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81–232 2002

THE SMALL BUSINESS HEALTH MARKET: BAD REFORMS, HIGHER

PRICES, AND FEWER CHOICES

HEARING

BEFORE THE

SUBCOMMITTEE ON REGULATORY REFORM 

AND OVERSIGHT

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

WASHINGTON, DC, JULY 11, 2002

Serial No. 107–64

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS 

DONALD MANZULLO, Illinois, Chairman

LARRY COMBEST, Texas 

JOEL HEFLEY, Colorado 

ROSCOE G. BARTLETT, Maryland 

FRANK A. LOBIONDO, New Jersey 

SUE W. KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

JOHN R. THUNE, South Dakota 

MICHAEL PENCE, Indiana 

MIKE FERGUSON, New Jersey 

DARRELL E. ISSA, California 

SAM GRAVES, Missouri 

EDWARD L. SCHROCK, Virginia 

FELIX J. GRUCCI, JR., New York 

TODD W. AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

NYDIA M. VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

DANNY K. DAVIS, Illinois 

BILL PASCRELL, JR., New Jersey 

DONNA M. CHRISTENSEN, Virgin Islands 

ROBERT A. BRADY, Pennsylvania 

TOM UDALL, New Mexico 

STEPHANIE TUBBS JONES, Ohio 

CHARLES A. GONZALEZ, Texas 

DAVID D. PHELPS, Illinois 

GRACE F. NAPOLITANO, California 

BRIAN BAIRD, Washington 

MARK UDALL, Colorado 

JAMES R. LANGEVIN, Rhode Island 

MIKE ROSS, Arkansas 

BRAD CARSON, Oklahoma 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

DOUG THOMAS, Staff Director

PHIL ESKELAND, Deputy Staff Director

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT

MIKE PENCE, Indiana, Chairman

LARRY COMBEST, Texas 

SUE KELLY, New York 

SAM GRAVES, Missouri 

ROSCOE BARTLETT, Maryland 

TODD AKIN, Missouri 

PAT TOOMEY, Pennsylvania 

ROBERT BRADY, Pennsylvania 

BILL PASCRELL, JR., New Jersey 

CHARLES GONZALEZ, Texas 

DAVID D. PHELPS, Illinois 

JAMES P. LANGEVIN, Rhode Island 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ROSARIO PALMIERI, Professional Staff

(III)

C O N T E N T S 

Page 

Hearing held on July 11, 2002 ............................................................................... 1

WITNESSES 

Keating, Ray, Chief Economist, Small Business Survival Committee ................ 4

Litow, Mark, Consulting Actuary, Milliman USA ................................................ 7

Matthews, Merrill, Ph.D., Director, Council for Affordable Health Insurance ... 8

De Posada, Robert, President, Latino Coalition .................................................... 10

Nelson, Wayne, President, Communicating for Agriculture and the Self-Employed .................................................................................................................... 12

APPENDIX 

Opening statements: 

Pence, Hon. Mike .............................................................................................. 29

Jones, Hon. Stephanie Tubbs .......................................................................... 32

Prepared statements: 

Keating, Ray ..................................................................................................... 34

Litow, Mark ...................................................................................................... 46

Matthews, Merrill ............................................................................................. 52

Neslon, Wayne .................................................................................................. 59

De Posada, Robert ............................................................................................ 63

(1)

THE SMALL BUSINESS HEALTH MARKET: BAD 

REFORMS, HIGHER PRICES, AND FEWER 

CHOICES 

THURSDAY, JULY 11, 2002 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON REGULATORY

REFORM AND OVERSIGHT,

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:13 a.m., in room 

2360, Rayburn House Office Building, Hon. Mike Pence (chairman 

of the subcommittee) presiding. 

Chairman PENCE. This hearing of the Subcommittee on Regulatory Reform and Oversight for the Committee on Small Business 

is called to order. And this hearing is entitled, ‘‘The Small Business 

Health Market: Bad Reforms, Higher Prices, and Fewer Choices.’’

We are very grateful for all the witnesses and the members who 

are in attendance. 

The Chair will make a brief opening statement, then recognize 

any members that have an opening statement. Then we will proceed immediately to our witnesses. The procedure we will follow 

today will be to encourage our witnesses to make brief remarks 

within a five-minute time frame and then we will reserve all of our 

questions for them at the conclusion of all of the prepared remarks. 

Witnesses should also know that it is not necessary for you to 

hurry through your written statement, that without objection, your 

written statements will be entered into the full record of this hearing. And you might use your time more to amplify the points that 

you would like to make to the members gathered here and to the 

record. 

Our hearing today essentially addresses the rising cost of health 

care to Small Business America. Of the 43 million Americans without health insurance, 62 percent are either small business owners 

and their families or small business employees and their families. 

The problem of the uninsured is very clearly a problem of small 

business access to health care at reasonable prices. Well intentioned reformers in the States and in Congress over the last decade 

have managed to dramatically increase the cost of health care and 

practically destroy the small group market. 

Two of three reforms that sound particularly harmless are guaranteed issue and community rating. Guaranteed issue has given 

healthy people a reason not to purchase insurance. If you can get 

coverage at any time, then why purchase it before you get sick, in 

2

effect. Community rating, which was meant to keep prices reasonable for high risk customers, has actually led in many cases to 

prices spiraling upward and healthier people dropping their coverage. 

Both combined have led many companies to drop out of the small 

group market in most of the states. A few examples, according to 

one of our witnesses who represents the nation’s largest health 

care actuarial company, 40 states and the District of Columbia 

have no small group market left. Insurance companies have just 

stopped offering coverage in those states. 

Additionally, a small employer in Florida trying to buy health insurance from e.healthinsurance.com, the nation’s largest on-line insurance broker, cannot find any health insurance. Otherwise, they 

have a choice of two HMOs. 

Also, according to ‘‘The State,’’ which is a newspaper in South 

Carolina, small businesses in South Carolina have ‘‘given up providing health insurance.’’ According to the South Carolina Department of Insurance, eight out of ten uninsured individuals are members of working families. Since 1992, 73 companies have withdrawn 

in whole or in part from Arkansas’ health insurance market. Fiftysix of these withdrawals have taken place within the last four 

years. 

Obviously, in states where there is no competition for the small 

business dollar, prices will continue to rise. The National Association for the Self-Employed reports in a recent survey that seven out 

of ten small businesses do not provide health insurance to their 

employees and costs are almost uniformly cited as the chief reason 

for this trend. 

It is imperative that we act and act quickly in Congress to reverse the course of small business health insurance market, before 

we reach a point where no small business can afford health insurance for its employees. 

I certainly look forward to the testimony of all of our witnesses 

and, in the absence of the ranking member, the gentleman from 

Pennsylvania would recognize the gentlelady from the Virgin Islands. 

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

Ms. CHRISTIAN-CHRISTENSEN. It is going to be very brief, because 

I do have an opening statement that I will submit for the record. 

But I just wanted to say that the issue of coverage is a critical one 

that we face in this country, being the last industrialized nation 

not to cover all of its residents and citizens. And I am on several 

bills that either express the sense of Congress that we should have 

universal coverage by 2004 and related bills. But I realize that 

there are many, many different approaches to this very important 

issue and I welcome all of the participants in this hearing today. 

I thank the chairman for calling it. Because all of the different approaches ought to be on the table. We need to have a very open 

and an ongoing dialogue so that we can insure that everyone is covered. It is amazing that 60 percent of the people who make up over 

40 million uninsured work for small businesses, small business employees or employers. We welcome you and we look forward to your 

testimony. 

3

Chairman PENCE. With apologies to the gentlelady from the Virgin Islands, thank you for your opening statement and we will 

enter your formal remarks in the record without objection. With 

that, I would recognize for any opening remarks she might have 

the former chairman of this committee, the gentlelady from New 

York, Congresswoman Sue Kelly. 

Ms. KELLY. Thank you, Mr. Chairman. I have no remarks. I am 

interested in hearing what the witnesses have to say to us today, 

but thank you for holding this important hearing. 

Chairman PENCE. And now the much anticipated opening statement of the distinguished gentlelady from Ohio, Congresswoman 

Tubbs Jones. 

Ms. TUBBS JONES. Mr. Chairman, thank you for such a kind introduction to my colleagues on both sides of the aisle. Access to 

health care—in addition, this is really not my subcommittee, but 

I appreciate the opportunity to be here, because this issue is so important to the small businesses in my district. 

Access to health care is the most important concern facing small 

business. Approximately 43 million people are without health care 

insurance in this country. Many of these are employed by small 

business. It is shameful that these businesses are at such a competitive disadvantage compared to big business when it comes to 

providing health plans. Small businesses drive our economy 

through innovation by opening doors for women and minorities. 

This Congress must work to remove the barriers that inhibit access to health care. We must do so not only for the health of small 

business workers, but also for the health of small business. Association health plans and tax credits represent important ideals that 

will ultimately figure into a plan to reduce the number of uninsured small business employees. 

However, we must recognize that there is no blanket solution to 

this problem. Allowing small business access to health care will require a unique combination of ideas. Ultimately our solution must 

afford small business the economies of scale enjoyed by big business while reducing the punishing effects of community rating and 

guaranteed issue. However, this solution must not make irrelevant 

laws that mandate coverage of certain benefits and must not force 

workers to purchase coverage that includes riders. Insurance policies that include riders do not constitute adequate coverage because such policies do little to make adequate health care more affordable. 

As we move forward with our work in this area, I encourage my 

colleagues to keep plans offered by entities like the Greater Cleveland Growth Association and COSE, which is the Council of Smaller Enterprises, in mind. These organizations are prominent advocates for greater access to health care for small business in my own 

congressional district, the 11th Congressional District of Ohio. The 

Growth Association has written many helpful articles in order to 

help small business evaluate options for providing care. With their 

front-line perspectives, both organizations will prove helpful to us 

as we attempt to expand small business access to health insurance. 

I was talking with the president of the United Food and Commercial Workers in Cleveland the other day. They have their own 

health care plan and they are self-insured. He said to me for nine 

4

years their health care coverage remained pretty equal, pretty 

steady. But in the last two years, their health care costs have doubled, I mean, have increased by 50 percent. That is like doubling, 

right? 

I said to him, what are you going to do about that? And he said, 

you know, we are sitting at the table, we are in negotiation right 

now, trying to figure out how do I work with this small business 

to keep my union employees with some type of coverage and keep 

it processed. I think this becomes another issue, particularly, as 

well, as we move people from welfare to work. Many of the small 

businesses are being encouraged to bring former welfare workers 

into their business for employment. The dilemma then becomes you 

have people moving from welfare to work at minimum wage with 

no health care. And so it is like they are moving from welfare to 

poverty, based on the amount of income that they have. 

So I am interested in this issue. I look forward to the witnesses’ testimony on the issue and to working with them to try to resolve 

this issue. Mr. Chairman, I thank you for the opportunity to be 

heard. 

[Ms. Tubbs Jones’s statement may be found in the appendix.] 

Chairman PENCE. And I thank the gentlelady for her passionate 

remarks. With that, before we move to our witnesses, I would certainly recognize the gentleman from Illinois for any opening statement or opening remarks that he would care to make. We thank 

him for his attendance and all the members gathered. With that, 

we would welcome all of our witnesses. We appreciate very much 

your commitment to public service and taking the time to be with 

us in this important panel today. 

Most of you are veterans of Capitol Hill hearings and know the 

rules of the game. But for those few neophytes, the lights mean exactly what they do on the street coming here today. Green will 

mean go and yellow does not mean accelerate. 

This chairman does not use the gavel too harshly, but once you 

are over the five minute time, we will ask you to wrap it up as 

quickly as you can. And again I would emphasize to all the members that we will entertain questions of all of the witnesses after 

we have heard the statements. 

The Subcommittee will first hear from the Chief Economist at 

the Small Business Survival Committee, a prominent organization 

that has, particularly in recent years, risen to be a very trusted 

and oft quoted organization in the national media on issues related 

to small business. And their Chief Economist Ray Keating is with 

us today and is recognized for five minutes. 

STATEMENT OF RAYMOND J. KEATING, CHIEF ECONOMIST, 

SMALL BUSINESS SURVIVAL COMMITTEE 

Mr. KEATING. Thank you, Mr. Chairman, and thank you for the 

kind words about SBSC. We are very pleased to be here to speak 

on behalf of small businesses regarding health care costs and the 

impact that government reforms and regulations have had on those 

costs. 

Again, my name is Ray Keating. I serve as Chief Economist for 

SBSC. We’re a non-partisan, non-profit small business advocacy 

group and we have more than 70,000 members across the nation. 

5

We work on a wide range of public policy issues that impact small 

businesses, their employees and the economy in general, and obviously health care policy is of critical interest to us. We hear regularly from our members about the problems they have in the health 

care marketplace. And obviously, number one on their list is rising 

health care costs. 

Small business have been confronted with enormous increases in 

health care costs in recent years. I will offer you just a few examples from my written testimony. 

There was a national survey of small businesses released in April 

of this year by the Kaiser Family Foundation. And of the small 

firms not offering coverage, 72 percent cited cost as a very important reason for not doing so. Of all the small businesses executives 

surveyed, 67 percent said they were very or somewhat dissatisfied 

with the costs of health care. 

In Massachusetts, health insurance premiums went up by 12 to 

15 percent this year, with many small businesses reporting increases of more than 20 percent. A Michigan survey taken, again, 

in April of 2002, found small business health insurance premiums 

had doubled in the previous four years and were expected to rise 

by 20 to 25 percent this year. The survey also found, which obviously is quite worrisome, that 24 percent of business owners said 

rising health care premiums threaten the existence of their business. 

Another report noted that health insurance premiums in 2001 

rose 55 percent faster for small businesses than for large firms in 

2001. 

So you get the basic idea of what the problem is right now and 

this has been a multi-year problem for small businesses. It has just 

not been the last year or two. Obviously, these rising costs take a 

heavy toll on small firms. Many did not survey. Some cannot afford 

to offer health insurance coverage in the first place and that places 

these firms at a competitive disadvantage in attracting good employees. Other businesses reduce coverage, including having employees pick up a bigger share of health care costs or they simply 

eliminate coverage altogether. 

The obvious question is why? Why are health care costs on the 

rise, and not only for small businesses, but for individuals and 

other firms as well? The increase in health care cost is due, to a 

significant degree, to government’s increasing role in the health 

care marketplace. One major problem is the third party payer 

issue. Government’s ever increasing role in health care funding 

vastly accentuates the problem of third party payments which push 

health care costs higher. 

Just to back track, insurance, of course, makes perfect economic 

sense. Health insurance, properly understood, protects individuals 

against large, unpredictable costs. However, many employer-provided health care plans and government programs have ventured 

far beyond the basic concept of insurance to offer first dollar coverage for small and predictable expenses. 

When a third party, whether an employer-provided plan or the 

government, picks up the tab for reasonable and predictable health 

care spending, demand is driven up and consumers and health care 

6

providers possess few, if any, incentives to be concerned about 

costs. The result is higher costs. 

Another major impetus to increased health care costs and rising 

premiums is government regulation. More regulations and mandates on the part of government, no matter how well intentioned 

they might be, inevitably result in higher costs. Higher costs, of 

course, mean reduced access to quality health care. 

As the chairman mentioned, we note the dire impact of two 

forms of regulation imposed to a significant extent in the States 

over the past decade or so, and that is guaranteed issue and community rating. 

Guaranteed issue, in effect, means that individuals may not be 

turned down for health insurance coverage no matter the condition 

of their health. And community rating mandates that an insurer 

charge the same price for everyone in a defined region, regardless 

of their varying health care risks. 

These regulations violate the basic tenets of the insurance business, namely, risk spreading. Guaranteed issue removes incentive 

for people to buy health insurance until they are ill. And community rating does not allow for critical risk factors to be considered 

when pricing insurance. And the results are completely predictable—much higher insurance costs and fewer insured individuals. 

In my written testimony, I offer examples in New Jersey on how 

costs have skyrocketed, how in Kentucky, insurers have fled the 

case and, of course, those are just two prominent examples. 

Unfortunately, looking ahead, it often seems that the only debate 

in policy circles today is how far new mandates and regulations 

should go. In our view, Congress and the White House need to dramatically shift the health care debate away from more government 

involvement and, instead, focus on removing governmental barriers 

to additional choices in the health care marketplace. 

I see that my time is up, but I would like to highlight that one 

dramatic change that Congress could do would be on the reform 

and deregulation front, is to lift the current restrictions on, for example, tax-free medical savings accounts. MSAs, just for people 

who are not aware, they combine a traditional high deductible, catastrophic insurance plan with a tax-exempt savings account. MSAs 

reconnect that buyer-seller relationship in the marketplace. Individuals and their doctors make health care decisions, not some distant bureaucrat. 

Again, in my written testimony, we offer various examples of the 

restrictions that are on MSAs right now, but this is a clear opportunity where deregulation can expand health care choices, expand 

competition, reduce the number of uninsured, and lower the cost 

for businesses of all sizes. That is the exact opposite of what happens with more regulations like guaranteed issue and community 

rating. 

So in the end, market and competition work. Deregulation and 

expansion of choices in the health care marketplace will have positive effects on both costs and quality of care. Minimal government 

intervention and regulation allow businesses and consumers to 

seek out the type of health care coverage that meets their needs 

and pocketbooks. And I look forward to any questions that you 

might have after we are done. 

7

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

Chairman PENCE. Thank you, Mr. Keating. Next, the Subcommittee will hear from Mark Litow, who is a consulting actuary 

for Milliman USA, the nation’s largest health care actuarial firm. 

Mr. Litow is a fellow in the Society of Actuaries and a member of 

the American Academy of Actuaries and one of the most recognized 

experts in the country on the issues before this Subcommittee 

today and is warmly welcomed and recognized for five minutes. Mr. 

Litow? 

STATEMENT OF MARK E. LITOW, CONSULTING ACTUARY, 

MILLIMAN USA 

Mr. LITOW. Thank you and thank you very much for putting this 

together and giving me a chance to testify. I have been in this business for 27 years. I have been working in exclusively health care 

for that whole time and a lot of my time is spent in the small group 

as well as individual markets. 

On Saturday, I am actually traveling to South Africa to deal with 

much the same problem. They implemented guarantee issue and 

community rating in South Africa January 1, 2000 and the market 

is totally falling apart. So this has been practiced in a number of 

countries throughout the world. This is not just the United States’ problem. Australia did it in the 70s and has had dramatic problems, as well. 

Just as a caveat, since consultants always need caveats, the opinions I express are my personal ones. They are not of the firm. I did 

have several of my colleagues, however, in the firm review this and 

they do agree with the opinions found in my testimony. 

As Mr. Keating indicated, this market is in very, very bad shape. 

I think the Chairman indicated and I think that was from my testimony, that only ten states we see as being viable, as I recommended to insurance companies that I work with for entering 

those markets. There are some other states that are sort of on the 

borderline, another five. Another 15 states or so where the Blues 

or one other dominant carrier can get large, large discounts that 

other carriers cannot get and so they dominate the market, and 20 

other states where there really is very little market left. 

So the question is, how did we get there and that is a long history. But very quickly, we implemented the premium tax exclusion 

that was referenced by the earlier witness in 1954, which emphasized using third parties to cover everything. That led to Medicare 

and Medicaid in 1965, which led to cost shifting and many other 

problems. And we ended up with a situation where virtually somebody else is always paying for our health care. There is very little 

personal responsibility. And that afflicts all of the health markets 

and the small group market, with its inability to get the same leverage as large group, is even worse. 

So we are in a real predicament. It has taken us a long time to 

get there and in the 90s we put in the rating bans and guarantee 

issue that made it significantly worse and has exacerbated the 

problem. 

So the real question is, what do we do about it, given that we 

are in this serious position? And I have a couple of recommendations to put forward. First would be, I would look at seriously reVerDate Aug 23 2002 01:36 Aug 24, 2002 Jkt 081232 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A232.XXX A232
8

pealing the premium tax exclusion, which created such heavy reliance on third party. That has created a serious problem and there 

are various things to do. You obviously need to replace it with 

something to help people who need the protection and cannot afford 

it. And I would suggest some form of tax credits as a possible solution to that. 

Secondly, I would either look at either modifying HIPAA, which 

put in guarantee issue, or simply repealing it. To modify it, you 

could offer basic and standard plans as an alternative to people 

and then you would not have to repeal it. 

The other thing are the rating bands that many of the states 

have put in. If those are too tight, generally less than plus or 

minus 25 percent, what you will see is just rate spirals develop 

very rapidly in the states. Some of the states have what they call 

pure community rating, where there is no allowance for rate differentiation. And so what happens in these situations is that the 

healthier people start to reduce their coverage or drop their coverage. The higher cost groups en masse by rich coverage, and it 

puts more and more weight—and, of course, then the insurers have 

to continue to increase the premiums and you develop rate spirals. 

And that is what is happening in these markets. The key thing 

in health care reform is focus on keeping the healthy people in the 

system. Those are the people that subsidize the less healthy. If 

they start exiting the system, you will have problems. 

So those are my three recommendations. We are going to need 

to show some patience in implementing this, because it has taken 

us a long time to get into this mess. It is going to take us awhile 

to get out. But we seriously need the rigorous debate that has just 

been talked about on this market and we need to start acting now, 

because if we do nothing, the situation will just continue to get 

worse. Thank you very much. 

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

Chairman PENCE. Thank you, Mr. Litow and look forward to 

questions from the members gathered about your remarks. The 

Subcommittee will now hear from Dr. Merrill Matthews, who is the 

Director of the Council for Affordable Health Insurance. He is a 

public policy analyst specializing in health care issues and is the 

author of numerous studies in health policies, past President of the 

Health Economics Roundtable for the National Association of Business Economics, former health policy advisor for ALEC and his relationship with this Chair dates back over a decade of misadventures and per adventures in the area of health care reform and is 

very warmly welcomed by the Chair. And, Dr. Matthews, you are 

recognized for five minutes. 

STATEMENT OF MERRILL MATTHEWS, JR., PH.D., DIRECTOR, 

COUNCIL FOR AFFORDABLE HEALTH INSURANCE 

Mr. MATTHEWS. Thank you, Mr. Chairman, and I would like to 

thank you and the members for putting on this hearing. I believe, 

as was stated earlier, that for small businesses, this is one of the 

most important issues they are facing—how to provide affordable 

coverage to their workers. 

As you mentioned, I am with the Council for Affordable Health 

Insurance. It has been in Alexandria for ten years. We are a reVerDate Aug 23 2002 01:36 Aug 24, 2002 Jkt 081232 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HR\OC\A232.XXX A232
9

search and advocacy association representing small insurers in the 

small and individual group market. 

I would like to start out by discussing a little bit, by going to an 

analogy and maybe making it clear what happens with guaranteed 

issue by doing that. My father-in-law is a homebuilder. Suppose 

that in his state, the state legislators looked out and said we have 

a problem with homelessness in this state. How are we going to get 

these people into homes? We would like to be able to fund some 

new homes, but we really cannot afford it. What are our options 

available? 

Well, we have some homebuilders in the state. Why do we not 

just require them that for every, say, five homes they build, they 

have to build one free and provide it for a homeless person? If the 

state legislature was to do that, my father-in-law, of course, would 

have to struggle with that. He did fairly well being a homebuilder 

of middle class homes, but he did not make enough money off of 

four or five homes to build a whole new home. 

As a result, as he started into this process, he would find he 

would have to raise the prices of those homes for paying customers 

in order to be able to afford to build the other home free of charge. 

As those prices began to rise for the paying customers, they would 

look at that and they would say, why are we paying more? We have 

friends living in other states that spend a lot less for the same size 

house. 

And those customers would begin to look for options. They might 

not buy a new home. They might move across the state line. They 

may choose another alternative like moving into an apartment. 

They would begin to find other alternatives and as a result, my father-in-law would be building fewer homes. They would cost more, 

the ones that he built, and the people that this was set up to help, 

the homeless, would end up getting fewer homes out there, as well. 

What happens with guaranteed issue is something very similar 

to what they would be trying to do with my father-in-law. Guaranteed issue is an attempt to try to make insurance companies the 

safety net. It is an attempt to try to make insurers become the provider for people who have medical conditions and other things and 

cannot get health insurance in a normal market. 

Now what we do in other areas of the economy, if we have people 

who are in need, we let the market work for everybody else and 

we provide assistance for those that have needs. In food, we have 

people out there who cannot afford the food they need, we provide 

food stamps or a food stamp program. For those who need housing, 

we do not tell builders you have to build an additional house free 

of charge. We provide assistance for those who need the housing. 

That is what we ought to look at in terms of health insurance. 

Instead of going to insurers and, in essence, saying you have got 

to take people who you would not normally take because they have 

a medical condition, which ends up, when those people move into 

the market, they have very high expenses. They end up bringing 

those expenses into the pool. The premiums rise for everyone, it 

has been discussed earlier. Young, healthy people begin to drop out 

of the pool because they say, my goodness, this is very high. And 

if I can go into the health insurance market any time I want to, 

why do I want to stay in here while I am healthy? 

10

So you get the pool smaller and sicker. And as a result, you get 

fewer people insured and the people that you were really trying to 

help initially end up paying a whole lot more if the product is even 

available at all. 

Now as mentioned by Ray, a number of states have tried to do 

this. It has never worked—never worked. At the federal level, we 

tried to do this in the small group market with the HIPAA legislation. If you looked at the American Academy of Actuaries report 

when this first came out, the press release said insurance premiums might rise between 2 and 5 percent. If you looked inside the 

report, it said, well, for some groups, the premiums could go up between 125 and 167 percent. That is exactly what we are seeing 

from the people you were discussing. The premiums are rising because people can move into the market and, in essence sick people 

can move in and the premiums will begin to rise. 

We think there are two or three things that can be done with 

this. Number one, you need to have a program that creates government as a safety net and not tries to make business the safety net. 

You can do that by repealing HIPAA. That is one option that Mark 

Litow mentioned. You can provide some options out there and the 

NAIC has got model legislation that will, if you are going to have 

guaranteed issue in some areas, you can let insurers offer those 

that are underwritten in other areas, so that there are some 

choices out there. And you can move to a situation in which if a 

state has a risk pool, the risk pool becomes, in essence, the safety 

net for those people who are uninsurable. 

If we are going to do this, ideally you move to a provision in 

which your high risk pool captures the uninsurable people. That 

lets the market work for everyone else. There is legislation in the 

Senate by Senators Baucus and Smith that would provide funds to 

do just that, and we think that is the way you need to go. And I 

will be available for questions later. Thank you, sir.

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

Chairman PENCE. Thank you, Dr. Matthews. Our next witness is 

Robert de Posada. Did I pronounce that correctly? 

Mr. DE POSADA. Yes, you did. 

Chairman PENCE. Robert de Posada is President of the Latino 

Coalition. He is former president of the Hispanic Business Roundtable and brings a critical perspective about minority business enterprise and the challenges that they face in wrestling with the extraordinary costs of health insurance to this panel. 

We are grateful for your national leadership. We are grateful to 

recognize you for five minutes. 

STATEMENT OF ROBERT GARCIA DE POSADA, PRESIDENT, 

LATINO COALITION 

Mr. DE POSADA. Thank you, Mr. Chairman. As you mentioned, 

Hispanics are disproportionately affected by the uninsurance crisis 

that we have, currently. We are three times as likely as the rest 

of the population—— Ms. KELLY. Excuse me, Mr. de Posada. Could you pull that 

microphone closer to you? Thank you. 

Mr. DE POSADA. Is this better? 

Ms. KELLY. Yes. 

11

Mr. DE POSADA. Hispanics are disproportionately affected by this 

crisis. The census shows that Hispanics are three times as likely 

as any other group in the country to be uninsured and the reason 

is simple. I mean, it is source of employment and the economics, 

income levels. Americans get their insurance from their job and the 

overwhelming majority of Hispanics work for small business and in 

the service industry, which as we all know are more likely to not 

offer health insurance simply because they cannot afford it. 

Also, according to the census, we are finding that less than 1 percent of all Hispanic owned businesses have 100 employees or more. 

Therefore, 99 percent of Hispanic businesses in this country, 1.4 

million, are considered small businesses. Fifty-five percent of the 

Hispanic owned businesses are also in the service and in the retail 

sector. And if we add construction to this, we are talking about 68 

percent of them. 

After talking to many of these employers, we are convinced that 

they would love to move into a system that they could offer insurance to their employees. The problem is that with all the good intentions and all the good legislation and regulations at the state 

and federal levels that public officials are making, it is almost impossible for them to afford it. Guaranteed issues and community 

rating and, you know, modified community ratings are driving 

costs through the roof. And believe it or not, rates for small business, for small group market, is significantly higher than in the individual market, which is already very high. 

What we are seeing is that too many working families are being 

left behind. We call them the too poor, but not poor enough. Too 

poor to afford health insurance, but not poor enough to qualify for 

Medicaid. 

So what would we recommend? From a small business perspective, first, we strongly urge you to pass legislation to repeal guaranteed issue at the federal level and to continue to support high 

risk pools. Second, we would push for the association plan legislation again. These two proposals will help reduce the cost of health 

insurance overall. 

Also, as a more creative approach and we have been looking at 

how to implement this, we would like to allow small businesses to 

actually purchase health insurance on the Internet. But the key 

here would be the regulations that would apply to these businesses 

would be the ones in the home state where the insurance companies are providing. This would help address the whole issue of the 

state regulatory level. 

However, from an individual perspective, we are strongly recommending immediate passage of the bipartisan legislation to provide 

refundable tax credits or vouchers to workers who do not get health 

insurance from their jobs. This would help focus the assistance on 

those who need it most and would help cover the gap of uninsured, 

where it is needed most. 

And do not let opponents fool you. I mean, this has become too 

much of a partisan attack. You can get health insurance for working families in the market for the $3,000 being proposed. Currently, on a quick search on the Internet, we found that in Anderson, Indiana, you can get for $172 a month coverage for a family 

12

of four. In Chester, Pennsylvania, for $187 a month, you can find 

for a family of four. So it is affordable and it is doable. 

Also, once this legislation is implemented and signed into law, 

what you are going to find is all the health insurance companies 

that currently are seeing this market as something that is not approachable, it is not worthwhile for them, all of a sudden, millions 

of families with $3,000 vouchers, this becomes a significant market 

for them and they will design plans to meet this need. 

We have a serious uninsured crisis in the Hispanic community 

in our business sector and we urge you to stop the good intentions, 

new mandates and regulations that are driving prices through the 

roof. While politically popular, you are destroying the market and 

will end up leaving thousands of workers without coverage. We 

urge you to do what is right and to help small businesses and their 

employees. And we thank you for holding this hearing, because at 

least you are taking a first step in that direction. Thank you, Mr. 

Chairman. 

[Mr. de Posada’s statement may be found in the appendix.] 

Chairman PENCE. Thank you, Mr. de Posada, for those very insightful and provocative remarks. 

Our final witness this morning is Wayne Nelson, President of 

Communicating for Agriculture and the Self-Employed. And Mr. 

Nelson is a grain farmer from Winner, South Dakota, and was 

elected to his current post in 1993 and is one of the most recognized experts in the agricultural arena on challenges facing the 

self-employed in small business in agriculture in the country. And 

it is delightful to have you here and I am anxious to hear your remarks. You are recognized for five minutes. 

STATEMENT OF WAYNE NELSON, PRESIDENT, 

COMMUNICATING FOR AGRICULTURE & THE SELF-EMPLOYED 

Mr. NELSON. Thank you very much, Mr. Chairman and members 

of the Committee. CA, Communicating for Agriculture & the SelfEmployed, is a national organization made up of farmers and small 

business members who are individual operators of very small businesses that only have one or two employees. 

As you all know, it has been stated earlier, health costs are rising at very alarming rates. After a few years of lesser increases, 

the last two years have seen dramatic increases. This really hits 

small businesses very, very hard. And unfortunately, they are forcing more of them to drop coverage that they have previously offered to their employees or keep them from offering new plans.

Compounding the problem is that more insurance companies are 

dropping out of the small group markets in some states, leaving 

fewer choices for small businesses and a less competitive market. 

Many of the employees of these small businesses end up in the individual market. 

While it is important to take steps to keep a viable small group 

market working in every state, it is equally important, we feel, that 

steps be taken to maintain a viable, competitive, affordable individual market, not only to serve the self-employed, but also to 

serve the individuals who work for small businesses that are not 

able to offer insurance under employer coverage. 

13

Many of the federal and state reforms that were enacted in the 

1990s with the intent of helping the small group market have backfired and actually done harm. Also, several states have tried reforms in the individual market, tried to make them more like the 

employer market with disastrous results. 

Some state legislatures believe that simply legislating that every 

insurance company had to offer insurance to anyone at any time, 

regardless of their medical conditions, could really solve the problem. And this has led to sky high premiums and no competition, 

with many companies leaving states that have guaranteed issue in 

the individual market. 

C.A. believes that everyone deserves access to quality insurance 

and we feel that high risk pools, sometimes called health insurance 

safety nets, are the best, most workable way to address the problem of access for people in an individual market. 

Thirty states now have high risk pools that offer high risk pool 

programs that offer health insurance to individuals who are medically uninsurable. All risk pools by their inherent design need to 

be subsidized. Funding is an issue that is holding back more states 

from adopting them and funding poses a challenge for existing 

state programs, because they try to keep premiums as affordable 

as possible. 

C.A. believes that some partial federal funding to help start pools 

in the remaining 20 states would be helpful. Additionally, federal 

funds to help pay the premiums in the existing states would also 

be very helpful. 

The second issue that is very important is we are trying to do 

something to temper the high cost of health insurance that keeps 

many individuals and the small businesses from purchasing insurance. CA strongly supports refundable, advanceable tax credits or 

health credits as one way to make insurance more affordable. 

There are several plans introduced in both the House and the 

Senate and the President has offered his health credit plan and 

they would offer up to $1,000 per individual and up to $3,000 per 

family. These health credits are refundable, which means that they 

would be available to an individual or family even if they have no 

income tax liability. 

Department of Treasury has done review and estimates that the 

President’s plan would lower the number of uninsured by six million people, which is very significant. 

We also feel that MSAs or medical savings accounts would offer 

another alternative to help get more people insured. Recent legislation extended the period of time for the current MSA program by 

one more year, but much more needs to be done. MSAs need to be 

available to all sizes of companies, not just very small companies. 

We feel that a wider range of deductibles would allow consumers 

more choice and would allow companies to offer products better 

suited to customers. It would also be helpful to allow contributions 

by both the employee and the employer in the same year. 

C.A. believes that our power is in our association to help our 

members have better health insurance. CA has offered an endorsed 

health plan to our individual members for the last 26 years. Even 

though CA members participating in the plan are in the individual 

14

market, they have similar power to those in groups in regard to 

health products offered and the cost of premiums. 

The association can negotiate with an insurance company with a 

much louder voice in terms of tempering rate increases and offering 

quality products than the individual can alone. That combined 

voice is a power of the association. 

We will continue to work toward keeping a viable individual insurance market to also help the small group market. We will strive 

to have high risk pools for individual market access in every state, 

to have refundable tax credits, to help make insurance more affordable, to expand MSAs, to offer more choice and to enforce the 

power of the association to try to help individuals get better health 

benefits at a lower price. 

Together, we think these things can make a significant change 

in helping small business and the self-employed have better insurance products. Thank you very much, Mr. Chairman. 

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

Chairman PENCE. Thank you, Mr. Nelson, for those thoughtful 

remarks. The Chair is going to pose just a couple of quick questions 

and then yield to other members before I ask the balance of the 

questions I have. 

Beginning with Mr. Keating, from your perspective as an economist, what are small businesses going to do if Congress does not— we are talking about repealing HIPAA, we are talking about the 

fair care—no one has used that term, but that is the legislation, 

the Army-Lipinski legislation. If we do not do something, medical 

savings accounts expanded beyond the pilot program. Give me a 

scenario and I am just going to run down the line, anybody who 

wants to take a whack at it, where agriculture, the Hispanic community, where are we going to be in five years if we just let this 

continue to go in the direction it is headed? 

Beginning with Mr. Keating, let us go down the line. 

Mr. KEATING. Well, if you look at the rate increases that small 

businesses are facing, five years from now, you know, you could 

easily talk about doubling the cost of your health care. How are 

they going to react? They are going to react in a lot of ways. 

Number one, maybe some of them are going to have the ability 

to eat that, as they say. But you know what happens when small 

business owners eat those costs? That means there is less money 

for investment, there is less money for expansion. That means less 

job creation and small businesses are the engine of job creation and 

innovation in the economy. 

But most of them, our 70,000 members, most are not going to be 

able to eat costs like that, so they are going to then turn around 

to their employees, they are going to offer, perhaps, eliminate coverage as many of the surveys are indicating that small businesses 

will do that. They will ask for a bigger chunk to be picked up by 

employees. They will drop coverage, they will not offer it in the 

first place. 

Those costs are real. One of the things that is very frustrating 

from an economist’s perspective when you look at the policy arena 

is that the things that might sound nice politically often are really 

ugly when you look at the economics. I mean, it sounds nice to say, 

okay, all you people have to charge the same rate for health insurVerDate Aug 23 2002 01:36 Aug 24, 2002 Jkt 081232 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\A232.XXX A232
15

ance, you have to guarantee that no matter where a person is in 

terms of their life and their health, they have to be able to be 

issued health insurance. That all sounds very nice, but there are 

very real costs that go along with that. 

And just as sure as taxes are costs to small business owners and 

the rest of us, and we can see the cost of taxes. It is real easy. You 

know, you get your tax bill, you see how much money comes out 

of your paycheck. Regulations are very dangerous, because they are 

hidden largely from the consumer. But nonetheless, the costs are 

quite real. So you are going to see small businesses react in all of 

those ways that I mentioned before and that is going to have a real

impact on the U.S. economy without a doubt. 

Chairman PENCE. Mark Litow, same question. 

Mr. LITOW. I agree with that. I think two of the other speakers 

mentioned at least high risk pools. You are already seeing in a 

number of states where the small group market has deteriorated 

rapidly, that the healthiest people in those groups are going into 

individual markets and the sickest will go into the high risk pool. 

And without any changes, you will see that happen. 

The individual market is also deteriorating, but at a slower rate. 

Ultimately, those pressures and the pressures from Medicare and 

Medicaid will create a situation where health care really becomes 

a crisis from the whole system standpoint. And I think the CBO 

projections or 75 year projections show that anywhere between 

2027 and 2042, that it will bring down, effectively, say, bring down 

the economy. But what is going to happen is, you are going to get 

serious ramifications from that. 

So I think without any change, that is clearly the direction. And 

there will have to be a change made, a very drastic change at some 

point. But it is always very difficult to predict how fast that will 

occur, whether it is in the next ten years or 25 years. But I think 

the small group market in the next five years without any change, 

you will just continue to see a reduction and you will see a lot of 

those people flow into the individual market and/or some into large 

groups and more into uninsured. 

Chairman PENCE. Is there any question in your mind, Dr. Matthews, that doing nothing simply exacerbates the problem, will 

swell the ranks of the uninsured and create even a larger problem 

than we have today? 

Mr. MATTHEWS. Doing nothing will do nothing but get more uninsured. It will exacerbate the problem. There is one caveat here 

which I think we are seeing coming into the market now. A number of the insurance companies are looking, seeing the prices increase, are looking for alternatives. Through most of the 90s, most 

employers moved to some type of managed care plan in order to be 

able to hold down costs. But by and large, the patients, the consumers, they do not want these. The doctors are not pleased with 

managed care. So there is a sense in which we are trying to figure 

out some way to get away from the more restrictive types of managed care like HMOs. 

But I think you may see an evolution in policies in which companies begin to move to something more like a high deductible, which 

is less expensive. Get you away from some of those costs that guarVerDate Aug 23 2002 01:36 Aug 24, 2002 Jkt 081232 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\A232.XXX A232
16

anteed issue will impose upon people who have a number of costs, 

but they are still in the low range. 

So policies at even larger companies like Humana and Aetna 

have moved to a medical savings account type of policy now that 

they are offering, for the opportunities to get a higher deductible, 

making it less expensive, and then moving more money into the 

employee’s medical savings account. And I bring this up because it 

has been interesting. In ’96, with the debate over medical savings 

accounts, a number of people opposed them because they did not 

want people to have to have high deductible policies. They did not 

feel like they were that good, they did not feel like they provided 

the coverage and so forth, especially for sick people. What we are 

seeing in the market is employers and insurers beginning to move 

to that as a result of the legislation that was trying to escape that. 

Chairman PENCE. Thank you. 

Mr. DE POSADA. Well, you know, what you are going to see is a 

huge rise in the number of uninsured. That is a certainty. In addition to that, you are going to see a huge crisis in the hospital emergency room operations. I mean, most of these people currently that 

are uninsured are relying on emergency rooms to take care of their 

most basic needs and you are seeing a very serious and financial 

crisis in a lot of these hospitals. 

I think ultimately you are going to see what we are seeing already in the Hispanic community, which is a huge black market for 

prescription drugs that are, in many cases, counterfeits and ineffective. 

Finally, I think what you are going to end up seeing is a very 

strong push for us to expand the Medicaid program, which, I mean, 

we have been battling this at the state levels, where you are seeing 

that the budgets are going out of control and states are significantly restricting services. And it is becoming extremely poor services that these Medicaid individuals are receiving. 

On a personal level, I mean, I live and my business is in Washington state. We have, you know, we are hit by community ratings 

and by guaranteed issue. And probably, I mean, you are going to 

end up seeing people like me not hiring people, but just hiring people on a part-time basis, in order to avoid any potential crisis of 

me being forced to offer health insurance. 

I mean, there are proposals in the Senate to force people like me 

to offer health insurance to my employees. I mean, ultimately, that 

would be disastrous for my business. So I think what you are going 

to see is a lot of people going, also moving from a defined benefit 

to a defined contribution, which is already happening and groups 

like Aetna are already offering, you know, using other terms. But 

I think it would be a serious problem, particularly in our community, it would be disastrous. 

Chairman PENCE. Mr. Nelson. 

Mr. NELSON. I think that the same consequences would be evident in rural America, with real small businesses and farmers, as 

well. There certainly would be an increase in the number of uninsured. 

One thing I wanted to point out was that a lot of these things 

together, MSAs and tax credits and some partial federal funding 

and risk pools can do a lot. But they are not going to solve 43 milVerDate Aug 23 2002 01:36 Aug 24, 2002 Jkt 081232 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A232.XXX A232
17

lion uninsured in one fell swoop. And I feel that some people think 

there is a fix out there somewhere that we can enact one piece of 

legislation that will fix this whole problem in just a matter of a 

year or even less. 

And I think it is important to note that these are just cogs in 

the wheel. And why not get started and try to do some of these 

what we call re-reforms, to try to fix some of the reforms that have 

not worked in order to help lower that number of uninsured. 

Thanks. 

Chairman PENCE. I have a number of other questions to follow 

up on the witnesses’ remarks, but I want to yield to my colleagues, 

beginning with Mr. Phelps from Illinois for any questions he might 

have of any members of the panel. 

Mr. PHELPS. I appreciate the opportunity and the testimony has 

been very enlightening. I chaired the Health Care Committee in 

the Illinois House when I was there and I have a large rural district, so my interest mostly has been trying to focus on challenges 

in the rural setting, although we have a combination of some urban 

areas, too. 

It may not be a question, most of mine is going to be just comments and maybe if anybody has a reaction, instead of all of you 

reacting, just feel free to pitch in, one or all. 

I guess one of the things in this discussion that maybe I have 

missed and I know it is just part of the overall problem that we 

take for granted and accept, but I guess I did not hear enough or 

would be interested in hearing about how we contain the cost of 

health care? Because most, if not all, the comments are on target, 

which I mostly agree with, I think we are looking at the effects of 

the system that has gone bad. What is the source of the problem? 

We know people that are uninsured cannot afford it, maybe because they do not have a high enough wage or maybe do not have 

a job at all, so we have different layers of government that has responded to these situations. 

But the cost of care, how can we involve ourselves with insurance 

reforms that might get to the source of the problem? Because we 

can have prescription drug coverage plans, you know, that has 

been offered and one that has passed at least the House last week 

or so, two weeks ago. You know, what about the cost? How do we 

get to the cost? Does there need to be regulation? Has regulation 

caused the high cost? And I think if you study it closely—I have 

my own opinions, because I have seen both sides from a public 

service, elected official, as well as a small businessman and someone who raised a family of four. My youngest is still at home and 

a senior at a university. 

But the cost keeps escalating. Does that mean there is not 

enough profit being made by the doctors and nurses, the hospitals, 

the deliverer of care? If profit does not happen, we all are in trouble. You know, that makes the world go round. 

The cost of equipment, do we need those sophisticated equipments and miracle drugs that are on the scene if everybody cannot 

afford it or if it is exacerbating the problem? Why are we making 

them to begin with? Well, because we want to save lives and extend the care and the age of people. But what is the problem with 

the costs going up? 

18

I heard back in the early 90s that it was administrative costs, 

too much paperwork. That has been reduced quite a bit, maybe not 

enough. So I guess instead of deliberating, going on a self-filibuster, I will just let you react to some of my frustrations, any of 

you. 

Mr. LITOW. Well, first of all, you are right. The cost of health 

care from 1975 to 2000 went up at 8.3 percent per year. It is right 

out of the government statistics books. And the inflation rate for 

non-medical service was 4.3 percent and wage growth and assets 

have not kept up. 

So as long as we continue to double the rate and, of course, the 

last two years, the gap is even much wider than that, we are in 

a problem. People just cannot afford it. And the reason that has occurred is a lot of things we talked about. It goes back to we have 

created a system where somebody else is paying for it. I think everybody talked about that and the demand—we have set up a system where the demand for health care is up on the ceiling and 

somebody else is paying for that. And whether we did that for 

health care or for the three basic needs of food, shelter and clothing, we would have the same dilemma. 

And so we need to sit down and modify the system, not that people—we should have high quality care and access to that, but we 

have to find a way to bring cost into the equation with equal 

weight. And that will change the way providers are operating. It 

will change the way insurers are operating and it will change the 

way consumers are operating, for sure. 

And our models show, we ran a model a number of years ago 

called Simucare with the Council and we have updated that. And 

right now, our model is showing that health care should cost about 

53 percent of what it costs today. So that will give you some idea 

of what we think could be done, but it is going to take a long time 

to unravel that. 

Mr. PHELPS. I know I just made general statements and it is 

tough to respond without a specific question. I guess I just like to 

see the industry focus on the source of the problem, instead of setting up all kinds of mechanisms to respond, to react, and I think 

that is the situation we are in. Because I have watched it carefully 

over the last two decades, at least. 

When you say, and I am not necessarily taking issue, but just 

as the devil’s advocate, let us say, it is shifting responsibility if 

someone else pays, even though we know over 40 million people 

uninsured are too many, there are a whole lot more people that are 

paying for health care. So I do not think what is coming out of my 

check, although we have a nice situation, being government officials and I wish and hope that happens for everyone in the country, 

but we are paying and not shifting responsibility to someone else. 

We are paying so much out of our earnings for health care. But evidently, that is not enough to keep up with the cost that is rising 

each year. 

So I do not know what the justification really is for all the costs 

rising at the percentage that you just quoted, other than if you are 

saying that there are too many that are not contributing anything 

and taking too much out. 

19

Mr. LITOW. Well, let me try to explain. Utilization of health care 

services, especially for outpatient type services, anything that is 

discretionary, changes dramatically when the consumer is involved 

in paying for that cost. So that, and we have seen that in all kinds 

of markets and all kinds of countries. 

And so what has happened in the country is utilization is very 

high, partly because consumers ask for all these services because 

somebody else is paying for it. Providers create all these things and 

can charge a lot of money for them, more than they would, because 

somebody else is paying for it. 

So you have created a system—and then we put in laws that 

have created certain things and we have had to, the providers, you 

know, once you have price controls on services they have had to operate to make a profit. So what has happened is you go through 

this whole pattern of trying to provide, providers having to deal 

with somebody else, the government, the insurers, everybody but 

the person using the services. 

And so the number of services are way up, services are 

unbundled, we have all kinds of rules which create administrative 

costs. So it is a very complicated thing. But the point is, we have 

got a lot of extra utilization, we have got a lot of extra charges. We 

have got unnecessary visits, we have defensive medicine, it is a 

long list. 

And you can get ten people to testify and people will give different balances, but I think people will generally—they may agree 

on, have different weights on it, but you will find most people agree 

that you have all these issues going on and it is not just one fix. 

There are a lot of problems. 

Mr. PHELPS. One final comment for your consideration and you 

can take it as you like. Thank you, Mr. Chairman, for the time. I 

believe very much in being innovative and trying to work the system to improve it and that is why I am cosponsor of the ArmeyLipinski bill, as well as MSAs since I have been here and in Illinois 

legislature. 

But the bottom line is, we keep talking about competition and 

less government regulation, which I think is part of the answer. 

But I do not know of any other situation where, if the price of some 

product gets so expensive that the consumer cannot afford it and 

there truly is competition, some way or another the person providing that product brings down the price. But I think we see a 

very unusual dynamic here. The price and the cost of health care 

keeps going up no matter what we do and so we are adjusting everything to meet the cost, no matter how high it keeps spiraling. 

And we have all kinds of people justifying why it keeps going up, 

but everything we do does not seem to affect the price of care and 

that is frustrating. 

Mr. KEATING. If I could just throw in one comment? The key and 

your support of MSAs is right on the mark. That’s a big issue that 

we push and tax credits and so on. The key is—there was an article in ‘‘The Washington Post’’ earlier this week and somebody said, 

whatever we do, health care costs keep rising. 

Well, you have to do the right thing. And the problem is when 

you look at things like increased regulation, whether it is mandated benefits, community rating, etc., etc., guaranteed issue, those 

20

are the wrong things. So we have to make sure our policies are 

geared in the right direction that so that we wind up with more 

choice and more competition in the end, and not just more regulation that we can all feel very nice and warm and fuzzy about, but 

it does not really accomplish anything and makes things worse in 

the marketplace. 

Mr. MATTHEWS. Let me respond with a couple of points. Number 

one is, health care costs are probably going to continue to rise, even 

if we had a perfectly efficient system in there, maybe perhaps at 

a lower rate, because there is so much more we can do. The doctors, the medical schools, the hospitals, the pharmaceutical companies, there is just a range of new procedures and so forth that is 

coming out available that we are going to be able to do. So you 

would anticipate some kind of increases just in the ability to be 

able to do things we could not do ten years, 20 years ago. 

But in addition, going back to your point about the cost of health 

insurance, the interesting thing here is, in certain sectors of the 

market, prices remain fairly affordable. If you go to certain states 

that have minimal regulations, have not done certain things to sort 

of destroy the market, in many of those states you can find affordable policies. 

In addition, in many of these states, the companies themselves 

are looking for ways to create new products that are innovative in 

the way they are trying to address the cost. So if you go—increasingly, some of the Blue Crosses around the country and other insurers are moving to what would be a high deductible, say a 

$2,000, $2,500, $3,000 deductible for major medical care. But as 

long as you are staying within the network, you can get primary 

care, preventive care, prescription drugs and so forth, for $20 or 

$25 co-pay out of pocket. So they have a high deductible policy if 

you are going to have, if there is major medical accident procedure, 

sickness or something of that nature. But for standard care, it still 

remains very affordable. In other words, they try to get the benefits 

of the high deductible policy along with the provision in there to 

encourage people to get preventive and primary care. 

Those policies are still, in many states, quite affordable for a 

family of three or four and you referred to some of those. My point 

being is, the insurers are looking for ways to sort of make the market work, but there are fewer and fewer options out there available 

for them, as state legislatures and Congress have passed more and 

more regulations giving them fewer options. 

I think if you were to remove some of those regulations, give 

them a little more freedom out there, you would find them creating 

policies that are very affordable in a lot of areas, but they need to 

have that freedom to be able to do it. 

Mr. NELSON. I think one thing, a very simple thing that could 

be very helpful, is to have the health consumers recognize what it 

is really costing them. I would guess that there are a significant 

number of employees that do not know how much their health insurance is costing, because it just automatically comes out of their 

check. And they do not know when they go in for a procedure or 

go in for a check up how much that is really costing. 

21

So simply educating and empowering the consumer to learn more 

about what health care really costs and how much their care is 

costing them would be very helpful. 

Chairman PENCE. I thank the gentleman from Illinois and would 

recognize the gentlelady from the Virgin Islands for any questions 

or comments she might have to the panel. 

Ms. CHRISTIAN-CHRISTENSEN. Thank you. Just a few brief questions and mine have to do more with quality, because as a physician and chair of the Health Trust of the Congressional Black Caucus, a lot of my time is spent on the elimination of disparities and 

providing for some equity in health care and health status for people in this country. 

So I probably will just ask two questions and I direct the first 

one at Dr. Matthews and anyone else can also answer it. The Associated Health Care Plans would be exempt from state-mandated 

coverage of benefits. Do you see this possibly reducing the quality 

of health care available to small business employees and, if not, 

can you explain how it does not do it? 

Mr. MATTHEWS. In my opinion, it would not reduce the quality. 

And the reason is that under ERISA, large employers that self-insure under ERISA are not subject to the state mandates. And yet, 

if you go by and look at the types of benefits that those large employers offer, in many cases they cover the same types of things 

that the states would require by the mandate. 

So the policies from large employers that are not required to do 

that, because they have the money and other things, typically have 

very comprehensive policies that are very good. So the Association 

Health Plans are an attempt to try to do something very similar. 

And I would expect some of the benefit plans to have comprehensive benefits in there. But I think it would also give them the opportunity to offer basic coverage for those employees, individuals, 

associations, that do not have the money to be able to get the comprehensive plan. 

Like you, I like to have a comprehensive plan covering me and 

managing to cover just about all the health care costs. But sometimes, some people cannot afford the Cadillac with all the options. 

They need to be able to get the lower cost plan that provides the 

basic care because that is all they have the money for, and the Association Health Plans would give them that option. 

Ms. CHRISTIAN-CHRISTENSEN. I mean, we need to try to get away 

from two-tiered levels of services. The same question about the risk 

pools. It sounds as though they foster a two-tiered system of services. And I guess I would start by directing this to Mr. Litow first. 

Can you talk a little bit about the high risk pools and whether or 

not they also would provide a good, comprehensive quality level of 

services, equal to the other insurances? 

Mr. LITOW. Well, high risk pool plans, very often you don’t have 

the same level of choice of coverage. But as far as the level of services go, I am not aware—I was on the Board of the Wisconsin High 

Risk Pool for a number of years. I would not say that the quality 

of service, those people—it is private coverage. The coverage is subsidized. In Wisconsin, we pay about 60 percent of the costs and I 

think that is consistent with a number of the states. The person 

22

gets in and pays 150 percent of the normal rate in this high average of five top companies in the state. 

So the intent of a high risk pool is two-fold. One is to encourage 

healthy people to buy insurance at that time, so when they get 

sick, they have the protection. If they wait until they get sick, then 

there is a penalty. But as far as the access to treatment—— Ms. CHRISTIAN-CHRISTENSEN. And as far as the basic level of 

services? 

Mr. LITOW. They would have that. They are just paying the penalty for having waited and getting into the system late. But they 

are not, I do not believe they are penalized in any way. Like I said, 

sometimes the coverage choices are not as substantial. 

I do not know, is anybody else aware of any? 

Mr. MATTHEWS. I can say that in the Texas High Risk Pool, basically, in several of the states and I do not know about all of them, 

but in the high risk pools, you are basically getting a Blue Cross 

policy that is subsidized by the state, because you are getting people who have expensive medical conditions. 

And so I know in Nebraska, it is a Blue Cross policy. The insurers make very little policy if they sell that policy. I think the last 

I heard, it was like a $25 commission or something like that. But 

you get a comprehensive plan. 

In the Texas High Risk Pool, you get three or four options. You 

can have an HMO, a PPO. They give you options of deductibles. It 

looks very much like a standard insurance policy. 

And I think what Mark was saying is that the providers themselves, the doctors and hospitals, are largely blind to that aspect 

of it. I mean, they do not—it is not an issue of you are in the high 

risk pool so I cannot give you the coverage or I cannot provide this 

or give you this prescription. 

Mr. NELSON. In a couple of states, in Wisconsin, in fact, where 

Mark was on the board, they have another plan that offers some 

help to low income people to be able to better afford entrance into 

the high risk pool. And there is a pilot study now in Montana, who 

has a high risk pool, a federal study of a couple million dollars this 

year to help low income people be better able to afford getting into 

the high risk pool. 

In one of the proposed bills in the House right now with some 

partial federal funding for high risk pools, there are some dollars 

set aside for low income people going into the pool, as well. So I 

think that people are looking at that. 

Mr. MATTHEWS. And—go ahead. 

Mr. DE POSADA. On the two-tier system that you were talking 

about, particularly in the minority communities, you are seeing it 

already. 

Ms. CHRISTIAN-CHRISTENSEN. Absolutely. 

Mr. DE POSADA. I mean, you are seeing all of our communities, 

all of our businesses not being able to offer, so therefore you do 

have a two-tier system. We are very strong supporters of Association Health Plans because at least that will reduce the cost significantly so that businesses can, these businesses will be able to afford it. 

However, there is no one silver bullet. And unless you start targeting the same kind of support that you are giving businesses to 

23

employees who do not get health insurance from their job, you are 

basically ignoring a huge part of the market. So that is why you 

need to focus a lot more also on the individual market. 

Mr. MATTHEWS. Just if I can add this. I share your concern. We 

do not want a two-tiered system out there. In my opinion, the high 

risk pool, in fact, prohibits or prevents that two-tiered system because it makes insurance accessible to somebody who can then 

move into the system and pay for it with their insurance plan just 

like everyone else. 

Ms. CHRISTIAN-CHRISTENSEN. I—go ahead. 

Mr. NELSON. Another quick point is that the high risk pool population of these 30 state—well, 28 operating now, and two states, 

New Hampshire and Maryland are coming on this year—it is a 

fluid population. It is not a static population. And some people 

move from the risk pool into an employer, get employed by someone or maybe are able to get other insurance. So people do not stay 

in there forever, so it is helpful to have them in there for a short 

period of time at some point. 

Ms. CHRISTIAN-CHRISTENSEN. Well, with the tens of millions of 

people who are the folks who are employed by small business that 

make up the uninsured right now, this is a critical issue and one 

that we have to address. 

I look at some of the things that we are discussing today as really sort of stop-gap measures. Because what we really need to be 

doing as we provide the relief to small businesses and help them 

to be able to insure their employees is do something about those 

high risk persons that are creating the problems we are trying to 

solve coming into the insurance system. And reaching them, providing the prevention, providing the improvements in the health 

care structures and the poor communities, rural as well as minority 

communities, and making sure that everyone has equal access to 

quality health services, quality prevention services, have good 

health care infrastructure in their community, so they are not coming into the insurance pool at high risk. That is what is really driving up the cost at that front end. 

But we will be working with our chairman to resolve the issues 

that are before us today. That is a longer term problem, but we realize that we do have to provide some relief to our small businesses 

in terms of providing insurance coverage. We know that those tens 

of millions of people do need to be covered, that is something that 

we must address. And we look forward to working with you on it. 

Chairman PENCE. I thank the gentlelady from the Virgin Islands 

for her attendance, participation and am very much looking forward to working with you on addressing these issues. 

I would also recognize the gentleman from Puerto Rico for any 

comments or questions to our panel and am grateful for your participation in the hearing today. 

Mr. ACEVEDO-VILA ́. Thank you, Mr. Chairman. I just have one 

quick question to Mr. de Posada. I am not surprised at the numbers about the uninsured Hispanics. I am just a little bit curious. 

What were the numbers, let us say, five years ago? Has there been 

any improvement or are we in a worse position? I just want to 

know if there is a trend in the amount of uninsured Hispanics. 

24

Mr. DE POSADA. I mean, like the rest of the population, what you 

are seeing is whenever there are good economic times, obviously 

the numbers drop a little bit. But what you are finding is that—— Mr. ACEVEDO-VILA ́. My point is, are we closing the gap or has it 

been like that for the last whatever years? 

Mr. DE POSADA. No, it has been like that for a very long time and 

it will continue to be like that simply because these are people that 

are working for small businesses that do not offer health insurance. 

So unless we figure out ways to encourage those employers to offer 

or go into the individual market, allowing, you know, giving them 

the support through tax credits or vouchers to be able to afford it, 

you are going to see the number continue to increase. 

Mr. ACEVEDO-VILA ́. Thank you. 

Chairman PENCE. I thank the gentleman for his participation 

and know the gentleman from Puerto Rico to be probably the most 

outspoken and outstanding advocate of issues related to the Hispanic community in this country. 

Mr. ACEVEDO-VILA ́. I have the biggest Hispanic congressional 

district. [Laughter.] 

Chairman PENCE. No argument. I have a few more questions for 

the panel, although this has been an enormously valuable and illuminating discussion. 

Earlier, the Chair asked about scenarios if we do not act. I would 

like to have you elaborate for the record on some of the proposals, 

some of which have been challenged here today by my colleagues. 

But it seems like in the area of reform, there was a consistent call 

for refundable or advancable tax credits. 

I know Mr. de Posada called for that and Mr. Nelson did, as well. 

Mr. Litow and Mr. Matthews, just from my notes alone. I am an 

original cosponsor of the Fair Care Armey-Lipinski bill. What advantages are there between one reform and another? If history 

teaches us that in legislation as well as military affairs that you 

move the line when you put mass on point, where would this panel, 

beginning with Mr. Nelson and we will go in the opposite direction, 

where would the experts on this panel suggest that this committee 

and this Congress put mass on point? If there are a host of good 

ideas from repealing HIPAA to medical savings accounts, the Fair 

Care initiative, refundable tax credits, what is the most promising, 

if there is one? And why would that be the most promising, both 

from the standpoint of public policy and from the standpoint of the 

internal politics within the Congress itself? Mr. Nelson, your opinion? 

Mr. NELSON. Well, if this was, the world was free of budgets, my 

answer would be different than it is, because we are under constraints of budgets. And then when we start looking at the availability of money to try to do these reforms, I think that if we look 

at reforming MSAs, which is relatively low cost at some partial federal funding of high risk pools, which is relatively low cost, we are 

looking at several bills that may be $100 million a year and at 

these tax credits, some of the tax credit bills being proposed are 

fairly low cost. Then that is what I guess, in the reality of the next 

two years in terms of the cost, the budget that is available to us, 

that would be my three choices, I think, of trying to do something 

to really help. 

25

Whether one of those is more important than the others, I do not 

really have an answer for that. I just think that all three are very, 

very important. What I wish is that we could pass Fair Care, which 

has all three in them, and be done with it, but I am afraid that 

that might not be possible. I wish it was. 

Chairman PENCE. Mr. de Posada, in your testimony you eventually got to the conclusion that we would see a significant increase 

in Medicaid, pressure for increase in Medicaid spending, which is 

terribly frustrating to me as a conservative. But it is also frustrating to me because this entire hearing, this entire discussion, is 

about working Americans. 

The people that are working, that are employed, and despite the 

hateful stereotypes that can attach to minority communities, you 

have been an eloquent voice in this hearing today for the Hispanic 

community and its desire, people’s desire to build wealth and be 

productive parts of the economy and small business sector, in particular. 

Where do we focus right now that is going to make the biggest 

difference? 

Mr. DE POSADA. I think there are two pieces of legislation that 

you can move very quickly, and actually the House already passed 

one of them, which would be, I think, Association Health Plans, because that would take care of reducing costs. And in some essences, 

will allow people to by-pass some of the state regulatory policies 

that are really increasing the prices. 

The second issue would be immediate passage of Fair Care. I 

mean, when you focus the support on those individuals that are 

currently being affected by this, those that are working but do not 

get health insurance from their job, I think automatically you are 

going to be opening a huge new market of people that actually will 

not have to depend either on Medicaid, potentially, or having to 

rely on the hospitals. I mean, it is very sad. 

We did, last year, yes, last year we issued a report on the re-importation of drugs into the United States. And we were followed, 

when we were doing a press conference in California, we were followed by a TV crew from Chicago. When we went there, they did 

this report about the sale of illegal prescription drugs in Chicago, 

in the little 7–11 type stores, where people were coming in and 

they would sell them drugs. 

Most of these people did not know that there was a community 

health center two blocks away. So, I mean, what we are seeing is, 

these people are taking drugs or getting sick or getting immune to 

major drugs and ultimately going to emergency room hospitals and 

increasing the prices for everybody. And I think if we start focusing 

on giving that support to the individuals to be able to enter the private market, I think we are going to see a significant reduction in 

the dependency of and in the complications, which always end up 

to be more costly. 

Chairman PENCE. Dr. Matthews, your remarks today were most 

helpful to the Chair, because being from south of Highway 40, it 

is hard for me to get my brain around some of these things and 

I was particularly grateful for the home building analogy. You 

made the comment, though, that we need to get insurance companies out of the safety net business and get the government in. I 

26

want to get your opinion about where we put mass on point, and 

if you could pick one, I would be grateful. But when you say that 

government should be the safety net and not insurance companies, 

are you suggesting that through reform, or are you suggesting that 

through direct subsidy? 

Mr. MATTHEWS. I think in both. We have a model out there that 

works pretty well. I mentioned it earlier. On, for instance, where 

you are talking about housing or food, we have people out there 

that cannot afford the food they need, but we do not go in and regulate the grocery stores and the farmers. We simply provide assistance to those people who need the help and then we let the market 

work. And we let them enter the market with the assistance. 

Now what we are talking about is not necessarily welfare. But 

it is an attempt to say if you have people out there who cannot 

function in the market as it exists, then do not go in and regulate 

the insurance companies. Let the market work and provide the assistance through the Armey-Lipinski bill is one way to provide assistance. For those who cannot enter the market because they have 

a medical condition, you do not go tell the insurers you have to 

take them, you provide some additional assistance to them is one 

way to do it, and Mark Litow has done an analysis of how you 

might do that. But you have the high risk pools as the safety net. 

The high risk pools are public, private entities that provide health 

insurance for those people who cannot enter the standard market. 

My point being is that you create a system that works off a 

model like we already have that provides assistance and creates a 

safety net, but you cannot make business, whether you are talking 

about insurance or other things, you cannot make business a safety 

net. You need to create a safety net and government is really the 

only functional way of doing that. 

Chairman PENCE. Thank you, Dr. Matthews. Mr. Litow, in the 

category of reforms, you said that repealing the premium tax exclusion would do much to stem the tide of almost the lemmings over 

the cliff drive to third-party payer that we have. 

Mr. LITOW. Right. 

Chairman PENCE. And I was very provoked by your comments 

about that. Is that tax credit, is tax credits where we put mass on 

point to move this issue quickly? 

Mr. LITOW. Yes. I believe so. In fact, I think that is what Merrill 

was talking about. We have actually constructed a proposal where 

tax credits replace the premium tax exclusion step by step and actually over a long period of time, we believe it will be revenue neutral. So we are not even certain, we do not think there is a cost. 

Now I am sure people would have various assumptions about 

that. But that is where I would start, yes. 

Chairman PENCE. Would you start there or do you think that is, 

in fact, the most promising to close this wound and begin to reverse 

what I think I will characterize in this hearing as horrendous 

trends for small business America? 

Mr. LITOW. That is fair. I do not think there is any disagreement 

here. It is always tough to estimate the progression, but what I believe will happen is, as people start to become aware of the costs 

that they are paying for health care and what other people are paying for health care, so, for instance, under Medicaid, part of the 

27

issues with Medicaid are very few providers will take people under 

Medicaid. Why? Because the reimbursement rates are so low. And 

if people start to realize that they are paying a lot more because 

Medicaid reimbursements are so low or Medicare or they are paying for uncompensated care, it will open up a whole area of debate. 

And I believe that actually that will allow us to do some more substantial reforms in those areas, but at least to open up a debate.

And that is why I believe bringing the consumer back in on the 

cost side and changing from a premium tax exclusion system, 

which relies on third party to tax credits, particularly to give help 

to people who need it, as Merrill talked about, is a critical first step 

in that. 

Chairman PENCE. And lastly, is it Dr. Keating? 

Mr. KEATING. No, just a Masters, sorry. 

Chairman PENCE. Well, I admire your thinking, regardless of 

your title. I just simply did not want to improperly recognize you. 

I would like to get your sense. You said in your testimony, according to my notes, that we needed to dramatically shift to additional 

choices, drive competition into the equation. And it seems like your 

focus was less on the issue of subsidies and what we have heard 

some others place emphasis on with regard to Fair Care and 

Armey-Lipinski, but was to lift restrictions on tax-free medical savings accounts. Is that the most promising area of reform? Is that 

where Congress should go to expand the pilot programs we have? 

Mr. KEATING. We certainly agree with, if not all, most of the proposals that have been talked about here. But we think the key 

here, Congressman Phelps had asked, you know, what is the core 

problem here? And it is the third-party payer issue. That is why 

we emphasize making medical savings accounts permanent, lifting 

the many rules and restrictions on them so they can flourish as a 

viable choice for everybody in the marketplace. When you think 

about how MSAs work, they directly deal with that third-party 

payer issuer. The consumer has money in that savings account. It 

is his or hers, he or she, they are concerned about the costs, how 

that money is spent, they are concerned about their health care, 

and they have the back up of what insurance is supposed to be, 

that catastrophic plan that helps you weather those large, unforeseen costs. 

So our emphasis is on dealing with that third-party payer issue 

and the true emphasis of my testimony was that and that is easy, 

or it should be easy. I know there are a lot of opponents in Congress that are not crazy about medical savings accounts for a variety of reasons, but that should be easy. 

The hard part is the other side that we talked about. It is deregulation. You know, the trend here, unfortunately, in Congress 

and the states has been towards more and more regulation, more 

and more government funding, expanding government programs. 

We need the emphasis to move in the opposite direction. That is 

hard, I mean, I know that is hard. I understand politics as well as 

economics, so it is very difficult to move to deregulate. But we need 

to deregulate when it comes to things like guaranteed issue and 

community rating and mandated benefits. Again, a lot of these 

things sound nice but the economics are ugly. 

28

Chairman PENCE. With that, the Chair would like to thank all 

of the witnesses for outstanding and very provocative remarks 

today. Mr. Keating made the comment that he understood politics 

as well as economics, which is also true for the Chair. I have very 

little understanding of economics and my understanding of politics, 

after a year and a half in Congress, matches that. 

Let me thank you for your willingness to help us in this subcommittee draw attention to not only the reforms but to the deleterious and harmful effect that issues like guaranteed issue and essentially price fixing have affected in our system. 

You may all be assured that this subcommittee and the full Committee on Small Business will continue to call on you as we try and 

take your counsel to stem what I believe is a dangerous rising tide 

in small business America. That if we do not stem this tide, it 

seems evident to me and other limited government conservatives, 

that we will be faced with no choice but to grow public assistance 

through Medicaid to address this gaping hole in America, and take 

us even farther down the road of socialized health insurance in the 

United States of America. 

It is this Chair’s ambition that we would reverse this trend, that 

we would build on the strength of a competitive free market model 

and we will enlist your assistance and your proposals and your energy as we try and drive that agenda before the advent of that legislative and public crisis arrives. 

So with that, this hearing of the Subcommittee on Regulatory 

Reform and Oversight of the Committee on Small Business is adjourned. 

[Whereupon, at 11:43 a.m. the Subcommittee was adjourned.]

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