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48–406 PDF 2011

S. HRG. 111–960 

ADDRESSING INSURANCE MARKET REFORM IN 

NATIONAL HEALTH REFORM (ROUNDTABLE 

DISCUSSION) 

HEARING 

OF THE

COMMITTEE ON HEALTH, EDUCATION, 

LABOR, AND PENSIONS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON

EXAMINING ADDRESSING INSURANCE MARKET REFORM IN NATIONAL 

HEALTH REFORM 

MARCH 24, 2009 

Printed for the use of the Committee on Health, Education, Labor, and Pensions 

( 

Available via the World Wide Web: http://www.gpo.gov/fdsys/ 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS 

EDWARD M. KENNEDY, Massachusetts, Chairman 

CHRISTOPHER J. DODD, Connecticut 

TOM HARKIN, Iowa 

BARBARA A. MIKULSKI, Maryland 

JEFF BINGAMAN, New Mexico 

PATTY MURRAY, Washington 

JACK REED, Rhode Island 

BERNARD SANDERS (I), Vermont 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, JR., Pennsylvania 

KAY R. HAGAN, North Carolina 

JEFF MERKLEY, Oregon 

MICHAEL B. ENZI, Wyoming 

JUDD GREGG, New Hampshire 

LAMAR ALEXANDER, Tennessee 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

JOHN McCAIN, Arizona 

ORRIN G. HATCH, Utah 

LISA MURKOWSKI, Alaska 

TOM COBURN, M.D., Oklahoma 

PAT ROBERTS, Kansas 

J. MICHAEL MYERS, Staff Director and Chief Counsel 

FRANK MACCHIAROLA, Republican Staff Director and Chief Counsel 

(II) 

C O N T E N T S 

STATEMENTS 

TUESDAY, MARCH 24, 2009 

Page 

Bingaman, Hon. Jeff, a U.S. Senator from the State of New Mexico, opening 

statement .............................................................................................................. 1 

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah ............................ 2 

Roberts, Hon. Pat, a U.S. Senator from the State of Kansas .............................. 3 

Brown, Hon. Sherrod, a U.S. Senator from the State of Ohio ............................. 4 

Prepared statement .......................................................................................... 5 

Hagan, Hon. Kay R., a U.S. Senator from the State of North Carolina ............. 7 

Trautwein, Janet, Executive Vice President and CEO, National Association 

of Health Underwriters, Arlington, VA .............................................................. 8 

Prepared statement .......................................................................................... 9 

Williams, Ronald A., MS, Chairman and Chief Executive Officer, Aetna, Inc., 

Hartford, CT ......................................................................................................... 19 

Prepared statement .......................................................................................... 20 

Pollitz, Karen, M.P.P., Research Professor, Health Policy Institute at Georgetown University, Washington, DC ...................................................................... 25 

Prepared statement .......................................................................................... 25 

Ignagni, Karen, M.B.A., President and CEO, America’s Health Insurance 

Plans, Washington, DC ........................................................................................ 31 

Prepared statement .......................................................................................... 32 

Nichols, Len, Ph.D., Director, Health Policy Program at the New America 

Foundation, Washington, DC .............................................................................. 41 

Prepared statement .......................................................................................... 42 

Baicker, Katherine, Ph.D., Professor of Health Economics, Department of 

Health Policy and Management at the Harvard School of Public Health, 

Cambridge, MA .................................................................................................... 46 

Prepared statement .......................................................................................... 47 

Praeger, Sandy, Health Insurance Commissioner, State of Kansas, Kansas 

City, KS ................................................................................................................. 53 

Prepared statement .......................................................................................... 54 

ADDITIONAL MATERIAL 

Statements, articles, publications, letters, etc.: 

Senator Enzi, prepared statement .................................................................. 90 

Response to questions of Senator Hatch by: 

Karen Ignagni, M.B.A. .............................................................................. 91 

Sandy Praeger ........................................................................................... 92 

Katherine Baicker, Ph.D. .......................................................................... 93 

Ronald A. Williams, MS ............................................................................ 93 

Len M. Nichols, Ph.D. ............................................................................... 98 

(III) 

(1) 

ADDRESSING INSURANCE MARKET REFORM 

IN NATIONAL HEALTH REFORM (ROUNDTABLE DISCUSSION) 

TUESDAY, MARCH 24, 2009 

U.S. SENATE, 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 10:05 a.m. in Room 

SD–430, Dirksen Senate Office Building, Hon. Jeff Bingaman presiding. 

Present: Senators Bingaman, Harkin, Brown, Casey, Hagan, 

Merkley, Burr, Hatch, Coburn, and Roberts. 

OPENING STATEMENT OF SENATOR BINGAMAN

Senator BINGAMAN. OK. Why don’t we get started? We have a 

few people here, and we thank everybody for coming. 

Senator Enzi, I am told, is snowed in Appropriations Wyoming 

and is not able to be here. Senator Roberts is going to fill in for 

him and is on his way. But since we have several Senators here, 

why don’t we go ahead and get started? 

Let me make a few comments here and then ask any other Senator that wants to make comments to do so. Then we will turn to 

our witnesses, and we have sort of set this up as a roundtable discussion so that we don’t have it as formal as usually is the case 

with hearings. 

This is the second in a series of hearings that were designed to 

explore key issues surrounding legislation to provide meaningful 

and affordable health insurance for all Americans. Today’s hearing 

focuses on the insurance market reforms that are needed to achieve 

that goal. Particularly, it is focused on small group and individual 

insurance markets, and we thank all the panelists for being here. 

Approximately 60 percent of Americans receive their coverage 

today, their private insurance coverage from large employers. That 

is employers with 50 or more employees. Insurance offered through 

these employers include many protections, such as requirements 

that insurance companies provide coverage to all interested employees, the creation of large risk pools to spread the cost of coverage, and prohibitions on excluding coverage for specific pre-existing conditions. 

In contrast, the coverage in the individual market is much less 

predictable, and regulations governing this market vary considerably from State to State. Individuals may or may not have imporVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\DOCS\48406.TXT DENISE
2 

tant protections to ensure that coverage is meaningful and affordable. 

For example, individuals may have critical health conditions that 

are excluded from coverage, or they may have very high cost-sharing requirements or be excluded from coverage altogether based on 

broad nonmedical characteristics. For example, older individuals on 

average are charged six times more for a policy than younger individuals, and women may be charged as much as 50 percent more 

for coverage than their male counterparts. 

The National Women’s Law Center indicates that it is still legal 

in nine States for insurers to reject individual applicants on the 

basis of having experienced domestic violence. In the end, about 30 

percent of individuals applying to the individual insurance market 

are either denied a policy or are forced to pay significantly more 

for coverage, and only about 15 million to 17 million Americans 

purchase policies on the individual market. 

As to the small business or small group market, that is, frankly, 

a market very relevant in my State, where most of the employers 

are small employers. In this market, like in the individual market, 

it is more difficult to spread risk because of the small size. Similarly, small employers have less bargaining power to negotiate affordable and meaningful coverage. 

In many cases, small businesses have found it difficult to find affordable and meaningful coverage and have chosen not to provide 

health insurance to their employees. According to the Kaiser Family Foundation, less than two-thirds of small businesses offer 

health benefits to their employees, and this problem is apparently 

getting worse. Ninety percent of the decline in employer-sponsored 

coverage has been attributed to small businesses. 

So we want to explore these issues with this group of panelists. 

I was told that Senator Roberts was going to come and stand in 

for Senator Enzi here. He is not here. Let me just see if Senator 

Hatch—excuse me? Oh, here. He arrives right now. OK. 

Senator ROBERTS. What are you doing down there? 

[Laughter.] 

Senator BINGAMAN. Come on down here. We are waiting for you 

to tell us what you know on this subject. 

While I am doing that, I will just call on Senator Hatch and any 

other Senator who wants to make any initial statement here before 

we get into this. 

Senator HATCH. Do you want me to go? 

Senator BINGAMAN. Go right ahead. 

STATEMENT OF SENATOR HATCH

Senator HATCH. Well, we welcome all of you experts here today. 

It is very important because we know that insurance is one of the 

most important issues that we have in all of healthcare, and I don’t 

believe you can do a healthcare bill without resolving some of the 

problems that exist in the insurance industry. 

You folks, you do a lot of good for the industry, but there are also 

a lot of things that are challenges and problems that we have got 

to work out. Insurance market reform, there is no question about 

it, is a critical piece of any kind of healthcare reform if we are 

going to do it at all. 

3 

I think virtually everybody agrees that reform is necessary, and 

the question is what reforms should be implemented, both on the 

State and Federal levels? I am going to be very interested in what 

you have to say here today. We have chatted with a number of you 

in the past, and we are very, very impressed with this panel. 

We welcome you to the Senate. We look forward to hearing from 

you. 

Thanks, Mr. Chairman. 

Senator BINGAMAN. All right. Senator Roberts, did you want to 

go ahead? 

STATEMENT OF SENATOR ROBERTS

Senator ROBERTS. Yes, sir. Thank you very much. 

I apologize to the group for being late. I was just finishing up finally reading the entirety of the stimulus bill. That is a joke. That 

is not—well, it is not a joke. 

Senator BINGAMAN. Please continue to tell us whenever you do 

tell a joke. 

Senator ROBERTS. Yes. OK. 

[Laughter.] 

OK. Mr. Chairman, I want to thank you for holding this roundtable today, and I want to pass on Senator Enzi’s thanks as well 

for the members of the committee. I know he would like to be here 

with us today, but the weather in Wyoming is not a very good situation. The weather had other ideas. He is starring in that movie, 

‘‘I Am Snowed In In Wyoming.’’ 

I understand the staffs worked very closely to plan today’s roundtable, as well as set an agenda for two additional roundtables in 

the future. This is a very good thing. I appreciate that. I know Senator Enzi does as well, as does the chairman. 

I think we have a stellar panel. I am looking forward to hearing 

from our experts and getting into the details of insurance market 

reforms. I believe it is very helpful to hear from people that have 

actually enacted policies in the real world. This is called reality, a 

reality hearing. You can tell us what you did right, what you did 

wrong, and how you would improve things moving forward. 

As a Senator from the State of Kansas, I could not be more proud 

that one of these experienced people on our panel today is Kansas 

insurance commissioner, former Kansas legislator, and my very 

good friend Sandy Praeger. 

Commissioner Praeger was first elected as the Kansas insurance 

commissioner in 2002, went on to re-election in 2006. Her health 

insurance expertise and her leadership abilities have also been recognized at the national level. She is the most immediate past president of the National Association of Insurance Commissioners. 

In addition, she has experience as a past mayor of the city of 

Lawrence, no small task. Lawrence, that is the home of the 

Jayhawks, right? Right. That comes from a Wildcat, Mr. Chairman. 

You would have to understand that if you were from Kansas. 

A past member of both chambers of the Kansas legislature. I am 

so pleased that Sandy could be here today to share her considerable experience with health insurance market regulation with this 

committee. 

4 

Thank you, Sandy, and thank you to all of our panelists for taking time out of your very valuable schedule to be here today. I look 

forward to hearing from you. 

I hope the members of this committee can learn from all of our 

witnesses and use that knowledge to better inform their decisions 

on healthcare reform legislation. Healthcare reform will be difficult. There will be tradeoffs with any policy we devise. Insurance 

reforms all result in tradeoffs. 

Rating rules are a perfect example. We must be cautious when 

considering reforms that may result in unaffordable prices for our 

young and healthy. We need those folks to participate because they 

help keep costs down. However, ensuring access to quality insurance for those struggling with health conditions is, I hope, our top 

priority. 

Our job here is to find a balance that accomplishes our goals but 

doesn’t create a disruption in our insurance marketplace. While it 

is critical we get the policy of insurance market reform right, I 

would be remiss if I didn’t at least mention the perils of the process. Without the right process, we can’t move forward on the best 

healthcare reforms for the American people. I doubt seriously if we 

can do this in 100 days. 

If those in the majority attempt to use the budget reconciliation 

process to put healthcare reform through the Senate—or a better 

word would be ‘‘jam’’—they will be sending a clear signal that they 

are not interested in a truly bipartisan effort. 

With that, I look forward to our witnesses to make recommendations on how we should shape policies of healthcare reform. 

Mr. Chairman, thank you again for holding this roundtable. 

Senator BINGAMAN. Well, thank you again. Thank you. 

Let me just see if Senator Brown or Senator Coburn or Senator 

Hagan wish to make any statement? 

STATEMENT OF SENATOR BROWN

Senator BROWN. Just a few comments. Thank you, Mr. Chairman, for your leadership. 

Thank you all, members of the panel, for your distinguished service to our country and for being here today. 

Recently, a couple of weeks ago, my office conducted a seminar, 

if you will, for the five new Ohio House members elected last year, 

bipartisan, some in both parties—new House members from my 

State—to talk about case work and to sort of help them work their 

way through these first months in office in dealing with all the 

problems that people bring to our offices. And obviously, one of the 

issues that comes up so frequently is how do you deal with health 

insurance companies? 

I think we all—our offices, if we are paying attention—all of our 

offices spend an awful lot of time fighting with insurance companies on behalf of our constituents. Insurance companies that often, 

and probably the perception of many, discriminate based on age 

and gender or medical history. Insurance companies that seem to 

put restrictions on treatments and prescription drugs that patients 

get, the wait for reimbursement, the wait to pay claims, and preexisting conditions. All of the issues that we have disagreements on 

5 

and that it is our job as elected officials to fight for our constituents 

to be treated fairly. 

Let me share one real quick story about all of this that may 

bring this home in some sense. A woman named Deborah from 

Summit County, Ohio—the city of Akron is the county seat there— 

she is one of the 50 million Americans left out of our healthcare 

system because she lacks insurance, she can’t get insurance. 

Her income is too high for Medicaid. Her pre-existing condition— 

she has had two heart attacks. She has a spinal injury. Those conditions disqualify her from finding private insurance in the private 

market, her inability finding affordable insurance in the private 

market—no surprise there. 

She wrote to me, 

‘‘My only option is to start paying for my funeral. While everyone on Capitol Hill argues the point, people are suffering 

and dying. America proclaims itself the wealthiest and most 

powerful Nation in the world. If that is the case, why do we 

have people suffering and dying for lack of simple healthcare?’’ 

We know what we need to do this year, and I think Deborah’s 

words speak it certainly more persuasively than any of us could. 

Last point, Mr. Chairman, I think that the President is right 

when he said there should be an option like the original Medicare, 

some public option to bring competition. Competition, as we hear 

from our friends in the insurance industry and hear from people 

on all sides of political debates, competition is the American way. 

It is healthy for our society. 

I think competition in healthcare with a public option, whether 

it takes the form of FEHBP in some case, some sense, or a public, 

more Medicare look-alike option is a good thing, I think, for the insurance industry. It is a good thing for the country, and it is something that this committee I think should and will pursue. 

I again thank the chairman for having this hearing today. 

[The prepared statement of Senator Brown follows:] 

PREPARED STATEMENT OF SENATOR BROWN

I want to first thank the Senator from New Mexico for holding 

this important hearing. He has been doing a great job leading the 

HELP working group on coverage and I look forward to working 

closely with him as our committee’s effort to reform the health care 

system moves forward. 

I think we can all agree that the private health insurance market in this country is broken. 

Every day I hear from constituents who are frustrated: 

• with health insurance that is nearly impossible to afford; 

• with health insurance that fails to protect them from catastrophic health costs; 

• with health insurance that openly discriminates based on their 

age, gender, location, or medical history; 

• with health insurance that puts onerous restrictions on which 

providers patients can see and on which treatments and prescription drugs they can get; 

6 

• with health insurance that waits literally months to pay 

claims, or requires enrollees to fight for every penny the insurer 

owes; 

• and with health insurance that doesn’t respond to customers’ 

questions, problems, and appeals. 

Take, for example, Debra from Summit County, Ohio. She is one 

of the nearly 50 million Americans locked out of our health care 

system because she lacks insurance. Her income is too high for 

Medicaid, and her pre-existing conditions—she has a spinal injury 

and is recovering from two heart attacks—disqualify her from finding affordable insurance in the private market. As a result, she has 

piled up thousands of dollars in unpaid bills and is in constant 

pain. 

She writes, ‘‘My only option [is] to start paying for my funeral. 

. . .While everyone on Capitol Hill argues the point, people are 

suffering and dying. . . . America proclaims itself the wealthiest 

[and] most powerful Nation in the world. If this is the case, then 

why do we have people suffering and dying for lack of simple 

health care?’’ 

Or then there are those, like Barbara and Allen from Lyndhurst, 

Ohio, who have what is considered very good insurance, but it was 

not enough to protect them from a rash of bad luck. 

Barbara was diagnosed with a rare form of muscular dystrophy 

15 years ago. She has insurance, but the payments for the chronic 

disease management she needs are not sufficient to ensure access. 

In fact, the local hospital sometimes refuses to admit her because 

it would rather fill its beds with more lucrative patients. 

Allen developed stage 4 Non-Hodgkin’s lymphoma while working 

as a physician for a medical center in Cleveland; though he recovered from the disease he was forced out of his job and now is discriminated against by potential employers because his medical status skews the risk pool that insurers use to price their plans. Unfortunately, these stories are not unique. They represent the experience of thousands of Ohioans and millions of Americans who are 

being ill-served by the private health insurance market. 

And it is because of stories like these that I am skeptical of any 

health reform proposal that relies solely on the private insurance 

market to solve all of our problems. 

It is private insurers who decided to experience-rate enrollees 

and apply pre-existing condition exclusions, which has skewed risk 

pools, forced Federal and State Governments to cover more Americans, and enriched insurers by allowing them not to do their jobs. 

It is private insurers who have set ‘‘reasonable and customary’’ 

reimbursement rates so low that balance billing has become the 

norm and ‘‘participating’’ providers an endangered species. 

It is private insurers who instruct their claims personnel to deny 

claims first so they can hold on to premium dollars for as long as 

possible. 

Private insurers have helped to create a system of winners and 

losers, a system in which insured individuals can still be bankrupted by health expenses and uninsured individuals can die far 

too young because they can’t get the care they need. 

7 

There are good insurers and bad insurers, but the private insurance system is not, by any stretch, the complete answer to any 

question in health reform. 

Insurance reform is positive, insurance reform is essential, but 

insurance reform is only a piece of the health reform puzzle. 

There are those who believe that health reform can be achieved 

by tightening insurance regulation. 

When the Medicare Advantage program was launched, private 

insurers promised that taxpayers would get better coverage at a 

lower price. 

Medicare remains far more popular, with far fewer complaints, 

than Medicare Advantage, and taxpayers are paying significantly 

more for Medicare Advantage than they are for Medicare. 

Private insurance reform isn’t a panacea. Regardless of what insurance reforms we apply, President Obama is right that there 

should be an option like original Medicare for Americans to 

choose—the competition will be healthy, and those Americans who 

want to avoid health plans tethered to profit targets should have 

another choice. 

I am looking forward to today’s testimony and know it will be 

helpful. Health reform is a puzzle we can solve; this is one of the 

pieces that will help get us there. 

Thank you, Mr. Chairman. 

Senator BINGAMAN. Senator Coburn. 

Senator COBURN. I will pass. 

Senator BINGAMAN. Senator Hagan. 

STATEMENT OF SENATOR HAGAN

Senator HAGAN. Thank you, Mr. Chairman. 

I would like to welcome all of the panelists here. 

I think this issue is one of the biggest issues facing the Nation 

right now, the affordability, accessibility, and in particular, the 

portability of insurance so that people can change jobs, especially 

those with pre-existing conditions. I think this roundtable will help 

bring some of this to light. 

It is certainly a huge issue facing our country today, and I am 

thrilled to be at the table. 

Thank you. 

Senator BINGAMAN. Well, thank you. 

Let me just very briefly introduce this distinguished group of witnesses we have here. 

Janet Trautwein is the executive vice president and CEO of the 

National Association of Health Underwriters in Arlington, VA. 

Thank you for being here. 

Ronald Williams is chairman and chief executive officer of Aetna, 

a leading diversified health insurance company. 

Karen Pollitz is a research professor at the Health Policy Institute at Georgetown University. Thank you for being here. 

Karen Ignagni—am I pronouncing that right? OK. President and 

CEO of America’s Health Insurance Plans, a trade association that 

represents the Nation’s health insurance organizations. 

Len Nichols directs the health policy program at the New America Foundation and has a distinguished background in these issues 

as well. 

8 

Katherine Baicker is a professor of health economics at the Department of Health Policy and Management at Harvard School of 

Public Health. Thank you very much for being here. 

And Ms. Praeger was just introduced, Commissioner Praeger. So 

we welcome you as Kansas’s 24th commissioner of insurance, and 

we appreciate you all being here. 

I guess the idea here was to have you each take a couple of minutes and tell us the most important things you think we need to 

be aware of in trying to understand the issue and how to proceed. 

I think that, at least from my perspective, the real issue is what 

are the most critical reforms that we need to try to enact in these 

areas? 

Ms. Trautwein, why don’t you go ahead? Then we will just go 

down the panel, and after we have heard from all of you, then we 

will have questions. 

STATEMENT OF JANET STOKES TRAUTWEIN, EXECUTIVE VICE 

PRESIDENT AND CEO, NATIONAL ASSOCIATION OF HEALTH 

UNDERWRITERS, ARLINGTON, VA 

Ms. TRAUTWEIN. Thank you, Mr. Chairman. 

I really am very pleased to be here today. This is a very, very 

important topic. The rising cost of health insurance is a problem 

that is driven by the rising cost of healthcare itself. As a part of 

any health reform package, I just want to stress that it is essential 

that we do everything possible to lower healthcare costs. 

Keep in mind that of every premium dollar, 88 percent nationwide goes to cover claims, which is healthcare itself. I do also believe and NAHU believes that any health reform package should 

also include some very important health insurance reforms and 

that we can do this in a way that is both effective and affordable. 

Now our members are benefit specialists. They help individuals 

and businesses purchase coverage on a daily basis. After the coverage is purchased, they also work with them through any problems that come up, and we are very familiar with what kinds of 

problems those are. 

In fact, this service aspect of their jobs is the biggest part of their 

jobs, and it is something that most people are not aware of. There 

is a lot to do with not only getting coverage in place, but keeping 

it in force. 

It gives us kind of a unique ability, this very frequent interaction 

with consumers, to understand what the greatest issues are. I will 

share what some of those are very briefly. 

The biggest response that we get from most people who are covered by employer-sponsored plans, as you indicated, is that they 

love their employer-sponsored plans. I would just start off saying 

that we strongly believe that any reform package should include 

employer-sponsored coverage as its core. That is for large and small 

employers. 

We do have, today already, about 14.5 million Americans that 

are already in the private individual health insurance market because either they choose to purchase individual coverage or employer-sponsored coverage is just not available to them. It is for 

this reason that we have looked very, very carefully at the individual market, which we think is a key place to start with reforms. 

9 

We have put together 10 very specific policy recommendations, 

which I am happy to go through during the course of our discussion 

today. But in general, what those recommendations do is ensure 

that coverage is available to everyone regardless of their health 

status, that everyone can afford coverage that is not only there and 

available to them, but they can pay for it, that it is affordable to 

them. I have included a lot of detail in my written statement. 

I would also say that some of our recommendations also have to 

do with portability, and greater portability than what people have 

today. They have to do with what happens when they leave a group 

plan, and let us say they are going to start their own business and 

what faces them and what are the options in the event that they 

have a chronic health condition, but they still are going to start 

this business? What is available to them? 

This is what our recommendations revolve around, and I do just 

want to applaud you for putting this together. I think this discussion is so important, and I think we have a lot of—my fellow panelists are just excellent, and I think that we will have a good discussion this morning. 

[The prepared statement of Ms. Trautwein follows:] 

PREPARED STATEMENT OF JANET STOKES TRAUTWEIN

EXECUTIVE SUMMARY

The National Association of Health Underwriters (NAHU), a professional trade 

association representing more than 20,000 health insurance agents, brokers and 

benefit specialists nationally, whose members help individuals and businesses purchase private health insurance coverage on a daily basis, feels that we must keep 

private individual health insurance coverage accessible and affordable for all Americans. Although we strongly feel that any health reform effort should be centered on 

employer-sponsored plans, it is critical that we look first at the individual market 

to be certain that it functions effectively and affordably for those who purchase coverage there. Since each State’s individual market is uniquely regulated, consumers 

in some States are faring better than in others, but no State’s individual health insurance market is problem-free. 

Americans deserve to see what can be done at the Federal level to provide better 

access to individual coverage for everyone who needs it, and great care needs to be 

taken when implementing these market reforms on a national level so that coverage 

is affordable. No matter how ‘‘fair’’ a market-reform idea might seem on its surface, 

it’s not at all ‘‘fair’’ if it also prices people out of the marketplace. 

NAHU has developed 10 specific policy recommendations to ensure that all people, regardless of their health status and pre-existing medical conditions, have the 

ability to purchase affordable private individual coverage. It should be noted that 

some of these requirements may need to be present only during a transition process 

to complete guaranteed issuance of coverage. However, they still are quite important 

to achieving the affordability of coverage so crucial to getting everyone in the system. Our proposed requirements could either be enacted as part of a transition process to complete guaranteed issuance of coverage or they could be stand-alone requirements. Our recommendations are to: 

1. Require guaranteed access to individual coverage and with State-level financial 

backstops for catastrophic risks. 

2. Give pre-existing condition credit for prior individual market coverage to ensure 

true health insurance portability from one individual market policy to another. 

3. Standardize State requirements regarding the consideration of pre-existing conditions. 

4. Improve Federal group-to-individual coverage portability provisions so that people can transition directly from employer coverage to individual coverage without 

hurdles. 

5. Stabilize individual market rates by requiring more standardization as to how 

individual market carriers determine pricing. 

6. Increase consumer protections regarding individual market coverage rescissions. 

10 

1 Urban Institute and Kaiser Commission on Medicaid and the Uninsured estimates based on 

the Census Bureau’s March 2007 and 2008 Current Population Survey (CPS: Annual Social and 

Economic Supplements) http://www.statehealthfacts.org/comparebar.jsp?ind=125&cat=3. 2For example, a PPO individual health insurance policy for a 37-year-old male living in Had- donfield, NJ, (a suburb of Philadelphia) with a $1,000 deductible and 80/20 percent coinsurance 

would be $514/month for coverage beginning on February 1, 2009. New Jersey guarantee issues 

all individual health insurance policies and prices them based on a modified community rate. 

A comparable policy could be issued to the same male living in Wayne, PA, (also a Philadelphia 

area suburb 22 miles away from Haddonfield, NJ) for $170 a month. Pennsylvania medically 

underwrites its individual policies and imposes pre-existing condition look-back and exclusionary 

periods. 

7. Make it easier for employers to help people purchase individual health insur- ance. 8. Provide Federal financial assistance to keep individual health insurance coverage affordable, including enhanced deductibility, subsidies for low-income individuals, and Federal financial support for qualified State financial backstop programs. 

9. Ensure that all Americans have health insurance coverage. 

10. Allow State implementation of enhanced consumer protections with a Federal 

fallback enforcement mechanism. 

NAHU urges Congress to carefully consider these ideas and we look forward to 

working with policymakers to fill the gaps in our Nation’s coverage system and to 

make private individual health insurance coverage more affordable and accessible 

for all Americans. 

NAHU’S SOLUTIONS TO CREATE ACCESSIBLE AND AFFORDABLE INDIVIDUAL HEALTH

INSURANCE COVERAGE NATIONWIDE

The National Association of Health Underwriters (NAHU), a professional trade 

association representing more than 20,000 health insurance agents, brokers and 

benefit specialists nationally, feels that American policymakers must do everything 

they can to keep private individual health insurance coverage accessible and affordable for all Americans. 

As an association of benefit specialists who help individuals and businesses purchase private health insurance coverage on a daily basis, we know that the vast majority of Americans are happy to receive their health insurance coverage through the 

employer-based system. Our association believes that any health insurance market 

reform effort should include the employer-based system as its core. But even though 

it works well for many people, the employer-based system isn’t an option for everyone. Approximately 14.5 million Americans have private health insurance coverage 

that is not connected with an employer-sponsored plan.1

BACKGROUND ABOUT INDIVIDUAL HEALTH INSURANCE COVERAGE

Since the individual market is so small nationally (only about 5 percent of the 

non-elderly population has such coverage) and each State’s individual market is separate, the ability of an insurer in any given State to spread costs and risks across 

a large pool is very limited. Individual-market risk spreading is even more complicated because that market is prone to a phenomenon known as adverse selection. 

Adverse selection occurs when a person delays buying an insurance product until 

he or she anticipates an immediate need for the benefit. Since individuals always 

know more about their own health status than anyone else does, and because all 

of the cost of buying individual health coverage is generally borne by the insured, 

the amount of adverse selection and poor risk spreading occurring in the individual 

market is very high. This has a direct impact on the pricing of individual-market 

policies. 

The States are the primary regulators of individual health insurance policies. This 

is in contrast to the group health insurance market, where fully insured plans are 

governed primarily by State law but self-funded health plans are governed federally 

under the Employee Retirement Income Security Act of 1972 (ERISA). Since each 

State’s health insurance regulatory requirements vary, State-specific regulations 

often impact the types of individual policies available in each State and their cost. 

The cost variance from State to State is dramatic. Some of the States that have 

gone to the greatest lengths to ensure equal insurance access actually have the 

highest coverage costs.2

Our States have proven to be an excellent laboratory for health reform and have 

given us some great examples of what does and does not work when it comes to 

providing choice and affordable premiums for individual health insurance buyers. 

Unfortunately, the great innovations provided by the States have not produced 

11 

3The States without a guaranteed-access mechanism are Arizona, Delaware, Georgia, Nevada 

and Hawaii. Furthermore, Florida’s high-risk pool has been closed to new applicants since 1992, 

so it effectively also has no access mechanism for new medically uninsurable individuals. 

much consistency. Furthermore, State-level consumer protections have sometimes 

proven to be inadequate, resulting in some people not being able to obtain the coverage they need at all or at an affordable price. 

COVERAGE FOR EVERYONE

One of the greatest problems with individual health insurance today is that not 

all Americans are able to purchase coverage. In some States, people with serious 

medical conditions who do not have access to employer-sponsored plans cannot buy 

individual coverage at any price. 

One of the simplest ways to address the access issue in the individual market 

would be to require that all individual health insurance policies be issued on a guaranteed-issue basis without regard to pre-existing medical history. However, in addition to being accessible to all Americans, individual coverage also must be affordable. It would be unwise to require insurers to guarantee-issue individual coverage 

to all applicants unless a system where nearly all Americans have coverage and full 

participation in the insurance risk pool has been achieved. Due to their small size 

and the propensity towards adverse selection, State individual health insurance 

markets are very fragile and price-sensitive. Also, there currently is no controlled 

means of entry and exit into the individual health insurance market independent 

of health status, like there is with employer-group coverage. Without near-universal 

participation, a guaranteed-issue requirement in this market would have the perverse effect of encouraging individuals to forgo buying coverage until they are sick 

or require sudden and significant medical care. This, in turn, would undermine the 

core principle of insurance: spreading risk amongst a large population. The result 

would be exorbitant premiums like we currently see in States that already require 

guaranteed issue of individual policies but do not require universal coverage or have 

a financial backstop in place. 

Great care needs to be taken when implementing market reforms on a national 

level to not inadvertently cause costly damage to the existing private-market system. No matter how ‘‘fair’’ a market-reform idea might seem on its surface, it’s not 

at all ‘‘fair’’ if it also prices people out of the marketplace. 

RECOMMENDATIONS TO ACHIEVE NEAR-UNIVERSAL COVERAGE

To bring everyone into the health coverage system, NAHU believes that Congress 

would be wise to look at our existing system for holes and examine what the States 

have done to successfully fill those coverage gaps. A few simple reform measures 

would go a long way toward extending health insurance coverage to millions of 

Americans. State small-group health insurance markets and consumers ultimately 

benefited from the passage of Federal Health Insurance Portability and Accountability Act of 1996 (HIPAA); a similar measure that preserves State regulation and 

consumer protections for individual-market consumers but would also make coverage options more consistent and affordable is warranted. 

Such requirements could either be enacted as part of a transition process to complete guaranteed issuance of coverage or they could be stand-alone requirements. In 

either case, NAHU believes that the following policy recommendations would have 

a profoundly positive impact on individual health insurance market access and affordability nationwide. 

Recommendation 1: Require Guaranteed Access to Individual Coverage with Qualified State-level Financial Backstops for Catastrophic Risks to Keep Coverage Affordable 

Federal access protections in HIPAA ensure that small-group health insurance 

customers and individuals leaving group health insurance coverage under specified 

circumstances must have at least one guaranteed-purchasing option. But these Federal protections do not apply to everyone. People purchasing coverage in the traditional private individual health insurance market who are not transitioning from an 

employer’s plan do not have Federal guaranteed-issue rights. That means right now, 

in a number of States, there are people with serious medical conditions who cannot 

buy health insurance at any price. 

Furthermore, in many of the 45 States 3 that have independently established at 

least one mandatory guaranteed-purchasing option for individual-market consumers 

with serious health problems, there are still access problems due to design flaws. 

For example, some States have required that all people be guaranteed access to all 

12 

coverage on an immediate basis, without regard to health status. Unfortunately, 

merely requiring guaranteed issuance of individual coverage has led to adverse selection and, consequently, very high premium rates that create a barrier to entry 

for most consumers. On the other hand, in some States that allow for the consideration of health status, there can be a great deal of inconsistency in what types of 

risks are deemed to be uninsurable by individual carriers. Also, States with a highrisk health insurance pool often have funding difficulties that can result in high premiums and pool instability, both of which can be a barrier to entry. 

While the mechanism for access to health care coverage may vary from State to 

State, access should not be denied to any American. The Federal Government 

should immediately require that all States have at least one guaranteed-purchasing 

option for all individual health insurance market consumers. But, beyond that, the 

Federal Government should also stipulate that a guaranteed-issue mandate, a designated carrier of last resort or a high-risk health insurance or reinsurance pool 

alone may not be a sufficient means of providing guaranteed access. 

The best solution is a partnership between the private individual market and the 

mechanism for guaranteed access. A State’s high-risk pool or reinsurance mechanism could serve as a backstop to insulate the traditional market against catastrophic claims costs. The Federal Government should establish broad guidelines for 

qualified State-level financial backstops (i.e., capped rates for high-risk individuals) 

to allow for State innovation but also ensure consistency of access and affordability. 

Several States have been able to successfully combine a guaranteed-issue approach with universal underwriting criteria for all carriers and either a traditional 

high-risk pool or a reinsurance mechanism. When establishing State guaranteedaccess requirements coupled with a financial backstop, four States in particular 

should be looked at as potential models: 

Idaho.—One of the most interesting arrangements is from Idaho. It is a hybrid 

arrangement—the only one of its kind—known as an individual high-risk reinsurance pool. Although the idea of reinsurance isn’t new, Idaho is using it in a manner 

that is different than what has been done before. In Idaho, if a person’s health status (based on a uniform medical questionnaire that all carriers use) meets a certain 

threshold, the carrier can cede a large part of the financial risk for the individual 

to the reinsurance pool. Individuals who are insured in this manner are still issued 

a policy through the insurer they applied for coverage with, but must select one of 

four standard options. The coverage is still comprehensive, but the more limited 

benefit choices make administration of the reinsurance mechanism simpler. The carrier pays a premium to the pool in exchange for the pool taking on the risk of the 

individual’s high claims. The individual consumer pays premiums to the insurer and 

has coverage issued by that insurer, not the pool itself. So the reinsurance mechanism is largely invisible to the consumer, although the premium is somewhat higher 

than the consumer would have otherwise paid. This program is funded through several mechanisms. First, the State’s premium tax, paid by all insurers in the State, 

is the primary funding source and this is considered a stable funding source since 

it is not a State appropriation. In addition, when a carrier cedes risk to the pool, 

it pays a premium to the pool. Finally, the pool has the ability to assess insurance 

carriers for funding but, so far, it hasn’t needed to do so. The Idaho pool is one of 

the few State programs that has more than enough funds to operate on a consistent 

basis. 

Utah.—In Utah, health insurance carriers in the individual market must offer 

coverage to everyone who applies, but if an individual’s medical costs are deemed 

to potentially exceed a set threshold ascertained through a medical questionnaire, 

the carrier can refer the person instead to the State high-risk pool. Of importance 

here is that every insurance carrier uses the same medical questionnaire, so the 

pool gets only the most serious health risks and the regular market keeps other applicants. The current downside of the Utah arrangement is that the excess funding 

for the pool comes from the State so, while the benefits are extremely comprehensive, State budget limitations have resulted in the need for an annual cap on benefits that are troublesome. But the mechanism is interesting and could be replicated 

and otherwise works well, if the funding issue could be resolved to something more 

stable. 

Washington.—The Washington State high-risk pool and guaranteed-issue requirements work similarly to those in Utah although, in addition to the consistent 

underwriting requirements, carriers are limited to a set percentage of individual 

business that can be referred to the pool. Since Washington’s pool isn’t State-funded, 

it does not have an annual benefit maximum. It’s another example of a partnership 

with the private market and a public guaranteed-access mechanism that works and 

could be replicated elsewhere. 

13 

New York.—Another twist on the reinsurance concept is New York with its 

Healthy New York program. Small employers, sole proprietors and uninsured working individuals, regardless of health status, who meet set eligibility criteria and participation rules can purchase a limited range of comprehensive coverage options offered through private carriers and backstopped with a State-level reinsurance pool 

for extraordinary claims. This is a different kind of reinsurance than in Idaho, since 

it works on a retrospective basis, but it is a great example of why a backstop can 

increase affordability. Although New York is a guaranteed-issue State, it still uses 

this mechanism to spread the risk of higher risk participants. If we compare the 

rates for similar coverage in New Jersey, also a guaranteed-issue State but with no 

financial backstop, it becomes clear that, although premiums are higher than in 

non-guarantee issue States, the financial backstop provided by the reinsurance 

mechanism has improved affordability there. 

Recommendation 2: Give Pre-existing Condition Credit for Prior Individual Market 

Coverage to Ensure True Health Insurance Portability 

The issue of pre-existing conditions and individual market coverage portability 

has been repeatedly identified as a problem. It’s not just a problem for people who 

have a serious medical condition when they apply for coverage. People who have obtained individual coverage when healthy and then acquired medical conditions over 

time can be limited in their ability to switch coverage plans due to pre-existing conditions and medical underwriting requirements. 

HIPAA does provide individual-market consumers some protections, but they 

don’t go far enough. Current law requires that all health insurance policies be guaranteed renewable unless there is non-payment of premium, the insured has committed fraud or intentional misrepresentation, or the insured has not complied with 

the terms of the health insurance contract. In addition, most States require that individual health insurance policies be renewed at class average rates and prohibit 

the practice of re-underwriting (making people fill out a new health questionnaire 

at renewal), provided that the policyholder sticks with the same product. 

The flaw in HIPAA is that it does not protect individuals who want to change carriers or health insurance products within the individual market. This is not only 

a problem for the individuals who want to make a change, but it also stifles individual market carrier which in turn has a significant impact on price. 

To solve this problem, States should be required to adopt a qualified access program so that no individual will be denied a private health insurance option because 

of a pre-existing condition, as described in Recommendation 1. In addition, individual market health insurance carriers should be required to give individual health 

insurance market consumers credit for prior individual coverage when changing insurance plans, if there is no greater than a 63-day break in coverage, just as is required in the group market by HIPAA. This means that existing individual-market 

consumers who wanted to switch health insurance products and/or health insurance 

carriers would be given credit against any pre-existing condition look-back or exclusionary periods equal to the amount of prior coverage they have. Furthermore, 

NAHU believes that the 63-day coverage window provisions should be amended to 

specify credit should be granted as long as the individual applies for coverage within 

63 days, to protect individuals in cases where coverage cannot be issued immediately upon application. 

However, to protect against adverse selection, a provision would also need to be 

included to address situations where individual-market consumers were substantially changing their level of coverage and/or benefits. In these cases, while credit 

for prior coverage would be applicable, carriers would still be able to assess for insurable risk when determining initial premium rates. 

Recommendation 3: Standardize State-Level Requirements Regarding the Consideration of Pre-existing Conditions 

Right now, State exclusionary and look back periods for pre-existing conditions in 

the individual market range from none at all to 5 years. NAHU believes greater 

standardization could easily be achieved in a similar way as was done relative to 

the small-group market in HIPAA when a Federal maximum look-back window of 

6 months and a 12-month exclusionary period was established for the States. Having a pre-existing conditions rule that is consistent in both the individual and group 

model would also be much simpler for consumers to understand. 

In the absence of a fully implemented and enforceable individual purchase mandate, plans and high-risk options must be able to look back at a new applicant’s 

medical history and impose reasonable waiting periods in order to mitigate adverse 

selection. Until implementation is complete, greater standardization of limitations 

is necessary and warranted. 

14 

Recommendation 4: Improve Federal Group-to-Individual Coverage Portability Protections So That People Can Transition Directly From Employer Coverage to Individual Without Hurdles 

HIPAA attempts to provide individuals who are leaving group health insurance 

coverage with portability protections to make it easier for them to purchase coverage in the individual market. Unfortunately, the protections are confusing and 

many consumers unintentionally invalidate their HIPAA guaranteed-issue rights 

without realizing it and then risk being denied coverage when they apply for individual coverage. 

Under current law, individuals who are leaving group coverage must exhaust either COBRA continuation coverage or any State-mandated continuation of coverage 

option if COBRA is not applicable before they have any group-to-individual rights 

under HIPAA. Once the consumer exhausts these options if available, then he or 

she can purchase certain types of individual coverage on a guaranteed-issue basis, 

provided that there is no more than a 63-day break in coverage. Each State was 

required under HIPAA to develop a mechanism for providing this coverage. The two 

most common State elections are to either allow HIPAA-eligible people to purchase 

coverage through a State high-risk health insurance pool, or to require all individual 

market carriers to guarantee-issue HIPAA-eligible consumers at least two products, 

which are often priced higher than traditional individual coverage. 

Most people who leave group coverage are unaware of all of the stipulations required to receive Federal portability-of-coverage protections. Faced with high 

COBRA or State-continuation premiums, many individuals decline such coverage either initially or after a few months. Then, depending on their health status or a 

family member’s, they may experience extreme difficulty obtaining individual market coverage. To solve this problem, the HIPAA requirement to exhaust State continuation coverage or COBRA before Federal guarantees are available should be rescinded, and individuals leaving group coverage should be able to exercise their Federal group-to-individual portability rights immediately, provided that there is no 

more than a 63-day break in coverage. 

Recommendation 5: Stabilize Individual Market Rates by Requiring More Standardization as to How Individual Market Carriers Determine Pricing 

Another inconsistency among State individual health insurance markets is the 

way that premium rates are determined at the time of application. In a few States 

they are determined merely by geographic location (pure community rating) and in 

several others rating factors are determined by the State but are limited in nature 

(i.e., age, gender, industry, wellness, etc.), which is known as modified community 

rating. However, even with States with modified community rating, the rating factors and how they may be applied vary significantly by State. It is NAHU’s view 

that State individual health insurance markets would benefit from greater standardization as to how premium rates are determined. 

The first step to greater standardization would be for States to adopt a uniform 

application for applying for individual insurance coverage. A clear and understandable uniform application would assure full disclosure of accurate and consistent information when individuals apply for coverage. It would also be easier for consumers 

when applying for coverage with several different insurance carriers at one time. 

In the vast majority of States, no specific rating structure is required in the individual market, and carriers can assess for insurable risk at the time of application 

and discount or increase rates based on health status with few limitations. Full, accurate and complete risk assessment has proven to be the most effective rating 

mechanism because it has been demonstrated to lower overall premium cost. However, the unlimited rating structure used in most State individual markets is in contrast to most State small-group health insurance markets and can create anti-selection issues between the two markets. Most State small-group carriers are also allowed to assess for insurable risk but have limitations on the amount of premium 

adjustments based on health status. In addition to these initial limitations, most 

State small-group laws require that premium increases are limited on renewal. This 

means that the amount each small group’s premium can go up annually is based 

on the overall health experience of the carrier’s entire small-group pool and is limited by the State to usually 10–15 percent plus an additional amount for inflation. 

The Federal Government could require that States meet a minimum standard of 

rate stabilization by imposing maximum rate variations for initial applicants, as 

well as a cap on renewal premium increases, as most States do for their small-group 

market. Another option would be to allow a modified community rate. However, in 

order to protect against runaway costs, the Federal Government should ensure that 

wide-enough adjustments may be made for several key factors. At a minimum, variations need to be allowed for applicant age of at least five to one (meaning that the 

15 

4Mercer Management Journal 18. ‘‘The Case for Consumerism in Health Care’’ http:// 

www.oliverwyman.com/ow/pdflfiles/MMJ18lCaselConsumerismlHealthcare.pdf. 5 America’s Health Insurance Plans. Comprehensive Health Insurance Policy Rescissions in 

the Individual Health Insurance Market Reported by AHIP Member Companies, 2007 Survey. 

rate of the oldest applicant may be no more than five times the rate of the youngest 

applicant). In addition to age, variations in premium rates should also be allowed 

for wellness factors, smoking status, gender and geography. Since we know that up 

to 50 percent of health status is determined by personal behavior choices,4 in order 

to have effective cost containment, we need to be able to reward healthy behavioral 

choices. 

Recommendation 6: Increase Consumer Protections Regarding Individual Market 

Coverage Rescissions 

Under very rare circumstances, individual health insurance carriers rescind an insurance policy based on a submission of fraudulent information on an application 

or an intentional omission of required information. Surveys of individual health insurance plans indicate this happens to far less than 1 percent of individual market 

consumers annually,5 but all individuals buying individual coverage deserve assurances that they will not be subject to unfair policy rescissions or pre-existing condition determinations. 

All States should be required to develop an independent medical review process 

to resolve disputes concerning policy rescissions and/or pre-existing condition determinations. In addition, health plans should be required to limit rescissions to only 

material omissions and misrepresentations on the uniform insurance application. 

Health plans should be responsible for reviewing all applications received for clarity 

and completeness at the time of application and not after the policy is issued. If a 

carrier does not conduct a review of listed medical conditions on the application 

upon submission, it should not be allowed to use any subsequently obtained health 

information as a standard for a rescission, unless fraud or deceit has occurred. 

Health plan consumers should be clearly informed of their rights relative to rescissions and pre-existing condition determinations. Consumers also should be informed 

of their obligation to provide complete and accurate responses on health plan applications and to provide additional information at the time of application upon request 

of the health plan. 

Recommendation 7: Making it Easier for Employers to Help People Purchase Individual Coverage 

One of the biggest complaints about the individual market is that coverage is too 

difficult to purchase independently, and one of the greatest advantages of employergroup coverage is its ease of enrollment and payment. Many employers would like 

to offer their employees traditional health insurance coverage but simply can’t afford to do so under current economic conditions. Also, some employers have an employee base that is difficult to cover under a traditional group scenario. As an alternative, employers should be allowed to work with licensed insurance agents and brokers to help employees purchase and pay for individual coverage by setting up a 

Section 125 plan, deducting premiums from wages, aggregating premiums and sending them to the insurer, and possibly providing a defined contribution. This would 

be a particularly appropriate coverage option for certain types of businesses that are 

rarely able to offer benefits to all employees (for example, restaurants and some 

small retail establishments) and for employees who may not be eligible for an employer’s group plan, such as part-time or contract workers. This could help to draw 

many uninsured individuals into the private health coverage system. In addition, it 

could expand the size of the individual market, making it less fragile and, therefore, 

less costly. 

However, current Federal law requires that all individual health insurance policies sold in a group setting are subject to ERISA and all of the HIPAA consumer 

protections relative to group health insurance plans, including the group guaranteed-issue and pre-existing requirements and all nondiscrimination provisions. 

Under current market conditions, practically no individual-market policies can meet 

all of the HIPAA small-group protections since they are not designed for a product 

that is marketed to individual consumers. In addition, the sale of list-billed policies, 

which are individual policies where the employer agrees to payroll-withhold individual health insurance premiums on behalf of its employees and send the premium 

payments to the insurance carrier but does not contribute to the cost of the premium, is specifically prohibited by some States. 

Congress should overturn State bans of the sale of list-billed policies and clarify 

that individual health insurance policies purchased by employees are not the same 

16 

6PricewaterhouseCoopers. ‘‘The Factors Fueling Rising Health Care Costs, 2008.’’ http:// 

www.americanhealthsolution.org/assets/Uploads/risinghealthcarecostsfactors2008.pdf. 7http://www.oregon.gov/OPHP/FHIAP/. 

as group health insurance policies and are not subject to the group insurance requirements specified in HIPAA or ERISA but rather the newly reformed rules for 

the individual market. In particular, the Federal requirements regarding individual 

policies sold on a list-bill basis need to be clarified, since even minimal involvement 

on the part of the employer could trigger group health plan requirements. 

Congress should also establish that all individual health insurance policies sold 

under a list-billed arrangement are subject to all insurance regulations governing 

the issuance of traditional individual insurance policies in the State in which the 

policy was sold. This would include rating requirements, issuing requirements and 

the requirement that such products only be sold by licensed health insurance producers, among other consumer protections. 

Recommendation 8: Provide Federal Financial Assistance to Keep Individual Health 

Insurance Coverage Affordable 

The most critical problem that we see in State individual health insurance markets is affordability, particularly for those individuals who have medical conditions. 

The high cost of coverage for these people often doubles as an access barrier. 

There are clear broad-scale solutions that NAHU supports relative to coverage affordability. The most important of these is acting on the true underlying problem 

with our existing system: the cost of medical care. Health care delivery costs are 

the key driver of rising health insurance premiums, and they are putting the cost 

of health insurance coverage beyond the reach of many Americans.6 Addressing the 

cost of care and its impact on the cost of coverage is critical in every market. 

However, there are other affordability reforms that could be crafted that would 

specifically help individual market health insurance purchasers. 

TAX EQUITY—ENHANCED DEDUCTIBILITY OF PREMIUMS

The most important step toward making individual coverage more affordable 

would be extending tax equity to individuals and families purchasing health insurance coverage on their own and equal tax treatment for the self-employed. NAHU 

believes Federal tax laws should be updated to provide the same Federal tax deductions to individuals and the self-employed that corporations have for providing 

health insurance coverage for their employees, although not at the expense of the 

existing employer exclusion. Specifically, NAHU feels Congress should take action 

to: 

• Remove the 7.5 percent of adjusted gross limit of medical expenses on tax filers’ 

itemized deduction Schedule A form. • Allow the deduction of individual insurance premiums as a medical expense in 

itemized deductions. • Equalize the self-employed health insurance deduction to the level corporations 

deduct by changing it from a deduction to adjusted gross income to a full deductible 

business expense on Schedule C. • Clarify in statute that employers implementing list-billing arrangements for 

their employees may also establish Section 125 premium-only plans for their workers. This would enable employees to pay for their individual policies on a taxfavored basis. If an individual participated in a section 125 plan for a list-billed policy, those premiums would not be eligible for deduction as a medical expense under 

Schedule A. 

SUBSIDIES

NAHU also supports targeted premium-assistance programs for low-income individuals purchasing private coverage, and we feel that the Federal Government 

should finance such programs. A subsidy program could be national in scope or each 

State could be required to create one that suits the unique needs of its citizens in 

partnership with the Federal Government. Several States have already created successful subsidy programs and their existing structures could be used as a model 

framework for a national reform. I have included a chart at the end of this statement that itemizes some of the State subsidy programs that provide us with some 

good models on creative ways to help both employers and their employees with the 

cost of health insurance coverage. Two States in particular should be looked to as 

models: 

Oregon.—The Oregon Family Health Insurance Assistance Program (FHIAP) 7 is 

one State program that could serve as a model. FHIAP is an innovative State covVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 S:\DOCS\48406.TXT DENISE
17 

8http://www.oepic.ok.gov/. 9 Blue Cross Blue Shield Association. ‘‘Insure Oklahoma: Overview and Impact.’’ http:// 

www.bcbs.com/issues/uninsured/background/insure-oklahoma-overview.html. 

erage initiative that subsidizes both employer-sponsored coverage and individual insurance coverage. Eligible families making over 150 percent FPL who do not receive 

cash assistance must participate if employer coverage is available, and others can 

participate on a voluntary basis. Licensed health insurance professionals help both 

employers and individuals with enrollment and participation. The program subsidizes coverage on a sliding scale according to income. Subsidies range from 50 percent to 95 percent of the premium. Individuals and families use FHIAP subsidies 

to pay for insurance at work or to buy individual health plans if insurance is not 

available through an employer. FHIAP members pay part of the premium. They also 

pay other costs of private health insurance such as co-payments and deductibles. 

Once approved for FHIAP, members are eligible to remain in the program for 12 

months. Three to four months before the member’s eligibility ends, FHIAP sends a 

new application and members may re-apply. FHIAP provides direct premium assistance through the insurer for people who use its benefits to purchase individual coverage. For those with employer coverage, FHIAP reimburses employees for the cost 

of their premium within 4 days of receipt of a valid pay stub denoting the employee 

contribution. This program has been around for a number of years and struggles 

each year with funding, but many have benefited from it and it is a streamlined 

approach with little administrative cost. 

Oklahoma.—Oklahoma’s Employer/Employee Partnership for Insurance Coverage (OEPIC or Insure Oklahoma) 8 is another very successful State subsidy program that works with both employer-sponsored and individual health insurance coverage for self-employed people, certain unemployed individuals, and working individuals who do not have access to small-group health coverage. In 2008, 9,923 employees and dependents were directly subsidized by Insure Oklahoma, which is a 

234 percent increase from the previous year.9 Licensed insurance agents and brokers help identify applicable participants and enroll people and employers in the 

plan. Through the program, the employer pays only 25 percent of the premium of 

the low-wage worker, the employee pays up to 15 percent of the premium and the 

State pays the remainder. The program’s passage was supported by insurers, small 

employers, agents and brokers and providers. It is funded by a State tobacco tax 

and Federal funds based on a Medicaid Health Insurance Flexibility and Accountability waiver. Twenty insurers participate, offering dozens of qualified products 

that meet simple specified coverage standards. 

FEDERAL FINANCIAL SUPPORT FOR QUALIFIED ACCESS MECHANISMS

Finally, we support even more targeted means of providing Federal affordability 

assistance to individual market consumers, particularly to individuals with serious 

medical conditions. Since in any insurance pool of risk a small number of insureds 

incur the majority of claims. NAHU’s access solutions alone, by guaranteeing that 

the highest-risk individuals are covered in a financially separate private-market 

pool, will help lower costs for all consumers. But even more could be done to help 

lower costs. 

Funding for high-risk health programs is a continual problem in some States. 

When a pool consists of only sick people, there is no spreading of risks, so premiums 

charged to policyholders are never enough to cover expenses and additional funding 

mechanisms must be created. A variety of funding sources are currently being used, 

including using State premium taxes, direct State appropriations, assessments to 

carriers that operate in the State, hospital taxes, or a mixture of several sources. 

Current limited Federal grant funds for high-risk pools have enabled a number of 

State high-risk pools to lower premiums and even start low-income subsidy programs. NAHU believes this funding should not only continue, but it should also be 

increased and expanded to the new qualified access mechanisms outlined in Recommendation 1. 

The issue of affordability is key. A State should be required to demonstrate that 

the funding source for whatever high-risk option it elects will be both broadly distributed over as much of the marketplace as possible and stable over time. CMS 

could develop broad criteria, and this program could be administered easily with the 

career employees already dedicated to the current high-risk pool grants. It would 

be important when establishing criteria not to hinder State innovation relative to 

funding sources as this is a key factor of ensuring affordability. Furthermore, due 

to the high-needs population being served, premiums alone cannot be considered a 

stable funding source. 

18 

10 Insurance Research Council. ‘‘IRC Estimates That More Than 14 Percent of Drivers Are Uninsured.’’ http://www.ircweb.org/news/20060628.pdf. 

Funding could be conditional upon a State’s ability to meet federally established 

broad criteria regarding the framework of a qualified program. This may be the biggest bargain for Federal dollars that exists. A small amount of funding will go a 

long way. The current $75 million grant funding for high-risk pools has helped 

many pools establish low-income subsidies, disease-management programs and 

other important benefits for pool participants. New funding would be used to help 

subsidize premiums for the high-risk beneficiaries because, regardless of the backstop option the State creates, premiums alone in a State high-risk option will never 

be enough to satisfy claims, and premiums for participants in these programs must 

be at reasonable levels to ensure adequate participation. Funding could also be used 

as an additional backstop to State high-risk options that meet specified requirements for those rare individuals whose medical expenses are so great they would 

exceed high-risk pool lifetime caps. 

Recommendation 9: Getting Everyone Covered 

NAHU believes that implementing recommendations 1 through 8 will bring our 

country much closer to all Americans having health coverage. But an additional way 

to achieve the standard of near-complete coverage that is necessary for stand-alone 

guaranteed issuance of coverage as well as controlled entry and exit into the individual insurance market is through the implementation of an enforceable and effective individual mandate. 

NAHU has historically approached the idea of an individual mandate to obtain 

health insurance coverage with great caution. Similar mandates for auto insurance 

coverage have failed to reduce the number of uninsured motorists.10 Also, subsidies, 

as well as benefit standards and enforcement mechanisms, would need to be created 

to fairly implement such a mandate. However, if such barriers could be overcome, 

enough people would be covered to mitigate the problem of adverse selection and 

its resulting cost consequences. 

If the Federal Government were to require an individual mandate to obtain coverage, NAHU feels that it must be structured appropriately. The following elements 

are crucial to an effective and enforceable individual mandate: 

• While the mandate may need to be phased in over time, starting with perhaps 

select populations like children age 25 and under, ultimately it must apply to all 

populations equally. 

• An individual mandate must be accompanied by a national qualified guaranteed-access mechanism with a financial backstop as described in Recommendation 

1 so that all individuals have cost-effective private health coverage options available 

to them. This is especially critical during the transition period when the mandate 

is being put into place and the entire population is not yet insured. 

• An individual mandate should not be accompanied by overly rigid coverage 

standards that would make coverage unaffordable and inhibit private plan design 

innovations. 

• Subsidies in the form of direct private coverage premium assistance or refundable advanceable tax credits for the purchase of private coverage must be made 

available to low-income consumers. 

• An effective coverage verification system must be created, with multiple points 

of verification. 

• An effective enforcement mechanism would need to be implemented with multiple enforcement points and effective penalties for noncompliance. 

• Each State must be responsible for enforcement of the mandate for its own population. The United States is too large and diverse a country for such a mandate 

to work otherwise. 

Recommendation 10: Allow State Implementation with a Federal Fallback Enforcement Mechanism 

States should be given a finite timeframe of several years to achieve these reforms 

through legislative or regulatory means. If a State cannot adopt the necessary reforms in the timeframe allotted, Federal enforcement through CMS should be the 

fallback, similar to the way CMS serves as the Federal fallback enforcement authority for HIPAA’s small-group market requirements. 

19 

CONCLUSION

NAHU members work on a daily basis to help individuals and employers of all 

sizes purchase health insurance coverage. We also help clients use their coverage 

effectively and make sure they get the right coverage at the most affordable price. 

All of this experience gives our membership a unique perspective on the health 

insurance marketplace. Our members are intimately familiar with the needs and 

challenges of health insurance consumers, and they have a clear understanding of 

the economic realities of the health insurance business, including both consumer 

and employer behavioral responses to public policy changes. We have had the 

chance to observe the health insurance market reform experiments that have been 

tried by the States and private enterprise, and we have based these individual-market health reform policy recommendations on what we believe would be the most 

beneficial changes for individual health insurance consumers. 

The NAHU membership urges Congress to carefully consider these ideas to improve individual health insurance coverage options for consumers nationwide. Our 

private health insurance plans are innovative, flexible and efficient, and our marketplace is up to the task of responding to well-structured reforms. We look forward 

to working with Federal and State policymakers to fill the gaps in our Nation’s coverage system and to make private individual health insurance coverage more affordable and accessible for all Americans. 

We appreciate this opportunity to participate in today’s hearing and look forward 

to the discussion with the committee and other panelists. 

Addendum: Chart on State-Level Private Health Insurance Subsidy Programs for 

Low-Income Individuals 

Senator BINGAMAN. Thank you very much. 

Mr. Williams, please. 

STATEMENT OF RONALD A. WILLIAMS, MS, CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, AETNA, INC., HARTFORD, CT 

Mr. WILLIAMS. Good morning, Mr. Chairman and members of the 

committee. It is a pleasure to be here and to see so many of my 

colleagues I have had the privilege to work with over the past few 

years. 

I am Ronald A. Williams, chairman and chief executive officer of 

Aetna, a leader in providing diversified healthcare benefits. As the healthcare system hurtles toward $4.3 trillion in annual 

spending in 2017, we have an opportunity and an obligation to 

achieve meaningful reform that guarantees access and makes 

health insurance more affordable for all. You have my commitment 

to work with you to transform the healthcare system. 

It is worth noting at the outset that our industry, my company, 

and the expectations of our customers and members have changed 

a good deal over the past several years. Health insurance is not 

about just paying claims anymore. At Aetna, our spending on technology and innovation, more than $1.8 billion since 2005, and the 

composition of our workforce of 35,000, nearly 40 percent of whom 

are clinical and technology professionals, are much different than 

they would have been just 10 years ago. 

Transforming our healthcare system will require us to work collaboratively to address the key roadblocks that stand in our way 

and build a sensible path to reform. That means building on an 

employer-based healthcare model that already works for more than 

177 million Americans and accelerating our efforts to harness the 

power of health information technology and confronting the challenges associated with rising healthcare costs. 

In our view, the following are critical components of reform. 

First, we need to get all Americans covered through an enforceable 

individual coverage requirement combined with subsidies and other 

20 

changes to make coverage affordable. It must be coupled with sliding-scale subsidies to ensure that income is not a barrier for any 

individual, and we should offer tax credits for small businesses to 

encourage them to offer and subsidize employee coverage. 

Second, we need to take steps necessary to bring affordable coverage within reach for everyone. This begins by using health information technology as a tool to bend the cost curve and addressing 

our country’s pervasive quality issues. We also need payment reform because the traditional fee-for-service payment structure often 

rewards physicians and hospitals for the volume of services they 

deliver rather than the value of quality of care they provide. 

Third and finally, we need to engage consumers in their own 

healthcare, focusing on prevention and wellness, and provide them 

the tools to be good consumers. The healthcare system needs fundamental reform, and that will require unprecedented determination and collaboration across the healthcare system. 

We are ready and willing to work with you because we know that 

success will be rooted in a public-private cooperation to create and 

implement practical solutions that drive systemic change. 

Thank you. 

[The prepared statement of Mr. Williams follows:] 

PREPARED STATEMENT OF RONALD A. WILLIAMS, MS 

Good morning Chairman Kennedy, Ranking Member Enzi and members of the 

committee. Thank you for the opportunity to be here today. I am Ronald A. Williams, Chairman and Chief Executive Officer of Aetna Inc., one of the Nation’s leading diversified health care benefits companies. I appreciate the opportunity to share 

my views with this committee and to continue working with you to transform our 

health care system, which we can all agree is in urgent need of reform. I believe 

our health care system must provide affordable, high quality coverage for all Americans. 

My company is committed to taking part in the development of meaningful, broadbased solutions, and I am convinced that we can help move reform forward. Our 

views are shaped by our experience with the 36.5 million unique individuals to 

whom we provide products and services in all 50 States; the 894,000 health care 

professionals with whom we interact daily; and the thousands of employers for 

whom we devise benefits solutions regularly and the 50 States and multiple Federal 

entities that regulate our products. 

Our industry, my company and the expectations of the people who are our customers and members have changed a good deal over the past several years. Insurance is not just about paying claims anymore. Increasingly, our stakeholders expect 

us to be their partner, to add value and to innovate. Employers want affordable, 

high-quality products and services to enhance the health and productivity of their 

employees. Doctors and hospitals want to give their patients access to medical innovations and new technologies, with fewer administrative barriers. Our members 

want access to our network of health care professionals, tools to make informed decisions, transparency of price and quality data, and access to the expertise of nurses 

and trained professionals on issues ranging from chronic disease care to wellness 

and prevention. 

At Aetna, our business model has changed significantly over time as we work to 

meet these new expectations. We have been at the forefront of bringing the information age to health care. That is why we have spent more than $1.8 billion on technology and innovation since 2005. Our innovations mean that we no longer simply 

process and pay claims; now we have sophisticated systems that scan hundreds of 

millions of interactions between our members and their doctors, hospitals and pharmacies to alert them and their physicians to sometimes dangerous interactions 

caused by errors or omissions. 

Our workforce has changed also. Today, nearly 40 percent of our workforce are 

clinical professionals or work in information technology. The focus of all our employees is to improve health and ensure our consumers get the best, most appropriate 

treatment possible, including wellness and preventive care and managing their comVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 S:\DOCS\48406.TXT DENISE
21 

1Modern Healthcare, ‘‘By the Numbers,’’ 2006–2007 Edition, December 17, 2006, p. 66. 

2Pickreign, Jeremy et al. ‘‘Employer Health Benefits 2008 Annual Survey,’’ Kaiser Family 

Foundation and Health Research and Education Trust, September 2008. 

plex diseases. If you are an Aetna member, you can reach a health care professional 

at any time of the day or evening who can respond to your health care needs. As the health care system hurtles toward $4.3 trillion in annual spending by 

2017, we have an opportunity and an obligation to achieve meaningful reform and 

improvement. Our experience and perspective tell us that we are a nation and culture unique from the rest of the globe, and we require a uniquely American solution 

that will enable the health care system to meet the Nation’s expectations for health 

care quality, access and affordability. 

To transform our current healthcare system into what it should be, we need to 

work collaboratively to address the key roadblocks that stand in our way and build 

a sensible path to reform: 

• It is essential that we realize real reform while preserving and building 

on the employer-based health care model that works for most Americans. 

We should avoid systemic disruption to the 177 million Americans who have employer-sponsored coverage, and instead build upon the strengths and innovations of 

private health coverage for the good of other populations. Together, employers and 

insurers are driving innovations that are helping many Americans better maintain 

their health, take advantage of helpful health care technology and access safe, quality health care. • We need to accelerate our efforts to harness the power of health information technology (HIT), which is so critical to addressing cost and quality 

issues. Congress made a significant investment in HIT in the American Recovery 

and Reinvestment Act, but the United States still lags behind other countries in the 

use of electronic medical records (EMRs). If 90 percent of all providers in the United 

States were using EMRs, we could see savings of about $77 billion within 15 years.1

With the advent of sophisticated clinical decision support capabilities, those savings, 

coupled with lives saved, could exceed current expectations. At Aetna, we have 

made significant investments in health information technology, and we are not finished. Our investments are designed to help patients and doctors take action on 

their health conditions and help patients get the standard of care they expect and 

require. 

• We need to confront the challenges associated with the rising cost of 

health care. Costs will rise from $8,000 per person this year to more than $13,000 

per person in the next decade. There is an important, but often overlooked connection between health care costs and the premiums people pay for health insurance 

coverage. Health insurance premiums reflect the underlying cost of health care. So 

unless we, as a nation, are successful in ‘‘bending’’ the cost curve, we will see premiums continue to rise at a pace far faster than either wage growth or inflation— 

which puts health insurance out of the financial reach of a growing number of U.S. 

residents. If we do not address the issue of costs, reforms made today to improve 

access will not be sustainable. We all have a significant role to play in this complex 

problem. This includes our industry, which is committed to achieving new levels of 

simplification and reduced administrative costs. 

A SOLID FOUNDATION FOR REFORM

Many are questioning whether we can achieve meaningful health care reform. I 

believe the answer is that we can reform our system and simultaneously achieve 

the dual goals of improving access and making healthcare more affordable. All of 

the players in health care—health insurers, hospitals, physicians, employers, pharmaceutical companies, consumers, legislators and regulators—will need to focus on 

achieving both of these goals together. 

As you consider how to structure reform, I urge you to build upon the current employer-based system that today covers 177 million people—60 percent of the American population. When given the choice, 82 percent of workers who are eligible for 

employer-offered coverage participate in their employers’ health plans.2

Leveraging the strengths of the employer-based system would enable people to 

keep the health coverage they have if they are satisfied. It would also continue the 

innovation that has resulted from employers and health plans working together over 

decades to improve quality and value. We recognize that maintaining the basic 

structure of health care coverage through the employer-based system is not enough. 

Our customers are demanding that we make sound health care investments that 

positively impact their physical and financial health. We have responded to this imperative by: 

22 

• Developing products and services that improve the quality of health care and 

help control rising benefits costs; • Providing members with access to convenient tools and easy-to-understand information that can help them make better-informed decisions about their health and 

financial wellbeing; • Introducing new levels of transparency to the health care system; and • Pioneering new ways to focus on wellness and prevention programs. 

We recognize that maintaining the current structure is not enough. Reform efforts 

need to focus on access and affordability of insurance for the 45 million uninsured 

Americans and those seeking coverage in the individual and small group markets. 

A growing number of people, nearly 18 million under age 65, are accessing insurance through the individual market. In addition, coverage is often expensive and unstable for the millions accessing coverage through the small group market. 

CRITICAL COMPONENTS OF REFORM

Getting all Americans Covered 

Covering all Americans is imperative for fixing our Nation’s health care system. 

An enforceable individual coverage requirement, combined with subsidies and other 

changes to make coverage affordable, is the best way to ensure that all Americans 

have continuous access to insurance coverage and high-quality health care. Since 

2005, we at Aetna have been speaking out in support of an individual coverage requirement, as we believe it is the critical step for achieving universal coverage. 

One of the great, and often painful, challenges in our system is that too many 

individuals often have difficulty accessing coverage in the individual market. Insurers have relied on tools like medical underwriting and pre-existing condition exclusions to maintain the solvency of the current system, which lacks universal participation. Insurance works best when everyone participates in the system continuously, whether they are healthy or sick. Today’s individual market system does not 

reflect these principles and insurers face adverse selection, wherein people enter the 

insurance marketplace when they need coverage and healthcare services. 

An enforceable individual coverage requirement solves this problem better than 

any other proposed policy, because it allows us to bring everybody—both healthy 

and unhealthy—into the insurance pool. By using an individual coverage requirement to address the challenge of adverse selection, we can transform our system 

into one where private insurance is provided on a guaranteed-issue basis with no 

pre-existing condition exclusions and a rating system that does not include health 

status. We support allowing insurers to provide discounts on premiums for those 

who engage in healthy behaviors to help increase incentives for good health. These 

reforms would allow all Americans access to coverage and would help people keep 

their health coverage as they go through life transitions, allowing true portability. 

An individual coverage requirement must, of course, be coupled with sliding scale 

subsidies to ensure that income is not a barrier for any individual’s fulfillment of 

this requirement. In addition, we must offer tax credits for small businesses to encourage them to offer (and subsidize) employee coverage. We must create a rational 

regulatory structure that is conducive to creating affordable coverage options. I 

would encourage greater uniformity of State laws and regulations and the development of a new Federal charter. Insurers with a multi-state presence face costly administrative burden to comply with divergent State laws and regulations, and these 

higher administrative costs are passed onto the market at large through higher insurance premiums. A national entity would need to determine a standard benefit 

package and determine what types of actuarially equivalent plans could be offered. 

Under a national framework, plans could cross State boundaries and be offered 

through national, State or regional insurance exchanges that create new pooling 

mechanisms. 

We believe an individual coverage requirement, subsidies and insurance market 

reforms create the best framework for addressing our country’s access challenge. 

Others believe a new public plan is the silver bullet for the uninsured. I would submit that, for a number of reasons, a public plan is not the best way to fix our system. 

First and foremost, insurers bring innovation, value and choices that allow individuals to choose a tailored approach to their individual needs that a one-size-fitsall public plan just could not achieve. With our unique capabilities in the realm of 

encouraging wellness and prevention, providing care coordination and chronic disease management, and empowering consumers and providers with health information technology, we can offer health care that responds to the specific needs of individuals. Health care is one area in which we must leverage the agility of the private 

sector to provide continued innovation and customization of health care plans. 

23 

3Milliman, Hospital & Physician Cost Shift, December 2008; figures reflect 2006 and 2007 

data. 4 Centers for Medicare and Medicaid Services, ‘‘National Health Expenditures Projections: 

2008–2018.’’ 5The Commonwealth Fund, ‘‘2006 International Health Policy Survey of Primary Care Physicians in Seven Countries,’’ November 1–2, 2006. 6The New England Journal of Medicine, ‘‘National Survey on Physician Adoption of Electronic 

Health Records,’’ July 2008. 

Beyond recognizing the added value that private insurers can provide, we must 

also be aware of the challenges a new public plan would impose on the rest of the 

system. A public plan would most likely employ the payment rates used in Medicare, which are far lower than the rates paid by private payers. In fact, the average 

family of four with private insurance spends an additional $1,788 on health care 

each year because of Medicare and Medicaid underpayments to providers. On an aggregate level, commercial payers incur approximately $89 billion more in costs than 

they would if public and private payers all paid equivalent rates.3 Expanding the 

use of low public payment rates would mean expanded cost-shifting for our health 

care system. 

There is no doubt that getting all Americans into the health care system is of the 

utmost importance. The best solution for our country will not be to shift us over 

to a system for which the public sector gradually takes more and more responsibility 

and competes with the private market, but rather to engage in a public-private partnership that allows each sector to focus on what it does best. Aetna is fully committed to active participation in this partnership to create a better system in which 

no one is left out. 

Bringing Affordable Coverage Into Reach 

If we want to ensure that all Americans have access to high-quality, affordable 

health coverage, we must both slow the growth of health care costs and get greater 

value out of our health care spending. 

The cost of health care in the United States is growing at an unsustainable rate. National health spending will reach $2.5 trillion in 2009 and by 2018, it is expected 

to reach $4.4 trillion and comprise just over one-fifth (20.3 percent) of Gross Domestic Product (GDP). This year, we can expect the top three cost drivers—hospitals, 

physicians and prescription drugs—to comprise 73 percent of health care spending.4

If we fail to effectively address our Nation’s health care cost problem, which is 

ultimately driven by the increasing illness burden borne by our population, we will 

find that access expansions will be unsustainable. A case in point is Massachusetts, 

where the absence of payment reform and more effective utilization threatens to undermine the ultimate success of truly commendable access reforms. Investments in 

health information technology and tackling payment reform are both necessary to 

slow the cost growth and improve quality. 

HIT can live up to expectations: The use of health information technology will 

not only be a powerful tool to bend the cost curve, but will also help address our 

country’s pervasive quality issues. The United States continues to lag behind its 

peers globally in embracing HIT solutions necessary to yield cost reductions and 

quality gains. Compared to other developed nations the United States trails in its 

overall use of electronic medical records (EMR), with an adoption rate of only 28 

percent.5 A New England Journal of Medicine survey suggests that 83 percent of 

U.S. doctors have still not adopted EMR technology.6 Consequently, Aetna continues 

to strongly support the President’s initiatives to accelerate HIT adoption and commends the Congress’ recent work to invest up to $22 billion to promote the use of 

electronic health records that have clinical decision support capacity as recommended by the Institute of Medicine. Over the past 4 years, Aetna has invested more than $1.8 billion in deploying 

health IT solutions that improve both the quality and cost-efficiency of the care that 

is delivered to our members. In making these investments, Aetna recognized from 

the outset that beyond its other claims and care management technologies, robust 

clinical decision support capabilities are essential to yielding the desired quality and 

cost returns necessary to produce a return on HIT investment. This was a key reason for Aetna’s 2005 acquisition of Active Health Management and its innovative 

Care Engine® technology. 

This unique technology provides a truly integrated solution for providers to extend 

clinical decision support beyond the electronic records platforms that may be contained in a physician’s office or hospital. Care Engine® scans millions of lines of 

pharmacy, lab, diagnostic, claims and other clinical data and matches them up to 

the latest available medical literature. It can scan disease management members’ 

data for opportunities to improve care through enhanced diagnostic and therapeutic 

24 

7The American Journal of Managed Care, ‘‘Using a Claims Data-Based Sentinel System to 

Improve Compliance With Clinical Guidelines: Results of a Randomized Prospective Study,’’ 

2005;11:93–102. 8The Journal of Health Economics, ‘‘Information Technology and Medical Missteps: Evidence 

From a Randomized Trial,’’ 2008; 585–60. 9McKinsey Global Institute, ‘‘Accounting for the cost of U.S. health care: A new look at why 

Americans spend more,’’ December 2008. 10 National Committee for Quality Assurance, ‘‘The State of Health Care Quality,’’ 2007. 

precision, and then notify physicians and patients with actionable information that 

can lead to improved outcomes at the point of care. Among the providers and plan 

sponsors now utilizing Care Engine®, it has demonstrated that the technology’s use 

can generate a meaningful return on investment by measurably improving quality 

outcomes (e.g., 19 percent reductions in overall hospitalizations)7 while producing 

overall cost savings (e.g., eight-fold ROI or 6 percent reduction in average charges).8

As we look ahead to ensure the public also receives a strong ROI for this new 

national HIT investment, it will be important for the Secretary and the Office of 

the National Coordinator within the Department of Health and Human Services to 

reinforce expectations in regulation and other guidance that: (1) providers meet 

measurable targets focused on quality outcomes in their use of publicly financed 

health information technology; and (2) that these technologies measure up to standards that ensure their capability to assist providers with clinical decision support 

that integrates pertinent data from all of the critical points within the health care 

system. 

Addressing Health Care Costs and Quality: A Critical Foundation 

On an annual basis, the United States spends $650 billion more on health care 

than peer OECD countries, even after adjusting for wealth.9 The vast majority ($436 

billion) of this ‘‘excess’’ spending results from outpatient care. There are other factors that contribute to the ‘‘excess,’’ including technological innovation, high levels 

of utilization, misaligned incentives for providers, lack of transparency and consumerism, higher prices and population health challenges. 

We need to tread carefully when it comes to some of these cost factors, as we do 

not want to stifle the innovation that drives improvements in our ability to improve 

and save lives. We can, however, work to ensure that technology is used appropriately to improve the standard of care and drive better patient outcomes. We can 

also re-align incentives in our system to ensure that quality and value serve as the 

primary motivators for choosing specific treatments. 

The American health care system is wrought with inefficiencies, wasteful duplicative spending and poor performance. Understandably, there is a strong concern that 

our inputs in health spending are not yielding high enough quality output in care 

and outcomes, and the impact of these quality disparities is brought to bear in very 

real terms. In fact, between 35,000 and 75,000 avoidable deaths and $2.7 billion to 

$3.7 billion per year in avoidable medical costs can be attributed to unexplained 

variations in care,10 underscoring the need for widespread dissemination of evidence-based medicine and standards. The guidelines must ultimately be applied at 

the individual member level to mitigate variation and wasteful spending. 

Payment reform will also be a critical tool to improve quality and bending the cost curve: The traditional fee-for-service (FFS) payment structure often 

rewards physicians and hospitals for the volume of services they deliver rather than 

the value or quality of care they provide. Aetna supports transforming the payment 

system into one that aligns provider reimbursement incentives with the pursuit of 

high-quality outcomes for patients. We need a payment system that works for the 

patient, bringing them value—high quality at the right cost. 

Reform needs to focus on promoting patient-centered care that integrates the multiple aspects of the health care delivery system and shifts the model from episodic, 

acute care to comprehensive, evidence-based care. Yet equally important is that any 

attempts to enact comprehensive payment reform include the input and support of 

the multiple stakeholders that make up the system, including providers, patients, 

employers and health plans. The managed care backlash of the 1990s taught us the 

valuable lesson that in order for payment reform to succeed, providers need to participate in the agenda-setting and metric-development process and patients need to 

know their interests are being served. 

We believe engaging consumers in their own health care is also of critical importance in achieving greater value within our health care system. As the leader in 

consumer-directed health plans (CDHPs), we continue to help plan sponsors with 

empowering their employees to make informed decisions about their medical care. 

In fact, the average large employer saved more than $7 million per 10,000 members 

over the course of 5 years when an Aetna Health Reimbursement Arrangement 

25 

(HRA) or Health Savings Account (HSA) was offered as a plan option. We also found 

that Aetna customers with CDHPs were much more likely to use online consumer 

tools and information—a leading indicator of employee engagement. They were also 

more likely to use preventive services than those enrolled in traditional health 

plans. 

Congress has taken some important steps forward: I applaud the members 

of this committee, the Senate and the House for their success in passing several key 

reforms that will start to slow the growth of our Nation’s health care costs while 

improving healthcare quality. The inclusion in the American Recovery and Reinvestment Act of 2009 of $1.1 billion in funding for comparative effectiveness research 

will help ensure that we invest in treatments that truly offer added benefit to the 

right patients. The commitment of $22 billion to investments in health information 

technology infrastructure and Medicare and Medicaid incentives for providers to 

electronically exchange patient health information will not only help to advance 

quality of care, but will help us to achieve long-term savings. 

CONCLUSION

I believe that President Obama and this Congress have charted a course of 

change, and I want to make clear that we too are committed to expanding access, 

controlling costs and improving the quality and value of care people receive. I hope 

this committee and the Nation as a whole will view Aetna and our industry peers 

as partners in advancing these shared goals. Our experience and effectiveness in developing and using technology to drive quality improvements, for example, can inform the larger discourse about health information technology and comparative effectiveness. We will support those efforts aimed at addressing access and affordability as well as the quality and value of health care in America. Over the past 

several years, Aetna has tried to lead by harnessing innovation and utilizing technology to serve people, and by stepping out front on issues that we believe can truly 

make a difference to our country. 

The health care system needs fundamental reform, and that will require determination and collaboration across the health care system that is unprecedented. We 

are ready and willing to work with you—because we know that success will be rooted in public/private cooperation—to create and implement practical solutions that 

drive systemic change. 

Working together, I believe that the path forward is achievable and that we will 

be able to bring a new approach to health care that efficiently and safely gets people 

to their desired destination—optimal health. 

Thank you. 

Senator BINGAMAN. Thank you very much. 

Ms. POLLITZ. 

STATEMENT OF KAREN POLLITZ, M.P.P., RESEARCH PROFESSOR, HEALTH POLICY INSTITUTE AT GEORGETOWN UNIVERSITY, WASHINGTON, DC 

Ms. POLLITZ. Good morning, Mr. Chairman, members of the committee. 

I am Karen Pollitz, and I direct research on private health insurance at Georgetown University. 

Very briefly, I think the challenges facing this committee are 

daunting, but doable. I think the first thing that you need to do 

to get health insurance to work the way you want it to is to stop 

it from discriminating against people based on their health status, 

their age, their gender. The cherry-picking, lemon-dropping activities that are common in the insurance market today need to end. 

You also need to stop the sale of health insurance that is inadequate. We have 57 million Americans who are struggling with 

medical debt today, and most of them have health insurance. 

Twenty-two percent of insured cancer patients nonetheless burn 

through their life savings paying medical bills. 

These practices are defended because they make health insurance cheaper, but it is not really a good kind of cheaper because 

26 

it makes protection flimsier. So we need to make insurance affordable by providing subsidies for good coverage and dependable coverage that is always there. To make sure that these prohibitions 

on these kinds of bad practices are followed, you are going to need 

an unprecedented level of accountability and transparency in market practices so that you can ensure that they actually stop. 

Then I think you need to reorient the market and organize it to 

compete in ways that we want it to. And in particular, I think introduction of a public plan, a public health insurance plan option 

in health insurance markets is a good thing. It can cue the market 

to compete in the ways that you want it to, to be a tough price negotiator, to be an innovator, and to share those innovations widely, 

not just bottle them up as trade secrets. 

I think there will be a lot of talk about a public health insurance 

plan today and sort of whether that is a fair thing or not, and I 

would just encourage you not to get too caught up in that. I don’t 

think a public plan should be there to bully private insurers, but 

I don’t think it is there to prop it up either. 

I think you want the market to have very specific goals and have 

an entity out there that is cueing the market to get it to move in 

the direction of those goals. 

Thank you. 

[The prepared statement of Ms. Pollitz follows:] 

PREPARED STATEMENT OF KAREN POLLITZ, M.P.P. 

Mr. Chairman and members of the committee, thank you for inviting me to testify 

on opportunities to strengthen health insurance markets in health care reform. My 

name is Karen Pollitz. I direct the study of private health insurance and its regulation at Georgetown University’s Health Policy Institute. 

A program of health reform to guarantee universal coverage including through 

private health insurance will need to address several key shortcomings of private 

markets today. These include: 

1. Discrimination based on health status and risk selection; 

2. Inadequate coverage; 

3. Affordability challenges for low- and middle-income people; 

4. Rising costs; and 

5. Lack of transparency and accountability. 

Part of the solution to these problems will lie in strengthening and reorganizing 

private health insurance markets to produce the coverage results we seek. A health 

insurance Exchange—sometimes referred to by other names, such as ‘‘Connector’’— 

can be established to pursue the goals of reform and to hold markets accountable 

for progress toward those goals. 

PROMOTE RISK SPREADING AND STABILITY

It has long been true that approximately 20 percent of the population accounts 

for 80 percent of health spending. The sickest 1 percent account for nearly one-quarter of health expenditures. We rely on health insurance to spread costs more evenly 

across the population and protect all of us from the risk that we may find ourselves 

in need of expensive care in any given year. Unfortunately the distribution of medical care needs creates a powerful economic incentive to avoid risk, not spread it. 

Discrimination based on health status is a problem for all health insurance purchasers, although most pronounced in the individual market today. Even consumers 

with mild conditions may be turned down, charged more, or offered a policy with 

permanent coverage exclusions. More expensive health conditions such as cancer, diabetes, pregnancy, will always render a person uninsurable in medically underwritten individual markets. 

Risk avoidance practices continue even after coverage is issued. Last summer, the 

House Committee on Oversight and Government Reform studied problems relating 

to post-claims underwriting and rescission. Individual market policyholders who 

make claims in the first year of coverage may be investigated for evidence their 

27 

health condition was pre-existing or not fully disclosed during the initial medical 

underwriting process. Claims may be denied or coverage cancelled or rescinded as 

a result. Although these practices are intended to protect against fraud, abuses have 

also been documented.1

Stability and long term affordability of coverage is also highly problematic in the 

individual market today. Typically people remain enrolled in policies for less than 

2 years.2 High rates of turnover result from several factors. In general, the individual market today is a residual market and unsubsidized, so participants tend to 

leave as soon as they regain eligibility for subsidized job-based or public coverage. 

However, for those who must remain longer, various market practices encourage 

churning or make it increasingly unaffordable to remain covered. 

Age rating makes it difficult to afford coverage over time. Insurers typically 

charge people in their early sixties three to six times the premium for people in 

their early twenties. The slope of this age climb varies, but often age adjustments 

are modest for young adults, becoming more pronounced for people in their fifties 

and early sixties, not coincidentally, when the incidence of many high-cost medical 

conditions also increases. 

Durational rating is used by many insurers to increase premiums based on the 

tenure of the policyholder. The predictive power of medical underwriting wears off 

over time; policyholders who were young and healthy when they first applied for 

coverage tend not to remain that way. By applying tenure surcharges, insurers encourage those enrollees who are still healthy to apply for new coverage, and resubmit to medical underwriting, in order to hold premiums down. This practice has the 

effect of segregating policyholders who have gotten sick, forcing their premiums 

even higher. 

In a related practice, insurers may introduce new policies into the marketplace 

every few years, leaving older policies in force but no longer actively marketed. With 

freshly underwritten applicants diverted to new policies, the claims experience of 

the ‘‘closed’’ policies deteriorates, driving up premiums. People healthy enough to 

leave the closed block will do so, further escalating premiums for those with health 

problems who are stranded.3

A recent health insurance survey of family farm and ranch operators, who rely 

disproportionately on the individual health insurance market, found high rates of 

financial burden due to these kinds of market practices.4

How reform can help.—Congress can and must change the rules of the health insurance marketplace so that insurers no longer compete on the basis of risk selection, but instead, on the basis of efficiency and customer service. All policies should 

be sold on a guaranteed-issue basis. 


48406-1.eps
28 

* As an alternative, some have suggested modified community rating that would allow premium adjustments for age but not health status. Because income generally increases with age, 

it is argued, age adjustments would be more equitable. However, income does not rise nearly 

as fast with age as do health insurance premiums. For example, median household income at 

age 55 is only 30 percent higher than for age 25. By contrast, under age rating, a 55-year-old’s 

health insurance premium could be surcharged by a factor of 2 to 5. If modified community rating is adopted and income equity is a goal, premium subsidies will need to reach farther up 

the income scale for individuals as they age. Age rating is also problematic because age strongly 

correlates to health status. The incidence of many chronic conditions increases steadily with age. 

As a result, age rating will tend to disproportionately surcharge premiums for people with heart 

disease, cancer, and other conditions. If age rating is permitted, at a minimum, its impact on 

affordability of coverage for the chronically ill will need to be closely monitored. 

Premiums should be determined based on community rating.* Pre-existing condition exclusions should end. Federal minimum standards for health insurance should 

be strengthened so that these protections apply to all types of health coverage. Vigorous oversight to ensure compliance is also essential. 

ASSURE COVERAGE ADEQUACY

Under-insurance is a serious and growing problem. In 2007, 57 million Americans 

lived in families struggling with medical debt—a 33 percent increase since 2003— 

and 75 percent of them had health insurance.5 Policies that fail to cover key benefits, such as prescription drugs, maternity care, and mental health care, can leave 

people under-insured. Likewise, caps on covered benefits leave patients at risk for 

catastrophic medical expenses. High deductibles, co-pays, and other cost sharing are 

also problematic. 

In an effort to offset rising premiums and stem coverage loss, the content of coverage under many health insurance plans and policies has eroded steadily. However, 

this strategy has proven to be ineffective. Coverage erosion leaves the under-insured 

in circumstances very similar to the uninsured—they forego or delay needed medical 

care due to costs, experience poorer quality care, and suffer financial burdens.6

Coverage adequacy is particularly important for patients with chronic conditions. 

Even modest co-pays for services can accumulate to burdensome levels for patients 

who need medical care and prescriptions on a regular basis. For example, a study 

of the effect of doubling prescription drug co-pays—from $6 to $12 for generic drugs 

and from $12 to $25 for brand name drugs—found that patients with diabetes, hypertension, and depression reduced use of their respective medications by nearly 

one-quarter.7 Failure to properly manage chronic conditions often leads to the development of more serious and expensive medical complications. Under-insurance 

among the chronically ill should be viewed as a threat to public health. There is 

also evidence high-cost sharing is exacerbating collections problems and fueling bad 

debt for hospitals and doctors.8

How reform can help.—A key goal of health reform must be to ensure that all people have adequate coverage. Minimum standards for what health insurance covers 

must be developed and explicitly take into account what insured patients will be left 

to pay out-of-pocket when they need medical care. Research finds that when outof-pocket spending for health care services exceeds just 2.5 percent of family income, 

financial pressures on families from medical bills increase dramatically. Financial 

burdens arise for low-income families at even lower levels of out-of-pocket spending.9 Accordingly, the design of all health insurance plans and policies must consider the care needs of patients with cancer, diabetes, heart disease and other serious medical conditions. Coverage for care needs of people when they are healthy— 

primary and preventive care services and maternity care—must also be included. 

Cost sharing must be held to modest levels and further subsidized for low-income 

individuals. 

A condition of insurer participation in a health insurance Exchange must be the 

offering of policies that meet minimum coverage standards. The elimination of substandard coverage options will not only address the problem of under-insurance, it 

will reinforce risk spreading. When all policies provide adequate coverage, people 

will not sort themselves by risk status across plans that offer widely varying levels 

of insurance protection. 

ASSURE AFFORDABILITY

Overwhelmingly, the uninsured lack coverage today because they cannot afford it. 

Most uninsured have incomes below twice the Federal poverty level. Significant assistance is needed to make coverage affordable. As just discussed, artificially depressing premiums by offering substandard policies will not help. 

29 

Affordability must be measured against the cost of comprehensive coverage. Jobbased group health plans offered by large employers today suggest one benchmark 

for the likely cost of adequate coverage. Such plans currently cost approximately 

$4,800 per year for self-only coverage and $13,000 for family coverage.10

How reform can help.—Subsidies are essential to make coverage affordable for 

millions of uninsured Americans. Defining affordability will certainly entail some 

subjective judgments. However, economic studies of consumer spending suggest 

health insurance may be affordable for middle-income families as long as premiums 

do not exceed 4 to 8 percent of household income, with lower affordability thresholds 

for lower income families.11 A similar standard has been adopted by the State of 

Massachusetts in determining its premium subsidies and affordability index, and as 

a result, subsidies for both premiums and cost sharing are available for individuals 

and families with income to 300 percent of the poverty. Residents with income to 

500 percent of poverty are ineligible for subsidies but may receive a waiver of the 

requirement to buy health insurance on grounds of affordability. 

COST CONTAINMENT

Since 1999, employer-sponsored insurance premiums have more than doubled, 

well outpacing inflation and the rise in earnings.12 In 2007 total national health expenditures reached $2.2 trillion, or more than $7,400 per capita and more than 16 

percent of GDP.13 All indications are that unless we take action through health care 

reform, health spending will continue to rise at levels beyond what families, employers, and taxpayers can afford.14

In today’s private health insurance markets, competition between carriers does 

not help control costs. Quite the opposite, data show there is a high degree of concentration among insurers, with just a handful of carriers accounting for the majority market share in most States. Insurers have not used their market power to negotiate favorable provider rates or otherwise control costs as might be expected; 

rather, they’ve passed on health care costs to consumers while increasing profitability at the same time.15

How reform can help.—Health insurance markets can be better organized to generate new forms of competition and more effective cost containment strategies. First 

and foremost, once all policies meet standards for comprehensive coverage, it will 

be easier for consumers to shop on the basis of price prompting insurers to behave 

more cost effectively. 

As is the case in Massachusetts, the Exchange could also be given authority to 

negotiate with health insurers over premiums and to exclude the least efficient and 

effective carriers from participation. The Exchange might also adopt minimum loss 

ratio targets, adopt standards for broker commissions, and institute other expectations of efficiency to lower health insurance administrative costs. 

Importantly, a public health insurance plan option should also be offered to 

heighten competitive pressures to contain costs. A public health insurance plan can 

substantially influence market innovation by investing in new approaches to disease 

management or more effective use of information technology. Such innovations 

should be freely shared with other insurers so they could adopt them at lower cost. 

A public health insurance plan also could induce other insurers to be tougher price 

negotiators with providers. 

The issue of a public health insurance plan option has prompted concern that it 

would constitute unfair competition with private insurance companies, and might 

even result in the elimination of private insurers over time. However, experts suggest a different outcome seems as or more likely because a public health insurance 

plan will face other unique constraints. In particular, health care providers have 

been formidable in their exercise of political pressure to oppose payment rate cuts 

under Medicare, as evidenced by Congress’ vote to prohibit Medicare from negotiating prescription drug price discounts under the Part D program. While a public 

health insurance plan will likely enjoy some cost advantages over private insurers, 

political constraints will prevent it from exploiting those advantages.16

In addition, it is important to remember how private insurers have benefited from 

public programs by shifting costs to them. Thanks to Medicare, the private market 

no longer finances most medical care for the elderly and disabled, nor for patients 

with ESRD and ALS. Medicaid eligibility categories now include women with breast 

and cervical cancer who are under-insured for this care. Three-fourths of States 

have opened high-risk pools for uninsurable residents whom private insurers refuse 

to cover. In 2000, Minnesota’s attorney general found private health insurers were 

shifting to taxpayers the cost of mental health care it contracted to provide its beneficiaries by forcing policyholders, through claims delays and denials, to turn to public programs for mental health care.17 Offering a public health insurance plan option 

30 

also ensures that the sickest patients will always have a source of affordable, adequate health coverage in the event that some private insurance companies do not 

immediately cease cost avoidance activities. 

TRANSPARENCY AND ACCOUNTABILITY

Finally, transparency of information is critical in a competitive market where consumers have choices. Lack of transparency promotes inefficiency and bias in consumer choices.18 Health insurance policies are complex and confusing for consumers, 

who often do not understand what type of coverage they have or how it works.19

One industry survey found that less than one-fourth of consumers understand the 

terminology in their health insurance contracts; and rather than try to read their 

policy, most would prefer to prepare their income taxes or go to the gym.20

Greater transparency in market behaviors will also be needed to ensure accountability. Compliance with market rules must be closely monitored and enforced if we 

want insurers to cease competition on the basis of risk selection. 

How reform can help.—In an organized marketplace, there can be rules to ensure 

that insurance products are understandable. One important task of an Exchange 

must be to provide more and better information about health insurance than most 

consumers have today. The Commonwealth Connector, for example, designates 

types of health insurance plans as gold, silver, and bronze to make it easier for consumers to compare across option. In addition, the Connector makes available plan 

comparison tools that highlight differences in key plan features such as deductibles, 

co-pays, and benefit limits.21 Members of Congress and other participants in the 

Federal Employees Health Benefits Program (FEHBP) have on-line access to full 

health insurance policy language for each available plan option. Under health reform, the Exchange should require all health insurance policies to be available for 

public inspection at all times in order to promote transparency. 

If a goal of reform is to encourage health insurers to compete on the basis of efficiency, this information must also be readily available. In Washington State, for example, the Office of the Insurance Commissioner (OIC) makes available a Health 

Carrier Information Comparison tool with information about carrier loss ratios, profit margins and other characteristics to help consumers see how much of their premium dollars are spent on medical claims vs. administrative costs.22 Health insurers should be required to disclose plan loss ratios including detailed information 

about administrative costs by type and amount. In addition, price transparency will 

help consumers and providers see and compare variation in prices (charged and allowed) for different health care services. 

The Exchange should also collect data to hold health plans accountable for compliance with nondiscrimination rules. Insurer marketing, rating, and plan administration practices that might be used to evade such rules must be monitored. Disclosure 

must include data on applications, enrollment and disenrollment by plan, including 

demographic and health status characteristics. Rating of policies at issue and renewal must also be monitored. In addition, it will be important to track claims handling practices, including payment denials and delays, with detail disclosed on type 

of service and patient diagnosis. Data on grievance and appeals procedures and outcomes will also be needed. 

In recent months, accountability and transparency have become watchwords in 

our effort to strengthen financial markets and the economy generally. These themes 

must also apply to health insurance and guide your efforts on health care reform. 

END NOTES

1. See committee hearing transcript at http://oversight.house.gov/ 

story.asp?ID=2089. See also Girion, L., ‘‘Health insurer tied bonuses to dropping sick 

policyholders,’’ Los Angeles Times, November 9, 2007. 

2. ‘‘Individual Health Insurance: An Update’’ Henry J. Kaiser Family Foundation, 

August 2004. http://www.kff.org/insurance/7133.cfm. 

3. ‘‘On their own,’’ Consumer Reports, January 2008. Available at http:// 

www.consumerreports.org/health/insurance/health-care-on-your-own-1-08/overview 

/health-care-on-your-own-ov.htm. 

4. ‘‘2007 Health Insurance Survey of Farm and Ranch Operators’’ Issue Brief No. 

3, The Access Project, September 2008. Available at http://accessproject.org/adobe/ 

issuelbrieflnol3.pdf. 

5. Cunningham, P., ‘‘Tradeoffs Getting Tougher: Problems Paying Medical Bills 

Increase for U.S. Families, 2003–2007’’ Center for Studying Health System Change, 

Tracking Report No. 21, September 2008. 

6. Schoen, C., et al., ‘‘How Many Are Underinsured? Trends Among U.S. Adults, 

2003 and 2007,’’ Health Affairs, Web exclusive (June 10, 2008). 

31 

7. Goldman, D, et al., ‘‘Pharmacy Benefits and Use of Drugs by the Chronically 

Ill,’’ Journal of the American Medical Association, Volume 291, No. 19, May 19, 

2004. 

8. See for example, ‘‘Hospital Strategies for Addressing Out-of-Pocket,’’ Healthcare 

Financial Management Association Roundtable, October 1, 2008. Available at 

http://www.allbusiness.com/company-activities-management/operations/11664702- 

1.html. See also Cash, Cheryl, ‘‘Adding up the cost of high-deductible health care 

plans: Quality care, billing and collection challenges face many pediatricians as 

more families switch to consumer-driven health insurance,’’ AAP News, Volt. 28, No. 

1, January 1, 2007. 

9. Cunningham, P. et al., ‘‘Living on the Edge: Health Care Expenses Strain Family Budgets’’ Center for Studying Health System Change, Research Brief No. 10, December 2008. 

10. ‘‘Employer Health Benefits 2008 Annual Survey,’’ Henry J. Kaiser Family 

Foundation and Health Research and Educational Trust, available at http:// 

ehbs.kff.org/pdf/7790.pdf. 

11. Blumberg, L., et al., ‘‘Setting a Standard of Affordability for Health Insurance 

Coverage’’ Health Affairs Web Exclusive, June 4, 2007. 

12. Kaiser Family Foundation. http://ehbs.kff.org/pdf/7790.pdf. 

13. http://www.cms.hhs.gov/NationalHealthExpendData/02lNationalHealth 

AccountsHistorical.asp#TopOfPage. 

14. http://www.cms.hhs.gov/NationalHealthExpendData/Downloads/proj2007 

.pdf. 

15. Robinson, J., ‘‘Consolidation and the Transformation of Competition in Health 

Insurance,’’ Health Affairs, Volt. 23, No. 6, November/December 2004. 

16. Holahan, J. and Blumberg, L., ‘‘Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?’’ The Urban Institute, 2008. http:// 

www.urban.org/UploadedPDF/411762lpubliclinsurance.pdf. 

17. Hausman, K., ‘‘Insurer Admits Errors, Agrees to Implement Parity,’’ Psychiatric News Vol. 36, No. 14, July 20, 2001. 

18. Gabix, Xavier and Daibson, David, ‘‘Shrouded Attributes, Consumer Myopia, 

and Information Suppression in Competitive Markets,’’ The Quarterly Journal of Economics, Volt. 121, No. 2, PP. 505–540, May 2006. http:// 

www.mitpressjournals.org/doi/abs/10.1162/qjec.2006.121.2.505. 

19. Reschovsky, J., and Hargraves, J.L., ‘‘Health Care Perceptions and Experiences: It’s Not Whether You are in an HMO, It’s Whether You Think You Are,’’ Center for Studying Health System Change, Issue Brief No. 30, September 2000. 

20. ehealth, Inc., ‘‘New Survey Shows Americans Lack Understanding of Their 

Health Coverage and Basic Health Insurance Terminology,’’ January 3, 2008, available at http://www.marketwire.com/press-release/Ehealth-Inc-NASDAQ-EHTH806855.htm. 

21. See http://www.mahealthconnector.org. 

22. See https://fortress.wa.gov/oic/hcis/public/comparisonhome.aspx. 

Senator BINGAMAN. Thank you very much. 

Ms. IGNAGNI. 

STATEMENT OF KAREN IGNAGNI, M.B.A., PRESIDENT AND CEO, 

AMERICA’S HEALTH INSURANCE PLANS, WASHINGTON, DC 

Ms. IGNAGNI. Thank you, Mr. Chairman, members of the committee. It is a pleasure to be here. 

Our members are providing health insurance services to over 225 

million people through a diversified product mix. We are committed 

to reform, as Mr. Williams indicated. He is a member of our board 

of directors and has been a leading member of the committee on 

the board that has worked to propose solutions to the problems 

that you are talking about today. 

Our members believe that health insurance reform needs to be 

done this year. We want to participate with you in helping to get 

legislation passed. We believe that the legislation needs to have 

three parts—universal access, cost containment, and modernization—to bring us into the 21st century and begin to pay for value, 

32 

not volume. We have offered very specific proposals in each of these 

areas that are outlined in our testimony. 

In addition, as to the matter before you this morning, we took 

the responsibility to look at the issues that affect our industry. We 

have considered them very carefully, and we have proposed major 

changes that can be made to ensure that no one will fall through 

the cracks, that no one is discriminated against because of a preexisting condition, and that there is guaranteed issue. 

Second, today we have sent a letter to the committee to outline 

jointly with the Blue Cross Blue Shield Association a package of solutions that, if implemented together, can phase out the practice of 

varying premiums based on health status. We are committed to 

giving Americans health security. 

There have been certain aspects of the market that has caused 

it to work the way it does. We are very much interested in engaging with you about what those issues are, how we believe we can 

solve them, and how we can demonstrate to the committee and to 

the Nation that our members can be counted upon to offer transparent, equitable, safe, fair health insurance products. We are delighted to be here this morning. 

Thank you. 

[The prepared statement of Ms. Ignagni follows:] 

PREPARED STATEMENT OF KAREN IGNAGNI, M.B.A. 

SUMMARY

AHIP’s members believe that health care reform legislation needs to be enacted 

and signed into law this year. Our Board of Directors has devoted hundreds of hours 

to the development of policy proposals for building a stronger health care system. 

From the outset, we have committed to a series of proposals that would transform 

the health care system. Our Board has made it clear that it does not view the status 

quo as acceptable, and it is deeply committed to helping this committee, the Congress, and the Administration achieve workable reforms. 

In December 2008, the AHIP Board announced a comprehensive proposal for restructuring the health care system with these cornerstone goals: achieving universal 

coverage, reducing the future growth rate of health care costs, and improving quality of care. To ensure that no one falls through the cracks of the U.S. health care 

system, our proposals include insurance market reforms addressing guaranteed coverage for people with pre-existing medical conditions, portability of coverage, continuity of care, and other solutions for addressing the concerns we heard during a 

nationwide listening tour we conducted last year as part of AHIP’s ‘‘Campaign for 

an American Solution.’’ Our written testimony outlines specific proposals addressing 

three major priorities: 

Insurance Market Reforms to Provide Affordable, Portable Coverage to 

All Americans: 

• Improving the individual market. 

• Helping small business. 

• Strengthening the small group market. 

• Establishing an essential benefits plan. 

• Confronting cost-shifting. 

• Improving public programs. 

• Protecting Americans from bankruptcy. 

Containing Health Care Costs: 

• Setting a goal for reducing the future rate of growth in health care costs. 

Steps for Creating a High-Value Health Care System: 

• Incentives for more effective and coordinated delivery of care. 

• Prevention, early treatment, and coordinated care for chronic conditions. 

• Uniform standards for quality, reporting, and information technology. 

• Comparative effectiveness research. 

• Targeted investments in public health infrastructure. 

33 

I. INTRODUCTION

Senator Bingaman, Senator Enzi, and members of the committee, I am Karen 

Ignagni, President and CEO of America’s Health Insurance Plans (AHIP), which is 

the national association representing approximately 1,300 health insurance plans 

that provide coverage to more than 200 million Americans. Our members offer a 

broad range of health insurance products in the commercial marketplace and also 

have demonstrated a strong commitment to participation in public programs. 

We appreciate this opportunity to testify on solutions for achieving health care reform and how insurance reforms are integral to this effort. We believe that legislation needs to be enacted and signed into law this year, and we are committed to 

playing a meaningful role in this debate. To that end, we have worked hard to bring 

tangible strategies to the discussion that will address market issues, make the system more affordable, and facilitate the modernization that needs to occur in the delivery of health care services. 

In December 2008, the AHIP Board announced a comprehensive proposal for restructuring the health care system with these cornerstone goals: achieving universal 

coverage, reducing the future growth rate of health care costs, and improving quality of care. 

The AHIP proposal is the culmination of 3 years of policy work by our Board of 

Directors, which has focused on developing workable solutions to the health care 

challenges facing the Nation. It also responds to the concerns and incorporates the 

ideas that were raised by the American people during a nationwide listening tour 

we conducted last year as part of AHIP’s ‘‘Campaign for an American Solution.’’ 

This listening tour included roundtable discussions involving Americans from all 

walks of life, including people with and without insurance, small business owners 

and their employees, union leaders and members, elected officials, and community 

leaders. 

Since June 2008, our Board has held eight in-person meetings and 11 conference 

calls, devoting hundreds of hours to the development of policy proposals for building 

a stronger health care system. From the outset, our community has committed to 

a series of proposals that would transform the health care system. Our Board has 

made it clear that it does not view the status quo as acceptable, and it is deeply 

committed to helping this committee, the Congress, and the Administration achieve 

reforms that work and become the building blocks on which a uniquely American 

system can be built. 

II. INSURANCE MARKET REFORMS TO PROVIDE AFFORDABLE, PORTABLE COVERAGE TO

ALL AMERICANS

As this debate moves forward, we believe all participants in the health care system have a responsibility to play a leadership role in identifying strategies in their 

sectors that will allow the Congress to pass health care reform legislation that will 

work and that can be sustained. 

Rather than build on the existing regulatory structure, we are proposing a fundamental overhaul that would bring all individuals into the system, and allow major 

changes to be made that would ensure that all Americans can obtain affordable 

health insurance and do so irrespective of their health care history. We are proposing a series of policy changes which, if implemented together, will ensure that 

no one falls through the cracks, that coverage will be portable, and that information 

will be given to consumers that they need and want. To achieve these goals, the 

following steps are necessary: 

Helping to Ensure Portability and Continuity of Coverage for Consumers in the 

Individual Market 

• Ensuring that no one falls through the cracks by combining guaranteeissue coverage (with no pre-existing condition exclusions) with an enforceable individual mandate: For guarantee-issue to work, it is necessary for everyone to be brought into the system and participate in obtaining coverage. Achieving 

this objective will require specific attention to the mechanisms for making the mandate enforceable and will require coordinated action at multiple levels of government. 

Indeed, the importance of combining guarantee issue with an enforceable individual mandate is borne out by research and experience from the States. For example, a report by Milliman, Inc. found that States that enacted guarantee-issue laws 

in the absence of an individual coverage requirement saw a rise in insurance premiums, a reduction of individual insurance enrollment, and no significant decrease 

in the number of uninsured. 

34 

• Ensuring fairness in the tax code: Currently, individuals purchasing insurance on their own cannot deduct expenses for health insurance coverage unless total 

health care expenses exceed 7.5 percent of adjusted gross income. This should be 

corrected to promote tax equity and help make health care more affordable whether 

coverage is obtained through an employer or the individual market. • Ensuring a stable market for consumers: A broadly funded mechanism 

which spreads costs for high-risk individuals across a broader base needs to be put 

in place to ensure premium stability for those with existing coverage. • Ensuring that coverage is affordable for lower-income individuals and 

working families: Refundable, advanceable tax credits should be available on a 

sliding scale basis for those earning less than 400 percent of the Federal Poverty 

Level (FPL), as discussed below. 

Helping Small Business Provide Health Care Coverage More Affordably 

Small business owners find themselves in an increasingly difficult marketplace for 

health insurance because of constantly rising health care costs and the limited ability of most small businesses to bear risks, contribute a substantial share of costs, 

or support administrative functions. On March 9, AHIP’s Board of Directors approved a policy statement outlining solutions to help small business based on the 

following three core principles: 

Affordability 

• Essential Benefits Plan: As discussed below, we propose the creation of new 

health plan options that are affordable for small employers and their employees. 

These ‘‘essential benefits plans’’ would be available nationwide and provide comprehensive coverage for prevention and wellness as well as chronic and acute care. 

In addition, these plans would be subject to State regulation, but would not be subject to varying and conflicting State benefit mandates that result in increased costs 

to small businesses (and that do not apply to the generally larger employers that 

enter into self-funded health care coverage arrangements). 

• Tax Credits or Other Incentives to Assist Small Business: We support the 

establishment of tax code incentives or other types of assistance that encourage both 

small business owners to offer coverage to their employees and employees to take 

up coverage. We recognize the special challenges, both administrative and financial, 

that small businesses face in offering contributions toward their employees’ coverage. Providing assistance can encourage these contributions and help enable employees to take up coverage which improves predictability and stability in the small 

group market. 

• Improving Coordination of Private and Public Programs Strengthens 

Small Group Coverage: Premium or other assistance offered to low-income individuals and working families can be applied to and work with employer-sponsored 

coverage. This is important whether the assistance is provided through Medicaid, 

the Children’s Health Insurance Program (CHIP), or other expanded programs designed to help individuals and families obtain coverage. Improved coordination allows workers to take up coverage offered by small businesses by leveraging both 

public and private sources of assistance, and benefits the firms’ employees as a 

whole by increasing rates of participation in the small group plan. 

Flexibility 

We are committed to working with the small business community to ensure that 

small businesses have access to a range of options and tools that better assist them 

in helping their employees obtain health care coverage. One-size-does-not-fit-all, as 

the needs of diverse small firms vary greatly. 

• Micro-firms: As an example, ‘‘micro-firms’’ (those with fewer than 10 employees) face special challenges in offering coverage. Statistics show that only about onethird of these firms offer coverage. This reflects the administrative, financial, and 

logistical challenges many micro-firms face in setting up and establishing plans and 

offering and contributing to their employees’ coverage. To help these firms meet 

these challenges, enhanced tools could be developed that would allow those microfirms that have found it impractical to offer coverage, to contribute to coverage purchased on a pre-tax basis by individual employees. As part of comprehensive health 

care reform, employees could then use these contributions to help purchase coverage 

in a reshaped health care system that combines an individual requirement to obtain 

coverage with reforms in the individual market. 

• One-stop information source: All small firms will benefit from collaborative 

efforts between health plans and the public sector (e.g., insurance commissioners) 

to ensure that small employers and individuals have one-stop access to clear, organized information that allows them to compare coverage options. This one-stop shop 

35 

could also allow individuals to confirm eligibility for tax credits or other assistance 

and even provide a mechanism to aggregate premium contributions from multiple 

sources. By providing a mechanism to combine even modest contributions from multiple sources (public and private), this new one-stop shop could be especially helpful 

to employees who may hold multiple jobs. 

Simplicity 

Small businesses may find the current system difficult to navigate with a lack of 

simple, streamlined information about multiple coverage and care options and related assistance programs. We propose modifications to introduce greater simplicity 

to the system through technology and regulatory reform and the creation of a onestop information source as described above. These proposed efforts will benefit all 

participants in the health care system, including the small business community. 

• Technological advances: In our December 2008 Board statement, we emphasized that any health care reform proposal should include recommendations to 

streamline administrative processes across the health care system. Success will require advances in automating routine administrative procedures, expanding the use 

of decision support tools in clinical settings, and implementing interoperable electronic health records. Using technology to help streamline administrative processes 

will improve care delivery, enhance the provider and patient experience, and speed 

claims submission and payment. Done right, streamlining can also help reduce costs 

systemwide, leading to improved affordability. 

• Regulatory reform: Regulatory structures should be rethought so that they 

work better and provide for a more consistent approach in areas such as external 

review, benefit plan filings, and market conduct exams. In a reformed market, policymakers should be driven by striking a balance between the traditional roles of 

the Federal Government and the States, and the objectives of achieving clearer and 

‘‘smarter’’ regulation that promotes competition and avoids duplication of existing 

functions. Greater consistency in regulation and focusing on what works best will 

enhance consumer protections across States and help improve quality, increase 

transparency, and increase efficiency leading to reduced administrative costs. 

Strengthening the Large Group Market 

We support building upon the existing employer-based system, which currently 

covers 177 million Americans according to the U.S. Census Bureau. It is a key part 

of our economic fabric. Although the employer-based system faces challenges, more 

than 90 percent of employers report that offering high-quality coverage is important 

to their ability to recruit and retain valuable workers and enhance employee morale. 

Thus, as a first priority, the Nation’s reform agenda should be committed to a policy 

that ‘‘first does no harm’’ to that system and limits strategies that would reduce employer coverage. Focus should be placed on retaining a national structure for the 

large group market that continues to promote uniformity and ensures the smooth 

functioning of the employer-based system. 

At the same time, the Nation’s economic uncertainties and job losses underscore 

the need for new strategies to assist individuals who become unemployed or are 

transitioning from job to job. While a Congressional Budget Office (CBO) study 

found that nearly 50 percent of the uninsured go without coverage for 4 months or 

less, additional protections are still needed. We propose ensuring that tax credits 

are available to individuals on an advanceable basis to help them through job transitions along with access during these times to more affordable coverage options consistent with our proposal for a basic benefits plan. 

Establishing an Essential Benefits Plan 

Individuals and small businesses should have access to an affordable ‘‘essential 

benefits plan’’ available in all States that provides coverage for prevention and 

wellness as well as acute and chronic care. To maintain affordability, the essential 

benefits plan should not be subject to varying and conflicting State benefit mandates. 

An essential benefits plan should include coverage for primary care, preventive 

care, chronic care, acute episodic care, and emergency room and hospital services. 

Alternatively, it should include coverage that is at least actuarially equivalent to the 

minimum Federal standards for a high-deductible health plan sold in connection 

with a health savings account, along with the opportunity to include enhancements 

such as wellness programs, preventive care, and disease management. 

Allowing benefit packages to vary based on actuarial equivalence is crucial to ensure that any package can evolve based upon new innovations in benefit design and 

the latest clinical evidence. 

36 

Confronting the ‘‘Cost-Shifting Surtax’’ Currently Imposed On Employers And Consumers Purchasing Health Care Coverage 

As part of any national health care reform initiative, Congress must address the 

fact that reducing outlays in one area inevitably means shifting costs elsewhere. Underpayment of physicians and hospitals by public programs shifts tens of billions in 

annual costs to those with private insurance. A December 2008 study by Milliman, 

Inc. projects that this cost shifting essentially imposes a surtax of $88.8 billion annually on privately insured patients, increasing their hospital and physician costs 

by 15 percent. This study concluded that annual health care spending for an average family of four is $1,788 higher than it would be if all payers paid equivalent 

rates to hospitals and physicians. The transfer of these costs to those with private 

coverage cannot be sustained and is critical to addressing concerns over affordability. 

The impact of cost-shifting is dramatically illustrated by the tables below, which 

use real data showing that hospitals in California recorded significant losses in 2007 

by serving Medicare and Medicaid beneficiaries. These losses are offset, however, by 

higher costs charged to commercial payers. This cost shifting translates into higher 

premiums for working families and employers. 

Hospital Net Income Figures in California 

[In millions] 

Year 

Medicare and Medicaid Commercial Total 

DSH Non-DSH DSH Non-DSH DSH Non-DSH 

2001 ............................................................................... 256 (1051) 137 1621 (825) 853 

2007 ............................................................................... (914) (4292) 790 6230 (1450) 1852 

Hospital Payments to Non-DSH Hospitals Relative to Costs in California 

[In Percent} 

Year Commercial Medicare Medicaid 

2001 ........................................................................................................................................... 117 98 67 

2007 ........................................................................................................................................... 142 85 56 

Non-DSH Hospital Margins in California 

[In Billions} 

Year Commercial Medicare Medicaid 

2001 ........................................................................................................................................... 2.0 (0.2) (0.9) 

2007 ........................................................................................................................................... 6.2 (2.4) (1.9) 

In addition, the U.S. currently spends approximately $50 billion each year to provide health services to those without coverage, leading to high levels of uncompensated care. This too results in cost-shifting to those with coverage in the form of 

higher premiums and other related costs. According to a 2005 Families USA study, 

the cost-shift due to uncompensated care adds $922 annually to family premiums. 

When these costs associated with uncompensated care are combined with the cost 

shifting that results from the underfunding of Medicare and Medicaid, the impact 

for families with private coverage is an overall surtax of $2,710 annually due to 

cost-shifting. 

Improving Public Programs 

For health care reform to succeed, we also need to improve the public safety net. 

We strongly supported the funding that is committed to this priority by H.R. 2, the 

‘‘Children’s Health Insurance Program Reauthorization Act of 2009’’ (CHIPRA). We 

also support extending Medicaid eligibility to all individuals with incomes at or 

below 100 percent of the FPL. In addition, adequate support should be provided to 

community health centers, recognizing the critical role they play in providing access 

to services for vulnerable populations and to ensure they can continue this role in 

the future. 

37 

Protecting Americans from Bankruptcy 

To guard against medical bankruptcy, a system of tax credits should be designed 

for lower-income individuals and working families that would cap their total health 

care expenses (to include spending on premiums and cost-sharing) as a proportion 

of income. Achieving the goal of universal coverage is also critical to preventing 

medical bankruptcies, as research shows medical expense related bankruptcy is 

most prevalent among those without health insurance coverage. 

III. CONTAINING HEALTH CARE COSTS

A broad consensus is emerging that reform of the system—that covers all Americans and provides safer and more effective care—is possible if we can contain the 

future growth in health care costs. At present, U.S. health expenditures are rising 

at an unsustainable rate, placing unaffordable burdens on families and small businesses, and hampering our competitiveness as a nation. In order to confront these 

issues, all stakeholders need to be challenged to innovate, perform better, and come 

to the table with solutions. 

Health plans are leading the way by pioneering disease management and care coordination programs, promoting prevention, wellness and early intervention, and 

implementing innovative payment strategies that reward performance and outcomes. We are committed to working with the Administration, Congress and other 

stakeholders to advance strategies that promote effective, efficient, and high value 

health care. 

At the same time, efforts to make our health care system more affordable for the 

long run will succeed only if the Nation as a whole makes a strong commitment to 

reducing the future rate of increase in health costs and we all work together to 

achieve it. The critical link between reducing costs and increasing quality should 

help guide this effort. Spending more on health care does not necessarily equate to 

better quality; rather, the opposite has been shown. In particular, many regions of 

the Nation with higher spending actually have poorer quality of care and exhibit 

wide variations in practice and treatment patterns. 

Recognizing the need for bold action, we are encouraging Congress to consider setting a goal for reducing future health care costs over a 10-year period and designate 

a public-private advisory group to develop a roadmap to reduce projected growth by 

1.5–1.7 percentage points. The importance of such an effort cannot be overstated, 

nor can the responsibility that each stakeholder group must assume. Leaders in 

each sector know best about how to reduce future cost trends, and we are proposing 

a strategy where each of the key groups would be expected to take the lead in outlining a blueprint to reduce future cost growth in their sector. 

The value of launching such an effort is illustrated by the chart below, which 

shows the dramatic impact of reducing annual increases in the projected growth of 

national health expenditures by 1 percentage point, 1.5 percentage points, or 1.7 

percentage points. The aggregate cost savings under any of these scenarios would 

be very large, with the third scenario—achieving a reduction of 1.7 percentage 

points—yielding savings of $3.5 trillion over 10 years, or more than $700 billion in 

2018 alone. 

38 

Reducing cost trend in this manner would strengthen the Nation’s economic position relative to the global economy, provide significant relief to individuals and employers, and improve the solvency of the Medicare trust fund. Moreover, cost savings 

of this magnitude could go a long way toward ensuring that every American has 

access to affordable, quality coverage and care. These savings could help finance 

part of the costs of providing coverage to the uninsured, as well as reduce costs for 

those who are currently covered. 

The impact on the U.S. economy is particularly important, as the chart below 

shows. Modest reductions in cost trends would have a dramatic effect in holding 

down future projections of national health care spending as a percentage of our Nation’s gross domestic product (GDP). 


48406-2.eps
39 

A financially sustainable and affordable health care system can only be achieved 

by bringing underlying medical costs under control. If health care costs are allowed 

to continue rising at rates far exceeding economic growth, they will stall all efforts 

to expand coverage and improve care. Meeting specific affordability goals will require leadership from all stakeholders. Health plans are prepared to step up and 

meet that challenge and participate in a fast-track process with other stakeholder 

groups. 

IV. CREATING A HIGH-VALUE HEALTH CARE SYSTEM

The goal of containing costs can only be realized if it is coupled with parallel efforts to improve the ability of our health care system to deliver high-quality care 

that is in line with best practices and addresses the disparities in care experienced 

by cultural and ethnic minorities. 

The fragmented U.S. health care delivery system is wasteful and unsustainable. 

Patients across the Nation fail to receive high quality care on a consistent basis, 

while the system overpays and encourages the overuse of costly specialty care, yet 

underpays primary care which fosters care coordination and chronic care management. About 18 percent of Medicare hospital admissions result in re-admissions 

within 30 days of discharge, accounting for $15 billion in spending and $12 billion 

in potentially preventable re-admissions. 

The total costs of preventable medical errors that result in injury are estimated 

to be between $17 billion and $29 billion—of which over half represent health care 

costs. Additional research demonstrates that there is an alarming gap between what 

is recommended by scientific evidence and what is actually practiced, including a 

2003 RAND study which found that only 55 percent of patients receive treatments 

based on best practices. 

To address these challenges, we need to focus on several critical areas to create 

a high-value health care system. 

• Updating and recalibrating the Medicare physician fee schedule. The 

current process for determining physician payment across different specialties under 

the Medicare program should be overhauled, and a transparent, public process 

should be created. Payment levels should be adjusted for cognitive and procedural 

services as well as account for gains in efficiency and provider productivity. Recalibrating the value of professional services will create renewed interest in important 

areas such as primary care. 

• Setting standards and expectations for the safety and quality of 

diagnostics. The 2001 Institute of Medicine’s landmark report, Crossing the QualVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 S:\DOCS\48406.TXT DENISE

48406-3.eps
40 

ity Chasm, recommended setting and enforcing explicit professional and facility 

standards through regulatory and other oversight mechanisms, such as licensure, 

certification and accreditation, that define minimum threshold performance levels 

for health care organizations and professionals. Standards will hold providers accountable for ensuring a safe environment in which patients receive care. • Promoting care coordination and patient-centered care by designating 

a medical home as well as supporting other primary care delivery models. 

The patient-centered medical home is a promising concept that would replace fragmented care with a coordinated approach to care. By providing physicians with a 

periodic payment for a set of defined services, such as care coordination that integrates all treatment received by a patient throughout an illness or an acute event, 

this model promotes ongoing comprehensive care management, optimizes patients’ 

health status, and assists patients in navigating the health care system. Other models which utilize nurses and other professionals to coordinate and manage patients’ 

care also should be explored. • Linking payment to quality. Payment incentives which reward physicians 

that practice both efficiently and consistently with clinical practice guidelines should 

continue to be promoted. The next generation of pay-for-performance models will 

move beyond the current focus of ensuring that processes of care are followed and 

performance metrics are reported, and instead, reward providers for achieving results including better clinical outcomes, improved patient experience, and lower 

total cost of care. Similar incentives which apply to hospitals also may have potential benefits. • Bundling payments for better management of chronic conditions across 

practitioners and facilities. Bundled payments could allow for better management of chronic conditions by providing a single prospective payment for all providers involved in the management of a patient’s condition. Under this model, providers would have shared accountability and responsibility, and thus be motivated 

to individually provide quality care in more efficient ways as well as work with 

other professionals to improve collective performance. • Redesigning acute care episodes. Global case rate models—which typically 

provide an all-inclusive payment for a defined set of services, regardless of how 

much care is actually provided—may be a beneficial payment approach for procedures and conditions which have a relatively clear beginning and end. • Refocusing our health care system on keeping people healthy, intervening early, and providing coordinated care for chronic conditions. Additional proactive steps need to be taken to identify individuals at risk for chronic conditions, help them access care, and encourage them to maintain healthy lifestyles. 

A proactive approach that keeps people healthy and productive needs to: (1) address 

the growing shortage of physicians and nurses in selected disciplines, including primary care and general surgery; and (2) reward providers for spending time with patients and coordinating their care. 

• Improving care nationwide by adopting uniform standards for quality, 

reporting, and information technology. AHIP strongly supports the investments 

in health information technology that were enacted as part of H.R. 1, the ‘‘The 

American Recovery and Reinvestment Act of 2009.’’ This legislation lays the groundwork for steps that must be taken to ensure that health care providers, consumers, 

payers, and policymakers have access to consistent and useful data on the quality 

of care delivered. 

• Investing more in research to better understand which treatments and 

therapies work best. We need to close gaps in research, organize information on 

practices yielding the best outcomes for patients, and diffuse this information among 

practitioners and patients. H.R. 1, the ‘‘American Recovery and Reinvestment Act of 

2009,’’ provided $1.1 billion in Federal funding—which we strongly supported—to 

support research that will advance these important priorities. 

• Creating accountability for consistently delivered, high-quality care 

based on the best evidence. All stakeholders should promote the delivery of the 

best clinical outcomes and patient experience while ensuring the most effective and 

appropriate utilization of health care services. To accomplish this objective, investment in the development of new and improved measures that assess episodes of care 

and efficiency must be fast-tracked as part of health care reform. 

• Making targeted investments in our public health infrastructure. Our 

public health infrastructure needs to be better positioned to implement strategies 

that prevent or ameliorate health care concerns and promote well-being and healthy 

lifestyles as part of health care reform. We advocate a new, targeted national initiative to increase public awareness of the links between preventable conditions and 

chronic illness and to support new and existing prevention programs in our schools, 

worksites, and communities. Health plans are committed to working directly with 

41 

communities to promote safe and healthy living and provide models for targeted investments in public health across the Nation. 

The visual on the following page shows that many of the initiatives that have 

been implemented in the private sector today are paving the way for future innovations under a reformed health care system. Existing programs listed in the left column provide a valuable foundation for the tools and strategies of tomorrow’s health 

care system. 

V. CONCLUSION

AHIP appreciates this opportunity to outline our suggestions for enacting meaningful health care reforms. We are doing our part to advance new strategies, and 

we are strongly committed to working with committee members and other stakeholders to develop solutions for ensuring that all Americans have access to high 

quality, affordable health care coverage. 

Senator BINGAMAN. Thank you very much. 

Dr. Nichols. 

STATEMENT OF LEN M. NICHOLS, Ph.D., DIRECTOR, HEALTH 

POLICY PROGRAM AT THE NEW AMERICA FOUNDATION, 

WASHINGTON, DC 

Mr. NICHOLS. Mr. Chairman, it is a real honor to be before you 

and to work with this storied committee today. 

My name is Len Nichols, and I direct a health policy program at 

the New America Foundation. 

I am here to say that our insurance markets are failing us. They 

lead to inefficiency, unnecessary human suffering, death, and loss 

of productivity from that premature death and prolonged morbidity. But it is important we recognize that the fault lies not with 

the people who run the insurance companies. The fault lies in the 

rules we have set for them. 


48406-4.eps
42 

1 Institute of Medicine, Coverage Matters: Insurance and Health Care, (National Academies 

Press: Washington, DC, 2001). 2The ‘‘price’’ of insurance is the ‘‘load,’’ the difference between the premium paid and the 

amount of money paid to medical providers for health services. Individuals pay loads between 

30–40 percent, small groups pay 25–30 percent, and large groups pay 6–15 percent. 

By and large, they follow the rules, and those rules are stupid. 

We need to acknowledge that smart rules can make markets more 

efficient and work better. They can make markets more efficient 

and more fair. 

The role of policy, in my view, is to set rules that channel selfinterest to serve the public interest. Our goal should be to create 

marketplaces wherein insurers that adopt socially responsible business models will thrive. 

The obsolete business model that has led to all this inefficiency 

and human suffering is centered on aggressive underwriting and 

risk selection. So the simple thing to do is outlaw it. We want insurers to compete on price, clinical value-added, and consumer satisfaction, not on avoiding the sick and strategically denying valid 

claims. 

Therefore, to that end, I think it is very clear you need to think 

about rules that would end discrimination based on health status. 

You have heard a lot about that. Sounds like we got a consensus. 

Let us just do it this afternoon. End discrimination based on health 

status. 

Guaranteed issue. Sell to all comers. Guaranteed renewal. Some 

kind of modified community rating so you don’t use health as a discriminating factor. 

Then I would say you need to avoid adverse selection. You have 

to have an individual mandate to require people to purchase that 

insurance. If you are going to ask insurers to take all comers, you 

have to make sure the population they are covering is the full population and not just the sick. 

Thank you very much. 

[The prepared statement of Mr. Nichols follows:] 

PREPARED STATEMENT OF LEN M. NICHOLS, PH.D. 

Chairman Kennedy, Ranking Member Enzi, Senator Bingaman and other distinguished members of the committee, thank you for inviting me to testify today on 

this central topic of health reform and how best to organize insurance markets. My 

name is Len M. Nichols. I am a health economist and direct the Health Policy Program at the New America Foundation, a non-profit, non-partisan public policy research institute based in Washington, DC, with offices in Sacramento, CA. Our program seeks to nurture, advance, and protect an evidence-based conversation about 

comprehensive health care reform. We remain open-minded about the means, but 

not the goals: all Americans should have access to high-quality, affordable health 

insurance and health care that is delivered within a politically and economically 

sustainable system. I am happy to share ideas for your consideration today and 

hereafter with you, other members of the committee, and staff. 

Insurance markets are a great place to focus on early in your inquiries. We know 

that having quality health coverage is literally a matter of life and death. The Institute of Medicine (IOM) estimates that over 18,000 Americans die every year because 

they do not have access to the timely and necessary care that health insurance affords.1 Many of us in this room take this kind of seemingly routine care for granted, 

yet I know that securing access to health insurance for all is a moral obligation that 

many members of this committee share. 

The truth is many insurance markets do not work very well for many of our fellow 

citizens. Small employer groups with fewer than 50 or 100 members lack bargaining 

power, administrative economies of scale, and the ability to self-insure. As a result, 

they pay very high prices for coverage.2 Perfectly healthy and higher income individVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 S:\DOCS\48406.TXT DENISE
43 

3Karen Pollitz and Richard Sorian, ‘‘Is the Individual Market Ready for Prime Time?’’ Health 

Affairs Web Exclusive, October 23, 2002; Karen Pollitz, Richard Sorian, and Kathy Thomas, 

‘‘How Accessible is Individual Health Insurance for People in Less-Than-Perfect Health?’’ Kaiser 

Family Foundation, June 2001. 4Mark V. Pauly and Len Nichols, ‘‘The Nongroup Insurance Market: Short On Facts, Long 

On Opinions And Policy Disputes,’’ Health Affairs Web Exclusive, October 23, 2002. 

uals do satisfactorily well in the non-group market most of the time. However, those 

with health conditions, even fairly minor ones, often encounter carriers who refuse 

to sell to them at all or only at a greatly inflated price.3 The non-group market can 

never work well for those with serious health conditions and modest incomes.4

Even large group markets are not working all that well. Large employers are increasingly focused on cost and quality issues as much as and in some cases more 

than everyone else. Most large employers self-insure because they concluded long 

ago that they were not getting value for the risk-bearing services they were buying 

from insurers. Today, many large employers just buy claims processing and provider 

contracting services. Furthermore, many employers actually engage in benefit design and care management efforts themselves, sometimes in concert with insurers 

acting as third-party administrators, but often alone. 

Thus, insurance markets need to be reformed—and some people must be given 

substantial subsidies—for us to reach the goal of covering all Americans in a sustainable way. 

I will get specific in short order, but I prefer to start with a big picture perspective. To reform our health system generally and our insurance marketplaces specifically, we must re-align incentives quite profoundly. The role of policy is to set the 

rules so that self-interest is channeled to serve the social interest. We have not done 

this very well with regard to insurance regulation, either at the Federal or State 

levels. We can do far better. 

Our goal should be to create marketplaces wherein insurers who adopt socially 

responsible business models will thrive. The obsolete business model that has inflicted so much inefficiency and human suffering on so many is centered on aggressive underwriting and risk selection. Under this model, insurers compete to insure 

the best risks and avoid the sick at all costs. Americans will be much better served 

by rules that make it unprofitable and illegal to continue these strategies. 

It is necessary to institute rules that will encourage insurers to: interact with enrollees efficiently, respectfully, and transparently; help us get and stay healthier; 

identify outstanding and efficient providers and use information tools and incentives 

to help them deliver better care; and, structure payments to providers so that continuous quality improvement is embedded in every care process, regardless of 

whether the care is being delivered in the physician’s office, the hospital, or elsewhere. In other words, we want to create markets wherein insurers compete based 

on price, clinical value-added, and consumer satisfaction, rather than on avoiding 

the sick and strategically denying claims. 

NECESSARY REFORMS

The following reforms are necessary to create an insurance market that is accessible and affordable for all: 

A new marketplace that extends the advantages of large group purchasing—large, balanced risk pools and administrative economies of 

scale—to all. This new marketplace or ‘‘exchange’’ could be organized nationally. 

But insurance markets, like health service markets, are inherently local. The conditions on the ground vary quite a bit across the country and even within States. For 

example, integrated health systems, large multi-specialty physician groups, and effective and responsive local non-profit health plans are not as widespread as most 

of us would prefer. Therefore, creating several marketplaces or exchanges on a regional, State, or sub-state level (or some combination), would be preferable to a single national marketplace. 

However, and this should be made abundantly clear, the most important rules 

that govern the new marketplace must be uniform across the country. We cannot 

serve all Americans well with a regulatory patchwork that reflects local lobbying 

disparities more than good policy sense. 

The responsibility for enforcing the new insurance regulations should remain with 

the States. As a result of their current role, States have more functional knowledge 

about regulating insurance companies and of the local nuances of local markets than 

the Federal Government. However, the Federal Government will need to invest in 

back-up regulatory authority if States fail to act consistently with the intent of Federal legislation. 

44 

Initially, the new exchanges should subsume today’s small group and non-group 

markets. This will enable people who are not eligible for Medicaid (or Medicare) who 

work in small firms or are without access to employer-sponsored coverage to enter 

right away. No residual market outside the exchange should be allowed for these 

small groups and individuals. This will eliminate risk selection once and for all. 

Over time, large (currently self-insured) groups might be allowed to enter into the 

market, perhaps starting with State and Federal employees. Care must be taken to 

protect against risk selection, however, so large groups should be allowed to come 

in only as a result of employer choice, not the choice of individual employees. 

The marketplaces should be governed by a balanced, non-profit board of directors 

appointed by political leaders. Insurers will need to meet specific standards in order 

to participate. They should be required to report data (for comparative performance 

purposes) and abide by the marketing rules and open enrollment period policies set 

by the board. 

Prohibit discrimination based on health status. No American should be denied coverage or charged differential premiums because of their health status or 

family history. To achieve this goal, the following reforms are absolutely necessary: 

guaranteed issue (all insurers must sell all products to all people within the exchange and outside the exchange large employers must allow all workers to join 

their plans at group rates), no exclusions based on pre-existing conditions (once virtually all Americans are covered), guaranteed renewability (plans cannot refuse to 

continue covering individuals or differentially change their premium as a result of 

changes to health status), and modified community rating (premiums may not vary 

based on health status, but can vary by age, geography, and family size). 

Minimum benefit package. All Americans should have coverage that protects 

their health and financial needs. Therefore, Congress or another authority should 

require a minimum level of benefits to guarantee the quality of coverage being offered in the marketplace and protect against adverse selection that could result 

from wide variations in product design. 

The minimum benefit standard could be designed as a specific minimum benefit 

package or an actuarial value target. An actuarial value test, while not as effective 

for market competition as a specific benefit minimum package, would nevertheless 

preserve some flexibility for benefit and cost-sharing design and still guarantee 

quality coverage. If done carefully, this strategy could also protect against extreme 

adverse selection. 

Risk adjustment (distributing payments to insurers based on differential risk profiles) will be necessary to help reduce the consequences of adverse selection as well. 

Insurers should also be permitted to sell supplemental products; however, these 

packages must be priced and described separately to allow consumers to easily compare different choices and create transparency regarding cost and value. 

Subsidies. Health care costs have risen faster than wages for some time. As a 

result, health insurance and health care have become more unaffordable for more 

and more American families every day. Therefore, we will need to devote substantial 

subsidy dollars to make health insurance and health care affordable for all Americans. However, affordability has two dimensions—for households and for governments. Ultimately, the final definition of affordability will reflect political judgments 

about what households and governments can afford. This definition may evolve over 

time, as will delivery system efficiencies, demographic trends, and economic growth. 

Reform proposals should include sliding scale subsidies for individuals and families who need help affording coverage (again, defined by the community). Subsidies 

could be available for both premiums and cost-sharing requirements (depending on 

the design of the minimum package) and made available directly or through the tax 

code. 

We should keep in mind that the Federal Government already spends more than 

$200 billion per year subsidizing insurance through the tax treatment of employerprovided health coverage. Economists, analysts, and courageous policymakers have 

argued for years that the income tax exclusion for employer premium payments is 

both regressive and inefficient relative to other ways to subsidize insurance coverage. The current employer tax exclusion is a poorly targeted subsidy that we could 

and should use to make our health system both more efficient and more fair. Therefore, as we think about how to finance coverage expansion and necessary subsidies, 

we should remember that some of the resources we have dedicated already could 

be targeted far more efficiently. 

Requirement to purchase coverage. No one suggests an individual mandate 

because they want to ‘‘make’’ people buy insurance. Rather, when combined with the 

reforms described above, a requirement to purchase coverage is necessary to make 

the insurance market function efficiently and fairly. Without a purchase requirement, insurers will legitimately fear that only the sick will buy health insurance 

45 

5Kaiser Family Foundation, ‘‘The Uninsured, A Primer: Supplementary Data Tables,’’ October 

2008. 6Sarah Axeen and Elizabeth Carpenter, ‘‘Who Receives Uncompensated Care,’’ New America 

Foundation, March 2008. 7 John Holahan, Allison Cook, Lisa Dubay, ‘‘Characteristics of the Uninsured: Who is Eligible 

for Public Coverage and Who Need Help Affording Coverage,’’ Kaiser Family Foundation, July 

2007. 

(adverse selection). That fear will produce higher premium bids, which will cost people and governments more money. Purchase requirements will guarantee that the 

population seeking care represents the entire population. As a result, insurers will 

bid lower in a competitive context. Massachusetts has seen this happen in real life. 

Once insurance is accessible (through the newly reformed marketplace) and affordable (through subsidies), all individuals should be required to purchase coverage 

to make sure everyone pays their fair share and reduce the costs shifted to the insured by free riders. A free rider is an individual who could afford to purchase coverage, but does not enroll. Ten percent of the uninsured make more than four times 

the Federal poverty level.5 Often when a free rider gets seriously ill they visit a hospital emergency room and indicate that they cannot pay for the services provided 

to them. Their costs are shifted to the insured in the form of higher provider prices 

and in turn higher private insurance premiums. Roughly 16 percent of our uncompensated care expenses for the uninsured go to people who make more than 400 percent of the poverty level.6

In addition, 25 percent of people eligible for public coverage at little to no cost 

do not enroll.7 While these individuals are not free riders, they still contribute to 

the cost-shift or ‘‘hidden tax,’’ which results in higher premiums for the insured. An 

individual mandate would necessitate effective outreach and enrollment efforts to 

minimize the number of people who are currently missed by the system and ensure 

this vulnerable population is taking advantage of available coverage. In the long 

run, this should help them get healthier and become more productive citizens. 

Finally, as a condition of living in a community that helps individuals afford insurance and care, everyone has a personal responsibility to maintain their own 

health. Value-based design features in the minimum benefit package that encourage 

healthy eating, exercise, and lifestyle behaviors will help give Americans some of 

the tools they need to achieve this goal. In addition, part of taking responsibility 

for our own health includes a requirement to access appropriate health care services 

when necessary. This is possible only if a person is insured. Therefore, a requirement to purchase or enroll in available coverage represents one part of an individual’s personal responsibility to the larger community. 

Transparency for insurers. In general, we must increase transparency within 

our insurance markets to engender fair competition and give consumers the information they need to make informed choices about the insurance products that are 

right for them. Insurers should be required to report information on the quality of 

care their enrollees are getting, as well as patient satisfaction indicators that will 

be made public by the exchanges. The Healthcare Effectiveness Data and Information Set (HEDIS) measures, which are continually updated by the National Committee for Quality Assurance (NCQA), seems like a reasonable place to start. Also, 

exchanges will want to help the public compare administrative efficiency by making 

available the ratio of premiums collected versus dollars spent on patient care. The 

risk profiles of enrollees will need to be reported for exchange-wide risk adjustment 

as well. 

OPTIONAL REFORMS

The reforms described above could achieve satisfactory performance from a market comprised exclusively of private health insurance plans. Yet, I admit that there 

are few real-world examples that prove this kind of system would function as anticipated, though reforms in Massachusetts are making great strides. (Since Massachusetts remains a work-in-progress I will not analyze it in detail in the written testimony but will gladly discuss my impressions of what we know so far in the hearing 

itself, or later). While my personal views lead me to believe that private insurers 

alone could enable our new marketplace to deliver excellent performance in the future, I understand profoundly that many advocates and citizens are skeptical that 

regulations or contracts will be able to ensure that private insurers actually comply 

with all reforms for all people. 

Several leading reform proposals recommend allowing consumers to choose between public and private health plans. Therefore, it is worth exploring how to design an insurance marketplace wherein private and public plans can compete fairly. 

46 

8For further information on my thoughts about a competing public plan, see: Len M. Nichols 

and John M. Bertko, ‘‘A Modest Proposal for a Competing Public Insurance Plan,’’ New America 

Foundation, March 2009. 9 Health Policy Program, ‘‘The Case for Health Reform,’’ New America Foundation, 2009. 

Public plan. Let me be crystal clear: if the playing field is level, it is possible 

for public and private health insurance plans to compete and deliver value for consumers without distorting the insurance market. This policy question should not 

create an impasse or stall reform efforts.8

Fair competition, however, will require separating the oversight of the public plan 

from that of the managers of the marketplace or exchange(s). It will also require 

that all rules of the marketplace—benefit package requirements, insurance regulations, and risk adjustment processes—apply to all plans equally, whether public or 

private. 

More than 30 State governments offer their employees a choice between traditional private health insurance products and a plan self-insured by the State. This 

experience combined with historic competition between public and private plans in 

both the Medicare program and California Public Employees Retirement System 

(CALPERS) serves as proof-of-concept: plans operating with politically appointed 

managers can compete with plans run by private managers if the rules of engagement are structured properly. 

Again, State employee plans offer an excellent model for how we could structure 

a choice of a public health insurance plan. More than 30 State governments offer 

their employees a choice between traditional private health insurance products and 

a plan self-insured by the State. In the case of the self-insured product, the State 

or a third party administrator (TPA) negotiates provider contracts and performs administrative functions. While the State may pay a TPA (usually the resident ‘‘Blue’’ 

plan) to handle some tasks, the plan is publicly owned and the State bears the insurance risk. If claims outpace premiums in a given year, the State pays and is at 

risk for the difference. Likewise, if the TPA collects more premiums than it pays 

out in claims, the surplus dollars are usually allocated to a premium stabilization 

fund or remain with the State’s general revenues. Neither the TPA nor the State 

plan’s managers profit from stinting on care. This credible reassurance seems to be 

what most advocates for the choice of a public health insurance plan seek. 

Therefore, I believe the type of public plan I describe above can achieve many of 

the goals of public plan advocates, while preserving fair and effective market competition, negating the risk of excess cost-shift, and avoiding any kind of inevitable 

progression toward a single payer health system. Yet, this approach will require us 

to systemically address delivery system reforms that can deliver more value and 

lower cost growth trajectories over time. But that is a subject for another day. 

CONCLUSION

Insurance market reforms are an essential part of re-making our health system 

into one that works for all Americans in the 21st century. Comprehensive health 

reform must also include efforts to improve quality and reduce cost growth. But the 

foundation of a health system must be coverage. Without coverage, tens of millions 

of Americans will never have access to appropriate care and health-enhancing interventions. 

There is a compelling collective interest in making sure coverage is a reality for 

all Americans: the economic loss we suffer as a result of the uninsured exceeds the 

cost of covering everyone.9 Also, we must cover all Americans to allow the information system and quality innovations, that we desperately need, to work successfully. 

Therefore, making insurance markets work for all is a crucial step on the road to 

real reform, the kind of reform your committee has long sought and that our Nation 

desperately needs. I hope this testimony is useful and I remain, as always, eager 

to answer any questions. 

Senator BINGAMAN. Thank you very much. 

Dr. BAICKER. 

STATEMENT OF KATHERINE BAICKER, Ph.D., PROFESSOR OF 

HEALTH ECONOMICS, DEPARTMENT OF HEALTH POLICY 

AND MANAGEMENT AT THE HARVARD SCHOOL OF PUBLIC 

HEALTH, CAMBRIDGE, MA 

Ms. BAICKER. Thank you. 

47 

It is an honor to be here to talk with you about the crucial issue 

of making our health markets work better. Our system should provide both high-quality care and high-value insurance, and those 

aren’t necessarily the same thing, although they are surely related. 

High-value healthcare would end the overuse of intensive procedures of questionable value and the under use of procedures of high 

health value and usually low intensity that we see in varying degrees across the country. There are parts of the country that spend 

two or three times as much money as other parts to deliver care 

that is of no higher value to the recipients. 

High-value health insurance would deliver protection against the 

risk of needing expensive healthcare not only this year, but against 

the risk of developing conditions that would require much more expensive healthcare in years to come. Market reforms can make that 

kind of high-value health insurance more widely available to everyone, but they work best when everyone gets insured early because 

insurance is about that risk. 

We don’t need health insurance because healthcare is expensive. 

We need health insurance because healthcare is uncertain and expensive, and that is when we value health insurance the most. 

Health insurance can do a good job in the private market of redistributing money. If you want to redistribute money to high 

health risk people, you need to also include a bundle of social insurance to wrap around private market insurance, and that social 

insurance need not be socialized. It can be a risk-adjusted voucher 

or other mechanism to ensure that vulnerable low-income, highrisk populations also have access to the lifesaving healthcare that 

their insured counterparts enjoy. 

Thank you. 

[The prepared statement of Ms. Baicker follows:] 

PREPARED STATEMENT OF KATHERINE BAICKER, PH.D. 

My name is Katherine Baicker, and I am a Professor of Health Economics in the 

Department of Health Policy and Management at the Harvard School of Public 

Health. I would like to thank Senator Kennedy, Senator Enzi, and the members of 

the committee for giving me the opportunity to speak today about how we can address the crucial policy challenge of health insurance market reform. This testimony 

is derived in large part from recent academic work with my colleague Amitabh 

Chandra that appeared in the journal Health Affairs. I summarize that work here. 

This morning I would like to discuss several general principles about the nature 

of health insurance. Misunderstandings about these principles have the potential to 

impede the development of a much-needed consensus on how to engineer reform. 

Uncovering the kernels of truth that underlie these misperceptions can help focus 

reform efforts on the critical challenges facing our health system. 

A key distinction should be made between health care and health insurance. Insurance works by pooling risks: many pay a premium up front, and then those who 

face a bad outcome (getting sick, being in a car accident, having their home burn 

down) get paid out of those collected premiums. The premium is the expected average cost of treatment for everyone in the pool, not just the cost of treating the sick. 

Because not everyone will fall sick at the same time, it is possible to make payments to those who do fall sick even though their care costs more than their premium. This is also why it is particularly important for people to get insured when 

they are healthy—to protect against the risk of needing extra resources to devote 

to health care if they fall ill. 

Uncertainty about when we may fall sick and need more health care is the reason 

that we purchase insurance—not just because health care is expensive (which it is). 

Many other things are expensive, including housing and college tuition, but we do 

not have insurance to help us purchase them because they are not uncertain in the 

way that potentially needing very expensive medical care is. The more uncertainty 

there is, the more valuable the insurance is. 

48 

THE PROBLEM OF THE SICK AND UNINSURED

Insured sick people and uninsured sick people present very different issues of 

public policy. People who have already purchased insurance and then fall sick pose 

a particular policy challenge: insurance is not just about protecting against unexpected high expenses this year, but also about protecting against the risk of persistently higher expenses in the case of chronic illness. This kind of protection means 

that once insured, enrollees’ premiums would not rise just because they got sick, but 

this is not always the case today. In fact, insurers have an incentive to shed their 

sickest enrollees, suggesting a strong role for regulation protecting them. Nor are 

insurers held responsible when inadequate coverage raises the costs of a future insurer, such as Medicare for those over 65. These problems highlight the limited 

availability of true long-run insurance offerings, a reform issue that is often glossed 

over in the conflation of health care and health insurance. 

Uninsured Americans who are sick pose a very different set of problems. They 

need health care more than health insurance. Insurance is about reducing uncertainty in spending. It is impossible to ‘‘insure’’ against an adverse event that has 

already happened, for there is no longer any uncertainty. If you were to try to purchase auto insurance that covered replacement of a car that had already been totaled in an accident, the premium would equal the cost of a new car. You would 

not be buying car insurance—you would be buying a car. Similarly, uninsured people with known high health costs do not need health insurance—they need health 

care. Private health insurers can no more charge uninsured sick people a premium 

lower than their expected costs. The policy problem posed by this group is how to 

ensure that low-income uninsured sick people have the resources they need to obtain what society deems an acceptable level of care—and ideally, as discussed below, 

to minimize the number of people in this situation. 

This highlights one of the many reasons that health insurance is different from 

car insurance: the underlying good, health care, is viewed by many as a right. Furthermore, we may want to redistribute money from the healthy to the sick, in the 

same way that we redistribute money from the rich to the poor. This kind of redistribution is fundamentally different from private insurance—it is social insurance, 

and it is hard to achieve through private markets alone.1 Medicare, which insures 

the aged and disabled, is an example of a social insurance program. Private markets 

can pool risk among people starting out with similar health risks, and regulations 

can ensure that when some members of those risk pools fall ill, insurers cannot 

deny them care or raise their premiums, but transferring resources to people who 

are already sick and uninsured or transferring resources from lower health risk 

groups to higher health risk groups requires social insurance. 

How then do we provide the sick and uninsured with socially acceptable care? Private health insurance alone is unlikely to achieve this goal: no insurer will be willing to charge a premium less than an enrollees’ likely health costs. Instead, they 

could be provided with health care directly or a premium subsidy equal to their expected health care costs. Alternatively, we could force sick people and healthy people 

to pool their risks, such as through community rating coupled with insurance mandates (to preclude healthy people from opting out of subsidizing sick ones). These 

kind of transfers are based on social choices about redistribution. 

The advantage of social insurance programs, including a nationalized health care 

system, is that they can achieve redistribution that private markets alone cannot. 

They may also provide benefits with lower administrative costs (although, in the 

case of moving to a single payer system, the size of administrative savings relative 

to overall health care cost growth is likely to be small).2 There are, of course, costs 

associated with social insurance programs as well. First, there is the drag on the 

economy imposed by raising revenues to finance them. Second, there is the loss of 

competition, diverse offerings for diverse preferences, and market discipline that private provision brings—and that promote higher value and innovation. This means 

that the social insurance program may be both expensive and inefficient—and thus 

impose an even larger burden on already strained public budgets. These pressures 

have, perhaps unsurprisingly, spawned additional misconceptions that suggest that 

the costs of expanded insurance are lower and the benefits higher than the data 

support. 

THE COST OF COVERING THE UNINSURED

A common and deceptively appealing argument for expanding insurance coverage 

is that we could both spend less and achieve better health by replacing the inefficient emergency room care received by the uninsured with an insurance plan. Unfortunately, this argument finds little empirical support. ER care for the uninsured 

is indeed inefficient and might have been avoided through more diligent preventive 

49 

care and disease management. Diabetes treatment is a good example; it is much 

cheaper to manage diabetes well than wait for a hospitalization which requires a 

leg amputation. Having health insurance may lower the costs of ER and other publicly provided care used by the uninsured through better prevention and medical 

management. But empirical research also demonstrates that insured people consume more care (and have better health outcomes) than uninsured people—so universal insurance is likely to increase, not reduce, overall health spending.3

Why does insurance cause greater consumption of health care? Insurance, particularly insurance with low cost-sharing, means that patients do not bear the full cost 

of the health resources they use. This is a good thing—having just made the case 

for the importance of the financial protections that insurance provides—but comes 

with the side-effect of promoting greater consumption of health resources, even 

when their health benefit is low. This well-documented phenomenon is known as 

‘‘moral hazard,’’ even though there is nothing moral or immoral about it. The RAND 

Health Insurance Experiment (HIE), one of the largest and most famous experiments in social science, measured people’s responsiveness to the price of health care. 

Contrary to the view of many non-economists that consuming health care is unpleasant and thus not likely to be responsive to prices, the HIE found otherwise: 

people who paid nothing for health care consumed 30 percent more care than those 

with high deductibles.4 This is not done in bad faith: patients and their physicians 

evaluate whether the care is of sufficient value to the patient to be worth the outof-pocket costs. The increase in care that individual patients use because of insurance has even greater system-wide ramifications. R&D in new medical technologies 

responds to the changes in aggregate incentives driven by health insurance. While 

these technologies may improve welfare, they also raise premiums because of larger 

armamentarium of treatments available to the sick. There is evidence of these system-wide effects: when Medicare was introduced in 1965, providers made spectacular investments beds in high-tech care, and hospital spending surged over 25 percent in 5 years.5

Even increases in preventive care do not usually pay for themselves: in general 

prevention is good for health, but does not reduce spending. Some preventive care 

has been shown to be cost-saving—such as flu vaccines for toddlers or targeted investments like initial colonoscopy screening for men aged 60–64—but most preventative care results in greater spending along with better health outcomes. Indeed, 

some money spent on preventive care may not only cost money, but may be no more 

cost effective than some ‘‘high-tech’’ medical care. For example, screening all 65- 

year-olds for diabetes, as opposed to only those with hypertension, may improve 

health but costs so much (about $600,000 per Quality Adjusted Life Year) that that 

money might be better spent elsewhere.6

All of this suggests that insuring the uninsured would raise total spending. This 

doesn’t mean that it would not be money well spent (which I believe it would be). 

Spending more to attain universal insurance is not a problem if it generates more 

value than it costs, and the view that health care is a right is not inconsistent with 

this framework. First, and sometimes overlooked, is the security that insurance provides against the uncertainty of unknown health care expenses. The value of this 

financial smoothing alone is estimated to be almost as much as the cost of providing 

people with insurance.7 Second, much of the additional health care that the newly 

insured would receive is likely to improve health. (But this is by no means automatic, for as discussed below, being insured is not enough to guarantee good health 

care.) Extending health insurance coverage is worth it for these reasons—but not 

because it would save money. 

GETTING HIGH-VALUE CARE

Having insurance may increase the quantity of care patients receive, but it is no 

guarantee that they will receive high quality care. A recent study found that Americans received less than 60 percent of recommended care, including preventive, 

acute, and chronic care, and including such low-cost interventions as flu vaccines 

and antibiotics for surgical patients.8 Beginning with the work of John Wennberg 

at Dartmouth, an immense literature in medicine and economics has found that 

even among Medicare enrollees, there are enormous differences in the quality of 

care received: in fact, in areas where the most is spent on Medicare beneficiaries, 

they are the least likely to get high quality care. The use of mammograms, flu-shots, 

beta-blockers and aspirin for heart attack patents, rapid antibiotics for pneumonia 

patients, and simple laboratory tests to evaluate the management of diabetes are 

all lower in higher-spending areas.9 Higher spending is not even associated with 

lower mortality, which suggests that more generous insurance provision does not 

necessarily translate to better care or outcomes. 

50 

When these results showing the lack of relationship between spending and quality 

were first reported there were two predictable responses by skeptics: that high 

spending areas had sicker patients who were (appropriately) less likely to receive 

these therapies, and that patients in high-spending had higher satisfaction even if 

their measurable health outcomes were the same. Neither claim is supported by the 

evidence. 

What, then, do patients in high-spending areas get? Evidence suggests that this 

higher intensity is driven by greater use of procedures with questionable clinical 

value—that may even be associated with under-use of high value, less-intensive 

care. Patients in high-spending areas are no more likely to receive surgery, but see 

more specialists more frequently, have more diagnostic and imaging services, and 

get more intensive care in the end of the life—none of which has been shown 

through clinical trials to improve health.10 ‘‘Coordination failures’’ in delivery may 

both raise costs and lower quality, even among the insured. 

Thus, while health insurance increases the quantity of care patients receive, being 

insured alone is not sufficient to ensure high quality care. Insuring the uninsured 

will give them access to the sort of health care that the rest of us receive: a combination of valuable care, overuse of some costly interventions with little proven 

benefit, and under-use of some vitally important therapies, care that is sometimes 

coordinated but often fragmented. This is better than no care, but it highlights the 

problem of collapsing the entire debate about U.S. health care reform down to the 

issue of uninsurance: health insurance alone does not guarantee good health care. 

THE ROLE OF EMPLOYERS

Employees ultimately pay for the health insurance that they get through their 

employer, no matter who writes the check to the insurance company. The view that 

we can get employers to shoulder the cost of providing health insurance stems from 

the misconception that employers pay for benefits out of a reservoir of profits. Regardless of a firm’s profits, valued benefits are paid primarily out of workers 

wages.11 While workers may not even be aware of the cost of their total health premium, employers make hiring and salary decisions based on the total cost of employment, including both wages and benefits such as health insurance, maternity 

leave, disability and retirement benefits.12 They provide health insurance not out 

of generosity of spirit, but as a way to attract workers—just like wages. When the 

cost of benefits rises, wages fall (or rise more slowly than they would have otherwise), leaving workers bearing the cost of their benefits in the form of lower 

wages.13

The uncomfortable arithmetic of this wage-fringe offset is seen in other contexts— 

for example, workers bear the costs of workers compensation, and mandated maternity benefits primarily reduce the wages of women of child-bearing age.14 When it 

is not possible to reduce wages, employers may respond in other ways: employment 

can be reduced for workers whose wages cannot be lowered, outsourcing and a reliance on temp-agencies may increase, and workers can be moved into part-time jobs 

where mandates do not apply. These adjustments are neither instantaneous nor 

one-for-one for every person (depending, for example, on wage rigidities, how much 

individuals value the insurance benefit, and how heterogeneous the employees’ income and health are)—a fact that obscures the underlying connection. This also 

means that the claimed connection between health care costs and the ‘‘international 

competitiveness’’ of U.S. industry is murky at best: higher health costs primarily 

lower current workers’ non-health compensation, rather than firms’ profitability (although the same trade-off cannot operate in retiree health benefits, making their 

effects more complicated).15

Why, then, do we have a private health insurance system based primarily on policies offered through employers? There is a preference in the tax code for premiums 

paid by employers relative to premiums paid by individuals or direct payments for 

health care. This tax preference drives both the predominance of employment-based 

policies and the prevalence of policies with low cost-sharing, because care paid for 

in the form of higher employer premiums comes at a lower after-tax price than care 

paid for out-of-pocket. Of course, this tie between employment and insurance comes 

at a well-known cost: workers who leave or lose a job risk losing their insurance 

or facing much higher premiums, sometimes forcing them to stay in a job to retain 

health insurance.16

This is not to say that there are not important advantages to getting insurance 

through an employer instead of on the individual non-group insurance market (especially given the current state of individual market), including better pricing and risk 

pooling. The employer market is the primary mechanism for maintaining cross-subsidization from low-risk populations to high-risk ones, with tax subsidies adding an 

51 

element of social insurance (albeit one that is not particularly progressive).17 It is 

these benefits that are the main advantages of access to employer policies, not the 

fact that employers nominally pay part of the premium. 

EFFICIENT INSURANCE

Greater patient cost-sharing could help improve the efficiency of health care 

spending, but it is not a cure-all. It is certainly true that first-dollar insurance coverage (that is, insurance coverage for the first dollar of health care expenditures or 

insurance with very low cost-sharing more broadly) encourages use of care with very 

low marginal benefit and that greater cost-sharing would help reduce the use of discretionary care of questionable value. But there is also evidence that patients underutilize drugs with very high value when confronted with greater cost-sharing 

(whether because they lack resources or information). Worse, there is evidence that 

even $5–$10 increases in co-payments for outpatient care can result in some patients getting hospitalized as a result of cutting back too much on valuable care, 

offsetting the reduced spending.18 Capping total insurance benefits is also shortsighted and imprudent: not only does evidence suggest that such caps result in adverse clinical outcomes, worse adherence, and increased hospital and ER costs, but 

the presence of caps means that patients are not insured against catastrophic 

costs—exactly what insurance is supposed to protect against the most. 

There is no reason to think that the optimal insurance structure would look like 

the typical high-deductible plan. Rather, it might subsidize high-value care such as 

treatments to manage diabetes or asthma, while imposing greater cost-sharing on 

care of lower value, such as elective surgeries with limited health benefits. People 

would choose the insurance plans that offered them the best benefit mix—trading 

off higher premiums for plans that covered care of diminishing marginal value. Of 

course, what may be valuable to one patient could be wasteful for another, and the 

key challenge for ‘‘value-based insurance design’’ policies is to differentiate these 

cases. Many firms are experimenting with these plans.19 Focusing exclusively on 

high-deductible plans that rely on a blunt structure of patient cost-sharing and perfectly forward-looking patients may forestall the development of even more innovative plans. 

This does not mean that competition and cost-sharing have no role in driving 

higher value spending, however. Competition between insurers to offer plans that 

have the mix of benefits enrollees find most valuable could drive the kind of innovative plans described above. Increased cost-sharing such as that promoted by high 

deductible policies coupled with health savings accounts can also be an important 

tool for improving the value of care. As the evidence from the RAND HIE discussed 

above shows, the low-cost sharing plans fostered by the current tax treatment of 

health insurance (which look more like pre-paid health care than true insurance) 

promote the use of care that is of limited health benefit. While most spending is 

indeed done by people with very high total costs, well-designed cost-sharing programs could still have substantial effects on spending decisions. Most spending is 

not done in emergency settings, and even limited cost-sharing can have an effect 

on a substantial share of total spending.20 This suggests that carefully designed incentives could have a big effect on improving the value of care delivered. 

CONCLUSION

We know that our health care system is not delivering the consistently high-quality, high-value care that we should expect. While there are many open questions in 

the design of the ideal system, with millions uninsured and rising costs threatening 

to swamp public and private budgets alike, we cannot afford to wait to act. 

Focusing on the underlying issues discussed here suggests that the fundamental 

problems facing our health insurance system are unlikely to be cured by the extremes of either a single payer system or an unfettered marketplace. On the one 

hand, the unregulated marketplace is unlikely to provide long-run stable insurance. 

Private insurers will always have an incentive to try to shed their highest cost enrollees, so without regulatory safeguards even the insured sick will be at risk of losing the insurance protections to which they are entitled. Private insurance fundamentally cannot provide the kind of redistribution based on underlying health 

risk or income that social insurance can. On the other hand, a single payer system 

does not automatically provide high quality care: the provision of low-value care is 

as pervasive in the single payer Medicare system as it is elsewhere. Single-payer 

systems are also slow to innovate—as suggested by the fact that it took Medicare 

40 years to add a prescription drug benefit, long after most private insurers had 

done so. Nor do calculations of the costs of a single-payer system measure the utility 

loss from forcing people with different preferences into a monolithic health insurVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00055 Fmt 6633 Sfmt 6621 S:\DOCS\48406.TXT DENISE
52 

ance plan. The private facilities that have sprung up in Canada to meet the demands of those who want more health care than the public system provides fundamentally undermine the ‘‘single payer’’ nature of the system. 

How one balances these trade-offs is likely driven as much by philosophy as economics, and any reform will involve tough choices between competing values. Serious reforms would focus not exclusively on lowering costs, but on increasing the 

value that we get from health insurance and health care.21 Reforms that promoted 

higher-value insurance could both extend coverage so that more people benefit from 

the protections that insurance affords and ensure that those protections are secure 

for those who fall ill. These reforms would not be enough to achieve uniformly highquality care, however. The frequent failure of the use of best practices and the tremendous geographic variation in the use of costly care of uncertain medical benefit 

are often obscured in the focus on the uninsured. That many nations, including both 

the United States and Canada, struggle with these challenges suggests that reforms 

of the payment system alone are unlikely to solve all of these problems. A comprehensive reform proposal that aimed both to extend insurance protections to those 

who lack them and to improve the value of care received by those who are insured 

would be more likely to succeed at each goal than proposals that focused on just 

one. 

Thank you again for the opportunity to meet with you. I would be happy to answer any questions that you might have. 

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53 

11. Lawrence Summers, ‘‘Some Simple Economics of Mandated Benefits,’’ American Economic Review 79 (1989): 177–183. 

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1 (2008): 109–132; Katherine Baicker and Amitabh Chandra, ‘‘The Labor Market Effects of Rising Health Insurance Premiums,’’ Journal of Labor Economics 24, no. 3 

(2006). 

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54. 

17. Mark V. Pauly and Bradley Herring, ‘‘Risk Pooling and Regulation: Policy and 

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18. John Hsu, M. Price, J. Huang, R. Brand, V. Fung, R. Hui, B. Fireman, J.P. 

Newhouse and J.V. Selby, ‘‘Unintended Consequences of Caps on Medicare Drug 

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Senator BINGAMAN. Well, thank you very much. 

Ms. Praeger, go right ahead. 

STATEMENT OF SANDY PRAEGER, HEALTH INSURANCE 

COMMISSIONER, STATE OF KANSAS, KANSAS CITY, KS 

Ms. PRAEGER. Good morning. Thank you, Senator. 

It is always a pleasure to see my own Senator Roberts, and 

thank you for that nice introduction. 

And it is a pleasure to be here, representing the Nation’s insurance commissioners. I am optimistic after what I have just heard 

from this very distinguished panel that there is an awful lot of 

agreement among the panel members about both the problem and 

I think some potential solutions. 

I just have four points I want to make on behalf of our national 

association. First, any solution, as we have all said, must address 

the rising cost of healthcare, and you cannot expect the insurance 

mechanism, which is the payment system, to fully address the rising cost. I think that is going to require some aggressive action on 

the part of you all at the Federal level. 

Whatever solutions are proposed, we certainly hope that consumer protections will still be in place and enforced at the State 

level. States have already taken great strides in putting in place 

patient protection legislation, solvency standards for companies, 

54 

fraud prevention programs, and oversight mechanisms that enable 

us to answer those questions that Senator Brown talked about in 

his opening comments. 

When consumers feel that they are being unjustly treated by 

their insurance company, it is our insurance commissioners across 

the country that are on the ground day in and day out with those 

consumer protections. So we hope that any solution, first and foremost, recognizes those important elements of consumer protection. 

It is easy, as we look at solutions, to create an opportunity for 

adverse selection. We would just obviously caution against that. I 

think rating reforms are necessary. I also agree that rating based 

on health status should be eliminated. 

I think individuals should be required, all people should be required to have coverage, but there needs to be consistency across 

markets so that if you have different rating rules at the State level 

and you have a national plan that does eliminate health status rating, then you will get adverse selection into that national plan, 

which will make it eventually very costly and unaffordable. So 

avoiding adverse selection is critically important. 

Again, I would just emphasize the importance of preserving a 

State role in the process. I think we recognize that States alone 

cannot solve the problem. It will require working collaboratively 

with the Federal Government on a number of issues—sliding-scale 

subsidies, for example, for low-income folks. 

Assisting us with a reinsurance mechanism for the high-cost utilizers. We have in place the high-risk pools. Congress has helped 

us through grants back to the States for high-risk pools, but that 

is another area where certainly State and Federal cooperation and 

collaboration is important. 

And I would point out that our national association has expertise 

here in Washington ready, willing, and able to assist in hammering 

out the details of any legislation that is put forward. We have been 

actively involved with Senator Durbin. His SHOP Act, I think, has 

some very good components. Several years ago, we were actively involved with Senator Enzi of this committee. 

So we want to be a resource. We want to assist. We know the 

system is broken, and it is time to address it. 

[The prepared statement of Ms. Praeger follows:] 

PREPARED STATEMENT OF SANDY PRAEGER

INTRODUCTION

The NAIC represents the chief insurance regulators from the 50 States, the District of Columbia, and five U.S. territories. The primary objective of insurance regulators is to protect consumers and it is with this goal in mind that the members 

of the NAIC submit these comments today on the health of the private insurance 

market. 

To begin, we recognize the failures in the current market, they are well documented. Over 15 percent of Americans, almost 46 million people, go without coverage. For most, coverage is simply too expensive, a result of medical spending that 

has run out of control and consumes 16 percent of our economy. For others, those 

without coverage through an employer and with health problems, coverage is not 

available at any price. For Americans lucky enough to have insurance, premiums 

take ever larger bites out of the monthly paycheck, even as rising deductibles and 

co-payments shift more of the financial burden of sickness to the patient. Insurance 

Commissioners see this every day, and we welcome Congress’ interest in helping the 

States tackle this challenge. 

55 

1 42 U.S.C. 300gg–12. 

2 Centers for Medicare and Medicaid Services, National Health Expenditures. 

State insurance commissioners believe it is important to ensure that affordable, 

sufficient health coverage is available to small business owners, their employees, 

and individuals. The NAIC offers its full support in developing Federal legislation 

that will reach this goal—a goal that can only be attained through Federal-State 

coordination. We offer the experience and expertise of the States to Congress as it 

attempts to improve the health insurance marketplace. 

STATE EXPERIENCE

States led the way in requiring insurers to offer insurance to all small businesses 

in the early 1990s, and the Federal Government made guaranteed issue the law of 

the land in 1996 1 for all businesses with 2–50 employees. Federal law does not limit 

rating practices, but 48 States have supplemented the guaranteed issue requirement 

with laws that limit rate variations between groups, cap rate increases, or impose 

other limitations on insurer rating practices. These rating laws vary significantly in 

response to local market conditions, but their common objective is to pool and 

spread small group risk across larger populations so that rates are more stable and 

no small group is vulnerable to a rate spike based on one or two expensive claims. 

In addition to requiring insurers to pool their small group risk, many States have 

established various types of purchasing pools and have licensed associations to provide state-approved insurance products to their members. 

States continue to experiment with reinsurance, tax credits and subsidies, and 

programs to promote healthier lifestyles and manage diseases as they pursue the 

twin goals of controlling costs and expanding access. These state-based reforms are, 

of necessity, very distinct—based on both the specific needs in the marketplace and 

the strengths and weaknesses of the marketplace. For example, the State of New 

York implemented the very successful ‘‘Healthy NY’’ program, a reinsurance-based 

program that addresses many of the problems identified in New York’s individual 

and small group markets, but utilizing its strong HMO networks. Likewise, the 

Commonwealth of Massachusetts has implemented broad reforms built on past reforms and the unique insurer, provider and business environment. 

As always, States are the laboratories for innovative ideas. We encourage Federal 

policymakers to work closely with their State partners, as well as with health care 

providers, insurers and consumers, to identify and implement reforms that will 

make insurance more affordable to small businesses. And remember, all significant 

reforms will have significant consequences—both positive and negative. 

KEYS TO REFORM

Based on the experience and expertise of the States, we encourage Congress to 

consider these four keys for successful health insurance marketplace reform: 

• Address Health Care Spending. Any effort to increase access to insurance 

will not be successful over time unless the overriding issue of rapidly rising health 

care costs is also addressed. While the health care challenge in this country is generally expressed in terms of the number of Americans without health insurance coverage, the root of the problem lies in the high cost of providing health care services 

in this country. According to the most recent National Health Expenditures data, 

health care spending reached $2.2 trillion in 2007, 16.2 percent of GDP and $7,421 

for every man, woman and child in the United States.2 This level is twice the average for other industrialized nations. 

This level of health care spending has badly stressed our health care financing 

system. Health insurance reform will not solve this problem, since insurance is primarily a method of financing health care costs. Nevertheless, insurers do have a 

vital role to play in reforms such as disease management, enhanced use of information technology, improved quality of care, wellness programs and prevention, and 

evidence-based medicine—all of which have shown promise in limiting the growth 

of health care spending. Whatever is done in insurance reform should be done in 

a manner that is consistent with sound cost control practices. • Protect the Rights of Consumers. States already have the patient protections, solvency standards, fraud prevention programs, and oversight mechanisms in 

place to protect consumers; these should not be pre-empted by the Federal Government. As the members of this committee know all too well, the pre-emption of State 

oversight of private Medicare plans has led to fraudulent and abusive marketing 

practices that would have been prevented under State law, bringing considerable 

harm to thousands of seniors. In similar fashion, the Employee Retirement Income 

Security Act of 1974 (ERISA) severely restricts the rights of millions of employees 

56 

covered by self-insured plans. We urge Federal policymakers to preserve State oversight of health insurance and avoid pre-empting or superseding State consumer protections. • Avoid Adverse Selection. Any program that grants consumers the choice between two pools with different rating, benefit, or access requirements will result in 

adverse selection for one of the pools. For example, if a national pool does not allow 

rating based on age or health status, while the State pool does allow rating based 

on those factors, then the national pool will attract an older, sicker population. Such 

a situation would be unworkable. While subsidies or incentives could ameliorate 

some of the selection issues, as costs continue to rise and premiums increase, the 

effectiveness of such inducements could erode. 

• Preserve a Strong State Role. Congress must carefully consider the impact 

of any new Federal reforms on the States’ ability to be effective partners in solving 

the health care crisis. In developing a national direction for health insurance reform, we encourage Congress to preserve the role of the States in tailoring reforms 

to meet the specific needs of consumers and to promote a vibrant marketplace. We 

also note that States can, and should, play a key role in deciding how reforms will 

be phased-in to ensure the least amount of negative disruption. 

In addition, the NAIC urges Congress to review current Federal laws and regulations that hinder State efforts to reform the health care system. For example, 

ERISA curtails consumer protections and supersedes State laws, and inadequate reimbursement payments in Federal health programs have resulted in higher overall 

costs and decreased access for many consumers. Such Federal policies can limit the 

ability of States to implement broad market reforms. 

CONCLUSION

Years have been spent talking about broad health care reforms that will ensure 

that all Americans have access to affordable health insurance coverage and the 

peace of mind that goes with it. Action is long overdue and we stand ready to assist 

in whatever way we can. 

The NAIC encourages Congress and the members of this committee to work with 

States and learn from past reforms. Together, we can implement successful initiatives that will truly protect and assist all consumers. 

Senator BINGAMAN. Thank you all very much. 

Senator Hatch has to go to the floor to manage a bill, and so why 

don’t I call on him first for any comments or questions? 

Senator HATCH. Well, thank you so much, Mr. Chairman. 

We are delighted to have all of you here. You are just wonderful 

leaders in this area, and we appreciate the time that you have 

taken to come and discuss these matters with us. 

Let me just ask one question before I leave, and that is although 

the term ‘‘enforceable mandate’’ is often mentioned in our 

healthcare reform discussions, I have a sneaking suspicion that the 

definition of the word ‘‘enforceable’’ varies depending upon the 

stakeholder group. 

I would like each one of you to tell us your definition of the term 

‘‘enforceable individual mandate,’’ if you would? 

Mr. WILLIAMS. I will go first. I think, simply put, it is a way by 

which the Congress, should it choose to implement such a law, 

would assure that we got everyone into the insurance mechanisms 

that were deemed appropriate. I think we can look at Massachusetts as one example of how it has been done through the tax system. I think there may be other models that people choose to do 

as a way to achieve it. 

The notion, simply put, is that we have the ability to offer insurance to everyone on a guaranteed issue basis, as long as everyone 

is in the insurance pool. 

Ms. POLLITZ. Senator Hatch, I think in its simplest form, an enforceable mandate is also an entitlement. People are entitled to 

coverage, and they are obligated to have it. You can certainly track 

57 

people’s enrollment and have them report on their insurance status 

throughout the year and then assess a penalty for not complying 

with that. 

I think, more importantly, a mandate is only enforceable if it is 

reasonable. So, to tell people that they need to go out and buy an 

insurance policy, which will be expensive, you need to make a lot 

of subsidy money available. Health insurance, good health insurance that covers people when they are sick is always going to be 

expensive, even if we succeed beyond our wildest dreams in cost 

containment. 

It will always be expensive, and I have had cancer. It is expensive to be sick. And to have coverage that pays those bills will cost 

a lot of money. So people are going to need help to afford good coverage, and I think they are going to need assurances that the coverage will really take care of them. 

That is why I think transparency and accountability throughout 

the marketplace, policies that are simple, that are understandable, 

that are straightforward, that behave, that pay claims when they 

are supposed to, that don’t accidentally lose people along the way 

once they start making claims—all of that needs to be provided for 

as well for you to have an enforceable mandate. 

Ms. IGNAGNI. Senator, I think Mr. Williams and Ms. Pollitz have 

said it exactly right. We need a mandate that is enforceable so that 

we can build a system, as you indicate in your opening remarks, 

that really meets the test of what every American wants, which is 

it is fair, it is equitable, it is transparent. 

Ms. Pollitz is absolutely right that we need to think about subsidies to make sure that people have a helping hand so they can 

afford coverage. But at the same time, and I know we will get into 

this discussion, we also need to have a very specific strategy on 

containing underlying costs, in addition to providing subsidies. 

So we agree with both comments that have been made, and we 

think that with those pieces in place, those building blocks, you can 

change the rules to be the kinds of rules that the American people 

are telegraphing they want. We have done a great deal of work, 

and we are looking forward to talking about that. 

It is with that idea of taking responsibility to look at when you 

change the rules what is possible and under what circumstances, 

and that is the way our board has proceeded in its activity and a 

very significantly deep dive. 

Mr. NICHOLS. Senator, I believe individual mandate is about having everyone pay their fair share, but no more than their fair 

share. So there have to be subsidies, as Karen said. But I also 

think it really is possible to use modern technology to help us enforce it in a way that it might not have been so easy 15, 20 years 

ago. 

Let me give you an analogy from car insurance. I grew up in 

rural Arkansas, and my brother taught me the time-honored tradition of going to buy your car insurance, register your car, driving 

home, calling up and cancel your car insurance so you don’t have 

to pay your premium anymore. 

Well, it turns out that leads to about half the States not doing 

such a good job of enforcing car insurance mandates, as you know. 

It turns out some States have figured this out. Georgia, for examVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00061 Fmt 6633 Sfmt 6601 S:\DOCS\48406.TXT DENISE
58 

ple, which is not known as a ‘‘big brother’’ place, figured out that 

the insurer could send an e-mail to the DMV and tell the DMV 

that Len Nichols just canceled his car insurance, at which point the 

DMV will mail a letter to the insured and say, ‘‘We understand you 

just canceled your car insurance. You just lost your driver’s license. 

Have a nice day.’’ 

So it turns out if you share information in a very feasible way 

across settings, you can find out who is and who is not paying their 

fair share. We can enforce this, in my opinion, sir. Look at how 

Georgia went from 78 percent compliance to 98 percent compliance 

in 2 years with this kind of technique. You can do this and make 

it completely enforceable in our world. 

Ms. BAICKER. Just a quick note that the lines between the carrots and the sticks that we are talking about are more blurred than 

one might think that they are. I don’t think anyone is suggesting 

that people who don’t comply with an individual insurance mandate should go to jail. The usual penalty is something like not 

being able to get a tax benefit that you would otherwise be entitled 

to. 

On the other side, if you are trying to design a carrot, the way 

many of the carrots are designed are giving you a tax benefit if you 

are insured. So removing a tax benefit if you are not insured versus 

giving a tax benefit if you are insured might have very similar effects if the dollars at stake are similar, although there are clearly 

psychological issues. 

Placing a mandate really changes the way people perceive the obligation, the responsibility on them. So they could have different effects, but it is not such a bright line, I think. 

Ms. TRAUTWEIN. Can I just comment on that real quickly? Because I think all of us think that we have to get everybody into the 

system if we are going to be able to effectively make these reforms 

and that they will actually save money. Not to throw a wet blanket 

on the whole discussion, but I think we have to be realists about 

how easy it may or may not be to enforce a mandate. 

I agree with Len that we have technology that we haven’t had 

before, but this mandate and making it effective and enforceable is 

going to take a long time. We have 300 million people in this country. We are not the size of Massachusetts or one of the European 

countries that have been able to enforce it. 

It is not that we don’t want to do this. I think we just have to 

look and see what we need to do during this time in which the 

mandate is becoming more enforced because we will have to figure 

this out. There are going to be multiple checkpoints we will have 

to do. 

One of the things that we have talked about in our recommendations is that we have to make sure that there is some system of 

risk adjustment or modified reinsurance arrangement to make sure 

that during this time when we don’t really have everyone in the 

system yet that we have adequate means so that we haven’t made 

coverage more expensive and done something that is exactly opposite than what we set out to do. 

I just want to mention that it is not that we disagree, but we 

also need to say, yes, we need to do this, and we also need to do 

59 

this other thing, too, just in case it takes us a while to get the hang 

of it. 

Senator BINGAMAN. Ms. Praeger, did you want to make—— 

Ms. PRAEGER. I just want to add, too, that eventually we have 

to have everyone insured. We will never get our arms around the 

rising cost of healthcare if we don’t have everyone in the system. 

I think Massachusetts has set a good example in terms of their 

program that phases in the individual mandate. There are some 

penalties, but the penalties are fairly minor initially. So, any kind 

of a mandate ought to be phased in, recognizing the impact that 

it is going to have on individuals and small groups. 

I don’t think we can mandate people have something they can’t 

afford. So we have to—hand in hand goes both subsidies and cost 

reduction measures. 

Senator HATCH. Mr. Chairman, as you said, I have to leave. But 

if each of you would take time and just write to us and be even 

more specific than you have been here. This is a very tough issue, 

as you know. It is not easy to resolve, although it may be easier 

than some of us think. 

I would like to have each of you take time and give us the best 

that you can give us on this. I would personally appreciate it very 

much. I have a lot of other questions, but I will submit them for 

the record. OK? We hope you can answer all of the questions that 

we submit. 

Thanks so much. I am sorry I have to leave. 

Thanks, Mr. Chairman. 

Senator BINGAMAN. Thank you very much. 

Let me ask one question and then just open it up to anyone else 

who wants to ask questions here. 

This letter, Ms. Ignagni, you referred to the letter that you and 

the president and CEO of Blue Cross Blue Shield Association sent, 

and you have this is dated today, sent to Senators Kennedy, Baucus, Grassley, and Enzi, saying that: 

‘‘By enacting an effective and forceful requirement that all 

Americans assume responsibility to obtain and maintain 

health insurance, we believe we could guarantee issue coverage 

with no pre-existing condition exclusions and phase out the 

practice of varying premiums based on health status in the individual market.’’ 

That seems to me to be a significant part of what Dr. Nichols 

was advocating we need to do in the individual market. Let me just 

perhaps ask Dr. Nichols if he thinks that gets the job done? 

Mr. NICHOLS. Well, sir, first I would have to say the statement 

that came from AHIP in that letter is such a long way from where 

we were as a Nation in 1993, we should all take a deep breath and 

have a round of applause. There is no question about that. This is 

real progress. I mean that. 

I would say it is no question that what we want to do is end 

health status rating across the board. I would not limit it to the 

individual market. When you began your remarks, you mentioned 

the fact that two of our markets aren’t working very well. One is 

small group and the other is individual.When a lot of us with gray 

in our beard and losing hair on top think about this a long time, 

60 

we think maybe there is no better way to get these things fixed 

than to put them together. 

I wouldn’t want to have one set of rating rules for the small 

group market and one set of rating rules for the individual market. 

In my view, you want to put them together. 

The economies of scale are never going to be achievable that we 

want for everyone if the small group market continues to buy in 

groups of 10, 20, 7, 4, whatever. So you want to put them all together. 

What I would say is it is a great way to start. What you want 

to do is have a goal of moving toward the end of health status rating across the board. I mean, I would ask Mr. Williams and Aetna, 

when they do the big employers, which is a large part of their business, as I understand it, they don’t do health status rating. They 

do basically community rating across the board for those big 

groups. 

Why not have the same kind of thing for everybody else? Therefore, we can move to a world where you make a new marketplace 

for small group and individual, and in that marketplace, you have 

the same rules for everybody, and the big guys can leave them 

alone because the big guys are doing fine relative to everybody else. 

Mr. WILLIAMS. I would comment on that by saying I think there 

is a general misunderstanding that small groups are really not 

rated on their own health experience as a group. They really are 

part of a small group insurance pool that represents all of the 

small businesses in that geography that Aetna would aggregate together. 

That an individual case has no credibility in an actuary—our underwriter would not attribute the experience of that group to its 

premium until a group is well over close to 400 employees or so. 

When a small group gets an increase, that increase is not the result typically of the health experience of the individuals in that 

group. It is a reflection of the healthcare cost in that geography for 

all the small businesses pooled together. 

Now I think there are opportunities to create one-stop shopping, 

and there are other things that we can do working with perhaps 

the brokers and others, other agencies to simplify the purchase 

process. But I think there is a misunderstanding about the pooling 

nature of the small group market. 

Senator BINGAMAN. I believe Senator Roberts had a question. 

Senator ROBERTS. Dr. Nichols, in your written testimony, you 

have discussed two options for assuring that all Americans have 

adequate health insurance benefits. First, a minimum benefits 

package requirement, which you have just talked about, and then 

an actuarial value target. Can you tell me who does that? Would 

that be done by States, or would that be done by something called 

a national actuarial exchange? 

The pros and cons of this, I think, are obvious, but I don’t want 

a national actuarial exchange morphing into a CMS in regards to 

the insurance industry. Would you care to comment? 

Mr. NICHOLS. Sure. Fair question. I would say, Senator, the basic 

idea behind having a minimum benefit package that specifically 

specify—let us just take a concrete example of the Federal employees? Blue Cross Blue Shield Standard, which is kind of a benchVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00064 Fmt 6633 Sfmt 6601 S:\DOCS\48406.TXT DENISE
61 

mark that a lot of people know. The idea behind specifying that is 

to say that is the package we want all insurers to make their initial bid upon so we can compare apples to apples and see how their 

efficiencies rate. 

Then the idea, at least in my head, is to allow insurers to offer 

supplements above that as long as they are priced separately. An 

alternative way to think about setting that minimum benefit package to permit apples-to-apples shopping is instead of saying Blue 

Cross Blue Shield Standard with its specific deductibles and its 

specific co-pays and all that stuff, allow insurers to offer another 

plan that would be actuarially equivalent. 

You could say the actuarial equivalence of Blue Cross Blue 

Shield Standard, but that would, for example, allow people who 

wanted to offer higher deductibles with different kinds of health 

savings accounts arrangements. It would allow HMOs that might 

want lower deductibles and more access to care, but they expect to 

do more care management. It allows the marketplace in many ways 

to breathe. 

What I believe and my actuarial colleagues have convinced me 

is that if we define that actuarial target appropriately enough, sir, 

it would allow the marketplace to actually be more competitive and 

allow more freedom of choice with some risk of adverse selection 

being created. However, if you define the target appropriately, most 

actuaries I know, the people I listen to, believe it is actually manageable. So that is the idea. 

The idea is not to impose some standard from God. I would suggest that, in fact, what you want is—— 

Senator ROBERTS. I wouldn’t refer to CMS as God. 

Mr. NICHOLS. Well, neither would I. Sorry about that. 

Senator ROBERTS. Well, you might have it sort of described in between there with some words in between God, but that is beside 

the point. 

[Laughter.] 

Mr. NICHOLS. I will let you go ahead. But what I would say is— 

what I believe you want, sir, is a set of Federal rules about the way 

all markets will work. But I could not agree with my colleague 

Sandy Praeger more. It has to be enforced at the State level, and 

you probably want to let States have some breathing room out 

there. 

Senator ROBERTS. Well, that was my next question. I just don’t— 

pardon me for the noise. A Federal one-size-fits-all approach to this 

issue, we have to preserve State flexibility, consumer choice. To be 

frank with you, the rural healthcare delivery system, Senator 

Coburn knows this—Dr. Coburn knows this firsthand. I am just 

trying to save what we have and improve upon it. 

But every provider out there is getting reimbursed 70, 80 percent, and then choices are being made in regards to Medicare that 

are not good. We are rationing healthcare, and it scares me when 

we get into the individual mandate stuff. 

So thank you, sir. 

Senator BINGAMAN. Thank you. 

Senator BROWN. 

Senator BROWN. Thank you. 

62 

Mr. Williams, your comments about fee-for-service and the difficulty of the cost of fee-for-service took me back to something Senator Harkin said at the White House summit on healthcare, where 

he said that you pay for quantity, you get quantity. You pay for 

quality, you get quality. 

Would you each talk about how we can manage costs better than 

we have? That it is pretty clear we—Doctor, I remember my first 

year in the Congress was 1993, and we brought in an orthopedic 

surgeon to speak to the Subcommittee on Health in the Commerce 

Committee, which I sat on. And he said, 

‘‘If I have 10 people come to see me with lower back pain, 

what I should do is say take a couple of aspirin, go home, get 

some rest, come back in 2 weeks if you still have pain.’’ 

He said, 

‘‘But what I do is I order tests. I order tests for three reasons. One is I make more money if I order tests. Two, if I don’t 

order tests, I might get sued. And three, if I don’t order tests, 

the patient will go to another doctor.’’ 

It is a bit simple, but not too far off perhaps. 

Just your comments generally, Mr. Williams, since you have 

made me think of it. Start with you, but I would like to hear all 

of your thoughts on when you pay for quantity, you get quantity. 

Mr. WILLIAMS. Well, I think that there is a huge opportunity to 

re-align the incentives in the system, both at the physician level as 

well as at the member level. What I mean is that the best investment we can make is in how we manage the chronic conditions— 

the asthma, the diabetes, the hypertension. Because the most effective thing we can do is avoid the health event so that we don’t have 

to pay for the activity. 

What we need is a healthcare system that emphasizes primary 

care, emphasizes prevention. If you look at the way the values are 

set for what physicians are paid, the system that has been put in 

place utilizes something called the RUC Committee. It is a committee of the AMA that operates under legislation of Congress, as 

I understand it. 

That committee has 26 physicians on it. Twenty-three of them 

are specialists, and three are primary care. What happens is the 

reimbursement for primary care is at the low end of the spectrum, 

and the reimbursement for procedures is greater. 

What that means is as a system we are not paying primary care, 

family practice, pediatricians to invest the time to help the patient 

understand their condition and stay healthy. So we need to change 

the system in terms of paying for activity to really paying for more 

managing of the population. 

I think also we do have to address the tort reform issue in the 

sense that we need to recognize bad things do happen. People need 

to be compensated. But replacing a physician in the place, as your 

colleague described, they are going to be put on the witness stand 

and asked, ‘‘Was there any other test you could have conducted, no 

matter how remote the indications were for that patient?’’ 

And that physician wants to say, ‘‘No, I did every conceivable 

test.’’ And that drives cost. 

63 

So, we need to think about the evidence base, the guidelines, and 

give physicians some way to say that they are practicing consistent 

with evidence-based guidelines and applying their own clinical 

judgment. That if something bad happens, there is a way, through 

health courts or other mechanisms that States have come up with, 

to give us an opportunity to deal with that. 

Senator BINGAMAN. Ms. Pollitz. 

Ms. POLLITZ. Senator, I think that was very excellent, and I 

would add that we need to also look at some very basic design elements of our insurance policies with respect to chronic conditions. 

We have to remember that people who have chronic conditions use 

care all the time for a long period of time, sometimes for their 

whole lives. 

Research shows that even little co-payments, things that we would think—you know, $6 co-payments for a prescription—will 

confound the ability of many patients with chronic conditions—diabetes, asthma, arthritis, depression—of taking the drugs that they 

need. They don’t fill their prescriptions as often. They split pills. 

They get by. Because it is not just $6, it is $6 times 3 prescriptions 

that they have to fill every week. 

We need to really focus, I would agree very much, on chronic conditions. That accounts for 75 percent of our medical spending. We 

need to take down barriers, including barriers that we build into 

our insurance policies, and not keep dinging people a little bit here, 

a little bit there. It really adds up. 

I think we need to examine, back to Senator Roberts’s question, 

when we look at the design of our health insurance policies and 

what should be covered and what is minimum credible coverage, in 

addition to any actuarial standard that we may decide upon that 

we feel sort of lives within our overall budget goals—I know this 

is going to be hard to afford. We need to line up those policies 

against what the very specific care needs will be for people who 

have chronic conditions and say how much are they going to be left 

to pay out-of-pocket? 

If it gets very high, we need to recognize the fact that they won’t 

be able to manage their conditions. However much we may pay 

doctors to try to do a better job, they just won’t be able to afford 

the cost sharing. 

Senator BINGAMAN. Senator Coburn. 

Oh, did you have more? Oh, go ahead. 

Senator BROWN. I wouldn’t mind hearing from others, if that is 

OK? 

Senator BINGAMAN. Yes, you could give a brief answer so we 

could get on to that other question, too. 

Ms. IGNAGNI. Yes, sir. I think Senator Brown has asked a very 

important question. And quickly, there are three buckets I think 

you want to look at. 

A number of the stakeholder groups have been working together 

on quality performance and how we can make recommendations to 

all of you. We have conferred with your staff about how you map 

all of this, and so I won’t spend too much time, but to say there 

needs to be uniformity of performance measurement so physicians 

and hospitals aren’t frustrated that many different payers, whether 

public or private, use different systems. 

64 

They need to be very oriented toward what are the goals, what 

are we measuring, No. 1? One bucket. 

No. 2, there is a very significant need to—there has been underinvestment in research. The Institute of Medicine has repeatedly 

pointed to this. This is very important as we transition to a 21st 

century system. How do we get that research diffused into practice? 

That is a second issue in that bucket. 

Third bucket—— 

Senator BROWN. Is that comparative effectiveness? 

Ms. IGNAGNI. Well, it is not exclusively comparative effectiveness. 

Comparative effectiveness will talk about the effectiveness of drugto-drug, drug-to-device, drug-to-bio, drug-to-therapy. What the investment in research, in addition to what I am talking about, is 

that the Institute of Medicine has pointed to gaps in research in 

specific areas. 

So we need to have not just more evaluation of what works. That 

is very, very important. But in addition, research the gaps in evidence. How do we get the best practices, that the professional societies are coming up with, very importantly diffused into practice? 

Atul Gawande has talked about an ‘‘institute of best practice.’’ 

There are many things in that area. 

Third bucket—and I know, Senator, you want to move on, so I 

will be very quick about this—the whole idea of moving away from 

paying for a particular body part to be treated. Bundling services, 

episodes, global payments, capitation, a range of issues that were 

brought out in the 1990s, and from a health plan perspective, we 

understand what caused abrasion with physicians in the 1990s. 

And we have worked very, very hard. 

Now in the area of imaging, for example, you have physician-tophysician conferring about what is being ordered and what would 

be better based on physician practice guidelines. There is much 

more sophistication about this. That is just one example. 

But care coordination, as Karen said, is—Ken Thorpe has done 

terrific work here—how we can bundle things more effectively, do 

early intervention, keep people healthy. So I know, Senator, you 

want to move on, but those are just the highlights of the buckets, 

and we could provide more information. 

Mr. NICHOLS. I will be very brief as well. I just wanted to point 

out there are two dimensions I would say, and I agree with everything that has been said so far, on how to reduce cost. 

In the insurance case specifically, if you outlaw underwriting and 

aggressive risk selection and you make it not profitable, they will 

stop it. When they stop it, you will get money back. 

The difference between a premium and the claims costs, that is 

to say medical gloss ratio, is made up of a lot of activities, all of 

which are designed to make money for the company or help it 

break even. If you take away that incentive to do that, that will 

save a bunch of money. 

That is a fundamental difference between their load, by the way, 

in a large employer and a small employer. Ron is right. They don’t 

risk rate individual employers when they are small, but they do 

put them into classes. There are a bunch of classes. 

65 

What is interesting is the load they pay in that small group market is much higher than in the large group market. What we want 

to have is a country where all of us get the large group load. 

The second way is everything Karen just said about buying 

smart. The way I would put it, we want to re-align incentives so 

that hospitals and clinicians, and I mean across all sites of care, 

including drugs and devices, all of them should be aligned with the 

payers and the patients. We want high-quality care the first time, 

the best kind of care the first time. We want everybody to pay their 

fair share, but we want the docs and the hospitals to have the 

same interest in achieving that level of efficiency. To do that, you 

have to bundle. 

There are a lot of experiments going on right now. A lot of us 

are thinking about this really hard. A lot of smart people are working on it. I would just tell you to stay tuned. But I do think you 

have to move toward paying for a bigger bundle of services than 

not. 

Senator BINGAMAN. Senator Coburn. 

Senator COBURN. Thank you. 

First of all, let me thank you for being here. There are a lot of 

approaches for us getting to where we have a broad insurance market. I am convinced we don’t have a market today. I don’t think 

there is one that is really out there. 

The idea of stopping cherry-picking. If, in fact, we had a real 

transparent market, a truly transparent market where everybody 

could see, and we had true risk adjustment based on a penalty, 

based on what that risk is, why would that not work in terms of 

averaging out the cost to everybody and averaging away from the 

cherry-picking? Having real interest where we spread the cost of 

this all over everybody, including the highly sick and the highly 

well, why would that not work? 

Ms. BAICKER. Let me give a 30,000-foot view and then let the experts weigh in. One of the reasons the small and nongroup market, 

I think, works so badly is the different risk rating that goes on in 

large groups versus small groups. If there is an opportunity for 

low-risk people to move across markets and see their premiums 

drop, then you have a devolution of risk pooling that is always 

churning underneath. 

How could you avoid that? Well, if each individual person were 

paying his or her expected costs, and sick people were paying a lot 

more and healthy people were paying a lot less, you wouldn’t have 

any incentive for insurance companies to cherry-pick, and you 

wouldn’t have any churning between markets. But we don’t find 

that acceptable because we don’t want sick people to have to pay 

a lot more for their healthcare than healthy people. 

There are ways to get around that, such as the risk-adjusted 

vouchers I mentioned, where individuals are contributing the same 

amount to their healthcare regardless of whether they are high or 

low risk. But then insurers are getting paid more if they have a 

sicker pool and less if they have a less sick pool. 

Senator COBURN. That is what risk adjustment does. 

Ms. BAICKER. Exactly. That, I think, would both undo the incentive for cherry-picking and would also undo the pressure that destabilizes market pooling. That could be done through side payVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00069 Fmt 6633 Sfmt 6601 S:\DOCS\48406.TXT DENISE
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ments between insurers, or it could be done more centrally through 

public funds being paid out to higher risk groups and taxes being 

levied on lower risk groups. 

Senator COBURN. OK. 

Senator BINGAMAN. Anyone else want to comment on that? 

Mr. WILLIAMS. Yes, I would just comment briefly. I would first 

say that I think that there is an insurance market, particularly in 

the commercially insured sector where we have 177 million people 

in that sector and where the purchasers are incredibly innovative. 

For example, one of the things that we are working on with our 

clients is a value-based insurance design that recognizes that for 

a person who has cancer, their medication has a very different implication for them than someone who is taking a convenience drug 

that you can do without based on their physician’s judgment. 

And for the patient who needs that medication, their co-pay may 

be zero. In some instances, we have clients we are thinking about 

paying them to take the medication. So, the level of innovation that 

goes on in the commercial sector is much greater than goes on in 

other sectors. 

I think transparency is enormously important. But I think we 

focus a lot on transparency in the insurance component of the sector, but consumers need transparency at the physician’s office. 

Mr. NICHOLS. You bet. 

Mr. WILLIAMS. They need it in the hospital. For example, at 

Aetna, any one of our members can go online and find out what 

the Aetna negotiated rate is for their physician and understand 

what they are going to pay for those top 30 procedures before they 

go see the physician. 

Now we also would love to enrich the level of quality data that 

we have, but we do believe there should be national standards and 

should be easy for physicians and quality data that physicians believe is clinically meaningful. 

I think what you miss is the level of innovation I mentioned. We 

have spent, one company, $1.8 billion, which is almost 10 percent 

of the entire amount that we are committing to health IT in the 

country. And so, the question of what do for-profit companies do?, 

we invest in innovation that really is about managing healthcare. 

Two-thirds of our customers are self-insured Fortune 100 companies who very much have a population, long-term point of view. 

Their interest is, I have the employee now. I am going to have 

them mid-career, and they are going to work for me up until they 

retire. And so, there is just an enormous amount of innovation that 

goes on that would be missed. 

Senator COBURN. Well, let me just say in follow-up we spend 

twice as much as any nation per individual on healthcare. The closest to us is Switzerland. They are 25 percent below us. I don’t 

think we need to put another dollar into healthcare. What I think 

we need to do is let market forces truly work, and we can do that 

through universal access. We can have everybody covered, and we 

can still get great quality healthcare. 

The idea of adding another $80 billion or $90 billion a year to 

enhance that, all that was going to do is make our problem worse. 

It is not going to make it better. 

67 

I appreciate so much the idea that we have incentivized subspecialization in this country to a lot of benefit. There is no question. 

But we have disincentivized primary care to a tremendous 

disbenefit to everybody in this country. We are never going to get 

the prevention dollar savings until we start incentivizing primary 

care. 

Senator BINGAMAN. Senator Merkley. 

Oh, yes, did you want to make a comment on that? 

Ms. IGNAGNI. Could I just make one comment? I think Senator 

Coburn said something very important here, and one of the issues 

we have been working very closely with is the specialty societies 

are the primary care area, and it is very clear that there are shortages of slots in medical schools for primary care physicians. There 

aren’t enough medical students going into primary care. 

The one thing the committee might consider as it constructs its 

recommendations is giving very significant help, if not free tuition, 

for the best kids to go through in primary care, a sort of National 

Merit Scholar Program. 

Senator COBURN. That doesn’t solve the problem. Here is how 

you solve primary care: you pay them what they are worth. You 

pay for prevention. We have a pay differential where a pediatrician 

makes a third of what the average physician in this country makes. 

Ms. IGNAGNI. I agree. 

Senator COBURN. If you want people to go into pediatrics, you 

have to pay them. 

Ms. IGNAGNI. I agree. We totally agree with that. 

Senator COBURN. That means you may have to decrease some on 

the top side. 

Ms. IGNAGNI. Right. 

Senator COBURN. But to incentivize them to go there, when they 

are not going to be able to pay the med school loans afterwards, 

they are not going to stay there. That is what happens. We have 

internists all the time. Two percent of the medical school graduates 

this year went into primary care. That is 1 in 50. Forty-nine went 

into specialization or subspecialization, and it is going to accentuate our costs. It is going to drive the costs higher, much like the 

orthopedics. 

Ms. IGNAGNI. Senator, you just hopped in right before I took the 

breath to say exactly what you did, which is that I think you could 

attack this on two ends very productively. But a small investment 

in the beginning of the pipeline could help considerably, in addition 

to exactly what you have just said. 

Senator COBURN. We did it with the stimulus package. The fact 

is, it is not going to work until you make payment equitable. 

Ms. IGNAGNI. We have to make payment equitable. 

Senator BINGAMAN. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair. 

Some of you have touched on this, but I want you to try to address it straight on. That is incentives or adjustment in the structure of insurance related to health smart behaviors. 

We had the CEO of Safeway here a few weeks ago, and he has 

really been driving the concept in their organization of addressing 

issues of smoking, of weight. I believe exercise was somehow incorporated into the model. 

68 

Individuals see financial rewards, if you will, for behavior that 

reduces the healthcare impacts, thereby making their quality of life 

higher and the costs for the organization much lower. I just wonder 

if you all would like to address the appropriateness of this in a 

broader healthcare strategy? 

Ms. POLLITZ. Ms. POLLITZ. I would absolutely agree that prevention and 

wellness is an overwhelming public health issue, goes way beyond 

the bounds of insurance coverage. Having worked in my younger 

days at the Department of Health and Human Services and having 

come to appreciate the unsung heroes in the Public Health Service 

and how difficult it is to promote public health, I think the more 

you can invest in that, the better. 

I would add, though, that you will need to be very careful, and 

here is another area where accountability and transparency in your 

insurance products is going to come into play. You are going to 

need to be very careful about designing insurance products in ways 

that promote wellness or penalize non-wellness. 

The Bush administration rewrote the rules. Congress passed a 

rule in 1996 that said group health plans may not discriminate 

against members based on their health status. Everyone in the 

group is the same. They get treated the same. They get the same 

benefits. They pay the same. 

There was a small exception for modest premium surcharges or 

discounts that could be provided for wellness, but those were very 

much hemmed in. So that you could get a discount, for example, 

a wellness discount on your insurance premium if you took a smoking cessation class, but not only if you could quit smoking. Because 

they didn’t want to kind of cross the line into treating people differently based on how healthy they were. 

The Bush administration rewrote those rules and said that now 

group health plans can have penalties as big as 20 percent of the 

entire cost of the health insurance premium for people who not 

only don’t enroll—who enroll in wellness programs, but who actually meet healthcare targets. 

Days after this regulation took effect, new products came on the 

market that offered to small employers now who had been buying, 

say, a $500 deductible for their group, to give them a $2,500 deductible and then require all the employees to come in for a health 

screen. And every time you pass a test, you get a $500 reduction 

in your deductible. 

So if you reduce your blood cholesterol, if your body mass index 

is the right amount, if you don’t use tobacco products, if your blood 

pressure is not high, then you get a low deductible. But if you can’t 

pass those things, now you are in a $2,500 deductible. 

The effect of that is to split up the pool, and it puts the sick people in the high deductible plans, and it puts the healthy people in 

the low deductible plans. That may be a wellness incentive, but it 

also makes it hard for people who have high cholesterol all of a 

sudden to afford their cholesterol medication because it is subject 

to a $2,500 deductible. 

When you look at the Web site of the company that is offering 

this, right on their Qs and As for employers, how can you save 

money with this? It says some of your sick people will go someVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00072 Fmt 6633 Sfmt 6601 S:\DOCS\48406.TXT DENISE
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where else. They won’t like it. They will sign up for their spouse’s 

plan that doesn’t have this. 

I think we want to create opportunities for wellness. Many, many 

opportunities for wellness. Make it hard for people to not lead 

healthy lives. But we want to be very careful about penalizing 

them in their health insurance and in particular in their 

deductibles and co-pays and charging them more when they get 

sick because that has now crossed a line into discrimination, and 

it is going to be counter to good public health. 

Senator BINGAMAN. Ms. Praeger, did you want to comment? 

Ms. PRAEGER. I would like to comment on that because it does 

go back to the re-alignment of payment incentives. A primary care 

physician can be a great partner in helping a person achieve 

wellness, but they get no reimbursement. They get no reimbursement for spending the time that would be necessary to help counsel 

that person. 

So re-aligning the payment mechanism I think is one of the real 

keys to achieving some overall—maybe not cost reduction, but certainly slowing down this escalating rising cost where the payment 

incentives are just—— 

Senator BINGAMAN. Ms. Ignagni. 

Ms. IGNAGNI. Yes, Senator, the plans in your area that I know 

you know have been doing path-breaking work with primary care 

physicians. They are paying them significantly over the Medicare 

rates to actually take responsibility to help coordinate the care and 

support these healthy choices. 

There is great data. So we would be happy to provide it to you. 

But you have some path-breaking things going on in your State 

that you should be very proud of, particularly in the area of Medicare Advantage. 

Senator BINGAMAN. Mr. Williams and then Ms. Trautwein. 

Mr. WILLIAMS. Just a couple of comments. I would agree wholeheartedly that this area is a slippery slope. But I think that we see 

a tremendous level of enthusiasm among the employer community 

to implement well thought out, appropriate programs. I can tell you 

from our own experience with 36,000 employees, our medical costs 

went up 3 percent last year. 

The reason it went up only 3 percent was because our employees 

engage in wellness and fitness strictly on a voluntary basis, and 

each employee had an opportunity to earn an incentive based on 

their participation in exercise and wellness and fitness and really 

doing things that they were very comfortable with. Strictly voluntary basis. 

We see this among a large number of employers, and I think 

given the obesity epidemic we have in the country and the tremendous problems with chronic conditions, it is very important. 

Now one final comment is, again, another example with innovation. We are working with five large employers and with President 

Clinton’s foundation and actually working with pediatricians so 

that children who are obese do not have to be diagnosed with a 

particular health condition in order for Aetna to pay for nutritional 

counseling, extra income for the pediatrician, and counseling sessions for the family with the dietician so that the family can have 

the dietician who is culturally appropriate to their background and 

70 

can help them figure out what they need to do. It is another example of innovation really tackling what we all, I think, would agree 

is a fundamentally important problem. 

Senator BINGAMAN. Ms. Trautwein, and then Senator Burr had 

a question. 

Ms. TRAUTWEIN. I just want to mention one more thing on the 

wellness and just to add on to what everyone else has said here. 

You can set up these wellness programs, and most of them are 

set up based on a patient deciding what their own objectives are, 

and any rewards that they might receive are based on the plan 

that they have put together. So certainly someone that is in a 

wheelchair will have different objectives than someone who runs 

marathons, and that is critically important to know that the plan 

is not the same for everyone. 

Now I really don’t think that we do enough to encourage employers today to put these programs together. I think our incentives 

should be greater, not less. That they should be able to provide bigger incentives, and some of them have nothing to do with insurance. There are all kinds of things that employers can do, and I 

think engaging employers is the key to making this whole thing 

work because, in fact, that is where most of the people are every 

day. 

Senator BINGAMAN. Senator Burr. 

Senator COBURN. Mr. Chairman. 

Senator BINGAMAN. Yes? 

Senator COBURN. Will we be allowed to submit written questions? 

Senator BINGAMAN. That is fine with me, if the witnesses are 

willing to answer them. 

Senator COBURN. Thank you. 

Senator BINGAMAN. I think it is a good idea. 

Senator Burr. 

Senator BURR. Thank you, Mr. Chairman. More importantly, 

thank you for taking some written questions because I certainly 

have more than the chairman seems scheduled to take. 

Let me just make a comment on this last question, and that is 

that individuals who receive some benefit participate in wellness 

and prevention programs at a much higher rate. Self-insured employers have proven it, and they don’t have to be punitive in the 

way they apply it. 

But if you want prevention and wellness to be a centerpiece of 

healthcare in the future, then you have to make sure the individual 

feels the financial benefits of the decisions that they make. It is 

tough to run 2 miles in the afternoon. But when you see a financial 

benefit come to you for doing it, you are more inclined to do that 

and then to diet in conjunction with it because that might benefit 

the cost of your overall healthcare plan as well. 

Now prior to the last two questioners, I was somewhat dumbfounded by the words that I hadn’t heard. I read them in your testimony, but I didn’t hear them in the verbal testimony—medical 

home, prevention and wellness. I was beginning to think maybe we 

were going to miss out on some things that I thought were absolutely staples of reform. 

71 

The words that I did hear the most often, subsidies and incentives. That is troubling because it sort of suggests right at the beginning that you can’t change the model so it works without subsidies or incentives. I remember when Dr. Coburn and I offered an 

alternative to the SCHIP proposal a month or so ago that covered 

all children under 300 percent poverty, and it did it some $100 billion cheaper than the proposal. It didn’t pass. 

You can, with the right level of creativity, offer expanded coverage from the standpoint of the population and do it for less 

money. But you have to be willing to change what you are willing 

to try to achieve and how you are willing to structure that. 

I want to move to Ms. Pollitz for just a minute because I think 

if I heard you correctly, you insinuated that co-payments, especially 

as it related to chronically ill patients, would alter whether they 

would get care. It may force them to get less care. It may force 

them not to get the preventive care that they need. 

The Rand Health Insurance Experiment found that people that 

paid nothing for their healthcare consumed 30 percent more than 

those who had some skin in the game—co-payment, deductible. So 

how do we balance between what the Rand Corporation went out 

and found, and that is that when we have no skin in the game, 

there is a 30 percent higher rate of consumption by those individuals. When you require some degree of responsibility for payment, 

you begin to have at least less care delivered, and I think their conclusion was, more appropriately, the care that they needed versus 

the care that they just wanted? 

Ms. POLLITZ. Well, I think the finding, Senator, of the Rand experiment was that cost sharing is a blunt instrument, that it deters 

people from seeking necessary care as well as from seeking care 

that they could do without. 

Senator BURR. Well, as a matter of fact, what it found was a 

greater consultation with their doctors about the care that they did 

receive, that it was appropriate, that it was needed, but more importantly, that it would benefit their health outcome. I think that 

is the conclusion they came to. 

Ms. POLLITZ. Well, and to go back to your opening about how 

much incentives versus how much medical homes, I think you are 

right. We need to find a balance. 

But at the end of the day, once someone has been diagnosed with 

diabetes, they need to test their blood four times a day. They need 

to take their insulin and their diabetes medications. They need to 

have regular physician checkups, labs, eye visits, check their feet. 

They need these things. This is not optional care. This is what it 

takes to manage diabetes well. 

And when they don’t get that, they develop severe and expensive 

and life-threatening complications. They lose their eyesight. Their 

kidneys fail. Our ESRD program on Medicare, that is the most expensive healthcare program that is out there when people’s kidneys 

fail, and half the people who are enrolled in that program have diabetes. 

So when we try to save money, you know, just pay me a dollar 

every time for a co-pay for every one of your things, every one of 

your doctor visits, every one of your medications, all of your diabeVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00075 Fmt 6633 Sfmt 6601 S:\DOCS\48406.TXT DENISE
72 

tes supplies, we are erecting barriers to people getting that care because some just can’t—they just can’t do it. 

I think we need to examine the role of co-payments and financial 

incentives and say for things that we know are tried and true, or 

as Mr. Williams said, once somebody gets cancer, I want them to 

take their antiemetic so that they can complete their chemotherapy 

course. I don’t want them to pay for the cost of $1,000 drug. 

Senator BURR. I think what Aetna’s experience has been is that 

once they educate their beneficiaries on why they follow the path 

that Aetna and the healthcare professional lays out that, No. 1, the 

outcome is better and, No. 2, the amazing thing is the cost is less. 

So it actually suggests that if it takes co-payments to get people 

in a different conversation with their healthcare professional, that 

is probably a good thing. 

Now you did say as well in your testimony that the public plan— 

I guess it is this public competition that we are talking about with 

the private sector—should be a tough negotiator. Is Medicare and 

Medicaid a tough negotiator? 

Ms. POLLITZ. Well, Medicaid I think is an example of a strapped 

program that is underfunded. 

Senator BURR. OK, let us just talk about Medicare. 

Ms. POLLITZ. It absolutely underpays, and we should fix that. Is 

Medicare a tough negotiator? Medicare pays what it pays. 

Senator BURR. Do we adequately address prevention and 

wellness in Medicare? 

Ms. POLLITZ. Oh, I think we have improved over the years coverage of certain preventive services, but, no, I think we could do 

a better job. 

Senator BURR. Certain preventive services, maybe six of them 

that we added—— 

Ms. POLLITZ. Exactly. 

Senator BURR [continuing]. In the 1990s, and we fought tooth 

and nail to get that. 

Ms. POLLITZ. Right. 

Senator BURR. But when you look at those six services and you 

talk about prevention and wellness, they fall so far short from a 

standpoint of what is coverage, and that is a public plan. That is 

the U.S. Government. That is CMS. That is basically a plan that 

has been unlimited from a standpoint of what they could spend, 

but I think an example of a serious flaw in architecture compared 

to exactly what all of you have described today the architecture of 

the future. 

Mr. NICHOLS. Sir, if I could jump in, I would just say that I agree 

with you—— 

Senator BINGAMAN. Why don’t you give that answer, and then I 

will call on Senator Hagan? 

Mr. NICHOLS. OK, sir. I agree with you. We have essentially tied 

Medicare’s hands from becoming a very prudent purchaser, a 

value-based purchaser, and there is a lot of discussion about how 

to make Medicare a better buyer. But it ends up kind of making 

your fundamental point that is motivation and incentives are all 

part of this. But at the end of the day, we need to recognize it is 

in our interest if the chronically ill get appropriate services early, 

73 

and that is really what Karen is talking about. She is talking about 

ways to try to figure out how do we make that happen. 

I remember Ron talking about how in Aetna now they have a 

product where they are actually going to have zero co-pay for certain things, maybe even pay people to do certain things because we 

are all better off if those diabetics manage their care with their 

condition absolutely appropriately and stay out of the hospital. 

That is really what we are all trying to work toward here, I think. 

Senator BURR. Thank you, Mr. Chairman. 

Senator BINGAMAN. Senator Hagan and then Senator Harkin. 

Senator HAGAN. Thank you, Mr. Chairman. 

I had the privilege to sit on the State employee health plan for 

the State of North Carolina, where we covered about 800,000 people. What we are talking about right now is the fact that so much 

of the cost is really for chronic disease—diabetes, cardiac failure. 

That is where so much attention needs to be given, wanting to be 

sure people take their medication on a timely basis. 

What I really wanted to ask about right now has to do with cost, 

and Mr. Williams, this question is addressed to you. So many of 

the physicians that I talk to say that if health insurance plans 

have a standardized format, that is just the standardization of 

forms, they could save so much money in their individual offices 

from just handling the forms. Why can’t we do that? 

Mr. WILLIAMS. I would say that I think there are important and 

significant opportunities to administratively simplify so that physicians are spending less time on paperwork. We have a major initiative across the industry, that I am chairing, taking a look at what 

we can do to standardize processes and, most importantly, also 

automate processes. 

For example, in our plan, we get over 80 percent of our claims 

electronically. Over 26 percent of the physician inquiries are handled over the Internet, where a physician gets the data they need 

electronically. We are trying to put in place a multipair portal so 

the physician can go one place and reach out to any health plan 

and get eligibility data. 

I think it is a fair criticism, and I think it is an opportunity for 

the industry to really work hard to administratively simplify what 

we do. 

Senator HAGAN. And to the whole panel, do you think this is 

something that Congress should weigh in on? Yes. 

Ms. IGNAGNI. Senator, I think you should expect stakeholder responsibility. Mr. Williams said it very well. He is chairing a major 

effort that we are undertaking with the Blue Cross Blue Shield Association together to look at every area where we can simplify administrative processes and costs, and reduce costs. 

I think you should expect us to come forward and identify that, 

talk about what the Government in a healthcare reform effort 

could facilitate as you move forward in developing legislation, what 

should be expected in the private sector. We hope by doing so, that 

might start a series of stakeholder responsibility conversations 

about the area, the broad area of cost containment and the opportunity to take a point or a point and a half off future growth. 

We gave you a chart in our testimony if we were able to do that 

as a society, just over 10 years, if you took 1.7 percentage points 

74 

off future rate of growth, the projections, you are talking about savings in the neighborhood of $3.5 trillion. Those are quite significant. 

But you should expect us to come forward and identify that. 

Senator HAGAN. I do think with the initiative that we have from 

the health IT perspective that it is going to drive quite a bit of the 

standardization of these forms. 

I had one other question having to do with the minimum benefit 

package, and I know a lot of regulation has to go on at the State 

and the Federal level. Many States have different individual requirements on benefits that they mandate that are covered at the 

State level. 

This question has to do with how would a minimum benefit package be put together that would be available across all 50 States? 

Dr. Nichols, that was directly in one of your statements. 

Mr. NICHOLS. I would say that the way you want to think about 

this, first of all, let us all get the same set of facts in our heads. 

A lot of discussion about the cost of benefit mandates out there, a 

lot of empirical work that would show, in fact, benefit mandates 

don’t really add that much to cost. The serious econometric work 

that is in my profession suggest 3 percent to 5 percent. CBO has 

concluded that. 

The State of Texas Department of Insurance, not a noted left 

wing organization, concluded 3 percent in the State of Texas. And 

by the way, they include in-patient adult rehab and alcohol counseling. So it is serious benefits there. 

The point is this, how we pay for and manage care is far more 

important than the benefits that are covered. The reason those 

econometric studies find there is very little net impact of specific 

benefit mandates is because they compare the small group pockets 

where those things are relevant to the large group pockets. The 

large group pockets are uniformly more generous, and yet they 

have lower cost. 

So let us ask ourselves how do they do that? A, they do what Ron 

said a moment ago. The big employers really have the time and potential in resources to work with the third-party administrators to 

try to be smarter about what they buy, and they also negotiate better contracts with the clinicians because they have buying power. 

The point is we need to extend that bargaining power and that 

information utilization potential to all of us and not just some of 

us. So I would say the one thing Congress could do in the short 

run is to mandate transparency about how different activities are 

spent. That will encourage the industry and the clinicians to work 

together. 

But on sort of selecting the benefit package itself, I would come 

back to at some level it has to be a Federal decision. You don’t 

want 50 different benefit packages around the country. 

What you do, however, want is to allow the market to breathe. 

You do not want this to be something that is absolutely written in 

stone and force, say, very efficient integrated health systems who 

are very good at managing care and patient satisfaction, you don’t 

want to force them to a certain kind of deductible. 

75 

Similarly, you don’t want to force folks who manage care differently to have a particular product. So, in my view, you want an 

actuarial value standard and let the market go. 

Senator HAGAN. Ms. Pollitz. 

Ms. POLLITZ. I would just add to that that while I agree you need 

to set a Federal standard—I mean, if people need coverage, they 

need coverage. It doesn’t matter where they live. 

To the extent that you are going to allow some flexibility through 

an actuarial equivalent standard, and I appreciate Len’s stress on 

sort of the positive implications of certain kinds of different benefit 

designs, but I think you need to be very careful, and two actuarial 

equivalent plans might on average cover the same thing. But this 

plan covers 100 percent of what cancer patients need, but nothing 

of what diabetics need. This one, 100 percent of what diabetics 

needs and nothing—— 

We can’t just sort of say actuarial equivalence is close enough. 

I think in the quest for transparency and monitoring this over 

time, you will also need to develop some better measures of uncompensated care and medical debt and check those frequently. 

To the extent that we find that our actuarially equivalent plans 

that are meeting our standards are still leaving people in medical 

debt, and check them by conditions, then you need to go back and 

tweak it. But I think we buy health insurance in case we get sick. 

So the standard that you set needs to take care of people when 

they have cancer and diabetes and heart attacks and when they get 

pregnant, and it can’t leave them with thousands of dollars of medical bills every year that they have to keep paying in addition to 

what we are asking them to pay for their premiums. 

Senator BINGAMAN. Senator Harkin. 

Senator HARKIN. Thank you, Mr. Chairman. 

I have been trying to get my head around how insurance is utilized more effectively in the field that everyone has mentioned here 

earlier, and that is in prevention and wellness. How do we get insurance involved in that? 

Just a couple of observations, 75 percent of all Medicare spending is on chronic illnesses, most of which are preventable. So the 

old saw, you cut where the fat is the thickest. 

I saw a picture, a PowerPoint that Dr. Dean Ornish put up one 

time, and the first picture was of a sink that was overflowing with 

water, and you had people on the floor mopping it up. His point 

was that for most of our healthcare today, we are mopping up the 

floor, but no one is shutting off the sink. 

It seems to me that is what insurance is. The insurance is paying 

for mopping up the floor, but not paying much to think about shutting off the sink. So, I have been trying to figure out how do we 

make it so? 

Mr. Williams, your company, you have to pay your shareholders. 

Your obligation is to your shareholders. You have to make a profit. 

All insurance—well, except maybe mutuals. But that is a different 

situation. 

We all know about prevention and wellness. Everyone has mentioned it. We have to focus more on that. What is the role of insurance in insuring people for engaging in healthful lifestyles, for 

businesses to be involved? 

76 

I can figure out the taxing system. I mean, I can figure tax incentives for businesses and individuals that can motivate, provide financial incentives and things like that. That is not a heavy lift. 

Please explain for me how we get the insurance companies involved in this. 

Mr. WILLIAMS. Sure. I would first start off by describing our business model today versus a number of years ago. A number of years 

ago, we were a financing mechanism. We paid the claims, and we 

provided customer service. 

Over the past 10 years, we have transformed and added a whole 

set of prevention and wellness and clinical support in health 

informatics functions and capabilities, and I will be more specific. 

Twenty percent of the people who work at Aetna are nurses, doctors, pharmacists, behavioral health specialists, and 20 percent 

more are IT professionals. 

Senator HARKIN. IT. 

Mr. WILLIAMS. IT. What the IT professionals do is help us identify from the claims data, the pharmacy data, the lab values, the 

health risk assessments, patients or members who are on the path 

to becoming a diabetic or on the path to becoming a hypertensive. 

Now our job is not to treat them. Our job is to identify them and 

offer them on a voluntary basis education, information, counseling 

support so that when they go see the doctor, they are in a position 

to really fully engage in understanding their health status. Because 

if you are a diabetic and you take better care of yourself, there are 

fewer claims. 

Senator HARKIN. Pre-diabetic? 

Mr. WILLIAMS. Pre-diabetic. Well, even if you are in an early 

stage of being a diabetic. What happens is most of these conditions 

are progressive. You start out ‘‘pre.’’ You enter the early. You go 

through the mid-stage, and then you go through the late stage. 

What we spend our time doing is first identifying people who 

have the condition, understanding the stage they are at, and trying 

to make certain they are educated and understand what they need 

to do to slow down the progression through that process. 

Senator HARKIN. Let me ask one question. Medicare right now, 

Medicare will pay for nutrition counseling if you are diabetic. 

Mr. WILLIAMS. Right. 

Senator HARKIN. But they will not pay for nutrition counseling 

if you are pre-diabetic. Well, that doesn’t make sense. 

Mr. WILLIAMS. Well—— 

Senator HARKIN. Now let me ask you, does your insurance company, do you have policies that say to your policyholder that if you 

go in and get tested and you meet certain indices for being pre-diabetic, we will pay for you, we will cover you to go get nutrition 

counseling? 

Mr. WILLIAMS. Yes, we do have. Yes, the short answer is yes. 

Senator HARKIN. You have policies that do that? Covers everybody? 

Mr. WILLIAMS. That is correct. Yes. 

Senator HARKIN. Or is it a special thing that you have to get in 

a policy? 

Mr. WILLIAMS. Well, what would happen is the policy choice is 

always the employer’s choice. But I would say the vast majority— 

77 

and let me answer more broadly. There is a set of recommended 

prevention guidelines recommended by the U.S. Preventive Services Task Force. 

Senator HARKIN. I am very familiar with it. 

Mr. WILLIAMS. We cover it, period. If it is recommended as a preventive service, we cover it. 

Then there are a set of things that relate to chronic conditions, 

and we have the flexibility to identify what we believe is a good 

investment to slow down the rate of increase. So we would pay for 

nutritional counseling. We pay for a whole host of things that 

would be appropriate services to slow down the rate of progression 

through a chronic condition. At our heart, our business is today 

managing that. 

Senator HARKIN. That would be a minimum benefit in every one 

of your policies then? 

Mr. WILLIAMS. Yes. 

Senator HARKIN. And you have a smoking cessation, anything 

that is on the U.S. Preventive Health Task Force, the A or B? 

Mr. WILLIAMS. Yes, we would typically cover. I mean, there 

would be rare exceptions. But I mean, just to be clear, I would easily—just sitting here today, I would say 85, 90 percent would easily 

cover everything. 

Senator HARKIN. Right now, only 7 percent of employers offer 

wellness and prevention programs to their employees. Seven percent offer some form of wellness and prevention programs to their 

employees. So we have a long way to go to get in business. 

Now again, we can figure that one out. With tax incentives and 

things like that, that is not a heavy lift. We can figure that one 

out. I still wonder about getting up front on the prevention side because a lot of what you are dealing with in insurance is the result 

of something that happens before insurance ever kicks in. 

For example, Mr. Williams and Ms. Ignagni, I mean, representing the two insurance industries here, you should be in the 

forefront of the fight to get sugary sodas out of our schools and 

junk food out of our schools and getting kids exercise in schools, 

you know? You have to be in the forefront of that because kids 

learn their bad habits there. 

What do we say to our kids when they go to school and they see 

soda machines and vending machines with all the junk food? What 

message are we sending to them? That is OK, fine. You go ahead 

and do that. 

Again, this is not in your insurance realm, but it would seem to 

me as an insurance company, you ought to be in that battle, in that 

fight to have better—and also advertising to kids. Right now, a kid, 

a child—I am a little off here now—between 7 and 12, somewhere 

in that neighborhood, 5 to 12, sees an average of I think it is pretty 

close to 200, maybe in the thousands of ads on TV every year. OK, 

it is in the several thousands of ads they see every year for food. 

Just food ads. 

How many of those ads are for fruits and vegetables and good 

eating and nutrition? None of them. They are all for sugar, starches, sodium, things that just lead to bad habits. 

Well, you know, if we don’t correct that, we are mopping the 

floor, and your insurance companies are paying for mopping the 

78 

floor. I, as a policyholder, am paying more for mopping the floor, 

and I don’t want to pay anymore for that. 

So, I just urge you to get engaged in that. Now I didn’t mean to 

give a speech on that, but every one of you mentioned prevention 

and wellness as part of this battle. Well, it seems to me we have 

to do both. We have to figure out how the insurance companies 

handle that later on and then how we move up forward and start 

early programs. 

I don’t know how insurance is at all—you have just got to do it 

as a public policy thing? Well, maybe there is a bottom line. Looking ahead, there would be a bottom-line benefit for you if less people became obese or less people smoked and less people had chronic 

illnesses. It would be better for your bottom line, too, I guess, now 

that I think about it. 

Let me ask one more question. My time is running out. I want 

to ask about a public plan. I think Senator Brown brought it up. 

Can a public plan co-exist with private insurance plans? That 

seems to be a question I am getting all the time. Can we have a 

health reform that has all these private plans and then have a public plan? What do you think? I don’t know. 

Mr. WILLIAMS. My opinion is, no, it cannot. 

Senator HARKIN. It cannot. 

Mr. WILLIAMS. The public plan, Medicare does not negotiate. I 

have not yet met a physician who has negotiated with Medicare or 

a hospital that has negotiated with Medicare. It sets a market rate, 

and that is the rate. 

It is extremely difficult for any one entity to be both the referee 

and a player in the game. I think that there are many opportunities to improve the market by having the Federal Government play 

a role in the context of regulator and referee, which we have talked 

about extensively today. 

I think that the problem we are trying to solve, which is making 

certain that everyone has access to healthcare services, can be addressed through the guaranteed issue, no pre-existing exclusions, 

and some of the other reforms that we are describing. I also believe 

that when we look at why private insurance costs so much, we 

must confront the data I have seen that suggest private employers 

are paying $90 billion more than they would otherwise pay because 

of the cost shift from Medicare to the private sector. 

To the extent that we create a public plan that exacerbates the 

cost shift, we are on the slippery slope, and I would say it probably 

would have been greased to accelerate our momentum toward a 

single payer system. 

I believe that the innovation that the private sector represents 

is extremely important. I think we have 177 million people in that 

sector that is working well, and I think if we can address the limitations we have to make certain that everyone has access to 

healthcare without pre-existing conditions and that we are not 

looking at health status as a means of rating, that we can solve the 

problem in a way that would address the underlying issues. 

Senator HARKIN. Ms. Trautwein, do you have—I am just going 

to go down the line. Do you have any views on that? 

Ms. TRAUTWEIN. Yes, I would just add to that, and I also don’t 

think that it is possible for a public and private sector to compete 

79 

on a level playing field. I don’t see any way that is possible, given 

the nonrate negotiation that Ron was talking about. 

I think when you don’t have a level playing field, what happens 

is one entity or the other is selected against. So I suppose the public program could be set up so that it gets all the bad selection, but 

more likely what is going to happen is, as Ron said, the private 

programs will be selected against even more than they are today, 

and the cost shifting would be exacerbated even more than it already is. I just think that is a recipe for disaster. 

Senator HARKIN. Ms. Pollitz. 

Ms. POLLITZ. Private health insurance and public plans co-exist 

today. Almost half of our healthcare spending is covered by public 

programs today. 

When you talk about the cost shift, we have had to develop public programs because private insurance won’t take care of people 

who are vulnerable. That is why we created the Medicare program 

because private insurance wasn’t taking care of people who are elderly or disabled or when their kidneys failed or when they got 

ALS. So we had to create a public program for that. 

Two-thirds of the States have high-risk pools. 

Senator HARKIN. Say that again. 

Ms. POLLITZ. Two-thirds of the States have high-risk pools, public plans when private insurance won’t take care of people, won’t 

cover them because they are uninsurable. We have come up with 

this concept of uninsurable. So we had to create public plans to 

take care of that. 

Our latest eligibility category for the Medicaid program was 

underinsured women who have breast and cervical cancer. That is 

now a reason that you can get into the Medicaid program to get 

treatments because the private sector isn’t providing good coverage 

that takes care of what people need. 

Of course, they can co-exist. They do co-exist. The cost shift overwhelmingly goes in the direction of the public plans. They do get— 

they get all of the expensive vulnerable cases that private insurance won’t take care of. Now granted, as Len said, we need to 

change the business model and change the way markets compete 

so that we can try to get private insurers to begin, for the first 

time, to compete to take care of people when they are sick and not 

just to avoid them. 

But I think, given that the track record on that is pretty sparse, 

it is very helpful to have a public plan that you create for that very 

purpose. It cues the market. It says this is the kind of behavior we 

want, and you can charter that plan so that it doesn’t just compete. 

It certainly won’t compete to maximize profits. 

But you can charter that plan to be an innovator, not to crowd 

out other private sector innovations, but to be where public plans 

brought us DRGs and RBRVS and a lot of innovations that we 

have in payment that have been widely adopted by private carriers. 

A public plan can do that and can be tasked in its charter with 

sharing what it learns and what it gains from that investment and 

not just trying to keep all those secrets for itself. I think it is absolutely essential. 

Senator HARKIN. Very good. 

80 

Ms. IGNAGNI. We started our work from the proposition that the 

status quo was not acceptable. Everything we have proposed today 

and all the work we have done over the last 2 years is designed 

to change the market as it exists today. So we hope that you don’t 

make judgments about what is the case today and what is to be 

the case tomorrow based on what are the rules today. 

If we get everyone in, we can change the system dramatically to 

guarantee issue, to deal with the health status rating, to make the 

system more transparent and consistent across 50 States, and to 

create the kind of system that we believe the American people 

want. To have a system, we do have significant amount of cost 

shifting. 

We have provided some data based on California, which is the 

best data system in the country, that shows you real cost shifting 

as Government continues to underpay both in Medicaid as well as 

Medicare. So this is a very significant issue in terms of ever establishing a level playing field. 

Second, all of the work that is being done in disease management, care coordination, medical homes that are working right 

now, pay-for-performance, upside, downsides, and real measurement to actually do it in the way that all of you have suggested, 

all of that is being done and pioneered in the private sector. 

We have data that is beginning to come in, and it is very impressive. It is going to be shared. It will be researched. It will be third 

party verified. So we have a lot to report about what is happening. 

Clearly, the market today doesn’t work because we don’t have everyone in. Everything that is now in existence in terms of the regulatory structure works through that prism. When you change that 

and you create subsidies, there are a package of things you can do 

that will change everything. 

What we have done is proposed an aggressive system of Government regulation that would supervise private sector competition 

and the competition that I think the people want. 

Mr. NICHOLS. Senator, you asked a great question, and I would 

say in some ways, it is sort of the question of the week or month 

at least. I would say there really are two ways to start answering 

it. 

The first is, to build on what Karen just said, the market is broken now. It is not working, and the consequence of that is that a 

lot of people have lost their trust. They have lost their trust in our 

ability to change the rules in such a way that all insurers will behave the way most of us think they would if you change the rules. 

That lack of trust is real and that need for, if you will, reassurance of some other kind of plan being available is a real, profound, 

I would say, demand out there. 

The second thing that we need to keep in mind is that if we just 

decide to put everybody into Medicare, except for the private plans 

that would survive for maybe 3 years—I will give Ron that—we are 

going to end up with a system that is basically going to be run 

from Washington and Baltimore. I don’t think many of us are in 

favor of that either. 

So what I would propose is you think about a public plan model 

more like what State employees do. Maybe we should ask Senator 

Hagan how it worked down there in North Carolina? But in genVerDate Nov 24 2008 13:20 May 17, 2011 Jkt 035165 PO 00000 Frm 00084 Fmt 6633 Sfmt 6601 S:\DOCS\48406.TXT DENISE
81 

eral, States, 34 of them today, decided to have a self-funded plan 

for which the State bears the insurance risk. That is to say the 

State has appointed the leaders of the plan. They don’t profit in 

any way from the hint of denying care. They can’t. 

Senator HARKIN. Thirty-four? 

Mr. NICHOLS. Thirty-four. Yes, sir. We can give you names and 

so forth. What they do with that plan, sir, is they let it compete 

with the private insurance industry, and in most cases where they 

have been doing this, they have been doing it more than 15 years. 

I am not making this up. This has been going on for a long time. 

So what is the deal? The deal is they wanted a plan where they 

had basically—it is typically a PPO type arrangement—larger providers. They typically hire a private insurer to process claims and 

negotiate with contracts with the providers. So they got a big network. They compete head-to-head on a fairly level playing field. 

Now it turns out we wrote a paper just last week, and we would 

be glad to send it to you and talk with you about it, that would 

outline kind of how you could do this. We would suggest even 

stronger firewalls between the people who run the new marketplace and the people who run the plan. 

But the point is these States have been doing it without the kind 

of firewalls we would recommend you consider, and still it functions effectively and has led to, in many cases, better performance 

in that part of the insurance market than any other part of a lot 

of States. So I do think there is a model between Medicare and 

nothing that could get us where we need to be. 

Senator HARKIN. I would like to see that paper. 

Ms. BAICKER. Very briefly, I agree that in theory there could be 

great gains to having a public plan, and I worry that in practice 

one ends up doing more harm than good. So it very much depends 

on the implementation details. 

With your indulgence, just one sentence or two on your last question about why we don’t see more investment in prevention and 

wellness by insurers. I think there is an upstream problem and a 

downstream problem that as people age onto Medicare, the problems that they develop in middle age they bring with them to another insurer. So private insurers may not have the incentives to 

invest in wellness when the cost—or benefits accrue much further 

down the line. 

Similarly, a lot of the problems that private insurers inherit happened at a time way before they had any control over what was 

going on, and that is a key case for public policy intervention that 

when we are talking about health reform, not just health insurance 

reform, but health reform to get all Americans access to better 

health through a lifetime, that has to be investment in wellness, 

in the availability of healthy foods. 

If you go to poor neighborhoods, there aren’t supermarkets in a 

lot of places, and that is a matter of public policy. There aren’t 

green spaces to exercise in. That is a matter of public policy. So I 

think we have to look at health reform as a much broader endeavor, and that may be much more cost effective than anything we can 

do within the healthcare or health insurance system. 

Thanks. 

82 

Ms. PRAEGER. Thank you, and I just have to comment on the supermarket. If you go to a supermarket in an affluent neighborhood, 

the fresh produce is like you are in an art museum. It looks gorgeous. It is beautiful. It is perfect. If you go into low-income neighborhoods, if they have fresh produce at all, it doesn’t look very 

good, and it is kind of expensive. So it is no wonder the diet issue 

is a problem. 

The public plan, and I have read Dr. Nichols’s report. It is a good 

read and a fast read, and I think he makes some very good points. 

Senator HARKIN. You mean we could probably understand it? 

[Laughter.] 

Ms. PRAEGER. Well, I could, so, yes. 

The public plan, if it is competing on a level playing field with 

the private marketplace, I think there can be some benefits to it. 

But I think, first, you need to make sure that that public plan is 

charging a premium that is sufficient to pay the claims, and that 

is critically important for the long-term viability and for the competitiveness of it. 

The public plan should comply with all of the State regulations 

that are in force in that State where that public plan is offered, 

and Kansas is a State that has a State-run, State public plan for 

its State employees, and it does work side by side with the private 

market plans. 

Then the payment system should be based on a negotiation and 

not just dictated that this is what providers will be paid. So if you 

have equal rules and are treating the public plan the same as the 

private plan, it can help drive market changes because of the ability to perhaps bring some standards across the States, and I think 

eventually there are areas where standards set at the Federal level 

are pretty important. 

Some of the things that we have done through State regulation 

that we are advocating should happen in all States are things that 

would address some of the administrative costs that Senator Hagan 

referred to a few minutes ago. Utilization review ought to be standardized, and we have worked with our health insurance plans to 

get model legislation drafted so that utilization review is handled 

in the same way so that companies don’t have to comply with different rules in different States. 

External review, the same. Rate and form filing. We have a system for electronic rate and form filing through our national association, and that needs to be extended to health insurance as well. So 

uniform standard. So there are a lot of things that the States are 

working on that could benefit and inform and perhaps lead to 

greater uniformity by those things being adopted at the Federal 

level. 

Senator BINGAMAN. Senator Casey is the only one who hasn’t 

had a chance to ask some questions. Go ahead. 

Senator CASEY. Thank you, Senator Bingaman. 

I appreciate and it was interesting to listen to that line of questioning that Senator Harkin was propounding to the witnesses. I 

appreciate that. Whenever Senator Harkin is speaking, we listen 

and we learn. He has a lot of wisdom. 

And I have you for the next 2—no, I am only kidding. I was 

going to say 2 hours. 

83 

[Laughter.] 

We have some time here. I wanted to pick up on—I am serious 

about one of the lines of questioning that Senator Harkin focused 

on. I will deal with two things. One is the question of what we are 

going to do going forward on the individual market and small 

group markets. But before I get to that, I wanted to get back to 

prevention because he asked some important questions. 

Dr. Baicker, I wanted to start with you. So many Americans 

today understand what we are talking about here when we talk 

about prevention and wellness. They get it. We may not practice 

it enough. The statistic about 7 percent of employers having it in 

place, even if that were tripled, it wouldn’t be enough. 

I think people understand it, but they also understand that we 

are not there yet. Tell me two things, if you can—and I will ask 

anyone else to chime in—what are the strategies on prevention and 

wellness that we know work, that it is irrefutable that the strategy 

works? 

And second, tell me the mechanics of getting there. It is great to 

have something that works. We can point to programs that work. 

We can point to strategies that work and a whole series of whether 

it is healthcare or other parts of our economy, but we have to put 

in place a strategy that we know will work. We also have to have 

the mechanics to make sure it gets implemented so that it actually 

will work and not just theoretically work. 

But tell us about that. Tell us what we know that—and not that 

it is a Democratic idea or a Republican idea, tell me what we know 

about the consensus of what works strategically for prevention and 

wellness. 

Ms. BAICKER. That is a great question, and I wish I could give 

you a complete answer. But I am not sure we have a complete answer. I will give you my best answer. 

Senator CASEY. In other words, let me just interrupt for one second. If you had a magic wand and you had total control over what 

the U.S. Senate does on healthcare, what are the three things you 

would do on prevention and wellness? What would you put in the 

statute? 

Ms. BAICKER. You are going to want to take the wand back. 

[Laughter.] 

Senator CASEY. Give it a try. This is not a real formal hearing. 

Give it a try. 

Ms. BAICKER. I know there is no wand. I would like to unbundle 

the idea of prevention or wellness as a monolithic thing because I 

think there are many different things with different implications 

for cost and effectiveness that frequently get bundled up together, 

and I think that damages the debate. 

Senator CASEY. OK. 

Ms. BAICKER. We talk a lot about should preventive care be coverage and preventive care have no co-payment. Shouldn’t we invest 

more in preventive care? By and large, preventive care does not 

save money. There are lots of chunks of preventive care that are 

cost effective, meaning you spend some money and you get a lot of 

health for it. 

The best, most cost-effective items in what we generally call preventive care do save a little bit of money. Flu shots for toddlers. 

84 

There are some interventions that when you spend money on them, 

you actually reduce healthcare spending over the short run, but 

there are very few. 

Senator CASEY. Let me stop you there for a second. Tell me about 

the ones that—preventive strategies that are helpful to the individual but don’t save money. 

Ms. BAICKER. There is a great article on this in the New England 

Journal of Medicine—— 

Senator CASEY. It is still the idea of the—— 

Ms. BAICKER [continuing]. That I would love to send your way, 

not authored by me. That there are a chunk of tests that yield life 

savings at a reasonable cost. So the metric that I am using is how 

much does it cost to save a life year? For the most cost-effective 

things, flu shots, you actually save money and save a life year. 

Then there is a chunk of things that cost money, but buy you life 

years at a very reasonable rate, at a rate that we think, boy, that 

is worth the money spent on it instead of spending it on other 

things besides healthcare. So things like screening people who are 

at risk of hypertension or who are at risk of diabetes or other complications. 

Now that same screening procedure that is done on a person who 

has risk factors, if, instead, you do that on a much older person or 

a person without those risk factors, it becomes cost ineffective. So 

the very same procedure is cost effective for some people and not 

cost effective for others based on the underlying risk, based on the 

individual circumstances. 

Some of the innovation that Mr. Williams was talking about at 

Aetna is how do you tailor your insurance design to promote the 

kind of consumption that is high value while not promoting the 

kind of consumption that is low value? That is tricky when the 

same procedure sometimes falls into one category, or sometimes 

falls into the other. 

Now there are some procedures that are almost never cost saving, or never cost effective, that are still preventive, but they are 

tests that really yield very low returns in terms of health. Those 

you probably don’t even want to think of as preventive care. 

How do you get there for preventive care? Then I will do a quick 

recap on wellness. On preventive care, value-based insurance design is one promising angle, where you pay people to get the care 

that is of high value and you charge much higher co-payments for 

the care that is of lower value. Lots of things are going to fall differentially along that spectrum based on the individual patient’s 

risk characteristics. 

That makes for a very tricky contract, and the logistics of how 

you write that down in a way that promotes stretching our 

healthcare dollars as far as possible while not being discriminatory 

or unenforceable or tricking people into thinking that they are getting protections when they aren’t, that is an important regulatory 

question. 

On the wellness side of things, I think the reason we are seeing 

a rising roll of employers in that market where you would naturally think why aren’t the insurers doing this is that employers 

often have a longer-run relationship with their employees than insurers have with their covered lives. 

85 

If you are going to be at an employer for a decade, your health 

and productivity matters more to that employer than it does to the 

insurer when you might only be in their plan for a few years. Employers also accrue some of the benefits of having you be more productive in terms of being a more productive worker. 

So we would like to think that individuals should just do this on 

their own for their own health, but there are all sorts of barriers 

to individuals being able to successfully implement a lifelong 

wellness program, where an employer might be able to step in with 

an environment that promotes it 8 hours a day instead of the few 

interactions that you have with your insurer or even with your 

physician. 

So what works on the wellness front, evidence is still coming in 

on that. But I think there is strong evidence that it matters a lot 

that there be day-in, day-out enforcement of health behaviors, reinforcement of good health behaviors, and the workplace is one 

place for that. Communities are another place. You want integration of community efforts and employer efforts. Again, that is a 

matter of public policy, not one that I think insurers can implement on their own. 

Senator CASEY. Let me stop you there for a second and put you 

on the spot with regard to employers. Give us a large employer example of the strategy just on wellness that is working. 

Ms. BAICKER. I am hesitant to name a particular employer, but 

Len said Safeway. 

[Laughter.] 

But there are—— 

Senator CASEY. What do you say? 

Mr. NICHOLS. Pitney-Bowes. 

Ms. BAICKER. That is another good example. 

Senator CASEY. Tell me what they did. In other words, around 

here, there aren’t always a lot of original ideas in Washington. We 

borrow all the time, and there is nothing wrong with being a copycat if it is a good idea. 

Tell me—if you don’t want to specify a company—what the elements are that are in place for those big companies that we should 

put in the bill. 

Ms. BAICKER. Those are two different questions, and I think it 

is a key distinction. The things that seem to work are highly integrated efforts where it is not just a class once a week or once a 

month. It is not a bonus at the end of the quarter if you have 

reached a goal. 

It is every day at lunch there is a class. Every morning there is 

stretching exercises. You have time off from work to participate in 

those activities. The employer provides—— 

Senator CASEY. There are lots of opportunities. 

Ms. BAICKER. So it is an environment. It is not just a limited program. Now those are the things that work. 

Senator CASEY. A culture, right? 

Ms. BAICKER. I hesitate to say that you can legislate a culture 

that way. I don’t know how you would write down a bill that promoted that kind of culture without—— 

Senator CASEY. Right. OK. 

86 

Ms. BAICKER [continuing]. Being so prescriptive that you shut 

down the innovation that you are trying to foster. 

Senator CASEY. Good point. OK. 

Ms. POLLITZ. Senator. 

Senator CASEY. Yes? And we have others. 

Ms. POLLITZ. I would just add I think an investment in public 

health is so important. That tens of billions of dollars that you just 

invested in IT, you should at least match that for new investment 

in public health. 

Prevention may not score savings, but public health does save, 

and we underinvest in public health more than just about any 

other developed nation. The root cause of so much of our healthcare 

spending is in junk food, as Senator Harkin said, gun violence, 

speed limits, people who don’t wear helmets, lack of family planning, food safety problems. I mean, I am not buying peanut butter 

still. 

So we need to invest in public health in a big way. And with Senator Harkin here—I think you are still on Appropriations, right? So 

you can authorize the spending here and send him next door to 

make the money available in the budget. But we do underinvest. 

I know you are a champion, Senator, of our Public Health Service 

agencies, and I know they always eat last at the trough after everybody else comes in. But we need to stop that, and that is such 

a cost-effective investment, and it will just embrace all of these 

other things that we are talking about. I just think that has to be 

a priority in this legislation. 

Senator CASEY. I want to go to the other question, but anyone 

else have anything on—— 

Mr. WILLIAMS. Yes, just quickly on—— 

Senator CASEY. Mr. Williams, you have been dealing with this at 

the insurance company level. 

Mr. WILLIAMS. We deal with it quite extensively, and I think that 

the large employers we work with, which I described earlier is twothirds of our almost 19 million medical members, are very focused 

on this fundamentally as a productivity issue in the context of their 

employees. Smoking cessation is absolutely critical. 

I think the other area that we haven’t talked about, which I 

think was addressed through the mental health parity bill, is the 

undertreatment of depression and being certain that the whole 

issue of depression is thought about holistically and that we don’t 

send the person over here for their medical care and over there for 

their behavioral health but is thought about holistically. 

The person who has a heart attack is screened for depression because they may very well be depressed. They might not take their 

medications. They might not engage in their rehabilitation. And 

therefore, their recovery is prolonged. So I think that is a huge 

area. 

Ms. IGNAGNI. Senator, just a footnote on that. Fifteen years ago, 

there was a lot of discussion about managing care that went out 

of favor, but the concept—we threw the baby out with the 

bathwater. Clearly, over the last 15 years, our plans have been reinventing the tools, and now care management is about doctor-todoctor, using specialty society guidelines, best practice, etcetera. 

87 

We are about to issue a study on disease management and care 

coordination for Medicare Advantage participants, many in your 

area, and we can show a reduction, significant reductions because 

of disease management in ER usage in days per thousands. 

So, as Mr. Williams said, there are phases of intervention—early, 

middle, and late. But if you get the chronically ill organized into 

care systems that are supported by physicians, organized by physicians, you can see some major implications here that are quite productive. 

If you marry that with the kind of public health investment that 

Ms. Pollitz is talking about, I think particularly in the area of obesity, we attack smoking in a very significant area. A number of decades ago, the surgeon general stood up before the American people 

and said we have to attack this. Similarly for obesity because it 

runs through every chronic illness. 

The area of disparities. There are a number of things that we put 

in our testimony that Congress can do now in addition to what is 

being done in the private sector. Our health plans are monitoring 

disparities. In some cases, we can’t collect data or there are barriers at the State level from doing that. That should be addressed. 

We now can target early individuals who are at risk of certain 

things. So we can go on and on, but there is quite a body of evidence and experience now to really begin to answer your question 

of where do we intervene, how do we do it, and how do we do it 

in the way that is most effective, cost efficient, and provides the 

highest value? 

Senator CASEY. Thank you. 

I know we are running out of time. Senator Harkin may say we 

are out of time. He is in charge now. We have to be cognizant of 

that. 

But just a few more moments. I wanted to—and at the risk of 

being redundant here because I know I missed the first 45 minutes 

or so—with regard to one topic and one example. The topic is the 

individual and small group market for insurance, and the example 

is Massachusetts. What, if anything, have we learned from their 

experience with the exchange concept? 

Well, A, what have we learned? And B, no matter what we have 

learned, can we apply that lesson to what we do in a Federal or 

a national sense? Anybody want to try a take on it? 

Doctor? 

Mr. NICHOLS. Senator, I would certainly start by saying what we 

learned is you can achieve bipartisan agreement on how to reform 

a health system. Let us go back to Governor Romney, who was at 

the time a Republican presidential aspirant, willing to use the 

word ‘‘all.’’ And you had a Democratic legislature maybe among the 

bluest on the planet willing to accept the word ‘‘limit.’’ 

That was an appropriation bill. Not an entitlement. So what you 

had there, I think, is a very good lesson for how you all can move 

forward. 

Senator CASEY. Good point. 

Mr. NICHOLS. Second, I would say what they have done technically is they were, believe it or not, even though it was Massachusetts, they were humble. They didn’t try to do it all in 60 days. 

They tried to do it all over a couple of years. They phased it in, 

88 

and they were very intentional about signaling where they were 

going. 

We are going to essentially eventually meld the individual and 

small group markets. We are going to build on what we have now. 

We are not going to blow up the employer system. We are not going 

to do away with Medicaid. In fact, we are going to strengthen both. 

But we are going to move into a world where we absolutely outlaw discrimination based on health, and we encourage people to 

buy and we are going to give them incentives to buy. We are going 

to give them subsidies to buy. But we are going to require them 

to fulfill their part of the bargain, which is to make sure they 

achieve the level of coverage so that they can get the care they 

need so there are no more free riders. 

They exempted people they thought couldn’t afford it. So they 

were mindful of the affordability. That is a very small number in 

Massachusetts, but it is nevertheless a very important principle. 

Then I would say the final thing they did was they made it clear 

that we are going to have a penalty on not buying coverage, but 

we are going to phase it in. So we are going to take Janet’s point, 

you can’t move there in a very fast way. You have to be cognizant 

of human nature. At the same time, made it very clear where they 

are going, and I think it is a very interesting model. 

Senator CASEY. So you think it is readily applicable to what we 

are trying to do here? 

Mr. NICHOLS. I think all of those things are readily applicable. 

The details will certainly have to be different. Massachusetts is not 

Utah, or Pennsylvania, or Iowa, so you are going to have a little 

bit of different things on the ground in those places. 

But at a minimum, that structure is a very good structure to go 

with, yes. 

Senator CASEY. Thank you. 

Anybody else? 

Ms. PRAEGER. Senator, I think the healthcare costs will need to 

be addressed because I do think it is becoming increasingly more 

expensive. So I think any reform again has to address the underlying increasing costs of just the healthcare delivery system. 

I want to re-emphasize also the point about public health. I think 

public health is a critical component. We all have the opportunity 

in our States to advocate for clean water, clean air, healthy schools, 

and healthy environments for our schools. We need to partner with 

the schools to get junk food out of school cafeterias and out of the 

vending machines. 

There are just a lot of things that we can do from a public health 

standpoint that I think will serve us well for the next several generations. 

Senator CASEY. I know we have to wrap up. Anyone else who 

didn’t have a chance here? Yes? 

Ms. IGNAGNI. Senator, I think that I agree with my colleagues, 

the observations they have made. This point about proceeding to 

line up cost containment and universal access together. 

I don’t think they did enough in Massachusetts early on, and I 

think that most people there would agree with that now, and they 

are trying to catch up and figure out what to do. So that is point 

89 

No. 1. This is the hardest thing to do, to actually achieve consensus 

on cost containment. 

The second thing is to the extent that you have the kinds of 

rules, aggressive rules and robust rules that everyone on the panel 

is talking about, to what extent do you need purchasing through 

a connector, or is that connector there to supervise, provide information about plan selection, track subsidies, et cetera, et cetera? 

I think there will be a lot of important discussion around that 

principle. 

Senator CASEY. Well, unless anyone else—Ms. Pollitz. 

Ms. POLLITZ. I would just add I am not sure if I am disagreeing 

with Karen or I misheard her, but I agree that you need to address 

getting everybody coverage and addressing rising costs. But I 

wouldn’t, I absolutely wouldn’t urge that you wait to cover everybody until you have figured out how to cover the costs. 

I think we have been doing that for decades, and we need to 

cover everybody now because people are in need, and we do need 

to figure out how to control costs. I think, as Sandy Praeger said 

earlier, that will be easier to do once we have everybody invested 

in the system. 

Senator CASEY. Well, thanks, everyone. 

I don’t have the gavel near me, but I am going to bang the gavel. 

Hearing adjourned. 

[Additional material follows.] 

90 

ADDITIONAL MATERIAL 

PREPARED STATEMENT OF SENATOR ENZI

Mr. Chairman, I want to take a few minutes to express my very 

sincere gratitude to Senator Bingaman and his staff. They have 

worked very closely with my office to plan today’s roundtable as 

well as set an agenda for two additional roundtables in the near 

future. Senators Kennedy and Baucus have laid out very aggressive schedules for moving forward on health care reform legislation 

and Senator Bingaman’s job of working on the coverage piece is so 

vital to the larger health reform debate. 

I also appreciate how much Senator Bingaman’s staff worked 

with my staff to come up with the list of witnesses before us today. 

I think we have a stellar panel and I am really looking forward to 

hearing from our experts and getting into the details of insurance 

market reforms. I have said many times how helpful it is to hear 

from people that have actually enacted policies in the real world 

who can tell us what they did right, what they did wrong, and how 

they would improve things moving forward. I hope the members of 

this committee can learn from our witnesses and use that knowledge to better inform their decisions on health care reform legislation. 

I travel back to Wyoming almost every weekend and lately I 

have been really worried by what I am hearing. Most people think 

that once Congress moves forward on health care reform, their 

health care will be free. This worries me; nothing is free. The humorist and writer P.J. O’Rourke once noted, ‘‘If you think health 

care is expensive now, wait until you see what it costs when it’s 

free.’’ 

Even more disturbing than misunderstandings outside of Washington about free health care are the reports of the hospitals, physicians, drug manufacturers, health plans, and others who don’t 

think that Congress should pay for health care reform. They see a 

price tag of over a trillion dollars and say, charge it. This thoughtless disregard for the long-term economic health of our Nation, and 

for the future of our children and grandchildren, is reckless and irresponsible. 

These health care stakeholders all seem determined to ignore the 

fundamental problem that plagues the U.S. health care system. 

The truly difficult challenge that Congress must address is how to 

get control of America’s exploding health care costs. Simply throwing more money at the problem is not a solution. 

The fact is health care isn’t free and there will be tradeoffs with 

any policy we devise. Insurance reforms all result in tradeoffs. Rating rules are a perfect example. We must be cautious when considering reforms that may result in unaffordable prices for our young 

and healthy—we need those folks to participate because they help 

keep costs down. However, ensuring access to quality insurance for 

those struggling with health conditions is, I hope, a priority for all 

of us. Our job here is to find the sweet spot that accomplishes our 

goals but doesn’t create a disruption in our insurance marketplace. 

I have a few ideas about ways we can reduce costs—some of 

them pertain to getting better value out of every dollar we spend 

on health care by reforming the health care delivery system. Other 

91 

ideas include making the health insurance market function more 

efficiently by encouraging insurance companies to compete and 

offer the best plans at the most affordable prices. I look forward to 

hearing suggestions from our witnesses about ways to reform the 

health insurance market. 

While it is critical that we get the policy of insurance market reform right, I would be remiss if I didn’t at least mention the perils 

of process. Without the right process, we can’t move forward on the 

best health care reforms for the American people. The first real 

test of whether the new Administration and Senate leaders are serious about developing bipartisan solutions will be how the upcoming budget addresses healthcare. Reconciliation cuts off most avenues for real debate in the Senate and is intended primarily as a 

tool to reduce the deficit. If those in the Majority attempt to use 

the budget reconciliation process to jam health care reform through 

the Senate, they will be sending a clear signal that they are not 

interested in a truly bipartisan effort. I urge President Obama to 

stand by his promise to work on health care in a bipartisan way 

by pledging that he will not support passing reform through reconciliation. 

With that, I will look to our witnesses to make recommendations 

for how we should shape the policies of health care reform. Mr. 

Chairman, thank you again for holding this roundtable today. 

AMERICA’S HEALTH INSURANCE PLANS (AHIP), 

WASHINGTON, DC 20004, 

March 27, 2009. 

Hon. JEFF BINGAMAN, 

Hon. ORRIN HATCH, 

Senate Committee on the Budget, 

U.S. Senate, 

Washington, DC 20510. 

Re: Response to Senator Hatch’s question submitted for the record regarding the 

implementation of an enforceable individual mandate. 

DEAR SENATORS BINGAMAN AND HATCH: On behalf of America’s Health Insurance 

Plans (AHIP), I appreciated the opportunity to testify and participate in the roundtable discussion hosted by the Senate Committee on Health, Education, Labor and 

Pensions on March 24, 2009. AHIP is the national association representing approximately 1,300 health insurance plans that provide coverage to more than 200 million 

Americans. Our members offer a broad range of health insurance products in the 

commercial marketplace and also have demonstrated a strong commitment to participation in public programs. 

We are responding to a question Senator Hatch submitted for the record regarding how the panelists would construct an individual mandate to purchase health insurance coverage. AHIP’s Board of Directors is continuing to examine this issue as 

a part of our effort to bring tangible strategies to the discussion that will address 

specific problems in the health insurance market. In response to Senator Hatch’s 

question, we offer one potential method to construct an enforceable mandate for individuals to obtain and maintain coverage. 

We believe that an enforceable individual mandate is an essential reform to bring 

everyone into the system. An individual mandate combined with other market reforms, including guarantee-issue of coverage and removing health status as an allowable rating factor in the individual market, are important building blocks in constructing a 21st century health care system. Achieving universal participation with 

an individual mandate will require specific attention to the mechanisms for making 

the mandate enforceable and will require coordinated action at multiple levels of 

government. 

First, an effective individual mandate must be supported with premium assistance for lower-income individuals and working families. Refundable, advanceable 

92 

tax credits should be available on a sliding scale basis for those earning less than 

400 percent of the Federal Poverty Level (FPL). 

Second, individuals need access to affordable, quality health insurance. To this 

end, AHIP supports the ability for health insurance plans to establish ‘‘essential 

benefits plans’’ that are available nationwide, provide coverage for prevention and 

wellness as well as acute and chronic care, and are not subject to varying and conflicting State benefit mandates. The coverage under an essential benefit plan must 

be at least actuarially equivalent to the minimum Federal standards for a high-deductible health plan sold in connection with a health savings account, along with 

the opportunity to include enhancements such as wellness programs, preventive 

care, and disease management. 

Third, the verification and enforcement of an individual mandate may be achieved 

through the Federal tax code. The Federal tax return could ask for any applicable 

information, including affordability or financial hardship standards, the availability 

of employer coverage, and eligibility for government subsidies. Individuals would 

then indicate their insurance status over the course of the year. A financial penalty 

should be imposed for all breaks in coverage or an allowance could be made for 

short breaks in coverage. Such penalty could equal 100 percent of the premium for 

the essential benefits plan offered in the individual’s geographic area. The financial 

disincentive must be close enough to the actual cost of coverage in order to deter 

individuals from foregoing health insurance coverage until a significant medical 

need arises. 

Last, individuals should have the opportunity to enroll in health insurance coverage during an initial open enrollment period (after enactment of health care reform) without the imposition of a preexisting condition exclusion. Individuals should 

face disincentives if they elect health insurance coverage after this initial open enrollment or after a significant break in coverage. 

We appreciate the opportunity to offer suggestions regarding the implementation 

of an enforceable individual mandate. AHIP believes that health care reform will 

only occur when individuals and stakeholders bring concrete solutions to the table, 

and we are doing our part to advance new strategies. 

Sincerely, 

KAREN IGNAGNI, 

President and CEO. 

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC), 

WASHINGTON, DC 20001–1509, 

April 20, 2009. 

Hon. ORRIN HATCH, 

U.S. Senate, 

Washington, DC 20510. 

DEAR SENATOR HATCH: During the HELP Committee Roundtable Hearing on 

health insurance reform on Tuesday, March 24th, you asked each witness to describe an ‘‘enforceable’’ individual mandate. Since time was not sufficient for a 

verbal response, I am happy to provide my answer via this letter. 

To begin, let me say that as a State regulator I can see great benefit to an effective individual mandate. If our goal, as a nation, is to make quality health care accessible and affordable to all Americans, then making comprehensive insurance coverage available to every American is critical. However, if only those in need of medical care purchase insurance, then the insurance market could become 

unsustainable. An individual mandate that ensures the young and healthy participate in the marketplace will allow the risk to be spread over a broader population 

and stabilize the insurance pool. 

This, of course, brings us to your question, ‘‘What is an enforceable mandate?’’ 

State regulators look at this question from two different perspectives. 

First, an enforceable mandate must have sufficient penalties and oversight to ensure compliance. As has been seen with some automobile insurance laws, low penalties and/or lax oversight can lead to low compliance. The penalties must be high 

enough to make purchasing insurance the better option and there must be constant 

oversight to identify those who are noncompliant and ensure that people remain 

compliant. We can look to States’ experience with auto insurance, and to Massachusetts with health insurance, to craft an effective enforcement plan. 

Second, an enforceable mandate must provide affordable options so people can 

comply with the mandate. If consumers are required to purchase a ‘‘Cadillac’’ plan 

that they cannot afford, and subsidies are insufficient, then people will be forced 

93 

into noncompliance. This is probably the trickiest, and certainly the most expensive, 

part of developing an enforceable mandate. Some flexibility at the State level may 

be the best approach. 

As I stated in my testimony, years have been spent talking about broad health 

care reforms that will ensure that all Americans have access to affordable health 

insurance coverage and the peace of mind that goes with it. Action is long overdue 

and State regulators stand ready to assist Federal lawmakers in whatever way we 

can. The NAIC encourages Congress to work with States and learn from past reforms. 

Together, we can implement successful initiatives that will truly protect and assist 

all consumers. 

Sincerely, 

SANDY PRAEGER, Chair, 

NAIC Health Insurance & Managed Care Committee, 

Commissioner of Insurance, State of Kansas. 

RESPONSE TO QUESTION OF SENATOR HATCH BY KATHERINE BAICKER, PH.D. 

According to a study published in 2007 by the National Bureau of Economic Re- search, an employer mandate of $9,000 for family coverage would reduce wages by 

$3 per hour and cause 224,000 workers to lose their jobs. 

Your colleague, Dr. Chandra, himself in the past on employer mandates has stated that ‘‘The populist view is this will only come out of profits. But, ultimately, the 

money will come out of wages. And, worse, for some people, it can’t come out of 

wages.’’ 

Question. What are your thoughts on imposing an employer mandate during current conditions on your labor sector and economy in general? 

Answer. The effectiveness of a mandate depends both on the ability to enforce it 

and on the size of penalty imposed. The ability to enforce requires the existence of 

and access to administrative data on compliance (such as centralized data from insurers). The size of the penalty depends on the dollar value of the fine (assuming 

the penalty is a fine and not a jail sentence) and, just as importantly, the frequency 

with which it is imposed. A mandate that is ‘‘enforceable’’ but rarely enforced would 

not likely meet with universal compliance. 

RESPONSE TO QUESTIONS OF SENATOR HATCH BY RONALD A. WILLIAMS

Question 1. Our goal in health reform is to provide affordable and meaningful 

health insurance for all Americans. Assuming this is our goal, many health policy 

experts have identified significant problems in the American health insurance markets, particularly in the small group and individual market. As a result, they have 

proposed significant health insurance reforms. What are the most critical challenges 

we face in American health insurance markets (if any) and what are the most critical reforms needed to address these challenges (if any)? Are there any reforms that 

have been discussed that concern you? 

CRITICAL CHALLENGES FACING HEALTH INSURANCE MARKETS

Answer 1. There are a number of critical challenges we face in American health 

insurance markets: 

• Lack of universal coverage creates an expensive, inefficient system. Individuals 

often have trouble accessing insurance coverage in the individual market. Insurers 

who offer products in the individual market face adverse selection—wherein only 

those who are sick or anticipate needing expensive medical treatment choose to buy 

insurance. For these people the costs of the medical care they need can greatly exceed the costs of insurance premiums they would pay. In other words, those who 

join the system late are not purchasing ‘‘health insurance,’’ but rather ‘‘pre-paid 

health care,’’ which is something health insurers cannot provide in an economically 

sustainable way. Therefore, insurers need to employ preexisting condition exclusions 

and medical underwriting to encourage people to become and stay insured even 

when they are not sick, keep the population of insureds balanced between sick and 

healthy people, and keep premium costs stable. As a result, high-risk individuals 

who are not covered through the employer-based system face challenges accessing 

individual insurance in many States. In those States where they do not have trouble 

accessing insurance—States with guaranteed issue and community rating— 

healthier individuals often go uninsured as they are reluctant to purchase coverage 

before they need it because of its high cost. The differences in premiums for nearly 

identical products in the neighboring States of New Jersey (community rating and 

94 

1 Based on comparison of quotes derived on www.ehealthinsurance.com on July 11, 2008 for 

an August 1, 2008 start date. The percentage range is based on the premium in Pennsylvania 

reflecting 100 percent to 150 percent of the standard (quoted) rate, depending on medical underwriting. 2Families USA, ‘‘Paying a Premium: The Added Cost of Care for the Uninsured.’’ Publication 

No. 05–101, June 2005. Available at www.familiesusa.org. 3PriceWaterhouseCoopers, ‘‘The Factors Fueling Rising Healthcare Costs 2008.’’ Prepared for 

America’s Health Insurance Plans, December 2008. 

guaranteed issue) and Pennsylvania (medical underwriting) is illustrative, with premiums for a 35 year-old male purchasing a standard HMO product being 158 percent to 368 percent higher in New Jersey than in Pennsylvania.1

With people unwilling or unable to participate in the individual market, we have 

a universally acknowledged access problem that affects both the uninsured and the 

insured. The uninsured face decreased access to health care and expensive medical 

bills for the care they do receive, while the average insured family pays an additional $922 in premiums (or 8 percent of total premiums paid) each year as a result 

of cost-shifting from care being provided to the uninsured.2 This does not even consider the cost-shifting from government programs. • Chronic illness can be exacerbated, and its expense multiplied, by delays in care. 

Uninsured and under-insured individuals with chronic illnesses often wait until an 

acute episode to seek medical care or insurance coverage, as discussed above. This 

increases costs for everyone in the system and results in poor quality and possibly 

worse outcomes for those who are forced to wait. Greater attention must be placed 

on prevention, wellness and chronic disease management, and on getting these people early and continuous access to the health care insurance system. • Cost inflation results in part from misaligned incentives in our payment system. 

The current system is filled with incentives to offer more services, typically failing 

to discriminate between services with high and low value. Health insurance premiums directly reflect the underlying costs of health care, with premiums rising because of increasing doctor, hospital, drug and other medical costs. In fact, in 2007, 

health care costs grew at an annual rate of 6.4 percent while the cost of health insurance premiums increased at an annual rate of 6.1 percent.3 If we want to ensure 

the affordability of coverage, we have to address health care costs, and without effective payment reform the cost of health care will continue to grow. • Divergent State laws and regulations add complexity that increases costs. The 

complex and duplicative web of 50 State insurance laws and regulations is administratively burdensome and unnecessarily increases healthcare costs and premiums 

for health insurance. 

TYPES OF REFORMS NEEDED TO ADDRESS CHALLENGES

• Individual Mandate. We at Aetna, believe that an enforceable individual coverage requirement is the key to addressing our country’s access challenge because 

it allows us to bring everybody—both healthy and unhealthy—into the insurance 

pool. By using an individual coverage requirement to address the challenge of adverse selection, we can transform our system into one where private insurance is 

provided on a guaranteed issue basis with no preexisting condition exclusions and 

a rating system that does not include health status. 

• Subsidies. We believe that an individual coverage requirement must be coupled 

with sliding scale subsidies to ensure that income is not a barrier for any individual’s fulfillment of this requirement. In addition, we must offer tax credits for small 

businesses to encourage them to offer (and subsidize) employee coverage. 

• Health Insurance Exchange and Federal Charter. We believe that we must create a rational regulatory structure that is conducive to creating affordable coverage 

options. Our system would be best served by a Federal regulatory structure for 

health insurance, with regulation enforced by State insurance departments. A national entity would need to determine a standard benefit package and determine 

what types of actuarially equivalent plans could be offered. Under a national framework, plans could be offered through a national exchange, or through State or regional insurance exchanges that create new pooling mechanisms. At the very least, 

we would encourage greater uniformity of State laws and regulations and the development of a new optional Federal charter. Today, insurers with a multi-state presence face costly administrative burdens to comply with divergent State laws and 

regulations, and these higher administrative costs are passed onto the market at 

large through higher insurance premiums. 

• Payment Reform. Payment reform will also be a critical tool to improve quality 

and bend the cost curve. The traditional fee-for-service payment structure often rewards physicians and hospitals for the volume of services they deliver rather than 

95 

4Modem Healthcare, ‘‘By the Numbers.’’ 2006–2007 Edition. December 17, 2006, p66. 

5Milliman, Hospital & Physician Cost Shift, December 2008: figures reflect 2006 and 2007 

data. 

the value or quality of care they provide. Aetna supports transforming the payment 

system into one that aligns provider reimbursement incentives with the pursuit of 

high-quality outcomes for patients. We need a payment system that works for patients, bringing them value-high quality at the right cost. Reform also needs to focus 

on promoting patient-centered care that integrates the multiple aspects of the 

health care delivery system and shifts the model from episodic, acute care to comprehensive, evidence-based care. 

• Health Information Technology. The use of health information technology (HIT) 

will not only be a powerful tool to bend the cost curve, but will also help address 

pervasive quality issues. The United States continues to lag behind its peers globally in embracing HIT solutions necessary to yield cost reductions and quality gains. 

Aetna continues to strongly support the President’s initiatives to accelerate HIT 

adoption and commends the Congress’ recent work to invest up to $22 billion to promote the use of electronic health records that have clinical decision support capacity 

as recommended by the Institute of Medicine. If 90 percent of all providers in the 

United States were using EMRs, we could see savings of about $77 billion within 

15 years.4 With the advent of sophisticated clinical decision support capabilities, 

those savings, coupled with lives saved, could exceed current expectations. At Aetna, 

we have made significant investments in health information technology, and we are 

not finished. Our investments are designed to help patients and doctors take action 

on their health conditions and help patients get the standard of care they expect 

and require. 

TYPES OF REFORMS THAT RAISE CONCERNS

• Public Plan. First and foremost, insurers bring innovation, value and choices, 

allowing individuals to choose a tailored approach for their own needs that a onesize-fits-all public plan could just not achieve. Health care is one area in which we 

must leverage the agility of the private sector to provide continued innovation and 

customization of health care plans. We believe that this incentive to innovate will 

be stifled if a public plan is put into place. 

A new public plan could also have negative repercussions for those who are already privately insured. A public plan would most likely employ the payment rates 

used in Medicare, which are far lower than the rates paid by private payers. In fact, 

the average family of four with private insurance spends an additional $1,788 on 

health care each year because of Medicare and Medicaid underpayments to providers that result in cost-shifting to the privately insured. On an aggregate level, 

commercial payers incur approximately $89 billion more in costs than they would 

if public and private payers all paid equivalent rates.5 In other words, while the 

government saves money with underpayments, the 200 million Americans with private insurance are paying for it. Expanding the use of low public payment rates 

would mean expanded cost-shifting for our health care system, with providers charging higher rates to privately insured individuals, ultimately raising their insurance 

premiums and decreasing the affordability of their insurance. Moreover, a public 

plan is not the most direct or precise policy intervention to reduce significantly the 

number of uninsured. The Massachusetts health reform plan, for example, does not 

include a public plan and has achieved near-universal coverage. 

Finally, there are some who argue that a public plan is the only way to ensure 

access to coverage for all Americans, regardless of health status. However, it is important to remember that in the absence of an individual coverage requirement, a 

public plan would face the exact same selection problems that private plans face 

today. As such, a public plan is not the silver bullet for the guaranteed issue of 

high-quality coverage. With the right regulations in place, however, private plans 

can provide guaranteed access to coverage for all Americans, while fostering innovation in the realms of wellness and chronic disease management and providing a 

suite of coverage options designed to respond to the unique needs of different people. 

A new public plan is not only an unnecessary use of public dollars, but also not the 

most effective policy response to the problem at hand. 

• Elimination of Employer-Sponsored Health Insurance. We should avoid systemic 

disruption to the 177 million Americans who have employer-sponsored coverage, and 

we should build upon the strengths and innovations of private health coverage for 

other populations. Many Americans are satisfied with their current employer-sponsored coverage. According to a survey performed by the National Business Group 

on Health, 67 percent of employees believe their health plan is excellent or very 

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6 National Business Group on Health, ‘‘Employer-Based Health Benefits Survey.’’ April 2007. 

http://vww.businessgrouphealth.org/pressrelease.cfm?ID-87 7Pickreign, Jeremy et al. ‘‘Employer Health Benefits 2008 Annual Survey.’’ Kaiser Family 

Foundation and Health Research and Education Trust. September 2008. 

good, and 75 percent consider a health plan to be the most important employee benefit. Eighty-three percent of employees surveyed would rather see their salary or retirement benefits reduced than their health benefits if an employer needed to reduce 

their total compensation.6 Among workers who are offered health insurance coverage, 82 percent elect to participate in their employers’ health plans.7 Instead of 

disrupting a system that works for many individuals, it would be more effective to 

explore ways to extend coverage to those currently not in the system. 

Question 2. Individual health insurance markets are regulated both at the State 

level and Federal level. Should regulations be reformed at the national level, State 

level, or some hybrid? Additionally, if you think that regulation should occur to 

some degree at the national level, is it necessary for Congress to consider a phasedin approach or some other mechanism to address the diversity of initial regulatory 

conditions in each State? 

Answer 2. We must create a rational regulatory structure that is conducive to creating affordable coverage options. Today’s system of 50 divergent sets of State regulation imposes unnecessary and costly administrative burdens on our existing system. As such, I believe our system would be best served by a Federal regulatory 

structure for health insurance, with regulation enforced by State insurance departments. Given the current diversity in State regulation, a phased approach will be 

necessary to provide Americans with a seamless transition over to a new system. 

As we make the system more accessible to all Americans, it is important to consider the 18 million people currently enrolled in the individual market whose initial 

premiums are based on health status. The transformation to the new system would 

result in a larger pool that would include previously uninsured, high risk people 

who, in a community rated system, would likely increase premiums for the already 

insured persons. 

Question 3. Thus far, Massachusetts is the only State to successfully achieve a 

near universal expansion of health insurance. Before implementing the following reforms, Massachusetts had already made significant reforms to its insurance market 

and stood to lose Federal Medicaid dollars if they did not enact additional reforms. 

The 2006 Massachusetts insurance reforms focused on: (1) developing a statewide 

exchange that pools the small group and individual markets, (2) developing a minimum coverage standard, (3) mandating that all individuals secure health insurance, and (4) including subsidies for low-income individuals. Do you believe the 

Massachusetts’ reform could serve as a model for national reform? What aspects of 

the reform are most promising (if any) and what aspects raise the most significant 

concerns (if any)? 

GENERAL COMMENTS ABOUT MASSACHUSETTS HEALTH REFORM

Answer 3. One of the key issues in insurance reform is determining how to disperse risk across a group of people. The Massachusetts health reform plan has demonstrated that creating an insurance exchange is an effective mechanism to spread 

risk while ensuring that everyone has access to coverage. The Massachusetts Connector creates a level playing field for offering and purchasing health insurance for 

those unable to access coverage through an employer. The exchange also offers 

many of the same efficiencies as a large group market. 

While the basic components of the Massachusetts model could serve as a national 

model for health reform, there are several key issues that should be addressed before implementing this type of plan at a Federal level. In particular, we need to fix 

our current volume-based payment system and address the growth of health care 

costs. Not doing so will greatly impact affordability of health insurance and sustainability of efforts to achieve universal coverage. In addition, increasing the role and 

supply of primary care providers will be essential. 

KEY COMPONENTS OF MASSACHUSETTS’ HEALTH REFORM PLAN

The Connector Exchange 

What works well: The Connector creates a centralized location for individuals 

and employees of small businesses to purchase health insurance. This type of insurance pooling also helps to expand the risk across these different market segments. 

Additionally, the Connector does not have a public plan. 

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Opportunities for change: The Connector limits participation to six insurers 

who must bid for a spot on the exchange. In any future adaptation of the Massachusetts plan, we believe we must provide for open competition, allowing consumers to 

be the true judges of ‘‘winners’’ and ‘‘losers’’ among companies providing insurance 

coverage. 

Individual Mandate 

What works well: Requiring individuals to purchase health insurance is critical 

to reforming the healthcare system. An individual mandate is an effective method 

of ensuring all people—healthy and sick—are included in the system, thus avoiding 

adverse selection where people only seek insurance when they need it and when 

their health care costs are higher. Massachusetts redirected money previously spent 

on providing care to subsidize new insurance options for the uninsured. 

Opportunities for change: In Massachusetts, the individual mandate was not 

enforceable until 2008, 2 years into the program. For an individual coverage requirement to be effective, it has to be enforced as early as possible. Also, if Congress 

phases in an individual mandate nationally, effective risk adjustment mechanisms 

must be explored to help offset the risk of adverse selection and keep individuals’ 

premiums affordable. 

Insurance Regulation 

What works well: Even before Massachusetts’ health reform plan was enacted, 

the State required guaranteed issue and renewal, prohibited medical underwriting, 

limited preexisting condition exclusions and had modified community rating rules. 

By adding an individual mandate and subsidies to help lower-income people afford 

coverage, the Massachusetts reform plan stabilized the market and the exchange 

more effectively pooled risk than the market did prior to reform. 

Opportunities for change: Particularly if there is a phase-in of the individual 

mandate, there needs to be risk adjustment provisions to help offset the costs of adverse selection and keep the system and individual premiums stable. Importantly, 

a well-enforced individual coverage requirement with risk adjustment or reimbursement provisions will enable insurers to provide access to insurance on a guaranteed 

issue basis without exclusions for preexisting condition or rating on the basis of 

health status, similar to the regulation in place in Massachusetts. 

Premium Assistance 

What works well: The sliding scale subsidies available for those under 300 percent FPL is an effective method of ensuring low-income individuals and families can 

purchase insurance. 

Opportunities for change: Many of the insurance products available are still 

unaffordable for those under 400 percent FPL. Insurance providers should be given 

the flexibility to create a variety of benefit packages that meet consumer’s expectations. Available subsidies should be generous enough to allow low-income individuals and families to purchase insurance. 

Financing and Cost-Containment 

What works well: Creating viable opportunities for the uninsured to access 

health insurance is a start to reducing the cost of providing care to individuals currently accessing the healthcare system at expensive points of entry (e.g. emergency 

rooms) and with potentially untreated and complicated medical problems. 

Opportunities for change: Massachusetts’ health reform has done little to address the issue of cost containment. A Massachusetts-like program implemented at 

a Federal level must include payment reform and further investments in HIT and 

comparative effectiveness to bend the cost curve. Without changes to improve the 

value of healthcare, reform efforts will quickly become unaffordable. 

Benefit Package 

What works well: Massachusetts established actuarial equivalence for the plans 

offered through the Connector, allowing insurers the flexibility to design their benefits within a set of requirements. 

Opportunities for change: The minimum benefit package levels under the Massachusetts plan are very comprehensive, requiring people to purchase plans that 

may be richer than what they truly need. It would be more cost-effective for minimum benefits levels to be set at a more modest level (e.g., only cover catastrophic 

and preventive services), allowing individuals to purchase other coverage as they see 

fit. 

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Expanding Public Programs 

What works well: Massachusetts expanded Medicaid eligibility to all those 

under 100 percent FPL. This not only expands coverage to a vulnerable population, 

but ensures that cost-sharing is not a deterrent for care for low-income citizens. 

Aetna supports this expansion of Medicaid, as those living beneath the Federal poverty level would be very unlikely to be able to pay for or access another source of 

insurance coverage. 

Question 4. How should an individual coverage requirement be enforced? 

Answer 4. Aetna believes an individual coverage requirement should be enforced 

through the tax system, with verification conducted through annual income tax 

forms. Under a prospective enforcement system, individuals would be expected to 

provide proof of government or private coverage—or demonstration of financial 

hardship, the standards for which would need to be determined in advance. Those 

individuals not complying with the individual coverage requirement would need to 

pay a penalty equivalent to the cost of an essential benefits plan in their geographic 

area. With a penalty set at this level, there would be a lower incentive for noncompliance, with most individuals likely calculating that their dollars are better 

spent on a health insurance policy than on an equivalent penalty. The penalty could 

be delivered either through reduction of the individual’s tax refund or as an additional tax liability. 

Enrollment in insurance coverage should also be facilitated at the point of health 

care service, with uninsured individuals enrolled in either a government program, 

if eligible, or in a basic essential benefits package. 

RESPONSE TO QUESTION OF SENATOR HATCH BY LEN M. NICHOLS, PH.D. 

Question. What is an enforceable individual mandate? 

Answer. Considerable evidence suggests that an individual mandate is enforceable. This is fortunate because an individual purchase requirement is absolutely 

necessary to make private insurance markets work for all Americans. Insurers must 

be required to sell to all comers regardless of health status. However, insurers must 

also be assured they will get to insure the entire population, not just the sick, to 

make the market work efficiently and fairly. Relevant research and our moral compass also tell us that the first step toward making a mandate enforceable is making 

the cost of compliance affordable. Therefore, in order to enforce a mandate we must 

first ensure that health insurance is accessible and affordable for all. 

The key to an enforceable individual mandate is combining and integrating a 

number of approaches. Enforcement methods in a U.S. context should include: 

• Information sharing: Electronic information sharing between citizens and the 

institutions they come in contact with, including: insurance marketplace managers, 

(i.e., those who administer enrollment for the ‘‘exchange’’), employers, health providers, health insurers, schools, department of motor vehicles, and government 

agencies. This does not mean turning schools, hospitals, etc., into enforcers. These 

institutions need never be asked to deny care or service. But they would be asked 

to inform the authority responsible for enrollment records that a particular individual does not appear to be insured as of a particular date. The uninsured person 

would then be contacted by the exchange administrator’s office and either enrolled 

in a plan of the enrollee’s choice or possibly levied with a penalty and/or a requirement to pay back premiums. 

We would need to allow insurance administrators to systematically review and 

monitor enrollment. Increased information sharing of this sort would also help identify people who are eligible for public or subsidized coverage but who are not enrolled. Information sharing has proved particularly effective in raising the rate of 

compliance with car insurance mandates. 

POLICY SPOTLIGHT: GEORGIA CAR INSURANCE

In 2001, Georgia’s uninsured motorist rate was 20 percent. Legislators recognized 

that individuals were purchasing car insurance in order to register their vehicle, but 

were cancelling their insurance when the registration process was completed. 

To address this problem, Georgia requires all insurers to report policy enrollments 

and cancellations to a central database. This information is then cross-referenced 

with the car registration information. If after 30 days the system finds a motorist 

with a cancellation entry but without a new policy enrollment, a set of penalties (including fines and registration suspension) is put in motion. This process reduced 

Georgia’s uninsured motorist rate from 20 percent to 2 percent in less than 2 years. 

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• Proof of insurance on tax returns: Many uninsured Americans could be 

identified through the tax system. While not all low-income individuals file tax returns, this could be a useful mechanism to identify middle- and high-income uninsured Americans. Almost 20 percent of uncompensated care in the U.S. is delivered 

to people who make more than four times the Federal poverty level. 

• Auto-enrollment/insurance checks at point of service: Individuals who do 

not sign up for their own insurance (or if eligible, do enroll in a government program) would be automatically enrolled in a health plan by an insurance administrator. When they seek medical care from a doctor, hospital or clinic, their insurance 

status would be checked. Unpaid premiums would be reported to the insurance exchange administrator. A payment schedule would be identified, based on the uninsured person’s income and ability to pay, to pay the overdue bills. 

The idea is to create a seamless system and normative expectation that all citizens would have and maintain coverage. The net result of these information conduits is to make sure each person/family pays their fair share and no more. We do 

not need nor recommend criminal penalties. Monetary penalties should suffice. Remember, most people buy insurance today without a mandate, and the vast majority 

of the uninsured are in that situation because they cannot afford health insurance. 

Most uninsured are likely to buy as soon as we make it accessible and affordable. 

No one suggests an individual mandate because they want to ‘‘make’’ people buy 

insurance. When combined with insurance markets and subsidies, an individual requirement to purchase coverage will actually help the market function more efficiently and fairly. In addition, a more sustainable health system will be a shared 

responsibility between individuals, employers, providers, and governments. A requirement to purchase or enroll in coverage represents one part of an individual’s 

responsibility to the larger community. 

[Whereupon, at 12:24 p.m., the hearing was adjourned.] 

Æ