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HEARING ON HEALTH REFORM IN THE 21st CENTURY:        EMPLOYER-SPONSORED INSURANCE  

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

APRIL 29, 2009

SERIAL 111-17

Printed for the use of the Committee on Ways and Means

COMMITTEE ON WAYS AND MEANSCHARLES B. RANGEL,       New York, Chairman
FORTNEY PETE STARK, CALIFORNIASANDER M.       LEVIN, MICHIGANJIM MCDERMOTT, WASHINGTONJOHN LEWIS,       GEORGIARICHARD E. NEAL, MASSACHUSETTSJOHN S. TANNER,       TENNESSEEXAVIER BECERRA, CALIFORNIALLOYD DOGGETT, TEXASEARL       POMEROY, NORTH DAKOTAMIKE THOMPSON, CALIFORNIAJOHN B. LARSON,       CONNECTICUTEARL BLUMENAUER, OREGONRON KIND, WISCONSINBILL       PASCRELL, JR., NEW JERSEYSHELLEY BERKLEY, NEVADAJOSEPH CROWLEY,       NEW YORKCHRIS VAN HOLLEN, MARYLANDKENDRICK B. MEEK,       FLORIDAALLYSON Y. SCHWARTZ, PENNSYLVANIAARTUR DAVIS,       ALABAMADANNY K. DAVIS, ILLINOISBOB ETHERIDGE, NORTH       CAROLINALINDA T. SÁNCHEZ, CALIFORNIABRIAN HIGGINS, NEW       YORKJOHN A. YARMUTH, KENTUCKYDAVE CAMP, MICHIGANWALLY HERGER,       CALIFORNIASAM JOHNSON, TEXASKEVIN BRADY, TEXASPAUL RYAN,       WISCONSINERIC CANTOR, VIRGINIAJOHN LINDER, GEORGIADEVIN NUNES,       CALIFORNIAPATRICK J. TIBERI, OHIOGINNY BROWN-WAITE,       FLORIDAGEOFF DAVIS, KENTUCKYDAVID G. REICHERT,       WASHINGTONCHARLES W. BOUSTANY, JR., LOUISIANADEAN HELLER,       NEVADAPETER J. ROSKAM, ILLINOIS
Janice Mays, Chief Counsel and Staff       DirectorJon Traub, Minority Staff Director
Pursuant to clause 2(e)(4) of Rule XI of       the Rules of the House, public hearing records of the Committee on Ways       and Means are also published in electronic form. The printed hearing       record remains the official version. Because electronic submissions are       used to prepare both printed and electronic versions of the hearing       record, the process of converting between various electronic formats may       introduce unintentional errors or omissions. Such occurrences are inherent       in the current publication process and should diminish as the process is       further refined.C O N T E N T S
Advisory of April 22 announcing the hearing

WITNESSES

Elise Gould, Ph.D., M.P.Aff., Director of Health Policy Research, Economic Policy Institute

J. Randall MacDonald, Senior Vice President for Human Resources, IBM Corporation

Kelly Conklin Owner, Foley-Waite Associates, Bloomfield, New Jersey

Denny Dennis, Senior Research Fellow, NFIB Research Foundation

John Sheils, Senior Vice President, The Lewin Group, Falls Church, Virginia

Gerald Shea, Special Assistant to the President, AFL-CIO

SUBMISSIONS FOR THE RECORD

Joe Solmonese, Statement

Judy Waxman, Statement

National Small Business Association, Letter

HEARING ON HEALTH REFORM IN THE 21st CENTURY:  EMPLOYER-SPONSORED INSURANCE 

Wednesday, April 29, 2009U.S. House of Representatives,Committee on Ways and Means,Washington, D.C. 

The committee met, pursuant to call, at 10:05 a.m., in Room 1100, Longworth House Office Building, Hon. Charles B. Rangel [Chairman of the Committee] presiding.

[The advisory of the hearing follows:]

Chairman RANGEL.  Good morning. 

This is the fourth in a series of hearings that we have had for national health care.  We have a very exciting panel of witnesses.  We hope, in working with Energy and Commerce, that we can combine their jurisdiction over Medicaid with our jurisdiction over Medicare; and at the end of the day make certain that no one falls between the cracks as we move on the President's wish to sign a mandate that we have quality care, lower cost and maximum coverage, for everyone. 

Today we will be concentrating on the employer-sponsored insurance and making certain that we recognize how important it is and that we do everything to strengthen it.  And as the President says, If you like what you have got, we are not thinking about doing anything except trying to lower the cost across the board. 

We want also to make certain that the private insurance plans do take the high-risk people, that preconditions are not an issue.  And we will be entertaining the question of employer mandate, we will be entertaining the question of a public plan.  All of these things will be discussed. 

And so, again, sometimes on our side, David, we believe that the hearings are the best that we can do.  But it is almost not fair to the witnesses to prepare and then have 5 minutes and just the questions.  But we do hope all of you will make yourselves available if we have a roundtable where you don't have the 5 minutes, where you can expand on your visions as to how we can make a healthier America. 

I would like to yield at this time for Mr. Camp. 

Mr. Camp.  Thank you for yielding, Mr. Chairman. 

And before I make my opening statement, I just want to take a moment and recognize the chairman's commitment to the issue before us, health reform in the 21st century, and his receptiveness to working together to find the right way to reform health care in this country. 

Now, last week, I requested additional witnesses so that we could fully vet the complexities involved in improving both health insurance and health care.  And I just want to say that the chairman has granted the minority an additional witness.  Mr. Chairman, I need not tell you, there are several new members on this committee, particularly on our side as well, and this is not an insignificant act on your behalf, and I want to thank you personally very much for that. 

I look forward to continuing this approach to health care reform; and hopefully, this will spur further bipartisan talks and negotiations.  I remain confident that we can find common ground. 

Health care reform should not be a partisan issue.  It is not a partisan issue; it is not a Republican issue or a Democrat issue.  It is an American issue. 

It is not to suggest we don't face difficult questions.  In fact, today's hearing will explore one of the tougher challenges we face:  How do we protect employer-sponsored insurance and the access to affordable health care it provides millions of Americans?  And today we will hear from several employers, one of them Denny Dennis of the National Federation of Independent Business, which represents hundreds of thousands of small businesses, businesses that typically employ about five people, and collectively create 60 to 80 percent on the new jobs in America. 

Of particular concern to these job providers and creators is a Federal mandate to provide insurance or pay a penalty.  That tax, per Mr. Dennis' testimony, would harm small businesses, especially those operating at the margin, and disproportionately impact low-income workers. 

Others today will suggest that a government-run health plan must be a part of the solution, though such an option carries significant risks.  As Mr. Sheils at The Lewin Group will testify, their April 2009 study that found the introduction of a government-run plan that reimbursed providers at government-set Medicare rates would have significant ramifications for those who already have health insurance, one finding almost 120 million Americans would lose their current health insurance coverage.  Inside that data we found that of the 120 million who lose their coverage, 108 million are those who have employer-provided insurance. 

A total of roughly 160 million Americans have health insurance through an employer.  That means seven out of ten people -- workers, husbands, wives, children -- will lose their health insurance provided by employers due to a government-run plan.  I think my colleagues on both sides of the aisle will agree that it is difficult enough to provide access and coverage for the 30 to 45 million Americans without insurance without having to take on the responsibility of an additional 108 million individuals with employer-sponsored insurance. 

Nor does an employer mandate which trades job creation for insurance coverage make our job any easier.  Employer-provided insurance is under pressure and in many cases is already eroding.  This is a trend we need to reverse, not accelerate.  We need to improve upon our current health care system, not end it. 

Now, I know some of the majority have suggested Republicans are making the government-run plan an issue.  And as I noted last week, even the White House has said that reform does not hinge on the inclusion of this provision.  And just yesterday the Washington Post opined, and I quote, "It is entirely possible to imagine effective health care reform changes that would expand coverage and help control costs without a public option."  And the editorial went on to read in part, and I am quoting again, "It is difficult to imagine a truly level playing field that would simultaneously produce benefits from a government run system.  Medicare keeps costs under control in part because of its 800-pound-gorilla capacity to dictate prices, in effect to force the private sector to subsidize it.  Such power of exercising a public health option eventually would produce a single payer system.  If that is where the country wants to go, it should do so explicitly, not by default." 

And, Mr. Chairman, I ask that the Washington Post editorial be submitted into the record. 

And with that, I yield back the balance of my time.  Thank you.

Chairman RANGEL.  Thank you.  Without objection, Mr. Camp. 

[The information follows:]Chairman RANGEL.  In furthering an opportunity to make certain that we have maximum participation, even if we don't get maximum support, if the minority really feels that there are some things here that can be worked out without having formal hearings, there is no reason why we cannot get experts to take a look at that, whether we use the library, H-137, or even the hearing room. 

But this is so important that even if you can't vote for it, we would like to be able to accommodate in terms of bringing the experts here that you might need or we might need to better understand some of the complexities that just may impede someone from wanting to receive the goal, but just not being able to support a bill that has it or doesn't have it.  So we will work that out after. 

We have an outstanding group of witnesses:  Dr. Elise Gould; Randy MacDonald; Bill Pascrell from Jersey will be introducing a small businessman from his district, Kelly Conklin; Denny Dennis, who is a research policy person from the National Federation of Independent Business; John Sheils is Senior Vice President of The Lewin Group; and our last witness will be Gerry Shea, who comes representing the President of the AFL-CIO.  So this is going to be a good day for all of us. 

We will start with Dr. Gould, who is the Director of Health Policy Research, an outstanding background, an author and lecturer; and she will give us some views on why a public health insurance plan would be able to help us. 

Thank you for taking time to share your views with us.  You may proceed.  As you know, we have 5 minutes more or less, and we want to give the members an opportunity to ask questions while you are here.  Thank you.  You may proceed. 

STATEMENT OF ELISE GOULD, Ph.D., DIRECTOR OF HEALTH POLICY RESEARCH, ECONOMIC POLICY INSTITUTE  

Ms. Gould.  Good morning Chairman Rangel, Ranking Member Camp and distinguished members of the Ways and Means Committee.  My name is Elise Gould, and I am a health economist and Director of Health Policy Research at the Economic Policy Institute.  I appreciate the opportunity to appear before you today to share my views. 

Employer-sponsored insurance -- I will call it ESI from here on out -- provides insurance for the majority of under-65 Americans.  ESI, particularly among large firms, works because it pools risks, has low administrative costs and offers a stable source of coverage for a large share of the population. 

Many of these people enjoy the benefits they receive and would like to keep them.  However, we have seen a weakening in ESI over the last several years, and it is important to examine strategies -- and I commend that Chairman Rangel in holding a hearing to examine strategies -- to strengthen ESI and find ways to provide this high-value coverage to more Americans. 

The employer-sponsored health insurance industry in the United States did not flourish until the middle of the 21st century.  During World War II, employers offered health benefits as a way to attract workers when the National Labor Board froze wages.  In 1954, Congress amended the Internal Revenue Code to clarify and expand a 1943 administrative tax ruling that granted tax exempt status to employers contributions for their employees' group medical and hospitalization premiums.  Excluding premium contributions from taxable income made $1 worth of health insurance less expensive to provide than $1 worth of wages. 

In general, this tax exemption, effectively a government subsidy, reduced after-tax insurance premiums enough to encourage even the healthiest employees to enroll.  In that way, sustainable risk pools were formed and group policies became more attractive to insurance companies. 

Over the latter half of the 20th century, employer-sponsored health insurance became increasingly popular.  Workers have grown to rely on employers to provide insurance and employers have used it as a tool to attract and retain and best workers and improve the health of their workforce. 

Employer-based coverage remains the most prominent form of health insurance today.  About 63 percent of the under-65 population has insurance either through their own or a family member's employer.  Over 80 percent of the college educated and 80 percent of those in the top half of the income distribution have ESI coverage.  In fact, if you break the nonelderly population in fifths by household income, we would see that those in the top-income fifth are nearly four times more likely to have coverage than those in the bottom fifth.  So we see that employer-sponsored health insurance is working well for tens of millions of American workers and their families. 

That said, the problem remains that many folks who are left out are ill served by the employer-sponsored system.  Further, while ESI remained the dominant form of health coverage through the 2000s, the share of people covered by ESI declined 5 percentage points since 2000.  This erosion, or unraveling, has occurring even during the economic recovery. 

During an expansionary period, we would have expected coverage to increase as employment grew, but it simply did not.  High and rising health costs are mostly to blame.  Average premiums for an employer-sponsored family plan have risen nearly 120 percent since 1999, three-and-a-half times faster than workers' earnings and more than four times faster than general inflation. 

Small business owners and their workforce face particular challenges in obtaining ESI.  The coverage rates in firms with fewer than 10 workers is less than half that of workers in firms with more than 100 workers.  Half of all the uninsured are employed by a business with fewer than 100 workers, and 36 percent work in firms with fewer than 25 employees. 

Small firms that do offer health insurance face high costs, paying on average 18 percent more than larger firms for identical policies.  This is due to higher and more variable health risks, a lack of competition amongst insurers and greater administrative expenses. 

I know, in 2007, in the small firm where I work, with less than 30 days' notice, our insurer raised rates by 27 percent, forcing us to switch carriers at the last minute, which is not easy in the limited marketplace.  It is these high and unpredictable costs that have made it increasingly difficult for small firms to provide the insurance they want to offer their workers. 

So what does the future hold?  The current economic downturn and forecasts of high employment indicate continued erosion of employer-sponsored insurance in the near future.  I estimate that by the end of 2009, nearly 50 million nonelderly will be uninsured. 

The link between insurance and work has been a tradition in this country.  ESI, particularly in large group markets, can effectively pool risk, lower administrative costs and maintain stability.  But we must recognize its limitations.  There has to be a way for nonworkers, part-time workers and even those full-time workers that have been closed out of the current system to find affordable coverage. 

Private market reform, such as community rating and guaranteed issue, can improve competition between insurance companies by ensuring that this competition takes place on the grounds of efficiency and not on a company's ability to sort the population for the lowest risk. 

The best way to ensure that coverage is universally made available to those who do not have good ESI is to construct a national insurance exchange that includes a public health insurance option.  A public health insurance option is an essential part of this exchange.  While giving Americans more choices for coverage, it also has the added advantage of increasing competition to already limited markets, reducing costs and cost growth, driving quality advancement and innovation and serving as a benchmark for the insurance market. 

As we move forward to a meaningful reform, we must be wary of quick fixes to our insurance system.  One such fix involves taxing health benefits.  Research shows that taxing high-priced health coverage will heavily burden two groups:  workers in small firms and workers in employer pools with higher health risks, such as those with a high percentage of older workers.  Small businesses are paying high premiums for the insurance they provide to their employees not because the plans are especially lavish, but because they have high administrative costs and include too few employees to constitute the broader risk pool that would qualify them for lower premiums. 

Capping the tax exclusion exacerbates the problem small firms already have.  It would encourage the young and healthy to opt out of these pools, and upon their exit, premiums would likely rise for those remaining.  Instead, we should build on what works well in today's American health care system, ESI for the bulk of the workforce, as well as extremely popular public programs like Medicaid. 

Thank you, and I am more than happy to answer any questions you may have.

Chairman RANGEL.  Thank you so much for your testimony.

[The statement of Ms. Gould follows:] 

Chairman RANGEL.  We would now like to call on Randy MacDonald, who is a Senior Vice President for Human Resources at the IBM Corporation, and is the Chairman of the Board of the Policy Association, that represents more than 250 of the largest corporations in the United States.  And he is committed to providing health insurance to employees, but he is concerned, as all of us are, with the rising health care costs. 

So we are very anxious to get your views on how we can be helpful with our bill. 

STATEMENT OF J. RANDALL MacDONALD, SENIOR VICE PRESIDENT FOR HUMAN RESOURCES, IBM CORPORATION  

Mr. MacDonald.  Good morning, Chairman Rangel, Ranking Member Camp and members of the Ways and Means Committee.  My name is Randy MacDonald.  I am the Senior Vice President of Human Resources for the IBM Corporation.  As mentioned, I also serve as Chairman of the HR Policy Association, a group of chief human resource officers for more than 260 of the largest corporations in America. 

Simply put, IBM is building smarter health systems with a more personalized experience for patients.  A smart health care system will be better instrumented, interconnected and intelligent, centered around the patient.  IBM intends to be a leading proponent of health care reform because it is both a competitive necessity and because it is good business for us. 

We believe that broad systemic reform is necessary.  A successful agenda will build on a patient-centered, accountable, competitive health care market that delivers effective outcomes in improving the cost. 

I must say, adding millions of people to an overburdened, underperforming system is somewhat like diverting water into the Red River while you are piling up sandbags.  Change must be structured, it must be planned and it must have incremental giant steps. 

IBM has 450,000 reasons to be an active participant in this national discussion.  Those reasons are employees, our retirees and their dependants, and the fact that we spent $1.3 billion on health care in 2008 alone. 

Successful health care reform doesn't have to begin from scratch.  Employer-based health care is a good starting point, but we need a broad-based approach to fix fundamental flaws, including effective incentives for wellness, prevention, primary care, better cost controls and higher quality outcomes. 

Earlier this decade, IBM had double-digit cost increases.  Accountability and transparency were nonexistent for employee decision making.  Real cost, prices and subsidies were actually hidden.  Between 2005 and 2007, our assessment showed dramatic declines in employee health risk, including behaviors such as smoking.  Participation in wellness programs rose sharply and more adopted healthy behaviors such as exercise and good nutrition.  Program costs during this period were $81 million with a total savings approaching $200 million. 

Today, our employee population is healthier, employee costs remain lower than our benchmarks.  With this experience, we support a national health care reform agenda with seven recommendations. 

First, strengthen the voluntary employer-based system of health care;

Second, adopt a comprehensive national reform agenda;

Third, significantly improve wellness, prevention and primary care;

Fourth, create a competitive and accountable marketplace;

Fifth, control cost, improve quality and reduce cost shifting;

Sixth, assure adoption of health care information technology; and.

Seventh, ensure all Americans have health insurance. 

Mr. Chairman, reform can only succeed with an approach built on shared responsibility.  All stakeholders must come here with an open mind and share the burdens as well as the benefits of reform.  In my written testimony and through the work of the HR Policy Association, I have detailed what we see as those stakeholder responsibilities. 

In sum, we believe that the crisis in American health care is too complex for any one person, for any one organization or one sector of our society to figure out the best solution.  We need a comprehensive solution.  Not a Band-Aid here or there, but a solution. 

The panacea in health care is a system that does more than just deliver quality care at reasonable cost.  Our aim should be to make all Americans healthier and our economy stronger.  Thank you.

Chairman RANGEL.  Thank you, Mr. MacDonald. 

And we will make certain that whatever we move forward we don't hurt what is already working for IBM and for America.  So thank you for your contribution. 

[The statement of Mr. MacDonald follows:] 

Chairman RANGEL.  Mr. Pascrell will have the honor of introducing his -- a member, outstanding member of his community.  I yield to Congressman Pascrell.

Mr. Pascrell.  Thank you, Mr. Chairman.  I am proud that we have on our panel today Mr. Kelly Conklin, who both lives and works in my district.  Mr. Conklin is the cofounder of Foley-Waite Associates, an architectural woodworking company in Bloomfield, New Jersey.  He and his wife and business partner, Kit, started their business in 1978. 

Foley-Waite Associates specializes in the fabrication of architectural woodwork and serves an exclusive high-end clientele in New York.  He employs highly skilled experienced craftsmen in wood and related materials. 

Mr. Conklin and his wife are lifetime residents of New Jersey.  They currently live in Glen Ridge. 

And, Mr. Chairman, if you will note during the testimony, if you haven't already read the testimony, it specifically zeros in on the question of transparency and where do our premium dollars go. 

So Mr. Conklin thank you for joining us. 

Mr. Chairman, thank you for allowing me to introduce him.

Chairman RANGEL.  Mr. Conklin, the Chair anxiously awaits the comments of the business gentleman from New Jersey.

STATEMENT OF KELLY CONKLIN, FOLEY-WAITE ASSOCIATES, INC., BLOOMFIELD, NEW JERSEY  

Mr. Conklin.  Thank you, Mr. Chairman, members of the committee, Mr. Pascrell.  My name is Kelly Conklin and I am here to talk about health care and its impact on small business. 

I would like to make one thing clear right up front.  I am not a policy expert on health care, but I deal with broken policy every day in my business.  I own, with my wife, Kit, as the Congressman said, our business in Bloomfield, New Jersey; and my purpose today is to give you a window into small companies like mine and how the mess that is our current health care system impacts us.  I will start with some background to try to explain where we are and finally lay out a few ideas as to where we might go. 

A little history.  My wife and I opened Foley-Waite in 1978 in a 700-square-foot shop in Montclair, New Jersey.  In 1987, we expanded and hired four employees and we started offering health insurance.  The premiums were about 5 percent of our payroll, and we paid it all. 

Today, we employ 13 people, occupy 12,000 square feet of loft space and serve some of the most influential people in the world, and we fork over $6,000 a month in health insurance premiums.  That is 20 percent of our payroll, one of the largest single expenses in our budget. 

Why do I still offer coverage?  Practically, it is necessary to attract and retain skilled employees, but I do it because it is the right thing to do for my people, it is the responsible thing too.  If I didn't offer coverage, I just would be shifting costs onto someone else. 

We have got to stop pretending that we can escape this cost.  It is a fixed cost.  When responsible employers offer coverage and others don't, it creates an unlevel playing field.  If I am contributing for my employees and a competitor isn't, they have an advantage. 

We would be much better off in a system where all employers contribute a reasonable amount instead of this game of cost-shifting.  That is why a supported system of shared responsibility where employers pitch in their fair share. 

April is a month that I dread, but not for taxes.  Taxes are simple.  I call my accountant.  But health insurance renewal is a nightmare.  Rising costs force us to cap our contributions for employees' coverage, and we are switching carriers each year.  We had a rise in Blue Cross/Blue Shield, but they just raised our rates 25 percent, so we are switching to Health Net.  That means new primary care physicians, and for my wife, who has a chronic illness, a new doctor who knows nothing of her medical history. 

It is very frustrating as the person who writes and signs the checks every month to know that a lot of that money we spend isn't going to health and it isn't going to care.  My shopping for health insurance, my choice, is who is the cheapest this year -- 3 years, three insurance companies.  And over the past 2 months, as we transition to our new carrier, our premium bills are now $8,700 per month.  While I am writing the check for the new company, I am paying full freight for the old company. 

This is efficiency?  This is not bureaucratic?  This is cost effective?  Really? 

The health insurance market has failed to deliver on its promise for small business.  It fails to contain cost, enhance efficiency or improve outcomes.  It fails to provide coverage to millions -- our dry cleaners, our corner store owners, Joe the Plumber and Al the Mechanic.  Something has to be done. 

I think transparency is critical.  It is time to have the insurance companies come clean and say up front what is covered and what is not.  It is time to ensure everyone access to affordable health care based on shared commitment where employers like me, our workers, health providers and the government all pitch in. 

We can take a big step by creating a public health insurance option.  A well-designed public health insurance plan would finally give small businesses like mine real bargaining power, provide a guaranteed backup and introduce greater transparency.  Most importantly, by creating genuine competition and restoring the vitality of the market, dynamic innovation in the private sector will occur. 

I am not against private insurance; I am just saying we need more options.  As a cabinetmaker by trade, I think about it like this:  A toolbox holds a variety of tools, each perfected to perform a specific task.  You can't drive nails with a screwdriver or cut wood with pliers.  And in my experience, when a critical tool is missing, well, things can get ugly. 

With health care, we have tried to do everything with a hammer.  The public plan option is a critical tool missing from the toolbox, the one that could stem rising costs. 

According to Commonwealth Fund, reform with a public option would save employers $231 billion between 2010 and 2020 and $3 trillion for the Nation.  Without a public plan, we lose three-quarters of that.  Billions for the little guy, imagine what we could do with that. 

I have read about ideas I can't support.  I don't think new tax credits are the solution to this problem.  I would rather have real health reform that addresses costs rather than a tax credit that will only be consumed with skyrocketing premiums.  We don't need to fiddle with taxes or jigger the Tax Code; we need policies to stabilize a health care system in critical condition. 

I know I am not alone.  I am a member of the New Jersey Main Street Alliance, a coalition of over 300 New Jersey businesses working for health reform that works.  In a survey referenced in my written testimony, small business owners said three things: 

One, we are willing to contribute, but we can't go it alone.  Seventy-three percent said they would, 12 percent said they wouldn't; that is a six-to-one ratio. 

We support reform that includes choice of a public health insurance plan, 59 to 26 percent, two-to-one. 

We want government to play a stronger role in making health care work, 70 to 16 percent, four-to-one. 

Businesses are looking to you for leadership.  We need you to enact health reform that works for us and our employees this year so we can do our part for economic recovery. 

Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you Mr. Conklin.  Tell our friends in New Jersey help is on the way.

Mr. Conklin.  Thank you, Mr. Chairman.

[The statement of Mr. Conklin follows:] 

Chairman RANGEL.  I would like to yield to Mr. Camp to introduce our next couple of witnesses.

Mr. Camp.  Well, thank you. 

Our next witness is Denny Dennis, who is a Senior Research Fellow at the NFIB Research Foundation.  And following that we will hear from John Sheils, Senior Vice President of The Lewin Group in Falls Church. 

Thank you. 

Mr. Dennis. 

STATEMENT OF WILLIAM J. DENNIS, JR., SENIOR RESEARCH FELLOW, NFIB RESEARCH FOUNDATION  

Mr. Dennis.  Thank you very much Mr. Chairman and Mr. Camp.  This is an interesting day because Friday I start my 34th year in NFIB. 

I would like to make two points initially in my testimony.  The first one is, employer-mandated health insurance that is in the form of just funding premiums -- pay-or-play, the payroll tax, they are all the same thing -- they all become a mandate, are bad for small business, are bad for low-income people and they are bad for the economy. 

The second point I would like to make is that health care costs must be addressed, preferably prior to coverage expansion, certainly no later than simultaneous to coverage expansion, and hopefully not later than coverage expansion. 

As to the former, mandates are bad for small business because, initially -- and I am going to underscore the word "initially" -- in the short term, small business will absorb the brunt. 

Now, since there is a direct correlation between the amount of income that a small business owner takes from the business and his propensity to provide health insurance, meaning that if you take a lot out, you tend to, almost always, provide health insurance; if you take a little bit out, you tend not to provide health insurance.  Under those circumstances, the abrupt necessity to absorb additional costs, attack the most marginal and vulnerable of employers.  The same is true not only with low-income employers, but low-margin businesses. 

Second, an employer mandate effectively requires not only subsidization of low income, but also sometimes high income, which means it is a very blunt instrument, and you are looking for a targeted instrument. 

And, finally, it really embeds an employer-based system on smaller firms when an employer-based system clearly does not work for smaller firms.  One of the things we are going to have to talk about is who the system works for and who it doesn't; and clearly, for small businesses, it doesn't. 

The employer mandate is also bad for low-income people because they are eventually going to have to pay for this.  They pay for it in lost wages, they pay for it in lost employment and they pay for it in other opportunities such as shorter working hours.  This is generally understood by economists.  This isn't new.  In fact, I cite several prominent articles in my written testimony. 

One of them is a particularly interesting.  It comes from the American Economic Review, 1989, written by someone I think most of us, or probably all of us, in this room have heard of, a fellow by the name of Larry Summers. 

Recently, there came an article in the Journal of the American Medical Association, JAMA, also from some people we have probably heard of, Ezekiel Emanuel and Victor Fuchs, which concludes the same thing, that the cost of mandates is all passed back to low-income people. 

And then, thirdly, it is bad for the economy because it is essentially a regressive tax, a very regressive tax, and supposedly we are concerned in this day and age about income inequality. Yet we are going to try and add more cost onto all our low-income people. 

So your choice is this when it comes to the employer mandate:  Make low-income people pay for their health insurance, effectively in a hidden, blunt and politically easy way under the guise of employer money on the table; or you can subsidize the health insurance of the low-income, target your subsidies, but do so in a politically more difficult way. 

With regard to costs --  I think we all agree that a major reason for the coverage problem is cost.  I don't think that is in dispute.  But what we are talking about here is a sequencing issue. 

Let's take a look at Massachusetts.  Massachusetts took up coverage first and now they are concerned with cost.  So what happened?  Between 2005 and 2007 Massachusetts cut its uninsured rate by about half.  There is some argument about numbers, but it is about half.  Meanwhile, costs, the entire costs of health care in Massachusetts, rose 23 percent.  The entire health care cost in the United States comparatively rose 11 percent. 

Now, if we do the same sequencing in the United States that they did in Massachusetts and have the same results that they had in Massachusetts, we are going to have a much worse problem, because Massachusetts started out with a very low uninsured rate, much lower than the Nation as a whole, plus they had a series of other advantages. 

So your choice then is really to enact cost-control reforms before or simultaneous to coverage, because after there will be a huge new demand placed on the system for which there will be no offsets. 

I thank you very much, Mr. Chairman.  I would be more than happy to answer questions, and also to go more into the employer-based system and why it doesn't fit small business very well.  Thank you.

Chairman RANGEL.  Thank you. 

[The statement of Mr. Dennis follows:] 

Chairman RANGEL.  Our next witness.

Mr. Camp.  Thank you. 

Mr. Sheils, you have 5 minutes. STATEMENT OF JOHN SHEILS, VICE PRESIDENT, THE LEWIN GROUP  

Mr. Sheils.  Thank you.  I am a Vice President with The Lewin Group.  We are a nonpartisan health management consulting firm specializing in health care; we don't advocate for or against any legislation. 

President Obama's proposal, while running for the presidency last year, was to create a public plan that would be available to people who are self-employed and small businesses that want to offer insurance to their employees. 

Senator Baucus' proposal states that the new public plan would be similar to the Medicare program.  And implementing the program in a manner that is consistent with Medicare has some huge implications. 

If you turn to page 4 of the testimony, right now, payment rates for providers under the Medicare program are equal to about 71 percent of what private payers pay.  For physicians' care, the payments are equal to about 81 percent of what private insurers pay.  So you have a 25 to 30 percent lower price, lower premium, as a consequence of that. 

In addition, there are some -- in addition, administrative costs are lower under the program.  For private insurance -- for private-sector insurance, administrative costs average around 13.4 percent of claims.  In the public program, we expect the costs to be about 7 percent of claims.  So we have a premium that is 20 to 30 percent lower than the premium that you have in private insurance today. 

And if you look at the chart on page 5, average private coverage premiums right now are about $970 per month per family for family coverage.  That would drop to $7,600 per family, if you were to buy it through this public plan.  That is a savings of about $2,500 over the course of a year.  So it is going to be a very attractive option; lots of people are going to want to go into it. 

On page 6, we show what happens under the proposal.  But to give it a little better context, the public plan has been proposed as part of efforts to expand coverage.  One of those requirements is a requirement that the employer either pay a tax or provide insurance. 

Also, President Obama's proposal included some expansions of Medicaid and some new tax credits to help people buy insurance.  So we ran the model, did our estimates with simply those assumptions. 

If you look at the right side of the chart, we show first of all that there are about 28 million people who are uninsured today who would become covered under the program as a result of the program.  That includes an increase of 16 million people on Medicaid. 

The public plan would cover about 132 million people, but most of that is going to be people dropping their private coverage and moving into the public plan.  That is about 120 million people and 70 percent of the private insurance market. 

Just to -- in our paper we also looked at the impact if you would limit it just to small firms, and that is on the left side of this page; and in that case, if you limit it just to small firms, overall there is a loss of private coverage of about 32 million people. 

For employer coverage specifically, again on the right-hand side of the table, private employer insurance would go down by 107.6 million people.  There would be an increase in the number of employers who are buying coverage for their workers through the public plan of 113 million.  It is really a net increase in the number of employers contributing to the cost of the insurance for the worker that derives primarily from the pay-or-play requirement, which is to provide insurance or pay a tax.  So this is a very large shift away from employer coverage. 

On page 10 we have an estimate of what happens to provider income if we were to set up a program available to all firms, using Medicare provider payment rates.  Hospitals would lose about $36 billion in net income, physicians would lose about $33 billion.  If you limit it to small firms, actually hospitals come out a little bit ahead.  And that reflects the fact that there is uncompensated care that is reduced by covering more people.  These are net figures.  But covering everyone under Medicaid with -- under Medicare payment rates would have a fairly substantial negative effect. 

The last thing I wanted to talk about is cost-shifting.  This is a chart on page 11 which summarizes the payment system for hospitals in the United States.  And we have arrayed people by their source of coverage and we have expressed the payments as a percentage of costs. 

Right now, in the middle, Medicare -- actually, in 2003, payments were equal to about 95 percent of costs.  Medicaid payments were lower, about 89 percent.  And then the uninsured accounted for a substantial amount of uncompensated care. 

To recover those shortfalls, the hospitals, and physicians as well, will increase what they charge private payers.  Private payers were paying 122 percent of costs.  And the key to understand here is, when you put more people in Medicare where their payment rates are at this level, it will push down revenues for hospitals for those people and require the hospitals to increase their charges to privately insured people. 

If you look at the final page here, we estimate that if we were to set up a program where all firms can go in using Medicare rates, there would be a cost shift to privately insured people of about $526 per person for a privately insured person, and maybe $1,500 for a family policy.  But if you were to limit it to just small employers, small firms, the program would have less of a cost shift.  In fact, because of the reduction on compensated care, it actually would be a small reduction in the cost shift. 

So the point of the paper was to explain that there are different ways that you can construct this program.  You don't have to use Medicare rates; you could use midpoints between private and Medicare. 

There are a number of choices, and in our study, we look at the impacts, all of these impacts, under those various several scenarios.  Thank you.

Chairman RANGEL.  Thank you very much. 

[The statement of Mr. Sheils follows:] 

Chairman RANGEL.  Now we hear from Gerry Shea, who is the Special Assistant to the President, John Sweeney, right? 

Mr. Shea.  Thank you, Mr. Chairman.  I am Gerry Shea.  I am the assistant to John Sweeney.

Chairman RANGEL.  Let me ask you this.  The Service Employees International Union, are they working with the AFL in terms of monitoring what we are going through and seeing what labor drink is best for their members? 

Mr. Shea.  Very closely.  My last meeting yesterday was at a meeting with a number of unions, including both the Service Employees and the United Food and Commercial Workers, neither of which are affiliated with the AFL-CIO, as well as a number of the AFL-CIO unions -- and the NEA by the way.

Chairman RANGEL.  That is very helpful.  We anxiously await your testimony. 

STATEMENT OF GERALD M. SHEA, ASSISTANT TO THE PRESIDENT, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS  

Mr. Shea.  Thank you, Mr. Chairman and Mr. Camp.  We appreciate the invitation to share our perspective based on the Union's bargaining experience with 40 million Americans, and I am honored personally to be before this committee. 

You have a tremendous responsibility in providing leadership on this crucial question, and I come to you both with a plea for help, which you have heard before, and also a pledge for cooperation and flexibility in terms of approaching this.  

We have to solve this problem this year.  And, in part, we have to solve this problem because even though the employer-based system, which is after all the backbone, as you pointed out, of our health care coverage and financing situation has served us pretty well, it is really hanging on, holding on, by its fingertips. 

I can tell you that based on our experience monitoring bargaining situations across the country, this continues to be the most difficult issue in bargaining.  I could give you examples today if I were free to share some confidential information about current large bargaining, where this is the only issue on the table and where strikes may ensue in short order in some very critical services because of this. 

It is true that large firms still provide coverage.  But when you look beneath those gross statistics, you see that there is very substantial cost-shifting to individuals.  So that the studies are that the number of uninsured have gone, or the percentage of underinsured, have risen from 15 percent to 25 percent over the past 5 years.  Those are people who have insurance, but can't afford to get the care that they are prescribed to get. 

So we are just seeing the erosion of the employment-based system.  And even if you didn't want to do national health reform and cover everybody, we would need your help to stabilize that system because it can't be done without government leadership. 

I am involved many, many hours a day working with employers and with other unions on ways that we can restructure health care to make it higher quality and more efficient.  Those are very, very important conversations from our point of view.  They are vital to the future of health care in this country. 

One of the clear lessons from that is that we can't do it alone as the private sector.  This has to be done by the private sector and the public sector, that is, with government, working together. 

So what are the elements of stabilizing employment-based coverage in our opinion?  One, it is controlling costs, because without controlling costs, whether you look at a private employment-based system or a public, say, single-payer system, without controlling costs, we can't afford the health system we now have.  It is simply unsustainable for anybody.  So that is priority number one in terms of employment-based coverage as well as other coverage. 

Secondly, you have to have everybody in the system.  If you are going to continue, if you want to rely on the employment-based system, we have to have all individuals and all companies participating in the financing of that care. 

And then, thirdly, government has to play the role of making sure that there are fewer rules that are enforced across the board and, in our opinion, by sponsoring a public health insurance plan option. 

So let me just elaborate a little bit, first, on costs.  Long term we need to restructure the way we deliver and pay for care.  The estimates from the Institute of Medicine are that $300 billion a year in this -- of what we spend, go to care that is neither beneficial and sometimes downright dangerous for people.  That is a lot of waste and inefficiency, and we know we can do better. 

We have shown in many institutions that we can reduce hospital-acquired infections; we have shown that we can reduce the readmission rates in a number of hospitals by taking certain proven steps; we have shown that we can reduce the horrific problem of mistakes in surgery by simple protocols checklist and time-out kinds of procedures. 

We can do this.  It won't be easy, and it won't be overnight, but we can do it; and that is the most important thing, long term.  Because while there are a lot of ways that you could control costs in health care we think that the best way and the most acceptable way to people in this country is going to be by improving the quality and efficiency of that care. 

Secondly, the point about including a public insurance plan plays in here.  Mr. Sheils has talked about the effect of a public insurance plan in terms of the savings that it could engender.  We believe, while there is a lot of policy dispute about the number of people who would shift from the private insurance to the public insurance sector, Mr. Sheils has rather high estimates of that, in our opinion. 

There is a clear understanding that this would reduce costs and save us money, so we think that is a critical step. 

On the issue of cost-shifting, by the way, of the private sector -- and this goes to the point about whether or not we should require everybody to pay -- let me just give you our experience.  Workers regularly trade off wages to keep health benefits.  They make this decision on the ground every day, and their decision is consistently, we want health benefits, even if it means trading off wages and, in some cases, even trading off jobs.  It is that important to American families for the simple reasons that you would all understand.  We all hold the same position on this. 

So people want everyone to participate.  They are willing to pay their fair share in this as long as everybody else does. 

And then, lastly, the government must maintain the rules to the road for everybody.  And we are doing -- we are starting this in a number of the quality improving areas by requiring reporting on uniform national standards of quality and making that information public to inform both purchasers, individuals and clinicians; and we need to extend that beyond this. 

So, Mr. Chairman and Mr. Camp, I appreciate the opportunity to appear before you.  I just want to make one last point if I could; and that is that the idea of taxation of health benefits has come up as a way to raise money.  And I just want to say -- going back to my point about what we need to focus on here is stabilizing the employment-based system -- if we were to go to taxation of benefits, that would be the ultimate destabilizing step we could take. 

You may consider the employment-based system, an accident of history in the United States; we heard some of the history from Dr. Gould.  It is, however, composed of several core elements, one of which is the tax preferred treatment of benefits.  You take that away and you are really pulling the rug out from under this system. 

Now, maybe you want to change the system altogether.  There are a lot of proposals to do that.  But this taxation of benefits would certainly stabilize it.  And in terms of the public support for health reform, asking people to pay again for the health insurance they already think they pay an enormous amount for is not going to wash.  This is not going to get public support; it is going to get tremendous public opposition.  So I would just caution against going down that road. 

Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you. 

[The statement of Mr. Shea follows:] 

Chairman RANGEL.  Let me make it clear -- I want to thank the panel and to make it abundantly clear that we recognize that you are not Republican and Democratic witnesses; it is just who invited you.  But we know that all of you are concerned about improving the health care of Americans and that they get access to affordable health care. 

I don't think it is necessary to say that, but I just want to make the record clear as I tear into Denny Dennis, the Republican witness. 

Mr. Dennis, you made it abundantly clear that cost is a factor in terms of people having access to health care.  We have, I guess, 45 million people, half of which work every day.  And if they have a serious illness in this great country of ours, they have got to get care; do you agree? 

Mr. Dennis.  Yes.

Chairman RANGEL.  Where would they get this care? 

Mr. Dennis.  Where would they get this care today? 

Chairman RANGEL.  If they are going to be treated, they have the swine flu, colds, broken legs; they don't have insurance.  They work hard every day, their employer loves them, but can't afford health insurance.  Where do they get it? 

They don't ask whether they are Republican or Democrat.  They say, Have you got insurance?  They say "no."  In some moral mandates, the people have to take care of these people, especially in our hospitals, especially in the emergency rooms.

Mr. Dennis.  Correct.

Chairman RANGEL.  What do we do with these people?  Do we allow them to continue not to be insured?  They don't pay for it, the taxpayer pays for it.  What would you suggest we do for them? 

Mr. Dennis.  Well, one of the things that we suggested, as far as smaller firms are concerned --

Chairman RANGEL.  No, no, I am talking about the employee.  He is right now, as you and I talk, working every day, scared to death the kids are going to get sick.  He can't afford insurance; the employee can't afford insurance.  They are here in large numbers, millions of people. 

So we can't ignore them if we are talking about universal coverage.  But for you, recognizing costs, what do we do? 

Mr. Dennis.  In terms of making sure that they have coverage and care, yes, they do.  The question becomes who is going to pay for it, and that is the issue. 

There are certainly better ways to deliver care for the low-income folks who are aren't insured than we are doing today.  We are doing it through emergency rooms.  Why aren't we doing it through clinics? 

Chairman RANGEL.  Well, your contribution would be expand community health care clinics? 

Mr. Dennis.  I am suggesting that would be -- there are several steps that we could take, Mr. Chairman, that would --

Chairman RANGEL.  Well, that is what we are here for, because we have a serious problem.  It is going to cost money. 

Many of us truly believe that the facts yell at us that it is going to save money.  They kind of believe -- I am no doctor and neither are you -- that if these people have preventive care, have examinations, where they are tired of hearing, You should have come earlier; now you have to be admitted to the hospital, which is the most expensive type of care. 

But if they knew that their kids could get examinations, if they knew they had the dignity to ask the employer, I have got to go for my check-up. 

You just don't have to be a scientist to know you are saving money.  And as a patriot and the chairman of this committee, to me, it means they are healthy, they will be working, they will be paying taxes.

Mr. Dennis.  Yes, Mr. Chairman, we had a study done for us by Professor Rossiter at William and Mary to look at costs, precisely places that we can go to save costs, and we have given a copy to committee staff .

Chairman RANGEL.  Where?  Well, I have already said, and you are not going to contradict, that 48 million people that don't have health insurance, if we give them, overall the country is going to save money.  Forgetting productivity and all that economist talk, we have got to save money in terms of them not costing society --

Mr. Dennis.  Yes.

Chairman RANGEL.  Health care that they don't have insurance to pay for. 

What I want you to do is not to admit that we have a problem, but we are mandated today to move forward and resolve this problem, and we just need your expertise to say if I tell you that one of the things we are considering is having a public plan --

Mr. Dennis.  Yes.

Chairman RANGEL.  If the employer has a plan, you keep it if you like it.

Mr. Dennis.  Yes.

Chairman RANGEL.  But if indeed you have got a precondition, you can't get in the plan, or it is too costly, that the government would say, this is backup. 

Mr. Dennis.  Yes.

Chairman RANGEL.  This is backup for you.  And you have got to do it.  Could you go along with it? 

Mr. Dennis.  No.

Chairman RANGEL.  No? 

Mr. Dennis.  No, not with that particular proposal.  What we would suggest instead is to look at the Massachusetts --

Chairman RANGEL.  Forget Massachusetts.  Tell me how it works. 

Mr. Dennis.  Essentially we have something called a connector or an exchange. It provides a central clearinghouse, we want to talk about a clearinghouse, where insurance companies register their plans, and people can go to them, particularly low-income folks can go to them, individuals can go to get their insurance.  And so it is like a big, central marketplace where individuals and small business have more choices to shop for better plans. 

Chairman RANGEL.  And the government mandates that the employers must insure these people.

Mr. Dennis.  No.

Chairman RANGEL.  Not with compassion. 

Mr. Dennis.  No, it doesn't.

Chairman RANGEL.  I understand that is the Massachusetts plan, that it is an employer mandate.

Mr. Dennis.  Well, it is $295 worth of mandate.

Chairman RANGEL.  I don't care how much of mandate.  I am saying an employer has to provide insurance for an employee.

Mr. Dennis.  Why would you want to put people out of work?  Why would you want to depress wages?  There has got to be a different way to approach this.  The question becomes -- there is an interesting issue here.  It is called -- you know, we use the politically really nice term of "shared responsibility." 

Chairman RANGEL.  You are using it.

Mr. Dennis.  I am just bringing it up.  I am not using it.  I am saying I don't know what that means.  I know what -- 

Chairman RANGEL.  You don't have to know, I didn't raise it.  You can argue with yourself what it means.  I am saying that --

Mr. Dennis.  Okay.

Chairman RANGEL.  -- we have to do something, and you are suggesting I don't know what. 

Mr. Dennis.  No, no, I am not suggesting.

Chairman RANGEL.  We are going to take care of these people, and if you don't help us to do it, we may have a way to do it that you don't like.

Mr. Dennis.  No.

Chairman RANGEL.  We are going to say that the employer has a responsibility, and the employee has a responsibility, and the government has a responsibility.  And we are not going to Massachusetts, we are staying right here and hammer this thing out.  So when you think of something that you say, well, that makes some sense, I don't agree with it all, then come back and we will talk.

Mr. Dennis.  Well, let me say, Mr. Chairman, that the pooling and the whole idea of getting rid of being able to rate on claims experience and that sort of thing, which is all inherent in the system I am talking about, is certainly very much directed towards the type of thing that you are talking about.  After all, the State cut its insurance or its number of uninsured by half.  That certainly gets to, I think, what you are looking at, isn't it? 

Chairman RANGEL.  I am talking about full coverage.

Mr. Dennis.  So I think, well, it would be nice, yes.  But at least we are moving in the right direction.  This is clearly, I think, a very positive suggestion, and we know there are other kinds of things that could easily be done.  Excuse me, I take that back.  I will get rid of the word "easily."  Other things that can be done to lower costs which will bring in more people into the system.  So I think indeed that we are proposing some very positive steps to directly go after the kind of concerns that you have.

Chairman RANGEL.  Well, would you write an amendment to your written testimony and spell out what you think those are, and by unanimous consent I will have it put in the record.  And once I see what your ideas are, then we will get back to each other.  But it is not easy. 

[The information requested by the Chairman follows:]

I yield to David Camp. 

Mr. Camp.  Thank you, Mr. Chairman. 

Thank you all for your testimony this morning. 

Mr. Sheils, in your testimony you mention that if a new government-run health plan paid providers at private market rates, the premiums in the government-run plan would be 6 to 9 percent below those in the private market.

Mr. Sheils.  Yes.

Mr. Camp.  You cite the reason as higher administrative costs in the private sector.  And this has been a discussion we have had in the committee over many months about comparing administrative costs between the government and private-sector health programs.  And my comment is I believe it is an apple-to-oranges comparison.  There are many programs that significantly improve the health and well-being of those in private health coverage that I believe are considered administrative costs, disease management programs, 24-hour nurse help lines.  I think those serve critical functions, but they are considered administrative costs in this comparison that often occurs.  And private plans also spend money building provider networks which can improve access, for example, to top-quality providers and exclude poor performers.  And so this provides real value to the employees, but also falls into the category of administrative costs. 

And similarly, antifraud programs which help reduce the cost of health care.  I think those are irrelevant in private health plans, while government-run programs like Medicaid and Medicare have pretty poor records on fraud and abuse.  In fact, there was a recent article in Congressional Quarterly, and it found that, and I am quoting, "The government has never done a particularly good job detecting fraud in Medicare much less preventing fraud in the first place.  Most claims are never checked at all."  But these antifraud programs and other costs are also considered administrative. 

So I would ask unanimous consent to submit for the record a letter to the editor in the Wall Street Journal which was written by the former Administrator of CMS that highlighted some of the problems of trying to compare administrative costs between Medicare and private health insurance, and I would just like to ask your comment on that. 

[The information follows:] 

Mr. Sheils.  Sure.  There are management -- utilization management functions that most private health plans have.  Precertification.  You might find on your insurance card you have got to call in to get permission to go get an MRI, you have to get permission to go to the emergency room and so on.  Those things are estimated to save costs between 4 and 8 percent.  Our own study came up with something in the neighborhood of 4 percent. 

The numbers we have on the cost of services are adjusted in here to roughly reflect that adjustment.  So we are not really counting it -- we are counting it where I think you should count it, the cost of the utilization. 

The administrative costs are what they are.  But then the differences in utilization and the impact that has on the premium is also part of it.  So it accounts for that very roughly.  I can't say -- it roughly accounts for it.

Mr. Camp.  And, Mr. Sheils, Lewin Group has done work for hospitals and physicians, but you have also done work for the Economic Policy Institute, who is testifying here today, as well as for The Commonwealth Fund; is that accurate? 

Mr. Sheils.  That is right. 

Mr. Camp.  Mr. Shea, would it be a fair statement to say most of your members would like to keep what they have? 

Mr. Shea.  That would be a fair statement, sir.

Mr. Camp.  And would it also be fair to say that a Medicare-like coverage would probably not be an acceptable replacement for the level of benefits that most of your members have now? 

Mr. Shea.  We cover many retirees, including Medicare recipients, Mr. Camp, and we usually supplement the Medicare benefits to bring them to the standard of what active workers get. 

Mr. Camp.  Particularly the nonretiree members would find a Medicare-like plan to be significantly below the benefit level they are receiving now; would that be fair to say? 

Mr. Shea.  We strongly believe that with a public plan, you need to allow for a private insurance role, a private union fund role --

Mr. Camp.  Yes.

Mr. Shea.  -- that would supplement or compete with.  You want to have something not just a public plan. 

Mr. Camp.  Yes, but comparing the two, a Medicare-like plan has much -- the plan they have now has a much higher benefit level than a Medicare-like plan.

Mr. Shea.  That is true.  And widely for many years people have said if we were to extend Medicare to other people, you would have to raise the benefits and modernize them. 

Mr. Camp.  Yeah.  And so that for your retirees, as you mentioned, you use a supplement. 

Thank you all for your testimony.  I yield back the balance of my time.

Mr. Levin.  [Presiding.]  It is interesting, Mr. Sheils, when Mr. Camp asked you about the administrative costs, you said that you were comparing apples and oranges.  I think your answer was you are not. 

Mr. Sheils.  You are correct.  I would say that is correct.

Mr. Levin.  Okay.  So I don't think we can just pick and choose when we like your results and when we don't.  But I think we can question your -- some of your assumptions in terms of what would be the transfer from employer insurance to a public plan, because as people thought about transferring, the private sector might well respond to competition, to competing with the public plan, right? 

Mr. Sheils.  Yes.

Mr. Levin.  And so therefore, the private plan might become more effective, right? 

Mr. Sheils.  We expect improvements, but we don't think that they will be able to -- most plans won't be able to survive in that environment.  The ones that will survive will tend to be integrated systems, HMOs.  And where, for example, some of these HMOs own their own hospitals, they don't have to worry about the cost shift. 

Mr. Levin.  Let me ask you this:  If you look at employer plans in the construction industry, which I used to know something about, you assume that the employers would shift to the public plan en masse.

Mr. Sheils.  Based on the price for coverage that they would be offered, it differs a little bit by firm size, but we basically figure out what the cost of insurance is in today's market for individuals, which is kind of an involved process.  And then we figure out what the cost of the plan is for the plan, and then we use models of how people respond to changes in the relative prices of health care to figure out how many people go into the public plan. 

Mr. Levin.  But these employer-based plans are controlled by collective bargaining agreements, aren't they? 

Mr. Sheils.  Well, 16 percent of --

Mr. Levin.  I am talking about in the construction industry. 

Mr. Sheils.  In the construction industry, I believe that is correct, yes.

Mr. Levin.  Your assumption is there would be a massive shift, that they are subject to collective bargaining agreements, and that the employee representatives would decide to shift to a public plan? 

Mr. Sheils.  Yes.  There are two things to consider.  First of all, in a competitive environment you would want -- you know, you almost have to.  I mean, if your competitor uses a public plan and is saving $2,500 a year for family coverage, then you are going to be at a competitive disadvantage unless you do the same thing. 

Mr. Levin.  Of course if --

Mr. Sheils.  I just want to add that Mr. Shea pointed out that workers explicitly make these trade-offs between costs and benefits, and it seems to me likely that when a family has a chance to save that kind of money, the workers may develop a considerable demand for the change. 

Mr. Levin.  Okay.  Though one plan might be better than the other. 

Mr. Sheils.  Yes.

Mr. Levin.  Your figures assume that there would be a major reduction in the uninsured? 

Mr. Sheils.  Yes.

Mr. Levin.  Mr. Dennis, just to pick up what our Chairman was saying. 

Mr. Dennis.  Yes, sir. 

Mr. Levin.  I reread your testimony, and the problem is you don't like a mandate, you don't like a public plan, but you have no plan.  I mean, the problem with the opposition here, they don't like a public plan, they don't like the mandate, they have some other complaints, but coming up with a plan that will clearly reduce the uninsured of close to 50 million people in this country, there is no plan.  And I think you should take up our Chairman's offer. 

I have your small business principles, but I think what you need to do if you don't like the mandate and you don't like the public plan is to come forth with a very specific proposal that would assure that there would no longer be 50 million uninsured in this country, and that in a reasonable period of time the number would be essentially zero or close to that, because otherwise simply trying to slug it out by critique doesn't work if there is no alternative. 

My time is up.

Chairman RANGEL.  [Presiding.]  Thank you, Mr. Levin. 

Mr. Herger from California. 

Mr. Herger.  Thank you, Mr. Chairman. 

As you know, at last week's hearing Ken Sperling testified on behalf of the National Coalition of Benefits.  The Chair asked about the Coalition's view on a government-run plan.  Since then, members of National Coalition of Benefits Steering Committee, who collectively represent hundreds of employers that sponsor health benefits for tens of millions of Americans, sent a letter to you stating their position on a government-run plan. 

In part the letter says, "Proposals to have a public plan compete in the private marketplace are of grave concern to employers who provide health insurance coverage.  The public plan's unfair competitive position, both by size and regulatory authority, will merely shift cost to the private sector and employees covered by private plans." 

The letter goes on to say, "Medicare's underpayment results in private payers and the people covered by these plans making up the shortfall, and increases the cost to employers of providing quality health-care coverage.  A public plan option administered by the Federal Government is inherently destabilizing to employed-based health insurance benefits," close quotes. 

Mr. Chairman I would ask unanimous consent to enter the letter into the record. 

Chairman RANGEL.  Without objection, Mr. Herger.

[The information follows:]******** COMMITTEE INSERT ********

Mr. Herger.  Mr. Sheils, you estimate that a government-run health plan paying Medicare rates would mean a $36 billion cut to hospitals and a $33.1 billion cut to physicians, and that is just in 1 year.  Since it is paying below-market rates, the government-run plan could charge below-market premiums.  While the government-run health plan might be cheaper, it doesn't mean it will be better. 

I worry that people enrolled in the new government-run plan may find themselves with health coverage, but without access to care.  Today half of physicians are no longer accepting Medicaid patients, and 28 percent of Medicare beneficiaries searching for a new primary-care physician are having a problem finding one. 

Wouldn't a public option, that is a government-run plan, paying providers Medicare rates only exacerbate access-to-care problems? 

Mr. Sheils.  I think you are correct, it would make it much more difficult for the providers.  It is fair to say that our numbers are showing that the physicians under this plan and hospitals will be providing more services to more people for less money.  And it is hard to imagine you can do that without something bad happening somewhere. 

I think that we spend enough on health care in this country that through efficiencies we could get by on a level of spending.  The question is will a system actually give us those efficiencies, or will it simply, as you say, cause some providers to stop seeing privately insured -- the members of the plan and so on. 

I don't think there would be a wholesale rejection of the plan by providers, however, because so many people would go into the public plan.  Who would you care for; if you didn't accept Medicare, who would you care for?  There would be 120 million people it; 132 million people in it plus Medicare itself, so it is 170 million people.  I don't think any provider will be able to walk away from what is probably 60, 70 percent of the whole marketplace that way. 

Providers will have to somehow do it within the amounts they are being paid.  Whether that compromises the quality of care or not is an open question.  It could be done in ways which are bad for patient health.  It could be done in ways, if we are careful, where it does not impact patient health so seriously. 

But it is very hard to imagine taking this much money out of the system while at the same time increasing demand for services without something bad happening somewhere.  So I guess that would be my answer.  I am not terribly specific, I apologize.

Chairman RANGEL.  Let me thank you and the panel and tell you where we are.  The bells mean we have to respond.  The budget bill is on the floor.  It will take 15 minutes, roughly 10 are left, to answer that.  And then two suspensions are there.  That is roughly 5 minutes.  And so if we could suspend and all return at 12 o'clock.  I apologize to the panel for this break, but you might be able to get something to eat, and we will come back, start promptly at 12 o'clock, and we will try to proceed as expeditiously as possible. 

Chairman RANGEL.  Thank you, and we adjourn until 12:00.

[Recess.]

RPTS DEANDCMN NORMAN

Mr. McDermott.  [Presiding.] If the witnesses will take their seats, we will resume the hearing.  Although I took the Chair here, I also am the next one to ask questions so I will start. 

I am having a little trouble understanding where a couple of you people are coming from.  I can understand a big company having their employees and want to keep them in private, inside the company in some kind of a health plan, because you have got them trapped today.  They are scared of losing their jobs so they will accept whatever you do, and you can keep off-loading the health-care costs onto the employees of the company.  But what I am having trouble understanding is what happens to the smaller employer who sounds like they are represented by the NFIB. 

But, Mr. Conklin, I don't understand; you started out paying 5 percent of payroll and now you are up to 10 percent of payroll? 

Mr. Conklin.  No, Mr. McDermott; it is 20 percent. 

Mr. McDermott.  So you are 20 percent of payroll.  Now, I hear from your industrial organization there that if you have that kind of cost, you will have to lay off people.  Have you laid off anybody? 

Mr. Conklin.  No, sir.  In fact we just recently hired up.  So the fact that health-care costs go up to the employer does not that you are going to lay off workers? 

Mr. Conklin.  No, we -- I mean we have to offer that benefit in order to attract workers.  It is an expectation. 

Mr. McDermott.  So at what point -- I mean you are paying -- I can't quite tell from your testimony -- I read it all -- you are paying $8,700 per person?

Mr. Conklin.  No, $8,700 for the company.  I have 10 people.

Mr. McDermott.  Per month? 

Mr. Conklin.  Right.

Mr. McDermott.  So that is $870 per person, per month? 

Mr. Conklin.  Right.  And I want to make sure that this is understood for the record.  This is during the transition.  Now, what is happening is I have some employees coming off our old carrier and going on to a new carrier.  And while that is happening I have to keep the old policy in place and pay a percentage of the new policy. 

Now, this process is taking 2 to 3 months, so we will have $8,700 outlays for 2 to 3 months.  And then at some point in the future, our old carrier, HMO BlueCross, will return the unused portion, so to speak.  But like all insurances I have to pay it up front.  In order to maintain coverage for everybody until this process is complete, that is my premium expense. 

Mr. McDermott.  Why wouldn't you want to have -- given that story you just told, why wouldn't you want to have a public option that you could say to your employees, go to this public option, it is a generous program, it is as good as what I am able to buy for you, and be able to get it for, say, 10 percent of payroll? 

Mr. Conklin.  I have no difficulty with that.  My hope is that if that option were available, and I would hope from this process that if it is done right, the public option would serve a couple of different purposes.  One is -- and it is very important -- is that it would make it easier for me as an employer to understand and explain to my employees what they are getting for our money, because they are making a contribution too.  I don't pay the whole freight on this.  And if we could do that and there was a plain-language component of the public sector solution, whatever form that public sector solution takes, then the private sector, which I think has some conflicts of interest that it tends to camouflage, and the way it presents the products would be forced to reveal what the real costs are. 

Mr. McDermott.  Tell me how they camouflage. 

Mr. Conklin.  Well, they camouflage it by presenting me with a 3/4-inch thick booklet of arcane, legalistic language that explains what the policy really is.  And what I am looking for is a very plain-English thing that says here is what you are getting.  This is what the co-pays are, that is all there; and what the deductibles -- this is how much you will spend each month, but here are the limits of the policy.  If you go into the hospital and you have a serious problem and that problem is, let's say, cancer, the average cost of, say, a cancer treatment in the New York Metropolitan Area for a serious illness is, say -- and am making all this up, like I said, I am not a policy expert but this is sort of my thinking -- and that problem or that illness on average costs $1.5 million to treat in New Jersey, okay; our policy only covers 1.25 million.  You are going to be on the hook for 250,000, because when you go in the hospital, you sign that document that says whatever the insurance company doesn't pick up, I will pay. 

So one of the things I am hoping is if we have that sort of transparency in the process, then we can also have an honest discussion about medical bankruptcy.  And then we are going to really know what insurance should cost and how we can fully cover everybody.  Until we have that kind of transparency, I don't even think we know how much health insurance really costs. 

Mr. McDermott.  Do you have an idea what is a fair amount for a small business person to spend on the health care of their employees; 5 percent, 2 percent, 1 percent, 8 percent? 

Mr. Conklin.  Well, it would be great if it is 1 percent or it would be great if it was half of a percent.  But if it costs 10 percent, then as an employer I want to pay 10 percent.  And I want the guy down the street to pay 10 percent, I want the guy up the block to pay 10 percent.  But if what we have to do to cover everybody is create a progressive payment system, I will live with that too. 

When I started my business, and it was my wife and I, we had no health insurance, but we were young and we were healthy and, as I said in my written testimony, we were broke.  So we weren't going to go out and buy any health insurance. 

That is a problem that has to be addressed.  I don't know whether you will be able to address that level of detail in the legislation you are considering now.  And I hope that as this discussion continues, we realize that we are probably not going to get it right this time.  It is probably not going to be perfect, whatever you come up with.  If you come up with a public option, it is probably not going to be perfect. 

And if we don't cast it into stone or steel and say that its a Federal program that can never be changed but we recognize that through this process we are going to have to make adjustments and improvements, then I think, great.  Anything that gets it closer to a fair, equitable system that gets 100 percent coverage has to be reflected in my bottom line and reduce cost.  That just -- I am giving it to you from my perspective, which is on the street. 

I was thinking earlier during the testimony that there used to be a TV program, "Homicide:  Life on the Street," this is sort of like "Health Care:  Life on the Street."  And, you know, what I experience is something different than what I am hearing from the other panelists, which is not to say that their testimony is inaccurate or hasn't been well thought out.  It is just not quite -- it doesn't quite jibe with what happens in real life as I have experienced it.

Mr. McDermott.  You would like a public option, you could pay 10 percent? 

Mr. Conklin.  Absolutely. 

Mr. McDermott.  Would you move tomorrow to that?

Mr. Conklin.  Well, I would certainly give my broker the opportunity to convince me that it wasn't a good idea.  And if he could do it at a competitive rate, and tell me why it wasn't a good idea, in clear language, and if he had a competitor who was giving me the real information, then he would be forced to do that.

Mr. McDermott.  Thank you very much. 

Mr. MacDonald.  The whole issue about migration to a public plan; I think if we took a real-life example that I have is migration is going to occur as quickly as others would suggest it is.  A case in point would be a couple of years ago, through a consortium, several companies created what was called Retiree Health Access, and the actuaries in the IBM case thought that probably about 60,000 would migrate to that plan.  The first year was 2,000 people. 

I think there is a general reluctance for people to migrate away from an employer plan.  So I think a lot of it will be driven off of the design, the cost structure, the access.  I don't think you will see that migration as quickly as some would suspect that you would. 

I think the second thing is when you raise the issue around cost; is there an argument being made that you are laying off people because of health care costs?  I think Gerry said it quite appropriately; there is a trade-off of costs.  If health care is rising at 20 percent or 10 percent, whatever the number is, then you make decisions around what are my raises going to be this year?  What am I going to do in investing in human capital?  What am I doing for training programs?  There is always offset.  Somewhere there is always offset.  It is not incremental upwards, it is always trying to create a level playing field.  So I don't see the migration as quickly as others do.

Mr. McDermott.  May I ask you one other question? 

Mr. MacDonald.  Sure. 

Mr. McDermott.  If you lay people off at IBM, where do they go?  Can they afford the COBRA option? 

Mr. MacDonald.  First of all, we have a benefit continuation policy that is up to 6 months right off the bat.  So we pay for that,  and they go beyond that with COBRA. 

Mr. McDermott.  And at the end of 6 months they are on their own.

Mr. MacDonald.  Then they go to COBRA. They go to a continuation --

Mr. McDermott.  And where you are operating, is COBRA enough money -- I mean, can you make out of your unemployment insurance enough to pay COBRA and the house rent? 

Mr. MacDonald.  Well, in the spirit of bluntness, IBMers tend to be at the higher end of the pay scale.  And so in the spirit of honesty, our average wage is close to approaching $100,000.  So you would assume there is some level of savings there to create that offset. 

Mr. McDermott.  Thank you very much.  

Chairman RANGEL.  [Presiding.]  No one is thinking about IBM planning to go to any public plan. 

Mr. MacDonald.  That is what I am suggesting.

Chairman RANGEL.  I know you are.  It just makes sense that every plan is not as good as yours, but the plan that we are talking about, when Mr. Conklin sees his competitor with nothing and he is paying this large amount, he wants everyone to get in there and share this so that his competitors would include health care as a part of doing business.  It just makes -- Mr. Sheils, are you here in Washington? 

Mr. Sheils.  Yes, sir.

Chairman RANGEL.  Talk with my buddy from New Jersey.  Because, You know, you have got the theory and everything, but like he says, he has to deal with this every day.  It is a cost on him.  And I am not talking about compassion, I am talking about saving money.  Having people working every day, not having to worry about their kids getting sick or their wife not being able to get medicine, but being able to concentrate on making some cabinets.  But a person in trouble, with no health care, is not a productive person. 

And so, you know, we have got to do something about it.  And I would rather work with you so that we can get bipartisan support of this darn thing.  You come in with something -- you talk with Mr. Conklin and if he is convinced, we have got a deal. 

Let me call on my hero of the Congress, Mr. Johnson. 

Mr. Johnson.  Thank you, Mr. Chairman. 

Mr. Dennis, the Economic Policy Institute has proposed imposing a health care pay-or-play mandate on businesses.  And their proposal would require employers pay 75 percent of individual premiums and 66 percent of family premiums for all employees working at least 20 hours a week.  Employers who can't meet these requirements would be forced to pay 6 percent payroll tax. 

The Lewin Group estimates this would represent a tax increase of nearly $1,600 per employee.  Is this mandate the type of thing that small businesses could afford? 

Mr. Dennis.  First, let me just say this, Mr. Johnson.  Whether you call it paying for the premium, pay-or-play, or a payroll tax, it is the same thing.  So we are talking about a generic group here where the parts are equivalent to one another. 

If initially the business has to pay $1,600 per employee, and the business has10 employees, that is $16,000.  Sixteen thousand dollars, the question is where do you get that money?  One place is to take it off your salary, the owner's income.  I don't think any of us want to have $16,000 taken off our salary. 

This is just another mandate.  It is going to end up in lost jobs, it will end up -- we have already talked about how employees' wages are depressed because of benefit costs.

Mr. Johnson.  Well, it seems to me -- and I had a small business at one time -- if you are not making money or on the margin a little bit, you are going to have to -- you can't afford another increase.  What you will do is probably lease out your medical stuff.  You know, fire the employees and work them out of a different organization, you know, I don't think any of you realize what it costs to run a small business.  It is not a simple operation.  And some of you know.  You work sometimes, some months, just to make ends meet.  And if we stick you with another tax, which is what that is, I don't think you are going to like it.  Mr. Conklin, I don't think you would either. 

Mr. Dennis.  I think, Mr. Johnson, there is one really important point in this, and that is we have about 5.9 million small employers in this country.  Some of them are doing very well.  It sounds like Mr. Conklin's business is doing quite well.  That is great.  I am all for that.  There are some others that aren't doing so well, and there are some others that are just starting.  The condition of each business is very different.  And I am not talking about one business, I am talking about the group of businesses, all of them together.  Some provide. 

I think the very fact there is a relationship -- and I repeat -- there is a relationship between what you take out of the business and whether or not you provide employee health insurance, a direct relationship.  That speaks volumes. 

When business does well, the employer does well and the employees do well.  When a business doesn't do so well, the employees don't do so well and the employer doesn't do so well. 

Mr. Johnson.  Yeah, I know.  There are some companies who provide health insurance.  Exxon is one of them.  And about 20 percent of their people don't take advantage of the program they offer, because they think they are bulletproof.  You understand that.  The 21- to 35-year-old guys.  In fact, one of you testified that you didn't have insurance; I think it was Mr. Conklin. 

Well, I appreciate, Mr. Conklin, the efforts you have taken to continue providing health insurance for your employees.  I have heard from a number of small business owners, just like you, are finding health insurance to be increasingly unaffordable.  And we need to reverse that trend. 

You mentioned the inability to pool employees and spread risk the same way large employers do.  I wonder if you would support reforms that would allow small businesses to join together and pool their risk.  Association health plans never have been passed up here.  And the independent guys, i.e. Realtors, for example, are all for that kind of a program, and they don't have health care, a lot of them.  So doesn't buying in bulk for supplies reduce cost? 

Mr. Conklin.  Yes, Congressman.  Buying lumber bulk does reduce costs.  I don't think you want the same model to determine what you are going to buy in health insurance.  I think one of the problems we have in the discussion we are having about health insurance is we keep applying this business model as if we were talking about widgets.  But what we are really talking about is people and the kind of care that is available to them. 

And when these larger groups, the question I have and I can't -- again, I am admitting I am not a policy expert -- but the question I have is who is going to determine who my carrier is in this larger group.  We are going to form an association and we are going to go out in this group and shop for health insurance.  And then we are all going to somehow agree that the best provider of health insurance for us is the X, Y, Z company. 

Now, I am not sure who makes that decision.  I am not sure what that decision is based on.  And we are still stuck with this sort of opaque process by which I don't really have a choice, I have an option:  join the association, shop for health insurance in the open market. 

Mr. Johnson.  Well, association health plans don't have to be one provider; it can be five or six and they can pick. 

Mr. Conklin.  We are still there, though.  We may be saving a few dollars on the side, but the group and the way the group is structured and the available selections are still limited within this organizational model.  So I don't see that as being a vast improvement over the system. 

Mr. Johnson.  Well, it is because they don't have any insurance right now. 

Mr. Conklin.  Well, look, I said earlier that all the solutions -- I used the tool-box analogy.  If that tool functions the way some people are saying it might function, then it may be useful to add it, but it is not going to solve the problem. 

Ms. Gould.  Congressman, do you mind if I respond, as you brought up my employers? 

Mr. Johnson.  Mr. Chairman?  Go ahead. 

Ms. Gould.  Thank you.  You brought up the estimates of what it might cost, 6 percent of payroll for small employers to contribute.  But what wasn't also brought to light in that research that the Lewin Group did analyze is that the national exchange with the public plan, small employers who are currently offering insurance would actually experience windfall savings with that kind of a framework.  In fact, firms with 10 or fewer workers would save about $3,500 per worker compared to even lower savings that you would see across all firm sizes.  So small firms stand to gain a lot from that kind of structure. 

Chairman RANGEL.  Mr. Pomeroy. 

Mr. Pomeroy.  Thank you, Mr. Chairman.  I commend the panel.  It has been a very interesting discussion.  And Mr. Conklin, you are the guy off the street; you have had compelling testimony today, absolutely delightful. 

I will start with Mr. MacDonald.  In your capacity as a leader within the HR world, let alone IBM, you would have an expert view on the notion of whether or not the employer platform ought to be a base for the delivery of health benefits in the first place.  Some believe it is time to move off of that. 

I would tell you I disagree with that.  I believe there is still enormous value, let alone the fact that we have got 65 percent, as Dr. Gould told us, covered with the employer model, the platform.  I believe we keep that part and build out, not blow it up and start all over. 

What are your thoughts on that? 

Mr. MacDonald.  Clearly, as I think I said in my opening statement, we shouldn't start from scratch, and that the employer plan is a base or a foundation.  As I look at whether we want to talk about it in terms of a public plan or some individual mandate, you know, perhaps we have to migrate there over time.  And I think part of the issue has to be that you use employer-based plans as that model.  Employer-based plans typically have a foundation for wellness, they have a foundation for preventive care, and a foundation for primary care.  Those are, I think, absolute critical components to any plan that is designed, whether it be at a large employer or a small employer. 

Mr. Pomeroy.  Mr. MacDonald, how about Medicare?  I am dismayed that those elements did not seem to be advanced effectively in present Medicare reimbursement incentives.  Have you been able to achieve a greater role for primary care, preventive care, wellness and impacted your cost curve?  If so, you have got information that we desperately need to consider as we develop Federal reinvestment policy.

Mr. MacDonald.  I would agree with you on the inefficiency and the lack of effectiveness in the Medicare arena.  And the answer is yes.  For instance, in the 3-year study that we did where we fundamentally created what we call a healthy living rebate, where we focused on nutrition, childhood obesity, physical exercise and smoking cessation, we invested around $81 million.  And in that 3-year period we saved $200 million. 

At the same time we had a high-risk population that we identified at about 13 percent of our population; 55 percent of that high-risk population is now down to less than 7 percent.  So we see a direct correlation for making investments in areas of preventive care, primary care that yields returns. 

Mr. Pomeroy.  Did you elevate the role of primary care in your interaction with your insureds?  Is that how you were able to maintain the behavioral modifications that produce this positive health result? 

Mr. MacDonald.  It is a two-prong approach.  Yes, working with our carriers and other insurers that we work with, was one way we created designs.  But part of that investment was a significant investment in making the employee and their dependents educated consumers. 

Let me just give you an example on childhood obesity.  You say why childhood obesity, they are not your workers.  Well, it is also a statement of society, but more importantly, it really reflects that if an employee goes to work and feels good about their family situation, there is not an issue there, they will be more productive and more satisfied. 

One of the things we did is created IT tools, not surprisingly, for people to go on and look at what does it mean to have nutrition for children and exercise programs.  One of the interesting byproducts was that coming back in the surveys, we found it was more family friendly.  People began to discuss what they were eating at dinner and what they were doing during the day.  A simple thing like not watching TV more than hour, and the type of TV that the child was looking at, not being a couch potato.  All those things helped immensely in intervening in those costs. 

Mr. Pomeroy.  Your confidence in your plan indicates perhaps to me that IBM would be one in a new insurance world where large employers could continue to offer what they had been offering or send their employees to shop in an insurance exchange.  You may very well continue to do what you have been doing. 

Mr. MacDonald.  Regardless of your aspiration about a public plan or not, the thing that I would caution us as patriots, using Chairman Rangel's approach, describing us appropriately so by the way, we have to ensure that we are still engines for information and transformation.  I mean, what I was just describing was a sense of transformation within the health-care arena.  And I think that has to be a fundamental premise of what we are doing going forward. 

I agree, by the way, with Gerry.  The whole concept of taking out the exclusion for tax deferral, we would completely agree; and I think there would be a mutiny at the gate, so to speak, if that were to occur.  I think there are fundamental things we have to maintain. 

Mr. Pomeroy.  Mr. Chairman, may Mr. Shea also respond? 

Mr. Shea.  Thank you, Mr. Chairman.  I just wanted to piggyback on Mr. MacDonald's comments and to make the point that I really don't think it is useful for us to see this as either/or -- either Medicare is good or private is good. 

If you look at the experience of people who have been working together -- I am talking about large employers, small employers, purchaser groups, consumer organizations -- and I would put us in that category -- or AARP, physician groups, hospital groups, how you restructure the system to get better value -- a key component of that is what the government does.  We can do these things if we do them together.  That is the lesson from what has gone on in the last 10 years. 

I think Mr. MacDonald would probably agree.  Medicare has led the way in terms of quality measures and quality reporting.  They, with a fairly modest investment, have got every acute-care hospital in the country reporting on a standardized set of measures.  And one of the things that the hospitals will tell you and the employers will tell you is, we don't want to have one measure set over here and one measure set over there.  Medicare instituted a uniform set of measures that everybody reports on.  And we know from the statistics, even in the first 5 years of that, that has improved quality.  The performance has really improved on those measures.  That is something Medicare did that the private sector wants to emulate and be part of. 

One of the things that bothers me about the debate over the public insurance is it is like we are back to yesteryear this is a polarized debate, in my humble opinion, which has prevented us from straightening out our health care mess for now decades.  It is that precise kind of thing. 

The only reason we talk about the public insurance program is we think it is a good cost-containment mechanism.  If the private insurers want to come up and present a credible case that they can control costs, then we would be very interested in hearing it.  But their history does not indicate that they can make that case based on what they have done in the past.  So, therefore, we simply say, well let's try the public insurance alternative and see if competition might get us someplace that the private insurance market has never been able to do.  This is not -- we are not enshrining a public insurance program.  We are trying to get these costs under control. 

Mr. Pomeroy.  Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you.  Mr. Brady from Texas may inquire. 

Mr. Brady.  Thank you, Chairman.  I agree with Mr. Conklin the the churning of the health insurance adds to the problem a great deal, not just in the private sector.  We had Texas Childrens Hospital and Texas Medical Center trade a nonprofit health insurance program to try to lower costs, and they failed, as they told me, mainly because small businesses have to churn, move from insurance plan to insurance plan every 1 year, 2 year, 3 years, as they did in my small business, to try to contain costs.  The point from the leaders of the Childrens Hospital is that until you connect behavior of that patient to their health-care plan prevention, other initiatives, won't really help. 

I want to describe to you a model that I found in a small town in east Texas; Evadale, Texas, just north of Orange.  There they have a paper mill, and 7 years ago the paper mill management and the union there, the steelworkers, agreed that the steelworkers would run the health-care plan.  What they did was they put together a very commonsense patient consumer model that had three parts to it.  One, they built a clinic at the front gate of the plant so that every union -- and there are 3,000 workers -- and their family had immediate access to preventive care.  When the family, child, whatever got ill, immediate access. 

Secondly, they went out to bid for imaging and specialty services, and even had insurance companies bid on that; put together a list of good, qualified specialty imaging services. 

Thirdly, they hired Navigator, a group that would help their members navigate the health-care system to the point where if you had a chronic disease or multiple illnesses, they would send a nurse along with them to go from doctor to doctor, and then sit down with that steelworker and work through the options to continue the medication and make the right decisions.  It was a very basic process.  The company pays an average health-care costs.  This group who I visited with, toured the center, sat down with the groups, haven't had a health-care premium increase in 7 years. 

When you talk to union workers, they say, look, if my child gets sick I take them to the clinic immediately, because if I don't, not only do they not get well but that money comes out of my pocket.  When they needed to even blacktop the front of the clinic, the union workers said, no, don't use our money for that; just buy the materials, we will do it because that is our health-care money it. 

You talk to the doctor who is there, who is hired by the steelworkers, said I am practicing medicine the way I always hoped to.  Instead of spending 15 minutes with the patient and 15 minutes with paperwork, spends the whole 30 minutes providing quality care; one, because he loses his job if he doesn't.  But secondly, he said, I don't have to worry about them suing me.  They are not anxious to sue themselves, because this is their health-care money. 

And then talked to the PA and they are all cross-trained in the office.  And their point was that one had worked at another institution, at a hospital, and if someone came in with a sore neck, they checked the insurance policy, and if this imaging was allowed and that imaging was allowed then everything was run, mainly because they could; and, secondly, because they lost money on the ER and uncompensated care in Medicare.  So we don't do the cost-shifting here.  We don't shift cost. 

Bottom line, there was a direct connection between the  behavior of the patients, of those who were being covered, and the health-care costs.  I am convinced that no matter what model we create -- that was for 3,000 workers, so it wasn't a big model.  In fact, smaller may be better if we are going to try to connect the consumer to the health care they get and the ultimate cost of it. 

My question is, regardless of what model we pick, how do we really change behavior to prevention, to immediate action, to quality care, if we don't, in whatever we do, connect that informed consumer, provide them easy access to prevention, and make sure they understand that those are their health-care dollars.  And I would open it up to the panel for any comments you have. 

Mr. Conklin.  Can I get a job at that mill?  It sounds great.  You know, if you could come up with a workable model for a company of 13, I would say we are in.  Again, I would say these are the kind of examples and the kinds of ideas that we really need to think through carefully and see how they might apply within the broader marketplace. 

One the problems I see with that example in our part of the country is that --

Mr. Brady.  It isn't geographic.  That model works wherever you take it.

Mr. Conklin.  It may or may not.  And it may work at 3,000 and not work at 20.

Mr. Brady.  Obviously, a model like that -- I don't want to cut you short -- but let's get serious.  We are not talking about that model for 13 workers or 20.  You are talking about putting together an amount that can create that synergy and do that bidding.  Any other comments? 

Mr. MacDonald.  Congressman, I might suggest that one of the ways of doing that is to focus on -- some of us are old enough to remember this -- I am not suggesting that we go back that far -- but when the physicians visited us at our homes in the young years. 

But I would also argue that now one of the things that we have done to incent that behavior that you discussed is really trying to focus on the primary care physician, making the doc -- if you will, using a sports analogy -- the quarterback, the ability to coordinate care, the ability to take that medical home approach. 

You talk about paperwork, the inability of either the doc or hospitals or the insurers to have a coordinated effort around the IT function that needs to be brought into the system.  Those are three or four things that could be done readily and we already have experience that have actually proved to be very beneficial to an awful lot of people. 

Mr. Brady.  Chairman, thank you.

Chairman RANGEL.  It would help if the members shorten their questions, so that within the 5-minute period we might get the benefit of our distinguished guests who are here, because it is embarrassing for the Chair to cut off the guest when he was asked a question and time wouldn't permit it. 

But having said that, we will go now to the gentleman from New Jersey who brought the guest here, Mr. Pascrell. 

Mr. Pascrell.  I thank the Chairman.  I thank the panelists.  Excellent, all of you. 

Mr. Conklin, I have a question for you and I have a question for Mr. Dennis.  I contend that an important part of health reform is providing at least the minimum benefit to ensure that individuals have meaningful coverage.  Without this component, I fear we will have a race to the bottom that leaves many sick people behind and others with coverage that fails to meet their needs. 

Some have argued that a health-reform package that provides for minimum benefit will restrict employers' ability to tailor the benefits to the employees' needs.  In your testimony you highlight the experience you faced each year when you were shopping for coverage, to use your word. 

As I understand it, there is relatively no choice in either what you are able to offer your employees and, consequently, no choice in the options among what your employees can choose. 

Now, this is a problem that is not just unique to your business.  I think you would agree with that.  My question is this:  Given your experiences in shopping for coverage that meets your employees' needs, do you really believe that a minimum benefit standard would impede your ability to provide adequate coverage to your employees? 

Mr. Conklin.  No, Congressman, I don't.  I think it would be one of those very useful tools in helping us evaluate and understand what that minimum -- we don't know what that minimum is, I don't know what it is, and it would be great if somebody could inform me in that way -- and the employees. 

Mr. Pascrell.  Thank you very much.  Mr. Dennis, in your position paper, one of the primary points made against an employer mandate is that it fails to address the real problems of the health-insurance market for small businesses, which is primarily affordability.  I agree with you to a point.  An employer mandate alone will not even begin to solve the problems.  I would like to make it perfectly clear that no one here has claimed that making any single change will solve the problems of our health systems.  You haven't heard that from anybody on either side.  In fact four of President Obama's eight health-reform principles address cost growth and affordability.  So I venture to say affordability is the single most important issue in this debate. 

On that note, I would like to point out that some of the options you have provided us in reducing health-care costs include expanding high-deductible plans -- this is in your testimony -- preempting State laws that serve to provide assurances of adequate insurance coverage.  It is there.  It attempts to allow employers to offer the most bare-bones policies. 

Now let's get down to the nitty-gritty, because I have heard some folks from the other side, my good friends, you would almost think that Medicare was a bare-bones plan.  So my question to you is this:  How do more bare-bones policies that ignore State laws and fail even to cover reasonable benefits provide protections for individuals, particularly those with chronic conditions or complex health-care needs? 

Are you suggesting therefore, Mr. Dennis, that we ration -- that we ration health care?  Is that what you are suggesting. 

Mr. Dennis.  When you are talking about a minimum benefit, minimum benefit plans, you could have one with virtually nothing in it; or you could have Cadillac-after-Cadillac-after-Cadillac of plans. 

Mr. Pascrell.  No, we are not talking about that kind of distinction.  Nobody on either side, sir, has ever said it is an either/or proposition. 

Mr. Dennis.  Oh, no, I'm sorry.  I didn't mean to leave you with that impression. 

Mr. Pascrell.  Good. 

Mr. Dennis.  Without saying there are two extremes to this, you can go either very small and very bare bones, or you can go to very expensive, let me put it that way.  And there are all kinds of gradations in between.  Whenever you set a minimum policy, whatever that policy is, there will be -- that is the level from where you start, and that is obviously the minimum benefit.  It can be either a very good policy or a very poor policy.

Chairman RANGEL.  It could be a good policy or a bad policy.  I want you to take notes. 

Mr. Dennis.  My point is it is directly tied to cost.

Chairman RANGEL.  I understand.  It makes a lot of sense. 

Mr. Dennis.  Directly tied to costs.  And so what we are talking about here is a cost issue.  I am not sure, maybe I don't understand the question. 

Chairman RANGEL.  No, we can't go through the question again. 

Mr. Pascrell.  I thought the question was pretty clear, Mr. Chairman.

Chairman RANGEL.  Well, anyway, we have to move on.  We certainly appreciate that on our side. 

We have Mr. Ryan waiting. 

Mr. Ryan.  Thank you, Chairman. 

Mr. Shea, I enjoyed the point you made before.  I actually agree with a lot of what you had said, which is the current system is not getting costs down.  We are not attacking the root cause of health inflation.  I don't think anybody is trying to defend the current system from that perspective. 

I guess there are just going to be two big different approaches here on how best to attack the root cause of health inflation.  We need to do a better job of offering an alternative, if we don't think that this is the plan to go with. 

On that, Mr. -- is it Sheils or Sheils? 

Mr. Sheils.  Sheils. 

Mr. Ryan.  I have been on the floor with the budget all day.  I apologize, I just arrived.

RPTS MERCHANTDCMN SECKMAN

Mr. Ryan.  I want to get into your actuarial analysis of the EPI plan, and Ms. Gould, If you want to jump in, because I don't want to unfairly characterize your plan, walk me through what it seems to me is sort of a death spiral of private plans that occurs.  How do you arrive at the $119 million or $120 million figure whereby people lose their private health insurance and go onto the government plan, as you have done in your analysis?  What is the dynamic that occurs that makes that happen. 

Mr. Sheils. The dynamic that occurs is that people are going to gravitate to the lowest-cost plan.  The difference here for a family in annual coverage cost is $2,500 a year.  That is shoes for kids.  It is getting the car fixed, so you can go to work.  For uninsured people and people living, those things are very, very important, so it is a huge amount of money. 

Mr. Ryan.  And that is because the payment rates are set at the Medicare rates? 

Mr. Sheils. That is right. 

Mr. Ryan.  Which are lower on average than the private pay rates.

Mr. Sheils. Substantially, yes. 

Mr. Ryan.  And because of the cross-subsidization that inevitably occurs with these lower rates than the private rates, more people going toward the lower public rates will push up prices in the private rates, making private insurance that much more expensive --

Ms. Schwartz.  Will the gentleman yield? 

Mr. Ryan.  Not right now. 

Go ahead.

Mr. Sheils. This isn't the EPI policy.  This is the public plan.  EPI is a different --

Mr. Ryan.  Okay.  Got you.

Mr. Sheils.  It is not the public program that people are talking about, no. 

Mr. Ryan.  So your $120 million estimate is based upon the assumption that we apply Medicare rates to the public plan.

Mr. Sheils. Yes, if you were to do that.  We also show what happens if you are less aggressive in the pricing, use private pay rates or use something in between. 

Mr. Ryan.  That is crossover, right? 

Mr. Sheils. Right.  And the idea is to sort of give people a smorgasbord of options so that you can look at what the impact is on providers, on cost shifting, and arrive at some decision of your own where you want to place things.

Mr. Ryan.  Dr. Gould, let me ask you then about your plan.  Tell me if I am wrong, please.  Your payment rates here are income below 200 percent of poverty, premiums fully subsidized; above 200 percent of poverty, you phase in between 200 and 300 percent of poverty, $70 for an individual, $140 for a couple, $200 for a family of four; nonworkers, different payment schedule; but the same for everybody based upon their income qualifications.  Is that essentially --

Ms. Gould.  You are talking about the subsidy structure for low income? 

Mr. Ryan.  Yes.

Ms. Gould.  That is correct.

Mr. Ryan.  And that caps it out of pocket, right, when you throw in co-insurance and everything else, right? 

Ms. Gould.  That is correct. 

Mr. Ryan.  So here is my question and concern.  That is why I want to ask Mr. Sheils and yourself, if we are going to pay the same for the services, regardless of the quality of the services, how are we going to expect the quality to improve, meaning not all doctors are the same, not all hospitals are the same?  They don't give us the same quality of care.  But if we are going to be paying the same rates for the services, regardless on the quality of these services; if a person has the same health insurance, which regardless of whether you are a smoker or you have bad behavior, if you are going get the same deal, aren't we basically having a system where the good cross-subsidize the bad in the health care provision of services based on quality?  And aren't we having a system where we are making it harder for us to incentivize healthy living and wellness management and those kinds of things if we had such a standard plan and the same fixed rates applied against providers regardless of their quality? 

Ms. Gould.  I think you are neglecting the employer-sponsored insurance will continue.  And what we will see is what we see with the examples of IBM and other large corporations that are able to innovate with their delivery system and change those incentives.  Those can continue.  There is no question that those kind of innovations can continue.

Mr. Sheils. I don't think we have talked today yet about the things that are really wrong with the health care system, the things that would really control costs.  Controlling payments, controlling what we pay providers, it reduces your cost, but it doesn't affect the basic inefficiencies in the system.

Mr. Ryan.  Right.

Mr. Sheils. We don't do anything here to correct the underlying problem in the system, and that is that the incentives for providers are way out of whack.  We know that in some parts of the country, you get twice as much health care as you do in other parts of the country; yet it has been proven that there is no correlation to your health status as a result.  So there is a great deal of suspicion, and much of what we do is just plain unnecessary.  None of these proposals -- the public plan proposal does not fix that.

Mr. Ryan.  Right.

Mr. Sheils. It does mean we pay less for the services that we use.

Mr. Ryan.  But it doesn't address the root cause of --

Mr. Sheils. No.  In California, we worked on a workers comp problem, and people said, you know, our utilization in workers comp is four times what it is in the neighboring states.  Well, we looked at it, but it turned out the costs were pretty much the same in the neighboring States.  The difference was that, in California, the payment rates were much, much lower.  I mean, dirt cheap, low rates.  And there was an increase in utilization that was generating the increase, the revenues, so they are able to maintain that kind of revenues. 

We don't want to move to a system like this.  And I don't think that we have at all, whether a public plan or whatever, I don't think we have gotten to the nub of the issue at all here.

Mr. Ryan.  He is about to bang the gavel on me.  There it is.  Thank you.

Chairman RANGEL.  Soon and very soon the bells will ring, and we will have a 15-minute vote, two 5-minute votes, but also a new Member is being sworn in.  And so it will be at least an hour that we will be away from the hearing. 

We have ten members who have not yet had an opportunity to inquire.  And I would like at this time to see how many of those here that haven't asked questions will be willing to come back at 2:00.  And I can't hold the witnesses to have to stay here, but those that can, depending on the number of members that would respond, would make a difference. 

So by hands, those who haven't had an opportunity, how many would be coming back at 2:00?  So I think at this time after Mr. Blumenauer gets his 5 minutes that we will then ask everyone that is left in order to ask a question and ask who they would want to answer, and I would ask the panel to submit an answer in writing, and apologize to all of you for the awkwardness of this time, but I can't thank you enough for the valuable information that you have given to us. 

And I may have to see Mr. Pascrell's friend in New Jersey to get this all straightened out, because you told it like it was, and we understand that. 

So, Mr. Blumenauer, we are going to stay as long as we can, and you are recognized. 

Mr. Blumenauer.  Thank you, Mr. Chairman.  And I will try and adhere to your admonition in terms of short questions. 

I would just say that I was very impressed with the track record of IBM as being creative, promoting wellness.  We have got some legislation we have introduced on a stand-alone basis to try and further incent that. 

And I appreciate the clarification that was made that a private, even if we have a public plan, there will still be tens of millions of people through the private sector driving those issues of cost containment and promotion. 

I have one specific question, Dr. Gould.  The reference that I am hearing about people that are going to be crowded out that we are going to be seeing; if there is an employer mandate, that it is going to lead to significant job losses or reductions in wages.  This reminiscent to me of what we heard when it was argued that we shouldn't increase the minimum wage because that was going to have a massive negative effect. 

In my State of Oregon and others around the country, the higher-minimum-wage States actually appeared to be growing, not shrinking.  Does the research on minimum wage have any application to having an employer mandate for health care? 

Ms. Gould.  It absolutely does.  When we think about how firms paying for health care are going to be offset, you can think, at the high end, there would be different forms of compensation that could give perhaps.  At the low end, you are right, you are constrained by the minimum wage.  But what we are talking about here perhaps is something like a 5, 6, even 7 percent payment that would be required.  Compare that to the minimum wage, we have seen in the last 2 years that 27 percent increase in the minimum wage. 

We don't know yet really what the effects are of that unemployment.  But if we look again, as you say, to the minimum wage literature in the 1990s, we can see that there were no employment effects of that kind of increase.  And in fact, I would go one step further in saying, if we were to chart really contained costs, and I think one thing that hasn't really been mentioned here is that the introduction of the public plan would actually do a good deal to contain costs and bend that cost curve; if we were to do that, it actually can increase the competitiveness of our firms.

Mr. Blumenauer.  Thank you.

Mr. Sheils. And I would challenge that.

Mr. Blumenauer.  Excuse me.  My time.  I asked the witness a question.  I would like to ask another witness a question, if you don't mind.  Is that all right?  I would like to --

Mr. Sheils. I apologize if I have offended you, sir.

Mr. Blumenauer.  That is fine. 

I just want to ask my question to Mr. Conklin.  You had referenced the byplay, that you are on sort of a merry-go-round having to switch plans, you are going back and forth trying to, what impact does that have on you and your employees being on this health care merry-go-round? 

Mr. Conklin.  Well, it has various impacts.  One of them is uncertainty for me and my employees.  So these transition periods cover a quarter of the year, in essence.  And during that quarter of the year, people still get sick.  They don't stop getting sick because we are changing our health plan.  So there is always the question of, which card do I use?  And then there is the question of, and what am I getting, you know?  Is it going to be 25 bucks when I go to the drugstore this time, or is it going to be 40 bucks, the co-pay? 

But really one of the more significant impacts of the constant shifting is, who is your doctor?  And who is choosing your doctor, because you are not choosing your doctor?  The health insurance provider is choosing the doctor.  I have got a stack -- I almost wanted to bring them for you so you could see it.  I got a stack about this high that I have collected over the last 5 years of the list of doctors for each insurance company. 

Now, sometimes they cross over, and you will find them in there, and sometimes they don't.  So if you are going to go to the doctor and get care, you are going to get it from somebody who is as familiar to you as the guy who drives a taxicab.  And how would, you know, how do you feel going to the doctor sharing some of the most intimate aspects of your life with a perfect stranger? 

I mean, there is a disincentive to go to the doctor that is part of the system.  And I think, and this I think is a really important part of this discussion, it leads to the perception that they are doing this on purpose; they are doing this to keep me from going to the doctor.  They are doing this because it keeps their costs down, and there is an element of distrust that now has completely permeated the private insurance system.  So there is a lot of repair work to do.

Mr. Blumenauer.  Thank you, Mr. Chairman.

Chairman RANGEL.  Let's see what we can accomplish with the time that is left. 

Mr. Boustany, why don't you inquire for a minute? 

And we ask the panelists to respond in a minute, so that we can move on, okay? 

Oh, I am sorry.  No.  Mr. Boustany arrived earlier, John. 

Mr. Boustany. 

Mr. Boustany.  I am sorry.  Am I on?  Okay. 

Thank you, Mr. Chairman. 

Mr. Dennis, President Obama promised, if you have got health care already, and probably a majority of you on the panel do, then you can keep your plan if you are satisfied with it.  But you have research that shows employers, and especially small businesses, that would stop offering private coverage because employees could receive coverage under a government plan.  So wouldn't a bill that forces workers to lose existing coverage, as has been described by Mr. Sheils, be contrary to the President's campaign promise? 

Mr. Dennis.  I am not going to get into that about campaign promises. 

But, clearly, I mean, we have a situation that the current system itself, the current employer-based system does not work for smaller firms. While you can start with the employer-based system as a system from which you work around, clearly something has to be done at the bottom to help us in that regard. 

From the small employer perspective, the costs of the system are relatively high, and this gets to your point.  There was a cite offered earlier about an 18 percent difference in relative effective cost between small and large.  There is another study that shows you get 78 to 83 percent of insurance equivalent, which is effectively the same thing.  You have greater volatility of premiums because you are a small group.  Owners face real hassles.  This was brought up with your experience.  Everybody agrees on this. A series of people who are business owners, who are not experts in insurance, although unfortunately they are having to become one.

We are talking about wellness and prevention.  In a small business, a 13 person firm, I don't think so. 

And then we have bizarre things that happen in this system.  For example, you will see that the small businesses are much more likely to pay 100 percent of the premiums than the large ones; 40 percent of small businesses with insurance pay the whole fare.

Chairman RANGEL.  I am sorry to interrupt you, but Mr. Kind would you inquire for 2 minutes. 

Mr. Kind.  Thank you, Mr. Chairman. 

I will try to be brief.  But first of all I want to thank Mr. MacDonald for kind of showing us the IBM way of what up-front preventative investment does to drive down costs in a larger employer setting.  And I think the testimony was real impressive.  And hopefully, as we move forward on reform, we will figure out ways to further incentivize what IBM and others are doing across the country.  Because a lot of this is a lot of common sense, you know, in the free market working to drive costs down. 

Mr. Dennis, let me, agree with you in your opening testimony, where I am afraid that if coverage gets out ahead of cost, this could become politically very dangerous, and the system could be very tough to reform.  But I don't want NFIB to walk away leaving the impression you don't stand for anything.  Because I know over the last few years, I have worked closely with NFIB.  But not just NFIB, but AARP, SEIU, a restaurant association, of realtors, to come up with what I think is a very viable national purchasing pool plan that we have introduced in a bipartisan basis with tax incentives, with prohibition against risk-rating, and also virtual HR managers for small businesses that could answer a lot of the problems small businesses encounter in the free marketplace right now.  Could you comment on the wisdom of such an approach? 

Mr. Dennis.  Surely.  And the answer is yes.  We have distributed an outline, I believe, to the dais of what the basic current SHOP act contains.  But essentially, what we are looking at is a pooling mechanism, a very large pooling mechanism, where we are going to draw employers in, and we are going to cap or control the ability to rate on the basis of experience, health experiences, and claims, claims histories and that kind of thing.  So it is a program that I think is effective, could work for small businesses.  It won't solve every problem that the world has ever come up with for us, but clearly is a step forward.  I think I can speak for our legislative staff, of which I am not one, that it would welcome any Member to join you in co-sponsorship of this bill. 

Mr. Kind.  Mr. Dennis, I think you would also agree, wouldn't you, if we do the proper health insurance reforms the right way, such as eliminating underwriting or rating based on health experience, that, too, could benefit small businesses? 

Mr. Dennis.  Absolutely.

Chairman RANGEL.  Mr. Heller, could you inquire for 2 minutes? 

Mr. Heller.  I will.  And I had a prepared question, but I will make it brief. 

Mr. Sheils, what else are we not doing here on this panel? 

Mr. Sheils.  Well, I guess the basic concerns for me are the incentives in the system.  For physicians, the incentives are to just provide as many services so that you can crank out as many bills.  We know, for example, well documented, that if you slow the rate of growth in physician payment under Medicare, you get a 30-cents-per-dollar offset from increased utilization.  Those are the things that are out of control. 

We know what works in terms of cost containment.  We have done this -- we have seen it twice.  Once is in the 1990s.  There was a terrific investment in managed care that was made by employers in the early 1990s.  The rate of growth in spending per worker declined from 18 percent a year in 1989 down to 8/10ths of 1 percent by 1996.  Adjusting for inflation, that is a net reduction in what we spend on health care. 

And then with the Medicare Part D program, this was a competitive market-based approach as well, and we are all gratified to hear that the program came in costing a great deal less than what we had projected it would cost.  And again, this has to do with the competition that results.  So I think that the idea that has worked in the past is performing integrated systems where everybody has an incentive to keep people healthy, everybody has an incentive not to do things that are unnecessary.  And those models have worked. 

They are very unpopular.  I am talking about managed care.  They can be pretty unpopular.  But there are ways to build on that platform.  If we have done it once or twice, we can do it again.  So that is the direction I have tended to think in terms of.

Mr. Heller.  Thank you very much, Mr. Sheils. 

Mr. Chairman, I yield back.

Chairman RANGEL.  Thank you so much. 

Ms. Schwartz, would you please inquire for 2 minutes? 

Mr. Schwartz.  Thank you very much. 

And I do want to point out, I know there has been some frustration I think I hear from the panelists that you haven't been allowed to or been asked very much about all the other actions we should take to help improve quality, improve efficiency and contain costs.  We have had other hearings, and maybe we can invite you back to discuss some of those things. 

But the fact is my understanding was this was purposefully set up to discuss employer-based health care. 

I do want to say that I acknowledge Mr. MacDonald, particularly speaking to health IT.  We have done great work on that in this administration already in investing in health information technology.  This committee has done great work on that under Medicare. 

And primary care, we are very, very aware of the increased need for primary care providers, and in fact, I am circulating a bill today that is going to address many of those issues and I hope answer many of those questions.  And I do want to also just second Mr. Kind's really good work and important work in terms of the market reform for small businesses, the agents who have joined together to purchase care. 

The question I have has to do with other market reforms.  And I think I would ask Dr. Gould to start with his reaction to the fact that we have talked about community rating, we have talked about of course maintaining the employer-based system of care.  I don't think that we are all talking about that, most of us anyway.  But we do -- I actually do that.  It is really hard for people to enroll. 

I think that, Mr. Conklin, you talked about this, that even when you have coverage, many employees don't take employer-based coverage.  And either they don't sign up, forget to sign up, miss the 30-day notice and didn't have to have a life-changing experience to sign up later; there are waiting periods for 6 months, so even if your employer covers you, you can't sign up.  I think I want to change the playing field on this. 

So my one question is, could we -- quick question -- maybe it is a yes or no answer, if I could.  What do you think about doing automatic signup if your employer offers you health insurance? 

Dr. Gould, do you think we ought to do like we did for 401(k) fees and just have people automatically signed up?  Of course, they could opt out if they have health insurance elsewhere -- 

Chairman RANGEL.  The two-minutes have expired.  If someone wants to answer yes or no. 

Ms. Gould.  I think auto enrollment would be a great idea.

Mr. MacDonald.  It is wrought with problems.

Chairman RANGEL.  Congressman Roskam from Illinois will be recognized for 2 minutes. 

Mr. Roskam.  Thank you, Mr. Chairman. 

Anticipating the falling gavel, just maybe a word, not really time for a question, but just to follow up with the exchange between Mr. Dennis and the gentleman from New Jersey. 

I served in the State legislature in Illinois for 13 years and served on the insurance committee.  What was interesting was, take Mr. Conklin's situation, assume for the sake of argument that he and his wife, his business partner, decide that they are going to put a salesperson out on the road, and they need to get a vehicle to do that.  Let's say that the vehicle is sort of the analogy for a health insurance policy.  The government comes in and says, you have got to have a really safe vehicle.  You may say, well, Ford Taurus is pretty safe, but there is a government standard that says, no, no, no, Ford Taurus, not safe enough, you have got to put them in the best Volvo possible.  And if you don't put them in a Volvo, you can't put them on the road.  So you are in a situation then, as the owner of a company, that says, well, we can't really afford the Volvo; we can give them a Schwinn, but they are not going to let us do a Ford Taurus. 

And that is not unlike what insurance is like in the State of Illinois and other places where mandate after mandate after mandate after mandate comes in.  You listen to the testimony, and it is sympathetic.  Legislatures end up voting in favor of these mandates but are really blind to the cumulative cost that goes up.  So I think that having a legitimate no-frills policy has to be a part of this conversation. 

And with that, I yield back. 

Chairman RANGEL.  Thank you. 

Bob Etheridge. 

Mr. Etheridge.  Thank you, Mr. Chairman. 

Mr. Chairman, I would like to submit a couple of questions for the record. 

I will only ask one question in the expediency of time. 

Mr. MacDonald, we have heard from a number of employers, not just you but others, that how valuable it is as part of your health benefits to really have a prevention and wellness program.  And in your testimony, you talked about your healthy choice that translated into about an estimated $79 million in savings in health care claims between 2004 and 2007. 

And I happen to believe that preventative medicine has to be a part of any health system we put together.  I just think that, without doing that, we don't get to where we need to get to.  My question to you is this:  Can you talk just very briefly about your program, about the specific cost savings?  And secondly, do you have any data on this that you could share with this committee? 

Mr. MacDonald.  I won't give you the specifics.  I will respond in writing on the data, but there is an enormous amount of data that we are willing to share.  And I really think that the primary issue that we have focused on is trying to connect the employee and their dependants with the primary care physician.  I think that begins to drive behavior faster than anything.  The preventative wellness programs help, but the single most important focal point for us is the primary care, the medical home approach to medicine.

Mr. Etheridge.  Thank you, Mr. Chairman.  I yield back.

Chairman RANGEL.  Thank you so much.

John Linder, thanks for your patience.

Mr. Linder.  Thank you, Mr. Chairman. 

Mr. Sheils, how many Americans choose their health care provider or their health care insurance? 

Mr. Sheils.  How many choose their provider? 

Mr. Linder.  How many choose their insurance? 

Mr. Sheils.  I think it is 80 percent or more of those that are offered it.  Most of those people have coverage from some other source.

Mr. Linder.  How many of those people have it chosen for them by their employer? 

Mr. Sheils.  Probably 30 or 40 percent. 

Mr. Linder.  Don't the employers make most of the health care decisions in this country? 

Mr. Sheils.  They have done, yes, sir.

Mr. Linder.  Mr. MacDonald, what percentage of your payroll does IBM pay for health care? 

Mr. MacDonald.  As a percentage of payroll, it runs about 7 percent.  But you have to remember that we have almost 300,000 lives, and therefore a lot of people, not a lot, but several thousand people opt out, so it actually could be higher.  And plus our wage, as I indicated before, tends to be at the higher end, so that percentage is a little deflated.

Mr. Linder.  How much does the employee pay?  Does the employee pay X percent of the premium? 

Mr. MacDonald.  We are one of the few corporations in America today that give a free PPO plan to all employees.

Mr. Linder.  If we had a public plan to compete with, what percentage of employees do you think might opt for it? 

Mr. MacDonald.  Before I mentioned to you, in my opinion, that there would be little migration to a public plan initially; I think that people are very reluctant to change as it relates to health care.  As evidenced with HSA, they have been reluctant.  I think a lot of it is really driven off of design, access and pricing.  And so for me to opine directly on a public plan, I don't have the details yet.

Mr. Linder.  Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you. 

Mr. Yarmuth of Kentucky. 

Mr. Yarmuth.  Thank you, Mr. Chairman. 

Mr. Sheils, you mentioned earlier that, you were talking about why people would move to a public plan, you talked about cost savings and so forth, and seemed to imply that the only reason, at least the only one we discussed, was that you could pay lower rates to providers and that had a deleterious effect on the system.  Aren't there other factors involved that may make it cheaper, like there is no profit component to the cost?  There is also the potential of lower administrative costs like those achieved by Medicare that would allow the public plan to be less expensive.

Mr. Sheils.  We showed earlier in the testimony that the cost to private insurance administration, including profits, et cetera, is around 13.5 percent of benefits.  Under this plan, it probably would be closer to 7 percent under this public plan.

Mr. Yarmuth.  Thank you. 

Mr. Conklin, first of all, thank you for saying a couple of things which I have been saying, and that is why I applaud you for saying them.  And one is, we aren't going to get it right the first time.  There are going to be thousands of unforeseen consequences that we will have to work on, but we need to start on this effort. 

And secondly, that we are trying, I think this is the way I interpret it, that we are trying to apply business concepts to something that is not necessarily a pure business.  If you wanted to leave your business right now, if you wanted to shut it down, if you had a better opportunity somewhere else, given unfortunately the condition of your wife, would you have an easy time getting insurance if there weren't some kind of a public plan? 

Mr. Conklin.  No, I don't think we would have an easy time getting insurance, and the insurance we got would be expensive, and I don't think paying more in that scenario would yield better results for my wife.  Right now, we have a pretty decent HMO, and she, we, are paying for the best care she has ever gotten 100 percent out-of-pocket.

Mr. Yarmuth.  Thank you. 

One final question.  Did under the Lewin Group, Mr. Sheils, estimate the, or what did the Lewin Group estimate is the 11-year savings to national health expenditures under the commonwealth plan? 

Mr. Sheils.  I believe it was $4.8 trillion. 

Mr. Yarmuth.  So a significant amount.  Thank you very much. 

Thank you, Mr. Chairman.

Chairman RANGEL.  Mr. Reichert is recognized.

Mr. Reichert.  Thank you, Mr. Chairman. 

Would everyone on the panel agree that if an employee today is happy with and satisfied with their health plan, that they should be able to keep it?  Is there anyone who disagrees with that comment? 

Mr. Sheils, if a new government-run health plan was created and it paid providers Medicare rates, how many Americans would lose their employee-based health insurance that they currently have? 

Mr. Sheils.  It would be about 108 million people.

Mr. Reichert.  And Mr. Chairman, I have one other concern.  I fortunately have been blessed to work with King County for King County in Seattle, Washington.  A great wellness activities, preventative health care plan.  I am concerned about saving $18 million over the last few years promoting prevention, health prevention programs; Microsoft does the same thing.  I am concerned that if we move to a public health plan, a government-run health plan, I should say, that we may lose some of those innovative ideas. 

And I yield.  Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you.  Mr. Meek is recognized. 

Mr. Meek.  Thank you so very much, Mr. Chairman. 

Anyone on the panel, one of the main reasons that we are -- I mean, one of the main issues that we run into with this whole health insurance issue is preexisting conditions.  And I just want to ask anyone that wished to answer, what kind of incentives should be out there as it relates to government incentives to not only take on preexisting conditions when we look at overall insurance? 

Mr. Shea. Congressman, the word comprehensive is often associated with reform in our discussion these days.  And I really think it is worth bearing in mind that there are very concrete parts of that.  One of those pieces is that we have to accept everybody into coverage.  We can't exclude people because of preexisting conditions. 

But the correlate of that is if we get everybody in and if we get them in from birth, we need to provide them with the kind of preventative care, with the kind of early detection, with the kind of management of chronic diseases that come up.  That is where the real cost savings are going to be in terms of managing health care.  So it is one piece of the overall puzzle, and it is important that we address all of them together.

Mr. Dennis.  Congressman, you have not only the preexisting condition in the sense of someone coming into a job, but you have a similar situation when someone is in a job and faces, job lock, which happens quite frequently in smaller firms.  Someone will be in a job, have insurance, and then can't move to another job because of the health insurance situation.

Mr. Meek.  Well, that is something definitely we are going to have to tackle, because I can see it even going down to almost health care employment discrimination saying, well, if you have a preexisting condition, I don't need you in my group or in my company because you are going to cost us all more. 

Thank you, Mr. Chairman.

Chairman RANGEL.  Thank you. 

You have been one of the best panels that we have had.  I cannot begin to tell you how many members who have so many things to do with so many other pieces of legislation how they have stopped by to say what a great panel this has been and how important it has been. 

I yield to Mr. Camp before we adjourn.

Mr. Camp.  Well, I would just agree with the chairman's comments. 

Thank you all for being here.  I appreciate your testimony very much.

Chairman RANGEL.  And with that, most of you veterans know how it works here.  We regret the awkwardness here, but you made a great contribution toward our thinking.  We have got to have a health bill.  And hope all of you would feel that your input has been a part of what we are doing.  Thank you so much.  The committee stands adjourned.

[Whereupon, at 1:27 p.m., the committee was adjourned.]

[Questions for the Record follow:][Submissions for the Record follow:]

Joe Solmonese, Statement

Judy Waxman, Statement

National Small Business Association, Letter
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