U.S. GOVERNMENT PRINTING OFFICE

65–217 WASHINGTON : 2000

ASSOCIATION HEALTH PLANS—

PROMOTING HEALTH CARE

ACCESSIBILITY

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

WASHINGTON, DC

FEBRUARY 16, 2000

Serial No. 106–43

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELA ́ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBEN HINOJOSA, Texas

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

SHELLEY BERKLEY, Nevada

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on February 16, 2000: 01

WITNESSES

Wilson, Paul, Executive Director, North American Equipment Dealers Association Group Insurance Trust ............................................................................ 05

Baumgardner, James R., Acting Deputy Assistant Director for Health Policy,

Congressional Budget Office ............................................................................... 07

Lehnhard, Mary Nell, Senior Vice President, Blue Cross Blue Shield Association ........................................................................................................................ 09

Joensen, Mark, Vice President and Director of Health Care Analysis, Consad

Research Corporation .......................................................................................... 11

Kaplan, Arlene, CEO & Founder, Heart-to-Home ................................................ 13

Gallo, Richard, Owner, The Office Outlet .............................................................. 15

APPENDIX

Opening statements:

Talent, Hon. James .............................................................................................. 45

Christian-Christensen, Hon. Donna ................................................................... 48

Prepared statements:

Wilson, Paul .......................................................................................................... 49

Baumgardner, James R ....................................................................................... 56

Lehnhard, Mary Nell ........................................................................................... 60

Joensen, Mark ...................................................................................................... 82

Kaplan, Arlene ..................................................................................................... 86

Gallo, Richard ....................................................................................................... 92

Additional material:

CBO Papers, ‘‘Increasing Small-Firm Health Insurance Coverage Through

Association Health Plans and Healthmarts’’, Congressional Budget Office 95

(1)

HEARING ON ASSOCIATION HEALTH PLANS

WEDNESDAY, FEBRUARY 16, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON SMALL BUSINESS,

Washington, DC.

The Committee met, pursuant to notice, at 10:00 a.m., in room

2360, Rayburn House Office Building, Hon. James M. Talent

[chairman of the Committee] presiding.

Chairman TALENT [presiding]. I am going to go ahead and get

the hearing going. I congratulate the Committee on its wonderful

attendance.

As regular attendees of Small Business Committee hearings

know, members come in as the hearing goes on, and I would hope

we will have a good attendance before long.

Unless there is a problem, I will go ahead, and then when the

Ranking Member comes, be happy to allow her to give her opening

statement at that time.

Good morning ladies and gentlemen, and welcome. We meet

today to continue our discussion on expanding access to health insurance for the small business community. The difficulty of purchasing quality, affordable health care continues to plague small

business. In fact, small business owners, their employees, and their

families represent over 60 percent of the 44 million uninsured in

the United States.

I speak on a daily basis to small business owners who want to

provide health benefits to their employees but cannot afford to do

so. I hear from others who are able to offer insurance, but face the

possibility of double-digit rate increases that would force them to

cancel their plans. And still others complain that due to the high

cost of their plan, they are forced to offer fewer benefits to their

employees or raise their deductibles so high that many employees

cannot afford to cover themselves and their families.

These small business people want and need to offer high quality,

affordable health benefits. For example, a small ‘‘mom and pop’’

hardware store must compete with Home Depot to attract and retain quality employees. In our tight labor market, health benefit

packages are essential. It is unfair that a small ‘‘Main Street’’

hardware store cannot access the same economies of scale, administrative efficiencies, and purchasing clout that Home Depot and

other large businesses enjoy when purchasing health insurance. If

such things are good for big business, why are they not good for

small business?

To address these needs, Representative Harris Fawell introduced

Association Health Plan legislation several years ago. AHPs emVerDate 11-MAY-2000 12:48 Sep 12, 2000 Jkt 065217 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HR\OC\E217A.XXX pfrm03 PsN: E217A
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power small business owners, who cannot afford to offer health insurance to their employees, to access insurance through bona fide

trade and professional associations. In other words, AHPs offer national trade and professional associations, from the National Restaurant Association, to the American Farm Bureau, to groups like

the National Association of Women Business Owners, to respond to

the needs of their membership and sponsor health care plans.

The small business owners and farmers who are members of

these associations can buy into these plans for themselves, their

employees, and their dependents. These Association Health Plans

would cover very large groups, enjoy economies of scale, and have

the option to offer self-funded plans which would not have to provide any margin for insurance company profits.

Since its inception, AHP language has been revised and improved to strengthen both solvency requirements and state enforcement provisions in response to concerns. I am confident that AHPs

will allow associations the flexibility to design comprehensive, affordable benefit packages that meet the needs of their membership.

They will promote health care accessibility for a segment of the

population that is greatly underserved by our Nation’s health care

system—the small business community.

Today’s hearing will continue a productive dialogue which began

at a hearing we held back in June. Since that first hearing, we

have seen some progress in Congress’ quest to improve our Nation’s

health care system and reduce the number of uninsured. In early

October, the House passed H.R. 2990, legislation which contained

several access provisions, including AHPs. Later this month, a Conference Committee, of which I am a member, will meet to discuss

the Senate and House versions of the bill. I am committed to insuring that AHPs are included in the final conference report.

Today we have assembled a knowledgeable panel of witnesses

who will help us further explore the potential benefits of AHPs. We

will hear testimony regarding recent data projecting the potential

impact of Association Health Plans. Additionally, we will hear from

an Association Health Plan administrator, a representative of the

insurance industry, and two small business owners. I am looking

forward to the testimony of all witnesses.

Now would be the point at which I would recognize Ms. Velazquez for her opening comments. Since we have a vote anyway and

since she is not here to give those comments, I think what I will

do is adjourn the meeting, go vote, and then come back, and see

if Ms. Velazquez is here to give her comments. Otherwise, we will

go ahead with the witnesses.

We are going to recess the meeting.

[Recess.]

Chairman TALENT. All right. We will reconvene the hearing, and

I will recognize the gentlelady from New York for her opening comments.

Ms. VELAZQUEZ. Thank you, Mr. Chairman, for holding today’s

hearing on Association Health Plans.

I would like to commend you for your continued efforts to help

small businesses provide health insurance coverage for their employees. I am happy to work with you on this issue, and last year

3

I was one of an original co-sponsor of your bill to provide an immediate 100 percent deduction for health care costs.

This is a critical issue not only for the small business community

but for millions of uninsured Americans. I hope that today’s hearing will provide us with a greater understanding of this problem

and possible solutions.

Despite the booming economy and growth of the stock market, almost 43 million Americans are still without basic health insurance.

Of these 43 million uninsured, almost 60 percent are either selfemployed or have a family employed by a small business that does

not provide health benefits. In 1997, workers in firms with fewer

than 100 employees represented 32 percent of all workers age 18

to 64. Sixty percent of these, 42.6 million workers, obtained health

insurance through their employer or their spouse’s employer, but

28 percent are uninsured. These uninsured employees in small

firms account for 49 percent of all uninsured workers.

Because many small employers are marginal firms that struggle

to remain in business, they are often simply unable to afford health

care. Additionally, those small businesses that do provide health

insurance are especially vulnerable to increases in premiums.

These factors make it more difficult for smaller firms to provide

health insurance.

Earlier this year, this Committee looked at one solution to address the cost and access to help small business with health care.

That solution was Association Health Plans. Employers have long

been attracted to the idea of banding together to buy health insurance as well as to provide other benefits. AHPs will be small business purchasing entities that could benefit from economies of scales

and greater purchasing power. AHPs will reduce the number of uninsured workers, although it is unknown by exactly how many.

Today, we continue that examination of AHPs as we hear from

the Congressional Budget Office on a recent study it released. Despite the promise of reducing the number of uninsured, the CBO

study paints a different picture and raises serious concerns on

health plans that need to be addressed.

The CBO study found that AHPs will only have a slight effect

on insurance coverage nationwide, increasing the number of people

insured through small firms by 330,000 individuals. I am interested in hearing from CBO on its findings and rationale as to the

drastic contrast and comparison it reached while conducting the

study’s research.

I also believe that the study brings up an important issue for this

Committee to review. Concerns have been raised by a number of

different groups that AHPs which seek out or attract employers

with low-risk workers will weaken the equitable small business

risk pools that States have spent years trying to build.

A result may be the firms with above average risks could find

their insurance rates climbing steeply as low-risk, small firms join

Association Health Plans. These are all issues that must be addressed in relation to Association Health Plans.

In closing, I would like to thank the chairman for holding today’s

hearing and reiterate my strong desire to help small businesses

provide health care for their employees. I am looking forward to

4

hearing the testimony of the witnesses and learning more about

Association Health Plans.

Thank you, Mr. Chairman.

Chairman TALENT. I thank the gentlelady, and the gentlelady

and I have an agreement. We normally follow that she and I will

make the opening statements. However, as members know, when

a member of the Committee feels strongly and wants to make brief

remarks, I will deviate from that as long as it doesn’t get to the

point where it really slows down the hearing.

And I understand Mr. Sweeney would like to make some brief

opening statements.

Mr. SWEENEY. Yes. Thank you, Mr. Chairman.

Chairman TALENT. I would be happy to recognize him for that.

Mr. SWEENEY. Let me commend you for conducting this hearing.

Let me say that I apologize, but I will have to step out and go to

another Committee markup, and that is why I would like to at

least have a statement submitted for the record and recognize that

the numbers here are pretty overwhelming, as my colleague from

New York pointed out, that over 44 million Americans are uninsured, and 60 percent of that 44 million are small business owners.

And we know that small businesses and self-employers put their

money and their assets into their business, and the price of insurance for small companies is astronomical. This oftentimes really

puts a small business owner between a rock and a hard place, and

this is a particular concern to me, because 90 percent of the employment in my district is derived from small businesses.

Let me finally just say that I strongly believe in a market-based

system, and I look forward to the testimony of our witnesses to

help us begin to look at opportunities to resolve this issue, and I

again commend you and the ranking member for conducting this

hearing.

Chairman TALENT. I thank the gentleman. We certainly understand. I have another hearing going on at the same time myself,

a markup, and may have to step out for a few minutes from time

to time.

All right. We will go right to the first witness who is Dr. Paul

Wilson, and I am very pleased to welcome Paul, in part, because

he is so knowledgeable and, in part, because he comes from my district in Missouri. Dr. Wilson is a Certified Employee Benefit Specialist and is currently the Executive Director of the Association

Health Plan for the North American Equipment Dealers Association located in St. Louis.

And I just want to say for the members that Association Health

Plans do operate sporadically on a State-by-State basis around the

country, notwithstanding that there is no provision for them under

Federal law. And Dr. Wilson is the executive director of such an

association.

Dr. Wilson.

5

STATEMENT OF PAUL WILSON, EXECUTIVE DIRECTOR, NORTH

AMERICAN EQUIPMENT DEALERS ASSOCIATION GROUP INSURANCE TRUST

Mr. WILSON. Thank you, Mr. Chairman.

I am Dr. Paul Wilson, and for the last 23 years I have served

as executive director of the Association Health Plan for the North

American Equipment Dealers Association, which has been located

in St. Louis since the year 1900.

I am here today in my position as vice president of The Association Health Care Coalition—I will refer to that later as TAHC—

which exists for the purpose of preserving the ability of bona fide

trade and professional associations to provide high-quality health

insurance coverage to American workers.

Today, I will briefly describe how Association Health Plans have

been serving small business for the last 50 years and why the reforms of H.R. 2990 are so badly needed in order to protect the

health coverage of workers. I will also comment on the recent report by the Congressional Budget Office.

I first want to commend you, Mr. Chairman, for your outstanding

leadership on this issue of health insurance reform for small business. There is an immediate threat to bona fide association plans

and their insured workers. NAEDA—that is the organization that

I mentioned earlier, the North American Equipment Dealers—is

representing TAHC today because of the immediacy of the circumstances which confront our Association Health Plan. These circumstances apply to many of TAHC’s members.

NAEDA established an Association Health Plan in 1949 to provide farm and construction equipment dealers in mostly rural communities with affordable health benefits. This was necessary, because many insurance companies then seemed more interested in

serving urban and suburban areas rather than rural communities.

We now face a very serious situation which jeopardizes the

health insurance coverage of the workers covered by our plan. The

proliferation of State regulations and mandates have made it likely

that our association plan will end July 1, 2000. We have recently

been informed by our insurance carrier, UniCare, that our association policy will not be renewed on that date as it applies to small

group health coverage for employers with less than 50 employees.

Rather, UniCare wants to transition our business now to small

group lines of theirs which will reduce health plan options to our

members in all but six States.

We have contacted more than 50 insurance carriers, but none

want association business. They tell us it is just too costly to comply with regulations and mandates which differ in each State.

Assuming that our 50-year association plan comes to an end July

1, we are now faced with a very burdensome question: Will the employees and families currently served by our health plan be able to

obtain similar high-quality coverage at rates their workers can afford by negotiating directly with the insurance companies, on their

own, and without the assistance of an association plan and staff?

My experience has shown that when insurance carriers underwrite

new accounts, roughly 40 percent of the firms do not get the lowest

quotation due to the health status of employees. In our situation,

each of the carriers will likely rate-up or rate-down our members

6

based on new account underwriting case characteristics which often

include individual employee health statements.

NAEDA strongly believes that our members would have more affordable coverage if we were able to continue as an AHP. Prompt

enactment of H.R. 2990 is our only chance to continue as an AHP.

Many years of experience of TAHC’s membership puts us in a

good position to comment on the CBO report. We believe the CBO

report dramatically underestimates the value of AHP’s to small

business, and therefore underestimates the number of uninsured

people who could gain coverage if AHP reforms were enacted.

Attached to my written statement is a short peer review of the

CBO study by Dr. Donald Westerfield, professor of Statistics and

Economics at Webster University in St. Louis. Dr. Westerfield

found that CBO did not account for wage differentials, health care

package composition differentials, and premium contribution differentials between employers and employees, among other things,

between large and—categories of large and small firms. Thus, CBO

is comparing apples, oranges, and bananas. Dr. Westerfield concludes that a study normalizing the relevant data would much

more effectively capture the cost savings that associations can provide to small business.

We believe the report does not recognize the fact that bona fide

AHPs have a long track record of reducing health insurance costs

for small businesses through operating efficiencies, such as economies of scale, greater bargaining power to negotiate discounts, and

regulatory uniformity.

For example, at NAEDA, we know that we historically have provided savings of at least 8 percent of administrative expenses due

to the economies of scale of our AHP. Associated Building and Contractors has a plan with administrative costs of about 13.5 percent

compared with administrative costs of 20 to 30 percent for similar

coverage purchased through an insurance company.

These are just two examples, and there are many others, but the

CBO report simply does not acknowledge this reality, which we

have seen demonstrated for 50 years.

Second, CBO’s statistical analysis does not reflect the dynamics

of the market when it assumes that AHPs will attract mostly lowrisk populations. This ignores the reality in today’s economy that

small employers must offer competitive benefit packages in order

to compete for quality employees, especially when they compete

against large employers.

After working with small employers on a daily basis for the last

23 years, I can attest to the fact that they must offer high-quality

benefit packages at the lowest possible cost out of economic necessity. AHPs that serve small businesses will be driven to offer affordable, attractive benefit options through operating efficiencies

and offering innovative new products. Businesses with truly highrisk populations will be able to obtain savings on high-quality benefit packages due to the savings achieved. Again, the CBO report

does not acknowledge this reality; rather, it assumes that small

employers will always seek the smallest possible benefit package

for their employees.

7

To summarize, TAHC believes that CBO substantially underestimated the benefits of association group purchasing and an injection

of healthy competition into health insurance markets.

Finally, I must address comments by the Blue Cross Blue Shield

Association in a statement released concerning the CBO report.

They say that AHP legislation is merely a shell game. This is disingenuous coming from insurance companies which are engaged in

their own shell games. Insurance carriers are actively target marketing to limited segments of the population while quietly avoiding

the rest. Many other strategies practiced by insurance companies

are described in my written report, and these amount to adverse

selection against small business, and this is the real shell game

going on today.

It is incumbent upon policymakers to establish policies which

promote ways of getting health insurance to those people in communities that insurance companies are not interested in serving.

AHPs are already filling this role and can do a much better job if

given the proper tools and regulatory environment. TAHC strongly

urges Congress to enact the AHP reforms in H.R. 2990 towards

this end.

Thank you very much, Mr. Chairman.

[Mr. Wilson’s statement may be found in appendix.]

Chairman TALENT. Thank you, Dr. Wilson.

Our next witness is Mr. James Baumgardner who is the Acting

Deputy Assistant Director for Health Policy of the CBO.

STATEMENT OF JAMES R. BAUMGARDNER, ACTING DEPUTY

ASSISTANT DIRECTOR FOR HEALTH POLICY, CONGRESSIONAL BUDGET OFFICE

Mr. BAUMGARDNER. Thank you, Mr. Chairman and members of

the Committee. I am pleased to be here today to discuss the provision of employer-sponsored health insurance by small firms. The

Congressional Budget Office recently completed a paper on that

topic entitled ‘‘Increasing Small-Firm Health Insurance Coverage

Through Association Health Plans and HealthMarts,’’ and I ask

that that report be included in the record.

My comments today will focus on three aspects of CBO’s report:

First, the circumstances that contribute to the relatively low rates

of health insurance coverage through small firms; second, a summary of the rules that would apply to the proposed association

health plans and HealthMarts, and finally, CBO’s estimate of how

the introduction of AHPs and HealthMarts would affect the number of people insured through small firms and the premiums they

face.

Employees of small firms are less likely to have health insurance

than are employees of large firms. For 1996, data from the Medical

Expenditure Panel Survey indicate that about 40 percent of employees in small firms—those with fewer than 50 workers—obtained health insurance through their employer. In contrast, almost 70 percent of workers in firms of 100 or more employees obtained coverage through their job.

Several factors appear to play a role in the lower rate of insurance coverage through small employers. Workers in small firms, on

average, have lower wages and lower family incomes than workers

8

in large firms. As a result, small-firm employees are less able to

afford comprehensive health insurance, and less of a tax incentive

exists for providing health insurance through their employer.

Small firms typically face higher costs for providing a given benefit package than do larger firms because of higher administrative

expenses per enrollee and less purchasing power.

Small firms generally purchase insurance that is subject to State

benefit mandates and other regulations, which tend to increase average premiums. Firms that self-insure—mostly large firms—are

exempted from those State insurance rules by the Employee Retirement Income Security Act, ERISA.

Recent proposals would establish federally certified AHPs and

HealthMarts, entities that would offer health plans to participating

employers. Trade, industry, or professional associations that had

been in existence for at least 3 years could sponsor an AHP, which

would have to offer its insurance products to all member firms.

HealthMarts, in contrast, would have to be available to all small

firms in a specific geographic area rather than be offered in conjunction with an association.

To explore the effects of AHPs and HealthMarts, CBO constructed an analytical model using assumptions based on the relevant economics literature. We estimate that about 4.6 million

small-firm employees and their dependents would receive coverage

through the new insurance vehicles, but most of those individuals

would have obtained insurance even if current law remained unchanged. On balance, about 330,000 more people would be covered

through small-firm employment than would otherwise have been

the case. That represents a 1.3 percent increase in coverage

through small firms.

Because of lower premiums, some small firms would begin to

offer their employees coverage through AHPs and HealthMarts,

and others would shift from coverage obtained in the traditionally

regulated market to the new entities. Firms that moved to the new

plans would, on average, pay premiums that were about 13 percent

lower than they would have faced in the traditional market under

current regulations. They would be paying less money for less insurance, however, since some of those premium savings would be

the result of a less generous benefit package.

Introducing AHPs and HealthMarts would be likely to lead to

some selection. For plans that were fully State regulated, the proportion of firms with higher expected health costs would rise after

the new AHPs and HealthMarts became established. Consequently,

firms remaining in the traditional insurance market would see an

average increase in premiums of about 2 percent.

The impact of AHPs and HealthMarts would vary from State to

State, depending on the extent of State insurance regulation. In

general, States that were more highly regulated would be riper

markets for the new entities, as would areas with greater concentrations of small firms. The actual outcome of the proposed legislation would also depend on the activities of the regulatory authorities responsible for AHPs and HealthMarts.

That concludes my statement. I will be happy to answer any

questions.

[Mr. Baumgardner’s statement may be found in appendix.]

9

Chairman TALENT. And, without objection, your report will be

entered into the record.

Our next witness is Mary Nell Lehnhard who is the senior vice

president of Blue Cross and Blue Shield Association.

Ms. Lehnhard.

STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE

PRESIDENT, BLUE CROSS BLUE SHIELD ASSOCIATION

Ms. LEHNHARD. Mr. Chairman, members of the Committee, I appreciate the opportunity to testify on this legislation.

Blue Cross and Blue Shield Plans share your commitment to

small employers and their employees. We want to assure that

small employers have coverage options that are as affordable as

possible, of high quality, and responsive to the employer-employees’

needs. We are actively supporting Federal legislation to make coverage more affordable for small employers through a system of tax

credits.

I would like to make two points today. The first one is that

States have enacted legislation to stop the most egregious and most

destructive practice in the small group market—insurers reducing

premiums by selecting or as they call it ‘‘cherry picking’’ the best

risks and avoiding those employer groups who are sick. This practice was rampant in the eighties, and the States effectively stopped

it with their small group reforms.

The bottom line then was that if your group had even one sick

employer family member, your coverage was unaffordable, no one

wanted your business. The States are now telling Congress that

the AHP legislation would take us back to the days of competition

based on risk selection and coverage for the sickest groups costing

multiples of the coverage for the healthy groups.

I would like to submit for the record letters from the Republican

Governors Association, the National Governors Association, the National Council of State Legislators, and the National Association of

Insurance Commissioners, all urging the Congress not to enact this

legislation.

My second point is that credible research reports what Blue

Cross and Blue Shield Plans have been telling us and what the

States are saying, that exempting some insurers or health plans,

which is what AHPs are, from State law and oversight is bad public policy and will completely pull the rug out from under their success and stopping ‘‘cherry picking’’ at the State level. We have

brought this research to you before from Barents and others confirming this, but I would highlight the key findings of the recent

CBO report.

First, AHPs will not significantly affect the number of insured.

Yes, for the 330,000 people that get coverage it is very significant,

but the proponents have been alleging that AHPs would result in

up to 8.5 million people receiving coverage that were previously uninsured. Again, CBO’s estimate is 330,000.

Second point, CBO found that the slight increase in coverage

would result from two things: AHPs selecting the better risks, for

one, and this would happen in two ways: Self-funded AHPs would

pull better risks out of the State insured market, the State regulated pool, and an insurer that offered an insured AHP product

10

would not have to pool that product with the rest of its business,

which is what the States currently require. The other way they

would reduce coverage is to drop the State-mandated benefits.

The third point from CBO is that AHPs would not reduce overhead costs. The CONSAD study states the benefit of State preemption would be found in administrative cost reductions. The CBO

found, quote, ‘‘no substantial evidence,’’ end quote, that joining a

purchasing cooperative reduced insurance costs. And in fact a

study by William M. Mercer Inc. found that administrative costs

would in fact increase because of duplication and members having

to pay membership fees.

Very important point: The States that have done the most to pool

the risks in the small group market to make coverage more affordable for older, sicker groups would see the most damage. These are

States like New York, Pennsylvania, most of the New England

States, some of the large Midwestern States. ‘‘Cherry picking’’ in

these States would be rampant because of the State reform laws,

and the State laws would quickly become unworkable and meaningless. The Federal Government would then have to step in and

redo what the States did in the eighties.

Fourth and most important point, CBO found that four out of

five workers would be worse off. Twenty million workers would see

a premium increase, only 4.6 would see a decrease, and this will

vary tremendously by State. As I said, the States that have done

the most to encourage cross-subsidization, which is what you want

from insurance, will see the biggest premium swings. Finally, I

would point out research by the Urban Institute that exempting

AHPs from State reforms would actually reduce overall coverage.

We believe the warnings are clear, and we believe they are credible. The States knew what they were doing when they enacted

these reforms. They live in these markets, and they understand

these markets. Blue Cross and Blue Shield offers coverage in every

State, urban, rural areas. We do no redlining, we are in every part

of the State, and we, along with the States, ask Congress not to

return to the days where there was no meaningful pooling of risks

and thus no meaningful cross-subsidy in the small group market.

We urge you not to enact these provisions.

[Ms. Lehnhard’s statement may be found in appendix.]

Chairman TALENT. Thank you.

Our next witness is Dr. Mark Joensen who is the vice president

and director of Health Care Analysis of CONSAD Research Corporation in Pittsburgh, Pennsylvania.

Dr. Joensen.

11

STATEMENT OF MARK JOENSEN, VICE PRESIDENT AND DIRECTOR OF HEALTH CARE ANALYSIS, CONSAD RESEARCH

CORPORATION

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

Committee. I thank you for the opportunity to speak to you this

morning about the effects of Association Health Plans on insurance

coverage in the United States. I believe that some research that I

have been involved with may be helpful to you as we deliberate

these issues. I will keep my presentation short to leave ample time

for questions later on.

My name is Mark Joensen. I am vice president of CONSAD Research and director of Health Care Analysis. CONSAD is a public

policy research firm based in Pittsburgh. For nearly 40 years, we

have provided Federal Government agencies, foundations, private

enterprises, and others with impact analysis and other research designed to inform policy-making. We have performed numerous

analyses of different health care reform proposals over the years.

In 1997, the National Federation of Independent Business Research Foundation commissioned a study from us to analyze the

potential impacts of the proposed Expanded Portability and Health

Insurance Coverage Act of 1997 on the number of Americans with

insurance. This act included provisions to allow the creation of Association Health Plans. We completed that study in July 1998, and

I have provided the Committee with copies of this report for your

review.

Based on our analysis, we estimate that the creation of Association Health Plans would result in an increase in employer-sponsored insurance coverage of approximately 2.3 million workers employed with small firms. In addition, we estimate that an additional 2.2 million dependents would gain insurance coverage as a

result of AHPs. In total, we estimate an increase of approximately

4.5 million newly insured workers and their families.

This estimate represents our best single point estimate of

changes in insurance coverage. We also conducted sensitivity analyses of our results using ranges of assumptions for important

model variables. This sensitivity analysis produced a range of estimates that vary from 2.1 million to 8.5 million newly insured individuals.

I am happy to answer any questions you may have about our research and results, but I would like to spend my remaining time

comparing our analyses and results with those of the recently released CBO report. This CBO analysis projects that the creation of

AHPs and HealthMarts would increase the number of people with

insurance by 330,000 individuals—that would be both workers and

dependents. The study gives a range of estimated increases that

vary from 10,000 up to 2 million.

As is usual with projections of this kind, the results of the analyses depend highly on model assumptions and data. I believe that

the different analytic frameworks used by CBO and CONSAD are

quite similar. Based on my review of the CBO report, I believe that

a large portion of the differences in estimates result from the selection of a single model parameter. The individuals from CBO may

have a different view on where the main part of the differences are,

but that is what I am going to talk about this morning.

12

This parameter, the price elasticity of demand for insurance of

small firms, is a measure of how much small firms would react to

changes in the price of insurance. If the price of insurance decreases, we expect more firms to offer insurance to their employees.

The price elasticity of demand depicts the percentage change in insurance coverage that would result from a given percentage change

in insurance prices.

The value of the price elasticities used by both CBO and

CONSAD were taken from the economics literature. The CBO analysis uses a price elasticity equal to ¥1.1 to produce its estimates.

For their sensitivity analysis, the CBO uses a range of ¥0.6 to ¥1.8. However, in the CBO report, other estimates of price elasticity of demand by small firms are presented, including estimates

by Roger Feldman and others that would give a price elasticity

ranging from ¥3.9 to ¥5.8.

In our analysis, we use a price elasticity equal to ¥2 to ¥3. This

range of values is derived from the economics literature and are

cited in our report. I believe that the larger value for the parameter explains the numerical differences between our results.

There are several reasons why I believe that it is appropriate to

use the numbers that we did. First and most importantly, a majority of the pertinent studies in the literature support the values that

CONSAD used. The additional reason I am going to present is a

little bit more subtle. All of the available studies of price elasticities describe changes in insurance rates that result from price

changes in the existing market for insurance. However, I believe

that allowing for the creation of AHPs fundamentally changes a

segment of the insurance market.

CONSAD’s numerous studies of the insurance market indicate

that a number of factors affect a small business’ decision to offer

insurance to employees. Price is obviously an important factor. But

small businesses also face impediments to offering insurance that

are due to a lack of trust between themselves and insurance brokers, incomplete access to information describing available health

plans and the plan benefits, and a lack of resources to understand

and manage the terms of available health plans.

AHPs will overcome these barriers to insurance coverage. AHPs

will be administered by organizations in which small businesses already belong, and thus have existing relationships and communication links. Thus, even if there was no price reduction associated

with the creation of AHPs, I believe that there would be an increases in insurance coverage, because they overcome some of these

non-price barriers. And for any given change in insurance prices,

I believe that an insurance market that includes AHPs would

produce larger increases in coverage than the existing insurance

market. There are several additional differences that we can discuss later.

Irrespective of the differences and the absolute values of the

CBO and the CONSAD results, both analyses indicate that insurance coverage will be increased as a result of the creation of AHPs.

Clearly the benefits associated with AHPs will outweigh potential

costs. Although AHPs will not provide the complete solution to the

problem of Americans without insurance, I believe that they are

part of the solution.

13

This concludes my prepared testimony, and I invite any questions you might have for me after all the panelists present their

remarks. Thank you.

[Mr. Joensen’s statement may be found in appendix.]

Chairman TALENT. Thank you, Dr. Joensen.

Our next witness is Ms. Arlene Kaplan, CEO and founder of

Heart-to-Home of Great Neck, New York. Thank you for coming

here, Ms. Kaplan.

STATEMENT OF ARLENE KAPLAN, CEO AND FOUNDER,

HEART-TO-HOME

Ms. KAPLAN. Good morning, Mr. Chairman, members of the Committee. Thank you for the opportunity to appear before you today

to discuss Association Health Plans and their importance to

women-owned businesses.

My name is Arlene Kaplan, and I have been in the health care

field for over 40 years. I was once a laboratory technologist, working in some of New York’s finest hospitals. Then for almost 20

years I worked with 1199, the Hospital Workers Union in New

York, as an organizer and a vice president. In 1984, I opened my

first company called Heart to Home, a New York State licensed

home care agency. I also own a New York State licensed adult

home, Heartland on the Bay, and Workplace CPR, a company that

provides CPR training and first aid to corporations and the community.

In addition I am a past national officer of the National Association of Women Business Owners and have been a member since

1985. My principal focus for NAWBO has been in the health care

and health insurance reform arena. My remarks today are on behalf of NAWBO. NAWBO is a non-profit organization representing

the interests of over nine million women business owners. NAWBO

has over 78 chapters across the United States.

While working with Local 1199, I was involved in the union’s

plans for a National Health Care Program. As part of my responsibilities, I testified in December of 1978 before the Senate Health

Subcommittee regarding a comprehensive national health plan. I

was also very lucky to be part of the union’s wonderful health and

disability plan. We were self-insured and could and did create our

own programs. As a union that was predominately female, we provided benefits that did not exist with insurance companies. We provided maternity disability before it became law, and we provided

prenatal and delivery benefits regardless of your marital status.

We provided well-baby care long before insurance companies. To

the best of my knowledge, the union’s benefit plan always exceeded

the State mandate of benefits.

I touch on this only to show what can be done when people with

a community of interest come together and design programs that

fit their needs. That doesn’t mean that NAWBO would set up an

Association Health Plan, but we would certainly like to explore the

possibility. We believe that we have needs that could be best addressed if we were permitted, as the union was, to design plans

that meet those needs.

14

That is what happened with my union. The union existed for the

purpose of representing members in collective bargaining, and the

establishment of our benefit plan was an outgrowth of those goals.

NAWBO exists for the purpose of representing the needs of and

furthering the goals of women business owners. To be able to develop an Association Health Plan would be a step in the furthering

those goals.

Small businesses are the backbone of the American economy. The

majority of these businesses do not offer health care benefits to

their employees, not because they don’t want to, but cost, access,

and the ability to remain with a carrier has been a detriment. For

example, Wanda Goetz, a NAWBO member and owner of an information management consulting service in Florida, cannot afford to

give her employees health insurance benefits, because most of them

are older, 50 plus. The premium cost was estimated at $7,000 a

month for small business. As someone who has benefited from the

legislation that allowed the union to be self-insured, I think that

as a woman business owner I should have the same rights.

NAWBO strongly believes that the Association Health Plans

would benefit our membership. Any plan that we design we certainly would want to be superior. We have grown our businesses

by being better and more efficient, and that is how we would treat

our health plan.

Association Health Plans give small businesses and the self-employed the freedom to design more affordable health options and

offer their workers access to health care coverage. NAWBO members believe that these new coverage options would promote greater

competition, lower costs, and new choices in health insurance markets. By allowing individual and small employers to join together,

AHP’s promote the same economies of scale and purchasing clout

that workers in large companies currently realize.

The Quality Care for the Uninsured Act, H.R. 2990, includes the

language supported by virtually the entire small business community to expand Association Health Plans. We must reach those

small business owners without health insurance, and AHP’s are

the market-oriented private sector solution to the small business

problem. We believe that the language in the Quality Care for the

Uninsured Act would provide the necessary protections.

I would like to share just one more story with you. Christine

Bierman, owner of Colt-Safety in St. Louis, Missouri tells her own

story. Quote, ‘‘I own a small fire and rescue distribution company

in St Louis, Missouri. I founded the company in June of 1980.

Through the years, we have had up to 25 employees at any given

time. We currently have 15.

My mother worked for the company from 1987 till her death in

1994. In 1989, she was diagnosed with breast cancer and had a

mastectomy. The cancer recurred in 1992. We were one of the lucky

companies that did not have to fight their insurance company to

cover bone marrow transplant. The unfortunate and most unfair

situation was that for the next 6 years of my mother’s life, the insurance company rates escalated between 15 and 25 percent each

year. In about year 3, I began questioning about getting into another insurance company. We could go nowhere else due to my

mother’s preexisting condition.

15

The escalating costs came at a time when we were also losing

market share due to integrated suppliers and mega-mergers in our

industry. This is usually when a small company can show their entrepreneurial skills by cutting costs and moving quicker than the

mega companies. We were forced to cut our 100 percent employee

coverage to 80 percent, and now only cover 60 percent of employee

benefits.’’

What we see happening if my association, NAWBO, is permitted

to form an Association Health Plan is that our members in each

State will be able to provide for their employees’ health benefits so

that all of our stories have a good ending not a sad one.

Thank you.

[Ms. Kaplan may be found in appendix.]

Chairman TALENT. I thank you, Ms. Kaplan.

What we will do is we will go to Mr. Gallo for his statement and

then adjourn for the vote which is on a rule, and then come back.

And I would urge members to return. This is the only panel, and

we will go right to questioning, and then we do have to vote out

our views and estimates of the SBA’s budget submission for the

Budget Committee.

Our next witness is Mr. Richard Gallo, owner of the Office Outlet

of Indiana, Pennsylvania.

Mr. Gallo.

STATEMENT OF RICHARD GALLO, OWNER, THE OFFICE

OUTLET

Mr. GALLO. Chairman Talent, members of the Committee, good

morning, and thank you for giving me this opportunity to come to

you today and give my testimony concerning health care reform

and how it affects my small business and my family.

Just a little background about myself, first. I am from Indiana,

Pennsylvania, the hometown of the late, great actor Jimmy Stewart. We have a very nice museum and a statue of Mr. Stewart, so

please come and visit us. Centered in our community is a fine educational institution, Indiana University of Pennsylvania. We are

also known as the ‘‘Christmas Tree Capitol of the World.’’ But, we

are not quite as famous as our neighboring town of Punxsutawney,

PA which has the famous weather forecaster, Punxsutawney Phil,

which reminds me, we have six more weeks of winter here.

I was born and raised in Indiana, Pennsylvania, population of

15,000. I have been married to my wife, Wendy Bechtel Gallo, for

the last 16 years. We have 4 children, 6, 8, 10, and a 12–year old.

My wife and I were blessed when we were able to purchase our

first business, the Office Outlet, an office products store. We have

owned the Office Outlet since 1995.

Previously, I had managed an office product store for over 16

years. I was employed there a total of 22 years. I found that being

employed was very different than owning your own company. I had

high hopes of being able to provide benefits, like health care insurance, to our employees. To my shock and surprise, I found out it

would cost me over $40,000 per year for a small company to give

every employee, including my family, health care insurance. This

was looking at the lowest priced health care plans and group rates

16

around. For a small business, just starting out, meeting this figure

would be impossible.

So for now, my wife and I go without health care insurance, and

my employees must take care of their own by whichever means

they can.

I recently had to see a specialist for health reasons. I had no idea

what expense would be—what it would be or how I was going to

come up with the extra cash for payment. With four children, a

mortgage, bills, and other expenses, there is not much cash in the

savings account. With all the tests and medicine it was quite expensive, and I may yet have to have surgery. This motivates me

even more to travel to Washington, DC, and speak out concerning

this very important issue before you—affordable and accessible

health care insurance plans for small businesses.

I feel for the many others in my situation, and now I personally

know the frustrations of not having health care insurance. This can

become a financial nightmare. I was blessed to have a family member who helped me with the expenses, but a lot of others may not

have someone to turn to for help.

I ask this Committee: Who are the people going to turn to for

health care insurance? The Government cannot pay for everyone to

have insurance. My answer: The only way that this can be resolved

is that we, as employers, must have available affordable health

care plans to give our employees or at least offer them as co-pay

plans.

I was blessed to have worked for a company that paid my insurance for the 22 years I was employed there. I appreciated that benefit, and it is one of the reasons I remained with that company at

that length of time. It gave me a sense of security and appreciation

for my job. I would like to be able to offer that same benefit for

my valuable employees. I strongly encourage this Committee to

continue their efforts with AHPs. This will help small business employers like myself by giving us the same access and choice of affordable health care for our employees.

The Fortune 500 companies, like Ford, Chrysler, and Wal-Mart

have the ability to offer health benefits to their employees under

the one unified Federal statute, known as ERISA, the Employee

Retirement Income Security Act. This saves the big guys from the

cumbersome task of having to comply with the different rules, regulations the benefits mandates that exist in each 50 States. We,

the small businesses, have no such opportunity. This is why Associated Health Plans are an absolute necessity.

I see that many small employers are faced with the same problem. We must make enough profit to be able to employ good workers and offer them benefits that will keep them with our companies. As employers, we need good workers that are going to stick

with us, to help build our companies as well as their futures. Without benefits, they look elsewhere for jobs. In Pennsylvania, we have

lost thousands of young people for this reason each year. Our fine

representatives from Pennsylvania can attest to that.

AHP will allow us, as small business owners, the opportunity to

band together across State lines through memberships and bona

fide trade or professional associations, enabling us to purchase affordable health coverage for our families and our employees.

17

For example, many of us are members of national associations,

such as the NFIB, the Chamber of Commerce, realtors, builders,

and restaurant associations. If AHPs would become law, small

business owners and employees will benefit from the same economics of scales, purchasing clout, and administrative efficiencies as

our big business counterparts. This will result in lower health care

costs and new coverage options for the working uninsured, like myself, who are currently faced with no options other than the high

priced, overregulated plans that exist in our individual States.

I close with this summation and advice: Please work together as

one Committee and come to a true assessment of what is needed.

Work with the insurance companies to come up with reasonable

legislation that is fair for all and enables the insurance companies

to provide health care for the millions that need it at affordable

rates.

I will end with a quote from Mark Twain, ‘‘Do the right thing,

it will gratify some of the people and astonish the rest.’’

Thank you, Mr. Chairman and Committee members, may God be

with you.

[Mr. Gallo’s statement may be found in appendix.]

Chairman TALENT. Appreciate your testimony, Mr. Gallo.

We will adjourn—or recess the Committee, excuse me, while we

vote and then come right back.

[Recess.]

Chairman TALENT. We will reconvene the hearing, if the witnesses will have a seat. If we can have order in the room. Thank

you for not making me break my pledge never to use the gavel during my time as chairman.

Looks like the ping pong game will be over for awhile, so maybe

we can all get our questions in.

Mr. Baumgardner—There were parts of your report that I agreed

with, and I want to start with those. On page 4 of your report, you

talked about the reasons why the cost of health insurance for small

firms is generally greater than that for bigger firms. I just want

to go over that for a minute, and I certainly agreed with what you

were saying.

You mentioned that, first of all, a larger firm is likely to have

more purchasing power, because they represent bigger groups.

That is one reason, isn’t it? And then another is they can spread

their administrative costs out over more employees. So, if you have

got $1 of administrative costs and you spread it over two employees, that is 50 cents a person, but over 100 employees that is 1 cent

a person. That is another reason, right?

Mr. BAUMGARDNER. Right.

Chairman TALENT. And then also, I don’t know if you mentioned

this or not specifically, but a firm that is big enough to be able to

self-fund has savings also, doesn’t it, over firms that can’t, because

it doesn’t have to pay the marketing costs of the insurance company or the profit margins of the insurance company. That is an

advantage too, isn’t it?

Mr. BAUMGARDNER. Yes.

Chairman TALENT. Okay. So, that much I agreed with.

I want to cut right to the chase and get to the part that I disagreed with and I think is really the crux of all the aspects of the

18

report that I didn’t agree with. And that is—your assertion that

AHPs, if they were formed, would in effect ‘‘cherry pick;’’ in other

words that healthier groups would tend to go into AHPs. And as

I understand it, you believe that because AHPs would be exempt

from state benefit mandates and, therefore, would have the ability

to offer employees less extensive coverage and so would offer employees less extensive coverage. Is that the sum and substance of

your opinion?

Mr. BAUMGARDNER. Yes, sir. First of all, we never used a term

as inflammatory as ‘‘cherry pick.’’ I know others have used that.

But there are really two reasons why we think there would still be

some selection: One is the issue of the exemption from mandates—

that is, by not offering certain mandated benefits, you would be relatively more attractive to groups that had a lower expected cost,

because their employees would see themselves as less likely to

want to use those benefits. So, that was one point.

I think the second reason we would expect some selection is what

in economics we call the survivor principle. Basically, if you can

offer lower prices, on average, you are going to get a bigger market

share. And in the case of States, especially those that have had

tighter premium compression regulations, the lower-cost firms are

doing a lot more cross-subsidizing of the higher-cost firms.

In essence, the availability requirements on the AHPs would

allow them to slice the market in a different direction. The AHPs

have to make their coverage available to everyone in the association, whereas the State-regulated plans have to adhere to the

Statewide availability rules. So, in essence, the plans that are

going to survive in the longer run are the AHPs that are able to

offer a better price break relative to plans in the regulated market.

The groups doing the cross-subsidizing in the regulated market are

these with lower expected costs. We think lower cost groups would

gravitate toward the AHPs for that reason.

Chairman TALENT. But the second reason is really a function of

the first, as I understand it. In other words, because AHPs offer

less—in your theory, because they are exempt from state benefit

mandates, would offer less extensive coverage, cost less, therefore

draw in the healthier firms who would be attracted to the lower

price. And the effect would then magnify, because as those healthy

firms left the small group market, there would be fewer healthy

firms to cross-subsidize the sicker firms in the small group market,

so that insurance would go up, and the effect would tend to magnify for that reason.

Let me just read what you said: ‘‘Exempting AHPs and

HealthMarts from offering mandated benefits might substantially

affect selection. With the exemption, AHPs and HealthMarts could

design benefit packages that had fewer benefits and were relatively

unattractive to firms whose employees had costly health care

needs. Those firms would want more extensive benefit packages

and would probably maintain their enrollment in traditional, fully

regulated plans. As a result, their high health care costs would not

affect the premiums offered by AHPs and HealthMarts, which

might allow those plans to lower their costs by more than the savings from the mandate’s exemption alone.

19

Lower price plans with leaner benefit packages would appeal

more to healthy firms, both those that offered no coverage to their

employees and those that already offered insurance. In other

words, the effect magnifies. The more they draw in the healthier

firms, the better is their pool, the more competitive they are vis a

vis the small group market, and therefore the more they draw in

from the small group market, and the selective impact magnifies.’’

That is what your report says.

Mr. BAUMGARDNER. Yes, that is basically correct.

Chairman TALENT. The crux of the whole thing is the assumption

that firms that are exempt from state benefit mandates would, for

that reason, offer less comprehensive health insurance, insurance

that would be less attractive to firms that had sick employees.

Mr. BAUMGARDNER. That is a lot of it. I think that if AHPs had

to face the same guaranteed availability statewide that the firms

in the state-regulated market did, the guaranteed availability

would play a role as well.

Chairman TALENT. Do you know of any other entities besides

AHPs that currently are exempt under the law from State benefit

mandates?

Mr. BAUMGARDNER. Well, of course, as I said in my testimony,

a self-insured, single-employer firm is exempt.

Chairman TALENT. Big companies that can self-fund, right? Now,

have we observed this effect in the big company market? I mean,

would you say that self-funded, large corporate plans offer insurance that is lower quality than you can get on the small group

market?

Mr. BAUMGARDNER. Well, I think there are two things—I think

you raise a good point, and it is an interesting point.

Chairman TALENT. I agree. Maybe you would like to answer it.

I mean, do big firms—this is important, Mr. Baumgardner. I have

been working on this for a long time, and you come in here and

say, on the basis of an assumption that I think is just unsound,

that AHPs are going to adversely select, and they are going to take

healthy firms out of the market, and I don’t think they will.

See, they are made to operate very similarly to big corporation

health insurance practices, including self-funded practices. So, tell

me, do you think that big companies with self-funded plans, on balance, offer less comprehensive and less poor quality insurance than

is available in the small group market? I can read you what you

said in the report.

Mr. BAUMGARDNER. I would like not to be held to a yes-no on

this.

Chairman TALENT. Well, I will be happy to give you an opportunity to explain. The premiums themselves do not differ consistently on the basis of firm size. That means big firms, small firms

pay the same premium. But the benefit packages that large firms

offer their employees are more generous than those offered by

small firms. That is on page 4 of your report.

Mr. BAUMGARDNER. Right. And I totally agree with that statement. I think the important thing that also needs to be recognized

is that, as we said in today’s testimony, larger firms, on average,

have higher paid workers, higher income folks who are going to

tend to want a higher quality package.

20

I think it is also the case, as we mentioned, the tax exemption

from employer-sponsored insurance that, in essence, lowers the

price more when you have workers in a higher tax bracket. So, I

think—and also the large firms facing lower administrative costs

for a given benefit package, it is cheaper for them to provide it.

So, for reasons that their costs are lower, their workers tend to

be higher income, their workers tend to get greater incentives

through the current tax system, those are all reasons we would expect larger firms to be offering more generous benefit packages.

Chairman TALENT. Those are reasons why larger firms can save

money on health insurance. They don’t usually save money—they

don’t save the money by cutting the benefits. They put the money

into increased benefits, and the reason is not the generosity of people like ‘‘Hacksaw’’ Jack Welch over at General Motors; it is because they want good employees. Now, don’t you think small businesses will want good employees as much as big businesses want

good employees?

Mr. BAUMGARDNER. Well, again, I think it is a function of the

workforce in these different size firms. On the other side, let me

take—go down to the small firms. Precisely because they have

lower income workers, they probably would prefer a less generous

package so as to have less of their earnings offset by the cost of

that package to the employer. In fact, it is exactly in the small firm

market that these mandates probably are certainly more binding

since the group that—because of the interaction of ERISA with

state law, the group that probably would want a less generous

package, to some extent, can’t get it because of the mandates, and

in fact that is why we do estimate in the end some increase in coverage among small firms.

Chairman TALENT. I appreciate that. Did you talk to any small

business people who told you their employees want the poorer quality health insurance?

Dr. Wilson, you run Association Health Plan, okay? Do your

members and their employees want lower quality health insurance

than the big companies?

Mr. WILSON. They want the same benefits. An example of that

is a Virginia equipment dealer that I am quite familiar with just

last month. His costs went up, he got a rate increase from his carrier, and he wanted to eliminate that little drug card that you take

to your pharmacy with a co-pay. He said, ‘‘Well, I can’t really afford

the rate increase, so I will just remove that drug card from his

plan.’’ So, he announced it to his employees that in the effort to—

and these are mostly garage mechanic type employees—told them

that he was going to remove the drug card, and he had an uproar

on his hands. In fact, his accounting manager called me up and

said, ‘‘Paul, you are going to have to help my boss. He is in the doghouse with all the employees. He is taking their drug cards away.’’

So, this notion of small employers being able to change those

benefit levels and have that be accepted by their employees, I have

not witnessed that.

Chairman TALENT. Mr. Gallo, you used to work for a bigger firm,

right, and you had health insurance.

Mr. GALLO. That is correct.

21

Chairman TALENT. And then you opened up your own small business.

Mr. GALLO. Yes, sir.

Chairman TALENT. Now, did your preferences for health insurance change? When you opened up your own small business, did

you want poorer quality health insurance at that point?

Mr. GALLO. No, sir. In fact, I look at my employees as my company, and they are very important to me, and my employees deserve a good health care plan. I don’t think dumping to down would

be the answer.

Chairman TALENT. Plus you have to compete with the bigger

firms, don’t you?

Mr. GALLO. Right, that is correct.

Chairman TALENT. Kind of what I figured, and I emphasize this

point to the Committee, because this whole analysis that attacks

Association Health Plan rests on the assumption that because Association Health Plans would be exempt from state benefit mandates that therefore they would offer poorer quality health insurance to their people, which causes then—that supports the whole

argument that they would ‘‘cherry pick’’ by drawing in healthier

people.

As a matter fact, Dr. Wilson, you run an Association Health

Plan. Do the members of your association with the healthier or the

sicker people tend to go into your plan? Or does it make any difference?

Mr. WILSON. Well, we really don’t—since HIPPA, we don’t really

select that out to that extent, but I do know this: Our association

plan is a member of TAHC, and it has had 70 members since 1992,

since it began, 70 bona fide association plan members—only bona

fide association plan members.

Last night at dinner, I read some of the materials and wondered,

are these people really using adverse selection? We went through

our membership, and I brought our list with me, and last night we

went through and we sorted by blue collar and white collar. And

we came up with the fact that these bona fide trade associations,

we are probably the best cross-section of them that exists, these 70.

They are 90 percent blue collar. We have contractors, car dealers,

equipment dealers, builders, telephone workers, bottlers, lumber

growers all across what you consider the service sector in blue collar. We only had 10 percent—we did have 10 percent of our members who were in professional, what some people think are the lowcost associations.

Chairman TALENT. Just emphasize again to the Members, the

point is to recreate for pools of small businesses the same economies and efficiencies of scale that big businesses have, so, Association Health Plans will operate an awful lot like the big corporate

plans, which don’t result in healthier people going to work for corporations. As a matter of fact, all of us know, as a matter of experience, that people who have a history of illness, if they can get a

job with a big company that has good coverage generally tend to

do it, because it is more secure. So, if anything, the Association

Health Plans will draw in sicker people, not healthier ones.

I want to make one other point, Mr. Baumgardner. We talked before about the extra costs that small businesses have to pay relVerDate 11-MAY-2000 12:48 Sep 12, 2000 Jkt 065217 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HR\OC\E217A.XXX pfrm03 PsN: E217A
22

ative to big firms in terms of buying of health insurance. Because

big firms can spread the administrative costs over more employees,

because they are larger purchasing pools, because they can selffund, they don’t have to pay as much for profit margins or marketing costs. And yet your report assumes that the cost savings

arising from the group purchasing features of AHPs and

HealthMarts would be negligible. Isn’t that right?

Mr. BAUMGARDNER. Yes, that is correct.

Chairman TALENT. Now, that is an assumption; that is not a conclusion you make. It is an assumption, and notwithstanding the

diseconomies for small firms, if they could join into an AHP and

make one big purchasing group, they would not have cost savings

arising from that feature. That is an assumption you make on page

22.

Now, as a basis for that assumption—you do drop a footnote

here—a study by Stephen Long and Susan Marquis about pool purchasing?

Mr. BAUMGARDNER. Yes, that is correct, sir. They looked at—and

that is one thing I would like to say is we are always careful about

receiving selected data from folks who of course are going to let you

know how much they were able to save costs within their particular plan.

To us, the Long and Marquis data had the advantage that it was

a random sample of firms that were selected regardless of were

they in the regular small group market or where they were purchasing, say, as an individual small group or were they purchasing

from a cooperative arrangement of some sort? Some of those were

alliances that were not AHPs. Others were Association Health

Plans under current law.

And, essentially, the Long and Marquis paper came to the conclusion that they were not seeing any premium differences between

the small firms purchasing as an individual firm versus people purchasing through the pools. What they did find is that the choice of

plans was bigger if you were with an alliance or a cooperative, and

there was also more information often conveyed to the employees

comparing the health plans offered within the cooperative. But the

premium differences they didn’t find. So, that was the basis of the

assumption we made there.

Chairman TALENT. Well, let me direct you. The staff should have

given you a copy of that article. I agree it is a pretty good study.

They reached some very interesting conclusions. I have marked it,

handwritten different pages on it. So, if you will go to what I have

marked as page 3, and I will be happy to provide this to members

of the Committee if they want. If you look at the bottom of page

3 where it says, ‘‘We did not see evidence of differential risk selection in pool purchasing arrangements.’’

Mr. BAUMGARDNER. And that is under current law where States

can regulate these plans, and they have to comply with benefit

mandates.

Chairman TALENT. Yes, exactly. In other words, they weren’t

studying the kinds of Association Health Plans that the bill would

create, were they? They were studying all different kinds of pooled

arrangements, including state-sponsored, pools that the government had put together, right? It would not surprise me at all, Mr.

23

Baumgardner, if pools the government had put together did not

achieve any economies or efficiencies of scale, the same kind of people who pay $500 for an ashtray over at the Department of Defense.

Now, if you will go back to the end of the article, page 7, because

they allowed for the fact that they were looking at a whole lot of

different kinds of pools and not specific ones. And here is what they

say, this is the last paragraph, ‘‘Clearly, there is a need for more

research beyond what this first descriptive study can do. The pool

purchasing we examined comprised a broad range of agreements.

We found some evidence that the outcomes may differ substantially

under different forms. But further work is needed to desegregate

the types of pooling and to do more carefully constructed studies

within markets of the participants and non-participants.’’

So, actually, this study, which as far as I can tell is the sole support for your assumption that Association Health Plans would not

have cost savings from premiums, stands for, if anything, the opposite proposition, because they say, ‘‘We found some evidence that

the outcome may differ substantially under different forms.’’ So, at

best, we really don’t know what would happen if somebody studied

just Association Health Plans, do we?

Mr. BAUMGARDNER. I think that is fair, and certainly as research

is updated we will look at those studies.

Chairman TALENT. Well, I appreciate your candor. I think that

is fair too, and I will recognize the gentlelady from New York for

any questions she may have.

Ms. VELAZQUEZ. Thank you, Mr. Chairman.

Mr. Baumgardner, the CBO analysis indicates that 20.3 million

Americans will actually see rate increases for health coverage due

to the passage a law creating AHPs and HealthMarts, does it not?

Mr. BAUMGARDNER. Ms. Velazquez, I would like to speak to that

point, because I think perhaps it is taken slightly out of context in

that basically that 20 million, we really can make—with our analysis, we really can only speak on average what is going to happen.

So, within that pool that stays in the traditional regulated plans,

we feel those firms, on average, are going to see a 2 percent increase.

I think it is going to depend on State law. There are a number

of States that allow fairly wide ranges of premiums to be charged

to different firms. You can see like 5 to 1, 2 to 1 as what is allowed.

A lot of firms probably won’t see any change in those less regulated

States. So, it is really an on average statement of a 2 percent increase within that 20 million group that stays within the traditional regulated market.

Ms. VELAZQUEZ. One of the arguments used by the proponents of

HealthMarts and AHPs is that this plan will enable small businesses to pool resources through group purchasing and obtain significant administrative cost savings through these new arrangements. What proportion, if you can tell us, of the premium reduction estimated by CBO is related to administrative savings?

Mr. BAUMGARDNER. Well, as the chairman pointed out, we assume zero for that. We assume 5 percent for the mandate exemption savings. So, the answer would be zero with the assumptions

we use, as far as the administrative savings. And, again, that

24

was—the Long and Marquis study suggested and the Chair made

reasonable points that there will be more research in the future,

but based on what we could see now, we went with zero as the assumed savings there.

Again, I think a big coop still is not the same as one large firm.

You don’t control the benefits office. They don’t work solely for you.

They work for a lot of distributed small firms. Yegian and others

in a study in California, for instance, found that the—and they are

looking at a particular health purchasing alliance; yes, it is not an

Association Health Plan. But they found that the premiums

charged to these small firms through this cooperative arrangement

those premiums were larger than what large firms saw. So, I think

even small firms as a group are never going to have some of the

economies that a large firm can have. Again, the benefits office and

all the employees are yours in a large firm.

Ms. VELAZQUEZ. Are you telling us that the CBO study has to be

revisited?

Mr. BAUMGARDNER. Well, when more research comes up—these

studies often are slow in coming through the academic literature—

there could be an update someday. I couldn’t say I would foresee

one any time soon, though.

Ms. VELAZQUEZ. Dr. Joensen, the CONSAD report implies that

small employers will be better off under AHP legislation. However,

the CBO report estimated that four out of five small businesses

will face higher health insurance premiums if AHP legislation were

enacted.

Please explain why the CONSAD analysis came to such a different conclusion regarding the value of this legislation for the average small employer.

Mr. JOENSEN. That is a good question. The purpose of our study

was simply to estimate the increase in insurance coverage, and in

fact we did not focus on the impact of the creation of Association

Health Plans on the premiums of other firms. And in fact I think

that the estimate provided by CBO of a 2 percent increase is probably a reasonable estimate.

What are we seeing? We are seeing that firms that have higher—

the actuarial value of the health care services being used by those

firms are higher than average, and in fact that 2 percent increase

means they are going to be paying of their own health care costs.

In exchange for that, these individuals who are able to join AHPs

we believe will be seeing a decrease in costs, and as a result of that

decrease——

Ms. VELAZQUEZ. Why so?

Mr. JOENSEN. Why? Because for a number a reasons, including

the reasons that we heard from Mr. Baumgardner. They include

the reduction in benefits because of mandates, the relaxation of

mandates. We believe, in fact, that there will be a administrative

savings due to the grouping independent of what the Long and

Marquis study presents. It is just one study.

We believe that it is reasonable to expect savings, but it is important to note that our results estimate—the results that our study

estimates are based on a 10 percent decrease in premiums for

those small businesses that currently do not offer insurance. And

I believe that the result presented by CBO is associated—they estiVerDate 11-MAY-2000 12:48 Sep 12, 2000 Jkt 065217 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\E217A.XXX pfrm03 PsN: E217A
25

mate that there will be a 13 percent decrease, is that correct, for

the firms that join the AHPs?

Mr. BAUMGARDNER. Right, for the firms joining the AHPs, on average.

Mr. JOENSEN. Right, right. So, I think we are talking about estimated reductions that are very similar.

Ms. VELAZQUEZ. Mr. Joensen—Dr. Joensen, a primary concern

raised by the CBO’s report is that AHPs will pool the healthy from

the small group market, causing premiums to increase for the majority of small employers. Unlike the CBO report, the CONSAD

analysis does not consider that AHP legislation will have on employers purchasing coverage in the traditional small employer insurance market. I would like you to explain why the effects on the

traditional market were not considered in that analysis?

Mr. JOENSEN. Again—very good question—again, the focus of our

study was simply to look at the pool of businesses that currently

do not offer insurance, not the impact on those that currently do.

I believe that, as I said before, that the CBO’s analysis of those effects on those businesses that currently offer insurance is a reasonable one. They see a 2 percent increase, on average, in premiums

and a decrease in insurance coverage for those people that is negligible compared to the uptake.

So, yes, we could have increased the scope of our study and focused on the impacts on the currently insured. We chose not to do

that. We believe that our estimate of the number of individuals

that will receive insurance for the first time due to the AHPs is

correct, and we should—we can change or we can add to our study

to look at the decrease in those firms that currently offer insurance, but I believe it will also be a negligible number compared

to——

Ms. VELAZQUEZ. Why?

Mr. JOENSEN. I am just basing that estimate on the results that

CBO produced. They saw an increase of 340,000 in the firms that

currently do not offer insurance and a decrease of only 10,000. So,

I am saying that if we assume the same percentage of people losing

insurance, it really is a small percentage.

Ms. VELAZQUEZ. Ms. Lehnhard, you state that the CONSAD report is not credible. Could you please elaborate on that?

Ms. LEHNHARD. Well, we commissioned the Barents group of

KPMG to look at that study, and some of the things that they

raised as concerns, for example, were, first, the universe of the population used was, in their terms, exaggerated. They used Medicare

eligibles, for example, and Medicaid eligibles and some populations

that don’t belong in the base.

Secondly, they assume that for every 5 percent decrease in premiums, you have a 6.5 percent decrease in the number of uninsured, and that extraordinarily high by any of the literature. CBO

won’t even accept a 3 percent increase, I don’t believe, for every 1

percent decrease in premiums.

They didn’t look at the effect on the rest of the insurance markets, what would happen to people who weren’t in AHPs, their premiums. Those are some of the kinds of concerns that we have.

Ms. VELAZQUEZ. Would you like to respond?

26

Mr. JOENSEN. Yes, I would, in fact. The issues that the representative of Blue Cross just mentioned were presented to me in

February of 1999 in a letter that had been written by their consultant, I think it was the Barents Group, and they issued a number

of criticisms after reading the report. I, unfortunately, didn’t realize that we would be discussing those points today, but in response

to those criticisms I produced a letter refuting each and every one

of their criticisms, and I will make a copy of that letter available

to the Committee, because I think it is quite important.

With regard to the two specific criticisms that we just heard they

are both absolutely incorrect. The base of population that we used

in our study was simply the currently uninsured. We did not look

at people who are receiving Medicare, Medicaid insurance, insurance from other private sources, or insurance from the Federal Employment Benefit Plan. So, in fact, the base of individuals we used

in our calculations was the currently uninsured.

In addition, this notion that we used an elasticity of 60 is—an

elasticity of 6.5, we did not use an elasticity of 6.5. We used an

elasticity of between two and three, which is, I believe, supported

by results of literature, economics literature studies.

Ms. VELAZQUEZ. Yes, Ms. Lehnhard?

Ms. LEHNHARD. One other concern we had, and I think it was

mentioned earlier today that they didn’t take into account the income of workers for small employers, which CBO says is the largest single factor in their not taking up insurance.

But could I make one comment on the exchange, very quickly, we

have heard between the two studies? With all due respect to the

chairman, I think this whole debate has been about an exemption

from State-mandated benefits so small firms could lower their costs

by not offering State-mandated benefits.

Ms. VELAZQUEZ. What type of mandated benefits do you think

would be most likely dropped?

Ms. LEHNHARD. The most expensive mandated benefits are mental health, substance abuse. The most numerous benefits are women’s issues—breast mastectomy coverage, in vitro fertilization—

those are the most numerous. But we work with small employers

everyday, and they are desperate to get the costs down, and we

have worked very successfully with State legislators to get streamlined packages. But we know they want—it is not a quality issue;

it is a cost issue. Can we offer anything to our employees?

But I put that aside. The biggest issue is not mandated

benefits——

Ms. VELAZQUEZ. Ms. Lehnhard, I just would like for Dr. Wilson

to comment on those benefits that Ms. Lehnhard said will be

dropped, will be most likely dropped. Are you providing those AHP

that you are in——

Mr. WILSON. Yes, all of the mandates. But with all due respect,

I think she is just guessing that. I don’t know that there is any

reason——

Ms. VELAZQUEZ. Do you provide your AHP those mandated benefits?

Mr. WILSON. Yes, ma’am. But I also know that the notion of bare

bones plans has never worked for my association plan, no matter

what the price was. Our dealers would be interested in a quote on

27

that. What if you gave me a plan that was really stripped down,

had a high deductible, it had a high out-of-pocket maximum to

where—and they get the quotation, and then they look at it, and

it is a lot less. Bare bones plans are less.

And then they have to go back and convince their employees, because we can’t overlook the fact that most small employers do not

pay 100 percent of the cost for their plans. They do not have total

control over these plans. The employees often pay 50 percent of the

cost, and if the employer decides he is just going to arbitrarily go

out and do a bare bones plan, he has almost got to take that to

a vote to his employees or he could have a real disruption among

his business. This can cause a very negative—and I think it is

being overlooked, the fact that the employees do pay a whole lot

of the cost, and they should have a lot to say about what the benefit levels are.

Ms. VELAZQUEZ. Would you like to comment?

Ms. LEHNHARD. The point I would make is that the biggest issue

is not mandated benefits. That is a relatively small part of the cost.

We do think that some employers, many employers will drop benefits. The biggest issue is who is going to crosssubsidize whom, and

that is what the States have tried to address with the rating reform laws.

And, again, what the States are telling us is if groups can get

out from having to cross-subsidize other groups in the State, if they

are relatively healthy, they will do that. If they are not healthy,

they will stay in the cross-subsidized pool. That is where the big

premium swings will come, particularly in Northeastern States

where they have really compressed the rates to achieve maximum

cross-subsidies between older, sicker groups and younger, healthier

groups. That is the big issue, and that is the big disruptive issue.

Ms. VELAZQUEZ. Mr. Baumgardner, based on your findings, how

would the introduction of AHPs into a market like my home State

of New York, a State that has very tight compressed premiums,

and it is dependent on a strong and highly crossed subsidized market, be affected? Specifically, what will be the result on low-cost

firms?

Mr. BAUMGARDNER. Well, we don’t have specific results State-byState and I think would hesitate to do that. But certainly based on

our analysis and what drives the results, clearly, in States where

you have got tighter rate compression, and I think New York is

number one in that category, as well as a fair number of mandated

benefits, I believe, we would expect more action in that State both

ways.

The potential premium reduction to those firms who do take advantage of the AHPs is likely to be greater in New York than in

other States. Proportionally to population, you would have more of

a decrease in the uninsured in that State. By the same token, on

the other hand, for the firms staying in the traditional regulated

market, we would expect them to see a relatively higher premium

increase in New York. So, all the effects one would expect would

be more magnified in a more regulated State.

Ms. VELAZQUEZ. Dr. Joensen, would you like to comment?

Mr. JOENSEN. I agree with that analysis.

Ms. VELAZQUEZ. Thank you, Mr. Chairman.

28

Chairman TALENT. That analysis rests on the assumption,

doesn’t it, that healthier people would tend to go into the AHP? Because what I said before the whole chain of reasoning rests on your

assumptions that AHPs ‘‘cherry pick,’’ which rests on the assumption that if the smaller firms pool together as AHPs, had a resulting economies of scale or economies because they weren’t subject to

mandates, or whatever, that they would offer lower quality health

insurance.

Now, I will ask you all again. Let us take the big firms, because

they can function right now the way AHPs do. Do big firms tend

to employ people who are relatively healthier than the rest of the

market? Is there any data to suggest that?

Yes, Ms. Lehnhard.

Ms. LEHNHARD. Let me give you the answer this way: If the only

issue in this bill were exemption from rating rules, your AHPs still

had to provide mandated benefits, you would still have a horrendous problem. It is not the mandated benefit, it is the fact that

they can get out from under a deliberate decision by the State to

require some cross-subsidy in the market. It is really not a mandated benefit issue as much as a rating issue. And I think that is

what CBO is saying, that two-thirds of their savings——

Chairman TALENT. Well, forgive me for thinking it was a mandated benefit issue given that the CBO report said exempting

AHPs and HealthMarts from offering mandated benefits might

substantially affect selection. You can see why I might have

thought that exemptions from mandates might be part of what was

driving this. We are now disavowing this?

Mr. Baumgardner.

Mr. BAUMGARDNER. I have not disavowed anything in the report,

sir.

Chairman TALENT. I didn’t think so.

Now, regardless of the reason why it costs a bigger firm or a pool

of small employers less to buy health insurance, your whole case

rests on the assumption that they will buy less insurance instead

of using that margin to buy better insurance for their people. So,

I will ask you again.

Ms. LEHNHARD. No.

Chairman TALENT. Big firms already operate that way. Now, do

they buy poorer quality health insurance for their employees?

Ms. LEHNHARD. I am saying something very different. I am saying that if you neutralize the mandated benefit issue by requiring

everybody in your world after AHPs are passed to provide mandated benefits, you are still going to get selection, because people

who are healthier know they don’t have to stay in a State pool and

cross-subsidize sicker people. So, they will move to an environment

where they don’t have to cross-subsidize.

Chairman TALENT. But if the AHP, the cross-section of healthy

and sick people in the AHP is roughly the same as in the small

group market, then they are still cross-subsidizing if they go into

the AHP, aren’t they, and there is no incentive to do it. So, you

have to show that AHPs will draw healthier people that will stay

in the small group market.

29

So, I will ask you again: Do big firms, which can do everything

that we want AHPs to do, tend to have healthier or sicker people

working for them?

Either one of you want to answer? I mean, we all know

anecdotally, because we probably all have friends who work for a

big firm and don’t want to leave, why? Because they have a history

of illness or they have a child who has a history of illness, and they

are afraid if they leave the big firm, they won’t get as good a health

insurance in the small group market. Anybody else here have

friends like that?

Now, I didn’t go through the study that CBO went through, but

common sense tells me that sicker people will tend to go into larger

pools, which an AHP is.

Dr. Wilson, do you want to make any comment?

Mr. WILSON. This is one of the items in the CBO report when

you started talking about high-cost firms and low-cost firms. To a

great degree here with small employers, we are talking about firms

with maybe half a dozen or maybe two dozen employees, and I just

wonder what a high-cost firm and low-cost firm is, what a sicker

firm is versus a healthy firm?

Last—maybe today, we have a perfectly healthy firm ce—nobody

has been in the hospital for 20 years, and now somebody has a serious auto accident. Does that immediately change that firm into a

sicker firm or a healthy firm? I think not. I want to quibble a little

bit with the rationale that the ‘‘cherry picking’’ is done, and there

is resistant to changing these plans by employees who are

paying——

Chairman TALENT. Now, I will just say that the bill we filed requires that the associations exist for purposes other than providing

health insurance. You can’t form just to offer health insurance. So,

it has to be like the National Restaurant Association or the National Association of Women Business Owners or the Chamber of

Commerce.

They have to accept any small employer into the association who

is in that line of work. They can’t, Ms. Lehnhard, say, ‘‘Oh, no, no.

You have sick people working for you, so you can’t join the association.’’ They must offer health insurance to everybody in the association. I will tell my concern, Mary Nell, is that the things won’t

work, because the sick people will go into the AHPs. This is my

concern.

Because my brother has—everybody who attends these Committee hearings regularly—if you attend them regularly, by the

way, and you are not on the Committee or a staff member, okay,

get a life. Never mind.

My brother is a tavern owner, okay? Right now, he buys it a bare

bones plan in the small group market for himself. He can’t offer it

to his employees. Now, if my niece, his little girl, got sick, it would

be a substantial incentive for my brother to join an Association

Health Plan like the National Restaurant Association’s plan, because he would be able to get better health care.

So, tell me why—what frustrates me—maybe I am doing this for

Harris Fawell who carried this bill for six years and fought against

this prejudice for six years—why do you think that sick people

30

would prefer to remain in the small group market rather than in

a bigger pool? It is not rational, it is anti-intuitive in my mind.

Ms. LEHNHARD. I think what the States have done is maximize

the pooling. In a Blue Cross and Blue Shield Plan, say, in Missouri,

all of our small business is pooled. We have one pool. It used to

be we could have 36 different categories and move people into different categories as they got sicker. And there are sick and healthy

groups. I would say, for example, in the large group market, Microsoft has a very young, healthy population. The auto workers probably have an older, sicker population.

You are going to have the same variations in the small group

market, and a lot of associations, you know, associations of young,

high-tech manufacturers won’t want to offer mental health benefits, substance abuse, and people will gravitate to that benefit

package when they don’t need those benefits.

I would counter that your brother, if their child got sick, wouldn’t

go into an AHP; they would go into the State-mandated benefit

package and get as many benefits as they could. And HIPPA let—

one more point—HIPPA lets you do that.

HIPPA is going to let people hop constantly from health plan to

health plan based on the benefits they need. And we have worked

very hard to have what is called a retention strategy, that you keep

people in the plan, you keep them over time, you don’t have disruption, you don’t have churning, price war competition. It is very disruptive and confusing to people, and we think that is exactly what

is going to happen, that people are going to hop when they see a

better opportunity or their family members get sick.

Chairman TALENT. Well, Mary Nell, let us address the mandated

thing. A little while ago you said even if you equalize the mandated

issue it wouldn’t make any difference.

Ms. LEHNHARD. No, it will make a difference. You will still have

a problem.

Chairman TALENT. You will still have a problem, okay.

And the reason for that, isn’t it, that mandates by their nature

tend to affect pretty small sections of the population. In other

words, if you take 10 people who are ill, okay, or 100 people who

are ill, 95 of them have illnesses that are not affected by State

mandates, because State mandates—and I used to be in the state

legislature. You pass a State mandate, because there is a particular, discreet, usually small fraction of the population that has

a serious problem. It is not big enough that the market would on

its own provide insurance to that person. And, so the State has to

come in and say, ‘‘Look, we know that not enough people need in

vitro that is probably going to be offered in most plans, but we

think it is so important that people have this, we are going to require that you have it.’’

So, this idea that mandates make a big difference to the average

person who is sick making a decision about where they are going

to go, because they are not—the treatment for their illness doesn’t

depend on a mandate. Mandates don’t—they only cover illnesses

that affect small fractions of the populations. I am not saying they

are not important.

And if you want to say, ‘‘We don’t want AHPs because we don’t

want more plans that are subject to state mandates, I understand

31

that argument. But don’t say that affects ‘‘cherry picking,’’ because

the overwhelming majority of people who are sick don’t need the

mandates to get the coverage. They just need good, quality insurance.

Ms. LEHNHARD. But if you look at—any actuary will tell you that

I think it is about 6 percent of the population, any population—this

room, Washington, DC—generates about 20 percent of health care

costs. Twenty percent of the population generates 80 percent of the

health care costs. If you can avoid that 6 percent or part of that

6 percent, you make a bigger dent in your premium than the most

aggressive cost management.

Chairman TALENT. If they are sick with emphysema or leukemia

or diabetes or renal failure or cancer——

Ms. LEHNHARD. No, this is mental health, substance abuse, those

are our big items.

Chairman TALENT. Yes, mental health is an expensive one, I will

grant you that, okay? But most of the people that we are talking

about aren’t moving, and most of the States don’t have, unlimited

anyway, mental health or substance abuse mandates, do they?

Ms. LEHNHARD. Some States mandate special treatment for disabled and mentally ill children. It is extensive.

Chairman TALENT. I have looked at the mandates. The expensive

ones are only in a few states. The ones that all the states tend to

have are the ones for mammograms or in response to a special interest that wanted to get covered—the psychologists so you have to

pay for the psychologist. I think this is mandate argument is a red

herring.

I mean, you are in a lot of states, Blue Cross, right?

Ms. LEHNHARD. Every State.

Chairman TALENT. Yes, every state. And you were talking about

the effect of small group reforms. Now, while the States have been

doing all this compression, all these reforms, has the number of uninsured been going up or going down?

Ms. LEHNHARD. The number of overall workers with insurance

has been going up. The number of workers in the small employer

market with coverage has been going down. They are very price

sensitive, and as premiums go up, very low-wage workers in the

small group market they can’t afford the coverage.

Chairman TALENT. Exactly. Now, you also mentioned the possibility of turbulence or ping ponging in and out of AHPs and back

to them. And let us examine where you could go. Now, how many

markets are you in where there is less than five competitors in the

small group market?

Ms. LEHNHARD. Probably not very many.

Chairman TALENT. Well, how many are you in where you are the

only one?

Ms. LEHNHARD. The only competitor?

Chairman TALENT. Yes. Quietly offering health insurance.

Ms. LEHNHARD. We are the only competitor in one State, and

that is because they had small group reform and let the amoebas

out, and everybody left the State.

Chairman TALENT. Okay. How many states are you one of, say,

two?

Ms. LEHNHARD. I doubt anywhere.

32

Chairman TALENT. How many States—in how many states do

you control, say, 50 percent of the market share?

Ms. LEHNHARD. I don’t know. I would have to get back to you.

We do have large market shares in some states.

Chairman TALENT. Yes, because, Mary Nell, I have to get to one

thing. The ping-ponging is another way of looking at that, which

is that Association Health Plans would be another pretty effective

competitor in the market, wouldn’t they?

Ms. LEHNHARD. Not at all. Our plans will not—they are not worried about that at all. First of all, an AHP can be an insured product, and we have got a lot of these—we have a tremendous—I

think we have 60 percent of the association business now, and one

of the AHP models is insured, we will be there with insurance. The

other model is self-funded. We do a tremendous amount of third

party administration for self-funded groups. They are not worried

about the competition. They are worried about the public policy.

Chairman TALENT. I know you do a tremendous amount of third

party administration for self-funded plans, but you don’t insure

those people, do you? You are hired as an administrator.

Ms. LEHNHARD. That is right.

Chairman TALENT. And if those people are currently employed in

the market or insured in the small group market, markets, which

let us say, Blue Cross has a very significant share in, and AHPs

are created, and they do self-fund, and I would expect many of

these national AHPs would self-fund. Anybody who goes into that

self-funded plan is not going to be available for Blue Cross to insure.

Ms. LEHNHARD. But we might be there as a third party administrator.

Chairman TALENT. For a flat fee or something. I grant you—no,

I take what you are saying on face value. I don’t want to suggest

otherwise.

Who is next here? Ms. Kelly.

Mrs. KELLY. Thank you.

Dr. Wilson, the CBO study assumes that the administrative costs

generated by AHPs is going to really be negative. In the last hearing, we heard testimony that AHPs would generate considerable

savings in administrative costs and marketing costs. Do you think

that savings for your AHP, if this legislation was enacted, would

be there and would stay there?

Mr. WILSON. Well, yes, I do, and primarily for one reason is that

if this H.R. 2990 wording is included, it will keep the insurance

companies involved with associations. I mentioned earlier that we

went out to 50 insurance companies, including almost all of the

Blue Cross’ companies, and asked them if they wanted to work or

even talk about working with our association, and not one responded.

Now, if this wording were to—my opinion is if this H.R. 2990 leveling the playing field for associations with large unions and large

corporations were to occur, I believe you would see the insurance

carriers then coming back into the AHP market and providing

more competition.

Mrs. KELLY. Ms. Lehnhard, I am interested that you said when

you were testifying earlier that your New York mandates are the

33

only reason Blue Cross—I think I got your words right—are New

York’s mandates the only reason that you said that Blue Cross and

Blue Shield provide good insurance to New York? You implied that

by what you said, and I wrote this down, because I wrote this down

as a question to ask you. You said you are in the market in New

York, and the mandates hold you to a certain level.

Basically, my question is, you know, you are out there, you are

trying to insure those of us in New York, and we need you there,

but I am wondering if our State mandates are the reason that you

are doing as well as you are in New York or would you be doing

this on your own?

Ms. LEHNHARD. I think without question what we would be doing

in the absence of mandates is offering small employers the choice

of those benefits, not requiring it for everyone. We have——

Mrs. KELLY. So, you would step in basically in the same way that

this law would step in by offering choices, is that right?

Ms. LEHNHARD. We typically have a very broad choice of products

for small employers.

Mrs. KELLY. What keeps you providing good coverage? What is

it out there that is pushing you to keep good coverage on your people?

Ms. LEHNHARD. I think there are two levels of response, and let

me respond for the industry, not Blue Cross and Blue Shield. The

first level of response is the State insurance commissioner. The

State insurance commissioner makes sure you have a decent lifetime limit, not $10,000; it is usually at least $1 million. They make

sure you don’t have co-insurance and deductibles in fine print that

are misleading. That is not a mandated benefit; that is just oversight of the State that would be missing in a self-funded—nobody

would be looking at that. There is nothing in the bill to that.

The other issue is mandated benefits, and we provide what our

customers want. The customers drive our product.

Mrs. KELLY. In other words, you are saying that market forces

are the things that are pushing you to provide what your customers want.

I want to go to you, Ms. Kaplan, because I think you brought

that out in your testimony. You said that in your union, your mostly women union, you were offering better benefits at a lower price

than you could purchase through any other way; is that correct?

Ms. KAPLAN. That is correct. We were a Taft-Hartley Fund. The

money came from the employers, but the union essentially was designing the plan for the benefit of the people who were participating. And if I might, that is how our association sees it. The

women business owners who belong to NAWBO would join the insurance part of it, because they are members, because they would

be the people—we are a membership driven organization, so the

members would be deciding the range of benefits that would be offered to all of our members across the country, and that would be

the range of benefits that the members would buy into. It is not

that some small group would decide within the organization that,

‘‘Well, we are only going to have 21 days of hospitalization and

some doctor bills.’’ That is not what members are looking for. They

are looking for broad insurance, enough coverage so that they are

34

protecting their businesses by the business not having to foot bills

for illnesses directly, which they may be doing now.

Mrs. KELLY. So, back to you, Ms. Lehnhard. What makes you

think that the Association Health Plans wouldn’t do the same

thing? Why in the world wouldn’t they at least meet their State

mandates and go beyond them, as Ms. Kaplan just gave us an example of?

Ms. LEHNHARD. As I said, I think this whole debate, for the most

part, has been about the cost of State-mandated benefits and the

need to get out from under that cost. And if you go back to

earlier——

Mrs. KELLY. She was in a situation where she wasn’t involved

with worrying about State-mandated benefits. She was just doing

what she needed to do for her members, and it worked.

Ms. LEHNHARD. If you go back to the earlier testimony of the

groups primarily supporting this, the debate has been about the

cost of State-mandated benefits and how much cost that means for

employers. With all due respect, I just can’t imagine if it is not an

issue, why push this to be passed?

Mrs. KELLY. What makes you think market forces wouldn’t act

to allow the Association Health Plans to—why wouldn’t they act to

allow the Association Health Plans to get better coverage at lower

cost? As a matter of fact, on page 14 in the CBO study it says that

there would—and I have got to read this here—‘‘The firms that

continue to purchase traditional health insurance plans would pay

an additional $800 million in premiums. That increase would be

more than offset by the $1.2 billion in net premium savings that

would result because firms face lower premiums in AHP and

HealthMart plans.’’ What do you say to that? That is the CBO

study.

Ms. LEHNHARD. Back to your question what small employers

would do, CBO assumed a third of their savings, I believe, from

dropping State-mandated benefits, but we live in the State markets. There is a reason, first of all, providers lobby for State-mandated benefits, and it is because the market is not providing them.

And, secondly, if you look at the biggest opponents of State-mandated benefits, it is the small employers who don’t want to have

to provide those benefits.

Mrs. KELLY. Whose hide is the $1.2 billion coming out of?

Ms. LEHNHARD. I am sorry?

Mrs. KELLY. Whose hide is the $1.2 billion coming out of?

Ms. LEHNHARD. CBO is very clear on that. It is coming out of the

sicker, older people who are paying higher premiums, because the

younger, healthy people have left the insured market. It is a costshifting. It is a lack of cross-subsidy. You are asking older, sicker

to pay more as the younger and healthier have lower premiums.

Mrs. KELLY. You are assuming that everybody in an AHP would

be older and sicker? Is that what you are saying?

Ms. LEHNHARD. They won’t join it unless they get a better price

than they are getting in the State regulated market. That is an assumption that CBO makes. Why would they join it and pay

more——

Mrs. KELLY. Well, you are assuming—wait, wait. You have been

talking about—a lot about ‘‘cherry picking’’ here. You are assuming

35

that a—for instance, I am just going to use Ms. Kaplan, because

she has got an example here that worked. You are assuming she

is not going to include any of her younger people——

Ms. LEHNHARD. No.

Mrs. KELLY [continuing]. Younger members. I mean, I am sorry,

maybe I just don’t get it here, but why do you assume she is only

going to take——

Ms. LEHNHARD. I think the States are assuming that the types

of associations that will get out from under the cross-subsidies required by the States are the associations that have, by definition,

younger, healthier people in them. That is what the States are worried about. They may not be worried about Ms. Kaplan’s——

Mrs. KELLY. Well, I don’t know if you have attended enough of

these hearing to know, but I used to be a florist, and I had no way

of insuring my employees, because I simply couldn’t afford it. And

I can tell you, had I had that opportunity—I had employees that

were fully across the age range, and some of them were sicker,

some of them were healthy. And I can tell you that if I had the

opportunity to join an AHP, I would have done so, because my folks

needed that. And I don’t see why you would see that an AHP that

is formed to cover people in a small business would decide they are

only going to ‘‘cherry pick’’ with younger people. And who would

then have to insure the older, sicker people? Are you worried that

you would have to do that?

Ms. LEHNHARD. The question is not that the association would

treat people differently. They would have to insure everybody in

their association. It is the question of whether an association starts

up in the first place. An association of older mine workers is not

going to set up an AHP. They are going to stay in the State-insured

market where they know they are fully cross-subsidized by younger, healthier people. They are just not going to start a union—I

mean, an AHP, and that is what CBO says.

Mrs. KELLY. And CBO, from what I understand, I had a question

about——

Chairman TALENT. Will the gentlelady yield?

Mrs. KELLY. Yes, sure.

Chairman TALENT. Where does CBO say that?

Mrs. KELLY. That is exactly what I was going——

Mr. BAUMGARDNER. I have lost which quote.

Chairman TALENT. Well, Mary Nell said that only associations

that have healthier people will start AHPs, and that is why they

will only have healthier people in there. Now, where do you say

that in your report?

Mr. BAUMGARDNER. I doubt that we said that.

Chairman TALENT. Yes, you don’t say that, do you? Mary Nell,

you want to find a different source?

Ms. LEHNHARD. They don’t say it like that. I can absolutely provide it for you. It is not that blunt. It is the question of who——

Chairman TALENT. Well, I don’t want to be mistaken. Does staff

know where that might be in the report, because as I recall, I read,

I think, from page 8 where Mr. Baumgardner said, ‘‘No, no, the

way that only the healthy people get in the AHPs is because they

don’t have to do the mandates,’’ which we have disagreed about

36

whether the mandates are important or not. You notice, sometimes

the mandates aren’t important, sometimes they are important.

Mr. Baumgardner said on page 8—and I think I read this—‘‘that

exempting AHPs and HealthMarts from offering mandated benefits

might substantially affect selection.’’ Then he goes on to say, ‘‘It is

because they won’t be subject to the mandates. They will have

lower costs. They will therefore buy less insurance. They will therefore attract the healthier people.’’ It is not that they will start with

healthier people.

You can take a minute. I thank the gentlelady for yielding. I will

let her have her time back, and if you can find it——

Mrs. KELLY. I just have one question while we are waiting for

a response from Ms. Lehnhard. I have the impression from reading

your testimony and getting through as much as I looked at—I

mean, I went through your report, but I perhaps didn’t read it

word for word, but I didn’t get anything except that you based your

CBO study on one study on the operating efficiencies of group purchasing arrangements. Did you use one study or did you use more?

Mr. BAUMGARDNER. Well, many studies went into——

Mrs. KELLY. Did you use one study or did you use more? Just

yes or no.

Mr. BAUMGARDNER. In preparing this study?

Mrs. KELLY. In putting together this study.

Mr. BAUMGARDNER. Could you ask the question again, please. I

want to get my yes or no right.

Chairman TALENT. If it is okay with the gentlelady, I like witnesses to be able to explain.

If you will maybe answer yes or no and then explain if you want

to, how is that?

Mrs. KELLY. Okay, yes.

Mr. BAUMGARDNER. We used a number of studies——

Mrs. KELLY. You used one model, is that correct? One study, one

model. A study based on one model. I will rephrase that, so I hope

you understand what I am asking.

Mr. BAUMGARDNER. We constructed a model at CBO that, among

other things, uses the results from a number of studies in determining what assumptions to keep——

Mrs. KELLY. Did you use just one model? It was your model.

Mr. BAUMGARDNER. Yes.

Mrs. KELLY. A theoretical model, correct?

Mr. BAUMGARDNER. It is a multi-equation, yes, but we used one

model——

Mrs. KELLY. A multi-equation model is a theoretical model, isn’t

it?

Mr. BAUMGARDNER. Well, it uses parameters that—for the behavioral assumptions, one looks at various studies in the literature to

decide what are reasonable assumptions and then feed into that.

Mrs. KELLY. Right. But it was your model.

Mr. BAUMGARDNER. Yes.

Mrs. KELLY. Thank you.

Chairman TALENT. Ms. Napolitano. Ms. Napolitano is next.

Ms. NAPOLITANO. Thank you, Mr. Chair.

Listening to a lot of the conversation, it is just befuddling to me

being from California and the many small businesses that I know

37

that are unable to purchase insurance for their employees, especially the ‘‘Mom and Pops,’’ and the hardships they go through

when they are hit by catastrophic illnesses. But it just does not

equate in my mind that given the large numbers of small business

that there isn’t something—there are some minor ones; they can

purchase some insurance—but that there isn’t an AHP that will be

able to consolidate all the power that these numerous businesses

can afford in being able to join together and have that purchasing

power.

And I know there is diverse plans. I retired from Ford. I was initially covered 100 percent, and in time, by the time I retired, there

was only, I think, 50 percent match. But needless to say, things

change; that is accepted. You go through transitions, things

change, costs change, et cetera. But why is it that we have to really

fight every step of the way to get adequate coverage for the small

business person who essentially is providing a great service?

And, certainly, they don’t just go out and say, ‘‘I just want to employ young people because the coverage, if I may want to buy it,

I don’t have to pay a higher premium for the people, if I cost share

of 50 percent it, whatever.’’ You employ people who are going to get

the job done, whether it is an elderly or retiree, whether it is a

young one or a family member. You don’t sometimes have that

choice.

So, why does the insurance have the ability to red light—to me,

it is a red light—when you say, ‘‘Well, sorry, but we don’t really

want you, because you have older employees that are going to be

a drain on the pot, if you will.’’ It is just inconceivable to me.

Can somebody tell me what can be done to be able to actually

bring together the pool, whether it is by the organizations’ efforts

or whether it is anybody, just explain that anomaly.

Ms. LEHNHARD. I would make two quick points. There isn’t a

State in the country where we can refuse coverage for a small

group no matter how sick they are. We have to take every small

group. And in terms of pooling for purchasing powers, in California—California Blue Cross, California Blue Shield—a small employer gets the power of the arrangements that Blue Cross and

Blue Shield has negotiated, not only with small employers behind

them but all other big accounts. When we go out and negotiate an

arrangement with a hospital or provider, we are representing the

groups of 2 and the groups of 10,000. They have maximum purchasing power. You couldn’t find a pool in California as big as our

Blue Cross and Blue Shield plans.

Ms. NAPOLITANO. I understand that, and I have retired a couple

times. I am covered by PERS, Public Employees Retirement System. Guess what? I used to have Blue Cross Blue Shield. I now

only have Blue Cross. So, if I have medical necessities that would

put me in the hospital, I am not covered, and yet this is a $127

billion entity in PERS.

Now, tell me about the purchasing power for the employees or

the retirees.

Ms. LEHNHARD. I don’t understand. You don’t have hospitalization coverage?

Ms. NAPOLITANO. No, just Blue Cross.

Ms. LEHNHARD. Blue Cross is——

38

Ms. NAPOLITANO. Or Blue Shield. One or the other. I only have

the medical. I do not have the hospitalization.

Ms. LEHNHARD. Blue Shield offers and hospital and——

Ms. NAPOLITANO. I know it offers, but the employer is not offering it to the employees, whether it is a cost-based decision or not.

That, again, is something that affects employees.

Ms. LEHNHARD. That is the employer’s decision.

Ms. NAPOLITANO. Right, but we don’t have a choice is what I am

trying to say. And, unfortunately, that happens more often than

not.

My concern is the small business—if we are going to capitalize

on the growth of the small business and the entrepreneurship and

be able to afford then the ability to have employees maintain that

economy, we need to be sure that we provide them with all the assistance we can. Part of it is the health coverage, and I would want

to look into how we can work together to be able to provide the

pooling of resources to be able to assist the employers in covering

of their employees regardless of who they are.

Ms. LEHNHARD. One of things we have said is Congress needs to

focus on the low-wage worker in the small-employer group with

scarce resources. That is where to start.

Ms. NAPOLITANO. Most of the small businesses are low wage——

Ms. LEHNHARD. And we supported tax credits for that low-wage

worker, not the employer but where they have a low-wage worker

to help them pay for coverage and a decent cost-sharing arrangement with the employee. Even if that employee is buying coverage

now, it is probably out of money that should be used for food or

rent or something for their children. And we said just go ahead and

provide the tax credit even if the employer is already providing it,

if they are low-income.

Ms. VELAZQUEZ. Would the gentlelady from California yield for

one second?

Ms. NAPOLITANO. Yes, certainly.

Ms. VELAZQUEZ. Ms. Kaplan, how would you view—and this is

based on what Ms. Lehnhard just brought up—how would you view

a Federal tax credit aimed at covering your employee in low-wage

jobs?

Ms. KAPLAN. I would view any help that would enable the small

business with low-wage employees—and you know, being from New

York, we talk about health care workers doing home care. We are

talking about low-wage workers, so that any time that they are

asked to contribute to their own health care costs it is impossible.

There is no way that an employee is going to make a choice between feeding their kids and paying a premium.

And the only way we are going to provide a company like mine

for everybody is if the employees contribute so that anything that

would help to get the both of us into a situation where we could

buy the insurance, they could contribute in some way but getting

tax credits or other things, anything would help.

Ms. VELAZQUEZ. You would support that.

Ms. KAPLAN. Absolutely.

Ms. VELAZQUEZ. Mr. Gallo?

Mr. GALLO. I think of a tax credit as kind of a temporary fix

there, because the cost is still going to rise in the health care insurVerDate 11-MAY-2000 12:48 Sep 12, 2000 Jkt 065217 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 E:\HR\OC\E217A.XXX pfrm03 PsN: E217A
39

ance. So, that might help out that they have some credit there, but

I don’t think it is an answer to it.

Ms. VELAZQUEZ. What about if you could comment in terms of

giving employees of businesses that are unable to provide health

care the ability to deduct 100 percent?

Mr. GALLO. Well, that would be good for the business in helping

the business out. I look at the, again, the employees where we are

talking co-pays. They still have to—and I think it was the Doctor

that made the comment about they want good benefits, and if they

are partners in that program or that plan, that rise in cost is still

going to be there, and they are going to be paying part of that.

Ms. VELAZQUEZ. Thank you.

Thank you, Ms. Napolitano.

Ms. NAPOLITANO. Thank you, Nydia.

One of the things that comes to mind is that a small—a low-wage

earner without insurance but with a family would rather insure

the children, because if they get sick, they need to have the child

taken care of before anything else. And any plan, I don’t care what

plan it is, only offers the employee, spouse, and then family. Has

any thought been given to be able to provide families with children

coverage for children? Is has really—in my case, I had five children. I would have rather covered them than myself, because I

knew I had to go to work, and I kept myself healthy or at least

reasonably so. But if any of my children—I would go bananas, I’d

be desperate.

Ms. LEHNHARD. I think this is what the CHIP Program is designed to do, and the States can take it to quite a high income level

relative to the——

Ms. NAPOLITANO. But you have to have a certain income level.

Ms. LEHNHARD. But I think you are talking about——

Ms. NAPOLITANO. But many of them do not—not necessarily. You

have two people working. Sometimes you will not be eligible. So,

what happens to those families who have a husband and wife

working, even at a minimal that are at that wage line?

Ms. LEHNHARD. I would have to check on it, but it may be that

you are eligible even if both parents are working as long as you

meet the income level. It is a tremendous program, and we are

working with CHIP Program——

Ms. NAPOLITANO. I am well aware of the CHIP Program.

Ms. LEHNHARD [continuing]. To try to get coverage for children.

Ms. NAPOLITANO. Right. But it is still a small business owner

that sometimes will be facing the absence of a mother if the child

is sick. So, it costs the company in the long run.

Thank you, Madam Chair—Mr. Chair.

Chairman TALENT. I thank the gentlelady.

Ms. Lehnhard, I haven’t found in the CBO report any statement

that they think only the healthier associations will start Association Health Plans. Have you been able to find it or your staff?

Ms. LEHNHARD. It is a question of who is most apt to—if you are

an association, are you going to look at your enrollment and say,

‘‘Am I going to be successful?’’

Chairman TALENT. Right. I understand the point, but you said

CBO relied on it, and I haven’t been able to find it.

40

Ms. LEHNHARD. Page 10, ‘‘In the long run, one would expect the

most successful AHPs to be sponsored by association whose members had lower than average health care costs.’’

Chairman TALENT. Okay, where is that?

Ms. LEHNHARD. The top of the page.

Chairman TALENT. That is a statement about which are likely to

be successful in the long run, not which are likely to go in there.

Ms. LEHNHARD. And it is the premium relative to what you can

get in the State-insured market. If you can’t offer a cheaper premium, you are not successful.

Chairman TALENT. If you can’t insure at less cost, you are not

successful. In other words, you may charge the same premium and

provide more insurance and provide a competitive advantage for

that reason, right?

Ms. LEHNHARD. I think the point is risk selection. This is, I believe, in the context——

Chairman TALENT. No, we haven’t gotten past the problem here

with risk selection then. Unless you can show that the employers

in the Association Health Plans will use any economies to save

money and buy less insurance rather than provide better insurance, you haven’t got your risk selection issue. And every time I

have asked you guys about it, you kind of looked at me, and I

haven’t forced you to say yes or no, because I don’t want to be

mean. But, you haven’t shown that yet.

Ms. LEHNHARD. I think I have said pretty clearly that I think

this whole debate is about small employers wanting out from under

State-mandated benefits and their costs when the choice is between

basic primary care and hospitalization versus additional benefits.

Chairman TALENT. Okay. Let us go back then, Mary Nell. Big

firms, right now, they are not subject to State mandates, right?

Ms. LEHNHARD. Big firms don’t, on average, have low-income

workers like the small groups.

Chairman TALENT. Okay. So, small firms do. Have you ever

heard of the Western Growers Association?

Ms. LEHNHARD. They offer a very stripped down benefit.

Chairman TALENT. Who are their workers? They are migrant

workers, right?

In comparison—this is testimony from our last hearing—the

least expensive comparable health plan offered by the governmentrun Health Insurance Plan of California for the comparable age

range is $273.75 per month. This is comparable plans. However,

the HIPC Plan is only available in certain parts of the state. Western Growers Association’s least expensive family health plan is

$149 per month for employees of any age.

Ms. LEHNHARD. I think the point, though, is they have asked the

State, and the State has agreed, they are out from under Statemandated benefits. They asked to be out, and they have a yearly

cap of $20,000 a year on spending.

Chairman TALENT. Well, the question is not whether they are

subject to state mandates or not.

Ms. LEHNHARD. They asked to be out from under them.

Chairman TALENT. You keep going back to that after you say it

is not relevant. The question is however they save the money——

41

Ms. LEHNHARD. I said it is not as relevant as rating. It is

about——

Chairman TALENT. Because big employers aren’t subject to state

mandates either, right? And big employers do not use those savings

to offer poorer quality health insurance. We are agreed on that,

aren’t we? Big employers don’t offer poorer quality health insurance than small employers. Are we agreed on that?

Ms. LEHNHARD. In general, I agree. They have richer benefits;

they can afford it.

Chairman TALENT. Okay, good. So, that is no longer a question

in the debate. So, now the only issue what your statement is that

it is because they have healthier people working for big employers?

Ms. LEHNHARD. No, they have higher-income employees. That is

the CBO’s point. The employees can afford—when employees are

paying 50 percent of the premium, they can—higher-income employees can afford that.

Chairman TALENT. I am trying to follow this.

Ms. LEHNHARD. The employees have to pay——

Chairman TALENT. Is there any data, Mr. Baumgardner? Do you

have any data to support that?

Mr. BAUMGARDNER. Which part of the——

Chairman TALENT. The point that they have employees who

want better health insurance as opposed to small businesses.

Ms. LEHNHARD. No, the employees can afford the coverage more

than employers in small groups.

Chairman TALENT. All right. Do they have people who can afford

it and who want it more? Do you have data to support that?

Mr. BAUMGARDNER. Certainly, there is evidence that with higher

income people generally in a lot of markets choose a higher quality

product.

Chairman TALENT. Dr. Wilson, do you have a point you wish to

make.

Mr. WILSON. I didn’t want to interrupt, but——

Chairman TALENT. Well, go ahead.

Mr. WILSON [continuing]. I would like to say, again, to emphasize

Dr. Westerfield’s view, which is included in my paper, and he is a

statistician also, but I asked him to put this in English so that I

could understand it. And I would ask that everybody look at that.

But he really—we are almost using the CBO study, because it is

the only study we are talking about today as some kind of baseline

where he feels that it did not, in their model, address wage differentials that you are talking about, in the model. There should

be another line on that table 1 for wage differentials between the

three different category of size of employers. He feels that there

should be a line having to do with plan differentials—full-board

plans or bare bones. And then the employer-employee contribution.

We are not talking—the study doesn’t address who is actually paying for these benefits and the differences between large and small

employers.

I am a little—I am totally uncomfortable that we have a very

valid report here at this moment.

Chairman TALENT. Well, Ms. Kaplan testified that when she was

in a union, which was, of course, exempt from mandates, that she

felt she got better health care insurance.

42

Ms. KAPLAN. There was no question that we were and still are—

the union is still a majority of women, and so the benefits that the

union was dealing with were geared towards the population that

was covered under the plan. We were providing maternity benefits

for single women before those benefits were available, because the

insurance companies sold programs that said you had to be a family to get maternity benefits. We provided maternity disability before it became a mandate. We provided well baby care, because

that is what was necessary for the people who participated in that

plan. Now, that was on top of whatever other general benefits

there were.

And that is how NAWBO perceives that it would create a plan

based on the needs of the small women business owners. So, the

women business owners of our organization, would look at what are

their needs, what are they looking for, and create a plan that

would, for the most part, be concerned with the kinds of benefits

these women want. I am going to say, right off the bat, it is going

to be—have to include coverage for mammographies, for routine

pap smears, for mastectomies, for child care, for maternity benefits

where—we are not going to create a plan that says you can go in

the hospital, have your baby, and you are going to leave today. We

have experienced it. We are not going to do that to ourselves, at

least I don’t think so. We never have in the past. We are going to

look out for us.

Chairman TALENT. I appreciate that very much. Here is what I

am going to do. I am going to try and be fair here, because I have

interrupted a few times. I feel strongly about this. So, I am going

to state the case as I see it, and then I will let Ms. Lehnhard or

Mr. Baumgardner have the last word, how is that? So, you all get

to trump me this time.

I am going to quote from the written testimony of Joe Rossman,

with the ABC, and they have an association plan, and this was

from the last hearing on this: ‘‘The ABC plan has total expenses

of 13.5 cents for every dollar of premium. These costs include all

marketing, administration, and insurance company risk claim payment expenses and premium taxes. Alternatively, small employers

who purchase coverage directly from any insurance company can

experience total expenses of 30 cents for every dollar of premium

or more.’’

As CBO indicated in its report—I don’t think there is any question that if small employers pool; they get economies of scale. They

have higher purchasing power; they have lower administrative

costs; they can spread the administrative costs among more employees; they don’t have to pay—if they can self-fund, they don’t

have to pay the insurance companies profit margin; they don’t have

to pay the insurance companies marketing costs, because they are

not trying to make a profit on the plan. They may be using it as

a recruiting tool to get people in the association, but they are not

trying to make a profit. And they don’t have any marketing costs,

because they simply send the flyer out to their members. Therefore,

they are able to buy insurance and provide insurance at less cost.

Because they are able to provide insurance at less cost, more

small employers will be able to afford insurance, and we will have

fewer people who are uninsured, and more people who currently

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are insured but only have a few choices will have more choices, because there will be more money to buy them insurance with.

Now, the alternative argument, it seems to me, to the extent it

is still standing here, that somehow Association Health Plans will

only attract healthier people, and that therefore this will have a

negative impact on the small group market. I don’t see it. I think

it will tend to attract sicker people. I don’t think people who work

for small employers are necessarily healthier. I think the tendency

may be for them to be sicker. I don’t think they have any less need

or desire for health insurance if they are sick than people who

work for big employers. And I don’t see any reason why it wouldn’t

operate very similarly to the way big companies’ self-funded plans

or big company plans do.

So, now I will let you two offer the response.

Mr. BAUMGARDNER. I would like to touch a couple points. One is

the issue of mandates. There is some evidence from the Journal of

Public Economics paper by Gruber. Looking at small firms, comparing States that had a mandate and States that didn’t, roughly

they found about a 5 percent less offering of drug abuse treatment

in the States without the mandates, 8 to 9 percent less offering of

out-patient mental illness coverage, about 6 percent less offering of

in-patient mental illness coverage. So, we believe there is some

binding effect for some plans of these State mandate benefit restrictions. And, again, to the extent the legislation exempts one

from complying with those mandates, we think some plans are

going to take advantage of it.

Let me also point out they are clearly not going to take advantage of all mandated benefits. GAO did a study, looked at the actuarial cost—that is sort of the claims cost—of per paid claims for the

areas where there were mandated benefits. They found estimates

in the range of, say, 5.4 to I believe it was 22 percent as the actuarial cost of those mandated benefits. One of the reasons we in fact

assumed only a 5 percent mandate savings was a recognition that

not all these benefits are going to be dropped simply because you

have an exemption.

And in fact that leads to why is the coverage result relatively

small? It is small, in part, because there doesn’t appear to be a big

advantage taken of being exempt from the mandates. A lot of those

benefits would stay in the package. We are just saying, on average,

there would be fewer benefits in these packages.

And then on this other point, on selection, a couple observations.

One is that there is some evidence, and we would be happy to look

for that for your staff, on packages and selection. The ones I am

aware of, Medigap, people who choose the benefit that has prescription drug coverage do tend to be sicker. There have been some

studies of university health plans where the more generous package started to attract the older workers in those plans. So, there

is some evidence of that out there.

Again, a final point on the—that kind of covers both: I think

what are the key elements in the legislation that these new plans

don’t have to comply with that plans under current law do? Basically, it is the State-mandated benefits and the availability rules,

not complying with State availability rules but just availability

within the association. So, those are really the two things that are

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different, and in fact they are the source of the effects that we have

calculated.

Again, on this selection thing, it need not even be active selection. I think the point is, again, I call it economic selection—I referred to the survivor principle earlier. If you are in a situation

where you are allowed to price lower for the same thing, you are

going to tend to do better, and given the premium compression

rules that are State regulations, the associations that do end up

with an average risk that is lower than the average in the State

pool will indeed be able to offer lower premiums on that count, and

we would expect them to survive.

Again, we are not making any judgment on are the State rules

a good idea, are these rules a good idea? I am really just trying to

explain sort of the source of the effects within our study.

Thank you.

Ms. LEHNHARD. I don’t want to be redundant to what he said, so

I will focus on a different point: The non-selection savings. You

mentioned that 13 percent administrative cost is about what our

Blue Cross and Blue Shield administrative cost is for small group

coverage. And I would just point out that when you have an Association Health Plan, you will have some marketing costs. You have

got to tell them about the product; you have got to send out enrollment forms; you have got to follow-up.

But the biggest cost difference between a large employer and a

small group market is enrollment. It is very expensive to enroll a

plan, get people’s names, addresses, social security numbers, their

family members, do the family members have other coverage, is

anybody on COBRA? It is a very expensive process to enroll, and

when you enroll a big company, you have the economy of scale of

dealing with that one company. When you enroll 50 companies, you

don’t have economies of scale on enrollment, and that is the major

marketing cost.

Putting all that aside, though, I don’t want to leave the impression that Association Health Plans are bad or, as I said, it is active

‘‘cherry picking.’’ I think it would be inadvertent selection. We do

a lot with Association Health Plans, and you do get a lot from it.

You get the trust, the communication, all of those things that you

mentioned, but they are regulated by the State. You can do that

and keep that without changing the law, and that would be my

final point.

Chairman TALENT. Do you have anything else?

Ms. VELAZQUEZ. No.

Chairman TALENT. Okay. Appreciate you all being here. We have

a little more business in the Committee to conduct, but I will adjourn the hearing, and I do appreciate everybody’s input. I think

it has been a very useful hearing.

Thank you very much.

Without objection, we will leave the hearing record open for 10

days for any additional written questions from the members.

The hearing is adjourned.

[Whereupon, at 1:08 p.m., the Committee was adjourned.]

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