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AFFORDABLE HEALTHCARE: A BIG PROBLEM FOR

SMALL BUSINESSES

FIELD HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JANUARY 10, 2008

Printed for the use of the Committee on Small Business and Entrepreneurship

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

BENJAMIN L. CARDIN, Maryland

JON TESTER, Montana

OLYMPIA J. SNOWE, Maine,

CHRISTOPHER S. BOND, Missouri

NORMAN COLEMAN, Minnesota

DAVID VITTER, Louisiana

ELIZABETH DOLE, North Carolina

JOHN THUNE, South Dakota

BOB CORKER, Tennessee

MICHAEL B. ENZI, Wyoming

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director

WALLACE HSUEH, Republican Staff Director

(III)

CONTENTS

Page

OPENING STATEMENTS

Coleman, the Hon. Norm, United States Senator from Minnesota, presiding ... 1

WITNESS TESTIMONY

Ludeman, Cal, commissioner, Minnesota Department of Human Services, St.

Paul, Minnesota ................................................................................................... 4

Carlson, Mark A., president, Minnesota Mailing Solutions, Golden Valley,

Minnesota ............................................................................................................. 15

Kuba, Sanjay, president GCI Systems, Shoreview, Minnesota ............................ 21

Flohrs, Jason, director of Government Affairs, Twinwest Chamber of Commerce, Plymouth, Minnesota ............................................................................... 26

Oemichen, William L., president and chief executive officer, Minnesota Association of Cooperatives and Wisconsin Federation of Cooperatives, St. Paul

Minnesota ............................................................................................................. 30

McLaughlin, Patrick, director of marketing, Employers Association, Inc., testifying on behalf of Susan Eskedahl (vice president) .......................................... 38

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Carlson, Mark A.

Testimony .......................................................................................................... 15

Prepared statement .......................................................................................... 19

Coleman, Hon. Norm

Opening statement ........................................................................................... 1

Eskedahl, Susan

Prepared statement .......................................................................................... 50

Flohrs, Jason

Testimony .......................................................................................................... 26

Prepared Statement ......................................................................................... 28

Kuba, Sanjay

Testimony .......................................................................................................... 21

Prepared statement .......................................................................................... 23

Ludeman, Cal

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 8

McLaughlin, Patrick

Testimony .......................................................................................................... 38

Prepared statement*

Oemichen, William L.

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 34

COMMENTS FOR THE RECORD

Miller, Darlene M., president and CEO, Permac Industries ................................ 56

*see Susan Eskedahl’s statement

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AFFORDABLE HEALTHCARE: A BIG PROBLEM

FOR SMALL BUSINESSES

THURSDAY, JANUARY 10, 2008

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, Washington, DC.

The Committee met, pursuant to notice, at 2:12 p.m., in the

Reading Room, James J. Hill Reference Library, 80 West 4th

Street, St. Paul, Minnesota, the Honorable Norm Coleman presiding.

Present: Senator Coleman.

OPENING STATEMENT OF THE HONORABLE NORM COLEMAN,

SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP AND A UNITED STATES SENATOR FROM

MINNESOTA

Senator Coleman [presiding]. This hearing of the Small Business

Committee is called to order. I want to first say what a great pleasure it is to be here, to be back in St. Paul, a very special place for

me. There is a hockey team that has a new owner, by the way, that

is just around the corner from here. So it is always a special place

in my heart.

I want to thank the panelists for being here, for helping to educate me and my colleagues, this testimony will be transcribed and

will become part of the official record.

I also want to thank Chairman Kerry and Ranking Member

Snowe for scheduling this field hearing in Minnesota. I am sorry

that they are not going to be able to be here firsthand to hear from

our panelists.

Let me start by saying that James J. Hill, this library’s namesake, the empire builder who changed the economic destiny of this

whole region, did not start as a tycoon. He began as a small business person. So did William McKnight, who began 3M. So did Dick

Schulze, who began Best Buy. So did Rose Totino, the frozen pizza

queen. So did Earl Bakken, who started Medtronic. Not every small

business becomes a Fortune 500 company, but almost every business starts out small. By encouraging and sustaining our small

business base, we make possible the big businesses of the next generation.

In Minnesota, and across the country, small businesses form the

backbone of our economy. They are our job creators, our innovators,

our producers, from the farm to Main Street. Yet they face unique

challenges in order to grow and remain competitive, challenges

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borne not only by the owners but also by their employees. This is

especially evident in regard to health insurance where small businesses are often at a disadvantage with their larger competitors

and are increasingly struggling to offer affordable health coverage

to their employees.

Health insurance costs in Minnesota have risen dramatically,

growing at twice the rate of inflation over the past 10 years. I believe the data shows that premiums increased 7.6 percent in 2006

alone. This not only leads to higher health care costs for business

owners, but also higher out-of-pocket expenses for employees. In

fact, between 2000 and 2008, the number of Minnesotans who

spent more than 10 percent of their pre-tax income on health care

increased by 490,000. These figures reflect the real-life stories I

have heard from small business owners and families across Minnesota. When I travel the State, the single issue that is most prevalent, that is raised most often, is health insurance, and among

small business people, this is also the issue that is raised most

often.

Today, we will have the opportunity to hear some more of these

compelling stories. We will hear from Sanjay Kuba, CEO of GCI

Systems in Shoreview. Despite years of success, president Kuba

recognizes the challenges he will face while trying to expand his

company over the next few years. As health care costs continue to

increase at record rates, Mr. Kuba must decide if he can continue

to add the employees needed to meet growing demand. We will also

hear from Mark Carlson from Minnesota Mailing Solutions who recently sold his business to Pitney-Bowes. He will share that a

major factor in his decision to sell his business was based on the

unsustainable small business health care market. Both these stories show that without reform, health care costs can prevent small

businesses throughout this country from truly meeting their economic potential.

As many of you know, this is a problem which dates back to the

1940s. Since World War II, health insurance has moved toward an

employer-based system. Because a large majority of folks are insured through their job, there is a misconception that most of the

uninsured in America do not have jobs. In reality, of the 47 million

who will be uninsured at some point this year, almost half are employed by small business.

For example, one survey showed that only 9 percent of workers

in large firms—and that is firms of a thousand or more employees—and their families were uninsured compared to small firms—

less than 10 employees—where 34 percent were uninsured. The

statistics make clear that increases in health care costs have forced

many small business owners into a position where they are simply

not able to afford to offer health insurance to their employees. Besides its obvious negative impact on the health of families across

the country, the lack of a health plan can also make it difficult for

small businesses to maintain and keep the talent that they need

in order to be competitive.

In order for our small businesses to prosper and ensure that

working families have access to affordable quality health care, we

need to find effective and reasonable solutions. As a Member of the

Senate Small Business Committee, I am dedicated to finding ways

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to expand insurance coverage for employees of small businesses. As

with most issues, the best ideas will undoubtedly come from folks

who are personally dealing with this challenge in their communities far from Washington, DC, which is why I am pleased that

we are holding this field hearing in my favorite city, St. Paul. No

offense to Minneapolis or any other city, but as a former mayor of

this great city, I know how important small businesses are to the

overall economy of St. Paul, Minnesota, and to the entire States

and the entire country.

In addition, our State is a natural location for a field hearing on

this issue because of its strong leadership on health-related issues,

as well as our State’s large number of small businesses. Minnesota

not only has the second highest health care quality ratings as

measured by the Agency for Healthcare Research and Quality,

AHRQ, but also the lowest rate of uninsured residents in the country. Yet with all our State’s success, Minnesota’s more than

500,000 small businesses still cite increasing health care costs as

their number one concern impeding future economic growth—the

number one concern impeding future economic growth.

As we explore the possible fixes, I continue to support association

health plans, AHPs, which would allow small business associations

to band together across State lines to offer affordable health insurance. AHPs would allow small employers to tap into the same

health care system utilized by large employers. According to the

Congressional Budget Office, AHPs could provide small businesses

with premium reductions of 13 percent, on average, and as high as

25 percent. That is about $450 to $1,250 savings per covered employee—savings that would translate into millions of people getting

health insurance.

While this certainly is not a silver bullet, it is a good option for

one segment of the uninsured population. I also look forward to

hearing today from our excellent panel some of the other potential

solutions to this national problem. In the end, we must do what we

can to help both small business thrive and working families receive

the health coverage that they desperately need. After all, it is access to health care that is the key to keeping your family healthy,

and no one should ever be left out simply because of the size of

their employer.

I will close with a quote that many of you have heard me say

time and again. Winston Churchill once said, ‘‘Some people see

business as a predator to be shot. Some see it as a cow to be

milked. Few see it for what it really is: A sturdy work horse pulling

the wagon of human progress.’’ We all want to see that strong,

sturdy horse continue to pull the wagon of progress, and I think

we will hear today that progress cannot continue without comprehensively reforming the small business health care system.

I want to thank everyone again for attending. I would now like

to take a minute to introduce our witnesses.

Cal Ludeman is Commissioner of the Minnesota Department of

Human Services. As the Commissioner of Minnesota’s Department

of Human Services and co-chair of the State’s Smart Buy Alliance,

I am looking forward to Mr. Ludeman’s insight on how we need to

reform the way we purchase health insurance. I certainly support

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the idea of bringing more transparency and quality data into the

health care system.

Mr. Mark Carlson is president and CEO of Minnesota Mailing

Solutions. Mr. Carlson will share his 9 years of experience as CEO

of a small business and provide insight on some of the challenges

he faces in purchasing health insurance for his employees.

Mr. Sanjay Kuba is president of GCI Systems. As someone who

employs parents of children who suffer from chronic diseases, Mr.

Kuba will discuss the impact of health insurance mandates and

other regulations on small businesses. Like Mr. Carlson, his personal experience will help us understand some of the disadvantages

small businesses face and the need to level the playing field.

Jason Flohrs is director of Government Affairs, Twin Cities

Chamber of Commerce. Mr. Flohrs will be testifying on behalf of

TwinWest’s 1,000 members and will provide some recommendations on how to achieve better health outcomes and slow the rate

of cost increase. I had a chance to be at TwinWest yesterday, and

it is good to see you again today, Mr. Flohrs.

And Bill Oemichen is president and CEO of Minnesota Association of Cooperatives and Wisconsin Federation of Cooperatives. Mr.

Oemichen will share with us how the Minnesota and Wisconsin cooperative model works and make suggestions for reducing the

health care costs of small business. I often say, Mr. Oemichen, that

the family farmer is the ultimate small business in this State, and

certainly in this country.

Mr. Patrick McLaughlin is director of Marketing and Membership, Employers Association, Incorporated. We had another witness, Sue Eskedahl, who could not be here. She had a family emergency and will not be able to make it. Patrick has been kind

enough to take her place here today, and he will discuss Employers

Association’s success with health care purchasing pool and highlight the benefit of association plans. I worked with Mr.

McLaughlin for many, many years, if not at this point actually decades, and so I appreciate his leadership and his being here today.

I want to make it clear to the witnesses that this testimony

today will be entered into the formal record, and so the hearing

will remain open for 2 weeks after we are done, for additional testimony, and if I send questions to you, there is time for you to submit additional answers.

Commissioner Ludeman, I know you have to leave at 3, so we

are going to start with you. We will hear your testimony, and I

may have some questions for you.

STATEMENT OF CAL LUDEMAN, COMMISSIONER, MINNESOTA

DEPARTMENT OF HUMAN SERVICES, ST. PAUL, MINNESOTA

Mr. LUDEMAN. Thank you very much, Senator Coleman. I appreciate your indulgence for my——

Senator COLEMAN. If you could move the mike closer.

Mr. LUDEMAN. I will say it again. Thank you, Senator Coleman,

for your invitation, the Committee’s invitation for this testimony

from me and the other panel members. While I am Commissioner

of the Department of Human Services in Minnesota, the largest

State agency and the largest purchaser of health care in Minnesota, I am also what you called an ‘‘ultimate small business

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owner,’’ and so I have been faced with this issue for a lifetime of

career in small business as well. And I appreciate your indulgence

for my need to leave in about an hour.

There is no question—you have said it extremely well—this is a

very important issue facing our Nation and our State, the rising

health care costs. It is no news to anyone that health care costs are

consuming all our pocketbooks, not just small businesses but Government as well. And so every business, individual, and the State

of Minnesota will be facing a major financial crisis, already are in

many regards, if we do not change the current health care delivery

system.

We must address, I think, a very important flaw in the system.

We currently pay on a fee-for-service model based on volume. We

pay for volume. Someone does a service and we pay for it. The

more volume that they do, the more services they provide, the more

that goes out of the checkbook.

But we do not pay on value, which leads to unnecessary, repetitive, and even unsafe care. Many people are familiar with the

Rand study of 2006 which revealed that, on average, a person receives recommended care only 55 percent of the time, yet pay every

time that they are seen. The small business owners here today

know that they would be out of business if their customers were

satisfied 55 percent of the time.

So what is acceptable in health care? I will tell you today what

is happening today in the status quo is not acceptable. The problem

is that when we buy health care or use the health care system, not

only are costs unknown to us, they are unknown to everyone, including your doctor or even major purchasers. If the quality—and

I think generally most just do not believe that that is an issue at

all, quality—but the truth is that the system is largely a black hole

in a black box, which is left grossly unaccountable for outcomes and

costs alike. This black box of the health care system must be open

and transparent, and that is my major message today. We must address quality of care and payment reform. As we head into the

2008 election year, you will hear a lot of debate about access to

health care and the uninsured, which are very important issues.

But we must look beyond access alone, especially in the State with

the lowest uninsured rate. If we do not, health care will not be affordable to anyone, small business, large business, or Government

alike.

The State of Minnesota is addressing this issue by building alliances with other purchasers of health care. The State of Minnesota

has a majority of the market share, spending over $4 billion a year

on health care, covering over 770,000 Minnesotans, which is not

enough to even effect the change of the entire market. That is why

in 2004 Governor Pawlenty announced the formation of the Smart

Buy Alliance, a private-public purchasing alliance made up of

large, small, and mid-sized businesses, including the State of Minnesota as a health care purchaser. The alliance members leverage

their purchasing power to drive value into the health care delivery

system. The goals are to improve quality and lower cost by reducing inappropriate and unnecessary care and also hope to achieve

savings in the long run through coordinating their members’ expectations on quality and value based on four key buying principles.

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And I will tell you those principles, and then I will ask if you have

any questions.

The first principle is to reward or require ‘‘best in class’’ certification. The marketplace that small business is used to knows that

they are best positioned in the market if they are regarded as ‘‘best

in class’’ in whatever it is that they do. Customers come to their

door knocking when they know that they are going to get the best

or the best value. We do not do that in health care. Employers need

to buy health care from the best and send their employees to the

facilities and physicians where they can receive the best care.

The second principle is to adopt and utilize uniform measures of

quality and results. The alliance adopts uniform methods of measuring quality of care so that we are able to implement pay-for-performance programs and to reward health plans and providers of

high quality. That is underway today. Having organizations like

Minnesota Community Measurement and the Institute for Clinical

Systems Improvement, called ICSI, helps steer employees and businesses to the high performers. Minnesota is the only State in this

Nation that has a measuring organization like Minnesota Community Measurement and any organization based on subscription by

physicians themselves which help establish what is called ‘‘best

practice.’’

The third principle is to empower consumers with easy access to

information. It will be impossible for consumers, whether empowered by a high-deductible HSA account, for example, to use their

health care dollar wisely if they do not have cost and quality information. Therefore, the Smart Buy Alliance works to make this information available to consumers.

The fourth principle is to require the use of information technology. Virtually every other industry in this world has made

major productive advances through the use of information technology. That is not as true in health care as in almost any other

industry. The alliance requires the use of health information technology. I am sure that within your business, from the folks at this

table, efficiencies and quality improvements come with the use of

this technology, and the health care system has to catch up. Because of the Smart Buy Alliance’s demand, Governor Tim Pawlenty

joined with leaders from Minnesota’s largest health organizations,

including providers, to announce what is called an ‘‘electronic

health information exchange.’’ It is a business environment that we

are engaged in even at DHS that now has an organization that will

see that we will have electronic exchange of information as it relates to patient safety, as it relates to increasing the efficiency

amongst health care providers, and as it relates to reducing administrative costs for all health care organizations.

I think an inevitable question that may come from you is: What

can the Federal Government do? Although the Smart Buy Alliance

represents a large portion of the State’s health care market, it does

not include Medicare. Minnesota has been very successful in using

our purchasing power to leverage better results; however, Medicare

is not in sync with these principles. Some examples where the Federal Government can help and Medicare can line up with the

State’s effort are to continue the hospital pay-for-performance

model that HHS administered called the ‘‘Premier Hospital Quality

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Incentive Demonstration.’’ This option could result in substantial

savings in the health care system, with a major share accruing to

the Federal Government through reduced Medicare payments primarily from decreased hospital readmissions. But this savings

would also accrue over time to everyone in this room.

We also need to look at what is called ‘‘episode-of-care payment’’

to transform the current Medicare fee-for-service payment system,

which I spoke about earlier, to payments for episode of care, which

is about changing the current distribution of cumulative fee-forservice costs per episode. So when you add up all the CPT codes,

as they are called, for each service, there is no gathering of this information to say this is what it takes to have this episode of care

and have it compete in the marketplace for cost or quality, and we

should pay for those episodes, not for each procedure. This policy

would change Medicare payment methods to reward and encourage

more efficient and coordinated care, and the savings would also accrue to everyone else in this room.

Also, Medicare needs to think about how to strengthen primary

care and care coordination. One of the reasons Minnesota enjoys

one of these positions of the lowest uninsured rate and high-quality

care is that our percentage of primary care physicians to the population is one of the highest in the Nation. We need to change the

reimbursement so that the primary care physician practices to coordinate and support enhanced services, such as care coordination,

care management, and easy access to appropriate care. The physician practicing in Minnesota today has few of those responsibilities

because they are simply not paid for or encouraged.

And then we need to correct the market signals, the price signals

in the health care market. We have simply all glided along on a

medical trend cost rise that we have accepted. The options need to

address the tendency of current pricing mechanisms to send the

wrong signal to participants in the market. So physicians are confused; governments are confused; small businesses are confused;

and I am reminded of the champions in Minnesota’s business history that you outlined in your opening comments that, with the exception of Earl Bakken, for example, those champions were not in

the business of health care. The small business owners you see

here today have had to become health care insurance experts, and

that is not what their intention was. And so that is what we can

do the most for small business in Minnesota.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Ludeman follows:]

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Senator COLEMAN. Thank you.

Mr. Earl Bakken was an engineer. He was a fix-it guy.

Mr. LUDEMAN. He turned into a health care guy.

Senator COLEMAN. He turned into health care in a big way.

Thank you, Commissioner. Just a couple of observations, and I

have a couple questions. But in my travels around the State, your

next to the last point, talking about primary care physicians, one

of the challenges we face is getting folks to be primary care physicians. And in part it is about—reimbursement. Part of that and

pay is part of that, and we have got young folks or folks getting

out of med school with huge debt, and you have got a choice to be

going into a specialty or becoming a primary care physician. What

I am hearing time and again is folks are deciding from economic

necessity to go one path, and that is creating a real challenge for

us. So it is something we are not addressing at this hearing. But

I really believe that we have to be cognizant of it.

The other comment or question is I appreciate—and I have heard

some discussion of this—episode-of-care payment versus procedure.

The benefit is that you can look at things in a holistic way. So it

is not isolated—and I would presume an offshoot of that would be

coordinated care and quality of care that could be enhanced. So I

think it is a concept certainly worth looking at.

I heard loud and clear your message about quality and your message about transparency, and I hear it again and again, and certainly it is something that we have to take to heart. And I appreciate your kind of preempting my question about what the Federal

Government can do because that is important.

As we talk, though, about transparency—and we talk about, empowering consumers—one of my concerns has to do with consumers

shopping around, making choices. But you really need an educated

consumer to do that. Are we at that point today? And what is it

going to take us to get to that point?

Mr. LUDEMAN. Senator Coleman, that is a great question. The

answer to that question today is no, we are not at a very high

plane or level of consumer education about the literacy of people.

When you talk about CPT codes, I doubt that there is even maybe

a lot of people in this room that know what some of these coding

arrangements are or how it relates to a physician’s office.

Talking about to be able to measure adequately enough so that

we can get to an outcome is where the consumer wants to be, and

that is what they need to find out. So when you can say that if you

are a diabetic or have diabetes in your family and you want the

best possible diabetes care, whatever that is—you may not know it

yet, but you can at least find out what these measures are so that

you can find the best possible performers in the marketplace to

say—and we can do that in Minnesota today, one of the few States

in the Nation that can do it. Let’s say Norm Coleman’s Physician

Clinic is the best in this State in the diabetes care, whatever that

is. But you have to have at least that much literacy to know I have

diabetes, this is going to take—it is a life-changing event. I am

going to have to have a lot of care coordination and self-care involved. I need to go to the best. So at least we have that information public today. Adding price information to say is this episodeof-care management, as you described it, getting that price in a

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basket of care or episode of care, whether it be in the acute world

or even over a lifetime, is the harder part, but we are going to announce soon a new pricing transparency project that will be

launched this year as well. So you can tell both the price and the

quality based on what your particular health care need is.

Senator COLEMAN. So there are really three parts to this. There

is, one, the information itself, information about quality. There is

then the ability to access—is it accessible information? And with

computer technology, what I am hearing in Minnesota, we can access. But the third piece is do you have the ability, the literacy, the

level of literacy to understand how to get there.

We have looked at this issue. I am co-author of the Health Literacy Act of 2007 to educate the individual to be able to access information. But what I am hearing in Minnesota, I understand we

do a good job having the information available, and having a way

to get there. It is that other element to connect people with that

pool of information that I think is critical.

Also, you talked about requiring use of information technology.

That is an expensive proposition for a lot of institutions. Who pays

for that? Is there a role that the State or the Federal Government

has in dealing with the cost of utilizing information technology in

the delivery of health care?

Mr. LUDEMAN. Senator Coleman, about 60 percent of Minnesota

consumers today, which is now a brand-new platform, have available to them electronic medical record or personal health records

available to them electronically, which is good, and that is a high

level across this Nation. A lot of that is because of our large integrated care systems in the metropolitan area. The State government sends out through the Department of Health anywhere from

$15 to $20 million a year in what are called ‘‘electronic medical information grants,’’ mostly to small clinics in certain parts of the

State based on their need. They are connecting together more.

There is actually a concentration on the market based on the need

for electronic projects that have to happen, and physicians, clinics,

and hospitals all know it, and they are searching for the money.

But the basic intrinsic cost is borne by the provider, and some of

the argument has been that they never are able to recover some

of that cost. However, if it does lead to higher productivity on the

part of that clinic or hospital, they should be able to regain those

costs just like any other business environment that is represented

here today.

Senator COLEMAN. Again, I understand the importance. The only

concern—and this concern has been articulated to me—is that

there are costs. And businesses, by the way, have to make those

judgments. But if we require them to do it—it is one thing to say

I am going to make this investment, even though it will take me

X period of time to recover it, but you are going to make the decision because we require you to do it or because you have reached

that point where you think it is to your benefit—I just think it is

an issue that is worth further discussion. Particularly with small

businesses, some of them simply may not be in the position to have

the capital up front, particularly small operations, and there are

rural health clinics and a range of others, many of the rural hospitals which operate on, very thin lines in terms of being able to

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continue operating. Critical access hospital designation plays an

important role in that. But I just think that this is an issue that

should require further discussion between the folks at the State

level, the Federal level, and then those folks at the local level.

Commissioner, I greatly appreciate your presence here today. I

know you have to leave at a certain point in time. What I am going

to do now is to proceed with the rest of the panelists, and each of

them will provide their testimony. Then at the end, I will then

have a series of questions, I presume, based on the testimony. But

why don’t we at least have the panelists present their testimony

one at a time, and then I will have the complete record in front

of me. Commissioner, thank you.

Mr. Carlson, you may proceed.

STATEMENT OF MARK A. CARLSON, PRESIDENT, MINNESOTA

MAILING SOLUTIONS, GOLDEN VALLEY, MINNESOTA

Mr. CARLSON. Senator, it is an honor and a privilege to be able

to present my testimony to you today. I am going to give you my

statement in four parts. I am going to give you a little background

of my company so it puts the healthcare issue in context for my

size of business. I am going to give you our experience with cost

and problems over the last 6 years in particular. I am going to give

you a little bit of human impact from two of my employees’ experiences. And then a couple of my thoughts about—as naive as I am—

answers that I might be able to suggest to approach this problem.

For the past 9 years, Minnesota Mailing Solutions was a small,

locally owned distributor of office automation equipment, particularly postage meters, folding inserting equipment, address printers

and software, and letter openers. My testimony reflects these 9

years as a small business owner.

Minnesota Mailing Solutions has been in business for more than

20 years, and until last month, this business was always independently owned and operated. Last month, I did sell my business to

Pitney–Bowes. Part of my decision, a big part of my decision, was

making sure my employees could stay whole and be able to have

affordable health care—something that I was no longer able to

really provide for them.

We employ 17 people, and we have an annual payroll of around only $750,000 a year. The average age of our employee over the

last 5 years ranges from 33 to 40 years old, so we are not an old

population by any means. And all have been in good health. Dependent coverage is carried by 45 percent of my employee group,

and the average cost to an employee to cover their dependent has

been over $6,000 annually. Employees pay 100 percent of their dependent portion of the coverage, and they utilize the section 125

pre-tax premium option to help offset some of that cost.

As the employer, I have always paid 100 percent of my employees’ coverage. On December 1, I sold my business to a major U.S.

corporation, as I said, to keep the employees and offer them some

relief. The average employee realized a savings of over $3,000 a

year by going to a major employer and their coverage.

My experience over the last 6 years, we have had 18 to 24 percent premium increases annually. These premium totals are greater than 21⁄2 times higher than they were 5 years ago and over

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$50,000 a year annually. That is a full-time equivalent person for

my company. I could have hired a marketing person at that rate.

It is $50,000 less for me to reinvest in employee training, in capital

equipment, in growing the business, or even in just profit. It really

begs the question: Do I grow the business or do I remain status

quo?

We have had no catastrophic events in our employee group to

fuel increases, just normal life events: Three or four babies born

over that period of time, one gall bladder surgery, maybe a broken

limb here or there, prescription drugs. Nothing out of the ordinary

of everyday life.

Every year we have increased deductibles; we have increased copays, we have increase out-of-pocket maximums, just to limit that

increase of a 20-percent increase annually. Had we not done that,

we would have had 30-, 40-, 50-percent increases in premium.

Without these changes and reductions in services, we would have

ended health care a long time ago. We had to do this just to remain

stable and to keep our employees covered as best we could.

The average, fully insured plan for a small employer like mine

utilizes about 95 percent of the premium dollars they pay in in

health care coverage. Last year, our usage was only 79 percent of

all the premiums we paid. I was expecting no increase this year.

I got a 10-percent increase instead. I was not rewarded for having

a healthy workforce. I was penalized for it. The reason I was given

by my carrier for the increase in my premiums was that there were

so many gastric bypass surgeries performed that it is now a mandated coverage in Minnesota; the cost had to come and be paid for

somewhere. And so as a small business owner, I had to help cover

that.

Additionally, a fully insured plan such as mine and a small employer, I am required to pay additional taxes to cover the uninsured—maybe this is just a Minnesota issue; I am not sure—to

cover the uninsured in Minnesota, the underinsured, and the uninsurable. And those tax rates added another 10 percent of my premium, which only small business has to pay. Large employers are

exempt from this if they are self-insured carriers. And so, again,

the bulk of carrying the load falls on small business.

What happens with this kind of a situation is that small employers that go to associations and things as such—this is not in my

testimony, but it is a thought that just occurred to me—is that we

start to eliminate the pool of healthy employees and the pool of uninsured gets bigger and bigger.

Senator COLEMAN. Mr. Ludeman, before you go, there was one

more question I was going to ask you.

Mr. CARLSON. Sure. No problem.

Senator COLEMAN. Mr. Ludeman has talked about data—cost

and quality data. Do you think employers are going to utilize this

data? As a small business person, do you even have the ability to

tap into that?

Mr. CARLSON. Personally, I would. My employees are all connected. I have a server system within my network, and we are

small enough that as a driver, because it is important to me, I

would be able to do that. I cannot say that for other small businesses. I think that would be a challenge.

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Senator COLEMAN. I would like Mr. Ludeman just to hear that.

And, Mr. Kuba, I turn to you and probably would ask you the same

thing with the Commissioner here. This data, would this be helpful

to you? Give me a sense for the Commissioner because he is the

guy that is putting the time and energy into this.

Mr. KUBA. You know, like Mr. Carlson, we can do it. You know,

we are fully networked and everything. I would like to learn more

about it. I cannot really say how helpful it would be based on what

I know right now. But we could easily do it.

Senator COLEMAN. OK. I just wanted to take the opportunity

with the Commissioner here to provide a little feedback. Commissioner, thank you very, very much.

Mr. Carlson, please finish at this point.

Mr. CARLSON. Sure. So small businesses, once again, like in property tax, seem to be the ones who have to carry the brunt of the

load.

A couple of experiences I want to share with you regarding two

of my employees. One employee has two family members who are

diagnosed with a bipolar disorder. In addition to the $8,000 in premium he pays to cover his family on his $48,000-a-year salary, he

is paying $300 to $400 additional per month—and this is what I

know of; it may even be more than that—in prescription out-ofpocket expenses that are not covered or that require much higher

co-pays.

I have another employee, he is married, he has three children on

his plan. They are healthy, yet because of the dependent coverage,

he pays $9,000 annually in premium on his $50,000 earnings. That

is almost one-fifth of his pay.

Both of these employees are earning over $23 an hour, yet the

strain on their family is tremendous. They are hard-working, stable, middle-class families. I cannot imagine the difficulty less fortunate workers might have.

While I wished I had the magic bullet or the right answer, from

a small business perspective I fully support the idea of employee

responsibility and for employee incentive to use their plan wisely,

to share in the costs and to control expenses. I think that is a wise

and prudent thing for all of us. However, I think employees are

also responsible for making healthy lifestyle choices and practices

and to minimize their risks. However, these costs must be realistic

and affordable. Health care mandates for coverage are designated

to protect individuals. I know they are necessary, but mandates

should not have to be borne by only small business but, rather, by

users of such services, all employees, and the entire public in general.

The system rewards practitioners for the number of services provided. I think that is backwards. Service providers that are costeffective, efficient, and have higher results, they should be rewarded, and they should be rewarded by additional business. That

is the same way it works in my business. The better I am, the more

business I get. Until we change the model of performance and result, the spiraling costs will only continue. In my own business, we

are not rewarded for how many calls we make to a customer but,

rather, the fewer calls we made; and the higher satisfaction level

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the customer has, the more reward we get. I think the same should

be in our health care system.

I thank you for your time.

[The prepared statement of Mr. Carlson follows:]

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Senator COLEMAN. Thank you very, very much, Mr. Carlson.

Mr. Kuba.

STATEMENT OF SANJAY KUBA, PRESIDENT, GCI SYSTEMS,

SHOREVIEW, MINNESOTA

Mr. KUBA. Thank you. Well, I would like to say thank you to the

Senate Small Business and Entrepreneurship Committee and

Chairman Kerry for the work in tackling this very important issue.

Also, thank you to Senator Norm Coleman and his staff for their

work in putting this event together and for providing me the opportunity to testify.

GCI Systems is an information technology distributor and consulting and services company that started in 1988. We currently

have 23 employees. We started as a one-person business and have

grown nicely over the last 20 years. We began to offer health insurance to our employees in 1995. We have seen an increase in our

health care expenses every year since 1995, with the exception of

this year, 2008. Most of those years involved double-digit increases.

Each year we spent a great deal of time going out to the market

to price the three or four carriers that offer health insurance in the

small business marketplace in Minnesota. That exercise has also

included an analysis of co-pay amounts, hospitalization percentages, and maximum out-of- pocket amounts to get the most palatable blend of company premium increase versus benefit and related

expense to the employee.

Since 1998, the company has had two employees who each has

one child with a chronic medical condition. The annual medical expense of each of those children is substantial and sometimes approaches $100,000. This is completely beyond the company’s and

the employee’s control. We do not have enough employees to adequately spread the risk to a carrier offering health insurance based

on these two cases; therefore, everyone in the company must have

either considerably higher out-of-pocket expenses or opt out of our

program.

In 2005, we moved to an HSA. When we moved to an HSA, the

increase in our health insurance premium and combined with the

HSA contribution expense dropped to single digits. And in 2008,

the company’s total health care expense will drop based on our current employee count. However, we are in a sense passing an additional burden onto our employees as the out-of-pocket maximum

has increased from $5,250 to $5,900 for family coverage.

Today, only 12 of our 23 employees participate in our plan. Ten

of those 12 are covering only themselves as part of a single plan.

The only two that are opting for the family plan are the two people

mentioned earlier.

Based on the current employee count, the company will spend

approximately $50,000 on premium and HSA contribution expenses. The 12 employees’ combined out-of-pocket expenses will be

between $28,000 and $52,000 this year. The two employees who

have a child with a chronic condition will most likely have out-ofpocket costs of $12,000 and $15,500, respectively. And these are

truly burdensome amounts.

We do offer a solid health plan as the company contributes

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count, depending on which plan they participate in, single or family. However, I am hearing from other businesses, and many much

larger than ours, that they make no contribution to their employees’ HSAs.

How is this impacting our business? First, we spend a great deal

of time analyzing the marketplace and our options in going out for

bids each year. Second, the expense is burdensome for both the

company and its employees, as described earlier. Third, it is a constant obstacle in attracting new, highly skilled, and qualified employees. In fact, we just lost another prospective employee last

week because of extremely high family medical insurance costs.

When you compare the amount of out-of-pocket expenses that our

employees pay versus a company that is self-insured, we are paying

sometimes twice as much or more for family coverage.

The marketplace is clearly broken. In particular, Minnesota has

some extremely burdensome regulations. The requirement that carriers must be not-for-profit and must have minimum loss ratios

makes this market very unattractive for competitors. I believe that

only four companies participate in the small business market

today.

The carriers that participate in the market are mandated to

cover some 150-plus treatments and conditions. Only the companies participating in a small business marketplace contribute to

Minnesota Comprehensive Health plan, or MCHA. That is unfair

as it is a benefit to the entire market.

Insurance is supposed to be about spreading risk. How can there

be any kind of competitive marketplace when 3M is treated as one

group and 23-employee GCI Systems is treated as one group?

There is no real risk spread in the small business marketplace. Association health plans are not allowed. Association health plans can

be a great way to spread risk. And only health insurance premiums

made as part of an employer-sponsored plan or flexible spending

plan are tax deductible. Why is that?

What do I think should be done about this? Here are some of my

recommendations:

Pass association health plan legislation, first.

Two, increase the small business health insurance eligibility size

to 100 employees; 100 employees is really the minimum to self-insure. We were in that 50 to 100 size at one time and could only

find one carrier that would write insurance for us at that time, and

we could not self-insure.

Three, reduce the regulations tied to the market like minimum

loss ratios and excessive mandates to allow more competition and

provide more choice.

Find another funding source for MCHA.

Five, make personal health insurance premiums tax deductible

like the premiums that employers pay. Get employers out of the

health insurance business.

And, six, move quickly to drive electronic medical records to

lower administrative costs, provide better service, and increase the

transparency to the system.

Thank you again, Senator Coleman, for this opportunity to testify.

[The prepared statement of Mr. Kuba follows:]

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Senator COLEMAN. Thank you very much, Mr. Kuba.

Mr. Flohrs.

STATEMENT OF JASON FLOHRS, DIRECTOR OF GOVERNMENT

AFFAIRS, TWINWEST CHAMBER OF COMMERCE, PLYMOUTH,

MINNESOTA

Mr. FLOHRS. Good afternoon, Senator Coleman. Thank you for

the opportunity to be here today. I am pleased to submit the following testimony for the record, and thank you for holding this

hearing here in Minnesota.

My name is Jason Flohrs. I am director of Government Affairs

for the TwinWest Chamber of Commerce. TwinWest Chamber is a

regional business organization representing about 1,000 business

members in the western suburbs of Minneapolis. Of those 1,000

members, 78 percent are small businesses with less than 50 employees; 95 percent have fewer than 100 employees.

Health care remains the number one issue facing the business

community in Minnesota. In a scientifically valid sampling conducted last summer with businesses statewide, over half of the respondents cited ‘‘access to affordable health care’’ as the number

one or two issue facing their business. This level of concern is rising rapidly. This year, 40 percent selected it as their top issue, up

from only 33 percent a year before.

Affordability of health care dramatically outweighs other concerns related to business competitiveness, including workforce education, recruitment and retention of good employees, taxation, energy costs, and even foreign competition. In our own, non-scientific

surveys, ‘‘Business Ballots,’’ and questionnaires, health care is consistently at the top of the list among our member businesses’ concerns. In addition, in company visits made through the Grow Minnesota program, which is a business retention and expansion program that we partner on with the Minnesota Chamber of Commerce and the Minnesota Department of Employment and Economic Development, we continually hear anecdotal evidence and

horror stories, really, of the difficulties that small employers especially are having in providing health care to their employees.

Growth in health care costs per person that are paid for by private insurance is still 2 to 3 times higher than growth in per capita

income or wages and over 5.5 times higher than inflation. Employers continue to be the major source of health insurance for Minnesotans, but these cost pressures are causing a decline. Doubledigit premium increases are squeezing employers, and employersponsored insurance dropped from nearly 70 percent in 2001 to

barely 60 percent in 2004, only 3 years.

TwinWest supports creating a functioning health care marketplace that will achieve better health outcomes and slow the rate of

these cost increases. The business community hopes to achieve this

through a combination of both legislative action and individual responsibility for purchasing decisions.

Our initiatives are guided by five principles intended to work toward a viable health care market:

First, create understandable and comparable standards for pricing and quality of services so consumers can make decisions based

on value. As you have already heard, Minnesota is a leader in this

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endeavor, but much more can and needs to be done. Business owners are committed to getting this information into the hands of

their employees and helping them make value-based, cost-conscious

decisions.

Second, we have to reward doctors and hospitals for value, not

volume. Our health care system should pay based on results and

outcomes, not just on the number of procedures performed. Again,

efforts are underway in Minnesota that do attempt to address this,

but without similar alignment of incentives within Medicare, no

large-scale progress or nationwide progress will be made.

Third, reform health care insurance so purchasers have more stability and predictability. This is especially important for small businesses, as one or two major adverse health events within a small

employee pool can radically impact premium costs. You have heard

some of those stories already today.

Fourth, we need to increase the use of health information technology to improve quality of patient care.

And, fifth, reward health and promote wellness. In order to decrease the cost of health care, we must also prevent the need for

those services.

Finally, I would like again to stress our belief that efforts need

to be focused on actually lowering the cost of health care. Without

first controlling these skyrocketing costs, there is no viable financing solution.

Thank you for the opportunity to be here today. As an advocate

for small business owners, TwinWest looks to you to continue to

protect our members’ ability to be competitive and to create jobs by

solving one of our biggest challenges. Fixing the Nation’s health

care system is no easy task, but I hope it is one you will carefully

deliberate and constructively approach in this Congress.

Thank you.

[The prepared statement of Mr. Flohrs follows:]

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Senator COLEMAN. Thank you, Mr. Flohrs.

Mr. Oemichen, am I pronouncing the name right?

Mr. OEMICHEN. Oemichen, Senator. But I found being in St.

Paul, growing up here, it was an advantage to be Irish as opposed

to German.

[Laughter.]

STATEMENT OF WILLIAM L. OEMICHEN, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, MINNESOTA ASSOCIATION OF

COOPERATIVES AND WISCONSIN FEDERATION OF COOPERATIVES, ST. PAUL, MINNESOTA

Mr. OEMICHEN. Thank you, Senator and Members of the Committee. We are very pleased to be here. I am Bill Oemichen, president and CEO of the Minnesota Association of Cooperatives and

Wisconsin Federation of Cooperatives, and I am going to talk about

what appears to be a pretty unique project of joining individuals

together for purchasing health care as a group. But I want to just

set the stage here for just a couple of seconds.

We are proud that Minnesota is the leading cooperative State in

the Nation. We have over 1,000 cooperative businesses in the State.

Our sister organization in Wisconsin is proud that Wisconsin is the

second leading cooperative State in the Nation. Between the two

States, 6.3 million residents have ownership interest in a cooperative, and it is more than half of the State’s population in both

States. And these numbers are all according to statistics developed

by the U.S. Department of Agriculture, so Federal Government statistics. Here in the Twin Cities, three of the largest businesses operate as cooperatives, including Land O’ Lakes, CHS or Cenex Harvest States, and HealthPartners HMO.

The health care challenge for agriculture is what I would really

like to talk about today, and for us it is both a combination of price

and access. There have been a number of surveys done of agriculture populations. One of the best that we have looked at was

done by the University of Wisconsin-Madison, and they found that

41 percent of farm families in the Upper Midwest could not afford

to insure every member of the farm. In addition, about 18 percent

of farmers operate uninsured, and probably more importantly, for

many of the farmers, even though they are considered to have insurance, what they have is a high-premium, high- deductible, what

can really be only called a catastrophic health care plan. And, unfortunately, what we are finding in Wisconsin—and we think the

same statistics are going to be verified in Minnesota—is that most

farmers also do not have coverage as part of their health insurance

plan for any farm-related injuries. So if they are injured milking

the cow in the barn, that would not be covered.

The net result is health care is agriculture’s number one problem. We know this from surveying farmers. One survey from 4

years ago of dairy farmers in the Upper Midwest showed that even

though dairy prices were at record lows, the number one reason

dairy farmers were exiting was the fact that they could not get affordable quality health care.

So this led to a challenge, or this leads to a challenge for agriculture in our State of Minnesota because to the extent farmers

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cannot get health care, they are making decisions to leave, and

much of the State’s economy depends on agriculture.

So how did the cooperative community and agriculture community respond? We moved forward legislation in Minnesota and Wisconsin back in 2001, 2002, and 2003, to create purchasing alliances. In Wisconsin, they were specifically made cooperative purchasing alliances, and I am pleased to recognize State Senator

Sheila Harsdorf, who is here today sitting in the audience. She was

the principal author of the Wisconsin legislation. And Liz Quam,

who is also here, was the originator of the idea here in the State

of Minnesota, and she is a former Assistant Commissioner of

Health. Forming cooperative purchasing alliances is a cooperative

way. You can remember—not personally—but remember back to

the years of rural electrification and rural telephone service. When

there has been a need, people have banded together to try to deal

with the problem.

So the whole idea was to leverage buying power amongst all

these individuals because farmers typically buy their health insurance as self-employed individuals, and a statistic you might be interested in is farmers pay 3 times as much as salaried individuals

for their health insurance. They pay twice as much, on average, as

other self-employed individuals. And one of the principal reasons

for that is farmers are typically seen as being in dangerous occupations. And if Commissioner Ludeman were still here, he probably

could talk about that from a very personal perspective.

So we decided to work on forming a health care cooperative. We

approached Congress and we are very appreciative to you, Senator,

and your colleague Senator Herb Kohl from Wisconsin, and Representative David Obey for providing $4.4 million in Federal appropriations for an initial stop-loss fund for the Farmers’ Health Cooperative. This has been used primarily as a risk fund to get insurers

interested in providing insurance for the Farmers’ Health Cooperative. And prior to getting that money, we had approached every insurer in the State of Minnesota, every insurer in the State of Wisconsin, and they said they were not interested. Once they saw

there was actually some stop-loss fund dollars there, they understood that this is a serious project.

So we launched the Health Care Cooperative in Wisconsin on

April 1, 2007, working on a very similar project here in the State

of Minnesota, and as part of the co-op care legislation sponsored by

Senator Harsdorf, there have actually been, in Wisconsin, a number of small employer health care cooperatives—one in Brown

County, Wisconsin, for example, and forgive me for saying ‘‘home

of the Green Bay Packers.’’ But there are 120 small businesses in

that cooperative and buying their health insurance together for

over a year now, and they report that it is operating quite successfully.

As part of the health cooperative, we are providing much better

benefits than what farmers typically receive. We are providing that

24-hour coverage, so if they are injured in their barn, they are covered for that. We are providing prescription drug coverage, which

most farmers do not currently get. We are also providing—very importantly, we think—preventative health care for farmers, up to

$500 per family member per year. It is probably well known in agVerDate 11-MAY-2000 07:43 Oct 30, 2008 Jkt 042908 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 C:\DOCS\42908.TXT DianeA PsN: DianeA
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riculture that farmers are proud about the fact they have not seen

their physician in 10 to 20 years. But as you can imagine, we need

to encourage them to get in, and this has certainly helped to do

that.

So we commend Congress for looking at health care reform, and

especially you, Senator, and your interest in association health

plans. We think that that certainly represents a viable model that

can work very successfully across the country. We tend to be a little biased and express a little bit of preference for the cooperative

model for obvious reasons, as the Federation and the Association

of Cooperatives. But we like that model because it is a health care

entity that is actually owned by the members who are buying their

health care insurance from that entity, and so they really have a

strong input on what their health care looks like.

When we developed the Farmers’ Health Care of Wisconsin Cooperative, we surveyed over 4,000 farmers by telephone, brought several hundred farmers into focus groups, and said, ‘‘What would you

like in your health care plan?’’ And the health care plan that was

designed was based on what they wanted to see, and the board of

the cooperative is totally made up of farmers. And we think that

is something that gave a lot of confidence to the farmers who are

members there.

Another thing, one of the issues that I think you will find in association health plans—this is not an argument against association

health plans and perhaps we can suggest a way to deal with this—

is if you have a small business member from New York and a small

business member from Minnesota, typically health care costs are

going to be higher in New York. We have found that in Minnesota

you see similar things. Where I grew up out in western Minnesota,

in the Benson area, health care costs are typically lower than in

the Twin Cities. And what we did is we were able to price that

health care in part based on the geographic location of where that

member is, and we were allowed to do that under law. And so may

I suggest that to you as part of the association health plan.

We also very much like the idea of multi-State plans. One of the

desires, obviously, here in Minnesota is to have a health care cooperative like the one operating in Wisconsin and that has been very

successful to date. And we have to go through—get separate State

legislation in every State we go to, and we have to deal with the

complex State insurance regulations in each State. And in saying

that, I used to work for the State office of the Commissioner of Insurance, and I also served in Wisconsin as the chief consumer protection official for the State when Tommy Thompson was Governor.

And so perhaps in some cases, I put those regulations into place,

but they are very, very difficult for consumers and providers to understand. So allowing cross-border operations I think would help in

efficiency.

A couple other requests we would make to Congress: ERISA currently preempts cooperatives from State insurance regulation for

electric co-ops and telephone cooperatives. We would suggest the

possibility of looking into expanding that preemption for other

types of cooperatives as well, and this is not—and I tell you as a

former consumer protection official this is not an effort to get

around mandates. We actually fully comply voluntarily with all of

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the mandates, but basically the idea is to give us the ability to

build these efficient—more efficient, at least—health care entities

across State borders.

Health savings accounts. One of the issues we have run into

there in operating Health Care Cooperative is Federal law for

HSAs does not allow for a family deductible, and for farm families

this has been a problem. They are each looked at individually, and

so they have to satisfy their individual deductibles. And for farmers, they would like to do that as a family, if possible.

Prescription drugs. We are glad we are able to finally provide

that type of coverage to farm families, but they are certainly concerned about the cost of those prescription drugs. And I know Congress has been looking at ways to address that.

And just very quickly, I would like to echo or put an exclamation

point on everything that Commissioner Ludeman said on transparency of claims. In our contract with Aetna, who is our health

insurance company, we have negotiated transparency with them.

So all of that health care data flows through to the cooperative, so

the cooperative can make real pricing decisions and have a greater

ability to negotiate with Aetna in future rate increases, or hopefully someday maybe even rate decreases. And that we thought was

really, really important.

Senator COLEMAN. He is an optimist.

[Laughter.]

Mr. OEMICHEN. Yes, absolutely. So we appreciate the effort to be

here, and I will point out that the Congressional Research Service

is publishing a report on State health care innovations, and they

have informed us that they are citing this as one of the principal

State health care innovations for 2007.

Thank you again for the opportunity to testify.

[The prepared statement of Mr. Oemichen follows:]

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Senator COLEMAN. Thank you, Mr. Oemichen.

I do want to note the presence of Senator Harsdorf and thank

her for her leadership on this issue. I think you are doing extraordinary things, and it is nice to be able to do it, to have a framework

that allows you to operate. So to both Ms. Quam, who apparently

had the idea, had the thoughts behind this originally, and then for

the leadership of Senator Harsdorf, I certainly express my appreciation. Thank you.

Mr. McLaughlin.

STATEMENT OF PATRICK McLAUGHLIN, DIRECTOR OF

MARKETING, EMPLOYERS ASSOCIATION, INC.

Mr. MCLAUGHLIN. I am Pat McLaughlin, director of marketing

for the Employers Association, and I appreciate the opportunity to

share some thoughts, Senator, with you and the Committee today.

We were established over 70 years ago to provide assistance to

employers in the areas of employer/employee relations and management and leadership training and project assistance in basically

the HR area. We serve over 1,500 members, of which over 70 percent have 300 or fewer employees. But that represents nearly a

million employees that are members through their employer of Employers Association. And a key issue for our membership is affordable and competitive health care options. That is no secret to anybody. Too many of our members, though, are questioning the decision to continue to offer health care as an option. Over 80 percent

of the people employed in Minnesota are employed by organizations

having fewer than 200 employees.

Among the efforts in health care that we have spearheaded and

begun, we successfully ran a health care purchasing pool from 1991

to 1996, which at its peak covered well over 20,000 lives. We spent

3 years, from 2001 to 2003, in due diligence to find a fiscally prudent option after the plan that we did have was forced away from

the market based upon, among the limited options out there, none

of the health insurers wanting to book the business.

We were looking for something that would allow small and midsized employers to come together under a self-funded plan to minimize health care cost fluctuations and bring more competition to

the marketplace. A couple of our panel members today have already talked about one in particular. Mark, I think you said that

by selling to Pitney-Bowes, your employees saved 3,000 bucks

apiece for family coverage. It is not a level playing field, and the

ability to pool some risk is about one of the main ways that we are

going to get there.

The average size of employers that showed interest in our plans

was about 150 employees, and about two-thirds of those were manufacturing entities. In 2004, we formulated a separate trust comprised of our members who would spearhead the development of a

competitive health care option for fellow association members. At

the same time, bills were co-authored in the Minnesota House of

Representatives and Senate to change four components of the Multiple Employee Welfare Arrangement, MEWA, in State statute.

Technical changes were approved which allowed us to move forward with an application to the Minnesota State Department of

Commerce, and in December of 2004, conditional approval was

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granted—only to be recinded in April of 2005. This application also

had strong bipartisan support from State House and Senate lawmakers who realized the benefits of the association’s approach for

businesses in their areas.

In July of that year, our president, Tom Ebert, stated in part the

following:

The health care crisis to which we responded in the early 1990s persists today

with little substantive change. The fundamental issues causing spiraling health care

rates are still the same: the lack of full disclosure of health care costs and the absence of a true marketplace where consumers can shop for health care based on

price and on quality.

To solve the health care crisis, enlightened governmental leadership, rather than

political rhetoric, is required. A way must be found to truly pool the risk of small

employers and to level the playing field for all employers and employees in the

health care market.

In 2004, the Minnesota Legislature recognized the need for

health care marketplace reform to benefit small employers when it

amended the MEWA regulations. EA spent considerable time and

money in its MEWA application effort over the past 3 years.

Disappointingly, the Department of Commerce rescinded its initial conditional approval. The DOC’s contention that MEWAs

would fail in the future because they have failed in the past is frustrating. In light of new health care product choices and plan design

and more sophisticated leadership, we believe that MEWAs could

be successful in Minnesota, as they have been in other States.

We believe passage in the U.S. Congress of a law permitting national associations to form health care co-ops would be a health

care marketplace reform that would benefit small employers.

But there is another hope, another way. If Governor Pawlenty

sees the need for exploring the MEWA option and encourages the

Minnesota Commissioner of Commerce to waive MEWA restrictions—powers which he has been given by the legislature—the

Governor would help Minnesota’s small and medium-sized employers in providing cost-efficient health care coverage to their employees.

Over the past 2 years, we have tried to form strategic relationships to offer our members an opportunity to get bids on an individual-employer, self-insured health plan design, and developed

and delivered training around designing and implementing various

wellness and employee engagement initiatives. The first employer

self-insurance plan design for the small employer has been met

with anticipated hesitancy based on fear of fluctuating health care

costs and few competitive marketplace options from which to

choose. We ourselves as an employer went self- insured 2 years ago

for health and dental care for our employees. Thus far, we have

had one bad experience year, but a more positive second year,

keeping in mind that we only had one viable option from which to

choose.

Secondly, we implemented a population health management program for our employees, incenting healthy behaviors and action

plans. Many of our members have also either come to training at

EA to learn about a variety of health program designs or, more importantly, have moved into action and created programs that are

working for them. Some examples range from offering only healthy

vending machine foods to free dental checkups to full-blown comVerDate 11-MAY-2000 07:43 Oct 30, 2008 Jkt 042908 PO 00000 Frm 00043 Fmt 6633 Sfmt 6601 C:\DOCS\42908.TXT DianeA PsN: DianeA
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prehensive wellness programs. Our small and mid-sized employers

are doing things differently. They are encouraging and in some

cases mandating participation but, most importantly, realizing savings on health care premiums and potentially preventing more serious health problems in their employee populations.

Despite our efforts, small employers to compete effectively for talent, they must offer high- quality—and we heard that earlier—affordable health care to their employees. One way to accomplish this

at the Federal level is to pave the way for small employers to collectively pool their risk, whether it is in association health plans

or some other competitive market option, such as Taft–Hartley

trust plans or successful MEWAs in existence today.

So provide pooling cost and quality information accessibility, and

people will do that. We have learned that people will go after the

information if it is out there. They have done it for years. The unfortunate part is that still today people are much more adept at

finding out information on what toaster they ought to buy than

where they ought to go for important health care.

We should also encourage embracing new ideas, and I think the

Government can have a role in actually trying them in sort of control group fashion, to keep them under control, not have them run

out of sight in terms of large numbers of people becoming involved,

but rather use control groups of smaller numbers of people and approach new ideas and give them a chance to work in a marketplace

economy.

Thank you.

[Mr. McLaughlin testified on behalf of Susan Eskedahl, vice

president, Employers Association, Inc. Ms. Eskedahl’s statement

appears in Appendix Material Submitted, page 50.]

Senator COLEMAN. Thank you, Mr. McLaughlin.

I have a series of questions, some may be for individuals, some

may be for the panel. One of them, Mr. Carlson, is up front. I was

struck by your comment about selling the business to PitneyBowes, to a large employer. I think you said there was about

$3,000 in savings for employees. Help me understand why. What

are the competitive disadvantages that you have as a small business versus what the larger business could offer?

Mr. CARLSON. Although I do not know the intricacies of their

plan, as a large employer, they are able to contribute more toward

that dependent coverage that I could not pay, but they also have

a greater risk pool so their premium rates are lower, so they are

able to contribute more, so their overall cost is less. Thus, it is less

expensive for the employee.

Senator COLEMAN. One of the common denominators in all of this

testimony is—by the way, there are a number of common denominators that I have heard, and I will kind of walk through a couple

of them, just to make sure I clearly understand them, but increasing the pools—and I want to make sure I understand this. Mr.

McLaughlin, you talked about the MEWAs, the Multiple Employee

Welfare Arrangements. And then at the same time, you also talked

about the possibility of AHPs, kind of the national pooling, where

as I understand these Multiple Employee Welfare Arrangements

that typically it is kind of State focused. And perhaps the question

is to you, Mr. Oemichen, or to Mr. McLaughlin. Are these in conVerDate 11-MAY-2000 07:43 Oct 30, 2008 Jkt 042908 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 C:\DOCS\42908.TXT DianeA PsN: DianeA
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flict? You mentioned that there are some things that if you are

going to do AHPs to look at multi-State, to look at the reality that

there may be more efficient and lower-cost operations in one area

than the other. Do you see them—can you envision where they can

co-exist in the same health care marketplace, or are they entirely

separate entities?

Mr. MCLAUGHLIN. My view may be slightly myopic because the

majority of our membership lies within the State of Minnesota. I

would rather see, and from a personal standpoint, think it would

work better if there were a national multi-State arrangement

which would provide this kind of access for people.

Could they exist at the same time and in the same place? Perhaps so. But you do get into situations all the time within the

MEWA of employees for a company that are located all over the

country, and there are some considerations within that.

So that is not a perfect answer, but it is as close as we have

found to date, and the association health plan from our standpoint

would probably be a better solution.

Senator COLEMAN. Mr. Oemichen, could you see them existing in

the same place? One of the other concerns that comes up again and

again is added choices drive down cost. Would it be possible that,

in fact, existing in the same place would actually provide greater

choice and drive down cost?

Mr. OEMICHEN. I believe so. I do not think there is any inconsistency. One of the things that we found out when we created the

Farmers’ Health Cooperative in Wisconsin is that we started to see

resulting decreases in premiums and additions to plan offerings by

competitors in the State. So competition from our perspective is

something that is very good for the health care marketplace. And

so we think whether it is an association health plan, whether it is

a cooperative, whether it is a Multiple Employer Welfare Arrangement, MEWA, the more options that are out there, I think the better it is for the consumer.

The one issue is to make sure that they are dealing with the law

of numbers. The greater number of people they have in them, the

greater ability they are going to be able to negotiate for a better

price. The large companies, as has already been said, have figured

out how to do that, and because of that the health care providers—

not to give too much of my resume, but I sit on a hospital board,

and I see this happening. With the large employers—they can negotiate a much better rate with the hospital. Where does that cost

get pushed? It gets pushed down to the small employers who have

not been able to band together to negotiate for a better price.

So I think all these things can work together, and competition

would be very good for the marketplace.

Senator COLEMAN. Speaking about competition, one of the concerns that is reflected—I think, Mr. Kuba, you talked about a very

systematic kind of searching for the best plan, the best option

among the carriers. But the reality is that there are—what? I think

the first largest carriers in the State have 98 percent of the market. There are a limited number of carriers.

Would any of you gentlemen suggest anything we could do on the

Federal level to inject more competition into the State small group

markets? Is there anything—or do you feel that the level of comVerDate 11-MAY-2000 07:43 Oct 30, 2008 Jkt 042908 PO 00000 Frm 00045 Fmt 6633 Sfmt 6601 C:\DOCS\42908.TXT DianeA PsN: DianeA
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petition we have today is sufficient? And I think almost everyone

here has dealt with that.

Mr. KUBA. I will take a crack at it. I do not think the level of

competition is adequate, and if the four or five—we usually,I think,

we get bids from usually four. They are very similar in price. There

is not a whole lot of difference. I think the marketplace overall

seems to be set up so that you do not get a lot of price variation

between the major carriers.

I think it is a statewide issue, so from a Federal Government

perspective, I do not know exactly what can be done. But, you

know, the idea that these carriers have to be not-for-profit so they

set up not-for-profit subsidiaries or things like that and then have

to carry minimum loss ratios. I believe the percentage is 78 or 80

percent or something like that. They cannot make more than 20

percent a year, so if they do lose money, it takes a long time to

make that up.

Now, any carrier entering this marketplace to compete with Blue

Cross and the others is probably going to incur losses just entering

the market like you would entering—any business entering any

new market. But they do not have—with loss ratios and things like

that, they just do not have the ability to make that up. In my opinion, it really prevents other carriers to get involved in the market.

And, you know, the way the market is set up, if we are paying

to insure companies, they are paying to providers, what is their incentive to get more efficient, the insurance company? You asked

about IT for the providers, and the small providers. I mean, there

could be an incentive from an administrative standpoint because

the amount of time, the amount of manual time that small providers spend in just getting the records created correctly and compliance and submitting to the payers and those kinds of things,

they could really benefit from IT to lower those administrative

costs. I think their problem is that the market is so uncertain and

the cost pressure is so high that there is too much uncertainty.

But what is the incentive from a large insurance provider right

now to lower their costs? I mean, we basically are—and if their

costs go up, they just charge us more money.

Senator COLEMAN. Anybody else want to address that issue of

what we could do at the Federal level, things that we could do at

the Federal level to increase competition in the State small markets?

Mr. OEMICHEN. Senator, I would say association health plans is

one of the steps in the right direction because you are going to

allow an association on broader than a State boundary level to put

together a health care plan and get an insurer, and they will have

to meet perhaps some State regulations depending on how you

write the Federal legislation. But we would love it right now, for

example, if the Wisconsin Farmers’ Health Cooperative could start

offering health insurance to cooperative members in the State of

Minnesota. In many cases, they belong to the same dairy co-op, the

same farm supply co-op that already operates across State boundaries. But the health care co-ops cannot because of State regulations.

So it is taking us fairly considerable time to get State approval

here in Minnesota to get a health care cooperative or health care

43

trust put in place. It would be a lot easier matter if we could have

some type of reciprocity, or the ability to operate across State lines,

and by doing so, going back to that word again, ‘‘competition.’’ It

would create competition, and we think just like in Wisconsin, it

might help provide better benefits at a lower cost to Minnesota

residents.

Senator COLEMAN. Mr. Oemichen, you made a point in talking

about expansion of ERISA to explain that we are not looking to get

around mandates. Let me talk about mandates. In fact, Mr. Flohrs’

testimony really mirrored what Mr. Carlson said, talking about

gastric bypasses, for instance. You had a great record, you were

saving costs, and all of a sudden, you find yourself, Mr. Carlson,

with an increase. In part, you indicated, I believe, it was a certain

mandated coverage that is now impacting that.

I have been working with the Mayo Clinic. This is politically a

difficult issue. In Minnesota, we have lots of mandates. I think

there are over 60 mandates. And any time you talk about eliminating a mandate, a group will come forth and say, hey, that is not

fair to us. On the other hand, you know, if you are 21 years old

and carrying health insurance, you need to carry 61 mandates;

what is that going to do to costs? And for employers, even if we

would have AHPs, if you have to carry 61 mandates, affordability

is still going to be an issue.

The question is how you deal with that in a non-political way.

The Mayo Clinic has talked about setting up some sort of independent commission. I wonder if I could get a reaction as to, one,

your reflection on the issue of mandates, and whether that is an

idea that makes sense. Or do you have another idea of how we

could deal with it? Anybody want to raise that? I know at least two

panelists raised the issue.

Mr. CARLSON. I will address it just from my own naive perspective. I really feel for families who have these major issues that

need attention, and they can be very expensive. And so it becomes

an entire issue for the entire population to deal with. And again,

the problem is that a majority of it is falling on small business.

But I think we need to—as Mr. Ludeman has said—let us get

back to the practitioners who are providing these services. The

health care industry is the only industry I know that gets rewarded

for how many times you go see the doctor. They can fail miserably

in their diagnosis, and I still have to pay them. If I fail in my delivery to my customer, they do not pay me. And so if we can get control on that, we can get control under the mandates, and it can become more affordable for everyone. The mandates may not be that

big an issue. Who is the best provider? Who is the best healer in

that area of mandates? Who is most effective at it? Let us reward

them and encourage others to get better at it, and then I think we

all win.

Senator COLEMAN. Mr. Flohrs, I would like your perspective.

Mr. FLOHRS. The Mayo idea that you brought up is actually a

point that is included in our health care policy agenda for the coming year. I think it is an idea that does make sense as you are dealing, as you mentioned, in a political environment, and oftentimes

with very charged emotional cases where individual families and

individual people are suffering great losses and great challenges.

44

There needs to be a response to that, certainly. But looking at it

from a statewide perspective or a nationwide perspective, the overall health of the system also has to be considered. That is why we

have called for an independent third-party kind of review of that

based on scientific evidence, based on economic evidence, what it

will do to a health care marketplace, to insurance premiums in

general, and bring that back to the legislature to allow them to use

that in making those decisions.

Senator COLEMAN. I want to take advantage of the panel here.

I know we are just starting to get back some of the data on health

savings accounts that I have heard anecdotally, high-deductible

health plans. Could I get some reaction from folks as to what your

own experience has been and how worthwhile these offerings are?

Mr. Carlson?

Mr. CARLSON. I have never offered that in my company. I seriously looked at it this year, and we do have that option now under

our new employer. I am not aware of any of my employees taking

advantage of that yet. It takes a lot of education and a lot of understanding of why that would work. I think they are a good idea. I

am just new to this, so I really cannot add much. Sorry.

Senator COLEMAN. I appreciate that.

Mr. Kuba.

Mr. KUBA. We adopted it in 2005. It slowed the growth of our

health care expenses. We went to a high-deductible plan. We have

about 50 percent of our people participating. The reason why we

went that way was to add some—for two reasons. One is to add

some predictability. So if you know you are going to be in a situation where you are going to incur high medical expenses, at least

you have got some predictability as to what that is. Number two

is that with HSAs, employees can contribute to their own HSA; it

is tax deductible; and it is a way to pay the out-of-pocket expenses

in a tax deductible manner, as opposed to going with a cafeteria

plan like a section 125, or—I mean, excuse me, a flexible spending

plan like a section 125, and a section 125 plan is much more onerous and much more risky for an employer than an HSA, is what

we have found.

Senator COLEMAN. One of the complaints about HSAs, one of the

criticisms has been that they are not helpful to employers at certain socioeconomic levels. Can you respond to that at all? Is there

an income level where somehow it is less effective or people are

less interested? And then let me—I hate to do two questions at one

time, but I want to kind of follow up on this HSA question. Mr.

Carlson’s comment about the level of sophistication or knowledge

that one would need to make those choices, could you comment on

that? And, Mr. Flohrs, I would love to hear the TwinWest Chamber’s perspective on that also.

Mr. Kuba.

Mr. KUBA. The 12 people who are participating in our plan right

now are at all income levels. They are across the board. There is

not any income level. However, only two people are participating

in the family option. Everybody else is just covering themselves,

whether they are married, with children or not. And those two are

the ones that have the children that have chronic medical conditions.

45

Senator COLEMAN. Mr. Flohrs, could you give your perspective on

this issue?

Mr. FLOHRS. Yes. I do not know if I can speak to the different

income disparities and who would select them or not. The HSA

model or the health reimbursement account model is something

that the chamber has supported, really because of a desire to bring

the marketplace back into health care. And the current system as

we have it, without that, it does not provide a direct incentive for

an individual to shop around, to compare that cost and value, to

be careful about how they utilize their health care dollars or how

they spend their health care dollars. It really puts that control directly back in their hands and reconnects them to those purchasing

decisions, which does lead to real savings. It is not just a different

way to finance it.

Senator COLEMAN. Mr. Oemichen.

Mr. OEMICHEN. Senator, with our Farmers’ Health Cooperative,

about 40 percent of the members are utilizing a HSA. Of our six

plans, two of them are HSA eligible. And you might be interested

to know that, regardless of income, the typical farmer, if he is in

a family plan, has a $5,000 deductible, and so that is much higher

than the $1,000 threshold. So if they can put that money in a taxadvantaged way, they absolutely would want to do it, and they very

much appreciate the existence of HSAs.

Can I make one comment on mandates, Senator?

Senator COLEMAN. Please.

Mr. OEMICHEN. I want to go back to your previous question, because I said we have been complying with mandates. I understand

from the consumer protection perspective the idea of having mandates because of the philosophical feeling that when a consumer is

negotiating with a large insurance company, there is unequal bargaining power. I just want to point out that in a cooperative that

is a little bit different because the consumer is the owner of the cooperative and making that health insurance choice. So I am not

sure that same paternalistic thought really applies in that situation. And so I think that that could be a compelling case to say that

perhaps the State should back off somewhat on requiring mandates

when it is the consumer who owns the health care entity.

Senator COLEMAN. Mr. McLaughlin.

Mr. MCLAUGHLIN. We have an HRA in our plan, and the reason

is that—and I think this speaks to the income disparity a little bit,

the HSA was—one of the requirements of the HSA had to do with

prescription co-pays, that they had to be covered under the HSA at

one particular point in time. And the lower-income people would

use up an HSA very quickly because they were not able to put as

much into the HSA, and so the tax advantage of saving for the future was not there for those people.

In our plan, we as an employer—when there is a balance at the

end of the year—put half of it into next year’s HRA so that over

time, hopefully you can offset the out-of-pocket increases that we

have incurred as individuals.

I think over time it will work, but in my experience, those people

that are of somewhat lower income are always going to be struggling almost regardless of what the plan is.

46

Senator COLEMAN. Let me ask, just if I can, one or two other

questions. I do want to end this in a few minutes just to stay within the time that we allowed. You talk about allowing small businesses—and I will ask you, Mr. McLaughlin, or others—to pull together, self-fund. Are there protections or requirements to assure

sustainability? Mr. Oemichen, I would ask you in terms of other—

in Minnesota, we kind of pride ourselves on, you know, ‘‘co-ops are

us,’’ and we have got a long history. But that in and of itself does

not guarantee sustainability, and I wonder are there kind of basic

protection requirements that need to be in place to ensure the sustainability of some of these small business pooling and self-funding

proposals.

Mr. MCLAUGHLIN. Absolutely. That is absolutely necessary.

There is a long history of that, of certain trust plans getting into

financial trouble. So the funding requirement needs to be policed.

It needs to be regulated. But that can still be done and in the long

haul save the consumer some dollars.

Senator COLEMAN. Mr. Oemichen, do you want to add to that?

Mr. OEMICHEN. I was just going to add there is a long history

of cooperatives operating successfully. HealthPartners HMO, as I

mentioned, operates on a cooperative basis, and they have a million

members and have operated for several decades. And there are a

number of examples across both States. The one issue I get concerned about is that because there is a potential threat we should

not do any of them. And we need to have more experimentation out

there, and there are going to be some risks that some are going to

fail, but there is also the chance that many of them, like

HealthPartners, like other cooperatives that have been successful,

are going to go forward and have a very long life and provide that

competition that is necessary.

So this is maybe more of a philosophical response to your question, but I think that the proof is in the pudding. There are many

examples where they have already been very successful.

Senator COLEMAN. Mr. Kuba, do you want to respond? I see a

nodding of the head to indicate agreement with the previous comments.

Mr. KUBA. Yes. I do not have anything to add. I agree with all

that.

Senator COLEMAN. Let me ask the last question, then. We have

talked about the Tax Code allowing tax deductions for health care

costs and some of the advantages. You know, Big Business has it.

Just one open question to all the panelists. Tax policy can impact

behavior and can make it easier to move into a certain arena, can

provide greater opportunity. What additional tax policies can Congress enact to provide the most meaningful assistance to small

businesses in the area of health care? Is there anything we did not

discuss today? Are there other things we should actually go back

to the Finance Committee and say it is strongly recommended that

if you really want to do something meaningful, beyond what we

have talked about, to help small business, this is it? Are there

other things that should be put on the table, something that we

have not discussed here today?

Mr. Flohrs.

47

Mr. FLOHRS. Senator Coleman, while I do not have any specific

recommendations on Federal tax policy, I think that many of the

things that can be done using that tax policy should be done in the

way that puts decisions and puts the market back into the health

care system, because we have talked a lot about different financing

models this morning, different ways of grouping together, spreading risk. If something is not done about actually controlling just

rising costs in the delivery of health care itself, all of those financing solutions are in the end unsustainable. The State has a large

pool as it sponsors its uninsured, and yet those costs are still continuing to go up. So until we address the costs, many of the financing solutions need that cost piece to go along with it.

Senator COLEMAN. I have indicated before that I am going to

keep the record open for 2 weeks. I lay that question out to the

panelists, and within 2 weeks, if individually or any of the associations with which you work have some advice or counsel that you

would so offer, I would love to hear from you on that very specific

question.

Mr. Flohrs, your comment, that is perhaps a good comment to

draw this to a close, but realize that we have got to deal with the

cost of health care, and as that continues to rise, it makes it more

and more difficult for small businesses, for the average individual

to have the coverage that they need, regardless of what the pooling

arrangements are and regardless of what the cooperative arrangements cost, is an issue that clearly has to be dealt with.

What I heard today, if there are themes, reward value not volume, again and again and again, quality, transparency, competition. So as I go back, those concepts will certainly be ringing in my

ears and I will look for specific ways in which to do that.

I want to thank all the panelists for your participation. This has

been very, very helpful. As I said, I will keep the record open for

2 weeks, and with that, this hearing is now adjourned.

[Whereupon, at 3:48 p.m., the Committee was adjourned.]

(49)

APPENDIX MATERIAL SUBMITTED

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COMMENTS FOR THE RECORD

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