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76–496 2012

SMALL BUSINESSES AND PPACA: IF THEY LIKE 

THEIR COVERAGE, CAN THEY KEEP IT? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTHCARE AND 

TECHNOLOGY 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD 

JULY 28, 2011 

Small Business Committee Document Number 112–029 

Available via the GPO Website: www.fdsys.gov 


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(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

ROSCOE BARTLETT, Maryland 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

CHUCK FLEISCHMANN, Tennessee 

JEFF LANDRY, Louisiana 

JAIME HERRERA BEUTLER, Washington 

ALLEN WEST, Florida 

RENEE ELLMERS, North Carolina 

JOE WALSH, Illinois 

LOU BARLETTA, Pennsylvania 

RICHARD HANNA, New York 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

MARK CRITZ, Pennsylvania 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

JUDY CHU, California 

DAVID CICILLINE, Rhode Island 

CEDRIC RICHMOND, Louisiana 

GARY PETERS, Michigan 

BILL OWENS, New York 

BILL KEATING, Massachusetts 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, General Counsel 

MICHAEL DAY, Minority Staff Director 


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C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Renee Ellmers ................................................................................................. 1 

Hon. Cedric Richmond ............................................................................................. 2 

WITNESSES 

Mr. Steven B. Larsen, Deputy Administrator and Director, Center for Consumer Information and Insurance Oversight, Centers for Medicare and 

Medicaid Services, Washington, DC ................................................................... 4 

Dr. Douglas Holtz-Eakin, President, American Action Forum, Washington, 

DC .......................................................................................................................... 10

Mr. Brian Vaughn, President, Nearly Famous, Inc., Douglas, GA ...................... 13 

Mr. William Dennis, Jr., Senior Research Fellow, National Federation of 

Independent Business, Washington, DC ............................................................ 15 

Mr. Timothy Stoltzfus Jost, Robert Willett Family Professor of Law, Washington and Lee, University College of Law, Lexington, VA ............................. 16 

APPENDIX 

Prepared Statements: 

Mr. Steven B. Larsen, Deputy Administrator and Director, Center for 

Consumer Information and Insurance Oversight, Centers for Medicare 

and Medicaid Services, Washington, DC .................................................... 31 

Dr. Douglas Holtz-Eakin, President, American Action Forum, Washington, DC ..................................................................................................... 40 

Mr. William Dennis, Jr., Senior Research Fellow, National Federation 

of Independent Business, Washington, DC ................................................. 55 

Mr. Brian Vaughn, President, Nearly Famous, Inc., Douglas, GA .............. 57 

Mr. Timothy Stoltzfus Jost, Robert Willett Family Professor of Law, 

Washington and Lee, University College of Law, Lexington, VA ............. 67 

Questions for the Record: 

Chairwoman Ellmers Questions for Larsen ................................................... 78 

Chairwoman Ellmers Questions for Jost ........................................................ 81 

Answers for the Record: 

Larsen Answers for Ellmers ............................................................................ 83 

Jost Answers for Ellmers ................................................................................. 95 

Additional Materials for the Record: 

‘‘Health Reform’s Grandfathering Rules Likely to Raise Costs,’’ by Judith 

Messina; Bloomberg News ........................................................................... 102 

‘‘Small-Business Health Care Tax Credits Are Having a Miniscule Impact,’’ by Salley Pipes; Forbes ...................................................................... 104 

‘‘Healthcare Law Could Leave Families with High Insurance Costs,’’ by 

Julian Pecquet; The Hill ............................................................................... 106 

Associated Builders and Contractors, Inc. Letter for the Record ................. 108 

American Bankers Association Letter for the Record ................................... 110 


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SMALL BUSINESSES AND PPACA: IF THEY 

LIKE THEIR COVERAGE, CAN THEY KEEP IT? 

THURSDAY, JULY 28, 2011 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HEALTHCARE AND TECHNOLOGY, COMMITTEE ON SMALL BUSINESS, Washington, DC. 

The Subcommittee met, pursuant to call, at 10:05 a.m., in room 

2360, Rayburn House Office Building, Hon. Renee Ellmers (chairwoman of the Subcommittee) presiding. 

Present: Representatives Ellmers, King, Richmond, and Altmire. 

Also Present: Representative Kingston. 

Chairwoman ELLMERS. All right. We are going to go ahead and 

get started. Good morning to everyone, and I call the hearing to 

order. 

I want to thank the witnesses on both panels. We will have two 

panels today who are testifying, and we certainly appreciate their 

attendance and participation in this important Subcommittee hearing. 

Although the health care law won’t be fully implemented until 

2014, businesses are already feeling the effects. A study released 

this week by the National Federation of Independent Business 

found that small firms are worried that the law could lead to higher taxes, more administrative burdens, and bigger budget deficits 

without lowering costs or making Americans healthier. 

Under the law, many small business owners will be required to 

offer coverage to their employees or pay a penalty. And the small 

business tax credit that has been touted to offset the cost of health 

insurance is, in reality, a temporary and a narrow one, where the 

full credit applies only to the smallest of businesses. 

If your firm has more than 25 employees, you are one of the 23 

million self-employed, you qualify for no credit whatsoever. 

We have heard small businesses are concerned that regulatory 

requirements on insurers, such as the medical loss ratio, may drive 

some carriers out of the market, resulting in fewer options and premium hikes. Small firms are uncertain about whether they will be 

able to continue offering coverage; if so, at what cost; and if not, 

what their penalties will be and what the coverage will cost taxpayers. 

This is all while our economy is still very fragile, an economy 

that is adding fewer jobs than forecast, and still has a high unemployment rate. In this environment, it is not surprising that small 

business owners continue to be hesitant to create jobs, expand or 

invest. And there are more regulations ahead. 


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During the health care debate, one of the most repeated assurances was that if you like your current health care coverage, you 

would be able to keep it. However, for a number of reasons, a small 

business may be driven out of its current plan. 

The Department of Health and Human Services predicts that 

over half of all employers and up to 80 percent of small firms may 

relinquish grandfather status by 2013. This means that small business owners and workers may be forced to switch to higher-priced 

plans or drop insurance altogether. 

Although the goal of the health care law may have been to make 

health care insurance more accessible, its taxes, mandates, regulations, and administrative burdens are causing many small businesses, our best job creators, to postpone hiring and expanding. 

Again, I thank the witnesses who are here with us today for participating. I look forward to hearing their input on how we can help 

to reduce the impact of some of the health care law’s uncertainty, 

mandates, regulations and requirements for our small businesses. 

I now yield to Ranking Member Richmond for his opening statement. 

Mr. RICHMOND. Thank you, Madam Chairwoman. Thank you for 

yielding. 

Today’s hearing will focus on the health insurance landscape for 

small businesses since the passage of the health care bill. 

Currently, employers are the principal source of health insurance 

in the United States, providing benefits for more than 158 million 

people. Given the role of business in providing insurance, two questions have been raised about the Affordable Care Act. First, will 

small firms be able to keep existing health plans and, equally important, how will the Affordable Care Act affect small firms’ decision to offer coverage? These are the questions we will address 

today. 

Small businesses face numerous challenges when choosing a 

health plan. This includes making tough choices about coverage, 

benefits, which physician should be part of the insurer’s network 

and what co-pays should apply to services. 

Yet with all these challenges, cost remains the greatest barrier 

to coverage. According to one report, over the last decade health insurance premiums have increased 113 percent. 

The Affordable Care Act was enacted to lower costs and create 

more quality health care choices. Still, the legislation has not been 

without its critics. Some have argued that small firms will not only 

lose their ability to keep their plan, but most will drop coverage altogether. We will hear from the administration and witnesses on 

both of these issues. 

One, on the matter of retaining current health plans, CMS has 

issued regulations outlining how firms can maintain so-called 

grandfather status. The regulation provides latitude for firms to 

provide changes because of rising prices. It also clarifies for firms 

what they need to do to keep their plan despite ACA changes. 

While protecting small businesses’ ability to retain plans is important, the reality is many firms will make changes. Historically, 

small firms change plans due to rising prices or different benefit 

needs. Now, small firms will be afforded better service and choice 

when choosing a new plan. 


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The Affordable Care Act not only creates new incentives but 

maintains laws that encourage employers to purchase insurance. 

Most notably, the employer-provided benefits remain tax free and 

employees can still pay premiums on a pretax basis. And since 

2010, small firms have been eligible for a new health insurance tax 

credit. 

One of my constituents, Ms. Verna Williams, owner of Nola 

Health Care LLC, provides a great example of how firms are using 

this successfully. She owns a private health clinic in New Orleans 

and was able to avail herself of the new tax credits. Now, all 12 

of her employees have health care coverage, and she said she was 

very pleased with the new health care legislation and its benefits 

for her employees. 

In addition to the incentives, insurance reforms are already on 

the books that benefit small firms. No longer can insurance companies discriminate based on preexisting conditions or raise premiums without adequate justification. 

Again, starting in 2014, private health insurance exchanges will 

create a virtual market for buying insurance. Exchanges will provide another option and enhance competition, something lacking in 

the small-group market. 

With all these changes, what will all of these changes mean for 

small businesses? One study predicted that employer-sponsored insurance could shrink by over 20 percent. However, others, such as 

those by the RAND Corporation and the Robert Wood Johnson 

Foundation, found that small firms would increase coverage. 

This hearing will give members of the Committee the opportunity to discuss the Affordable Care Act and its implementation. 

Ensuring that small firms can keep their plan, while making coverage more affordable, is critical. 

I want to thank Director Larsen and the witnesses that have 

taken time out of their busy schedules to be here today. I look forward to hearing from you all. 

With that, I yield back, Madam Chair. 

Chairwoman ELLMERS. Thank you, Mr. Richmond. 

Chairwoman ELLMERS. As you can see, some of our other Committee members have not arrived yet, but I will state for the record 

that if they have any opening statements they can submit that for 

the record. 

I would like to take a moment just to explain the timing the 

lights. You will have 5 minutes to deliver your testimony. The 

lights will start out as green. When you have 1 minute remaining, 

the light will turn yellow. Finally, it will turn red at the end of 

your 5, minutes and I ask you to try to adhere to your 5-minute 

time limit. 

You have the button there to push to speak into the microphone. 

Our first witness is Mr. Steve Larsen, who is director of the Center for Consumer Information and Insurance Oversight, or the 

CCIIO, with the Centers for Medicare and Medicaid Services. Prior 

to his current position, Mr. Larsen served as director of the Division of Insurance Oversight at CCIIO. 

Welcome, Mr. Larsen. You will have 5 minutes to present your 

testimony. Thank you. 


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STATEMENT OF STEVEN B. LARSEN, DEPUTY ADMINISTRATOR 

AND DIRECTOR, CENTER FOR CONSUMER INFORMATION 

AND INSURANCE OVERSIGHT, CENTERS FOR MEDICARE 

AND MEDICAID SERVICES, WASHINGTON, DC 

Mr. LARSEN. Good morning, Chairwoman Ellmers and Ranking 

Member Richmond and members of the Subcommittee. Thank you 

for the opportunity to discuss how the Affordable Care Act is improving the affordability, the accessibility, and the quality of health 

insurance available to small businesses and their employees. 

Providing and maintaining health insurance coverage for employees has been a challenge for small businesses for many years. 

States have struggled for decades, really, to improve their smallgroup health insurance market, and I know this from my many 

years of experience as insurance commissioner in the State of 

Maryland. 

Small businesses pay significantly more than large firms for the 

same health insurance policies. Some estimates put that at about 

18 percent more. There are a number of reasons for this. Small 

businesses lack the purchasing power that large employers have, 

administrative costs for insurers in handling small businesses are 

much higher than for large businesses. Small businesses often 

don’t have the human resources staff to navigate through the difficult process of choosing between health plans. 

Prices for insurance for small businesses can be more volatile, 

due to the smaller risk pool, compared to large businesses, and employees in small businesses are subject to medical underwriting in 

many States. So this means that the rates that small businesses 

are charged can spike if just a single employee becomes very ill. 

The Affordable Care Act addresses these challenges in the market 

and helps close the gap between small- and large businesses’ ability to offer health insurance to their employees. 

First, starting in 2014, small businesses will be able to reduce 

administrative costs and pool their buying power by purchasing insurance through the exchanges. The exchanges are State-based, 

competitive marketplaces for buying private health insurance. 

Small businesses will be able to buy health insurance through a 

part of the exchange called the SHOP. 

SHOPs will give small businesses and their employees many of 

the advantages of large employers that large employers have today, 

such as more choice, more competition, and more clout in the marketplace. These SHOP exchanges are a one-stop shop where small 

businesses and their employees will be able to easily compare 

health plans, get answers to questions, and then enroll in highquality health plans that meet their needs. 

Health plans that participate in the State exchanges will compete for business on the basis of price and quality, and this type 

of market competition has the power to drive improvement in both 

plan quality and affordability. 

We recently issued draft regulations which will provide States 

the flexibility to provide small employers with a range of options 

on how the employers offer coverage to their employees. For example, a small business participating in the SHOP exchange may 

choose a level of coverage and a level of contribution towards that 

coverage, and then employees will choose among the health plans 


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available on the exchange within that level of coverage offered by 

their employer. Or, employers may provide to their employees a 

broader range of options, such as shopping for any level of coverage 

among competing health plans. 

Under the proposed regulations, the employer would write a single check to the SHOP, reducing administrative burdens. The 

SHOP, as a premium aggregator, would handle the administrative 

functions that can burden the small business owner. SHOPs will 

simplify the employee decisionmaking process by providing side-byside comparisons of health plans’ premiums, benefits, and cost 

sharing. Not only will the Affordable Care Act benefit small employers by enabling them to pool their buying power, it will also 

protect them from premium spikes caused by an employee’s illness. 

Beginning in 2014, the ACA prohibits new health plans from rating on the basis of health status or claims history. In addition, the 

law limits how much insurers can increase rates based on employees’ ages. These new rating limitations will help make small businesses’ health insurance rates fairer, more predictable, and easier 

to understand. 

In addition, limits on health plans’ medical loss ratios will also 

save small businesses money, as insurers that fail to meet the 

MLR standard will provide rebates. 

Finally, the law established a small business tax credit that is 

making health coverage more affordable for small businesses. The 

tax credit is designed to encourage both small businesses and taxexempt organizations to offer health insurance coverage to their 

employees for the first time or to maintain coverage that they already offer. 

Small businesses are already benefiting from the Affordable Care 

Act and those benefits will expand dramatically as the ACA continues to take effect. 

Thank you for the opportunity to appear before you today to discuss the Affordable Care Act’s critical provisions to support small 

businesses’ ability to offer health insurance to their employees. 

Chairwoman ELLMERS. Thank you, Mr. Larsen. 

Chairwoman ELLMERS. And I will begin the questioning. 

Generally, grandfathering should allow you to keep the coverage 

you had when the health reform law was enacted, with some exceptions. The June 17, 2010, and November 17, 2010, rules on 

grandfathering list several changes that disqualify a plan from 

being grandfathered. 

The rules seem to leave open whether other changes will be disqualified, and leave open the possibility of additional administrative guidance, to explain how plans must comply to continue to be 

grandfathered, I am wondering how can small businesses count on 

grandfathering if the guidance is vague and the rules may change 

as we go along? 

Mr. LARSEN. Sure. Well, as you point out, we put out the initial 

interim final rule back last summer, which laid out kind of broad 

categories in which small businesses and health insurers have 

flexibility to alter some provisions of their health coverage, but not 

so much that it really changes the fundamental nature of the coverage. 


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We received and have reviewed various comments on many aspects of that regulation. We did, in fact, amend the interim final 

rule to provide actually more flexibility to businesses and small 

businesses to maintain their existing coverage by allowing them to, 

for example, switch carriers. If they wanted to switch carriers, if 

they thought they could get a better deal. 

So, in fact, although we have amended the initial guidance that 

we put out last summer, we have done so in a way that really provides more flexibility to small businesses and to the health insurance issuers that provide that coverage. 

Chairwoman ELLMERS. I have another question for you at this 

time. Small businesses are concerned about the possible mandates 

in the health care law’s minimal essential benefits package. Because many new services, treatments, are likely to be required, the 

cost of premium is also likely to increase. 

What can you tell us about the Institute of Medicine’s forthcoming recommendations on the essential benefits package? 

Mr. LARSEN. Well, I can’t tell you much about what they are 

going to say. We haven’t received their recommendation. But if I 

could just summarize the process that we will follow, and I would 

add that we are, I think like you, very aware and tuned into the 

need to make sure that the package of essential health benefits is 

an affordable package. 

There is kind of a multistep process that we are following at 

HHS. The first step was that the Department of Labor performed 

a survey of employers to gauge what were the typical benefits that 

are offered in employer-sponsored coverage today, and we have got 

that survey. That has been published. 

The Secretary also, as you point out, did ask the Institute of 

Medicine to recommend to us methodologies or ways to think about 

how we should define the package of essential health benefits. But 

I do want to be clear, because I know there has been some confusion on this. The IOM is not the body that will be charged with 

defining what that list is. That is left to the HHS, and we will do 

that. And I think we have announced previously that our objective 

is to have that guidance out sometime this fall. We know there is 

a lot of interest in that, both in the States and among businesses 

and among insurers, so we are hoping to get that guidance out this 

fall. 

Chairwoman ELLMERS. So basically you do anticipate that there 

will be additional administrative guidance on the grandfathering? 

Mr. LARSEN. Well, on the essential health benefits, yes. On the 

grandfathering, I can’t speak to that at this point. I don’t think we 

are anticipating anything, but we continue to review these, and as 

they need to be tweaked and improved, if that need arose, then we 

would look at that as an opportunity. 

Chairwoman ELLMERS. Okay. I now yield to Congressman Altmire for his questions. 

Mr. ALTMIRE. Thank you, Madam Chair. 

Director Larsen, thank you for being here. Economists, like Dr. 

Holtz-Eakin, who we are going to hear from shortly, have predicted 

that the employer mandate will lead to dramatic declines in employer-sponsored coverage, as you well know. 


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In your view, will most small firms drop their coverage or simply 

pay the penalty? And what do you expect they will—do you expect 

that they will continue providing health care to their workers? 

What do you expect the outcome will be? 

Mr. LARSEN. We do expect small employers to continue to offer 

employer-based coverage. It is really a cornerstone of our economic 

system, of our employer-based insurance system. 

If you look at a number—and I know there are a number of different studies out there, but if you look at, for example, the RAND 

analysis or the Urban Institute—there are those two—for example, 

I think predicted significant increases in the offer rate, not decreases but increases. 

For example, RAND predicted that you would see an increase for 

very small businesses. I think, for example, less than nine, nine or 

less employees, from about 50 percent today to about 70 percent in 

the future under the ACA, and its numbers were similar for The 

Urban Institute. 

Mr. ALTMIRE. And regarding the medical loss ratio in particular, 

as you know, the ACA requires insurance companies to spend at 

least 80 percent of their premiums they collect on medical care. 

What will this mean for small firms and how will it affect the cost 

of coverage, in your view? 

Mr. LARSEN. The medical loss ratio provision of the ACA is a 

very important provision and helpful provision to small businesses 

and individuals because it applies to individual purchasers as well. 

It helps to provide value to small businesses when they are paying 

their insurance premiums by ensuring that issuers are not spending inordinate amounts on administrative expenses. So it drives efficiency in the issuers for the insurance company, and that creates 

value for the premium dollars that small businesses are paying. 

Mr. ALTMIRE. Now the companies would argue that it doesn’t just 

drive efficiency, they might dispute that on its face, but they also 

would say that it is going to drive small insurers out of the health 

insurance market entirely. 

Do you have a response for that? 

Mr. LARSEN. We don’t think that is the case and we haven’t seen 

that. I guess I would also hasten to add that the Affordable Care 

Act specifically provides States and the Secretary with the flexibility to address, at least in the individual market, the medical loss 

ratio provisions. 

In the small-group market, in fact, many States already had in 

place medical loss ratio targets. I think there were around 10 that 

were already at 80 percent. There were a handful that had less 

than that, so that was already present in the marketplace, and 

many insurers were already used to pricing to an 80 percent level. 

Mr. ALTMIRE. Do you envision CMS playing a role in and ensuring competition in the market? Were you given that authority 

under the law and are you going to—— 

Mr. LARSEN. Well, I mean, when we get to the exchanges in 

2014, competition is kind of the cornerstone of what we are trying 

to accomplish in the exchanges. And we will be working actively 

with the States as they set up their State exchanges. And to the 

extent that we are operating a federally facilitated exchange, we 

will do everything we can to make sure that there is competition 


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among insurers. The exchanges are all about competition among 

private carriers to the benefit of, you know, small businesses and 

individuals. 

Mr. ALTMIRE. And last question, Madam Chair. Since 2010, eligible small firms have had the ability to obtain a health care tax 

credit. And according to the NFIB information provided to this 

Committee, 1.1 million small businesses are eligible for either a 

partial or full credit. And while I realize the IRS administers that 

credit, does CMS have any estimates on employers taking advantage of the credit and how it has lowered their costs? 

Mr. LARSEN. Yes, I know that there are varying estimates about 

both the eligibility rate and the uptake rate, and some of it is survey-based. We are currently working with our colleagues over at 

Treasury and IRS to get an estimate on what that is. I apologize 

I don’t have it for you here today, but we hope to get that soon. 

Mr. ALTMIRE. Great. Thank you. 

Chairwoman ELLMERS. Thank you. I have a couple more questions for you, Mr. Larsen. 

Small business owners have told us the new law and its regulations are vague, and we mentioned that already, and they don’t 

know what is required of them. For example, many aren’t sure if 

the employer mandate applies if they have employees who are 

working 30 hours a week or less. 

If they currently offer insurance to the individual employee, they 

aren’t certain if the new law requires them to also cover the employee’s family. How are the small business employers, who don’t 

have the benefit of large administrative staffs or outside benefit 

counselors to advise them, to be expected to comply with the complicated law and its numerous regulations? Can you clarify just 

some of that for us? 

Mr. LARSEN. Yes, and that is a very important question. I think 

some of the surveys that have done—and although we don’t necessarily agree with many of the points that came out in the NFIB 

report or the McKinsey report, I think one thing that comes 

through clearly in those is that there still remain a lot of questions 

among small business owners. Either they don’t understand the 

law, or they don’t feel they have enough information. And I think 

that is an important point that we have to take note of, that between now and 2014 we have to continue our efforts to reach out 

to small businesses and educate them. 

There are some tools that will be available, for example, in the 

exchanges. There is a role of these entities called ‘‘navigators,’’ 

which are going to help people understand the health care law, understand how to access the exchanges. But there is more work to 

be done there, and I think there has been confusion, some misinformation, and I think it is something that we definitely need to 

focus on between now and 2014. 

Chairwoman ELLMERS. New regulations require insurers to 

spend 80 to 85 percent of premiums on direct care for patients 

rather than administrative costs. These requirements may be difficult for small insurers to meet, driving them out of the market, 

limiting consumer choice, and raising the cost of insurance and, as 

the market decreases, that is always that risk. 


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How can small insurers compete when they don’t have the resources or economies of scale to do so? 

Mr. LARSEN. Well, we are certainly sensitive to the need to maintain competition. 

Ultimately, the Affordable Care Act provides some flexibility in 

the individual market, but less flexibility to modify the MLR standard in the small-group market. However, again, I think as I mentioned earlier, there were already existing in many States a medical loss ratio standard at or about the standards set out in the 

ACA, and I think that provided a benchmark from which carriers, 

you know, could launch from. 

Chairwoman ELLMERS. Interestingly enough, very recently, in 

fact last Friday, The Hill newspaper had a front page article titled, 

‘‘Health Care Law Could Leave Families with Higher Costs.’’ 

The article describes the debate over what the story terms a 

major provision of the health care reform law, which provides that 

if a worker has employer-based coverage that is affordable for the 

employee only, the family is expected to take the employer coverage 

even if it is unaffordable. 

Is this the correct interpretation and can you clarify some of that 

for us? 

Mr. LARSEN. We are actually looking at that very issue, which 

is the interpretation of the application of the tax credit to the individual, to the family, and who qualifies at what point? When an 

employer makes an offer, is that binding on the dependence of the 

family members of the employee? 

We are anticipating in future guidance to clarify this and a number of issues relating to the application of the tax credit and how 

it works. You know, we put out a first—kind of a wave of guidance 

just a couple of weeks ago on the exchanges. And the next phase 

of that, which will deal with eligibility and enrollment and the application of the tax credit, hopefully will clarify some of those 

issues. 

Chairwoman ELLMERS. And then I have one last question. This 

also addresses one of the issues that Mr. Altmire referred to. 

The tax credit may apply temporarily and narrowly if the business has fewer than 25 full-time or equivalent employees making 

an average annual wage of $50,000 or less. But what about every 

other small business? What advantages do they have as far as a 

tax credit? 

Mr. LARSEN. Well, you are correct in that the tax credit was targeted towards the smallest of the small businesses with, you know, 

under nine getting the maximum credit, and you can get up to 25, 

depending on what the wages are that you pay your small business. 

You know, one of the reasons why it was targeted, because those 

were the small businesses that had the lowest offer rates. As you 

move up to, say, employers with 50 employees, you have offer 

rates, offer rates of insurance coverage that can be in the 80 to 90 

percent rate. 

So the tax credits were targeted towards that segment of the 

market that was most in need of help in terms of getting the offer. 

There are still many benefits, as I mentioned, in the Affordable 

Care Act for businesses that are larger than 25, the rating restricVerDate Mar 15 2010 09:15 Dec 03, 2012 Jkt 076496 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HR\OC\A496.XXX A496

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tions are very important. Small businesses, and I know this from 

my own experience, in many States small businesses get rated up 

if they have sicker members. And so that practice is going to go 

away. It is going to create a lot of fairness and benefit. 

And then the general benefits of the exchange, much lower administrative costs. The CBO found that as well for—and that applies to all small businesses, not only just those under 25 employees. 

Chairwoman ELLMERS. So you do see some possible changes or 

flexibility in the whole—— 

Mr. LARSEN. Well, there are benefits to small businesses. But 

you are right, the tax credit is targeted to the smaller small businesses because, again, it was concluded those are the ones that 

have the lowest rates of insurance coverage for their employees. 

Chairwoman ELLMERS. Thank you, Mr. Larsen. I just would like 

to ask if Mr. Altmire has any additional questions. Okay. 

Well, Mr. Larsen, I thank you for joining us today to answer our 

questions and providing your insight on these issues. We will continue to closely follow them and want to work with you and help 

ensure that small businesses have flexibility and choices in their 

health care coverage decisions. 

I want to suggest that Mr. Larsen ask a member of his staff to 

remain here during the testimony of the second panel. And would 

you please identify—and I believe we have already spoken, so, 

thank you, perfect, wonderful. 

And, thank you again, Mr. Larsen, for your time. 

Mr. LARSEN. Great, thank you. 

Chairwoman ELLMERS. I truly appreciate it. 

Chairwoman ELLMERS. And now I would like the second panel to 

come forward. 

Wonderful. Let’s go ahead and get started. Thank you so much 

for coming today to be with us for this Subcommittee hearing. 

Our first witness is Dr. Douglas Holtz-Eakin. Dr. Holtz-Eakin is 

president of the American Action Forum. He served as a commissioner of the congressionally chartered Financial Crisis Inquiry 

Commission from 2009 to 2011, and director of the Congressional 

Budget Office from 2003 to 2005. Dr. Holtz-Eakin received his B.A. 

in mathematics and economics from Denison University and his 

Ph.D. in economics from Princeton. Welcome, Dr. Holtz-Eakin, and 

you have 5 minutes to present your testimony. 

STATEMENTS OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION FORUM, WASHINGTON, DC; WILLIAM DENNIS, 

JR., SENIOR RESEARCH FELLOW, NATIONAL FEDERATION 

OF INDEPENDENT BUSINESS, WASHINGTON, DC; BRIAN 

VAUGHN, PRESIDENT, NEARLY FAMOUS, INC., DOUGLAS, GA, 

TESTIFYING ON BEHALF OF THE UNITED STATES CHAMBER 

OF COMMERCE; AND TIMOTHY STOLTZFUS JOST, ROBERT 

WILLETT FAMILY PROFESSOR OF LAW, WASHINGTON AND 

LEE UNIVERSITY COLLEGE OF LAW, LEXINGTON, KY 

STATEMENT OF DOUGLAS HOLTZ-EAKIN 

Mr. HOLTZ-EAKIN. Well, thank you, Chairwoman Ellmers and 

Acting Ranking Member Altmire. I appreciate the chance to be 


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here to talk about the Affordable Care Act’s small businesses and 

employer-sponsored insurance. And you have my written testimony 

which I submit for the record. 

Let me just make a couple of points. The first point, and I think 

the overriding one, is that ultimately the ability of small businesses 

to offer insurance is contingent on the health of those businesses 

and their ability to grow. And the Affordable Care Act contains 

many provisions that I think are detrimental to the abilities of 

small businesses to prosper and grow. 

There are taxes, the 3.8 percent investment tax that is going to 

be a direct hit on small businesses. 

There are a large number of mandates and penalties, and the 

regulatory implementation I think is daunting to any small business. We are in an environment where in 2010 we had a record 

number of Federal Register pages. That was prior to the implementation of the Affordable Care Act and Dodd-Frank and a whole 

bunch of other things. So this adds to the regulatory burden. 

And even some of the so-called help, the tax credit in particular, 

is structured in a way that penalizes growth. If you had workers, 

if you pay higher wages, even this temporary tax credit gets scaled 

back and it is ultimately a penalty against those who succeed. And 

so the structure of the ACA is not one that I would call good economic policy to promote growth, especially on small businesses. 

The second is that the Affordable Care Act is actually going to 

raise insurance costs. There is now consensus that it fails to bend 

the health care cost curve, which is the fundamental driving force 

underneath the premiums, and small businesses will suffer from 

that. 

It has $500 billion in new taxes. Many of them are taxes that are 

going to go directly to the premium bottom line. My testimony outlines the impact of the so-called premium tax on health insurers. 

There is medical device taxes. All of these are higher costs in the 

food chain that lead to higher premiums that is going to hurt the 

ability of a small business to continue to offer insurance and lead 

many of them to elect to drop their coverage and/or never offer it 

to begin with. 

The third point, I guess, is this issue that Mr. Altmire mentioned 

with the previous witness, and that is the question of the incentives for employers to drop coverage and send their employees to 

the exchanges. 

And there have now been a number of studies, as was mentioned, one that I did with Cameron Smith, my colleague, that 

looked at the pure financial incentives for employers and employees 

to mutually agree that it would be in their financial interest to provide the insurance through the exchanges. And we concluded that 

up to 35 million American workers would benefit from this arrangement, and that their employers would agree that they should 

go off the exchanges. The only loser in that is the taxpayer who has 

to pick up an enormous tab. 

A recent paper by Cornell Professor Richard Burkhauser and colleagues comes to roughly the same conclusion. I am aware there 

are other studies that say that, no, that won’t happen. Their leading argument appears to be that, well, it won’t happen because we 


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have always offered insurance. But in the face of a dramatic policy 

change, I don’t see why that is a compelling argument. 

We are now seeing the leading edge of evidence. We have survey 

evidence from McKinsey, from PriceWaterhouseCoopers, and I will 

let Mr. Dennis speak for the National Federation of Independent 

Business, suggesting that in fact this financial impact is not only 

real, it will be pursued by businesses. 

And so I think this is a serious concern because the subsidies are 

enormously generous. We are talking about $7,000 for someone 

making $59,000 in income in 2014. This is well over 10 percent of 

their income. It would be financially irrational for employees and 

employers to ignore that kind of money. 

And if it is true that many pursue this, budgetary cost of the insurance subsidies through the exchange is going to explode. It 

could easily be double what was in the original bill. We are all well 

aware of the financial problems that face the United States Government. And to have this come in much more expensive than was 

budgeted, I think, is an extreme danger. 

Which brings me back to my first point which is, in the end, it 

is going to be the environment for small businesses to grow and 

prosper that is crucial. There is nothing about sailing directly toward a debt crisis that is good economic policy or beneficial for the 

small business community at the heart of our debt problems, our 

explosive entitlements. 

And my view is that the Affordable Care Act has a whole series 

of upward risks on the budgetary side that make the possibility of 

that crisis much higher, and, as a result, have to be viewed as a 

threat not just to the economy, but to small businesses in particular, and certainly to their ability to continue to offer insurance 

to their employees. 

And I understand the sentiments behind the Affordable Care Act, 

but I think on balance its structure is one that hurts the small 

business community and doesn’t aid it in the end. Thank you. 

Chairwoman ELLMERS. Thank you for your comments. And we do 

have your testimony, as we do all of our panelists. 

I now yield to Representative Kingston from Georgia for the purpose of introducing his constituent as a witness. 

Mr. KINGSTON. Thank you, Madam Chair. It is a great honor to 

be with you on this dais, you and Mr. Altmire, a good friend of 

mine from Pennsylvania. And I appreciate all the hard work that 

you do on this Subcommittee to try to promote jobs in this tough 

economic environment. I appreciate the panel for being here. 

I have a hard deadline at 11 o’clock with another Committee on 

which I serve, so I am going to be leaving shortly before then. But 

I wanted to say hello and introduce my constituent, Brian Vaughn. 

He is no stranger to the struggles of an entrepreneur. He has been 

with the Burger King franchise operation since 1980 and kind of 

came up through the corporate structure, working in Florida and 

in Georgia, and then in the 1990s took the plunge to become a 

franchisee himself; and, since that period of time, has bought out 

his partner and been on his own with his wife—I am not sure if 

Cindy is here—but knows the importance of keeping employees 

happy by offering a good compensation package, including a good 

benefit package, worker safety, a good environment to work in, and 


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has many employees who have been with him on the management 

side for over 10 years, which is remarkable. 

He has four stores in three different cities and also knows what 

it is like to compete in this environment and to get the customers 

back in when it is very hard on their pocketbooks in today’s economy, but knows all the challenges that small business people face, 

really: labor, environmental regulations, safety regulations, franchise regulations. I think he has been through it all, but has done 

it successfully. 

So I am very proud to have him as a constituent and as an example of an entrepreneur. And I wanted to point out also, one of his 

jobs before he became an entrepreneur was to recruit entrepreneurs. So he looked at it, and did not have to take that plunge, 

yet he made it anyhow. 

So I am proud to have Brian Vaughn here today and I look forward to his testimony. 

Mr. VAUGHN. Thank you. 

Chairwoman ELLMERS. Go ahead. 

STATEMENT OF BRIAN VAUGHN 

Mr. VAUGHN. Chairwoman Ellmers, Congressman Altmire, and 

distinguished members of the Subcommittee, thank you for inviting 

me to testify before you today on how the new health care law will 

impact my business and my employees. 

As the Congressman stated, by name is Brian Vaughn and I own 

Nearly Famous, Incorporated, which consists of four Burger King 

restaurants in Georgia, and I am happy to be here today on behalf 

of the U.S. Chamber of Commerce. I am also a proud member of 

the National Franchisee Association and have served on their 

board of directors for 3 years. 

Nothing I say here today reflects the position or opinions of my 

franchise or Burger King Corporation. You know, when people 

think of Burger King, they think of a big international corporation. 

Even though the sign on the door says Burger King, my four restaurants are small family-owned and -run businesses. 

I began working as a Burger King assistant manager in 1980, as 

the Congressman said, earning $14,000 a year. After working my 

way up, I partnered in 1993 with Francis Lott to open our own four 

Burger King restaurants in Georgia. In 2001 I bought out my partner’s interests and today I operate these four restaurants with my 

wife, Cindy. 

At our four restaurants, we are proud to have created 182 jobs. 

We have 59 full-time employees and 123 part-time employees; 14 

of our full-time employees are managers, for we currently pay 100 

percent of their health care premiums at an annual cost of nearly 

$56,000. We also pay for term life, short-term disability, vision, and 

dental insurance. My wife and I participate in this very same plan. 

For our other employees, we offer a value mini-med plan at a 

cost of between $106 and $165 per month. Currently only 19 of the 

more than 100 part-time employees have elected to participate. 

Many employees choose to keep the wages they earn to help pay 

for their day-to-day living expenses rather than use a portion of 

their wages to pay for the coverage. 


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As the president of my company, I also have to decide how much 

of the company’s income can be used to pay for wages and benefits 

and how much has to be used to cover the expensive daily operations. There is only so much money, and, first and foremost, we 

all have to cover our daily expenses. 

Washington, it seems, really doesn’t understand this. A lot of 

noise was made last fall about the types of plans that I offer my 

employees. Under the health reform law, Washington has decreed 

that these so-called limited benefit plans are not acceptable. Despite repeated promises that if you like your plan you can keep it, 

the law has outlawed these plans, beginning in 2014. 

I understand that for many, a more comprehensive plan seems 

critical; and, by comparison, these limited benefit plans are slim. 

However, it is important to acknowledge reality. These plans are 

less expensive and allow my team members to choose to take more 

of their wages home and use a smaller amount of their wages to 

pay for some coverage. 

Prior to health care reform, I had the flexibility to hire more 

workers, pay them a wage and offer them access to this moderate 

coverage. Now I am being told by Washington that I have to offer 

all my full-time employees Washington-defined health coverage or 

pay a penalty. Because of the cost of offering this prescribed coverage and the size of the penalty, I will have no choice but to restructure my workforce in a way that protects me from losing everything I have worked for. 

What does this mean? Well, given the law and the unfinished 

regulations, and I mean unfinished regulations, it is hard to say. 

I have no idea. Prior to the law’s enactment, my goal had been to 

hire fewer people for more hours. It is easier to retain employees 

that work full time. 

However, now that the law is passed, I have to consider options 

other than what makes practical business sense. Now, because of 

what Washington has mandated, it may make more sense for me 

to hire more people for fewer hours at a time when millions of 

Americans are out of work. Is this really the right incentive? 

This is not what I want to do, and it is not what is best for my 

employees, but in order to survive and be able to pay the employees that I have to, it is what we will have to do. 

While I have not read the entire law, and I am not able to follow 

the regulations—which are being issued at record speed, mind 

you—I am trying to figure out how to protect the company that I 

have spent my entire life building. It is ironic that the law touted 

as the Patient Protection and Affordable Care Act neither protects 

patients nor makes health care affordable. Instead it is a law of 

broken promises under which no one will be able to keep the health 

care they have. Even if they like it, it is a law which incents companies to scale back their workforces and reduce the benefits offered to their valued employees. 

In conclusion, I understand that given the existing political realities, Washington, D.C., a total repeal of the health care law by 

Congress is an unlikely proposition, at least for now. 

However, I am hopeful that Congress will repair or eliminate the 

more onerous burden, such as the employer mandate. These provisions saddle businesses with new requirements that actually enVerDate Mar 15 2010 09:15 Dec 03, 2012 Jkt 076496 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\A496.XXX A496

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courage us not to expand our business and, astoundingly, discourage us from creating jobs. 

The bottom line is that your decisions can help or hinder this. 

The laws you create can either give small businesses greater confidence and certainty to grow and generate new jobs or just do the 

opposite. Regrettably, this new health care law is already doing the 

latter, and Congress must take the action to rectify it. 

Again, thank you again for this opportunity, and I look forward 

to your questions. 

Chairwoman ELLMERS. Thank you, Mr. Vaughn. I will just tell 

you that my very first job at age 16 was with Burger King back 

in Madison Heights, Michigan, back in 1980. 

Mr. VAUGHN. Thank you. 

Chairwoman ELLMERS. Thank you again for your testimony. 

Chairwoman ELLMERS. I would like to introduce Mr. William 

Dennis. Mr. Dennis is senior research fellow at the National Federation of Independent Business. He has directed the NFIB’s research foundation since 1976. 

Welcome. And you have 5 minutes to present your testimony. 

Thank you. 

STATEMENT OF WILLIAM DENNIS 

Mr. DENNIS. Thank you, Madam Chairman, Mr. Altmire, and 

Representative King. 

Last week NFIB released a study called ‘‘Small Business and 

Health Insurance: One Year After Enactment of PPACA.’’ 

I would like to focus my remarks on the results of that study, 

since it is quite current and relevant to what we are talking about 

today. 

First of all, we surveyed only people, small employers that had 

50 or fewer employees. It was a nationally random sample, not just 

the NFIB members. There will be probably some randomly in 

there, but this was a national random sample. The survey was conducted in late April and in May of this year. So, while it wasn’t 

done yesterday, it is current enough so that I think we can say it 

is the state of what we know today. 

The findings are really quite simple. The first is that we are in 

this period of declining offer rates by this group of firms. There are 

42 percent that now offer, which continues the down trend over the 

last 10 years at least. MEPS just produced a 39 percent estimate, 

which is lower, and so the NFIB survey really does capture the 

trend. 

Something else that you should understand is that nothing has 

happened in the last year and nothing is projected to happen in the 

next year. People who had offered before tend to offer now and expect to offer in the future. And, those who do not or have not offered didn’t pick it up this year, and they don’t plan to in the future. So we expect this down trend to continue. 

Twenty percent with insurance do expect major changes in that 

insurance. Virtually all those changes are not to the benefit of the 

employee. Since enactment of PPACA, one in 8, 12 percent, of 

small employers have either lost their specific plan or been told 

they will lose their specific plan. 


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Of those who claim to be familiar with the law or have some familiarity with its contents—by very large margins, overwhelming 

margins, particularly those who insure—think it will not reduce 

the cost of health insurance. It will not reduce administrative burdens, will increase taxes, and will add to the deficit. They do agree 

more people will be covered, although they are not quite sure 

whether that is going to yield better benefit or yield greater health 

outcomes. 

Let’s just look at the tax credit. We estimate using some new 

data that we recently collected that out of the 5,228,000 small employers with under 25 employees, an estimated 245,000 will be able 

to take advantage of the full credit, and 1.165 million will be able 

to take advantage of the partial credit. That is not how many will. 

Fewer will probably take advantage of that in part because of 

awareness. Those numbers are the maximum that will take part. 

Now, beyond that, there is the whole incentive effect. How many 

will the credit incent? One of the ideas behind this is just not to 

provide a windfall, to have people do what they are already doing, 

but to provide an incentive for people to purchase it. 

We calculate that only about 2 percent have an incentive based 

on the full credit, though more than that have an incentive based 

on the partial credit. 

The survey also explored the reaction of these small business 

owners, if low-income people start to leave for the exchanges. About 

21 percent said they would seriously explore looking at whether or 

not they are going to drop their health insurance for everybody. 

Another 26 percent said that they also would do that, but were less 

certain. 

So there clearly are pressures that would lead folks in that direction. Once competition actually sets in, firms continue to churn, 

new firms enter without health insurance, we are going to see real 

market pressures, not to—not only not to add for those who don’t 

have it, but to drop it for those who do. 

Thank you. 

Chairwoman ELLMERS. Thank you, Mr. Dennis. 

Chairwoman ELLMERS. I now would like to yield to Mr. Altmire 

to introduce your witness. 

Mr. ALTMIRE. Thank you, Madam Chair. And it is my pleasure 

to introduce Professor Timothy Jost. Professor Jost teaches at the 

Washington and Lee University College of Law. He is co-author of 

a casebook health law used widely throughout the United States in 

teaching health law. 

Professor Jost is the author of numerous articles on health care 

regulations and comparative health care law and policy. He is also 

consumer representative to the National Association of Insurance 

Commissioners. Professor Jost earned his J.D. from the University 

of Chicago School of Law, cum laude. Welcome, Professor Jost. 

STATEMENT OF TIMOTHY STOLTZFUS JOST 

Mr. JOST. Thank you very much and thank you, Ranking Member Ellmers and Congressman Altmire and Congressman King. 

The title of today’s hearing is: ‘‘Small Business and PPACA: If 

They Like Their Coverage, Can They Keep It?’’ 


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This is a variation of one of the commitments made by the Affordable Care Act, realized in section 1251, that if you like your 

plan you can keep it. But, notice, the ACA’s commitment is to individuals, not to employers. 

It is not if you currently have insurance through your job, you 

are stuck with that insurance, no matter how it changes. It is if 

you the employee, or individual enrollee, like your coverage, you 

can keep it. In fact, most privately insured Americans do have insurance through their jobs and regulations adopted last summer by 

Labor, Treasury, and Health and Human Services, give employers 

considerable flexibility to change their plans without losing grandfather status. 

Employers can change their formularies, providers, networks, 

and even insurers or plan administrators. They can increase 

deductibles, out-of-pocket limits, and copayments not only to keep 

up with medical inflation, but also up to 15 percent more. They can 

also reduce their own contributions to premiums by as much as 5 

percent. They can add new employees and new dependents. 

Of course, if the plan changes too much, it ceases to be the plan 

it was. It is probably no longer the plan the enrollee liked, and 

grandfather status is lost. The Department has projected that 15 

to 33 percent of plans would lose grandfathered status in 2011. 

Private surveys cited by Mercer and Hewlett in submitted testimony predict higher levels, although they also noted that many 

employers do not really view loss of grandfathered status as a 

major problem, and some said they wanted to comply with the new 

law as soon as possible. 

The NFIB survey released last week surprisingly did not reflect 

widespread loss of grandfathered status. The NFIB reports that 90 

percent of small businesses intending to make significant changes 

in their plan have not lost their plan. 

It does report that 12 percent of employers have had their plan 

terminated or been told that it will be not available in the near future. This number is consistent with churn in insurance coverage 

observed in earlier years, and I believe I cited a 2008 NBER report 

which showed this kind of turnover in the early 2000s. Plans are 

always coming and going in the small-group market. 

NFIB also reported that 20 percent of employers anticipated significant changes in their plans over the next 12 months, but last 

year and the year before changes in benefits, cost sharing, and premiums, as reported in the annual Kaiser HRET report, were at 

even greater levels. This is a bad time in the economy, as we all 

know, and things are changing. 

Another and very important question is whether employers will 

continue to offer coverage after the ACA is fully implemented. A 

number of studies have addressed this question. Their predictions 

range at the extreme, from those of Dr. Holtz-Eakin, who predicted 

that ESI would shrink by 22 percent, and the McKinsey survey, 

which claims that 9 percent of employers will definitely drop coverage, to those of the RAND Corporation which estimated that coverage would, in fact, grow by 8.7 percent. 

But most studies, including studies by Booz, Lewin, Urban, Mercer, Towers-Watson, and most importantly the CBO, predict that 

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mented. In fact, all of the reasons employers offer insurance now 

will continue to exist after health care reform goes into effect. 

Most importantly, employee benefits are exempt from Federal 

and State income taxes and payroll taxes. In Virginia, where I live, 

employees taxed at the alternative minimum tax marginal rate of 

28 percent receive a subsidy of over $0.49 on every dollar for the 

coverage that they receive through their employer. 

The average American covered by ESI has an income of 423 percent of the Federal poverty level and would not be eligible for any 

of the premium subsidies under the Affordable Care Act. 

Employers who drop health insurance would have to dramatically increase after-tax cash compensation for their higher-income 

employees to cover this loss of tax subsidy, and the law prohibits 

them from dropping benefits from their lower-wage employees but 

keeping them for their higher-wage employees. 

Health benefits also continue to be one of the most highly valued 

forms of compensation and also help insure a healthy and productive workforce. After 2014, employees are even more likely to demand health insurance at work because of the individual mandate; 

and large employers—not small employers—but large employers, 

will face a penalty if they don’t offer insurance. 

In Massachusetts, which adopted similar reforms in 2006, employer offer rates grew from 70 to 76 percent. There is every reason 

to believe the ACA will not dramatically change the scope of employer coverage in the United States. 

Thank you. 

Chairwoman ELLMERS. Thank you, Mr. Jost. 

I will begin the questioning, and my questions are directed to 

each member of the panel. 

Health care reform was supposed to make health care more accessible and affordable. Do you think the new law does anything 

to help reduce the cost of health care? And I will start with Mr. 

Jost. 

Mr. JOST. Yes, and one example of that is the medical loss ratios, 

which has already been discussed. I follow the medical loss ratios 

very closely. I was very much involved in their drafting through 

the National Association of Insurance Commissioners. 

One of the things that people are beginning to notice is that 

growth in health care costs has been dropping in the last couple 

of years. There is another report on that out this morning. 

At the same time, in the very recent past, insurance profits have 

been growing very, very rapidly; and people who follow the insurance industry closely are saying that, if insurers have to spend 80 

percent of their premiums on health care costs and costs are dropping, premiums can’t continue to rise. They are going to come 

down. 

And we already saw that in Connecticut, where one insurer 

dropped its rates by 10 percent. We are starting to see it in other 

States. 

I think, in fact, that the MLR is going to have a dramatic affect 

in reducing the cost of health insurance for employers and individuals over the next couple of years. 

And if I could just add quickly, one question that was asked earlier was, will it drive small insurers out of the market? I have read 


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all of the State adjustment requests that have gone final. In only 

one State have any insurers left since the law went into affect. As 

Mr. Larsen said, people are talking about it. It isn’t happening. 

Thank you. 

Chairwoman ELLMERS. Mr. Vaughn. 

Mr. VAUGHN. Well, I certainly would have no way of knowing, a 

nonacademic. I am a business person. But let me just give you a 

few numbers so you can understand my situation. 

If you take 2010 and my small business—I am a Subchapter S 

Corporation. So, at the end of the year, the bottom line of my company was $319,000. The way this plan exists now, if I took this 

plan and I insured all of my employees the way it is designed, it 

would cost me $307,000, which leaves me $12,000. 

Now, understand I am taxed personally on the net income of my 

company. But do I take that money? Absolutely not. What I do, I 

have to turn that money around and reinvest in the building, buy 

new equipment, and those sort of things. $12,000 does not even 

leave me enough to pay my taxes, let alone reinvest in my business. 

The other piece of this is I am not likely to pay a penalty. Why 

would I do that? Because I am not really helping anyone. The penalty would cost as much as the insurance I am providing now. So 

if this thing continues on the path it is, I can tell you right now 

that I will do everything I can to avoid paying the penalty. I will 

probably more than likely drop coverage, and what it will do to the 

cost of insurance I have no idea. 

Thank you. 

Chairwoman ELLMERS. Mr. Dennis. 

Mr. DENNIS. It is really important to remember is when we started this thing, small businesses were very much in the forefront of 

calling for reform of health care. The reason was cost. Cost increases drove us. This morning, I believe I opened the Journal— 

the Wall Street Journal—and saw a study from the Social Security 

Administration which projected that, under PPACA, costs would 

rise faster than they would otherwise. It wasn’t a great deal, but 

it was indeed faster. That is the first point. 

The second is we have had some lower rates recently than we 

have seen over the past several years. It has been attributed in 

some quarters to the new law. What we see, is that this recovery 

is very different from the last five recoveries. Relative demand for 

various services has been much slower than average; and health 

care has been one of them. Whether it is people not having money 

or being more parsimonious with the money they have, I don’t 

know. But, still, the whole thing is that this is a very abnormal period. 

And then we start to look at everything that is inherent in 

PPACA. You are going to have minimum benefits. While we don’t 

know what is going to be in the minimum benefit package, clearly, 

as Mr. Vaughn’s example shows, there is going to be a whole series 

of folks who are either going to have to add a lot more benefits or 

do something else. 

Then we have all types of expensive things that we haven’t even 

talked about which don’t necessarily directly affect smaller firms. 

Things like the CLASS Act for example. Then we have, of course, 


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a whole lot of new folks coming on. So all this together is going to 

drive costs higher, I am afraid. 

Chairwoman ELLMERS. Thank you, Mr. Dennis. 

Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. I would largely concur. In analyzing the bill 

as it passed and became the law, the CMS actuary, the administration’s own actuary, concluded that it would raise, not lower, national health expenditure. If the national health expenditure bill is 

larger, the insurance that covers that bill has to be larger. There 

is no way around that. When the CBO put out its new long-term 

budget projections, it found that, after passage of the law, things 

went up, not down. 

The law contains two new entitlement spending programs. The 

CBO estimates they grow at 8 percent a year as far as the eye can 

see. There is no evidence of bending the cost curve anywhere to be 

found in those kinds of numbers. 

And so if you dial the clock back to the beginning of the debate, 

there were two criteria by which any health care reform should be 

judged: the ability to cover more Americans with affordable and 

quality insurance, and the capacity to deliver those services with 

lower costs and higher quality. And the Affordable Care Act flunks 

the latter, which is ultimately the fundamental driver of the insurance costs in the United States. And so things like the MLR are 

mere fiddles at the edges of a tidal wave of health care spending. 

Unless we get the tidal wave under control, the premiums go up. 

Chairwoman ELLMERS. Thank you. 

I have one more question for you. Do you think the health care 

law’s mandates and taxes, along with the numerous regulations 

that are being issued, make it less likely that small businesses will 

hire more workers and expand their companies? 

And again I will start with Mr. Jost. 

Mr. JOST. Well, the small businesses, there is some incentives 

and disincentives. There are benefits under the law that small 

businesses get and that large businesses don’t get, and there are 

some benefits that large businesses get that are not available to 

small businesses. 

For example, small businesses need to cover the essential benefits package. It is not clear to me that that is going to be a major 

expense. Because in fact what happens is that State mandates are 

going to go away. It is not at all clear the Federal essential package is going to cost more than State mandates, but that is something that small businesses need to cover that large businesses do 

not need to. 

On the other hand, large businesses need to pay the penalty if 

they do not cover their employees; and small businesses don’t. 

I come from a family that started a small business about 20 

years ago, that my brother-in-law started by borrowing money from 

the rest of us in the family, and it is today a $300 million publicly 

traded company, and its product is a household name. They didn’t 

worry about am I going get this benefit or lose this benefit if I grow 

a little bigger. They tried to help out their employees, they tried 

to help out their customers and sell a good product. 

I think that is the way American businesses work, and I think 

that under this law it is going to continue to work that way. It is 


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just that employees and individuals are going to have better health 

care coverage. 

Chairwoman ELLMERS. Mr. Vaughn. 

Mr. VAUGHN. Well, I can start out by saying that overregulation 

is killing small business. 

Let’s go back to minimum wage. I have already scaled down my 

staff, and I am running as, frankly, as lean as I can possibly run 

right now and make a living. The reality is there are going to be 

virtually no full-time jobs in this industry. I can tell you the way 

it will work in my company is only my management staff will be 

full time. Everyone else will work 29 hours a week or less. And it 

is just that simple. We cannot afford this thing. 

Chairwoman ELLMERS. Thank you, Mr. Vaughn. 

Mr. Dennis. 

Mr. DENNIS. Well, right now, immediately, the overwhelming 

issue is uncertainty. We have absolutely no idea what is going on, 

and I think everybody would agree on that. I don’t think that is 

a very controversial statement. Nonetheless, that has an enormous 

impact on what you are willing to do in terms of hire and invest; 

and we are seeing that very clearly within the small business population. 

We do this monthly survey, as we have been doing since 1973, 

and it is constantly showing that small businesses are much more 

pessimistic and feel much less—how can I say—favorable towards 

the economy than do larger folks. That is borne out by—their sentiment is borne out by a whole series of measures, including some 

that are contained in a recent Federal Reserve of New York paper 

that is just out. But that is the immediate thing. 

Longer term, you have the whole issue of cost and taxes; and 

they go together. And what does that have to do? All that means 

is, if the government has it, then you don’t have it, and you have 

less available to do that. And so the question is you can’t invest 

if you don’t have it. 

And then we have the interesting issue of growth and does the 

50 divide mean anything. And for some firms it clearly will. It 

won’t just mean do I go over 50 or not, whether I hold back a little 

bit from 50 for fear that I am going to be hung up on that whole 

thing. There will be a lot of firms who are growth firms that, as 

Mr. Jost used as an example of his brother-in-law, that will just 

go blowing right on by. They are going to be high-growth firms, and 

they are not going to pay attention to anything. But it is going to 

have an impact on a whole lot of small firms. 

Chairwoman ELLMERS. Dr. Holtz-Eakin. 

Mr. HOLTZ-EAKIN. Well, I guess I would echo the firm level recognition of the regulatory costs that Mr. Vaughn mentioned. I 

think I would echo the uncertainty in the firm level growth incentives that Mr. Dennis highlighted. 

But if you step back and take a look at the basic architecture of 

the Affordable Care Act, it says let us spend a trillion dollars over 

the next 10 years and finance that by raising $500 billion on new 

taxes and much of it on inputs into what will be paid for by insurance, and thus make insurance more expensive, and let’s finance 

the rest by cutting $500 billion roughly out of Medicare, something 

the CMS actuary said is simply economically unrealistic and would 


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mean the closure of a large number of hospitals and failure to 

serve those beneficiaries. 

So I would probably take that with a grain of salt. 

What you have in the end then is higher taxes, much larger deficits, in a recovery that is utterly unsatisfying. And I cannot conclude that that will be beneficial for the hiring practices of small 

businesses. 

Chairwoman ELLMERS. Thank you, Dr. Holtz-Eakin. 

I yield to Mr. Altmire for questions. 

Mr. ALTMIRE. Thank you, and I am glad that our panel brought 

up the subject of taxes and the burden that it places on small business. 

I wanted to ask Mr. Dennis and Mr. Vaughn, as you are aware, 

currently health benefits for employees is non-taxable; and some 

proposals have recommended requiring employees for the first time 

ever to pay taxes on health care benefits. And I was wondering 

from Mr. Dennis, how would a fundamental change like that impact a small business’ decision to offer health care to its workers? 

Mr. DENNIS. Well, the question is really equity. Right now, we 

have a system where if I am an employer and I contribute $1,000 

or $5,000 to help my employee buy their own insurance on the 

market, whether it is through the exchange or whatever, there is 

no tax exclusion for the employee. If an employer pays for it, there 

is an exclusion. That clearly is inequitable. In the long term that 

is going to hurt smaller firms, and their ability to contribute. 

You are not asking about the inequity, though. You are asking 

about whether or not the exclusion itself is important. The exclusion does lower the amount that you have to pay up front. Long 

term, it encourages more people to use more services. And more 

services means higher costs, and long term we just can’t have that. 

We have to start being more parsimonious on many of these things. 

Mr. ALTMIRE. So you are in support of that policy change to 

tax—— 

Mr. DENNIS. We would be in support of making it equitable. I am 

not sure that our organization has taken a position on whether or 

not they would be in favor of eliminating or curbing the tax exclusion. 

Mr. ALTMIRE. Thank you. 

Mr. Vaughn, as a business owner, how would your employees 

react if they had to pay taxes on the health care benefits that you 

provide? 

Mr. VAUGHN. Well, that is a hypothetical; and I apologize for 

really not having an answer to that. I can’t predict how they would 

react. 

But there is something really important here that I don’t want 

to get lost. Let’s define what is a small employer and what is a 

large employer? The method that is being used right now—and, 

frankly, I can’t understand it—and what is a full-time employee 

and what is a part-time employee, I can’t understand that either. 

There was a study done recently by the University of Tennessee 

funded by the likes of Burger King, McDonald’s, and different ones 

to determine what would be the best way to determine what a 

small business is and what can they afford. 


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Have you heard about profit per employee? As opposed to this 

very drawn out, sort of complicated formula for figuring these 

things out, it is a real simple formula. It is how much money do 

I make net, divided by number of employees. Guess what it is in 

my industry? $1,300. If I paid the penalty, the penalty is $2,000. 

Is that equitable? Does that make sense? 

I have got to tell you, there are other industries, whether it is 

financial or insurance industries, they are $10,000 plus per employee, profit per employee. 

So my position is this. This thing has to be repealed. I mean, it 

has to be repealed. If it is not repealed, at the very least the regulatory aspect of it should be changed to a system like profit per employee. 

Again, I apologize for not answering directly. I really don’t know 

how they would react. 

Mr. ALTMIRE. Are you concerned to hear that that is a proposal? 

If your representative came and sat down before you and said, hey, 

here is something I am thinking about supporting, taxing your employees’ health care benefits, you wouldn’t—— 

Mr. VAUGHN. Of course, I would be concerned about that. I am 

for lower taxes for anyone. Yes, absolutely. 

Mr. ALTMIRE. Mr. Jost, do you want to comment on what type 

of fundamental change like that, what the impact would be on the 

health market? 

Mr. JOST. I think it would destroy our employment-based health 

insurance system in this country. We have a long tradition in the 

United States that actually has been very successful in providing 

health insurance to people through their jobs. We are now trying 

to get beyond that to reach those people who are not covered 

through that, and that is what the Affordable Care Act is going to 

do. But to pull the rug out from under employment-sponsored 

health insurance by removing the tax deductions and exclusions 

would destroy it and would throw our health care system into 

chaos. 

Mr. ALTMIRE. Dr. Holtz-Eakin, do you want to comment on that? 

I am going to move on to a different question, but you look like you 

might have something to say. 

Mr. HOLTZ-EAKIN. There are really two aspects that I think bear 

mentioning. One is, it figures prominently in this discussion about 

how many employers will drop coverage under the Affordable Care 

Act. Because the basic horse race is between the pile of cash being 

put out in the exchanges for low-wage workers, where there is a 

clear net advantage for the employer to drop coverage, pay the penalty, give the employee a raise, let them go use their after-tax 

wages, plus a subsidy, and get insurance. 

And another Federal subsidy, which is nontaxation of employersponsored insurance which benefits high-wage workers. And those 

who conclude that there will not be a big employer drop are counting on the fact that that tax subsidy for high-wage workers will 

dominate. Employers will continue to use it to pay the high-wage 

workers, and nondiscrimination rules will keep everyone in. 

I think that is an optimistic fantasy, quite frankly. Be quite 

aware that, in the end, all you are doing is a horse race between 


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two Federal bribes; and one of them is going to win. We will see 

how it plays out, but it is costing the Treasury either way. 

The second thing is, most people who talk about changing the tax 

treatment of employer-sponsored insurance are looking at revenueneutral tax reforms that broaden the base and thus bring in subsidized consumption like health insurance in exchange for lower 

tax rates. And I think that is a very different question than simply 

saying do you want to go tax health insurance. It is about having 

a tax system that is fair across low- and high-wage workers and 

provides greater growth incentives because marginal rates are 

lower. 

Mr. ALTMIRE. Last question. I wanted to give you the chance to 

answer that because I thought I knew what you were going to say. 

Mr. HOLTZ-EAKIN. It was a shocking question. 

Mr. ALTMIRE. The question I wanted to ask you—and you are not 

here to pontificate about politics or to speculate about what the 

Congress is going to do or should do certainly, but you bring great 

credibility to the debate based upon your background and your involvement in the past. So I ask just out of interest, given where 

we are. This is the law. The bill has passed. It is the law. The Supreme Court may or may not rule, absent knowing what is going 

to happen there. Repeal has failed in the current political environment. We don’t know what the future holds there. 

To the degree you are comfortable assessing it, what would you 

suggest the Congress do as far as tweaking the current law, assuming this is a fact, this is going to continue, or continue to push repeal even though it doesn’t look like it is a viable option? 

Mr. HOLTZ-EAKIN. Wow, can I have 5 hours instead of 5 minutes? 

Briefly, I think you can point to a couple of things. There are 

some provisions of the law that I think have universally garnered 

some suspicion—I will use that word. And I think the CLASS Act 

is the first among those and probably should go away as something 

that is ill-designed and dangerous to the American taxpayer. 

The second would be, in the array of coverage expansions, the 

heavy reliance on an unreformed Medicaid program I think many 

people find problematic. We know Medicaid beneficiaries have 

much more difficulty finding primary care physicians and seeing 

specialists. To simply put more Americans into a substandard 

health care system is problematic, and I have a concern that there 

is just too much money on the table in exchanges. I won’t relitigate 

that. So in terms of the coverage expansion pieces, I think you have 

to look at all that. 

I won’t say a lot about the regulatory initiatives. I think making 

them cleaner and getting the rulemaking done in a fashion that 

doesn’t leave the business community so perplexed can be entirely 

beneficial. 

On the delivery system reforms I think there are two very big 

concerns. One would be the role of the Independent Payment Advisory Board, which, as structured, appears inevitably to be led to 

near-term provider reductions as opposed to quality improvements 

or other things that everyone thinks would be desirable. Just can’t 

get there. It is given 1-year targets. It is going to go slash reimbursements probably on the most innovative and, thus, the most 


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expensive new therapies. That is detrimental for health care. I 

would worry a lot about that, quite frankly. 

And the ACOs appear to be a recipe for industry concentration, 

not better care. 

So, you know, across all of these things I think there is work to 

be done in improving the delivery system, improving the financing 

of the coverage expansions, and making sure that this thing hangs 

together budgetarily, about which I have deep concerns. 

Mr. ALTMIRE. This is really the last question. Are there things 

in the bill that you think are worthwhile in isolation that should 

be kept? 

Mr. HOLTZ-EAKIN. I have always been a proponent of exchangelike entities—forget the label attached to them. Better ability to 

shop, compare, and pursue health insurance has always been—I 

think every economist would like that, and I certainly do. So the 

design of those and exchange rulemaking I think is a critical moment in the life of this law. 

Mr. ALTMIRE. Thank you all for being here. 

Chairwoman ELLMERS. I now would like to recognize Mr. King 

for his questions. 

Mr. KING. Thank you, Madam Chair. 

I thank all the witnesses for being here to testify and regret my 

schedule did not allow me to hear it all in depth. So I hope I don’t 

duplicate anything that has been raised here before this panel. 

First, I think I need to make a statement as to anybody who 

wonders where I stand on this issue. I look at it from a whole number of different perspectives. 

I just don’t think it is arguable whether this is sustainable economically or whether it will improve our health care or whether it 

will avoid eventually rationing or whether it will reduce research 

and development. I think those things all we understand—at least 

I think I do—thoroughly, that we are not going to see better health 

care at a cheaper price that is more accessible or more available. 

You will see different people who have access perhaps, but it is perhaps a shift within the population. I don’t think it changes anything beyond that. 

So I have spent my life—my working life as a small businessman. I started a construction business out in 1975, and we provided—not on the first day, because I didn’t have any employees 

the first day—but over a period of time as we began to accumulate 

employees, I took on a responsibility to voluntarily provide them 

health insurance. 

And I have watched this debate be shifted here in this country 

so that the word health care and health insurance, those two 

words, have been conflated into the same meaning in the minds of 

many people that are advocates of this policy that is before us 

today. I think it was dishonest, I think it was disingenuous, and 

I think it was willful, a strategic effort to try to blur the definitions. 

I remember our then-Governor of Iowa, Governor Culver, coming 

to this Capitol and our delegation meeting and saying 40,000 kids 

in Iowa don’t have health care. I don’t know how many times I had 

to ask him what that meant before I could get through to him that 

health care and health insurance were two different things. 


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I will make the point that I don’t believe an employer has—if 

they choose to accept a responsibility to provide health insurance 

for their employees, that is a competitive position in the marketplace, but it is not a moral obligation for the employer. To hire 

good people and keep good people is the motive. 

When the Federal Government decides to impose an employer 

mandate, then that sets another standard; and in the minds of people now they think it is an entitlement that goes with a job. I think 

that is a mistake. I think it saps some of our vitality. 

I wanted to take this down to the constitutional aspect of it, just 

noticing we had a law professor here, Mr. Jost. That is the part 

that grates on me the worst. We can talk about policy all day long. 

I have drawn my conclusions on that. And I have also drawn them 

on the constitutional side of this. 

But I just take it down to the individual mandate rather than 

the employer mandate side of this and ask this question, if the 

Federal Government can constitutionally commandeer a portion of 

a person’s paycheck or a portion of the revenue of an employer, for 

that matter, if they can commandeer that and assign it to a government-produced or a government-approved product, which is premiums for health insurance that is approved by the Federal Government, then what limitation would there be on the commandeering of that revenue stream beyond health care? Is there a constitutional line here I don’t understand? Or could it also be for a 

car, an appliance, buying certain types of health food, or a membership in a health clinic—excuse me, perhaps a gymnasium? Is there 

a constitutional line beyond that? 

If the Supreme Court rules in favor and upholds this bill, this 

Act, this law of the land, as Mr. Altmire referred I believe, if they 

do that, what then can the rest of the workers and the employers 

in America look forward to being commandeered? Where is the 

line? 

Mr. JOST. Again, I only have 5 minutes, rather than 5 hours, 

probably less than that. I would refer you to the excellent opinion 

on this topic written by Judge Sutton of the Sixth District, a very 

well-known, conservative judge, who has in fact been prominently 

mentioned as a Supreme Court potential nominee. And what Judge 

Sutton said and what the other Federal judges, several Federal 

judges, the majority of the Federal judges who have considered this 

question have said in favor of the constitutionality of the statute, 

and where I believe the Supreme Court will come down, is under 

that Article 1 of the Constitution, Congress has the authority to 

regulate commerce. 

Under earlier decisions, Congress must regulate economic decisions. It cannot regulate noneconomic conduct. But what Judge 

Sutton and what the other judges have found is that the health 

care marketplace and the health insurance marketplace are interstate commerce. In fact, it is the largest sector of our economy. 

Mr. KING. Excuse me, Mr. Jost. If an individual doesn’t engage 

in purchasing health insurance, then they are not engaging in 

interstate commerce with the purchase of health insurance. And if 

you expand the argument to utilizing health care services, if an individual is born and dies in a State and doesn’t cross a State line 

and doesn’t use medical of any kind—and that happens; it has alVerDate Mar 15 2010 09:15 Dec 03, 2012 Jkt 076496 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\A496.XXX A496

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ways happened, every generation—how is it that they are engaging 

de facto in interstate commerce? 

Mr. JOST. Well, what Judge Sutton said is, on its face, the statute is constitutional. As applied, there may be some situation 

where somebody may come forward and said, I never used health 

care in my life. I will never use health care in my life. I can prove 

it. The law should not apply to me. He said, that might be a different case. We will cross that bridge when we come to it. 

Mr. KING. We have come to it, actually. Because the Constitution 

has got to apply to everybody. 

Mr. JOST. Right, but a statute—the first question is, has Congress written a statute that is facially constitutional? Could it be 

constitutional as applied to some people? And as applied to 

99.99999 percent of the population, people use health care. 

Mr. KING. The statute presumes that everyone does use health 

care, and it presumes that health insurance is an obligation that 

is a component of health care. And if it presumes that everyone is 

utilizing, then the constitutional rights of those who do not are directly then incorporated into that. So they don’t have their constitutional rights unless they assert them. We have to pass legislation that constitutionally protects everyone. That is the point I 

would make. 

I went way past my time. I am sorry, but I appreciate the indulgence, and I yield back the balance of my time. 

Chairwoman ELLMERS. Thank you. That was a very interesting 

exchange, so I appreciate the line of questioning. Those are definitely some of those issues as we move forward that really does 

need to be discussed. So even though we went over, that was—I 

can say it is all right. 

Do you have any other questions at this time? 

And, Mr. Altmire, do you have any? 

I have a couple of more questions I would like to ask, starting 

with Dr. Holtz-Eakin. 

You have said in the health care law it is a threat to the health 

care of—excuse me, the health of small businesses, and the mandates and penalties are a financial burden. Do you think small 

firms disproportionately affected by the various mandates, penalties, and taxes in the law, will this affect their ability to increase 

employee wages, purchase new equipment, and hire new workers? 

Mr. HOLTZ-EAKIN. Absolutely. If you think of the smallest of the 

small businesses, the proponents of the law like to say, well, look 

they get the credit, and they are exempt from the mandate, and so 

it is all going to be good. 

But the reality is they will face the upward premium pressures 

that inevitably come from the benefit mandates that have already 

begun to be implemented and which are driving premiums up. The 

taxes that will be imposed on insurers, medical device companies, 

and others will which inevitably drive—in my written testimony, I 

walk through the arithmetic of this. This is $5,000 for a family over 

the next 10 years, real big impacts on the cost of health insurance. 

Every time those premiums go up, they come up at the expense 

of wages. There is no way around that. So even for those who are 

ostensibly spared the greatest regulatory burden, the greatest compliance cost burden, and even where temporarily helped, although 


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I am not a fan of the structure of that credit, it is available. I think 

it is, on balance, a bad deal. 

Chairwoman ELLMERS. Thank you. 

Mr. Vaughn, I have a question for you. You currently have 30 

full-time employees; is that correct? And a number of part-time employees. So 30 full time and a number of part time. With the employer mandate in the health care law, is it likely that you will create any additional full-time positions? 

Mr. VAUGHN. As I mentioned earlier, it is not likely. It is likely 

that I will cut to fewer full-time positions. 

It is interesting about what Mr. Larsen said earlier, the tax credit—look, I am not going to participate in this certainly without taxpreferred dollars. He talked about—what was it—nine employees 

or less or some ridiculous number, and those are the only people 

who are going to get a tax credit. So this thing is extreme. 

Mr. Jost said earlier that the large firms, they are not worried 

about it. It is probably not even on their radar screen. That is just 

the cost of doing business for them. But, again, it is clearly in my 

case going to create more part-time jobs and, frankly, people more 

dependent on the government, and I will be cutting even more jobs. 

Chairwoman ELLMERS. Do you feel you may have to cut wages 

also, especially now, of course, with—you know, we have minimum 

wage. But as far as potential increases in wages, do you think you 

may have to draw back on that as well? 

Mr. VAUGHN. I think so. 

Someone mentioned earlier wages should be—absolutely should 

be a function of competition in the market. And I think that those 

of us that are in this business, we are all pretty much in the same 

situation. We are in a pennies business, and our margins—literally, 

we said this thing about Burger King, and people look at us as very 

wealthy and very rich. Out of a dollar, we keep less than a dime 

at the end of the day. And so there is just no way we can afford 

this. Absolutely not. 

Chairwoman ELLMERS. Thank you, Mr. Vaughn. 

And my last question—I have two questions, actually, for Professor Jost. If the forthcoming mandated minimum essential benefit package requires employers to offer a base amount of coverage, 

the package will undoubtedly exceed the coverage that small the 

businesses currently offer. Aren’t the premiums likely to increase 

for the employer or the individual or both? 

Mr. JOST. I would like to refer to a study that was published last 

month by the Urban Institute in which they projected that the 

firms for small employers, average employer contribution per person covered would in fact decrease by 7.4 percent after the Affordable Care Act was fully implemented. 

The reason for that is the exchanges. Right now, small employers 

have to deal with individual insurance companies, and they don’t 

have the economies of scale large employers do. They often have 

risk pools that are less favorable than large employers, and they 

are on their own. Even if they get a good rate this year, they could 

be cancelled next year or they could get a higher rate next year. 

In the exchanges, their business is going to be pooled with the 

business of all of the other small employers, and there is going to 

be lots of competition in the exchanges. There are going to be naVerDate Mar 15 2010 09:15 Dec 03, 2012 Jkt 076496 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HR\OC\A496.XXX A496

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tional insurers as well as the domestic insurers, maybe some of 

these new cooperatives that they are going to be talking about 

today. And so the projection is that, in fact, costs will go down. 

Now with respect to the essential benefits package in particular, 

I had always assumed that small businesses provide less rich benefits than large businesses. I tried to check on that the other day 

and found out if you look at the national compensation survey the 

benefits are pretty much comparable and cover the same things. 

The reason again is because of the State mandates that require in 

many States employers to cover a lot of the same benefits of shared 

employers. 

Also the essential benefits package only covers benefits. It 

doesn’t prescribe cost sharing. Right now, a lot of the gain is in trying to increase cost sharing in various ways. That is probably one 

of the reasons why health care costs are going down, because employees have more skin in the game. And I think that under the 

essential benefits package, number one, it isn’t going to change 

that much what benefits employers are going to have to offer; and, 

number two, they will still have the ability to do considerable adjustment in the cost sharing to try to save costs. 

Chairwoman ELLMERS. Can you just describe to me the difference—you mentioned national insurers and domestic insurers. 

Can you identify for us what you mean by that? 

Mr. JOST. Yes. Under the Affordable Care Act, the Office of Personnel Management is supposed to come up with two national—at 

least two, maybe more—national multi-State insurance plans that 

will be available in every State. It will be like the insurance you 

have, Congresswoman, through the Federal employees health benefit package where you have a choice of national insurers as well 

as local HMOs or other small carriers at the State level. And that 

is going to introduce more competition into the insurance market. 

Again, I have been looking at all of these adjustment requests as 

they come through, and what you see is that in many States you 

have what you see in my market, where you have one insurer with 

85 percent of the market. Well, they set the price. Nobody else really can compete with them. But we are doing to see a number of 

insurers competing, and competition brings down prices. 

Chairwoman ELLMERS. And so can you describe to me then the 

domestic insurer? 

Mr. JOST. Well, by that, I meant insurers that are already there, 

that are licensed in the State. 

Chairwoman ELLMERS. And when you describe the national, are 

those private insurance companies or would that be the government plan? 

Mr. JOST. No, they have to be private insurance companies. They 

have to be a company licensed in the State. 

Chairwoman ELLMERS. Okay. Well, thank you all so much for 

your participation. 

I had asked—if you did have another question, I am more than 

willing—we will definitely approach that. 

This Subcommittee will continue to closely follow the issues related to this implementation of the health care laws. It is very, 

very important that we stay on top of this as it moves forward, especially since things seem to be evolving as we go along. 


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I ask unanimous consent that three articles be submitted for the 

hearing record: an article from Crain’s New York business dated 

June 23rd, 2011, entitled Health Reforms: Grandfathering Rules 

Likely to Raise Costs; an article from Forbes dated July 4th, 2011, 

entitled Health Care Tax Credits are Having a Minuscule Impact; 

and an article from The Hill, which I had mentioned earlier, dated 

July 21st, 2011, entitled Health Care Law Could Leave Families 

with High Health Care Costs. 

Without objection, so ordered. 

All those in favor, signify by saying aye. All those opposing, signify by saying nay. The ayes have it. The request is agreed to. 

Chairwoman ELLMERS. And I ask unanimous consent that members have 5 legislative days to submit statements and supporting 

materials for the record. 

Without objection, so ordered. 

This hearing is now adjourned. Thank you so much. 

[Whereupon, at 11:40 a.m., the Subcommittee was adjourned.] 


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STATEMENT OF 

STEVE LARSEN 

DEPUTY ADMINISTRATOR AND 

OlRECTOR, CENTER FOR CONSUMER INFORMATION AND INSURANCE 

OVERSIGHT 

CENTERS FOR MEDICARE & MEDICAID SERVICES 

ON 

THE IMPACT OF THE AFFORDABLE CARE ACT ON SMALL BUSINESSES 

BEFORE THE 

UNITED STATES HOUSE COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON HEAL THCARE AND TECHNOLOGY 

JULY 28, 2011 
32 


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House Committee on Small Business, Subcommittee on Healthcare and Technology 

Hearing on the Impact of the Affordable Care Act on Small Businesses 

July 28, 2011 

Chairwoman Ellmers, Ranking Member Richmond, and Members of the Subcommittee, thank 

you for the opportunity to discuss how the Affordable Care Act is improving the affordability, 

accessibility, and quality of health insurance available to small businesses and their e!nployees. 

The provision of health insurance to employees can present a very real challenge to small 

businesses. On average, small businesses pay about 18 percent more than large firms for the 

same health insurance policy. I Small businesses lack the purchasing power Ihat larger employers 

have and arc often the targets of insurance industry coverage restrictions and significant annual 

rate increases. Given the difficulties small businesses face in finding and keeping aftordable, 

high-quality health insurance, it is not surprising that they are less likely to offer insurance to 

their employees. According to the 2010 Kaiser/HRET Employer Health Benefits Survey, 59 

percent of businesses with 3 to 9 employees offered health insurance, compared with 99 percent 

of businesses with more than 200 employees. The Kaiser/HRET Survey also found that the most 

important reason that small businesses cited for not offering health benefits is that the cost of 

insurance is too high.2 Small businesses in loday's market are disadvantaged not only by their 

lack of purchasing power compared to large businesses, but also by the challenges they face in 

comparing various insurance products and selecting the best option. 

The Affordable Care Act contains a number of provisions that wi([ help close the gap between 

small and large businesses' ability to offer health insurance (0 their employees. For example. [he 

law establ ishes tax credits for small businesses that provide health insurance to employees 

beginning with the 20 10 tax year. Additionally, starting in 2014, it prohibits most insurers from 

charging small businesses higher rates based on the health status or gender of employees. 

Finally, it creates, as part of the Aftordable Insurance Exchanges. the Small Business Health 

Options Program (SHOP), which will help small business owners compare insurance options in 

their State and purchase coverage for themselves and their employees. SHOP, which will 

'Gabel J, McDevil( R. Gandolfo L, er al. Generosity and Adjusted Premiums in Job-Based Insurance: Hawaii is Up. 

Wyoming is Down. Health Affairs, 2006, 25(3): 832-843. 

'hnp:/!ehbs.kff.org/pdtl2010IS085.pdf, pages 37 and 43 

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become operational by January I, 2014, will help enhance competition in the health insurance 

market, improve choice of affordable health insurance, and give small businesses the same 

purchasing clout as large businesses. 

Tax Credits for Small Businesses that Insure their Employees 

The Affordable Care Act establishes a Small Business Tax Credit that is making health coverage 

more aftordable for small businesses. The tax credit is designed to encourage both small 

businesses and small tax-exempt organizations to offer health insurance coverage to their 

employees for the first time, or to maintain the coverage they already offer. It is targeted at small 

businesses und tax-exempt organizations that primarily employ moderate- and lower-income 

workers. Small businesses can claim the credit for 20 10 through 2013 and for two years after 

that. For each year from 2010 through 2013, the maximum erl':dit is 35 percent oflhe employer 

contribution to premiums paid by an eligible small business, and 25 percent of the contribution 

paid by an eligible tax-exempt organization. After 2013, the maximum matching rate increases 

to 50 percent tor small businesses and 35 percent for tax-exempt organizations, and the credit 

will be available only to small businesses that offer coverage to their employees through the 

SHOp.3 The tax credits provide a vitally needed bridge to 20 14, when small firms will be able 

to shop for coverage in the state-run Affordable Insurance Exchanges. 

We are already seeing the benefits of these provisions of the Act. [n a survey released by Small 

Business Majority in January 201 Lone-third of small business owners surveyed who do not 

otTer insurance said they would be more likely to do so because of the tax credit and the 

Exchanges. Nearly a third of respondents who wefe offering insurance said they would be more 

likely to continue offering it because of the tax credit and the Exchanges.4 There are signs that 

insurance sales to small businesses are increasing. Blue Cross/Blue Shield of Kansas City. which 

reached out to local employers to make sure they were aware oflhe credit, is reporting a 58 

percent increase in the number of small businesses buying insurance since April 2010. This 

) http://www.irs.gov!publn~wsroom!taxcreditfiyer.pdf 

'http://www.smallbusinegsmajority,orgireportsiSBYl.Healthcare Survey OI0411.pdf 
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translates into 400 new small businesses buying coverage for 9,000 employees in the area.s 

UnitedHealth Group enrolled 75,000 new customers in tlrms with fewer than 50 employees.6 

Ending Price Discrimination Based On Illness and Other Factors 

Small businesses are heavily disadvantaged in loday's insurance markets. Without a large group 

of enrollees to pool risk, a single sick employee can cause a drastic premium spike for small 

employers. The premium spike can be paliiculariy large if the cmployee or dependent has a 

costly condition such as cancer or heart disease or a complicated birth. While most States limit 

the extent to which premiums can vary due to employee health status and other factors, many do 

not. In the current market, health status and experience ratil1g have a disproportionate impact on 

small businesses, and even with limits on variation, premiums can be significantly higher for 

small busil1esses. 

The Affordable Care Act takes significant steps to eliminate this disparity. Beginning in 2014, 

the law prohibits new health plans from rating on the basis of health status or claims history. By 

eliminating these discriminatory rating practices, small businesses will no longer see their 

premiums skyrocket because one or two employees fall ill. In addition, the law prevents insurers 

from varying rates based on the gender of a small business's employees and limits how much 

issuers can increase rates based on employees' ages. These new rating rules will help make 

small businesses' health insurance rates fairer. more predictable, and easier to understand. CBO 

estimates that premiums in the small group market could be up to I to 4 percent lower than they 

would have been without the Affordable Care Act in 2016. Savings will come primarily from 

insurance reforms, the competitive nature of the Exchanges, and lower administrative costs. The 

small business tax credits that will help reduce costs for eligible small employers in SHOP will 

save those businesses even more. 

Starting this year, limits on health plan~' medical loss ratio (MLR) will also save small 

businesses money as insurers that fail to meet the standard (80 percent in the small group market) 

must provide refunds to the businesses to which they sold coverage. Finally, the Affordable Care 

.., Cauthin P., "Tax Credits Spur Health Cove-ragc,'~ Kansas Health fnstitule ~ews Service, January 10,2011. 

6 Levey NN, "More Small Businesses are Offering Health Benefits to Workers," The Los Angeles Times, December 

27,2010. 

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Act provides $250 million to States to help improve the oversight of proposed health 

insurance premium increases, take action against insurers seeking unreasonable rate hikes, 

and ensure consumers receive value for their prem ium dollars, 

Affordable Insurance Exchanges: Choices, Competition, and Clout for Small Businesses 

The Affordable Care Aet created the Affordable Insurance Exchanges (Exchanges), which are 

new State-based competitive marketplaces for buying private health insurance. Both individuals 

and small businesses will be able to buy health insurance through Exchanges beginning in 2014. 

On July 11,20 II. the Centers tor Medicare & Medicaid Services (eMS) released a Notice of 

Proposed Rulemaking (NPRM) outlining a framework that will enable States to build 

Exchanges. On the same date, CMS released a second NPRM that provides a framework tor 

ensuring premium stability for plans and enrollees in the Exchanges. These NPRMs renect more 

than a year's worth of work with States, small businesses. consumers and health insurance plans, 

and offer substantial flexibility to Slates in designing their Exchanges. We are engaged in a 

continuous dialog with States, small businesses, consumer advocates, and others on the best way 

to shape the Exchanges to meet their needs. In addition, on July 18.2011, CMS released an 

NPRM that proposes standards for Consumer Operated and Oriented Plans (Co·ors). new 

private non-profit, consumer-governed health insurance plans that will help increase competition 

in the Exchanges and give small businesses additional affordable health insurance choices. 

These proposed rules are the latest in an ongoing series of steps that CMS has taken to help 

States develop Exchanges. Already, 49 States, the District of Columbia, and 4 Territories have 

received Exchange Planning grants authorized under the Act, and to date. ovcr half of the States 

have taken additional action to establish Exchanges. eMS is accepting public comment on the 

proposed rules for 75 days to learn from States. consumers. and other stakeholders how the rules 

can be improved. Cy!S will modify these proposals based on feedback that we receive. 

Small Business Health Options Program (SHOP) 

Small businesses will be able to buy health insurance through a part of the Exchange called the 

SHOP. States can choose to operate separate Exchanges for individuals and small businesses. or 

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have a single Exchange offering individual and small group insurance. Additionally, States can 

choose to keep participants in the individual Exchange and those in the SHOP in separate risk 

pools, or they may merge the two risk pools. giving individuals in the Exchange and workers in 

small businesses the same plan options. 

SHOPs are designed to make buying health coverage easier and more aflordable. SHOPs will 

give small businesses and their employees many of the advantages large employers have today 

such as more choice. more competition. and more clout in the marketplace. Small businesses 

and their employees will be able to easily compare health plans. get answers to questions, and 

enroll in a high.quality health plan that meets their needs. 

Under the Affordable Care Act, businesses with up to 100 employees will be eligible to purchase 

health insurance through the SHOP. States can choose to limit participation to businesses with 

up to 50 employees until 2016. Starting in 2017, States may let businesses with more than 100 

employees buy large group coverage through the SHOP. 

Increasing choice and competition: SHOPs wi!! enable small businesses to offer their employees 

a much greater choice ofheaith plans rrom insurers. options that large employers enjoy in the 

current marketplace. In general, small businesses participating in the SHOPs will choose a level 

of coverage and a level of employer contribution to determine which quali fled health plans they 

will make available to their employees. In this context, levels of coverage include four bene tit 

categories that will be available through the Exchanges (bronze. silver, gold, and pLatinum) 

which indicate the cost-sharing level for consumers. Employees will choose among the available 

qualified health plans within the level otlered by their employer, applying the applicable 

employer contribution to a plan within that level. This employee choice model provides side-byside comparisons of health plans, benefits, premiums, cost-sharing, and quality. Exchanges may 

also choose to provide additional options to employers through SHOP. 

Plans that participate in the Exchanges will need to compete for business by proving to 

employers and consumers that they can offer the best product at the best price. This type of 

market competition has the power to drive improvement in plan quality and affordability. 

s 
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Exchanges will use a streamlined, simple enrollment system geared toward consumers. 

Exchanges will enable consumers to learn about coverage options provided in the market so they 

can make informed choices about the coverage available through the Exchange. State Exchanges 

have flexibility regarding how they design their website and whether they use the application that 

will be made available by eMS or design one on their own that is comparable. State Exchanges 

will design a process for ensuring that participants' information is safc and secure. 

Exchanges will also build partnerships with and award grants to entities known as "Navigators:' 

who will reach out to employers and employt:es, consumers, and self:-employed individuals to: 

Conduct public education activities to raise awareness about qualil1ed health plans; 

Distribute tail' and impartial intormation about enrollment in qualified health plans, 

premium tax credits, and cost-sharing reductions; 

Assist consumers in selecting qualilied health plans; 

Provide referrals to an applicable consumer assistance program or ombudsman in the case 

of grievances_ complaints, or questions regarding health plans or coverage; and 

Provide information in a manner that is culturally and linguistically appropriate. 

States are given substantial flexibility in determining what role brokers and agents, who are a 

vital part of the small group market. will play in the SHOP. For example, States may allow 

agents and brokers to serve as ~avigators in the SHOP. 

Preserving employer control and State tlexibility: While there are many new options available 

for small businesses as a result of the Affordable Care Act. small business owners will decide 

whether to participate in the SHOP. While the SHOP and Exchanges will dramatically expand 

coverage options for many. small businesses wiI! still have the choice of purchasing private 

health insurance outside of the SHOP and the Exchanges. 

lfsmall businesses do participate in the SHOP. the NPRI'vl proposes that they will be able to 

choose their own level of contribution toward their employees' coverage, and, if they choose, 

make a single monthly payment via SHOP rather than making individual payments to multiple 

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plans on behalf of their employees. Employers will write one check to the SHOP. and the SHOP 

will take care of paying each insurance company the correct amount. This single payment is 

designed to increase the convenience of participating in the SHOP for sma It employers and 

reduce their administrative burden, making it easier for them to offer a choice of plans to their 

employees. 

Under the NPRM, States will have flexibility in deciding how the SHOP functions. During the 

current public comment period, we hope to hear fium all stakeholders, including small 

businesses, on the best way to structure the SHOP to maximize choice, competition, and value 

for the employer's premium do(lar. For example, in addition to employee choice among plans in 

a particular benefit level, the NPRM provides Exchanges the option to allow an employer to 

select one or more plans for its employees. This is how many small employers offer coverage in 

the current small group market. This additional tlexibility could allow employers to choose an 

option where employees choose plans at multiple levels, with the employee paying the cost 

difference for more generous plans. 

Increased clout: In the current market, small businesses pay disproportionately higher 

administrative costs compared to large businesses. SHOPs can save small businesses money by 

creating a competitive marketplace of qualified health plans and a simplified enrollment system. 

CBO estimates that lower administrative costs in the small group market, through economies of 

scale and standardization of benefits, will reduce average premiums by I to 4 percent. 7 In 

addition, insurance companies within the SHOPs will compete for business on a level and 

transparent playing field, driving down costs. As previously mentioned, smail business may also 

be eligible for the small business tax credit when they offer health coverage to their employees 

through a SHOP after 2013. 

Conclusion 

Small businesses are already benefiting from the Affordable Care Act and those benefits will 

expand dramatically as the Act continues to take effect. The small business tax credit is 

lowering costs and providing a bridge to 2014, when small businesses will enjoy many of the 

7 http://www,cbo.govlfi,,docsll07xxldocl 0781 111-30-Premiums.pdf (2009) 

7 
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advantages from whieh large businesses already benefit: larger risk pools. greater purchasing 

power. and a choice of plans. In addition, limits on discriminatory rating practices. risk 

adjustment, reinsurance. risk corridors, and greater pooled purchasing of coverage will go into 

effect in 2014 - ensuring that small businesses do not lilce a premium shock when their 

employees get sick and need health coverage most, thus keeping coverage affordable into the 

future. 

Small businesses wi!! continue to benefit from the Affordable Care Act. Thc Rand Corporation 

estimates that without passage of the Affordable Care Act. only 53 percent of small businesses 

with fewer than 10 employees and 71 percent of small businesses with 11 to 25 employees would 

have offered coverage in 2016g However. because ofthe Affordable Care Act. an estimated 77 

percent of small bllsine~ses with fewer than 10 employees will offer coverage in 2016 - resulting 

in over I million additional employers and 6 million additional workers with health insurance 

coverage- and almost 90 percent of small businesses with 11 to 25 employees will offer 

coverage in 2016 - that's 3 million additional workers with coverage." 

Thank you for the opportunity to appear before you to discuss the Affordable Care Act's critical 

provisions to support small businesses' ability offer health insurance to their employees. 

'http://www.rand.org/contentldamirandl))ubs/lechnical reoortsi20 1 O/RAND TR825.pdf (20 I 0) 

\) ibid. 

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Small Business and PPACA 

Testimony before the United States House of Representatives 

Committee on Small Business 

Subcommittee on Healthcare and Technology 

Douglas Holtz-Eakin 

President, American Action Forum' 

July 28,2011 

'The views expressed herein are my own and do not represent the position of the 

American Action Forum. 

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Chairwoman Ellmers, Ranking Member Richmond, and Members of the committee, 

thank you for the privilege of appearing today. In this written statement, I hope to 

make the following points: 

1. The Patient Protection and Affordable Care Act (PPACA) raises the overall cost of 

operating a small business and undermines job growth in the United States; 

2. The PPACA's new taxes will dramatically increase the cost of insurance 

premiums and force small insurers out of business; removing insurance options 

for small business owners and hastening the decline in employer sponsored 

insurance; 

3. The small business tax credits and the grandfathering health insurance 

provisions included in the PPACA provide offer false promises to small business 

owners and create disincentives for future job growth; and 

4. Ultimately, the PPACA will lead to a dramatic decline in employer sponsored 

insurance; meaning as many as 35 million Americans will not be able to keep 

their insurance if they like it and the federal government will need to 

substantially increase spending projections for the state exchange subsidies. 

Let me discuss each in turn. 

1. The Patient Protection and Affordable Care Act (PPACA) raises the overall cost of 

operating a small business and undermines job growth in the United States. 

The PPACA is a threat to the health of small businesses. Its heavy dosage of 

mandates and penalties will be a financial burden, and the law is riddled with 

hidden barriers to stronger job growth. 

The small business implications of the legislation are important because data from 

the ADP National Employment Report shows that since January 2001 companies 

with one to 49 employees were responsible for 36 percent of job growth. while 

those with 50 to 499 workers accounted for 44 percent of new jobs. 

Small business vitality is crucial to the economic fortunes of U.S. workers, and 

substantial new costs that curtail their hiring should be of concern to companies, 

workers and policymakers alike. 

Sadly, the new health-care law is an assault on small business, beginning with the 

3.8 percent Medicare tax on net investment income - a direct tax on many business 

owners. Of even greater concern is the law's most celebrated feature - the mandate 

to cover full-time employees with health insurance. For businesses with more than 

SO workers, this means paying a penalty if any full-time workers receive subsidized 

coverage. 

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The mandate creates a tremendous impediment to expansion. Suppose for example 

that a firm does not provide health benefits. Hiring one more worker to raise 

employment t 0 51 will trigger a penalty of $2,000 per worker multiplied by the 

entire workforce, after subtracting the first 30 workers. In this case the fine would 

be $42,000 to hire an additional worker. How many firms will chose not to expand? 

The authors of the health-care law reflect liberal indifference to the climate for 

business, perhaps believing that businesses have a hidden well of resources or an 

infinite ability to evade the burdens placed on them. Businesses will try to shift 

costs. But their ability to push the burden on customers with higher prices is quite 

circumscribed. 

Instead, we would expect that the effective burden will be borne by workers in the 

form of lower wage growth. fewer hours and reduced job growth. The only other 

avenue is for business owners to pay the costs out of scarce capital, raising the 

prospect of increased failure rates. 

2. The PPACA's new taxes and onerous regulations will dramatically increase the cast 

of insurance premiums and force small insurers out afbusiness; removing 

insurance options for small business owners and hastening the decline in employer· 

sponsored insurance 

As businesses juggle new direct operating costs. they will face higher insurance 

premiums. The law levies roughly $500 billion in new taxes that will enter the 

supply chain for medica! services, reveaHng themselves as higher medical costs. 

Specific to health insurers. the PPACA imposes a fee that amounts to a de facto 

"health insurance premium tax" that will raise the cost of health insurance by an 

additional 3 percent for American families and small employers. Under the law, an 

annual fee will apply to any U.s. health insurance provider, with the intent of raiSing 

nearly $90 billion over the budget window. As shown in Table 1, the aggregate 

annual fee for all U.S. health insurance providers begins at $8 billion in 2014 and 

rises thereafter. 

Table 1: Aggregate Insurance Feesl 

Year I Fee 

2014 I $ 8 billion 

2015 $11.3 billion 

2016 $11.3 billion 

2017 $13.9 billion 

2018 & Bey()nd ' $143 billion 

TQtal through 2020 $87.1 billion 

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To see the implications for insurance costs, one must examine how it affects 

individual insurers. Each firm will be liable for a share of the aggregate fee that is 

calculated in two steps. First, each company will compute the total premiums 

affected by the law using the formula outlined in Table 2. For example, an insurer 

with net premium revenues of$10 million is unaffected. In contrast, an insurer with 

net premiums of$100 million will have $62.5 million ($12.5 million from the SO 

percent component between $25 million and $50 million, and $50 million from the 

remainderJ.3 The aggregate fee is apportioned among the insurers based on their 

shares of the affected premiums. Importantly, the fees are not deductible for 

income tax purposes. 

Table 2: Fraction of Premiums Counted 

Taken at face value, insurers have to pay this new "health insurance premium tax." 

Unfortunately, this ignores the influence of market forces. For any company, as it 

sells more insurance policies it will incur a greater market share, and thus a greater 

share of the $87 billion. That is, with each policy sold, the firm's total tax liability 

rises; precisely the structure of an excise tax. And as with any excise tax, firms don't 

really pay taxes; they are shifted to suppliers, workers, or customers. Thus, it is 

important to distinguish between the statutory incidence of the premium tax - the 

legal responsibility to remit the tax to the Treasury and the economic incidencethe loss in real income as a result of the tax. 

Insurance companies will have to send the premium tax payments to the Treasury, 

so the statutory incidence is obvious. However, a basic lesson of tax policy is that 

people pay taxes; firms do not. Accordingly, the economic burden of the $67 billion 

in premium taxes must be borne by individuals. Which individuals will bear the 

economic cost? 

The impOSition of the premium tax will upset the cost structure of insurance 

companies, raising costs per policy and reducing net income (or exacerbating 

losses). Some might argue that the firms will simply "eat the tax" - that is simply 

accept the reduction in net income. For a short time, this may well be the case. 

Unfortunately, to make no changes whatsoever will directly impact companies' 

abilities to make investments in health IT programs, wellness initiatives and disease 

management tools. Ultimately, this hurts individuals and small employers who 

won't have access to the types of tools and programs that can improve the quality of 

care and lower costs. Trying to retain the status quo also hurts the return on equity 

invested in the firm. Because insurance companies compete for investor dollars in 

competitive, global capital markets, they will be unable to both offer a permanently 

lower return and raise the equity capital necessary to service their policyholders. 

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Importantly, these impacts wi![ be felt equally by the not-far-profit insurers. Nonprofits have comparable resource needs for disease management, wellness efforts, 

or IT equipment. They also have equity capital demands, as they rely on retained 

earnings as reserves to augment their capital base. Bearing the burden of the tax 

means lower access to these reserves and diminished capital, harming their ability 

to continue to serve policyholders effectively. 

In short, all insurers - for profit and non-profit alike - will seek to restructure in an 

attempt to restore profitability, with the main opportunity lying in the area of labor 

compensation costs. To the extent possible, firms will either reduce compensation 

growth, squeeze labor expansion plans (or even lay off workers), or both. However, 

there are sharp limits on the ability of companies to shift the effective burden of 

excise taxes on to either shareholders (capital) or employees (labor). Moreover, 

their ability to do so diminishes over time as capital and lahor seek out better 

market opportunities. 

The only other place to shift the tax cost is onto customer's - Le., families and small 

businesses. This economic reality is reflected in the Congressional Budget Office 

and Joint Committee on Taxation revenue estimating procedures. Specifically, they 

apply a 25 percent "offset" to the estimated gross receipts of any excise tax. In 

terms of the premium tax. this convention has two important implications. First, if 

the aggregate fee were recognized as a premium excise tax that carried incentives to 

shift some of the burden via lower dividends, capital gains, and wages, then the 

aggregate fee will overstate the net budget receipts. To the extent this happens, 

receipts of income-based taxes will fall; hence the need for an offset to the gross 

receipts of the excise tax. 

The second implication is that the remainder of the tax is passed on to consumers. 

That is, the offset is not 100 percent meaning that the non-partisan consensus-based 

revenue estimators have concluded that the vast majority of the burden of excise 

taxes will /lot be borne by shareholders or workers. 

If market conditions make it impossible for insurers to absorb the economic burden 

of the premium tax, they will have no choice but to build the new, higher costs into 

the priCing structure of poliCies. In this way, the economic burden of the tax is 

shifted to the purchasers of health insurance. In particular, the more competitive 

are markets for equity capital and hired labor, the greater the fraction of the burden 

that will be borne by consumers. 

The implications for purchasers of health insurance are obvious and unambiguously 

negative. In addition, as employers pay more for health insurance, they will have to 

shave back on cash wage increases, and thus taxable compensation. Thus the health 

insurance premium tax will have the perverse effect oflowering personal income 

and payroll taxes. 

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To top things off, the PPACA has an especially unpleasant feature for those facing 

higher premiums: the fees are not tax-dedu,tible but higher premiums will be 

taxable. 

This non-standard tax treatment matters a lot. If an insurance company passes 

along $1 of premium taxes in higher premiums and ,annat deduct the cost (fee), it 

will pay another $0.35 in taxes. Accordingly the impact on the insurer is $0.65 in net 

revenue minus the $1 fee. Bottom line: a loss of $0.35. (The problem gets worse 

when you consider that the $1 of additional premium is also subject to other statelevel premium taxes and in some cases a state income tax.) 

To break even, each insurer will have to raise prices by $1/(1-0.35) or $1.54. If it 

does this, the after-tax revenue is the full $1 needed to offset the fee. This has 

dramatic implications for the overall impact of the premium taxes. Instead of an 

upward pressure on premiums of $87.4 billion in fees over the budget window, the 

upward pressure will be $134.6 billion. 

The line of reasoning outlined above is sometimes met with skepticism, and 

countered with the notion that consumers will simply be unwilling to accept a 

higher price. Evidence suggests that this is not true, but suppose the counterargument is taken at face value. To the extent that firms accept a lower rate of 

return, they will be unable to attract capital. Similarly, to the extent they reduce 

employment in response to the tax (or cut wages and lose skilled employees to 

better opportunities), they will again suffer in their ability raise their scale of 

operations. In short, for insurers that attempt to adjust entirely on the cost side will 

be unable to maintain their operations at a competitive level, and will lose market 

share or even depart the industry entirely. For health insurance markets as a whole, 

this reduces competition. The bottom line for consumers is the same: higher prices. 

To gain a rough empirical feel of an average $87 billion health insurance premium 

tax, I employ publicly-available data on Yahoo! Finance.4 Those data indicate that 

the earnings for the industry called "Health Care Plans" were roughly $16 billion. 

The average annual aggregate fee of$8.7 billion is a substantial impact on the cost 

structure and profitability of the companies; roughly one-half of the net earnings. 

Could insurers absorb the fee and remain competitive in the market for equity 

capital? As a whole, the overall profit margin is shown as 4.2 percent.s Assuming no 

change in behavior, a 50 percent decline on a sustained basis would make it 

impossible to obtain the financing needed to compete. Accordingly, it will be a 

matter of competitive reality for the insurers to pass the fee to consumers in the 

form of higher health insurance premiums. 

In short, the health insurance fee will likely quickly and nearly completely be 

incorporated into higher insurance premiums. To get a feel for the implications. I 

adopt the projected changes in insurance coverage by Medicaid and SCAlP; 

employers, and non-group and others contained in the Congressional Budget Office 

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letter to Nancy Pelosi on March 20 2010.6 Using the rough assumptions that 55 

percent of employer coverage is self-funded and that 66 percent of Medicaid and 

SCHIP is private coverage yields an estimate of the insured coverage in each year. 

To compute the baseline premium income, I assume that premiums per person will 

grow at an average rate of 3 percent. When combined with the coverage growth 

implicit in the CBO projections, the result is projected growth in overall premium 

income. In 2009, overall premium income was $1.005 trillion, providing a starting 

point for a projection of premium income in each year. 7 

Table 3 shows the impact of the AGA on premiums. As shown at the bottom of the 

table, the premium tax in isolation will raise premiums from between 2.4 percent 

(in 2014) to over 3 percent (in 2015), If one factors in a second assessment on 

insurers that covers the transitional reinsurance program, the effect will be as large 

as 3.5 percent. 

Table 3: Impact ofPPACA on Insurance Premiums 

Year 2014 2015 2016 20l? 2018 2019 

Fees: Fully Insured Plans OnlyJ$Il) 

Premium Tax {PPACA Section 9010) $8.0 $11.3 $11.3 $13.9 $14.3 $14.3 

Reinsurance [PPACA Section 1341) $2.0 $2.0 $1.0 

Fees; Fully Insured & Self-Funded ($B) 

Reinsurance Transition (Section 1341 J $10.0 $6.0 $1.0 

Total Fees and Assessments ($Bl $20.0 $19.3 $\6.3 $13.9 $14.3 $14.3 

Impact: Fullv Insured Pre!mums Ipet.) 

Premium Tax 2.40% 3.03% 2.69% 3.02% 2.98% 2.89% 

Premium Tax and Reinsurance 3.16% 3.45% 2.96% 3.U2% 2.98% 2.89% 

Data from the Kaiser Family Foundation show that the average overall family 

premium in 2010 is $13,770.8 Using this as a rough guide, the ACA premium tax will 

add as much as $475 to the costs, or nearly $5,000 per family over a decade. 

The ACA contains insurance reforms, medical device taxes, pharmaceutical fees, and 

insurance company fees that will raise the cost of insurance for millions of 

individuals, small businesses and households. This analysis suggests that the 

insurance tax in isolation will raise premiums by roughly 3 percent. An important 

topic for future research is to perform similar analyses for the other cost-raising 

aspects of the AGA in order to assess the overall pressure on premiums. 

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3. The small business tax credits and the grandfathering health insurance provisions 

included in the PPACA provide offer false promises to small business owners and 

create disincentives for future job growth. 

Proponents of the PPACA point toward the fact that small businesses will receive aid 

in the form of a small business tax credit. ostensibly offsetting the burdens outlined 

above. Unfortunately, the credit is available only for employers with fewer than 25 

workers and those in which average earnings are under $50,000. Thus the cost and 

growth impacts for those with 26 to SO employees remains unchanged. Moreover, 

the credit is not a permanent part of the small business landscape. An employer 

may receive the credit only until 2013 and then for two consecutive tax years 

thereafter. Thus. the credit is available for a maximum of six years. 

Turning to the credit itself. to be eligible the employer must pay at least 50 percent 

of the premium. The credit is equal to 35 percent of employer contributions for 

qualified coverage beginning in 2010, increasing to 50 percent of the premium in 

2014 and thereafter. The amount of the credit is phased-out for firms with average 

annual earnings per worker between $25.000 and $50,000. The amount of the 

credit is also phased-out for employers with between 10 and 25 employees. 

The combination of requirements for premium contributions, limitation on 

employees, limitations on earnings. and phase-outs has surprised the small business 

community. IN particular. the reform's strict definition that a firm is only a small 

business ifit has 25 or fewer employees proved convenient to the legislators who 

crafted the bill. This narrow definition has led to a number of studies that assert 

that more than 80 percent of small businesses will be eligible for the tax credit. 

Even those studies that recognize the limitation imposed by the 25-employee limit 

tend to overstate the likely penetration ofthe tax credit. For example. the Small 

Business Majority and Families USA recently estimated that 84 percent of the 

nation's 4.8 million businesses that employ 25 or fewer employees will be eligible 

for the tax credit. Unfortunately. the net impact of the credit in offsetting the cost of 

the PPACA will depend not upon eligibility but rather on receipt of the tax credit. 

This distinction was noted early in the debate by the Congressional Budget Office 

(CBO). [n November 2009 when the law was being considered before Congress, 

eBO found that. "A relatively small share (about 12 percent) of people with coverage 

in the small group market would benefit from the credit in 2016." 

A more useful study focuses on the estimated number of small firms who would 

qualify for the small business health insurance tax credit. An analysis conducted by 

the National Federation of Independent Business (NFIB) found that the total 

number of firms that offer health insurance and pay more than half oftheir 

employees' premium costs, as mandated under PPACA, is more likely near 3S 

percent of all fjrms with less than 25 employees. 

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In the same way that the individual mandate provides an implicit tax on growth, the 

structure of the small business tax credit will raise the effective marginal tax rate on 

small business expansion. For this reason, the credit may discourage firms from 

hiring more workers or higher-paid workers. Consider two examples. 

In the first, employers will have an incentive to avoid increases in the average rate 

of pay in their firm. Suppose that the average wage in a small (3 worker) firm is 

$25,000 and the owner decides to add a more highly paid supervisor being paid 

$50,000. This will raise the average wages in the firm to $31,250 thereby reducing 

the tax credit per worker from $2,100 to $1.596. In effect, the structure of the credit 

raises the effective cost of adding valuable supervisory capacity. 

In this example, total credits to the firm are essentially unchanged ($6,300 to 

$6,384) by raising the average wage. If the new supervisor were paid $75,000 

however, total credit payments would fall from $6,300 to $4,368. The lesion is clear 

in that the structure of the tax credit can impose large effective tax rates on raising 

the quality of the labor force for those receiving the small business credit. 

Similar incentives affect the decision to hire additional workers because the overall 

tax credit falls by 6.7 percent for each additional employee beyond 10 workers. This 

is a very strong disincentive to expanding the size of the firm. Using the example 

above, suppose that the firm has 10 employees and total credits received were 

$21,000. The firm's total subsidY will peak at $21,840 with the hiring of the 13th 

worker. Thus, a firm employing 13 workers would get a total tax credit of $21,840 

while a firm employing 24 workers would receive a total credit of only $3,360. 

Ultimately, the small business tax credits will prove to be little more than a talking 

point for PPACA advocates. Relatively few small businesses will quality for the 

credit and even fewer will be able to offset the cost of PPACA on small business 

health insurance premiums. For those that do quality, receiving the tax credits will 

impose a new regime of hidden effective marginal tax increases on a small business 

owner's ability to increase employment and hire more qualified employees. 

Whether they quality for the tax credit or not. small business owners can expect to 

be re-working their benefits packages. Even though President Obama promised 

that, "If you like what you have you can keep it," most small business owners will 

need to find new health insurance plans to for their employees. 

In June 2010, the Administration released interim final regulations defining 

grandfathered status for health insurance plans (75 Fed. Reg. 24538). To be eligible 

for grandfathered status, employers cannot raise deductibles or out-of-pocket limits 

by more than 15 percentage points beyond the increase in the medical [nHation, nor 

can they raise co-pays by more than that amount, or $5 if that is more. They also 

cannot increase employee coinsurance percentages at all. In addition, a health plan 

or benefit package will lose grandfathered status if the sponsor cuts their 

contribution rate toward total coverage costs by more than 5 percentage points. 

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These regulations essentially undercut the stated intent of the law (Sec. 1251) that 

"nothing in this Act requires an individual to terminate coverage under a group 

health plan Of health insurance coverage in which they were enrolled on the date of 

the healthcare reform law's enactment." 

The Obama Administration's interim regulations for grandfathered plans estimate 

that 18 percent of large employer plans and 30 percent of small employers plans 

would lose grandfather status in 2011. increasing over time to 45 percent and 66 

percent respectively by 2013. This is at best an overly optimistic estimate, 

especially in light of recent employer surveys that indicate between 63 percent and 

88 percent of employers anticipate losing grandfathered status by 2013. 

Hewitt Associates, a leading global health benefits conSUlting, conducted a survey of 

450 employers representing 6.9 million employees that specifically focused on the 

grandfathered health plan rules. The survey found that 88 percent of self-insured 

medical plans and 81 percent of fully-insured medical plans expect to lose 

grandfathered status by 2014. 

These results are corroborated by a similar study done by Mercer, another leading 

global health benefits consulting firm, 62 percent of small businesses have at least 

one red flag in their plan design that violates the new law's mandates, and 14 

percent have two red flags. 

Simply put the rules designed to determine grandfathered status undermine 

existing health insurance plans and contradict the stated intent of the bill as well as 

the promises made to the American people by President Obama. The grandfathered 

health plan rule erodes existing employer-based insurance plans. especially for 

small businesses. 

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4. The PPACA will lead to a dramatic decline in employer sponsored insurance; 

meaning as many as 35 million Americans will not be able to keep their insurance 

if they like it and the federal government will need to increase spending projections 

for the federal government by $1.4 trillion. 

The PPACA will have profound implications for U.S. labor markets. Today about 163 

million workers and their families receive health insurance coverage from their 

employers. While proponents of the PPACA insisted that a key tenet was to build 

on this system of employer-sponsored coverage, the healthcare law creates strong 

incentives for employers to drop employer-sponsored health insurance. 

Roughly one-half of the $900 billion of spending in the PPACA is devoted to 

subsidies for individuals who do not receive health insurance from their employers. 

These subsidies are remarkably generous, even for those with relatively high 

incomes. For example a family earning about $59,000 a year in 2014 would receive 

a premium subsidy of about $7,200. A family making $71,000 would receive about 

$5,200; and even a family earning about $95,000 would receive a subsidy of almost 

$3,000. 

By 2018, subsidy amounts and the income levels to qualify for those subsidies 

would grow substantially: a family earning about $64,000 would receive a subsidy 

of over $10,000, a family earning $77,000 would receive a subsidy of $7,800 and 

families earning $102,000 would receive a subsidy of almost $5,000. 

An obvious question is how employers will react to the presence of an alternative -

subsidized source of insurance for their workers which can be accessed if they 

drop coverage for their employees. The most simple calculation focuses on the 

tradeoff between employer savings and the $2,000 penalty (per employee) imposed 

by the PPACA on employers whose employees move to subsidized exchange 

coverage. Consider a $12.000 policy in 2014, of which the employer would bear 

roughly three-quarters or $9,000. A simple comparison of $9,000 in savings versus 

a $2,000 penalty would seemingly suggest large-scale incentives to drop insurance. 

Caterpillar for instance noted that it could save 70 percent on health care costs by 

dropping coverage and paying the penalties; AT&T's $2.4 billion cost of coverage 

would drop to just $600 million for the penalties. And the list could go on. 

Unfortunately, the economics of the compensation decision are a bit more subtle 

than this simple calculation. Health insurance is only one portion of the overall 

compensation package employees receive as a result of competitive pressures. And 

the evidence suggests that if one portion of that package is reduced or eliminated -

health insurance - another aspect - wages - will ultimately be increased as a 

competitive necessity to retain and attract valuable labor. Thus, the key question is 

whether the employer can keep the employee "happy" - appropriately compensated 

and insured - and save money. 

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Table 4: Health Care Reform and Employer-Sponsored Insurance in 2014 

(Employer Health Plan =$11.941) 

Percent of Tax Wage Equivalent Federal Required Employer Free Employer 

Federal Income1 of Employer Drop 

Poverty Level Bracket' Health Plan" Subsidies· Pay Raise' Cash Flow' Decision7 

133% $31,521 15% $14,048 $l4,176 -$128 $9,941 Drop 

150% $35,550 15% $1'1,018 $13,385 $663 $9,941 Drop 

200% $47,400 25% $15,921 $10.965 $4,936 $9,941 Drop 

250% $59.250 25% $15,921 $7,530 $8,391 $9,941 Drop 

300% $71,100 25% $15.921 $5,187 $10.734 $9,941 Keep 

400% $94,800 28% $16.585 $2,935 $B.650 $9,941 Keep 

NpJ§: 

l.lncome calculated based on 2009 FPL lor a family of four of $22,050 [IIHS), indexed to (PI projections (CBO) 

2, Tax bracket calculated based on 2010 tax hraekel', indexed to CPI projections (eBO) 

3, Computed as eBO estimate of Silver Plan in 2016, indexed to 2014 ($11,941), and divided by (I-Tax Rate] 

4. Estjmated federal insurance subsidy 

6. Value of insurance plan minus $2,000 penalty 

I S. Wage equivalent minus subsidies 

i 7, Drop ifrequired pay raise is greater than free cash flow 

As Table 4 outlines, the answer is frequently "yes" - thanks to the generosity of 

federal subsidies, To see the logic, consider the first row of the table, which shows 

the implications for a worker at 133 percent of the Federal Poverty Level [FPL) or 

$31,521 in 2014. We project that this worker will be in the 15 percent federal tax 

bracket, which means that $100 of wages (which yields $85J is needed to offset the 

loss of $85 dollars of untaxed employer-provided health insurance. Consider now a 

health insurance policy worth $15,921, of which the employer picks up 7S percent 

of the cost. The employer's contribution to health insurance of $11,941 is the 

equivalent of a wage increase of $14,048 to the worker, 

Do the economics ofPPACA ever suggest that employer's could drop? Yes, The 

employee would receive $14,176 in federal subsidies - more than the value of the 

lost health insurance. On paper, they could take a pay cut and be better off. Clearly, 

the employer comes out way ahead - $11,941 less the penalty. Obviously. there is 

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room for the employer to actually improve the worker's life by having a smail pay 

raise and the same insurance and still save money. This is a powerful. mutual 

incentive to eliminate employer-sponsored insurance. 

The remaining rows of Table 4 repeat this calculation for workers at ascending 

levels of affluence. For example, at 200 percent of the FPL, the "surplus" between 

the pay raise required to hold a worker harmless ($4,936) and the firm's cash-flow 

benefit from dropping coverage ($9,941) has narrowed, but the bottom line decision 

in the final column is the same. Indeed, the incentives are quite powerful up to 250 

percent of FPL, or $59,250. Only for higher-income workers do the advantages of 

untaxed health insurance make it infeasible to drop insurance and re-work the 

compensation package. Appendix Table 1 repeats this analysis and checks the 

robustness of this conclusion if one assumes that health care costs are significantly 

higher and the employer's contribution to the insurance plan rises to $15,000. In 

this instance the decision holds for up to 200 percent of FPL. 

How big could this impact be? In round numbers, at present there are 123 million 

Americans under 250 percent of the FPL. Roughly 60 percent of Americans work 

(the employment-population ratio is 58.8 percent) and about 60 percent of those 

receive employer- sponsored insurance. This suggests that there are about 43 

million workers for whom it makes sense to drop insurance if the health plan costs 

the employer $11,941. 

CBO estimated that only 19 million residents would receive subsidies, at a cost of 

about $450 billion over the first 10 years. This analysis suggests that the number 

could easily be triple that (19 million plus an additional 38 million in 2014) - the 

gross price tag would be roughly $1.4 trillion3. 

In contrast, the CBO predicted that only 3 million individuals who previously 

received coverage through their employers will get subsidized coverage through the 

new exchanges. One mechanism that would reduce employer drop is if high-wage 

workers continue to receive insurance and non-discrimination rules force 

employers to offer insurance to all workers - even those for whom it makes sense to 

drop coverage. For those firms dominated by lower-wage workers this is unlikely to 

succeed as it will be possible to use the accumulated savings to retain the few highwage workers. Or, there may be incentives for firms to "out-source" their low-wage 

workers to specialist firms (that do not offer coverage) and contract for their skills. 

In any event, the massive federal subsidies are money on the table inviting a vast 

reworking of compensation packages, insurance coverage, and labor market 

relations. 

This analysis has been recently corroborated by employer surveys conducted by 

McKinsey & Company and PricewaterhouseCoopers (PwC). The McKinsey survey of 

more than 1,300 employers across industries, geographies, and employer sizes 

found: 

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Overall, 30 percent of employers will definitely or probably stop offering 

employer-sponsored insurance in the years after 2014 

Among employers with a higher awareness of reform, this proposition 

increases to more than SO percent, and upward of 60 percent will pursue 

some alternative to traditional employer-sponsored insurance 

As part of its annual report, PwC surveyed employers about changes they are 

making in their benefits plans. The survey found: 

Overall, 86 percent of employers are likely to re-evaluate their overall 

benefits strategy 

One-half (50percent) of employers are considering significantly changing or 

eliminating company subsidies for dependent medical coverage. 

With each passing day the impact of the PPACA grows clearer. The healthcare law 

harms small businesses and wnI have profound implications for U.S. labor markets. 

It must be repealed and replaced with real healthcare reforms that encourage 

providers to offer higher-quality care at lower costs; reduce the cost pressures that 

underlie the bankrupt Medicare and Medicaid entitlements; and give every 

American access to more options for quality insurance. 

Thank you and I look forward to answering your questions. 

1 The non~deductjbmty of the Insurance fees raises their economic impact. See text for discussion. 

2 The statute provides that after 2018 the insurance fee is equal to the amount of the fee in the preceding 

year increased by the rate of premium growth for the preceding calendar year. 

3 There is some ambiguity as to whether the reduced percentages to the first $50 million apply to all firms. 

If it applies only to those with revenue below the threshold, the overall analysis is little changed, but the 

premium pressures will differ across market segments and products. 

4 See bJ1P://biz.yahoo.com!p!S22gpmd.html. 

5 See also, "Health Care-Managed Care," Barclays Capital, November 19. 2009 which indicates an overall 

profit margin of 4.42 percent. 

G See http;lfwww.cbo.gov/itPdocs/113xx/docl1379/AQ)~!'..d_RecQnProp.pdf. 

7 See also, "Health Care-Managed Care," Barclay> Capital, November 19, 2009 which indicates an overall 

profit margin of 4.42 percent. 

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s httD'/I.hb, kff,Qrg/pdfIZ010/808S,pdf 

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Testimony of William J. Dennis. Jr., Senior Research Fellow, NFIB Research Foundation befClre the 

House Subcommittee on Healthcare and TechnCllogy 

Thank you Chairwoman Ellmers, Ranking Member Richmond. and all Members of the Healthcare and 

Technology Subcommittee for the invitation to testify today. My name is William Dennis and I am the 

Senior Research Fellow at the National Federation of Independent BuSiness. As such, I manage NFIB's 

research program and direct long-term policy planning and annual surveys. 

Earlier this week, NFIB released a survey titled, "Small Business and Health Insurance: One Year After the 

Enactment of PPACA." The data for this report were drawn from a nationally representative telephone 

survey of small employers during the latter part of April and the first half of May, 2011. The survey was 

conducted for the NFIB Research Foundation by the polling firm Mason-Dixon, Inc. of Columbia, Md. The 

sample was drawn from the files of Dun & Bradstreet with small employer defined as those employing 

50 or fewer people other than the owner(s) - the number that triggers the employer mandate within 

the law. 

Our results found that one year after passage of the Patient Protection and Affordable Care Act (PPACA), 

42 percent of small employers - defined as businesses employing SO or fewer people other than the 

owner(s)- offer employee health insurance. In the last 12 months, 1 percent of offering small 

employers added health insurance as an employee benefit while 4 percent of non-offering employers 

dropped it. 

The number of small employers offering employee health insurance is likely to change little over the 

next 12 months. Virtually no small employer now offering expects to drop health insurance in the next 

year and virtually no non-offering employer expects to add it in that time frame. 

Twenty (20) percent of small employers currently offering expect to significantly change their benefit 

package and or their employees' premium cost-share the next time they renew their health insurance 

plans. Almost ali significant changes expected involve a decrease in benefits, an increase in employee 

cost-share, or both. 

Since enactment, one in eight (12%) small employers have either had their health insurance plans 

terminated or been told that their plan would not be available in the future. Plan elimination is the first 

major consequence of PPACA that small-business owners likely feel. 

Eighteen (18) percent of small employers think they are "very familiar" with PPACA and another 40 

percent think they are "somewhat familiar" with the new law. 

By overwhelming margins, small employers who have some knowledge of the new law think that PPACA 

will not reduce the rate of health care (insurance) cost increases, will not reduce the administrative 
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burden, will increase taxes, and will add to the federal deficit. They agree that f'f'ACA will result in more 

people having health insurance coverage, but do not think it will yield a healthier American public. 

The principal factor explaining the PPACA outcomes that small-business owners expect is their current 

offer/non-offer status. Those offering employee health insurance are notably more pessimistic about 

the new law's projected outcomes, Neither the degree of familiarity with PPACA nor employee size-ofbusiness is associated with their expected outcomes, 

Low-wage employees, particularly those experiencing a large premium cost-share, have a powerful 

incentive to bolt an employer's health plan for the newly established and heavily subsidized exchanges. 

Should employees begin to leave for an exchange, 26 percent of currently offering small employers are 

very likely to explore dropping their health insurance plans and another 31 percent are somewhat likely 

to do so. 

A key factor in a small employer's decision to drop a current health insurance plan will be the proportion 

of employees who leave their health plan for an exchange. Forty-three (43) percent report that a 

majority of employees would have to leave before they would drop their plan and 35 claim it would 

require all of them. 

An estimated 245,000 (out of 5,228,000 employers with fewer than 25 employees) are eligible for a full 

PPACA tax credit. Another estimated 1,165 million are eligible for the partial credit. 

The PPACA tax credit acts almost exclusively as a windfall for small employers who currently offer health 

insurance rather than as an incentive to encourage its purchase. Considering eligibility and awareness 

issues, the full credit incents, but does not necessarily change behavior, of only about 2 percent of small 

employers having fewer than 25 employees. 

Fifty-seven (57) percent of small employers express interest in contributing to defined contribution-type 

health plans. Their interest assumes employees benefiting from their contributions receive equitable tax 

treatment compared to that in employer-sponsored plans. 

Thank you forth is opportunity to report the findings of our survey. I look forward to answering any 

questions you may have. 

William J. Dennis, Jr. 

NFIB Research Foundation 
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The U.S. Chamber of Commerce is the world's largest business federation, representing the 

interests of more than three million businesses and organizations of every size, sector, and region. 

More than 96 percent of the Chamber's members are small businesses with 100 or fewer 

employees, 70 percent of which have \0 or !ewer employees, Yet, virtually all of the nation's 

largest companies are also active members. We arc particularly cognizant of the problems of 

smaller businesses. as well as issues facing the business community at large. 

Besides representing a cross-section of the American business community in terms of 

number of employees. the Chamber represents a wide management spectrum by type of business 

and location. Each major classification of American business-manufacturing, retailing, services, 

construction, wholesaling, and finance-is represented. Also, the Chamber has substantial 

membership in all 50 states, 

The Chamber's international reach is substantial as well. In addition to the US. Chamber of 

Commerce's 115 American Chambers of Commerce abroad, an increasing number of members are 

engaged in the export and import of both goods and services and have ongoing investment 

activities. The Chamber favors strengthened international competitiveness and opposes artificial 

U.S. and foreign barriers to international business. 

Positions on national issucs ao'c developed by a cross-section of Chambel' members serving 

on committees, subcommittees, and task forces, More than 1,000 business people participate in this 

process. 

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Statement on 

"Small Businesses and PPACA: lfThey Like Their Coverage, 

Can They Keep It?" 

Submitted to 

THE HOUSE COMMITTEE ON SMALL BUSINESS 

SUBCOMMITTEE ON HEAL THCARE & TECHNOLOGY 

on behalf of the 

U.S. CHAMBER OF COMMERCE 

By 

Brian Vaughn 

Owner & President 

Nearly Famous, Inc. 

Douglas, Georgia 

July 28, 2011 

Chairwoman Elimers, Ranking Member Richmond and distinguished members of the 

Subcommittee, thank you lor inviting me to testify before you today on the impacts the new health 

care law will have on my business and my employees. I commend your efforts in holding this 

valuable hearing to further understand the damage the new health care law will haye on the ability 

of businesses, including small ones like mine, to compete, grow, and create jobs, as well as our 

ability to oller our employees health care benefits. 

My name is Brian Vaughn. and I am the Owner and President of Nearly Famous. Inc. which 

consists of tour Burger King franchises in Georgia. I am here to speak with you today on behalfof 

the U.S. Chamber of Commerce. The U.S. Chamber of Commerce is the world's largest business 

federation, representing the interests of more than three million businesses and organizations of 

every size. sector, and region. More than 96 percent of the Chamber's members arc small 

businesses with 100 or fewer employees, 70 percent of which have 10 or fewer employees. Yet. 

virtually all of the nation's largest companies arc also active members. Therefore. the Chamber is 

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particularly cognizant of the problems of smaller businesses, as well as issues facing the business 

community at large. 

[ am also a proud member of the National Franchisee Association (NFA) and have served on 

their board of directors for three years. The National Franch isee Association, founded in 1988, 

serves the BURGER KING'!; franchisee community through advocacy, education and training, 

networking and member-focused programs, services and benefits. The NFA works with member 

franchisees, system suppliers, business partners and Burger King Corporation to promote franchisee 

growth and success and further its mission statement "to improve, preserve and ensure the economic 

well being of all members." The NFA represents independent Burger King restaurant entrepreneurs 

in the United States and Canada who operate nearly 5,000 franchised restaurants and employ 

almost 200,000 individuals across the nation. The NFA represents more than 75 percent of the 

BURGER KING:!!) franchised restaurants in the United States and Canada. These comments are my 

own and nothing I say here today retlects the position or opinions of my franchisor, Burger King 

Corporation. 

Company Background 

When people generally think of Burger King, they think of a big corporation. However, 

although the sign on the door says Burger King, the company that my wife and I own is a smail 

operation-{)onsisting of lour Burger King restaurants serving three small communities in Georgia. 

And the beginning of our story is even more humble, but it is the kind of'pull yoursclfup by your 

own bootstraps' story that has happened for thousands upon thousands of other small business 

owners across our great nation-it's the type of story that goes to the very heart of what it means to 

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Jive the American dream and if we're not careful, slories like mine and that wonderful dream that 

has driven so many to succeed will cease to exist. 

In 1980, I began my career with Burger King as an Assistant Manager, earning 

$14,000/year. It wasn't much, but it was a slati and that is all I wanted. By working hard and smart, 

I was able to eventually work my way up through the company to an officer position where I was 

responsible for servicing franchisees. In 1993. I partnered with Francis Lott -- a real estate 

developer/architect and together we opened four Burger King locations in Georgia. It was a great 

opportunity; I was abl!: 10 stay with the Burger King brand while essentially venturing out on my 

own. Then in 2001. I bought Ollt my partner Francis' interests and today continue to operate those 

tour stores with my wife, Cindy. Our size allows us to be a professional operation while still 

maintaining an all important family environment that extends to our managers and employees, 

many of whom have been with us tor over a decade. 

Our sense of family actually stretches into the Georgia communities of Douglas. Hazelhurst 

and Baxley where we operate. We strongly believe that it is important to give back to the 

communities which have been so great 10 us. Through our tinancial donations to the academic and 

athletic boosters. we are able to contribute toward our area's school systems and the children 

enrolled there which is very important to us. I have also served as President of our local Lion's 

Club. which typically raises and spends $50,000 a year to purchase eyeglasses for the needy, and as 

Treasurer of Ollr local chamber of commerce. 

Like many other successtlli small business owners. I did not have anything handed to methere was no proverbial goose with a golden egg. or silver spoon. I have worked hard and tirelessly 

for what I have now. My primary, current goals are twofold: first, to create financial security for my 
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family-my wife and our two children, one of who is just starting college; and second, to create 

more jobs and economic opportunities for others. To do this, our plan has been to expand and open 

a new store by reinvesting some of our profits back into our business, Sadly though, given the harm 

the new health care law is going to reek on our business as werl as the uncertainty and the pain 

caused by other regulations, I fcar that neither of these dreams nor my plans to achieve them wi!! be 

possible. In fact, my worry is that everything I have worked for will be for not and may be wiped 

out by this new health care law. At the very least, I witl be forccd to adjust my number offul! time 

stall and the economic opportunity that accompanies full time employment, in order to avoid the 

draconian provisions in the law. 

Ten years ago, when we purchased our partner's interest in the franchise restaurants we 

knew that we were assuming a large financial obligation that had great risks. Up until the passage 

of health reform, our plan had been that after October 20 I I (this October), my wi fe and I would 

have entirely paid offthc debt on our business for that purchase. We have long anticipated and 

planned for the day when we could spend the money we were using to payoff this debt to expand 

our business and branch out further. For my entire career, I have been working to become 

financially independent but now I face a very uncertain future. 1 fear that everything I've worked 

for will be for naught. 

The new health care law has wrecked our plans to grow our business and create jobs. We 

are already taking steps to downsize our team in anticipation of the full weight of the law's burden 

which will affect me most heavily in 2014. My new fOCllS. unfortunately, is on how to have the 

leanest workforce possible and, even morc dismaying, my worries about the very survival of our 

business are emblematic oflhe reactions of millions of small businesses throughout our nation. I 

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cannot imagine that this is what the President and Congress intended, particularly as they continue 

to try to pull our country out of a recession and reduce the unemployment rate. But intentions aside, 

it is the reality that they have created for us; it is the reality facing the very entrepreneurs that our 

nation needs to create the jobs to get our economy back on track. 

It is ironic that the law touted as thc Patient Pr(liection and Allin'dahle Care Act - ndther 

protects our country's people, nor makes health care more affordable. It is a law of broken 

promises - under which no One will be able to keep the health care they have, even if they like it 

and one which will incent more companies to scale back their workforces and reduce the benefits 

otlered that were previously valued by their employees. Having shared a little about my business. 

our history and our future, I would next like to discuss how the new health care law wiil pummel 

my business and my employees and how you might prevent that trauma ti'om occurring. 

Health Care 

Up untit now, my wite and I have been pretty fortlll1ate; and while our business has been on 

sound financial looting, we arc not flush with cash. Like most in the fast food franchisee world, we 

operate on low margins and are very susceptible to quickly loosing this footing and our solvency, 

Our fundamental fear is that the new health care law, when fully implemented. will devour Ollr 

minimal profits and put us in a negative cash position. Simply put, the shock the law will have on 

our business and employees witI be devastating and it is already forcing us to make incredibly 

difficult decisions. Will we completely close our doors, shutter one or two of our stores, cut 

employees' jobs. (;ut employees' hours or a combination of these? Honestly, it is very hard to say. 

Certainly, none of these options are appealing, particularly given that we had been hoping to 

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actually expand the business and add employees. Unfortunately, these are the types of choices we 

are left with as a result of tile new health care law. 

At our tour locations, we are proud to have created 182 jobs. Fifty-nine oHhe jobs are fulltime jobs and the rest are part-lime positions with under thirty hours of work per week. Fourteen of 

the full-time jobs are management jobs for which we currently cover 100% orthe cost of the health 

care for the employee at an annual cost to US of nearly $56.000 per year. For the fourteen 

management jobs, we also cover 100% of the cost of term life, short-term disability, vision and 

dental. OUf current carrier tor our management is a Blue Cross-Blue Shield Major Medical plan. 

My wife and I also participate in this same plan. I also offer a value mini-med plan to the rest of the 

employees at a cost of between $106 and $165 per month. Currently, only 19 of the more than 100 

part time employees eligible for the mini med plan I offer have elected to take it. They simply 

would rather have more in their paycheck or they get coverage on a spouse's plan. 

During a time when the economy is struggling to regain its tooting and when unemployment 

rates continue to hover at 9%, my employees like my wife and [ - are grateful to have jobs. Many 

choose to keep the wages they earn to help pay for their day to day living expenses, rather than use 

a portion of them to pay lor coverage that I otTer. Just as my employees have a limited amount of 

income, so does our company. Andjust as my employees have to decide how much of their wages 

they need to use to covertheir daily living expenses, as the president of my company, I have to 

decide how much of the company's income can be used to pay wages and benefits, and how much 

has to be used to cover the expenSC5 of dally operations. There is only so much money and allhe 

end of the day, my employees and I each have to first and foremost cover our daily expenses. 

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Thet"e was much ado last fall about th~ types of plans that loiTer my employeesWashington. under the health reform law, decreed that so called "limited benefit plans" are nol 

acceptable. Despite repeatedly promising that "if you like your plan. you can keep it" the law has 

outlawed these plans. Now wllile ! understand that for many, a morc comprehensive plan seems 

critical and, by comparison, these limited benefit plans arc slim. it is important to acknowledge 

reality. There is only so much money - both tor my employees and for me. These plans ofter less 

expensive coverage options that allow my tcam members to choose to take more oftheir wages 

home to pay tor other expenses and use a small amount to pay for some coverage. Just like my 

employees, my income is limited. Prior to health retorm, I had the ability (0 hire more workers, pay 

them a wage and offer them access to this moderate coverage. Now. I am being told by Washington 

that I have to offer all of my full time employees' Washington defined health coverage or pay a 

penalty. First, because ofthe cost ofoftering this prescribed coverage and the size of the penalty, I 

have no choice but to restructure my workforce in a way that permits me to avoid losing everything. 

What does this mean? Well - given the law and the regulations that are still being promulgated it 

is hard to say. 

What I do understand is that while it may be difficult for me to reduce my worktorce to the 

extent that I am no longer an applicable "large employer" under (he health care law. I may be able 

to restructure my workforce in a way to avoid the penalty. Although part-time workers arc included 

in determining whether I am a large employer. they are not included in ~alculating the penalty. 

Prior to the law's enactment - my goal had always been to hire}'€wer people for ~ hOllrs. It is 

easier to retain employees that work full time. However. now that the law has passed, l have to 

consider options other than what makes practical business sense. Now, because of what 

Washington has mandated. it seems to make more practical business sense for me to hire more 

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people for fewer hours. At a time when millions of Americans are out of work, is this really the 

right incentive" This is not what I want and it is not what is best tor my employees, but in order to 

survive and be able to pay the employees that I have, it is what I will have to do. 

While I have not read the entire law, and f am not able to follow the regulations which arc 

being issued at record speed by the Administration, I am trying to figure out how to protect the 

company that f have spent my entire life building. With 30 years in the business, I don '( want to 

have to read "Interim Final Rules" and notices issued by administrative departments in Washin!,>1on 

to figure out what my legal obligation is under the law. I want to keep my company financially 

anoat, to give back to my community and to keep my promise to my employees. Unfortunately. to 

do this, the law is forcing me to tuke a position that is 180 degrees from where I want to be. 

Conclusion 

I understand that given the existing political realities in Washington, DC. a total repeal of the health 

care law by Congress is an unlikely proposition for now. [Iowever, I am hopeful that this 

Subcommittee and your colleagues in the Hou~e and Senate will focus on repairing or eliminating 

the more onerous mandates such as the employer mandate. These provisions saddle businesses with 

burdens that actually encourage us not to expand our business and astoundingly discourage job 

creation. The bottom line is that your decisions can help or hinder us. The l&ws you create can either 

fosler an environment that gives small businesses greater confidence and certainty to grow and 

generate new jobs, or do just the opposite. Regrettably, this new health care law is already doing the 

latter and Congress must take the necessary action to rectify it. 

Thank you again for this opportunity and I look forward to your questions. 

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IF YO\; LIKE YOUR HEALTH PLAN, CAN YOU KEEP IT'! 

Statement of Timothy Stoltzfus Jost, J.D 

Professor of Law, Washington and Lee University School of Law 

To the House Committee on Small Business, Subcommittee on Health and 

Technology 

Thank you Chair Eimers and Ranking Member Richmond for the opportunity to addrcss 

the Subcommittee today on this important topic. 

One of the premises of health care retorm was <>Jfyou like your insurance plan, your 

doctor. or both. you will be ahle to keep them." My testimony today will address two 

important questions raiscd by this premise. First, how do the AtTordable Care Act and 

implementing regulations f"ultill this commitment by grandfathering in coverage provided 

through existing health plans'? Sl;:\;ond. \vhat do we know about how the ACA wilt affect 

the willingness of employers to offer coverage after 2014'! Obviously. if employers drop 

coverage. employees will not be able to keep the plans they like. 

Grandfathering under the ACA. 

"1 r you like your plan you can keep it" was written into the Affordable Care Aet as 

section 1151. entitled "Preservation of Right to Maintain Existing Coverage." Section 

125! provides that many of the new reform provisions or the AC A do not apply to 

individual or group health plans that were in place on :Vlarch 23, 2010,1 These 

"gnmdfathered" plans can. therefore remain largely unchanged, 

To understand the grandfalhering provisions. it is important to understand the nature of 

the commitment it makes. The commitment is not. "if you don't like the coverage you 

have now. you arc stuck with it lorever," It is also no!. "ifthe coverage you have now is 

completely inadequate. you cannot hope for better coverage." It is not even, "if you arc 

currently insured. your employer or insurer can change your coverage in any way they 
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want and avoid offering you the consumer protections of health reform." It is simply, "if 

you you're your insurance plan, you can keep it." 

This commitment poses two important questions: who is the "you" who gets to keep the 

plan. and what is the "plan" that can be kept? The most common form of health insurance 

coverage in the United States is employer-sponsored insurance (ESI),2 Under ES[. the 

plan is sponsored and paid for in part by the employer. who normally selects the plan or 

plan options, even though the enrollee is the employee. The title of this hearing, "Small 

Businesses and PPACA: If They like Their Coverage. Can They Keep ItT' assumes thal 

the commitment was made to employers. The commitment, however, is to individual 

enrollees, and section 1251 quite clearly offers the right to maintain existing coverage to 

individuals. Section 1251 applies to group as well as individual coverage, however. and 

employers can also expect to continue to otter the coverage they are currently offering 

their employees. as long as the plan they offer remains the same. 

Second, what is the "your plan," and when does it cease to be "your plan"? How much 

can an insurer or employer change a plan without losing grand fathered status? 

Obviollsly, a tormulary change from Nexium to Prevacid isn't enough to lose 

grand fathered status, but surety if a deductible is increased from $500 to $5000. or a $20 

co payment is changed to a 50 percent coinsurance obligation. thc plan is no longer the 

plan that the enrollee had and is almost certainly not the plan the enrollee liked. 

Exercising their delegated authority under the ACA, the Departments of Labor, Treasury, 

and Health and (luman Services issued an interim tlnal regulation on June 17, 20 I 0 to 

implement section 1251. defining when a plan loses grandfitthcrcd status.) The 

regulation adopts bright line rules identifying the changes that will end grandtitthered 

status so that insurers, employers. and enrollees will not have to guess when a plan ceases 

to be grand fathered. 

The major changes that will result in the loss of grandfatnered status under the regulation 

include: 

2 
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• Elimination of all or substantially all of any benefit necessary to diagnose or treat 

a particular condition; 

• An increase in coinsurance percentages; 

• An increase in a deductible, out-of-pocket limit. or other tlxed dollar cost-sharing 

requirement or limit other than a copayment by more than the increase in the 

medical component of the CPI since March 2010 plus a total of 15 percentage 

points; 

• An increase in a copayment in excess orthe greater of I) medical intlation plus 

$5.00 or 2) medical intlation plus a total of!5 percentage points; 

• A decrease of the employer contribution, whether based on the cost of coverage or 

on a fonnula, by more than 5 percentage points below the contribution rate in 

place on March 23, 20 I 0; and 

• The reduction in the dollar value of existing annual limits, the imposition of an 

annuullimit on coverage by plans that did not impose any limits before, or the 

adoption ofannllallimits less than any lifetime limits a plan imposed before if it 

only imposed lifetime limits before Mach 2010. 

Self-insured plans can change plan administrators and remain grandfilthered, and under 

an amendment to the grand fathered plan rule adopted last November, employers can also 

change insurers and not lose grand fathered status.4 New employees and dependents can 

be added to a grand fathered plan without losing grandfl1thered status. Hnally, employers 

and insurers are not prohibited by the regulation from making changes in plan structure, 

provider network, or tormulary. 

In sum, the grand fathered plan rule takes a common sense approach, allowing employers 

and insurers to maintain the plans they had in March of 20 10 and increase enrollee or 

employee cost-sharing and employee premium contributions to respond to increases in 

health care costs. ''lhile at the same timc not torcing onto enrollee Qr employees 

continued enrollment in a plan that has become dramatically more expensive or less 

valuable than the plan that they had when the ACA was adopted. 

3 
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Will Employers Continue t() Offer Coverage'? 

Another very important question is whether employers will continue to offer coverage 

after the health care reform law is fully implemented. Obviously. if employers cease to 

offcr coverage. employees cannot keep it. 

A number of studies have addressed the question of how the ACA will affect employersponsored insurance (ESI). These predictions runge at the extremes from those of Dr. 

Ilolz-Eakin, who predicted that ESI would shrink by 22.3 percent. to those of the Rand 

Corporation, which predicted that ESI would grow by 8.7 percent.' Most studies. 

however. including studies by BoOl., Lewin, Urban, Mercer, and Towers-Watson, predict 

that coverage will remain largely uncllanged.6 This was also the conclusion of tile 

Congressional Budget Office, which Congress entrusts with analyzing the effects of 

legislation. The CBO projected that the number of Americans covered by employmentrelated insurance would grow from 150 million in 2010 to 159 million in 2019, 3 million 

fewer than would have been covered had the AC A not been adopted. 7 

Another outlier study done by McKinsey and Company received a great deal of coverage 

when it was published earlier this summer. This survey reported that nine percent of 

employers stated they would definitely and 21 percent would probably drop coverage. 

McKinsey noted. however, that their survey was not intended as a "predictive economic 

analysis of the impact of the Affordable Care Act:' g The McKinsey surveyors only 

asked about continued oi1ering of coverage after selectively providing intormation about 

the ACA. The survey has been criticized as being effectively a push pol 1.9 

On Monday of this week, the National Federation of Independent Businesses released a 

report on the effect orthe ACA on small businesses.1O One of the key findings of this 

report is that the ACA has not yet resulted in small businesse~ abandoning health 

coverage. Health insurance olTers decreased only abollt 2 percent last year, which is 

consistent with declines in recent years. The Report also projects that there will be no net 

loss of coverage offers over the next year. 

4 
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The 0JFIB study does project that 26 pcrcent of small employers are very likely and 31 

percent very likely to drop coverage atler the ACA is fully implemented. This projection, 

however, is based on a fundamcntal misunderstanding of the ACA that formed the basis 

lor the questions asked survey participants. The questions NFIB asked presumed that 

employees will be able to ft'ecly choose between offered employer coverage and 

receiving premium lax credits in the exchange. That is simply not what the ACA 

provides. I I Employees who have a coverage offer from their employer are not eligible 

for premium tax credits unless the coverage offered is seriously deficient. Since the 

answers to these qucstions are based on a false premise, they have no predictive value. 

Today, 69 percent of employers offer health insurance. I " The percentage of employers 

that offer insurance has been steadily dropping in recent years. and is likely to continue to 

drop regardless of health I'ctorm. 13 Indeed, in a survey conducted in 2009, before the 

ACA was adopted. only 57 percent of employers were "very contident" that they would 

still be otlering ESI in ten years. J.I 

But all of the reasons that employers oflCr ESI now, and have done so since the 19405. 

will continue to exist after health reform goes into effect. Most importantly. unless 

Congress decides to change existing law to reduce the deficit, the cost of employee 

benefits will continue to be exempt from federal and state income and payroll taxes. In 

Virginia. a low-tax state. an employee taxed at the Alternative Minimum Tax marginal 

rate 01'28% receives a subsidy 01'49 percent for every dollar spent on ESt. This is the 

federal government's largest tax subsidy and will amollnt to $249 billion in 201S, 15 

almOSl 8 times the cost CE30 estimates tor the ACA premium tax credits and cost sharing 

subsidies in that year. The average American covercd by ES( has an income of423 

percent of the federal poverty level and thus would not be eligible tor ACA premium tax 

credits, which are only available to 400 percent of poverty. 16 Seventy-nine percent of 

employees insured currently insured through ESI have incomes above 250 percent of 

poverty,17 Employers who drop health insurance would have to dramatically increase 

after-tax cash compensation tor their employees to cover this loss of tax subsidy. This is 

particularly true for older employees who tend to be higher income employees and most 

of whom would not qualify for subsidies. (The McKinsey survey failed to mention the 

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continued availability of this tax subsidy in the infonnation they provided the employers 

as they conducted their survey). 

Second, health benciits will continue to be one of the most highly valued forms of 

compensation to employees. 1 R Employers competing to attract and retain talented 

employees will have no choice but to continue to offer health benefits after reform is in 

place unless all their competitors also drop coverage, Third, employers will continue to 

otTer health benefits to ensure a healthy and productive worktorce, An increase in 

absenteeism and decrease in employce morale will likely result if employers drop ESI. 

The wellness pl'Ogram incentives available under the ACA will increase the ability of 

employers to use their health benefits to encourage workcr health and productivity. 19 

Fourth, Group insurance will also in all likelihood continue to be available at a lower cost 

than individual C\wcrage with comparable benefits and cost-sharing, even after the 

exchangcs are in placc. 

While all ofthesc current incentives for ESi will remain ailer the ACA becomes fully 

effective in 2014. the ACA also offers employers new' reasons to cxpand coverage. First. 

and most important, the minimum coverage requirement (individual mandate) will 

requirc uninsured Americans who can afford health insurance to buy covcrage, Since 

employment-related insurance qualifies as minimum coverage, Americans will demand 

health insurance oftheir employers so that they can fulfill this requirement. The Rand 

Corporation prqiects that a dramatic increase in the percentage of employers offering 

coverage after the ACA goes into eftect will be driven primarily by employee demand for 

insurance in response to the minimum coverage requirement.2

() 

Employers with more than 50 employees who fail to provide coverage for their 

employees will also face penalties of $2000 per fufl-time employee if one or more of 

their employees receive premium tax credits. 21 This penalty will not be tax deductible, 

adding to its cost. 

Some small employcrs that provide insurance for their employees through the exchanges, 

on the other hand, can receive a tax credit covering up to 50 percent of their share of the 

6 
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premium I()r up to two yeal's.22 This provision seems already to be increasing coverage 

among very small businesses. As the NFm survey pointed out, one orthe biggest 

reasons it has not been more eftective is lack of knowledge on the part of small 

businesses. You can playa useful role here by making sure that every small business in 

your district is aware orthb opportunity. 

Other provisions of the ACA may also, of course. incentivize employers to drop 

coverage. Most notably, employees with household incomes below 138 percent of 

poverty will quality for Medicaid and those with household incomes below' 400 percent 

of poverty will quality tor premium tax credits. Some employers who employ 

predominantly lower income employees will see this new tax subsidy as an opportunity 

to shift the cost of insuring their employees to the federal government. The ACA, 

however, prohibits employers from discriminating in favor of high !y-compensated 

employees. so an employer that drops coverage for its janitors it will also have to drop 

coverage for its managers (and pay them enough in taxable income to allow [hem to 

purchase coverage in the nongroup market).:] 

Employers may also drop coverage if the cost of covcrage increascs dramatically undcr 

the ACA. Some provisions orthe ACA, such as the elimination of annual dollar limits on 

coverage or the requirements that plans cover adult children up to the age of26 or 

preexisting conditions are likely to increase the cost of coverage tor group plans. The 

"Cadillac tax" provision \\;i1l also impose a tax on high cost plans after 201 S."-I 

Other ACA provisions, however. are likely to reduce insurance costs. The exchanges 

will afford small employers more bargaining clout and a more competitive market and 

may reduce the cost of insuranct: dramatically for small businesses.25 Employers who 

can get a better deal outside of the exchange, of COllrse. will continue to have access to 

that market. The medical loss ratio requirements of the ACA are already forcing insurers 

to become more efficient and are likely to drive down insurance premiums as medical 

cost increases moderate,26 Overall, the CBO estimated that changes in premillms in the 

small group market \vould range from an increase in one percent to a decrease in two 

7 
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percent while in the large group market the change would range from no change to a 

decrease in three percent. 27 

However, the ACA is likely to affect different employers differently. Employers with 

100 or fewer \:mp!oyees will have to cover the "essential benefits package" provided by 

the ACA, which may be more generous than coverage ofrered currently by some 

employer!> in some states."s On the other hand. state benetit mandates will largely be 

eliminated, as the states will have to pay for any additional costs imposed by their 

mandates, thus coverage may become less costly in some statcs. 29 Employers with 

young, healthy work forces will face higher premiums once health status underwriting is 

eliminated, although employers with older and less healthy workforees will face lower 

premiums. 

While in the end it is not possible to predict exactly how employers will react to all of 

these cross-cutting incentives, the best real world experiment we have is Massachusetts, 

on whose reforms the AC A was modeled. Since the Massachusetts refonns were 

adopted, employer offer rates have grown from 70 to 76 percents. 30 There is no reason to 

believe that employers would react radically differently to the ACA reforms. 

Final Observations and Conclusion 

It is important to remember that the eff(,"Ct ofthc ACA on ESI is only one of many 

considerations that must he weighed in evaluating health care reform. Obviollsly, many 

Americans "'lith preexisting conditions who do not work for employers. who offer health 

insurance and who cannot pllrchase it in the nongroup market now will benefit trom 

being finally able to get access to affordable comprehensive insurance. It is also likely. 

moreover, that reform wilt lead to a burst of entrepreneurial innovation as many 

Americans who are stuck in dead-end jobs because they fear losing their health insurance 

can tinally strike out on their own and start their own busines~es, secure in the knowledge 

that they can get affordable health insurance regardless of their health status, 

In conclusion, the grand fathering provisions of the ACA, and the regulations that 

implement it, do allow employees, and employers, to keep an insurance plan they like as 

8 
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long as the plan docs not change into essentially another plan. Moreover. there is every 

reason to believe that the ACA will not dramatically change the scope of employer 

coverage in the United States, although the elimination of current tax subsidies for detleit 

reduction could have that effect. The promise that "'if you like your health coverage. you 

can keep it:' is being fulfilled. 
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References 

I Cnder the final legislation, gral1dfathercd health plans arc subject to the following provisions of the 

Public Health Services Act as established by the ACA: 

• The coverage transparency provisions of section 2715, 

• The requirement of section 2718 that plans spend at least 80 or 85 percent of their premiums on health care claims and quaJity improvement activilies, 

The prohibition against waiting periods in excess of90 days found in section 2708, 

Section 271 t 's prohibition against lifetime limits. 

• The ban against rescissions except for fraud found in section 2712. and 

The requirement that plans cover adult children up to age 26 found in section 2714. 

Additionally. the prOhibitions of section 2711 against annunllimits and of section 2704 against preexisting 

condition exclusions (initially oilly for children) apply to grandfathcred group plans. The adult children 

requirement only applies to grandfathered group plans only ifnon-grandfathered group coverage is not 

available. 

Grandfathered plans are exempt however, from many of tile 2010 and 2014 reforms. including the 

requirement that plans cover the essential benefits package and limit deductibles, the right to internal and 

external appeals, and requirements that plans cover preventive care without cost-sharing 01' provide access 

to emergency care without extra Cl)st-sharing for out-of-network providers. 

: Fifty-six percent of Americans had employment-related insurance in 2009. U.S. Census Bureau, Income, 

Poverty, and Health Insurance Coverage in the t;nited States: 2009. p. 24 (2010) 

, 75 Fed. Reg. 3453&. 

• 75 Fed. Reg. 70114 

, Avalere Health, The Affordahle Care Act's Impact on Employer Sponsored Insurance (20t I). available at 

hltp:/!w",.w.avalerehealth.net!pdf'!~Q\ \-06-17 ESI memo. pdf. Dr. Ho!z-E.\kin·s estimate is based on 

serious misunderstandings that make its projections unreliable. For I;xample, the paper ignores the payroll 

tax and Slate income tax subsidi<:s for ESI and seems to assume that employers can casily separate their 

employees by income for the purpose of extending health benellts. which is not only illegal but unrealistic. 

" Id. 

, CBO. Analysis of ACA, March 20, 20 to. 

http://www.cbo.gov!ftpdocs/t 13xx/doc I I 379!AmcndRcconProp.pdf 

':VlcKinsey Quarterly, How Health Care Reform will Affect Employee Benefits (201 J), available at 

http:.!/www.mckinseyquarterly.com/How.US _bealth_ care_reform_ will_alIect employee . .benefits 2813 

.) Brian Buellt,r, Top Expert. DbpUICd McKinsey Health Care Study Akin to Push PolL TPM. June 23. 

20 I I. http://tpmdc.talkingpointsmemo.comf20 Ill06Itop-expert-disputed-mckinsey-health-care-study oak into-push-poll.php 

10 http://www.nfib.com/PortalsiOIPDI./ All Users!rcsearch/sludies!ppaca/NFlB,healthcare-study.20 II 07.pdf 

"IRC' 36B(cl(2)(B)&(C),addedbyACA' 1401. 

" Kaiser Family Foundation. News Release, Sept. 2, 2010, http://www.kff.orgi insuranceI0902IOnr.cfm 

11 Bowen Garrett & Mathew Buettgens, Employer-Sponsored Insurance Cnder Health Reform (2011), 

http://www.rwjforg/files/research!71749.pdfat 6. 

I" Academy Health, Tile Affordable Care Act and Employer-Sponsored Insurance lor Working Americans. 

20 II. h\tp:!lwww.academyhealth.org/t1les/nhpc!2011/AH 2011 AffordableCareReportF1NAL3.pdf at 7. 

1'0MB, Budget of the United States, FY 2011, hnp:/iwww.gpoaccess.!1.ov!usbudgetlfvll/pdFspec.pdfat 

Kaiser Family Foundation. A Profile of Health Insurance Exchange Enrollees (10 II) 

hrtp:iiwww.kfIorgihealthreform/uploadi8147.pdf 

I' Garrett & Bucttgens. supra not I I at 6. 

J8 Top Employee Benefits. http://www.money-zine.comICarecr-Devc!opment/finding-a-JoblTopEmployee-Benetitsi 

19 Public Health Services Act' 2705UJ added by ACA ' !20 I. 

'" Christine Eibncr, et al.. Establishing State Health Insurance Exchanges (20 10), 

http://www.rand.orglcontentldamlrandipubs!tedmical rcportsl20 IO/RAr;D TR825.pdf at xi xii. 

10 
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" IRC 4980H(a), added by ACA ' 15lJ 

" ACA ' 152!. 

'J PHSA ' 2716. added bv ACA ' 100L 

~I ACA ' 9001. -

:, Garrett & Buettgens. supra note II. at 3-4, 

,,, PHSA ' 2718, added by ACA ' 100L See Carl Md)()nald. CitiRank. 

https:iiir,citLcomr'6MBvRrEaOvRCT 1 Zc Y Va6lJpglc%2F7pmh 7W JrH pzv6hs%3 D, analyzing the effects 

of the medical loss ratio requirement. 

" CBO. Analyzing Premiums under the Affordable Care Act (!O I 0) 

http://www.cbo.govitl:pdocsl!07xx/docl 0781 !11-30-Prcmiums.pdf 

,sPHSA' 2707(a),addcdbyACA' 1001;;\CA' 1302, 

'"ACA'IJll(d)(3)(B). 

", Health Reform in Ivlassachusctts, (20 II) hl1p:!fbluecrossfoundation.org/HealthRe!brml-imedja/DODDA3D667BE49D58539~21 F74C723C7.pdf 

II 
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Questions Submitted for the Record 

To Steve Larsen, Deputy Administrator and Director, Center for Consumer Information and Insurance 

Oversight 

Centers for Medicare and Medicaid Services 

Hearing: "Small Businesses and PPACA: If They Like Their Insurance, Can They Keep It?" 

Subcommittee on Healthcare and Technology 

House Committee on Small Business 

1uly 28, 2011 

1. In response to a question from Chairwoman Ellmers on Medical loss Ratio at the hearing, you 

said that you were only aware of one slate that had experienced insurers leaving the state since 

PPACA went into effect. Are you aware that Aetna alone has left 9 states' PPACA's child 

coverage mandate has resulted in 17 states not having access to child-only insurance policies, 

and in 39 states, at least one insurance company has exited the child-only insurance 

marketplace. 

2. During the hearing, you stated that Medical loss Ratio would help small businesses by providing 

value. Would you explain what you mean by that? 

3. In response to a question from Chairwoman Ellmers on the effect of Medical Loss Ratio on small 

insurers, you stated that you are sensitive to the need to maintain competition, but you 

acknowledged that there is less flexibility in PPACA to modify the MLR in the small group market 

than in the individual market. What do you think is the best way to ensure that small insurers 

remain competitive and are not driven out of the market, which could limit consumer choice, 

and raise premiums? 

4. Many states will experience rate shock at the same time that the exchanges are established. 

How are states that have wider rate bands going to adjust for rate shock in 2014 when the 

exchanges open? Is there a plan to help ease this transition? 

5. How are employers expected to track penalties for employees who go to the exchange for 

coverage? If an employee has coverage with one employer, then moves to another employer, 

does the employer get the penalty back? 

6. What government entity will determine the amount of the employee's subsidy? Is it IRS? HHS' 

Another agency? 

7. During the hearing, you stated that the exchanges will have lower administrative costs. On what 

data are you basing your statement? Massachusetts, for example, added a 4% administrative 

load onto the cost of premiums. 

8. Small bllsiness owners are confused about the health care law generally and, in particular, about 

the application of the employer mandate. During the hearing, you said that various surveys 

have confirmed this, and CMS should reach out to small businesses to help them understand the 

law. What type of outreach and education do you anticipate, and when do you expect it to 

begin? 

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9. In response to a question from Chairwoman Ellmers about an article in The Hill titled, "Health 

Care law Could Leave Families with Higher Costs," you stated that CMS is looking into the issues 

of: 1) application of the health care tax credit to the individual and to the family; and 2) when 

employer makes an offer of health insurance, whether it is also binding on the family. You 

mentioned that eMS anticipates future guidance to clarify these issues. Would YOLl elaborate on 

when YOLl expect that guidance and the specific issues that will be covered? 

10. In response to a question from Congressman Altmire, YOLl stated that CMS is currently working 

with the Department oft he Treasury and the Internal Revenue Service to estimate how many 

small employers have claimed the small business health care tax credit, and you expect to have 

that information soon. Would you please provide that estimate in response to these questions? 

11. You said the health care tax credit was targeted to the smallest businesses (those with fewer 

than 50 employees) because they had lower rates of health insurance coverage. However, 

many small businesses with more than 50 employees that offer health insurance may not be 

able to afford it if the premiums continue to increase. Do you think the tax credit should apply 

to more small businesses? 

12. In response to a question from Congressman Altmire, you said that under the employer 

mandate, you expect employers to continue to offer coverage, and that some studies have 

predicted even more employers will offer coverage. What if the employer mandate results in 

higher costs and fewer employers offering coverage? 

13. If a small employer currently offers a very basic or mini-med plan, and the Minimum Essential 

Benefit package requires the employer to offer a far more comprehensive package of benefits, 

won't the employer have the incentive to drop insurance and put his employees into the 

exchange? 

14. Do you support allowing employers to continue offering a basic, limited benefit plan under 

PPACA that would allow employees to take home more of their wages as salary and a smaller 

amount for their health insurance coverage? 

15. Do you believe the Minimum Essential Benefit package will cost small businesses, most of which 

currently offer employees catastrophic or very basic coverage, more than they currently pay 

because of the expense of additional required benefits? 

15. Brian Vaughn, who testified at the hearing, is just one small bUSiness owner who has stated that 

he will restructure his workforce to avoid PPACA's many mandates. In fact, he stated that there 

will be very few full time jobs in the restaurant industry after PPACA goes into effect, because 

only his management staff will be full time, and the remaining employees will work 29 hours per 

week or less to avoid triggering the employer mandate. 00 you think PPACA's employer 

mandate is encouraging job creation and economic growth? 

17. As of July 1, there were ten states where the federal government will be taking over rate review 

under authority granted by PPACA to determine if rate increases are reasonable. How long will 

this takeover last? Do you think the federal government will be better able to determine 

whether rate increases are "reasonable"? 

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18. Will the subsidies for insurance on the exchanges apply to the employer or the employee? 

19. Is there an incentive for employers to keep their employees together to purchase coverage in 

the SHOP market, rather than letting the employees seek individual coverage through the 

exchanges? 

20. Will cost sharing for Minimum Essential Benefits be permitted? 

21. In response to a question from Chairwoman Ellmers, you mentioned that you are "very aware 

and tuned into the need to make sure that the package of essential benefits is an affordable 

package." How will the determination be made as to what is "affordable"? 

22. You said that you believe employers will continue to offer insurance for the reasons they have 

offered it since the 19405, but particularly to stay competitive. What would the incentive be to 

continue insurance if their competitoris) drop(s} insurance? 

23. When do you expect the 105(h) non-discrimination rules to be issued? Are Medicare, Tricare or 

other programs excluded from this calculation? 

24. The Chajrwoman mentioned that small bUSinesses are confused by PPACA and its vague 

regulations, and are having difficulty complying with them. You responded that there will be 

tools called "navigators" available in the exchanges to help people understand how to access 

the exchanges. However, small businesses are trying to understand the law now, comply with 

provisions and regulations that are currently in effect, and plan for implementation of the law 

before 2014. What tools are available now to help them? 

25. A recent article in U.S. News and World Report said that an HHS rule mandates that states 

collect "raw claims data sets" from insurers on all individuals with private coverage purchased 

either individually or though small employers. Exactly what information does HHS propose be 

collected from insurers on individuals with private coverage, and what is the projected use of 

this information? 

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Questions Submitted for the Record 

To Timothy Stoltzfus Jost, Professor of Law, Washington and Lee University School of Law 

Hearing: "Small Businesses and PPACA: IfThey like Their Insurance, Can They Keep It?" 

Subcommittee on Healthcare and Technology 

House Committee on Small Business 

July 28, 2011 

1. During the hearing, you mentioned that the move to exchanges -and the associated competition and 

pooling would solve cost problems, and cited the Urban Institute study. However, these are one time 

improvements, Pooling happens once, Competitive pressure starts. After that, it is the pace of health 

care costs - which are constant - that matter. Won't these continuing costs eventuallv overwhelm the 

one·time gains from the exchange and pooling? 

2, You cited a study that projected the average employee contribution would decrease under PPACA's 

exchanges. You then said the Minimum Essential Benefits will not markedly change what employers 

offer, If a small employer currently offers a very basic or "mini·med" plan. after the Minimum Essential 

Benefits regulabons are issued, assuming they require more benefits than a mini'med plan, won't the 

employer's cost escalate? 

3, In your testimony, you stated that all of the reasons that employers have offered employer·sponsored 

insurance since the 1940s will continue after PPACA goes into effect, Most large empioyers will probably 

continue to offer coverage. But don't you think many small business owners will, as Mr. Vaughn testified, 

find it difficult to offer health insurance or pay the penalty, and also keep their current employees and 

create new jobs? 

4. What percentage of small bUSiness owners do you believe qualify for and receive the small business 

health care tax credit? 

S. like Mr. Vaughn, who testified at the hearing, many small business owners face the choice between 

offering health insurance or paying the electric bill. As he said, he;s president of his company and "must 

decide how much oftne company's income Can be used to pay for wages and benefits and how much has 

to be used for dailv operations, There is only so much money and, first and foremost, we all have to cover 

our daily expenses" Do you think most small businesses are in a cash position that easily allows them to 

offer health insurance or pay the penalty? 

6. In your testimony. you stated that after 2()14, " ... Iarge employers, not small employers will face a penalty 

if they don't offer insurance." What is your definition of a small business? 

7. Small business owners have been telling us that they cannot afford to create full time jobs under PPACA. 

As Mr. Vaughn testified at the hearing, "Prior to health care reform, I had the flexibility to hire more 

workerS, pay them a wage and offer them access to this moderate {health] coverage. Now I am being told 

by Washington that I have to offer all my full time employees Washington·defined health coverage or pay 

a penalty. Because of the cost of offering this prescribed coverage and the size of the penalty, I will have 

no chOice than to restructure my workforce in a way that protects me from losing everything I worked 

fot." Do you think small businesses should be permitted under PPACA to offer a mini·med plan 

indefinitely, and not just under the current temporary waivers? 

8. Mr. Vaughn said that the employer mandate saddles businesses with new requirements that actually 

encourage businesses not to expand their businesses and not to create jobs, The Committee has heard 

this from many small businesses. Do you think the employer mandate employee threshold should be 

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increased to apply to businesses of 100 or more, or 200 or more, so that small firms with 50 employees 

can add workers without being subject to the mandate or a penalty' 

9, In Medical loss Ratios, do you think that insurance broker commissions should be included as part of the 

80% cal(ulation for health care, or the 20% for administrative expenses? If you said the 80% for health 

care, do you think insurance brokers will be forced out of business as a result? 

10, In your testimony, you stated that "small businesses need to cover the essential benefits package. It is 

not clear to me that that is going to be a malor expense." What do you expect to be included in the 

Minimum Essential Benefits package 7 

1 L The budget analysis of eMS's own actuary, Richard Foster, found that the health care law would raise, not 

lower, national health expenditures. Doesn't it follow that if the national health expenditure is larger, the 

health insurance that covers those expenditures must also be larger? 

12, The Institute of Medicine (10M) is expected to release its recommendations for the Minimum Essential 

Benefits package by this fall. Jonathan Gruber, an economist who helped create the state plan in 

Massachusetts, told the 10M panel that a 10% rise in the cost of the essential benefits package would 

increase the cost of government subsidies by 14.5%, or $67 billion, while reducing the share of the 

insured by 4.5%, or 1.9 million, through 2019. Do you think increasing the cost of government subsidies 

while only reducing the share of the insured by 4,5% is a good tradeoff? 

13. Dr, Holtz·Eakin testified that the numerous regulations promulgated pursuant to the law should be made 

cleaner and in a way that doesn't leave the buSiness community so perplexed, What reforms to the 

PPACA regulatory process would you recommend? 

14. Do you think that small bLlsinesses are disproportionately affected by the various mandates, penalties and 

taxes in the health care law? And if so, will this affect their ability to increase employee wages, purchase 

new equipment and hire new workers? 

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Steve Larsen Questions for the Record 

Deputy Administrator and Director, Center for Consumer Information & Insurance Oversight 

Centers for :Vledicare and Medicaid Services 

House Committee on Small Hnsiness 

Subcommittee on Healthcare and Technology 

July 28, 2011 

1. In response to a question from Chairwoman Ellmers on Medical Loss Hl'Itio at the hearing, 

you said that you were only aware of one state that had experienced insurer's leaving the slate 

since PPACA went into effect. AI't~ you aware that Aetna alone has left 9 states? PPACA's child 

coverage mandate has resulted in 17 states not having access to child-only insnrance policies, 

and in 39 stales. at least one insurance company has exited the child-only insurance 

marketplace. 

Answer: The Affordable Carc Act prOlccts coverage for children by prohibiting most health plan~ 

li'om limiting or denying coverage for a child under age If.) simply because the child has a pre-existing 

condition sLich as asthma. On June 28. 2010. the Administration published regulations implementing 

this provision in both the group and individual markets lor the first plan year (in the individual 

market. policy year) beginning on or after September 23. 20 I O. For non-grandlathcreJ individual 

health insurance policies. children under age If.) can no 1t1l1ger be denied coverage because ofa preexisting condition. 

In March 01'2010. the insurance industry said th",y wanted to make di~criminatil1g against children 

with pre-existing conditions a thing of the past Several months later. th,,) reneged 0l11hcir 

commitment and unfortunately, some insurance companies simply Slopped selling new child-only 

insurance policies. We stand ready to work with private insurers 10 facilitate their ability to offer 

child·only health care policies. Already we have offered to work with the private plans to have 

special open seasons and have advised thcm of other options available to limit adve"e selection, sm;il 

as adjusting rates l'or health slalus or permitting child-only rates to be different Ii-om rates l'or 

dependent children. consistent with state law. We hope that insurers in the aflected States will 

examine all of the llcxibility available to them 10 conlinue to offer child-only policies and reconsider 

their decision not to offer child-only policies. 

Addilionally. CCIIO will continue its work to ensure thai Pre-Existing Condition Insurance Plans 

(PCfrs) in all States "ffer coverage It)r children at a premium based on the standard rate for children. 

fhe PeiP program includes coverage of pediatric benents. prescription dmgs. and inpatient. 

outpatient. and mental health services. 

In addition to ensuring that cbildren with pre-existing conditions cannot be denied coverage, the 

Affordable Care Act provides additional options for children. for example. allowing parents to keep 

dependent children on their health policies until the <Ige 01'26 and the Pre-E'd5ting Condition 

Insurance Plan. 
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2. During the hcaring, YOIi stated that Medical Loss Ratio would help small businesses by 

providing value. Would you explain what you mean bylhat'? 

Answc.·: Today, many insurance companies spend a suhstantial portion of consumers premium 

dollars 011 administrative costs. profits. overhead. and marketing. Thanks to the Affordable Care Act. 

small businesses and their employees will receive more value for their premium dollar becHlIse 

insurance companies in the small group market will bc required to spcnd at least 80 percent of 

premium dollars on medical care and health care quality improvement, rather than on administrative 

costs, starting in ~Oll. If they don't, the insmancc companies will be required to provide a rebate to 

their small group customers starting il12012 for the }OJ I MLR reporting year. 

3. In response to a question from Chairwoman Ellmers on the effcct of Medical Loss Ratio on 

small insurers, you stated that you are sensitive 10 the need to maintain competition. but you 

acknowledged that there is less ncxihility in PPACA to modify Ihe MLR in the small group 

market than in the individual market. What do you think is the hest way to ensure that small 

insurers remain competitive and arc not ddY'cn out of the market, which cOllld limit consumer 

choice, and raise premiums? 

Answer: Section 2718 of the Public lIealth Service Act permits an adjustmcnt to the 80 percent 

Medical Loss Ratio (MLR) standard Cor a Stat,,', individual health insurance market if til" Secretary 

determines that applying this standard "may destabilize the individual market in such State:' The 

statute does not gram the Secretary th" authority 10 adjust the standard ill the small or large group 

market. 

In order to help small insurers remain competitive. the Affordable Care Act establishes Affordable 

Insurance Exchanges (Exchanges). where thesc insurers will be able to compete for new business ill 

2014, whell the Exchanges start providing coverage. E.xchanges will be State·based competitive 

marketplaces. where individuals and small businesses will be able to purchase affordable private 

health insurance and have the same insurance chokes as Members orCongress. Each State has the 

opportunity to tailor its Exchange to meet it> need:;. but all Exchanges will ,(;rve as a one-stop shor 

where individuals and small businesses will get information about their options and enroll in the plan 

of their choice, 

4. Many states will experience rate shock at the same time that the exchanges arc established. 

How arc stales thaI have wider rate bands going to adjust for rate shock in 2014 when the 

exchanges open? Is there a plan to help case this transition'! 

Answer: To help protect insurers against risk selection and market uncertainty. the Affordable Care 

Act e:;tablishes three programs that begin in 1014; I) temporary reinsurance; :2) a temporary ris~ 

corridor program: and 3) permanent risk adjustment. Reinsurance and risk corridors will give insufers 

payment stability as insurance market reforms begin. while an ongoing risk adjustmcill program will 

make payments to health insurance issuers that cover higher-risk populations (e.g .. those with chronic 

conditions) to more evenly spread the financial risk borne by issuers. These progml11s will ensure that 

health plans and issuefs compete for coverage on the basis of price . quality, and service. 
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On July 15.20 I I. the Department of Ilealth and l-Itllnan Services (HHS) published a proposed rule 

related to these provisions and solicited public comment. The proposed regulations provide standards 

to make the programs work and significant State Ilexibility tl1r their implementation. while 

minimizing the burden on States and issuers. Well-designed reinsurance. risk corridors. and risk 

adjustment programs can help encourage innovative care delivery that" ill 510" the gro"lh in our 

nation's health care expenditures. 

Further. Exchanges will make coverage more affordable through tax credits as well as crcating larger 

risk pools and increasing competition, choice. and clollt tor qualifying individuals and small 

businesses. 

5. How are employers expected to track penalties for employees who go to the exchange for 

coverage'! If an employee has coverage with one employer, then moves to another employer, 

docs the employer get the pcnait) back? 

Answer: The Department of the Treasury has responsibility [')f the implementation of section 4980H 

of the I nternal Revenue Code, which relates to employer responsibility payments. While regulations 

related to this provision have not yet heen issued. the Department of the Treasury issllcd Notice::O II· 

36 on May 3. 20 I I and :\otke 2() 11-73 on September 13.20 I I. soliciting comment on a variety of 

issues related to the irnpicnwnlation of section 498011. ~oticc 20 II -36 can be found at 

http://www.irs.l!ov/pubfirs-drop/n-II-36.pdt: and Notice 2011-73 can be found at 

http://www.irs.!!ov/puh/irs-drop/n-I 1-73.pdf. 

6. What government entity will determine the amount of the employee's subsidy,? Is it IRS'! 

H HS? Another agency? 

Answer: Proposed regulations issucd by the l)cpal1mcnt oCthe rrcasury on August 12.201 I detail 

how premium tax credits and the atfordability of employer-sponsored coverage "ill be determined. 

fha! regulation can be tound here: http://www.ofr.lwv/OFRUpload/OFRDatal2011-20728 Pl.pdf. 

7. Ouring the hearing, YOh stu ted that the exchanges will have lower administrative costs. On 

what data are you basing your statement'? Massachusetts, for example. added a 4% 

administrative load onto the cost of premiums. 

Answer: The nOll-partisan Congressionall3udget Ortiec (Cl30) estimates that the AHordable Care 

Act will reduce premiullls lar the same plan in Ihe non-group m,lrket between 7 and 10 percent 

through rompetition and administrative simplifications stich as the elimination ofmedic,,1 

underwriting. Premiums f(lr the same pltll1 would bc reduced an additional 7 to 10 percent because of 

better risk pooling. Effects in the small group market range from a I percent increase to a :: percent 

decrease. The CBO analysis can be found here: http://ww\~ .cbo.ll:ovfftpdocsll 07xx/doc I ()7811l1·30-

Premiums. pdf. 

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8. Small business owners arc confused about the health care law generally and, in particular, 

about the application of the employer mandate.nuring the hearing, you said that various 

surveys have confirmed this, and C:V[S should reaeh out to small businesses to help them 

understand the law. What type of outreach and education do you anticipate, and when do you 

eXI)ect it to begin'! 

Answer: Agencies across the Administration have participated In efforts to inform small busines,es 

abollt the provisions of the Affordable Cart: Act. \\iithin the Center for Consumer lnfbrmation & 

Insurance Oversight (CClI0\ we have mel with a wide range of stakeholders including chambers of 

commerce. agents and brokcr organizations. and other small business organiLations. both to identify 

questions that should be addressed and to explore additional ways to communicate with small 

businesses. We have worked with the Small Business Administration to inform small businesses 

about the benefits orlhe Affordable Care Act. including the creation of Exehangcs and the Small 

Business Health Options Program (SHOP), As States develop the Exchanges with Federal stlpport. 

they are idcntil)iing communications strategies to reach eligible individuals. employers. and 

employees. We also understand the importance ofbrokcrs in thi, market and. in conjunction \vith the 

Department of the Treasury, we released a new roulld of olltreach that targeted small businesse:i and 

brokers on September 7,201 1. The message is simple - the new Small Business Ileallh Care Tax 

Credit is worth up to 35 percent of the health insurance premium costs a small business incurred in 

20 I 0 lor insuring its employees, As pali of this outreach effor!. the attached letter was setH to 

thousands of agents and brokers, highlighting the availability orthe credit. applicable tiling deadlines. 

and encouraging them to talk to their clients who may be slllall businesses. We are excited to 

continue to work with States. other Federal agencies. employer organizations. employers. and 

insurance industry groups to hclp establish both a more transparent and competitive market and an 

innovative way to give employers the option of offering employees a broad choice of health plan~. 

W.:: hay," also worked "ith the Department of Labor's Employee Benefits Security Administration 

(ELISA). which, along with the IRS, conducted a two part compliance assistance wcbcast reaching 

almost 2()O() attendees. [BSA also held, in coordination with state insurance commi:;sioners, 13 

Health Benefits Education Compliance 'Seminars rcaching almost 1600 small employers. IIR staff and 

other plan service providers. with 1\\0 more scheduled in the next couple of months. Both rBSA and 

the IRS provide FAQs on their respective wehsites to assist employers in understanding the law and 

their resp()n~ibiIitjes, Additional seminars and wcbcasts are planned. For assistance. private sector 

employer sponsored plans and plan participants with questions about the law and their rights and 

responsibilities can contact Customer Service Representatives in CCIIO. Consumer Assistance 

Program grantees in the staks. and EBSA flcnctits Adv isors located throughout the country. EBS/\' s 

Benefit Advisors may be reached electronically through www.askebsa.dol.gov or by calling toll-tf'ec 

i -866·444-cbsa (3:212). 

9. In responsc to a qucstion from Chairwoman Ellmers about an article in TIll! lUll titled, 

"Health Care Law Could Leave Families wilh Higher Costs," you stated that eMS is looking 

into the issues of: I) application of the health care tax credit to the individual and to the family; 

and 2) when employer makes an offer of health insurance, whether it is also binding on the 

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family. You meutiom-d that eMS anticipates future guidance to clarify these issues. Would you 

elaborate on when you expect that guidance and the specific issues that will be covered? 

Answer: The IRS recently clarified this isslie in a regulation proposed on August 12.20 II. 

According to the proposed rule. the ,latute provides that the coverage is unaffordable if the required 

employee contribution for sdf:only coverage exceeds 9.5 percent of household income. More 

information regarding this issuc can be found ill Treasury Proposed Regulations § 1.36B. issued by 

the IRS on August 12.2011. That proposed regulation can be accessed here: 

http://www.gpo.gov/fdsvslpkg/FR-2011-08-J 7fpdf720 li-Z0728.pdf 

10, In response 10 a question from Congressman Altmire, you slated that eMS is currently 

working with the Department of Ihe Treasury and the Internal Revenue Service to estimate how 

many small employers have claimed the small business health care tax credit, and you expect 10 

have that information soon. Would )'OU please provide that estimate in response to thl.'se 

questions? 

Answer: Wc are currently working with our colleagues at the Department ofTrca:mry and the IRS to 

determine the number of small employcr~ who havt! claimed the small business health care tax credit 

on their tax returns and "iii share with them your requ"sl dUll they provide that information "hcn it is 

availahle. As you know. many businesses receive extensions to file their income tax returns with 

September or October deadlines. so the IRS i" still actively receiving and processing return,. 

11. You said the health carC tax credit was targeted to the smallest businesses (those with fewer 

Ihan 50 employees) becausc they had lower rates of health insurance coverage. However, many 

small husiness,,, with more than 511 employees that offer health insurance may not be ablc to 

afIord it it' the premiums continue 10 inc.'ease. no YOlllhink the tax credit sliould apply to lIIore 

small businesses? 

Answer: The tax credit is dcsigned to encourage bUlh small businesses and small tax-exempt 

organizations to offer health insurance cnverage to their employees for the first rime. or to maintain 

the coverage they already oller. It is t8rgekd at small busiuesses and small tax-exempt organiz.ations 

that primarily employ moderate- and lower-income workers. which are the businesses least likely to 

offer health insur,1ncc to their workers. 

12. In ,'esponse to a qnestion from Congressman Altmlre, you said that under the employer 

mandate, you expect employers to continue to otTer coverage, and that some studies have 

predicted even more employe,'s will otTer coverage. What if the employer mandate results in 

higher costs and fewer employers offering coverage? 

AlIswcr: Employers with fewer than 50 full-tim", employees arc exempt trom the employer 

responsihility provision. The vast majority of businesses (96 percent) that \\ould be subject to the 

employer responsibility provisions (those with 50 Of more workers) already offer coverage. 

Employers usc the offer of health insurance as a significant recruitment and retention tool no matter 

the size of the business. Employers wi II continue to seck out top talent and the new law makes it 

casicr tor them to do so hy tackling health cost, and supporting small businesses. 

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The Congr~ssional Budget Ortice (eRO) has estimated that the Affordable Care Act will have very 

little impact on the numher of individuals receiving employer-sponsored ht'alth insurance. In 

particular. eso estimatcs that ··the number ofpeopk obtaining coverage through their employer will 

be about I million lower in ~O 19 through 1011 tinder PPACA and the Reconeil ialion Act than tinder 

prior law" (compared to a baseline of 162 mil!ioll or ! 63 million). CSO adds that "Some 

commentators have e,<pressed ;;urprisc that CBO and JeT do not expect a Illuch larger reduction in 

employment-based insurance coverage I ... I. However, the legislation leaves in place substantial 

financial advantages for many people 10 receive insurance coverage through their employers, and it 

provides some nc" incentives for employers to offer insuranc<: covcrage to their employees ... 1 

As ello points out, studies by a number of in depend en I think tanks have reached similar conclusions. 

"Analysts at the Urban I nslitllte estimated that employer-based coverage would have diminished by 

about haifa million people, on net, iflhe legislation had been tully implemented in 2010. Analysts at 

RAND estimated that the number of workers orfered. although not necessarily enrolled in. 

employment-bascd coverage would increase, on net, by about J 4 mill ion "hen the health care 

legislation WaS flilly phased ill."~ 

13. lfa small employer currently offers a \'cry basic or mini-OIed plan, and the .VlinimuUl 

Essential Benefit package requires the employer to offer a far more comprehensive package of 

benefits, won't the employer lul\'c the incentive to drop insurance and put his employees into the 

exchange'! 

Answer: Employers lise the offer of health insurance as a significant recruitment and retention 1001 

no manerthc size of the husiness. Right now, qualit}ing small businesses and small tax-exempt 

organizations can receive assistance of up to 35 percent ofthc cost of covering employees. This 

maximum percentage rises to 50 in 2014. In 2014, Stale-bast!d Exchanges will provide small 

businesses with affordahle, high-quality coverage options so that they may have the same type of 

choices that large employers have when purchasing insurance. 

14. Do you support allowing em)lloyers to continue offering a basic, limited benefit )llan under 

PPACA that would allow em)lloyees to take home more or their wages as salary and a smaller 

amount for their health insurance co\'erage'~ 

Auswer: The Affordable Care Act ensures Americans have access to high-quality, affordable health 

insurance. To achieve this goat the law ensures that new plans available in the new Exchanges, and 

in the individual and small group markets, offer a package of essential health benefits that arc 

comparable in scope to what employers typically offer today. 

I hUp:/lMVW.cbo.govitipdoC5i 121 "idoc 121IW03-30-llealthCareLe.isialion.pdf 

:: CRO quote t~lken (rom: http://\,,,\"\v.cbo.gov/llpdocs/121\.x/doc 11119103-30~HcalthCarcLcgislation,p~f 

('BO citt::-, nn {.fronn Institute stud) (lvuiJahlc here and thh I\/\:.ID stud): Christine Eibnl':r. Peter S. Hus'\l':}. and Fcucrk'l} 

Giro::;i. "Th~ I:n~ct.:. of the An{m.1a~1c (\11'1,,; ,\~t on Wllrkt.:r~: ! k:1l1h fIlSUn.IJ1C~ CO\Cn.lUC," \'e\!." ;'."I1Ufl1ml JOllrtW{ ql 

\ledietne. vol, 363. no. 15 (10 I 0). p. J 394. '"" 

6 
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15. 1)0 you believe the :Vlinimum Essential Benefit l»lckage will cost sm»11 husinesses, most of 

which currently offer employees catastrophic or ,'ery basic coverage, more than they currentl~' 

Imy because of the expense of additional required benelits? 

Answer: Onc of the goals of the Affordable Care Act is to provide all American,; with access to higb. 

quality and affordable health insurance via Affordable Insurance Exchanges - coverage that provides 

real protection against unexpected medical costs. 

Beginning in 2014. Exchanges will op"ratc SHOP. ",hich will o ITer smail businesses and their 

employees new choices, Through SHOP, employers can offer employees a variely of Qualified 

Ikalth Plans (QIIPs). SHOPs will provide sidc-by-side comparisons ofQHPs -- their benefits, 

rr0miufl1s. and quality·- and enable small businesses to oiler their employees a choice ofQllPs from 

several insurers. much as large employers can. Small business owners will be able to decide whether 

and when to participate in a SI lOP, SHOPs can save businesses money by spreading insurers' 

administrative costs across more employers, In addition. many small businesses may be eligible for 

small business tax credits when they offer health coverage to their employees through a SHOP. In 

fact. the CRO estimates that abollt 12 percent of people with coverage in the small group market will 

benefit Ii'om the tax credit in 20 J 6. For that 12 percent. the cost of insurance is estimated to be 8 to I I 

percent lower than it \\ould have heen "ithout the At10rdablc Care Act J 

16. Brian Vaughn, who testilied at the hellring, is just one small business owner who has stated 

that he will restructnre his workforce to avoid PPACA's llIany mandates, In fact, he staled that 

there wWlle very few full time jobs in the restaurant industry after PPACA goes into effect, 

because only his llIanagement staff will be full time, and the remaining employees will work 29 

hours per week or less (0 avoid triggel'ing the employer mandate. Do you think PPACA's 

employer mandate is encouraging job creation and economic gronth? 

Answer: The employer responsibility requirement does not take effect until 2014, Businesses with 

fewer than 50 full time employees are exempt ii'om the employer responsibility provision, \1any other 

provisions of the A ffordahlc Care Act stich as the wwl1 business tax credit a re already improving the 

affordahility. accessibility. and quality of health insurance available to small businesses and their 

employees. As tile Affordable Care Act moves toward tid I implementation, small businesses will 

benetit trom new protections against discriminatory rating practices and gr~ater pooled purchasing of 

coverage through Affordable Insurance Exchanges. As noted previously. the vast majority of 

businesses (96 percent) that "ould be subject to the employer responsibility provisions (those with 50 

or more workers) already otICr coverage, and businesses with thver than 50 \vorkers arc exempt trom 

the provhion, 

Additionally_ our current health care system can inhibit entrepreneurship and slllull business (;-mnation 

by locking \vorkers -- especially those with families or with any sort of health problem --into jobs at 

large tirms that offer tamily coverage and have a big enough risk pool to absorb the cost or covering 

pre.existing conditions. This "job lock" causes some workers to stay at large firms even iflhcy would 

be more productive working at a small business or becoming an enlrepreneur. 

hHp:H\V\'V\\'.cbn.go\·,'ttpuocsil 07, ,,/docl {)78 J! ! 1-30-Pn.:miums.pdt' 
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By providing: health security tt)r every American allli eliminating e"clusions t{,r pre-existing: 

conditions and price discrimination against those who are sick. health reform willmakc it easier tor 

small businesses to attract the best worker, and easier ti)f entrepreneurs to strike out on their own. 

17. As of July \. there were ten states where the federal government will be taking OVer rate 

review under authority granted by PPACA to determine if rate increases are reasonable. How 

long will this takeover last? Do you think the federal government will be better able to 

determine whether rate increases arc ""casonable"? 

Answer: As of September I. 20 II. the Federal government is conducting rate review in six States 

and partnering with two Stales to conduct rate rcview.~ A State that does not meet the regulatory 

standard li)f an effective rate review program may seek a redetermination at any point. If the State is 

dcte"mincd to meet or exceed the dctinitioJ]. rate review would transition to the Stale. eMS wi II 

continue to accept informali,)11 from States and monitor Stat"s in order to ensure correct classitication. 

and can reevaluate the status of this list as changes are made in each State. 

Section 2794 ortlle Public Ikalth Service Act requires the Department. in conjullction with the 

States, to develop a process tor the review oCunrellsolluble rate,. As detailed in the rate review 

regulation (CMS-9999-FC). which was finalized on May 19.20 I I. States with effective rate review 

systems must conduct reviews of proposed rates equal to or greater than the applicable threshold (10 

percent from Scptcm bel' 20 I I to August 20 12). I f a State lacks the resources or authority to conduct 

the required rate reviews. the Department will review all rates equal to or greater than the threshold. 

Con;;umers will be given access to new information li)r all rale increases equal to or greater than the 

threshold. That regulation is available here: http://www.gpo.gov/fdsvs!gh/FR-2011-05-

23/pdfl20 11-12631.pdf 

To determine whether a State met standards outlined in the tinal rule, the Department reviewed all 

available documentation. and reached out to Stale regulators and stalTto verify the information and t() 

obtain any updates. The Centers for Medicare & 7v1cdicaid Services (eMS) "ill continue to accept 

information from States and monitor States in order to ensure correct dassificatioll. States can submit 

new information to eMS at any point and eMS can reevaluate the status of the ctTectivc rate review 

determination as changes are made in each Slat" on an ongoing basis. Finally, sedion 2794 

appropriated $250 million to assist States that seck to operate an effective rate review program. 

18. Will the subsidies for insurance on the exchanges apply to the employer or the employee'! 

Ans,,·cr: There arc two types ofassistal1ce uvailable to purchas\: <:ov<:ntge in ExclHmgcs. First. 

individual> and families with household incomes between 100 and 400 percent of the federal poverty 

level purchasing coverage on the individual market through E:'I.changes arc eligible t~)f premium tn.' 

credits. Second. eligible small businesses that choose to offer their employees [he option 01" 

purchasing coverage through a Sf lOP arc eligible tor a tax credit to help offset the cost of proviLling 

·1 http: /-.:ciio.-':-111s.gO\./rc:-,ollrc.:si!h(,1<;hcct5/ral~ rnic\\'_ rUl.."t_s-hCcLhtml 

8 
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coverage. In 2014. the maximum credit is 50 percent ora "nail business' premium costs and 35 

percent of the employer's premium costs ror small tax-exempt employers. 

19, Is there an incentive for employers to keep their employees together to purchase cuverage in 

the SHOP market, rather than letting the employees seek individual coverage through the 

exchanges? 

Answer: As previously mentioned. employers lise the offer of health insurance as a significant 

recruitment and retention tool. Employers will continue (0 seek out top talent and the new law makes 

it easier for them to do so by tackling health costs and supporting small businesses. The Exchanges, 

which will become operational by January l. :014. will help enhance competition in the health 

insurance market. improve choice of affordable health insurance. and give small businesses the same 

purdlllsing clout as large businesses. SltOP will case the administrative burden associated with 

providing health coverage to employees. providing choices ror employees \vhilc preserving employer 

control over the level of assistance they provide 10 their employees. 

20. Will cost sharing for Minimum £ssential Benents be permitted? 

Answer: Section 1302 of the A ffordable Care Act allows cost sharing for qualiticd health plan~ and 

other plans. I{egulations speci fic to the Essential Health Benefits have ,clto be issued so [ am unable 

(0 comment on this matter in more detail at this time. 

2l. In response to a question from Chairwoman Fllmers, you mentioned that you are "vcQ' 

aware and tuned into the need to make sure that the package of essential benefits is an 

alTunlablc package." How "ill the determination he made liS to what is "affordable"? 

Answer: While the law <.:Hlls on HI IS to provide details regarding essential health benefits. this will 

be a team effort. As HHS moves forward, "e will consider the repol1 regarding employer·sponsored 

health insurance coverage provided by the Department of labor Oil April 15,2011. HHS has also 

asked the Institute of Meditine (10M) for their recommendations OJ} a process for dctining and 

updating these bcncllls. The 10'v1 ha5 a long history of providing independent. objective expert 

guidance to federal agencies and we expect their report in September. 

Most importantly. we look forward to hearing: from the American people. doctors. nurses. Members of 

Congress and all interested stakeholders. Beginning this lalL HHS will launch an errort informed by 

the 10M's recommendations to collect public comment and hear directly from all Americans ,,,110 are 

interested in sharing their thoughts on this important issu<'!. 

22. You said that you believe employers will continue to offer insurance for the ,'easons they 

have offered it since tbe 194()5, vut partklliarly to sta}' competitive, What would the incentive be 

to continue insurance if their competitor(s) drop(s) insurance? 

Answer: Employers lise the offer ofh~Hlth insurance as a significant recruitment and rClcntion tool. 

Employers will continue to seek out top talent and the new law makes it easier for them [0 do so by 

tackling health cost;; and supporting smal! businesses. Additionally, employers enjoy a tax benet it tor 

9 
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providing coverage Hnd large employers that arc subject to the employer mandate will have all 

incentive to purchase coverage fix their employees to avoid the penalty. 

As previously mentioned, the Congressional Budget Office «('flO) has estimated that the Affordable 

Care Act will have very little impact 011 the number of individuals receiving employer-sponsored 

health im.mance. In particular, CBO eb[illlatcs that ,·the number of people obtaining coverage through 

their employer will be about I million lower in 2019 through 2021 under PI' ACA and the 

Reconciliation Act than under prior law" (compared to a baseline of 162 million or 163 million). 

CBO adds that "Some commentators have expressed surprise that CFlO and JeT do not expeci a much 

larger reduction in employment-based insurance coverage r ... I. However. the legislation leaves in 

place oubstan!ial financial advantages for many peoplc to receive insurance coverage through their 

employers. and it provides some new incentives for employers to olter insurance coverage [0 thcir 

employees:'; 

23. When do you expect the 105(b) non-discrimination rules to be issued? Are 'vledicare, 

Tricare or other programs excluded from Ihis calculation? 

Answer: I bdieve you arc refcrring to regulations implementing section 2716 of the Public Health 

Service Act. as added by section 1001 of the Affordabk Care Act. which applies to new fully-insured 

group hcalth plan" rules and definitions similar to those Ihal apply to self-insured group health plans 

under section I 05(h) oftbe Internal Revenue Code relating to discrimination in t:1V0!' of highly 

compensated individuals. Whilc regulations related 10 this provision have not yet been isslled. the 

Dep.lrtment orthe Treasury issued Notice 20 I 0-63 on September ~O, 20 10 and Notice 20 I I-Ion 

January 3, 20 I I. soliciting comment 011 issues related to the implemcntation ofthesc 

nondiscrimination rules. 1\Qtice 20 I 0-63 can bc found here: http://www.irs.gov/pub/irs-dror/n-IO63.pdfand '.Jot;ce 2011-1 can be lound here: http://www.irs.gov/pub/irs-drop/n-Il-01.pdf. Bccau,e 

we arc still in [he I'ulemaking procc"" J am unable to comment on the timing of these regulations. 

24. The Chairwoman mentioned that small husinesses arc confused hy PPACA and its vague 

regulations, and are having difficulty complying with them, You respondcd that there will be 

tools called "navigators" available in the exchanges to help people understand how to access the 

exchanges. However, small husinesses an' trying 10 understand Ihe law now, comply with 

provisions and regulations that are currently in effect, and plan lor implementation oFthe law 

before 201-1. What tools are available now to belp them? 

Answer: 

As we have implemented these new program~ and processes. we have pursued them il111n open and 

transparent manner. CMS has puhlished extensive information Oil our rulcmaking and other decisions 

011 the CCiIO website and on the consumer-oriented www.HealthCare.gov 10 ensure that information 

is widely available for puhlic input and understanding. 

, http://,,\\,,,.c!Jo.goviftrdocs!121,,/~pcl:!1l9iO)-]O-llealthCarcl.cgislation.pdl' 

10 
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Agencies across the Administration have participated in efforts to inrorm small businesses about the 

provisions of the Affordable Care Act. Within the Center for Consumer Information & Insurance 

Oversight (CCIIO), we have mct with a wide range of stakeholders including chambers of commercc, 

agents and broker organizatiolls, and other small business organizations, both to identify questions 

that should be addressed and to explore additional ways to communicate with small bllsinessc>. We 

have worked with the Small Business Administration to inform small businesses about the hendi!s of 

the Anordahlc Care Act. including the creation of Exchanges and the Small Business Health Options 

Program (SIIOP). As Stales develop the Exchanges with Federal support, they arc identifYing 

communications strategies to reach eligible individuals, employer,;. and employees. 

We also understand the importance of brokers in this market and, in conjunction with the Depal1ment 

of the TI'easury, we released a new round of outreach that targeted small businesses and brokers 011 

September 7, 20 II. The message is simrle - the new Small Uusiness Health Care Tax Credit is worth 

up to 3S percent oCthe health insurance premium costs a slllall business incurred in 20 I 0 for insuring 

its employees. As part of this outreach Cftl1rt. the attached letter was sent to thousands of agents and 

brokers, highlighting the availability ofthe credit. applicable Ii ling deadlines, and encouraging them 

to talk to their clients who may be small busjllc~se,. 

Also. smalt employers call usc the website, IlealthCarc.uov, to find easy-to-understand information on 

the Afj')fdable Care Act. HealthCare.gov indudes a glossary of health insurance and health reform 

terms, an implementation timciinc, summar;,"s ofprovisiQl1s of the Act, ri'equently asked questions. 

press releases, a tool to search for and compare the health insurance plans available fix purchase in 

each 7.ip code, and much more intormation. 

Employers can also lind infonnalion on the Dcpartmem of Labor's dedicated A(I\ wen page at 

w\Vw.doLgov/ebsa/healthreform/. which include;, regulations and oth~r guidance, frequently asked 

questions_ lact sheets as well as information on upcoming compliance assistance events. 

The Exchanges will also build partnerships with and award grants to entities known as "Navigators," 

who will reach Ollt to employers and employees, consumer>, and sclf-employed individuals to: 

Conduct public education activities to raise awareness about qualified health plans: 

Distribute fair and impar1ial information about enrollment in qualitied health plans, premium 

tax credits, and cost-sharing reductions: 

Assist consumers in selecting qualified health plans: 

Provide referrals to an applicable consumer assi"tance program or ombudsman in the case of 

grievances. cOl11pla iOb_ or quc,tion;. regarding health plans or coverage: and 

Provide information in a manner that is culturally and linguistically appropriate. 

States may allow agents and brokers to serve as "Iavigators in the SHOP, 

25. A recent article in U.S. News altd World Report said that an HHS rule mandates that states 

collect "raw claims dala sets" from illsul'crs 011 all individuals with private coverage purchased 

either individuall.l'· or through small employers. Exaclly what information does HHS propose be 

collected from insurers on individuals with private coverage, and what is the projected lise of 

this information? 

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Answer: On July 15.20 II, the Department published proposed rules 011 the three risk mitigation 

programs included in the Affordable Care Act to help protect insurers against risk selection and 

market uncertainty reinsurance. temporary risk corridors. and risk adjustment. To implement 

effectively the risk-adjustment program sct forth in the A ftordable Care Act, this type of data is 

needed to support the risk-adjustment determination and to make certain the compditivc field is level 

among carriers and stabiliLc premiums in the individual and small group market. 

I IllS considered three possibilities fix data coliection: (I) r\ centrali7ed approach in which issuers 

suomit raw claims data sets to HHS; (2) an intermediate State-level approach in which isslIers submit 

raw claims data sets to the State government. or the entity responsible for administering the rish 

adjustment process at the State level: and (3) a distributed approach in which each iS~ller retains its 

data and provides self-determined risk scores 10 the risk adjustment entity. In the proposed rule. the 

Department proposes implementing number (2) and is seeking comment on this approach and its 

alternatives. 

12 
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Response to Questions Submitted fur the Record to 

Timothy Stoltzfus Jost, Professor of Law, Washington and Lee University School of Law 

Hearing: "Small Rusinesses anti PPACA: lfThey Like Their Insurance, Can They Keep It?" 

Subcommittee on Healthcarc anti Technology 

House Committee ou Small Business, ,July 28,2011 

Timothy Stoltzfus .Jost 

Thank you Chairwoman Ellmers for the opportunity to expand on my remarks presented to the 

Subcommittee on July 28,201 L in response to these questions, Your questions and my answers 

follow: 

/, Durillg the hearing, youlIlellliollcd thar lhe mow II! exchanges . und fhe associafed competition 

and poolinR - wOlild ,mire cost problems, and ciled flJe Urhan /l1slil1l1e siudy, However, Ihese are olle 

lime impml'etllellls, Pooling happens Ol!ce, Compel iii!''' pressure 81urls, /i//er'ilal. if is the pace (!f 

health care costs wilich art! cons/anI Iilatlllaller. Won 'Ilhese continuing "osts evellllllllly 

overwhellJl the Olle-lillle gains/rom the exchange and f!()()/inf<? 

:VIost developed countries control health carc ,osts through regulatory price controls and budget 

limits, The Affordable Care Act takes a different approach t(l controlling the costs <If private health 

care, It relies on competition among health insurers through the exchanges to bring down nealth 

insurance costs. and indirectly health care costs, Whether or not this strategy will work remains to he 

seen. but it is the way American way, I would agree that the elTccts of pooling will primarily be 

experienced immediately, Out I can see no rcason why competition could nOI continue to bring dO\ln 

costs over time. One can certainly think of indllstries. like consumer elcctronics. where competition 

has brought down costs continuously as it has improved quality. I know of no a priori reasofllVhy 

this could not be true in health care, although we all know how difficult controlling health care costs 

in the United Slates has been, 

2. 1"011 cited a sludv that projected Ihe aI'erage employee col1lrihuliol1 would decreasl' under 

1'1'ACA', exchanges, )'011 then said fhe Minimum E\'Selltiallkn~fils ",ill flOIIII((rkedh change whal 

employers otfer. Ira sfl/all employer ClIl'renlZv offcrs ([ l'elY hasic or "mini-med" plan. alier the 

l\'linimUtl1 F"senfial Bene/its rr:gu/atiotls are istaled a.;; • .-s'umilig they require 1'nOl'e hene,/h.'\' tIltH! a mini-

/lied plall, !l'ml 'fthe elllployer 's ells! e,yealale:' 

The term "mini-med" or "limited bendit plan" is commonly used to refer not to the scope ofhcnefits 

offered but to the dollar limits placed on thos!;) benetits, The minimum essential benefits requirement 

of section 1302 of the Attord,lblc Care Ad is addressed to the scope of bend Its, In fact, the scope of 

covered benefits offered by employers today does not differ markedly based on size of employer. and 

is unlikely to do so in the future. See National Compensation Survey, 20()g, Tables 12, 1-+. 16. 17, 

18, at http://www.bls.gov/ncs/ebs/detailedprovisions/2008/ebbl0042,pdf 

Section 1302 provides that the scope of the essential benefits under the Affordable Care Act must 

equal those provided under a typical employer plan, I do not. therefore, expect that the cost of 

providing benefits will escalate when the essential benefits requirement goes into efkct 
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Currently the scope ofbcnetits offered by smal! employers is driven to a considerable degree by state 

benefit mandates. [n many state" these arc numerous. North Carolina. for example. has more than -10 

according to the Blue Cross/Blue Shield annual legislative survey. Because states must pay for any 

benefit mandate they impo~e on qualified health plan~ beyond the cori:: ledcral essential benclits. it is 

quite possible that the burden that mandates place on health plans will in fact diminish atter the 

esscntia I benefit package is in place. 

3. III YOllr Il!slimoJlv. YOII sUl1l'd Ihll! all of/lie reasolls [hal employers havl! oj/ered elllp/over~ 

.ljJO!l.mred illSl{rance since the 19-10" will (:onlil1ue alia PPACA Koes ililo "ffed. Mosl larK" 

employers will prohably COlililllle [0 of!er core rage. Bul dOli 'I )"ollli1ink many small bl/sillns oWllers 

w!lI, as I'vlr. Val/ghn testified filld if dt/tlcuillo o[fi'r !tea/lh illsurance or pav tile penaft)'. and also 

keep their current f!mployees lind creote neB' ioh.~'? 

I think it is difficult to prr~iect at this point how small employers will respond to the implementation 

orthc 11l1ordablc Care Act. The Rand Corporation. for example, has predicted a dramatic expansion 

of small employer coverage. 

http://www,rand.org!content!dam!rand(pubs(technical reports/1010/RAND TR825,pdf The 

Urban Institute also projects that cost> will drop for small employers ,md offer rates increase. 

http://www.rwjf.org/files/research!72530guickstrike201106.pdf Many small businesses do not now 

olfer health insurance. and it is likely that many will continue not to do so after 20 [4, even if their 

cost of otlering coverage drops. It is also po,sible that small employers "ho pay very low wages but 

now offer insurance will decide to drop insurance and let the government pay tor the health care of 

their employees imtead. Some studies project thai this will happell. 

One can argue thm employers should not be responsible for providing health insurance for their 

employees. In many other countries. emj110ycrs have no responsibility to do so. Since the 19405, 

however. we have largely relied on an employmcnt~based health insurance system and it has served 

us well. The ACA otTers an alternative to Americans whose employers do not provide health 

benefits-refundable means-tested tax credits. But employers who do cboose to continue to offer 

coverage will continue to receive tne generous tax suhsidies they do now. and it is likely that the vast 

majorhy of them will continue ttl offer covcrHgc. 

One has to wonder. however. about what is fair. If one employer provides health insurance for its 

employees but a competitor down the street docs not. do they compete on a level playing field? If 

one employer offers family coveragc. and the spouse oj" One of its employees, who is covered under 

that insurance, works tor a competitor down the street who does not provide coverage. is that fair" 

Many el11ployees of businesses lhat do not offer insurance today arc on Medicaid. covered at public 

expense. Many others are uninsured, The uninsured pay tor 01111' about a third of their health carc. 

The rest of the costs are shirted to the gOyefflm..::nl or to Americans who arc insured and their 

employers. Perhaps we should not think only about ,vIr. Vaughn. but also about who is paying tor 

the health care needs of his employees . 

.t. What percellla,,!.! o{small husincss owners do you helier!! qualifj.'.IiJr and reed"e Ihe sllIa/! 

hllsine.u hea/lh care lax crcdie 

II study conducted by the Small13usincss Majority and Families USA estimated that 4 million small 

bllsines~cs were eligible for the tax credit and 1,2 million for the maximum credit in 20 I O. 

http://www.familiesusa.org/assets!pdfs/health-reform!Helping-Smal'-Businesses.pdf ! have no 

idea how many have applied ,,)[ the credit, although in some markets where the ra" credit has been 
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extensivciy publiciLcd, take up has reportedly been high. http://www.bcbs.com/news/bcbsa/bcbsaapplauds-efforts-to-make-tax-credits-more-available-for-small-businesses,html Unfortunately, 

studies show that many eligible businesses do not know the tax credit is available. A study by the 

Small Business Majority found that only 43 percent of smull businesses were aware of the tax credit. 

The NFI£3 study presented at the hearing also found that fewer than half of all small businesses were 

aware of the credit. If employers do not know about the tax credit. they will not take advantage of it. 

It would be very helprul if members of Congress, including in particular the members of this 

Subcommittee, would actively educate smali businesses in their districts aboutlhe availability of the 

credit as a constituent service. I know of nothing my own congressman has done to this end. 

although I contacted his offiee and offered to help with this. 

5. Like Mr. Vaughn, who lesti/ied allile heartnx, mallY smalf husiness owner"jilce the choice 

betlreen of leI' in X health insllrafl<'e or pavinx Ihl! "Iec/ric hil!. ,Is he said he is presidenl ofli!s 

am/pall)" and "'must decide h011' milch orlhe cOllrpanr" iI/COllie call he I/scd If) PI(V/i)i' wages and 

bel/~/ils alld hoI\' /lllIch has to he used/hI' dai~v operalio!1S, There is olily so milch money (fm/' first 

(/lId./i)I'ClIIOSI, we a/l hape 10 con". our dwlr expenses . . , Do rOlilMllk 1II0st small husiness.:s are il1l1 

cash position thai easily al/oll's them II! otler health i!lsurance or pay the penail,.:' 

\1ost small businesses wrrently offer health insurance_ including 5()% of businesses with 3 to 9 

workers, 76% with 10 to 24, 92% of 25 to 49, and 95% "ith SO to 199. 

http://ehbs.kff.org/pdf/2010/S0S5.pdf Since all of the incentives that currently exist for offering 

health insurance-generous tax subsidies. employee dem'ltld, reduced absenteeism, lind im:reased 

productivity-will continue to be in place after 2014, most small businesses are likely to continue to 

offer health insurance. Indeed. if insurance becomes more uffordablc through the exchanges or 

employees value it more because of the minimum coverage requirement, coverage may increase as 

the Urban Institute and Rund predict. 

Many small businesses will continue to be unable 10 afford health insurance. rhe penalty only 

applies to employers with more than 50 full-time or full-time equivalent employees who do not offer 

health insurance, so most small bw,inesses that do not currentlv offer health insurance will be 

exempt. Some mid-size employers. however_ will have to decide whether to offer insurance or pay 

the penalty. No employer will owe a penalty, however, unless an employee oflhe employer seeks 

insurance al public expense. The penalty is effectively a charge on "fredoaders:' Employers who 

cover their employees adequately don't have to worry about it. Those who "hoose to have the 

taxpayers pay to insure their employees will have to help out. 

6. 111 WillI' leSliIllOIl),. HIli staled IIml aller 2111-1, .. .. Jorge emp/oyl!l's. 11111 slI/a/! ell/plorers will/ilee (/ 

penaily if Ihey dOli 'I <>l/i:r insllrance.·· WIlli' is yo III' definilion olo small hllsiness:' 

The statutory definition (,lund in IRe section 4980H(c)(2)-an employer with 50 or more full-time or 

full-time equivalent employee. 

7. Small hlls/lless owl/en him? heen rellillf!,IIS IhallhevCilIlI10t tll/ill'd to create/iill time jobs IIlIder 

PPACA. As lvlr. Vaughn testified ai Ihl! hearing, "Prior ro heallh cal'e I'ejill'm, I hod the flexihdity 10 

hire 1l101'f! workers, PI{V them {/ wage and offer them (Ieee,>\" 10 Ihis moderali! (iled/hl col't'rage. Now I 

alll heillg lold hy Wm!ringtolllhal I harl! {(I (IlkI' all "wIllI! time employel!s Wasilillgloll-dejilll!d 

hea/lli con:rage or pay a pemtlly. iJecause (IFIIie cost olotferilli( l/tis pn:scrihed coverage £/mllhe 

size (!lIb!! penally, f wi/! hare 110 choice Ihan /0 res/ruelure IIIV wurkjilrce in (/ wII.1·tll,,1 pmleels me 
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Fllm/osing e"ely/hing (1I'()rkedjiJf'. " Do VOl! Ihink \'IIu;/' bllsinesses s!iould I)" pprmilled lIlIder 

PPAeA /0 offer a milli·me" plall indef/nile/r, alld f1OliliS(lIl1der the cl1rrelll f(:lIIpol'm)' It'llivers) 

As of July 15 of this year HHS had granted limited ben eli! or "mini-med" plan waivers for plans 

covering about 3.2 million Americans. 

http://cciio.cms,gov!resources!files!approvedapplicationsforwaiver.htmIThis is less than 2 

percent of the 170 million Americans covered by employment-based health insurance. ('he vast 

ml00rity or employers already offered conforming coverage or have begun to do so. 

Some of the limited bcnelit plans granted waivers otTer relatively adequate coverage. Others border 

on fraud and are literally worse than nothing. Plans that offer only $20()() in benelits, that do not 

cover the first day ofhospitalizution, or that have loss ratios of under 50 percent are not realty 

insuram;e. They merely deceive people into believing that they have insurance until they actually get 

sick or injured and find out that they are on their OWI1, To add insult to injury, some employers who 

ofter mini-mcds do not contribute to the cost oftncsc plans. The entire plan is paid lor by the 

employee, and the premiums the employee pays almost equal the benefit limits. The employee 

would be better off simply putting the money in the bank to pay illr routine expenses. The only 

coverage for catastrophic events is bankruptcy. I do not believe that this coverage should continue to 

remain available, It is a cruel joke. If stleh plans disappear after 2014, Americans will be hetter off. 

8. Mr. Vaughn said Iha/lhe empluyer mal/dale saddles bllsinI.Csses Willi /lew requirnnc/11s that 

actually "neOl/rage husinesses 1101 IiJ expalld Iheir businesses and I/Of to crealejo/J.I'. The COl11l11illee 

has heard fhis/i'om man)' small businesses. Do YOl/ll!ink Ihe employer mandale employee filreshold 

should be increased /0 applv to bl/sinesses of f ()() or more, or 20() O/' /!lure, so that slIllIllfjrms with 

j() employee., call add workers wil!iout heillf' mbjec/lo the lIlandale or a penally:' 

As I noted earlier, 95 percent of employers with more than 50 employees now offer coverage. 

,,,)uld assume that Congress decided that the remaining 5 percent could and should offer coverage. or 

pay a penalty if their employees had to seck coverage at taxpayer e'(pense. As large employer is 

otherwise defined in thc statuw to include employers with more than 100 employees, this threshold 

would make sense as well. 

9. In Afedicall.oss Ratios, do you think !lUll insurance hroker commissions shou/d be included av 

par! a/lile 80% calculation/i)/' health cate, or the 20%.101' administrative expensl!s? [{YOIl said the 

80%.f(Jr health carc, do l'(l//lhink i/l.\'lIf'(Ince hrokers will be lureI'd Ollt o/bmil1i!ss us (/ resu!1? 

Compensation paid to brokers and agents for marketing insurance has always been considered an 

administrative expense. Broker and agent fees are certainly not a health care e:-.pcnse. The 1"AIC 

and HHS concluded that Congress understood that commissions were an administrative expense. and 

thus classified them as such for the medical loss ratio rule, 

The ~ArC recently conducted a study to determine the potential effect oflhe MLR rule on brokers 

and agents. http://www.naic.org!documents!committees b 110607 hcrawg report, pdf It queried 

slates that have ,tatc MLR rules similar to the federal rule and found that these states have seen no 

adverse effect on access to agents and bro~ers, llalso found thai while some insurers have ClIt 

commissions, others have not. For. example, data provided to the :--lAIC by NAilL! showed that 

commissions have not been cut in North Carolina by the insurers fot' which NAIIU provided data 

over the past four years. Becaustl commissions have been written as a percentage of premiums in the 
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past, moreover. commissions have been rising rapidly for some lime as premiums have risen. 

Current culs in commissions may be simply a return to more normal levels. 

No one likes to sec their income ClIt, and everyone would like to have Congress protect their income. 

Ilrokers and agents are not exception. Brokers and agents provide valuable services to small 

businesses, but! have seen no evidence yet (hat small businesses arc suffering from the MLR rule by 

losing access to their services, 

In fact, there is strong evid,mce that consumers are benefiting from the rule. Some insurers arc 

already moderating their premium increase requests to avoid having to pay rebates to consumers. 

I lad the medical loss ratio requirement been in effect in 2010 (it is Ilot effective until this year), 

consumers would have received between L3 and 2 billion in rebates, almost $450 million of which 

would have gone to small businesses. 

http://www.l1aic.orgidocumenls/commillees_h_1 10607_ herawg_reporl.pdf 

https:l!ir.citi.com!Z6MByRrEaOyRCTlZcYVa6IJpglc%2F7pmh7WJrHPzv6hs%3D Ifbroker and agent 

commissions are removed from the MLR. premiums for small businesses will go lip and rebates to 

small busine:.ses will go down dramatically. According to the NAIC study, rebales to small groups 

would have dropped in 20 I 0 hy ov(;r two thirds to $126 million. Small businesses will pay much of 

the cost of protecting (he income of agents and brokers. 

10. Tn your rcsliJilol1Y. you s{a{ed thai ""smal! businesses need to ('(I\'!!" tlie essential benefits package. 

It is no! dear /() file tliat Ihat is goil/g to be a major expense. "" IVhal do rOil t'xpl!cl/o he il1c/IIl/('d in 

lire Jfinimum Esselltial Benellis pad{lge~ 

The categories of services lhat must be covered by the essential benefits package are listed in AeA 

section 1302. 

(A) Ambulatory patient services. 

(B) Emergency ser\' ices. 

(e) Hospitalization. 

(D) Maternity and newborn care. 

(E) :Vlental henlth and substance usc disorder services, including behavioral health treatment. 

(F) Prescription drugs. 

(G) Rehabilitative and habilitative services and devices. 

(II) Laboratory services. 

(I) Preventive and wcllness services and chronic disease management. 

(J) Pediatric service,. including oral and vision carc. 

rhe exact services that "ill be included in the package remain to be determined. but must equallhc 

scope of benefits covered by the typical employer plan. I expect that I II IS will carefully consider the 

cost of services as well as the need for services a" it constructs the essential benefits package. 

! ,. The hudgel (llla/ysis o{C}!.)'" own actIWI)', Richard Fosler, jill/lid ritaltile hl!allh care law wOIl/d 

raise. II(){ lower. nalionat heallh expclldil1lrcs. Doesn't ilfillfow Iilal it rile IIU/iollal heallh 

expenditure is hll~f1,er. the hea/lh illSul'ance thai COl't!!''\" lhow e.v!cnditllres 1I111st also be l(lrg<,r' 

No, it does not. The eMS actuary projected that the AeA would increase the nUl11ber of Americans 

covered by health insurance by 34 million. but increase the cost of the total health care system only 

by nine tenths of olle percellt between 2010 and 2019. 

http://www,cms,gov/ActuariaIStudies/Downloads/PPACA 2olO-04-n.pdf Per person COSiS thus, in 

fae\' would decrease. Specilically, the ActLlar)" projected that the expenditures for private insurance 
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and cmployer-sponsored insurance would decrease irom the level that they would have been at absent 

reform. 

One other important fact must not be forgotten-growth in health care expenditures creates jobs. 

Indeed. health care is one of the greatest engines i()r joh creation in our counlry. 

http://www.bls.gov/emp/eptable201.htm :vIany of these johs arc in small husinessesphysician's and dentist's ollice. home health agencies, independent drug Slores. Sma!! business pay 

for health care, bul they also provide health care. More people who need health care will be 

receiving it because of the Affordable Care Act. The people and small businesses \\Im provide il to 

them will have jobs (and profits) because of the Affordable Care Act. 

f2. The Instilule o/Meilicine I !U;'vi} is expected to release its recomllll!mlaliolls/hr the ;\Iillilllll!ll 

t~,seflfi"l Bellejil.l packag!! hy Illis/(III. JOllalhal1 Gruber, (In economist who helped creare rhe slate 

plan in A-tassac!llIselts, wId lire fOM pane/tllat iI 10% rise inlhe cost 0/"111" essenlilll bellelils 

packag!' would increase the cost olgovemnwul sllb.,id;e.\' bv /./.5%, Of 567 billion, wlli/e reducillg 

the share orthe insllred hy -1.5%, or 1.9 million, through 20f9. Do you think increasinf; lhe cos! ol 

govl!l"IIlIIenl.wbsidi!!s while Oll/l' reducil1}? the sha!'!! olthe insllred bv -1.5% is a }?()od tradeofF 

Although I don't know the a~sumptiol1s on which Dr, Grub,r's stilt,menl \\GS based. it seems 

reasonable to believe that if the cost of insmance goes LIp, the cost of public subsidies will go up and 

the number of people insured go down. The ACA. however. stipulates that the essential benefits 

package ll1ust equal the current typical employer benefits package. so this situation should not occur 

if the law is follo\ved, 

13. Dr. Hollz-Eakin lesli/h,d thalille !lillI/emus regulations prolllulgated plIl'SUalll to the law should 

I>e made cleal1er all</ ill a \l'lIy fhal doeslI '1Ieal'l! Ihe husilless cOlli/Ill/nil)" so perplexed What re./orms 

10 (he PPAC·J regu/cIlOI}'pl'ocess wOllfdYOIi reco/llIJlI!fld? 

[ have read every regulation that has been i~sucd under the insurance retzlnn proviSIons of the 

Affordable Care Act because I have written a blog about each of them at www,healthaffairs,org/blog. 

I would imagine I am une of the few Americans who has read all ofthcll1. On the whole, I have 

found the regulations to be sensible, cost-conscious. and quite clearly-wrillcn. The agencies have 

tried very hard to make compliance wilh the law no 1110re difficult than ncccs,ary. Our health care 

system is incredibly complex and any attempt to reform it while preserving its basic free market 

orientation will also he incredibly complex. We could have established a single-payer system with a 

fraction of the rcgul«tions, Other countries have done so, Flut that is not the path we have chosen. 

Using private businesscs to provide a publicly-funded servicc to the public is inescapably a 

regulation-intensive enterprise, because it is necessary to ensure that public funds arc weI! spent and 

that the public receives high-quality, low-cost services. But the derarlment, implementing the 

Affordable Care Act are doing a rcspol1siblcjob in doing so. trying to minimiLc unnecessary burdens. 

14, Do you think that small businesses are disproportionately affected by the various mandates, 

penalties and taxes in the health care law? And if so, will this affect their ability to increase 

employee wages, purchase new equipment and hire new workers? 

I know of nn taxes under the law that fall disproportionately on small businesses. The penalties will 

tall only on larger businesses-those with more than 50 employees--most of who III already offer 

insurance, Small businesses will be able to take advantage oflhe exchanges and very small 

businesses get the benefit of thc small cmployer tax credit. I do not believe small businesses are 
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affected disproportionately by the ACA in an adverse way, indeed they disproportionately bl'nefit 

from the law. 

One other issue must be considered. Many reople who currently work for large businesses would 

prefer to start their own small business will but cannot do so because they fear they will lose their 

health insurance if they leave their job. They will now be able to fulfill their dream and count on the 

premium tax credits to help out until they get on their feet. We may "ell see a flowering of smal! 

business entrepreneurship under the i\CA that will create jobs and help gel our economy back on its 

feet. 
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Health reform's grandfathering rules likely to raise costs 

By Judith Messina 

Bloomberg News 

President Barack Obama's push for health care legislation had a key pledge; People who liked their 

coverage could keep it, As a practical matter, it might not be so easy. 

June 23, 2010 

When it became clear this past March that the new health care reform law would grandfather existing 

health plans, employers breathed a Sigh of relief. It seemed that President Barack Obama had kept his 

promise; People who liked their coverage could keep it, Grandfathered plans had to conform to some 

new rules, but they were exempt from costly mandates such as providing preventive care without copays. Many small business owners believed grandfathering would preserve their ability to contain costs. 

last week, however, the Department of Health and Human Services, the Labor Department and the 

Treasury burst employers' bailoon, issuing regulations that would set limits on how much plans can 

modify their coverage and still be grandfathered. 

Experts say the new regulations make holding costs down even more of a Sisyphean challenge for small 

businesses; If they make changes in their current plans to save money, they risk losing their 

grand fathered status and will be forced to comply with new mandates that are expected to increase 

costs. 

"They're taking away your bargaining ability, and that's going to be used to the advantage of insurance 

companies," says Saul Brenner, a senior tax partner and head of the international tax division at 

accounting and advisory firm Berdan. 

Under the new rule, businesses would not be able to change carriers, raise employees' percentage of 

cost-sharing, or increase co-pays and deductibles by more than a set amount if they want to keep their 

grandfathered status. If, in fact, they lose their favored status, their plans will be considered "new," and 

they will have to offer all of the bells and whistles of reform. 

Some of those bells and whistles are already incorporated into many plans, such as providing emergency 

services without prior authorization, or are inconsequential, such as reporting well ness initiatives to HHS 

starting in 2012. But others-such as a mandate to cover clinical trials and ceilings on cost-sharing 

starting in 2014-are expected to add momentum to already steeply rising costs. 

HHS defends the new rules, saying they allow employers to make routine changes to grandfathered 

plans, but not to dramatically reduce benefits or increase cost-sharing to the detriment of employees. 

But by HHS' own estimate, as many as 80% of small businesses in the country will lose their 

grandfathered status by 2013 under the new rule. 
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At this point, the grandfathering limits are still a proposal, and the government is seeking comments 

through mid-August. Experts say they are unlikely to change substarltially. 

The prohibition on changing carriers, in particular, takes an important cost-control tool away from small 

businesses, which already lack the flexibility and leverage of larger companies. Many change carriers 

every couple of years in search of better rates or new offerings as insurers offer deals to drum up new 

business. Westchester broker Alex Miller says that for most of his small business clients, trying to keep 

their grandfathered statlls is probably not worth it, especially if rates continue to climb 15% to 20% a 

year as they have in New York. With limits on cost-sharing. employers could get further behind every 

year. 

"I think a small handful of my clients will stay put because they have a unique health care plan, such as 

an indemnity plan that is no longer sold," says Mr. Miller, president of Millennium Medical Solutions 

Corp. in Armonk. "But for the great majority of my clients, how are they going to take a 20% [premium] 

increase and not make any changes?" 

What's clear is that the costs and benefits will be different for each employer, especially with the 

economy still in the doldrums. Experts say businesses should calculate the trade-off between being 

grandfathered with limited room for changes. and being able to shift costs but also being subject to 

more mandates that will raise costs. 

"It comes down to comparing what you keep or give up by keeping your grandfathered plan or moving 

to a new one," says Joe Torella. president ofthe employee-benefits division of HUB International 

Northeast. "Cost has to become the largest question mark." 

http://www.crainsnewyork.com!article!20100623(SMALLBIZ!100629939 
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Small-Business Health Care Tax Credits Are Having A Minuscule Impact 

July 4, 2011 

Sally Pipes 

Forhes 

The Small Business and Entrepreneurship Council recently surveyed 304 small business owners 

about how satisfied they were with th~ new healthcare refomllaw's tax credits. 

Nearly 90% had not applied lor the credits. Some had no idea they existed, others were deemed 

ineligible, and more than a lifih found that they "offered no real benefit." Only 7'% of small 

businesses were actually using th..: tax credits earmarked specitically tor them. 

What gives') Why aren't small enterprises taking President Obama up on his offer to help them 

"afford the cost of covering their workers'?" 

In short. because the president's "help" is relatively worthless. Worse. other components of the 

law threaten to makt: health coverage even more expensive for American small businesses. 

As many firms have learned tirsthand. it's nearly impossible to qualify for ObamaCare's tax 

benelits. Through 2013. only employers with fewer than 10 employees and average wages of less 

than $25.000 a year are eligible tor (he full 35% credit The credit's value decreases as a 

company's workforce increases beyond 10 employees - and as its ave rag..: annual saJary rises 

above $25,000. 

rurther. companies with more than 25 workers or with an average salary of over $50.000-

arc ineligible. 

In 2014. the maximum credit will jump to 50% it)}' qualified employers. But the salary limits will 

stay the same. At that lime. the credits can only be used {~)r government-approved coverage 

purchased through ObamaCare's new insurance exchanges. By 2016. they expire altogether. 

Given this barrage of restrictions. it's no wonder the Congressional Budget Oftice estimates the 

credits will impact just 12% ofi'olks in the small-group market. 

Even tor those who quulil'y, the tax credits may not be worth the trouble. Because they diminish 

as companies grow. a small business may have to choosc between hiring new cmployees and 

kecping the tax benetit. 

In other words, ObamaCarc's credits may actually discourage small tirms from creating jobs. 

Early evidence indicates that small businesses aren"t responding to the health law's handouts. 

According to a January 2011 Discover Small Business Watch survey. tewer small businesses 

offer health coverage now than before ObamaCare's lax credits were in place. 
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That's because the credits do little to assuage business-owners' chicfconcern th" rising: cost 

of health benefits, 

Nearly 70% of small businesses polled by Discover said that it's dillicult to tlnd aff()rdablc 

healtheare tor themselves and their employees. About the sume number of business-owners 

believe that ObamuCufe willll1uke health insurance less affordable, according to the Small 

Business and Entrepreneurship Council. 

It appears that they're right. A new report from PrieewaterhouseCoopers projects that employer 

health costs will rise 8,5 percent in 2012, thanks in part to the heillth reform law. That'5 on top of 

an 8% projected hike this year, 

Ordinllry workers are feeling the pain. too. Since last year. their share of heal the are premiums 

has risen to 15,1 percent of the total cost - an increase of 1.2 percentage points. At !inns with 

less than 200 employees, the average worker's annual contribution toward his health insurance 

has shot up more than 38% li'om $625 to $865, 

One reason for the cost hikes, according to PwC, is that ObamaCarc encourages health care 

providers to consolidate in order to i{Jrtn Aecountabk Care Organizations, which arc intended to 

better coordinate patients' care, starting initially with those on Medicare. But consolidation aho 

reduces competition. Th<lt can yield higher prices. Indeed, the Robert Wood Johnson l'mmdatiOl1 

found that hospital consolidation in the 1990s drove up inpatient prices 5%, 

Over the past decade and a halt: small businesses have created almost two-thirds of new jobs, 

But their growth has slowed to a crawl in the wake oi'the recession, ObamaCare's tax credits 

were intended to reverse thaI trend, But they've done no such thing, 

Meanwhile, by inHaling the cost of health care. the rcst oCthe law has undermined any chance 

the credits had of helping small businesses pay for health coverage. 

President Oballla tried to buy slllall husinesses' support for his health overhaul with an overhyped (ax giveaway, Thus far. his otfer is one they've been all too happy to refuse. 

SalZV C Pipes is President, C£O and Taube Pel/OIl' in Health Care Studies Ililhe Pacific 

Resellrch Ins/ilute, Her lafest book, The Truth About Obamaearc, was published in 20/11, 

http://blogsJorbes,comLsallypipes/20l1/07/04/small-business-health-care,tax-credits-are-having-aminuscule,impact/ 
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Healthcare law could leave families with high 

insurance costs 

By Julian Pccquct - 07/21111 12:43 PM ET 

A major provision of the heal!hcare reform law designed to prevent businesses fi"Om dropping 

coverage {'x their workers cuuld inadvertently leave families without ace.:s, tu subsidized health 

insurance. 

The problem is a huge headache for the Obama administration and congressional Democrats. 

because it could leave families unable to buy affordable health insurance when the healthcare 

law requir.:s that everyone be insured starling in 2014. 

Some oflhe administration's dosest allies on heaithcare retorm warn this situation could 

dramatically undercut support for tbe law. which already is unpopular with many voters and 

contributed to Democrats losing the !lousc in the 2010 midterm elections. 

"It's going to be a massive problem if it comes out that families havc to buy really expensive 

employer-based coverage." said Jocelyn Guyer. deputy executive director at Georgctovill 

University's Center lor Children and Families, 

"lftlley don't tlx this -.. - and Ily 'they' I mean either the administration or Congress we're 

going to have middle-class families extremely unhappy with IhcalthcarcJ reform in 2014, 

because they'lI basically be liKing linancial penalties fiJr nOI buying coverage wh..:n they don't 

have access to any atTordable options." 

At issue is a so-called "tirewall" in the law that denies subsidies to workers vlihose employers 

ofth quality. atlordable coverage. 

The firewall applies to plans with premiums tbat cost less than 9,5 percent ora workcr's income. 

If a wocker has to dole out more than that amount to buy cowragc, the employer covcrage is 

considered unaflordable and the worker is digible t'Or subsidies to buy covcragc on the new 

exchanges. 

Initially. advocates tboughllhe threshold also applied to family coverage. If premiUm costs paid 

to cover a worker's family cost 20 percent of a worker's income, for example. the worker and his 

or her family should be eligible Jor subsidies, 

But in calculating the bill's cost last year. Congress's Joint Committee on Taxation (JeT) took 

the law to mean that employers and their families aren't eligible l'Or subsidies as long as the 

individual plan is affordable regardless of the price ofthc family plan, 

This means the costs to an employee tor covering his or her family could he too high to afford 

for many working families, 
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"If you've got employer-based c()veragc that's afl{)rdable for the employee only." Guyer 

said. "the t:1mily is expected to take the employer coverage even if it''s totally unaff()rdable and 

no one in the family is eligible for the exchange subsidies," 

'I he glitch is causing heartburn for advocates who worry that it could leave thousands of children 

and spOllses uninsured and subject to penaltics for not havi ng insurance. 

"The .JeT read orlhe Janguag\.: is disturbing and we hope the administration doesn't read the 

language that way," said Bruce Lesley. president of the childrcn's advocacy group First 

Focus. "It would put dependent coverage. childrcn and spouscs at grave risk." 

The Obama administration is expected to clarify shortly - through Treasury Department 

regulations - who's eligible lor subsidies. 

An administration otllcial told The Hill. "'Thcse matters will he considered in future regulations." 

Healtheare reform proponents say they've quietly been talking to the administration for months 

about the issue. 

"We've talked to them - a 101- about this." said Judith Solomon. vice president for health 

policy at the liberal Center on Budget and Policy Priorities. "We've made our views known." 

While advocates say changing the policy is a no-brainer. the costs could be a hurdle. 

One new study. by the Employment Policies Institute. estimates that changing the policy could 

cost taxpayers $50 billion per year. But if the administration leaves the policy as is. "millions of 

families will be stuek in a no-man's-land without affordable coverage through their employer or 

the exchangt'." 

"Whichever interpretation holds." the study concludes. "the consequences are signilicant." 

Others dispute those figures, They argue that employers will offer affordable coverage for whole 

families and point out that many children who aren't covered by employer family plans are 

eligible for Medicaid or the Children's lIealth Insurance Program. 

"[(s really not clear to me how much of an impact it would be lto change the policy!." Solomon 

said. The S50 billion-pef-year figure "seems very high to me." 

Source; 

http://thehill.comlblogslhealthwatch/hcalth-rctorm-implementationll72765-healthcare-law-mavleave-families-with-high-insurance-costs 
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A.soc!at.d Bunda" and COI'ltr&cto .... '''Ill, 

July 27. :2011 

The Honorable Renee Ellmers 

Chairwornan 

Healthcare and Technology Subcommittee 

Small Bu,iness Commiltee 

U,S, HotlS~ or Representatives 

Washington, D,C, 20515 

The Iionorable Cedric Richmond 

Ranking Member 

Healthcarc and Technology Subcommittee 

Small Flusine" Commillee 

U,S, House of Representatives 

Washington, D,C, lOS IS 

Dear Chairwoman Ellmers and Ranking :Vlember Richmond: 

On behalf of Associated Builders and Contractor, (ABC), a national association with 75 chapters reprc,cnting more 

thall 23,OO() merit shop construction and con-rruction-related firms with nearly two million employees, I am writing in 

regard to thG subcommittee hearing titled, "Small Busine"e, and PPACA: If They Like Their Coverage, Can They 

Keep ITT 

Providing quality health care benelits is a top priority for ABC and its member companies, TIlrougllout the health care 

reform debate, ABC auvocated for policies that reduce the Ctl)t of health mre I,)!, employer; and their employees, ABC 

called on Congress to advance common-sense propmals that would address the sk),rocketing cost of health insumnec, 

espc'('ially for employer-sponsored plans and the rapidly rising number of uninsured Americans, ABC believes nut:: 

refum) should proviJt! greater choice tmu affordability anti allow private insurer, to compete for bllsjne~s. 

Unfortunately, the massive and complex health e,"'e law, known as the PUlient Protection and Affordable Care Aet. 

does not effectively address any of those i;sues, Costs have not been lowered and costly new mandates '1l1d taxes have 

been imposed on an important but struggling sector of the economy: small bu~inesses, Small bu')inc"is owners havewatched insurance premiums increase or have had tlldr pla!b discontinued, torcing some to purchase mure expensive 

policies or drop their coverage. 

Additionally. ABC has expressed concerns ahou! the regulatory hurdens imposed hy the massive health care law, The 

oulcomt,;!-t uf many of the health care-rt::htcd ltxlcral rukrnakings nrc cun-endy unclear, creating an el1vironrncm of 

uncertainty in our industry thaI makes it ditlkult for firllls to adequately plan )()r the future, 

ABC urges Congress to move rorward with legislative proposals mal will provide employers lUld their employees with 

health care solutions thaI are hoth practical and atlilrduble, ABC support; the following initiat; ws: 

,,/ Allowing Americans to buy insurance acro,,"' state lint'S. This would bc particularly helpful to those who 

work in the constnlction industry, a, the unique nalure or construction work demands that ocnelils be portahlc. 

,,/ A tax deduction for the self-employed and for employers, ABC supports raising the self-employed 

health care deduction 10 IOU percent and maintaining the tax deductibility of health imurance premiums 

for all employers . 

.,/ Small Business Health !'Iaus (SBHPs), SBHPs gi ve small businesses the power to pool together to 

offer health care at lower prices-something many corporations and labor unions already arc permitted 

touo, 

4250 North Fairfax Drive, 9th Floor· Ar1ington, VA 22203 .. 703,812,2000" www.abc,org 
109 


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,/ Health Savings Accounts (HSAs). HSA, nrc lax-free savings accounts for medical expemes tila! anow 

more "nail business owners to ohtain affordable health coverage for themselves and their employees. 

ABC SUPPOlb exl>auding access to high-deductible health p!;\m and HSAs. as well as increasing HSA 

contribution limits. 

v' Flexible Spending Accounts (FSA), rSAs. Or "cafeteria plans," allow employees to set aside money 

(pre-tax) each year to be used for medical expense, such as co-pays, deductibles and services not 

~ovcred under their ba5c insurance plan, If an employee docs. not use an of the money contributed to his 

or her FSA by the end of the plan year. the remaining amounl is j(lrkitcd to the employer. This 

limitation should be changed to allow worke" to take contml of their health care costs and plan for the 

future, 

" Health IT, ABC supports advancing the \V;dcspread adoption of health int(Jrmation technology. 

Technology holds the promise of improving the quality of patient care. enhancing aCt'e~s to care, 

reducing medical error~ and reducing health care costs. 

" Medical malpractice rel'orm. Unnecessary and frivolous lawsuits contribute 10 the increasing cosl or 

insurance. Enacting tort reform \vill dramaticaHy th.:crca::;.c the CO,{ of healrh insurance for the American 

public. 

ABC appreciates your attention to thi~ irnpo!1urlt rnatter and look" forward to \\.'Orking with you on commUll-\;.cnse 

health care initiati ves. 

Corinne M. Stevens 

Senior Director, legislative Affairs 
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Ui\lJl\l\" 

(,'Ind,,:!'> 

di\ll{\!\ ..... l'\H Rnt;:; 

July 28, 2011 

The Honorable Sam Grave, 

U,S. J louse Small Business Commiltee 

United Stales HOllse of Representative, 

Washington. D.C. 20515 

Dear Chairman Graves. 

On behalf orille members of the IlSA Council'. I am advising you of Ollr position on the 

recenl final rule adopted by the Federal Reserve Hoard. known as (RegUlation II) that 

exempts HSAS from the interchange lee cap and the network exclusivity and routing 

requirements. 

As you arc well aware. these tee, would have had a prol()lmd impact on health-related 

accounts. induding Health Savings Accounts (HSAs). We arc including. for further 

clarily. the attaehed mcmo. 

While this does no! dil'e<:tly address the "ObamaCarc" impact on existing plan design. I.e. 

··you can keep (he plan YOLI have," this Lssue has such a substantial impact on this subject 

we beliow it is essential to be part ofthc permanent record ofthe U.S. lIouse Small 

Business Commillee. 

further, there are at least three other issues that will have an impact on ,,!let her 

Americans will be able to keep their Health Savings Accounts. including the not-yetreleased preventative care rule. the already issued minimum loss ratio rule and the notyet-released actuarial v'alue rule, \vhich \ve will comment on in the ncar future, and hope 

that ,Oil will hold the reeord open tbr our Ibrthcoll1ing comments in these regards, 

Sincerely. 

J. Kevin A. \,1cKcehnic 

Executive Director 

liSA Council 

I Ihe I!S.\ C!mnd! 

BilnK!,;r) !n~unll1("e tlll;:i(' In:'>uf,Jtj(:(; and tcchnobg) ilth isOl':> dcdic;;lt.::J to 

imprm in~ ,\rn.;;rictln hcatth.;arc b) illlproyin~ the Ji~tril)l1tion of f [S,>\O) lhroug:illM'h5. 
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pmangrum on DSK3VPTVN1PROD with Insert graphic folio 157 76496A.081

J, K-evin A. McKechnie 

Executive Dlrector 

The HSA COLinel! 

.-::!tckBchn@aba com 

Memorandum 

To: HSA COllneil Roard Members 

Date: .lui} :0, 201 I 

SlJRIEC I: Federal Resene', Regulation II onll\terehange Fees and Network Exclusivity al\d 

Routing 

The American Bankt!rs Association HSA Council hU5 concluded that 1iSAs are exempt from th~ 

entir~ scope of the Federal Reserve's Regulation II {RECf H) on interchange fees aml network 

exclusivity and routing because bmwjlde trust accounts (including all HSA I.!t:counts) are not 

included in the definitions of the tyJXs of accounts governed by the regulations. 

Discussion 

Till.: federal Rcservc~5 n:::gu!atiol1:5 on intcrchangt! tees ~'(cluded /Jo!1djide trust ac",'ounts rrom the 

definition ofthe types of account~ govt::rJ)l;!u b,Y the r~gulation5" The Council rel:ommeuded this 

definition to rhe Fed and it \Vas accepted. 

(n addition, th~ Fed also eXt!mpted Direct Deposit Accounts (DDA~) that operate as bona fide trusts 

if they \\,crc established as trust or custodial accounts under th~ IRS cod~. This should indudlj evt'ry 

HS;\ account regardless of\'dldher the) arc considered n-onafjde trust accounts. I :: 

§ 235.2 Definitions 

(oj Account 

(l) 1\:leans a [ransaction~ 5<.1.vings. or other asset account (other than an occasional or 

inl:id..::ntal cn:dit b<.l!ance in a cfl!dit plan) established fOf any purpo<;;.e lwd that i~ 

located in th~ United States: and 

(2) Docs not includ~ an aCCOuJ1l hdd under a bOlla fide Irust agreement that i$ 

c\t~!udcd by' section 903('2} ofthe Elt:ctronit, Fund Transt~r Act and rule~ prescribed 

there under. 
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The F~d abo a,c~pted the Cuuncil', r~coll1mcmlation regarding the definition of "electronic debit 

transactions" to only include transactions pcrj(ml1cd on an accounL 3 

§ 235.2 Definitions 

2(a) Accollnt 

I, Typcs of accounts. The term "account" incluues accounts held by any person. including 

conslImer accounts (i.e .. t!lose established primarily for personal. tamily or household 

purposes) and iJU5iness accounts. Therefor~. the limitations 011 interchange transaction tees 

and the prohibitions on network exclusivity arrangements and routing restrictions apply to all 

electronic debillrans'lClions. regardless of whether the transaction involves a debit card 

issued primarily for personaL fillnily. or household purposes or for business purposes. For 

example. an issuer of a business-purpose elebit carel is subject to the restrictions Oil 

interchange transaction fees and is also prohibited trom restricting the number of payment 

card networks on which an electronic debit transaction may be processed under § 235.7. 

2. BOllafide trusts. This part docs not ddine the term bOl/a/ide trust agreement; therefore. 

institutions must look to state or other applicable law for interpretation. An account held 

under a custodial agreement that qualifies as a 1mst under the Internal R<!velluc Code. sllch as 

an individual retiremeJ1l account. is considered to be held under a trust agreement ror 

purposes of thi~ part. 

Sincerely. 

>'\'~ \-\f.. ~<'<~ i...... 

Kevin McKechnie 

Executive Director 

, .. rlw hngu~)ge in t-"Fr,·\ ~l;dion 920 Joe:) not prtn iJ~ Ihf ~Uly .:~ct.:"pllflns tu the s!":c!ion's pnwisiml.s bu:;\.;d un the purpos>!" I~)f 

\"hid, an account \\a~ .... Stilhlis!1I..--O': murcoYo.;(. S..;ctinn ()20(.:)(2) ddin~~ ·'(kbit canl" ao,; 111l.;[uding cards that mHy b~ u,,~i..I h) d~bil 

an <l{;!:ouut "p;garJks:;. llfr\lC pHrr!)"~$ I{)f \\hidl Llw at;L:oUlll \\,1'" t;:ituhlishell:' 'I ht:n.:lofi,;, lh~ HO(Jrd dl)t:~ nut bdk\,c {h.)t the 

'StiltU!;';: c:\cmpl'i debit ":dl'cis lhat <!{;ct::s>; HS,\~ unci. other similar accounts s()ldy bct::.tusc -juch iiCl.:ountS Jrc cSlabllihcd tbr health 

t:an:~I'Cbl~d Plll1WSc5. Su'.:h (ltrJs. i1fid acconnt". hl..)\\·(:\.~r. may he othcn.·,j..;e l.:!"\:emj11 trom tbe nn,tn1':-. inh:n:hange k~ ",tanuanls if 

th~) quaJi I} lor duoth¢r c"\C't11ptiOl1. l'of e.'\amph!. as commt!llh:n: nOkd. 50lHot I IS As and other sim lIar UCi.:ounts an: strucUlred as 

hona Pde trust arrangt'll1cllb. Cards that aeee"" tbiJ::'c HSA) would h~ Gxempt from the rvquircmtnts of this part hcCUllS~ they do 

Iwl t!.'\'::\!:-O::j: ··i,lc .... oun!:-;..'· ~(~ tin; (,,:nn i .... JdlJl~d in § 135.2{<JJ. fit addition. some cards th:.!t act'~ss H'it\' .. [1m.! (Ithcl' ~im!lar accounts 

arc structured hk~ pn:paiu c.ards when;: rllnd~ arc hdd in an ()mnlhlls ilccnunl (which i<; Lon..;iti..:rL:'d l3n '-,tt;cnunC nndcl' ~ 1.U.2{a)) 

and lht:' t'!l1lpin)~c nlay ut:CCS$ the ti.lllds U'.;ing a prepaid card Proviul!d Ih!.::'e Gird.:; Jrl.! sLructured in such u \~ay lJllH quaJilics 

lh.;m for the rdoadabk, g;:ner.al~u<;c prepaid (.:ard c'\emption in th.; statute, these cards used 10 access! fS;\s and similar ut:l:(lunb 

\yill he i:xempt from the rule'" ill!";I't:h;:!Hg~ fcc :.,tilndards Set' di'icu~siot1{)r~ 235.5{.:). Tbe..,!.: (.:ard~. ho\\cvcr. will b~ subl~ct to 

lh~ rule' ~ flt!{work t'xclu.'ijyit) ;IIlU routing prm 'sinn..;_ See Ji~cu~sion ol\lda~t:d cHrl.:{j"c J<1t...: rdatt:d lo ~ 235.7 ..