S. HRG. 109–110

SOLVING THE SMALL BUSINESS HEALTH CARE

CRISIS: ALTERNATIVES FOR LOWERING COSTS

AND COVERING THE UNINSURED

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

APRIL 20, 2005

Printed for the use of the Committee on Small Business and Entrepreneurship

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21–830 PDF 2005

S. HRG. 109–110

SOLVING THE SMALL BUSINESS HEALTH CARE

CRISIS: ALTERNATIVES FOR LOWERING COSTS

AND COVERING THE UNINSURED

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

APRIL 20, 2005

Printed for the use of the Committee on Small Business and Entrepreneurship

(

Available via the World Wide Web: http://www.access.gpo/gov/congress/senate

SOLVING THE SMALL BUSINESS HEALTH CARE CRISIS:

ALTERNATIVES FOR LOWERING COSTS AND COVERING THE UNINSURED

(IV)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

OLYMPIA J. SNOWE, Maine, Chair

JOHN F. KERRY, Massachusetts, Ranking Member

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

GEORGE ALLEN, Virginia

NORMAN COLEMAN, Minnesota

JOHN THUNE, South Dakota

JOHN ISAKSON, Georgia

DAVID VITTER, Louisiana

MICHAEL ENZI, Wyoming

JOHN CORNYN, Texas

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

WESTON J. COULAM, Staff Director

NAOMI BAUM, Democratic Staff Director

(V)

CONTENTS

Page

OPENING STATEMENTS

Snowe, The Honorable Olympia J., Chair, Committee on Small Business

and Entrepreneurship, and a United States Senator from Maine ................... 1

Kerry, The Honorable John F., Ranking Member, and a United States

Senator from Massachusetts ............................................................................... 4

Bond, The Honorable Christopher S., a United States Senator from Missouri . 7

Landrieu, The Honorable Mary L., a United States Senator from Louisiana .... 11

Burns, The Honorable Conrad R., a United States Senator from Montana ....... 14

Pryor, The Honorable Mark, a United States Senator from Arkansas ............... 18

Isakson, The Honorable Johnny, a United States Senator from Georgia ........... 21

Cornyn, The Honorable John, a United States Senator from Texas ................... 21

Thune, The Honorable John, a United States Senator from South Dakota ....... 22

Talent, The Honorable James M., a United States Senator from Missouri ....... 23

Lincoln, The Honorable Blanche, a United States Senator from Arkansas ....... 53

TESTIMONY

Chao, The Honorable Elaine L., Secretary, U.S. Department of Labor,

Washington, DC ................................................................................................... 30

Barreto, The Honorable Hector V., Administrator, U.S. Small Business

Administration, Washington, DC ........................................................................ 47

Newman, Doug, Newman Concrete Services, Inc., Hallowell, Maine ................. 86

Mansell, Al, President, National Association of Realtors, Washington, DC ....... 98

Haynes, Tom, Executive Director, Coca-Cola Bottlers’ Association, Atlanta,

Georgia .................................................................................................................. 107

Nichols, Len, Director, Health Policy Program, the New America Foundation,

Washington, DC ................................................................................................... 116

Morrison, John, Montana State Auditor, Commissioner for Insurance and

Securities, Helena, Montana, on behalf of the National Association of

Insurance Commissioners .................................................................................... 127

Lindsay, William N., III, Past Chair, National Small Business Association,

Denver, Colorado .................................................................................................. 141

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Barreto, The Honorable Hector V.:

Testimony .......................................................................................................... 47

Prepared Statement ......................................................................................... 49

Bond, The Honorable Christopher S.:

Prepared statement .......................................................................................... 9

Burns, The Honorable Conrad R.:

Prepared statement .......................................................................................... 16

Byrd, The Honorable Robert:

Prepared statement .......................................................................................... 28

Chao, The Honorable Elaine L.:

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 32

Answers to Post-Hearing questions from Chair Snowe ................................. 338

Answers to Post-Hearing questions from Senator Burns .............................. 342

(VI)

Page

Durbin, The Honorable Richard:

Prepared statement .......................................................................................... 80

Kerry, The Honorable John F.:

Letter from Mila Kofman, Health Policy Institute, Georgetown

University ...................................................................................................... 58

Haynes, Tom:

Testimony .......................................................................................................... 107

Prepared statement .......................................................................................... 109

Landrieu, The Honorable Mary:

Prepared statement .......................................................................................... 12

Lindsey, William N., III:

Testimony .......................................................................................................... 141

Prepared statement .......................................................................................... 143

Answers to Post-Hearing Questions from Chair Snowe ................................ 336

Answers to Post-Hearing Questions from Senator Burns ............................. 337

Mansell, Al:

Testimony .......................................................................................................... 98

Prepared statement .......................................................................................... 100

Morrison, John:

Testimony .......................................................................................................... 127

Prepared statement .......................................................................................... 129

Answers to Post-Hearing Questions from Chair Snowe ................................ 328

Answers to Post-Hearing Questions from Senator Burns ............................. 330

Newman, Doug:

Testimony .......................................................................................................... 86

Prepared statement .......................................................................................... 89

Nichols, Len:

Testimony .......................................................................................................... 116

Prepared statement .......................................................................................... 119

Answers to Post-Hearing Questions from Chair Snowe ................................ 332

Answers to Post-Hearing Questions from Senator Burns ............................. 335

Pryor, The Honorable Mark:

Prepared statement .......................................................................................... 19

Thune, The Honorable John:

Prepared statement .......................................................................................... 326

COMMENTS FOR THE RECORD

Air Conditioning Contractors of America, prepared statement ........................... 168

American Chiropractic Association on behalf of various health professional

organizations, letter to Chair Snowe .................................................................. 170

ASPPA, on behalf of SBCA, SBLC, ECFC, comments for the record and

press release ......................................................................................................... 171

Associated Builders and Contractors, prepared statement and media advisory 180

Blunt, The Honorable Matt, Governor of the State of Missouri, letter to

Senator Snowe ...................................................................................................... 187

Fiore, Paul, Service Station Dealers of America and Allied Trades, prepared

statement .............................................................................................................. 188

Gay, John F., International Franchise Association, prepared statement ........... 191

Graham, John H., IV, American Society of Association Executives, letter

with Comments for the Record ........................................................................... 196

Hill, Eleanor, King & Spaulding LLP, letters to Chair Snowe and Senator

Kerry ..................................................................................................................... 199

Johnson, Derrell E., American Council of Engineering Companies, prepared

statement .............................................................................................................. 202

(VII)

Page

Keffer, Jim, American Foundry Society, letter to Senator Snowe ....................... 206

Keithly, Carter, President and CEO, Hearth, Patio & Barbecue Association,

prepared statement .............................................................................................. 207

Kerrigan, Karen, Small Business and Entrepreneurship Council, prepared

statement .............................................................................................................. 210

MacDicken, Becky, Director of Government Affairs, The Tire Industry

Association, prepared statements ....................................................................... 217

Matieu, Sandra J., Home Builders and Remodelers Association of Maine,

letter to Senator Snowe ....................................................................................... 222

Mental Health Liaison Group, letter to Congressman Hastert and Senator

Frist ....................................................................................................................... 224

National Association of Wholesaler-Distributors, prepared statement ............... 227

National Funeral Directors Association, prepared statement ............................. 236

National Lumber and Building Material Dealers Association, prepared

statement .............................................................................................................. 239

National Restaurant Association, letter to Chair Snowe ..................................... 241

Organizations and Public Officials Opposed to Federal AHP Legislation, list

submitted for the record ...................................................................................... 253

Perkins Restaurant and Bakery, letter to Chair Snowe ...................................... 242

Pound, William T., National Conference of State Legislatures, letter to

Congressmen Boehner and Miller ...................................................................... 243

Printing Industries of America, Inc., prepared statement ................................... 244

Warner, The Honorable Mark R., and Huckabee, The Honorable Mike,

National Governors Association, letter to Senators Frist and Reid ................. 247

Ness, Debra, National Partnership for Women and Families, letters to Chair

Snowe and Senator Kerry ................................................................................... 249

Professional Photographers of America, prepared statement .............................. 280

Protect Your Healthcare, letter to Chair Snowe and Senator Kerry .................. 283

Rawlinson, David A., Textile Rental Services Association of America, letter

to Senator Enzi ..................................................................................................... 286

Samuel, William, American Federation of Labor and Congress of Industrial

Organizations, letter to Chair Snowe and Senator Kerry ................................ 287

Schlicht, James, The American Diabetes Association, prepared statement ....... 289

Schmatz, Kathleen, President and CEO, Automotive Aftermarket Industry

Association, letter to Chair Snowe ..................................................................... 292

Small Business Council of America, comments for the record ............................. 173

Smith, Daniel E. and Selig, Wendy K.D., American Cancer Society, letter

to Senator Kerry ................................................................................................... 299

Stanton, Joseph M., National Association of Homebuilders, prepared

statement .............................................................................................................. 301

Twarog, Daniel L., North American Die Casting Association, letter to Senator

Snowe .................................................................................................................... 303

United States Chamber of Commerce, prepared statement ................................. 304

Westerfield, Donald L., Ph.D., National Center for Policy Analysis, testimony

submitted to HELP Committee ........................................................................... 309

Women Impacting Public Policy, prepared statement .......................................... 319

(1)

SOLVING THE SMALL BUSINESS HEALTH

CARE CRISIS: ALTERNATIVES FOR LOWERING

COSTS AND COVERING THE UNINSURED

WEDNESDAY, APRIL 20, 2005,

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP,

Washington, DC.

The Committee met, pursuant to notice, at 10:04 a.m., in room

428–A, Russell Senate Office Building, the Honorable Olympia J.

Snowe, Chair of the Committee, presiding.

Present: Senators Snowe, Bond, Burns, Thune, Isakson, Cornyn,

Kerry, Landrieu, Pryor, Lincoln, and Talent.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, CHAIR, SENATE COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MAINE

Chair SNOWE. The hearing will come to order. Good morning. I

want to welcome everybody to today’s hearing to focus on the

health care crisis facing small businesses.

I want to most especially welcome Secretary Chao for being here

today, for her long-standing championship of and advocacy for the

creation of Association Health Plans to further the rights of hardworking Americans across this country. I also want to welcome Administrator Barreto, who is a former small business owner and

knows all too well the difficulties of acquiring affordable health

care for his employees. I want to thank you both for the leadership

that you have given on behalf of this issue that is so central to the

well-being of small businesses across this country.

Finally, I want to thank all the small business representatives

who will testify on the serious challenges to reduce health care

costs and expand coverage and also to hear opposing views on this

subject, so hopefully we can clarify some of the issues here today.

As you may recall, we examined this issue 2 years ago during the

very first hearing I conducted as Chair of this Committee, and regrettably, since then, the problem has only grown worse. Today, I

want to probe deeper into solving this crisis and hopefully jumpstart real action by Congress to enact solutions this year.

This hearing will focus on Association Health Plans, which I

strongly believe can play a major role in addressing this country’s

health care crisis. Touted by President Bush as one of his major

initiatives, supported by over 80 million Americans, AHPs will

bring necessary reform to insurance markets that have long

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trapped small businesses and their employees in a vicious cycle of

escalating premium costs and fewer coverage options. AHPs are

crucial to solving the small business health care crisis because they

represent a fair, fiscally sound, and tested approach to reducing the

ranks of the uninsured in this country at a nominal cost to the

Federal Government.

Of the nearly 45 million uninsured Americans, 62 percent of the

uninsured are either employed by small business or dependent on

someone who is. If we want to get serious about helping the uninsured, which I certainly think is long overdue, we should start by

focusing on small business.

USA Today recently identified health care insurance costs as the

number one issue facing small business employers across the country, a fact confirmed in the National Federation of Independent

Business’s Small Business Economic Trends Monthly Report for

March. Almost 30 percent of the small business owners surveyed

responded that cost and availability of insurance was the single

most important problem facing small businesses today. This was

far and away their most pressing concern, and it is one that I have

heard time and time again.

Indeed, these surveys and studies mirror what we already hear

today from small business owners across the country. Today, we

will hear from one of my constituents, Doug Newman, a concrete

company owner from Hallowell, Maine, who has described premium

increases of almost 65 percent since 2000.

The time has come for action, not words, to deliver small business owners relief from this crisis. AHPs accomplish this with a

common sense approach that allows small employers to join together through bona fide associations to buy health care coverage.

AHPs will level the playing field of employer health care coverage

by giving participating small employers the advantages of Federal

law currently enjoyed by large employers and unions.

AHPs have the strong support, as I mentioned, of President

Bush, as he has said repeatedly in his State of the Union addresses. The Majority Leader, Senator Frist, has indicated he would like

to see floor action on AHPs this year, and I certainly welcome and

appreciate his support.

AHPs are supported by a coalition representing over 12 million

employers and 80 million individuals, and significantly, for the first

time ever, tomorrow in the HELP Committee, Chairman Enzi is

hosting his first hearing on AHPs.

Moreover, as shown on Chart 1, a recent snapshot poll in USA

Today asked 2,076 CEOs what changes to health care policies could

be made that would have the greatest impact on your business?

The number one response, at 56 percent, was consolidated group

rates, pooling, just as recommended in the legislation that we have

introduced with respect to Association Health Plans to help small

businesses.

Today, I want to examine the truth and the realities involved

with AHPs and to finally, once and for all, drive a stake into the

myths that opponents have put forward about AHPs over the

years. AHPs allow small businesses to pool their employees together to receive the same bulk purchasing and administrative efficiencies already enjoyed by large corporations and unions. It builds

3

on the success of ERISA’s self-insurance plans, used by large employers, and the Taft-Hartley plans available to union employers,

which currently provides health benefits for 78 million people, more

than half of the people who receive health insurance from their employer.

Our aim is to inject competition in the marketplace and offer alternatives to small businesses trapped in the current system. Associations will be able to administer one national plan with lower administrative costs. And reducing costs for small businesses is why

we are here today.

Studies by both the GAO and the Small Business Administration’s Office of Advocacy concluded that small businesses currently

absorb a greater portion of their plans’ administrative costs, paying

as much as 20 to 30 percent more in total premiums than larger

health plans. As a result, small businesses receive less generous

benefits than larger employers while paying the same level of premiums. On both counts, small businesses and their employees lose.

Now, here we have Chart 2. The Kaiser Family Foundation recently reported that between the spring of 2003 and the spring of

2004, health insurance premiums increased 11.2 percent. This

marks the fourth consecutive year of increases. As you can see from

this chart, health insurance premiums have seen annual increases

since 2000 of 10.9 percent, 12.9 percent, and 13.9 percent, respectively, a growth that far outpaced inflation and erased wage gains.

AHP legislation will also provide a full range of benefits similar

to what many States currently require. In many cases, large employers and unions, which are exempt from State benefit mandates,

offer the most generous plans. Not surprisingly, many employees

actually choose to stay in their jobs only to maintain that higher

level of coverage. Like these larger plans, the bill’s extensive new

safeguards will ensure that health care coverage is available when

employees need it as well as to prevent fraud.

Contrary to opponents of this legislation who claim it will lead

to cherry-picking of only the young and the healthy, this legislation

specifically requires that Association Plans must be open to all Association members, and each employer who participates in the plan

must offer the plan to every eligible employee at the risk of fines

and even imprisonment of up to 5 years.

Finally, critics claim that the Department of Labor could not

handle its responsibilities under this legislation. Frankly, I cannot

imagine an agency better prepared than the Labor Department,

which currently oversees 300,000 similarly structured plans, and

that is why I am delighted to have Secretary Chao here today to

testify to this issue. We rarely hear complaints about these plans

failing and leaving subscribers without coverage. AHPs would not

add an unmanageable burden to the Department of Labor, and as

the Secretary of Labor will testify, sufficient resources will be available to ensure that the Department fulfills its obligations.

AHP legislation is one excellent reform among myriad solutions

to the health care crisis, but it is one that should be available to

start making a difference immediately. This is not a radical new

policy we are talking about here. We should also examine ways to

use the tax code as a mechanism for increasing access to health

care, and that is why I recently introduced legislation with Senator

4

Bond and Senator Bingaman to enable more small business owners

to offer choice of cafeteria plans, to allow employees to purchase

health insurance with tax-free dollars.

And with that in mind this morning, we will also review alternatives, including those put forth by the Administration. I know

my colleagues have introduced various issues regarding refundable

tax credits, expanded Health Savings Accounts, and so forth. I

don’t think all of these issues are mutually exclusive, but I think

we should begin this process of starting to enact legislation. It is

not without coincidence that 80-million-plus Americans support

this legislation and 12 million employers. We all know that small

business is a job generator in America and it is in our central and

national interest to make sure that we preserve their economic

well-being.

So with that, I will now turn to the Ranking Member, Senator

Kerry, for any remarks he chooses to make.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

A UNITED STATES SENATOR FROM MASSACHUSETTS

Senator KERRY. Well, thank you very much. I appreciate the opportunity to share some thoughts and also to try to make the most

of this Committee’s opportunity here to really deal with this issue.

I welcome our panels and all those of you who are interested in

this subject.

Madam Chair, I thank you for bringing this Committee together

to try to tackle this critical issue. I hope we will all make the most

of it.

I want to thank you also for extending courtesies to our colleagues, Senators Lincoln and Senator Talent, to join us. They have

been working on this on the side, and I think it is good when committees can allow that to happen.

We want to welcome all of the people here today who are going

to testify on this. I want to thank State Auditor Morrison, who has

joined us from Montana, and Bill Lindsay from Colorado, who is

representing the National Small Business Association, and a special thanks to Len Nichols of the New America Foundation for

agreeing to share his expert thoughts with us once again.

The Chair has properly underscored how important this issue is

to all of us. Health insurance premiums, we will all agree—let us

find the places we can agree first, obviously—we all agree that

health insurance premiums are skyrocketing and they are squeezing our economy, squeezing businesses, squeezing individuals, and

this is not new. This has been going on now for years, increasingly.

I think average premiums for most Americans are up something

like $3,500. There is no family in America whose income has gone

up anywhere commensurate to the rise of health care alone, before

you even get to the rise of gasoline prices, education costs, and the

other costs of the average American family.

The fact is that over the last 4 years, the average American family’s income has gone down, and the wealthiest Americans have

seen their income go up. The tax burden, when you add excise,

property, sales, and all the other tax burdens, have gone up. So

people are being squeezed and health insurance premiums are rising faster than wages. They have grown at double-digit increases

5

for the last 4 years. No salaries of the average American have

grown at double-digits, let alone single-digits in many cases.

Since 2000, healthcare premiums for family coverage have increased 59 percent, compared with inflation at 9.7 percent, and

wage growth at 12.4 percent. Small businesses have obviously been

hit particularly hard. Some have reported their premiums increasing by more than 70 percent in one year alone. As a result, the

number of small businesses in 2004 that offered health benefits to

their workers is only 63 percent, which is down from 68 percent in

2001.

By contrast, 99 percent of businesses with 200 or more employees

offer health benefits, though increasingly we see them moving from

defined benefit to defined contribution, so there has been a transition even there. And if you talk to the auto manufacturers and others, they will tell you the greatest squeeze on competition today is

the cost of health care at $1,200 to $1,700 per automobile.

Of the 45 million uninsured Americans, 60 percent, 27 million,

are small business owners, their employees and their families, and

that ought to be unacceptable in our country.

For nearly 2 years, I had the privilege of traveling across this

great country of ours and speaking with Americans of every stripe,

of every level of income, about this issue of health care. Time and

again, the conversation became one of almost desperation. People

really are not sure where to turn and how to control this. It is obvious to all of us that it is one of the most pressing issues. In fact,

I think the Secretary of Health and Human Services and others answered at our Finance Committee hearing on Social Security that

far more pressing than Social Security, in fact, are Medicare, Medicaid and health care.

Every time I would have the opportunity to talk about options,

people’s eyes lit up when I said to them, you know, we could have

a program in America where small businesses and individual

Americans have the right to buy into the same health care plan as

Members of Congress give themselves, and I think many people in

America like that idea and think it is very fair.

When I spoke to the self-employed and small business owners, it

was good to be able to explain to them how we could not only allow

them an access to a range of plan choices—we could offer them all

kinds of plan choices, not just one, but several different plan

choices—and you could offer them the same consumer protections

that are offered to us and to those other Federal employees who

take part in the Federal Employee Health Benefits Program. So

you could give them affordable options and the same protections at

the same time, and you could give them the Federal reinsurance

plan that would reduce premiums for everyone in America.

You could make American businesses more competitive by reducing those premiums for everyone in America if we created a reinsurance pool to lower those premiums. And the minute you do that,

you have a greater range of choices in the marketplace. All those

who care about the marketplace, which we all do, the more choice

you have, the more competition you have, the more you affect pricing, and we could do that with that kind of an insurance plan.

These ideas, I believe, are real solutions. They are not real because I proposed them. They are real because they work and they

6

are real because they have been tested and, in fact, a number of

States are now moving on their own to embrace both reinsurance

plans and other ways of lowering the cost of health care.

The relief is real. Independent academic analysis has found that

health care proposals such as that one would cover 95 percent of

all Americans, 99 percent of all children in America. We have 11

million children with no health insurance at all today. That is unacceptable. It would reduce health care premiums by at least 10

percent for every family in America.

Is there a cost to it? Sure, there is a cost to it. There is a cost

to everything here, and we make our choices, one priority versus

another. If your priority is to give people who earn more than $1

million $32 billion in tax relief next year, you can’t do this. But if

your priority is to lower the cost of health care for all Americans,

you can.

The test is whether we are willing to give voice to our values and

explain the choices to Americans and give them an important opportunity to have a choice during defining moments like these. So

that is really what we are here to put to test.

Now, beginning today, this Committee has an opportunity to help

lead the Senate. There is a difference of opinion. It is an honest difference of opinion and I really look forward to exploring it here. If

somebody can prove to me that the things that a lot of experts say

that are negative won’t happen, terrific. But for the moment, we

have strong evidence that Association Health Plans just don’t live

up to their billing.

We have expert testimony that suggests that they will cause premiums to rise for the vast majority of small businesses and their

employees, that it will offer no help to many of the uninsured. It

actually might even raise the uninsured rolls, according to some

analyses, by an additional one million people, and in many cases

will erode the benefits and consumer protections that are currently

existing in the regulation of health insurance products and leave

consumers at risk for unpaid claims as the result of plan failures,

insolvency, or even fraud.

Now, I am not alone in believing this. That is why over 1,300 national and local organizations have spoken out against AHPs. It is

nearly impossible to find an Attorney General, Governor, or insurance commissioner of either party—either party—that has not gone

on record in opposition to these plans. Even our U.S. Secretary of

Health and Human Services Mike Leavitt wrote a letter to Congress encouraging us to bypass this ill-conceived plan when he was

Governor of Utah.

Now, if you truly want to solve the small business health care

crisis, and if we really want to engage in a dialog of alternatives

for lowering the costs and covering the uninsured, then I welcome

a vigorous discussion about not only AHPs, but about all these

other ideas that have been advanced. Let us not make this just a

one-topic discussion. Let us not make this a one-plan possibility.

Let us really examine, with the same kind of openness we approached the Bolton nomination yesterday, and talk about what

the possibilities are. It is my hope that we can draft legislation—

I am drafting some now—that would provide a more complete picture of how we can proceed to do this.

7

But the time to act is now. I hope we will find a real solution,

and I welcome the testimony that we are about to hear and the effort to do that.

Chair SNOWE. Thank you, Senator Kerry.

Senator Bond, who was my predecessor as chair of this Committee and who began this effort, I welcome you, Senator Bond.

OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S.

BOND, A UNITED STATES SENATOR FROM THE STATE OF

MISSOURI

Senator BOND. Thank you, Madam Chair. It is good to be back.

I see a lot of friendly faces again.

We are talking about problems that are very important to small

businesses across this country. When I first came on this Committee, small businesses were primarily concerned about excessive

regulation and excessive taxation. I would like to think that this

Committee, on a bipartisan basis, moved and moved effectively to

deal with those problems, and we have made significant progress.

We are delighted to have Administer Barreto here, who continues

that fight.

But now, as I go around and I talk to small businesses, the one

thing they tell me is they are concerned about the cost of health

insurance premiums, and that is why we also are delighted to have

Secretary Chao here, because I believe that she is going to be able

in her testimony to debunk some of the myths that have been put

forth about Association Health Plans.

There is no question that with approximately 45 million uninsured Americans, expanding access to quality, affordable health

care must be a top priority for this Senate. Now, I was here back

in 1993 and 1994 when they ran an idea for national health care

up the flagpole. You know, they couldn’t even get 50 people to salute that one, because when you looked at it and you found that

raising taxes to put more burdens on small business, and supposedly to give them a break on their health insurance, was no solution whatsoever.

We know that the cost explosion the insurance companies are imposing on small businesses and how small business owners are

finding it virtually impossible to provide the health care coverage

that they, as well as other employees, need, we need to have better

solutions.

One solution—and there is no easy, simple solution to this—but

one solution has been to expand community health centers, and I

have been proud to work on expanding community health centers,

which do provide access on a very affordable basis to locally controlled primary health care entities. But we are now today going

to talk about something that would give small businesses the opportunity to provide for themselves and their employees a solution

to the health care cost problems that knocks 25 to 27 million small

business owners and their dependents out of health insurance.

Small businesses cannot compete with the kind of health care

plans that corporations and unions provide for their employees.

Those people who get up on their high horses and say, well, the

insurance regulators and the Attorneys General say they won’t

work. They are wrong. AHPs will work. Do you know why they

8

work? Because they provide a broad basis of employees, a large

pool, not only that provides better management of risk, it provides

administrative savings to the small businesses. We are talking

about giving small businesses the same tools that large corporations and large unions have.

AHPs are not a new idea. They have been talked about and bandied about and compromised for almost a decade. During that period, what was once thought to be a manageable problem has become the crisis that we had today. Had we passed AHP legislation

when it was first introduced, when people like my colleagues, Senator Talent and Senator Snowe, were first talking about it, we

would not be seeing the problems we see today for small business.

Yes, as a former Governor, I want to see State solutions where

they work. But when you have national small businesses competing

with corporations that are national in scope in the insurance market which is national in scope, then we know we have to have a

national solution.

The principle underpinning AHPs is simple, the same principle

that makes it cheaper to buy your soda by the case instead of by

individual cans. Bulk purchasing is why large companies and

unions can get better rates for their employees than small businesses and it is about time that we bring Fortune 500-style health

benefits to the Nation’s main street small businesses and their employees.

I commend Senator Snowe for taking the lead and using this position to advance the number one health care priority. With the

support of President Bush, the Department of Labor, Small Business Administration, and over 100 small business groups, I hope

this bill will move quickly. For the sake of small businesses

throughout the country, their employees, and their families, we

must pass AHP legislation.

I thank Chair Snowe and Senator Talent for their leadership,

dedication, and commitment on behalf of small business. I look forward to working with you, Madam Chair, to help pass Association

Health Plans in this session of the Senate.

[The prepared statement of Senator Bond follows:]

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Chair SNOWE. Thank you, Senator Bond. I am looking forward to

it, as well.

Senator Landrieu.

OPENING STATEMENT OF THE HONORABLE MARY L.

LANDRIEU, A UNITED STATES SENATOR FROM LOUISIANA

Senator LANDRIEU. Thank you, Madam Chair. I know you are

anxious to get to the panel, so I am going to submit my full statement for the record, but I just wanted to make a very brief opening

comment thanking you for your hard work. This has been a very

difficult issue that you and I have worked diligently over the last

couple of years. I thank Senator Kerry for his leadership and work

in reaching out to small businesses in our country.

I can only add this morning that the small businesses in our

State are looking for relief. Ninety-seven percent of the people employed in my State are employed by businesses under 500 people.

Health insurance prices are too high; are making them uncompetitive, and are losing jobs. So a solution needs to be found.

I think the solution, Madam Chair, that you have put forward

has a great deal of merit. As you know, I have worked very closely

with you as we have developed a lot of the ideas behind the bill.

But I am still concerned about cherry-picking, that if not addressed

completely in our effort could be the undoing of what we are actually trying to do and make the health crisis in our country worse

instead of better.

In addition to cherry-picking, Madam Chair, there are a few

other vulnerabilities I see in the plan that has been laid forward

that I would like to pursue in the line of questioning.

Finally, I want to mention that the Durbin-Lincoln proposal

called Small Employer Health Benefit Plan of 2005 is a different

model, but I think it has a lot of promise. It tries to do and meet

the same principles, giving options, more affordable options for

small business.

While I would agree that the proposal before us should be given

a lot of attention, there are perhaps other methods of getting to the

same end, which is giving needed relief to small business. So I will

look forward to this panel.

Thank you, Madam Chair.

[The prepared statement of Senator Landrieu follows:]

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Chair SNOWE. Thank you.

An important Member of this Committee, Senator Burns.

OPENING STATEMENT OF THE HONORABLE CONRAD R.

BURNS, A UNITED STATES SENATOR FROM THE STATE OF

MONTANA

Senator BURNS. Thank you, Madam Chair, and I welcome my

good friend from Montana this morning. I am looking forward to

his testimony. I have a prepared statement. I would just like to

make a couple of points, though.

I think ever since I have been on this Committee, going way back

to when Senator Bumpers was Chairman way back in the 1990s,

we were talking about health care, and we are still talking about

it today. Senator Pryor, you have big shoes to fill on this Committee. And we accomplished a lot of things during that Committee, so you have got big shoes.

But this issue comes up, and as you get comments from your

State here in Washington and when you are back in the State and

you have conversations, no matter what the event is, it seems like

it goes from conversational chatter to screaming about doing something about the affordability and the accessibility to health care.

And, of course, insurance premiums always come up in the series.

So I held a series of roundtables in the State on this and asked

what the possible solutions were.

I was a small businessman. It wasn’t planned to be that way, but

that is the way it was. That was a long time ago, and even back

then, we bought insurance for our employees, but Phyllis and I

chose not to buy any on ourselves. So even back then, the concern

of cost was very real.

It is tremendous—the reason for the cost in health care, we have

made tremendous technological advances and we all share in those

costs and they come at a price.

Now, I know there has been a lot of discussion on AHPs. It has

been very contentious to some folks. And, of course, I have always

had some reservation about it. I want to make sure I want to know

what the role of the Federal Government should be. Should we be

making decisions here in Washington, DC for people in Montana?

I don’t know. We pass a lot of legislation that one size fits all, and

sometimes it doesn’t and so we have some problems with that.

With that said, I firmly believe that perfection should not be the

enemy of the good. When health care costs spiral out of control, as

they have done in these recent years, the American public needs

relief, and one way to address this issue is through Congressional

action. It may be the only action that we have to take.

I know this. The Chair of this Committee, ever since I have been

in the Senate and ever since she has been here, has worked tirelessly in health care issues and I applaud her for her work, and

I plan on working with her. I am not a co-sponsor yet of this piece

of legislation, but I think maybe it is narrowing down. We are coming to the choke point where we may have to act. And, just like

I said, I have reservations about that, but nonetheless, small business cries out right now. Their ability to expand, provide jobs and

economic growth is being stifled by this issue of high costs of

health care premiums and accessibility to those plans.

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I look forward to the testimony. Madam Chair, congratulations

for taking this on. It is a monumental task, but I believe that you

are up for it and I thank you.

Chair SNOWE. Thank you.

Senator BURNS. I will make my formal statement a part of the

record.

[The prepared statement of Senator Burns follows:]

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Chair SNOWE. Thank you very much, Senator Burns. I appreciate

your willingness to work through some of these issues and for your

comments and perspective on this important issue for small businesses. Thank you.

Senator Pryor.

OPENING STATEMENT OF THE HONORABLE MARK PRYOR,

A UNITED STATES SENATOR FROM THE STATE OF ARKANSAS

Senator PRYOR. Thank you, Madam Chair. I have a statement for

the record and I don’t want to take any more of the Committee’s

time. Thank you.

[The prepared statement of Senator Pryor follows:]

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Chair SNOWE. It will be incorporated in the record, without objection.

Senator Isakson, welcome.

OPENING STATEMENT OF HON. JOHNNY ISAKSON,

A UNITED STATES SENATOR FROM THE STATE OF GEORGIA

Senator ISAKSON. Thank you very much, Madam Chair. I, too,

will be brief, but I do want to tell you where I am coming from.

Prior to my election to the U.S. Congress in 1999, I ran a residential real estate brokerage company. It had 200 employees and

900 independent contractors. The employees, I could provide with

group medical insurance by virtue of ERISA. They paid part, I paid

part as the operator of the company.

But to the 800 to 900 independent contractors, by law, I could

not provide them with benefits because of the IRS test on independent contractors, which so many small businesses deal with in

construction and real estate and consulting and education and so

many other areas. Of those 900 people that worked for me and produced the sales that produced the revenue that paid the taxes in

support of this country, many were second or third career, single,

divorced, or widowed women or individual single men who could

not literally at that time—and this was 6 years ago—buy competitively in the marketplace health insurance. I tried as hard as I

could without violating the IRS code to direct them wherever I

could to be able to buy insurance, which was generally terribly excessive if even accessible.

So one of the reasons I am so proud of your effort and that of

Senator Talent is that you are filling probably the largest—or attempting to fill probably the largest single void that exists out

there in small business, which is part of the most productive part

of our economy. We have a crisis and these individuals have a crisis. Your Association Health Plan approach is a way to help fill

that void and give them accessibility and some semblance of affordability by being able to pool together that, quite frankly for those

individuals is just almost not available today, and I want to thank

you and Senator Talent for your effort.

Chair SNOWE. Thank you very much, Senator Isakson, for offering that view and insight into your experience. I appreciate that.

Senator Cornyn, thank you.

OPENING STATEMENT OF THE HONORABLE JOHN CORNYN,

A UNITED STATES SENATOR FROM TEXAS

Senator CORNYN. Thank you, Chair Snowe. It is good to be a new

Member of this Committee. You and I have worked together as fellow members of our party’s task force on the health care costs and

the uninsured, and I think we all recognize that there is no more

pressing issue confronting America today than dealing with health

care issues—cost, access, and all the issues that follow from them.

I support the goals of Association Health Plans, trying to make

health insurance more affordable and more accessible. I also support other approaches that are designed to get us to those ultimate

goals, such as market reforms and State mandates on health insurance coverage which make it unaffordable to many individuals. I

think we made some good headway in 2003 with the Medicare

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Modernization Act when we created Health Savings Accounts, and

I think they offer a lot of potential for individuals and employers

to increase access and to manage health care costs. It is going to

require some additional transparency by health care providers so

consumers can actually make good choices and compare prices in

a way that I think has great promise to bring costs down and increase access to health care.

I, along with Senator Bond, agree that FQHCs, Federally Qualified Health Centers, are an important part of the solution.

Another area that we have failed to act on in the Senate is medical liability reform and the defensive medicine that is attendant

to our current medical liability crisis in the country, driving up

costs in a way that prevent access to good quality care. In my own

State, 100 out of our 254 counties could not offer an obstetrician,

for example, to a woman who wanted to deliver a baby before we

passed medical liability reform on the State level. And in high-risk

medical specialties like neurosurgery and emergency room medicine, it was simply impossible to recruit qualified physicians to

come work in those counties because of the medical liability situation.

I hope to help contribute to this debate, because I think it is one

of the most compelling issues confronting our country today. Our

ability to compete and the ability of small employers, as has already been noted, to create jobs for the American people is dependent on our ability to provide employees with affordable, quality

healthcare.

Thank you for convening this hearing, and I look forward to

working with you and the other Committee Members.

Chair SNOWE. Thank you. We have a great line-up of newly elected Members on this Committee with Senator Isakson, Senator

Cornyn, and Senator Thune. Thank you.

OPENING STATEMENT OF THE HONORABLE JOHN THUNE,

A UNITED STATES SENATOR FROM THE STATE OF SOUTH

DAKOTA

Senator THUNE. Thank you, Madam Chair and Senator Kerry,

for holding this important hearing. I also want to thank Secretary

Chao and Administrator Barreto for being here, as well as the

other panelists we are going to hear from.

This is an incredibly important issue to the economy. It is clearly

the one that I think, as you travel across the country and in my

State of South Dakota, hear as much about if not more than anything else, maybe with the exception now being the cost of energy.

But the cost of health care is enormously important, and again, it

is, of the 45 million people who aren’t covered in this country, half

of them work for, or their family members do, for small businesses.

I think the thing that gets missed in this debate is the people

who work for larger companies, for big businesses, they have the

benefit of economies of scale and that is not something that small

businesses can benefit from. What I think this proposal simply

tries to do is provide that group purchasing power, those economies

of scale that are available to larger businesses to help drive down

costs for small businesses.

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We have got 88,000 uninsured people in South Dakota. We have

got 71,000 small businesses. Almost every business in South Dakota is, by definition, a small business. And so this is really an

issue crying out for a solution. There have been a lot of—this issue

has been kicking around for a long time. Jim Talent chaired the

Small Business Committee in the House. I was a Member of that

Committee. We voted this out of the House I think on more than

one occasion when I was a Member of the House, 5-, 6-, 7-, 8-years

ago, and we still haven’t seen any final action on this, and furthermore, any effort, I think, on the Senate to get it on the floor for

a vote.

But in any case, it is time for this hearing. It is time for this

issue to be addressed, and frankly, I am hopeful that we will be

able to make progress on meaningful solutions to the cost of health

care in this country. And whether or not you like Association

Health Plans as a solution, I think it is an issue that has been debated and discussed around here. It is one that clearly has, I think,

tremendous potential to help lower costs by giving small businesses

access to group purchasing.

I would certainly hope that this Committee could work constructively to get a bill out of here and to have a debate on the floor

and then hopefully to do something that, in my view, at least

would give small businesses out there another option. This is, with

the appropriate safeguards for solvency and with the issues that

have been addressed, I think, in this legislation with regard to giving our small businesses more choices, it is an approach whose

time has come.

So thank you, Madam Chair, for conducting the hearing. I look

forward to hearing from the witnesses.

Chair SNOWE. Thank you, Senator Thune.

Senator Talent, who is not a Member of this Committee, but we

welcome him because he chaired the Small Business Committee in

the House previously and was a leader and continues to be a leader

on this subject and certainly has a very important point of view.

So Senator Talent, thank you.

STATEMENT OF THE HONORABLE JAMES M. TALENT,

A UNITED STATES SENATOR FROM THE STATE OF MISSOURI

Senator TALENT. I thank you, Madam Chair, and I want to thank

the Ranking Member also, both for holding this hearing, for your

leadership, for allowing me to come here and make a brief statement, and I understand that Senator Durbin and Senator Lincoln

are going to do the same thing. I have chaired a Committee and

I know that sometimes you feel like the Members not on a Committee who have an interest in the hearing are trying to hijack the

Committee, and I think you have got a useful compromise, just allowing us to come and make a few statements.

I do feel strongly about this because it is so important, and we

all know that. I guess that is one thing we agree on, Senator Kerry.

In fact, I think we probably agree on a lot of things.

All the Association Health Plan idea does is allow small employers to do what large employers have been doing for many, many

years. That is really all it does. And if you think about it, everybody in the United States, or virtually everybody who has health

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insurance, and there are a lot of people, unfortunately, who don’t,

but just about everybody who does has it as part of a big pool, a

big national pool. In some cases it is private, like the big Fortune

500 companies or the labor union plans. It may be public, you

know, Medicare and Medicaid, retired Federal employees, current

Federal employees. They are all part of a big pool because there are

economies of scale to insuring large pools. I mean, it is a matter

of common sense. It costs less from an overhead and administrative

standpoint to insure a pool of 300,000 people than it does a pool

of 30 people, much less three people.

I don’t understand why small businesspeople shouldn’t have the

same opportunity. When we came up with this idea, and the Chair

has been working on it for a long time, too, one of the things I liked

about it is I thought it ought to be attractive to everybody. It is

fully within the philosophical mainstream of both parties and it

really was in the House. We put this bill out of our Committee with

strong support by Members on both sides of the aisle and it has

passed in the House on strong bipartisan votes on a number of occasions.

It empowers the little guy—I mean, if you want to think about

it this way, it empowers the little guy and gal against the big insurance companies that currently dominate this market. It is a lot

like the co-ops that grew out of the agricultural movements in the

populus parts of the country. It just empowers people to do something on their own to reduce costs for themselves.

It has a big advantage in these days of big deficits. It doesn’t cost

anything, if you read about a cost to associations and health plans,

other than the money the Secretary of Labor may need to hire a

few more people to regulate it, which is a very small amount of

money. The only other cost that anybody will ever posit for this is

the cost that happens when employers who haven’t been insuring

people in the past buy health insurance for them, because then

money that they had been paying in wages, which are taxable, goes

to a fringe benefit, which is not taxable. So the cost is the Government loses revenue because people get health insurance. That is a

cost I don’t mind. That means the number of uninsured are going

down in the country. That is the only cost to Association Health

Plans.

One of the reasons I thought it wouldn’t be so controversial is

there is really no down side to it. We set them up. If we are wrong

and people don’t want them, they just won’t buy them. We are not

saying to insurance companies, you can’t offer people insurance on

a small group basis. Go ahead and do it. States can regulate that

just like they are doing now.

We are saying small business people ought to have another option, and I think they will use that option, and let me just say, the

argument that is offered, and I have people come up to me with

this argument that we shouldn’t do this because only the employers

who have healthy people will want to go into the Association

Health Plan, that the employers who have sick people won’t be able

to go into the Association Health Plans. Madam Chair, as you

know, that is not allowed under the bill. The bill requires that

these associations—it is must offer, must carry.

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It is not possible. Think about how this will work. My brother

has a small restaurant. If this were allowed, he might join the restaurant association to get the health insurance. They don’t know

about his employees. His employees could change overnight. How

are they going to exclude people because they have sick employees

working for them?

In fact, I think the opposite is true. It is precisely the employer

who has the sickest workforce who is the most desperately looking

for an alternative. Now, they are going to go into these Association

Health Plans so fast, if you blink, you are going to miss them. And

I may just say, it is ironic when people raise that argument,

Madam Chair, because we all know, because we all deal with constituents, it is the insurance companies now who are cherry-picking. They are the ones who are canceling insurance because somebody files a claim. They are the ones who are jacking up rates because somebody files a claim. It happens every day. It won’t happen with Association Health Plans.

Just very briefly—I am not going to punish you for your hospitality by going on forever, Madam Chair——

[Laughter.]

Senator TALENT [continuing.] It has been raised that it won’t be

regulated by the States. We have talked about this. These are national pools. Believe me, I will say this to the State regulators, if

there were some way to have national pools regulated by the

States, I would do it. Just to get you on board, I would do it, but

you can’t. You can’t have 50 different sets of regulations for national pools. That is why we don’t allow it for big companies, for

labor union plans, because you can’t—you just physically can’t do

it.

I supported this, and originally we passed it—you remember,

Madam Chair—as part of a patients’ bill of rights, which was fine

with me. I begged for people to pass it with this as part of it and

it got held up in the Senate.

Finally, I just want to say one other thing, Madam Chair, and

there are lots of ideas out there and I am certainly very open to

them. What I hope we don’t do is let Association Health Plans get

sucked into the polarizing ideological battles about the direction of

health care. One of the things I like about Association Health

Plans, it is not a global change in the direction of our health care

policy. You may have one side that wants a national single-payer

system or a government-run system. You have another side that

really would like to eliminate the employer-based system and pass

all the tax deductions down to individuals and have them go out

and buy their own health insurance, and those are two very respected points of view. I don’t begrudge anybody for having that

point of view.

But one of the genius of this is, it is not a revolutionary change

on an ideological level in health care. It is a perfection of the employer-based system. It is a practical solution to the practical problems people confront, and I think that is what the American people

want us to do. I don’t think they are going to let us go into some

whole new world for health care, but I do think they want us to

help them help themselves where we can.

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That is what this is all about, and I am just grateful to you.

Every time I hear you talk about this, Madam Chair, I become encouraged because I think you have really got the idea behind it.

Thank you for letting me trespass and the time. I appreciate it.

Chair SNOWE. I appreciate that. Thank you very much.

Senator KERRY. Madam Chair.

Chair SNOWE. Yes.

Senator KERRY. Just before we go to this, I just want to say to

Senator Talent, first of all, I want to assure him and the other

Members of the Committee, and I hope we can work in the way

that this Committee has normally worked, that there is no ideological predetermination on this side as to how we do this, number

one.

Number two, the split is not between a quote: Federalized, Government-paid, one-size-fits-all versus AHPs—that is not at all what

we are talking about and I want to make that clear. The alternative I am talking about, among many alternatives, incidentally,

is a completely market-based, not-Government-paid-for plan, but

incentivized system where people choose to get in it or don’t choose

to get in it. And I think it is very important that we approach this

with a view to trying to find the most effective means of doing it.

In fairness, however, when the Senator says this is so simple,

and all we are trying to do is allow people to do this banding together, it is not that simple. I am for people banding together. I

am for economies of scale. Yes, it is important that people be able

to come in and find those market-based economies of scale. The

problem is that that is not all that it does. The fact is that you are

allowed to band together today under the law. Nothing stops you

from banding together today under the law. The question is, in

what form.

And when you say, must carry, must offer, the fact is that that

is only if you are a member of the association. Who gets into the

association? They have the power to say you don’t join our association. And that is where some—so there are issues here.

I want to work in good faith with the Senator. I want to work

to try to get rid of those, and if we do, we ought to be able to find

a common ground here where we can help deal with the problem

of small business. But we can’t be false in the packaging and say

this is all it does or this is as simple as it is when there are serious

issues of enforcement and structure and defining who gets what

coverage and how is it enforced and so forth.

Chair SNOWE. I just want to make a point on that. But under

this Association Health Plan, they have to offer it to all their members, so there is no exclusivity——

Senator KERRY. But who gets to be a member?

Chair SNOWE. Well——

Senator KERRY. That is a major issue. You can cherry-pick in

who becomes your members. Sure, you can.

Chair SNOWE. To all of its membership. You can’t.

Senator KERRY. You can not let somebody be a member, so we

will get at it.

Chair SNOWE. OK. We will.

Senator TALENT. I thank you again, and I thank Senator Kerry.

Chair SNOWE. We will look at legislative language.

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[Laughter.]

Chair SNOWE. Thank you.

And before I begin, I am pleased to submit for the record a statement by Senator Byrd, who is a co-sponsor of this legislation, and

so I ask unanimous consent that this statement be included in the

record. Without objection, it is so ordered. We are delighted to have

Senator Byrd as a co-sponsor.

[The prepared statement of Senator Byrd follows:]

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Chair SNOWE. So now it is your turn. We have a great team of

leaders in support of Association Health Plans and hopefully we

can talk about some of the issues that have been raised here today.

They are both extremely knowledgeable and have been champions

and advocates, and so Secretary Chao, let us begin. Thank you for

being here. Thank you for your patience. Thank you both.

STATEMENT OF HON. ELAINE L. CHAO, SECRETARY,

U.S. DEPARTMENT OF LABOR

Secretary CHAO. Thank you, Madam Chair, and also Senator

Kerry, for the opportunity to be here to discuss Association Health

Plans. It has been very, very helpful for me and my staff to listen

to the opening statements.

Association Health Plans are indeed a key component of the

President’s plan to make quality affordable health care benefits

available to all Americans and I really want to commend your leadership on the health care needs of small business workers and their

families. President Bush strongly supports S. 406, the Small Business Health Fairness Act, and I look forward to continuing to work

with this Committee as the Senate considers this much-needed legislation.

Madam Chair, I do have a much longer statement which I will

submit for the record, and if I could, I will just summarize the key

points.

Today, as we have heard, there are about 45 million Americans

who lack health care insurance. Clearly, all of us care about how

to solve the plight of these Americans. Sixty percent of the workers

are employed by small businesses and their families, and small

businesses, as we have heard, are only half as likely to offer health

benefits as large businesses, due in part to the high cost that they

face. A small business pays about 20 to 30 percent higher premiums than large organizations or labor unions.

The Small Business Health Fairness Act, S. 406, addresses this

problem by providing a level playing field for small businesses by

allowing them to join together through their trade or professional

associations. Small business owners and their employees will be

able to access the same economies of scale, negotiating clout, administrative efficiencies, and uniform regulations enjoyed by big

businesses and labor unions. AHPs will provide small businesses

with new health care coverage options and foster competition in the

small group insurance marketplace.

This bill will also reduce the vulnerability of small businesses to

health insurance scams by providing secure, affordable, quality

health benefits. Before an AHP can offer health benefits to a single

worker, the Department of Labor will have to certify that this organization meets the tough standards in this legislation.

Small business employers obtaining insurance through AHPs will

also enjoy significant premium reductions. According to CBO, the

average savings will be about 13 to 25 percent. Even more significantly, CBO estimates that about two million additional Americans

who are currently uninsured will be able to get coverage through

AHPs.

The Department of Labor’s role is one that we are very serious

about. The Department of Labor has extensive experience in reguVerDate 03-FEB-2003 13:14 Sep 06, 2005 Jkt 021830 PO 00000 Frm 00040 Fmt 6601 Sfmt 6601 D:\DOCS\21830.TXT SSC1 PsN: SSC1
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lating group health insurance and also in combatting insurance

fraud. The Department of Labor currently administers ERISA. This

Act covers approximately 2.5 million private employer-based, jobbased health plans covering 135 million workers, retirees, and their

families. Of these, about 300,000 plans are self-insured plans,

which means that they are exclusively regulated by the Department of Labor. These plans that the Department of Labor exclusively cover regulates about 78 million people.

ERISA has both civil and criminal enforcement authority to protect the benefits of workers in these plans, and in 2004, the Department reported about $3.1 billion in monetary recoveries from

our enforcement efforts on behalf of employee benefit health plans.

We have also had 121 criminal indictments. So our enforcement effort is strong and robust.

In addition, we have a nationwide network of benefits advisors

who answered roughly 160,000 inquiries from workers last year,

nearly 60 percent of which concern health plans.

Because of our responsibilities under the current law, the Department already performs many of the functions necessary to administer Association Health Plans and I am confident that we can

and will protect the workers who are participating in Association

Health Plans just as we currently protect the millions of workers

in other kinds of group health plans in large business and organized labor plans. The Department will allocate the resources necessary to carry out the certification and oversight responsibilities

of Association Health Plans, and we will do so with effective, efficient, and timely regulation and enforcement.

So in conclusion, AHPs will reduce the health coverage barriers

facing many small businesses. This bill will give them the tools to

pool risk, enjoy administrative savings on behalf of their workers,

and participation in nationwide health plans, and I ask that the

Senate take a serious look at the Association Health Plan legislation and give this much, much needed relief to small businesses.

Thank you.

[The prepared statement of Secretary Chao follows:]

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Chair SNOWE. Thank you, Secretary Chao.

Administrator Barreto.

STATEMENT OF HON. HECTOR V. BARRETO,

ADMINISTRATOR, U.S. SMALL BUSINESS ADMINISTRATION

Mr. BARRETO. Good morning, Chair Snowe, Ranking Member

Kerry, and distinguished Members of the Committee. Thank you

for inviting me here to discuss with you a solution to the current

health care crisis facing America’s small businesses.

I also want to thank you, Senator Snowe, for championing AHP

legislation in the Senate. I echo Secretary Chao in supporting S.

406, the Small Business Health Fairness Act, and I look forward

to continuing to work with you as the Senate considers this much

needed legislation.

The biggest concern for small business owners is their inability

to access quality, affordable health care. As Administrator of the

SBA, I see this every day as I travel throughout the country. Regardless of the discussion topic, small business owners inevitably

focus the conversation on health care. They ask me what we in

Washington can do to make health care more affordable for them,

and I hear from them time and time again that their inability to

access affordable quality health care is their biggest concern.

Although businesses large and small have experienced rises in

health insurance premiums disproportionate to inflation, the smallest businesses have been particularly hard hit. In 2004, premiums

for companies with 3 to 24 employees grew 13.6 percent. I think

this was also illustrated in the chart that Senator Snowe shared

with us at the beginning of her presentation.

The administrative cost involved with insuring employees of

small businesses pose a major stumbling block. In 2003, SBA’s Office of Advocacy examined 19 health care plans in two States. It

determined that administrative expenses for insurers of small

group health plans range from 33 to 37 percent of their claims,

versus 5 to 11 percent for larger self-insured plans. That is a difference of 22 to 33 percent between large businesses and small

businesses, and that was one of the problems that has already been

discussed and talked about.

Many small business owners have been forced to stop offering insurance coverage altogether. According to the 2004 Kaiser Family

Survey, and I believe Senator Snowe talked about this, as well, the

smallest firms are the least likely to offer health insurance. Only

52 percent of firms between 3 and 9 workers offer coverage, compared to 74 percent of firms with 10 to 24 workers, and 87 percent

of the firms with 25 to 49 workers.

When small companies do offer health benefits, the prospect of

picking between plans is a pipe dream and employees only hope

they can afford the higher premiums they face simply for working

at a small business. All in all, it is a terrible way to treat people

who are keeping our economy afloat.

Given the staggering costs facing small businesses, their employees are far less likely to have health coverage. The Department of

Labor estimates show that people and families headed by self-employed and small firm workers make up 50 percent of all uninsured

Americans.

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The President wants all Americans to have access to high-quality

affordable health care. This is why the President supports lowering

the barriers on Association Health Plans. Flourishing AHPs will

expand access to health benefits to millions of uninsured Americans. Since small employers are forced to seek health insurance for

their workers as separate entities, it is more expensive and often

impossible for these firms to purchase insurance coverage. AHPs

would allow small businesses to pool their resources together

across State lines, affording them the benefits of uniform Federal

regulation, greater economies of scale, and flexibility to design coverage options that large firms and labor unions currently enjoy.

Today, small businesses that choose to pool their resources under

current law must instead cope with the requirements of 50 different State insurance regulators and State mandates rendering

AHPs in their current State cost prohibitive. Legislation to enhance

AHPs would have allowed small businesses participating in AHPs

to save an average of somewhere between 9 to 25 percent of the

cost of their health insurance premiums. This is according to a

study by the Congressional Budget Office. Three-hundred-and-thirty-thousand people without health insurance would have been covered had Congress passed that legislation.

Lowering the cost of health insurance will also provide small

businesses with better opportunities to recruit and retain the employees they need to grow and prosper. The availability and quality

of health care benefits is often a deal breaker for Americans seeking employment. Strengthening AHPs will even the playing field

for small businesses by allowing them to offer health benefit plans

similar to those that are offered by their larger competitors.

I again want to thank Secretary Chao for the leadership that she

and the Department of Labor have shown on AHPs. Her commitment to helping small business owners overcome their biggest hurdle has been admirable. I hope that Secretary Chao and I, on behalf of President Bush, can work closely with you and all the Senators this year so that small businesses and the 57 million Americans who work for them can receive access to better, more affordable health care through the strengthening of AHPs.

Until we come up with an affordable solution that crosses State

lines, I don’t think that we can solve this problem for small businesses, but we need to act now. Continuing to do nothing to address this crisis is unacceptable for millions of small business owners struggling to make ends meet in the face of ever-increasing

costs.

Thank you, Chair Snowe, for the opportunity to speak to you

today and the Committee about this very important topic. I now

look forward to answering your questions.

[The prepared statement of Mr. Barreto follows:]

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Chair SNOWE. Thank you, Administrator Barreto.

Before I begin, Senator Lincoln, welcome. You are not a Member

of the Committee, but we welcome you and your contribution.

Thank you for being here. Do you want to make a statement? You

are welcome to if you—go right ahead.

STATEMENT OF THE HONORABLE BLANCHE LINCOLN,

A UNITED STATES SENATOR FROM THE STATE OF ARKANSAS

Senator LINCOLN. I want to thank you, Madam Chair, for the opportunity to be here and your graciousness in allowing me to come

and be a part of your conversation.

I have a special interest in this issue, as do you. I know how

hard you worked for the solutions that we need to find here, and

with the small business health care crisis that exists in our State

and in your State, which have very similar demographics, it is undoubtedly our number one issue in Arkansas when I am traveling

through the State and hearing from people.

I am very pleased with your intent on looking at what the solutions can be for this problem. I am looking forward to working with

you, and I will reserve my time to be able to ask a few questions.

Thank you, Madam Chair.

Chair SNOWE. Thank you, Senator Lincoln. Thank you for being

here.

Let us begin, because obviously, we hear a number of concerns,

the ones that have been repeated over time. I would like to systematically address them.

I will begin with you, Secretary Chao, because we have heard,

well, it is going to eliminate consumer protections under this legislation and this approach because the Department of Labor will not

be able to provide the oversight for these Association Health Plans.

It won’t have the repeated circumstances of the MEWAs, the multiple-employer arrangements that subjected a lot of small businesses to fraud.

We have established entirely different conditions in this legislation. It is a bona fide organization. They cannot discriminate

against any of their members. They have to offer it to all of their

members. They have to have been in existence for 3 years for other

purposes other than health insurance. We provide reserves, solvency requirements, stop loss, notification, resources. In fact, CBO

underscores what needs to be done in making sure the Department

of Labor has at least 150 people to oversee this, and I would like

your comments on it.

But I would like to hear from you this morning, Secretary Chao,

what has been your experience as Secretary of Labor with respect

to providing oversight in this instance compared to the instances

for corporations and unions, because obviously we don’t hear the

similar complaints. I don’t hear any frustrations, concerns about

the fact that corporations or unions are offering less generous

plans, that they are cherry-picking, they are subjecting their members, employees, to discriminatory behavior. So we don’t hear the

same complaints and concerns about these plans that insure 78

million Americans, and yet what we are now hearing is that all of

these complaints are going to be waged against small businesses if

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we allow them to engage in Association Health Plans on a national

basis.

So would you begin, Secretary Chao, and tell us, first of all, why

don’t we hear similar complaints about corporations and unions?

Why doesn’t it occur under those circumstances? And if it doesn’t,

then why are there concerns expressed about Association Health

Plans for small businesses and why is there this disparate approach to these entities?

Secretary CHAO. Well, you are absolutely right. The Department

of Labor currently oversees about 2.5 million private job-based

health care plans, and again, that covers 135 million people. About

300,000 plans are regulated exclusively by the Department of

Labor, and most of that is with large businesses that are self-insured, and a lot of labor union organizations, that are again selfinsured. We also have a nationwide network of benefits advisors.

We field about 160,000 inquiries a year. Over 60 percent of those

are health care inquiries.

So we feel very confident in our ability to regulate under the new

AHP bill, should it be passed, the responsibilities and the authorities it would give to us.

On the issue of State protections, as you well know, in S. 406,

there will be consumer protection provisions that will still be regulated by individual States. Those will still remain.

And in terms of concerns about health fraud, your bill would

strengthen protections against unscrupulous health plan organizations, because the Department of Labor will be responsible for regulating whether an AHP can come into existence or not, and the

bill has very strong consumer protection provisions at both the

State and Federal level, as well as solvency requirements at the

State and Federal level.

Chair SNOWE. Administrator Barreto, would you answer this

question, as well, because it is mystifying to me. We have an explicit prohibition in this legislation against cherry-picking. We have

language in here that does not condition membership, such as

dues, payments, coverage, on the basis of health status-related factors with respect to the employees of its members or affiliated

members or dependents. It does not condition such dues or payments on the basis of group health plan participation. It would be

subject to the HIPAA requirements, some preexisting status. And

the fact is, it is probably far superior in a lot of respects.

So can you address the issue of cherry-picking, because again, we

are talking about a dual standard here. One, corporations and

unions. We don’t hear those complaints. No one is saying, let us

put them back in the State pool. We are not hearing that. We are

seeing, keep small businesses in the State pool and we will leave

them victims to the problems dealing with health insurance today,

which essentially is leaving small businesses and their employees

and their families uninsured or paying escalating prices beyond

comprehension. Frankly, from all my small business owners in

Maine, it is devastating. Maybe they get catastrophic coverage.

Can you address this issue, because somehow, we have to get to

the core of it. Obviously, none of us want to support adverse selection and cherry-picking, so if it is not happening with corporations

and unions, why would it happen under this circumstance? Is there

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something we are missing here? I mean, I just really want to know

because I can’t—we have been discussing this for several years now

and I have yet to understand how it would come about in this instance but it hasn’t come about with corporations and unions.

Mr. BARRETO. It is a great point. If what we mean by cherrypicking is that we are going to pick winners and losers, we are

going to choose which small businesses get health care and what

small businesses don’t get health care, I think Senator Talent

brought up a great point and I think what he is saying is that is

happening right now.

You know, there was a time—I remember when I was in California leading a business association, there were 20 major insurance companies offering health care coverage to small businesses,

and there were a lot of smaller players that were actually from outside of California that were offering it, as well. Today, small businesses are lucky if they have four or five choices. Oftentimes, those

insurance plans are almost exactly alike. There is not a lot of difference between these insurance plans. Oftentimes, the premiums

are exactly alike.

Sometimes, insurance companies decide to quote on a piece of

business, on a small business. Some years, they don’t decide, and

they don’t tell you why. Some years, they raise your insurance premiums whether you use the insurance coverage or not. That is why

small businesses are screaming. They are saying, this problem gets

worse every single year. It doesn’t matter if I use it or not. I know

I am going to get a double-digit increase.

Also, the things that small businesses can’t control, they can’t

control what is inside their insurance plan because of the State

mandates. They can’t control the administrative cost of those plans,

which keep going up higher and higher. They can’t control the cost

of small prescription drug benefits. They can’t control the cost that

doctors have to pay for malpractice insurance, which drives their

insurance premiums up and sometimes drives them out of the market, as well.

So the things that are keeping small businesses from participating. The cherry-picking that is happening and the reason there

are 45 million uninsured Americans, the reason the 60 percent of

people that don’t have health insurance work for a small business.

I mean is occurring right now, and I think what Senator Talent

was alluding to and you have alluded to, as well, is that what we

need to do is provide small businesses with more access, more

choice, more control, and that is what we believe Association

Health Plans will do.

Chair SNOWE. But I am trying to understand the difference between why it works well for corporations and unions, and we don’t

hear similar concerns or complaints or saying let us go back to the

old way, and the Department of Labor is doing a very effective, efficient job, has historically, and Secretary Chao has spoken to it,

about providing the aggressive oversight that is necessary, so we

don’t hear those complaints.

I don’t understand why it would be different for small businesses, and I think that that is really the challenge here, is to overcome that, because clearly, it seems to me, we ought to be able to

draft legislation in a way that addresses these concerns and satisfy

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the issues that have been raised. They are legitimate concerns. We

think we have addressed them. I keep adding more criteria and

standards and insurances to guard against any ability for these associations to be other than bona fide organizations for the purposes

in which they are intended and to offer this benefit to their members.

Mr. BARRETO. You are hitting a very important point, Senator

Snowe. You know, when a large corporation has 100,000 employees, or when the Federal Government has a million employees, or

when a union has tens of thousands of members, they have got

power. They have got clout. And if they don’t like what is happening in their insurance plan, they can move it, and there is a lot

more choice for them. They have a lot more control.

And some of these companies or organizations get so big that

they decide to self-insure themselves and the insurance company is

really just administering the claims. So there are options for them.

Small businesses don’t have those options. Small businesses have

take it or leave it. Here is the shelf plan. Here is what it costs if

we offer it to you this year, and if not, you are out of luck, and that

is the big problem and that is what we believe Association Health

Plans can go a long way to solving.

Chair SNOWE. Senator Kerry.

Senator KERRY. I hate to say it, but I think there is a lot of wishful thinking and we need to explore this. I have said to the Chair,

I really want to work with her closely and see if we can patch some

of these holes, but I think we have got to be honest about some of

the holes and not just gloss over them.

To that end, let me ask you, Secretary Chao, States currently

have protection mechanisms in place that limit how much and how

often premiums can increase. There is a right to an external review

of denied medical claims and direct access to emergency care or

specialty care or consumer marketing protections. All of these

rights currently exist.

The public needs to know that these rights only exist at the

State level. There are no Federal premium protections, no Federal

patient protections. And as you read S. 406 and H.R. 525, these

comprehensive protections will be eliminated.

Now, let me just focus on one of these rights of the many, protections for patients when an insurance company denies their medical

claim. Right now, 44 States require insurers to provide an external

review for enrollees. A centerpiece of the AHP is to exempt insurance plans from State protections. So if AHPs were enacted, would

patients have the right to an external review, external review when

an insurer denies a medical claim? Can you show me how that

right is guaranteed and enforced?

Secretary CHAO. Well, first of all, Senator, you are only talking

about the fully-insured, which is only half of the——

Senator KERRY. Well, I am talking about people.

Secretary CHAO. No, if I——

Senator KERRY. It doesn’t matter whether it is half or——

Secretary CHAO. It makes a difference, because if it is a fully-insured AHP, it is largely regulated by the State. If it is a self-funded

plan, which many large companies, and many large labor unions

have, it is regulated by the Department of Labor.

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Senator KERRY. I understand that.

Secretary CHAO. So there are two different plans here and the

AHP proposal does not take away the external review State consumer protections at all.

Senator KERRY. Every interpretation of it says it does.

Secretary CHAO. Self-funded plans already——

Senator KERRY. So you would be willing to write into it—we can

patch that hole, in other words. You are willing to guarantee that

those rights of external review will be afforded, is that what I

hear?

Secretary CHAO. We are willing to address what concerns you

have, but there is a big difference between—right now, there is a

whole group of organizations, companies, labor union plans which

are not regulated by the States already——

Senator KERRY. I completely understand that. I understand that.

Secretary CHAO. So let us keep that in mind——

Senator KERRY. We will get to some of that——

Secretary CHAO [continuing]. ——because there is an inequity

here, an unfairness that the AHP proposal is trying to address.

Senator KERRY. Well, it doesn’t create a fairness if it takes away

rights that people currently have and need. Now, let me speak to

that for a minute. There is a letter from Professor Mila Kofman at

Georgetown University at the Health Policy Institute. I would like

to ask that it be put into the record.

Chair SNOWE. Without objection, so ordered.

[The information of Senator Kerry follows:]

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Senator KERRY. Let me just read from one component of it. There

are a lot of issues raised in it. But she writes to the Committee—

she incidentally addresses it to you, also, Madam Chair. She says,

‘‘In addition to an adverse impact on private health insurance

under the Federal legislation, many consumers would face greater

financial exposure when an AHP becomes insolvent. Since 2000, association insolvencies have left more than 66,000 workers and their

families and thousands of participating employers responsible for

$48 million in medical bills that should have been covered by the

AHPs. The Federal proposal would make things worse by replacing

State solvency standards with less-stringent Federal standards and

regulation. AHPs have a long history of financial instability. The

U.S. Department of Labor, which would regulate AHPs, has no experience in regulating the solvency of health plans. Inadequate

standards and an inexperienced regulator would mean that participating small businesses may be stuck with unpaid medical bills

when an AHP becomes bankrupt.’’ Could you address that?

Secretary CHAO. I certainly can. There is an assumption that

somehow a self-funded plan offers less generous benefits, but in reality, the record shows that self-funded plans, which are not regulated by the States, in fact, offer as good or better health plans, in

part because their cost is so much lower. So with lower costs, they

are able to offer more benefits.

Senator KERRY. But that is not my question. That is not even

what we are talking about.

Secretary CHAO. Yes, we are. We are, because we are talking

about solvency and we are talking about plans and our ability to

administer these. The solvency requirements put into AHPs will, in

fact, strengthen the ability of the department to protect these

plans, because right now, there are no Federal regulations on certification or solvency, and with AHPs, there will be. So that will

be an added——

Senator KERRY. You are saying to this Committee that in this

legislation as written, the Federal solvency standards are, in fact,

stronger than State standards? That is your testimony?

Secretary CHAO. There will be——

Senator KERRY. No, my question is, are you saying that they are

stronger now, because that is not the reading of——

Secretary CHAO. It varies from State to State, obviously——

Senator KERRY. Correct, and there is no Federal——

Secretary CHAO [continuing]. And overall, the new protections

put into the AHPs will require the Department of Labor to certify

the solvencies of new self-funded AHPs that are being set up.

Senator KERRY. According to what standards?

Secretary CHAO. The AHP legislation sets up a revenue pool that

will provide a reservoir of indemnification insurance to AHPs.

AHPs will not be offered except——

Senator KERRY. Don’t you think, Madam Secretary, that it is important for us to guarantee that there are strong solvency standards, Federal standards, with respect to who may be left holding

the bag?

Secretary CHAO. Oh, absolutely, and I think the Federal——

Senator KERRY. And if they are not there and it is not adequate,

that is another hole we ought to plug, is that correct?

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Secretary CHAO. I think the Federal provisions for solvency

under the AHP legislation will be quite strong.

Senator KERRY. Well, quite strong may not be as strong as current State standards.

Let me go to the second paragraph of what she said, another

paragraph.

Secretary CHAO. May I just address that, please?

Senator KERRY. Sure.

Secretary CHAO. A fully-insured AHP will be subject to the solvency requirements of State law. There is no change from that,

from current law. A self-funded AHP is both accountable under

ERISA and subject to these new solvency rules. Self-insured plans

must make, under the legislation, detailed solvency requirements,

including actuarially determined reserves sufficient to meet claims,

additional cash reserves of up to $2 million, specific and aggregate

stop loss insurance to protect against unexpectedly high claims, indemnification insurance to insure that a terminating plan pays all

of its remaining claims, payment of an annual fee to a fund controlled by the Department of Labor to pay indemnity insurance

premiums, and the regulations will allow the Secretary to increase

these requirements, as necessary.

Senator KERRY. So you are in agreement with me that if there

is any discrepancy here with respect to State standards versus Federal, we ought to guarantee that we have the strong solvency

standards that are in here?

Secretary CHAO. That is the goal, yes, but you also have to have

balance. The overall goal is to be able to provide more insurance

on a nationwide basis, and if you are just going to graft whatever

is the State requirement onto the national Federal regulations,

that really wouldn’t work, either.

Senator KERRY. She goes on to say, ‘‘Finally, the AHP bill would

increase opportunities for health insurance scams, which have been

on the rise since 2000. Health insurance scams promoted through

associations have left over 200,000 policy holders with over $252

million in unpaid medical bills between 2000 and 2002. The bill

would put the U.S. Department of Labor in charge of an area that

is currently regulated by both the Federal Government and States,

and by putting DOL in charge, it would prohibit States from helping consumers.’’ Can you address that?

Secretary CHAO. Yes, I can. First of all, we are very concerned,

as everyone here is, about these scams. And, in fact, the best way

to fight these scams is to certify that these organizations are able

to offer health insurance. That is an added new protection which

is now in the Association Health Plans legislation.

In terms of the question as to Federal regulations, I wonder who

the writer thinks is regulating these health plans now? It is the

Department of Labor. So it is an incremental change for us in

terms of additional regulations. We already regulate over 300—actually, over 2.5 million health care plans, 300,000 of which are solely within the Department of Labor’s jurisdiction. And we have an

effective team of investigators and benefit advisors. So I think that

this is, again, an incremental increase as most of the regulatory

authorities we already have and we already exercise.

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Senator KERRY. I have a lot of questions. I know others have

questions, too. I want to perhaps come back to them, but can I just

ask you, at a hearing before the Health and Labor Committee in

1997, the then-Assistant Secretary of Labor in the Clinton Administration said that DOL did not have the resources to regulate

AHPs. She said then, and I quote her, ‘‘Based on our investigative

experience, we could review each pension plan once in 170 years,

and if you include health plans, once in 300 years. An infrastructure adequate to handle the new responsibilities replicating the

functions of 50 State insurance commissioners simply doesn’t

exist.’’

What has changed, and there is nothing in the budget that I

have seen that shows an increase sufficient to be able to meet what

a lot of people fear is just an already overburdened Department?

Secretary CHAO. Well, I can’t speak for the witness who spoke at

that time, but our responsibilities have not changed, and our staff

has significantly increased.

Senator KERRY. Well, the GAO, the CBO have all said that there

is not an adequate capacity. I mean, this is not new. In fact, in

2002, the GAO report said that it would take DOL’s current investigative staff 90 years to do a baseline assessment of non-compliance for pension plans alone. That is 2002. That is the GAO report.

What has changed? I mean, this is a continuum——

Secretary CHAO. I think citing those numbers is very misleading.

The real issue is, are we able to do the job, and the answer is, I

feel very confident that we can do the job.

The CBO report said that DOL needed approximately an addi- tional $55 million and 150 employees over the next 5 years to regulate AHPs. That is a very doable number. We have a budget of $60

billion, with $11.5 billion discretionary. Most recently, we implemented the Energy Workers’ Compensation System under which

we hired 300 people within about a 6-month period, as required by

the statute. We have also given $60 million in additional resources.

Now, it is very difficult to predict exactly how much money or

how much staff is necessary, but Association Health Plans are a

Presidential priority and we will certainly make sure that the resources are there to carry out any of the incremental authorities

that may be required.

Senator KERRY. Well, Madam Secretary, I respect what you are

saying, but I have to tell you, my experience in 22 years here has

shown no matter what the Administration is, that when you Federalize these responsibilities, you are often way behind in terms of

the staffing and adequacy of the capacity for oversight. And there

is a reason the Attorneys General across the country and insurance

commissioners and others are deeply concerned about the enforcement mechanism here, and I don’t think we should kid anybody

here that the resources are suddenly going to come pouring in. I

would like to believe it, but it is just very difficult to assume when

we see the difficulties already in exposing scams and in doing a lot

of the oversight that ought to be done, but I will come back. I will

let other colleagues——

Chair SNOWE. Thank you, Senator Kerry.

Just a point on that, because the CBO did estimate last month

in its analysis that it would require 150 workers regarding the imVerDate 03-FEB-2003 13:14 Sep 06, 2005 Jkt 021830 PO 00000 Frm 00074 Fmt 6601 Sfmt 6601 D:\DOCS\21830.TXT SSC1 PsN: SSC1
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plementation of these provisions, and obviously, the various estimates through 2010 and the costs.

On the issue of fully-insured versus self-insured, I think it is an

important clarification. We certainly could look at the solvency

questions again in this legislation to address some of the issues you

are raising, Senator Kerry. But it is my understanding on the fullyinsured that it will continue to be subject to State solvency requirements and the State laws, and in fact, you will have the certification ability to determine whether or not the AHPs are meeting

those standards within each State.

With respect to the self-insured AHPs, again, ERISA has no solvency standards for these entities, but we have set forth solvency

requirement standards in this legislation, in many cases will be

much stronger than what exists for the self-insured for corporations and unions, and so——

Senator KERRY. Well, I respect that, but here is the problem.

Look, I am not an expert, but I have to listen to experts. We all

do. And the National Association of Insurance Commissioners has

characterized the solvency standards in the bills as, quote, ‘‘woefully inadequate.’’ They stated that the bill’s $2 million cap on reserves would, quote, ‘‘result in disaster for consumers.’’ Now, that

is the warning to us. The American Academy of Actuaries concluded that the standards included in the bill would, quote, ‘‘contribute to AHP insolvencies, resulting in consumers and providers

being responsible for unpaid claims.’’ So I am just listening to the

experts tell us—woefully inadequate, not able to do it, and we will

hear from other people over the course of time.

But let me ask you, what steps could we take to guarantee and

really assure that workers are not going to be left with unpaid

claims? It seems to me we ought to be able to plug that hole, also,

with language.

Chair SNOWE. And the reason for the cap, and I would be interested in hearing your point of view on this, but on the cap and

what they are in the $2 million, we saw that the members were

not unnecessarily paying higher-price premiums, that they are

keeping larger and larger reserves for other purposes or just, you

know, so that the premiums become punishing for no good reason.

That was the reason. But, you know——

Secretary CHAO. But that is our responsibility.

Chair SNOWE. That is right.

Secretary CHAO. That is the responsibility of the Department of

Labor, to protect workers and their health plans, and if there are

unpaid claims, that is our responsibility to pursue them——

Senator KERRY. What does that mean, you are going to pursue

them?

Secretary CHAO [continuing]. To pursue them and to get it back.

And last year, we recovered $3.1 billion in employee benefit plan

claims for consumers.

Senator KERRY. We can get into the scam part of it. I wanted to

cede to another Senator, and I will do it——

Secretary CHAO. And the scam part——

Senator KERRY [continuing]. But the scam record is not great.

There are a lot of people left holding the bag, and we will go into

that a little later.

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Secretary CHAO. That is why additional regulations are required

and that is where the Association Health Plan legislation with its

certification provisions, will help to ensure that credible organizations are indeed offering these kinds of benefits.

Chair SNOWE. In fact, we strengthen them in this legislation——

Secretary CHAO. Yes.

Chair SNOWE [continuing]. With respect to these issues, but I

would be glad to hear more.

Senator KERRY. Maybe we can strengthen them even more.

Chair SNOWE. Absolutely.

Senator Burns.

Senator BURNS. I am sitting here listening to this whole thing

and you asked about all the questions that I wanted to ask this

morning with regard to this. I hope we are recording this over here,

this little debate going on.

I would ask one question, I guess, and maybe it is for the next

panel. You almost, if you are the regulator, you have almost got to

have the capability of being the underwriter, it seems to me. Do

you have that capability in the Department of Labor?

Secretary CHAO. To the extent that underwriting includes actuarial determinations, that is a part, as I mentioned, that we will

have to——

Senator BURNS. Yes. In other words, you have got to make the

decision that this is sound and it is safe, and how closely will you

look at the required coverages and demands that are set in each

State?

Secretary CHAO. Well, we will look at the solvency to ensure that

these are financially sturdy organizations that are ready to provide

this kind of benefit, and there will be, again, a setting up of insurance, of a reservoir, a pool of assets that will act as a backstop to

shore up Association Health Plans for any unforseen circumstances. So this is an added layer of protection. But again,

fully-insured plans will still have State-by-State solvency rules, so

that will remain.

Senator BURNS. OK. That is all the questions I had. I just wanted to kind of go one step beyond yours, so thank you.

Chair SNOWE. Thank you very much, Senator Burns.

Senator Lincoln.

Senator LINCOLN. Again, I would like to compliment Senator

Snowe. She is a real problem solver and I always liked working

with her, so I am looking forward to coming together to solve this

problem on behalf of the uninsured, and particularly our small

businesses.

Our States are very, very similar, and truly, our small businesses, particularly in my State, are our largest employers. Unfortunately, because they are less likely to be able to afford health insurance, they are also the bigger component of the problem of the

uninsured. These people are working hard and we want to be able

to try to provide them as much as we possibly can in the way of

health insurance, not only for the benefit of them and their families, but also for the fact that it helps us better manage the cost

of health care overall. So again, Senator Snowe, I am pleased by

your hard work on this issue and look forward to working with you.

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I guess my frustration has been that it seems like we always try

to reinvent the wheel, and to me, there is no real need to reinvent

the wheel. As I found myself traveling across my State and listening to people talk about my insurance plan, and I realized that the

Federal Employees’ Health Benefits Plan has been doing a pretty

decent job for the last 40 years in allowing us to pool all the Federal employees, those that are the young, fearless single staffers

that we all have who know no danger, to the families like myself,

as well as the Park Ranger in the remotest parts of Montana, to

be able to pool all of those different individuals and to increase

their choice and hopefully, as we have been over the years, decrease the cost.

So looking at that and trying to work from something that exists,

I have been trying to come up with one of these solutions, as well.

The FEHBP, which I have just described, our program, in my

opinion, does not promote Government-run health care, but harnesses the power of market competition to bring down health costs

and uses a proven Government negotiator.

So I think as we look at all of the different options that are out

there for small businesses, I hope we will bring the best of all these

worlds together.

Madam Secretary, we are pleased you are here, and certainly

your wealth of knowledge and what you already do in helping to

regulate and maintain insured individuals is critically important.

When you talk about the solvency, that is a critical part of what

we have to do, and I guess some of the concerns stem from the stipulations or the parameters that would probably need to be around

this reservoir of resources that you mention, and I guess also the

idea that the solvency—well, I guess the basis is whether or not

under the AHPs that they have to be licensed in the States where

they operate, and I don’t believe the AHP requires that.

Secretary CHAO. The proposal is——

Senator LINCOLN. Both the national and the State plans.

Secretary CHAO. The proposal for the AHPs is to certify them.

The whole purpose is to enable organizations to come together to

pool their resources across State lines.

Senator LINCOLN. Right.

Secretary CHAO. So there will be these increased solvency

requirements——

Senator LINCOLN. But would the AHP——

Secretary CHAO [continuing]. At the Federal level which had not

been there before.

Senator LINCOLN. Right. Would the AHP plans, would they have

to offer to every member in every area of the country? Would that

be required of them?

Secretary CHAO. They cannot discriminate against any member

in a group.

Senator LINCOLN. So they would be mandated to offer their plan

in every area of the country?

Secretary CHAO. There is a difference between—I think there is

a basic difference as we talk. When we talk about AHPs, I think

the intent is we are removing a barrier. We are creating a level

playing field.

68

Senator LINCOLN. It is a simple question. Are they required to

be licensed in the States that they operate, and are they going to

be required to offer to every member in every area of the country?

Secretary CHAO. They cannot discriminate against any member

who wants to access those plans.

Senator LINCOLN. So you are saying they have to offer their plan

to every member——

Secretary CHAO. Well, not to somebody who doesn’t want it.

Senator LINCOLN [continuing]. In every area of the country?

Secretary CHAO. If it is someone who wants it, yes.

Senator LINCOLN. Every area in the country.

Secretary CHAO. Perhaps someone doesn’t want it. Then they

don’t have to have it.

Senator LINCOLN. But, I mean, it needs to be offered in all those

areas.

Secretary CHAO. All the Federal health protections would apply.

Senator LINCOLN. And the licensure in each State, is that going

to be—are they going to be required to be licensed in the States

where they operate?

Secretary CHAO. I don’t think so.

Senator LINCOLN. Or serve?

Secretary CHAO. Fully-insured AHPs have got to file in each

State, because again, they are the ones that are regulated by the

States.

Senator LINCOLN. The national plans don’t.

Secretary CHAO. The self-insured currently are not registered in

each State.

Senator LINCOLN. Well, that is one of the things—in the Federal

plan, they do. Both the State and the national plans have to be licensed in the States that they offer, and I think some of that has

to do with some of the consumer protections that we talked about.

Secretary CHAO. Yes. We talked about the State consumer protections, which will still remain with AHPs, as will the solvency requirements.

Senator LINCOLN. But if it is a national plan and they are not

licensed in that State, they are not subjected to that, is that correct?

Secretary CHAO. The State consumer protections apply to fullyinsured AHPs across wherever they operate, across all States. The

State solvency requirements and consumer protection requirements

remain. That is my understanding.

Senator KERRY. By virtue of what——

Senator LINCOLN. Without licensure, I don’t think that is the—

but that is something we should——

Senator KERRY. We will work it out.

Secretary CHAO. Well, maybe we should discuss it.

Senator LINCOLN. Absolutely. That is something we should talk

about.

Secretary CHAO. My understanding is that all the State consumer protection and solvency requirements apply to fully-insured

AHPs.

Senator LINCOLN. In terms of the solvency issue, the Department

of Labor ensures the solvency at the beginning of the AHP. What

is the process with which you maintain the integrity of that solVerDate 03-FEB-2003 13:14 Sep 06, 2005 Jkt 021830 PO 00000 Frm 00078 Fmt 6601 Sfmt 6601 D:\DOCS\21830.TXT SSC1 PsN: SSC1
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vency? I mean, are there audits? The current law is that you audit

every 3 to 5 years their annual financial exams. There are quarterly financial exams that allow for the compliance of solvency. Is

any of that——

Secretary CHAO. I would imagine there will be annual reviews as

to the quality of the portfolio by the Department of Labor.

Senator LINCOLN. Is that written into the law?

Secretary CHAO. That, I am not sure of.

Senator LINCOLN. I think that would be something that would

provide assurances of knowing how the upkeep of the solvency is

going to be guaranteed for these plans and not just the initial solvency. Obviously, when you from the Department of Labor would

initiate an AHP, you are going to ensure its solvency from the beginning. But we as we are quickly finding out from Social Security

and everything else, unless that continued solvency is monitored.

Secretary CHAO. We regularly monitor and regulate health plans

now, so we wouldn’t just look at it in the beginning and then neglect it. It is an ongoing responsibility to monitor these, and also

to pursue malfeasant actors in providing these plans.

Senator LINCOLN. Well, I am not saying you don’t have the capability.

Secretary CHAO. Right.

Senator LINCOLN. I am just asking, is that required in the law

for you to do that? I am not saying that you don’t have the capability or that you don’t do it in what you do now.

Secretary CHAO. What I am saying, whatever is within the Department’s practice of monitoring these plans. But, of course, I will

be more than glad to talk about that with you because we have a

plan for monitoring that.

Senator LINCOLN. Well, I think what is important is that it is

written into the law of how the AHPs are governed, is that you not

only have the capability but you are given the requirement and the

authority to do that. So I think that is what the concerns may be

in terms of the solvency oversight, is to make sure that those

things are written into the law and required not just of you, which

you may already be capable of, and it sounds like you are from

what you already do, but that it is required of the AHPs in their

practice and it is required of you as a statutory requirement of how

they are going to be monitored, which gives people greater assurance, I think.

And I think one of the concerns particularly about the solvency

and the regulatory aspect is that it doesn’t require the Department

to regulate that particular plan in that State. It can regulate it by

any State standards, not just the State that it is practiced in. And

I may be incorrect in interpreting it that way, but I think that

would be something that would be very important to look into, that

you don’t just use one State’s law to regulate all of the AHPs in

other States but that they are using the current law of the current

State that they are actually practicing in, which is important, I

think, for the people in those States.

I know I have used an awful lot of my time, Madam Chair. Just

I guess one of the last things is to Mr. Barreto. I guess if you could

help us understand, because truly, our small businesses are our

number one employers and we want to give them every benefit posVerDate 03-FEB-2003 13:14 Sep 06, 2005 Jkt 021830 PO 00000 Frm 00079 Fmt 6601 Sfmt 6601 D:\DOCS\21830.TXT SSC1 PsN: SSC1
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sible to access the health care market. What would the legislation

do in addressing the rising costs of health care other than pooling

individuals? We know that that is going to be an important part,

and CBO, I believe, has given us some studies on what the small

group market does, but are there other things that we need to do?

I am not so sure that that is enough.

Mr. BARRETO. Well, it is not enough.

Senator LINCOLN. I believe that tax credits are very important.

Mr. BARRETO. It is not enough, but that is not all that it does.

Not only does it provide small businesses more choices, because

they will be part of a bigger pool which will attract more insurance

companies interested in providing them insurance, but when you

are not subject to the State mandate, you also have much more leverage to negotiate the benefits that you want.

You know, there are a lot of small businesses in your State. They

have to buy the insurance plan that is mandated inside that State.

In other words, if there was another plan in another State, let us

say in an adjoining State, let us say Texas, if they wanted to buy

the plan there, they couldn’t. Maybe they like the Texas plan better

because there are more benefits that they like in that plan. They

wouldn’t have that choice.

Also, when you start getting these larger pools, you are able to

do a lot about the administrative cost. That is a huge cost of health

insurance premiums. We have already talked about how larger

pools, Federal employees, unions, large corporations, their administrative costs are half of what they are for small businesses. So for

a small business, it is really the best of all worlds. They are part

of a bigger pool. They have more buying power. They are going to

pay less administrative costs. They have more flexibility to get the

benefits that they want, not the benefits that they are told that

they have to buy. So for them, this is a huge win.

Senator LINCOLN. We provide all that through the Federal employees’ plan, too, that template we are using.

Mr. BARRETO. Yes.

Senator LINCOLN. But I guess my question to you is, is that

enough? I mean, do you not think that small businesses need an

extra help in paying——

Mr. BARRETO. Well, if they could save 25 percent on their insurance premium, and that is what is estimated as the potential, they

could save 25 percent off their bottom line.

Senator LINCOLN. Is that enough of an incentive to get them into

the marketplace?

Mr. BARRETO. That is huge. That is big. There are a lot of small

businesses that aren’t hiring people right now because they say,

look, I need more employees, but I can’t afford the health insurance

premium so I am not going to hire anybody. There are small businesses that go out of business because they have a huge claim that

comes in to them and they don’t have the money to pay the claim

because they can’t afford the insurance.

Senator LINCOLN. So you don’t think there need to be any other

sweeteners to help get our small businesses into the marketplace?

Mr. BARRETO. I think that this is a good first step. This doesn’t

solve the health care crisis. The health care crisis is very complex.

There are a lot of things that drive up health care costs. But what

71

this does, it provides them access that they don’t have. It provides

them purchasing power that they don’t have.

Senator LINCOLN. Do the low-income workers, I mean, without

any kind of an incentive for their employer, is it going to be financially feasible without tax incentives for our——

Mr. BARRETO. A lot of those small businesses say to us, look, we

think that our employees are the most important thing that we

have and we don’t think that this is just an employee benefit per

se. We think that these employees have a right to have these insurance benefits. But we can’t afford it.

Senator LINCOLN. You think it is going to fly on its own without

the extra incentives that we need?

Mr. BARRETO. I think that this goes a long way to getting a lot

more people insured that don’t have insurance right now.

Senator LINCOLN. Thank you, Madam Chair.

Mr. BARRETO. And we do need to work on those other things. I

think that is important. I think tax credits and other incentives are

great. But if we can tackle this, the big problem that they have is

that they don’t have access. The big problem that they have is they

don’t have choice, they don’t have control, and they don’t have what

large corporations and unions have, and that is what we want to

provide small businesses. Small businesses are the only group that

don’t have this. Everybody else has it. Government employees like

me have it. You know, if you are a member of a union, if you work

for a large corporation you do. But if you work for a small business,

you don’t have it, and not just in your State, in all 50 States. That

is why it is such a big problem.

Senator LINCOLN. I do think they need a little more incentive,

but thanks, Madam Chair.

Chair SNOWE. Thank you, Senator Lincoln.

You know, it is interesting, the CBO report. Looking at the CBO

report from last month, it said that the effects of the bill on Medicaid would result in estimated savings to States of $18 million

over the 2006 to 2010 period, and $60 million over the 2006 to 2015

period. It also would increase their net revenues, too, over the long

term.

I think the point of it is it could have an important impact on

some of the programs in the State, especially on Medicaid, in reducing the number of uninsured. I mean, whether it is going to be

600,000 or eight million, depending on the various estimates, the

point is it is reducing it and it is offering an option. I think that

is what we have to look at in terms of this issue.

Plus, it doesn’t cost any significant amount of money to the Federal Government. I mean, that is the other thing. It is a nominal

cost to the Government, and that is why it becomes a very attractive option, in addition to the other issues that have been raised,

if we could address some of these issues and working with Senator

Kerry and all of you, because I think it could go a long ways toward helping give the States an option they otherwise do not have.

Senator Kerry, do you have any other questions before we move

on to the second panel?

Senator KERRY. I do, Madam Chair. I am sorry about that, but

I do, a few.

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Chair SNOWE. OK. We have got five others on the second panel.

I know the Administrator has to leave in a few minutes.

Senator KERRY. I know we do, but let me come back to what the

Administrator was just talking about with Senator Lincoln, and I

want to thank Senator Lincoln for her work on this. She has been

doing a terrific job in thinking about it and coming up with some

solutions.

Mr. Barreto, what you have chosen to do—first of all, you just

said this does not fix the health care crisis. I suppose an obvious

question is, why aren’t you proposing something that fixes the

health care crisis?

Mr. BARRETO. Well, I think this is part of starting to fix the

health care crisis, especially for small businesses. You know, small

businesses, they don’t complain about the health care system in

America. They complain that they don’t have access to it. They

complain that they don’t have choice and they complain that they

can’t afford it. So that goes a long way. But we are also doing other

things, too. We are trying to do something about the frivolous lawsuits and the cost of prescription drugs and trying to provide more

incentives to small business, as well, with Health Savings Accounts

and other incentives that small business can take advantage of.

Senator KERRY. Well, in my judgment, there is a more effective

way to try to do it. Madam Chair, what we are really talking about

here is the choice of incentive. Right now, small business can pool.

When you say they can pool, they don’t. They can’t pool because in

many cases, they don’t want to be subject to the State regulations

because it is costly. It is a cost issue and a regulatory issue, right?

And they can’t afford it.

Mr. BARRETO. Right.

Senator KERRY. OK. Your choice is to let them out from under

the State regulation, which a lot of people believe winds up creating—sure, they will get access to something, but what is that

something? Is it adequate? Is it going to protect people? Is it going

to provide them the coverage they have today?

Let me give you an example. You exempt them from State law,

and that means there is no requirement for mammography

screenings. There is no requirement for prenatal or maternity care

or well baby care, well child care, or diabetes supplies and education, or cancer screenings and mental health services because

AHPs are exempted from all those requirements.

Mr. BARRETO. But they could buy it if they wanted it. If they

want that, they can negotiate with an insurance carrier to have

that.

Senator KERRY. But the whole issue here is what is going to be

available and what is the quality going to be? Can they buy into

something? Yes, they may be able to buy into something. But why

should they be granted an exemption from those services which

States have decided are really critical to the quality of care that

is being provided in that State?

Mr. BARRETO. Because not every small business wants to buy it.

Not every small business feels that they need—I mean, some of

these things are just like a long menu that keeps gets adding onto

which keeps rising the cost of health insurance. Let us say that,

for example, there are some benefits on there that really don’t

73

apply to the small business’s workforce. In other words, they don’t

need it. Let us say there were a lot of benefits there that are very

important to women, but you have a small business that just has

men inside of it. Maybe they wouldn’t need all those benefits, and

vice versa. Maybe there are benefits that favor men in a business

that is run by all women. I mean, there are a lot of different

choices.

Here is the thing, is this is voluntary. If a small business likes

the plan that they have, they don’t have to change. Nothing has

to change for them. They can stay exactly where they are at right

now. But what we are talking about is this huge pool, millions of

small businesses that have no choice, and what we are saying to

them is we would like to offer them another option.

And as Senator Talent said, if they don’t work, they won’t buy

these plans. They won’t go into these plans. And so for us, we think

that this is, again, a step in the right direction to solve what they

believe is one of their most critical problems—lack of options, lack

of competition, and price.

Senator KERRY. Yes, but to some degree the question is whether

or not you want to try to establish a standard, which is what we

have been fighting about for years, as to what might or might not

be available at what kind of price.

I mean, under this approach, no one disputes that an AHP can’t

deny coverage to somebody. I don’t dispute that.

Mr. BARRETO. Senator, when you say the AHP cannot deny coverage, that is right. If they are a member of that——

Senator KERRY. I am not disputing that. They can’t discriminate.

Mr. BARRETO. Right.

Senator KERRY. That is not the question. At least as it is written,

they can’t.

Mr. BARRETO. Right.

Senator KERRY. But here is the problem. The premium that can

be charged has no limit whatsoever. There is no regulation whatsoever with respect to a premium that can be charged. And an AHP

could structure itself—I mean, according to good business practice,

you could say, well, we want to attract a certain kind of client, and

they could structure themselves as an association and only let people in who meet their particular structural requirements. They

could do that.

Mr. BARRETO. They probably wouldn’t do that.

Senator KERRY. Why not? Why not if a best business practice

was to find those kind of people because that is the way you make

the most money and have the least sickness?

Mr. BARRETO. First of all, most of the organizations that are

going to offer this are going to be Chambers of Commerce and business associations, organizations that specialize in meeting the

needs of small businesses, and there is no organization that I have

ever met in my life that wants less members. They want more

members. And so I don’t see them excluding people. But let us just

say that they did——

Senator KERRY. They want the right kind of client that meets

their business profile.

Mr. BARRETO. Most—if it is a trade association, obviously, it is

going to be anybody inside of that trade. If it is a Chamber of ComVerDate 03-FEB-2003 13:14 Sep 06, 2005 Jkt 021830 PO 00000 Frm 00083 Fmt 6601 Sfmt 6601 D:\DOCS\21830.TXT SSC1 PsN: SSC1
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merce, it can be almost any kind of a business. But here is the

thing. Most small business owners, I mean, the ones that are successful and are networking, belong to two or three organizations.

They don’t belong to just one organization. So if the organization

that they belong to is not providing what they want, they are either going to get it from one of the other organizations that they

join, or also competition is going to spring forward. There is going

to be an organization out there, a Chamber of Commerce that gets

it, does it right, and everybody else is going to flock to them.

That is the reason that every major business organization in the

United States—you know, we talked about experts. The experts on

small business are the Chambers of Commerce, the NFIB and the

Retailers Association. All of them have endorsed AHPs, and they

didn’t do it spontaneously. They have been studying this issue for

10 years and they are desperately seeking this option. That is why

there is so much passion around this issue. Every major business

organization in the United States has endorsed AHPs, and they understand what is at stake here. They have looked at this issue and

that is why they want it.

Senator KERRY. Well, there are loads and loads of Chambers of

Commerce who do not support it.

Mr. BARRETO. Some of them don’t, and there are some Chambers

of Commerce——

Senator KERRY. A whole bunch of them don’t.

Mr. BARRETO. There are some Chambers of Commerce——

Senator KERRY. I have got a list of them right here, and there

are a whole bunch of Farm Bureaus that don’t like it and small

business associations who don’t like it——

Mr. BARRETO. I have met with some of them, and some of them

already have a good health insurance benefit for their members

and they don’t want to change anything. They are happy with the

status quo. And I say to them, you know what? If you are happy

with your health insurance benefits, you should stay with them.

But we have got to do something about 99 percent of the other

small businesses that don’t have it.

Senator KERRY. Why do you think that so many consumer groups

across the country are opposed to this? I mean, a great number of

groups that represent the people who hopefully will get coverage or

have coverage, are opposed to this?

Mr. BARRETO. I think once you educate and inform people, they

are going to like the choice.

Senator KERRY. Do you think they are all ill-informed? Is that it?

Mr. BARRETO. I am not saying they are all ill-informed, but some

of them may not need this kind of health insurance benefit. But for

millions of small businesses who have nothing else, have no other

option.

Senator KERRY. You don’t think that they are concerned about

the rights of people, about people being able to be protected

against——

Mr. BARRETO. If they like their system that they have now, they

can stay in it. Nobody is telling anybody that they have to change.

What we are saying is that we want to give these small businesses

who are screaming for relief another option, and they want this option. You know, we have already talked about it. We have made

75

some significant progress. This has passed already several times on

a bipartisan basis in the House of Representatives and this is the

last place that we have to make progress. We have to make

progress in the Senate and make sure that people are informed and

educated about what the stakes are.

Senator KERRY. Can I ask you what insurance you have?

Mr. BARRETO. I have Blue Cross-Blue Shield.

Senator KERRY. Through the Federal Government?

Mr. BARRETO. Through the Federal Government.

Senator KERRY. And Madam Secretary?

Secretary CHAO. Same.

Senator KERRY. Good plan?

Mr. BARRETO. It has worked pretty well for us.

Senator KERRY. Any reason it shouldn’t be available to all Americans?

Mr. BARRETO. Well, I think Blue Cross-Blue Shield does make

their insurance available.

Senator KERRY. No, the Federal Employees Health Benefits Program, FEHB.

Mr. BARRETO. You are talking about a totally different thing

there. Obviously, part of our insurance premium is paid by the

Federal Government. Obviously, we are part of a pool of millions

of people, which gives us better benefits and better costs. Those are

the same kinds of things we want to give to small businesses.

Senator KERRY. But if we could, which we could, why shouldn’t

we make it possible for all small businesses to buy into the same

plan as we do?

Secretary CHAO. I think you would have to set up a whole new

program. What we are talking about here is tearing down barriers

and allowing small businesses to come together and pool risks so

they can decrease their costs——

Senator KERRY. Well, we are talking about making the market

more competitive.

Secretary CHAO [continuing]. So they can offer more health care

to their workers.

Senator KERRY. Wouldn’t it be a nice market offering to say to

people that you could buy into the same program that we do?

Mr. BARRETO. I think that there is a concern with a lot of small

business. Any time that you talk about something being part of the

Government, a Government plan, when you talk about adding

maybe $70 billion——

Senator KERRY. Blue Cross isn’t a Government plan. Blue Cross

is a private plan.

Mr. BARRETO. But it would be in the context of——

Senator KERRY. You have Blue Cross, don’t you?

Mr. BARRETO. I do.

Senator KERRY. You have Blue Cross, Madam Secretary? It is not

a Government plan.

Mr. BARRETO. We buy it as a Federal employee.

Senator KERRY. Yes, but why not let other people buy in as whatever kind of employees they are?

Mr. BARRETO. Well, I mean, a lot of it would depend on what the

cost would be. Would they receive the same benefits we do, because

part of our insurance is paid for by the Federal Government.

76

Senator KERRY. Correct, and what we would do is provide a 50

percent tax credit to small businesses to be able to buy in, so they

could afford it.

Secretary CHAO. I think the particular bill you are referring to

that was just offered also by Senator Lincoln.

Senator KERRY. That is a slightly different plan, but it is modeled on the same concept.

Secretary CHAO. That bill will cost $18 billion from mandatory

appropriations over the next 4 years.

Senator KERRY. Yes, I don’t support their bill because I think it

doesn’t bring in enough people, but there is a way to bring in more

people.

Secretary CHAO. The total cost to the Federal Government for

AHPs would be approximately $100 million over the next 5 years.

So again, I think the approach is quite sound. It would enable us

to cover more people and it would, again, tear down barriers that

currently exist and prevent a level playing field. And the AHP legislation does not establish a new and more expensive Federal program legislation.

Senator KERRY. So it is a matter of choice of expense, is that it?

Mr. BARRETO. Well, I think there are other things, too.

Secretary CHAO. It is a matter of choice and helping people.

What I am concerned about are workers who are working for small

companies who do not have health care insurance——

Senator KERRY. No, I know, but if you could provide health

insurance——

Secretary CHAO. [continuing.] ——and they cannot have it because of these artificial barriers that are preventing their companies and their employers from coming together, sharing in the pooling of the risk, which is commonly available to large corporations

and labor unions. Because small businesses currently cannot do

that, and therefore, they cannot offer that benefit to their workers.

Senator KERRY. Well, let me just point out, because I have heard

so many times here that this is going to be trying to make small

business exactly like big business and we are going to give them

the level playing field. It is not the same playing field, and it is

not making them the same, because small employers are going to

pay premiums to the AHPs just like insurance and they are going

to trust that the AHP is going to be there to pay for them down

the road. In contrast, large employers in America who self-fund are

at risk for their employees. These folks won’t be, which is why the

solvency issue is so critical. So it is not the same playing field.

Secretary CHAO. Well, self-insured plans under current law are

not under State jurisdictions, either. There is a big difference.

Senator KERRY. Well, I realize that, but it is the question of what

is the bottom line here with respect to the person signing up.

And the second thing I want to say is that you have to make a

fundamental decision in public life about what you think the standard is you are trying to make available to people. We in the Congress have decided that somehow we get this terrific plan, but

Americans shouldn’t be able to buy into it. I don’t think that is

right. I think Americans ought to be able to buy into it. Now, if

they can buy into it, so much the better for them. And if we were

to give them an economic incentive to empower them to buy into

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it and lower the premiums, you could, in fact, have 95 percent of

all Americans covered.

So when you say we are not solving the whole problem, you are

making a choice not to solve it because you think tax cuts are more

important.

Mr. BARRETO. I think what we are trying to do is respond to the

different parts of it. I am not sure that you can solve it in just onesize-fits-all. I think that you have got to solve these different moving parts that we talked about. What we are dealing with right

here is one——

Senator KERRY. But you can provide a comprehensive plan, Mr.

Barreto—I know it because a lot of people have done it through the

years—where you help deal with the cost side of it, you help deal

with—I mean, I know what the Administration is doing. I think

they put up $50 million nationally to try to deal with technology

in hospitals and in the health care industry. Fifty-million dollars

is laughed at in State after State. It doesn’t even take care of one

State’s challenge.

So it is really a choice of where you want to put your money, and

we disagree on that. But I think there is a better solution and

there is a better way to provide more affordable health care, which

is better health care to more people under better standards than

we are choosing to do, and that is an important debate to have and

that is an important role for us to play here. Is there a better way

to do this?

Now, we are not in charge of the Congress or the White House,

I understand that. So, therefore, we are going to have to try to find

a way to stop-gap this. What I want to do is not do harm, and what

I want to do is try to find a way to get as many businesses into

this as possible under the fairest mechanism possible. So I hope we

can stop-gap some of these holes on solvency, on coverage, on rights

and so forth, and I want to work with the Chair to do that. But

we ought to be honest in our appraisal of where some of those

issues may exist. It just happens in the writing of law that sometimes there are holes and misinterpretations.

Mr. BARRETO. I agree with you wholeheartedly, Senator Kerry,

and I think what small businesses are saying is, please send help

as soon as possible. We can’t discuss this and debate this for another 10 years. Some of us won’t be in business any longer if we

keep getting double-digit increases in our health insurance.

So again, and I think some of the other Senators mentioned this,

we should be talking about all of these options, and this is, I think,

something that is going to be with us for a long, long time. But if

we could do something like AHPs and do it this year, you could

provide relief to millions of small businesses while we are working

on some of those other issues that affect their health care costs and

access.

Senator KERRY. I just want to listen carefully to the experts who

tell me there may be more people uninsured and there may be

more problems with people scammed and there may be less delivery of adequate health care. Now, if I hear people saying that to

me, I am going to stop and examine it pretty carefully.

Chair SNOWE. Thank you. Thank you, Senator Kerry. No, I appreciate your comments and hopefully we can work through these

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issues. I think this was valuable, to have this discussion on the

specifics of the legislation, because it gets us beyond. I hope we can

create a building block and step forward. These issues, as I said

earlier, aren’t mutually exclusive. There are a variety of initiatives.

Let me just make several points. Obviously, Association Health

Plans are optional and they are voluntary. They can’t be created—

well, you could State-by-State, but we are going to hear in a subsequent panel an individual talk about the fact they weren’t able to,

because it is not efficient to create an AHP or a statewide pool for

small businesses in every State or a variety of States. I mean, it

just makes it almost impossible from a regulatory standpoint, and

ultimately they closed down their Association Health Plans because

you couldn’t transcend State boundaries. That is one of the issues.

The other issue is corporations and unions. We cite that for a

good reason. First of all, it is interesting to note, as I said earlier

in my statement, that they offer the more generous and most generous plans, and they are exempted from State mandates in that

they don’t have to comply with State mandates. It is suggesting

that if you don’t have State mandates, you are never going to get

the best benefits. That is not necessarily true. State benefits and

State mandates are important. Obviously, it sets a threshold establishing what we think is important.

On the other hand, it doesn’t mean to say small businesses and

their employees aren’t interested in those benefits and they have

to be mandated in order to get them. The whole purpose is to make

small business competitive with corporations and larger businesses

that offer this as a benefit.

Having good health insurance is an important benefit to attracting good employees, and that is the other thing, is to level the playing field for small businesses so that they can stay on par in competing for the good employees with corporations who can offer this

generous health care package. If you don’t have that in today’s

world, that can be first and foremost as to whether or not an employee or potential employee is going to make the decision, and so

that is another tool that we can give small business that they otherwise do not have.

Now, my small businesses have, what do they have, catastrophic

at best. I mean, they are paying $5,000 to $6,000 minimum a year

just to get the catastrophic coverage because it is the bare bones.

So what is the option here, is to give them something, the ability—

and these packages will be designed to attract the maximum number of participants in a plan, not the least number.

Now, we all want to avoid any issue regarding the race to the

bottom or the lowest common denominator, but I think that the

best instincts ultimately will prevail for very good reason, and we

have the oversight mechanisms in here to do it.

And so I hope that we can look at these issues in that sense. And

might I also add, on the legislation that was suggested here by

Senator Durbin, Senator Lincoln, and others, they also preempt

State benefit mandates. So under their plan, the Federal Government would make those decisions about what would be incorporated and they would be bypassing State mandates, as well. We

all are seeing why those State mandates are there. They are important. We are not saying we are trying to get out from under them.

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That is not the point of this. The point of this is desperation. That

is it. It is desperation. I mean, small businesses are desperate.

They are in a crisis and we have got to help them.

Let us just take one step forward, one step forward that won’t cost anywhere from $18 to $70 billion that they are suggesting. I

would like it. I mean, there are very good options. But we have got

to do something, and in this era of——

Senator KERRY. Would you like it more than a tax cut? No.

[Laughter.]

Chair SNOWE. Well, I have also had issues on that, too. In any

event, I think that is the point. I think we can. I think that is the

point here. I think that there are ways of reaching some conclusion,

and there are other issues that you are suggesting. I think we can

get there on some of these things. I just hope it won’t be a barrier

that we can’t—you know, we ought to be able to do something.

Senator KERRY. Madam Chair, can I ask that Senator Durbin’s

statement be made part of the record?

Chair SNOWE. Yes. Without objection, so ordered.

[The prepared statement of Senator Durbin follows:]

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Senator KERRY. Just kind of quickly, and we are going to end up,

but I want to find a solution. I ran a small business. I had about

35-, 40 part-time employees. I would have loved to have given

health care, but I couldn’t even consider it. I understand it, but I

also understand that there is a reason many of these protections

are standard, and that is the history of this. We all understand it.

There are costs and ways to reduce those costs.

I hope we can come up with a way to bridge these differences,

and I think we probably can if we work in good faith at it and

there isn’t just sort of an ideological quest here. If we really want

to try to find a way to help small business, hopefully, we can do

it in a fair-minded manner.

Chair SNOWE. Thank you.

Mr. BARRETO. Thank you very much, Senator.

Chair SNOWE. Thank you, and thank you for your patience.

Thank you for your contributions and your leadership. Again,

thank you very much.

The next panel, who have been more than patient. We have tested your endurance today. Sorry. But you see that it is obviously a

very important issue to all of us and I think it was a very constructive discussion here this morning, and so I appreciate your willingness to be patient.

Our second panel this morning represents the small business

community, obviously different associations and State governments

here, and so we appreciate your all being here today.

First of all, I would like to introduce Doug Newman, President

and owner of Newman Concrete Services located in Hallowell,

Maine. Mr. Newman is an active member of the Associated Builders and Contractors, served as the board representative for ABC’s

Maine Small Business for Responsible Health Care Reform Task

Force.

Also testifying is Mr. Al Mansell, a Realtor from Salt Lake City,

Utah, and current President of the National Association of Realtors, the Nation’s largest professional association, representing two

million members involved in all aspects of the residential and commercial real estate industry.

Testifying also is Mr. Tom Haynes, the Executive Director of the

Coca-Cola Bottlers’ Association. The Coca-Cola Bottlers’ Association

not only represents the interests of Coca-Cola Bottlers in dealing

with the Government and the company, but also manages numerous employee benefits, purchasing, and insurance programs for

these bottlers.

Also, Len Nichols, who directs the Health Policy Program at the

New America Foundation, which aims to expand health insurance

coverage to all Americans while reigning in costs and improving efficiency of the overall health care system.

I want to also welcome John Morrison, Montana State Auditor

and Commissioner for Insurance and Securities. Mr. Morrison is

representing the National Association of Insurance Commissioners

today.

Finally, I welcome Mr. Lindsay, who currently oversees the Employee Benefits Group at Lockton Companies of Colorado, one of

the largest insurance brokerage firms in the country. We appreciate your being here, too, and we thank you for being here. We

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welcome your testimony as former Chair of the National Small

Business Association, which is the Nation’s oldest non-partisan

small business advocacy group, reaching more than 150,000 nationwide. Thank you.

So, Doug, we will begin with you.

STATEMENT OF DOUG NEWMAN, OWNER, NEWMAN CONCRETE

SERVICES, INC., HALLOWELL, MAINE

Mr. NEWMAN. Good morning, Senator Snowe, Senator Kerry.

Thank you very much for having me here today to discuss this important issue of vital importance to small businesses. I would also

like to take the opportunity——

Chair SNOWE. Sorry to interrupt, but hopefully, you can summarize your statements within 5 minutes and we will submit your entire statement for the record. Thank you.

Mr. NEWMAN. I will be brief. I would also like to take a moment

and thank Senator Snowe for her strong leadership on behalf of

small businesses back in Maine. We are very proud to have you up

here fighting for us.

My name is Doug Newman. I own a company called Newman

Concrete Services located in Hallowell, Maine. We employ 50 men

and women on some of the largest construction projects in Maine.

Of the many challenges I faced starting my business 10 years ago,

health insurance is at the top of the list.

Looking ahead, what we find discouraging is we don’t see anything on the horizon that appears ready and willing and able to address the situation. Association Health Plans, we think, is a legislation that could provide some immediate relief.

I started my business in 1996, after working in the construction

industry since getting out of college. Within a few years, we had

grown to over $3 million in sales and had over 50 employees. Like

most people who started a small business, I wasn’t really prepared

for the obstacles I was going to face. I am very proud of what we

accomplished, but if you asked me if I would do it all over again,

I am not sure I could say with all honesty that I would.

Of all those risks and difficulties, health insurance has been one

of the most troubling. I learned early on that providing health insurance to my employees is a vital part of having a business. But

more importantly than that, like most small businesses, I think it

is the right thing to do. You feel a very strong moral obligation to

your employees. We are small businesses. I have less than 50 of

them. When the car breaks down, when the family problems arise,

when things aren’t going well at home, I know about it. These people, I deal with every day. We don’t have 2,000 or 3,000 employees.

I have a very small number of them.

When we were able to finally purchase health insurance 2 or 3

years after we started, it was a real milestone in my business. I

thought my business had finally arrived. We were now a solid, legitimate business. We were providing health insurance to our employees. Some of my proudest moments as a business owner has

been when people that work for me came to me and they were secure enough in the business, they were secure enough in the pay

and benefits that they started families, they bought homes. That,

to me, was when a business really arrives, when you have employVerDate 03-FEB-2003 13:14 Sep 06, 2005 Jkt 021830 PO 00000 Frm 00096 Fmt 6601 Sfmt 6601 D:\DOCS\21830.TXT SSC1 PsN: SSC1
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ees who work for you that feel confident enough in what you are

doing to do that.

What I didn’t know, and what I am learning every day, is just

how difficult it is to maintain that. And even as I face the challenges of rising health insurance costs, my employees face the same

thing.

In my State, the economy has been slow the last few years. The

price I charge for my projects that I get isn’t going up any. Wages

isn’t going up any. Unfortunately, everything else is.

Of my 50 employees, about half are covered by an HMO offered

through Anthem Blue Cross-Blue Shield. Employees and their families are eligible after 6 months to join the plan. I pay 70 percent

of the individual premium and I pay 50 percent of the family cost.

It is offered through a flex benefits account, which allows the deduction to be made before taxes.

Despite difficult financial times in recent years, reducing my employees’ share, or increasing my employees’ share just hasn’t been

an option. They can’t afford it. So as a result, the company has absorbed in the last 4 or 5 years some pretty large increases. I can’t

afford to ask my employees to pay more and I can’t afford to lose

my good employees.

We have cut costs and downsized what we can, but there is an

inevitable day of reckoning coming if we continue to face the same

unsustainable health insurance costs year in and year out. We are

just going to reach a point where we just can’t keep going. We are

literally being put in a situation where we can’t charge more, we

can’t make more, and the costs are coming up to a point where the

company is just simply not going to be profitable.

In the last 4 years, since 2000, health insurance premiums for an individual has risen from $42 a week to $70 a week. Family coverage went from $123 a week to $211 a week, represents about a

70 percent increase in just the last 4 years. All-told, my company

contributes right now well over $50,000 a year in health insurance

premiums. Unfortunately, this is often the difference between making money and losing money, and the last few years, it has put me

on the wrong side of that line.

Every year when renewals come, we are very fortunate—very fortunate—to get two quotes. In Maine, there are only three companies that are even writing insurance, and we have a relatively

weak market up there. If I have two insurance quotes to choose

from, I consider myself lucky. They are both basically the same

exact plan and the difference in cost generally isn’t that much.

One thing is inescapable. If we don’t do something very shortly

to provide access to lower health insurance for small businesses,

they are just going to be forced to drop it. Health insurance ceased

to be affordable a long time ago. Right now, it is affecting our ability to be profitable and to grow, and in the near future, it is going

to become simply impossible.

In Maine, we have had a shift of over 10 percent from private

insurance to Medicaid. In the last 4 or 5 years, the number of uninsured in Maine has remained pretty constant. We have had a shift

from 10 percent of the population enrolled in Medicaid to now 20

percent of the population is enrolled in Medicaid. No change in the

uninsured, just a shift from people paying private insurance to our

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Medicaid system, and anybody that has paid any attention to our

budget up there, they will see what kind of havoc that is causing.

It is for all these reasons that I support S. 406, the Small Business Health Fairness Act. There is no doubt in my mind that within a very short period of time, the bargaining power, the lower administrative costs, the freedom from very high costs associated

with mandates would lower my insurance and provide a break that

if we don’t get, I don’t know where we are going to go.

Another issue is just one of basic fairness. We compete against

companies every day that have been around a long time, have a

much better balance sheet than we do, and are financially able to

self-insure. They are able to create plans that meet their needs at

a significantly lower cost to me. It seems ironic to me that in a

country where the vast number of people are employed by small

business, we afford big businesses and labor unions the kind of

benefits that we don’t make available to small businesses.

The more technical issues have been discussed at great length,

so I will stop there and I would look forward to answering any

questions that you might have.

[The prepared statement of Mr. Newman follows:]

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Chair SNOWE. Thank you very much, Doug.

Mr. Mansell.

STATEMENT OF AL MANSELL, PRESIDENT, NATIONAL

ASSOCIATION OF REALTORS, WASHINGTON, DC

Mr. MANSELL. Thank you very much, Madam Chair Snowe and

Ranking Member Kerry and the only Member of the Committee

left, Senator Burns.

[Laughter.]

Senator BURNS. We have a lot of things to do.

[Laughter.]

Mr. MANSELL. You are a patient man.

[Laughter.]

We appreciate the opportunity to be able to come and speak to

the Committee today. I do, and particularly on behalf of the National Association of Realtors. We do not have 2,000 members,

though, Madam Chair. I will tell you, we only have 1.2 million.

Chair SNOWE. Oh, did I say 2,000? I thought I said two million.

Mr. MANSELL. You said two million, yes.

Chair SNOWE. Oh, thank you.

Mr. MANSELL. I like the growth, but it was a little more than we

actually have, so I just wanted to set that record straight. But we

are the largest trade association in the United States and we appreciate the opportunity to come and speak today on the Small

Business Health Fairness Act. We applaud you for your willingness

to sponsor this legislation and work it through the Congress.

Our members are very interested in S. 406, and unlike many

other pieces of legislation that we work on, this happens to be a

very personal issue for them. Of our 1.2 million members, 28 percent, or 330,000 of those members are uninsured. This is about

double the percentage uninsured as compared with the general

U.S. population.

Real estate firms are the prototypical small business. Most of our

firms, or the average firm, have only five or fewer employees or

independent contractor agents. These are truly small businesses,

and like most small businesses of any sort, they have a number of

issues with insurance. One is our salespeople who are not employees of our firms, are rather self-employed, independent contractors.

This makes it much more difficult for realty firm owners to provide

insurance to them. As Senator Isakson mentioned to you earlier,

because of the Internal Revenue laws, we can’t do that.

In a survey we did of our members, we found that 74 percent of

the uninsured Realtors said the reason they are uninsured is the

cost of coverage. Only 7 percent cited pre-existing conditions. We

are nervous that we are going to have an increase even in the 28

percent that are now uninsured because we have an additional 5

percent of our members who are actually on COBRA. So those opportunities are going to run out for them.

Our numbers of uninsured members have doubled over the past

7 years. The numbers in 1996 were 13 percent, or roughly 90,000

members. At the end of 2004, 300,000 members, or 28 percent,

were uninsured. This is something that we really feel strongly

about, that we need to be able to draw our ability to negotiate a

good deal as a large association and offer this benefit to our memVerDate 03-FEB-2003 13:14 Sep 06, 2005 Jkt 021830 PO 00000 Frm 00108 Fmt 6601 Sfmt 6601 D:\DOCS\21830.TXT SSC1 PsN: SSC1
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bers and help them to find affordable coverage in the health care

arena.

The most often asked question when members call in to our Information Central, which is kind of a hotline for our members, is,

‘‘What can NAR offer me in the way of affordable health care insurance?’’ And the answer we have to give is, ‘‘Very little,’’ because we

do not have the ability to form an Association Health Care Plan.

We very much would like to do that and be on a par with large

employers and unions who can do that all over the Nation. We believe if we were able to do that, we would be able to really help

with the uninsured problem facing our members and of the Nation

as a whole.

We have, as an association, done some survey work of the public

and small business owners. I would like to share what we found.

We found that 87 percent of the small business owners favor the

concept of S. 406. We found that 77 percent of small business owners say they likely would participate in an AHP program. Eightynine percent of voters favored the concept. And even when we presented the opponents’ arguments against small business health

plans, 81 percent of small business owners still favored it and 88

percent of the national voters favor it.

This is an across-the-board, non-partisan issue as far as we can

tell. This is something the public wants, and I can tell you for our

own folks, this is something they want. Certainly, our association

has people from all over the country and every party, and we want

to help them do that.

We know it isn’t a fix to everything. We know it isn’t the silver

bullet that is going to fix the world for us. But we think it is a viable option that will at least assist us in helping serve our members

better. We want to work with you to be able to come up with solutions to some of the problems that have been brought up, some of

the concerns, and get through those and get this piece of legislation

passed this year, because we believe that it will, in fact, help our

membership and reduce the number of uninsured in this country

and we will work with you to accomplish that.

Thank you very much.

[The prepared statement of Mr. Mansell follows:]

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Chair SNOWE. Thank you.

Mr. Haynes.

STATEMENT OF TOM HAYNES, EXECUTIVE DIRECTOR, COCACOLA BOTTLERS’ ASSOCIATION, ATLANTA, GEORGIA

Mr. HAYNES. Thank you, Chair Snowe and Ranking Member

Kerry, for inviting us here to this hearing and for holding this

hearing and for your focus and your work on trying to help the

small business community with their concerns, particularly this

pressing concern on health care.

I am here both on behalf of the Coca-Cola Bottlers’ Association,

which, as Chair Snowe said, represents all the Coca-Cola bottlers

in the United States, but also on behalf of a coalition of trade associations, all of whom believe that this is the single most important

thing we can do to help our members provide more affordable

health care to their employees.

I think our experiences should be very helpful to the Committee

in understanding the realities of what we are living with and understanding that some of the concerns expressed about AHPs are

not borne out by the real world experience of trade associations.

As Senator Kerry pointed out, it is possible to do this today. We

do have an Association Health Plan, but there is one fundamental

problem. It only works for the big businesses in our association, not

for the small businesses.

Five years ago, the plan that we had for small bottlers, bottlers

with less than 50 employees, was disbanded because we couldn’t

find a carrier in the country to work with who would help us put

this plan together and keep it together. So the bottlers that were

part of our plan were left to whatever alternatives they had, and

I think many of them found those alternatives very unattractive.

Now, the plan we have does not, again, reflect what we hear

about AHPs from the critics. Our administrative costs are quite

manageable. They are in the 7 percent range. We desperately want

to expand this program and to improve this program, but primarily

to expand this program to include the small businesses that bottle

and distribute Coca-Cola in the United States. If we could do it, it

would make a huge difference for them and their employees.

We have talked to some of the bottlers who used to be in our

small business plan, our small bottler plan, and they fall into two

categories. One is bottlers that have found their health insurance

costs rising very substantially and simply have not been able to

continue to do what they were doing before. So they increased

deductibles, they reduced coverages. The costs go up to employees.

Employees opt out of those programs. And what we have found

with some of the bottlers that once were in our program is that

they have gone from having 100 percent of their workforce insured

to having less than 50 percent of their workforce insured, and I

know that for all the Members of the Committee is the kind of situation that you do not want to see happen, increasing the rolls of

uninsured because of the cost of insurance to small business.

The second thing that we see is people who are continuing to

stick with it, absorb the increases, and simply change the rest of

their business, recognizing that health care is going to make other

things less possible. An example that we have looked at actually

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happens to be a foundation that manages scholarships provided to

250 students every year throughout the country, college scholarships. This foundation, which has a staff of seven, was once in our

small bottlers pool and their costs, their expenses were comparable

to those for big bottlers, big businesses within our association.

Since they were forced out of our plan by these market forces

and really fundamentally by the impact of trying to comply with

State mandates, their costs have gone up materially. Today, they

pay about 60 percent more than a bottler that operates in the same

State and in neighboring States. They pay more than the bottler

that pays the most in our program, which is at least partially experience-related, and it is fully-insured.

Even for the bigger bottlers that are still part of our program,

and there are about—I think we have 13 in that program out of

a possibility of 77—with AHP legislation, we would have lots of opportunities in the marketplace to improve their coverages to make

them more affordable.

I think the other fundamental thing, I think we are very typical

of a lot of associations. We don’t exist to write health insurance.

We do a lot of things for our bottlers. Every bottler in the country

is a member of our association. Most of them have been so for 90

years. So there is no possibility we would discriminate in terms of

membership. And even if we were inclined to, our relationship with

our members is multi-faceted and to think that we would make a

decision about our relationship with one of our members based

purely upon some prediction as to the healthiness of their workforce as part of our program, I just don’t think it is realistic and

I don’t think it is realistic for many of the other associations who

would try to write these plans.

So that is, in a nutshell—there is a lot more detail in my statement, but I look forward to answering your questions and I thank

you.

[The prepared statement of Mr. Haynes follows:]

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Chair SNOWE. Thank you.

Mr. Nichols.

STATEMENT OF LEN NICHOLS, DIRECTOR, HEALTH POLICY

PROGRAM, THE NEW AMERICA FOUNDATION, WASHINGTON,

DC

Mr. NICHOLS. Madam Chair, Senator Kerry, Senator Burns, it is

a high honor, indeed, to have been invited back to testify before

this Committee on this topic because I know how dedicated you all

are to improving health insurance coverage options for small business owners, their workers, and their families.

My name is Len Nichols and I am the Director of the Health Policy Program at the New America Foundation—Senator, I have

moved in the last 2 weeks—a non-profit, non-partisan public policy

institute dedicated to finding practical solutions to our Nation’s

most pressing problems. Our focus today is on enabling more small

employers to offer health insurance to their workers by being, and

I quote, more like large firms.

The primary reason for this huge discrepancy in offer rates by

firm size, which are documented in my written testimony, is that

large firms achieve economies of scale, as we talked about earlier

today. These economies of scale come from three sources. I am

going to focus on one, the one most relevant to our discussion, risk

pool size and stability. Simply put, the larger the risk pool, the

lower the variance of expected medical claims costs. The statistical

law of large numbers is a good friend to large pools.

It is possible for insurers to create a large stable pool out of

many small employers, but in real life, for various reasons, premium variance is higher for small firms than for large. So my testimony will address the pros and cons of alternative ways to enable

small firms to be more like large firms in purchasing health insurance.

Currently, there are two broad approaches on the table, Association Health Plans and subsidized participation in broader purchasing pools. Simply put, AHPs are one step forward, but I fear

they are two steps backward at the same time. And while the best

alternative is perhaps two small steps forward, it is, in my view,

well past time for small steps only. You have heard the urgency described.

Association Health Plans would make insurance cheaper by exempting members’ self-insured plans from State regulations, including benefit mandates, solvency standards, State taxes, and the

rest. These exemptions would lower premiums a bit, but the largest

gain to the AHP members would more likely come from scale

economies and from favorable risk selection vis-a-vis the rest of the

market as a whole, not necessarily within an association.

Firms with low-risk workers, whoever they were, young and

healthy, will find the self-insured AHP product exempted from benefit mandates that are most attractive, and as these firms leave the

currently fully-insured market pools, those pools would necessarily

deteriorate. The only empirical question is how much premiums

would rise for those who weren’t able to get into the self-insured

AHPs, and that is really what the ying-yang in this debate is all

about.

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You know, we have been talking about this for quite some time.

I think I have been testifying on it for at least 9 years. I think you

all have been talking about it for longer. And I have often asked

myself, why is it that proponents are so intent on creating a separate market for some small firms, but not for others, and I really

can only think of two reasons.

Some proponents, I think, really sincerely want to help firms and

they know their firms and they know that those firms are relatively low-risk and that would work. They could band together

and be similar. And they either don’t know about other firms in the

market or just don’t worry about firms that may have different risk

profiles.

Other proponents perhaps hope to administer self-insured AHPs

and use the market opportunity as a way to finance other objectives of the organization. These are fine reasons to seek legislation,

but they are not compelling public policy rationales, certainly not

for a Committee as dedicated to the well-being of the entire small

business sector as this one.

A better way to continue your historic mission is to encourage all

small firms to act like large businesses by banding together in a

truly large and powerful purchasing pool.

Now, some State benefit mandates, at least in my experience,

may indeed merit repeal on the arguments, on the real analysis

you can do. If so, then Congress should override them for all small

firms in all States, not just for those who happen to belong already

or come to qualify for an association.

So if AHPs aren’t the best way to go, how should Congress react?

Creating a single large purchasing pool, either in each State or in

a locale within a State, would indeed lower premiums, but subsidies, of course they are expensive, but they would entice even

more entry and help stabilize the risk pool, as well.

Who should be subsidized in this way? A lot of researchers asked

this question and we have pretty much concluded the most efficient

subsidies are those that are linked to low-income workers directly.

So if the policy objective is to subsidize firms that don’t offer today,

then linking firm-level tax credits to worker wages would be far

more efficient than subsidizing firms regardless of worker wages

and incomes, as implicitly AHPs would.

The SEHBP bill co-sponsored by Senators Durbin and Lincoln

links employer subsidies to worker wages and provides larger tax

credits the greater the employer’s share. This extra price reduction

means that that approach would likely increase coverage on net

more than AHP legislation, but neither approach is powerful

enough to solve the uninsured crisis which you all have articulated

so well.

In fact, recent work I have completed with the support of the

California Health Care Foundation makes clear that the greatest

risk to our health system’s future is this: an increasing fraction of

our workforce cannot afford health care as we know it. Premiums

are growing faster than wages. A worker with median wages in

2003 had the same purchasing power vis-a-vis health insurance as

a worker at the 25th percentile wage 5 years ago.

This rapid decline in purchasing power is surely responsible for

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cently, and this fact helps remind us of the three interrelated problems of our impressive, but flawed, health care system: low clinical

value per dollar, highly uneven quality of care, and inequitable access to that care.

To avoid more uninsured, higher costs, and even more stress on

small business owners, I think we have to tackle these problems

simultaneously through comprehensive reforms. Support for what

I will call an adult conversation about health policy alternatives is

actually growing around the country, a conversation we postponed

far too long. The fact that more workers cannot afford private

health insurance each year, as has been testified to today, has been

noticed in every community around our country.

Details are better left for another day, but the principal and central elements of a far better health care system are emerging. The

guiding principle is universal coverage in exchange for universal

responsibility. Key elements of this center on an individual mandate to purchase private health insurance with continued employer

and increased social responsibility for financing support. There

must also be effective cost growth control so that the public subsidy

guarantee and continued employer participation will indeed be sustainable.

Now, while we muster the courage for this larger task, perhaps

our most important next step is to acknowledge as a Nation that

access to health care is fundamentally a moral issue. The Institute

of Medicine has clearly interpreted the research literature to tell us

that some of the consequences of lack of insurance are thousands

of premature deaths every year. This should be just as unacceptable to us as are deaths from smoking, drunk driving, medical errors, or acts of terrorism here and abroad.

Over 5,000 years of various scriptural traditions call upon us all

to clearly pursue justice and enhance the life chances of all our fellow human beings. Once we agree to stop accepting the morally unacceptable, then maybe we will be ready to talk about how, rather

than whether, to inprove our entire health care system, being ever

mindful of the essential role small employers will always have in

our economy and our health insurance opportunities.

Thank you very much.

[The prepared statement of Mr. Nichols follows:]

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Chair SNOWE. Thank you, Mr. Nichols.

Mr. Morrison.

STATEMENT OF JOHN MORRISON, MONTANA STATE AUDITOR,

COMMISSIONER FOR INSURANCE AND SECURITIES,

HELENA, MONTANA, ON BEHALF OF THE NATIONAL

ASSOCIATION OF INSURANCE COMMISSIONERS

Mr. MORRISON. Thank you, Madam Chair, Ranking Member

Kerry, Senator Burns. My name is John Morrison. I am the elected

Montana State Auditor and Commissioner of Insurance and Securities. I am testifying today on behalf of the National Association of

Insurance Commissioners.

The NAIC represents the chief insurance regulators of the 50

States, the District of Columbia, and the five U.S. Territories. I

chair the NAIC’s Health Insurance and Managed Care Committee.

The insurance regulators are devoted to protecting consumers, and

it is with this goal in mind that I comment today generally on the

small business health care crisis, and in particular on the proposal

to create association health plans.

Providing affordable health coverage to small businesses is critically important in many ways. The statistics cited here today show

the urgency of the problem. The numbers are even greater in Montana. In our State, 1-in-5 Montanans have no health insurance,

and over half of them—over half of them—work for a small business with fewer than ten employees. What we do as policymakers

and regulators impacts the health of these employees and their

families, the stability of the health insurance market, and the vitality of the small business community. I am pleased to offer the full

support of the NAIC in developing legislation that will reach these

goals.

States have acted aggressively over the past 15 years to stabilize

and improve the small group market. States have required insurers

to pool all of their small group risk by imposing rating bands to

further spread the risk of small, unhealthy businesses across a

larger population. States have created purchasing pools and allowed associations to provide State-regulated insurance products to

their members.

In Montana, we just enacted a plan that I proposed to give substantial tax credits and purchasing pool access to several thousand

small businesses to make health insurance more affordable. Our

proposal is supported by the Montana Chamber of Commerce,

NFIB, and over 40 major organizations representing labor, education, public health, providers, seniors, and others. The Montana

Chamber of Commerce has its own insured association plan, Chamber Choices. The Flathead County Business and Industry Association has its own insured association plan, the FBIA plan.

The Federal Government and the States must work closely with

these broad coalitions to implement reforms that truly make insurance more affordable to small businesses. Rehashing strategies

that have failed, such as AHPs, is not a step forward. It is time

to move forward to find effective solutions.

In their search for effective solutions, the Nation’s insurance regulators have identified seven basic principles by which Federal

health insurance reform legislation can be analyzed. These prinVerDate 03-FEB-2003 13:14 Sep 06, 2005 Jkt 021830 PO 00000 Frm 00137 Fmt 6601 Sfmt 6601 D:\DOCS\21830.TXT SSC1 PsN: SSC1
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ciples are intended to keep the focus on the needs of consumers

and the true causes of the current crisis.

One, the rights of all consumers must be protected. States have

patient protections, solvency standards, fraud prevention programs,

and oversight mechanisms in place to protect consumers. These

standards should not be preempted.

Two, do not damage existing State reforms that are working.

Small group purchasing pools, high risk pools, and other reforms

increase availability and affordability of health insurance. Federal

reforms must not erode these successful efforts.

Three, consumer education must be provided. The Federal Government must coordinate with State consumer education programs

to ensure consumers are able to make informed choices.

Four, rising health care costs must be addressed. There are multiple drivers of health care costs and they, in turn, are driving up

the cost of health insurance. Effective policy must include provisions to address cost drivers and control rising health care costs.

Five, do not make cost shifting worse. Low reimbursement payments have shifted costs to the private sector. Unfunded Federal

mandates have shifted costs to State governments. The cost of providing care to the uninsured is also shifted, driving up rates for insured consumers. Federal health insurance legislation must address cost shifting.

Six, the position of less healthy individuals must be protected.

New designs must not shift more costs to the sicker patient or discourage appropriate care.

Finally, seven, public policymakers should not allow the creation

of insurance companies that do not have appropriate oversight. To

allow them to be formed outside the existing regulatory structure

will create an unlevel playing field that is unfair to existing insurers and eventually harmful to consumers.

States continue to experiment with reinsurance, tax credits, subsidies, basic health plans for small businesses, regional pooling,

and programs to promote healthier lifestyles and manage diseases.

As always, States are the laboratories for innovative ideas. The

NAIC this year—this year—will examine these State initiatives to

find successful trends that can be followed by the States.

Still, the impact of the Federal Government on health care policy

is tremendous and America’s State insurance regulators look forward to working with you toward real progress on this issue for

small businesses and their employees everywhere.

[The prepared statement of Mr. Morrison follows:]

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Chair SNOWE. Thank you, Mr. Morrison.

Mr. Lindsay.

STATEMENT OF WILLIAM N. LINDSAY, III, PAST CHAIR,

NATIONAL SMALL BUSINESS ASSOCIATION, DENVER,

COLORADO

Mr. LINDSAY. Yes, Madam Chair.

Chair SNOWE. Thank you.

Mr. LINDSAY. Chair Snowe, Ranking Member Kerry, Senator

Burns, my name is Bill Lindsay. I am here as the former Chair of

the National Small Business Association, the Nation’s oldest small

business association.

I have spent a career running a small business designed to help

other small businesses with their health insurance. I thank you for

this opportunity to speak on this critical issue. As has been mentioned by all of the other presenters today, this is a very significant

issue affecting our Nation’s economy and small businesses.

Health care and the cost of insurance consistently rank as the

top concern of our members. We may want to fix the issue with

cost of insurance, but I urge you to heed the ethical credo of physicians, that is, first, do no harm.

NSBA has studied Association Health Plans, AHPs, and we are

one of the few small business groups that oppose them. We are,

however, supported through a coalition of numerous local, regional,

and State Chambers of Commerce in our opposition. There are several misconceptions about AHPs that have been discussed today

and I would like to speak about them briefly. There are four in

total.

The first is that larger pools create bargaining clout. Pooling

alone does not lower insurance rates. It depends upon who is in the

pool. Otherwise, Blue Cross and Blue Shield, which insures arguably the largest number of small businesses in America, would

have the lowest rates, and they don’t. Eighty percent of cost for insurance is based upon cost of the claims. Cost of claims is not impacted by a larger national pool. Doctors and hospitals agree to discounts on who is insured in their area. If an AHP had five million

members nationwide, but only several hundred in a local community, they would not be able to negotiate a lower rate than existing

players in that marketplace.

The cost of administration in small business insurance is very,

very important, but the question is how AHPs would impact that.

You would still have the issue of billing and collections, bad debt,

and all of the issues that insurance companies deal with right now.

The bill provides little protections against gaming, and in order

to affect the cost of insurance, which I have mentioned before represents 80 percent of the total cost, AHPs would have to employ

strategies that would adversely affect the rest of the market. Examples would be the ability allowed under HIPAA to have disparate rates based on the age of the applicants. That is permitted

under HIPAA, and AHPs would be able to structure those rates so

they would be able to appeal to younger and healthier workers.

Also, the ability to exclude not only State-mandated coverages, but

other forms of coverage that would be needed by those who have

chronic health conditions.

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A third point is that this bill would exempt AHPs from State solvency requirements. It has been discussed that there are provisions

in the bill on solvency, but you have got to remember that the National Association of Insurance Commissioners and the vast majority of States have moved away from static requirements to riskbased capital requirements that index those solvency requirements

based on the size and the growth of the pool.

The final misconception is that pooling cannot occur right now.

In Senator Burns’ State, in Montana, and in Mr. Morrison’s State,

there currently are opportunities for businesses to band together in

MEWAs that are regulated by the State insurance department to

create more market presence in that State, and those work very effectively.

The Mercer Report, and Senator, I have included my testimony

for inclusion in the record. I would like to request that this also

be included.

Chair SNOWE. Without objection, so ordered.

Mr. LINDSAY. It was commissioned by the National Small Business Association. It indicated that those with AHPs would see a

rate reduction of up to 10 percent over a period of 4 years, but

those not in AHPs will see premium increases of 23 percent or

more, primarily due to risk selection. The overall net increase in

the market would increase, and has been mentioned in previous

testimony, the resulting increase would be over a million additional

uninsured individuals.

Now, I know it is easier to criticize. The question then is, well,

what is the solution? Chair Snowe introduced S. 723, the Simple

Cafeteria Plan, which I think is a huge step and very positive for

small business. But in addition to that, the National Small Business Association has spent the last 18 months studying this issue

and we have put forth a comprehensive proposal for reform which

would include the following parts.

Number one, looking at the issues, we would seek to require all

individuals to have health insurance, either through Medicaid,

Medicare, individual insurance, or traditional group insurance.

We would provide subsidies to low-income individuals, not to

businesses.

We would provide a truly basic plan indexed to income levels so

that the cost would be proportionate to income.

We would remove the tax subsidy for health plans that are richer

than the basic benefit program and drive unnecessary utilization.

We would focus on quality, including public disclosure of health

care quality within hospitals and physicians’ offices.

We would tie malpractice reform to physicians who follow established protocols and proven clinical procedures.

And we would treat individual health insurance like group insurance for tax purposes to provide equity in the small business market.

Madam Chair, I thank you for the opportunity to present this information this morning and I hope it is helpful in your deliberation.

[The prepared statement of Mr. Lindsay follows:]

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Chair SNOWE. Thank you. Thank you, Mr. Lindsay.

Obviously, we have heard a variety of views here this morning,

or this afternoon now.

I am going to turn to Senator Burns for my turn because I know

he has got other appointments and this has gone on longer than

we anticipated, so Senator Burns, you may proceed.

Senator BURNS. I just have one question, and I just went through

the testimony of just about all of you last evening. Let me ask Mr.

Nichols, Mr. Morrison, and Mr. Lindsay, are all three of you proposing some sort of a taxpayer subsidy to take care of individual

plans or group plans?

Mr. NICHOLS. Senator Burns, I think it is fair to say that if we

are going to achieve significant expansion of health insurance coverage, we are going to have to have public monies. It is not our

place to advocate that today. It is our place to tell you the implications of your choices. I will say I think that is where we will eventually head and that is what I would like to see.

What we are trying to do, I think, is indicate we share your goal.

Your goal is to try to find a way to get small business much better

access to the same kinds of coverage large businesses have, and we

are simply trying to say, compared to AHPs, there are better alternatives and those alternatives include having all firms join together, have the same kind of rules apply inside a new pool as outside the pool, make sure the solvency stays where it is, and if you

really want to expand coverage and you are ready to make that

choice, then you can subsidize it with tax credits or whatever and

we can help you design that, too.

Mr. MORRISON. Senator Burns, I think your question hits on one

of the major issues that is key to providing more affordable insurance to more small businesses and their employees all across the

country. Right now, as you know, 1-in-5 Montanans don’t have any

health insurance. That is about 170,000 of us. Most of those

uninsureds want to provide insurance to their families and the employers want to provide it to their employees, but they can’t find

it at a level they can afford.

I had a conversation recently with a guy in Livingston who

owned an auto mechanic garage, and I was there at the coffee shop

and he came in. He was wearing his coveralls. He had grease still

on his hand. He came down, taking a few minutes away from work,

and he said, I am here because I want to provide health insurance

to my employees. And I said, how much can you provide? How

much can you pay? And he said, $100 a month. And I said, how

much can they pay, and he said $50 a month each. For $150 a

month each, they can’t find a product, and so, therefore, they go

bare.

Well, meanwhile in Montana, hospitals provide treatment to the

uninsured to the tune of $100 million a year and we are leaving

$7,000 per year on the table in that shop that wants to be going

toward defraying that cost shifting, but it can’t find a way to do

it.

And so as we develop alternatives, both as State policymakers

and Federal policymakers, the key, I think, is to provide access to

health insurance that requires each individual and each employer

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to pay as much of their fair share as they can afford to pay and

then step up to the level of being insured.

Senator BURNS. In other words, you subscribe to a subsidized

taxpayer subsidy.

Mr. MORRISON. Well, what we did in Montana, as you may know,

with our State House Bill 667 is we provide tax credits, tax credits

to small businesses that are currently insured with two to four employees. That allows them to defray on an annual basis the cost of

their health insurance premiums, and then for businesses that are

currently uninsured, we allow them to join a purchasing pool, and

the purchasing pool has rates that are discounted, as well.

Now, that purchasing pool does receive some revenue from I–149,

which is the tobacco tax initiative that the people of Montana enacted by a vote of over 60 percent of the people. It creates a special

revenue account and some of that revenue goes in to helping provide that purchasing pool access at an affordable price to several

thousand Montana small employers.

Senator BURNS. Has this plan passed, or is it pending?

Mr. MORRISON. This has been enacted by the legislature and it

is pending signature by the Governor.

Senator BURNS. How long is that tobacco money going to last?

Mr. MORRISON. We don’t know exactly how long it is going to

last. We were pretty conservative in the way we set this up to

make sure that we took account of the possibility of a significant

decrease in the expected revenue over time.

Mr. LINDSAY. Senator, if I may, you asked the question of me, as

well, and just to respond, I think that our view is that the only way

we are going to fundamentally reform our health insurance system

and be able to control costs is we have got to get everybody covered. And the question is, how do you do that if you are going to

be covering very low-income individuals?

I would also comment that we already have substantial subsidies

right now just in the form of the way our tax code works, and unfortunately, our tax code, because of the tax-favored nature of insurance, encourages people to buy greater and greater insurance

coverage, more than they need, because it is tax-deductible. Our

approach would limit that tax deduction and use the resulting tax

dollars to subsidize those that are low-income.

Senator BURNS. Well, I am just looking at the possibility of no

matter where the cost shifting happens, whether it happens at the

hospital or at the doctor’s office or the insurance companies, it happens. And so I just want to clear that up on where do you want

to subsidize. Evidently, all three of you agree that that is the case.

Thank you very much, Madam Chair.

Chair SNOWE. Thank you, Senator Burns, and thank you for

being here today and for your contributions. Sorry the hearing

went so long.

But I think it illustrates how compelling this issue is and the

problem, and it obviously does require a diverse approach. This is

one such approach. I am interested in hearing the varied views

represented here on the panel today and I would like to get to the

heart of some of these issues for a moment, and I won’t prolong it

because I know it is late and I understand, Mr. Mansell, you have

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an appointment. So I will finish up because Senator Kerry had a

speech, so he had to leave.

You heard some of the comments here today, and we obviously

have three panelists who are opposed and expressed concerns about

the way in which Association Health Plans are structured, what is

going to impact the State markets. Obviously, there is a significant

problem.

Doug, you continue to provide insurance for your employees,

much to your credit, given the soaring increases occurring in the

State of Maine. It is a market dominated by one or two, maybe

three carriers at best, but one predominately. That is true of many

markets throughout the country. That is why you have seen so

many—and because so many insurers have fled the small group

markets, ultimately, you have been left with paying whatever costs

are available for health insurance plans for your employees and for

your families.

You have heard some of the concerns here today about the idea

of Association Health Plans. Is there anything you want to address

in respect to that, whether it is on the adverse selection, cherrypicking, the impact on the State market, risk pools, so on?

Mr. NEWMAN. I guess I would start off by saying that the one unacceptable course of action is the status quo. I talk to small businesses every day in my association with NFIB and ABC and other

groups. I mean, I have run into hundreds of them in the course of

various things and I agree with what everybody else said. Health

insurance has overtaken workers’ compensation, regulation, taxes,

all the traditional issues we talk about. It has just overtaken them

all by leaps and bounds.

What I think is needed to avert what could be a disaster, particularly in State Medicaid systems, is we need to get some relief

focused and funneled to small businesses, the 10-, the 20-, the 30-

person firms, as soon as possible, and the reason I was so anxious

to come down here today was just to convey that thought, that it

is getting dire out there and that my business and many other

businesses like mine are literally on the verge of just saying, OK,

we can’t go on.

Health insurance is going to have to be one of the last checks I

write, because I need health insurance to keep my employees. I

don’t know if I want to be in business. I don’t want to be one of

those businesses that doesn’t offer health insurance.

So we need action and we need it very quickly, and I understand

that Association Health Plans aren’t the total solution. I tend to

disagree with some of the theories put forth by other folks about

cherry-picking. I think the real danger that is going on now is economic cherry-picking. Those people who are finding a way to make

it happen and making it happen, those that just can’t swing it anymore or can’t get into the market are not doing it and that is putting a huge burden on States.

I think that NFIB, for example, an organization we are involved

with that does great work for small business, there are no barriers

to entry to NFIB. Another group, ABC, if you happen to be a contractor, you can join. The entry fees to these organizations are

very, very modest. There are no barriers to entry. Anybody with

one person or 50 could join NFIB tomorrow and your legislation

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would require NFIB to offer them that rate. There wouldn’t be that

sort of cherry-picking. Every small business, essentially, in the

country will be eligible for an Association Health Plan.

I think some of the other concerns, there might be some reasons

why, but I think your legislation probably addresses some of those,

as well.

But I think the most important thing to remember is that we are

on the verge of a crisis out there. Seventy percent increases aren’t

sustainable. They are just literally not sustainable. And if we don’t

do something in the next year or two, I won’t be offering health insurance. I know of dozens, if not hundreds, of other businesses that

aren’t going to be offering health insurance, and then where are we

going to be? I don’t think we have the time to go down a path of

more comprehensive solutions. I think immediate action is needed,

and I think this would provide immediate relief to a lot of small

businesses and I don’t think, personally, I don’t think that the detriment that has been described by others would necessarily result.

Chair SNOWE. I appreciate your comments and I thank you for

taking the time to fly down here and be here today.

You know, it is interesting, because I think we have to get to the

real world solutions given the crisis that has surrounded small

business regarding this particular issue that has emerged as the

number one issue for a very good reason, if you look at that chart

and what you are experiencing in your own world.

Mr. Mansell, you are saying your association would expand, is

that the potential here?

Mr. MANSELL. No. No.

Chair SNOWE. No, not in terms of your members, but in terms

of the ability to provide——

Mr. MANSELL. Well, actually, what our association would like the

ability to do would be to group our people together and be able to

purchase from an insurer, our current insurer.

Chair SNOWE. Right.

Mr. MANSELL. We are not interested necessarily in becoming an

insurance company. That is not the direction our association is interested in. We are interested in being able to group purchase insurance at a better rate. We do not have a ‘‘cherry-picking problem.’’ The association doesn’t choose its members. They come to us

basically through being hired at real estate companies and joining

local boards and State associations and so forth.

Chair SNOWE. Well, how do they join your association? What

questions do you ask, if any, other than paying dues?

Mr. MANSELL. The questions we ask is, are you licensed by the

State, if there is a license law, and will you abide by the code of

ethics of the National Association of Realtors. Other than that, you

are in. It is not a real heavy entrance barrier for folks to get into

the association. The ability for people to play with that, ‘‘cherrypick,’’ as it has been talked about here, in our association, that isn’t

even in the realm of possibility. We are not interested in this from

a standpoint of generating revenues. We don’t need the revenues.

We need the insurance, and our association would act as a

facilitator to get this done, not as somebody that is going to collect

revenues.

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Chair SNOWE. And that is one of the points in this legislation.

But again, I am open to discussion on some of these questions. But

on the reserve requirements, when we are talking about—Senator

Kerry is referring to $2 million. Well, the reason for that is so

there wouldn’t be the ability to charge excessive premiums unnecessarily for the members.

Mr. MANSELL. Right.

Chair SNOWE. And so that is the reason for that cap. But again,

we can look at that particular issue. But I thought it was compelling, what you had mentioned, that 77 percent of your realtors

want to be able to participate. I mean, that, again, I think, speaks

to the large question here that is at stake.

Mr. MANSELL. It is a very serious problem. The other part of our

group who are insured are insured mainly on individual policies

and the problem they have is that as soon as they have any sickness in their family, they get canceled. And so it is a real serious

problem for our group, even those that are willing and able to purchase insurance. There are some serious barriers, and that is why

grouping together would be so valuable for us.

Chair SNOWE. Mr. Haynes, you have heard some of the points

that are mentioned, and I know you want to be able to—you had

the experience, I gather, on a State-by-State basis, is that correct?

Mr. HAYNES. We are doing it today.

Chair SNOWE. You are doing it today?

Mr. HAYNES. For the big businesses in our association.

Chair SNOWE. I see.

Mr. HAYNES. The carrier is willing to go through all the hurdles

and the administrative obstacles caused by complying, but the carrier will not, and we have not been able to find anyone who will

accept in that program a bottler with less than 50 employees. In

fact, everybody basically below about 125, they sort of push away

and don’t want to do. It is only the big businesses that they are

willing to go through the State mandates because there is enough

business there, there is enough revenue there to handle the administrative expenses.

The other thing, just a couple of points I might respond on. The

mandate issue, the perception is that the problem with mandates

is that we don’t want to provide coverage for breast cancer screening or prostate cancer screening or something like that. Nothing

could be further from the truth. We provided that when we had a

small group program and we would provide it today. Our smaller

bottlers want to provide health care benefits to their employees

that are comparable to the larger bottlers. If they don’t, they lose

those people and lose their ability to survive.

The issue with the mandates is not an individual mandate or a

couple of mandates, it is 50 different sets of mandates. It is simply

the administrative burden associated with complying with all sorts

of different requirements and preparing all the documentation,

training all the people who have to understand what the mandate

is in that State.

An example would be we have got, within our existing program,

we have got somewhere in the range of six or seven different definitions of when a dependent must remain in the program because

there are lots of different State rules on it. Some States say as long

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as they are a full-time student. Some States say as long as they

are a part-time student with X-numbers of hours. Some say until

the age of 21 regardless of status. So if you have got 25 or 50 people that you are trying to add to a program from one of these

smaller bottlers and there are four different definitions of dependent coverage, preparing all the documentation eats up the potential

for including them in the program, so we can’t get them in.

And a lot of the mandates—another one we have is we have got

a program that basically encourages employees to order prescription drugs by mail order. Well, there are States that prohibit creating any sort of incentive for mail order pharmacy prescriptions.

So we have got some States where we can do it and some States

where we can’t, which is different documentation, different training

for the people who are handling the claims management.

We are able to do it as long as there is critical mass within an

individual participant, but we simply can’t extend it to the small

businesses, which is the disparity issue that is really troubling.

Chair SNOWE. And what was the feedback from your membership, for example, on your plans in terms of—-because this whole

race to the bottom, the idea there are going to be bare-bone plans

and trying to get around State mandates. I mean, what was the

feedback in terms of designing a plan that was good for your members?

Mr. HAYNES. When we had them in our plan, the plan for the

small members was comparable to the plan for the big members,

which was comparable to the plan for big Fortune 500 companies,

really no material difference. They wanted a comparable plan as

long as the cost was reasonable, and that is what they would like

today. Today, they have less comprehensive plans at higher costs.

Chair SNOWE. I appreciate that.

Mr. Nichols, Mr. Morrison, and Mr. Lindsay, obviously, you are

on the other side of the equation on this debate. You have heard

the concerns here expressed today and some of the issues surrounding the desire to have this plan for small businesses as an

option. I mean, frankly, insurers are leaving the States, I mean,

leaving very few left. That is true in the State of Maine, for example, as Doug will tell you. There are very few carriers left to offer

any competitive pricing for insurance plans. So ultimately, what is

the State’s responsibility in that sense?

The goal of AHPs isn’t to circumvent and to get out from underneath the State mandates. The goal and desire is to have a plan

to offer their employees, hopefully with many of the benefits that

are now required under State law. But right now, given what is

happening in Maine and elsewhere across the country is that these

pools are diminishing to the point there is no competitive ability to

leverage a reasonable price for these plans.

I mean, we have a dominant carrier, which we know is true. The

Government Accountability Office issued a report several years ago

and we know. I mean, we know what the largest carriers for small

group markets in most of the markets across America. So it is either one to three, maybe five at best. So there is no leverage for

pricing, and so hence the crisis that we are facing and the soaring

premiums.

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So what is the responsibility of the States? How do you get

around this? How do you solve this problem now if you don’t have

$75 billion to address some of the other plans that we are talking

about here today, or $18 million the first 5 years and well beyond

that? Do you see what I mean? I mean, there are a lot of other

issues we can address, but right now, this is an option, and you are

hearing it from small business in the real world experience. So

what do we do?

Mr. LINDSAY. Madam Chair.

Chair SNOWE. Yes.

Mr. LINDSAY. In response to your question, I think as you have

just identified, the problem we have in America is not availability

of insurance, because HIPAA provided that for small businesses.

The problem we have is the cost of the insurance. And the key fundamental issue is going to be—and of course, the majority of small

business members, if they were told that they could purchase into

a pool would want to do it, but no one has told them yet what it

would cost, and that is the ultimate issue.

And so the question is, how is an AHP going to lower the cost?

The reason why most of us are so concerned about the issue of selection is that when you deal with health insurance premiums, you

have very few options to control costs. The first is you get costs

down by having positive selection. The people who buy your product are healthier than those who buy someone else’s product. You

do that by tiering your rates based on age, because if you are an

association, you want to have people benefit from your program

and so you are going to want to keep that rate low.

The second way is by the coverage that you offer. If you offer the

most comprehensive plan, you are going to appeal to people who

are going to use that comprehensive plan and it is going to raise

the rates. There is no magic here.

And then the only other third way would be negotiating better

deals with providers. As I have already mentioned in my testimony, provider discounts are local based on the number of people

in that market who participate, and you are going to be competing

with already large payers who are in that market and getting the

best possible rate.

So my view is the concern about AHPs, and it is a noble attempt

and it is a very important attempt to address a difficult problem,

but it is the effect it is going to have on the rest of the market that

is so disturbing. The concern that I have is the public policy impact

on those people who are currently insured who are not association

members or who have older, less healthier workers, because it is

going to be those people who get cost shifted to.

Mr. MORRISON. Madam Chair, first, the pleas of the people on

that side of the table are similar to the ones that I hear all over

Montana. No question about the urgency of this problem. Things

do need to be done.

We believe that AHPs are not likely to deliver the kind of relief

that some other approaches are. An important thing to realize

about AHPs is the way they deliver benefit to anyone is by segmenting the market. It is the only way that an AHP can deliver

a benefit, because the benefit of pooling in terms of saving money

comes in terms of negotiating deals with insurance companies, and

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when you are not negotiating a deal with an insurance company,

pooling does not bring down rates. It stabilizes rates, but it doesn’t

bring them down.

And so the only way an AHP member gets a lower rate is if they

can break off with a group of people in some fashion that have

lower medical costs. And so we insurance regulators oppose that

because we believe that the people who break off and will have

lower costs are going to wind up being a minority and a majority

are going to wind up being stuck with premium increases.

Now, there are some very constructive things that we can do.

Number one, taking that money off the sidelines that I described.

All of those small businesses out there that are uninsured right

now, half nationally, 60 percent in Montana, want to be contributing something. Let us find a way to allow them to contribute

what they can toward the overall cost of delivering health care.

Number two, personal health issues, dealing with people taking

charge of their own health and being accountable for their own

health. We have seen health management programs in workplaces

in Montana that have resulted in flat insurance premiums over

time because they get people’s cholesterol down, their blood pressure down, they get them to stop smoking, control their weight,

and so forth, and these have a real effect on the need for health

care.

Number three, utilization, which is closely tied with advertising.

The commercialization of some of these health care products and

services has resulted in higher utilization than we used to have

historically.

And then finally, some of these issues that Senator Clinton and

Senator Frist have taken up in terms of eliminating duplication

and inefficiencies in the communication process and so forth. These

present some real opportunities to actually bring down the cost of

delivering health care here in the United States, which is what is

going to ultimately bring down the cost of health insurance for

small businesses.

Chair SNOWE. So how long should small businesses wait? I mean,

I think that is the point: How long should small businesses wait

when they are in the midst of a crisis that is only growing? Corporations and unions are allowed to be exempt from State mandates, and they offer the most generous plans. Nobody is saying,

well, we ought to fold them back into the State risk pools. It is a

question of having the leverage to purchase at better price that no

one is helping small business out with right now.

I don’t know. It seems to me this is a practical approach, because

it costs little money. It actually reduces Medicaid costs to the

States. It will increase the number of insured and it will give them

the ability to have a plan for their employees that actually, according to the Congressional Budget Office, will reduce premium costs,

costs to the employers, as well. It has been documented by CBO

that it would bring down the costs, so it is a start.

It may not be everything. We can address some of the other

issues. But I don’t see—I am having a hard time figuring out what

is exactly the problem here in terms of practical application of this

issue in allowing associations—allowing small businesses to cross

State lines, because that is what it is all about. It is not trying to

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bypass what you do every day, Mr. Morrison. I think it is a question of how best we get at this particular problem that is really

leaving small businesses on, as the President says, on an island

unto themselves right now because there is no lifeline. So that is

one of the problems that we are grappling with.

Mr. NICHOLS. If I could, Madam Chair, I think in the attempt to

create a level playing field for small business vis-a-vis the large

businesses and unions you talked about, the AHPs do that. But in

doing so, they make the field unlevel vis-a-vis those insurance

products that are still regulated and fully insured in that market.

And so in an attempt to solve one problem, you kind of make the

other part unlevel.

What I am worried about is not the intent or the actions of these

individuals or the people who are going to set up Association Plans

for trade associations. They are going to take care of their trade

members because they have got lots of reasons to keep them there.

I understand that.

What I am worried about is precisely, Madam Chair, the urgency

of employers looking for the cheapest possible way for them to buy

insurance. When they are low risk, they will find the NFIB product, the general product to which they can enter for $50, very attractive. When they are not, Madam Chair, they will find it less attractive. They will then come back to the fully-insured sector where

all those benefit mandates exist and those prices are going to just

go up and up and up and up, and that is what we are worried

about, not the motives of these individuals but the way the search

for lower cost will play out in a real marketplace. That is what we

are scared of.

Chair SNOWE. It is just giving them the option, though. I mean,

I guess I am not sure why—if it is not competitive, they won’t join.

Mr. NICHOLS. They will join, Madam Chair. The issue is what

happens to those who can’t join or don’t want to join or find that

the price to them in these unregulated situations are less appealing

than they looked when their workers were all healthy. That is the

question.

Chair SNOWE. OK. Mr. Haynes, I will give you the last word.

Mr. HAYNES Can I respond to all three, but particularly to Mr.

Nichols, because I think analytically he is right in the sense that

if only some part of small business can benefit from AHPs, then

you have to look at where everyone else is.

My view is that there are trade associations out there that will

cover most, if not all, of the small business community. You have

broad-based associations like NFIB that I believe can—I think

most small businesses are part of some association that is going to

pursue one of these plans.

And here is the other fundamental thing, and I think it is missing in what we have all said, including me, and I think the exception is Doug Newman, because he points out something that I

think is very powerful in this which is the profit motive. It is not

true that the only money that an association can bring to its members by getting involved in this comes from adverse selection. There

is the possibility of lowering administrative costs through group

purchasing, but there is something really powerful, which is the

profitability of the private commercial small group carriers, the

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people who are currently supplying small business, and the fact is

that trade associations are almost universally non-profits and

whatever money we are making, we are returning to our members.

The Blue Cross system in the United States, just from what I

have looked at on the Internet last night, looks to be making

maybe as much as $5 billion a year selling small group insurance.

Now, I think they can withstand some competition and still serve

the small group market. I think they could afford to lose some of

their more profitable pieces of business and still very adequately

serve the small group market.

And I think that is really the concern that Len expresses, which

is really what I see as the most fundamental concern. I think that

is the answer to that. I think the people who are writing small

group insurance can continue to do it even if there is a small

amount of adverse selection.

Mr. LINDSAY. Madam Chair.

Chair SNOWE. Yes.

Mr. LINDSAY. One question you have asked repeatedly is this

whole question that if large business can do it, if unions can do it,

why can’t small business do it, and I think that is a part of this

issue. And I think that is a worthy challenge.

But I think the only way that you have a level playing field in

that sort of intellectual foray is that insurance has to be mandated.

The problem is, if we have—just by way of example, 5,000 businesses each with ten employees in a pool, 50,000, from a risk profile standpoint, they don’t operate the same way that a 50,000 single-employer business does. A single-employer business that buys

insurance buys it unemotionally for everybody. The CFO makes a

decision based on what is right for the company and what is realistic for the employees.

In the example I used with 5,000 businesses, they are going to

make a decision based on what is in their enlightened self-interest.

What is covered in the plan? How much are the rates? So each of

those 5,000 units are going to make individual decisions.

So we don’t have a level playing field in terms of the analogy of

small businesses being able to operate like a big business. And as

long as insurance is voluntary, that is the problem. If this body

were to make a decision that insurance was required, then associations could be able to work because then everybody would be on a

level playing field.

The challenge that insurance companies have, and I would argue

associations have, is the risk profile of people who come to them.

In the insurance business, we call it adverse selection, and it is

that adverse selection that would be the concern.

So the only way for an association to protect its members, not to

game its members but to protect them, would be to put up these

kinds of safeguards, and what we are talking about is that those

protections then unlevel the playing field, because in the traditional fully-insured market, you can’t do that under State law. And

so it is the unintended consequences that are the concern.

Chair SNOWE. OK.

Mr. MORRISON. If I could just add to that briefly——

Chair SNOWE. OK.

[Laughter.]

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Mr. MORRISON. When you are dealing with 5,000 employers, it is

going to be hard to save administrative costs the same way as if

you have one employer with that many employees.

Chair SNOWE. You have had the experience. Do you agree?

Mr. HAYNES. Absolutely not. Our administrative costs are comparable. We have 6,000 people in our pool spread across 12 bottlers

and our administrative costs are, as far as I know, comparable to

our largest bottler, which has 77,000 employees.

Chair SNOWE. You know, it is interesting, because it does document that administrative costs will come down. I mean, that is the

analysis that we have been given with respect to that, obviously,

because it will have greater efficiency.

Yes, Doug.

Mr. NEWMAN. If I could just make one final comment.

Chair SNOWE. Well, it is only fair to give a Mainer the final

word.

[Laughter.]

Mr. NEWMAN. On the issue of mandates, because I think it is

something that we sort of forget, and that is why are small businesses seeking out this huge expense of offering health insurance

to their employees, and I think that one of the best controls and

mechanisms that is around that is going to protect employees on

the issue of mandates is employers are buying health insurance because they are accountable to their employees. And if I went out

tomorrow and bought a really lousy health insurance plan, believe

me, I would pay the price for it.

I think few businesses are likely to go down that path because

we are accountable every day. It is a benefit we are trying to offer

because we are trying to compete. So I don’t think that the issue

of mandates is about trying to buy a bare-bones product to go out

there and save a whole bunch of money because you are going to

be shooting yourself in the foot with your employees.

I think the elimination of mandates does one very important

thing, is allows for innovation. I only have one choice a year in my

health insurance. I might get two quotes, but it is the same choice

for the same product. Everybody would agree on this panel that

what we need to do in health insurance is create some innovation,

try some new ideas, and get some personal accountability out

there, and eliminating the mandates allows for that.

Chair SNOWE. Well, thank you all. Thank you, Doug. Thank you

very much for being here and your willingness to testify and for

your patience and endurance here today, for the hearing going

much longer. But, you know, frankly, I thought it was very helpful

to the discussion and I was actually very encouraged by some of

the issues raised today and by Senator Kerry, Senator Burns, and

others that hopefully will advance this debate and ultimately to

reach some real concrete resolutions.

So thank you all very much, and the record for this hearing will

remain open for an additional 2 weeks, until noon on May 4, for

the submission of any additional testimony.

This hearing is adjourned. Thank you.

[Whereupon, at 1:29 p.m., the hearing was adjourned.]

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