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57–484—PDF 2008

S. HRG. 110–1052

47 MILLION AND COUNTING: WHY THE HEALTH

CARE MARKETPLACE IS BROKEN

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JUNE 10, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3

WITNESSES

Kelly, Lisa, Lake Jackson, TX ................................................................................ 5

Arth, Raymond, president and CEO, Phoenix Faucets, Avon Lake, OH ............ 9

Williams, Ron, chairman and chief executive officer, Aetna, Hartford, CT ........ 11

Hall, Mark, professor of law and public health, School of Law and School

of Medicine, Wake Forest University, Winston-Salem, NC .............................. 13

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Arth, Raymond:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 31

Baucus, Hon. Max:

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

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 3

‘‘Cash Before Chemo: Hospitals Get Tough,’’ Wall Street Journal article

by Barbara Martinez, April 28, 2008 .......................................................... 42

Hall, Mark:

Testimony .......................................................................................................... 13

Prepared statement .......................................................................................... 48

Responses to questions from committee members ......................................... 56

Kelly, Lisa:

Testimony .......................................................................................................... 5

Smith, Hon. Gordon H.:

Prepared statement .......................................................................................... 58

Williams, Ron:

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 60

Responses to questions from committee members ......................................... 75

COMMUNICATIONS

Administrative Solutions Plus, L.L.C. ................................................................... 89

National Association of Health Underwriters ....................................................... 93

University of Texas M.D. Anderson Cancer Center .............................................. 99

(III)

(1)

47 MILLION AND COUNTING: WHY THE

HEALTH CARE MARKETPLACE IS BROKEN

TUESDAY, JUNE 10, 2008

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:07 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Rockefeller, Bingaman, Kerry, Lincoln, Wyden,

Stabenow, Salazar, Grassley, Hatch, Snowe, and Smith.

Also present: Democratic staff: Russ Sullivan, Staff Director;

Elizabeth Fowler, Senior Counsel to the Chairman and Chief

Health Counsel; David Schwartz, Health Counsel; Billy Wynne,

Health Counsel; Shawn Bishop, Professional Staff Member; Susan

Hinck, Fellow; and Elise Stein, Detailee. Republican staff: Mark

Hayes, Health Policy Director and Chief Health Counsel Advisor;

Rodney Whitlock, Health Policy Advisor; and Lyndsey Arnold, Intern.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The committee will come to order.

About recovering from cancer, Happy Rockefeller, widow of the

late Vice President Nelson Rockefeller, once said, ‘‘Once you have

been confronted with a life-and-death situation, trivia no longer

matters. Your perspective grows and you live at a deeper level.

There’s no time for pettiness.’’

Today we will talk about life-and-death situations. We’ll look at

problems in the health insurance market that are literally making

the difference between living and dying. We will try to leave the

trivia behind. We will try to gain perspective. We will try to understand at a deeper level.

More than 170 million Americans buy health insurance in some

form through the private marketplace, but the insurance market is

broken. Premiums are high, benefits shrinking, and 47 million

Americans still lack health coverage altogether.

Today’s hearing is the third in a series that the committee is

holding to prepare for action on health care reform next year. The

committee will spend this year studying the health system and reform options so that we can achieve what previous Congresses and

presidents were unable to do. We must find a way for all Americans to have access to affordable, high-quality health care.

2

Next Monday, June 16, the Finance Committee will hold a daylong summit on health reform, and I thank Senator Grassley and

other Senators of the committee for their involvement in next

week’s summit. It is open to all members of Congress and to invited guests from the health policy community, and its goal is to

foster dialogue among members. Where we can, we want to start

to delve into options for reform. Several Senators on the committee

will co-chair panel discussions, and to those Senators who are, I

say thank you.

Today we will hear about the major problems in the health insurance market. We need to know what does not work so we can craft

the right reforms to yield the desired result: affordable high-quality

health care for all Americans.

Private insurers are having difficulties offering affordable options. The average premium for family coverage is more than

$12,000 a year. Premiums can be even higher for families purchasing coverage on their own and not through their employer.

Health coverage is even more expensive if you have an existing

condition like diabetes or heart disease. Since the year 2000, health

insurance premiums have been growing faster than the economy

and faster than wages. These trends are unsustainable. The health

insurance market is failing to keep premiums in check.

Employers are also having trouble purchasing coverage in the

health insurance market. Large and small employers alike find it

difficult to offer health insurance to their employees and retirees.

Premium increases are forcing many employers to scale back benefits or shift costs to employees. Some employers have stopped offering health insurance altogether.

Since 2000, the share of non-elderly Americans with employersponsored coverage dropped from 69 percent to 60 percent. Among

firms with 3 to 9 workers, coverage dropped from 58 percent to 45

percent. The health insurance market is losing ground with employers.

Individuals face hardships when they purchase health insurance

on their own. People who are not covered through their employer

or who do not qualify for programs like Medicare or Medicaid have

to buy it through the individual health insurance market. But let

us face it, the health insurance market for individuals is truly broken. Healthy people can forego coverage, while people with common

health conditions are usually excluded. These days people are being

denied insurance simply because they have allergies, or as we

learned from a recent press story, because they had given birth

through a C-section.

For many serious conditions like diabetes or heart disease, the

inability to buy private coverage almost guarantees that their conditions will worsen, and that also means that their conditions will

become even more costly to treat. Too often the coverage that individuals can afford has gaps and fails to protect against financial

ruin if a person gets sick. These days, most personal bankruptcies

are attributable to health care bills.

We have also heard troubling press reports that some insurers

look for ways to rescind policies when individuals need expensive

treatments. What is the point of health insurance if it does not

cover serious illness? Having health insurance makes a difference.

3

People with health coverage get treated when they need it. They

stay healthier longer and they lead more productive lives.

Today’s market for health insurance leaves too many people

without affordable coverage. The health insurance market needs

reform. We must do it right. In order to do so, we must understand

the problems.

Today we have a panel of witnesses to help us. Our witnesses

can help us to understand the failings of the current market and

where we need reform. The diverse perspectives will show us, hopefully, where to focus reform so that we reach our goal of having affordable high-quality health care for all Americans.

In a moment we will hear from Lisa Kelly. Mrs. Kelly will testify

via video conference about how her health insurance, which had a

$37,000 benefit cap, did not insure her for the full cost of her cancer treatment. When she later applied for coverage under her State

high-risk pool, they required a 12-month waiting period for her preexisting condition and did not cover any of her cancer treatment

during that year.

Problems like that in our health insurance market are not pleasant to think about. They are not easy to solve, but we cannot, and

should not, ignore them. These are life-and-death issues. We need

to leave the trivia behind. We need to gain perspective and to understand at a deeper level.

It was more than 30 years ago that Happy Rockefeller had cancer surgery. Let us try to apply some of her wisdom and her courage as we consider these issues today.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Senator Baucus, for continuing to

hold hearings on this very important subject of the uninsured, and

health care delivery generally. The Health Care Summit next week

is doing some good work, setting groundwork for what I hope we

do next year on reform. I know a lot of people are critical of the

way our health care system covers people.

The truth is that we do not really have a health care coverage

system, at least not like other countries do. What we have is a

patchwork of government incentives and government intervention.

We have the military system for the military. Seniors have Medicare. Veterans have a program. For the rest, it is provided, for the

most part, by employers. One hundred and fifty-eight million

Americans benefit from incentives that the Federal Government

delivers to encourage employers to provide health care coverage.

But approximately 47 million Americans do not have any coverage. The vast majority of the uninsured are also employed. If

your employer does not provide coverage or if you are selfemployed, you have to go out into the individual market to get

health care coverage. Currently the individual market is simply not

viable for millions of Americans. It does not mean that they could

not get used to it if they were provided incentives to do it, but right

now people seem to be satisfied with employer coverage.

Finally, we have the problems of coverage not being adequate for

those who do have it. We all know the consequences of not having

4

enough, or any, insurance coverage. What is particularly alarming

are the financial consequences for people with inadequate or no insurance when they seek treatment at a hospital for life-threatening

diseases.

A recent Health Affairs study showed that self-paid patients, including the uninsured, are charged 2.5 times more for hospital care

than the insured. That is just the beginning. Some hospitals even

require payment up front from the uninsured or under-insured before they provide treatment.

I would like to put an article in our record from the Wall Street

Journal, recently exposing this practice at a prominent institution,

M.D. Anderson of Texas.

[The article appears in the appendix on p 42.]

Senator Grassley. You have already referred to the case of Lisa

Kelly, so I will not go into that. We are going to hear more about

that, but it seems to me that it is outrageous, the hospital’s upfront collection policies.

The troubling thing about her story is that these were actions

taken by a hospital that is funded through taxpayers’ dollars and

charitable gifts. I guess I shouldn’t be shocked, given that my staff

uncovered, through investigations, hospitals that purported to provide care for the neediest in society and that receive significant tax

benefits for doing so not really providing that care that a charitable

institution ought to.

In addition to not paying income taxes, nonprofit hospitals receive tax-deductible contributions, issue tax-exempt bonds, and receive exemptions from State and local property and sales taxes. In

addition to not paying income taxes, nonprofit hospitals receive

tax-deductible contributions, issue tax-exempt bonds, and receive

exemptions from State and local property taxes. I said that twice

because I think we ought to know what these benefits are of nonprofit status.

This committee heard testimony that these hospitals receive ben- efits of more than $40 billion annually for the care that they are

supposed to provide. These benefits were granted to hospitals back

at the turn of the last century when hospitals were the only place

where the poor could go when they were sick. The enactment of

Medicare in 1965 and the explosion of the insurance market since

then has resulted in incentives for hospitals to treat only paying

patients.

The current environment is no different than where we were over

100 years ago. Back then, people with money had private physicians who made home visits, the poor received treatment at alms

houses supported by philanthropy. The only difference now is that

many of those former alms houses have become rich institutions

that believe they no longer need to serve the poor to reap all the

benefits of tax-exemption. I raise this issue again because, as we

talk about tax incentives for health insurance, I want us to also

consider the billions of dollars of tax benefits conferred to nonprofit

hospitals.

Given that the majority of our country’s hospitals are operating

as charitable institutions, any discussion of health care reform

should consider their role in the market. As we move forward on

health reform, we need to look at all the incentives the Federal

5

Government has in place, particularly those in the tax code, to

make sure they are serving people who need health care coverage.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Now I would like to welcome our witnesses. But, first, we will

hear from Mrs. Lisa Kelly from Lake Jackson, TX. Mrs. Kelly purchased a limited benefit health plan. Approximately one million

Americans have limited benefit plans. In 2006, Mrs. Kelly was diagnosed with acute leukemia and referred to a cancer hospital. She

will share her experiences of being under-insured during her health

crisis with us today.

I must say, though, Mrs. Kelly has a medical appointment later

this morning, so she will not be able to stay for the entire hearing,

so those of us who wish to ask questions will do so when she completes her statement. I would remind everybody that all written

statements will be automatically entered. That is later on.

Anyway, Mrs. Kelly, it is yours. Tell us what you want to say.

Let it all hang out. Tell us what you think. Do not pull any

punches. Just be straight and tell us what you think we should

hear.

STATEMENT OF LISA KELLY, LAKE JACKSON, TX

Mrs. KELLY. I am a little nervous.

The CHAIRMAN. Well, do not be.

Mrs. KELLY. Well, I bought a policy, thinking it would be good

enough to at least help me get in the door. I never had any serious

sicknesses. So I got a little policy through United Healthcare. It

was, like, $189 a month I paid. It got my allergy pills. And the hospital at home and my doctors there took the insurance. And then

when I found out I had leukemia, they told me I needed to go to

M.D. Anderson. So I thought, all right.

So I called, and I gave them all my information. They called me

back and said they could not accept my insurance, that I would

have to be self-paid and that I would have to bring a check for

$45,000 with me the very first day when they made my appointment.

I think our health care is really broken. But then I got to M.D.

Anderson, and I also then went and tried to get on—since I found

out my insurance was no good for them—I got signed up and got

on the high-risk pool, and I have Blue Cross/Blue Shield. I got in

it, and I had to pay for it for the whole year. But it would not cover

my cancer until February of this year. So now it has kicked in. I

was in remission, but now I am out of remission, so I am starting

over again.

The CHAIRMAN. Could you tell us, I am just curious, based upon

your experience, I take it that you believe—I certainly believe—

that your condition is just unfair. It is almost unconscionable. But

you bought coverage. You paid $189, you said, a month for a plan

and that did not cover your condition.

Mrs. KELLY. Yes.

The CHAIRMAN. And you then bought into a high-risk pool and

that did not cover you for a long period of time. What do you want

to tell our committee? We have a couple of people from the insurance industry here. Basically, what is the right thing to do? What

6

would the right approach be? What should Congress do, or what

should insurance companies do? What just sounds kind of right to

you?

Mrs. KELLY. I do not know what is right or what is wrong. I

know health care is expensive. I know doctors, and their time, and

the medicine is expensive. But I think some things are just totally

over-charged. Now that my insurance has kicked in it is a little

better, but when I was self-pay it was unbelievable, what they were

charging for things, and things that I did not even have.

I just think that someone needs to monitor how they do that, or

how the hospitals get by with charging the prices they charge. I

just think it should be fair for everyone all the way around. Whether you have money or you do not have money, you should be able

to go in and get health care and not be penalized or put to the side

because you do not.

The CHAIRMAN. Well, thank you very much for taking the time

to talk to us. Too often in this committee we have witnesses who

talk about concepts and abstractions, but you are providing a face

to the problem. You are showing us that this is real, that is, your

condition and what you face. I just thank you very much for taking

the time and having the courage to come and talk to us and tell

us what you think we need to hear.

Thank you very, very much.

Mrs. KELLY. Thank you.

The CHAIRMAN. You bet. We have a couple of questions, Lisa,

from other Senators.

Mrs. KELLY. All right.

Senator BINGAMAN. I was going to ask, Lisa—I’m Jeff Bingaman.

I am from New Mexico. I was going to ask, when you got this limited benefit policy that you had that turned out not to cover the

leukemia, what did you understand you were getting in the way of

coverage at that time? Did you understand you were getting inadequate coverage? Because the problem, it seems to me, is you were

insured, but you obviously were not insured for what you wound

up having. So what was your understanding?

Mrs. KELLY. Well, I thought it covered it. I had to turn in—but

M.D. Anderson would not accept it because it only paid 50 percent.

It had to be 70 percent or above. That is the only reason M.D. Anderson would not use it.

Senator BINGAMAN. So you think perhaps some other medical institution would have accepted it? Is that your understanding?

Mrs. KELLY. I do not know.

Senator BINGAMAN. All right.

Mrs. KELLY. I mean, in between, after a while, just to save

money I would get my levels checked at home and, if I needed

blood or platelets, I would go to the hospital at home and they

would turn it in to my insurance where it would not cost me as

much, so I would not have to come up here and pay full price.

Senator BINGAMAN. All right. Thank you very much.

The CHAIRMAN. Senator Wyden?

Senator WYDEN. Mrs. Kelly, I am Ron Wyden, from Oregon. I am

curious whether M.D. Anderson tried to help you get into this highrisk pool. Did they try to do anything to try to move things along

and get you coverage in a quicker way?

7

Mrs. KELLY. No. They just told me I needed to check into it. So

I went home, checked into it and signed up at home and got it

started.

Senator WYDEN. But they did not do anything? They did not offer

to try to help you? I gather it took you a fair while to get into that

high-risk pool, did it not?

Mrs. KELLY. It took about 2 or 3 weeks. I had a friend of mine

who contacted someone who did their insurance for them at work

and he usually just did companies, but he took me in and gave me

an application. We filled it out, and in probably 3 weeks I found

out I was accepted, but that it would not cover me for a year on

the cancer. I pay about $1,900 a month for that. That covers for

3 months.

Senator WYDEN. And you basically found this friend. But M.D.

Anderson, after that first contact you had with them, they did not

say, we will try to set you up with these kinds of programs and get

you through it?

Mrs. KELLY. No.

Senator WYDEN. All right. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Kerry?

Senator KERRY. Lisa, this is John Kerry from Massachusetts. I

just wanted to ask you a couple of questions.

First of all, when did you first buy this insurance?

Mrs. KELLY. I had it for about 2, 3 years before I found out I had

leukemia.

Senator KERRY. And were you working at the time?

Mrs. KELLY. No, I was self-employed.

Senator KERRY. Self-employed. Had you ever had insurance previously through an employer?

Mrs. KELLY. Yes.

Senator KERRY. How long before that?

Mrs. KELLY. Five or 6 years.

Senator KERRY. Before that. So you went 5 or 6 years without

any insurance?

Mrs. KELLY. We went quite a while without insurance, yes.

Senator KERRY. Without any insurance.

And do you mind if I ask how old you are? You can avoid it if

you want.

Mrs. KELLY. I am 53.

Senator KERRY. Fifty-three. All right.

How many years did you have insurance with an employer, or

through your employer?

Mrs. KELLY. Well, for 10 years with the grocery store I worked

for, and then probably 5 years with Hastings.

Senator KERRY. So, about 15 years you did have coverage

through your employer?

Mrs. KELLY. Yes.

Senator KERRY. Now, once you bought into this limited program,

did you know it was limited when you bought it?

Mrs. KELLY. I knew it was a little limited, yes.

Senator KERRY. All right. And when M.D. Anderson said you had

to show up with $45,000, did you have the $45,000?

8

Mrs. KELLY. No. Well, my husband had to borrow it against a

trust. His dad had passed away. So we just borrowed off the trust.

Senator KERRY. So you did borrow money and you did show up

with a $45,000 check?

Mrs. KELLY. Yes.

Senator KERRY. How much further, if at all, did you have to dig

into your personal money in order to treat yourself?

Mrs. KELLY. I’ve paid in a little over $82,000 right now.

Senator KERRY. Of your own money?

Mrs. KELLY. Yes.

Senator KERRY. And how much of a dent has that made in your

retirement and savings?

Mrs. KELLY. Well, we are trying to stay away from our retirement. We do not want to have to cash anything in, because that

is what we plan on living on. But so far we have not had to do that

yet. We are negotiating with them on it, because I still owe

$137,000.

Senator KERRY. Whom do you owe the $137,000 to?

Mrs. KELLY. M.D. Anderson.

Senator KERRY. All right. How do you expect to pay that?

Mrs. KELLY. We are going to have to cash in on some of our retirement, but we will use something where we will not be penalized.

Senator KERRY. All right. Thank you.

The CHAIRMAN. Thank you, Senator.

Any other Senators who wish to ask questions?

[No response.]

The CHAIRMAN. Lisa, thank you very, very much for taking the

time. I know you have to leave for treatment. But I guess the main

point here is that you spent over, what did I hear you say,

$137,000? How much?

Mrs. KELLY. That is what I owe.

The CHAIRMAN. That was on top of the $80,000?

Mrs. KELLY. That is on top of what I have already paid.

The CHAIRMAN. That is right. So even though you are supposed

to have health insurance, your health insurance did not cover those

costs?

Mrs. KELLY. Yes.

The CHAIRMAN. Thank you very much for taking the time. Thank

you, Lisa. We wish you well.

Mrs. KELLY. Thank you.

The CHAIRMAN. Now let us turn to the rest of our panel. Today

we hear from Raymond Arth, president and CEO of Phoenix Faucets out of Avon Lake, OH. A third witness is Mr. Ron Williams,

chairman and CEO of Aetna. Finally, Mr. Mark Hall, professor of

law and public health at Wake Forest University in WinstonSalem, NC.

Thank you all for coming. We would ask each of you to give your

statements. Speak for about 5 minutes, and your prepared statements will automatically be included in the record.

Mr. Arth?

9

STATEMENT OF RAYMOND ARTH, PRESIDENT AND CEO,

PHOENIX FAUCETS, AVON LAKE, OH

Mr. ARTH. Good morning. Thank you, Chairman Baucus and

members of the committee. I appreciate the opportunity to participate in this discussion this morning. I am here actually in two capacities: one as a small business owner who is dealing with this

issue of providing insurance for my employees as I have since day

one, and also as a past chair of the National Small Business Association, the country’s oldest small business advocacy group. So my

testimony really has two pieces: some personal observations on my

experience and a brief summary of NSBA’s policy recommendations.

I will tell you that I am not an authority on health insurance or

health care, but I do bring over 30 years of practical experience of

maintaining group coverage for my employees. I served for several

years as part of the group that ran a small business group purchasing program in Cleveland, OH, and I was also a participant

with NSBA as we drafted our positions.

First, though, as you begin to look at solutions to this problem,

I urge you to please remain conscious of, and sensitive to, the impact it will have on the small business segment. Small business is

a powerful engine of growth in our economy. Over 70 million Americans, which is over half of the private sector workforce, are employed in small businesses.

Over the last 15 years, nearly 95 percent of all net new job creation emerged from small business enterprises. Because we are

small, we have fewer resources, monetary and in terms of personnel, to deal with changes. So, please remain conscious of how

any change will impact us because we are, as I said, a major engine of growth in this economy and we are straining to pull the

load of the growing health care and health insurance costs.

When my brother and I started Phoenix Products over 30 years

ago, he was a cancer survivor, so we understood from the very beginning how important it was to be able to offer a good-quality and

affordable health insurance program for us and for all our employees. For 30 years, I have had to face that challenge almost every

year. It has become sort of my rite of spring.

Over those 30 years we have probably, at one time or another,

participated in every size, flavor, and style of health insurance program that has come along the way. By changing plans and plan designs, we have been able to control health care costs reasonably

well. Up until as recently as 2003, we were able to offer very generous programs with modest monthly premiums that remained affordable.

Unfortunately, my group demographics have been working

against me. The company is 31 years old. My average employee is

now 52. They have about 16 years of service with the company. As

people get older, they have more problems, they become higher

risk.

So in 2007, we were confronted with a 22-percent premium increase that we managed to avoid, largely through a major increase

in deductibles. We now have a $3,590 deductible program, though

the company self-insures part of that so the employee is not fully

exposed. So, we pretty much avoided that 22 percent.

10

After our renewal last year, I learned that one of our covered

participants has Gaucher’s disease, a very rare condition. It is an

enzyme deficiency, extremely expensive to treat. Our renewal figures for this year are up by 35 percent, which is pretty much the

maximum allowed under State of Ohio insurance regulations.

I no longer have any design changes I can make, I do not have

any new flavor-of-the-year to pull out in plan design that we can

locate, so somehow my company and our employees have to figure

a way to absorb almost $40,000 in incremental insurance premiums to cover 22 active employees. This is, clearly, a quandary

and a problem for me as well.

NSBA has been working on this issue for many years, and, in

2004 or thereabouts, we concluded over a full year of discussion on

what we think we should do and have come out with a recommendation that really revolves around a key principle, which is

universal coverage based on personal responsibility. We believe

that everyone in this country should have access to health care,

and we believe everybody should participate by having insurance.

This will require some major changes in the insurance market,

in underwriting rules, and in rating. We encourage and support the

notion of an established Federal basic benefits policy. We would

like to see a basic level of coverage that would be more affordable

and would cover especially catastrophic events like we have heard

today.

There are issues with the tax treatment of premiums that are

paid that are different for small businesses if they are not C corporations, and we would urge that some attention be given to that.

If an owner of a business cannot benefit by creating and having a

health insurance program, they are less likely to create one in the

first place.

We are also in favor of changes in the health care area: better

use of technology to help prevent errors and to make information

more available, especially information regarding costs and quality.

There is now no way to assess the performance of a physician or

a hospital before you go, and I have asked doctors what a procedure would cost, and they will not even hazard a guess. The man

who is going to do the procedure cannot tell me what the price will

be.

We have moved from the medical model where a patient and a

doctor confer about treatment and decide what to do, to the veterinarian model of medicine where the provider and the payer sit

down and decide what they are going to do to the patient. We do

believe we need to get the patient more involved, but that also

means that individuals have to have a stake in having health insurance and in bearing the cost. Medical malpractice is also an important piece.

So that is a broad recommendation. Many points are covered. It

is a very complex problem. For over 30 years I have worked to satisfy the primary goal of offering comprehensive and affordable

health insurance to my employees, and unfortunately now,

squeezed between my group plan demographics, one very serious

and expensive condition, and medical inflation that is running out

of control, I may have finally found the limit to my ability to do

so.

11

With that, I will conclude. Thank you.

The CHAIRMAN. Thank you, Mr. Arth. That is very helpful.

[The prepared statement of Mr. Arth appears in the appendix.]

The CHAIRMAN. Mr. Williams?

STATEMENT OF RON WILLIAMS, CHAIRMAN AND CHIEF

EXECUTIVE OFFICER, AETNA, HARTFORD, CT

Mr. WILLIAMS. Good morning, Chairman Baucus, Ranking Member Grassley, and members of the committee. Thank you for the opportunity to be here today.

My name is Ron Williams, and I am chairman and CEO of

Aetna, a diversified health benefits company that provides products

and services in all 50 States to more than 37 million Americans.

Mr. Chairman, we at Aetna are committed to being a key part

of the solution. Like you, I believe our Nation must do a better job

to ensure everyone can get high-quality and affordable health care.

To achieve this, we need to take stock of what is and is not working in our system and address the interrelated challenges of access,

quality, and cost. At Aetna, we are working to develop smart solutions to these challenges, and our approach is summarized in ‘‘To

Your Health,’’ our plan for health system transformation.

Today, 250 million people in America have coverage, and the

great majority of them get their coverage through the employerbased system. Our health system is also extraordinarily advanced,

with a competitive marketplace producing innovations that have

revolutionized medicine and health care delivery. These are

strengths to be built upon, not thrown away.

But make no mistake about it, the U.S. health care system has

some severe problems, evidenced by the unacceptable fact that 47

million people lack health insurance. If we want to get everyone

covered, we need to understand how insurance is supposed to work

and make it work for everyone.

Insurance should not be something you wait to buy until you

know you need expensive medical care. Instead, each one of us is

supposed to pay into the system and take care of others today

while we are healthy with the knowledge that tomorrow others

may be taking care of us.

That is precisely why we support an individual coverage requirement, because universal coverage requires universal participation.

But the uninsured, by choice or circumstance, are not participating

in this system today, and it is a diverse group. Eleven million are

eligible, but not enrolled in public programs. More than 30 million

come from low- to moderate-income households, and about 19 million are between 19 and 34 years old. We need different approaches

to pull each of these segments into the system, not only because

it will be better for them, but because it will be better for all of

us.

So as we contemplate the right mix of policies, I want to share

my thoughts about some of the underlying reasons why so many

people remain uninsured. First of all, the fact that 47 million people lack coverage is symptomatic of a different problem: the high

and rising cost of health care. This translates into expensive health

insurance, shown by the fact that premiums and health care costs

12

both increased about 7 percent annually over the period 1993 to

2003.

With this in mind, the right question is not, what can we do to

lower the price of health insurance, but rather, what can we do to

slow the growth of health care costs? Two of the most important

steps are to reorient the system toward value and to refocus the

system on promoting wellness rather than simply treating sickness.

At Aetna, we are making progress on both fronts by providing preventive care free of co-pays and deductibles, creating incentives and

tools for healthy living, and making it easier for members to know

both the price of services in advance and the quality of services.

With reduced costs, even the smallest employers will be able to

offer coverage to their workers.

A second impediment lies in some State regulations. Though

well-intentioned, they often end up making insurance unaffordable.

Let us take, for example, guaranteed issue of insurance and community rating, which essentially say that insurers have to offer

coverage to all comers for the same price, no matter when they decide to purchase it.

Not surprisingly, this results in really expensive health insurance, which not only frustrates efforts to get more people into the

system, but also creates a situation in which I can always wait

until I get really sick and then sign up for coverage on my way to

the hospital. These regulations may promote equality, but regrettably, they make insurance equally unaffordable to everyone.

The third systemic problem is that the individual market is broken. Much of what makes the employer-based system function

well—large and diverse risk pools and strong controls against adverse selection—is glaringly absent in the individual market.

While the practice of medical underwriting is often cast as a

dirty word, policymakers must recognize that it is one of the only

means insurers have to prevent adverse selection and remain competitive. But it does not have to be that way, and we want to work

with you to create a true public-private partnership to offer viable

options for the diverse set of individuals that make up this market.

I fundamentally believe we can cover the uninsured without pulling the rug out from under the 250 million people in America who

currently possess coverage, but it is not good enough to simply

identify problems. We need to develop solutions that respond directly to them, otherwise we will end up with a system where everyone can hypothetically get insurance, but few can actually afford

to buy it.

I appreciate the committee’s attention to this issue and hope you

will continue to call on me and my industry colleagues to help

shape solutions.

The CHAIRMAN. Thank you, Mr. Williams.

[The prepared statement of Mr. Williams appears in the appendix.]

The CHAIRMAN. Next, Mr. Hall.

13

STATEMENT OF MARK HALL, PROFESSOR OF LAW AND PUBLIC HEALTH, SCHOOL OF LAW AND SCHOOL OF MEDICINE,

WAKE FOREST UNIVERSITY, WINSTON-SALEM, NC

Mr. HALL. Chairman Baucus, esteemed Senators, it is a distinct

honor to appear before this distinguished committee as it begins

the monumental undertaking of reforming our health care system.

My testimony addresses the problems in the structure and functioning of the private health insurance market. I have studied

these markets for almost 2 decades through extensive empirical research with health insurers, agents, employers, and regulators.

Chairman Baucus presented the relevant statistics in his introductory remarks, and they are also contained in my written testimony.

In sum, the mounting cost of health insurance is driving more

and more people out of the market. As the number of employers offering insurance steadily declines, there has not been any commensurate increase in the number of individuals purchasing their own

coverage. And so, over the past decade or so, the percentage of nonelderly Americans covered by private insurance has declined from

about three-quarters down to about two-thirds.

These declines, I want to stress, have occurred despite strenuous

efforts to shore up the market’s erosion. We have enacted most of

the good ideas that are out there, and they have indeed helped

quite a bit. Laws like the Health Insurance Portability and Accountability Act have been vitally important by providing for guarantee issue and portability within the group market and in between the group and individual market. Without laws like these,

conditions would only have worsened much more than they have.

But things continue to worsen despite these good efforts because

the basic market conditions that cause the problems are still very

much in place. That is the main point I want to stress. The market’s problems derive not from bad or inadequate policy, but more

fundamentally from a basic fact of human nature or the human

condition, that the need for medical care is highly skewed throughout the population.

The high concentration of medical costs in a relatively few number of people is the single most important fact for understanding

how the private insurance market functions. To better make that

point, let me refer to the graph on page 3 of my written testimony,

which I have had enlarged here.

This shows the population arrayed in order of health spending

within a given year. What you see is that the top 1 percent of the

population, those like Mrs. Kelly who spend more than $43,000 a

year, account for 22.7 percent of total expenditures. So 1 percent

of the population accounts for almost 25 percent of total expenditures.

On down the line, if we go all the way to the top 20 percent,

those who spend more than about $4,000 a year, that group as a

whole accounts for 80 percent of total expenditures. The remaining

80 percent of people account for only 20 percent of expenditures,

and half the people account for only 4 percent of expenditures. So

I call this the 80/20 rule: 20 percent of people account for 80 percent of the costs, and 80 percent of the people account for only 20

percent of the costs.

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Because of this basic phenomenon, insurers obviously stand to

gain a great deal by identifying and either pricing out or avoiding

high-risk people, and they also stand to lose a great deal if they

do not attract a good number of the low-risks. Because so much

money is at stake, competitive forces naturally and unavoidably

focus on risk selection. Other ways to improve value, such as mentioned by Mr. Williams, are also part of the market, but they simply are not as profitable as the risk selection aspect.

That is why market regulation is so hard to do. The 80/20 rule

cannot be avoided or simply wished away. It is a fundamental law

of nature, as fundamental as gravity and as pervasive as the

weather. It has been observed as early as the 1930s, and it will

surely be with us for as long as anyone can foresee.

For instance, even if we entirely remove the top 50 percent of the

market, we would still be left with a skewed distribution in which

the remaining people at the top account for 10 times greater expenditures than the middle part of the distribution. So even removing the very high-risks, or half the risk of the market, would leave

a highly skewed distribution in which there is money to be made

by attracting fewer of the high-risk folks and more of the low-risk

folks.

It is this basic dynamic that creates most of the problems that

we have heard about, starting with medical underwriting. Now, as

Mr. Williams said, medical underwriting is necessary because of

adverse selection, the tendency of people to avoid the purchase of

insurance unless they really expect to need it.

The health insurance market can never survive, or even form in

the first place, if people could simply buy their insurance on the

way to the hospital. Therefore, medical underwriting rewards people who purchase while they are still young and healthy and imposes pre-existing condition exclusions or charges higher rates for

those who are not.

Even without medical underwriting, risk selection and segmentation still occur in the market because subscribers naturally sort

themselves by risk classes, to some extent, according to the covered

benefits and plan features that they find most attractive.

This gives insurers good reason to create new and attractively

priced policies targeted to healthier people who are shopping for insurance, but focusing new policies on healthy people segments the

existing subscribers into older policies whose prices increase much

more than average. If employed aggressively, these sorting techniques become known as churning, but this kind of risk segmentation happens on its own to some extent even without any sort of

manipulation.

I provided a glimpse of the market’s more troubling dynamics.

They are quite prevalent in the individual market, but the large

group market still works quite well. Small groups are somewhere

in between. Various insurance market reforms aim at keeping

things from getting a whole lot worse, but they are not capable of

eliminating these problems entirely because the problems, again,

flow from the elemental nature of how competitive markets should,

and must, respond to this concentration of health risks. Therefore,

the problems will always be with us unless the market is fundamentally restructured.

15

If I could take just one moment to conclude: the basic requirement is to place people into large groups where membership is not

tied to health risk. It is probably also necessary to limit the choice

of plans to some extent within the groups. That is how large employer groups currently work, which is why they remain the bestfunctioning part of the market. It is also how things work with the

Commonwealth Connector in Massachusetts and with Medicare

Part D.

To meet those conditions, everyone who is eligible must agree to

purchase insurance from their assigned group, and the insurers

must not have too much of a stake in how healthy or sick each subscriber is. That may be easy enough to state in the abstract, but

it is exceedingly difficult to achieve in practice. So, I wish this committee and the Senate Godspeed and wisdom in pursuing the formidable challenges that lie ahead.

Thank you.

The CHAIRMAN. Thank you, Mr. Hall.

[The prepared statement of Mr. Hall appears in the appendix.]

The CHAIRMAN. Let me just follow up on your basic points. You

are basically suggesting larger pools, and also some limitation of,

I guess, choice, at least in the individual market. But then you said

that is extremely difficult to do. Let me press you a little bit. If you

were to go a little further in thinking this through, how would you

define the pools? Some say sub-pools, some say larger pools.

How would you advise us or the insurance industry to limit

choice so that the pool is large enough, but still pre-existing conditions are somewhat dealt with one way or the other? My gut sense

is, the larger the pool the better. That takes away a little bit of the

second problem of limiting choice.

Then second, I do think there should be some significant limits

on choice. I think there are just too many plans out there. But your

thoughts?

Mr. HALL. Well, great questions. The choice element is probably

more important than the size element. A pool can be an adequate

size if it is only—I do not know, I have to turn to my insurance

experts—500 or 1,000. It does not have to be tens of millions to

take advantage of the law of large numbers. Even in a group of 500

you are going to get a distribution similar to the one I showed.

It is important, though, that people stick to the pool that they

belong to, so I am not suggesting that 500 is necessarily large

enough. But it does not have to be millions and millions, it could

be thousands and thousands. But the key is, if people are allowed

to change pools, to pick pools, then you are going to have the sorting effect that tends to drive a portion of the people into an

unaffordable zone.

So the main question in terms of pools is identifying membership

according to some criteria other than health risk, so you belong to

a pool because that is where you work, or you belong to a different

pool because that is where you live, or you belong to a third pool

because it provides subsidized coverage based on your income. So

you can have pools formed in a variety of different ways, but the

key is to limit the ability to move among pools based on individual

health preferences.

16

The CHAIRMAN. Mr. Williams, your reaction to that? I sense that

some in the insurance industry are a bit frustrated because people

do change plans, are in and out of plans, and it makes it more difficult for insurers to plan. But the basic question is, what about

pools? Define the size of pools. How helpful are pools? The second

is limiting choice.

Mr. WILLIAMS. Yes. I would say that one of the things that does

not carry over in insurance is, we all think about, more is better,

larger is better. It really is not the size of the pool. If we were buying pencils or something, a carload, you can get a better deal than

if you are buying a box.

In health insurance, if the concentration of the risk is at the extreme end, the left side of this chart, and it is all the top 1 percent,

and it is an extremely large pool of the most expensive people, then

you still end up with an unaffordable pool. The real key is to attract a pool that reflects a normal distribution of risk.

The CHAIRMAN. And how do you do that?

Mr. WILLIAMS. And you do that by having the basis of the pool

be something other than your health condition—for example, employment. The reason that large employer groups work is people

are in that pool not by virtue of their health status, but by virtue

of their choice of where to work, or a pool that is put together on

the basis of your occupation, or some other basis. So the basic notion is, pools are important. The fundamental size you really need

is a thousand to a couple of thousand people. That is why insurance is more affordable for businesses that have 2,000 to 3,000 employees and above.

The CHAIRMAN. Assuming the membership is a normal distribution.

Mr. WILLIAMS. Yes. And the fact that they are there by virtue

of their choice to work there is different than being there by virtue

of being there solely for the purpose of getting insurance.

So I think the basic notion of pooling is fundamentally important

to affordability, but it is not the size, it is mechanisms that give

you a normal distribution of risk: some people who need it today,

some who need it tomorrow, and some who will not need it at all.

The CHAIRMAN. What about limiting choice?

Mr. WILLIAMS. In terms of limiting choice, I think that is really

more about the catastrophic component of choice, meaning that

there is a set of decisions that we do want to limit choice on. That

is regarding preventive care. Everyone should have access to the

recommended—the clinically recommended—preventive benefits

that are essential to be healthy.

Within that, people may have different choices about how they

pay for an intermediate level of care that might represent a modest

amount based on their income or their particular circumstances.

The critical place to limit choice is to be certain that no one loses

their home, suffers bankruptcy, and is able to maintain clinically

cohesive care for catastrophic illness.

The CHAIRMAN. I thank you. My time has expired. But thank you

very much.

Senator Grassley?

Senator GRASSLEY. Thank you, Mr. Chairman.

17

Mr. Williams, in regard to the 47 million people without health

insurance, there are small business people like Mr. Arth and tens

of thousands—maybe hundreds of thousands—of other people who

want to provide health insurance for their employees. Can you tell

us what the Federal Government and State governments do that

makes it harder for Aetna to design, market, and sell products that

people like Mr. Arth can afford? And while you are at it, are there

any States where Aetna simply does not believe it is in their financial interests to operate?

Mr. WILLIAMS. I would say there are several things. I think one

of those is a very difficult policy area for legislators and regulators,

which is the whole area of benefit mandates. I think it is a difficult

decision, because there are lots of very difficult cases that present

themselves where it is very easy to add 1 percent or 2 percent to

the premium.

When you have done that over a 20-year period, you end up with

a significant impact. I think what we need are independent, objective clinical mechanisms to really answer the question of, what is

the basic benefit package that enhances affordability and gets it to

a price point? I think the other thing really is pooling. I think pooling is important. I think if we could pool Mr. Arth’s firm with a

company where the average age was 18 or the average age was 20,

we would again restore a balanced risk pool and be able to make

insurance more affordable to him.

The answer to States: there are States that we would prefer

change some of their regulations and approaches. We tend to do

business in all 50 States. Some are areas we choose to make significant investments in in promoting our small group business, and

those are places where the market dynamics permit us to attract

a balanced risk pool.

An example would be, New Jersey is a State where they have a

guaranteed issue, where every individual can buy an individual

health insurance policy. Unfortunately, that policy is twice as much

as they would pay in the State of Pennsylvania. So you can buy it

literally at the point of care, whereas, Pennsylvania has made a

different trade-off, where there is medical underwriting permitted.

But I think the fundamental question that we have to address

is, insurance is one mechanism. We have people in our society who

do not have insurance, who need access to health care. How do we

finance the fact that they need access to care and they did not purchase insurance or do not have insurance?

A lot of the solutions are the equivalent of taxing only the supermarkets to feed the hungry of the country. We have made a commitment that people should not go hungry, and so we mutualize

over the whole society the cost of feeding the hungry, and we need

to do the same thing for people who need health care and do not

have insurance.

Senator GRASSLEY. Mr. Arth, insurance regulations differ from

State to State. You being from Cleveland, what you pay for insurance is different from what somebody pays in Philadelphia or St.

Louis, and that was just made clear by the difference between New

Jersey and Pennsylvania. Do you think the Federal Government

needs to act to limit the ability of States to drive up health insurance costs for small businesses? How big of a concern is it for you

18

and other small businesses that your State could push you out of

the insurance market at any time?

Mr. ARTH. Well, I think Mr. Williams just mentioned how all of

these State mandates add up over time and add to the cost of insurance. I know Ohio—I do not remember the number—has a large

number of mandated coverages specific to our State. So one of the

principles of NSBA’s reform proposal, and something I personally

support, is this notion of a bare-bones policy, something that will

meet the basic requirements for health care, and especially protect

against a catastrophic event.

It is not yet fair for me to say that competitors in Indiana have

an advantage over me because they have fewer State mandates,

but in my involvement with the group plan in Cleveland, State

mandates were an issue very high on our priority list, and we were

very concerned about the additional cost they created.

There is evidence out there—and I do not remember the numbers—that a 1-percent increase in the cost of health insurance

translates into a 6-figure number of people who will lose their

health insurance because employers will choose to drop it. So it is

an important issue, and that is why we support this idea of a basic

plan.

Senator GRASSLEY. All right.

Professor Hall, last week we had Ford Motor Company testifying

where you are. I want Ford Motor Company to succeed and provide

insurance, but I care about someone like Mr. Arth and his 31 employees who have it.

Do you think that the way the Federal Government regulates insurance through ERISA and the way States regulate smaller insurers, as they can also because of ERISA, create a bias against small

business?

The CHAIRMAN. If you would answer briefly. We are going to

have a vote at 11:30, and I want every Senator to have an opportunity to ask questions, so I am going to adhere to the 5 minutes

quite strictly.

Mr. HALL. Very briefly. Yes, small employers are in a different

market and a different regulatory field than large employers covered by ERISA. On the other hand, we have the difficult balance

between federalism principles that respect States’ autonomy to address issues the way they see versus the concerns that you just expressed, so it is a difficult and messy balance to strike.

The CHAIRMAN. Thank you, Senator.

Senator Bingaman?

Senator BINGAMAN. Thank you all for being here. Thanks for

your testimony.

Professor Hall, let me ask you. You identified the central problem of our health care system being the need for companies to engage in risk segmentation, basically to deal with this adverse selection process.

Let me ask you about two specific areas that we have a lot of

debate about around here. One is these health savings accounts. It

has been my concern that every time a person buys a health savings account, or pretty much every time a person buys one, that is

one more better-than-average healthy person who is excluding

19

themselves from the pool that might be otherwise insured, so that

the problem of risk selection becomes worse.

Association health plans are another example. We are pushed to

go ahead and approve association health plans. Again, my impression is that that has the effect of taking relatively healthy people

out of what would otherwise be a larger pool and thereby running

up the cost of health care for everybody else.

I would be interested in whether or not I am real confused on

this, whether you agree with those points, whatever your thoughts

are.

Mr. HALL. Thank you for the question. Yes, I agree. I share those

concerns. Those concerns are very real and show the difficulty in

making positive improvements in a complicated market like this.

That is not to say that association health plans or health savings

accounts are necessarily a bad idea, but one has to be very careful

about how they are implemented, to implement them with the

awareness of the existing problems and with the awareness that

we need to avoid making them vehicles for extreme risk selection.

So I do not want to over-emphasize the problem in order to kill any

attempt to make positive reforms, but those are two examples of

things that could indeed aggravate risk selection.

Senator BINGAMAN. Is there some way to buffer against that? I

mean, the way it is currently structured, the health savings accounts are a way to get healthy people out of the pool that is otherwise insured, are they not?

Mr. HALL. Yes. But there are several ways. One is risk adjustment, where you have reallocation between the two risk pools to

offset that. A second is providing more help to people with chronic

illnesses to purchase or to choose a health savings account. So one

reason health savings accounts discourage sicker people is they are

afraid they are going to run through their account more quickly.

So, if they were given larger accounts, then essentially you riskadjust the size of the account, if you will, which currently is not

permitted by the tax rules. So I think one small but positive

change would be to allow employers to contribute more to the savings accounts of chronically ill people than to their healthy employees.

Senator BINGAMAN. But now, Mrs. Kelly, who was here on our

screen a little while ago, if you have the circumstances she has,

there is no way you can ever get coverage through a health savings

account for that kind of illness. Am I right?

Mr. HALL. Right. In the ideal situation, the savings account

would be approximately the same size as the deductible, so essentially you are paying your deductible out of a savings account that

you have established for that purpose. Of course, you would have

to be able to replenish that each year.

But the advantage of that is then, when you incur any medical

expenses, you are getting the benefit of the negotiated discounts

that the insurer has obtained for you, so, even though the ultimate

coverage is only catastrophic, you are getting discounted care from

dollar one rather than treating you as a self-pay patient, which is

apparently what happened to her.

Senator BINGAMAN. So she, instead of having to pay the, what

was it, $130,000——

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Mr. HALL. One hundred and thirty-seven thousand dollars. Yes.

Senator BINGAMAN [continuing]. That she owes, plus the $80,000

she has already paid.

Mr. HALL. Right.

Senator BINGAMAN. She would be able to pay something less.

Mr. HALL. She would be paying Blue Cross numbers rather than

person-off-the-street numbers.

Senator BINGAMAN. All right. My time is up, Mr. Chairman.

Thanks.

The CHAIRMAN. Thank you very much, Senator.

Next, Senator Kerry is not here. Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman. This is a great

panel.

Dr. Hall, I am going to leave you alone because I so strongly

agree with your views about the insurance market. If you are going

to restructure the market, you have to place people in large groups

whose membership is simply not tied to health risk. We do that in

our legislation, the Healthy Americans Act, and I think you are

right on target.

Mr. Arth, you had nice things to say about the bill in your written remarks, so I probably ought to quit while I am ahead, but let

me try a different way of getting into this with you for a minute.

A large fraction of the uninsured today works at small businesses,

and the fact is, these small businesses love to cover their people,

but they cannot afford it. So, this is all about getting more affordability for both the worker and the employer.

Let me kind of kick off what I think the key elements are and

see if you agree. I think we are in sync on this. First, we have to

change the tax laws so as to eliminate the disadvantage for the

small businessperson—change the incentives. We have been talking about pooling. That means that, instead of having four or five

people at your small business, you are part of a big pool so you

have more bargaining power. Then we have insurance reform so

that, say, if one of your people has a pre-existing illness, they do

not get clobbered because they are being discriminated against.

Next, you have to be able to find good, affordable providers. If

you are going to have a marketplace, you have to have a lot more

information in order to make the marketplace work. Fifth, you

have to have relief from some of the mandates, particularly the

ones that are less important, while still keeping personal responsibility so that the individual has some stake in the operation.

Does that strike you as kind of the check-off list of the key elements? That is what we tried to zero in on in the bipartisan

Healthy Americans Act. But I would like your thoughts. Maybe

some of these are more important than others to you. But take me

through the list as it relates to the key concerns, because I think

all of those go to affordability and being able to make the market

work.

Mr. ARTH. Senator, I am glad I am able to agree with you. I

would not want to get into some sparring match. But starting from

the top of the list, changes in the tax treatment of how premiums

are paid is important. I happen to be a C corporation, so it does

not affect me personally, but any other business entity, the treatment of the owner is different from the employee, and that serves

21

as a disincentive to the owner to create programs. So, I think that

is an important consideration.

The pooling issue is also important. I know there have been

many proposals for association health plans or other pools, but they

get into that problem of splitting up the risk pool into smaller fragments so that people can skim off the very healthiest and the very

best. From what I understand of the Healthy Americans Act, you

have taken steps to try to address that to make sure that risk pools

are properly balanced, which will address that issue.

You have to get into insurance reform if you are going to change

pool composition. I think you are talking now of community rating

models and restrictions on pre-existing condition exclusions and

those kinds of things.

In my own particular case, where I have one very expensive

claim, I am not sure exactly where that fits into market reform, except for the comment that was made about taxing all the grocery

stores to feed the hungry. We do things in this country because we

can, with little consideration given to what it costs. I would not

want to deprive this person of treatment.

I do hope that there is effective case management and that someone is looking over a shoulder to make sure that the treatment is

being effective. I cannot ask those questions. I only know about it

because I was told about it. So, I hope the market is doing its job

in making sure that case management is in place and that the

treatment is appropriate.

Information is so important. I can get more information if I want

to buy a television than if I want to have my knee repaired, and

that just does not make sense. That is a big problem. It works because most patients are willing to kind of let the system take care

of them. We really need to get patients involved with their own

health, with wellness initiatives and with selecting the care they

get, but we have to have the information. We had an effort in

Cleveland. It crashed and burned, unfortunately.

The mandates. I think we have already covered the fact that

they drive up costs. They are very well-intentioned, but for small

businesses they fall fully on us because we are the fully insured

group. Ford Motor, across the street from me, has an ERISA plan.

So all these well-sounding mandates end up being paid for by the

small group and the fully insured sector.

Senator WYDEN. Thank you, Mr. Chairman.

Mr. ARTH. Thank you, Senator.

The CHAIRMAN. Thank you, Senator, very much.

Senator Salazar?

Senator SALAZAR. Thank you very much, Mr. Chairman.

This is a question for Mr. Williams from Aetna, but I will use

the information from Mr. Arth as preparatory comments to the

questions. I understand very much what you said, Mr. Arth, coming from a small business with 22 employees. Your statement

about the jobs created by small business is very accurate, and it

is very important for us to make sure that we are trying to find

a solution for these employers like yourself who want to provide

health insurance to your employees.

But looking at your statistics for 2007, where you had a 22-

percent rise in the increase of your premium, that is a shocker. UnVerDate 11-MAY-2000 14:19 Jul 30, 2010 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 57484.000 TIMD PsN: TIMD
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fortunately, I think that is a shocker that we hear far too often

across the board in the small business community. One of the recommendations that I heard from Mr. Arth is that we need to move

forward with some kind of universal coverage program that establishes, I think your words were, a base coverage that would be provided to everyone.

My question to you, Mr. Williams, is, what do you think about

that concept? How do we establish some kind of a base coverage

that would be available to everyone that might cover some of these

80 percent of our health care costs essentially being consumed by

20 percent of the people?

Mr. WILLIAMS. I would start out by saying that I think the one

issue that we have not really focused on is the fact that the cost

of health insurance is an underlying reflection of the cost of the

health care system itself. We are simply collecting the cost and

passing it on, actually—and we heard from Mrs. Kelly—negotiating

discounts and really advocating on behalf of the consumer to get

them a better deal. So I think in terms of the——

Senator SALAZAR. Well, how do we bring health care costs down

then?

Mr. WILLIAMS. I think how we bring health care costs down is

to apply what we have applied to every facet of our business and

industry, which is information technology to connect the system, to

move the information around so that we avoid duplication, so that

physicians and other health care professionals have the best, the

most accurate and timely information in the system to create more

value in that context.

Senator SALAZAR. How can we be assured that, if we move forward with some of those reforms and investments in information

technology and recordkeeping, that we actually are going to see

some constraint in the growth in health care costs? I mean, when

you talk about a 7-percent increase a year from 1993 to 2003, how

do we know that the IT or some of these other things we are talking about are going to bring down the costs, which you say are

what is causing the rise in insurance rates?

Mr. WILLIAMS. One, there obviously is no guarantee. But two, I

can look at what has happened. One of our subsidiaries just published a study in the Journal of Health Economics, an independent

peer-reviewed publication, that demonstrated that, where you can

bring the data of an individual patient together and use the best

evidence-based medicine as published in the New England Journal

of Medicine and the Journal of the American Medical Association

and really use the lab data, the pharmacy data, the claim data

from the individual physicians, you are able to produce savings of

6 percent simply by using what we know. I believe that, if we can

truly connect the system, that the savings could be much more substantial.

Senator SALAZAR. These are complicated questions, and that is

why I am so delighted that, through his leadership, Chairman Baucus has decided to hold this Health Care Summit next week, because I think these are the kinds of questions that we need to get

into a much deeper discussion on.

One of the problems, I think, is the complexity of the system. I

would think Mrs. Kelly was probably very fortunate in that she

23

had a trust fund that helped her get high-risk health insurance

and she was able to pay for it, was able to get money from a trust

fund to pay for her costs at M.D. Anderson.

But I would imagine for most of the people who are underinsured and who find themselves in those circumstances, they

enter into this world of insurance with an expectation and simply

not understanding that there are lots of limitations on what they

are going to get coverage on.

So I guess my question to you is, do we just have a fundamentally broken system in that it is too complex or that the consumers

simply do not understand it? If it is, how do we simplify this so

that the American consuming public can understand what they are

buying when they are buying health insurance?

Mr. WILLIAMS. I think it is fair to say the system is complex, that

if we were designing a system from scratch we would not build a

system that works the way this system works. However, it is 17

percent of the Gross National Product of the country, and we need

to proceed with caution as we look at how we make changes.

I think that the member has not been asked, nor educated, to be

engaged. What we find is, when you build the information support

tools—for example, at Aetna, any of our members can go online

through the Internet and find out the cost of a physician’s top 30

procedures before they see the physician. That is revolutionary. In

health care, you never knew what anything would cost until after

the service was rendered.

Senator SALAZAR. I appreciate that.

Mr. WILLIAMS. So I think we have to create much more of a market.

Senator SALAZAR. My time is up, and I do very much appreciate

all of your testimony this morning.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator.

Senator Stabenow?

Senator STABENOW. Thank you, Mr. Chairman. I, too, am very

grateful for not only the hearings, but what we are doing with the

Health Summit. Thank you for doing that.

The CHAIRMAN. And thank you for participating Monday.

Senator STABENOW. Thank you to everyone for coming. Mr. Arth,

I think there is no question, from a small business perspective, you

are hit right between the eyes on this and every other cost, and yet

creating the majority of jobs in the country, and representing, I

think, a very important national organization. So, thank you to all

of you for being here, but particularly we need to have small businesses involved in the solution.

But I want Mr. Williams to speak to sort of where we go from

here. There has been a lot of discussion about health reform efforts

that should include a mandate on individuals to purchase insurance, and I am wondering, if there was a State or Federal individual mandate for individuals to purchase insurance, assuming

help for low-income individuals and so on, could you then support

the elimination of all pre-existing condition denials and exclusionary riders and waiting periods under that kind of a system?

Mr. WILLIAMS. If we create in this country an individual coverage

mandate that works and is enforceable, I believe that we can elimiVerDate 11-MAY-2000 14:19 Jul 30, 2010 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 57484.000 TIMD PsN: TIMD
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nate the pre-existing and medical underwriting activity in the industry and in the country, but we must have something in which

everyone participates in the system so that we can achieve a balanced risk distribution and go to work on really helping those individuals who are ill get access to the highest quality care.

Senator STABENOW. Thank you.

Have you looked at our Healthy Americans Act that Senator

Wyden has been such a champion on with all of us in terms of a

universal policy using private health insurance delivery?

Mr. WILLIAMS. Yes, I am somewhat familiar with Senator Wyden’s legislation. We talked about his program.

Senator STABENOW. We certainly would welcome your input on

that.

Let me move to another topic and ask you, in terms of cost, you

have indicated that your after-tax profit is about 6 cents per premium dollar. I am wondering how that breaks down between the

individual market, the small group market, and the large group

policies?

Mr. WILLIAMS. This is an excellent question. The answer is that

the individual market is actually less profitable for us than the

middle and the higher end. We tend to sell more fee income services, things where employers hire us to do condition management,

disease management, health informatics work, where the margins

are actually a little bit better than they are on the core insurance.

The individual, because there is no employer, there is no human

resources, there is no billing department, the expense of working

with the individual is a little bit more. So from our point of view

it is not as profitable a business, but we view it as an important

business and one that we are interested in growing.

Senator STABENOW. So from what you are saying then, can I assume the administrative costs then are the most for the individual

market versus the group markets? Where are the administrative

costs——

Mr. WILLIAMS. Yes. I would say that it is fair to say that the administrative expense associated—we think that our administrative

expenses, when we look at pure general and administrative expenses roughly, are in the 10-percent range. When we adjust it for

fee income where we do self-insured, our administrative expenses

would be on what we call premium and equivalence, about 7 percent. So we worked very hard to be efficient.

I think the thing that is not well understood is how much we invest in information technology to predict which members, next

year, will be the high-cost cases, help them get connected into a

physician, into the health care system, so that they can have that

episode of care in the most cost-effective way.

Senator STABENOW. On health information technology, I hope you

will be working with us as we look for ways from a more systematic standpoint to be able to address the technology issues I think

that are critical, not just for your company, but for all of us.

Mr. WILLIAMS. Yes.

Senator STABENOW. Thank you, Mr. Chairman.

Mr. WILLIAMS. Thank you.

The CHAIRMAN. Thank you, Senator.

Senator Kerry?

25

Senator KERRY. Thank you, Mr. Chairman.

Needless to say, as we are discussing here, we have a major overhaul staring us in the face, and the system is degrading daily. So

this has to be, as the chairman has put it, at the top of our agenda

next year.

Now, I believe that the best and most politically viable reform

option is to maintain the parts of the system that are working and

build new options to fill in the gaps. We have been through this

in 1994, we have been through it in 1986, and at other times. To

me that means stabilizing the employer-based market. You have

160, 170 million people in it who are currently getting insurance

through their employers.

We also want to build around, I think, the public programs,

Medicare, Medicaid, SCHIP, et cetera, because they do provide

high-quality coverage and they provide it, frankly, more efficiently

than the private market does.

Finally, we have to provide a new insurance option to the millions of Americans who do not get anything at all or who work for

small businesses that do not have the purchasing power or the resources to be able to cover people.

But it seems to me that President Bush, and now Senator

McCain, are promoting a policy that would effectively unravel the

system, as I judge it, because they leave employees on their own

to go out and purchase insurance in a deregulated market where

you can discriminate against anybody who is sick or has a preexisting condition, and those markets are particularly problematic

for the disabled.

So, Mr. Hall, let me just query you a little bit along that line.

You state that the large employer groups ‘‘remain the best functioning part of the market and that we need to get more people into

groups like them where coverage decisions are based on a worker’s

choices, not on the health risks.’’ That is what I heard you say, Mr.

Williams, also when I was here earlier.

So if we unravel the system, if you just go out and give people

‘‘tax credits,’’ are you not going to wind up with an incredible unevenness in the system, also with costly administrative waste increases as workers move away from a functioning group that is essentially community-rated and guaranteed-issue, and then they go

into a market that favors costly current insurance practices?

Mr. HALL. That is the main concern. If you move from purchasing and providing health insurance on a wholesale basis, as

employers do, to a retail basis, as tax credits or vouchers would,

you certainly introduce a whole new set of problems.

Senator KERRY. Among them higher cost and discrimination, adverse selection, et cetera.

Mr. HALL. That is right. I assume that legislation would prevent

overt discrimination, but there are more covert ways in which it

tends to happen on its own even without trying.

Senator KERRY. Right.

Mr. HALL. But the other point, Senator Kerry, is also the point

about administrative costs. Senator Stabenow was hitting at the

point that the medical loss ratio for individual insurance is much

lower than for group insurance, which reflects the residue of the

premium that goes towards overhead.

26

Senator KERRY. Mr. Williams, you discussed the Kentucky experience with community rating. Let me throw another example out

on the table. The State of New Hampshire repealed its adjusted

community rating system for the small group market and it allowed significantly more premium variation.

As one would expect, premiums for smaller firms, firms with

older and sicker workers, and firms in certain geographic areas all

faced large premium increases, while larger firms with younger

and healthier employees saw their premiums fall.

Among firms of 2 to 9 workers, 41 percent of employers faced

premium increases of 30 percent or more. New Hampshire promptly repealed the law 2 years later and went back to the communityrated system that it had before. Are you familiar with that experience?

Mr. WILLIAMS. I am actually not. But based on what you are describing, it sounds quite consistent with what could happen.

Senator KERRY. So you say that the employer-based pool of coverage is really a strength to be built upon, correct?

Mr. WILLIAMS. Correct.

Senator KERRY. And despite being a proponent of employer-based

coverage, you also suggest providing tax incentives for the purchase

of health insurance in the individual market. A number of health

and tax analysts, however, have pointed out that those incentives

would lead some employers to no longer offer health insurance because there is a tax incentive out there, and those in poorer health

would likely be unable to buy any insurance in that market and

then they end up uninsured. Is there not a contradiction in sort of

playing to the strength and expanding the pool, and then offering

something that in fact pulls people away and might wind up adding to the uninsured pool?

Mr. WILLIAMS. I think you are fair to conclude it is a complicated

set of issues. What I can tell you is, I spend an enormous amount

of time with the benefits departments of the top 50 companies in

this country. They are the most sophisticated purchasers, they are

the most demanding, and they are doing, I think, a very positive

job of having a positive impact on the quality of health care that

is delivered in America.

I think as we look at how we expand coverage, there are interrelationships and I think there are policy decisions that legislators

have to make about, how much do we neutralize the cost of health

care, meaning, how much of that increase can the small business

bear and how much do we shift to the individual market or to the

large group market?

At the end of the day, if the insurance market is a voluntary

market, it is not my opinion that matters, it is the opinion of the

purchaser who decides that you have shifted too much to them and

they simply cannot afford to offer the product.

Senator KERRY. Is that not exactly what we face today?

Mr. WILLIAMS. I think we face it as an issue. We still have over

250 million people who have coverage, and a big percentage of

those people are in the commercial market. But it is an important

issue, and I think that is why we are here.

The CHAIRMAN. Thank you. Thank you very much.

Senator Snowe?

27

Senator SNOWE. Thank you, Mr. Chairman. I know we have a

vote pending.

I want to thank all of you for being here today. My focal point

will be on small business, specifically as ranking member, and I

know in joining with Senator Kerry who chairs the Small Business

Committee. The single greatest problem facing small business, as

you well know, Mr. Arth, is the cost of health insurance. It is simply a crisis long overdue to be addressed.

Senator Durbin, Senator Lincoln, Senator Coleman, and I have

introduced legislation. Again, it is refashioning legislation that has

previously been introduced by myself and others regarding pooling

for small businesses nationally. This legislation gets at many of the

issues that have been raised here today in my opinion, and I would

like to have you comment on it.

I certainly want to share this legislation with you because we

now have the support of a broad-based coalition across the spectrum, from the NIFB, the National Realtors, AARP announced its

support yesterday, the Service Employees Union, and Families

USA. It goes on and on because we have brought people together,

disparate groups, to address each of the issues that have been

raised. What we do is create a national pool for small businesses

to join. We also begin the restructuring that many of you have

identified, and Mr. Hall, you mentioned.

One of the issues is that we prohibit health status as a rating.

And States can drop their pools, provided, of course, they agree to

major restructuring through health status, prohibiting health status as a rating. They also get tax credits if they adopt these reforms as well for those who might have some issues with cost because, as we know, depending on which pool you are in, which employer you are working for, you might have a better plan than

those who may be in a pool that has much sicker individuals. So,

it would spread the risk. We also address the benefit mandates by

allowing the National Academy of Science’s Institute of Medicine to

develop clinically and appropriate standards and practices.

So that is how we address the mandates question, which I know,

Mr. Williams, you mentioned is one of the most vexing challenges

and was here when we considered similar legislation on the floor

last year.

Do you think that that is something that could address some of

the issues? I know, Mr. Arth, your Council of Small Enterprises is

a pool in northeast Ohio. I do not know how that compares to what

we are doing, but we have to address this issue. We have a broad

range of support, and it is really legislation that is long overdue.

I think we can address it, given what we have put together, and

I think responding to the problems of the past.

Mr. WILLIAMS. I think I would simply say, I think that anything

that can create pooling is a very positive force in the marketplace.

I would also just encourage that we pay attention to creating a

level playing field so that there is not an opportunity for either individuals or others to move their place of insurance to one place,

to the extent we attract more favorable risk, because they do not

have to pay the mandates and lower costs, and then the rest of the

insurance pool can be impacted. So there has to be a level playing

28

field, and I think many of the attributes you have in that bill sound

very positive.

Senator SNOWE. I appreciate that.

Mr. Hall?

Mr. HALL. Yes. I think it sounds very innovative and has a lot

of positive features.

Mr. ARTH. And Senator, much of what you described is the kind

of thing we have been looking for. The one thing that struck me—

and I am not clear how this works, so forgive me for not being fully

up to speed—is that it sounds as though you could have a situation

where you have two different sets of rules in a State, a Federal set

of rules and a State set of rules, so it would be different. That

raises some concern, based on my prior experience—this is my personal opinion—that you then create the opportunity for one pool to

attract the healthy people and the other pool to be left with the ill

and the harder to control.

Senator SNOWE. So they would be required to eliminate health

status as a rating and vary the other ratings similar to what States

do now so that you do not have that discrepancy and that there is

not any adverse selection. I would like to share the legislation with

you all because I think it is important, and I think it is something

that could be done this year.

Senator Lincoln has joined us, and we have been working on it

for a long time. So, I hope we can share that with you. I would appreciate your input on this, given what you have testified hereto

today, and I thank you.

The CHAIRMAN. Thank you, Senator, very much.

Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman. I will try to be brief

because I know we have a vote.

But Mr. Arth, your story is just way too familiar to me, and I

think to many of us from small States where small businesses are

our number-one source for jobs in Arkansas, and I know in many

other States. Only 26 percent of those businesses with fewer than

50 employees offer health insurance coverage, and it is an enormous issue for us.

I have been extremely proud to work with Senator Snowe. She

has been wonderful through the years as we have looked through

and tried to find the common goals and figure out a way to really

provide some solutions for small businesses and self-employed individuals, because they are the largest component of those 47 million

who are uninsured. We want to do it in a responsible way that

gives them a good product but lowers their cost, because, let us

face it, I have yet to meet a small business that does not want to

offer health insurance. It just needs to be affordable.

I guess one of the things, as Senator Snowe mentioned, in terms

of being able to provide insurance in the pools that will make

sense, both on a State level and then the national in ensuring that

they do not have to use health status as a part of their rating, how

important is stability in your plan premium from year to year for

your company? In our bill we do ban those health status ratings,

so companies like yours, your rates would not shoot up just because

an employee gets sick. You would be able to maintain a balance

there.

29

Mr. ARTH. Senator, it is absolutely critical for us in our planning.

What we have seen now, and what I face going into the future, is

probably the State maximum, in the range of 35 percent a year. I

can plan on that, but it is not the kind of thing I can live with.

Senator LINCOLN. Well, for any business, I think the unknown,

unfortunately, is the most dangerous. We also, as Senator Snowe

mentioned, in providing incentives through the tax code, are able

to really increase participation in the plans, in the pools, and therefore get to where we want to be quicker, we hope.

The last question to Mr. Williams. I just wanted to touch on the

issue of guaranteed issue. It sounds to me that you are suggesting

that, because guaranteed issue and other requirements are driving

up the cost of premiums, that maybe perhaps we should do away

with guaranteed issue and put the high-risk patients into some

high-risk pool, in the States, maybe.

You mentioned that the existing high-risk pools are woefully inadequate. My concern, I guess, that we move to is, if we remove

the sick people from your plan, put them in these high-risk pools,

cover them by the States, who is going to pay for it? What are you

going to do with all that extra money you get when you are just

covering those well folks?

Mr. WILLIAMS. Well, I think, clearly, I was not clear, Senator. I

think that the notion is that we invest a significant amount of effort and time in helping people who have severe health conditions

manage those conditions. What we want is really a relationship

with an individual or a company over a period of time, recognizing

that, when you join today you may be young and healthy, but tomorrow something may happen through no fault of your own. We

want to be there, and we want to provide that care.

The issue that I was trying to communicate is, if you have not

been insured and today you need extensive care or expensive care

and you join Aetna as an insurance plan, you really are not purchasing insurance, you really are purchasing the financing of your

currently needed care.

We have certainly a strong expectation, and have invested a lot

in things like managing cardiac conditions, asthma, diabetes, hypertension. We have over 30 different disease management programs to help people who have these conditions, but the object is

to get into the health insurance pool, stay in the pool and, if you

cannot afford it, then the question is, how do we as a society help

you afford it?

Senator LINCOLN. Sure.

Mr. WILLIAMS. What I was saying was, to the extent that you

have not been in the pool and you are not in the day you need

health care and you need significant care, that perhaps a high-risk

pool is an appropriate solution because it is not Aetna that pays

the bill, it is how much of your cost shows up in the premium of

Aetna members and how many of those are unable to then maintain their insurance.

The CHAIRMAN. We are going to have to conclude the hearing because we have a vote we are almost going to miss.

30

Thank you very, very much. This was very constructive, very

helpful, and I deeply appreciate your attendance.

The hearing is adjourned.

[Whereupon, at 11:38 a.m., the hearing was concluded.]

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