THE RISING COST OF HEALTH CARE:

HOW ARE EMPLOYERS AND EMPLOYEES 

RESPONDING?

HEARING

BEFORE THE 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS 

OF THE 

COMMITTEE ON EDUCATION AND 

THE WORKFORCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, JUNE 18, 2002 

Serial No. 107-66 

Printed for the use of the Committee on Education 

and the Workforce

81-201 pdf 

For sale by the Superintendent of Documents, U.S. Government Printing Office 

Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 

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ii

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN A. BOEHNER, Ohio, Chairman 

THOMAS E. PETRI, Wisconsin GEORGE MILLER, California 

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan 

CASS BALLENGER, North Carolina MAJOR R. OWENS, New York 

PETER HOEKSTRA, Michigan DONALD M. PAYNE, New Jersey 

HOWARD P. “BUCK” McKEON, California PATSY MINK, Hawaii 

MICHAEL N. CASTLE, Delaware ROBERT E. ANDREWS, New Jersey 

SAM JOHNSON, Texas TIM ROEMER, Indiana 

JAMES C. GREENWOOD, Pennsylvania ROBERT C. “BOBBY” SCOTT, Virginia 

LINDSEY O. GRAHAM, South Carolina LYNN C. WOOLSEY, California 

MARK E. SOUDER, Indiana LYNN N. RIVERS, Michigan 

CHARLIE W. NORWOOD, JR., Georgia RUBEN HINOJOSA, Texas 

BOB SCHAFFER, Colorado CAROLYN McCARTHY, New York 

FRED UPTON, Michigan JOHN F. TIERNEY, Massachusetts 

VAN HILLEARY, Tennessee RON KIND, Wisconsin 

VERNON J. EHLERS, Michigan LORETTA SANCHEZ, California 

THOMAS G. TANCREDO, Colorado HAROLD E. FORD, JR., Tennessee 

JIM DeMINT, South Carolina DENNIS KUCINICH, Ohio 

JOHNNY ISAKSON, Georgia DAVID WU, Oregon 

BOB GOODLATTE, Virginia RUSH D. HOLT, New Jersey 

JUDY BIGGERT, Illinois HILDA L. SOLIS, California 

TODD RUSSELL PLATTS, Pennsylvania SUSAN DAVIS, California 

PATRICK J. TIBERI, Ohio BETTY McCOLLUM, Minnesota 

 RIC KELLER, Florida 

 TOM OSBORNE, Nebraska 

 JOHN ABNEY CULBERSON, Texas 

 JOE WILSON, South Carolina 

Paula Nowakowski, Chief of Staff 

 John Lawrence, Minority Staff Director

 SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS 

 SAM JOHNSON, Texas, Chairman

JIM DeMINT, South Carolina ROBERT E. ANDREWS, New Jersey

JOHN BOEHNER, Ohio DONALD M. PAYNE, New Jersey 

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan 

CASS BALLENGER, North Carolina LYNN N. RIVERS, Michigan 

PETER HOEKSTRA, Michigan CAROLYN McCARTHY, New York 

HOWARD P. “BUCK” McKEON, California JOHN F. TIERNEY, Massachusetts 

THOMAS G. TANCREDO, Colorado HAROLD E. FORD, Jr., Tennessee 

PATRICK J. TIBERI, Ohio 

JOE WILSON, South Carolina 
iii

Table of Contents 

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

WORKFORCE ............................................................................................................................... 2

OPENING STATEMENT OF RANKING MEMBER ROBERT ANDREWS, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE..................................................................................... 4

STATEMENT OF DR. PAUL GINSBURG, PRESIDENT, CENTER FOR STUDYING 

HEALTH SYSTEM CHANGE (HSC), WASHINGTON, D.C..................................................... 5

STATEMENT OF DR. HENRY SIMMONS, PRESIDENT, NATIONAL COALITION ON 

HEALTH CARE, WASHINGTON, D.C. ...................................................................................... 7

STATEMENT OF S. CATHERINE LONGLEY, COMMISSIONER, PROFESSIONAL AND 

FINANCIAL REGULATION, STATE OF MAINE, AGUSTA, ME ........................................... 9

STATEMENT OF PATRICK B. McGINNIS, CHAIRMAN AND CEO, TROVER 

SOLUTIONS INC., LOUISVILLE, KY ...................................................................................... 25

STATEMENT OF CAROL MILLER, THE FRONTIER EDUCATION CENTER, SANTA FE, 

NM................................................................................................................................................ 26

STATEMENT OF CATHY STREKER, DIRECTOR, EMPLOYEE BENEFITS AND 

PLANNING, TEXTRON, INC., PROVIDENCE, RI .................................................................. 28

APPENDIX A - OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE................................................................................... 37

APPENDIX B - STATEMENT OF DR. PAUL GINSBURG, PRESIDENT, CENTER FOR 

STUDYING HEALTH SYSTEM CHANGE (HSC), WASHINGTON, D.C. ............................ 43

APPENDIX C - STATEMENT OF DR. HENRY SIMMONS, PRESIDENT, NATIONAL 

COALITION ON HEALTH CARE, WASHINGTON, D.C........................................................ 51

APPENDIX D - STATEMENT OF S. CATHERINE LONGLEY, COMMISSIONER, 

PROFESSIONAL AND FINANCIAL REGULATION, STATE OF MAINE, AGUSTA, ME . 57
iv

APPENDIX E - STATEMENT OF PATRICK B. McGINNIS, CHAIRMAN AND CEO, 

TROVER SOLUTIONS INC., LOUISVILLE, KY ................................................................... 103

APPENDIX F - STATEMENT OF CAROL MILLER, THE FRONTIER EDUCATION 

CENTER, SANTA FE, N M ...................................................................................................... 111

APPENDIX G - STATEMENT OF CATHY STREKER, DIRECTOR, EMPLOYEE BENEFITS 

AND PLANNING, TEXTRON, INC., PROVIDENCE, RI ...................................................... 117

APPENDIX H – SUBMITTED FOR THE RECORD, CENTER FOR STUDYING HEALTH 

SYSTEM CHANGE, DATA BULLETIN, RESULTS FROM HSC RESEARCH, TRACKING 

HEALTH CARE COSTS: HOSPITAL CARE KEY COST DRIVER IN 2000, NUMBER 21 

REVISED, SEPTEMBER 2001 ................................................................................................. 123

Table of Indexes.......................................................................................................................... 139 
1

HEARING ON THE RISING COST OF HEALTH CARE: 

HOW ARE EMPLOYERS AND EMPLOYEES RESPONDING? 

____________________

Tuesday, June 18, 2002

Subcommittee on Employer-Employee Relations 

Committee on Education and the Workforce 

 U.S. House of Representatives 

Washington, D.C. 

 The Subcommittee met, pursuant to notice, at 11:30 a.m. in Room 2175, Rayburn House 

Office Building, Hon. Sam Johnson, Chairman of the Subcommittee, presiding. 

 Present: Representatives DeMint, McKeon, Tiberi, Wilson, Andrews, Kildee, Rivers, 

McCarthy, and Tierney. 

 Staff Present: Kristin Fitzgerald, Professional Staff Member; David Connolly, Professional 

Staff Member; Dave Thomas, Legislative Assistant; Ed Gilroy, Director of Workforce Policy; 

Christine Roth, Professional Staff Member; Kevin Smith, Senior Communications Counselor; 

Patrick Lyden, Professional Staff Member; Deborah Samantar, Committee Clerk/Intern 

Coordinator.

Mark Zuckerman, Minority General Counsel; Michele Varnhagen, Minority Labor 

Counsel/Coordinator; Camille Donald, Minority Counsel, Employer-Employee Relations; and, Dan 

Rawlins, Minority Staff Assistant/Labor. 
2

Chairman Johnson. Good morning. A quorum being present, the Subcommittee on EmployerEmployee Relations will come to order. 

 I appreciate you being here. Today the Subcommittee is going to hear testimony on the 

factors that contribute to rapidly increasing health care costs, as well as responses from employers 

and employees. I am eager to get to our witnesses today, so I am going to limit the opening 

statements to the Chairman and Ranking Minority Member of the Subcommittee. If other 

Members have statements, they will be included in the record. 

 With that, I ask unanimous consent for the hearing record to remain open 14 days to allow 

member statements and other extraneous material referenced during the hearing to be submitted in 

the official hearing record. Hearing no objection, so ordered. 

 Good morning again and I extend a warm welcome to all of you, as well as to Mr. Andrews 

and my other colleague, Mr. Wilson. I also want to thank everyone for being so flexible and 

understanding about the time change for today's hearing. I appreciate you responding. 

I would also like to apologize in advance, for I may have to leave this Committee hearing.

Ways and Means, my other Committee, is holding a Mark-up to make prescription drugs less 

expensive. After I leave, I will hand the gavel to Vice Chairman Jim DeMint. Thank you for 

understanding.

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTE 

ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

 Today's hearing is going to focus on rising health care costs, and employer and employee 

responses. This is our first hearing on the critical issue of rising health care costs, and though the 

committee has heard about the rising cost of retiree health care, we have yet to hear about the 

growing cost that all employees face. 

 Last year, employers' cost for health care benefits increased an average of 13 percent. This 

alarming trend is expected to continue for some time, and the increases will or could be larger. For 

example, the California Public Employees Retirement System, also known as CALPERS, recently 

announced a 25 percent increase in health care premiums for the next year. 

 This hearing is designed to answer two questions: One, why are costs increasing so 

dramatically, and, two, what do the increases mean for employers and employees, and how will 

they respond. 

 We will hear testimony regarding various reasons behind big dollar increases for health 

insurance. As you may know, a study in the next edition of Health Affairs details issues facing 

employers looking to increase cost sharing or reduce benefits because of rising health care costs. 

Experts will tell us today about rising prescription drug costs, higher costs for doctors and 
3

hospitals, and the costs that malpractice lawsuits and other litigation bring to the system. Knowing 

this, we want to strike while the iron is hot. 

 Another factor that many states are focusing on is how state mandates contribute to 

increased costs. Governors and legislators in many states are starting to require cost reviews of 

mandates before enacting new legislation. When these reviews are unsuccessful in stopping 

harmful new mandates, some governors are vetoing them, as Maine Governor Angus King did with 

an overreaching and burdensome expanded mental health parity law. 

 Another critical factor of rising health care costs is patients themselves. Because patients 

are usually only responsible for a fraction of their care, they are more likely to demand the latest 

Cadillac treatment or prescription. 

 How do employers and employees respond to these increasing costs? The first line of 

defense for many employers has been to increase co-payments to share the growing burden and 

ensure that employees are fiscally aware. Some employers also have shifted dollars from fringe 

coverage, such as dental or vision coverage, to medical and surgical care to ensure that needs are 

met. 

 We will also hear testimony about some innovative responses by employers. These 

employers are making changes in their health plans to give their employees the tools they need to 

make good decisions about their own medical care. While some of these innovative changes help 

employers reduce costs, they also empower employees with more control over health care dollars 

to help them meet their specific needs. 

 As I have said many times before, employers voluntarily provide health care for workers.

Unfortunately, as health plan costs make up a greater and greater share of company resources, 

many employers are being forced to reevaluate the size of their health benefit packages. 

 Employers, especially those who own small businesses, are more likely to see dramatic 

increases. They are concerned about issues such as the Patients’ Bill of Rights or coverage 

mandates, like mental health parity. Especially in this time of high health care inflation, many 

employers fear that additional cost spikes may force them to drop health care altogether. With that 

in mind, later we will hear testimony about the problem of the uninsured. We will also hear about 

solutions that will provide access to health care coverage for those without health insurance. 

 Health care costs are a serious issue. Private employers provide access to health care for 

128 million Americans, and the health of this employer-based system could be in jeopardy. It is 

extremely important that we understand why costs are rising, and I look forward to working with 

my colleagues on the Subcommittee as we examine the issue. 

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

WORKFORCE – SEE APPENDIX A 
4

Chairman Johnson. Right now, I would like to ask Mr. Andrews if he has an opening statement. 

Sir? 

Mr. Andrews. Thank you, Mr. Chairman. I also appreciate the flexibility of the witnesses in 

rescheduling the hearing, and we appreciate your efforts to be here, and I very much look forward 

to hearing what you have to say. 

OPENING STATEMENT OF RANKING MEMBER ROBERT ANDREWS, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

 I'm glad that this hearing is taking place out of the arena of partisan conflict, because I think 

this is an analytical problem, not a partisan one. Solutions may well lead to partisan differences, 

but the purpose of this hearing is to state the problem so that we can all begin to understand it. 

 I have heard about the problem of exploding health care premiums from employers and 

individuals throughout my state and my district. Commonly, small employers are coming to my 

office and telling me they are experiencing 20 to 30 percent increases in premiums. Large 

employers are experiencing increases which are less severe than that, but still double digits in an 

environment where general inflation is barely measurable, 1 or 2 percent. 

 Obviously, I have a very large share of that uninsured group that is mentioned in several of 

the statements in my District. Probably one out of every six adults in my District does not have 

health insurance, and this cost spiral makes the problem of providing those families with health 

insurance that much more difficult and that much more expensive. 

 I also find that what is interesting about this topic is that health insurance is such an 

anomaly in the American insurance market. In many other areas of insurance, the real cost of 

insurance has gone down in the last couple of decades. Most of my constituents are paying less for 

homeowner's and property and casualty insurance than they were 15 or 20 years ago in real dollar 

terms. Although it is not true in New Jersey, where auto insurance is a perennial source of great 

explosiveness, it is true throughout the country that auto insurance rates have moderated in many 

cases, and there has been success in that area. Health insurance really stands out as an anomaly in 

an otherwise functioning insurance market. 

 One of the things I'm interested in hearing about from the panelists today is what the shape 

and structure of that market is. I'm inclined to think that one of our root problems is that we do not 

have a national insurance market. Because of the way we have set up the regulation of health 

insurance, we, in effect, have 51 balkanized markets around the country. As a point of departure I 

think we should take a look at whether the absence of a seamless and powerful national market, as 

we have in many other areas, is one of the contributing causes to this very difficult problem that we 

are all facing. 
5

 So I am very appreciative of the quality of the panel that has been put together. I want the 

panelists to know that the relatively small attendance from the Members is in no way an expression 

of disinterest. Congress is sort of working a two-and-a-half day week lately, and everything gets 

crammed into a few precious hours, but we are very interested in what you have to say and very 

grateful that you are here to provide us with your testimony this morning. 

Chairman Johnson. Thank you, Mr. Andrews. You are absolutely correct, and I appreciate the 

camaraderie with which we are approaching this hearing. This is an important issue, and he is right 

that there is a lot of business going on in the House right now that everybody is tied up with, and 

that's why you are seeing a smaller number of Members today. 

 We have two panels of witnesses, and I will begin by introducing the first panel. Our first 

witness is Dr. Paul Ginsburg. Dr. Ginsburg is President of the Center for Studying Health System 

Change (HSC). Our next witness will be Dr. Henry Simmons. He is President of the National 

Coalition on Health Care. And our last witness is Ms. Catherine Longley who is the Commissioner 

of Professional and Financial Regulation for the state of Maine. 

 Before the witnesses begin their testimony, I would like to remind Members we will be 

asking questions after the complete panel has testified. In addition, Committee Rule 2 imposes a 

five-minute limit on all questions, and we would like to impose the same limit on your testimony. 

 With that, I thank you all for being here. Dr. Ginsburg, you may begin your testimony. 

STATEMENT OF DR. PAUL GINSBURG, PRESIDENT, CENTER FOR 

STUDYING HEALTH SYSTEM CHANGE (HSC), WASHINGTON, D.C. 

Thank you, Mr. Chairman and Members of the Subcommittee, for inviting me to testify. 

The Center for Studying Health System Change is an independent, non-partisan policy research 

organization, funded solely by the Robert Wood Johnson Foundation and affiliated with 

Mathematica Policy Research. Although we seek to inform policy with timely and objective 

analyses, we do not lobby or advocate for any particular policy position. 

 Although the most reliable studies of employers' 2002 premium increases have not yet been 

released, the increase is likely to be in the area of 13 percent, up from 11 percent for 2001. This 

figure probably understates the size of the increase because it does not reflect the increases in 

patient cost-sharing employers incorporated into their benefit plans in 2002. These double-digit 

increases come at a time when corporate profits are down and the average hourly wage rates are 

rising by only 4 percent. You can see the magnitude of the problems this creates for both employers 

and employees. 

 Insurance premium trends often diverge from trends in what insurers actually pay out in 

benefits, what I refer to as “underlying costs.” For example, in 2001, premiums for employmentbased coverage increased by 11 percent, while the underlying costs or spending on care increased 
6

by only 8.7 percent. However, five years ago, the reverse was the case, with premium increases 

trending below the underlying costs. 

 Economists refer to this as the “health insurance underwriting cycle.” This divergence 

offers a prospect for some limited relief in the short run. The trend in underlying costs, not as high 

as the trend in premiums, means that over time premium trends will get closer to the trends in costs. 

 Turning to the major component of health care costs, increases in hospital costs have 

replaced prescription drugs as the most important driver of overall cost growth, only because a 

much higher share of health spending is for hospital care. Prescription drugs are still the most 

rapidly increasing component. In 2001, per capita in-patient hospital spending increased by 5.6 

percent, an enormous turnabout from the 5.3 percent spending decrease in 1997. 

 This turnabout reflects both higher prices for hospital care and higher utilization of hospital 

services. Of the 9.5 percent increase for all hospital spending in 2001, 38 percent is due to higher 

prices for care and 62 percent is due to higher utilization of services. The service use component 

has been growing particularly rapidly in recent years. The use of physician services is also 

increasing, but physician price trends have been level. 

 Important drivers of health care costs at this time include advances in technology, increases 

in per capita income, the retreat from tightly managed care, provider consolidation and shortages of 

nurses and other skilled personnel. In my oral remarks, I will focus on the retreat from tightly 

managed care. 

 HSC's site visit research has documented a pronounced trend away from tightly managed 

care. Health plans have dropped authorization requirements for hospital admissions, referrals to 

specialists, and the use of expensive diagnostic procedures. Many patients can now see a specialist 

without first going to a primary care physician. 

 Provider networks are now much broader, giving enrollees a much wider choice of hospitals 

and physicians. Plans are less likely to contract with providers on a capitated basis, a method that 

gives providers incentives to economize on service use. Although some of these changes came 

from mandates, much of it happened in response to demands by employers and consumers for a 

less restrictive insurance product. 

 Fees changes have added to costs. Many believe that the aging of the American population 

is an important driver of health care costs. We have been analyzing this and find that while a 

driver, aging is a relatively small one. Preliminary estimates suggest that at this time, aging of the 

working age or under 65 population contributes about seven-tenths of a percentage point to the cost 

trend. Viewed in relation to the 2001 cost increase of almost 9 percent, aging is a relatively small 

driver.

 While I have reviewed many of the drivers contributing to the largest jump in health care 

costs in a decade, I want to close by touching on a core factor that is behind much of this. In the 

United States, our culture emphasizes that people should get all beneficial medical care regardless 

of cost. This works against attempts to discourage the development of treatments in which the 
7

benefits are uncertain or known to be small. Until the public becomes more aware of the costquality tradeoffs, rising health care costs will continue to strain the resources of government 

purchasers, employers, and consumers. 

STATEMENT OF DR. PAUL GINSBURG, PRESIDENT, CENTER FOR STUDYING HEALTH 

SYSTEM CHANGE (HSC), WASHINGTON, D.C. – SEE APPENDIX B 

Chairman Johnson. Thank you, Dr. Ginsburg. We appreciate your testimony. 

Dr. Simmons, you may begin. 

STATEMENT OF DR. HENRY SIMMONS, PRESIDENT, NATIONAL 

COALITION ON HEALTH CARE, WASHINGTON, D.C. 

Mr. Chairman and Members of the Subcommittee, I am Dr. Henry Simmons, the President 

of the nation's largest and most broadly representative alliance, the National Coalition on Health 

Care. The coalition was founded a decade ago, is non-profit, and is rigorously non-partisan. Our 

honorary Co-chairs are former Presidents Bush, Carter, and Ford, and our working Co-chairs are 

former Iowa Republican Governor Bob Ray and former Democratic Congressman Paul Rogers, 

who, for a decade, chaired the Health Subcommittee of the Energy and Commerce Committee. Our 

members include major corporations, the nation's largest consumer, provider, religious and labor 

groups, and very interestingly, the nation's largest health and pension funds, including CALPERS.

Collectively, these members represent or employ over a hundred million Americans. The American 

Cancer Society is our newest member. 

 As you have already heard, national health care spending is rising very rapidly and this year 

will exceed $1.54 trillion, and is scheduled to double by the turn of the decade. Our per capita costs 

are far higher than any other developed nations in the world, and our health outcomes are no better. 

 The premiums that employers, employees, and individuals pay for health care are rising 

today at the fastest rate in our history. Those huge increases are coming at a time of low general 

inflation. The question is why is this so? Why should you and employers and the public be 

concerned? Before answering that question, I, again, want to briefly review the major causes of 

rising costs. 

There are two major forces at work. There are old forces and there are new forces. 

Together, they have come together to create what we have termed “A perfect storm” in health care. 

The first set of traditional drivers include an aging population, increasing intensity of care, 

and one which has been mentioned, poor quality, waste, inefficiency, and a structurally flawed 

system, which experts have suggested are currently wasting $500 billion every year and harming 
8

unnecessarily millions of our fellow Americans. 

 Now, to those sets of forces, including high administrative costs, and state mandates, have 

been added a new set of forces, or emerging cost drivers, which include the underwriting cycle that 

Dr. Ginsburg talked about, pressure from Wall Street on for-profit health plans to increase profits, 

drug cost and utilization escalation, diminished competition in the system, 77 million baby 

boomers, medical malpractice increases, and international terrorism. 

 In answer to your question as to how employers and employees are responding to this, the 

answer is very poorly. In fact, in our judgment, after many years of work in the absence of major 

national policy changes and system restructuring as Secretary Thompson called for recently, we 

believe they will be unable to deal with this problem, nor will you. And certainly all our members 

have unanimously come to that conclusion. 

 Why should Congress, employers, and the public be concerned? Five reasons: 

 First, we have not one, but three serious interrelated systemic problems - rising costs, 

decreasing coverage, and pervasive, destructive, and extremely expensive quality problems. To 

successfully deal with any one of those problems, you must deal with them all. Whatever 

employers and private sector payers, including our members, have been doing to this point to 

control costs is not working and will not work, in our judgment. 

 Second, what is especially worrisome is that we are seeing these startling increases at a time 

of low general inflation and even though major employers have become very sophisticated and 

concerned about their costs, premiums for even the largest and smartest employers are out of 

control. Costs for small business and individuals are rising even more rapidly, as Congressman 

Andrews said. 

 Third, increasing health care costs for employers and sharply rising premiums are going to 

dramatically increase the number of Americans without insurance. 

 Fourth, the new wave of ostensible cost containment tactics that employers are edging 

towards, such as increased cost-sharing and defined contributions are, in fact, ways to shift costs 

not contain them. 

 And last, all these problems are growing worse and after much reflection, we have 

concluded that present policies and procedures, including those being debated on this Hill today, 

will not be powerful enough to enable employers, employees, or the American people to address 

those problems. 

 So in summary, we believe that we will need a major new public policy initiative to respond 

to the issue of surging health insurance premiums. Our members are working to encourage a 

renewed national debate about these far-flung issues facing our system and about the options for 

system-wide reforms that will be necessary to contain costs, achieve universal coverage, and 

improve the quality of care, while assuring equitable and sustainable financing, and simplifying the 
9

most non-user-friendly, complex system on the face of the earth. 

 We sincerely commend the Subcommittee for beginning this dialogue on an issue that has 

received so little attention to this point. 

STATEMENT OF DR. HENRY SIMMONS, PRESIDENT, NATIONAL COALITION ON 

HEALTH CARE, WASHINGTON, D.C. – SEE APPENDIX C 

Chairman Johnson. Thank you, sir. I hope you are not correct that we can't fix the problem either 

here or with the appropriate structure. 

Dr. Simmons. I think we can, just not with the tools we have been using. 

Chairman Johnson. Thank you for your testimony, Dr. Simmons. 

 Commissioner Longley, you may begin your testimony now. 

STATEMENT OF S. CATHERINE LONGLEY, COMMISSIONER, 

PROFESSIONAL AND FINANCIAL REGULATION, STATE OF MAINE, 

AGUSTA, ME 

Thank you, Chairman Johnson, Congressman Andrews, and Members of the Subcommittee. 

I am pleased to be here today to give you information I hope you will find helpful from one state's 

experience and perspective on the private health insurance market. In Maine, as in other states, we 

are facing a health care cost crisis. Let me put in context where Maine stands. 

 We spend about $5 billion a year on health care, or $3,900 per capita a year. We spend 

about 14 percent of our gross state product on health care, and in a recent study, we were ranked 

third highest among all states in health care spending. Between 1990 and 1998, our medical 

inflation increased 80.4 percent compared to 53.3 percent nationally. 

 Now, several factors exacerbate our situation. First, geographically we are a relatively large 

and rural state. We have a small population of 1.2 million people. We are ranked fourth among 

states as having the oldest population. We have a high level of chronic disease and we have a lack 

of competition among health care providers and insurance carriers. 

 We thought it might be helpful to explain our private health insurance market to you. We 

have about 22,000 people who are covered by individual health insurance, which is insurance that 

is not covered by employers. We are now experiencing a “death spiral” and that, in insurance 

terms, means that the pool of insureds is getting smaller and smaller, because those that are staying 

in are the sickest, therefore, the most costly. Therefore, premiums go up. Right now, those 
10

premiums are approaching absolute unaffordability. In my handouts, tab two, page nine, you will 

see that an HMO policy for a family of four can now cost upwards of $2,000 a month, or over 

$24,000 a year. We expect, without some reversal in policy, that that market might be eliminated. 

We would have no individual health insurance market in approximately five years. 

 The cost issues are not unique to our individual market. We face these same cost pressures 

in our small group market, and the difficult choice for employers is do you continue coverage, do 

you purchase higher deductibles, do you shift more costs to the employee, or as someone said, 

since it's a voluntary market, do you drop coverage altogether? Our highest selling policies in the 

state of Maine are the $5,000 high deductible policies. While it's easy to look at insurance 

premiums and realize they are too high, the more difficult question is why, and we commend the 

Committee today for focusing on costs. 

 I'll just take a minute to share with you a few examples of what we are doing in Maine. 

 As discussed, Maine has 24 insurance mandates. A mandate is required coverage for any 

insurer selling a state-insured plan. We have a process to review mandates with our legislature. 

Health insurance mandates are tricky. First, they differ on a state-by-state basis. Second, they 

don't apply to everyone. They don't apply to ERISA-exempt plans. And to show you what has 

happened in Maine, we have had a mental health parity mandate since 1995, and we are proud of it. 

It's a progressive mandate that covers seven biologically based diseases. 

 But since that time, we have grown more concerned about costs, and this year a bill was 

introduced which would have substantially expanded that mandate to cover over 40 additional 

mental health disorders. Although well-intentioned and certainly a laudable proposal, Governor 

King did veto that legislation and in his veto message, which is in your materials, he stated that 

when you are in a hole, the first rule is not to dig any deeper. 

 One of the things we're trying to do to get a handle on costs is to have better quantitative 

information on our state's underlying costs. In that respect, we have formed a performance council, 

funded initially by Robert Wood Johnson. The underlying goal of the group is to formulate tangible 

and objective measures of our health care system in Maine. There's a lot of national data, but what 

we seem to be lacking is knowledge about what the cost drivers in the state are and why. Some of 

the measures we are exploring are how we compare to other states in terms of insurance premiums, 

and numbers of hospitals. 

 Finally, let me speak about consumer education. We believe that in an era of higher 

deductible policies with citizens paying more out of pocket, consumer education is extremely 

critical. To that end, we have recently published a brochure, which is in your materials under tab 

three that describes much of how our health care system is paid for, and how hospitals, doctors and 

other providers are broken down. It's a primer on cost pressures created by cost shifting, utilization 

and other issues, and with it we hope to encourage people to become better-informed consumers. 

 Let me wrap up here. Our present focus is to better understand why health care costs and 

corresponding insurance costs are increasing so dramatically. I would end by saying it is important 

in any health care debate not only to focus on who pays, but also to scrutinize the underlying costs 
11

and the components of such costs. States can't solve the crisis alone and individuals and the Federal 

Government must assist. 

 I am happy to answer any questions. Thank you. 

STATEMENT OF S. CATHERINE LONGLEY, COMMISSIONER, PROFESSIONAL AND 

FINANCIAL REGULATION, STATE OF MAINE, AGUSTA, ME - SEE APPENDIX D 

Chairman Johnson. Thank you, Commissioner. We appreciate your testimony. We'll begin the 

question session.

You talk about looking for ways to address rising costs. Everybody talks about rising costs. 

But how do we address them? You also say that states alone cannot solve the crisis. Individual 

citizens and the Federal Government must assist. What do you mean by that? 

Commissioner Longley. In answer to the first question as to what is driving costs, it is the work of 

our Health Care Performance Council, to see where we may be outliers in terms of our delivery 

system and where we stack up against other states and other regions. We're looking, for instance, at 

our prescription drug premiums compared to other states. 

 I think another reason why we are a high cost state is our Medicare reimbursement levels. 

That is an area our hospitals have been actively looking at. I think we tend to rank pretty low on the 

totem pole. We were 49th out of 50 but after the Balanced Budget Amendment, we are now more 

towards the middle of the pack. 

 With regard to your second question about individuals and the Federal Government, I think 

there is a fundamental disconnect between consumers and their health care. The way our health 

insurance system is set up, the individual doesn't always know what something costs or doesn't 

have any incentive to know what something costs. So with respect to solutions, we would hope that 

policy goals would be tied to incentives, so that we don't have over utilization and so there is some 

cognizance or recognition by the consumer of where his or her health care dollar is being spent. 

 I think Representative Andrews mentioned before that the health insurance market is really 

quite different than other areas of insurance, because you have first dollar coverage. But the third 

party payment mechanism disconnects the consumer or the patient oftentimes from the cost 

implications. 

Dr. Simmons. Mr. Chairman, could I also answer your question as to how we would contain costs? 

Chairman Johnson. Go ahead. 

Dr. Simmons. Two observations. First of all, this is a task that is doable, but not with any of the 

partial patches that we've been trying to use for the past 45 years, and there is no one approach that 

would do it. When you have a systemic problem that has interrelations among it, you have to fix 
12

all the problems. If you just patch one, your problem just shifts elsewhere. If Medicare takes care 

of its problem, it shifts to the private sector, to the employers, to the employees, to the American 

people. So we need a systemic approach, because we have a systemic problem. 

 Now, what are the main elements of that? Secretary Thompson in his speech at Chicago 

Medical School just last week hit on one of them very hard. He said the way we deliver care in this 

country today approaches the point of being archaic. He said our system doesn't have as good 

quality controls as does a grocery store. That's a very serious problem. Part of the solution of 

controlling costs has to be restructuring our health care system. It's not bad health care 

professionals. We health professionals are working in a very flawed system that's got to be 

addressed as part of the cost containment problem. 

 Another major way to do it would be to work very hard on the quality problem. When 

Secretary O'Neill of the Treasury testified before a Senate committee and was asked how much 

waste he thinks we have in the system, he, having studied the health care system extremely well, 

judged that probably 30 to 50 percent of our entire $1.5 trillion dollar budget is wasted every year 

because of our lack of attention to quality. 

 We will never contain costs unless we get serious about the quality problem. And do you 

know what emphasis the Congress has put on the quality issue to this point? Virtually zero. We are 

spending $1.5 trillion dollars as a society. We put virtually zero into improving its quality. That's 

not very good public policy. 

 So in our judgment, there are four things that the nation would have to achieve to solve 

these interrelated problems. We must achieve universal coverage. We must institute a major 

national quality improvement program. We must put in a system that contains costs for the entire 

system and stops the national shell game of cost shifting, which is not working for anybody. 

Finally, we obviously need a fairer, more equitable and sustainable mechanism for financing the 

system, because many employers right now are not playing on a level field which they cannot long 

sustain. They will drop out and the death spiral of the employment-based system will grow larger. 

Chairman Johnson. Dr. Ginsburg? 

Dr. Ginsburg. Let me add to what has been said. I think a very key element in containing costs is 

that we need to inform consumers and physicians about what care costs and what the benefits of 

care are. I think it is the latter area that government can contribute a lot more information about 

regarding which new technologies work, where the benefits are small, and where the benefits are 

large. Even though it can't be the cornerstone of it, unless consumers are more aware of what it 

costs to get different services and incentives to make trade-offs, we are not going to get very far. 

Chairman Johnson. Don't you think it's hard to educate consumers, for example, about insurance 

and what they are getting with Medicare? Are you all having that problem in Maine? 

Commissioner Longley. I think there is more interest now as we shift away from managed care to 

a higher deductible policy. We have an example of an individual whose daughter was scheduled for 

elective surgery and he was trying to compare costs and called four hospitals. Not one would give 
13

him even a range of prices, because they're concerned about malpractice and complications. 

 So I think there is a growing concern. But I share your wonder at how much it will help. 

For instance, in our state employee health plan, which is the largest plan in the state, only 50 

percent of state employees get their annual wellness exam, which doesn't cost anything except a 

co-pay. You can lead a horse to water. We really do believe that consumer education is important. 

Whether consumers take advantage of it I guess is the $64,000 dollar question. 

Chairman Johnson. Your horses don't drink the water up there! Thank you. Those are good 

answers. I appreciate it. 

Mr. Andrews, would you care to question? 

Mr. Andrews. I would. I thank the panel for their testimony. 

Dr. Simmons, I listened to your very articulate analysis of the systemic flaws in the system 

and I am reminded that nine years ago, another witness sat precisely where you are sitting and gave 

almost word for word the same assessment of the systemic failures. She is now the junior Senator 

from New York, Hillary Clinton, and she was pilloried and criticized for proposals that she made to 

fix the problem. I would submit that the analysis that she had of the problem is truer today than it 

was nine years ago. I, frankly, just heard it from you. 

 Commissioner Longley, I want to ask you a question. If I were a businessperson in Maine 

today and I wanted to buy health insurance for my employees and their families; let's say there 

were 75 of them. How many underwriters do I have to choose from to buy the coverage in Maine? 

Commissioner Longley. Well, we have only four active insurance carriers in the state right now, 

and the largest of them is our Blue Cross plan, acquired by Anthem a couple of years ago. So 

there's not a lot of choice. We have some smaller companies, but predominantly four companies. 

Mr. Andrews. Do you know, and you can supplement the record, if you need to, how much of the 

market share the two top insurers of those four have? What percentage of the coverage do they 

have? 

Commissioner Longley. I believe Anthem has about 50 percent of the market. 

Mr. Andrews. The top two have 50 percent. In the metropolitan area I live in, in the Philadelphia 

metropolitan area, the most recent data I have seen suggests that the two leading underwriters have 

83 percent of the covered lives, and I think that number is reflective. 

 If Horizon Blue Cross and Blue Shield of New Jersey or Kaiser Permanente, based in 

California, wanted to compete in the Maine market and sell health insurance, what would they have 

to do? 

Commissioner Longley. Well, as with any state, you have to become an authorized insurer under 

state regulation. You have to meet capitalization and solvency standards that are fairly uniform 
14

throughout the states through the National Association of Insurance Commissioners (NAIC). 

 Maine has that same model. One of the drawbacks in anyone coming, and we don't see a 

flurry of carriers coming into the state, is we don't have that many covered lives. So just from a 

population standpoint, we have about 600,000 insured people. It's not a huge market. 

Mr. Andrews. When was the last time that someone of any size applied to get into the market? 

Commissioner Longley. Not for a while. We had Tufts exit the market with their insolvency. We 

had Harvard exit the market. So we basically have Cigna, Aetna, and Anthem. 

Mr. Andrews. What would your opinion be of a proposal to pass a Federal law that said here is a 

set of uniform national standards for fiduciary protection of financial resources and for protection 

of health care consumers? If you meet these standards, you can do business in Maine or California 

or Michigan or New Jersey or anywhere in the country you want to do business. What would you 

think about that proposal? 

Commissioner Longley. Obviously, I would have to look at it, but I think the NAIC has 

formulated pretty seamless financial standards for carriers doing business in other states. 

Mr. Andrews. But the difference is, of course, they would still require you to apply 51 separate 

times under 51 separate bureaucracies. What if you had to do it just once? 

Dr. Simmons, what do you think of that idea? 

Dr. Simmons. It would certainly be simpler than what currently goes on today. 

Mr. Andrews. Dr. Ginsburg, what do you think? 

Dr. Ginsburg. I would say that traditionally, insurers having to qualify in each state that they want 

to operate in has been a nuisance and costs something, but I don't think it has been a real barrier. 

 I believe it is more difficult today for insurers to enter new markets because of what is 

required to function as a managed care provider. One needs networks of providers, and one needs 

management techniques in place. So in a sense, there is probably somewhat less of a threat to entry 

from out of state for existing insurers. 

Mr. Andrews. But wasn't the balkanization that I characterized also present before managed care 

took such a big piece of the market when it was fee for service? Wasn't the same pattern really in 

existence then? 

Dr. Ginsburg. I think we had national insurers then, as we do today, and we have always had a 

combination of national insurers and Blue Cross/Blue Shield plans serving local or regional 

territory. 
15

Mr. Andrews. Let me ask you one other quick question, because my time is up. You make 

reference to 2001, where premiums increased by 11 percent and spending on care increased by 8.7 

percent, and you say that in some years, the opposite was true. Could you provide the Committee 

with some aggregate data on the increase in premiums and the increase in costs over a ten-year 

period? 

Dr. Ginsburg. Yes. I do have a table and would be glad to supply it to the Committee. 

Mr. Andrews. Could you tell us quickly what the increase in premiums to costs ratio would be for, 

say, a 10-year period? 

Dr. Ginsburg. Sure. Actually, in the mid-1990s there was a time when premium increases were 

virtually down to zero. Cost trends were also very low, but they were running about 2 or 3 percent 

a year. What was happening then is that insurers were very profitable and they were very 

aggressive in getting into additional markets, and I don't know if it happened in Maine, but that was 

the time when insurers did get into new markets. 

 In a sense, they competed with each other, competed away their additional profits, and the 

underwriting cycle turned. In the last few years, we have witnessed insurers withdrawing from 

markets that they weren't doing very well in, raising their premiums to restore their profit margins, 

and willing to give up market share. This cycle will turn soon, although, of course, we don't know 

when.

Mr. Andrews. I appreciate that. And if you could supplement with the statistics, I'd appreciate 

that.

Dr. Ginsburg. Glad to do that. 

Chairman Johnson. Thank you, Mr. Andrews.

Mr. DeMint, do you care to question? 

Mr. DeMint. I think what we are hearing is a debate between universal, free care for everyone, or a 

different type of systemic change. You folks have done a good job talking about some of the 

symptoms of our problems and recognizing we need systemic change, and there are really two 

ways to go. It's either more towards free, universal care or more towards a free enterprise type 

market. 

 I, frankly, think we need to consider the fact that most health problems are caused by bad 

habits and poor behavior. This means that free or nearly free health care services are probably the 

major contributors to poor health and the high cost of health care in this country because people are 

more willing to treat the problem than to read the information, or develop the discipline to prevent 

the poor health. 

 We are not talking about insurance now. We are talking about pre-paid health care. We 

have danced around the fact that maybe consumers are insulated from the costs, but it really doesn't 
16

make any difference how much information we give them about the costs if they don't have to care 

about how much it costs or if they don't have to care about preventing health problems. 

 I like the idea of looking at systemic changes, but if consumers and health care providers 

are not concerned about the costs to the consumer, it is going to be very difficult for us to centrally 

manage what we are talking about. That’s cost containment and quality control. I’ve had the 

opportunity in my professional life to work in both of these fields. We talk about quality problems, 

Dr. Simmons, but continuous quality improvement, which has proven to work in so many other 

industries, cannot work in health care as long as there is a third party payer mechanism, where new 

technologies and new ways to do things can't be tried because they can't be paid for. 

 It is my belief that we do need to look at systemic changes, but also recognize that we have 

to have something that is more consumer directed, and that the one who is seeking health care has 

to care what it costs. The one who is providing it cares what it costs, and the one to whom it is 

provided has to have the flexibility and the ability to use technology and new protocols that 

continuously improve care. Now it can take two or three years to get approval from Medicare or 

even third party private payers for a new type of treatment protocol. We’ve got the system tied up 

with this third party concept. We are not looking at ways to systemically change the system that 

might move it towards a more accountable market. 

 Frankly, I expected to hear a little more about that. Through defined contribution plans we 

have employers looking at ways to help employees develop accounts that have money in them that 

can be used to shop for part of their health care. So that when they call hospitals and ask for prices, 

they can demand to know those prices. And while we need to continue to offer a safety net in 

insurance, I am frankly surprised to hear all of you talking more about symptoms. Although we 

have talked about the need for systemic changes, the dialogue has been more about universal health 

care, free health care, and things that are creating the problems that we are talking about. So I don't 

know who to address my questions to, but I would certainly like to hear more about innovation. 

Dr. Simmons. I'd like to start, Mr. DeMint. 

I don't think it's a matter of either/or. First of all, universal coverage does not imply a 

government-controlled system. It doesn't require central administration. You could have universal 

coverage without either of those things. And it's not whether you have a market or whether you 

don't have a market. Ideally, we should have as much competition in the system as we can, but if 

we are going to do that, then we've got to understand what is necessary to make a system 

competitive. 

 Now, if you read the original papers of the Jackson Hole group who hypothesized managed 

competition, and read the papers from the New England Journal of Medicine a decade ago, they 

very honestly pointed out that markets will not work in health care unless you have universal 

coverage. That is the necessary precursor, because otherwise insurers compete on risk selection. 

That's one thing. The second thing you need is competitive systems. We are moving exactly away 

from that with system consolidation. The third thing we need is good information for the buyer and 

the seller, neither of which is currently present. And the fourth thing you need is government 
17

oversight. Markets don't work without that. 

 So I don't think it's a matter of should our system have market-based competition. We 

should, but we can't have it unless we recognize that we've got to put in some of the necessary 

prerequisites. I think that's the issue. 

Mr. DeMint. Those are good points, but consumers aren't going to seek information unless they 

need it, and right now they don't need it. It's meaningless. 

 Universal coverage does not have to mean dollar insurance coverage or prepaid health care.

We need to recognize that we can help people get access to health care and actually get better 

coverage for catastrophic events. We can help them get the resources to shop for health care, which 

would force the markets to come to them. That type of thing has happened in other markets, where 

years ago consumers couldn't buy computers. But once they started to, the markets came to them, 

and I think we can do that. 

 I just think in our dialogue, it's a matter of semantics. Universal coverage to some means 

free health care for everybody. To me, it means making sure that everyone has access to good 

health care, with the incentive to shop and to care about what it costs. 

Dr. Ginsburg. Could I add something? Because health care is so expensive, everyone needs some 

type of insurance to have access to care they need. 

Mr. DeMint. But part of the reason it's expensive is because people have insurance that covers it.

You can see what has happened with laser surgery, where the costs started high and the consumers 

paid for it. Now they shop, there is advertising, the technology has improved, the setting has 

become more convenient, and the quality has gone up. I would at least like to interject that thought 

into this debate. 

Dr. Ginsburg. Yes. I agree with that. The other point I wanted to make is that we, in a sense, are 

somewhat behind in providing various financial incentives to consumers to make good choices, and 

this is because of our experience with the managed care revolution. 

 When managed care became the norm, a lot of the cost sharing that we had in health 

insurance policies went away. Then we succeeded in loosening up managed care and we are just 

now starting to get back some of the cost sharing we had before, let alone thinking of new designs. 

And there is a lot going on with employer-based plans that put cost sharing into policies in ways 

that are productive. However, we have a long way to go. 

Mr. DeMint. Thank you.

Chairman Johnson. The gentleman's time has expired. 

We recognize the gentlelady from New York, Mrs. McCarthy. 
18

Mrs. McCarthy. Thank you, Mr. Chairman. I have a couple questions. 

 I spent 30 years of my life as a nurse, so I think I have a different outlook than a lot of my 

colleagues. When I look at health care today, it has become extremely expensive. Take the example 

of laser eye surgery. It’s performed and you're out within 25 minutes to an hour, depending on what 

you're having done, versus surgery 20 years ago when you spent three days in the hospital. So no 

one is looking at how much we are actually saving on the other end. 

 I am 58 years old. At 52 years old, they put me on Lipitol, not because of my health care 

needs. I eat well, but there was a hereditary factor. Hopefully Lipitol is going to prevent me from 

having heart attacks and strokes. No one is taking that into account, where 10 to 15 years ago 

someone who is 58 would end up having a heart attack or a stroke, and be placed in a nursing 

home. No one does a cost analysis on that. But I know that's another debate. 

 I happen to agree with you, Dr. Simmons, that we have to look at the whole system. If we 

fix one part this week, prescription drugs for example, that's not going to help the whole system. 

I'm curious about what you had said, though, when you talked about $500 billion in waste. Could 

you give me some examples of where you see waste? 

Dr. Simmons. Sure. There are quite a few in fact. In 1970, I was Deputy Assistant Secretary for 

Health in the Nixon Administration and the Ford Administration. One of the first jobs handed to 

me was when Republican Senator Wallace Bennett passed the Professional Standards Review 

legislation, and we had to look at the quality of care in this country. As a physician, I thought it was 

excellent before I was really forced to look at it. 

 There are huge numbers of examples of waste. One is giving care that will not produce any 

known benefit. There is a tremendous amount of that in many different ways. The other is making 

mistakes which are very costly, can take your life, can certainly prolong your illness and can be 

very expensive to take care of. 

 In fact, the National Association of Chain Drug Stores is one of our members. They have 

shared a study done by the University of Arizona School of Pharmacy with us that shows that it 

costs more in this country to take care of the preventable side effects of prescription drugs than it 

costs to buy prescription drugs. It costs $171 billion to fix the errors and $150 billion to buy the 

drugs.

 So there are hundreds of examples. There are some real heroes from my profession that 

have been virtually ignored in this country, pioneers like Dr. Don Berwick and Jack Winburg and 

Bob Brook, who have been telling us we have a serious problem that we have to address. 

Mrs. McCarthy. I agree with that, especially in hospitals. Going back a number of years ago, it 

was quite hard to do but we as nurses had to know all our medications, know what the side effects 

were, and doctors would prescribe the medication. 

 Then we changed the system. What the doctors prescribed had to be okayed by the 

pharmacists, because there could be five doctors on a case all ordering medication, with no one 
19

looking to see how one drug was interacting with other drugs. Of course it's easier today with 

computers. So we are slowly making strides in fixing that problem, but we can do a better job. 

 Obviously, I think mistakes are made. On the hospital floor we have less nurses because 

people aren't going into nursing. My sister, who was a nurse, just left the profession. She is now a 

school nurse, mainly, because on her day off she couldn't answer the phone because she knew darn 

well they were calling her to go in and work. You get tired. Nursing is a stressful job. We all love 

it. We went into it because we loved nursing. But you can't keep working 12-hour shifts without 

making a mistake. You can't. 

Dr. Simmons. Congresswoman McCarthy, I know that you are a nurse and the sad thing is that 

we're at the point in this system where the overwhelming majority of nurses working in this country 

would not recommend that somebody use their hospital. Now, that's pretty sad. That's really 

troublesome. And what are we doing about it? Virtually zero. 

Mrs. McCarthy. On Long Island we have started a magnet hospital. I'm going to see if we can 

experiment here and sponsor a bill where everyone is part of the quality of care in the hospital. 

Through the magnet hospitals that we have studied, we have seen the quality of care increase 

tremendously and we have also seen the nurses stay an average of eight years, because they have 

become part of the system. I think that was always the frustration with a nurse. They're with the 

patient the majority of the time, and yet they had absolutely no say in the quality of care. Now, I'm 

not taking this away from doctors, but a hospital is a team. If one part of that team isn't working 

together, the whole team falls apart. So I agree with you that we have to start looking differently at 

how we provide our health care, but in the end the bottom line is people should be involved. 

I was just saying to my colleague, for all the years that I have paid for health care insurance, 

and I mean this sincerely, I think the first time I ever used it was when I was about 48 years old. I 

went to the HMO and I got a $10 physical. Now, the problem is my physical was totally different 

from my husband's, because I’m a woman. I didn't get an EKG, I didn't get a rectal exam, and I 

didn't get half the tests he did. But I had never used it. Most people, thank God, are healthy up to a 

certain point. 

 At 58, every time I go to the doctor's now, well, your blood pressure is a little bit higher. I 

say that's the job. I'm fine on weekends. But in all seriousness, we are facing different health care 

issues only because we are getting older. That's normal health care. The final three months of costs 

are probably the most expensive. We have to start looking at those issues. 

 But I agree with you, people misunderstand universal health care. It is not a free health care 

system. Everybody pays into it. I have insurance, but if I went into the hospital tomorrow, I would 

be paying an extra $450 just to walk through Admissions to help care for someone that doesn't have 

health care insurance. We're already paying for this. 

Thank you. 

Mr. DeMint [presiding]. Thank you. 
20

Mr. Wilson? 

Mr. Wilson. Thank you, Mr. DeMint. 

Dr. Ginsburg, you mentioned that prescription drug prices have been the most rapidly 

growing component of health care costs since 1995. Why this increase in cost? 

Dr. Ginsburg. I think there are a few key reasons. One is that a lot of new drugs have come out 

that are valuable, but they are expensive. Another thing that concerns many in the field is that the 

very extensive direct consumer advertising and actually large expenditures on marketing to 

physicians are probably driving spending up. 

 You know, marketing prescription drugs is a little different from marketing other goods and 

services in the economy, because you are convincing someone they want something, but a third 

party is going to pay for it. So it's a method that has been a particularly effective form of marketing, 

and that is one of the reasons why drug spending has been increasing so much. 

Mr. Wilson. When you mention new drugs, obviously, people think of research and the cost of 

research. But has there been any study indicating price gouging or differentials that indicate an 

abuse of the economic power that a company may have? 

Dr. Ginsburg. With prescription drugs, the patent system is very important and as an incentive to 

do research, we confer a patent. So in a sense, each drug over the patent period is a monopoly and 

they can charge whatever they want. It is very difficult to second guess whether the price is 

appropriate because of the fact that for each drug that comes to market successfully, a lot of 

research and development efforts on other drugs just does not pan out. A successful drug has to 

gain revenue not just to justify its R&D cost, but the R&D costs of drugs that didn't make it. 

 You know, one of the aspects of managed care is that people became a lot more extensively 

covered for prescription drugs. Initially, the out of pocket costs of prescription drugs for 

consumers fell. In fact, I should add that to the list. That has probably been another factor why 

drug spending has risen very rapidly since 1995. 

Mr. Wilson. But what is the bottom line? 

Dr. Simmons. Mr. Wilson, could I add an answer to your question? I had the privilege of spending 

three years as the Director of the Bureau of Drugs in the Food and Drug Administration. So I have 

some idea of the public safety hurdles that the Congress requires drugs to go through.

New drugs are always going to be expensive. It's not an inexpensive process and unless 

those research costs are borne among other nations, somebody bears them all. Maybe they should 

be more fairly shared, but that's another issue. But the one area where there could be very 

substantial improvements in the public interest, without sacrificing safety, is a more rapid 

availability of generic drugs, and I think that is an area where the Congress has a real opportunity 

to serve the American people. It is in no way a compromise to safety to provide these drugs, which 

are every bit as good and safe, to the American people at a substantially lower cost. However, there 
21

are barriers to that now, as you know. 

Mr. Wilson. Well, are there any efforts to reduce the barriers? Is there any legislation or 

regulation? 

Dr. Simmons. Not that I know of, but I wouldn't pretend to know all those bills that might have 

been introduced here. 

Dr. Ginsburg. Actually, there has been a lot of activity to re-think this. I guess it's called the 

Hatch-Waxman Act that sets up procedures for what happens when a patent expires and a drug 

becomes available for generic manufacturers. There's been a lot of concern about steps that drug 

companies can take that are just delaying tactics that put off for a couple of years a very valuable 

drug becoming available in generic form at a much lower price for patients. 

Mr. Wilson. Also, Dr. Ginsburg, you indicated that there was a 38 percent increase in hospital 

spending in 2001 due to higher prices for care. Why are the hospital prices going up? 

Dr. Ginsburg. Hospital prices are going up for two reasons. One is that hospitals are experiencing 

higher costs, and a very important driver is that hospitals have to raise wages substantially for 

nurses and other skilled personnel to deal with the shortage. 

 But another factor is that hospitals that have gained more leverage vis-à-vis managed care 

plans are able to charge higher prices and indeed increase their profit margins. A lot of this is due 

to the loosening of managed care as employers, not very cost-conscious, have responded to 

employees' complaints about choice and demanded broad networks. This has meant that managed 

care plans no longer have the ability to constrain hospitals by the threat of excluding them from a 

network.

Dr. Simmons. Congressman, I would like to add an answer to your question. One of the major 

reasons hospital costs are rising rapidly is the quality issue, and that concerns the technology war 

that is going on in institutions. If somebody has a CAT scan or the latest laser surgery equipment, 

everybody has to have it, resulting in either underutilization by everybody or over utilization 

because they've got to pay for it. 

 Dr. Winburg of Dartmouth has pointed this out in the regional variation phenomenon that is 

so troublesome. It demonstrates that where there is more equipment and more professionals and 

more beds, people get more care. It costs $50,000 more per lifetime for a Medicare beneficiary in 

Miami than it does in Sun City, Arizona. There is no difference in outcome, but a huge difference 

in cost, and it is because of the different practice patterns and greater availability of resources that 

get overused. 

Mr. Wilson. I appreciate it very much. 

Thank you, Mr. Chairman. 
22

Mr. DeMint. Ms. Rivers. 

Ms. Rivers. Thank you, Mr. Chairman. I understand the arguments that you are putting forward 

about the current system, but I guess I would ask each of you to contemplate the premise that 

underpins the system, which is the idea that alone in the industrialized world, we make a 

determination on who will have health care based on who they work for. Do you think that's a 

good paradigm? 

Dr. Simmons. Do I think that's the best way to do it? No. And I think if we were starting from 

scratch, we probably would not pick the present way that we provide the bulk of private sector 

care. But that's the one system we have now and, of course, you have to figure out what is doable in 

a democracy and in the political process. Is it the simplest, most efficient way to do it given that 

people leave jobs? 

Ms. Rivers. Most ethical? 

Dr. Simmons. No. It just isn't. 

Ms. Rivers. You don't think we could retreat from that simply because it is now entrenched? We 

couldn't move from that? 

Dr. Simmons. I think that is a political judgment and no, I don't think it is impossible. In fact, I 

suspect that employers now are saying, look, either we're all in this business of providing health 

insurance or I'm getting out, because I cannot compete with the guy next door who is not bearing 

that cost. He's eating my lunch in market share and I'm trying to be a good guy and provide 

insurance, and it's unfair. 

 So that uneven playing field is a very serious phenomenon. You take some huge 

supermarkets on the west coast who are competing with the largest supermarkets in the United 

States, who don't provide as much insurance, and it's not a sustainable phenomenon. 

Commissioner Longley. I guess what I would say is if it was a clean slate, you might direct it 

differently. But we do have an employer-based system and we do have a system of private 

insurance. In Maine, it's 60 percent insurance, 40 percent public. So I think what people 

underestimate is that a transition, if we did go to a publicly paid system, is not going to be easy. 

There are no simple answers. 

 But, again, it gets back to the premise of my testimony. It is not who pays. You can shift it 

to make it a completely public payer system, as we have with Medicare and other systems, but it's 

what we are paying and can we control the underlying costs. I think closing hospitals are tough 

decisions at the local level and they are very hard to face. Those questions need to be answered. 

Ms. Rivers. But that is my question. We have jumped to a debate on how the current system 

should be altered without examining whether or not the current system is the right way to deal with 

it. What do you say to somebody who works for CVS and makes $6 an hour and doesn't get health 

care? Someone else, however, works for Ford Motor Company and makes $18 an hour, and does. 
23

Both have little kids with ear infections. How do we justify that, as a nation, other than saying it's 

entrenched. That's the system we are used to and it's going to cost money to change. 

Commissioner Longley. We do have safety nets for care, as well. I think we've done a good job in 

Medicaid and Medicare and other areas. So I'm not sure if it's completely broken. 

Ms. Rivers. But those systems are in trouble because of the cost sharing which is what Dr. 

Simmons was talking about.

Commissioner Longley. Absolutely. And Medicaid budgets across the country are the highest 

they've ever been and their rates of inflation are reflective of what is happening in the private 

market. 

Ms. Rivers. Dr. Ginsburg. 

Dr. Ginsburg. I agree with much of what has been said. I think one of the virtues of an 

employment-based system is that there has been innovation by some of the better employers. Have 

we gotten enough innovation to deal with the downside of the system? Probably not. 

 I think, as Henry Simmons mentioned, the big political obstacle to major change from the 

employment-based system is not the employers, but it's really the people who have good insurance 

through their employers and getting them to feel comfortable that they won't be big losers in the 

transition.

Ms. Rivers. I want to talk about the costs going up, because I represent and live in Ann Arbor, 

Michigan, which of course, as you were talking about, is a high care center. There are lots of 

practitioners. But it doesn't matter which group I talk to in the delivery system, all of them feel that 

they are underpaid, over-utilized, and hamstrung to a certain degree from providing good care. 

 As I look at doctors, nurses, physical therapists, and occupational therapists at the outset it 

does not look like any of them, except the doctors, are doing well. Certainly the nurses and the 

other technicians are not getting rich doing this. So when we talk about rising salaries, are 

expectations reasonable for what we think professionals in these areas should actually be paid? 

Can we actually save costs by paying nurses and technicians and other kinds of medical personnel 

less? 

Dr. Ginsburg. No. I don't think there is much hope of that. Historically, workers in health care 

did actually get paid more than their counterparts in other industries, but then when cost pressures 

were brought to bear on the health care system beginning in the early '90s, that changed. In fact, 

during the mid-1990s and later, you saw that rates of increase of wages in health care, traditionally 

leading the rest of the economy, started lagging behind it. 

 I would say, in the very recent data, they have crept up again in response to the shortages. 

So I think, for the most part, wage rates are pretty much determined by either tough collective 

bargaining when it's unionized, or otherwise the marketplace. I think whatever happens, happens, 
24

but I don't see that as a major opportunity to lower costs. 

Dr. Simmons. Congressman, it is true though if you look at Canada. When corrected for the cost of 

doing business my fellow physicians there charge substantially less than do my peers in this 

country. They make substantially less and provide, to the best of our ability to determine it, every 

bit as good care. So you can function with a different system. I'm not advocating that. 

 To go back to your first question, whether the employment-based system is the ideal way to 

do it, I think that is the big question that this country will face. I think to us it’s a fact that we have 

to achieve universal coverage. You can't fix the system unless you do it. But there is more than one 

way to do it, but it's not an infinite number. There are only three that we can see. 

 One is to build on the employment-based system and have a tax structure to which we all 

contribute that pays for those too poor to pay, who are unemployed and that possibly subsidizes 

small businesses. The second is an individual mandate, such as Congressman Thomas is proposing, 

and the third is a system like Medicare, where everybody is in and it's a mandatory, tax-based 

system. 

Ms. Rivers. Thank you. Thank you, Mr. Chairman. 

Mr. DeMint. Thank you, Ms. Rivers. 

Thank you all. We do have a challenge, with 160 million Americans insured in an 

employer-based system. There are some serious questions about third parties, but these employees 

are happy and it's going to be hard to switch them to something else. I appreciate your taking the 

time to give us this input today, and certainly your testimony will be used a number of times after 

this.

 We will dismiss this first panel, and I would ask the second panel to step up. 

Welcome. I want to thank our second panel for being here today. Our first witness on the 

panel is Mr. Patrick McGinnis. Mr. McGinnis is the Chairman and CEO of Trover Solutions in 

Louisville, Kentucky. Our second witness is Ms. Carol Miller. She is from the Frontier Education 

Center in Santa Fe, New Mexico. Our final witness for the day is Ms. Cathy Streker. She is the 

Director of Employee Benefits and Planning for Textron, Inc., at the Providence, Rhode Island site. 

 I would also like to welcome you on behalf of our Chairman, a fellow Texan, Sam Johnson, 

because Textron and Bell Helicopter are based in Fort Worth, Texas. He made me say that. 

 You probably have seen the lights here. Five minutes. They will be green, then yellow, 

then red when your time is up. 

 We will begin with you, Mr. McGinnis. 
25

STATEMENT OF PATRICK B. McGINNIS, CHAIRMAN AND CEO, 

TROVER SOLUTIONS INC., LOUISVILLE, KY 

Mr. Chairman and Members of the Subcommittee, my name is Patrick B. McGinnis, 

Chairman and CEO of Trover Solutions. We are the leading provider of claims recovery services 

for health care payers and property and casualty insurers in the United States. We employ 670 

people, about 80 percent of who reside in our home city of Louisville, Kentucky. I am here today to 

discuss employer-sponsored health insurance and what we are doing to involve our employees as 

consumers in the health care system. 

 Trover Solutions was forced to take a new direction in providing health benefits to our 

employees due to rapidly rising health insurance premiums. We had four choices: drop coverage, 

increase employee premiums, increase co-insurance, or reduce benefits. Each of these options 

carried unacceptable consequences. Some of our employees may not have been able to afford 

insurance coverage at all. 

 Working with our health insurer, Humana, Inc., we made a more innovative choice. 

Involve our employees in the process and use technology to drive a solution that gives employees 

more plan choices and the information to make better decisions about what care is right for them 

and at what cost. We wanted to help our employees to become better health care consumers instead 

of continuing as passive health care system users. Humana helped us develop technology-driven 

plan choices and educational resources that would enable our employees to navigate the system. 

 This year our employees chose from six plans, including an HMO, PPO, and a flexible 

contribution option. This last option pays for all services up to $500, since we want employees to 

adopt wellness as a way to reduce long-term costs. After this first dollar coverage, the employee 

has a $1,000 dollar deductible and a 20 percent co-insurance requirement for in-network services, 

which is capped at $2,000 per person. Providing these choices meant that our health insurance 

premiums would be less and employees could choose the plan that best met their needs. Getting our 

employees to make their own decisions about what type of health plan they wanted and the cost of 

that plan made good health care sense. 

 Today, most employees believe the cost of an office visit is $10 and the cost of a 

prescription is $20. Those are just their co-payments. The real cost of an office visit to a specialist 

in Louisville is about $75. The real cost of a month's supply of Prilosec averages $120. Our new 

program gives consumers a real understanding of the cost of health care.

These plans offer essential coverage and provide insurance against major medical events. 

All the plans cover routine and preventative services and catastrophic costs, and all these plan 

options are offered to all employees within our group and they can make their own decision about 

how much, what, and which plan they want. When the enrollment results were in, it didn't surprise 

us that two-thirds of the employees chose the least costly plan, called Coverage First. The young, 

the not so young, male and female, and I chose this plan for myself and for my family. 

 Today, this hearing is exploring what the marketplace is doing toward the development of 

consumer-driven health plans. It's time to make the market work for consumers like you and me. 
26

Employees want more choice and they need more information about health care options. They need 

to be in control of their health care expenditures and they need protection from major medical 

events. Employees need accurate, accessible information about the health care system and about 

their personal consumption of health care services. This will allow them and their families to make 

informed choices about their health care budget. 

 Today we ask the Congress to assist employees in driving the trend toward consumerdriven health benefits. Congress can help by passing legislation that permits a rollover of funds and 

flexible spending accounts and other health spending account options to encourage employees to 

use their dollars wisely and to save the remaining balance as appropriate for future need. 

Congressman Fletcher, Congressman DeMint, and others have introduced and co-sponsored 

legislation to permit $500 to be rolled over each year. We urge you to pass this legislation. 

 In conclusion, consumer-driven health benefits like the ones we are offering our employees 

represent the future health benefits model, helping individuals be better health care consumers by 

becoming actively involved in their health care purchasing decisions. In doing so, employers will 

be able to continue to provide their workforce with affordable benefits. 

 Your support and legislative action will encourage employers across the country to adopt 

similar consumer-driven benefits. Failure to support these initiatives will mean the continued rise 

in health care costs and consequent increase in the number of uninsured Americans. 

 Thank you for permitting me the opportunity to share our testimony with you today. 

STATEMENT OF PATRICK B. McGINNIS, CHAIRMAN AND CEO, TROVER SOLUTIONS 

INC., LOUISVILLE, KY – SEE APPENDIX E 

Mr. DeMint. Thank you, Mr. McGinnis. 

 Our second witness is Carol Miller. 

STATEMENT OF CAROL MILLER, THE FRONTIER EDUCATION 

CENTER, SANTA FE, NM 

Mr. Chairman and Members of the Committee, thank you very much for having me here to 

testify. I have been fiercely going through my testimony trying to keep it within the five-minute 

limit, because I am here representing a consumer point of view, which is somewhat different. 

 I live in a county in northern New Mexico with one of the highest rates of non-insurance in 

the United States. New Mexico hovers at about 22 to 32 percent uninsured, and in my county it is 

between 46 and 60 percent. This impacts the behaviors of my neighbors, who don't take advantage 

of even the most minimal level of services that most Americans take for granted. 
27

 Weekends in northern New Mexico are filled with car washes, enchilada dinners, pancake 

breakfasts, and the buying and selling of raffle tickets to raise money for neighbors needing help 

paying for cancer treatments or other medical care for members of their families. Donation jars 

with a photo of a sick child and a plea for donations are a familiar sight at gas stations and local 

stores. I believe my community is not alone in coming together in these informal ways to pay for 

health services. In many of these cases, at least one parent of the child is employed and often at 

more than one job, and I believe this is not an acceptable way to pay for health services. 

 One of the interesting factors that people haven't talked about is that most uninsured people 

are employed. A study by the Commonwealth Fund showed that 19 million full-time workers, that's 

16.4 percent of all full-time workers, are uninsured, and certain occupation groups are more likely 

to be uninsured. Three of these occupational groups are primarily located in rural areas, agriculture, 

forestry and fisheries, which contributes to the high rate of rural non-insurance. These are not only 

rural occupations, but also seasonal. That doubles the risk that workers in these industries will be 

uninsured. And I would just note that most of the people who are out fighting forest fires right now, 

really risking life and limb, are seasonal employees and the majority of them, once the fire season 

ends, will join the ranks of the uninsured. 

 I wanted to talk a little bit about what that means, because we have heard about cost shifts. 

Wherever you have seasonal employees, people in the temporary employment industry that are not 

getting benefits, they are still getting care, but it's not primary care and it's not preventive care. It's 

often acute care, which is the most expensive way to enter the health care system. 

 Lack of health insurance, even covered people who do not have adequate health insurance, 

is the leading cause of personal bankruptcies; 79 percent of the families filing for bankruptcy had at 

least some health insurance coverage. And 326,000 families identified illness/injury as the main 

cause of bankruptcy. An additional 270,000 had large medical debts at the time of bankruptcy. 

This should provide a cautionary note against reducing the cost of health insurance to employers by 

shifting more of the cost to employees. The unintended consequences of more cost shifting will 

hurt both the health of the employees and the health of the economy, which is hurt by these 

bankruptcies.

 A tragic study, in my opinion, was released by the Institute of Medicine last month called 

Care Without Coverage: Too Little, Too Late, which has documented that people without health 

insurance or with inadequate health insurance are sicker and die earlier than people with insurance.

They receive less frequent or no cancer screening, resulting in delayed diagnosis and treatment, and 

premature mortality. For example, uninsured women with breast cancer have a 30 to 50 percent 

higher risk of dying than women with private health insurance. People without insurance or with 

inadequate insurance go without care for managing chronic diseases. For example, eye and foot 

exams in the case of people with diabetes could prevent serious problems. 

 One other thing I want to talk about is the whole issue about educated decision-making, 

which is very expensive. There was a stunning finding, 93 percent of individuals with employment 

based insurance, 14 percent with Medicare, and 54 percent Medicaid are enrolled in a type of 

managed care, but 58 percent claim that they have never been enrolled in managed care! Some of 

that might be related to the incredibly high functional illiteracy rates in this country, which we 
28

estimate occur with 42 to 90 million Americans. 

 If we are to have informed consumers, it is going to be a very expensive process. Once you 

get out of middle class communities, you need to work one on one with people to understand health 

care choices. 

 Thank you. 

STATEMENT OF CAROL MILLER, THE FRONTIER EDUCATION CENTER, SANTA FE, 

NM – SEE APPENDIX F 

Mr. DeMint. Thank you, Ms. Miller. 

Ms. Streker. 

STATEMENT OF CATHY STREKER, DIRECTOR, EMPLOYEE BENEFITS 

AND PLANNING, TEXTRON, INC., PROVIDENCE, RI

Thank you, Mr. Chairman and Members of the Subcommittee. My name is Cathy Streker, 

and I am the Director of Employee Benefits and Planning for Textron. In addition, I have been 

working with the Business Roundtable's Health and Retirement Task Force on formulating policies 

for consumer-driven health care and other issues. The Business Roundtable is an association of 

chief executive officers of leading corporations. Textron's Chairman, President, and CEO, Lewis 

Campbell, chairs the Health and Retirement Task Force. 

 Textron is a $12 billion, global, multi-industry company. We employ more than 51,000 

employees, of which 36,000 are based in the United States. More than 75 percent of our U.S. 

employees receive their health care coverage through Textron. By early 2001, Textron recognized 

that the cost of employer-provided health care plans was forecast to double within the next five 

years.

 Several factors are putting upward pressure on health care costs. First, the baby boom 

generation is reaching the age where they will begin to place greater demands on the health care 

system. Second, new drugs and new medical technologies continue to hit the market. These drugs 

are life saving, but also costly. And, finally, in today's litigious climate, employers are exposed to 

an increasing risk of liability for the decisions of managed care providers. 

 With managed care responding to these factors by raising their costs to double-digit rates of 

inflation, it was clear to us that Textron's future competitiveness, our ability to meet the expectation 

of our shareholders, and the job security of our employees was at stake. We determined that we 

needed a solution that did not simply shift the cost of additional health care to our employees. Our 

goal was to identify an innovative solution that provided continued access to quality health care, 
29

while providing incentives for employees to become active consumers. 

 For Textron, the solution is consumer-driven health care, a partnership between the 

company and its employees, that slows the rising cost of health care without cutting benefits, and 

gives employees financial incentives and educational support to help them make better informed 

health care decisions. 

 Employees are already treated like health care consumers by pharmaceutical companies and 

other providers of health care products and services. Yet, after years of being insulated from the 

true cost of health care, most employees don't have the knowledge or motivation to make informed 

purchasing decisions. The consumer-driven model provides employees with the critical information 

to help them navigate the health care maze. 

 After extensive research and market analysis, Textron chose to implement Affinity Health 

as our new benefit plan. Key features of the plan include: (1) 100 percent coverage for preventative 

care services, such as annual exams, well baby, and immunization, (2) Personal care accounts, 

which are funded by Textron and used by our employees help pay for their health care services,

(3) “Carry forwards” for amounts credited to their personal care accounts that can be used for 

future health care expenses, including retiree medical (4) Financial protection in the event of a 

serious illness, and (5) Credible health care information, plus education and health care advocate 

resources to meet the employees' needs. 

 The consumer-driven model supports our commitment to consumer advocacy by arming 

employees with tools to make educated purchasing decisions. On January 1, 2001, Textron offered 

Affinity Health to approximately 1,600 employees. An extensive communication and education 

campaign accompanied this organizational shift from a culture of benefit entitlement to one of 

employee responsibility and empowerment. Our buy-in success was evident through employees' 

responses to a post-enrollment survey. Eighty-three percent understood Textron's business case for 

this change, 82 percent understood how the plan works, and 63 percent believes that the new 

program will help manage the increase in health care costs. Going forward, we plan to expand the 

consumer-driven health care plan to more of our U.S.-based employees next year. 

 Although consumer-driven health plans are relatively new, it is important that a 

collaborative effort continues among government, employers, and the health care industry. In 

particular, we at Textron offer the following recommendations. Federal legislation and regulations 

should provide a framework to support employer-funded personal care accounts and employeefunded flexible spending accounts. 

 To cite two examples, first, Textron and others in the business community are hopeful that 

the IRS will issue a ruling this summer to clarify that the current law allows employees to roll over 

unspent money in their employer-funded personal care accounts without tax liability. Second, 

Textron and other employers welcome the bill introduced by Congressman Jim DeMint of this 

Committee and Congressman David Phelps, that would permit rollover of employee-funded 

flexible spending accounts, giving American workers more options to save money for health care 

or retirement. In addition, health care providers must embrace collaboration with patients and make 

a commitment to follow evidence-based best practices. And, finally, employers need to work 
30

together with providers to implement long-term and financing strategies. 

 Once again, thank you for this opportunity to testify before the Subcommittee. I welcome 

any questions. 

STATEMENT OF CATHY STREKER, DIRECTOR, EMPLOYEE BENEFITS AND 

PLANNING, TEXTRON, INC., PROVIDENCE, RI – SEE APPENDIX G 

Mr. DeMint. Thank you. Just a couple of questions myself. 

Mr. McGinnis, let me make sure I understand the flexible plan that you talked about. You 

actually give your employees the first $500? 

Mr. McGinnis. We don't give it to them outright, but they have a $500 dollar spending account 

funded by us that pays for all covered benefits, subject to any co-payments or deductibles on a 

particular benefit. 

 For example, our pharmacy benefit requires a $10, $15, or $25 dollar co-payment, and the 

employee still would be required to pay that, but the rest of that cost would be covered by their 

flexible spending account. 

Mr. DeMint. Once they spend that, then they have another $1,000? 

Mr. McGinnis. Then they are exposed for a $1,000 dollar deductible and up to a $2,500 dollar coinsurance payment, and then at that point they are capped out. 

Mr. DeMint. When they shop for health care with that first $500, go to a doctor or whatever, can 

they go to a doctor that is a network provider that your insurance covers? In other words, do they 

get a break on their prices or do they just shop the top retail dollar? 

Mr. McGinnis. They have an incentive to use in-network providers, yes. 

Mr. DeMint. They have an incentive to ask for the costs. Thank you. 

Ms. Streker, with your plan, when you talk about preventative care, does that come out of 

their personal care account or is that a kind of first dollar insurance coverage? 

Ms. Streker. It does not come out of their personal care account. It is first dollar. 

Mr. DeMint. And are there indications so far that it is working and that they are out shopping for 

their health care? Have problems come up as far as getting price quotes from providers? Because I 

know that's the next step. The first step is to get employers to help facilitate these savings accounts 

and to help fund them and then encourage employees to fund their own through FSAs. But then 

when they go shopping for information and prices we need to make sure that information is 
31

available. What is happening there? 

Ms. Streker. We have been watching closely. We have been implemented now for six months. 

Certainly one of the key things that we have been watching for are employees actually reaching out 

to the facilities that we're providing to them to get the education that they need to make the right 

choices? We have seen an increase of Internet usage. Also, there is a nurse line that we used to 

offer which had a very low usage at that time. Now under our current plan there has been an 

increase in usage of the nurse line. 

 And regarding the pricing for the providers, one of the things Affinity Health does, when it 

does contract with a provider network, is to allow the pricing to be available to the participants. So 

that is available today, as well. Not as robust as we would eventually like it to be, but it is there. 

Mr. DeMint. Okay. 

I'm not familiar with electronic selection Mr. McGinnis or an Internet wizard that walks 

employees through key decisions. Just tell us a little bit more about that. 

Mr. McGinnis. Sure. A big part of the process of making this change in benefit structure was to 

explain to our employees, first of all, the inherent costs and what would occur if we continued to do 

what we were going to do. And we were looking at premium increases that, for our employees, 

would have been north of 20 percent had we continued the same benefit structure. 

 We use an employee committee for educational purposes. As we moved towards the choice 

product, our employees had the opportunity to decide which of the six benefits structures they 

wanted to choose by going on the internet and providing some demographic information about the 

health care needs of themselves and their family members. Then this information was analyzed and 

the wizard would suggest two or three logical selections that would provide the best choice of 

economy and coverage for them. 

Mr. DeMint. Great. These are exciting ideas. I could ask questions all day, but I will yield to Mr. 

Andrews.

Mr. Andrews. Thank you. I would like to thank the panelists for their very thoughtful testimony. 

Mr. McGinnis, your company has been hit with very severe increases in health insurance 

premiums, and you outlined the problems that you've had. How many choices in health insurance 

writers do you have in the Louisville market? 

Mr. McGinnis. I couldn't quote a figure, but my perception would be a reasonably large number. 

The Kentucky market is not nearly as concentrated as the statistics I heard on Maine. 

Mr. Andrews. Do you buy through a broker or do you buy directly? 

Mr. McGinnis. This year, in conjunction with making the structural change, we also went to a selffunded process. So we are, in effect, our own insurance company now. We have enough 
32

employees and enough expenditure that we self-insure our health care risks, and then purchase 

through a broker a policy that is referred to as a reinsurance policy, if you're familiar with that term. 

Mr. Andrews. Right. I am. 

Ms. Miller, what does it cost for a family health insurance policy in northern New Mexico? 

Ms. Miller. Actually, I have been working on looking at some of those policies for the 

organization I work with, and the lowest we've found for a young, single worker is about $500 a 

month just for a single. 

Mr. Andrews. One person? 

Ms. Miller. One person, that's correct. 

Mr. Andrews. So if this person has a couple of children, I would assume it would be well beyond 

that.

Ms. Miller. It would be quite a bit higher than that. 

Mr. Andrews. Five hundred dollars a month is $6,000 a year. 

Ms. Miller. Six thousand dollars a year, and it is affecting the fringe rate that employers are using. 

People used to figure between 17 and 22 percent. I know that the other small employers in New 

Mexico, if they provided insurance, said their fringe rate would be closer to 50 percent. 

Mr. Andrews. I know, Mr. McGinnis and Ms. Streker, that you are concerned with finding ways to 

keep your own employees insured and moderating the costs. We support that and we appreciate 

that. I want to ask if you could both give us some advice on what we should do about the people 

Ms. Miller is talking about. 

 There are nearly 40 million of them in the country, and it is our observation that you are 

paying for them too, because when they go to the hospital, the hospitals do not turn them away. 

The emergency rooms provide care; sometimes other parts of the hospital provide care. Most states 

have some kind of uncompensated care system. In New Jersey it is funded through the payroll tax; 

unemployment tax pays for that care. 

 What do you think we ought to do about the people that Ms. Miller is talking about, Ms. 

Streker?

Ms. Streker. One of the things we need to do, whether it is employer-provided health care, or 

government-provided health care is get the consumers involved. When health care is free, people 

do not take an active role in purchasing health care service. 
33

Mr. Andrews. You would agree, wouldn't you that it's hard to be involved if you have no money, 

or if you have a job that pays $6 an hour and it costs $8,000 a year for a policy. How do you get 

involved? 

Ms. Streker. By educating somebody about the cost of health care, rather than running to an 

emergency room. 

Mr. Andrews. Well, of course, people shouldn't do that. They wouldn't run to the emergency 

room if they had a heath insurance policy. So if they have none, the only place they can see a 

doctor is the emergency room. So what should we do? 

Ms. Streker. My point about going to the emergency room is in some cases, and this happens 

today even if people are covered under health care insurance, they will go to an emergency room 

versus treating it otherwise. 

Mr. Andrews. Versus what? If you have no health insurance, you can't go see your doctor unless 

you have enough money in your pocket to pay him or her. 

Mr. McGinnis, did you want to say something? 

Mr. McGinnis. Yes, I do. I think these are two important issues that are related, but often 

confused. One issue is access, and that's the problem you're talking about. The other issue is price. 

Now, I can't do anything about access, but I can engage my employees and their dependents 

in the purchase of health care to change the marketplace dynamics. I do agree with some of the 

former witnesses that we have to create a mechanism that requires healthy people to pay into the 

system before they get sick, because if healthy people don't have to be involved, then everything is 

shifted to sick people. 

Mr. Andrews. Of course, one of the reasons why the price that you pay is so high is because so 

many people do not have access. When the 15 to 20 percent of people nationwide who have no 

insurance get sick they are cared for, and the bill is then shifted back to you. We do have to deal 

with access. Do you have any suggestions? 

Mr. McGinnis. Well, I do believe that if we are going to have a system in which the distribution of 

health care benefits is through employers, all employers have to be part of the system. 

Mr. Andrews. I appreciate that. I think Ms. Miller would like to say something. 

Ms. Miller. I would like to mention one thing we're looking at in New Mexico at the state 

government level and that is creating a single risk pool for everybody. As for the delivery system, 

we’re trying to keep the private delivery system that we have. 

 In some states, and I believe the Commissioner from Maine referred to this, such as New 

Mexico and Alaska, most of the health care is actually paid for by the government right now 

through Medicare, Medicaid, state and Federal employees, VA and military benefits. There is a 
34

very small private insurance market in a number of states. Many of them are primarily rural and 

are impacted by Federal land ownership and the military and other Federal economic effects. 

 But I think we need to look at getting everyone into the same system. Since costs are going 

up and so many people are uninsured, they are not accessing care when it would be affordable. 

Recent studies of emergency room use actually showed that it really is the proper place for a huge 

percentage to be taking their sick child, because they didn't get the primary care that they needed 

which might have made a lower acuity situation. 

 So I think we need to be careful about assuming that we are not all paying for it. We 

working people are paying for all the care. I pay three taxes in my county, one property tax and two 

gross receipts taxes that are levied on top of what I am paying for my own health insurance to 

cover the uninsured in my county. 

Mr. DeMint. Mr. Andrews asked an excellent question, and I agree our goal should be for every 

American to have funds to access health care. How the insurance component of that works is 

something we need to think about. My hope, regarding his question about the uninsured, is that 

some of the models that are being created by employers that recognize that engaging consumers 

with funds of their own as shoppers are models that the government can also use to set up similar 

accounts and provide insurance coverage at higher levels rather than first dollar free care. 

 I am hoping that some of you, as employers, can put those prototypes in place and that 

Medicare can recognize that we can provide dollars for the poor to access care in a type of personal 

health account. We can encourage them to access information and not go to the emergency room. 

While many will say that at this point maybe they're not capable of managing those funds properly, 

moving folks in that direction is certainly a desirable goal. 

 As we watch what you do in the marketplace, we need to apply those same principles of 

consumer-directed care to every American, and not use our government programs to provide free 

health care where there is no consumer responsibility. 

Mr. Andrews. Will the Chairman yield for just one second? 

Mr. DeMint. I sure will. 

Mr. Andrews. I do appreciate his point about consumer education and choice. Of course, you can't 

be a consumer if you have no income to spend, and the problem for a huge percentage of the 

uninsured is that after they pay their rent and their utility bills and their grocery bills and their other 

expenses, there is essentially no income left to spend. This model may work well when people have 

disposable income, but getting people to the point where they have disposable income is the 

threshold you have to reach. 

Mr. DeMint. That is an excellent point. But Textron, for instance, gives the first $500 to the 

individual, which is not something they have to have an income for. My thought is we need to look 

at this type of model. I think Textron actually gives employees an account to spend from, and there 

is no reason why the government can't consider the same incentives for all the uninsured people 
35

Ms. Miller was talking about. Instead of first dollar coverage, we could create accounts that they 

can draw from, and they could become consumers. 

Mr. McGinnis? 

Mr. McGinnis. Our experience with these new plans was that even our employees who have more 

modest incomes are able to budget their finances and afford coverage through these mechanisms. 

The average compensation in our company of some 700 people is probably high $30s, low $40s. 

But probably 15 to 20 percent of our employees are in positions that are more clerical in nature, 

and their average compensation would be low $20s. We had very few fall off the table by 

changing these mechanisms. 

 My primary concern with the way our premiums were going up was the fact that I was 

going to end up with more employees who could no longer afford insurance, and that is one of the 

main reasons why we made this change, and it was successful. If people know what to expect, they 

will budget accordingly. 

Mr. DeMint. Ms. Miller? One more comment. 

Ms. Miller. I just want to clarify the record. The people I am talking about are not the poor, per se.

They are low wage workers or they are in the temp industry or they are contract employees or they 

are seasonal employees, and they have no access to the health insurance market. 

 We are actually doing a very good job in this country providing coverage for low-income 

people through some of the Medicaid expansions and other programs, but not this group of people 

who get up every day and go to work. Because of the kind of industry or the kind of employment 

category they are in, they cannot get access to health insurance. 

Mr. DeMint. Our next hearing will consider the uninsured, and hopefully we can use some of the 

ideas we have heard today to arrive at some new ideas for the uninsured. 

 I want to thank the panel again, and Mr. Andrews, and all the staff that helped us with this 

hearing. We are now dismissed. 

Whereupon, at 1:24 p.m., the Subcommittee was adjourned 
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Table of Indexes 

Chairman Johnson, 2, 5, 7, 9, 11, 12, 13, 15, 17 

Dr. Simmons, 7, 9, 11, 13, 14, 16, 18, 19, 20, 21, 22, 24 

Mr. Andrews, 4, 13, 14, 15, 31, 32, 33, 34 

Mr. DeMint, 15, 17, 22, 24, 26, 28, 30, 31, 34, 35 

Mr. DeMint [Presiding], 19 

Mr. Ginsburg, 12, 14, 15, 17, 20, 21, 23 

Mr. McGinnis, 30, 31, 33, 35 

Mr. Wilson, 20, 21 

Mrs. McCarthy, 18, 19 

Ms. Longley, 11, 12, 13, 14, 22, 23 

Ms. Miller, 32, 33, 35 

Ms. Rivers, 22, 23, 24 

Ms. Streker, 28, 30, 31, 32, 33