```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
                          UNINSURED AMERICANS

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 15, 1999

                               __________

                             Serial 106-19

                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
59-402 CC                    WASHINGTON : 1999

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman

NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois            JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  KAREN L. THURMAN, Florida
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________

                                                                   Page

Advisory of June 8, 1999, announcing the hearing.................     2

                               WITNESSES

Fronstin, Paul, Employee Benefit Research Institute..............     7
Galen Institute, Grace-Marie Arnett..............................    17
Holahan, John, Urban Institute...................................    30
Sheils, John, Lewin Group........................................    24

                       SUBMISSIONS FOR THE RECORD

Commonwealth Fund, New York, NY, Janet Shikles, letter and 
  attachment.....................................................    71
National Association of Health Underwriters, Arlington, VA, 
  statement......................................................    72
Private Citizen, St. Louis, MO, statement........................    75

                          UNINSURED AMERICANS

                              ----------                              

                         TUESDAY, JUNE 15, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 11:05 a.m., in 
room 1100, Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

June 8, 1999

No. HL-6

                      Thomas Announces Hearing on

                          Uninsured Americans

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on those individuals without health insurance. The 
hearing will take place on Tuesday, June 15, 1999, in the main 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 11:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Health insurance coverage is among the most important contributors 
to Americans' personal and financial security. Nonetheless, despite the 
nation's strong and growing economy, today more Americans are uninsured 
than at any other time in modern history. The latest studies indicate 
that more than 43 million Americans have no health coverage whatsoever. 
And this number is growing. Not only are Americans without insurance 
exposed to the potential for catastrophic financial liabilities in the 
event of illness, lack of insurance often discourages individuals from 
seeking proper and timely treatments. The presence of such a large 
number of uninsured patients in the health care system has also created 
troubling distortions in the financing of care, resulting in 
inefficient cross-subsidies and delivery trends.
      
    Several recent changes to law have been aimed at addressing the 
problem of the uninsured. In 1996, portability and guaranteed issue and 
renewability requirements were established for all health insurers in 
the Health Insurance Portability and Accountability Act (HIPAA) (P.L. 
104-91). The HIPAA law ensures that those who currently have insurance 
will be able to continue to gain access to coverage, even in the event 
of a job change or disabling illness. The legislation also included 
``medical savings accounts'' (MSAs). Medical savings accounts combine 
less costly catastrophic health insurance coverage with tax-favored 
savings accounts that are dedicated to paying routine medical costs. In 
addition, these accounts offer individuals the ability to accumulate 
savings that can be used for specific needs, like long-term care, later 
in life.
      
    Many other provisions in the tax code impact the financing of 
private health insurance. The current deductions for employer-provided 
health coverage and the individual exclusion, make employer-provided 
insurance a tax-free benefit for American workers. In addition, the tax 
code provides an individual deduction for health care costs in excess 
of 7.5 percent of one's adjusted gross income.
      
    In announcing the hearing, Chairman Thomas stated: ``Having access 
to affordable health insurance is clearly one of the most important 
patient protections of all. This hearing will help us better understand 
why, despite our many efforts to address the uninsured, the problem 
continues to persist.''
      

FOCUS OF THE HEARING:

      
    The hearing will seek the input of several academicians, employers, 
and policy experts in evaluating the characteristics of the uninsured, 
and in determining what factors are behind the continuing rise in the 
uninsured population, despite the country's continuing economic growth. 
The Committee will consider potential solutions to address the problem 
of the uninsured at a later hearing.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Tuesday, June 
29, 1999 to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      

    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://www.house.gov/ways__means/''.

      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Thomas. The Subcommittee will come to order.
    This morning's hearing I think is going to be useful to 
Members in a number of ways as we begin looking at not just 
health care packages, but tax packages as well, because the 
American health care system has demonstrated a unique capacity 
to deliver the highest quality medical care, but financing that 
care remains a real challenge. In recent years, the private 
sector is showing a remarkable ability to slow the growth and 
then, seminally, in 1997, at which time it was in fact the old-
fashioned way of basically reducing providers, the Medicare 
growth was slowed as well.
    Still, when you look out a few years, as all of us who are 
trying to deal with the issue do, look at the baby boom 
generation, not just from a Medicare point of view, but from 
technology driving health care costs, if not in the add-on of 
technological devices, then the molecular capability of 
designing new solutions through pharmaceuticals, 
notwithstanding the fact that some of them are enormously 
expensive.
    Today the Subcommittee will examine the impact of rising 
costs on the problem of the uninsured. The problem of the 
uninsured is, I think, one of the clear evidences of the system 
being fundamentally flawed. Despite record low unemployment, 
there are a record number of Americans without health 
insurance. According to various estimates, and some of our 
witnesses will provide a better understanding of what some of 
these numbers mean and whether or not we can have a comfort 
level with them, but the normal number is 43 million Americans 
without health insurance.
    The concern is that the ranks of the uninsured are growing, 
again, notwithstanding high employment. Of course, this fact 
has consequences for millions of Americans who face a financial 
catastrophe as well as health care concerns because I think you 
will see there is a clear relationship in terms of, to a 
certain degree, income, health, geography, and ethnic origin.
    Much political debate in recent months has been devoted to 
the issue of patient protections. Of course, the irony of that 
is it is dealing with people who already have insurance and, in 
fact, some of the so-called solutions may compound the problem 
of the uninsured and we will hear some concerns about that as 
well. As a matter of fact, we have had some Congressional 
Budget Office testimony about increased regulation, 
notwithstanding how well-intentioned it might be, leading to 
higher costs, leading to more uninsured. And the question of 
regulation and the uninsured needs to be better understood 
before we move, in my opinion, additional legislation.
    Of course, we are beginning to hear that on the horizon 
there are, notwithstanding efforts to control costs, the 
potential of increasing costs, which would be a clear pressure 
just on the cost factor alone, of increasing the number of 
uninsured. And for employers shifting additional costs over to 
employees means, notwithstanding the fact that the employer 
offers insurance, the employees choose not to avail themselves 
of it. Some interesting statistics from our panel in that area 
as well.
    Today we are going to examine the problem of the uninsured. 
This panel--and I fully understand some of your reluctance to 
get in and talk about it because everybody's advocating a 
solution, and one of the things that I have found is that there 
are far more people, in my opinion, advocating a solution than 
there are who really understand the interactions of some of 
those solutions. And so one of the things I would like to do is 
to, at least from the Health Subcommittee perspective, provide 
an understanding of what the world of the uninsured looks like 
so that when we begin to try to solve the problem, the 
solutions, in fact, address the problem.
    [The opening statement follows:]

Opening Statement of Hon. Bill Thomas, a Representative in Congress 
from the State of California

    The American health care system has demonstrated a unique 
capacity to deliver the highest-quality medical care. Financing 
that health care system, however, remains a challenging dilemma 
for this country.
    In recent years, the private sector has shown a remarkable 
ability to slow the growth in health care spending. Similarly, 
the Balanced Budget Act, passed by Congress in 1997, has helped 
slow the growth in Medicare spending.
    Still, there are ominous signs on the horizon. Medicare 
remains unprepared for the oncoming retirement of the baby-boom 
generation. And, for a number of reasons, the private sector 
health care market is anticipating a return to double-digit 
growth in health care costs. After five years of near-
stability, this will have a profound effect on millions of 
Americans.
    Today this Subcommittee will examine the impact of rising 
costs on the problem of the uninsured. The problem of the 
uninsured is the most glaring flaw in our health care system. 
Despite record-low unemployment, there are a record number of 
Americans without health insurance. According to various 
estimates, there are forty-three million Americans without 
health insurance. The ranks of the uninsured are growing at 
nearly one million a year. This fact has great consequences for 
millions of American families without health insurance who run 
the risk of financial catastrophe.
    Much political debate has, in recent months, been devoted 
to the issue of ``patient protections.'' This involves the 
perception that some health plans are not as responsive to 
patient concerns as some critics would like. Critics of managed 
care contend that the solution to these concerns is increased 
regulation. However, the Congressional Budget Office (CBO) has 
shown that increased regulation, however well-intentioned, 
leads to higher costs and higher costs lead to more uninsured.
    To those who would say increased regulation is the key, I 
would respond that the best patient protection of all is access 
to affordable health insurance coverage.
    A return to explosive growth in health care spending will 
push health insurance rates up even faster. Employers--who 
provide health insurance to their employees--will be put in the 
position of having to require employees to pick up more of the 
costs for their policies. Employees in increasing numbers are 
forgoing health insurance as they see it becoming ever more 
expensive.
    This Subcommittee will examine today the problem of the 
uninsured. We will begin today by hearing from a panel of 
experts who will help us understand the nature of the problem. 
Studying the origins of the problem will provide us with a 
lesson: adding costly regulation increases those without any 
coverage. Studying the nature of the problem will also help us 
develop more constructive, not counterproductive, solutions.
      

                                

    Chairman Thomas. And, with that, I would see if my 
colleague from California, Mr. Stark, has any opening comments.
    Mr. Stark. Mr. Chairman, I thank you for holding this 
hearing on the problem of the uninsured. It should take about 5 
minutes. If anybody in this room doesn't know that there are 
somewhere between 40 and 45 million uninsured in this country, 
then they are probably waiting for the movie ``To Fly,'' and 
that is a few blocks down the street. You are in the wrong 
room.
    I would wish that this hearing would have been preceded--or 
certainly followed up by--a markup of some bills to help the 
uninsured. Frankly, I am sure we know enough about the problem. 
We know we are the only industrialized nation in the world, 
perhaps the only nation in the world, that has been unable to 
provide insurance to all of its residents. We know that is a 
disgrace. We evidently don't know what we are going to do about 
it.
    This morning 81 of us reintroduced the Medicare Early 
Access Act which would let uninsured between 62 and 64 buy into 
Medicare and the unemployed between 55 and 62 buy in. The bill 
is fully financed. I would urge us to have moved to a markup of 
that legislation, which would at least help 400,000 hard-to-
insure Americans.
    Tomorrow, I will testify before our Subcommittee on a 
proposal to provide refundable tax credits to buy guaranteed-
issue, community-rated group insurance policies. Unlike other 
proposals, this bill will work because it reforms the insurance 
market, something no other bill dares to do. The key will be 
how to finance it. To end the national disgrace of uninsurance, 
I propose using some of our surplus, plus a tax increase on 
those employers who do not provide comparable insurance 
coverage for their workers.
    Another solution would be to dedicate the next minimum wage 
increase to paying for workers' health insurance. Some cities 
in California are already doing that.
    Others of us, like Representative McDermott, have proposed 
a single-payer system. Representative Kleczka is working on a 
bill to help retirees who have been dropped by their companies. 
I would urge a hearing on any or all of the solutions, 
including the idea of just gradually lowering the Medicare age 
of eligibility and gradually raising the payroll tax to pay for 
lifetime universal coverage.
    The witnesses have only been asked to discuss the problem. 
I certainly hope that, if there is anything unique about the 
problem of uninsured, they will suggest their preferences for a 
solution. This problem has been around for a long time. I 
gather the Republicans have just recognized it. And I certainly 
hope that it won't take them more than 15 minutes to count the 
40 million some-odd uninsured and let us get to the point where 
we talk about solving the problem.
    Thank you.
    [The opening statements follow:]

Opening Statement of Hon. Fortney Pete Stark, a Representative in 
Congress from the State of California

    Mr. Chairman:
    Thank you for holding this hearing on the problem of the 
uninsured.
    I hope it will be followed, soon, with mark-up of bills to 
actually help the uninsured.
    Frankly, I think we know enough about the problem.
    We know we are the only major industrialized nation in the 
world that has been unable to solve this problem--and we should 
know that that is
    a disgrace.
    What are we going to do about it?
    This morning, 81 of us re-introduced the Medicare Early 
Access Act, which would let uninsured between 62 and 64 buy 
into Medicare, and the unemployed between 55 and 62 buy-in. The 
bill is fully financed by a package of Medicare anti-fraud 
initiatives, and over time, this anti-fraud package actually 
reduces Medicare's long-term deficits. I urge us to move to 
mark-up of this legislation, which is estimated to help provide 
400,000 hard-to-insure Americans with dependable care.
    Tomorrow, I am testifying before the full Committee on a 
proposal to provide refundable tax credits to buy guaranteed-
issue, community-rated, group insurance policies. Unlike other 
proposals, this bill will work because it dares to reform the 
insurance market. The key will be how to finance it. To end the 
national disgrace of un-insurance, I propose using some of the 
surplus plus a tax increase on those employers who do not 
provide comparable insurance coverage for their workers. 
Another solution would be to dedicate the next minimum wage 
increase to paying for workers' health insurance.
    Others of us, like Rep. McDermott, have proposed a single 
payer type system. Rep. Kleczka is working on a bill to help 
the retirees who have been dropped by their companies. I would 
urge a hearing on any and all of these solutions, including the 
idea of just gradually lowering the Medicare age of eligibility 
and gradually raising the payroll tax rate to pay for life-
time, universal coverage.
    Even though the witnesses have been asked only to discuss 
``the problem'' of the uninsured, I hope that they will go 
beyond that and indicate their preferences for a solution.
      

                                

Opening Statement of Hon. Jim Ramstad, a Representative in Congress 
from the State of Minnesota

    Mr. Chairman, thank you for calling this important hearing 
to learn more about individuals lacking health insurance in 
America today.
    As Congress focuses attention on mandating various benefits 
within a health insurance plan, we must keep in mind the 
importance of having health insurance in the first place. One 
thing I am reminded whenever I meet with small employers in my 
district is that ``patient protections'' mean nothing if you 
can't afford health insurance coverage.
    I am proud of this Committee's attention to this issue. 
Legislation passed in 1996 under Chairman Thomas' leadership 
created Medical Savings Accounts (MSAs). MSAs are the premier 
example of affordable, patient-driven health care options and 
have given thousands of uninsured individuals in this country 
access to affordable, high quality health care. I am hopeful we 
can remove the unnecessary restrictions surrounding these truly 
patient-oriented plans soon for many of their colleagues who 
still remain priced out of the health insurance market.
    While Minnesota has done a fairly good job at increasing 
access to health insurance, I know more work needs to be done 
in my state and across the country. For example, I am hopeful 
we, along with our colleagues on the full Committee, are able 
to provide greater tax incentives for health care expenses. In 
addition, we must review proposals to stem the rise in health 
care costs, such as medical malpractice reform, increased 
competition in the market and relief from burdensome government 
rules and regulations.
    I look forward to learning more from our witnesses about 
the factors that contribute to the number of uninsured in 
America today, as well as ways to significantly reduce those 
numbers.
      

                                

    Chairman Thomas. The Chair recognizes some people may have 
the answer, but for some of us, I appreciate Dr. Fronstin; 
Grace-Marie Arnett; John Sheils, Lewin Group; and John Holahan 
of the Health Policy Center. Any written testimony you may have 
will be made a part of the record and during the time available 
to you, you may address us in any way you see fit. We will 
start with Dr. Fronstin and then move across the panel.

 STATEMENT OF PAUL FRONSTIN, PH.D., SENIOR RESEARCH ASSOCIATE 
  AND DIRECTOR, HEALTH SECURITY AND QUALITY RESEARCH PROGRAM, 
              EMPLOYEE BENEFIT RESEARCH INSTITUTE

    Mr. Fronstin. Thank you, Mr. Chairman.
    Chairman Thomas. And I would just say that if, in fact, we 
allot roughly 5 minutes each, tell the gentleman from 
California, that would be about 20 minutes instead of the 15 
that he felt was necessary.
    Dr. Fronstin.
    Mr. Fronstin. Thank you, Mr. Chairman. Mr. Chairman, 
Members of the Subcommittee, my name is Paul Fronstin. I am 
director of the Health Security and Quality Research Program at 
the Employee Benefit Research Institute and I am pleased to 
appear before you today to discuss uninsured Americans.
    Between 1987 and 1997, the percentage of Americans without 
health insurance coverage increased from just under 15 percent 
to now over 18 percent and, as we have already heard, it is 
about 43 million nonelderly Americans. When examining this 
trend, it is important to recognize that the determinants 
underlying it are different in the pre-1993 period than in the 
post-1993 period. Prior to 1993, the uninsured was increasing 
in large part because the percentage of Americans covered by an 
employment-based plan was declining. The erosion of employment-
based health insurance was in large part due to rising health 
care costs, resulting in small employers dropping insurance and 
large employers shifting the costs of coverage onto workers.
    Between 1993 and 1997, health insurance costs increased 
modestly and health care costs were in line with overall 
inflation. Low health care cost increases and the strong 
economy did have an effect on employment-based coverage levels 
and the uninsured during this period. Unlike the period prior 
to 1993, between 1993 and 1997, the percentage of nonelderly 
Americans covered by employment-based plans increased. The 
period since 1993 is unique. It is likely the first time in 
history that the U.S. population was experiencing an increase 
in the uninsured population while the percentage of Americans 
covered by an employment-based health plan was also increasing. 
Researchers have yet to completely understand this trend, but 
speculation has been offered.
    The growth rate in the uninsured population has slowed 
since 1993 and may also be attributable to modest health 
insurance cost increases. Between 1987 and 1993, health 
insurance costs increased an average of over 13.5 percent per 
year. During this period, the uninsured increased an average of 
2.6 percent per year. In contrast, between 1994 and 1997, when 
health insurance costs increased an average of 2.9 percent per 
year, the uninsured increased an average of 1.4 percent per 
year.
    When examining the uninsured, it is important to understand 
that some uninsured workers are offered health insurance by 
their employer while others are not. In 1996, 24 percent of 
uninsured workers were offered health insurance by their 
employer; an additional 5.1 percent could have received 
coverage through a family member. With an effective access rate 
of about 29 percent, it is likely that over 12.5 million of the 
43.1 million uninsured do have access to an employment-based 
health plan.
    The proportion of the nonelderly population with and 
without health insurance varies by geographic region. In 14 
States, 20 percent or more of the population was uninsured in 
1997. These States are in large part concentrated in the south 
central and southwestern parts of the United States. Young 
individuals are typically more likely to be uninsured than 
older individuals. Many in this group may think that they do 
not need health insurance because their probability of 
encountering a high-cost medical event is very low.
    The uninsured are concentrated disproportionately in low-
income families. Thirty-seven percent of individuals in 
families with income just above the poverty line were uninsured 
in 1997. This compares with only 8 percent uninsured among 
individuals in families with income at 400 percent or more of 
the poverty level.
    Approximately 84 percent of the uninsured were members of 
families with a working head of household in 1997. As a result, 
it is just as important to understand the job characteristics 
of uninsured workers as it is to understand the characteristics 
of the uninsured in general. Workers employed in small firms 
are more likely to be uninsured than workers employed in large 
firms. As a result, over 60 percent of uninsured workers were 
employed in firms with less than 100 employees or were self-
employed in 1997.
    Finding solutions for reducing the level of the uninsured 
is like trying to hit a moving target. While the 
characteristics of the uninsured population do not vary much 
from year to year, the people within that population do change. 
A recent EBRI study found that most uninsured spells were 
either very long or very short. Specifically, 37 percent of all 
uninsured spells lasted 4 months or less while 33 percent 
lasted 12 months or longer. Spells were more likely to last 
longer than 4 months for the following groups: Hispanics, 
individuals 25 years and older, the self-employed, workers not 
employed in manufacturing or the public sector, and individuals 
with long spells of unemployment.
    This concludes my statement. I do appreciate the 
opportunity to testify today. I would be happy to answer any 
questions you have and I look forward to working with the 
Subcommittee in the future if you have additional questions.
    Thank you.
    [The prepared statement follows:]

Statement of Paul Fronstin, Ph.D., Senior Research Associate and 
Director, Health Security and Quality Research Program, Employee 
Benefit Research Institute

    Mr. Chairman, ranking member, and members of the Committee, 
I am pleased to appear before you today to discuss uninsured 
Americans. My name is Paul Fronstin. I am a senior research 
associate and director of the Health Security and Quality 
Research Program at the Employee Benefit Research Institute 
(EBRI), a private, nonprofit, nonpartisan, public policy 
research organization based here in Washington, DC. EBRI has 
been committed, since its founding in 1978, to the accurate 
statistical analysis of economic security issues. Through our 
research we strive to contribute to the formulation of 
effective and responsible health and retirement policies. 
Consistent with our mission, we do not lobby or advocate 
specific policy solutions.

                              Introduction

    Between 1987 and 1997, the percentage of Americans without 
health insurance coverage increased from 14.8 percent to 18.3 
percent, and now comprises 43.1 million nonelderly Americans 
(chart 1 & table 1). However, when examining this increase it 
is important to recognize that the determinants underlying the 
trend are different in the pre-1993 period than the post-1993 
period. Prior to 1993, the uninsured was increasing in large 
part because the percentage of Americans covered by an 
employment-based health plan was declining. In 1987, 69.2 
percent of the nonelderly Americans were covered by an 
employment-based health plan (chart 2 and table 1). That was 
down to 63.5 percent by 1993. The erosion of employment-based 
health insurance was in large part due to rising health care 
costs, resulting in small employers dropping insurance and 
large employers shifting the cost of coverage onto workers.\1\
---------------------------------------------------------------------------
    \1\ The decline in coverage was also the result of declining real 
income and structural changes in the economy, such as the movement of 
workers from the manufacturing sector to the service sector, the 
increased use of part-time workers, and the decline of unionization 
(Fronstin and Snider, 1996/97).
[GRAPHIC] [TIFF OMITTED] T9402.001

[GRAPHIC] [TIFF OMITTED] T9402.002

[GRAPHIC] [TIFF OMITTED] T9402.003

    Between 1993 and 1997, health insurance costs increased 
modestly and health care costs were in line with overall 
inflation. According to an annual survey by William M. Mercer, 
health insurance costs declined in 1994, increased 2.1 percent 
in 1995 and 2.5 percent in 1996, and barely increased in 1997. 
Low health care cost increases and the strong economy had an 
effect on employment-based coverage levels and the uninsured 
during this period. Unlike the period prior to 1993, between 
1993 and 1997 the percentage of nonelderly Americans covered by 
an employment-based health plans increased from 63.5 percent to 
64.2 percent. At the same time, the percentage of Americans 
without health insurance coverage continued to increase, though 
at a slower rate than experienced between 1987 and 1993.
    The period since 1993 is unique. It is likely the first 
time in history that the United States population was 
experiencing an increase in the uninsured population while the 
percentage of Americans covered by an employment-based health 
plan was also increasing. Researchers have yet to completely 
understand this trend, but speculation has been offered. It 
appears that individuals leaving welfare (and Medicaid) because 
of the strong economy and welfare reform are contributing to 
both the increase in the uninsured and the increase in 
employment-based coverage. As former welfare recipients get 
jobs, some get jobs that offer health insurance while others 
get jobs that do not offer health insurance.
    The growth rate in the uninsured population has slowed 
since 1993, and may also be attributable to modest health 
insurance cost increases. Between 1987 and 1993, health 
insurance costs increased an average of 13.6 percent per year, 
according to chart 3. During this period the uninsured 
increased an average of 2.6 percent per year. In contrast, 
between 1994 and 1997, when health insurance costs increased an 
average of 2.9 percent per year, the uninsured increased an 
average of 1.4 percent per year. While the uninsured did not 
decline, lower health insurance cost increases did result in a 
slowing of the growth in the uninsured.
[GRAPHIC] [TIFF OMITTED] T9402.004

    In formulating public policy for the uninsured population, 
it is important to understand the characteristics of the 
uninsured population. The remainder of this testimony presents 
this information.

                                  Data

    The data in this testimony come from three sources: the 
Current Population Survey (CPS) and the Survey of Income and 
Program Participation (SIPP), both conducted by the U.S. Bureau 
of the Census, and the 1996 Medical Expenditure Panel Survey 
(MEPS), conducted by the Agency for Health Care Policy and 
Research.
    The CPS is conducted monthly, and health insurance status 
is measured by a survey of 145,000 individuals conducted in 
March of each year. The CPS has become the most widely used 
source of data on the uninsured and is the source of the 
estimate that 43.1 million nonelderly Americans were uninsured 
in 1997. This is the survey that has been used to track the 
uninsured since as far back as 1980. While the questionnaire 
has been changed in various years to improve the accuracy of 
the data, many researchers feel comfortable making adjustments 
to the data that result in a consistent time series since 1987 
(See Fronstin, 1998, for more details).
    The MEPS also contains data on the uninsured, but is not 
used as often by researchers as the CPS because it has been 
conducted only intermittently since 1977 (previously under the 
name National Medical Expenditure Survey), and because of the 
smaller sample size. However, data was collected in MEPS that 
is not collected in CPS. For example, MEPS asks workers if 
their employer offers them health insurance coverage and about 
health care utilization. Additional data on premiums, plan 
design, health care expenditures, and source of payment are 
expected to be released later this year.
    SIPP contains data on the uninsured, but is not used as 
often as CPS for a number of reasons, primarily because of the 
time lag in obtaining SIPP data. The strength of using the SIPP 
data for analysis of health insurance coverage is that it 
allows researchers to track individuals for as long as 36 
months. This allows researchers to conduct comprehensive 
analyses on duration of insurance status, some of the results 
of which are discussed below.

                             The Uninsured

    When examining the uninsured, it is important to understand 
that some uninsured workers are offered health insurance by 
their employer while others are not. For example, a 1997 study 
found that 24 percent of uninsured workers were offered health 
insurance by their own employer, while an additional 5.1 
percent could have received coverage through a family member 
(Cooper and Schone, 1997). With an effective access rate of 
29.1 percent, it is likely that over 12.5 million of the 43.1 
million uninsured actually have access to an employment-based 
health plan.
    Access to Health Insurance--This same study found that 
between 1987 and 1996 the percentage of workers offered an 
employment-based health plan increased, but take-up rates were 
down. The study found that while take-up rates declined across 
all income groups, they were down the most for low-income 
workers.
    Geographic Region--The proportion of the nonelderly 
population with and without health insurance varies by 
geographic region. In 14 states, 20 percent or more of the 
population was uninsured in 1997 (chart 4). These states are in 
large part concentrated in the south central and southwestern 
parts of the United States. Many of these states have a higher 
concentration of minority groups, such as Hispanics, who are 
less likely to be covered by health insurance. The higher 
uninsured rates may be due in part to the fact that Hispanics 
are more likely to be in low-income families than other races. 
States with a low percentage of uninsured individuals include 
Hawaii, Wisconsin, Minnesota, Vermont, and Pennsylvania.
[GRAPHIC] [TIFF OMITTED] T9402.005

    Age--Young individuals are typically more likely to be 
uninsured than older individuals (chart 5). This is apparent by 
looking at the data in chart 6, which shows that the uninsured 
population is disproportionately younger than the general 
population. The high proportion of young adults without health 
insurance may occur because they are no longer covered by a 
family policy and may not have established themselves as 
permanent members of the work force. Some young adults may also 
have lost access to Medicaid, which covered them up through age 
18 in some states. Many in this group may think that they do 
not need health insurance because their probability of 
encountering a high-cost medical event is very low.
[GRAPHIC] [TIFF OMITTED] T9402.006

[GRAPHIC] [TIFF OMITTED] T9402.007

    Income--Income plays an important role in whether or not an 
individual is uninsured. The uninsured are concentrated 
disproportionately in low-income families. For example, 37 
percent of individuals in families with income just above the 
poverty line were uninsured in 1997 (chart 7). This compares 
with 8 percent uninsured among individuals in families with 
income at 400 percent of the poverty level or more.
[GRAPHIC] [TIFF OMITTED] T9402.008

                              Work Status

    Approximately 84 percent of the uninsured were members of 
families with a working head of household in 1997 (Fronstin, 
1998). As a result, it is just as important to understand the 
job characteristics of uninsured workers as it is to understand 
the characteristics of the uninsured in general.
    Firm size--Workers employed in small firms are more likely 
to be uninsured than workers employed in large firms (chart 8). 
As a result, the uninsured is more likely to be composed of 
workers in small firms than the general working population. In 
1997, over 60 percent of uninsured workers were employed in 
firms with less than 100 employees or were self-employed (98 
percent of the self-employed reported a firm size of less than 
100 employees). According to chart 9, 12 percent of uninsured 
workers were self-employed; 22 percent were in firms with less 
than 10 workers, 13 percent were in firms with 10-24 workers; 
and 14 percent were in firms with 25-99 workers.
[GRAPHIC] [TIFF OMITTED] T9402.009

[GRAPHIC] [TIFF OMITTED] T9402.010

    Industry--Workers employed in the public sector or the 
manufacturing sector were least likely to be uninsured (chart 
10). Workers were more likely to be uninsured if they were 
employed in agriculture, forestry, fishing, mining, 
construction, wholesale and retail trade, or the personal 
service sector.
[GRAPHIC] [TIFF OMITTED] T9402.011

                      Duration of Being Uninsured

    Finding solutions for reducing the level of the uninsured 
is like trying to hit a moving target. While the 
characteristics of the uninsured population do not vary much 
from year to year, the people within that population do change. 
For example, a recent study by my colleague Craig Copeland at 
the Employee Benefit Research Institute found that most 
uninsured spells were either very short or very long (Copeland, 
1998). Specifically, 37 percent of all uninsured spells lasted 
four months or less, while 33 percent lasted 12 months or 
longer (chart 11). Spells were more likely to last longer than 
four months for the following groups:
     Hispanics.
     Individuals ages 25 and older.
     The self-employed.
     Workers not employed in manufacturing or the 
public sector.
     Individuals with long spells of unemployment.
    [GRAPHIC] [TIFF OMITTED] T9402.012
    
    Mr. Chairman, this concludes my statement. Thank you for 
the opportunity to testify today. I would be happy to answer 
any questions that you or members of the committee may have, 
and invite you to call on EBRI in the future for additional 
information.

                               References

    Copeland, Craig. ``Characteristics of the Nonelderly with Selected 
Sources of Health Insurance and Lengths of Uninsured Spells,'' EBRI 
Issue Brief no. 198 (Washington, DC: Employee Benefit Research 
Institute), June 1998.
    Cooper, Philip F., and Barbara Steinberg Schone. ``More Offer, 
Fewer Takers For Employment-Based Health Insurance: 1987 and 1996,'' 
Health Affairs 16(6), November-December 1997.
    Fronstin, Paul. ``Sources of Health Insurance and Characteristics 
of the Uninsured: Analysis of the March 1998 Current Population 
Survey,'' EBRI Issue Brief no. 204 (Washington, DC: Employee Benefit 
Research Institute), December 1998.
    Fronstin, Paul, and Sarah C. Snider. ``An Examination of the 
Decline in Employment-Based Health Insurance Between 1988 and 1993,'' 
Inquiry 33, Winter 1996/97: 317-325.

The views expressed in this statement are solely those of the 
author and should not be attributed to the Employee Benefit 
Research Institute (EBRI), its officers, trustees, sponsors, or 
other staff. The Employee Benefit Research Institute is a 
private, nonprofit, nonpartisan, public policy research 
organization.
      

                                

    Chairman Thomas. Thank you, Dr. Fronstin. I think there 
will be some questions about especially the very useful charts 
that you have provided with your testimony.
    Ms. Arnett.

 STATEMENT OF GRACE-MARIE ARNETT, PRESIDENT, GALEN INSTITUTE, 
                      ALEXANDRIA, VIRGINIA

    Ms. Arnett. Thank you, Mr. Chairman and Members of the 
Subcommittee, for the opportunity to testify today.
    I am president of the Galen Institute. We are a not-for-
profit health and tax policy research organization based in 
Alexandria, Virginia, working to promote a more-informed debate 
over individual freedom, consumer choice, competition, and 
diversity in the health sector.
    It is frustrating to those of us in the policy community as 
to all of you that, despite all of the thousands of hours of 
effort on your part and those of State lawmakers and despite a 
strong and sustained period of economic growth, that the number 
and percentage of Americans without health insurance continue 
to rise. At the State level, thousands of rules and regulations 
have been passed with the intent of forcing insurers to offer 
coverage that contained good benefits at reasonable costs and 
with protections for policy holders. Additional insurance 
regulation and mandates recently have been passed at the 
Federal level, as you all know, and even more are being 
debated. However, the data increasingly show that these laws 
have the effect of increasing the cost of health insurance and 
are, in fact, driving up the number of uninsured.
    People who are on the tightest budgets must make the 
hardest choices of deciding how to allocate their resources. 
After paying the rent or mortgage or putting food on the table, 
millions of Americans simply don't have enough money left to 
buy health insurance. Some are faced with the difficult choice 
between sending their children to good, safe schools or 
providing the family with the security of health insurance.
    We see, increasingly, the choices that Americans are 
making. When asked by a Kaiser/Commonwealth Fund survey, the 
majority of Americans polled cited cost as the reason for not 
having health insurance. In fact, between 1988 and 1996, the 
cost of health insurance increased by 111 percent, despite an 
increase in the overall consumer price index of only 33 
percent. After several years of leveling off, health insurance 
costs are on the rise again and that certainly does not bode 
well for the number of uninsured.
    The GAO has concluded that continued erosion of health 
insurance coverage is directly related to cost pressures. The 
Congressional Budget Office estimates that every 1 percent 
increase in the cost of health insurance, throws 200,000 more 
people off the insurance rolls. The uninsured are 
disproportionately young, minority, lower income, and either 
work for smaller companies or are their dependents. For low-
income Hispanic families, 52 percent are uninsured.
    The research that I have done, which is validated by 
numerous other experts, has convinced me that there is a causal 
connection. The growing burden of mandates and regulation in 
the health sector leads to higher costs for health insurance, 
which in turn, drives more people into the ranks of the 
uninsured. I direct you and the other Members of the 
Subcommittee to my testimony for a more detailed description of 
the specific research.
    For example, Gail Jensen of Wayne State University and 
Michael Morrisey of the University of Alabama at Birmingham 
found that as many as one in four of Americans lacks health 
insurance because of benefit mandates. Yet the number of 
mandates has increased 25-fold over the last quarter century. 
Mandates and regulations don't show up on the Federal budget 
ledger, but they do show up in the paychecks and loss of 
coverage by individual workers. Mandates are not free. They are 
paid for by workers and their dependents who receive lower 
wages or lose coverage altogether.
    Each mandate may increase costs by only 1 percentage or 2, 
but others add much more. Each one of these benefit mandates 
can be fully justified on its own merits. But cumulatively, 
they are condemning more and more people to being without 
health coverage. Small businesses and those attempting to 
purchase health insurance on their own are most vulnerable to 
these regulations because they do not have the opportunity to 
escape through the protection of ERISA.
    The Galen Institute last year conducted a study to 
determine the effects of State efforts to regulate their health 
insurance markets and shape coverage to help their citizens get 
affordable health coverage. Using GAO studies, we determined 
that between 1990 and 1994, 16 States were most aggressive in 
passing laws regulating health insurance. By 1996, these 16 
States were seeing their uninsured populations grow an average 
of 8 times faster than the 34 States that passed less 
comprehensive regulation. Before this blizzard of regulation, 
the two groups had been virtually equal. We looked at many 
other factors at these 16 States. The distinguishing 
characteristic was the passage of these very aggressive 
insurance regulations.
    One of the biggest regulators was Kentucky. The Governor 
said afterward, ``In spite of good intentions and noble 
purposes, it didn't work. The entire cost of the system went 
up.'' The findings by our study have been validated in part by 
other studies, including the Urban Institute.
    The fact that regulation has failed at the State level does 
not mean Federal action is not needed, but in the battle over 
patient protection legislation, the uninsured are being shoved 
aside in favor of a small percentage of those who have health 
insurance but are unhappy with it. And for the 43 million 
Americans with no health insurance, the data strongly suggest 
that patients rights legislation will hurt them by driving up 
the costs of coverage and throwing more people off the 
insurance rolls. I have provided a chart, Mr. Chairman, for the 
discussion of this issue.
    My time has run out. I would be happy, later on, to 
describe the chart if you would like.
    [The prepared statement follows:]

Statement of Grace-Marie Arnett, President, Galen Institute, 
Alexandria, Virginia

    Thank you, Mr. Chairman, and members of the committee for 
inviting me to testify today as you address the challenge of 
why, despite years of effort to try to reverse the trends, more 
and more Americans are without health insurance.
    My name is Grace-Marie Arnett, and I am president of the 
Galen Institute, a not-for-profit health and tax policy 
research organization based in Alexandria, Virginia. The Galen 
Institute was founded in 1995 to promote a more informed public 
debate over individual freedom, consumer choice, competition, 
and diversity in the health sector. The Galen Institute also 
facilitates the work of the Health Policy Consensus Group, 
which is composed of nearly 20 health policy experts from the 
major free-market think tanks, whose work I will discuss later 
in my testimony.
    For decades, policy makers at all levels of government have 
been searching for ways to help Americans gain greater access 
to affordable health care. You and your colleagues in 
Washington and lawmakers in the states have spent untold 
thousands of hours trying to achieve that goal.
    It is frustrating to you and to virtually all Americans 
that, despite these efforts and especially during a period of 
strong and sustained economic growth, the number and percentage 
of Americans without health insurance continues to rise. In 
1987, there were 32 million Americans under age 65 without 
health insurance at some point during the year. A decade later, 
the number has risen to more than 43 million or 16.1% 
uninsured.
    At the state level, thousands of new rules and regulations 
have been passed with the intent of forcing health insurers to 
offer coverage that contained good benefits, at reasonable 
costs, and with protections for policyholders. Some insurance 
regulations and mandates recently have been passed at the 
federal level, as you know, and even more are being debated. 
However, the rule that governs the practice of medicine should 
also govern lawmakers in addressing health reform issues: 
First, do no harm.
    The data show that these laws have the effect of increasing 
the cost of health insurance and are driving up the number of 
uninsured.

                   Insurance costs and the uninsured

    People who are on the tightest budgets must make the 
hardest choices in deciding how to allocate their resources. 
After paying the rent or the mortgage and putting food on the 
table, millions of Americans simply don't have enough money 
left to buy health insurance. Some are faced with the choice 
between sending their children to a good, safe school or 
providing the family with the security of health insurance. 
These are terribly difficult choices, but we see from the 
numbers the choice that more and more Americans are making.
    When asked by a Kaiser/Commonwealth Fund survey, the 
majority of Americans cite cost as their reason for not having 
health insurance.
    Over the last decade, health insurance costs have increased 
much faster than overall consumer prices. The General 
Accounting Office reported in 1997 that the average annual 
premium for employment-based family health insurance coverage 
increased by 111%, from $2,530 in 1988 to $5,349 by 1996. 
During this same period, overall consumer prices rose by 
33%.\1\ Now, after several years of leveling off, health 
insurance premiums are on the rise again. This does not bode 
well for the uninsured.
---------------------------------------------------------------------------
    \1\  U.S. General Accounting Office. ``Private Health Insurance. 
Continued Erosion of Coverage Linked to Cost Pressures,'' GAO/HEHS-97-
122. July 1997. Washington, D.C.
---------------------------------------------------------------------------
    The GAO concluded that the continued erosion of health 
insurance coverage is directly linked to cost pressures.
    The Congressional Budget Office estimates that every one 
percent increase in the cost of health insurance throws 200,000 
more Americans off the insurance rolls. The result: Those who 
can least afford the inevitable premium increases will lose 
their health insurance.
    The uninsured are disproportionately young, minority, lower 
income, and either work for small companies or are their 
dependents.\2\ Hispanics and minorities are the most likely to 
be uninsured. Among working-age Americans, 14% of whites, 24% 
of blacks, and 38% of Hispanics are uninsured.\3\ The uninsured 
numbers are even higher for lower-income minority group 
members, reaching 52% for Hispanic families whose incomes are 
below the federal poverty level.
---------------------------------------------------------------------------
    \2\ Hall, Allyson G., Karen Scott Collins, and Sherry Glied, 
``Employer-Sponsored Health Insurance: Implications for Minority 
Workers.'' The Commonwealth Fund, February 1999. New York.
    \3\ Commonwealth Fund analysis of 1997 Current Population Survey.
---------------------------------------------------------------------------
    The research that I have done, which is validated by 
numerous other experts, has convinced me that there is a causal 
connection: the growing burden of mandates and regulation in 
the health sector leads to higher costs for health insurance 
which, in turn, drives more people into the ranks of the 
uninsured.

                       Mandates and the uninsured

    The link between insurance mandates and the uninsured has 
been established by numerous researchers.
     Using data from 1989 to 1994, Sloan and Conover 
\4\ found that the higher the number of coverage requirements 
placed on plans, the higher the probability that an individual 
would be uninsured, and the lower the probability that people 
would have any private health insurance coverage, including 
group coverage. After more than 100,000 observations, they 
conclusively demonstrated that the probability an individual 
will be uninsured increases with each mandate imposed by 
government.
---------------------------------------------------------------------------
    \4\ Sloan, Frank A. and Christopher J. Conover, ``Effects of State 
Reforms on Health Insurance Coverage of Adults,'' Inquiry. 35:280-293, 
1998.
---------------------------------------------------------------------------
     Gail A. Jensen of Wayne State University and 
Michael Morrisey of the University of Alabama-Birmingham \5\ 
found that as many as one in four Americans lack health 
insurance because of benefit mandates. Each additional mandate 
significantly lowers the probability that a firm or an 
individual will have health insurance.
---------------------------------------------------------------------------
    \5\ Jensen, Gail A., Michael A. Morrisey. ``Mandated Benefit Laws 
and Employer-Sponsored Health Insurance.'' Published by the Health 
Insurance Association of America, January, 1999. Washington, D.C.
---------------------------------------------------------------------------
     Professor William S. Custer of Georgia State 
University \6\ found that state guaranteed issue requirements, 
coupled with either community rating or rate bands in the small 
group insurance market, increase the probability that a person 
will be uninsured by nearly 29%. These laws hit small firms and 
individuals purchasing insurance in the open market the 
hardest.
---------------------------------------------------------------------------
    \6\ Custer, William S. ``Health Insurance Coverage and the 
Uninsured.'' Published by the Health Insurance Association of America, 
December 1998. Washington, D.C.
---------------------------------------------------------------------------
    The number of mandates has increased 25-fold over the last 
quarter century, with more than 1,000 state mandated benefit 
laws on the books today. Most are an attempt by lawmakers to 
correct inefficiencies or inequitable practices in the market. 
Unfortunately, they are having the unintended effect of 
increasing the ranks of the uninsured.
    Mandates and insurance regulations do not show up on the 
federal budget ledger, but they do show up in the paychecks and 
in loss of coverage by individual workers. Jensen and Morrisey 
say, ``Mandates are not free. They are paid for by workers and 
their dependents, who receive lower wages or lose coverage 
altogether.''\7\
---------------------------------------------------------------------------
    \7\ Jensen, Morrisey.
---------------------------------------------------------------------------
    In a study, conducted in 1989 even before the explosion of 
state mandated benefit laws in the 1990s, Acs et al found that 
mandates significantly raised premium costs. Even then, 
insurance was found to be 4 to 13 percent more expensive as a 
direct result of benefit laws.\8\
---------------------------------------------------------------------------
    \8\ Acs, Gregory, Colin Winterbottom, and Sheila Zedlewski, 
``Employers' Payroll and Insurance Costs: Implications for Play or Pay 
Employer Mandates,'' in Health Benefits and the Workforce. Washington, 
D.C. U.S. Department of Labor, 1992.
---------------------------------------------------------------------------
    Each mandates may increase costs only a percentage or two, 
but others add much more. Every one of these benefit mandates 
can be justified individually, and each has a constituency that 
can and does argue passionately for its merit. But 
cumulatively, they are condemning more and more people to being 
without health coverage.

                Hitting the most vulnerable the hardest

    Small businesses and individuals attempting to purchase 
health insurance are hit with the full force of these mandates 
and insurance regulations. The small group and individual 
insurance markets have become fragile and expensive as a 
result. Most large companies avoid benefit mandates and state 
insurance regulation laws because they are protected by ERISA, 
the Employee Retirement Income Security Act of 1974 that allows 
companies that self-insure to escape the reach of these state 
insurance laws and regulations. Few small business can afford 
to self insure and are therefore subject to all of the mandates 
and regulations imposed by the states.
    Surveys conducted by the National Federation of Independent 
Business show that the great majority of small business owners 
would like to offer health insurance, but say high costs make 
it prohibitive. About 40% of businesses with fewer than 50 
workers do not offer health insurance. A person working for a 
company with fewer than 10 employees is three times more likely 
to be without health insurance than someone working for a 
company with more than 1,000 employees.
    Even small companies that do offer insurance often must 
make the choice between keeping their business going and 
offering health benefits. Many walk the line--offering 
insurance but requiring employees to pay a larger share of the 
premiums. Unfortunately, an increasing number of people offered 
health insurance through their jobs are declining coverage, 
again citing costs as the primary reason.
    For this and other reasons, the number of people with 
private health insurance has been declining for nearly two 
decades. Since 1980, the number of people with private health 
insurance coverage obtained either through the workplace or 
purchased individually has been declining, from 79.5% in 1980 
to 70.5% in 1995.

             State insurance regulations and the uninsured

    The Galen Institute conducted a study last year,\9\ which 
was published by The Heritage Foundation, to determine the 
effect of state efforts to regulate their health insurance 
markets and shape coverage to help their citizens get 
affordable health insurance coverage.
---------------------------------------------------------------------------
    \9\ Schriver, Melinda, and Grace-Marie Arnett. ``Uninsured Rates 
Rise Dramatically in States with Strictest Health Insurance 
Regulations,'' The Heritage Foundation, August, 1998, Washington, D.C.
---------------------------------------------------------------------------
    Using GAO studies, we determined that between 1990 and 
1994, 16 states were most aggressive in passing laws regulating 
health insurance. By 1996, these 16 states were seeing their 
uninsured populations grow an average of EIGHT times faster 
than the 34 states that passed less comprehensive regulations. 
Compare this to 1990, before the blizzard of health-care reform 
legislation began, when the two groups of states had nearly 
equal rates of growth in their uninsured populations.
    Could the increase in the number of uninsured in these 16 
states be caused by something other than regulation? Not 
likely. The regulating states had employment and income 
characteristics similar to the rest of the nation. Their only 
distinguishing feature was the passage of these sweeping health 
insurance regulations.
    One of the biggest regulators was Kentucky. ``In spite of 
good intentions and noble purpose, it didn't work ... The 
entire cost of the system went up,'' Gov. Paul Patton said last 
year. Kentucky citizens paid the price: 107,500 fewer citizens, 
out of a population of 3.4 million, had health insurance in 
1996 than in 1990. ``In my opinion, most of the general 
assembly believes that we in Kentucky have experimented enough 
for the time being,'' Patton said.
    In addition to Kentucky, the other states that imposed the 
most aggressive regulations were Idaho, Iowa, Louisiana, Maine, 
Minnesota, New Hampshire, New Jersey, New Mexico, New York, 
North Dakota, Ohio, Oregon, Utah, Vermont and Washington. Their 
new laws included: mandates on insurers to sell policies to 
anyone who applies and agrees to pay the premium--even if they 
wait to buy insurance until they are already sick (guaranteed 
issue); prohibitions on excluding coverage for some medical 
conditions (pre-existing condition exclusions); and 
requirements that insurers charge the same price to everyone in 
a community, regardless of the differences in risk posed by 
individuals (community rating); plus others.
    The findings from our study have been validated in part by 
other studies, including the Urban Institute.\10\
---------------------------------------------------------------------------
    \10\ Marstellar, Jill A., Len M. Nichols, Adam Badawi, et al. 
``Variations in the Uninsured: State and County Level Analyses.'' Urban 
Institute, June 1998. Washington, D.C.
---------------------------------------------------------------------------
    Recent federal legislation--the Health Insurance 
Portability and Accountability Act of 1996 and the Balanced 
Budget Act of 1997--have imposed at the federal level some of 
the insurance rules that had been enacted by the states, 
including guaranteed renewal and some of the most common 
coverage mandates, making it difficult to do a differential 
study now.
    However even now, 11 of the 16 states we studied still has 
a rising number of uninsured, and for all but two, the growth 
in their insured populations is under 1%.
    The fact that regulation has failed at the state level does 
not mean federal action is unneeded. But in the battle over 
Patient Protection legislation, the uninsured are being shoved 
aside in favor of the small percentage of those who have health 
insurance but are unhappy with it. Instead of helping the 43 
million Americans with no health insurance, the data strongly 
suggest that patients' rights legislation will hurt them by 
driving up the cost of coverage and throwing even more people 
off the insurance rolls.

                   More regulation is not the answer

    The health sector is the most heavily regulated industry of 
the American economy. In every other industry, Americans 
recognize that regulation drives up prices, restricts 
innovation, dries up competition, and forces businesses to 
cater to regulators and not consumers. That is exactly what is 
happening in the health sector.
    These data show that American citizens are paying a high 
price for the mistakes of well-intended but flawed legislation 
that has backfired in its intent. A poll released last year by 
the Charlton Research Company showed that 66% of respondents 
said they thought health care is regulated enough. Only 25% 
said more regulation was the answer, and the majority of them 
changed their minds if the regulations would increase 
government bureaucracy or health care costs.

              A fresh approach to energize the free market

    As costs and the number of uninsured continue to rise, a 
different approach clearly is needed. In a forthcoming book, 
entitled Empowering Health Care Consumers through Tax 
Reform,\11\ the Health Policy Consensus Group explores the 
intersection of health and tax policy for solutions. This group 
of economists and other health policy advisers, business group 
and union representatives, physicians, and political leaders 
describes the distortions to the health care system caused by a 
50-year-old provision in the tax code.
---------------------------------------------------------------------------
    \11\ Arnett, Grace-Marie, Ed. Empowering Health Care Consumers 
through Tax Reform, University of Michigan Press, Ann Arbor. 
Forthcoming.
---------------------------------------------------------------------------
    The central, structural defect impacting the market for 
private health insurance is the discriminatory tax treatment of 
health insurance. To begin to stem the flow of problems that 
wind up on their doorsteps, legislators can begin by providing 
broader access to health insurance through tax credits and 
other fixed incentives for individuals.
    In today's information age economy, an increasing number of 
people work part-time, are contract workers, or are starting 
their own businesses. These are the people who are 
disproportionately likely to be uninsured because the system is 
working against them.
    The federal tax code heavily favors workers fortunate 
enough to get their health insurance through the workplace. 
That is because workers do not pay taxes on the part of their 
compensation package that they receive in the form of health 
benefits as long as their employer purchases the policy for 
them. This generous subsidy, worth an estimated $111 billion a 
year, is the cornerstone of the system in the United States 
that ties private health insurance to the workplace.
    However, this tax provision distorts the efficiency of the 
health care market in a number of ways: (1) It restricts 
employees' choices to the selection the employer offers; (2) It 
undermines cost consciousness by hiding the true cost of 
insurance and medical care from employees; (3) Because the full 
cost of health insurance is not visible to employees, it 
artificially supports increased demand for medical services and 
more costly insurance; (4) As a result, inefficient health care 
delivery is subsidized at the expense of efficient delivery; 
(5) Cash wages are suppressed; (6) Many employees with job-
based coverage are frustrated because they have little choice 
and control over their policies and their access to medical 
services; (7) The self-employed, the unemployed, and those 
whose employers do not offer health insurance are discriminated 
against because they receive a much less generous subsidy, if 
any at all, when they purchase health insurance on their own.
[GRAPHIC] [TIFF OMITTED] T9402.013

                        Trapped in the Galen Gap

    The Galen logo is a conceptual depiction of a central 
problem in the health sector that affects Americans under age 
65. The vertical axis of the graph in the logo represents the 
value of the taxpayer-supported health benefits a given 
individual may receive. The horizontal axis represents the 
individual's income.
    Those with the very lowest incomes are most likely to 
qualify for taxpayer-supported health programs, especially 
Medicaid. But as an individual moves up the income scale, the 
likelihood of qualifying for public programs to receive health 
benefits drops off. Working Americans with incomes of less than 
$25,000 are most likely to be uninsured and are caught in the 
troth, which we call the ``Galen Gap.'' They earn too much to 
qualify for public programs but are less likely to have the 
good jobs that provide health insurance as a tax-free benefit.
    As people move up the income scale, they are much more 
likely to have both the good jobs and the higher incomes to 
qualify for the generous tax subsidy for employment-based 
health insurance, worth an estimated $111 billion this year.
    John Sheils of the Lewin Group estimates that families 
making less than $15,000 a year reap just $71 in tax benefits 
from job-based health insurance while families making $100,000 
or more get a $2,357 in tax break for the purchase of health 
insurance.\12\ This is a highly regressive subsidy that drives 
many of the problems involving cost and access in the health 
sector today.
---------------------------------------------------------------------------
    \12\ Sheils, John, and Paul Hogan. ``Cost of Tax-Exempt Health 
Benefits in 1998,'' Health Affairs. March/April 1999. Volume 18, No. 2. 
Bethesda, MD.
---------------------------------------------------------------------------
    The great majority of the uninsured are in the ``Galen 
Gap.'' Some have been trying to fill this gap from the left by 
creating and expanding government programs, such as the $48 
billion State Children's Health Insurance Program and working 
to expand Medicare to middle-aged Americans.
    We believe real solutions will come from exploring 
solutions on the right side of the chart--by focusing on tax 
policy. We believe that many more people would have access to 
medical services and health insurance that would be more 
affordable and more innovative if the tax treatment of health 
insurance were reformed.
    Federal legislators can begin building incentives for a 
better system and also undo some of the damage done by federal 
and state regulation by providing targeted tax credits to the 
uninsured to purchase their own health insurance.
    States can do their part by taking advantage of an 
immediate opportunity to provide tax credits and vouchers for 
uninsured children and their families through the Children's 
Health Insurance Program.
    There is a need to provide alternative grouping mechanisms 
for individuals in purchasing health insurance to give them an 
opportunity to take advantage of group rates. A number of 
provisions are being debated today, such as HealthMarts and 
Association Health Plans, designed to address the supply-side 
of the equation.
    Today, consumers are denied the choice of health plans best 
suited to their needs when mandates force plans to provide an 
array of benefits designed more to please lobbyists than 
consumers. Mandates also drive up health care costs making 
insurance more costly for individuals and families. Congress 
would be well advised to put a moratorium on more mandates 
until the cost and implications can be fully explored.
    The results examined in these studies show that regulation 
at the state and federal level is counterproductive in 
responding to the challenge of increasing access to health 
insurance in the individual and private health insurance 
market. If health care access and affordability are genuine 
goals, a far better approach would be to empower individuals 
and families to make health care choices that suit their own 
needs, restore the independence and integrity of the medical 
profession, and force the health care industry and insurance 
companies to compete for consumers' dollars. The health care 
delivery system at all levels should be accountable directly to 
the individuals and families being served.
    Thank you for the opportunity to present this testimony, 
and I would be happy to answer questions or provide additional 
information.
      

                                

    Chairman Thomas. Thank you very much, Ms. Arnett.
    Mr. Sheils.

 STATEMENT OF JOHN SHEILS, VICE PRESIDENT, LEWIN GROUP, FALLS 
                        CHURCH, VIRGINIA

    Mr. Sheils. Thank you, Mr. Chairman. Mr. Stark is right, of 
course. The number of uninsured is well-understood throughout 
the country. But I think the characteristics of the uninsured 
are not that well-understood and that is important because that 
will have a bearing on the types of programs we need to put 
together to address that population. Today I am going to 
discuss the growth of the uninsured population, the 
characteristics of the uninsured, and, interesting, will 
identify some coverage opportunities that are currently being 
declined by the uninsured.
    On the next page of my testimony, figure one, we have data 
on the uninsured going back to 1980. The number of uninsured 
increased from about 24 million in 1980 to 43 million by 1997. 
Over that period, the number of uninsured has grown at a rate 
of about 1 million persons per year. At that rate, we project 
the number of uninsured to reach 54 million by the year 2007.
    The data used to develop the estimates I just showed you 
are actually somewhat controversial. The Bureau of the Census 
data that they use actually underreports the number of Medicaid 
recipients by about 18 percent and those persons are 
erroneously classified as uninsured. When you correct for that, 
the number of uninsured comes down to about 38 million. In 
addition, Congress has a health insurance program in the 
pipeline right now with The Children's Health Initiative that 
we believe would reduce the number of insured by something in 
the neighborhood of 2.1 million children. If you account for 
those two factors, the number of uninsured that we are working 
with is closer to 36 million.
    The important point here is that, while different people 
have different opinions on what set of numbers of use, all of 
those numbers show a continuing rise in the uninsured 
population, something in the neighborhood of 1 million persons 
per year.
    The uninsured: What do there incomes look like? About 38.5 
percent of the uninsured have incomes below 150 percent of the 
poverty level. However, interestingly, we have 40.7 percent of 
the population are in middle-income groups, ranging from 
$20,000 to $50,000. The uninsured problem is fast becoming, has 
become, a problem for the middle-class American. One of the 
things we find here which is particularly disturbing, really, 
is that there are about 7.1 million uninsured, about 20 percent 
of the uninsured, are in families with incomes in excess of 
$50,000. That is an income level where, arguable, some level of 
insurance would be affordable.
    We also estimate that, of the 36 million uninsured, about 
4.8 million would be persons who are actually eligible for 
either Medicaid or CHIP, the Children's Health Insurance 
Program, who have decided not to enroll. And three-quarters of 
these people will be children.
    One of the most surprising figures in our work with this 
new data that has become available is we estimate there are 
about 10.2 million uninsured persons who have access to 
employer-sponsored coverage but do not take it. There are about 
3.4 million workers who have declined coverage at work and have 
been left uninsured. They have about 2.8 million uninsured 
dependents. In addition, there are about 4 million children in 
families where the parent has taken the employer coverage 
offered at their place of work, but they have declined the 
family coverage option. Often that is because the employer will 
say: I'll help you pay for the worker's insurance, but the 
family is going to have pay for the full amount of family 
coverage costs.
    One of the apparent culprits in this is not just the rise 
in health care costs, but, more importantly, the increasing 
proportion of the premium that employers are asking employees 
to pay for their coverage. For single coverage in 1991, a 
worker would pay 13 percent of the premium cost as a deduction 
from their paycheck. By 1996, it rose to 22 percent. That is 
about doubling. Family coverage grew from about 23 percent of 
the premium to about 31 percent of the premium. We found in a 
later study that each 1 percent increase in the premium prices 
paid, after adjusting for inflation, each 1 percent premium 
increase resulted in a loss in coverage of about 300,000 
persons. And that is expected to continue.
    So, to summarize some of the most troubling findings, first 
of all, the uninsured population is growing on an average of 
about 1 million persons per year. About 13.4 percent of the 
uninsured will actually be eligible for Medicaid or CHIP, but 
will not enroll. And about 10.2 million of the uninsured could 
take coverage through an employer plan, but have declined to 
take that coverage, presumably because of affordability issues. 
Finally, nearly 20 percent of the uninsured have family incomes 
in excess of $50,000 per year, yet do not purchase health 
insurance.
    Thank you.
    [The prepared statement follows:]

Statement of John Sheils, Vice President, Lewin Group, Falls Church, 
Virginia

    My name is John Sheils. I am a vice president with The 
Lewin Group, a Washington-based consulting firm, specializing 
in health care finance issues. Our firm has conducted numerous 
studies of the financial impact of rising health care costs and 
the growing uninsured population. We have also performed 
financial analyses of various health care reform proposals for 
several public and private organizations.
    I am appearing today as an independent health policy 
analyst. My testimony is my own and I am not appearing on 
behalf of any individual or organization.
    In my testimony, I discuss the continuing growth of the 
uninsured population. I also discuss the characteristics of the 
uninsured and identify coverage opportunities that are 
currently being declined by many of the uninsured. At the 
suggestion of your staff, my testimony is presented in a 
bullet-point format with charts that is designed for easy 
reference.

                The Number of Insured Continues to Grow

     The Bureau of the Census reports that 43.3 million 
Americans were uninsured in 1997. This is equal to 16.1 percent of the 
population.
     The number of uninsured has steadily increased for the 
past two decades. The number of uninsured increased from 24.5 million 
persons in 1980 to 43.3 million persons in 1997 (Figure 1).
     The number of uninsured has increased at a rate of roughly 
10 million persons every decade. At this rate, the number of uninsured 
reported by the Bureau of the Census will grow to about 54.0 million 
persons by 2007, which will be equal to about 19.1 percent of the 
population.
[GRAPHIC] [TIFF OMITTED] T9402.014

           The Census Data Overstates the Number of Uninsured

     About 18 percent of Medicaid recipients fail to 
report that they are covered by the program in the Bureau of 
Census data and are erroneously counted as uninsured. 
Underreporting is most severe for children.
     Correcting for this problem reduces the number of 
uninsured in 1997 from 43.3 million to 38.1 million (Figure 2).
     The Children's Health Insurance Program (CHIP) 
created under the Balanced Budget Act of 1997 will cover 2.1 
million uninsured children.
     Accounting for both CHIP and underreporting 
reduces the number of uninsured to 36.0 million persons, of 
whom 6.3 million are children.
     Even with these adjustments, however, the annual 
increase in the number of uninsured is still expected to be 
about 1.0 million persons over the next ten years.

    Figure 2.--Estimate of the Number of Uninsured Persons in the US
                             (in thousands)
------------------------------------------------------------------------
                                             Uninsured Persons
                                  --------------------------------------
                                      Total       Children      Adults
------------------------------------------------------------------------
Uninsured Persons as Reported in        43,329       11,211       32,118
 1998 CPS \1\....................
Correction for Underreporting of       (5,227)      (2,865)      (2,362)
 Medicaid Coverage \2\...........
Expanded Eligibility under CHIP        (2,071)      (2,071)  ...........
 \3\.............................
                                  --------------------------------------
    Total Uninsured..............       36,031        6,275       29,756
------------------------------------------------------------------------
\1\ Based upon Lewin Group analysis of the March 1998 Current Population
  Survey (CPS) data, which reports insurance coverage data for 1997.
\2\ Adjustment required to correct for underreporting of Medicaid
  coverage in the March CPS data. The CPS underreports Medicaid coverage
  by about 18.2 percent.
\3\ Estimated number of children who ultimately will become covered
  under the Children's Health Insurance Program (CHIP) established under
  the Balanced Budget Act that is designed to extend coverage to persons
  with incomes of up to 200 percent of the federal poverty level (FPL).
Source: Lewin Group estimates using the Medicaid Eligibility Simulation
  Model (MedSim) and the March 1998 Current Population Survey (CPS)
  data.

           Many of the Uninsured are Young and Healthy Adults

     About 17.4 percent of the uninsured are children 
under age 19 (Figure 3).
     About 42.7 percent of the uninsured are young 
adults aged 19 to 34, even though this is the age group where 
premiums for adults tend to be lowest.
     About 8.9 percent (3.2 million) of the uninsured 
are aged 55 and older where health costs and insurance premiums 
can be four times greater than for an adult age 25.
     Females are less likely than males to be uninsured 
because many mothers and pregnant women qualify for coverage 
under Medicaid.
[GRAPHIC] [TIFF OMITTED] T9402.016

              The Uninsured are Found in All Income Groups

     About 38.5 percent of the uninsured have incomes 
below 150 percent of the federal poverty level (Figure 4).
     However, about 26.6 percent of the uninsured have 
incomes in excess of 300 percent of the FPL.
     In fact, about 7.1 million of the uninsured (19.8 
percent) are in families with incomes in excess of $50,000.
     About 40.7 percent of the uninsured are in middle 
income groups ranged from $20,000 to $50,000.
[GRAPHIC] [TIFF OMITTED] T9402.017

About 13.4 Percent of the Uninsured are Eligible for Either Medicaid or 
                                  CHIP

     Even after CHIP is fully implemented, we estimate that 4.8 
million of the uninsured (13.4 percent) will be eligible for either 
Medicaid or CHIP.
     Of these eligible but not enrolled persons, 3.4 million 
will be children.

         Figure 5.--Distribution of Uninsured Persons by Income
                             (in thousands)
------------------------------------------------------------------------
Uninsured Persons Eligible for Medicaid/
         CHIP Who Do Not Enroll               Number          Percent
------------------------------------------------------------------------
Children under Age 19...................           3,445            9.6%
Adults Age 19-64........................           1,146            3.2%
Elderly Age 65 and Over.................             236            0.6%
                                         -------------------------------
  Total.................................           4,827           13.4%
                                         ===============================
  Total Uninsured.......................          36,031          100.0%
------------------------------------------------------------------------
Source: Lewin Group estimates based upon the 1998 Current Population
  Survey (CPS) data corrected for underreporting and adjusted for the
  expansion of children's coverage under CHIP using the Lewin Group
  Medicaid Eligibility Simulation Model (MedSim).

About 10.2 Million Uninsured Have Access to Employer-Sponsored Coverage 
                           But Do Not Take It

      About 3.4 million uninsured persons are actually eligible 
to participated in their employer's health plan.
     These workers have about 2.8 million dependent spouses and 
children that go uninsured.
     There are another 4.0 million uninsured dependents of 
workers who have taken coverage at work but have not elected the family 
coverage option.
     Overall, about 28.5 percent of the uninsured (10.2 
million) have declined the employer coverage that is available to them.

   Figure 6.--Distribution of Uninsured Persons by Access to Employer
    Coverage in 1996 using the Medical Expenditures Panel Survey Data
------------------------------------------------------------------------
    Uninsured with Access to Employer       Number (in      Percent of
                Coverage                    thousands)       Uninsured
------------------------------------------------------------------------
Workers Who Have Declined Employer                 3,389            9.4%
 Coverage /a/...........................
Dependents of Workers Who Have Declined            2,834            7.9%
 Employer Coverage......................
Dependents of Covered Workers Who Have             4,023           11.2%
 Declined Family Coverage...............
                                         -------------------------------
  Total Uninsured With Access to                  10,246           28.5%
   Employer Coverage....................
------------------------------------------------------------------------
/a/ The MEPS data report about 44.7 million uninsured person in the
  first quarter of 1996. These data reflect an underreporting of
  Medicaid enrollment of between 4.0 million and 5.0 million persons.
  These data are not directly comparable with the CPS data. MEPS data
  report the number of uninsured in the first quarter of the year while
  the CPS reports the number of persons who were uninsured for all 12
  months of the year.
Source: Lewin Group analysis of the 1996 Medical Expenditures Panel
  Survey (MEPS) data.

                       Many of the Uninsured Work

     About 76.2 percent of the uninsured are either 
employed or are the dependent child or spouse of a worker some 
time during the year (Figure 7).
     However, many of these individuals work only part 
time and for only part of the year.
     If you look at the uninsured in any given month, 
only 54.2 percent are working full time or are the dependent of 
a full time worker. In any given month, about 45.8 percent have 
no connection to employment.
[GRAPHIC] [TIFF OMITTED] T9402.020

Increases in the Employee Premium Contributions Seem To Be Part of the 
                                Problem

     The average percentage of the premium paid by the 
worker for single coverage increased from 13.0 percent in 1991 
to 22.0 percent in 1996 (Figure 8). For family coverage it 
increased from 23.0 percent in 1991 to 31.2 percent in 1996.
     A recent Lewin study showed that a 1.0 percent 
real increase (i.e., inflation adjusted) in premium prices 
results in 300,000 fewer persons taking employer coverage.\1\
---------------------------------------------------------------------------
    \1\ Sheils, John, Hogan, Paul, and Manolov, Nikolay, ``Exploring 
the Determinants of Employer Health Insurance Coverage,'' (Report to 
the AFL-CIO) The Lewin Group, Washington, DC, January 20, 1998.
---------------------------------------------------------------------------
     Recent survey data also indicates that the 
percentage of individuals accepting the employer coverage 
available to them declined from 88.3 percent in 1987 to 80.1 
percent in 1996.\2\
---------------------------------------------------------------------------
    \2\ Cooper, Philip and Steinberg-Schone, Barbara, ``More Offers, 
Fewer Takers for Employment-Based Health Insurance: 1987 and 1996,'' 
Health Affairs, Nov-Dec 1997, 16(6): 142-9. 
[GRAPHIC] [TIFF OMITTED] T9402.021

                           Troubling Findings

     The uninsured population is growing by an average 
of 1.0 million persons per year.
     About 13.4 percent of the uninsured (4.8 million) 
will actually be eligible for Medicaid or CHIP but will not 
enroll.
     About 10.2 million of the uninsured (28.5 percent) 
could take coverage through an employer plan but have declined.
     Nearly 20 percent of the uninsured have family 
incomes in excess of $50,000 per year yet do not purchase 
health insurance.
      

                                

    Chairman Thomas. Thank you very much, Mr. Sheils.
    Mr. Holahan.

  STATEMENT OF JOHN HOLAHAN, DIRECTOR, HEALTH POLICY CENTER, 
                        URBAN INSTITUTE

    Mr. Holahan. Thank you. Thank you for your invitation to 
discuss the problem of the uninsured. I am the director of the 
Health Policy Research Center at the Urban Institute.
    This is a very large topic. I would like to make three 
points and the first relates to differences in insurance 
coverage between adults and children. In this country, we have 
made a very large effort over the last 10 to 15 years to expand 
coverage of children through Medicaid and, more recently, 
through the Children's Health Insurance Program. The result is 
that now children are more likely to be covered by Medicaid and 
much less likely to be uninsured than adults.
    Figure one in my testimony shows differences between adults 
and children. The upper panel shows that the uninsured rates 
for adults are 17 percent versus the 12 percent for children. 
The lower panel looks at the population below 200 percent of 
poverty. There the difference is a 37 percent versus 21 
percent. Adults are also much less likely to have a usual 
source of care and much more likely to be in fair or poor 
health than children.
    I would also point out that these differences are likely to 
become greater. Children on Medicaid are less affected by 
welfare reform and they will also benefit from CHIP. Adults 
have fewer ways to stay on Medicaid after welfare reform and 
are more likely to become uninsured. I would conclude that 
these differences are likely to become greater.
    The second point is about variations among States in 
uninsured rates. I am going to talk about data from the 
National Survey of American Families, a new survey that we have 
done at the Urban Institute. The survey has large samples at 
the State level for 13 States which allows us better estimates 
at the State level than does the Current Population Survey. It 
shows very large variations among States in private coverage, 
particularly in employer-sponsored coverage, and these 
variations in employer coverage strongly affect uninsured rates 
among States.
    I point you to figure two in the testimony, which shows 
variations across States. Across the top are the percentage 
uninsured; the middle bar, the percentage covered by public 
programs; and the lower bar, population covered by private 
coverage, principally employer-sponsored coverage. There you 
can see that as employer-sponsored coverage goes down, the 
percentage uninsured tends to go up. It varies from a high in 
terms of private coverage from 84 percent in Wisconsin to 80 
percent in Minnesota down to 58 percent in Mississippi to 56 
percent in Texas. The corresponding uninsured rates are 5 
percent in Minnesota and 6 percent in Wisconsin versus 19 
percent in Mississippi and 21 percent in Texas.
    This is not meant as a criticism of employers, but to point 
out that States have a much bigger problem to deal with where 
employer coverage is low. For example, if you look at that same 
chart, you can see that 16 percent of the population covered 
are not covered by private plans in Wisconsin versus 44 percent 
in Texas, giving States like Texas and their localities a much 
bigger problem to deal with than do others.
    Figure four shows the same information for adults, that is, 
adults between 18 and 64 years of age. There you can see the 
pattern of variations in employer coverage as well as the 
mirror image in terms of variations in the uninsured rate. The 
coverage through private plans is 86 percent in Wisconsin down 
to 66 percent in Texas and the uninsured rate varies from 10 
percent in Wisconsin to 27 percent in Texas.
    I then want to move on and make a couple of points about 
recent insurance trends and this will sound a bit like what 
Paul Fronstin just said. The number of Americans without health 
insurance according to the Current Population Survey, has risen 
from 34.9 million in 1989 to 43.1 in 1997. The key thing here 
is that the reasons for the growth before and after 1984 have 
changed. From 1989 to 1993, employer-sponsored coverage 
declined primarily for dependents. Medicaid grew sharply 
because of the expansions for children and pregnant women and 
the recession. And the uninsured rate grew, but not as much as 
it would have if it hadn't been for public sector growth.
    Since 1994, employer-sponsored coverage grew significantly 
for both workers and dependents. The decline in Medicaid 
enrollment is probably the major reason for the increase in the 
uninsured. There have also been declines in private nongroup 
coverage for those below 200 percent of poverty. The uninsured 
continued to rise, but not as much as it would have risen had 
employer-sponsored coverage not continued to increase.
    It is hard to know at this point whether this growth in the 
last few years in employer-sponsored coverage is the reversal 
of past trends--the product of a lower rate of growth in health 
care costs coupled with a tight labor market. But if employer-
sponsored coverage turned around and started to fall at the 
same time that Medicaid rates were falling, then you could see 
a sharp increase in the uninsured.
    Thank you very much.
    [The prepared statement and attachments follow:]

Statement of John Holahan, Director, Health Policy Center, Urban 
Institute

    Thank you for the invitation to address the Committee about 
the problem of the uninsured. In my testimony I will focus on 
three aspects: differences between adults and children, 
differences among states, and recent trends. There are three 
major conclusions:
    (1) The United States has made a large effort to expand 
health insurance coverage of low-income children through the 
Medicaid program. This has continued more recently with the 
Children's Health Insurance Program. Largely as a result of 
Medicaid, children are much less likely to be uninsured than 
adults. Three-quarters of the uninsured in the United States 
are adults, and 37 percent of adults with incomes less than 200 
percent of the Federal Poverty Line (FPL) are uninsured.
    (2) There are significant differences among states in the 
likelihood of being uninsured. For both adults and children, 
the proportion of a state's population that lacks health 
insurance is inversely related to private coverage, 
predominantly provided through employer-sponsored plans. 
Medicaid and other state programs offset differences in private 
coverage to some degree. However, the problems states face in 
terms of the size of their uninsured populations depend largely 
on the extent of employer coverage.
    (3) The decline in employer-sponsored coverage over the 
last 15 years has been well documented. This decline has 
resulted in increases in the number of uninsured, despite 
expansions of Medicaid. Since 1994, employer-sponsored coverage 
has actually increased, particularly for dependents. The number 
of uninsured has continued to increase, but now the major 
reason has been a decline in Medicaid enrollment.
    This testimony draws on research that we have conducted at 
the Urban Institute. It relies on data collected through the 
National Survey of America's Families (NSAF), a new survey that 
provides information on over 100,000 children and non-aged 
adults representing the noninstitutionalized civilian 
population under age 65.\1\ The NSAF, conducted from February 
to November 1997, was designed to provide both state 
representative estimates in 13 states as well as reliable 
national level estimates. The 13 states are Alabama, 
California, Colorado, Florida, Massachusetts, Michigan, 
Minnesota, Mississippi, New Jersey, New York, Texas, 
Washington, and Wisconsin. The testimony also relies on 
analysis of several years of Current Population Survey data.
    Adults and children. Figure 1 provides data on rates of 
uninsurance, health status, and usual sources of care.\2\ The 
upper panel shows that adults are much more likely to be 
uninsured than children; they are also more likely to be in 
fair or poor health and to lack a usual source of care than 
children. For families of all incomes, 17 percent of adults are 
uninsured compared to 12 percent of children. Adults are also 
three times more likely to lack a usual source of care (18 
percent versus 6 percent) and more than twice as likely to be 
in fair or poor health (12 percent versus 5 percent).
    Both adults and children are worse off within low-income 
families, but the relative differences between adults and 
children are similar to those for all families. The lower panel 
of Figure 1 shows that uninsurance rates were 21 percent for 
low-income children and 37 percent for low-income adults. 
Health status was worse for low-income adults--23 percent of 
low-income adults were in fair or poor health versus 8 percent 
of low-income children--and they were less likely to have a 
usual source of care--27 percent of low-income adults versus 10 
percent of children lacked a usual source of care. The finding 
that low-income adults are less likely to have a usual source 
of care is consistent with their being more likely to lack 
health insurance, but somewhat inconsistent with the fact that 
they are in poorer health.
    Table 1 examines the insurance coverage of adults and 
children in more detail. The data show that, for families of 
all incomes, adults are slightly more likely than children to 
have private coverage, 75 percent versus 69 percent. However, 
they are much less likely to be covered through public programs 
(primarily Medicaid), 8 percent versus 20 percent. This results 
in a lower uninsurance rate for children than for adults.
    Most of the differences between adults and children are 
because of different insurance arrangements of those below 200 
percent of the FPL. Low-income adults are only slightly more 
likely to have private coverage than children, 44 percent 
versus 40 percent. However, low-income children are far more 
likely to have public coverage, 39 percent versus 20 percent, 
because of the poverty-related Medicaid expansions and because 
several states have other programs to subsidize health 
insurance for low-income children. The result of the more 
extensive public coverage of children is that the uninsurance 
rates for low-income children are substantially below those of 
low-income adults.
    Variations among states in health insurance coverage: 
Children. State differences in health insurance coverage of 
children are shown in Figure 2. Private coverage (employer-
sponsored and privately purchased insurance) for children of 
all incomes varies from a low of 56-58 percent (Mississippi, 
Texas) to a high of 84 percent (Wisconsin). Public coverage 
also varies from a high of 23-26 percent (California, 
Mississippi, New York, Texas, and Washington) to a low of 10-15 
percent (Colorado, Minnesota, New Jersey, and Wisconsin). 
Public coverage is high where there are ambitious public 
programs that provide coverage such as in California, New York, 
and Washington. Public coverage is also high where there is a 
large low-income population, such as Mississippi and Texas. The 
high levels of public coverage in California and New York 
reflect both broad coverage and large low-income populations. 
In general, high levels of public coverage do not offset low 
levels of private coverage, with the result that states such as 
Mississippi and Texas have the highest uninsurance rates. 
Because of their high rates of private coverage, states such as 
Massachusetts, Michigan, Minnesota, and Wisconsin have the 
lowest rates of uninsurance.
    Data in Figure 3 show that public coverage has a greater 
impact among lower-income children than among all children. 
States with public programs that have had broad coverage 
expansions, e.g., Massachusetts and Washington, or where 
existing eligibility rules bring in large numbers of children 
because there are so many low-income families, e.g., California 
and New York, have the highest rates of public coverage. Public 
coverage does more to offset low private coverage among low-
income children than for all children. For example, while New 
York and Washington have below-average rates of private 
coverage for low-income children, they have above-average rates 
of public coverage, and as a result, have below-average rates 
of uninsurance.
    Public coverage, however, does not always offset low levels 
of private coverage. For example, Texas and Mississippi both 
have below-average levels of private coverage. Both have levels 
of public coverage that are not significantly different from 
the national average. As a result, they have uninsurance rates 
of 32 and 28 percent, respectively, that are well above the 
national average. Colorado has levels of private coverage of 
low-income children similar to the national average, but public 
coverage is considerably below average. The result is an 
uninsurance rate that is significantly higher than the national 
average. Finally, Massachusetts stands out as a state whose 
private coverage is equal to the national average, but that 
also has very high rates of public coverage. The result is one 
of the lowest rates of uninsurance of low-income children in 
the nation.
[GRAPHIC] [TIFF OMITTED] T9402.022

[GRAPHIC] [TIFF OMITTED] T9402.023

[GRAPHIC] [TIFF OMITTED] T9402.024

[GRAPHIC] [TIFF OMITTED] T9402.025

    Some states with high rates of public coverage of low-
income children still end up with relatively low rates of 
public coverage of children overall because they have 
relatively small low-income populations--for example, 
Massachusetts. The opposite is true for a state like Texas. For 
example, Texas covers 39 percent of its low-income population 
(less than Massachusetts, at 47 percent) but 23 percent of its 
entire child population (versus 18 percent in Massachusetts). 
Another interesting contrast is that of Minnesota and 
Mississippi. Minnesota covers 41 percent of its low-income 
population, but only 15 percent of its entire population. 
Mississippi, in contrast, covers 36 percent of its low-income 
population, about equal to the national average, but 24 percent 
of its entire population.
    This suggests that it is both public policy and the size of 
the low-income population to which those policies are directed 
that will affect the proportion of children in a state covered 
by public programs. This explains why states such as Texas and 
Mississippi cover a higher proportion of their children through 
public programs than states such as Massachusetts and 
Minnesota, typically regarded as states with very generous 
policies.
    Variations among states in health insurance coverage: 
Adults. A similar picture emerges for adults. Figure 4 shows 
that private coverage varies from 66-68 percent (California, 
Florida, Mississippi, and Texas) to 82-86 percent 
(Massachusetts, Michigan, Minnesota, and Wisconsin). Public 
coverage varies from 10 to 12 percent in California, 
Mississippi, and Washington to as low as 4 percent in Wisconsin 
and 5 percent in New Jersey. Public coverage does less to 
offset variations in private coverage among adults than among 
children. Thus, states such as California, Florida, 
Mississippi, and Texas have the highest rates of uninsurance 
(21-27 percent), while states such as Massachusetts, Michigan, 
Minnesota, and Wisconsin have the lowest rates of 9 to 11 
percent. Because there is less variation in public coverage for 
adults than for children, the variation in uninsurance rates 
more closely tracks the variation in private coverage.
[GRAPHIC] [TIFF OMITTED] T9402.026

    Public programs are, again, more important for low-income 
nonelderly adults than for all nonelderly adults. Figure 5 
shows that states such as Massachusetts, Minnesota, New York, 
and Washington have the highest rates of coverage in public 
programs. But again, this public coverage usually does not 
offset the variations in private coverage. For example, 
California and Texas had very low rates of private coverage, 35 
and 36 percent, respectively. California's 22 percent of low-
income adults with public coverage and Texas's 14 percent did 
not offset these low rates of private coverage. Consequently, 
those states had higher-than-average uninsurance rates for low-
income adults; 43 percent in California and 50 percent in 
Texas. In New York, a relatively high rate of public coverage, 
27 percent, did offset the low rate of private coverage, giving 
New York an uninsurance rate close to the national average. An 
exception is Colorado, which had such a low rate of public 
coverage, 14 percent, that it had an uninsurance rate 
comparable to the national average despite having relatively 
high rates of private coverage.
[GRAPHIC] [TIFF OMITTED] T9402.027

    As was observed for children, some states typically thought 
of as having very generous public programs actually have below-
average rates of public coverage for adults as a whole. For 
example, Massachusetts, which had above-average coverage of the 
low-income adult population, had slightly below-average 
coverage of the adult population as a whole. This is because 
Massachusetts has a relatively small low-income adult 
population. At the other extreme, Mississippi and California, 
which have about average coverage of the low-income adult 
population, have above-average coverage of the adult population 
as a whole because of their large low-income populations.
    Why does the number of uninsured continue to grow? The 
number of uninsured in the United States has continued to 
increase, but for different reasons in the past few years 
(1994-1997) than in the prior period (1989-1993). Table 2 
provides information on coverage for all nonelderly and for 
adults and children; Table 3 provides information on coverage 
for individuals in households with incomes below 200 percent of 
the FPL, between 200 and 399 percent of the FPL, and at or 
above 400 percent of the FPL. The tables show the number of 
individuals by type of coverage in 1989-93 and 1994-97, as well 
the average annual growth rates.
    The reason for the break between 1993 and 1994 is that 
major changes were made to the Current Population Survey that 
make comparisons of trends before and after inappropriate. The 
years 1993-94 are an important breakpoint for other reasons as 
well. About this time, the economy had emerged from the 1990-92 
recession and began a long period of economic growth. In 
addition, the Medicaid expansions to coverage children and 
pregnant women had been phased in, and state welfare reform 
efforts began to affect Medicaid enrollment.
    Table 2 shows that the number of uninsured increased by 6.6 
million (4.4 percent annually) between 1989 and 1993. The 
number of uninsured children and adults increased by 1.3 and 
5.3 million, respectively (2.7 and 5.1 percent annually). For 
both children and adults, there were declines in employer-
sponsored coverage, particularly for dependents. The Medicaid 
expansions partially offset the declines in employer-sponsored 
coverage for both groups.

                     Table 2.--Health Insurance Coverage, 1989-1997 Nonelderly by Age Group
----------------------------------------------------------------------------------------------------------------
                                                                   Millions                    Average Annual
                                                   ----------------------------------------        Growth
               Type of Coverage \1\                                                        ---------------------
                                                      1989      1993      1994      1997     1989-93    1994-97
----------------------------------------------------------------------------------------------------------------
All Nonelderly:                                        215.7     228.0     229.9     236.2      1.4%        0.9%
  Employer (own) \2\..............................      71.3      72.2      75.1      77.4      0.3%        1.0%
  Employer (other) \3\............................      70.8      65.9      72.9      76.4     -1.8%        1.6%
  Medicaid........................................      15.1      22.9      23.0      21.1     10.9%       -2.9%
  Other Public \4\................................       7.0       7.7       6.1       5.7      2.3%       -2.6%
  Other Private \5\...............................      16.5      17.9      13.2      12.6      2.0%       -1.6%
  Uninsured \6\...................................      34.9      41.5      39.6      43.1      4.4%        2.9%
Children: 0-18                                          67.9      73.2      74.0      75.5      1.9%        0.7%
  Employer (own)..................................       0.2       0.4       0.6       0.4     23.8%      -11.3%
  Employer (other)................................      42.4      41.0      44.3      46.6     -0.8%        1.7%
  Medicaid........................................       7.8      12.3      13.3      12.1     12.1%       -3.1%
  Other Public....................................       2.8       3.5       1.7       1.5      6.0%       -3.7%
  Other Private...................................       3.6       3.5       3.3       3.2     -0.9%       -1.5%
  Uninsured.......................................      11.1      12.4      10.7      11.6      2.7%        2.8%
Adults: 19-64                                          147.8     154.9     155.9     160.7      1.2%        1.0%
  Employer (own)..................................      71.1      71.8      74.5      77.0      0.2%        1.1%
  Employer (other)................................      28.5      24.9      28.6      29.8     -3.3%        1.3%
  Medicaid........................................       7.3      10.6       9.6       8.9      9.7%       -2.5%
  Other Public....................................       4.2       4.1       4.4       4.1     -0.3%       -2.2%
  Other Private...................................      12.9      14.4       9.8       9.4      2.7%       -1.6%
  Uninsured.......................................      23.8      29.1      29.0      31.5      5.1%        2.9%
----------------------------------------------------------------------------------------------------------------
Source: Urban Institute, 1999. Based on data from March Current Population Surveys, 1990-1998.
Note: Excludes persons aged 65 and older and those in the Armed Forces.
Starting with the 1995 March CPS, significant changes were made to the questionnaire regarding health insurance
  coverage, including changes in question order, the use of state-specific Medicaid program names, and the
  addition of more detailed questions. In addition, the 1995 CPS reflects a change in the questionnaire's sample
  framework. Therefore, it is recommended that data from 1994 and afterwards not be compared to data from
  previous years in time-series analyses.
\1\ Although survey respondents can choose more than one type of health insurance coverage, individuals were
  assigned one type of coverage, following a hierarchy as listed.
\2\ Insurance through an individual's own employer group health plan
\3\ Primary coverage through another worker's employer group health plan (i.e., spouse or parent's plan).
\4\ Coverage from other non-Medicaid government insurance programs (i.e., Civilian Health and Medical Program of
  the Uniformed Services [CHAMPUS], Medicare, etc.).
\5\ Coverage through a private insurance plan, but not as part of an employer-provided benefit (i.e.,
  individually purchased nongroup coverage).
\6\ Uninsured is the residual category. An individual is classified as uninsured if he or she did not report any
  of the previous types of insurance coverage over the course of the year. Those with Indian Health Services as
  their only source of insurance are considered uninsured.

    During the 1994-1997 period, the number of nonelderly 
uninsured increased by 3.5 million (2.9 percent annually), 
while the number of uninsured children and adults increased by 
0.9 and 2.6 million, respectively (2.8 and 2.9 percent 
annually). But the increases in the uninsured in the latter 
period occurred for different reasons. First, there was a drop 
in Medicaid of about 1.9 million people (1.2 million children 
and 0.7 million adults, or 3.1 and 2.5 percent annually, 
respectively). There were also decreases in other public 
coverage of 0.4 million; this was due principally to reductions 
in military-related coverage (e.g., CHAMPUS, Veterans' 
Administration) presumably due to military downsizing. There 
was also a reduction of 0.6 million in other private coverage, 
possibly reflecting the increased cost of health insurance in 
the private nongroup market.
    These reductions in Medicaid, other public and other 
private coverage would have resulted in even greater increases 
in the uninsured had it not been for increases in employer-
sponsored coverage. The number of adults covered through their 
own employers increased by about 2.5 million or by 1.1 percent 
annually, while the number of dependent children covered 
increased by 2.3 million or 1.7 percent annually and the number 
of dependent adults increased by 1.2 million or 1.3 percent 
annually. Thus, unlike the previous period, the increase in 
employer coverage kept the number of uninsured from increasing 
by more than it otherwise would have.
    Table 3 provides similar data, disaggregated by income 
category. For those below 200 percent of the FPL, there was a 
large increase in Medicaid enrollment (7.4 million or 10.7 
percent annually) between 1989 and 1993. There were also 
smaller increases in employer-sponsored coverage as well as 
other public and other private coverage. But because of a large 
increase in size of the population below 200 percent of the 
FPL, the number of uninsured increased by 3.8 million (3.6 
percent annually).
    Between 1994 and 1997, there were large reductions in 
Medicaid enrollment (about 2.0 million), in other public 
coverage (0.4 million), and in private nongroup coverage (1.1 
million). Because of these declines, the number of uninsured 
increased by 1.3 million. The increases would have been larger 
had it not been for the strong economy reducing the number of 
people below 200 percent of the FPL.

                       Table 3.--Health Insurance Coverage, 1989-1997 Nonelderly by Income
----------------------------------------------------------------------------------------------------------------
                                                                     Millions                   Average Annual
                                                     ----------------------------------------       Growth
                Type of Coverage \1\                                                         -------------------
                                                        1989      1993      1994      1997     1989-93   1994-97
----------------------------------------------------------------------------------------------------------------
All Nonelderly:                                          215.7     228.0     229.9     236.2      1.4%      0.9%
  Employer (own) \2\................................      71.3      72.2      75.1      77.4      0.3%      1.0%
  Employer (other) \3\..............................      70.8      65.9      72.9      76.4     -1.8%      1.6%
  Medicaid..........................................      15.1      22.9      23.0      21.1     10.9%     -2.9%
  Other Public \4\..................................       7.0       7.7       6.1       5.7      2.3%     -2.6%
  Other Private \5\.................................      16.5      17.9      13.2      12.6      2.0%     -1.6%
  Uninsured \6\.....................................      34.9      41.5      39.6      43.1      4.4%      2.9%
Less than 200%:                                           74.4      88.2      87.6      85.1      4.3%     -1.0%
  Employer (own)....................................      10.2      11.6      12.4      12.1      3.4%     -0.9%
  Employer (other)..................................      14.3      13.9      16.1      16.0     -0.8%     -0.1%
  Medicaid..........................................      14.5      21.9      21.8      19.8     10.7%     -3.1%
  Other Public......................................       4.0       4.9       3.5       3.1      5.3%     -4.6%
  Other Private.....................................       6.8       7.6       6.0       4.9      2.7%     -6.2%
  Uninsured.........................................      24.5      28.3      27.8      29.1      3.6%      1.6%
200 to 399%:                                              72.2      71.9      71.6      73.0     -0.1%      0.6%
  Employer (own)....................................      27.1      27.5      27.5      27.4      0.4%     -0.2%
  Employer (other)..................................      30.0      27.0      28.7      29.3     -2.6%      0.7%
  Medicaid..........................................       0.5       0.9       0.9       1.0     17.8%      1.1%
  Other Public......................................       1.9       1.7       1.7       1.7     -2.7%     -1.7%
  Other Private.....................................       5.3       5.5       4.1       4.0      1.0%     -0.7%
  Uninsured.........................................       7.4       9.2       8.6       9.7      5.5%      4.1%
400 and over:                                             69.1      68.0      70.7      78.1     -0.4%      3.4%
  Employer (own)....................................      34.0      33.0      35.2      38.0     -0.8%      2.6%
  Employer(other)...................................      26.5      25.0      28.1      31.1     -1.4%      3.4%
  Medicaid..........................................       0.1       0.1       0.2       0.3      6.1%      3.0%
  Other Public......................................       1.1       1.0       0.8       0.9     -0.9%      3.3%
  Other Private.....................................       4.4       4.8       3.1       3.6      1.9%      5.2%
  Uninsured.........................................       3.0       4.0       3.2       4.3      7.7%      9.7%
----------------------------------------------------------------------------------------------------------------
Source: Urban Institute, 1999. Based on data from March Current Population Surveys, 1990-1998.
Note: Excludes persons aged 65 and older and those in the Armed Forces.
Starting with the 1995 March CPS, significant changes were made to the questionnaire regarding health insurance
  coverage, including changes in question order, the use of state-specific Medicaid program names, and the
  addition of more detailed questions. In addition, the 1995 CPS reflects a change in the questionnaire's sample
  framework. Therefore, it is recommended that data from 1994 and afterwards not be compared to data from
  previous years in time-series analyses.
\1\ Although survey respondents can choose more than one type of health insurance coverage, individuals were
  assigned one type of coverage, following a hierarchy as listed.
\2\ Employer (own) coverage includes insurance through an individual's own employer group health plan.
\3\ Employer (other) is primary coverage through another worker's employer group health plan (i.e., spouse or
  parent's plan)
\4\ Other Public is coverage from other non-Medicaid government insurance programs (i.e., Civilian Health and
  Medical Program of the Uniformed Services [CHAMPUS], Medicare, etc.).
\5\ Other Private is coverage through a private insurance plan, but not as part of an employer-provided benefit
  (i.e., individually purchased nongroup coverage).
\6\ Uninsured is the residual category. An individual is classified as uninsured if he or she did not report any
  of the previous types of insurance coverage over the course of the year. Those with Indian Health Services as
  their only source of insurance are considered uninsured.

    For those at the other end of the income distribution, 
i.e., 400 percent of the FPL and over, Medicaid and other 
public programs are relatively unimportant. This income group 
experienced a reduction in employer-sponsored coverage between 
1989 and 1993, and as a result the number of uninsured 
increased by 1.0 million, or 7.7 percent annually. Between 1994 
and 1997 the number of uninsured continued to increase, again 
by 1.1 million or 9.7 percent annually. In this period there 
were significant increases in employer-sponsored coverage and 
in nongroup coverage, but these were not sufficient to match 
the substantial population growth in this income range.
    In sum, these results mean that between 1994 and 1997 low-
income populations were adversely affected by significant 
reductions in Medicaid (2.0 million) and not helped by the 
increase in employer coverage. They also experienced 
substantial drops in private nongroup coverage. The number of 
uninsured among families with incomes below 200 percent of 
poverty increased by 1.3 million. Had it not been for a decline 
of 2.5 million in the total number of people below 200 percent 
of the FPL, the increase in the number of low-income people who 
were uninsured would have been much higher. For higher-income 
adults and children, the increases in employer coverage and in 
private nongroup coverage were substantial, but not sufficient 
to keep up with the growth in the number of higher-income 
adults and children, resulting in an increased in the uninsured 
of 1.1 million, or 9.7 percent annually.

                                ENDNOTES

    \1\ Stephen Zuckerman, Niall Brennan, John Holahan, Genevieve 
Kenney, and Shruti Rajan, ``Snapshots of America's Families: Variations 
in Health Care Across States,'' Washington, DC: The Urban Institute 
(Assessing the New Federalism), February 1999.
    \2\ The information presented in this testimony shows a lower 
percentage of children and non-elderly adults being uninsured than 
reported in the Current Population Survey. There are two fundamental 
reasons for the differences between the two surveys and their measures 
of insurance coverage. The first reason is that the NSAF measures 
insurance coverage at the time of the survey, whereas the CPS asks 
about coverage during the previous calendar year. The second reason for 
the difference is that the CPS asks a series of questions about 
insurance coverage and then assumes that any person not designated as 
being covered through any type of health is uninsured. The NSAF uses a 
series of questions similar in wording and sequence to the CPS, but 
adds a question that verifies whether people who appear not to have 
coverage are, in fact, uninsured. A substantial number of people who 
are initially designated as uninsured change to being insured as a 
result of the verification question. A detailed discussion of this 
issues is presented in Zuckerman, et al. (1999).

The views expressed in this statement are solely those of the 
author and should not be attributed to the Urban Institute, its 
trustees or its funders.
      

                                

    Chairman Thomas. Thank you very much. I think everyone 
agrees that at least, notwithstanding Dr. Fronstin's suggested 
adjustments to the 43 million where there may be some 
overcounts--I believe it was your testimony; it is somewhere 
between--oh, no, it was Mr. Sheils--it is somewhere between 38 
and 43 million.
    But when we begin to address the group in terms of 
potential public policy response, there are just a couple of 
percentages that jumped out at me. For example, somebody had a 
chart which showed that 19.8 percent over $50,000 were 
uninsured. And at some point, you begin asking yourself the 
question are these people comfortable, depending upon how many 
are in the higher income brackets, being, in essence, self-
insured, that they don't think the purchase of insurance, as 
they see it, as an economic value worth spending the money? Or 
what is it that clearly creates a decision on someone who is 
making maybe even $100,000 a year not to have health insurance?
    Those questions and the pursuit of that I think would be 
fundamentally different than when you say 13.4 percent of those 
who are eligible for Medicaid or CHIP are not now covered by a 
program in which they are eligible to be covered. Why aren't 
those people--why don't we have an outreach program? And, if we 
do, why is it not successful? It just seems to me, in 
addressing the question of insured, there are two fundamentally 
different approaches to two different groups.
    And if you have got more than 11 percent who have chosen 
not to take the health coverage and, notwithstanding the fact 
that their employer offers it, then that is another group that 
we could deal with, perhaps, in a slightly different way.
    That kind of a profile leads me to the question, I guess, 
that my friend from California thinks we already have the 
answer to, is there a single thing that would have the biggest 
impact on the uninsured? If we could do one thing or if were 
going to try to prioritize, in terms of public policy, where 
would we get the best return on our investment of trying to 
reduce the number of uninsured? Notwithstanding the fact that 
apparently there are some who, whatever we would do, would 
probably not be interested unless it was a mandated program to 
require them to carry health insurance because it appears not 
to be a financially driven decision. What is it that would be 
the one thing that we could do that would have the greatest 
impact? Any of the panelists.
    Ms. Arnett. Mr. Chairman----
    Mr. Fronstin. Can I just clarify one thing about the income 
estimates?
    Chairman Thomas. Surely.
    Mr. Fronstin. I think when you are looking at a person who 
reports they are in a family that has an income of $50,000--
say, $50,000, $60,000--my guess is you could easily find that a 
lot of those people are in two-worker families. Each worker is 
maybe making half that amount, $25,000 or $30,000. And they are 
less likely to be offered coverage to begin with because of the 
job they have, not because of the family income, when you look 
at it in aggregate.
    Chairman Thomas. I think that is a fair enough statement. 
And let us remove a significant percentage of those. I think 
when you begin whittling it down, you are still going to find 
what it would be, I think, a surprising percentage, even if it 
is only 5 or 6 percent, of people who are counted in the groups 
of the uninsured who would meet an income profile significantly 
different than most people just a priori thinking what the 
uninsured look like.
    Mr. Fronstin. True.
    Chairman Thomas. Thank you.
    Mr. Fronstin. And, in terms of where you would have the 
biggest effects, if you take the uninsured pie, 43 million, and 
start dividing it up, you really have 2 major groups. Workers 
in small firms and their dependents account for about 60 
percent, and that includes self-employed, 98 percent of which 
work for small firms. And my definition of small firms is 100 
or fewer than 100 employees. That is over half.
    The other large piece of that pie is children. We are 
talking about 25 percent of the uninsured. While there is now a 
CHIP, that will have some impact on that population. If the 
estimate is that only 2 million children will be covered under 
that program, that still leaves 8 or 9 million children 
uninsured.
    I think that is where you will have the biggest effect. I 
don't think you are going to have a big effect with the near-
elderly, the 55- to 64-year-olds. There are about 3 million 
uninsured in that population. If, by chance, we got every 
single one of them covered, whether it be a Medicare Program or 
something else, you still have 40 million people uninsured. It 
won't have a big effect on the total picture, but it will 
certainly have an effect for that population.
    Chairman Thomas. Well, if we are concerned about access to 
and affordability of health insurance, based on what you just 
said, it sounds to me like trying to help buy down the cost of 
participation would be a major factor in picking up that single 
largest group that you identified.
    Mr. Fronstin. Cost is the major reason, but also, when you 
are looking at small employers, it is not just cost. Small 
employers are typically more concerned about running the day-
to-day operation of their business than they are about going 
out and searching for health insurance, even at a reasonable 
cost. And a lot of small employers would like to do that, but 
they just don't have the time; they don't have the staff or the 
resources.
    Ms. Arnett. Mr. Chairman, I believe that the direct 
correlation between rising costs and the rising number of 
uninsured shows that an important step is to provide resources 
to help people to purchase health insurance. I think that is 
why there has been so much interest in the individual tax 
credit proposals Mr. McDermott has introduced. I know you and 
Mr. McCrery are working on a tax credit proposal. I know Mrs. 
Johnson has expressed interest and others as well in 
individually based tax credits. This idea has strong support in 
the market-based policy community.
    My colleague, Mark Pauly, a professor of health economics 
from the Wharton School, is doing an analysis now which is not 
yet published but will soon be. His research shows that if 
Congress were to provide a tax credit worth half the value of a 
decent health insurance policy, that the number of uninsured 
workers would fall by half, which is really a significant 
number. The costs numbers may be unaffordable, but I think it 
points in the right direction. The chart on my right shows 
where the problem really is. If people are of very low income, 
they very likely qualify for public programs. As they move up 
the income scale, they fall out of public programs but yet 
don't make enough to qualify for the generous taxpayer support 
for employment-based health insurance.
    If something can be done to help people in the $20,000 to 
$40,000 income range who are not eligible for public programs 
and don't qualify for or benefit from the employment-based 
exclusion, that would help enormously.
    Chairman Thomas. Does anyone else want to comment?
    Mr. Sheils. Yes. I just wanted to make a point that we have 
looked at tax credits. Tax credits are interesting. There are a 
lot of nice ideas there and there are a lot of things where you 
can get lost.
    One idea is to assist workers who have employer-based 
coverage in buying that coverage, giving them a tax credit, for 
example, for them to purchase some of that coverage. They are 
basically adding the employer's contribution to their own, or 
to the tax credit, and they can purchase it. The problem with 
that is that if you made the credit generally available to all 
workers, you would find that about three-quarters of the money 
that you were going to spend is going to go to people who 
already have insurance.
    Chairman Thomas. Exactly, or higher.
    Mr. Sheils. That is true. Also it is important not to leave 
out the nonworker category. This is a group of people who often 
are not working because they can't work. Some measure of 
disability, for example, is an example. We would not want--I am 
not sure we would want to focus a credit just on, say, the 
workers. The nonworker group probably deserves its attention as 
well.
    We have looked at some of these proposals where a tax 
credit was provided generally to all individuals for up to half 
of the premium. We saw the number of uninsured would be reduced 
by between 8 and 10 million persons. That would be a very big 
drop in the number of uninsured. It wouldn't be quite as much 
as half of the uninsured, but it would be quite significant.
    Chairman Thomas. Mr. Holahan.
    Mr. Holahan. Yes. Could I just make a point? A couple of 
points. One is that the numbers of people who would take up 
insurance with a 50-percent subsidy sound a bit high to me. I 
would like to know more about where that came from. Because I 
think, even for low-income people, subsidies closer to 100 
percent result in participation rates in the 50- to 60-percent 
range. And as subsidies decline as incomes go up, you would see 
lower takeup rates.
    Which goes to a related point that it is just remarkable, 
not just for low-income people, but for high-income people, why 
people don't value health insurance more than they do. You hear 
people say I won't need it or I'm healthy, but the point about 
insurance is to have it in those rare times when you really do 
have a very costly episode. I think a lot of education has to 
go on at all income levels to make people understand what 
insurance is all about because it is not just low-income people 
that don't take advantage of subsidies.
    Chairman Thomas. And, before I call on my colleague, that 
leads to what I think is one of the other concerns and this 
Subcommittee doesn't have as much of a jurisdictional 
opportunity as we would like in fully discussing the issue. 
Because it doesn't make sense to talk about health insurance 
just for the workers and it doesn't make any sense to have a 
tax credit structured, in my opinion, the way it is, through 
the employers for those workers.
    But your statement, Mr. Holahan, addresses the fact that it 
doesn't make a whole lot of sense to me either to have the 
cheapest group insurance concept go to the group that can get 
up every morning and go to work and get a tax benefit as well 
and the most expensive insurance, those who can't work and who 
have the biggest problems in the individual market. The whole 
concept of the way we deal with insurance and package it 
available to people and its relationship to the Tax Code, in my 
opinion, is all flawed. And that when you begin looking at how 
you want to solve the problem, it rapidly gets beyond simply 
putting some money out there for people to buy a product, in my 
opinion.
    The gentleman from California.
    Mr. Stark. Thank you, Mr. Chairman. Ms. Arnett, I was 
curious and did a little research. This guy Galen was quite a 
fellow. He was involved in socialized medicine all of his 
career as a physician. He was a doctor to a bunch of emperors 
and gladiators. He was nutty as a fruitcake. As one biographer 
put it, he made critical errors that remained unchallenged for 
1,400 years--sort of like the Republican Party. He became the 
ultimate medical authority for the ascendant Christian church 
and now the guiding light of the Bob Jones' medical school, Bob 
Jones' University.
    But, aside from that, your testimony does need some 
correcting, no matter who Galen is. You testified that surveys 
conducted by the NFIB show that the majority of small business 
owners would like to offer health insurance, but the costs make 
it prohibitive. That is not correct. An NFIB survey--and I will 
ask consent to put this in the record----
    Chairman Thomas. Without objection.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T9402.028
    

    Mr. Stark [continuing]. Done by the NFIB shows that to be 
inaccurate. The question was: Should employers be required to 
offer health insurance without having to pay the premiums? 
Sixty percent to seventy percent of the employers said no, even 
at no cost to them. What you are really finding is the NFIB's 
members wouldn't offer health insurance if it was free. I think 
you should review your testimony there.
    And in your testimony, you cite other sources that did 
studies for lobbying groups. You cite the Urban Institute study 
in support of your position. Well, we called Len Nichols, the 
author of the report, and he disagreed. He said that the great 
preponderance of independent academic research shows that, on 
balance, insurance reform has not affected coverage. Some 
helps, some hurts. But, in general, it has helped people who 
need insurance get it and caused some people who didn't 
particularly need it to drop the coverage. Not a bad social 
outcome, as the Urban Institute researcher, Mr. Nichols, said. 
You should take that reference out of your speeches because 
they don't stand with you on that issue.
    We have also heard some of the questions of the problem of 
people who don't sign up for insurance. And I suspect that, if 
insurance is mandated or made generally available through a tax 
credit or some other source, that many uninsured will not 
choose to sign up. I don't believe they choose not to, I think 
a lot of them are unaware. The outreach programs are bad. There 
is a whole host of problems. For example, the CHIP doesn't work 
very well. But, when they get to an emergency room, I would be 
willing to bet you that 90 out of 100 hospitals don't let them 
get past the admissions desk if they qualify for some sort of 
coverage.
    So that, for the hospital or indeed the physician to be 
paid, at the point of entry into the care system, these people 
who would be eligible under any kind of a program that we might 
come up with. They will will almost be required to sign up at 
the point of admission. Those are the people who obviously need 
the coverage and we might save a little money by not covering 
them until they need it. I think that is not a good solution 
because arguably they should get treated before they get to an 
emergency room.
    But the issue, it still seems, is that if we had everybody 
in this country covered, all the questions of who are the 
uninsured would be moot. There wouldn't be any. There aren't 
any in Canada. You guys, if this was the only research you did, 
would be out of business if you lived in Canada. I like you 
all, but I would like to put you all out of business on this 
topic as soon as we can. Thank you, Mr. Chairman.
    Mr. Sheils. I am ready for retirement anyway.
    Mr. Stark. I tell you, if we get universal health coverage, 
I will join you.
    Chairman Thomas. The gentlewoman from Connecticut. Are you 
leaving us as well? They are all leaving if they can get 
universal coverage, so it is really tempting to shift the 
topic. The gentlewoman from Connecticut.
    Mrs. Johnson of Connecticut. I have to stay to be sure they 
don't. [Laughter.]
    First of all, that was a very interesting figure that my 
colleague from California quoted about the small business 
community's reluctance to provide health insurance even if they 
don't have to pay the premium. It is very interesting that in 
1998, Hay Huggins' survey found that the overhead costs for 
firms with fewer than 10 employees were 35 percent compared to 
12 percent compared to 12 percent for companies with over 500. 
It isn't just the premiums.
    We found this in the Pension Reform Initiative, too. Only 
half of America's working people have even an option to pension 
plans because the administrative costs are so large for small 
companies that they can't afford to get into the business.
    The administrative costs are an issue and increasingly, and 
particularly, I might add, under my colleagues from the other 
side of the aisle's Patient Protection Act, those very 
employers would be exposed to malpractice suits. That is 
another issue.
    But they have every reason to be afraid that if they get 
into this, government regulation will cost them far outside the 
premiums in a way that many would not be able to survive.
    I want to ask a different question, though. Of this 36 
million figure, do any of you have--can you give us better 
guidance on how many of these people are uninsured for, say, 
less than 6 months? You know, how much of this problem is a 
transition problem and how much of it is a small business 
problem? And what insight can you give us as to that third of 
the companies with more than 500 employees that don't provide 
health insurance?
    Mr. Sheils. Well, I have a slide in here that I think will 
be helpful to you. It is on the number of individuals who are 
uninsured who are working. If you look at them on an average 
monthly basis--this would be on figure seven--on an average 
monthly basis, in any given month, about 37.9 percent of the 
uninsured are working full time and they have, about 16.3 
percent, have dependents. So, together, the number of people 
who are connected to employment while uninsured, on a given 
month, will come to about 55 percent of the uninsured.
    About 46 percent of the uninsured are what we call 
nonworkers. They are not working at the time and they are not a 
dependent of a worker. And those individuals, to address that 
population, you would have to have a fairly substantial program 
directed at nonworkers. Very often people look at these data 
and they say, well, a lot of the uninsured in the CPS were 
working. Seventy-five percent were either working or were the 
dependents. But, in fact, a lot of them were just working part 
of the year. When you look at it on an average monthly basis, 
in a given month, as you have asked your question, the problem 
is really split about 50-50 between workers and nonworkers.
    Mrs. Johnson of Connecticut. And, in terms of the larger 
firms that don't provide insurance, my understanding is that 
two-thirds of the firms with over 500 employees provide 
insurance, some kind of health insurance, and one-third don't. 
What do you know about the one-third that don't? Because that 
certainly is a big enough pool.
    Mr. Sheils. I am more familiar with the figure of, I think, 
25 percent. Seventy-five percent were offering it. But some of 
those firms are very large firms who are providing services. An 
example there is there is a major grocery chain that is now 
expanding throughout the country. It uses nonunion labor. There 
are no benefits to speak of. And those firms are coming in and 
crowding out some of those smaller chain stores in some areas 
where, in effect, you have coverage already. Some of this has 
to do with new phases in marketing with some of these firms, 
too. New ways to come in and introduce, frankly, cheaper labor 
into the marketplace to gain market share.
    It is really a labor market issue out there. If the 
employer feels they have to offer insurance to get people 
signed up and working for them, they will offer it. If they 
don't, if the workers, low-wage workers in particular, they are 
probably more interested in the wages, first, rather than the 
health benefits themselves. It varies across individuals. But a 
lot depends on what the individual is looking for, the people 
in the labor force, are looking for in the way of employment.
    Mrs. Johnson of Connecticut. And then, last, each of you 
have said a number of different things about what the impact 
would be of tax deductions and tax credits. First of all, I 
personally think it is a matter of fairness. We subsidize the 
access to insurance for everyone who gets it through employers. 
I think it is grossly unfair not to provide equal subsidies for 
those who don't.
    In my bill that I am putting in this week, it has very rich 
subsidies because I am trying to make it comparable to the 
subsidy--not the tax benefit to the individual, which is far 
lower, if it were converted into wages--but to the access to 
effectively free health insurance with copays that employees 
get through employers. And Ms. Arnett did quote some research 
that is in process, but I would appreciate your help in the 
coming days and any thoughts that you might have.
    But if you gave a tax credit to the low-income people and a 
deduction to high-income people, which my bill does, equal to 
the benefit that people who work for employers and get health 
insurance through their employers, the impact would be as great 
on their lives as through employment, then I think we would 
have a much greater impact on including the uninsured or 
bringing the uninsured into the insured group. I would be 
interested in your thoughts on that.
    My time has expired, but if you will get back to me on 
that, I would appreciate it.
    [The following was subsequently received:]

                           Tax Credit Issues

    The current tax code is often criticized as contributing to 
the uninsured population.\1\ As a result, proposals to expand 
health insurance coverage through a tax credit have been 
receiving increased attention lately. The tax credits proposals 
for health insurance, which come in all shapes and sizes would 
either enhance the current employment-based health insurance 
system or put it at risk.
---------------------------------------------------------------------------
    \1\ It can also be argued that the uninsured would be much higher 
if workers were not allowed to exclude any portion of health benefits 
from income, or if employers were not able to deduct health benefit 
expenses as a business expense.
---------------------------------------------------------------------------
    One possibility is to replace the current tax exclusion 
with a tax credit for all persons with health insurance. 
Several members of Congress have been discussing replacing the 
employer deduction for health insurance with an individual tax 
credit. If the tax credit were refundable, all persons with the 
same health insurance coverage who claim the credit would get 
the same tax credit. Another possibility is to leave the tax 
exclusion unchanged for individuals who get insurance through 
employment and add a refundable tax credit solely for 
individuals who do not qualify for employment-based health 
insurance. For example, recent proposals by some members of 
Congress would create refundable tax credits that would only be 
available to individuals who are not eligible for an 
employment-based health plan. Specifically, one such proposal 
would provide an $800 credit per individual and a $400 credit 
per child, up to an annual maximum of $2,400 per family, for 
those without access to an employment-based plan. Another would 
provide a partially refundable tax credit worth up to 30 
percent of the cost of a health plan for low-income 
individuals. These proposals are intended to leave the 
employment-based health insurance system intact, as they are 
targeted to individuals who are less likely to be covered by an 
employment-based health plan or ineligible for one.
    However, the movement to individual-based tax credits for 
any source of health insurance coverage may mean the end of the 
existing employment-based health insurance system. This has 
potentially enormous public policy implications, since the vast 
majority of Americans get their health insurance coverage 
through employers. Such a change may also have political 
implications, as public opinion currently may not support such 
a fundamental change in the U.S. health insurance system, as 
discussed later.
    Different proposals for adding a tax credit would likely 
have different outcomes. For example, some proposals intend to 
preserve the employment-based health insurance system, while 
others intend to replace it. Hence, a number of issues need to 
be considered in any debate over changing the tax treatment of 
health insurance coverage. Some of these issues are discussed 
below.
    Rep. Thomas and others have argued that health insurance 
should be completely de-linked from employment and advocate 
changing the tax code to move away from the employment-based 
system. In general, this argument holds that the major role 
played by employers in health insurance fundamentally distorts 
the economics of the health care market place. Specifically, we 
should completely replace the current health insurance-related 
tax code with an individual tax credit. Employers would not be 
able to deduct the cost of workers' health insurance as a 
business expense; instead, they would be expected to give 
workers a cash payment to obtain health insurance on their own. 
Advocates of this approach envision a private system of 
universal access to health insurance.
    But the assumption that employers would continue to provide 
the same contribution to their workers' health plan may be 
questionable. Employers might choose to eliminate their 
contribution to health benefits and instead pay workers a 
higher (taxable) wage. Also, limiting the employer deduction 
would directly affect only those employers that pay federal 
income tax; it would not, for instance affect state and local 
governments or nonprofit institutions. However, these 
organizations would be indirectly affected, as they would be 
competing for the same pool of workers in the labor market and 
it is likely that these employers would follow the behavior of 
employers that are subject to federal income tax.
    Proposals for limited tax credits presumably would have 
less of an effect on the employment-based system than a 
``pure'' individual tax credit. First, under a system where 
only persons not eligible for employment-based coverage would 
be able to take the tax credit, some employers might use this 
as an incentive to terminate health benefits. However, as long 
as workers continue to demand health benefits and unemployment 
continues to remain low due to a growing economy, and employers 
have to compete for scarce labor resources, employers may be 
reluctant to reduce health benefits. Given the same approach, 
in an economic recession it would be relatively easy for 
employers to terminate health benefits, especially if workers 
could get a tax credit when purchasing health insurance on 
their own.
    A tax credit with aimed at low income individuals would 
have a much smaller effect on the employment-based system. 
Under one recently-introduced bill, only single persons earning 
less than $25,000 and married persons earning less than $40,000 
would qualify for the tax credit. Since low-income individuals 
are least likely to have employment-based health insurance to 
begin with, the proposal would not be expected to have much 
impact on employment-based health plans. Under this proposal, 
persons eligible for the tax credit would be able to claim 30 
percent of the cost of health insurance.
    Another recently introduced proposal would create a tax 
credit available to persons with employment-based coverage, but 
the amount that could be claimed under the tax credit would be 
much smaller for individuals who are eligible for an 
employment-based health plan. For example, individuals not 
eligible for an employment-based health plan could take a tax 
credit of up to $1,200, while eligible individuals could only 
take a $400 credit. While the tax credit is targeted toward 
individuals who are not eligible for an employment-based health 
plan, employers might still terminate a plan because 
individuals could then claim the tax credit if they purchased 
health insurance on their own. In other words, the credit could 
create an incentive for employers to drop coverage.
    Additional Market Reforms--Proposals to change the tax 
treatment of health insurance in the past were generally 
combined with insurance market reform. These reforms usually 
included some type of ``community rating,'' whereby all 
individuals who wished to enroll in a health plan were charged 
the same premium regardless of employment, family or health 
status. In essence, the goal of past proposals was to limit 
insurers' ability to charge different premiums to groups on the 
basis of risk, thereby allowing less healthy individuals to buy 
insurance at the premium that reflects the community's average 
risk. Some, but not all, current proposals include provisions 
that would allow smaller entities to band together to purchase 
health insurance at favorable rates, but in general they allow 
the market to determine premiums.
    Another issue to consider is how employers would distribute 
funds if they were to eliminate health benefits in favor of 
higher wages. Health insurance is generally more costly for 
older individuals than for younger ones, since older people 
tend to have more health problems. This was reflected in a 
recent advertisement for a health plan in a local Washington, 
DC, newspaper, which showed premiums for a 30-year-old ranging 
from $71 to $86 per month, while premiums for a 60-year-old 
ranged from $225 to $254 per month. If individuals are charged 
different premiums because of their age in the nongroup market, 
employers would face a number of issues in deciding how much 
money to give workers to buy insurance on their own. For 
example, would a 25-year-old worker get the same pay raise as a 
50-year-old worker, or would the 50-year-old receive a higher 
pay raise because of the higher expected premium when premiums 
are not determined by average community risk? With an average 
premium in the above advertisement being $163, 60-year-old 
workers would not receive enough money to purchase health 
insurance on their own if the distribution were based on a 
community rate. This might result in older workers becoming 
underinsured and younger workers overinsured.
    How employers ultimately distribute the funds would partly 
depend on how flexible employers could be under any final 
legislation. For example, employers might be required to 
``community rate'' the distribution, i.e., to divide the 
distribution equally among all workers. All workers would get 
the same distribution regardless of age, although single 
workers might get a lower distribution than married workers if 
the plan subsidized family coverage.
    If all workers received an equal distribution level, it is 
likely that older workers would not be able to purchase health 
insurance on their own solely with the funds distributed from 
their employer. Under the assumption that insurance carriers 
operating in the individual market are allowed to age-rate the 
premium, older individuals would likely pay higher premiums 
than younger ones. In addition, unhealthy individuals could pay 
more than those in good health. And, if insurers set premiums 
using experience rating, there might be added pressure on 
employers to ``cash-out'' the benefit plan based on an 
actuarial (age-based) formula instead of a community-rated 
basis.
    A question also arises concerning how the tax credit would 
be distributed. Current proposals set the credit either on a 
per-person basis or as a fixed percentage of the premium, and 
some proposals limit eligibility for the credit to individuals 
in low-income families. It is also possible to vary the tax 
credit by health status and/or age. The need to vary the tax 
credit by age and health status, and the subsequent effects of 
varying the tax credit, are highly dependent on whether 
premiums are community-rated or experience-rated.\2\ If 
Congress continues to allow health insurance premiums to be 
experienced-rated, older and unhealthy individuals will likely 
pay more for insurance than younger healthy individuals. Under 
an experience-rated system, policymakers would ultimately have 
to decide whether to vary the tax credit by age and health 
status to address the issue of affordability.
---------------------------------------------------------------------------
    \2\ The value of the tax credit is also affected by geographic 
region, as health care costs and health insurance premiums vary by 
geographic region. Policymakers will also need to determine whether the 
value of the tax credit should be higher in high-cost regions, though 
they could simply set it at a fixed percent of the health insurance 
premium.
---------------------------------------------------------------------------

                             The Uninsured

    One of the concerns over changing the tax treatment of 
employment-based health insurance is that the change would 
erode (and potentially destroy) the employment-based system. As 
mentioned above, a tax credit may induce individuals to 
purchase health insurance on their own or it may make it harder 
for vulnerable populations to continue coverage. This has 
different implications for various segments of the insured and 
uninsured populations. For example, if only young healthy 
people choose to opt out of their employment-based plans, 
premiums would increase for individuals remaining in employer 
plans, while they would decline for individuals who opt out. 
This might have the unintended side effect of reducing coverage 
among individuals who remain in the employment-based system if 
the cost of employment-based health insurance is less 
affordable, ultimately increasing the uninsured population.
    The current tax treatment of employment-based health 
insurance has been shown to be regressive. However, removing 
(or simply changing) the tax subsidy might not increase social 
welfare, as discussed in Custer (1999). The assertion that the 
tax treatment of employment-based health insurance distorts the 
market for health insurance, thereby creating an inefficient 
allocation of resources, is based on the assumption that the 
tax preference is the only reason the market for health care 
services is inefficient. If other factors, such as inefficient 
and over regulated individual markets, prevent the health care 
system from performing optimally, the ``theory of second best'' 
suggests that changing the tax preference might not increase 
social welfare. Custer (1999) found that removing the tax 
preference for employment-based health insurance would have a 
larger effect on individuals in families with at least one 
family member in fair or poor health than on families in which 
all members are in good health or better. Specifically, he 
found that if the tax preference for employment-based health 
insurance were eliminated, employment-based coverage would 
decline 17 percent for individuals in healthy families and 34 
percent for individuals in unhealthy families.\3\ Similarly, 
Monheit, Nichols, and Selden (1995/96) found that the 
employment-based system and its tax treatment act to transfer 
income from individuals in good health to those in poor health. 
Essentially, the tax treatment of employment-based health 
insurance acts to promote participation in health plans among 
low-risk individuals, which ultimately assists the pooling of 
risk.
---------------------------------------------------------------------------
    \3\ Custer (1999) found that the percentage of individuals in 
healthy families with employment-based health insurance would decline 
from 70 percent to 58 percent. The percentage of individuals in 
unhealthy families with employment-based coverage would fall from 47 
percent to 31 percent.
---------------------------------------------------------------------------
    Changing the tax treatment of employment-based health 
benefits might affect the overall level of the uninsured. 
Custer (1999), for example, found that removing the tax subsidy 
would reduce the number of individuals covered by an 
employment-based health plan by more than 20 million. While he 
finds that 3.5 million individuals would purchase coverage in 
the individual market, many others would not, resulting in a 
substantial net increase in the uninsured. Even if the tax 
treatment were changed so that anyone purchasing health 
insurance qualified for a tax credit, affordability would 
continue to be an issue for low-income workers.
    Even repackaging the tax credit might affect the level of 
the uninsured. Thorpe (1999) found that introducing a tax 
credit would reduce the level of the uninsured, but the 
reduction would depend in large part on the level of the tax 
credit. Specifically, he found that a tax credit of $400 would 
result in 18 percent of single uninsured workers with incomes 
at 150 percent of poverty to participate in a health plan. At a 
tax credit of $800, their participation would rise to 22 
percent. As mentioned above, some proposals set the tax credit 
at $500 for a single person. In order to achieve a take-up rate 
of 75 percent, Thorpe (1999) determined that the tax credit 
would need to be set at $2,800 for a single low-income 
uninsured worker.
    While some members of the uninsured population would gain 
coverage under a tax credit system, others in the employment-
based system might drop coverage, leading to a net change in 
the level of the uninsured that could be positive or negative. 
Attempting to model this net increase, Cox and Topoleski (1999) 
found that the uninsured would increase between 0.2 million and 
24 million people, depending on the generosity of the tax 
credit and the parameters used to determine eligibility for the 
tax credit.

                               Conclusion

    There are trade-offs involved in providing individual tax 
credits to those who might have access to health insurance 
through the workplace. In some cases, employers could be given 
the incentive to drop coverage, in the knowledge that their 
employees could purchase it for themselves. In other scenarios, 
enough individuals would leave the employment-based system to 
destabilize it, resulting in even more distorted insurance 
markets and causing the number of uninsured to rise.
    If the goal is increased coverage, the structure of the 
health insurance marketplace cannot be ignored. As many 
policymakers have recognized, changes in the tax code designed 
to facilitate the purchase of individual health insurance will 
almost certainly have to go hand in hand with insurance market 
reforms. Here, there are profound questions regarding the 
proper Federal role in the process. In essence, none of the 
changes discussed above can or should take place in a 
``vacuum.''

                               References

    Cox, Donald F., and Christopher Topoleski. ``Individual Choice 
Initiatives: Analysis of a Hypothetical Model Act.'' Paper presented at 
the Employee Benefit Research Institute--Education and Research Fund 
(EBRI-RF) policy forum, ``Severing the Link Between Health Insurance 
and Employment: What Happens if Employers Stop Offering Health 
Benefits?'' Washington, DC, May 5, 1999.
    Custer, William S. ``The Tax Preference for Employment-Based Health 
Insurance Coverage.'' Paper presented at the Employee Benefit Research 
Institute--Education and Research Fund (EBRI-ERF) policy forum, 
``Severing the Link Between Health Insurance and Employment: What 
Happens if Employers Stop Offering Health Benefits?'' Washington, DC, 
May 5, 1999.
    Monheit, Alan C., Len M. Nichols, and Thomas M. Selden. ``How Are 
Net Health Insurance Benefits Distributed in the Employment-Related 
Market?'' Inquiry (Winter 1995/96): 379-391.
    Thorpe, Kenneth E. ``Changing the Tax Treatment of Health 
Insurance: Impacts on the Insured and Uninsured.'' Paper presented at 
the Employee Benefit Research Institute--Education and Research Fund 
(EBRI-ERF) policy forum, ``Severing the Link Between Health Insurance 
and Employment: What Happens if Employers Stop Offering Health 
Benefits?'' Washington, DC, May 5, 1999.
      

                                

    Chairman Thomas. Yes, I would very much like it if you 
would respond in writing to that question because we are going 
to be facing those questions very soon. The gentleman from 
Pennsylvania wishes to inquire?
    Mr. English. Yes. Thank you, Mr. Chairman. Mr. Sheils, in 
your testimony I think you have said some provocative things, 
but I particularly wanted to explore and amplify on the 
question that Congress is going to have to grapple in any 
health care reform legislation.
    It is specifically, in your view, how close and how direct 
is the relationship between the increases in the cost of health 
insurance and the increases in the uninsured rate? How close is 
that relationship? How predictable is an increase in the 
uninsured rate, following an increase in costs? And I am 
curious, given that CBO has informed Congress that perhaps a 1-
percent increase in insurance rates might yield a 200,000 
increase in the number of uninsured nationwide, does that 
figure seem realistic to you? Does it seem low? Does it seem 
high? And how does that conform with your research?
    Mr. Sheils. Well, thank you for asking that question. We 
did do a study where we tried to examine the determinants of 
insurance coverage; why are people losing coverage? We looked 
at demographics. We looked at the shift to the services sector. 
We have looked at the shift from full-time to part-time 
employment. Looked at the availability of Medicaid. And we 
tried to build a comprehensive model that measures all of this 
in there while, in addition, adding in price, the price that 
workers are paying for insurance.
    The analysis showed that about 75 percent of the loss in 
coverage that we had experienced since 1989 was attributable to 
the increasing price of insurance. Our estimate--this was an 
independent estimate. It had nothing to do with CBO's work and 
I don't think theirs had anything to do with ours--our estimate 
indicates that a 1-percent increase in the premiums paid for 
health insurance has been associated with an increase in the 
uninsured of about 300,000 persons. Now I believe CBO's number 
is 200,000. I know there was another time they did an estimate 
where a 1-percent increase was going to result in something 
like a 400,000-person loss of coverage.
    That is not an enormous number. It is three Sugar Bowls 
full of people, but it is not an enormous number, as some 
people had postulated. But it is a very--I think it is a very 
solid relationship at this point. It is very simple. You raise 
the price of anything, fewer people are going buy it. Fewer 
people can afford it.
    Mr. English. Well, I think----
    Chairman Thomas. Will the gentleman yield briefly on that?
    Mr. English. Absolutely.
    Chairman Thomas. Now were you able, then, to extrapolate 
beyond that? Is that an arithmetic increase? That is, if it is 
a 2-percent increase, you would lose between 400,000; 600,000; 
or 800,000? It tends to just move up arithmetically?
    Mr. Sheils. Roughly, yes.
    Chairman Thomas. Roughly. OK. Thank you. I thank the 
gentleman.
    Mr. English. Well, that is extremely useful research as we 
go forward. I am curious, in your testimony, you focused on the 
number of workers, the percentage of the uninsured who were in 
fact workers who declined employer coverage. Now we know that 
some people who are young consider themselves immortal so they 
don't need that sort of stuff. But I am curious if you can give 
us any greater detail with regard to the motivation of the 
workers who declined employer coverage? Can you give us any 
insight into why that statistic is so large?
    Mr. Sheils. Research actually was done on this where we 
looked at the cost of insurance to those workers and it 
indicated that price was a major factor, the price of the 
family coverage. But you can get insurance for these people, 
say $50,000, you can get insurance with a catastrophic cap for 
many of these people--and they tend to be younger. I know of 
one woman with a child who is getting it for $100 a month. That 
is what it is costing her. Now it is catastrophic insurance. 
She has to spend several thousand dollars out-of-pocket before 
it kicks in, but the person was able to get insurance.
    I can't tell you what the psychology is. I remember I had a 
painter come in and do my house. He had a great truck. I think 
he was making around $50,000, but he just did not believe in 
health insurance. We didn't see eye-to-eye on that and we 
didn't see eye-to-eye on the paint job, either.
    Mr. English. One last question. How much of this could be 
driven by part-time workers who are actually eligible for a 
medical card and who, unbeknownst to anyone, actually are 
eligible for benefits and utilizing public benefits, but who 
might not show up in the survey?
    Mr. Sheils. Well, there are people who are using--I am not 
sure I understand the question. I know there are lots of 
uninsured people who are using publicly funded clinics and that 
kind of thing.
    Mr. English. Surely. I guess, did your survey factor out 
people who were actually on public programs, in terms of 
workers who declined employer coverage?
    Mr. Sheils. That is right. We sorted out those people who--
oh, I see. How many of those 10 million who also have access to 
public coverage?
    Mr. English. Right. Exactly.
    Mr. Sheils. Some of them, presumably, could have qualified 
for public coverage. But the point is they are uninsured. They 
haven't enrolled in that either.
    Mr. English. OK. Thank you very much. This has been most 
informative.
    Mr. Sheils. Thank you.
    Chairman Thomas. I thank the gentleman. Does the 
gentlewoman from Florida wish to inquire?
    Mrs. Thurman. Yes, I would. Thank you, Mr. Chairman.
    Overwhelmingly, the one thing I hear from everybody on this 
panel is that it is the cost of insurance which is causing the 
problem. With that is associated what has happened with the 
cost of health care increases. Ms. Arnett, you mentioned in 
your testimony that you had looked at 16 States on the mandates 
issue. When you compared the increases in mandates suggesting 
that those mandates were also the cause of the increase of the 
health care insurance costs, did you look at the States where 
those mandates had not and what the difference was between 
those percentages of increases?
    Ms. Arnett. Yes, Mrs. Thurman. In the 16 States sample, 
there were some States that were very--that already had very 
high rates of uninsured and some States that had very low rates 
of uninsured. The study didn't include only States with high 
uninsured rates. And we did look at the impact of regulation 
across the board, things such as guaranteed issue, guaranteed 
renewal, portability, a range of issues that had been 
identified by the GAO. And the 16----
    Mrs. Thurman. And those were things that increased the 
costs?
    Ms. Arnett. Well, we did not do a cost analysis. We tried 
to, but it was very difficult to do that as a think tank. 
Insurance companies just don't give out complex and proprietary 
pricing information to outside organizations. It is very 
difficult to equate it with costs. That is why we looked at 
uninsured rates, which is something collected by the Census 
Bureau where we could get an objective analysis based upon the 
same data set across all States.
    Mrs. Thurman. I think the thing that concerns me, 
particularly when it comes to things like portability or 
existing diseases, which, you know, that we have tried to 
cover----
    Ms. Arnett. Preexisting conditions, right.
    Mrs. Thurman. The other issue is, though, I think we have 
all been told over the years that more people that are 
uninsured and don't have health care is also creating the cost 
of insurance or health care to this country. I feel like I am 
just going around in this vicious circle. And I am not sure 
what the answers are, Mr. Chairman, other than the fact, I have 
to say, that I think the idea is that the more people we get 
insured--and this is a question--does that help us bring down 
health care costs?
    Ms. Arnett. I think, overall, that is exactly right. The 
data certainly show that. But the question is why people are 
losing private health insurance coverage. In the States that 
are regulating the small group and individual markets, where 
the impact of these regulations hits hardest, that is where you 
see the coverage fall off. That is one important reason why the 
percentage of those with private coverage has fallen from 79.5 
percent in 1980 to 70.5 percent now.
    Mrs. Thurman. But then I would go back and suggest 
sometimes government is not all bad in this case, then. The 
issue here is--and maybe any one of you can respond to this--
would be what Mr. Stark has suggested and we are looking at. It 
may only be 400,000 people that you look at from age 55 to 64. 
It may be only 10 million children that you are looking at 
below. But you are still providing coverage and, as you provide 
that coverage, it should, by testimony and everything else we 
have heard, should drive down some of the cost associated both 
with insurance and health care coverage. Would you all agree 
with that?
    Mr. Fronstin. I think it was more likely to be true in the 
past when it was much easier for providers to cost-shift onto 
people that had insurance, but with managed care squeezing out 
a lot of that ability, I don't see that relationship being as 
strong as it used to be.
    Mrs. Thurman. Now we are just cost-shifting it to a whole 
lot of other folks that don't have insurance or who might have 
but are still paying for certain pharmaceutical assistance, 
whatever. Go ahead, Mr. Sheils, I am sorry.
    Mr. Sheils. I am not sure. It has long been held that 
getting everyone insured would somehow reduce the cost. We 
always shown an increase in cost.
    Mrs. Thurman. If everybody is insured?
    Mr. Sheils. Yes. And it depends on how you do it. If you do 
it with a system of proper incentives, you can save some money. 
But we are getting to the point where we are talking about many 
tens of millions of people here. It is hard to imagine that 
giving them coverage would result in a net reduction of costs.
    Mrs. Thurman. When you say incentives, I just was looking 
at a CRS report here that talks about all the tax incentives 
that might be available to folks. And one that I looked at was 
the self-employed deduction. We have the individual private 
market policies. We have the cafeteria plans. We have the MSAs. 
Over and over and over, we have lots of insurance incentives 
for people to buy.
    Here is a question. Under the self-employed deduction part, 
of that group, how many are insured that already have an 
incentive built into the law? Do we know?
    Mr. Sheils. It is not on us. Well, in our filing cabinets, 
I am sure. I just don't have the numbers with me.
    Mrs. Thurman. I think we should look at the programs that 
we already have available as to who has signed up for those and 
find out where the best incentive has been instead of just 
saying, arbitrarily, oh, just do a tax credit. That will take 
care of the problem.
    Mr. Fronstin. It is not that simple just to look at the 
self-employed to see whether or not they are covered.
    Mrs. Thurman. Farmers----
    Mr. Fronstin. Because a lot of them are covered--it is 
about a 50-50 split between coverage in your own name through 
your own business and coverage from a spouse. And that just 
makes it very difficult to do any kind of analysis. You know, 
when you introduce family incentives and those loosening the 
constraint of where you can get coverage from.
    Chairman Thomas. I thank the gentlewoman.
    Mr. Holahan. I was----
    Mrs. Thurman. Can Mr. Holahan?
    Chairman Thomas. Go ahead.
    Mrs. Thurman. Thank you.
    Chairman Thomas. It is just that we have got a vote on.
    Mrs. Thurman. I know.
    Chairman Thomas. And it is going to be tough. I would 
exercise the option and recognize the gentleman from Louisiana.
    Mr. McCrery. Thank you, Mr. Chairman. I begin by saying 
that there are others of us on this Subcommittee who think we 
have the answers too. Mr. Stark is not the only one who thinks 
he has the answers. There are plenty of answers to go around. I 
think it is useful to examine some of the forces that are 
driving the uninsured to be uninsured. And so, to that extent, 
I appreciate the panel's testimony.
    And, also, in defense of my good friends, the small 
business people in America, some of whom joined the NFIB and 
are polled by the NFIB and that poll was cited by my friend 
from California, I think it is probably an accurate result, but 
it is not surprising for the very reason stated by the panel. 
Mr. Fronstin, particularly, he said that small employers don't 
generally have the time to go out and seek health insurance for 
their employees, negotiate with various providers of insurance. 
Or at least they don't think they have the time and they don't 
want to take the time.
    It is not the cost, necessarily, that is the problem, not 
the cost of the insurance. It is the cost to the employer. It 
is the cost to the small business person who has to take his 
time, which is a cost, to go out and get that insurance. That 
is not a surprising statistic. It is perfectly reasonable.
    I would like to know from the panel if any of you know what 
percentage of the insured who receive a subsidy for their 
insurance--or, I am sorry, who do not receive a subsidy for 
their health insurance? What, of the total universe of insured 
people, some get a subsidy through government, direct 
government insurance, Medicaid, Medicare. Some get a subsidy 
through the Tax Code, through getting it through their 
employer. And then there is that group that doesn't get any 
subsidy at all, mainly in the individual market.
    Do you know what percentage of the total universe of 
insured is represented by those who get no subsidy?
    Mr. Holahan. About 5 percent.
    Mr. McCrery. About 5 percent?
    Mr. Holahan. Of the nonelderly population, about 5 percent 
have nongroup coverage. I think that is your question.
    Mr. McCrery. Is that generally what you have found, the 
other panelists?
    Mr. Sheils. Well, there is a group out there that doesn't 
have an association with an employer that has employer 
coverage. And I think we are looking at something--I will check 
this out, but I think it was in the neighborhood of 40 percent 
of those people were taking that coverage. But those people are 
also much lower income. That is a large part of why they did 
not get the coverage. For those who weren't associated with 
employment, there was a slightly higher percentage of persons 
who had coverage. But these, again, are people who had no 
subsidies whatsoever from the government. They were simply--no 
association with employment.
    Mr. McCrery. Right. But can you give me how--what slice of 
the uninsured pie is represented by those people who get no 
subsidy? Mr. Holahan says 5 percent.
    Mr. Holahan. It is 5 percent of all the nonelderly. It is 
hard to understand----
    Mr. McCrery. Is it a small percentage?
    Mr. Sheils. I think I know what you are looking for. I can 
try and find the number and then get back to you.
    Ms. Arnett. The percentage of the insured or the uninsured?
    Mr. McCrery. No, the insured. Now you have got a pie here 
that is made up of all of the insured people in the country. 
What slice of that pie is made up of people who get no subsidy? 
It is a fairly simple question. If you don't know the answer, 
that is fine. Just tell me.
    Mr. Holahan. It is 5 percent.
    Ms. Arnett. Right. I would think 5 percent, too.
    Mr. Holahan. It is about 5 percent who have private, 
nongroup coverage, who are not getting a subsidy. I think that 
is your question.
    Ms. Arnett. Right.
    Mr. Fronstin. But you are including in that, in your 
question, you are defining subsidy as including the tax 
exclusion?
    Mr. McCrery. Surely. That is a subsidy.
    Mr. Fronstin. OK.
    Mr. McCrery. Right? That chart over there shows the 
distribution of that subsidy. And it is a very graphic--it is a 
very good chart. It shows that people in this country who make 
a lot of money, defined by the Democrats as about $40,000 a 
year, Republicans a little higher, get a pretty big subsidy 
from the government. They are subsidized. People who make 
$25,000; $30,000; $35,000 don't get much. In fact, a lot of 
them don't get any subsidy. Most of them don't get any subsidy.
    I think that chart is worth taking a look at for Members of 
this Subcommittee. Do we want, if we have dollars to spend to 
subsidize health insurance in this country--which I question 
outright--but if we are going to do it, if we are going to 
subsidize health insurance, why are we subsidizing people who 
have the wherewithal to buy it for themselves to begin with? 
Why aren't we subsidizing the people who need the help? Now we 
do at the very low end, with Medicaid, but then we get into 
private health care, we are subsidizing the top earners in the 
country. It doesn't make much sense to me.
    If you subsidize something, you get more of it. Any of you 
economists? That is generally true, isn't it? If you subsidize 
something, you get more of it. OK. We have subsidized health 
insurance. We got a lot of health insurance. Also if you 
subsidize something, if the cost goes down----
    Chairman Thomas. If the gentleman would suspend. If the 
gentleman would suspend.
    Mr. McCrery. I am on a roll, Mr. Chairman.
    Chairman Thomas. I understand that, but we have got a vote 
on and it sounds like we want to come back. And I am going to 
ask the panel----
    Mr. McCrery. I would love to.
    Chairman Thomas. Do you want to come back? Then let us 
recess and come back, because I know two Members want to 
inquire and there may be some followups. I apologize to the 
panel. We will be back after two votes. The Subcommittee stands 
in recess.
    [Recess.]
    Chairman Thomas. If the panelists will return to their 
designated seating area.
    And the Chair apologizes to the gentleman from Louisiana--
if he can rewind his roll.
    Mr. McCrery. Mr. Chairman, I appreciate that although I 
have to say, in fairness, the red light had come on. My time 
had expired. If you would give me another round, I would be 
glad to defer to my--is that OK? OK.
    Chairman Thomas. Well, the Chair believes that he will 
allow you to go ahead.
    Mr. McCrery. Well, I appreciate that very much on the part 
of the Chairman and the gentleman from Washington. We were 
talking about subsidizing health care. And over the time we 
were voting, from two different sources, we discovered that the 
percentage of the pie that is accounted for by people who 
receive no subsidy is about 5 percent. It is a very small 
percentage of the insured pie that is bought by people who get 
no subsidy. And that is no wonder, is it? If your car were 
subsidized, you would probably buy a car a lot sooner than you 
would if it were not subsidized.
    And then I was going to make the point that if you 
subsidize something, you get more of it. Just, in the 
marketplace, if you subsidize some product, you are going to 
get more people buying that product. Just stands to reason. And 
that gets me to the point of why costs have risen in the health 
care marketplace. You have all pointed out that costs are a 
problem and increasing costs account, at least in part, for the 
growth in the number of uninsured in this country, but why are 
costs increasing?
    I think one reason costs have increased is because we 
subsidize the costs. If you don't have to pay the full price of 
it in the marketplace, you are going to get a lot more of it. 
And I think that is true for health care just as it is for food 
or shelter or anything else.
    And so, you know, I think we have got to get at the causes 
of this and if you hide the true cost of something, you are 
going to get more of that product. And I think that is what we 
have been doing in health care for far too long, we have been 
hiding the true costs of health care through subsidizing 
through Medicare, Medicaid, the employer, the work place. And 
so what can we do about that? Well, there are a lot of things 
and I have got all the answers but I will save those until I 
have a discussion with my friend from California.
    But one question I would like to ask the panel is can we 
have an efficient health care system without universal 
coverage? Isn't our health care system right now terribly 
inefficient? It is convoluted. We have got government-paid 
health care up here for the elderly. We have got government-
paid health care down here for the poor. And then we have got 
this private health care marketplace that looks like a 
Byzantine mess. Group markets and individual markets and big 
groups and small groups and moderate groups and it is not very 
efficient, is it?
    Mr. Sheils. The efficiency of the system is that there are 
things we like about our system because of the different types 
of insurance you can pick and choose. That is choice. Americans 
value that. But it contributes to inefficiency and makes things 
very, very cumbersome to operate. We stay away----
    Mr. McCrery. Well, you say that we have choice, but if I am 
working for a small business and my employer doesn't provide 
insurance for me, what choice do I have? If I am living in 
Alexandria, Louisiana.
    Mr. Sheils. If you have the money to buy the insurance, you 
can go out and buy it. If not----
    Mr. McCrery. I can buy what insurance?
    Mr. Sheils. You can usually buy--you can buy catastrophic 
insurance very often from individual----
    Mr. McCrery. In what market do I have to purchase that 
insurance?
    Mr. Sheils. Well, I just earlier cited an example of at 
least one case where that happened. I am not trying to say 
that----
    Mr. McCrery. Yes, I have got to the individual market. I 
can't get the same advantage that my neighbor has working for 
GM. I don't have much choice at all in the marketplace.
    I hear what you are saying and we love choice, but I am 
just wondering if--a lot of people in our society don't have 
much choice when it comes to health care and that is part of 
the problem. That is why they are uninsured because, number 
one, they have got to go to the individual market, which is 
higher cost than the group market. Number two, they get no 
subsidy from the government for purchasing, so they are at a 
distinct disadvantage to their neighbor, who does get a 
subsidy. It is no wonder that they don't buy it. It is not a 
good deal. It is a bad deal.
    Mr. Sheils. Well, I think there is a simple truth about the 
uninsured population that perhaps wasn't explored very much in 
recent years. But the uninsured are composed of two groups of 
people: People who want insurance but can't get it and people 
that can get it who don't want to buy it. There was an 
interview in 1994 in Money Magazine. They were interviewing all 
the various stakeholders in health insurance and asking what 
they were afraid of. Go to employers: Well, what are you afraid 
of? The government: What are you afraid of? And then they went 
to uninsured people. And the most often cited thing that they 
were afraid of is that they would have to start paying a 
premium.
    Mr. McCrery. Surely.
    Mr. Sheils. Some people just don't feel it is worth buying 
in.
    Mr. McCrery. That is right. And, in fact, a lot of those 
people who don't feel like it is worth buying in are young and 
healthy and they have got other priorities. And that is swell, 
except if you think of health care as something that people 
require and that everybody ought to contribute to in our 
society. They ain't contributing anything, are they? And so 
they do contribute to the inefficiency in the system. Go ahead, 
Ms. Arnett.
    Ms. Arnett. That is exactly right. Because it is 
inefficient to have so many healthy young people not 
participating in the insurance pools. By not participating, 
they wind up causing everybody else who is in the pool to pay 
higher prices. And when the costs are so invisible, as you so 
well point out they are, then everybody thinks everybody else 
is paying for the cost of their health insurance, and it drives 
up the cost further for everyone. And we wind up in this spiral 
that we are in right now.
    One of my colleagues on the consensus group said, 
concerning this trough, when you are in a hole, you want to 
stop digging. And one of the things that I think that is really 
important is to look at what has been causing the problem and 
see if we can stop digging and start filling up the trough.
    Mr. McCrery. Thank you, Mr. Chairman.
    Chairman Thomas. Certainly. The gentleman from Washington I 
know wants to inquire.
    Mr. McDermott. I want to congratulate the Chairman for 
having our annual socialism versus capitalism discussion on 
health care. But rather than get into that fight, I liked the 
line of questioning Mr. McCrery was going down.
    In fact, he stole my first question, which was: Is there an 
acceptable level of uninsured in a society? We have an 
acceptable level of unemployment, 4 percent or something. You 
know, I don't know. Everybody says we are going to have full 
employment. What they really mean is there will only be 4 
percent that we are counting that are not employed. How about 
insurance? You are all policy wonks so you don't have to think 
about the things we do. Is there an acceptable level of 
uninsured in a society, say 10 percent? Or 5 percent? Or do you 
think that it ought to be at zero?
    Mr. Fronstin. I am afraid that we haven't even reached 
that, the acceptable level. If you think about it, if 
unemployment doubled, if it was at 10 percent or 8 percent as 
opposed to 4 percent, it would be on the front page of every 
newspaper. The uninsured being at 17 or 18 percent is barely 
making page 25 in most newspapers. We may not have even reached 
that level to trigger, you know, national interest in this 
issue.
    Mr. Sheils. I have been waiting to get that question asked 
to me for about 12 years now. I think it is quite possible that 
there is an acceptable level of uninsured persons. I think 
there are a lot of complaints about our current health care 
system and many ways in which we want to improve it, but, 
arguably we are getting along. We are getting along. Most 
people have insurance. Most of those people who are uninsured, 
who get care when they sick, signed up for Medicaid when they 
go to the hospital.
    Unfortunately, what the big problem here is that people 
aren't getting their primary and preventive care, which is very 
important to preventing illnesses. But I was just going over an 
example during the break. Back in 1993, I was asked to look at 
the number of health reform proposals and figure out what it 
would cost to provide the premium subsidies and so on. The 
cheapest plan anyone ever gave me to cost out was in the 
neighborhood of about $60 billion. Uncompensated care----
    Mr. McDermott. Sixty billion dollars?
    Mr. Sheils. Sixty billion dollars. The Federal Government 
would have to come up with $60 billion to provide subsidies--I 
am sorry?
    Chairman Thomas. Over 5 years or 10 years?
    Mr. Sheils. One. One year. Now my point is that we were 
spending $60 billion in Federal money to wipe out a $22 billion 
problem. You could look at it that way. It is more complicated 
than that. I don't want to get into trouble for this, but if 
you take the position that people who are not insured are 
freeloaders and you are sick and tired of paying for them 
through cost-shifts and whatever might be happening, the odd 
thing is that if you go to universal coverage, you are talking 
about a program that is actually going to cost the government 
more and, since there is only one place to get that $60 billion 
and that is from people who have money. They are going to have 
to pay in money so that we can help other people have 
insurance. There is no other way to do it. And you might find 
that the individuals who are most concerned about the 
freeloading in the end would find that they are paying much 
more to finance this program to make sure that everybody has 
coverage.
    It is very remarkable to me that during the health reform 
debate we did not see more support coming from the uninsured. 
We did not see great marches on Washington demanding health 
coverage. We have had those, the poor person's march in 1965 I 
think it was. But we didn't see it.
    Mr. McDermott. You are really agreeing with Dr. Fronstin 
that we have not reached a level where it is a real problem. We 
are having this discussion and we have these hearings 
periodically and go around and around. People put in bills. But 
from an economic standpoint, it really doesn't make any sense 
to even worry about those 16 percent who are uninsured. On an 
individual basis, yes, maybe, but not as a policy for the 
society. Is that what I am hearing you are saying? $60 billion 
versus $22 billion and so why worry about it?
    Mr. Sheils. I think the level of uninsured is too high. I 
think that we may have----
    Mr. McDermott. On an economic basis, do you think that?
    Mr. Sheils. Yes.
    Mr. McDermott. Or are you just talking socially, as a good 
public policy?
    Mr. Sheils. A bit of both.
    Mr. McDermott. A bit of both. The reason I raise this 
question is because I listened to Mrs. Johnson and she was 
talking about a subsidy and I am probably the only guy up here 
who has actually had an experience with doing that in the State 
of Washington. We created the Washington basic health plan and 
had a sliding fee scale for people up to 200 percent of 
poverty. And the problem we ran into was the legislature's 
unwillingness to provide enough money to cover everybody who 
came forward saying they wanted into the Washington basic 
health plan. And we had 70,000; 80,000 people on a waiting list 
at one point.
    And I am not sure what level of subsidy--I haven't looked 
at her particular legislation--but what kind of--and I also 
hear the insurance companies now talking about the fact that we 
ought to have some kind of subsidy for the people at $20,000 up 
to $50,000, somewhere in there. If we would subsidize they 
would buy. Have you looked--has anybody looked at the figures 
as to what we are talking about and what that would mean, in a 
realistic world?
    And ours was voluntary. That is the other thing. And at 
some point we have to come to grips with the question Mr. 
McCrery asked about mandatory versus voluntary. And I don't 
know.
    But tell me about the subsidy question.
    Mr. Holahan. Could I just respond to that? Yes, I think for 
this to work, in terms of expanding coverage significantly, the 
subsidies have to be pretty generous. People do not respond to 
subsidies unless they are. And we are seeing that in a lot of 
places, including the State of Washington. Even though costs 
went above what the State was willing to pay, participation 
rates went down as people were required to pay more, went down.
    The other point is the whole issue of selection or adverse 
selection. It is very likely that the people you are going to 
get covered are going to be sicker than average. They will be 
the ones that will take advantage of the credit, and that is 
good, because it means you are kind of targeting on the people 
who probably need it the most, but the cost per covered person 
is going to be high. To go further and make the subsidies more 
generous, you will be bringing in healthier people, and the 
cost per new person would be lower. But I think the whole issue 
of selection is something that you will have to really grapple 
with.
    Mr. Sheils. We did a simulation of this on the tax credits. 
We looked at the $2,400 tax credit for all families, less for 
single individuals, everybody, and it brought it maybe 6.6 
million people; 6.6 million out of 40 million uninsured, 
however you are measuring it. We did it again where we cranked 
it up to something like 80 percent of the premium.
    Mr. McDermott. Eighty percent?
    Mr. Sheils. Yes, just for fun, and we got something like 10 
or 11 million. And we are basing it, basically, on the study I 
mentioned earlier where we look at the extent to which a change 
in the price of insurance changes the likelihood that somebody 
would buy coverage. Basically, a 1-percent increase in the cost 
of insurance--in this case, via the tax credit--should result 
in something in the neighborhood of a 300,000-person increase 
in the number of people with insurance.
    Mr. McDermott. Could I just stop you on that. On the basis 
of that figure, you are anticipating, next year, 3 million more 
people, since most people are talking about a 10-percent 
increase in price. You expect another 3 percent will be 
uninsured at the end of the next fiscal year?
    Mr. Sheils. Yes. You would see quite a few more people 
uninsured if the cost went up that much. I don't think they are 
going to go up 10 percent, but I think a lot of people----
    Mr. McDermott. At the FEHBP, they are already talking 10 
percent, and Calpers is talking----
    Mr. Sheils. I know, but I also know that brokers are going 
to their clients now with those figures, and they also always 
have in their briefcase some other policies to sell them that 
are more restrictive, more managed care, something like that. 
So, what happens is employers see the picture, and they say, 
``Whoa, no way,'' and a lot of them will respond by asking for 
less costly health plans, and I know the brokers are going out 
prepared for that.
    Mr. McDermott. Let me, then, come back to this question of 
mandatory versus voluntary. Can we ever deal with this problem 
if we don't make it mandatory?
    Mr. Holahan. I think you could partially deal with it. I 
think depending on----
    Mr. McDermott. Well, we are partially dealing with it now.
    Mr. Holahan. No, but you can even more so. The more you 
subsidize, the more people you will bring in, and they will 
tend to be, on balance, healthier people. But to get the 
universal coverage, in my view, you are going to need to have a 
mandate, and, in my opinion, it would be on individuals. That 
is the only way that you can get there. You will do a lot of 
good with the tax credit approach.
    Mr. McDermott. So, the subsidy program would basically be, 
in your mind, then, a kind of a high-risk pool, a national 
high-risk pool?
    Mr. Holahan. Well, it will have somewhat the same effect. 
The high-risk pools really get extremely get high risks.
    Mr. McDermott. Yes, but----
    Mr. Holahan. But, you would have a broader mix of risk than 
they tend to, but it would--I think that is what would happen.
    Mr. McDermott. One of the problems we found in our subsidy 
program was that you had to be sure you, we believe, don't lock 
people in; it is month by month. So, if a woman gets pregnant; 
she joins the program; goes for 9 months, has the baby and then 
drops out. So, we had lots of those kinds of problems too, 
because we did not have a mandatory 1-year or some kind of 
lock-in where we actually had some stability in the program. We 
found lots of problems with the subsidy program through our 
experience with that over this, and I am not sure--I come to 
mandatory coverage not because I have some kind of preconceived 
ideology but because of experience with trying to coax people 
in. It hasn't worked. We are now trying to coax people in with 
a tax incentive, and I would like to hear what you think about 
the 30-percent level. Some people have put it at 50 percent; 
some have put it at 100 percent. What is going to be the 
difference in effect between the 30-percent tax credit and the 
100-percent tax credit?
    Mr. Sheils. It is fascinating. It is really fascinating, 
because even Medicaid is a program which is free. You have to 
fill out forms, and it is time consuming, but it is free, and, 
people who--we get something like 60 to 65 percent 
participation rates in that program in cases where you are not 
also providing cash assistance. Just for health insurance, 
maybe closer to 60 percent of the people are actually signing 
up; 40 percent don't sign up.
    One of the reasons for that is that I think it is 
understood that if you get sick and you go into the hospital, 
you are going to be cared for. That responsibility is there to 
care for you when you get sick. Interestingly, there is no 
corresponding responsibility on the rest of society to pay for 
that or for that individual to contribute, but it seems to me 
that if you go to a 100-percent tax credit--I am mixing points 
here; I apologize--but if you go to a 100-percent tax credit, 
you might get 60 percent of the uninsured to sign up at the 
very most, and if you do a 30-percent credit--I have done some 
of these numbers--you will only get 3 or 4 million uninsured, 
as I recall. I don't have those numbers in front of me, but you 
really don't have that much impact on the number of uninsured, 
and for low-income people, a 30-percent credit, you might as 
well be asking them to pay the whole premium. If you are very 
low income, 30 percent of a $4,500 premium is just too much, 
and that is the main problem.
    Mr. McDermott. I thank the Chairman for his generosity----
    Chairman Thomas. Oh, no, we are going to get back to you. I 
think the gentleman from Louisiana wants another round, and I 
want to just take some of your points and bring them back to a 
draft and ask the questions in a slightly different way.
    There are some self-correcting factors, as Mr. Stark 
indicated, that on the Medicaid, if you eventually need some 
medical attention, you will tend to be picked up in the system, 
and I don't know how long it has been if that has been done 
that you wind up counted as not being in the system again if 
you don't go back through it, because I have a hard time 
dealing with that 13.4 percent never bumping into the health 
care system at some point and getting picked up or if they in 
fact are all virginal folk who have never been to a hospital or 
an emergency room and they are just out there. So, when you 
look at some of these numbers, it is kind of difficult to have 
as complete a comfort level as you would like.
    Just briefly, in terms of Mr. Holahan's chart, I want to 
ask it this way: the question--this is figure number four, to 
help insurance coverage of adults 18 to 64 years of age by 
State, and it pulls together a number of factors implicitly in 
the way the chart is set up. Part of the debate that we go 
through is from a tax committee point of view, we are talking 
about subsidizing the current insurance product in the market 
versus maybe changing the insurance product in the market and 
then subsidizing, and the frustration is that if you try to 
subsidize current insurance products in market, you are going 
to get the kind of numbers that you indicated where you spend 
an awful lot of money and get a 6-percent increase in those 
people who probably would have the highest propensity to be 
captured if you changed the insurance product and market in the 
first place of their own dollars, if you could create an 
attractive product, which is the most frustrating part. So, we 
are spending money, in my opinion, not very wisely.
    But the thing that I wanted to ask you about, chart 4, in 
looking at, Mr. Holahan, some of Mr. Sheils' and Mr. Fronstin's 
statistics, they obviously, in my opinion, show up on here, 
and--tell me if I am not correct--and is this the kind of a 
guide, maybe, that if we wanted to have maximum impact on the 
uninsured that we could begin to follow? When you look at the 
lower States--Florida, California, Mississippi, Texas--you 
obviously have the ethnic and racial minority inclusion. You 
also happen to have States that have a very high agricultural 
component and, except for Mississippi, a high population that 
would deal in a low-income employment on services, and all of 
those, then, would impact as compared to, notwithstanding the 
fact that Wisconsin and Minnesota are agricultural States, the 
kind of agriculture would be more yeoman farmer, family support 
structure, and high-dollar value as opposed to some of the row-
crop activity and fewer ethnic and racial minorities.
    So, what about beginning to--if you are going to subsidize 
the current insurance market and product instead of changing 
that market, wouldn't you want to try to target some of those 
subsidies to those profiles of folks, and would you get, for 
example, a better percentage of the dollars invested in helping 
if you in fact try to figure out how to deal with specific 
groups, whether they be ethnic, low income, agriculturally 
related?
    One of the things we have tried to do is where employers 
of--an employee may have multiple employers in the agricultural 
work, try to create an ability to pull together all those 
employers in multiple employee arrangements that could exercise 
some of the ERISA benefits. That would be one way of getting at 
that kind of a group. Would that produce better percentages of 
the dollars spent or should we really just spend time on 
insurance, the market, the product, and make fundamental 
changes in that, because I think, in part, that is what the 
gentleman from Washington is talking about as well? The Tax 
Code does not afford as many remedies, ultimately, as other 
areas of law change. Is that a fair statement, and where do we 
get the best bang for our buck in terms of investing?
    Mr. Holahan. Well, you have covered a lot of ground. I 
think that it would be hard to figure out how to design 
subsidies that would get at racial and ethnic groups without 
others.
    Chairman Thomas. You could get at that short handed by 
employment, couldn't you, to a very great extent?
    Mr. Holahan. But I thought that you were suggesting we 
already do that very well which may explain some of the 
geographic differences.
    Chairman Thomas. No, I think that is why we don't get at it 
very well; that, in fact, you have the high unemployment in 
those States that tend to have heavy agriculture, low income--
--
    Mr. Holahan. More services.
    Chairman Thomas [continuing]. And services which produce 
that 27 percent of unemployed, and that if we target it, 
agricultural work, in a way to organize the opportunities to 
present insurance differently.
    Mr. Holahan. I see what you are saying. And that seems to 
be that it would clearly improve upon the situation that is 
there now, to a degree.
    Chairman Thomas. Yes, but in marginal increments. You are 
just subsidizing at 80 to 100 percent on the credit, which eats 
up enormous amounts of money, and we get a bump of 10 to 12 
percent from a particular group.
    Mr. Holahan. But by organizing those pools, when you are 
going from, lets us say, the administrative cost load of say 30 
to 40 percent down to 10 to 15 percent, it is still a--let us 
say, it is a 20-percent reduction in price. You are still not 
going to pick up a lot from that.
    Chairman Thomas. Yes.
    Ms. Arnett. Mr. Chairman, Americans expect that health 
insurance to be associated with the workplace. Many of the 43 
million are uninsured because they are between jobs and are 
temporarily without health insurance. Many are really just kind 
of in a waiting pattern. More and more people find themselves 
moving from job to job, are much more mobile, and also starting 
their own companies. Many work for small businesses that are 
not yet able to afford to provide health insurance but 
eventually will. But it also is partly the mindset of the 
American people that they are just waiting until they get job-
based coverage because that is where they expect to get health 
insurance. In a culture in which people think of health 
insurance as something they own, control, and keep some 
continuity, then I think individually based tax subsidies could 
change the equation.
    Chairman Thomas. OK. The gentleman from Mississippi--from 
Louisiana. I don't know why I am trying to put you in 
Mississippi.
    Mr. McCrery. That is all right, Mr. Chairman. We love our 
neighbors in Mississippi.
    Ms. Arnett, you talked about the effect of regulation on 
cost, and you also noted a study that you did comparing growth 
rates on the uninsured in some 16 States that you defined to be 
highly prescriptive in terms of insurance regulation. Can you 
expound upon that?
    Ms. Arnett. Actually, we looked at two studies that the GAO 
had done and identified 16 States that had passed a majority of 
insurance regulations in the GAO studies. States passed these 
regulations to try to increase access to health insurance for 
those citizens through guaranteed renewal, guaranteed issue, 
community rating, portability, and other fair standard kinds of 
insurance regulations. The thing that surprised us is the 
unintended consequences that, in their genuine effort to try to 
use the tools that they had in passing laws and regulations, 
that their efforts appear to have backfired. The first year 
after all of those regulations were in effect, those 16 States 
wound up with uninsured rates rising 8 times faster than the 
other States that had not passed this package of insurance 
regulations. But it is very difficult now to do a differential 
study, because some of these provisions have been passed 
federally. The majority of those States still continue to have 
rising rates of uninsured. Despite genuine efforts to try to 
solve the problem by dictating to the market, that is not 
working, and this suggests to us that other solutions might be 
very well worth considering.
    Mr. McCrery. When you say that the number of uninsured or 
percentage of uninsured went up in these States, can you give 
us reasons why? You seem to be trying to make the connection 
between State regulation and the level of uninsured, but did 
the State regulation drive out insurers from the marketplace, 
whereby----
    Ms. Arnett. In many States--that is true, yes. In Kentucky, 
for example, I think they wound up with just a handful of 
insurers left, because they couldn't afford to provide health 
insurance. Some companies that want to provide health insurance 
in every market have found that those 16 States are the ones in 
which it is most difficult to provide affordable health 
insurance. They wind up staying in and only people who know 
they are going to use expensive health insurance wind up being 
in the pool, and you wind up with----
    Mr. McCrery. Why would an insurance company leave, say, 
Kentucky?
    Ms. Arnett. Because the regulations made the insurance so 
expensive that----
    Mr. McCrery. But aren't they in the insurance business? 
What else are they going to do?
    Ms. Arnett. Go to another State.
    Mr. McCrery. Ah, they can go to another State.
    Ms. Arnett. But, unfortunately, people can't, as you well 
point out.
    Mr. McCrery. They can sell their products in other States, 
because those other States don't have similar regulations.
    If we had a Federal regulation, though, that imposed 
nationwide, say, community ratings or guaranteed issue, would 
the effects be the same?
    Ms. Arnett. I would think so.
    Mr. McCrery. You would think so?
    Ms. Arnett. I would expect so, because community ratings--
--
    Mr. McCrery. You mean, there are not going to be any 
insurance companies left if we have a nationwide----
    Ms. Arnett. You would be moving toward a single payer 
system if you did that, ultimately, because the community 
rating is essentially a form a price control. Price controls 
have not worked for 4,000 years.
    Mr. McCrery. I don't think community rating is a price 
control. It is a price gathering mechanism, but it is not a 
price control.
    Mr. Sheils. I think----
    Mr. McCrery. Mr. Sheils.
    Mr. Sheils [continuing]. I think questions of regulation 
are more complicated than that. If you have regulations that 
drive up the cost, then, basically, the insurance industry, we 
expect some part of it to survive, and they will sell 
insurance, but it will be very high rates, and it will be kind 
of a boutique business. There won't be as many people covered 
under it as you might have had historically. We did see a lot 
of commercial insurance companies leave the State of New York 
after some of their more recent regulations.
    It is true that the grass is greener in other States where 
regulations concern, and firms will move. The thing about 
regulation in general is that all regulation probably generates 
some additional cost for consumers. You are forcing the 
insurers to do something they don't want to do. Why don't they 
want to do it? Because it is going to cost them money, and when 
that happens, your premiums go up.
    Mr. McCrery. That is true with respect to most regulation, 
but I would submit that it is not true with community rating, 
because community rating is merely a method of assessing the 
cost of the group or the pool, and if you put everybody in the 
pool, as you do in community rating, then all insurance 
companies are on a level playingfield, if you have some risk 
adjustment mechanism that is there to compensate for one 
company getting more--a greater share of the bad risk.
    Mr. Sheils. Can I respond to that, though?
    Mr. McCrery. Surely.
    Mr. Sheils. When you do community rating, one of the things 
that you are doing is leveling out the premium so that sicker 
people who were facing maybe $5,000 a year premiums, now they 
get it for $2,500. You are going to attract all those people 
into the market, but those people who are getting insurance for 
$100 a month--young people who are pretty healthy--those people 
are now going to be discouraged from buying insurance. So, you 
will change the composition of your insurance pool for sicker 
people, and that, in theory, can give you higher premium rates 
right there, which can lead to a loss of coverage.
    Mr. McCrery. Surely. Absent a mandate, you would be 
absolutely correct.
    Mr. Sheils. Right, yes.
    Mr. McCrery. I was getting to that, but my point is, it is 
not a cost to the insurance, though. The insurance company, 
their costs don't rise if you have community rating. Their 
costs rise if you mandate that they provide a certain type of 
health care coverage that they don't want to provide to 
everybody or they rise if you make insurance companies fill out 
all kinds of forms to prove that they are doing this, that, or 
the other, but they don't rise under community rating. They 
already have to rate--in fact, it might even reduce their 
costs, their administrative costs, if they don't have to 
medically underwrite all of their policyholders. So, I was just 
making that point.
    But you are right, if we don't make other reforms and if we 
don't mandate coverage, community rating would drive the cost 
up, because eventually you would have the health folks just 
saying, ``Well, it is not worth it. I will just pay out of my 
pocket.'' That is not a bad idea. Maybe we should do that. 
[Laughter.]
    Anyway, I will defer to my friend from Washington. Thank 
you all very much.
    Chairman Thomas. I thank the gentleman. Do you want to 
inquire again?
    Mr. McDermott. Yes, as long as you will let us question 
these people and keep them from their lunch. Thank you.
    We talk about regulation, and I guess I would like to hear 
your thinking about how it works, because I was in the State 
legislature when we put on two specific regulations from the 
State legislative level. One was the mandatory coverage of 
mental health care, and the second one was the mandatory 
coverage for breast reconstruction for those women who had had 
a breast removed due to cancer, and, clearly, that was done 
because--it wasn't because the legislature didn't have anything 
else to do on Wednesday. It was because there was public demand 
over this issue, so we responded to it.
    Since I have been in Congress, we have gone through the 
same thing with HMOs where we have decided that a woman who has 
a baby should have the right to stay in a hospital overnight if 
she and her doctor think so, and so we passed a law here that 
said that. We regulated it from that level.
    Is it your view that those regulations are best done up 
here as the public comes to us and demands that there be this 
change in coverage or is it better at the State level or is it 
just bad to do it at all? We should let the market take care of 
it totally and let people look at insurance policies and say, 
``Well, this covers breast reconstruction, and I might--'' 
since, in women, that is that major form of cancer, the number 
one cancer--``that I might have one, so I ought to buy a policy 
that has reconstruction in it, right?'' Is that the individual 
shopping that you are thinking about? Is that the best way to 
handle it; just leave the marketplace alone?
    Mr. Sheils. The problem with regulation, as I said earlier, 
is that it is going to involve additional cost. That doesn't 
mean it is a bad thing, and I really want to hit that. It 
doesn't mean it is a bad thing to do. We have regulations with 
automobiles. We can't even find a car without seatbelts in it. 
You have got to buy a car with seatbelts in it. We decided that 
is the way it is going to be done. The concern is that some of 
these regulations have the potential to really rob from the 
market lower cost alternatives to health insurance. Some of 
these provisions--and I think that Congress is actually not 
looking at anything that I would consider disastrously 
expensive at this point based on my read of what is around. 
There are some things that could be done which would be 
enormously expensive. Those things could generate a great deal 
of additional cost, and you would probably see a significant 
number of persons lose coverage.
    There are other things that people are talking about doing 
there which cost one-tenth of 1 percent of premium and two-
thousandths of a premium here and there. Those things often 
involve things like information, making information available 
to people, having an appeals process, and so. Those things are 
things that are much less expensive and may actually be 
beneficial systemwide. But the concern that--since we are here 
to talk about the uninsured--the concern with regulation on 
what health plans should or shouldn't do always does carry with 
it the potential for some higher cost and the potential that 
that will result in some loss of coverage. We have to balance 
that. We have to say, ``Well, everybody should have this basic 
protection with regard to breast reconstruction; everybody 
should have that, and that is all there is to it, and it is 
going to cost us more, but that is a choice that we may feel is 
appropriate. It is this whole business of trying to balance the 
two, and there is really no quantitative way of doing it. We 
can't say one is better than the other on the basis of some 
calculus you do somewhere.
    Mr. McDermott. And our choice, then, is either to make 
those regulations ourselves as Congress people or let the 
market do it and see what happens.
    Mr. Sheils. Yes, I think Congress would have to do a lot of 
this, if you felt that there was something that had to be done 
in regulating, because States have no power over self-funded 
plans with ERISA and all. Since this is something we should 
have, Congress would have to do it, but not quite let the 
market do it so it would die, but there is this concern that if 
you regulate insurance into something that is substantially 
more costly to individuals, you are really robbing people of 
the opportunity to buy a lower cost health plan.
    Mr. McDermott. My problem with this--we also went through 
the big health care reform proposal in the State of Washington, 
and we ran up against ERISA, and it seems to me, because of 
ERISA, you have to do it at the national level. I don't see how 
you can do otherwise. The insurance commissioner in the State 
of Washington covers about 40 percent of what goes on. The 
other 60 percent is behind the ERISA shield, and the insurance 
commissioner has absolutely nothing to say about it, and the 
legislature has nothing to say about it. So, it seems to me 
that all the regulation, ultimately, has to be done up here, as 
long as we allow ERISA to stand. Is that a fair estimate?
    Mr. Holahan. Yes.
    Ms. Arnett. The problem with that approach, though, Dr. 
McDermott, is the line really never ends of how many mandates 
the Congress would wind up having to put on, because whenever 
you are sick, what you need is what you need then. If there is 
not a mandate for that, people with similar problems will get 
together and ask Congress for it. With new technology, that 
line would continually grow longer, and I just don't see that 
there is ever an end to it.
    Mr. Holahan. There is a natural end to it, because it 
increases costs, which has consequence. It doesn't go on 
forever.
    Mr. McDermott. Well, thank you. You have helped us a great 
deal to understand what we don't know.
    Chairman Thomas. One of the concerns, of course, that I 
have is, if we come back to reality, and we are looking at the 
uninsured unwilling to pay whatever the costs are, either 
mandated or because they have choices and that is simply not as 
high a priority as we might place on it that they choose not 
to, is to continue to support a tax structure which allows 
employers and employees to partially negotiate what would 
otherwise have been a wage for fringe benefits which are in 
essence free, and when a fringe benefit equals a wage in terms 
of its economic impact, you would get some discipline.
    It just seems to me it would be a different world if we 
were willing to talk about a basic fundamental package that was 
covered with the tax provision, whatever it may be, and that 
all of those items that we think are desirable but not 
essential and especially effect only a portion of the 
population would be an aftertax add-on that would be available 
to individuals, that you have then at least a degree of self-
regulation--choose it if you want to--but that we from a 
society are providing a basic package universally at a cost we 
can afford.
    Of course, what you have to do is unravel U.S. history in 
health care areas since World War II and attempt to impose, for 
example, a cap on the tax credit. This Subcommittee, in the 
early eighties, attempted to do that and failed by two votes 
only of capping that credit, and I just am often amazed at how 
if the income tax structure was as disproportionately 
distributed as the health care tax credit is, some of our 
colleagues would be extremely upset of the regressive structure 
of that tax benefit. It, in fact, is true, and I would hope 
that they would be outraged by the regressive nature of the tax 
credit, but, unfortunately, there are some folks who are 
receiving a significant portion of that largesse who are in 
political alignment with some of those folks who would be upset 
if it were income, and that is why when you look for solutions 
that may in fact readily be arrived at from a structural point 
of view, the politics of it get very, very difficult.
    And for those who remained, I am in awe of Mr. Stark who 
knows the solution and simply waiting for the markup to deliver 
it. Some of us think it is slightly more difficult than that, 
and I want to thank this panel for helping us continue to 
indicate that it isn't as simple as some folks may think it is.
    The Subcommittee stands adjourned.
    [Whereupon, at 1:22 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
                              The Commonwealth Fund        
                                   One East 75th Street    
                              New York, New York 10021-2692
                                                      June 15, 1999

The Honorable Bill Thomas
Chair
Ways & Means Subcommittee on Health
U.S. House of Representatives
Washington, DC 20515

The Honorable Pete Stark
Ranking Member
Ways & Means Subcommittee on Health
U.S. House of Representatives
Washington, DC 20515

    Dear Congressmen:

    The Commonwealth Fund's Task Force on the Future of Health 
Insurance for Working Americans applauds you and the Subcommittee for 
holding today's hearing on Uninsured Americans. It is critical that the 
issue of health coverage for the uninsured is again brought to the 
attention of Congress and the American public. The Task Force looks 
forward to working with you and other members of the subcommittee as 
this issue moves ahead in the coming months and years.
    The Task Force is a new national expert panel created by The 
Commonwealth Fund, a New York-based foundation. The Task Force will 
carry out and fund cutting-edge research on solutions to the problem of 
working Americans who lack health insurance coverage. The 15-member 
panel will be chaired by James J. Mongan, M.D., President of 
Massachusetts General Hospital.
    The non-partisan expert task force--made up of individuals who are 
nationally recognized for their contributions to business, government, 
public policy, economics and/or medicine--will not advocate for 
specific solutions to the growing problem of working Americans who lack 
health care coverage. Instead, the panel will seek to accomplish the 
following two goals:
    1) Put the debate over expanding health insurance coverage back on 
the national policy agenda, and
    2) Make significant progress toward reducing the number of 
uninsured Americans and improving the quality of health insurance for 
working families.
    The Task Force will provide constructive analyses on a wide range 
of incremental ``workable solutions'' that have the potential for 
broad-based, bipartisan political support. Panel members and staff will 
endeavor to assist public policy makers working on the issue of health 
coverage for working Americans through the dissemination of thoughtful, 
fact-based analysis of policy proposals and costs.
    As you well know, federal legislative proposals to address problems 
with the employer-based health insurance system are needed, in part 
because:
     43.1 million non-elderly Americans lacked health insurance 
in 1997
     4 of 5 uninsured Americans in 1995 came from a family with 
at least one full time worker
     Working poor adults are twice as likely to be uninsured as 
are unemployed adults
    To address the current problems with the job-based health insurance 
system, the Task Force will consider workable solutions including: 
refundable tax credits or other tax subsidies for the purchase of 
health coverage; expansion to working families of subsidized health 
coverage programs including Medicaid and the state Children's Health 
Insurance Program (CHIP); programs to allow the working uninsured to 
buy-in to existing state and federal employee health plans; and 
creation of a Medicare buy-in for older, uninsured workers. The Task 
Force will also be reviewing, performing and commissioning research on 
a variety of other workable solutions.
    The Commonwealth Fund is a philanthropic foundation established in 
1918 with the mission of enhancing the common good. The Fund currently 
carries out this charge through its efforts to help Americans live 
healthy and productive lives and to assist specific groups with serious 
and neglected problems. The Fund's four national program areas are 
improving health care services, bettering the health of minority 
Americans, advancing the well-being of elderly people, and developing 
the capacities of children and young people.
    For more information please contact me, or John Budetti from the 
Task Force staff at (301) 913-0500. Or send information to 4800 
Montgomery Lane, Suite 400, Bethesda, MD, 20814.

            Sincerely,
                                  Janet Shikles            
                                         Executive Director        
                             Task Force on the Future of Health    
                                    Insurance for Working Americans
      

                                

Statement of National Association of Health Underwriters, Arlington, 
Virginia

    The Statement of National Association of Health 
Underwriters is an association of insurance professionals 
involved in the sale and service of health insurance, long-term 
care insurance, and related products, serving the insurance 
needs of over 100 million Americans. We have almost 16,000 
members around the country. We appreciate this opportunity to 
present our comments regarding the rising number of uninsured 
Americans. NAHU has had a refundable Health Tax Credit proposal 
to address the problem of the uninsured for more than a decade, 
and is pleased to have this opportunity to present the key 
components of that proposal to the members of the subcommittee. 
The NAHU Health Credit will provide a real solution to the 
problem of the uninsured in America by addressing 
affordability--the most basic component of access to health 
care.

                   Why Do We Need the Health Credit?

    The current estimate on the number of uninsured in this 
country is more than 43 million people. That number represents 
an increase from a few years ago, despite numerous state and 
federal efforts to improve access. Over half of the 43 million 
uninsured Americans are the working poor or near poor, many of 
whom already have access to health insurance through an 
employer-based plan. Since employers already provide access to 
health plans and pay a significant portion of the premiums for 
many Americans, why do we have so many uninsured? The problem 
isn't access--it's affordability. They just can't pay for it.
    This inability to pay has many causes. As we know, the 
United States government gives a tax break to people covered 
under their employer's health insurance plan. Health insurance 
premiums paid by an employer are not subject to income tax, 
even though many people consider employer-paid health insurance 
to be a part of compensation. Although this tax break has 
provided an excellent incentive for many people to become 
insured, it has also inadvertently created another problem--
lack of tax equity. When an employer pays $100 in tax-free 
health insurance premiums for an employee in a 30% tax bracket, 
it's worth $30 to that employee. To another employee in a 15% 
tax bracket, it would be worth $15, and for the low-income 
employee with no tax liability or the person who is self-
employed or otherwise has no employer-sponsored plan available, 
the tax break is worth nothing. Increased deductibility of 
health plan premiums for the self-employed has helped and will 
help more as deductibility levels are increased. But it does 
nothing for the bulk of the uninsured--the working poor with no 
or very low tax liability.
    People with no tax liability don't benefit from a deduction 
for two reasons. First, if they owe no taxes, there is nothing 
to deduct the premiums from, even if the deduction were 
available without the requirement that a person itemize. 
Second, and probably more important for the working poor, a 
deduction or even a credit which is only available at the end 
of the year might as well not be available at all, because if 
they can't get to it when their monthly premiums are due, they 
can't pay their premiums. That's why they are uninsured now.
    NAHU's tax credit is a refundable, advanceable credit, 
which means that people with no tax liability can get the 
credit monthly, when their premiums are due. This type of 
credit, advanced monthly and administered through the insurance 
company or the employer, would be simple to understand and 
almost impossible to abuse, since the insurance company or 
employer would certify that coverage was purchased. Such a 
credit would also enhance the effectiveness of COBRA's access 
mechanism by providing a means to pay COBRA premiums when 
people change jobs. Early retirees would be provided with the 
dollars that they needed to purchase a policy. And small 
employers who currently can't afford to provide a health 
insurance plan, would, with the combination of the contribution 
they are able to provide and dollars provided to employees 
through the health credit, be able to offer a group health plan 
to workers.
    Would the Health Credit disrupt the employer-based system? 
Absolutely not! We have specifically designed the Health Credit 
to be useable in an employer-based system. Most people are 
happy with the employer-based system, according to a recent 
survey by the Employee Benefits Research Institute. By allowing 
a credit to be available to all Americans, including those who 
obtain their health insurance through the employer-based 
system, we allow families to be insured together, which many 
employees prefer. Since most employers do not contribute 
towards dependent health insurance premiums, a credit which is 
not available through a plan where an employer pays part of the 
premiums would not satisfy the desire of most employees to have 
their entire family insured under one plan. Those who will 
benefit the most are the lower income employees, the working 
poor and ``near-poor'' whose employers at best pay a portion of 
the employee premium and none of the dependent premium--people 
who cannot now afford to come up with ``their share'' of health 
insurance premiums.
    NAHU spent a considerable amount of time selecting the 
dollar amount of the credit, taking great care to make the 
credit low enough so that it would not provide an incentive for 
employers to discontinue their financial contributions toward 
plans, and high enough to provide a meaningful incentive for 
people without access to an employer-sponsored plan. The amount 
of the credit is simply not large enough to cause an employer 
to stop providing coverage for employees. In addition, if an 
employee wants to use the credit ``outside'' of his or her 
employer's plan, they also leave behind the employer's 
financial contribution towards coverage. Very few employees 
would choose to use their credit on its own in the individual 
market when they could easily combine it with an employer's 
contribution to purchase in their employer's plan.
    With the recent decline in employer-provided health 
insurance along with the increase in group rates resulting from 
guaranteed issue, the number of uninsured is likely to increase 
further. Many other people have only minimal health insurance 
coverage. The lack of insurance not only limits the 
availability of health care to these people, but also, when 
pro-bono medical care is provided, results in a cost shift that 
raises insurance premiums for everybody else. The problem of 
the uninsured thus remains a major national problem that must 
be addressed.
    NAHU believes that all Americans should have access to 
affordable health insurance, and offers the Health Credit as an 
activist, innovative way to achieve insurance coverage through 
the competitive private sector.

                What the NAHU Health Credit Accomplishes

     The Health Credit will ensure that all Americans, 
regardless of income, have a basic level of resources to 
purchase health insurance.
     It creates a fair system that will enable everyone 
to obtain insurance protection, thus in essence achieving 
universal coverage, but through incentives rather than 
mandates.
     It focuses on achieving insurance security through 
the private, free enterprise system rather than through 
government programs.
     It retains the employer-based system of health 
insurance, including the ability to treat employer paid 
premiums as tax deductible business expenses, but for the first 
time equalizes the tax breaks for those who must out of 
necessity obtain insurance outside the employer-based system.
     If employers do not provide health insurance, the 
employees will be able to use the tax credit to help finance 
insurance coverage. Where employers provide only a fraction of 
the cost, employees can use the credit to help pay their share 
of the premium.
     The unemployed will have the credit available to 
help with the cost of insurance between jobs.
     Early retirees will be able to use the credit 
until they are eligible for Medicare.
     Self-employed individuals may elect to maintain 
their current tax treatment of health insurance premiums 
whereby premiums are deductible as a business expense and not 
reportable as personal income, or, they may elect to receive 
the Health Credit. If they opt for the Health Credit, they will 
receive the same business deduction for health plan premiums as 
under the current system. They will report the entire premium 
as unearned income on their personal return but no self-
employment tax will be paid on the health plan premium. 
Accordingly, self-employed individuals will be treated exactly 
like corporate employees.
     The same credit will be available regardless of 
whether a person is employed or unemployed, thus encouraging 
movement into the work force and removing the present incentive 
to stay on welfare in order to avoid losing Medicaid.
     The Health Credit, by being available only for the 
purchase of private sector insurance, will allow a shift of 
low-income individuals from the very costly Medicaid program 
into private insurance plans.

                          Eligible Population

    All American citizens would be eligible for the Health 
Credit except those in the Medicare program and participants in 
the military health plan, both of which have unique 
characteristics. There could conceivably be ways to apply the 
Credit to these groups, and NAHU would not be opposed to that 
if effective, financially supported, ways are found. NAHU 
believes that the Credit should not go to non-citizens because 
of their questionable tax status and the complexity of 
administering the Credit in such cases.

                       Size of the Health Credit

    The amount of the Credit will be $800 per adult and $400 
per child (under 18) to annual maximum of $2,400 per family. A 
two-parent family of four would therefore receive a total 
credit of $2400 annually. The Credit is a flat credit that will 
be the same for all eligible persons, regardless of income.
    The amount of the Credit will periodically change to 
reflect increases or decreases in the cost of living, as 
reflected by the medical Consumer Price Index (CPI). Changes 
will occur in $50 increments, in order to insure simplicity. 
Consequently, the Credit will be adjusted only when cumulative 
yearly CPI percentage changes exceed the level necessary to 
produce the $50 change.

                Financing the Cost of the Health Credit

    The primary source of funding results from a change in the 
tax law providing that the employer share of health insurance 
premiums (or the COBRA cost equivalent in the case of self-
insured companies) will be considered as unearned income to the 
employee, thus subject to income taxation. The Health Credit 
will in most cases, however, offset whatever the employee pays 
in the way of extra income taxes, as well as part or most of 
the cost, depending on the amount, of any premiums paid by the 
employee.
    Because the vast majority of people will gain rather than 
lose under the Credit, the revenue loss to the federal 
government from the Credit is substantially more than the 
additional revenue resulting from the increase in taxable 
income. Other funding for the Credit comes from expense 
reductions in the cost of coverage for Medicaid recipients who 
move from Medicaid and the Children's Health Insurance Program 
to the private sector, as well as a reduction in provider tax 
deductions for uncompensated care.

                    Administering the Health Credit

    One of the major advantages of the Health Credit is that it 
is a flat credit, the same for everybody, and therefore easy to 
administer. No bureaucratic calculations will be needed to 
determine the amount of the Credit based on a person's income 
level, percentage of poverty, changing economic circumstances, 
etc. It is one size fits all, with virtually everybody being 
eligible. The result is not only less administrative cost, but 
also less likelihood of fraud resulting from people trying to 
``game'' the system. There is nothing to ``game.''
    With regard to the payment of the Health Credit, the 
Department of the Treasury will have primary responsibility for 
overall administration. The Credit, while owned by the 
individual, will not be paid directly to the individual, but 
will be transmitted to an insurance company, employer, or other 
organization maintaining the individual's insurance account. 
The Credit may be used only for the payment of private 
insurance premiums, and may not exceed the total cost of the 
premiums. The Credit may also be deposited in a third-party 
administered medical savings account that includes catastrophic 
insurance coverage. Only health plans eligible as creditable 
coverage under the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA) will be eligible for Credit 
payment.
    The Treasury will maintain a computerized record of the 
amount of eligible Credit for each individual, or family, 
updated on a monthly basis. The Credit will be determined on a 
monthly prorated basis, in order to ensure the continuing 
availability of Credit funds throughout the year, particularly 
in cases of job change, and to help protect against fraud.
    In cases of employer-provided insurance, the Health Credit 
allocation can be handled as part of the regular withholding 
process. The Credit would be shown as a specific line item on 
the pay stub. Federal income taxes withheld by the employer on 
behalf of employees would be reduced by the amount of the 
Credit before being sent to the government. The employer's 
share of the insurance premium would be considered as 
additional unearned income to the employee, on which income 
taxes (but not social security taxes) would be paid. The 
employer would withhold these taxes at the regular marginal 
withholding rate for that employee.

                      How the Health Credit Works

    If a health insurance policy provided by the employer has a 
total monthly premium of $400, with the employer paying 50% 
($200) and the employee 50% ($200), the employee would, under 
the Health Credit plan, pay a federal income tax on the $200 
employer share of the premium which, as unearned income, in the 
15% tax bracket, would amount to $30 a month. If the employee 
has a family of four, the monthly Health Credit of $200 ($2400 
annually) would fully cover the increased taxes, and most of 
the balance of the insurance premium.
    The net effect would be that the employee in this example, 
instead of paying a $200 monthly premium, would in essence pay 
only a $30 premium under the Health Credit plan. If the 
employee is in the 28% marginal tax bracket, the extra monthly 
tax would be $56, leaving $144 under the Credit, after payment 
of the tax, to go toward the employee's insurance premium. Even 
in the top 39% bracket, with an increased tax of $78, this 
employee would come out ahead.
    In another example, if the employer pays no portion of 
health insurance premiums, the employee would have available 
the entire $200 credit per month to offset what he or she has 
to pay for insurance elsewhere.
    If the employee or anyone else does not choose to purchase 
insurance, they would not receive the Credit. The amount of the 
credit if insurance is purchased is the lesser of the premium 
paid or the maximum eligible credit. There is a strong 
incentive, in other words, to purchase insurance and in an 
amount at least up to the level of the Credit. Most people 
would not want to give up something from the government without 
getting anything in return.

             Impact of the Health Credit on the Individual

    The Health Credit is a fair credit in that it is the same 
for everybody. Everyone is treated equally. At the same time, 
those in low-income categories receive a greater proportional 
benefit than those in high-income categories. A $2400 Credit 
for a family earning $15,000 represents a 16% increase in 
income, whereas such a Credit for a family in the $100,000 
income category is just a 2.4% increase. Likewise, if in these 
two cases both families receive the same insurance policy 100% 
paid for by the employer, in the first case the tax for the 
family on the employer-paid premium would likely be zero or 15% 
at the most, while the tax for the latter family would be at 
least 28%. In most income categories, people will come out 
ahead under the Health Credit compared to where they are today.
    At the end of the year, if an individual determines that s/
he would have been better off under the current tax exemption 
system, s/he may amend his or her tax return and take the value 
of the current exemption instead of the Health Credit. Those 
who have a Section 125 Plan through their employer can still 
take advantage of their employer's Section 125 Plan for FICA 
savings and for other, non-health insurance premiums and 
benefits.

              Impact of the Health Credit on the Employer

    Under the Health Credit, the employer would retain the 
business tax deduction for whatever the employer provides in 
the way of health insurance or other health care coverage. 
Furthermore, employer-paid premiums that will be treated as 
unearned, taxable income for the employee will not be subject 
to the FICA tax for the employee or employer, nor will they be 
treated as additional payroll income and thus subject to 
various state payroll taxes, such as unemployment, workers' 
compensation, etc. So the firm will have the same incentive it 
has now to finance the cost of insurance.

              Health Economic Impact of the Health Credit

    A tax credit for the purchase of insurance will make it 
possible for many more people to obtain insurance. By doing so, 
it would help to lower the per capita cost of insurance. It 
would do so in two ways: by reducing the amount of 
uncompensated care that is offset through cost shifting to 
private sector insurance plans, and by substantially increasing 
the insurance base, spreading the cost over a wider number of 
people. The credit will also encourage insurance companies to 
write policies more geared to the size of the credit, thus 
offering more options and making it possible for low income 
families to obtain coverage without paying much more than the 
credits available.

                                Summary

    NAHU's Health Credit represents a simple and realistic way 
to extend private health insurance coverage to the uninsured 
and underinsured. It will help many other Americans with the 
cost of their existing insurance coverage. Unlike some tax 
credit proposals, the NAHU credit strengthens the employer-
based health insurance system. It is fair and is easy to 
administer. It is a private sector solution to a difficult 
problem. It gives people the tools to make their own decisions.
    With all the talk today of Patient Protections, we seem to 
have forgotten the most important protection of all--the 
ability to afford coverage. Access and choice can't exist 
without the dollars required to buy a health plan. It's time 
now for Congress to step up to the plate and reshape the 
current tax system to benefit all Americans in the form of real 
access to health care --the dollars to pay for it.
      

                                

Statement of Private Citizen, St. Louis, Missouri

    The passage of the Health Insurance Portability and 
Accountability Act is a commendable step in improving access to 
health insurance and reducing job lock. While improving access 
to insurance, it does nothing to ensure affordable rates, if an 
individual must switch to individual insurance, after having 
developed a health condition under an individual plan. Further 
reform is needed to ensure that responsible citizens who carry 
health insurance will be able to retain affordable coverage 
over the long term if they should become ill.
    This proposal is divided into the following sections:

    Problems with the Current System of Health Insurance
    The Core Reform Proposal
    Cost Issues Related to the Core Proposal
    Other Comments about the Core Proposal
    Additional Reforms Needed
    Cost Issues Related to the Additional Reforms

    Problems with the Current System of Health Insurance:

                          Portability Problems

    --The Health Insurance Portability and Accountability Act 
(HIPAA) does nothing to ensure affordable rates, if an 
individual must switch to individual insurance, after having 
developed a health condition. Individuals may be exposed to 
extremely high premiums.

             Other Problems Concerning Individual Insurance

    --If an individual becomes ill under an individual policy, 
their rates can be raised or their policy canceled.
    --Insurance companies should not be allowed to move 
individual policy holders from one internal risk group to 
another so that they can increase individual premiums on some 
groups of their policy holders due to claims. I have heard from 
some insurance agents that this practice may occur under some 
policies without the knowledge of policy holders.
    --When one insurance company takes over another insurance 
company, the individual policy holders need to be protected 
from behind the scenes risk class manipulations, and other 
detrimental changes to their policy.
    --Insurance companies have sometimes deliberately failed to 
send a renewal notice to sick policy holders, hoping they would 
forget to renew their policy.
    --There should be a guarantee that parents can obtain 
insurance for a child born with health problems or birth 
defects. Or at least, considering the principle that one 
ordinarily buys insurance prior to the risk, parents should be 
about to buy the insurance for the child during pregnancy 
without health considerations.

                  Problems Concerning Group Insurance

    --HIPAA provides protections for employer group policies 
and not other types of groups, such as alumni associations, 
professional and trade organizations, etc.
    --HIPAA does not prevent an insurer from raising the 
premium on a group due to claims from its members.
    --When an employer self-insures health of its employees, 
the employer should be subject to any regulations that would 
effect insurance companies offering a similar policy, including 
any applicable consumer protections and liability, if the plan 
is of HMO style. The ERISA provisions that release employers 
and their HMO's from liability can harm the employee.

             Problems Concerning Leaving an Employer Group

    --The current guaranteed ability for employees to convert 
their existing group policy to an individual policy on leaving 
the company is often too expensive, and sometimes reduces the 
coverages, if the original policy had riders for some of its 
coverages.
    --A group policy may not always continue its riders when 
used under COBRA. Riders such as prescription drug coverage 
should continue.
    --COBRA places a responsibility on the employer to continue 
insurance, but the insurance company is not required to carry 
COBRA customers, sometimes leaving an employer to his own 
devices to determine how to provide the ex-employee with 
insurance. If the employer cannot meet the responsibility, the 
ex-employee patient may be unable to use HIPAA to get an 
individual policy because he did not do COBRA first. This 
places both the employer and patient in an unfair bind.
    Insurance companies have delayed the application process of 
HIPAA applicants to cause them to run out their 63 day 
eligibility period, in order to avoid covering them.

                             Other Problems

    --Coverage disputes with HMO's need to involve an 
independent third party in the appeals hearing.
    --The problems regarding health insurance stem partly from 
the federal income tax code, which encouraged the practice of 
associating health insurance with employment. The tax code is 
inconsistent in that employer health insurance is tax free, 
while individuals who buy their own insurance pay taxes on 
income used for this purpose, except if they are self employed, 
then there is partial tax deductibility.
    --Many insurance companies and agents refuse to send a 
sample insurance policy. This makes shopping for all types of 
insurance more difficult.

The Core Reform Proposal:

    The following provisions would solve what I believe are 
some of the worst problems of the health insurance system:
    --To make health insurance more portable (e.g. to better 
allow transitions to situations of self employment, jobs that 
don't offer health insurance, or leaving the workforce), a 
person who developed a condition while under a health insurance 
policy (group or individual) would be able to move to a new 
individual policy and pay the same rate and be underwritten in 
the same class or group of policies as a healthy person of the 
same age, sex, and smoking status, in addition to avoiding the 
delay for coverage of pre-existing condition.
    --A person would retain this protection through multiple 
policy changes over a lifetime, as the insurance industry 
offerings evolve. This protection is important if a person has 
individual insurance and loses it or becomes dissatisfied 
because the insurance company ceases service in the area, goes 
bankrupt, discontinues or changes the product an unsatisfactory 
manner, is merged or taken over by another insurance company, 
or the individual cannot afford the premium and needs a lower 
cost plan whether offered by the original insurer or a 
competitor.
    --These protections would apply whenever an individual does 
not have a break in coverage longer than 63 days since their 
prior period of insurance coverage. To prevent this time limit 
from being wasted by stonewalling insurance companies, the 63 
days should be counted backward from the date of application 
for new insurance, and insurance companies must process 
applications in a timely manner.
    --These insurance protections should apply to allow insured 
young adults to transfer from a parent's health insurance plan 
to their own insurance, regardless of health and for Senior 
Citizens to transfer between Medicare Supplement policies and 
HMO's and vice versa.
    --For those who have had a gap exceeding 63 days, insurance 
companies would be free to use a separate risk group and higher 
prices, based on health history, in order to protect the system 
from people who wait until they are sick to purchase insurance.
    --The use of standard risk class for these insurance 
transfers may imply some minimal protection, even if the law to 
allow them is later repealed, as any individual policy obtained 
by these guidelines would be an ordinary individual policy, 
rather than a separate product or risk class, as now created by 
HIPAA, which could be priced or discontinued separately.
    --Insurance companies would not be allowed to move 
individual policy holders from one risk group to another so 
that they can increase individual premiums on some persons. 
Individual premiums should be based solely on age, sex, smoking 
status, geographic location (a broad-brush division of the 
state into several areas), and health history (only if 
individual has had a gap in coverage of 63 days or longer 
immediately prior to the application date). Individual 
experience rating should be prohibited, to prevent rate 
increases resulting from a decline of health during coverage.
    --The guaranteed acceptance into a group policy for a new 
employer would be extended to all groups that a person is a 
member of for which health insurance is sold (Alumni 
associations, professional and trade organizations, etc.). For 
example, if an Alumni association offers group health insurance 
to graduates of a particular school or university, it would 
have to take all graduates of that school and not impose delays 
or higher premiums for pre-existing conditions (subject to the 
63 day gap rule).
    --Insurance companies would not be allowed to raise the 
premium on a group policy due to change in health of existing 
members.

Cost Issues Related to the Core Proposal:

    --The approach of providing total portability only when an 
individual has prior coverage is superior to a simple total ban 
on health history questions and pre-existing condition 
considerations, as it requires a person to have had insurance 
to receive the protections, thus protecting the system against 
abuse by people waiting to get insurance until they are sick.
    --Imposing this protection only in cases where the person 
had prior coverage should minimize any resulting increase in 
the cost of individual health insurance, as the total cost 
borne by the industry in claims should not be strongly impacted 
if a chronically ill person moves from one policy to another, 
as that person would not move now if he could not get 
satisfactory coverage. (It may be necessary to require that the 
policies be similar, to prevent a dramatic, abusive upgrade in 
coverage at standard prices after a person becomes ill. It 
would also be necessary to allow transfer to a slightly better 
policy sometimes, to prevent a long term erosion toward 
inferior coverage for people who become chronically ill for 
decades and go through several insurers.)
    --A reinsurance pool could be used by insurance companies 
to protect themselves from the risk of a disproportionate 
number of transfers of sick persons to their policies, but this 
pool should be invisible to the consumer.
    --Due to the provision against raising group premiums, 
there may be some small increases in the cost of group 
insurance for the more healthy groups that would take place 
instead of sharp increases in the cost of group insurance for 
groups that have one or more unhealthy members. This is a good 
thing, as it make insurance do what it was intended to do--
spread the risk.
    --The Core Proposal will require no public funds other than 
those used to monitor insurance companies and enforce the 
rules.

Other Comments about the Core Proposal:

    --These protections would help responsible self employed 
and small business owners/employees who have maintained health 
insurance, as they could obtain individual insurance at an 
affordable price.
    --The COBRA problems would disappear, as COBRA would fall 
into disuse due to the new better options.
Additional Reforms Needed:

    The following provisions would make a more complete reform, 
but are outside what I consider to the be core proposal:
    --For the poor, Medicaid should be considered a qualifying 
insurance for purposes of allowing purchase an individual 
policy when a period of poverty ends.
    --There should be a guarantee that parents can obtain 
insurance for a child born with health problems or birth 
defects. Or at least, considering the principle that one 
ordinarily buys insurance prior to the risk, parents should be 
about to buy the insurance for the child during pregnancy 
without health considerations.
    --One should be able to purchase health insurance in a 
standard risk class upon reaching adulthood, regardless of 
whether the parents maintained insurance during childhood, e.g. 
to not hold the young adult responsible for mistakes of his or 
her parents.
    --Many insurance companies and agents refuse to send a 
sample insurance policy. The text of all insurance policies of 
all types should be a part of the public record to aid shoppers 
for insurance. The text of policies can be shown on the World 
Wide Web (WWW) at minimal cost to the public and/or insurance 
companies may be required to make the sample policies available 
at their cost.
    --The inconsistent tax treatment of health insurance 
premiums should be corrected to reduce this unfairness in the 
tax code. Regulations regarding the deductibility of health 
insurance premiums should not vary depending on whether 
premiums are paid by employer, employee, self-employed 
individual, or non worker. But it would be dangerous to 
implement the tax change without the other reforms, as some 
employers would drop insurance, and many sick people would then 
have inadequate protection.
    --Lifetime policy dollar limits should be prohibited, or at 
least required to be indexed for inflation using a health care 
index, or perhaps insurance companies should provide a choice 
of several indexed dollar limits, much as a policy buyer 
chooses a deductible. Perhaps a minimum dollar limit should be 
considered.
    --When an employer self-insures health of its employees, 
the employer should be subject to any regulations that would 
effect insurance companies offering a similar policy, including 
applicable HMO consumer protections, if the plan is of HMO 
style.
    --When one insurance company takes over another insurance 
company, policyholders of the old company should have the 
option of keeping the original terms of their policy.
    --Insurance companies should be required to send bills and 
renewal notices to all policy holders in a timely manner. They 
should provide the option to the policy holder to have their 
bills sent by certified mail return receipt requested for an 
extra billing fee equal to the additional postage. If a policy 
holder chooses this option, then the insurance company shall be 
forbidden to cancel the policy for nonpayment of premium for at 
least 30 days after the day the bill is sent, or 30 days after 
the renewal date, whichever is later, and then only if they 
have the card back that the bill was received. This provides 
the customer the option to make it the insurance company's 
legal obligation to remind them of their premiums via a bill 
and to ensure that the bill must be received. If certified mail 
billing is not chosen, cancellation should not occur before 30 
days after the renewal date.

Cost Issues Related to the Additional Reforms:

    --The provisions for children and transition to adulthood 
may require public funds or the cost may be spread out in 
higher premiums for everyone or higher premiums for child and 
young adult policies.
    --If sample policies are to be shown on a government 
operated web site, there would be some costs for web 
development services to create and maintain the site.
    --The tax provision may have a cost, or may raise revenue, 
depending on whether all premiums are made deductible, 
partially deductible, or taxable.

                                   - 
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