EXPANDING ACCESS TO QUALITY HEALTH 

CARE: SOLUTIONS FOR UNINSURED 

AMERICANS

HEARING

BEFORE THE 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS 

OF THE 

COMMITTEE ON EDUCATION AND 

THE WORKFORCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, JULY 9, 2002 

Serial No. 107-69 

Printed for the use of the Committee on Education 

and the Workforce

81-205 pdf 

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

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

 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
ii

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN A. BOEHNER, Ohio, Chairman 

THOMAS E. PETRI, Wisconsin GEORGE MILLER, California 

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan 

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

PETER HOEKSTRA, Michigan DONALD M. PAYNE, New Jersey 

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

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

SAM JOHNSON, Texas TIM ROEMER, Indiana 

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

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

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

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

BOB SCHAFFER, Colorado CAROLYN McCARTHY, New York 

FRED UPTON, Michigan JOHN F. TIERNEY, Massachusetts 

VAN HILLEARY, Tennessee RON KIND, Wisconsin 

VERNON J. EHLERS, Michigan LORETTA SANCHEZ, California 

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

JIM DeMINT, South Carolina DENNIS KUCINICH, Ohio 

JOHNNY ISAKSON, Georgia DAVID WU, Oregon 

BOB GOODLATTE, Virginia RUSH D. HOLT, New Jersey 

JUDY BIGGERT, Illinois HILDA L. SOLIS, California 

TODD RUSSELL PLATTS, Pennsylvania SUSAN DAVIS, California 

PATRICK J. TIBERI, Ohio BETTY McCOLLUM, Minnesota 

 RIC KELLER, Florida 

 TOM OSBORNE, Nebraska 

 JOHN ABNEY CULBERSON, Texas 

 JOE WILSON, South Carolina 

Paula Nowakowski, Chief of Staff 

 John Lawrence, Minority Staff Director

 SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS 

 SAM JOHNSON, Texas, Chairman

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

JOHN BOEHNER, Ohio DONALD M. PAYNE, New Jersey 

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan 

CASS BALLENGER, North Carolina LYNN N. RIVERS, Michigan 

PETER HOEKSTRA, Michigan CAROLYN McCARTHY, New York 

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

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

PATRICK J. TIBERI, Ohio 

JOE WILSON, South Carolina 
iii

Table of Contents 

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, SUBCOMMITTEE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

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

OPENING STATEMENT OF CONGRESSWOMAN LYNN RIVERS, SUBCOMMITTEE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

WORKFORCE ............................................................................................................................... 4

STATEMENT OF CONGRESSMAN ERNIE FLETCHER, 6TH DISTRICT OF KENTUCKY, 

U.S. HOUSE OF REPRESENTATIVES ....................................................................................... 5

STATEMENT OF CONGRESSMAN JOHN F. TIERNEY, SUBCOMMITTEE ON 

EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION AND THE 

WORKFORCE ............................................................................................................................... 7

STATEMENT OF MARK B. MCCLELLAN, M.D., MEMBER, COUNCIL OF ECONOMIC 

ADVISORS, WASHINGTON, D.C............................................................................................. 13

STATEMENT OF HARRY M. JANSEN KRAEMER, JR., CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, BAXTER INTERNATIONAL, INC., DEERFIELD, IL, 

TESTIFYING ON BEHALF OF THE HEALTHCARE LEADERSHIP COUNCIL ................. 23

STATEMENT OF RONALD F. POLLACK, EXECUTIVE DIRECTOR, FAMILIES USA, 

WASHINGTON, D.C................................................................................................................... 25

STATEMENT OF JOSEPH E. ROSSMANN, VICE PRESIDENT OF FRINGE BENEFITS, 

ASSOCIATED BUILDERS AND CONTRACTORS, ROSSLYN, VA, TESTIFYING ON 

BEHALF OF THE ASSOCIATION HEALTH PLAN COALITION ......................................... 27

APPENDIX A - WRITTEN OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE................................................................................... 41

APPENDIX B - WRITTEN STATEMENT OF CONGRESSMAN ERNIE FLETCHER, 6TH

DISTRICT OF KENTUCKY, U.S. HOUSE OF REPRESENTATIVES .................................... 47

APPENDIX C - WRITTEN STATEMENT OF CONGRESSMAN JOHN F. TIERNEY, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON 

EDUCATION AND THE WORKFORCE................................................................................... 55
iv

APPENDIX D - WRITTEN STATEMENT OF MARK B. MCCLELLAN, M.D., MEMBER, 

COUNCIL OF ECONOMIC ADVISORS, WASHINGTON, D.C.............................................. 61

APPENDIX E - WRITTEN STATEMENT OF HARRY M. JANSEN KRAEMER, JR., 

CHAIRMAN AND CHIEF EXECUTIVE OFFICER, BAXTER INTERNATIONAL, INC., 

DEERFIELD, IL, TESTIFYING ON BEHALF OF THE HEALTHCARE LEADERSHIP 

COUNCIL..................................................................................................................................... 79

APPENDIX F - WRITTEN STATEMENT OF RONALD F. POLLACK, EXECUTIVE 

DIRECTOR, FAMILIES USA, WASHINGTON, D.C. .............................................................. 93

APPENDIX G - WRITTEN STATEMENT OF JOSEPH E. ROSSMANN, VICE PRESIDENT 

OF FRINGE BENEFITS, ASSOCIATED BUILDERS AND CONTRACTORS, ROSSLYN, 

VA, TESTIFYING ON BEHALF OF THE ASSOCIATION HEALTH PLAN COALITION 107

APPENDIX H – SUBMITTED FOR THE RECORD, HARRY M.J. KRAEMER, JR., 

CHAIRMAN AND CEO, BAXTER INTERNATIONAL, INC., DEERFIELD, IL, 

TESTIFYING ON BEHALF OF THE HEALTHCARE LEADERSHIP COUNCIL, ANSWERS 

TO QUESTIONS RAISED BY CHAIRMAN SAM JOHNSON, JULY 25, 2002 ................... 115

Table of Indexes.......................................................................................................................... 119
1

HEARING ON EXPANDING ACCESS TO QUALITY HEALTH CARE: 

 SOLUTIONS FOR UNINSURED AMERICANS 

____________________

Tuesday, July 9, 2002 

Subcommittee on Employer-Employee Relations 

Committee on Education and the Workforce 

 U.S. House of Representatives 

Washington, D.C. 

 The Committee met, pursuant to notice, at 2:05 p.m., in Room 2175, Rayburn House Office 

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

 Present: Representatives Johnson, DeMint, Ballenger, McKeon, Tancredo, Tiberi, Wilson, 

Payne, Kildee, Rivers, McCarthy, and Tierney. 

 Staff present: Kristin Fitzgerald, Professional Staff Member; David Connolly, Jr., 

Professional Staff Member; Dave Thomas, Senior Legislative Assistant; Ed Gilroy, Director of 

Workforce Policy; Jo-Marie St. Martin, General Counsel; Greg Maurer, Coalitions Director for 

Workforce Policy; Heather Valentine, Press Secretary; Scott Galupo, Communications Specialist; 

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

Coordinator.

Camille Donald, Minority Legislative Counsel/Labor; and, Michele Varnhagen, Minority Labor 

Counsel/Coordinator.

Chairman Johnson. The Subcommittee on Employer-Employee Relations will convene. 
2

Today the Subcommittee will hear testimony on ways to expand health care access to 

uninsured Americans. And I am eager to get to our witnesses. So I am going to limit opening 

statements to the Chairman and the Minority Member. Therefore, if other Members have 

statements, they will be included in the record. With that, I ask unanimous consent for the hearing 

record to remain open 14 days to allow Members statements and other extraneous material 

referenced during the hearing to be submitted for the official record. Without objection, so 

ordered.

 Let me extend a warm welcome to you and all of the Members who are here and my other 

colleagues. Mr. Fletcher, thank you for being with us. 

OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE 

 Today's hearing focuses on expanding access to health care for uninsured Americans. On 

June the 18th, this Subcommittee heard testimony about the rising cost of health care and how this 

impacts employers and employees. In the last year alone, employers' health care benefits costs 

have increased an average of 13 percent. This fact led economists at our last hearing to predict that 

a significant number of Americans would lose their health insurance if this alarming trend 

continues. Because of the close relationship between health care costs and employers' ability to 

offer health insurance to employees, today's hearing will investigate how we can increase access to 

health care. 

 We will hear testimony painting a picture of the uninsured, who they are, where they work, 

and why they remain without health insurance. Members of Congress, the Administration, and 

outside experts will highlight solutions for uninsured Americans; solutions they believe will help 

put an end to this problem once and for all. 

 In the year 2000, 39 million Americans were uninsured. That means that 1 in 7 Americans 

went without health insurance. You might ask who are these uninsured? Well, they are working 

people who certainly don't have access to insurance or can't afford it. Fifty percent of the uninsured 

Americans work in small businesses. Some of these people are offered insurance and turn it down 

because of the costs. But many other employees in small businesses are not offered health 

insurance, leaving them without employer-sponsored coverage, our nation's primary form of 

insurance.

 Why is this the case? One basic reason is affordability. As we remember from our 

previous hearings, small businesses are subject to numerous state mandates and often have access 

only to very expensive health coverage. 

 By contrast, their large business counterparts bargain for health care with the clout of a 

much bigger group. Association health plans would solve some of these problems for small 
3

employers, letting them band together to bargain as a larger group and giving them relief from 

costly state mandates. 

 Today, we will also hear about the Congressional and White House support for these plans. 

Additionally, we will hear testimony about other burdens that small employers face. Many times, 

these mom and pop shops simply don't have the time to investigate their health insurance options. 

 We will hear about projects such as the Main Street Initiative to help bridge this knowledge 

gap. Over the years, Congress has taken action to help the uninsured. For example, last year, as a 

part of the Patient's Bill of Rights, Congress passed association health plans and medical savings 

accounts, two measures that would greatly expand access to health coverage for uninsured 

Americans. Unfortunately, these important initiatives that would reduce the number of uninsured 

have languished, while difficult political issues of the Patient's Bill of Rights are being debated. 

Congress has also acted to provide health care assistance for dislocated workers. This was 

done by way of tax credit provisions in the House passed economic stimulus package, and recently 

passed Trade Assistance Act. As the trade bill conference gets under way, debate will continue 

over the best way to provide health care assistance to workers who are in danger of losing their 

health insurance. 

 While Congress debates these issues, 39 million Americans wait, wonder, and worry, 

hoping we will put aside our differences and offer them some help. This Subcommittee has 

jurisdiction over employer-sponsored health care coverage. And the vast majority of Americans, 

65 percent, have employment-based health insurance coverage. Given this fact, I would like to 

think that this Subcommittee of all subcommittees could offer uninsured Americans some relief. 

With that in mind, I look forward to working with my colleagues on the Subcommittee as 

we examine this issue and potentially move forward with solutions to help these Americans. 

WRITTEN OPENING STATEMENT OF CHAIRMAN SAM JOHNSON, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE 

ON EDUCATION AND THE WORKFORCE – SEE APPENDIX A 

Chairman Johnson. Right now, I would like to welcome all of our witnesses. Thank you for 

being with us, John, and we look forward to your testimony and the guidance it will offer. 

 I now yield to the Minority Member today, Ms. Rivers, if you desire to make a comment, 

please.
4

OPENING STATEMENT OF CONGRESSWOMAN LYNN RIVERS, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, 

COMMITTEE ON EDUCATION AND THE WORKFORCE

Thank you, Mr. Chairman. I am pleased to be part of today's hearing on one of the most 

pressing problems facing this nation, the uninsured. Estimates range as high as 47 million people 

without insurance at any given time in this country. And CRS estimates that nearly 1 out of 7 

Americans, or 39 million people, had no health insurance for all of the year 2000. 

 More than half of the uninsured were full-time workers or their dependents. Also in this 

country, we find that more than half of our bankruptcies are the result of unpaid medical bills, as 

families struggle to find ways to meet the health needs of their families. 

 This is an unconscionable problem in a country known for its wealth and its health care 

advantages. While many of us have access to the best health care available anywhere in the world, 

others must scrimp to cover basic care or forego needed care all together. This disparity is 

unacceptable and cannot be allowed to continue. 

 I used to be one of the uninsured. As a young mother, my family and I went without health 

insurance because if our jobs didn't provide it, we couldn't afford it. We were not alone in that 

unfortunate situation. And no one should have to endure the fear of falling ill at the wrong time, at 

being unable to afford recommended preventative care, or of financial ruin resulting from serious 

injury.

 But anxiety is not the only side effect of foregoing health insurance. The Institute of 

Medicine found in a recent report that the lack of health insurance leads to delayed diagnoses and 

life-threatening complications resulting in 18,000 premature deaths each year. Researchers 

concluded, “Being uninsured for even a year appears to diminish a person's general health.” 

 I am encouraged that the problems facing the uninsured have gained increased attention in 

recent years. Awareness and national debate are essential to developing an effective national 

solution. However, the solutions proposed to fix the problem vary widely in both their approaches 

and their effectiveness. 

 I am concerned that some proposals appear to address the needs of certain uninsured 

Americans while leaving others without care, particularly those who, like my family, cannot afford 

the up-front costs of buying insurance. Partial assistance does not help those who cannot afford to 

pay the difference. And health plans limiting eligibility to certain groups do not help those who are 

excluded.

 I hope that we will move toward a health care system that meets the needs of all Americans, 

not just certain constituencies. I know that my colleagues here today share my deep concern about 

the uninsured, and I appreciate their devotion of time to this issue. 
5

 I thank our guest panel members, as well as Representative Tierney and Representative 

Fletcher, for being here with us today. And I look forward to their remarks. Thank you. 

Chairman Johnson. Thank you, Ms. Rivers. I appreciate your comments. 

We have got three panels of witnesses today. Let me warn our Members that we will be 

called for two votes somewhere between 2:30 and 3 o'clock. And, therefore, I am going to ask the 

Members with unanimous consent if we can restrict questions for this panel to five minutes for 

each side. 

 With that, I want to announce our first witness who is my colleague from Kentucky, 

Representative Ernie Fletcher. Congressman Fletcher is a former member of the EmployerEmployee Relations Subcommittee. Our other witness on the panel is the gentleman from 

Massachusetts, Congressman John Tierney. Mr. Tierney is currently a member of this 

Subcommittee. 

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

begin asking questions after the complete panel has testified. I know I don't have to explain the 

timer lights to you two gentlemen. We will hold you to five minutes. 

Please begin your testimony, Mr. Fletcher. 

STATEMENT OF CONGRESSMAN ERNIE FLETCHER, 6TH DISTRICT OF 

KENTUCKY, U.S. HOUSE OF REPRESENTATIVES 

I do miss serving on this Subcommittee. And I want to thank you and the Minority 

Member, as well as the other Members on the Committee, for allowing me to come here today. 

 As you may know, on May 9, 2001, I introduced H.R.1774, the Small Business Health Care 

Fairness Act. And I am pleased that 15 members on the Full Committee are co-sponsors, as well as 

five members of the Employee-Employer Relations Subcommittee. Also 24 members of the Full 

Committee, including 9 on the Subcommittee, voted last year for an amendment to the Patient’s 

Bill of Rights that includes association health plans (AHPs). And this amendment, as you know, 

passed with bipartisan support and was included in the final version of the Patient's Bill of Rights. 

 America's growing health care dilemma now calls for our action. We must help the 40 

million Americans that are currently without health insurance. Those without health coverage 

confront various and discouraged preventive care and delayed diagnosis. Consequently, studies 

reveal that morbidity and mortality rates among the uninsured are substantially higher than those 

with health insurance. And as double-digit health premiums increase and a weakened economy 

puts more and more small business workers in jeopardy of losing their health care benefits, we 

must turn our attention to the problem of the uninsured. 
6

 It is critical for Congress to take action. To include legislation like the bipartisan Small 

Business Health Care Fairness Act, we need to bring the Fortune 500 health benefits to the nation's 

“Main Street” small businesses and their employees. The Small Business Health Fairness Act 

creates AHPs for workers employed in small businesses and the self-employed. This bill provides 

working families employed by small businesses that make up 60 percent of the uninsured with 

more health benefits and more health plan choices. 

 Recently, the National Association for the Self-Employed announced research findings 

about self-employed Americans and their attitudes toward association health plans. According to 

their study, about three-fourths would be very likely, or somewhat likely to participate in AHPs if 

they offered more choices in health care benefits for themselves or their employees. And if 

insurance through AHPs were less expensive, 78 percent said they would be very or somewhat 

likely to participate. And even if AHPs just lessened paper work and administrative burdens, 72.7 

percent said they would be very or somewhat likely to participate. 

 Also, a recent GAO study report shows that the five largest insurance carriers combined 

have 75 percent or more of the market share in 19 of 34 states, supplying information in more than 

90 percent in seven of those states. Greater competition will benefit consumers by bringing 

premiums down and expanding access to coverage. The overwhelming trend in the state markets is 

less and less competition that leads to fewer choices, small benefit packages, and rapidly escalating 

premiums for small business workers. I believe H.R.1774 can help change that. 

 This legislation will inject competition into markets where it is lacking, thus further 

reducing premiums for workers. One independent study concluded that AHPs could reduce 

premiums by up to 30 percent. And it is estimated that up to 8.5 million uninsured workers 

employed by small businesses and their dependents would gain coverage if Congress enacted this 

legislation.

 Small businesses should have the same advantages as do corporate and labor union health 

plans. In fact, small employers now pay 18 percent more for coverage than large employers. 

Moreover, corporate and union health plans operate under uniform national standards, and are able 

to take advantage of economies of scale. Lacking the bargaining power of large corporations, many 

businesses are priced out of the health insurance marketplace leaving their workers uncovered. 

AHPs addresses this problem by allowing those businesses to band together nationally into 

associations that can provide insurance at a lower cost to their members. 

 Let me briefly discuss the three main arguments against AHPs: First is cherry picking or 

adverse selection; second are inadequate solvency standards; and third is inadequate oversight 

enforcement. My statement for the record addresses each of these myths in more detail. 

Under HIPAA, it is illegal for AHPs to deny coverage, so there is no cherry picking. The 

bill contains strict requirements that only bona fide professional and trade associations can offer 

AHPs. Adverse selections that currently exist in state markets will be greatly reduced when 

younger, healthier workers employed in small businesses who are uninsured are able to afford 

coverage that is affordable. This Act contains tough new solvency provisions that actually increase 

consumer protection. The bill gives federal and state authorities new enforcement tools to ensure 
7

that they are enforced. Allegations that health care coverage obtained through AHPs will be 

anything less than secure ignore the protections contained in this bill. 

 I remind you AHPs are different than Multiple Employer Welfare Arrangements (MEWAs), 

which generally would not qualify as AHPs. This bill establishes new clear regulatory authority, 

whereas, many of the problems with MEWAs resulted from unclear regulatory authority and lax 

oversight by the state. 

 This bill does not require an entire new bureaucracy. In fact, DOL already regulated AHPs 

for compliance. Bona fide trade and professional associations can be trusted to operate health care 

plans in the same manner as labor unions and large corporations. 

 I think it is very important that we pass this legislation this year. And I thank you for 

holding this hearing, Mr. Chairman. 

WRITTEN STATEMENT OF CONGRESSMAN ERNIE FLETCHER, 6TH

DISTRICT OF KENTUCKY, U.S. HOUSE OF REPRESENTATIVES – SEE 

APPENDIX B 

Chairman Johnson. Thank you, Mr. Fletcher. 

Congressman Tierney, it is always a pleasure to have one of our own Members testify 

before us. You may begin your testimony now. 

STATEMENT OF CONGRESSMAN JOHN F. TIERNEY, SUBCOMMITTEE 

ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE ON EDUCATION 

AND THE WORKFORCE 

Well, thank you, Mr. Chairman. There are a couple of things that I think we can agree on.

One is that everybody looks at this problem with the utmost good faith. And I think whatever side 

of the aisle you are on everybody is distressed with some of the statistics that both the Minority 

Member and the Chairman mentioned earlier about the number of uninsured and the difficulty of 

solving this problem. 

 But the other thing besides everybody's good faith that we can agree on is we don't seem to 

be able to agree on much. I have a preference for a broader plan like that of Congressman Jim 

McDermott from the state of Washington, for a system that would be open to everyone and 

administered by the states that would have comprehensive benefit programs without deductions or 

co-pays, or co-insurance for preventative or acute care, thus cutting down on the costs that it takes 

to administer all of those things. This plan would override federal programs and transfer those 
8

funds into a different fund from which expenses or expenditures would be made. 

 But I know that the difficulty we run into is that people argue about how to make up for the 

difference in those monies and what else might be needed whether you get those monies from an 

employer, from the employee, from accommodation of those, from a special assessment, from a 

general assessment out of the general revenues. We fight forever on that. 

 A system like that does have the benefits of global budgeting, keeping costs down. It does 

certainly allow people, including the providers, to be involved in the reimbursements discussions 

much differently. Now what we have is the arbitrary nature of insurance companies turning the 

screws it seems from time-to-time on hospitals, and doctors, and other providers. And, certainly, it 

would keep administrative costs substantially down. 

 But we don't seem to be able to get an agreement on that. We have had over 100 

co-sponsors in some years in that plan and fewer in others. But we have seen other plans like Dr. 

Fletcher's here, association health plans, medical savings accounts, tax credits, and again we can't 

seem to agree. 

 We argue on tax credits. Will a credit be enough? Will it be refundable? How are we 

going to keep costs down, or will this be an open piggy bank for insurance companies to just keep 

jacking up the premiums? Are they going to be equitable? Are we going to encourage cherry 

picking, and so on down the line? 

 One of the things that I don't think is at issue here is the amount of money that we spend in 

this country on health care. The United States has a medical average cost per person of $4,358. It 

is a substantial amount. The average for 29 other industrial nations is $1,764. The next highest to 

the United States is Switzerland at $2,853. So it seems that we are spending quite enough money. 

The question is are our systems working or not working, and what can we do to maximize the use 

of that money, so that we cover more and more Americans with a comprehensive plan that they can 

afford? 

 I have a suggestion as to how we might try to break through the roadblock and the 

disagreement that we have, and that is H.R.1033. I hope that we could use our good faith and seek 

an affordable comprehensive health care system by a method that gives the opportunity to states to 

use innovative ideas to come up with a system that would cover all of the citizens within their area. 

 We would allow them to develop their own systems of universal care by clearing away the 

underbrush of federal regulations and providing assistance through the implementation of planning 

grants first, and helping them later to transition to universal care. 

 We would require the benefits and protections of federally funded health programs to 

remain fully in tact even under the waivers. The bill would allow up to ten states to receive grants. 

And they would have to provide a standard package of substantial benefits. They would have to 

show that they can control costs, and then they would be eligible for a second grant that would pay 

for transition costs, usually in the form of uniform information systems, or reaching out to enroll 
9

eligibles. 

 Frankly, studies have shown that if these states can rationalize their systems, and thereby 

bring administrative costs into line with those of other industrialized democracies, states would 

save enough money to cover everyone in the state with more generous benefits than are currently 

available and still spend less overall on health care statewide. 

 So the bill, in summary, is planning grants to create demonstration programs to give 

waivers from federal requirements that might inhibit state innovation but always maintain the 

benefits and protections that existed in current federal programs, a comprehensive set of benefits, 

strong quality assurance requirements, and continual evaluation as we move forward on that. 

 In this way, we should be able to tap into the great resources of the states. And I note that 

some states are already surprising us with some real innovation, not the least of which is the state 

of Vermont, which has a Dr. Dinosaur program for children with income three times the poverty 

level, so that families of four earning up to $72,900 still get care for their children; or the Vermont 

Health Access Plan which gives health coverage and prescription drugs at low cost to adults that 

aren't otherwise eligible under Medicaid; or Success by Six that gives every child health care and 

prenatal care for families, and prescription drug programs that stop unfair patent protection abuse, 

or explore buying power like the Veterans Administration program and group buying to keep costs 

down.

 I think, Mr. Chairman, that if we allow states to use their innovative skills on that basis that 

we can perhaps get through the impasse that Congress seems to find itself in. 

WRITTEN STATEMENT OF CONGRESSMAN JOHN F. TIERNEY, 

SUBCOMMITTEE ON EMPLOYER-EMPLOYEE RELATIONS, COMMITTEE 

ON EDUCATION AND THE WORKFORCE – SEE APPENDIX C 

Chairman Johnson. Thank you, Mr. Tierney. I appreciate your testimony. 

Mr. Fletcher, critics of AHPs have pointed to the lack of state regulation, and the impact on 

state insurance fraud laws and benefit mandates. Why do you believe that small businesses should 

be granted relief from state regulation? And do you believe federal standards would be sufficient 

for AHPs? 

Dr. Fletcher. Mr. Chairman, as Ms. Rivers mentioned, there is an institute study about 18,000 

folks dying prematurely because of lack of insurance. And it is estimated that about 8 1/2 million 

people may gain insurance. So I think clearly it is a benefit that will help reduce morbidity and 

mortality rates across the country. 

 We have in our bill provisions for the states to take over certification and enforcement of 

the provisions applicable to AHPs. We set up the ability for states to do that. That means that if 

someone has a problem, they can pick up the phone and call their state commissioner of insurance, 
10

and there is somebody there to answer the phone. 

 Now, in addition to that, the Department of Labor already regulates exempt plans such as 

the self-insured, self-administered plans of the large Fortune 500 companies, as well as the union 

companies. The union health plans do qualify as AHPs. So I think this is a system where we are 

expanding fairness and the same benefits to small businesses that large corporations have. And on 

the economy of scale that we have seen, it can save up to 30 percent for small business. That means 

more people are going to be insured. 

 Another thing we also have to realize is that these associations are put together for reasons 

other than health care benefits. They are representing their members’ interests, which means the 

benefits that they offer will probably reflect the desires of the members, just like union health plans 

reflect the desires of members. 

 So you have a health care plan that is put together representing members, and no overhead 

from an employer. I think you are going to get very rich coverage as seen in the union health plans, 

as well as some of the Fortune 500 companies. 

Chairman Johnson. Thank you.

Mr. Kildee, do you care to question? 

Mr. Kildee. Thank you very much, Mr. Chairman. 

Mr. Tierney, I am a co-sponsor of your bill, H.R.1033. You describe universal coverage in 

it. Would that accommodate both public and private insurance coverage? 

Mr. Tierney. It essentially would be up to the individual states, to develop a plan of what sources 

or resources they wanted to combine to use. That is why we are really asking for their imagination. 

They could take the resources of the federal programs that are used in their state and mix them with 

their own resources, as long as they didn't go beneath the threshold of benefits and the protections 

federal programs have. 

 So they could decide to fund their program or the extras on their program, any way a 

particular state chose to do it. And they could have a plan that extended out SCHIP, for instance, or 

had a new program, or use more Medicaid, use some of Mr. Fletcher's ideas, if that seemed to work 

in conjunction with others, so long as they reach the goal of covering everyone in their state with 

good substantial benefits. 

Mr. Kildee. And it would include in that totality the private plans provided by, say, General 

Motors? Individuals would have a contract, and the state somehow would devise a plan to make 

sure that no one falls through the cracks? 

Mr. Tierney. It would be up to the state to do that. That is correct. 
11

Mr. Kildee. I am not sure what the status of Hawaii is right now, but at one time Hawaii had 

achieved basically 100 percent coverage. Do you think that could be replicated in other states? 

Mr. Tierney. I think it can be replicated in other states. I had mentioned some of the programs of 

Vermont that have covered in excess of 90 percent of their people through a different variety of 

programs. 

 I think it may well be that urban states and rural states may have different ways of 

approaching this problem. It may be different for different parts of the country and different types 

of populations. And that is why we try to offer flexibility to create models that we can then build 

on.

Mr. Kildee. In my own state of Michigan, in some parts of my district I have a microcosm of 

America. I have two older industrial cities and agricultural areas. Very often in the industrial cities 

there is good coverage because of the GM/UAW contracts, and then there are people who do not 

have coverage. The state could craft a system where insurance provided by corporations and union 

contracts remains in place. Somehow in a variety of ways it could fill in the gaps, so there would be 

universal coverage. 

Mr. Tierney. Yes, that is pretty much what Vermont has done. 

Mr. Kildee. And H.R.1033 would do that? 

Mr. Tierney. It would allow for that. 

Mr. Kildee. Thank you. Thank you, Mr. Chairman. 

Chairman Johnson. Thank you, Mr. Kildee. 

Mr. DeMint, do you care to question? You've got a little over two minutes. 

Mr. DeMint. Thank you, Mr. Chairman. 

Dr. Fletcher, as you know, the large majority of uninsured Americans are working for 

companies that don't offer health insurance, about 25 million Americans. As a small businessman 

myself, I understand why that is. It is the cost, the unpredictability of the prices, the difficulty of 

finding choices in a group market, not having a benefits manager, and the need to negotiate every 

year. It became a costly and cumbersome process. And that is why lots of small companies are 

getting out of the health insurance business. 

 How could AHPs address this list of problems for small businesses? 

Dr. Fletcher. Let me give you an example. Either a Chamber of Commerce, the Farm Bureau, 

NFIB, or any association that has existed for three years previously for purposes other than offering 

health care, could put together a standard insurance package that would represent the needs of their 

members. It would be negotiated on a national level, and every employee in a small business could 
12

participate in it. It is guaranteed. 

 AHPs average up to a 30 percent reduction in costs. It may be less than that. But, certainly, 

small businesses pay 18 percent more on average than companies that are self-insured, or large 

companies that are able to take advantage of this sort of policy. 

 So rather than doing all of the paper work to negotiate a plan every year, AHPs would allow 

small business to participate in a national plan if they were a member of the Chamber of 

Commerce, or the Farm Bureau as examples. And that goes for the self-employed farmer who has 

to find a plan in the individual market, which is very, very difficult to find at a reasonable cost. 

Mr. DeMint. Thank you. 

Chairman Johnson. Thank you, Mr. DeMint.

Ms. Rivers, you have a little over a minute. 

Ms. Rivers. Thank you.

Representative Fletcher, you note that your bill would prohibit AHPs from refusing to cover 

older or sick individuals. Is there any prohibition on increased premiums associated with those 

conditions? In other words, will people have the ability to come into this system in the same way 

everyone else does, or will they have to pay more if they are older, or sicker, or represent greater 

risks? 

Dr. Fletcher. What we have is “guaranteed issue”. They are on the rating system. An individual 

group would certainly have a rating, but not the individual within the group, so that is guaranteed 

issue. They don’t pay based on experience rating. And that allows us to bring more young people 

in, and actually reduce the rates for those high-risk people who probably have insurance because 

they need it through some other means. It would reduce their costs actually. 

Ms. Rivers. But say, for example, in one group there is a sicker person, someone who has a 

chronic or a catastrophic condition, does that then raise the price for everyone in that group? 

Dr. Fletcher. As far as the group, yes. Actuarially, any time you have the total cost raised, you 

would probably have the costs for the entire group or the entire association raised. But, the 

individual would not see a rate higher than their co-worker that was sitting next to them based on 

experience rating. At least that is the way we set up the bill. And if does not do that, we will 

change it. 

Ms. Rivers. But, I mean, we have small businesses today that are struggling under similar 

problems if they have older workers, or if they have people who are ill working for them. If they 

lose their insurance and have to by more, one of the problems with a higher risk group is that the 

costs are so high you can't participate. 
13

Dr. Fletcher. No, that is why we set up the economies of scale based on much larger national and 

association pools, so that small businesses would be able to buy into a plan at a guaranteed issue, 

and avoid the problems you are talking about. It prevents cherry picking, and it also allows people 

at high risk to get the kind of insurance they need. And one of the things we wanted to prevent was 

the very problem you were talking about, spiraling, escalating costs. 

Ms. Rivers. Okay, thank you. 

Chairman Johnson. Thank you both for your testimony, I appreciate it. You may step down. 

 I would ask now that Dr. McClellan to come forward and take his seat. And, again, I wish 

to remind Members that we will ask questions after he has testified. Dr. McClellan is our only 

witness on the second panel. He is a member of the Administration's Council of Economic 

Advisors.

 I think you understand how our timer light system works. And I would ask that you adhere 

to the five-minute rule for your opening statement, if you don't mind. 

STATEMENT OF MARK B. MCCLELLAN, M.D., MEMBER, COUNCIL OF 

ECONOMIC ADVISORS, WASHINGTON, D.C. 

Mr. Chairman, Ms. Rivers, and distinguished Members of the Subcommittee, I wish to 

thank you all on behalf of the Administration for your efforts to find bipartisan solutions to address 

the very closely related problems of the uninsured, and of rising health care costs. 

 The vast majority of the uninsured, as you know, come from families with at least one 

employed worker. And employers and workers everywhere are struggling with another year of 

rapidly rising health care costs. 

 As a result, this hearing on the problem of access to quality health care is especially timely 

and especially important. We very much appreciate your efforts to find common ground to provide 

relief for Americans who are uninsured, as well as those who are working and having more and 

more difficulty obtaining affordable health insurance. 

 The President has introduced a comprehensive set of proposals to ensure that all Americans 

have affordable health insurance coverage options with a particular emphasis on creating affordable 

options for the uninsured. All of these proposals are part of a broad vision for promoting health 

care quality and access for all Americans by developing flexible approaches to providing patientcentered health care coverage. Reflecting the urgency of the need for action, this vision involves 

strengthening every component of our health insurance system. 

 Many of these proposals such as new proposals to assist employees with high out-of-pocket 

costs, and our proposal for association health plans to help small businesses offer insurance are 

directed towards strengthening employer provided health insurance. In particular, the President 
14

supports legislation that provides for the creation of association health plans or AHPs to enable 

small businesses to provide better and more affordable health insurance options for their 

employees, just like those that many large employers can offer. 

 Small businesses are far less likely than large businesses to offer health benefits. In 1999, 

less than half of the firms with fewer than 50 employees offered health insurance benefits, 

compared to 97 percent of larger firms. A major reason why smaller firms are less likely to offer 

health benefits is the fact that providing health benefits is more expensive on a per capita basis for 

small firms. In addition, some of the most rapid increases in health insurance premiums in the last 

few years have occurred for small businesses. AHPs will help solve the problems with access to 

coverage for millions of workers and small businesses. 

 Legislative proposals like H.R.1774, introduced by Representative Fletcher, with over 100 

co-sponsors from both political parties, would allow large industry associations and other groups 

formed on the basis of factors other than expected health care costs to pool together to offer health 

insurance options. 

 Through the establishment of uniform federal standards for association health plans, small 

employers will be able to achieve greater purchasing power, administrative efficiencies, and 

flexibilities in benefit design, the same advantages that have long been available to large businesses 

and union plans. 

 Critics of AHP proposals argue that they will lead to fraud or failures, as that has occurred 

with some multiple employer welfare arrangements or MEWA plans. This is different. The AHP 

proposal is different. Through stringent regulatory requirements like those imposed by the 

Department of Labor on the plans of large employers and unions, and through much stronger 

solvency requirements, unprecedented federal consumer protections will be available for the AHP 

provided plans. There are more details on these provisions in my written testimony. 

Another criticism of AHPs is that they will cater only to healthy enrollees, undermining the 

small group risk pools of each state. For many reasons, including bona fide association 

requirements, large size requirements for AHPs, and the strong regulatory sanctions I already 

mentioned, AHPs cannot simply choose to provide services to healthy, low-risk businesses. And a 

requirement of availability, regardless of the small business risk, is reinforced by prohibitions on 

selective marketing and enrollment. 

 Just as large employer health coverage and multiple employer union health coverage must 

be attractive to a broad spectrum of covered workers, AHPs will not be able to attract small 

businesses by catering only to their healthier workers. Rather, AHPs must offer and provide 

consistent services to a large spectrum of eligible small businesses regardless of their expected 

medical costs. 

 As you know, the President, like many distinguished Members of this Committee, also 

supports a range of other proposals to give employees better options including improved medical 

savings accounts and flexible spending account rollovers. 
15

 Recently, the IRS and the Department of Treasury announced new guidance that will make 

it much easier for employers like some of the firms that you heard from in a hearing several weeks 

ago to offer these kinds of benefits to allow employees to get better protection against their high 

out-of-pocket costs, and to rollover unused balances to subsequent years. I would be happy to 

elaborate on these provisions in my question and answer period. 

 And, finally, the Administration is pleased by the progress towards the introduction of 

health insurance tax credits in legislation this year. Both the House and Senate have passed them. 

We have some specific ideas on improving the kinds of health insurance credits that have made it 

through both Houses, particularly for those designed to help trade impacted workers. And I would 

be happy to talk about that as well. 

 So thank you again. I ask that the remainder of my written testimony be read into the 

record. And I would be very pleased to answer any questions you may have. 

WRITTEN STATEMENT OF MARK B. MCCLELLAN, M.D., MEMBER, 

COUNCIL OF ECONOMIC ADVISORS, WASHINGTON, D.C. – SEE 

APPENDIX D 

Chairman Johnson. Thank you. I appreciate you being here, and thank you for your comments. 

Mr. Ballenger, do you care to question? 

Mr. Ballenger. Thank you, Mr. Chairman. 

I have a couple of questions. As an employer myself, I remember the good old days when 

we used to pay all of the health insurance costs for the worker and his family. As it got more and 

more expensive, sooner or later, the worker had to start paying more of the cost. 

I wonder if there is a statistic that shows one family member insured, and other family 

members who are not insured, because the insured person cannot afford to cover the family? Is 

there such a statistic available? 

Dr. McClellan. I don't know that figure off the top of my head. I suspect some of the other 

panelists might. I will try to get it to you. It is a number that we are concerned about as well and it 

has been rising because employers have found it more difficult to offer subsidized coverage to 

family members, as well as to the workers themselves. 

 And that is one reason for the need for policies like the one that I have discussed, to 

strengthen employer coverage, and also to provide affordable alternatives for people who are not 

offered employer coverage. 

Mr. Ballenger. I wonder if you noticed in the previous discussion of the bills that in one a 

company's individual AHPs plans were involved in a competitive situation and in the other one, the 
16

state studies this, and the state does that, and the state is in charge of this, and the state figures that.

Pretty soon it sounded like the state was running an insurance company. Some states that I know 

couldn't run a one-car funeral procession very well. 

Dr. McClellan. Sure. 

Mr. Ballenger. Did you notice that in the testimony? 

Dr. McClellan. We have noticed it in some of the testimony, Congressman. The Administration 

does believe that there are some things that states can do to help. And we have supported a number 

of states in expanding their Medicaid and SCHIP programs. 

 In many cases, by not trying to run the parade themselves, they have expanded those 

programs and provided more affordable coverage by contracting out to private insurers. And we 

want to encourage more of that. 

 But I think you hit on a very important point that individuals in this country deserve access 

to a range of health care choices. Private insurance choices that enable them to get the coverage 

they need in a way that keeps up with the rapid changes in medical technology, and in the way 

health care is delivered. 

 And that is why all of our proposals center on providing a broader range of affordable 

choices to patients, ways that let patients work together with doctors to get better coverage and 

better care. 

Mr. Ballenger. Thank you, Mr. Chairman. 

Chairman Johnson. Mr. Tierney, do you care to question?

Mr. Tierney. I would, thank you, Mr. Chairman. 

Thank you for testifying today. When you are talking about the association health plans 

that the President supports, basically there is a concern that I have about small employers being 

able to band together. 

 Do you agree with that? 

Dr. McClellan. They can band together under some circumstances and subject to state laws. 

Mr. Tierney. So, basically, the only thing that the President's plan offers is he exempts them out of 

those state laws in some instances, right? 

Dr. McClellan. And that is an important exemption available to large firms and to unions that 

cover multiple employers. 
17

Mr. Tierney. But on your President's plan, what he would do is he would for insured plans 

eliminate all state authority to regulate any arrangement with respect to compliance with consumer 

issues, right? 

Dr. McClellan. The President's plan would put in place for the association health plans the same 

regulatory structure run by the Department of Labor that has worked extremely well for large 

employer plans and union plans. 

Mr. Tierney. My question was, what he would do is he would absolve or exempt them from 

having to comply with state consumer protection laws, right? 

Dr. McClellan. Another option would be to use the federal regulatory system for consumer 

protection rather than a state system. 

Mr. Tierney. I just wanted to see if I could get a straight and simple and very short answer. 

Dr. McClellan. I will try to be very straight and simple. 

Mr. Tierney. What about the exemptions? 

Chairman Johnson. Mr. Tierney, let me just interject here a minute. Is that true? 

Dr. McClellan. That is right. 

Chairman Johnson. Thank you. 

Mr. Tierney. Can I have my time back, or are we all done? 

Chairman Johnson. You have it. 

Mr. Tierney. Thank you. Remind me to interrupt you sometime to make a point. 

 The fact of the matter is that he exempts some from state regulation consumer protections 

and gives them alternatives but you take them out of the state realm. 

Dr. McClellan. Federal consumer protections would apply. When it is a self-funded plan exempted 

from both solvency and consumer protections, you set up a separate structure for that, but the states 

would lose control over both of those things. 

 It also deals not only with solvency and consumer laws, but premium rating, limits on 

medical underwriting, and benefits. And the proposal would include specific federal standards for 

solvency, and underwriting requirements. 

Mr. Tierney. So, essentially, we have a President of a party that always goes around claiming 

states' rights and state prerogatives telling us he wants to replace that with a federal program. 
18

Dr. McClellan. Yes, sir. 

Mr. Tierney. So that was my point. Thank you. 

Chairman Johnson. Dr. McClellan, thanks again for being here. 

You mentioned that some of the most rapid increases in health insurance premiums have 

occurred in small businesses. Can you account for that and tell me how AHPs might help that 

situation? 

Dr. McClellan. There was a recent study done that tried to decompose cost increases in the last 

several years into different components. One component, rising malpractice liability costs is not 

something that this proposal would help with, but it is something that the President is very 

concerned about. 

 Things that this proposal could help address are the costs of compliance with state 

mandates. According to these estimates, something like 10 to 20 percent of cost increases could be 

addressed by providing the same kinds of exemptions from complex state mandates that are 

available to large firms. That is one important reason why large firms are able to offer health 

insurance that costs significantly less, and that the CBO and every other group that has studied this 

proposal clearly suggests would lead to lower costs here as well. 

 Another way that health care costs could be reduced is through lower administrative costs. 

Administrative costs for small firms which have to do with the individual underwriting, and the 

individual costs of enrolling their employees in a single plan are also quite high. 

 And finally, we think that an important source of savings for small businesses not available 

today is the opportunities for choice. By giving employees an opportunity to enroll in a plan that 

best meets their needs might involve some significant deductibles and the like, which we think 

would lead to savings as well. 

 Right now, small businesses can typically offer only one plan to all of their enrollees. So 

lower administrative costs, more flexibility to offer the kinds of benefits that employees want, and 

opportunities to offer choices are all ways in which the AHP proposal would lead to savings for 

small businesses, and they need them now. 

Chairman Johnson. I believe the Administration also proposes a credit available to those who do 

not have employer-sponsored coverage. Studies that we have seen suggest that 13 million of the 

uninsured are in families where employer-sponsored coverage is turned down. 

 Is that a way to assist these workers in selecting employer-sponsored coverage? 

Dr. McClellan. As I said at the outset we believe that the best way to help the uninsured, who 

comprise a very diverse population, is to strengthen all parts of our health care system. And that is 

why we support association health plans, medical savings accounts, flexible spending account 
19

rollovers, and other steps to improve employer coverage. 

Chairman Johnson. What about tax credits in particular? 

Dr. McClellan. For those that aren't offered employer coverage, the President believes that a 

refundable tax credit is the quickest and most effective way to get assistance to them. Estimates by 

non-partisan, professional, Treasury Department staff state that something like 16 million people 

would benefit from our health insurance credit proposal. 

 And that includes over 6 million people who would otherwise be uninsured, and would also 

benefit a lot of the people, who today, because they work part-time, they work in agricultural 

industries, they work in the restaurant industry, and other businesses where health insurance just 

isn't available through the job. They would get help as well. 

 Also, Mr. Chairman, I direct your attention to a new study that came out today using actual 

data from individual insurance plans, which showed that for the amounts of the credits that we have 

proposed, there would in fact be affordable coverage available. The average person, based on actual 

data, not hypothetical cases, who was using our credit now, would be able to get a policy for 

something like $1,000 a year. These are good policies that people are buying now for health 

insurance. So we think this is an important element in our approach to improving health care costs. 

Chairman Johnson. So what you are saying is there are about four plans out there, all of which are 

voluntary, and if they assume the tax credit role they can still stay under state control. Is that true? 

Dr. McClellan. That is absolutely right, sir. 

Chairman Johnson. Thank you very much. 

Ms. Rivers, you may question. 

Ms. Rivers. Thank you. During the time I have been in Congress these last eight years, there have 

been any number of proposals for new organizational ways of dealing with this problem; AHPs, 

MSAs, HRAs, any amalgamation of the alphabet you would like. And all of these seem to suggest 

that we would fragment the people who are purchasing insurance into these individual pools, or 

these smaller pools. 

 Is the best way to approach this problem to address smaller groups of people? You know, 

there are some people who are in AHPs, some people who are in employer-paid plans, and some 

who are in MSAs. Wouldn't it be smarter to go in the other direction to larger pools where most 

people share risks and costs, instead of by fewer with all of those different plans? 

Dr. McClellan. Congresswoman, I would argue that our policies do allow for better risk pooling.

With the association health plan for example, small businesses would be able to pool together into 

a large group to buy health insurance coverage. 
20

Ms. Rivers. The real point I am making is that they are being argued concurrent with other 

proposals. So you may have some people who have not been able to be in an AHP before now, or 

something like that, who would choose it while others who work beside them would choose the 

MSA if they were in a better position financially. 

 So what I am asking you is to look all at once at all of the proposals that are out there, rather 

than bringing people into smaller risk pools or larger risk pools, which seems to be a trend toward 

fragmentation 

Dr. McClellan. I think that our proposals do support better risk pooling. That is a very important 

goal of health insurance reforms, but they also support diversity and health insurance choices. We 

don't think that a one-size fits all plan is the right approach for American health care. People have 

different health care needs. 

Ms. Rivers. Right now, is that a big problem we have, one size fits all? I mean, honestly, in this 

room, how many of us would have exactly the same coverage? The Members of Congress all 

would.

Dr. McClellan. Actually, I think the Members of Congress have several plans they can choose 

from ranging from a major medical type plan to a more comprehensive Blue Cross plan. 

Ms. Rivers. I understand. But the point I am making is you said that the problem is one size fits 

all. And I am asking realistically whether that really is a problem in a nation of 280 million people 

that one size fits all is what is being promoted. I would think that probably everybody in this room 

has some sort of different kind of coverage than the person sitting next to them. 

Dr. McClellan. And we certainly support the kinds of federal policies that would allow them to get 

the kinds of policies that they prefer. 

Ms. Rivers. One of the things that I have heard argued before that I have never understood is 

health care being consumer-driven, and people making choices. Maybe since you are an economist 

you do this. But I have never encountered anyone who calls an array of doctors to find out what 

they charge in advance, what they are going to charge for a basic blood test, what they are going to 

charge for a urinalysis, and makes a determination on who to see based on that. 

 And I have never encountered anybody when they are sitting on the paper sheet with the 

little piece of cloth between them and the doctor, who said, “No, I don't want you to run that test 

because that might be costly.” As a matter of fact, what I see is patients who generally defer to the 

expertise of the doctor. So how do you see this consumer-driven system actually working in real 

life with real patients and real doctors? 

Dr. McClellan. That is a very good question. Before coming into the Administration, I actually 

was an internist and saw a lot of patients, and got to experience first-hand some of the problems of 

what happens when patients and doctors working together don't get to make health care choices. 

That happens very often in Medicaid plans that keep costs down by restricting the types of 
21

treatments that are covered, and the prices, and the access to physicians and specialists. 

Ms. Rivers. That is not consumer-driven. You were talking about consumers making these kinds 

of choices. 

Dr. McClellan. The best way I think for patients to make decisions is with support from their 

doctors, and with patients and doctors together thinking about both the costs and the benefits of the 

treatments they receive. And I think health plans in which government bureaucrats, or HMO 

bureaucrats, or others are making decisions for them by telling them what they can and can't get is 

the wrong way to go. 

Ms. Rivers. The theory is lovely. I hear it all the time. But I am trying to understand, in practical 

application, where you see consumers changing their choices and bringing down the costs? 

Dr. McClellan. Over the last 10 years we have seen patients moving from plans that are HMO 

style plans that were very popular in the early 1990s, towards plans that give them more choices of 

which doctors to see, and which treatments to get. 

Ms. Rivers. That costs more money. The point that I am trying to get to is I want to see the reality 

of this proposal that somehow under a particular system consumers will now start shopping doctors 

for price, and will now start intervening to keep certain kinds of tests from being run because of 

costs. Because, frankly, that goes against everything I have seen in terms of how people behave 

about their health. 

Dr. McClellan. As I understand, this Committee heard several weeks ago from a number of 

innovative new plans that encouraged patients to work with doctors to figure out how to treat their 

health.

Ms. Rivers. In theory. That is what they encourage in theory, but what I am looking for is real 

application.

Dr. McClellan. Well, I guess I would also point to the fact that many people, including many 

federal employees, have moved to plans that require them to pay something out-of-pocket when 

they go outside the network, and they often do. Sometimes they don't. Sometimes they get less 

costly care from a network provider, but often they don't. That is the kind of choice that patients 

should be able to make. And we want to encourage those kinds of options being available. 

Chairman Johnson. Thank you, Ms. Rivers. 

Mr. DeMint, do you care to question? 

Mr. DeMint. Yes, I do. Thank you, Mr. Chairman. 

Thank you, Dr. McClellan. And I appreciate your complete testimony very much. 

Actually, I think Ms. Rivers has put her finger on one of the biggest problems we have in health 

care today. That it is probably one of the few systems we have working where neither the 
22

consumer nor the provider have a vested interest in the cost. Why should we ask for cost 

information if we are not paying for it? And that is one of the reasons why many agree, including 

me, that health care costs are going up so rapidly, since neither the patient nor the doctor nor 

hospital have a vested interest in the cost. 

 Some of the things that you have listed in your testimony are very exciting; including what 

the Treasury Department did two weeks ago to revise their regulations to clarify that employers can 

give employees' money to actually shop for their own health care. This is a situation that has not 

existed, which I think could demonstrate in general to a lot of us in America that if they kill the 

cost they can save what they don't spend, and there will be more downward pressure on costs. 

 I am also interested in your support for the improvement of flexible spending accounts that 

would allow employees to get more invested with pre-tax dollars. I think is very important. Is this 

an issue of an expansion of HRAs that Treasury has created in effect, as well as an expansion 

improvement of FSAs? Is this something the Administration is really going to get behind and 

promote to give us the leverage we need in Congress to push some of these ideas through? 

Dr. McClellan. I think so. And our hope is that the clarification that the Treasury offered recently 

will provide some momentum for that. One reason, as I understand it, that the Treasury did 

announce this guidance when they did was they wanted to do it in time for employers that are 

formulating their health plan choices for next year right now to be able to take this into account. 

 And you all heard recently from some groups that are working with employers to offer 

these kinds of new benefits. Our hope is that we will see a number of employers now stepping 

forward. They have been telling us they want to have these kinds of flexible approaches to 

providing health care assistance. 

 We hope that is going to come to pass soon, and that it will provide more momentum for 

the kinds of legislative proposals that are really needed. The health account reimbursement 

clarification that the Treasury offered is a good first step, but it is not quite as flexible as flexible 

spending account rollovers would be, or as a true medical savings account that actually works 

would be. 

 So we think this is a step in the right direction, and we hope to work with you and other 

Members who have expressed concerns about these steps as well. One of the things that we will be 

continuing to work on is to clarify that in fact the kinds of reforms that we support in MSAs and 

FSAs will make them more attractive to people with significant health care expenses not less. 

 They will reduce and address the problems of so-called adverse selection that many critics 

of these proposals have made. And I think the kinds of plans that many companies are going to be 

implementing next year, as a result of the IRS guidance, will provide further evidence on that 

score.

Mr. DeMint. Excellent. Thank you very much. 
23

Chairman Johnson. Thank you, Dr. McClellan. I appreciate your time and your testimony. You 

are working for a better America, and we all appreciate that. Your testimony has concluded and 

you may step down now. Thanks again for being here. 

Dr. McClellan. Thank you all very much. 

Chairman Johnson. I would ask our third and final panel of the day to come forward and take 

their seats please. 

Our first witness on the third panel is Mr. Harry Kraemer. He is Chairman and CEO of 

Baxter International, Inc. Mr. Kraemer is here today on behalf of the Healthcare Leadership 

Council. Our second witness is Mr. Ron Pollack. Mr. Pollack is Executive Director of Families 

USA. And our final witness today is Mr. Joseph Rossmann. He is Vice President of Fringe 

Benefits for the Associated Builders and Contractors. Mr. Rossmann is testifying on behalf of the 

Association Health Plan Coalition. 

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

questions after the complete panel has testified. In addition, Committee rule 2 imposes a fiveminute limit on all questions. And I think after watching the previous panels, you all understand 

the green, yellow, and red lights down there. 

Mr. Kraemer, you may begin your testimony now. Thank you very much. 

STATEMENT OF HARRY M. JANSEN KRAEMER, JR., CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, BAXTER INTERNATIONAL, INC., 

DEERFIELD, IL, TESTIFYING ON BEHALF OF THE HEALTHCARE 

LEADERSHIP COUNCIL 

Thank you, Mr. Chairman and Members of the Subcommittee for inviting me here today. It 

is an honor to represent my fellow members of the Healthcare Leadership Council, as well as to 

share my own perspectives as Chief Executive Officer of Baxter International. 

 The Healthcare Leadership Council, or HLC, is a coalition of chief executives from 

America's leading health care companies and institutions, all of whom are committed to advancing 

a market-based health care system that values innovation and provides accessible, high quality care 

for all Americans. 

 Let me begin, Mr. Chairman, by applauding you and your colleagues for the attention and 

energy you are devoting to our nation's uninsured. Like you, the members of the Healthcare 

Leadership Council are deeply concerned about this issue. We are concerned about the lives of 40 

million people who lack health insurance. We are concerned about men, women, and children who 

are forced to receive their care in emergency rooms and acute care facilities, and who are suffering 

from avoidable illnesses and dying at too young an age. And we are also concerned about the 
24

impact this issue has on the cost and accessibility of health care for all Americans, and the well 

being and productivity of our communities. In short, we believe the status quo is troubling and 

costly on many levels, and entirely unacceptable. 

When the Healthcare Leadership Council took on this issue, we first asked the question, 

“Who are the uninsured?” The answers that came back from our research surprised us. 

Conventional wisdom about the uninsured labels people without health care as someone else, 

someone who doesn't have a job, someone living in extreme poverty, in short, someone people hear 

about, but don't really know. The truth, as I know you are now aware, is that we do know the 

uninsured. It may very well be your next-door neighbor, a cashier at the local market, or the person 

who runs our local day care center. We don't have to look far to find uninsured Americans. 

 It is impossible to put together a profile of a typical uninsured individual because this is a 

problem that crosses socioeconomic lines, but there are a few things we do know. Most uninsured 

Americans, 8 of every 10, live in a household in which there is at least one person currently 

working. We know that the smaller your workplace, the more likely you are to be uninsured. 

 Among businesses with fewer than 10 employees, one in every three workers is uninsured.

Among those with 25 to 99 employees, it is one in every five. Many of these people are not 

eligible for programs like Medicaid or SCHIP. And even if they are eligible, large numbers of 

them are not applying for benefits. 

 If you are Hispanic, you have a 33 percent chance of being uninsured; if you are AfricanAmerican, the likelihood is 20 percent; and if you are a young family, say between the ages of 18 

and 24, most of these folks will be uninsured, and their offspring are among the 8.5 million 

children who do not have health coverage. 

 Knowing what we know about the uninsured, that the vast majority is in working 

households, and that the problem is focused to a large degree within small Main Street businesses, 

we can begin to structure workable solutions. The members of the Healthcare Leadership Council 

advocate a three-pronged approach to this problem: 

 First, use refundable tax incentives to encourage the purchase of insurance, including 

employer-covered insurance. 

 Second, improve our existing public programs like Medicaid and SCHIP so that they do a 

better job of enrolling those currently eligible. Also, Congress and the Administration should give 

states greater flexibility to use those program dollars to help low income workers afford private 

coverage.

 And, third, provide a greater awareness among small business owners and low-income 

workers on the importance and availability of health coverage. 

There is much we can do to increase health coverage among small businesses. Studies have 

shown that many small business owners do not know the cost of health insurance for their 

employees. Many, in fact, also don't know that health coverage is 100 percent tax deductible. The 
25

Kaiser Family Foundation conducted a survey of small business owners who don't provide 

coverage for their employees, and asked those employers what they could afford and what they 

would be willing to pay for insurance. Remarkably, the price they listed was nearly adequate to 

purchase coverage. This tells us that we can reduce the number of uninsured Americans by 

providing small employers with credible, useful information on the cost, as well as the availability 

of health coverage. 

 Within HLC’s Health Access America campaign, we have launched the Main Street 

Initiative to look at ways to increase the level of healthcare coverage among small business owners. 

We envision, for example, developing websites that would provide nationally publicized health 

insurance information for small employers. We foresee widely distributed regionally tailored 

materials giving costs and benefit comparisons of locally available health insurance products.

There is much we can learn and model from the many successful local and regional programs 

around the country, programs in which employers, employees, and local governments collaborate 

to make coverage more accessible. 

 Once again, this Committee deserves appreciation for the work it is doing individually and 

collectively to help Americans without health insurance. The primary thought I want to leave with 

you today is that the health care industry stands enthusiastically ready to work with you to bring a 

healthier, fully insured America. Thank you very much. 

WRITTEN STATEMENT OF HARRY M. JANSEN KRAEMER, JR., CHAIRMAN 

AND CHIEF EXECUTIVE OFFICER, BAXTER INTERNATIONAL, INC., 

DEERFIELD, IL, TESTIFYING ON BEHALF OF THE HEALTHCARE 

LEADERSHIP COUNCIL – SEE APPENDIX E 

Chairman Johnson. Thank you, sir. I appreciate your testimony. 

Mr. Pollack, you may begin your testimony now. 

STATEMENT OF RONALD F. POLLACK, EXECUTIVE DIRECTOR, 

FAMILIES USA, WASHINGTON, D.C. 

Thank you, Mr. Chairman, for inviting me to testify. Thank you for conducting this 

hearing.

 As you said at the beginning of the hearing, there were 39 million Americans who were 

uninsured in the year 2000. By our estimate, another 2.2 million Americans lost health coverage as 

a result of losing jobs during the recession of 2001, leaving about 41 million Americans uninsured. 

That is more than the aggregate population of 23 states plus the District of Columbia. That is 
26

extraordinary. So I think it makes a great deal of sense for us to focus on this issue. 

 And, clearly, I don't think progress is going to be made on this issue unless we try to find 

change that is done in a bipartisan manner, and find ways to combine public, as well as private 

sector approaches to expand coverage. Having said that, Families USA believes that certain 

approaches are far less effective than others, and that the public program approach building on 

Medicaid and SCHIP makes the most sense. 

 Let me focus on two of these issues that are private sector initiatives. The first is individual 

tax credits. There are two major problems with individual tax credit approaches currently being 

considered including the President's proposal that provides a $1,000 tax credit for individuals with 

incomes below $15,000, and families up to $2,000, that have incomes up to $25,000. 

 The first problem is that the size of the tax credit is much too small to make meaningful 

health coverage affordable. We, at Families USA, undertook a 50 state survey using e-health 

insurance to shop for the best insurance policies available for a healthy non-smoking 25-year-old 

woman and 55-year-old woman. Here is what we found. The average cost of the most popular 

FEHBP plan, the Blue Cross/Blue Shield Preferred Provider Organization Plan for a healthy nonsmoking 55-year-old woman was $4,934. For a healthy non-smoking 25-year-old, it was $2,459. 

 Now if you take that amount of money that has to be spent over and above the tax credit for 

individuals with incomes below $15,000, what you will find is that it consumes a very high 

proportion of their resources. And for most people in that circumstance, it is like throwing a 10-

foot rope to somebody in a 40-foot hole. 

 Let me tell you what we found specifically about policies for 55-year-old women. Among 

the 50 states, 47 out of 50 states did not have a single plan that was sold for $1,000, which is the 

size of the tax credit. Only three states did, Connecticut, Ohio, and Maryland. And for those states 

the deductibles in each of those plans was $5,000, in other words, one-third of the income of the 

target population. Clearly, that is unaffordable. For 25-year-old healthy, non-smoking women, 

there wasn't a single plan available in 19 states. 

 In the other states, the plans had high deductibles. Doctor visits were not covered in 18 

states; prescription drugs were not covered in 19 states; maternity care for this very population was 

not available in 28 states. Mental health coverage was not covered in 22 states. In effect, these 

were Swiss cheese policies that had much more holes than they had cheese. 

 Our second concern is that this proposal is likely to jeopardize the coverage for people with 

health conditions. Because, clearly, what this is intended to do is to move people into the individual 

market and away from the employer market. 

 Clearly, people who have health conditions, or who have disabilities, are going to find that 

insurance companies do not want to sell to them. To the extent they do want to sell, they charge 

exorbitant premiums, and they don't make clean offers. So we think that the tax credit approach 

has severe limitations. 
27

 With respect to association health plans, Congressman Tierney raised questions earlier 

about some of the consumer protections. Let me raise one of those issues. In Rush Prudential 

HMO v. Moran, which was a recent Supreme Court case, it upheld the right of states to establish 

independent appeals rights. So if somebody feels they have been improperly denied or delayed 

care, states have established external independent appeals rights, so you can get a quick decision.

So if you have been improperly denied care, you can get that care quickly. AHPs would be exempt 

from those laws, and they would join the approximately 60 million people who are currently 

exempt from these state regulations, and those folks would be left out in the cold. The response by 

Dr. McClellan was that we would leave this up to ERISA regulations. Unfortunately, ERISA 

regulations do not have external appeals rights. 

 I would be happy to go over other concerns about AHPs, but I see my time is up. 

WRITTEN STATEMENT OF RONALD F. POLLACK, EXECUTIVE DIRECTOR, 

FAMILIES USA, WASHINGTON, D.C. – SEE APPENDIX F 

Chairman Johnson. Thank you Sir, we appreciate your testimony. 

Mr. Rossmann, you may begin your testimony. I thank you for being here. 

STATEMENT OF JOSEPH E. ROSSMANN, VICE PRESIDENT OF FRINGE 

BENEFITS, ASSOCIATED BUILDERS AND CONTRACTORS, ROSSLYN, 

VA, TESTIFYING ON BEHALF OF THE ASSOCIATION HEALTH PLAN 

COALITION 

Thank you. My name is Joe Rossmann. I am the Vice President of Fringe Benefits for 

Associated Builders and Contractors, ABC. I am testifying today on behalf of a coalition of 

organizations that support H.R.1774, the Small Business Health and Fairness Act of 2001.These 

organizations represent over 12 million small employers and 80 million workers. 

The problem with small business workers not having access to affordable health benefits is 

reaching crisis proportions. To cite just one example, in Houston, Texas, Acoustical Concepts, an 

ABC member, was forced to accept a premium increase of 47 percent this year, even though they 

had no significant claims. Also, their insurance company informed them that in the next one to two 

years, they would only be offered catastrophic coverage. 

 Massive premium increases are typical of what businesses are facing throughout the nation 

today. And many employers are cutting benefits as a result. Currently, initiatives aimed at 

expanding access to affordable health care are not working. Our coalition strongly urges Congress 

to enact bipartisan association health plan legislation, and to help expand coverage to the 
28

uninsured.

 AHP legislation will empower small entrepreneurs with the same tools that large employers 

and unions use today to make coverage affordable with economies of scale and increased 

bargaining power, administrative savings from having one uniform set of rules, the option of selffunding, health plan design flexibility, and increased competition in health insurance markets. 

 We estimate that AHPs can reduce the cost of health insurance by 15 to 30 percent for small 

business workers. Association health plans have already proven that they can deliver such savings.

For example, an association health plan sponsored by ABC had total expenses of $.13 1/2 on every 

premium dollar. This is in contrast to the small employers who can purchase the coverage directly 

from insurance companies and often pay total expenses of $.25 to $.35 on every premium dollar. 

Moreover, any profit generated by an AHP does not go to the stockholders and the insurance 

company, but rather stays in the plan for the benefit of participants keeping rates lower in the 

future. 

 Unfortunately, we had to discontinue the health insurance portion of our fully insured AHP 

a few years ago, when our insurance carrier informed us that they were terminating coverage. The 

problem is that it is just too costly and too complex for insurance companies to comply with the 

overlapping inconsistent and incompatible state laws. Thus, a badly needed source of dependable, 

quality health insurance coverage for small employers has been removed from the marketplace. 

 Workers in small businesses desperately need to have a new mechanism to group together 

to increase their bargaining clout and create more competition in the health insurance markets. This 

is true more so today because of the massive consolidations among insurance carriers, hospitals, 

and other providers. Recent mergers of health insurance companies have reduced competition, and 

likewise reduced choices for small employers. 

 I would like to address several of the issues that have been raised by the opponents of the 

AHP legislation. First, the opponents claim that AHPs will cherry pick the market and only benefit 

healthier groups. These assumptions under which the argument is made don't hold up under 

scrutiny. Under HIPAA, association health plans cannot exclude high-risk employers or 

individuals. They must accept all members of the association. Also, opponents’ allegations about 

adverse selection rest on the mistaken assumption that AHPs will only offer bare bones benefit 

packages.

 There is broad agreement that bare bones benefit plans have failed in the past due to the 

lack of demand. This is because small business workers want quality benefits like those enjoyed 

by workers in large companies. Also, small businesses must offer benefits comparable to those in 

large companies if they are going to attract and retain quality employees. AHPs will be able to offer 

Fortune 500 style benefit packages to small businesses by achieving the savings through economies 

of scale, greater bargaining power, and adding value for the members, not by cherry picking. 

 The other major criticism is the benefits offered by AHPs will not be secure. This ignores 

two important facts. First, association health plans under this legislation are fundamentally 

different from MEWA health plans. Second, it ignores the strong solvency standards and new 
29

criminal and civil penalties for combating fraud, which are contained in this bill. These provisions 

go well beyond what is required in corporate union plans in order to make sure that benefits are 

secure in the future. 

 In conclusion, the 12 million employers and 80 million employees represented by our 

coalition urge Congress to enact H.R.1774. It is an essential component to any solution aimed at 

reducing the uninsured population. 

 Thank you again for this opportunity, Mr. Chairman. 

WRITTEN STATEMENT OF JOSEPH E. ROSSMANN, VICE PRESIDENT OF 

FRINGE BENEFITS, ASSOCIATED BUILDERS AND CONTRACTORS, 

ROSSLYN, VA, TESTIFYING ON BEHALF OF THE ASSOCIATION HEALTH 

PLAN COALITION – SEE APPENDIX G 

Chairman Johnson. Thank you, sir. I appreciate you being here. In your testimony you indicate 

mergers of health insurance companies that reduce competition and provide alternatives for small 

employers. I think you have been ahead of the curve with your organization. We appreciate it. 

Mr. Tancredo, do you care to question? 

Mr. Tancredo. Thanks. I have just a quick question, Mr. Chairman 

In listening to this debate, in my own mind it boils down to a basic division of philosophy 

or ideas with regard to the government's role in this arena. And we really have devised a lot of 

ways to describe our position, vis-à-vis these plans. They are really based upon whether we believe 

down deep that any plan that is administered by, or has any participation by the private sector is 

either bad or good depending where you stand philosophically. Or on the other hand, whether we 

believe philosophically any plan that is essentially administered by a government agency has 

internal benefits that are worthy deliberation. That is really what we are talking about. Is the 

government better able to determine the kind of health care that all Americans should receive, 

thereby, eliminating this bizarre idea of individual choice or not? I am concerned about that. I don't 

believe that in the past it has ever shown its ability to actually provide a better kind of experience. 

 Mr. Rossmann, I am really interested in why your organization, and why people in private 

industry are not saying, “Let's have a full blown government health care plan that we no longer 

have to administer. It would have nothing to do with us. Let's just shove this whole thing on the 

Federal Government, and get out of the business essentially.” I mean I have great concerns about 

what would happen, but I am more interested to know why it isn't a logical position for you to take. 

Mr. Rossmann. I guess I would respond by saying that, our country was founded upon small 

business and small employers. And I think the private sector and competition goes a long way to 

make health insurance coverage, and any other commodity more efficient and better for employees, 
30

and for individuals in this country. 

 So I am a firm believer in private enterprise, and a firm believer in competition. And the 

thing that concerns me is the fact that we have less and less competition in the health insurance 

market than we have ever seen before. And that is part of our problem. So I hope we can bring 

more competition back into the equation to help make coverage more affordable for small 

employers. 

Mr. Tancredo. Thank you. I think it has certainly been a benefit to those of us who are Members 

of Congress, all federal employees that actually have plans that offer a wide variety of options. It is 

a great thing. 

For the most part, I have noticed over the many years that I have actually been able to 

participate in a federal plan, before I was in Congress I was Regional Director of the U.S. 

Department of Education that my benefits actually improved over the years because I was able to 

select from a wide panoply of opportunities. And I wasn't trying to determine what the best 

procedure was for any particular condition. That wasn't the issue that I was trying to determine. I 

was trying to find, of course, the greatest scope of coverage for the least amount of money. I was 

looking for, how much out-of-pocket expenses there were going to be, and what the greatest scope 

of coverage would be.

And I think that has made the federal plan, very, very positive, and very good. It has 

improved all the time. And I have always been in a quandary in my own mind as to why we can't 

replicate that for millions of Americans through the AHP process that you are describing for 

instance. 

Mr. Pollack. I don't think our choice is either/or. I don't think our choice is either 100 percent 

private sector, or 100 percent public sector. Those of us who get coverage through our employers, 

as I do, are satisfied with that coverage, and we want to see that strengthened. 

 There are a good number of populations, however, that do not enjoy the benefit of 

employer-provided coverage or other private sector coverage. The start of the Medicare program 

began because the private insurance industry failed and refused to provide health coverage for most 

of America's senior citizens. And we needed a public program to make sure that the most 

vulnerable senior citizens would get health coverage. They would not have received it otherwise.

Similarly, with Medicaid and SCHIP, there are low-income families and individuals who 

are not desirable from an insurance company standpoint, who would not get coverage without 

public insurance. So I don't think it is an either/or proposition. 

Mr. Tancredo. Defending my time for just a second then. I certainly agree with you that there is a 

need for government participation in the process for the people that you have described. But when 

you start talking about Medicare, from my point of view anyway you have accurately described 

why we have a problem, because with Medicare you have the government making a determination 

as to what the costs are going to be, and what we are going to fund. And the whole range of 

decisions is made by a governmental agency. 
31

We can change that, and we should, not by saying the government has no responsibility but 

by simply changing who makes the decisions for the “government to individual” process. And 

that's what I hope we can get to in this particular piece of legislation. 

Chairman Johnson. The gentleman's time has expired. I might add, I am on Medicare, and I don't 

like it. I would like to have a private plan. 

The gentleman from New Jersey, Mr. Payne, is recognized. 

Mr. Payne. Thank you very much. 

There are a lot of people that are under 65 that wish they had the Medicare plan that you 

have and don't like, because they don't have anything. 

 As a matter of fact, I think that with the inception of the HMOs 20 or 30 years ago, there 

were prognostications that they were a cure-all, and the answer was I believe that the early ones 

basically insured healthy people. In New Jersey, before they were popular or well known, HMOs 

were insuring healthy people, and therefore rates were low. Everybody was touting how great this 

new HMO business was. And there was a lot of whispering going around about them. 

 However, once you got in it, it was almost like an inverse chart. It wasn't designed that 

way, but it was just that the types of businesses participating had healthy people employed. Once 

we got into the whole mix that is when we found that it was not cracked up to be what the folks 

were talking about 25, 30 years ago. 

 Mr. Rossmann, in your statement, you stated that AHPs would increase bargaining power 

and limit cherry picking. But under proposed legislation, an AHP organization will be able to set 

prices for each individual company based on their individual worker's characteristics. Could you 

clarify that? 

Mr. Rossmann. Yes, sir. In general, the association health plan would set its level of rates based 

upon the entire pool, if you will, or the community of the association. A firm can be rated to the 

same extent as under state law today, based on the demographics, location, ages, and health status 

of the people, but only at the same limits as various states today. 

 Did I make that clear, or did I confuse the issue? 

Mr. Payne. Yes. 

Mr. Pollack. Actually, I don't believe that the legislation reflects that. I think that there is no such 

limitation because state regulation is preempted as a result. And so, the rules that would prevent 

this kind of cherry picking through discriminatory premiums would not exist with respect to those 

AHPs. And so, you could have the cherry picking phenomenon as a result of those very different 

premiums. 
32

Mr. Rossmann. I would respectfully disagree, and be glad to show it to you later if you would like.

There is specific language for that. Also, the association health plans would not be cherry picking 

because they would not be developing a set of plans that were unique to a certain class of 

individuals within the association. 

 What bona fide associations are trying to do is to give coverage to all of their members. So 

they are not looking to pick a member here and a member there, or an employer here or there. They 

want to provide coverage for all of their members, and generate a risk pool based upon the 

demographics, and the risks, if you will, of that group. 

Mr. Pollack. Let me give you a hypothetical situation that is not far-fetched. 

 You have an association of downtown, white-collar businesses that only applies to a certain 

geographical area of downtown. It excludes other parts of the metropolitan area. It does not 

include the low income, minority sections of town. You could create an association that could have 

another general purpose. And that association, in effect, would be cherry picking through its 

geographic location, in effect, redlining. And so, you would be able to exclude so-called 

undesirable risks through that kind of a process. 

 Obviously, that is not good for the remainder of workers. That might be very good for the 

white-collar, affluent, low cost workers. But for the remainder, who are going to wind up in a 

sicker pool, the costs for them are going to be considerably more expensive. So, in the totality, it is 

going to cause harm. 

Mr. Payne. Right, that is what I was alluding to earlier when the HMOs, or they might have even 

been AHPs, started. They just occurred, as I indicated, in the healthier areas, where people who 

had something in common brought associations together. Maybe they all played golf every 

Saturday, or jogged every Monday, or consistently saw a doctor. 

 And so, I do believe that we have to be careful. Insurance in general is supposed to be 

pooling the risks. You take large numbers of people, whether it is Lloyds of London, or whether it 

is health insurance, and you see how many people there are, what you estimate the payments to be, 

and you spread the risks. 

 Cherry picking is against the whole basic concept on which insurance began. Back in 1875, 

Mr. John F. Dryden founded the Prudential Insurance Company, in Newark, New Jersey and the 

pooling idea treats everybody equally. 

 I will yield back the balance of my time. 

Chairman Johnson. The gentleman's time has expired. We appreciate those comments, and I 

hope we get into that some more. 

Mr. Wilson, do you care to question? 
33

Mr. Wilson. Mr. Chairman, thank you very much. 

 Mr. Kraemer, we in South Carolina appreciate Baxter being a good corporate citizen. In 

fact, my oldest brother was a chemist for Baxter in King Street several years ago. 

 You mentioned that the Main Street Initiative might partner with local Chambers, 

development centers, and other business associations to provide information about insurance to 

small business owners. What kind of information do you see being provided? And how can 

government entities such as the Department of Labor or Small Business Administration (SBA) 

assist in the efforts? 

Mr. Kraemer. Thanks for your question. I appreciate that. If you think about the discussion that 

we have had over the last hour-and-a-half, a lot of what needs to be done is to improve the level of 

education. The Healthcare Leadership Council believes that we should increase the amount of 

information and resources, through employer run plans, and government programs so that small 

businesses have a better understanding of what is going on. 

 I know a number of you have run small businesses. Some people depend on their local 

Chamber of Commerce, some people depend on their local accountant, and some people are more 

computer literate and access the web. But if we could provide information so that people could 

understand what is available, they could understand what the tax incentives really are. There is a 

very high percentage of individuals running businesses that aren't even aware that these types of 

premiums are tax deductible. 

 So if we can get that information to Chambers of Commerce, put it on the web, and make 

sure the local accountants are aware of it, we believe that just taking advantage of the programs that 

are available today could potentially take care of a portion of the uninsured who lack coverage 

simply because they lack correct information. 

Mr. Wilson. Thank you very much. 

Mr. Rossmann, in the district that I represent I am very fortunate that many of your ABC 

members are a vital part of our community, and particularly small businesses. And I appreciate 

your concern about the health care premium costs increasing for small businesses. Would you relay 

again with regard to AHPs how this would help small businesses reduce premiums? 

Mr. Rossmann. It would basically give small businesses more choices through their association. 

An association could band together and go to an insurance company and negotiate rates and 

coverage on behalf of those small employers. Today's small employers are on an island all by 

themselves. And what they are essentially doing is going to large insurance carriers and just 

accepting the rates and coverage that are offered to them. 

 What associations can do, and what ABC has done for the past 40 years is to go out and 

negotiate with health insurance companies to provide packages of benefit programs and specific 

rates for those members. So it is mass purchasing power, if you will. 
34

If I could backtrack, I would like to respond to Mr. Pollack's comment about “the 

association made up of white-collar individuals” in a specific zip code. The AHP legislation has 

specific provisions in it to recognize only bona fide associations that have been in existence for 

three years or more for purposes other than just providing insurance. They have to be legitimate 

associations like ABC. 

 In addition to that, the Certified Public Accountants Association in California did a study 

based on their health plan and compared it to the California small group market. And they found 

that even though they are a white-collar industry, their health plans were essentially very similar to 

what you would see in California's small group market. So I think that the idea that the white-collar 

is better than the blue-collar, or that there is some specific segment of the market that is better than 

another is somewhat of a misnomer. 

Mr. Pollack. You know, I would like to just quickly respond. I didn't describe these as illegitimate 

associations. They are associations that could pick a very favorable constituency. But when you 

talk about saving money, where does that money get saved? It gets saved because it eliminates state 

regulation.

CBO informs us as to how that money would get saved. And CBO estimates that nearly 

two-thirds of the cost of savings from AHPs result from attracting healthier members from the pool 

of existing insured workers. So the point here is that while it is true that the AHPs may be able to 

have a cheaper product because they have a less risky population that is being insured, the 

remaining pools out there would then be robbed of having the ability to spread the risk more 

broadly to healthier populations, and would wind up spending more money. And, as a result, 

according to CBO, 80 percent of workers would be worse off under AHPs than if they did not exist. 

Mr. Rossmann. If I might respond to that, Mr. Chairman, I would say the CBO Report had a 

couple of flaws in it, if you will. Number one, it didn't look specifically at association health plans. 

It looked at all types of pooling arrangements. 

 I can tell you from personal experience, the Associated Builders and Contractors plan had 

total expenses of $.13 1/2 cents on every dollar. If you go to the small employer market, expenses 

are

$.25 to $.35 cents on every dollar or premium. In addition to that, CBO made the assumption that 

the bare bones benefit plans cut the benefits, if you will, which is another mechanism in saving 

costs. I think our employers want quality benefits. Even small employers want quality benefits, so 

they can compete with large employers. So I feel that there were a couple of flaws in the CBO 

Report.

Mr. Wilson. Thank you, Mr. Chairman. 

Chairman Johnson. Thank you. In grading America, we can have differences of opinion. 

The gentleman from Massachusetts, Mr. Tierney? 
35

Mr. Tierney. Thank you, Mr. Chairman. And thank all of you for your exchanges. I think they 

are helpful to a certain extent. 

Mr. Kraemer talked about, the fact that he thought that education was an issue, and that 

with the proper amount of education he was confident that a number of small business employers 

would in fact buy coverage. They didn't realize there is a 100 percent tax deduction for one thing, 

or how accessible or affordable it could be. 

 So let me ask you, Mr. Pollack. Let's assume that small businesses really would pay the 

coverage. What if we were to mandate employer insurance coverage through employers, and that 

they pay a certain percentage of the premiums as an employer contribution with employees paying 

the balance. Then use SCHIP monies for people that may be at a lower income level to pay just the 

employee share of the insurance premium, or a pre-funded refundable tax credit to pay the 

difference on that. Would that make any impact on our coverage issues here? 

Mr. Pollack. There is no question. I feel there are several parts to what you just asked. 

Mr. Tierney. Is that right? 

Mr. Pollack. Clearly, an employer mandate substantively would do a great deal to expand 

coverage, whether it is politically achievable is a very different matter. And, clearly, the business 

community would be strongly opposed to any kind of an employer mandate. 

Mr. Tierney. Well, except that I gave information to Mr. Kraemer, who tells us that he believes 

that his group believes that small business employers made aware of certain factors would not 

object to it. Let’s assume that. 

Mr. Pollack. I actually assume that employers, particularly, large employers would embrace the 

employer mandate that was proposed and on the table in 1993/94. And we found that was not the 

case. I think it is a feasible method to expand coverage, although politically I think it is very 

difficult. 

 With respect to your other question, however, about subsidizing benefits through public 

programs, I think it is something well worth exploring with one major caveat, and that is that I 

would hate to have public programs subsidize coverage that is considerably lower in terms of what 

it covers than the requirements in some of the public programs, especially for low income people 

who need the coverage. 

 Let me give you an example. For children, one of the most important things to cover is a 

thing called EPSDT, Early Periodic Screening Diagnosis and Treatment. It provides preventive 

services. It diagnoses whether a child has got some kind of health problem, and then it treats them. 

Many plans do not provide that. 

 So I think that there are some possibilities along the direction that you suggested, but I 

would just caution to make sure that the public sector creates the same accountability, in terms of 
36

what is covered through private plans, as it does through public plans. 

Mr. Tierney. And I think the other thing that we haven't really discussed at any great length here 

today in all the plans is the cost issue, just the administrative costs because I know there were some 

shots taken at Medicare earlier. 

 But, frankly, I have to say that the costs for administration in Medicare is somewhere 

between $.03 and $.06 on the dollar. And it is about $.25 or $.26 cents on the dollar for the socalled private businesses of insurance, who do a miserable, absolutely abhorrent job of what they 

do. And for all of your laudatory comments about the marketplace and business being able to do it, 

they haven't done it in the health industry, and have done just a terrible, terrible job. 

 So I wonder if each of you would take a second at least to tell me what your thoughts are on 

how we would reduce the administrative costs of giving to the American people a healthcare 

system that had accessibility and comprehensive benefits. 

I will start with you, Mr. Rossmann. 

Mr. Rossmann. Thank you. I would go back to the example of ABC, and what we have done in 

the past. 

 Our total cost, which included ABC's administrative costs, delivering the product to the 

members, and also included the insurance company's costs, their risk charges, their claim payment 

costs, and all of those types of things was $.13 1/2 cents on the dollar. And I compare and contrast 

that to what you are saying today, that with the small employer market, the cost is $.25 to $.35 

cents on the dollar. 

Mr. Tierney. That is one. You cover one small segment of the market. That leaves a lot of other 

people covered otherwise. You know, I was really looking at the broad scope of our health care 

system what do we do to control costs? 

Mr. Rossmann. I am sorry. I was specifically referencing association health plans. 

Mr. Tierney. Right. So I have heard that. But now what about the rest of it? 

Mr. Rossmann. The rest of the market? Well, I think we need to increase the competition, to a 

certain extent. You know the economies of scale go only so far I think, as far as insurance 

companies and administrative functions go. We talk about insurance carriers getting bigger and 

bigger and buying up other insurance companies under the perceived notion of economies of scale 

and I question that. 

Mr. Tierney. Thank you. I am running out of time here, so I am going to move along. 

Mr. Pollack. Let me give you one quick answer. We obviously just had a debate on the House 

floor, with respect to prescription drugs. It is the fastest rising cost in America's health care system. 

Here I think we could benefit from some significant competition. 
37

Unfortunately, the brand name companies are preventing generic companies from coming 

to the market. They are suing them, thereby getting 30-month delays, in terms of generic drugs 

coming on the market. There are collusive practices where the brand name companies, after they 

have sued the generic companies, offer a deal of sometimes hundreds of millions of dollars, and in 

return the generic companies delay putting the generic drug on the market. 

That failure to allow competition really hurts us all in the pocketbook. It fails to provide the 

kind of competition that can keep prices down. So that is one suggestion. 

Chairman Johnson. Mr. Tierney, thank you. Your time has expired. 

 I think we will allow Mr. Tiberi to question if he so desires. 

Mr. Tiberi. Thank you, Mr. Chairman. 

Mr. Rossmann, you represent ABC. How many members are there? 

Mr. Rossmann. There are 23,000 members. 

Mr. Tiberi. What is the average size of a member group? 

Mr. Rossmann. Our average size member group is probably about 15 to 20 employees. They are 

small employers. If you look at what we have under our insurance program, I would say the 

average size employer is about 15 employees. 

Mr. Tiberi. And what type of work does the employer do, in terms of the 15 to 20 employees, 

white-collar or blue-collar? What is the mix? 

Mr. Rossmann. Primarily, blue-collar, since our members are construction-related entities. And 

you would have craft employees involved, some administrative folks from the office, and probably 

the principal or the owner, and possibly the foreman too. 

Mr. Tiberi. And your association supports association health plans? 

Mr. Rossmann. Yes, sir. 

Mr. Tiberi. I just wanted to get that clear. 

Mr. Pollack, on page 13, in bold type you have, “AHPs leave many small employers behind 

with higher premiums.” And next to you, you have a gentleman who represents small employers, 

mostly blue-collar employers, who are saying we want association health care plans. 

 Can you explain to us, why your statements conflict with a representative of small 

employers? 
38

Mr. Pollack. It is not necessarily conflicting, but it does raise some serious issues for you as a 

legislator to consider. And that is I have no doubt that AHPs will reduce the costs for those 

employers who are in the AHPs. But if you take the discussion we had earlier, if what happens is 

that the companies that are part of the AHP have in them some of their least risky, in terms of 

health claims people in them, then what happens is the whole concept of an insurance pool really 

changes.

 The purpose of an insurance pool is to spread the risk among high-risk people and low-risk 

people. When you and I buy homeowners insurance, or life insurance, I don't expect to die next 

year. I presume you don't either. I don't expect a fire in my house next year. I presume you don't 

either. But we are low risks, and as a result we can help subsidize through our being low risks, 

lower premiums for people who are going to have those problems. 

To the extent that you take lower risk people out of the pool, and you leave in the pool only 

higher risk people, those people are left holding the bag because the cost per person for them is 

going to be considerably more expensive, and therefore their premiums are going to be higher.

And for many of them it is going to become unaffordable. 

Mr. Tiberi. I understand what you are saying, but the testimony that has been presented to us today 

states that not only is there a problem with the folks that you just talked about, but there is also a 

problem with employers not being able to afford health care coverage anymore. And we have small 

employers who are saying this would help them with that problem. And so, as legislators, 

sometimes it is better to take one bite of the apple than to try to swallow the entire apple. 

What is your solution in terms of this particular issue of employers saying I can't afford to 

provide health care anymore, and thus my employees are going into that camp that you are talking 

about now? 

Mr. Pollack. All right. First, we are not opposed at all. I thought I had made that clear in my 

written testimony, hopefully in my oral testimony. We are not opposed to employers banding 

together to get the benefits of banding together. 

 We are concerned about several things, which I think can be corrected, and I hope are 

corrected before we go forward with legislation. One is, I want to make sure that we minimize any 

opportunities for cherry picking. And I think there are some ways that we can achieve that. 

 Secondly, I want to make sure that plans, once they get established, do not have the kind of 

insolvency problems that MEWAs had years ago. I think any legislator who enacts AHPs, and then 

finds that you have those solvency problems is going to be sorely disappointed. 

 Groups like Families USA are not opposed to the concept. We are concerned about how it 

is being implemented. And we would very much be delighted to join with you and others to try to 

deal with some of these potential problems, so that we don't help some small businesses, and then 

harm a whole lot of others. 
39

Chairman Johnson. Thank you. We are going to have to adjourn. We have about six-and-a-half 

minutes to make a vote. 

I would like to ask Mr. Kraemer if you could answer a couple of questions in writing. 

Mr. Kraemer. I’d be more than happy to. 

Chairman Johnson. The first question is what are the advantages of covering the uninsured 

through employer programs versus SCHIP and Medicaid Programs? The second question is your 

testimony contained survey findings about small businesses that suggest many small business 

executives simply do not know the facts they need to know about the cost, and the administrative 

burden of insurance. And I would like to know why you think that is the case. 

 I appreciate all three of you being here, and thank you for your testimony. It was valuable 

to us. We certainly hope that you can come back sometime because I enjoyed the cross talk 

between the two of you. 

 Thank you for your testimony, and the Members for their participation. If there is no 

further business, the Subcommittee stands adjourned. Thank you. 

Whereupon, at 3:50 p.m., the Subcommittee was adjourned. 
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Table of Indexes 

Chairman Johnson, 1, 5, 7, 9, 10, 11, 12, 13, 15, 16, 17, 18, 19, 21, 23, 25, 27, 29, 31, 32, 34, 37, 

39

Dr. Fletcher, 5, 9, 11, 12, 13 

Mr. Ballenger, 15, 16 

Mr. DeMint, 11, 12, 21, 22 

Mr. Kildee, 10, 11 

Mr. Kraemer, 23, 33, 35, 39 

Mr. McClellan, 15, 16, 17, 18, 19, 20, 21, 22, 23 

Mr. Payne, 31, 32 

Mr. Pollack, 25, 30, 31, 32, 34, 35, 36, 37, 38 

Mr. Rossmann, 27, 29, 31, 32, 33, 34, 36, 37 

Mr. Tancredo, 29, 30 

Mr. Tiberi, 37, 38 

Mr. Tierney, 10, 11, 16, 17, 18, 35, 36 

Mr. Wilson, 33, 34 

Ms. Rivers, 12, 13, 19, 20, 21