current private non-group market I would say is not it. 

Mr. UDALL. Thank you very much and I thank all of the panel 

for their testimony. Mr. Chairman. 

Chairman AKIN. Thank you, Mr. Udall. 

Also, we have been joined by my good friend, Congressman Ed 

Case. Ed, did you want to offer any questions to the witnesses? 

21

Mr. CASE. Thank you, Mr. Chairman. Mr. Alders, I was intrigued 

by your testimony, because you represent a lot of the businesses in 

my district and I suspect a lot of smaller rural oriented districts 

across the country. 

My businesses are small mom and pop operations, husband and 

wife teams, sole proprietorships running small scale agriculture, 

small scale tourism, T-shirt shops, sole proprietor realtors, et 

cetera, et cetera. I think that is what you represent. 

Mr. ALDERS. Yes, it is. 

Mr. CASE. This may be a little bit of a tough question, but can 

you give me your reaction, from your real world experience, to Dr. 

Blumberg’s testimony? I am asking you to do that, because I take 

her concerns seriously. 

Will in fact health savings accounts or medical savings accounts, 

more control over individual contribution and spending decisions by 

businesses, cause adverse selection? Will it increase administrative 

costs? Does it disproportionately impact higher income people? 

The business owners that I know that are in your category are 

not the high end of the income earners of our country. Just tell me 

what you thought as you listened to her testimony. What was ringing true and what was not? 

Mr. ALDERS. I don’t consider my peers in relatively small agricultural operations to be high income either and I think they are the 

kinds of people who in our country have to face the decision of 

what they are going to do about health care. Are they going to insure at all and if so, what can they afford to insure against? 

I will say that my partner here on the panel, Dan, has probably 

thought through those arguments to a far greater degree than I 

have, but from my personal experience, I believe that the closer the 

health care consumer, regardless of his income level, the closer he 

is to the health care bill, the more he scrutinizes how much his access of a system is going to cost and the more he has skin in that 

game, so to speak, the wiser are going to be his choices, his decisions. I don’t know. Even incremental steps toward that I think 

would be very healthy. 

Just to give you a personal anecdote, a week ago one of my eight 

children split his head open on a rock and so I had cosmetic medical work that had to be done. I called a friend in my community, 

a surgeon and met him at his office and I bypassed the ER system, 

because of the cost that I knew I would incur there, several hundred dollars in medical expenses versus maybe a hundred or $200 

visiting my friend’s office after hours and we got Sam’s head 

stitched up appropriately. 

Because I have a high deductible policy and because those costs 

I knew were going to come out of my pocket regardless of what 

they were, if they were 2,000 they were coming out of my pocket, 

if they were 200 they were coming out of my pocket, but I went 

with a lower cost alternative that was even preferable, because I 

knew the guy who was going to be doing the stitching. 

I think if you empower consumers they are going to make smarter choices. We see that in every other realm of American business. 

I don’t know that my employee can afford a $5,000 family deductible policy, like I do. In fact in the past year he has had an exVerDate 0ct 09 2002 16:01 Aug 23, 2004 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 G:\HEARINGS\93203.TXT MIKEA
22

tended hospital stay and he has an $11,000 medical bill that he is 

paying out just a few dollars every month. 

I couldn’t afford to purchase health care insurance for him. I do 

give him a higher salary so that he can make that choice. He can 

choose what he wants to do. He chooses not to be insured and his 

children have been covered under the Texas CHIPS program. 

That $11,000 bill is a bill he is going to have for many, many 

years and I would be happy to contribute. Instead of paying him 

the salary I do, take two or $3,000, a couple thousand dollars a 

year and fund an HSA. I mean he would have $4,000 there since 

his beginning of employment with me, if HSA’s predated what they 

did and he would be able to meet some of those medical expenses 

through that HSA and he could afford that high deductible policy 

with an HSA. 

My personal experience is that I think if a consumer is in charge 

of paying some portion of that health care bill, he is going to make 

a much wiser choice. 

Mr. CASE. Thank you. Dr. Blumberg, I don’t want to leave you 

out of this. You suggest we are putting our money in the wrong 

place. I think that is essentially what you are saying. We shouldn’t 

be putting it here. We should be putting it over on the side of the 

CHIPS and lower income health care coverage. 

If we were funding adequately at that level, would you have the 

same degree of reservations with the deductibility of HSA premium 

payments? 

Ms. BLUMBERG. Yes. Essentially when I look at the problem of 

the uninsured today, I think there are two main areas in which we 

need to subsidize further. The first is clearly the low income, and 

I think most people in the room will agree that we could do a better job with that, but the second key element is that I believe we 

need to subsidize high risk, as well, as a social decision. 

Basically all of the issues that we have when we start doing reforms outside of expanding a public program, such as CHIP or 

Medicaid, relate to problems of adverse selection and risk segmentation. 

When insurers can be much more profitable by bringing in low 

risk individuals, then we can’t blame them for seeking those low 

risk individuals out. The regulations allow them to do that and the 

market forces really dictate that they do that, in order to compete 

in the insurance market. 

But what happens is that the individuals who are high risk or 

high cost or who have even some past kind of health care problem 

are really very vulnerable in this kind of dynamic. As we go create 

incentives to move individuals further into the private non-group 

insurance market, where we see even less risk pooling than we see 

in small firms and much less risk pooling than we see in the large 

firm market, then we are making those high risk individuals even 

more vulnerable than they already are, because they are not well 

served by the private non-group market. 

If we do anything to undermine the group market as it exists, 

high risk people, high cost people who are currently receiving coverage and receiving some risk pooling benefits from being in those 

group markets are basically then left out in the cold once they are 

in the existing non-group market. 

23

I think if we were better subsidizing the low income and the high 

risk, then I wouldn’t have a problem. 

Mr. CASE. Thank you. Thanks, Mr. Chairman. 

Chairman AKIN. Thank you, Ed, for your comments. 

I had a number of different questions here. Let me start off and 

I think I may toss a couple of these out just to whoever wants to 

respond. 

First of all, just for my own information, do these HSA’s in any 

way do they get around some of the insurance mandates that are 

dictated by individual states or does the person offering the insurance have to comply with the state mandates? 

Ms. BRADEN. Mr. Chairman, it is my understanding that they do 

have to comply with the state mandates individually and have to 

be approved by a per state basis. 

Chairman AKIN. Okay. That is one thing people complain raise 

the cost of health care is the various state mandates, but this 

doesn’t really deal with that part of the equation. 

Ms. SULLIVAN. We are waiting for clarification from the Treasury 

Department on a couple of those matters with regard to that preemption and what needs to be covered in these plans, but it comes 

down to fundamental plan design. 

You still have this deductible. If you are required to cover in 

vitro fertilization or some of the other things that do drive up the 

cost, it would be subject first to that deductible. 

The one thing that has been waived is preventive services and 

that is where we really get into some dicey concerns, because some 

states can begin determining a lot of specialty services and begin 

to consider them as preventive. 

We are waiting to see what kind of definition there is and this 

has implications across the spectrum for all employee benefits, because how employers determine what is within their own plan design and a number of very smart people who work on this have 

provided those comments to Treasury and we are waiting for that 

clarification. 

Chairman AKIN. So to some degree my question isn’t totally out 

in left field, but in general it is assumed that most of these plans 

will follow the state regs pretty much. 

Under the current situation with HSA’s the way the law stands 

right now, the premiums are currently paid by what? Is it paid by 

the employee? 

Mr. PERRIN. Sir, the premium can be paid by the employee or the 

employer. Under certain circumstances, i.e. you are unemployed, 

you are on unemployment insurance, you can take money out of 

your account to pay that premium or if you are on———. 

Chairman AKIN. If you are unemployed, you could take pretax 

dollars out of your account to pay for your insurance? 

Mr. PERRIN. Yes, sir. Let me just give you a little vignette on 

that. The———. 

Chairman AKIN. I have asked this question. I keep getting different answers on it. It must be tricky. 

Mr. PERRIN. No. This is a clear case of if you are on unemployment insurance, you can take out of your HSA account tax free and 

pay the premium. For example, airlines after 9–11 thousands were 

let go and one of the VP’s of one of the major airlines became conVerDate 0ct 09 2002 16:01 Aug 23, 2004 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\HEARINGS\93203.TXT MIKEA
24

vinced that HSA’s were what they should be providing to their employees for circumstances exactly like this, because she had pregnant women and all kinds of stories. That is the current situation 

under the current law. 

Chairman AKIN. I was kind of surprised that what Congressman 

Crane was proposing wasn’t in the original bill to begin with, because it seemed kind of logical in a way to fit in. Was that just part 

of the politics of putting it together do you know? 

Mr. PERRIN. That basically sums it up, sir. 

Chairman AKIN. Go ahead. 

Ms. BRADEN. On the group health side, for a group policy, usually the insurance company requires that the employer pay a percent of the employee amount in order to make it part of the group 

policy. 

Chairman AKIN. Right. 

Ms. BRADEN. So that is where that comes from. 

Chairman AKIN. Thank you. I had a couple of other questions 

here. Mr. Perrin, I think maybe you could answer this. 

Unions represent a fairly significant part of the rank and file 

throughout the country. In the interest of unions, who benefits 

from HSA’s? Is it only the business owners that benefit or do you 

union employees benefit as well? 

Mr. PERRIN. That is a great question, Mr. Chairman. You may 

know that the Hotel Employees and Restaurant Employees Union, 

prior to the vote in the House in August, sent a letter up to select 

democrats supporting the passage of the health savings account 

legislation. 

There are two primary reasons they are doing this. The first reason is that the union wants to hold the money. They have a bank. 

They want to hold the money. 

The second reason is and most important reason is that it dramatically drops their cost of their health insurance and in some 

cases, I have spoken with the very senior leadership of some unions 

where you have a guy who works his whole life in the union and 

when he reaches 51 or 52, he can’t do the manual labor. 

He can’t work at what he has done. He goes out and he has this 

gap between when he stops working and gets insurance and when 

he goes on Medicare. 

The leadership of this union was very interested in seeing that 

money build up for these guys so that they have some cushion in 

that time in which they are no longer working. 

In addition, when you move to a high deductible insurance policy, you are not talking about $755 a month. You are talking about 

$250, something much more affordable. 

For the unions who have been trading wages for benefits for a 

decade now, this offers them the opportunity of getting a raise and 

containing their health care costs. 

Let me just explain one other example. There is a union in the 

midwest, a statewide union, they are $10 million a year in the hole. 

This is what, when they went to their actuaries, they were told: 

You triple your out-of-pocket deductible, you add another ten percent cash to the plan and you reduce the 80/20 co-pay after you 

have met your deductible to 70/30. 

25

That is a real life scenario and I would be happy to provide you 

the person to call to confirm that and that was a year ago. 

Unions are getting killed by these costs exactly like everybody 

else and they are looking for something that is affordable. 

Chairman AKIN. Thank you for answering that. Our time isn’t 

too bad today so I am going to allow myself to run over a little bit 

and if the other gentlemen want an extra question that would be 

fine. 

Now to Linda a couple of questions that I had about what you 

were saying. I think all of us recognize that if you get somebody 

who all of a sudden develops diabetes, heart condition and a few 

other miscellaneous things, they get to the point where nobody 

wants to insure them, because they call them sort of uninsurable. 

It would seem to me that from some of the numbers we have 

heard, that if only one in five of the small businesses offer insurance to begin with and there are two questions really on the uninsurable thing it seems like to me, the first one is: The major problem that when somebody is uninsurable, who do you do with that? 

But aside from that question, it seems like one thing that you 

could do would be to reduce the number of people who are uninsurable and it would seem like to me just from a common sense point 

of view if you have Superman at 25 and you manage to get him 

from the uninsured category, where he is healthy, into the insured 

category and by the time he is 35 all of a sudden he is diabetic or 

something, then at least you have the benefit of having gotten people into the insured category. 

My understanding is once you are insured then if you become uninsurable, you at least have some ability to continue your policy. 

Does that make sense or would you respond to that? 

Ms. BLUMBERG. Sure. First, in the small group market there is 

technically no one who is uninsurable. The small group who has a 

very sick person in it may have to pay substantially more for insurance, depending upon the pool that they are in, but there is guaranteed issue now through HIPAA in the small group market. 

In the non-group, the private non-group market———. 

Chairman AKIN. I don’t mean to interrupt you, but does that also 

make it so that let us say you are a small business, you have five 

employees and one of them is in that category, does that also make 

it a lot more expensive to get the———. 

Ms. BLUMBERG. Yes. They can charge you up for that, depending 

upon how they are setting their premiums and what other firms 

are in your pool. You will likely experience an increase and the extent of the increase is a function of what state you live in, because 

the regulations on pricing——

Chairman AKIN. It varies from state-to-state. 

Ms. BLUMBERG [CONTINUING]In the small group market vary 

from state-to-state. 

Chairman AKIN. It is going to cost you more for everybody——

Ms. BLUMBERG. That is right. 

Chairman AKIN [CONTINUING]When you have someone in your 

pool that is uninsurable. 

Ms. BLUMBERG. That is exactly true. In the private non-group insurance market, there is no guaranteed issue in the vast majority 

of states and so individuals can be completely excluded. Many 

26

states also allow you to write out particular body parts or body systems that you have either had problems with in the past or have 

current problems or maybe a dependent does. 

There is guaranteed renewability, but again think about what 

the effective truth is when you have somebody who is very high 

cost in a narrowly priced pool in the non-group market and their 

premiums go up substantially over a course of a year or two. 

Then even though the law says that they are guaranteed renewable, they don’t necessarily have effective access to that insurance 

over time. 

Even if they buy into the non-group market when they are young 

and healthy, there is no guarantee that they are going to be able 

to afford to stay in it, because of the way that the pricing works 

in most states. 

In addition, sometimes a———. 

Chairman AKIN. Let me clarify that. So in other words, let us say 

I am 25 and Superman. I get the insurance. 

Ms. BLUMBERG. You are talking about in the non-group market? 

Chairman AKIN. Non-group. This is just like an individual major 

medical policy. Me and my wife, a couple of kids or something and 

we run along five, ten years. We pay for the high deductible stuff. 

We are covering the other stuff out-of-pocket the way we have been 

talking about. 

Then all of a sudden either one of my children, my wife or myself 

we get something that makes us more uninsurable, I think of diabetes because it is one of those things that you can get an onset 

somewhere along the line, you don’t know it is coming. 

The way most of the insurance works, you still can continue to 

buy insurance, can’t you, in the next year after you have gotten the 

diabetes? 

Ms. BLUMBERG. That is right, but you may have a very significant increase in your premiums, to the extent that———. 

Chairman AKIN. Wouldn’t that be the case in a group market as 

well? 

Ms. BLUMBERG. It may be, but when you are talking about in a 

group market, there is inherently more what we call risk pooling. 

So there are more people over which the risk is spread. 

For example, you think of a firm of 1,000 or more workers. A 

small number of very sick people in there, those excess costs are 

spread over a very large group. The impact on everyone’s premiums 

is very modest. 

The smaller the group, the more the impact of that excess cost 

on any particular individual’s premiums. In the non-group market, 

because most states allow you to be rated for premium purposes according to your own health care risk, your own health care situation, the situation is even worse for someone who incurs an illness 

or a serious injury. 

Chairman AKIN. So using a logical extension of what you are saying, it almost sounds like what you are saying is the only thing you 

would really support would be just sort of a universal coverage, 

right? 

Ms. BLUMBERG. No, that is not necessarily the case. I think you 

can———. 

27

Chairman AKIN. I have heard the same argument, because we 

were talking about the AHP’s and that was something that a number of us were pushing a couple of years ago. I heard the same 

complaint there. 

Ms. BLUMBERG. Well, AHPs are another mechanism that would 

affect risk pools. 

Chairman AKIN. There is also going to be some cherry picking 

within. You know like you have ten small businesses. They want 

to pool and the 11th small businesses got a couple of uninsurable. 

Well, there is going to be cherry picking within that as well. 

Unless you go to a total universal, I mean I don’t see how you 

get out of the box that you are describing. 

Ms. BLUMBERG. I can give you a couple of ideas if you would be 

interested in things that you could do short of going to a full universal system and still taking advantage of the market and the advantages of the marketplace that a lot of individuals favor. 

You could, for instance, set up a system where you let the government serve as a public re-insurer. In essence what would happen is an individual incurs a certain level of expenses. You pick a 

threshold. Maybe it is $10,000 worth of expenses. Maybe it is 15. 

Maybe it is 20. 

When an individual in a particular pool, and this is only one way 

to structure it, hits that level of expenditures, the government actually comes in and takes on a share of the costs of those particular 

high cost individuals. 

What that does is it takes part of the cost of the high risk out 

of what could be a relatively modest sized pool, say for small firms 

in the individual market. You can then finance the payment, the 

financing for those kinds of public re-insurance mechanisms very 

broadly, across the entire population, for example, and then the excess costs attributable to each of those very high cost individuals 

is spread over a much larger group. 

You don’t have the full cost resting within the insured group. 

That way the insurers then know that their exposure is substantially reduced, because a huge share of the expenses are attributable to a small number of people. They can then———. 

Chairman AKIN. That is interesting. Let me just ask then: Aside 

from that then if it were found, of course we have already put this 

into law so it is operative, but if this were to drop the number of 

people who were uninsured, would you then change your position 

and think well maybe it is okay or not? 

Ms. BLUMBERG. You are talking about the health savings accounts or the tax deductibility? 

Chairman AKIN. The health savings accounts and the tax deductibility both. 

Ms. BLUMBERG. I think what you are going to see is not an increase in the number of people who are insured. I think you are 

going to see a switching of who is insured. So you may find some 

people who———. 

Chairman AKIN. You are predicting there will not be a drop in 

the number of people who are uninsured? 

Ms. BLUMBERG. I don’t think it will decrease——

Chairman AKIN. As a result———. 

28

Ms. BLUMBERG [CONTINUING]The number of uninsured. I think it 

has the potential to increase it. I think there is also a strong likelihood that what you are going to see is a switching. 

Chairman AKIN. A switching. 

Ms. BLUMBERG. So people who currently have coverage lose it 

and people who didn’t have it before who are healthy are taking 

it up. 

Chairman AKIN. I would just take a minute now and let other 

members of the panel respond. 

Mr. PERRIN. Mr. Chairman, if I may, you know sort of the universal attack on health savings accounts is adverse selection and 

it is something that the Coalition has heard for ten years. 

What we haven’t heard is any proof. We have heard a lot of comments that this could, this might, this will. Nobody has any proof. 

Chairman AKIN. But what you do have proof of is that the number of uninsured is growing tremendously, right? 

Mr. PERRIN. You have proof of that and the other proof that you 

have got is that in 2001, the United States Treasury Department 

tracked the number of people who were previously uninsured who 

purchased then medical savings accounts and the number is astonishing. 

It is 73 percent. 73 percent of the people who purchased a medical savings account were previously uninsured and they were not 

just previously uninsured for two weeks. 

The definition in the law of the pilot project was that these people had to be uninsured for six months or more. These are chronically uninsured folks. 

What Mr. Crane’s bill will do is give that waitress at the deli the 

opportunity to buy a low cost health insurance policy. The uninsured are actuarialy sicker and less healthy than those people who 

have had insurance. It makes sense and it is in fact true. 

How is it that you get adverse selection, but 73 percent of people 

who purchase the medical savings account are uninsured and in 

fact actuarialy sicker? Those two things cannot be both true. Somebody is wrong. 

When you look at what is driving people out of the market for 

insurance, the answer is clear. It is cost and at $9,000 a year is 

a very high hill to climb for most people. 

What we are promoting here today, what our Coalition is promoting, is a low cost alternative. If you are uninsured, you have 

a whole host of problems, not the least of which is that the second 

largest cause of bankruptcy is uninsured costs. We are talking 

about moving people from the uninsured column into the insured 

column. 

Let me just say one last thing. Assurant, who is formerly Fordis, 

announced three weeks ago that the people who are buying their 

health savings accounts, 30 percent of them are previously uninsured. 

Tell me, Mr. Chairman, where that figure is as high in any other 

type of a health insurance. Mr. Crane’s bill will do one thing. It 

will help the uninsured and that is why it is named that. 

Chairman AKIN. Thank you. Kate? 

29

Ms. SULLIVAN. I just wanted to also reinforce and answer your 

question directly and a little bit of what Dr. Blumberg was talking 

about. 

If you put these tax incentives into the tax code when they are 

aimed at individuals, will this mean fewer people will have employer based coverage? 

We maintain that fewer people are going to have that coverage 

because of cost. That is the rising cost. There is a lot that we can 

do in the system to aim there and we have more people who are 

outside the employer based system for a variety of reasons. 

Right now, our only health policy we have today is telling people 

if you want health insurance, get a job. That is not the right reason 

to get a job. 

We have had people going to mass retailers who offered very 

good coverage for organ transplants, because that is what their 

daughter needed and there was no other way for them to get that 

transplant covered. 

People are getting jobs in the hospitality industry, because they 

run 24/7. They get that second job. We have to do better. We have 

to do more in the individual market. 

The proposal that Dr. Blumberg is outlining, as far as re-insurance, is something to look at as an alternative to simply high risk 

pools that could be very expensive for those individuals. 

Along with tax deductions, you should look at targeted tax credits for individuals within certain income limits so that they don’t 

disrupt that employer coverage, but they reinforce it where it 

works and unfortunately, it does not work perfectly. 

Chairman AKIN. Thank you very much. I don’t mean to monopolize the questions. I want to let Congressman Udall also jump in. 

You can either piggyback or start on your own or whatever you 

want to do, Tom. 

Mr. UDALL. Thank you, Mr. Chairman. 

Dr. Blumberg, what is the proof on adverse selection? What is 

out there that shows adverse selection in HSA’s? 

Ms. BLUMBERG. We do have a couple of good examples of situations where adverse selection has changed the options available on 

the market. 

A prime example is through FEHBP, the Federal Employees 

Plan, where originally there were two Blue Cross Blue Shield 

plans. One a high option that had a very low deductible and another option that had a slightly higher deductible and cost sharing 

involved. 

What happened was over time the healthier individuals migrated 

into the lower option, the one with the more cost sharing. The 

higher cost individuals were left in the low deductible plan, and the 

premiums in the low deductible plan escalated very quickly. 

Over a number of years, we now are in a situation where we only 

have the higher deductible plan. The other one was priced out of 

existence, even though the difference in the actuarial value of the 

two plans was not nearly as different as the difference in the actuarial value we see between health savings account type high deductible plans and current comprehensive coverage. 

30

There is also an example from the Harvard Community Health 

Plan, where the split of selection was very acute and reduced the 

number of options that they had there. 

We don’t have a lot of evidence from MSA’s at this point, largely 

because very few employers actually took advantage of them. There 

was very little enrollment and so when you are talking about a 

modest amount of participation, you can’t expect a big effect on the 

rest of the community. 

I think it remains to be seen what is going to happen, but I think 

we have enough evidence of knowing that death spirals do occur in 

insurance markets, that we need to be very wary about it. 

Mr. UDALL. The part of this that I think is very dramatic and 

the Chairman brought this out in one of his questions I think, is 

what you say in your written testimony, the distribution of health 

expenditures is highly skewed, meaning that a large share of total 

health expenditures is attributable to a small fraction of the population. 

So where you have a situation where ten percent of any insured 

population typically accounts for 70 percent of all of the spending 

of that group, that argues at least to me for some kind of subsidization of insurance coverage for high risk individuals and there are 

a variety of ways I guess you could do that. 

The one that you talked about earlier was where the government 

at large becomes a re-insurer. Could you talk a little bit about that 

and why that would make a difference for small business people? 

Ms. BLUMBERG. Sure. 

Mr. UDALL. You heard my concern earlier. The small business 

people, the small number of employers have a hard time getting insurance. Why would that help them? 

Ms. BLUMBERG. This is actually not much of a problem really for 

large employers. As I mentioned before, they have a large number 

of people over which they are spreading their health care risk. A 

small number of high cost people there, those costs are spread very 

broadly. 

The problem really is in the small group and the non-group market and what happens is because there is far less ability to pool 

the risk of high cost people for small firms. So when you do have 

even one very sick person who is employed by a small firm or 

maybe that small firm worker’s dependent, then you can see very 

substantial increases in premiums year-to-year. 

Actually, there is a great persistence in those premium increases. 

If you have a bad year, someone has a bad year and you are a 

small firm, your premiums go up substantially in the next year and 

then even if the health problem is treated and goes away, you still 

see persistence of those high premiums for a very extended period 

of time. 

If you had some kind of a mechanism, either through re-insurance or some other kind of pool where the government was subsidizing the costs of these high cost cases or the high risk cases, 

you end up taking away the reason why those premiums are spiking and being so variable year-to-year. 

You are taking a very large percentage of the costs for the total 

population out of the premium base of the small employer or the 

31

non-group market and financing that in a very broad way so the 

impact of it hits each of us in a much more modest way. 

Mr. UDALL. It ends up making it more affordable for smaller 

business people. 

Ms. BLUMBERG. Yes, that is right. You should see the premiums 

for small businesses——

Mr. UDALL. Go down. 

Ms. BLUMBERG [CONTINUING]And individuals’ premiums going 

down substantially as a consequence. 

Mr. UDALL. Thank you very much. Thank you, Mr. Chairman. 

Chairman AKIN. I thank you all very much for coming out and 

providing us with really a comprehensive education on the subject 

and I really appreciate that and look forward to trying to work 

through all of these problems and solve some of the problems of the 

uninsured. Thank you. 

[Whereupon, at 12:16 p.m., the Subcommittee meeting was adjourned.]

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